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DEPARTMENT OF THE TREASURY

Background

Internal Revenue Service

Section 951A was added to the
Internal Revenue Code (the ‘‘Code’’) 1 by
the Tax Cuts and Jobs Act, Public Law
115–97, 131 Stat. 2054, 2208 (2017) (the
‘‘Act’’), which was enacted on December
22, 2017. On October 10, 2018, the
Department of the Treasury (‘‘Treasury
Department’’) and the IRS published
proposed regulations (REG–104390–18)
under sections 951, 951A, 1502, and
6038 in the Federal Register (83 FR
51072) (the ‘‘proposed regulations’’). A
public hearing on the proposed
regulations was held on February 13,
2019. The Treasury Department and the
IRS also received written comments
with respect to the proposed
regulations.
In addition, on December 7, 2018, the
Treasury Department and the IRS
published proposed regulations (REG–
105600–18) relating to foreign tax
credits in the Federal Register (83 FR
63200) (‘‘foreign tax credit proposed
regulations’’). A public hearing on these
regulations was scheduled for March 14,
2019, but it was not held because there
were no requests to speak. However, the
Treasury Department and the IRS
received written comments with respect
to the foreign tax credit proposed
regulations. Certain rules in the foreign
tax credit proposed regulations are
being finalized in this Treasury decision
to ensure that the applicability dates of
these rules coincide with the
applicability dates of the statutory
provisions to which they relate. See
section 7805(b)(2). The rules being
finalized relate to §§ 1.78–1, 1.861–
12(c)(2), and 1.965–7(e). See part XI of
the Summary of Comments and
Explanation of Revisions section.
Comments outside the scope of this
rulemaking are generally not addressed
but may be considered in connection
with future guidance projects. In this
regard, the Treasury Department and the
IRS expect that future guidance will
address issues concerning the allocation
and apportionment of expenses in order
to determine a taxpayer’s foreign tax
credit limitation under section 904. All
written comments received in response
to the proposed regulations and the
foreign tax credit proposed regulations
are available at www.regulations.gov or
upon request. Terms used but not
defined in this preamble have the
meaning provided in these final
regulations.

26 CFR Part 1
[TD 9866]
RIN 1545–BO54; 1545–BO62

Guidance Related to Section 951A
(Global Intangible Low-Taxed Income)
and Certain Guidance Related to
Foreign Tax Credits
Internal Revenue Service (IRS),
Treasury.

AGENCY:

Final and temporary
regulations.

ACTION:

This document contains final
regulations that provide guidance to
determine the amount of global
intangible low-taxed income included
in the gross income of certain United
States shareholders of foreign
corporations, including United States
shareholders that are members of a
consolidated group. This document also
contains final regulations relating to the
determination of a United States
shareholder’s pro rata share of a
controlled foreign corporation’s subpart
F income included in the shareholder’s
gross income, as well as certain
reporting requirements relating to
inclusions of subpart F income and
global intangible low-taxed income.
Finally, this document contains final
regulations relating to certain foreign tax
credit provisions applicable to persons
that directly or indirectly own stock in
foreign corporations.

SUMMARY:

DATES:

Effective date: These regulations are
effective on June 21, 2019.
Applicability dates: For dates of
applicability, see §§ 1.78–1(c), 1.861–
12(k), 1.951–1(i), 1.951A–7, 1.1502–
51(g), 1.6038–2(m), and 1.6038–5(e).

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FOR FURTHER INFORMATION CONTACT:

Concerning the regulations §§ 1.951–1,
1.951A–0 through 1.951A–7, 1.6038–2,
and 1.6038–5, Jorge M. Oben at (202)
317–6934; concerning the regulations
§§ 1.951A–1(e) and 1.951A–3(g),
Jennifer N. Keeney at (202) 317–5045;
concerning the regulations §§ 1.1502–
12, 1.1502–32, and 1.1502–51,
Katherine H. Zhang at (202) 317–6848 or
Kevin M. Jacobs at (202) 317–5332;
concerning the regulations §§ 1.78–1,
1.861–12, 1.861–12T, and 1.965–7,
Karen J. Cate at (202) 317–6936 (not toll
free numbers).
SUPPLEMENTARY INFORMATION:

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1 Except as otherwise stated, all section references
in this preamble are to the Internal Revenue Code.

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Summary of Comments and
Explanation of Revisions
I. Overview
The final regulations retain the basic
approach and structure of the proposed
regulations and foreign tax credit
proposed regulations, with certain
revisions. This Summary of Comments
and Explanation of Revisions section
discusses those revisions as well as
comments received in response to the
solicitation of comments in the notices
of proposed rulemaking accompanying
those regulations.
II. Comments and Revisions to
Proposed § 1.951–1—Amounts Included
in Gross Income of United States
Shareholders
A. Hypothetical Distribution of
Allocable E&P
A United States shareholder (‘‘U.S.
shareholder’’) who owns stock of a
foreign corporation on the last day of
the foreign corporation’s taxable year on
which the foreign corporation is a
controlled foreign corporation (‘‘CFC’’)
includes in gross income its ‘‘pro rata
share’’ of the CFC’s subpart F income (as
defined in section 952) for the taxable
year. See section 951(a)(1) and § 1.951–
1(a). In general, a U.S. shareholder’s pro
rata share of subpart F income is
determined based on its proportionate
share of a hypothetical distribution of
all the current earnings and profits
(‘‘E&P’’ and ‘‘current E&P’’) of the CFC.
See section 951(a)(2)(A) and § 1.951–
1(b)(1)(i) and (e)(1). A U.S. shareholder’s
pro rata share of tested income (as
defined in section 951A(c)(2)(A) and
§ 1.951A–2(b)(1)), tested loss (as defined
in section 951A(c)(2)(B)(i) and
§ 1.951A–2(b)(2)), qualified business
asset investment (‘‘QBAI’’) (as defined
in section 951A(d)(1) and § 1.951A–
3(b)), tested interest expense (as defined
in § 1.951A–4(b)(1)), and tested interest
income (as defined in § 1.951A–4(b)(2))
(each a ‘‘tested item’’) generally are also
determined based on a hypothetical
distribution of current E&P, with certain
modifications to account for the
differences between each tested item
and subpart F income. See section
951A(e)(1) and § 1.951A–1(d).
For purposes of the hypothetical
distribution, the proposed regulations
define ‘‘current E&P’’ for a taxable year
as the greater of (i) the E&P of the
corporation for the taxable year
determined under section 964, or (ii) the
sum of the subpart F income (as
determined under section 952, as
increased under section
951A(c)(2)(B)(ii) and proposed
§ 1.951A–6(d)) and the tested income of

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the corporation for the taxable year. See
proposed § 1.951–1(e)(1)(ii). One
comment asserted that using the term
‘‘current earnings and profits’’ for this
purpose is confusing because the
definition differs significantly from the
definition of ‘‘earnings and profits’’
provided in section 964(a), and
therefore suggested using a different
term for this purpose. In response to this
comment, the final regulations replace
the term ‘‘current earnings and profits’’
with ‘‘allocable earnings and profits’’
(‘‘allocable E&P’’).

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B. Pro Rata Share Anti-Abuse Rule
The proposed regulations provide that
any transaction or arrangement that is
part of a plan a principal purpose of
which is the avoidance of Federal
income taxation, including, but not
limited to, a transaction or arrangement
to reduce a U.S. shareholder’s pro rata
share of the subpart F income of a CFC,
which transaction or arrangement
would otherwise avoid Federal income
taxation, is disregarded in determining
such U.S. shareholder’s pro rata share of
the subpart F income of the corporation
(the ‘‘pro rata share anti-abuse rule’’).
See proposed § 1.951–1(e)(6). The pro
rata share anti-abuse rule also applies in
determining the pro rata share of each
tested item of a CFC for purposes of
determining a U.S. shareholder’s global
intangible low-taxed income (‘‘GILTI’’)
inclusion amount under section 951A(a)
and § 1.951A–1(b). See id.
Several comments suggested that the
pro rata share anti-abuse rule is
overbroad and could be interpreted to
apply to nearly all transactions,
arrangements, or tax elections that
reduce the pro rata share amounts of a
U.S. shareholder. In particular,
comments noted that, under one
interpretation of the rule, a U.S.
shareholder that disposes of CFC stock
could be required indefinitely to
include its ‘‘pro rata share’’ of the CFC’s
subpart F income or tested items with
respect to such stock. These comments
recommended that the final regulations
clarify the scope of the rule and, in
particular, provide that the rule applies
only to reallocate subpart F income and
tested items of a CFC as of a
hypothetical distribution date among
persons that own, directly or indirectly,
shares of the CFC on such date.
According to these comments, the rule,
as narrowed in this manner, could not
apply to cause a U.S. person that
disposes of stock of a CFC before a
hypothetical distribution date to be
treated as having a pro rata share of the
CFC’s subpart F income or tested items
as of such date by reason of such stock.

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The Treasury Department and the IRS
agree that the scope of the pro rata share
anti-abuse rule should be clarified.
Accordingly, the final regulations clarify
that the rule applies only to require
appropriate adjustments to the
allocation of allocable E&P that would
be distributed in a hypothetical
distribution with respect to any share
outstanding as of the hypothetical
distribution date. See § 1.951–1(e)(6).
Thus, under the rule, if applicable,
adjustments will be made solely to the
allocation of allocable E&P in the
hypothetical distribution between
shareholders that own, directly or
indirectly, stock of the CFC as of the
relevant hypothetical distribution date.
As clarified, the rule will not apply to
adjust the allocable E&P allocated to a
shareholder by reason of a transfer of
CFC stock, except by reason of a change
to the distribution rights with respect to
stock in connection with such transfer
(for example, an issuance of a new class
of stock, including by recapitalization).
Other comments suggested that the
final regulations limit the pro rata share
anti-abuse rule to transactions or
arrangements that lack economic
substance or are artificial, or only to
transactions or arrangements that result
in non-economic allocations that shift
subpart F income or tested items away
from a U.S. shareholder. One comment
suggested that the rule should apply
only to enumerated transactions
identified by the Treasury Department
and the IRS as being abusive, and
another comment suggested that the
regulations should include examples
illustrating transactions to which the
pro rata share anti-abuse rule would or
would not apply.
The Treasury Department and the IRS
do not adopt these recommendations.
Transactions that lack economic
substance or are artificial would
typically be disregarded under general
tax principles, and non-economic
allocations would generally be
addressed through the facts and
circumstances approach of § 1.951–
1(e)(3) (as discussed in part II.C of this
Summary of Comments and Explanation
of Revisions section), such that limiting
the pro rata share anti-abuse rule in the
manner recommended could render it
superfluous. Moreover, the concerns
underlying the rule may arise in nonartificial transactions, or transactions
with substance, that would be respected
under general tax principles. In
addition, attempting to specifically
identify all the transactions covered by
the rule or to specify such transactions
by example would be impractical and
inconsistent with one of the purposes
underlying any anti-avoidance rule—

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that is, to deter the development and
implementation of new transactions or
arrangements intended to avoid the
operative rule.
Another comment recommended an
exception to the pro rata share antiabuse rule for transactions entered into
with unrelated parties and for
transactions entered into with related
parties located in the same country of
tax residence as the relevant CFC. The
comment also recommended a ‘‘small
business’’ exception for U.S.
shareholders with worldwide gross
receipts under $25 million. The
Treasury Department and the IRS have
determined that the policy concerns
underlying the rule can be implicated
by transactions that involve unrelated
parties, such as accommodation parties
(for instance, a financial institution) that
hold stock with certain distribution
rights in order to reduce an unrelated
U.S. shareholder’s pro rata share of
subpart F income or tested items.
Further, these concerns can arise
regardless of whether the parties
involved are located in the same
country of tax residence as the CFC.
Finally, the Treasury Department and
the IRS have concluded that the level of
gross receipts of the shareholders is not
relevant to, and therefore does not
justify, an exception to the rule. Any
administrative burden on small
businesses would not stem from the rule
itself but rather from engaging in a
transaction a principal purpose of
which is to avoid Federal income
taxation. Accordingly, these
recommendations are not adopted.
C. Facts and Circumstances Approach
Section 1.951–1(e)(3)(ii) of the
existing regulations provides special
rules applicable to CFCs with two or
more classes of stock with discretionary
distribution rights. Under these rules,
the allocation of current E&P is
primarily based on the relative fair
market value of the stock with
discretionary distribution rights. The
preamble to the proposed regulations
notes that this fair market value
allocation method had been the basis of
certain attempted avoidance structures.
Accordingly, the proposed regulations
adopt a facts and circumstances
approach in allocating current E&P in a
hypothetical distribution between
multiple classes of stock, including
stock with discretionary distribution
rights. See proposed § 1.951–1(e)(3). The
proposed regulations provide that,
where appropriate, the relative fair
market value of the stock may still be
taken into account, but as one of several
factors, none of which is dispositive.
See id.

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A comment asserted that the facts and
circumstances approach set forth in the
proposed regulations is a vague and
subjective standard that would create
uncertainty, while the fair market value
approach in the existing regulations for
stock with discretionary distribution
rights is a long-standing and objective
standard. The comment further noted
that the preamble to the 2005 Treasury
decision that adopts the fair market
value approach specifically rejects the
facts and circumstances approach,
stating that ‘‘the interests of sound tax
policy and administration are served by
requiring the value-based allocation.’’
TD 9222, 70 FR 49864 (August 25,
2005). The comment recommended that
the fair market value approach be
retained in the final regulations, in lieu
of the proposed facts and circumstances
approach, for purposes of determining
the pro rata share of subpart F income
and tested items.
The Treasury Department and the IRS
have determined, based on experience
administering the fair market value
approach, that a facts and circumstances
approach, in which the fair market
value of stock is relevant but not
determinative, would be a more reliable
method for determining a U.S.
shareholder’s pro rata share of subpart
F income (and tested items) than the fair
market value approach. While fair
market value is easily determinable for
publicly traded stock, determining the
fair market value of privately-held stock
is more difficult and typically requires
a determination of the stock’s rights to
distributions of current and
accumulated E&P and capital, as well as
the voting rights with respect to such
stock. In contrast, under section
951(a)(2) and § 1.951–1(b)(1), a
shareholder’s pro rata share of subpart
F income is determined based solely on
a hypothetical distribution of subpart F
income for the taxable year.
Furthermore, the amount of subpart F
income treated as distributed in the
hypothetical distribution is determined
under § 1.951–1(e) based on a
distribution of allocable E&P. Thus, the
most relevant attribute of any share of
CFC stock for purposes of the
hypothetical distribution is its economic
rights with respect to the allocable E&P
of the CFC, which is generally
determined by reference to its current
E&P. Generally, a share’s voting rights,
rights to distributions of E&P
accumulated before the current year,
and rights to capital, all of which are
also taken into account in determining
fair market value, are not relevant to the
hypothetical distribution of allocable
E&P, and therefore a fair market value

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approach can distort the determination
required under section 951(a)(2) and
§ 1.951–1(b)(1). A more flexible facts
and circumstances approach that
considers fair market value as a factor
can also take into account other factors
related to the expected distributions of
allocable E&P with respect to such
stock, without taking into account
capital liquidation rights and other
factors that are not relevant to the
distribution of allocable E&P.
Accordingly, the final regulations do not
adopt this recommendation.
D. Modifications to Example 4
The proposed regulations provide that
no amount of current E&P is distributed
in the hypothetical distribution with
respect to a particular class of stock to
the extent that a distribution of such
amount would constitute a redemption
of stock (even if the redemption would
be treated as a dividend under sections
301 and 302(d)), a distribution in
liquidation, or a return of capital. See
proposed § 1.951–1(e)(4)(i). The
proposed regulations include an
example to illustrate the application of
this rule. See proposed § 1.951–
1(e)(7)(v) Example 4. A comment
asserted that proposed § 1.951–1(e)(4)(i)
and the example illustrating the rule are
confusing because, given the definition
of current E&P in the proposed
regulations, the hypothetical
distribution would typically not give
rise to a return of capital (other than
through a redemption).
This rule is not intended to refer to
the consequences of the hypothetical
distribution itself (for example, the
extent to which it could give rise to a
return of capital), but rather is intended
to provide that terms of the stock or
related agreements and arrangements
that could give rise to redemptions,
liquidations, or returns of capital if
actually exercised (or otherwise taken
into account) are not taken into account
for purposes of the hypothetical
distribution. The final regulations and
the related example are clarified to
reflect this intent. See § 1.951–1(e)(4)(i)
and § 1.951–1(e)(7)(v) Example 4.
Similarly, the final regulations clarify
that the facts and circumstances taken
into account in determining the
distribution rights of a class of stock do
not include actual distributions (or any
amount treated as a dividend) made
during the taxable year that includes the
hypothetical distribution date. See
§ 1.951–1(e)(3). Such distributions (or
dividends) are not relevant in
determining a class of stock’s economic
rights and interest in the allocable E&P
(which are not reduced by actual

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distributions during the taxable year) as
of the hypothetical distribution date.
E. Application of Section 951(a)(2)(B) to
Subpart F Income and Tested Income in
the Same Taxable Year
Under section 951(a)(2)(B), a U.S.
shareholder’s pro rata share of subpart
F income with respect to stock for a
taxable year (as determined under
section 951(a)(2)(A)) is reduced by the
amount of distributions received by any
other person during the year as a
dividend with respect to the stock,
subject to a limitation based on the
period of the taxable year in which the
shareholder owned the stock within the
meaning of section 958(a). Section
951A(e)(1) provides that the pro rata
share of tested income, tested loss, and
QBAI is determined under the rules of
section 951(a)(2) in the same manner as
such section applies to subpart F
income. Accordingly, the proposed
regulations provide that a U.S.
shareholder’s pro rata share of tested
income is determined under section
951(a)(2) and § 1.951–1(b) and (e),
generally substituting ‘‘tested income’’
for ‘‘subpart F income’’ each place it
appears. See proposed § 1.951A–1(d)(2).
Because section 951(a)(2)(B) applies
for purposes of determining the pro rata
share of both subpart F income and
tested income, the proposed regulations
could be interpreted as permitting a
dollar-for-dollar reduction under section
951(a)(2)(B) in both a U.S. shareholder’s
pro rata share of subpart F income and
its pro rata share of tested income. The
Treasury Department and the IRS have
determined that this would be an
inappropriate double benefit that is not
contemplated under section 951(a)(2)(B)
and section 951A(e)(1). Accordingly, the
regulations under section 951(a)(2)(B)
are revised to clarify that a dividend
received during the taxable year by a
person other than the U.S. shareholder
reduces the U.S. shareholder’s pro rata
share of subpart F income and its pro
rata share of tested income in the same
proportion as its pro rata share of each
amount bears to its aggregate pro rata
share of both amounts. See § 1.951–
1(b)(1)(ii).
The examples in § 1.951–1(b)(2) are
modified solely to illustrate the
application of the revised rule in
§ 1.951–1(b)(1) and to conform to the
terminology in the final regulations. The
Treasury Department and the IRS are
studying the application of section
951(a)(2)(A) and (B) in certain cases that
may lead to inappropriate results, for
example, due to the concurrent
application of the provisions. In
addition, the Treasury Department and
the IRS are studying the application of

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section 951(a)(2)(B) with respect to
dividends paid to foreign persons,
dividends that give rise to a deduction
under section 245A(a), and dividends
paid on stock after the disposition of
such stock by a U.S. shareholder.
Comments are requested in this regard.
F. Revisions to Cumulative Preferred
Stock Rule
The proposed regulations provide a
special rule applicable to preferred
shares with accrued but unpaid
dividends that do not compound
annually at or above the applicable
Federal rate (‘‘AFR’’) under section
1274(d)(1) (‘‘cumulative preferred stock
rule’’). See proposed § 1.951–1(e)(4)(ii).
If the cumulative preferred stock rule
applies with respect to stock, the
current E&P allocable to the stock may
not exceed the amount of dividends
actually paid during the taxable year
with respect to the stock plus the
present value of the unpaid current
dividends with respect to the stock
determined by using the AFR that
applies on the date the stock is issued
for the term from such issue date to the
mandatory redemption date and
assuming the dividends will be paid at
the mandatory redemption date. See id.
A comment stated that it is unclear
whether the applicability of the
cumulative preferred stock rule is
determined based on the AFR as of the
issuance date or, alternatively, the AFR
for the current year. The comment
suggested that, because the amount of
the preferred dividend determined
under the cumulative preferred stock
rule is based on the AFR as of the issue
date, for consistency, the applicability
of the rule should be determined by
reference to the AFR as of the issue date
as well. The Treasury Department and
the IRS agree with this comment, and
the final regulations are revised
accordingly. See § 1.951–1(e)(4)(ii).
The proposed regulations provide that
the amount of any arrearage on
cumulative preferred stock is
determined taking into account the time
value of money principles in the
cumulative preferred stock rule. See
proposed § 1.951–1(e)(4)(iii). A
comment recommended that the rule be
clarified to reference the calculation of
the present value of the unpaid current
dividends described in the cumulative
preferred stock rule. The Treasury
Department and the IRS agree with this
comment, and the final regulations are
revised accordingly. See § 1.951–
1(e)(4)(iii).
The proposed regulations contain a
special rule for purposes of sections 951
through 964 to treat a controlled
domestic partnership as a foreign

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partnership to determine stock
ownership in a CFC by a U.S. person for
purposes of section 958(a) if certain
conditions are met. See proposed
§ 1.951–1(h). A comment suggested that
because the proposed regulations define
a ‘‘controlled domestic partnership’’ by
reference to a specific U.S. shareholder,
the rule could be read to apply only
with respect to that shareholder but not
with respect to other partners of the
controlled domestic partnership, for
which the partnership would therefore
still be treated as domestic. The
comment requested that the final
regulations clarify that the treatment as
a foreign partnership is with respect to
all partners of the partnership. The rule,
if applicable, is intended to treat a
domestic partnership as a foreign
partnership with respect to all its
partners. The final regulations revise the
definition of controlled domestic
partnership to clarify the scope of the
rule. See § 1.951–1(h)(2); see also
§ 1.965–1(e)(2). A change is also made to
§ 1.951–1(h) to conform to the change in
the final regulations to the treatment of
domestic partnerships for purposes of
section 951A. See part VII.C of this
Summary of Comments and Explanation
of Revisions section.
Finally, certain regulations have been
revised to reflect the repeal of section
954(f) (regarding foreign base company
shipping income) and section 955
(regarding foreign investments in less
developed countries). See Public Law
108–357, 415(a)(2) (2004) and Public
Law 115–97, 14212(a) (2017). The
Treasury Department and the IRS intend
to revise other regulations to reflect the
repeal of these provisions in future
guidance projects.
III. Comments and Revisions to
Proposed § 1.951A–1—General
Provisions
A. CFC Inclusion Date
The proposed regulations provide
that, for purposes of determining the
GILTI inclusion amount of a U.S.
shareholder for a U.S. shareholder
inclusion year, the U.S. shareholder
takes into account its pro rata share of
a tested item with respect to a CFC for
the U.S. shareholder inclusion year that
includes a CFC inclusion date with
respect to the CFC. See proposed
§ 1.951A–1(d)(1). Under the proposed
regulations, the term ‘‘U.S. shareholder
inclusion year’’ means a taxable year of
a U.S. shareholder that includes a CFC
inclusion date of a CFC of the U.S.
shareholder, the term ‘‘CFC inclusion
date’’ means the last day of a CFC
inclusion year on which a foreign
corporation is a CFC, and the term ‘‘CFC

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inclusion year’’ means any taxable year
of a foreign corporation beginning after
December 31, 2017, at any time during
which the corporation is a CFC. See
proposed § 1.951A–1(e)(1), (2) and (4).
Several comments noted that, under
certain circumstances, the requirement
that a U.S. shareholder take into account
its pro rata share of a CFC’s tested items
for a U.S. shareholder inclusion year
that includes a CFC inclusion date
could have the effect of requiring a U.S.
shareholder to take into account its pro
rata share of the CFC’s tested items for
a U.S. shareholder inclusion year that
does not include the last day of the CFC
inclusion year. This could happen, for
instance, if a U.S. person with a taxable
year ending December 31, 2019, sells a
wholly-owned foreign corporation with
a taxable year ending November 30,
2020, to a foreign person on December
1, 2019 and, as a result of the sale, the
foreign corporation ceases to be a CFC;
in that case, under the proposed
regulations, the CFC inclusion date with
respect to the foreign corporation would
be December 1, 2019, whereas the CFC
inclusion year of the foreign corporation
would not end until November 30, 2020.
The comments raised several concerns,
in particular, that the U.S. person in this
example would be unable to determine
its pro rata share of any tested item of
the foreign corporation as of December
31, 2019, since the foreign corporation’s
tested items could not be determined
until November 30, 2020. The
comments also noted that the proposed
regulations’ definition of CFC inclusion
date was inconsistent with section
951A(e)(1), which provides that the pro
rata share of certain amounts is taken
into account in the taxable year of the
U.S. shareholder in which or with
which the taxable year of the CFC ends.
The comments recommended that the
relevant definitions be revised to accord
with section 951A(e)(1).
The Treasury Department and the IRS
agree with these comments.
Accordingly, the final regulations
provide that a U.S. shareholder takes
into account its pro rata share of a tested
item of a CFC in the U.S. shareholder
inclusion year that includes the last day
of the CFC inclusion year. See § 1.951A–
1(d)(1). However, consistent with
sections 951(a)(2) and 951A(e)(1), a U.S.
shareholder’s pro rata share of each
tested item of a CFC is still determined
based on the section 958(a) stock owned
by the shareholder on the last day of the
CFC’s taxable year on which it is a CFC
(the ‘‘hypothetical distribution date’’).
See §§ 1.951–1(e)(1)(i) and 1.951A–
1(f)(3). The term ‘‘hypothetical
distribution date’’ in the final
regulations has the same meaning as the

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term ‘‘CFC inclusion date’’ in the
proposed regulations.
B. Pro Rata Share of Certain Tested
Items

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1. Pro Rata Share of QBAI
The proposed regulations provide
that, in general, a U.S. shareholder’s pro
rata share of the QBAI of a tested
income CFC is proportionate to the U.S.
shareholder’s pro rata share of the tested
income of the tested income CFC for the
CFC inclusion year. See proposed
§ 1.951A–1(d)(3)(i). However, the
proposed regulations provide that, to
the extent the amount of a tested income
CFC’s QBAI is greater than ten times its
tested income for the year (that is, the
point at which the shareholder’s
deemed tangible income return
(‘‘DTIR’’) attributable to the QBAI would
fully offset its pro rata share of the
tested income CFC’s tested income), the
excess QBAI is allocated solely to
common shares (and not to preferred
shares) (the ‘‘excess QBAI rule’’). See
proposed § 1.951A–1(d)(3)(ii). The
excess QBAI rule is intended to ensure
that a shareholder cannot obtain an
increase in its DTIR by reason of
preferred stock that exceeds the increase
in its aggregate pro rata share of tested
income from the ownership of the stock.
Without the excess QBAI rule, U.S.
persons would be incentivized to
acquire debt-like preferred stock of
CFCs that have significant amounts of
QBAI and minimal tested income in
order to effectively exempt some or all
of the U.S. person’s pro rata shares of
tested income from other CFCs from
taxation under section 951A. The
preamble to the proposed regulations
requested comments on the approach in
the proposed regulations, including the
excess QBAI rule, for determining a U.S.
shareholder’s pro rata share of a CFC’s
QBAI.
The only comment received with
respect to the QBAI allocation approach
in the proposed regulations agreed that
it was appropriate to limit the allocation
of QBAI to a preferred shareholder,
because the debt-like claim that a
preferred shareholder has on a CFC
should not entitle it to an amount of
QBAI that could be used to effectively
exempt tested income of the
shareholder’s other CFCs. The comment
noted that, in cases where a CFC has
minimal tested income and substantial
QBAI, the approach in the proposed
regulations could result in a common
shareholder receiving a pro rata share of
QBAI that is disproportionate to its pro
rata share of tested income, but
acknowledged that this effect would be

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reversed in future years when the CFC
generates more tested income.
The Treasury Department and the IRS
agree with the comment that the
approach in the proposed regulations
achieves the correct result over a multiyear period. Accordingly, the final
regulations generally adopt the QBAI
allocation rule of the proposed
regulations, with certain modifications
to the excess QBAI rule to better
effectuate the purposes of the rule.
Specifically, the final regulations
provide that, in the case of a tested
income CFC with tested income that is
less than ten percent of its QBAI (the
tested income CFC’s ‘‘hypothetical
tangible return’’), a shareholder’s pro
rata share of QBAI is determined based
on the shareholder’s pro rata share of
this hypothetical tangible return. See
§ 1.951A–1(d)(3)(ii)(A) and (C). A U.S.
shareholder’s pro rata share of the
hypothetical tangible return is
determined under the rules for
determining the shareholder’s pro rata
share of tested income, for this purpose
treating the hypothetical tangible return
as tested income. See § 1.951A–
1(d)(3)(ii)(B). In most cases, the excess
QBAI rule in the final regulations will
produce the same results as the excess
QBAI rule in the proposed regulations.
However, unlike the excess QBAI rule
in the proposed regulations, the
application of the excess QBAI rule in
the final regulations is not limited to
preferred stock.2 Further, with respect
to common stock, by untethering the
allocation of excess QBAI from the
allocation of tested income, and instead
applying a hypothetical distribution
model to the excess QBAI, the rule
ensures that the reduction under section
951(a)(2)(B) and § 1.951A–1(b)(1)(ii) to a
U.S. shareholder’s pro rata share of
tested income does not result in an
excessive reduction to the U.S.
shareholder’s pro rata share of QBAI.
See § 1.951A–1(d)(3)(iii)(C) Example 3.
One comment recommended that the
final regulations allocate QBAI to
convertible preferred stock or
participating preferred stock by
bifurcating the stock into preferred stock
2 When the excess QBAI rule in the final
regulations applies to a CFC with preferred stock,
the increase to the preferred shareholder’s DTIR by
reason of the preferred stock generally will be
limited to an amount equal to its pro rata share of
tested income, consistent with the purpose of the
rule in the proposed regulations. This is the case
because the formula for determining the preferred
shareholder’s pro rata share of QBAI (that is,
multiplying the CFC’s QBAI by the ratio that such
shareholder’s pro rata share of the hypothetical
tangible return bears to the CFC’s total hypothetical
tangible return) will yield a product that equals 10
times that shareholder’s pro rata share of tested
income. For an illustration, see § 1.951A–
1(d)(3)(iii)(B) Example 2.

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(to the extent of the dividend and
liquidation preference) and common
stock (to the extent that the
participation right is ‘‘in the money’’),
and then allocating QBAI to each
component separately. This issue has
been mooted because the determination
of a U.S. shareholder’s pro rata share of
QBAI no longer depends on whether the
stock owned by the shareholder is
common or preferred. Accordingly, the
final regulations do not adopt this
recommendation.
Finally, for the avoidance of doubt,
the final regulations clarify that the
aggregate amount of any tested item
(including QBAI) of a CFC for a CFC
inclusion year allocated to the CFC’s
stock cannot exceed the amount of such
tested item of the CFC for the CFC
inclusion year. See § 1.951A–1(d)(1).
2. Pro Rata Share of Tested Loss
The proposed regulations provide that
a CFC’s tested loss is allocated based on
a hypothetical distribution of an amount
of current E&P equal to the amount of
tested loss, except that, in general,
tested loss is allocated only to common
stock. See proposed § 1.951A–
1(d)(4)(i)(C). The general rule that tested
loss is allocated only to common stock
is subject to two exceptions. First, the
proposed regulations allocate tested loss
to preferred shares to the extent the
tested loss reduces the E&P accumulated
since the issuance of those preferred
shares to an amount below the amount
necessary to satisfy any accrued but
unpaid dividends with respect to such
preferred shares. See proposed
§ 1.951A–1(d)(4)(ii). Second, when the
common stock has no liquidation value,
the proposed regulations allocate tested
loss to classes of preferred stock with
liquidation value in reverse order of
priority. See proposed § 1.951A–
1(d)(4)(iii). These two exceptions result
in tested loss allocations corresponding
to changes in the economic value of the
CFC stock. The preamble to the
proposed regulations requested
comments on the proposed approach for
determining a U.S. shareholder’s pro
rata share of a CFC’s tested loss,
including how (or whether) to allocate
tested loss of a CFC when no class of
CFC stock has positive liquidation
value.
Comments were supportive of the
approach taken in the proposed
regulations to determine pro rata shares
of tested loss because the approach
avoids complexity, minimizes the
potential for abusive allocations of
tested loss, and is consistent with the
economic reality that common stock
generally bears the risk of loss before
preferred stock. One comment that was

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supportive of the approach in the
proposed regulations suggested a
possible alternative approach of
allocating tested loss to preferred shares
to the extent the preferred shares were
allocated subpart F income. However,
the comment noted that the approach of
the proposed regulations is simpler and
that the suggested approach would
require additional rules to ensure that
corresponding allocations of tested
income were made in future periods to
the preferred shares to reflect an actual
payment of a dividend to the preferred
shares. The Treasury Department and
the IRS agree with the comment that the
approach for allocating tested loss in the
proposed regulations is simpler and that
the suggested approach would require
adjustments to the pro rata share rules
for tested income as well, resulting in
more complex tracking of previous year
pro rata allocations for CFCs and their
shareholders to determine current year
allocations. Accordingly, the suggestion
is not adopted.
One comment recommended that if
no class of stock has liquidation value,
the tested loss should be allocated first
to any shareholders that hold
guaranteed debt of the CFC, and then to
the most senior class of common stock,
unless another class of stock will in fact
bear the economic loss. The Treasury
Department and the IRS have
determined, based on experience with
pro rata share rules in the subpart F
context, that the facts and circumstances
approach provides a flexible and
appropriate allocation of tested loss,
including in cases where no class of
stock has liquidation value. Therefore,
this comment is not adopted.

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IV. Comments and Revisions to
Proposed § 1.951A–2—Tested Income
and Tested Loss
A. Determination of Gross Income and
Allowable Deductions
For purposes of determining tested
income or tested loss, gross tested
income is reduced by deductions
(including taxes) properly allocable to
the gross tested income (or which would
be properly allocable to gross tested
income if there were such gross income)
under rules similar to the rules of
section 954(b)(5). See section
951A(c)(2)(A)(ii). The proposed
regulations provide that, for purposes of
determining tested income and tested
loss, the gross income and allowable
deductions of a CFC for a CFC inclusion
year are determined under the rules of
§ 1.952–2 for determining the subpart F
income of a CFC. See proposed
§ 1.951A–2(c)(2). Section 1.952–2
provides rules for determining gross

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income and taxable income of a foreign
corporation. For this purpose, and
subject to certain exceptions, these rules
generally treat foreign corporations as
domestic corporations. See § 1.952–
2(a)(1) and (b)(1).
The preamble to the proposed
regulations requested comments on the
application of § 1.952–2 for purposes of
determining subpart F income, tested
income, and tested loss, including
whether other approaches for
determining tested income and tested
loss, or whether additional
modifications to § 1.952–2 for purposes
of calculating tested income and tested
loss, would be appropriate. Several
comments were received in response to
this request. The comments generally
supported applying § 1.952–2 for
purposes of determining tested income.
However, a number of comments
requested modifications to, or
clarifications regarding, the application
of § 1.952–2. Some comments suggested
that § 1.952–2 be revised for purposes of
determining tested income and tested
loss to allow the use of net operating
loss carryforwards under section 172
and net capital losses subject to limits
under section 1212. Another comment
requested that the Treasury Department
and the IRS provide a list of specific
deductions allowed to a CFC that would
be disallowed to a domestic corporation,
such as under section 162(m) or 280G.
The same comment requested
clarification that carryforwards of a
CFC’s disallowed interest deduction
under section 163(j)(2) are not subject to
any limitation or restrictions. Several
comments suggested that section 245A
should apply to determine a CFC’s
subpart F income and tested income and
tested loss under § 1.952–2. There is
also a concern that § 1.952–2 could be
interpreted so expansively as to entitle
a CFC to a deduction expressly limited
to domestic corporations, such as a
deduction under section 250.
The Treasury Department and the IRS
intend to address issues related to the
application of § 1.952–2, taking into
account these comments, in connection
with a future guidance project. This
guidance is expected to clarify that, in
general, any provision that is expressly
limited in its application to domestic
corporations, such as section 250, does
not apply to CFCs by reason of § 1.952–
2. The Treasury Department and the IRS
continue to study whether, and to what
extent, section 245A should apply to
dividends received by a CFC and
welcome comments on this subject.
Section 1.952–2(b)(2) provides that
the taxable income of a CFC engaged in
the business of reinsuring or issuing
insurance or annuity contracts and

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29293

which, if it were a domestic corporation
engaged in such business, would be
taxable as a life insurance company to
which subchapter L applies, is generally
determined by treating such corporation
as a domestic corporation taxable under
subchapter L and by applying the
principles of §§ 1.953–4 and 1.953–5 for
determining taxable income. These
regulations, which were promulgated in
1964, have not been updated to reflect
current sections 953(a), 953(b)(3), and
954(i). A comment requested that the
final regulations confirm that the rules
of current sections 953 and 954(i) apply
in determining the tested income or
tested loss of a CFC described in
§ 1.952–2(b)(2). The Treasury
Department and the IRS agree that the
tested income or tested loss of a CFC
described in § 1.952–2(b)(2) is
calculated in the same manner as its
insurance income under sections 953
and 954(i), and the rule is revised
accordingly. See § 1.951A–2(c)(2)(i).
However, no inference is intended that
a CFC may determine reserve amounts
based on foreign statement reserves in
the absence of a ruling request. See
section 954(i)(4)(B)(ii). In this regard,
the Treasury Department and the IRS
intend to address, in separate guidance,
the use of foreign statement reserves for
purposes of measuring qualified
insurance income under section 954(i).
B. Gross Income Excluded by Reason of
Section 954(b)(4)
Section 951A(c)(2)(A)(i)(III) provides
that gross tested income does not
include any item of gross income
excluded from foreign base company
income (as defined in section 954)
(‘‘FBCI’’) or insurance income (as
defined in section 953) ‘‘by reason of
section 954(b)(4)’’ (the ‘‘GILTI high tax
exclusion’’). The proposed regulations
clarify that the GILTI high tax exclusion
applies only to items of gross income
that are excluded from FBCI or
insurance income solely by reason of an
election under section 954(b)(4) and
§ 1.954–1(d)(5). See proposed § 1.951A–
2(c)(1)(iii). Thus, this exclusion does not
apply to any item of gross income
excluded from FBCI or insurance
income by reason of an exception other
than section 954(b)(4), regardless of the
effective rate of foreign tax to which
such item is subject.
One comment noted that this
clarification is consistent with the
language of the GILTI high tax
exclusion, which is limited by its terms
to income subject to the high tax
exception of section 954(b)(4). Several
comments, however, requested that the
final regulations expand the GILTI high
tax exclusion to exclude additional

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categories of high-taxed income. These
comments asserted, based on the
legislative history of the Act, that
Congress intended that income of a CFC
would be subject to tax under the GILTI
regime only if it is subject to a low rate
of foreign tax. Some of these comments
suggested that the exclusion be
expanded to apply to high-taxed income
that would be FBCI or insurance income
but for the application of one or more
exceptions in section 954(c), (h), or (i).
Others recommended that the final
regulations apply the GILTI high tax
exclusion to any item of gross income
subject to a sufficiently high effective
foreign tax rate, regardless of whether
such income would be FBCI or
insurance income but for an exception.
Comments suggested that the Treasury
Department and the IRS could exercise
their authority under section
951A(f)(1)(B) to treat a GILTI inclusion
as a subpart F inclusion that could
potentially be excludible, on an elective
basis, from FBCI (or insurance income)
under section 954(b)(4).
Comments recommending an
expansion of the GILTI high tax
exclusion to any item of high-taxed
income suggested various methods to
determine the appropriate foreign tax
rate for this purpose. One comment
recommended the same threshold as
used for the high tax exception for
subpart F income under section
954(b)(4)—that is, a rate that is 90
percent of the maximum rate specified
in section 11 (21 percent), or 18.9
percent. Another comment
recommended a 13.125 percent rate,
citing the conference report
accompanying the Act that indicated
that, in general, no residual U.S. tax
would be owed on GILTI subject to a
foreign tax rate greater than or equal to
that rate. H.R. Rep. No. 115–466, at 627
(2017) (Conf. Rep.) (‘‘Conference
Report’’).
Other comments suggested that even
if the GILTI high tax exclusion is not
expanded to take into account all hightaxed income, taxpayers should be
permitted to elect to treat income that
would otherwise be gross tested income
as subpart F income in order to qualify
for the exception under section
954(b)(4), for example, through a
rebuttable presumption that all income
(or alternatively, all high-taxed income)
of a CFC is subpart F income. One
comment asserted that such a rule
would be consistent with taxpayers’
historical ability to elect through the
choice of transactional or operational
structure to subject their CFC income to
current taxation under subpart F. For
example, the comment stated that a
taxpayer could cause a CFC to make a

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loan to its U.S. shareholder, resulting in
an inclusion under section 956, or could
intentionally structure its operations in
a manner that causes income to be
characterized as FBCI. The comment
also asserted that a rule that effectively
permits a taxpayer to elect into subpart
F income is consistent with the
regulations under section 954, which
permit an election to be made with
respect to high-taxed income under
section 954(b)(4) notwithstanding that
that provision, similar to section 954(a)
itself, is expressed as a mandatory rule.
See § 1.954–1(d).
The final regulations do not adopt
these comments. The Treasury
Department and the IRS have declined
to exercise regulatory authority under
section 951A(f)(1)(B) because that
authority relates to the treatment of a
GILTI inclusion amount, rather than an
item of gross tested income. A GILTI
inclusion amount is determined based
on a U.S. shareholder’s pro rata share of
all the tested items of one or more CFCs
and, as a result, the determination of the
extent to which foreign tax is imposed
on any single item of net income for
purposes of section 954(b)(4) cannot be
made by reference to a GILTI inclusion
amount. The final regulations also do
not permit taxpayers to elect to treat
income that would otherwise be gross
tested income as subpart F income in
order to qualify for the exception under
section 954(b)(4). Unlike section
954(b)(4), nothing in section 954(a) or
the legislative history suggests that
taxpayers should be permitted to treat
income that is not described in section
954(a), such as gross tested income, as
FBCI through a rebuttable presumption
or otherwise. In addition, this type of
rebuttable presumption could give rise
to significant administrability concerns.
These concerns are discussed further in
a notice of proposed rulemaking
published in the same issue of the
Federal Register addressing an election
under section 954(b)(4) with respect to
income that would otherwise qualify as
tested income.
The Treasury Department and the IRS
continue to believe that the GILTI high
tax exclusion, as articulated in the
proposed regulations, reflects a
reasonable interpretation of section
951A(c)(2)(A)(i)(III) and section
954(b)(4), for the reasons stated in the
notice of proposed rulemaking
accompanying the proposed regulations.
Accordingly, the final regulations retain
the GILTI high tax exclusion without
modification. See § 1.951A–2(c)(1)(iii).
However, the Treasury Department and
the IRS are studying, in light of the
addition of section 951A by the Act, the
appropriate circumstances under which

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taxpayers should be permitted to make
an election under section 954(b)(4), with
respect to income that would not be
FBCI or insurance income, to exclude
such income from gross tested income
under the GILTI high tax exclusion
using authority other than section
951A(f)(1)(B). In that regard, existing
§ 1.954–1(d)(1) does not provide the
necessary framework for applying the
exception under section 954(b)(4) to
income that would be gross tested
income, such as rules to determine the
scope of an item of gross tested income
to which the election applies and rules
to determine the rate of foreign tax on
such items. Therefore, the Treasury
Department and the IRS are issuing a
notice of proposed rulemaking
published in the same issue of the
Federal Register as these final
regulations that will propose a
framework under which taxpayers
would be permitted to make an election
under section 954(b)(4) with respect to
income that would otherwise be gross
tested income in order to exclude that
income from gross tested income by
reason of the GILTI high tax exclusion.
However, until the regulations
described in the separate notice of
proposed rulemaking are effective, a
taxpayer may not exclude any item of
income from gross tested income under
section 951A(c)(2)(A)(i)(III) unless the
income would be FBCI or insurance
income but for the application of section
954(b)(4) and § 1.954–1(d).
C. Gross Income Taken Into Account in
Determining Subpart F Income
1. In General
Section 951A(c)(2)(A)(i)(II) provides
that gross tested income is determined
without regard to any gross income
taken into account in determining the
subpart F income of the corporation (the
‘‘subpart F exclusion’’). Section 952(a)
defines ‘‘subpart F income’’ as the sum
of certain categories of income,
including FBCI and insurance income.
Other than with respect to the
coordination between the subpart F
exclusion and section 952(c) (discussed
in part IV.C.2 of this Summary of
Comments and Explanation of Revisions
section), the proposed regulations do
not provide guidance on income that is
‘‘taken into account in determining the
subpart F income’’ of a CFC within the
meaning of the subpart F exclusion. In
this regard, the final regulations provide
rules for determining gross income
included in FBCI and insurance
company for purposes of the subpart F
exclusion, including by reason of the
application of the de minimis and full
inclusion rules in section 954(b). See

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§ 1.951A–2(c)(4)(ii)(A), (B), and
§ 1.951A–2(c)(4)(iii)(C); see also part
IV.C.3 of this Summary of Comments
and Explanation of Revisions section.
The final regulations also clarify the
circumstances in which the subpart F
exclusion applies to less common items
included in subpart F income under
section 952(a)(3) through (5) (subpart F
income resulting from participation in
or cooperation with certain
international boycotts, payments of
illegal bribes, kickbacks, or other
payments, or income derived from any
country during which section 901(j)
applies to that country). See § 1.951A–
2(c)(4)(ii)(C) through (E).

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2. Coordination With Section 952(c)
a. In General
The amount of subpart F income for
a taxable year is subject to the E&P
limitation and recapture provisions in
section 952(c). Section 952(c)(1)(A)
provides that a CFC’s subpart F income
for any taxable year cannot exceed its
E&P for that year. See also § 1.952–
1(c)(1). However, section 952(c)(2)
provides that, to the extent subpart F
income is reduced by reason of the E&P
limitation in any taxable year, any
excess of the E&P of the corporation for
any subsequent taxable year over the
subpart F income for that year is
recharacterized as subpart F income.
See also § 1.952–1(f)(1). An amount
recaptured under section 952(c)(2) is
treated as subpart F income in the same
separate category (as defined in § 1.904–
5(a)) as the subpart F income that was
subject to the E&P limitation in a prior
taxable year. See § 1.952–1(f)(2)(ii).
The Code does not provide a rule that
explicitly coordinates the subpart F
exclusion with section 952(c), which
commenters identified as a source of
confusion and potential inconsistency.
In order to resolve this ambiguity, the
proposed regulations set forth such a
coordination rule by providing that the
gross tested income and allowable
deductions properly allocable to gross
tested income are determined without
regard to the application of section
952(c) (the ‘‘section 952(c) coordination
rule’’). See proposed § 1.951A–2(c)(4)(i).
Thus, income that would be subpart F
income but for the application of the
E&P limitation in section 952(c)(1)(A) is
excluded from gross tested income by
reason of the subpart F exclusion. In
addition, income that gives rise to E&P
that results in subpart F recapture under
section 952(c)(2) is not excluded from
gross tested income by reason of the
subpart F exclusion. In effect, the
section 952(c) coordination rule treats
an item of gross income as ‘‘taken into

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account’’ in determining subpart F
income to the extent, and only to the
extent, that the item would be included
in subpart F income absent the
application of section 952(c).
The proposed regulations include an
example that illustrates this rule. See
proposed § 1.951A–2(c)(4)(ii)(A). In the
example, in Year 1, FS, a CFC wholly
owned by a U.S. shareholder, has $100x
of foreign base company sales income,
a $100x loss in foreign oil and gas
extraction income, and no E&P. In Year
2, FS has gross income of $100x that is
not otherwise excluded from the
definition of gross tested income in
proposed § 1.951A–2(c)(1)(i) through
(v), and no allowable deductions, and
$100x of E&P. The example concludes
that in Year 1 FS has no subpart F
income because of the E&P limitation in
section 952(c)(1)(A) and no gross tested
income because gross tested income is
determined without regard to section
952(c). In Year 2, the example concludes
that, because FS’s E&P ($100x) exceed
its Year 2 subpart F income ($0), the
subpart F income of Year 1 is recaptured
in Year 2 under section 952(c)(2), and
FS also has $100x of gross tested income
in Year 2 because gross tested income is
determined without regard to section
952(c).
One comment agreed that the section
952(c) coordination rule was an
appropriate interpretation of the statute,
noting that the rule preserves the ability
for section 952(c)(2) to recapture subpart
F income generated in prior years, while
preventing recapture under section
952(c)(2) from permanently exempting
gross tested income generated in
subsequent years. However, several
comments suggested that the section
952(c) coordination rule be withdrawn.
These comments asserted that the
section 952(c) coordination rule can
lead to double taxation because the rule
can result in the taxation of an aggregate
amount of CFC income in excess of the
net economic CFC income over a multiyear period. Some comments further
suggested that the section 952(c)
coordination rule is contrary to the
language of the subpart F exclusion, on
the grounds that any income of a CFC
that generates E&P that are
recharacterized as subpart F income by
reason of the E&P recapture rule is
‘‘taken into account in determining the
subpart F income’’ of the CFC and
should therefore be excluded from gross
tested income under the subpart F
exclusion. Other comments
recommended that the section 952(c)
coordination rule be retained as it
pertains to the E&P limitation rule
under section 952(c)(1)(A), but be
modified to exclude from its scope the

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E&P recapture rule of section 952(c)(2).
Under that approach, both the subpart F
income subject to E&P limitation in a
prior year and gross income in a
subsequent year that generates E&P
giving rise to recapture of subpart F
income would be excluded from gross
tested income.
The Treasury Department and the IRS
have determined that the section 952(c)
coordination rule is consistent with the
relevant statutory provisions and results
in the appropriate amount of income
that is subject to tax under sections 951
and 951A. Gross income that would be
subpart F income during the current
year but for the application section
952(c)(1)(A) is literally ‘‘taken into
account’’ in determining subpart F
income in that it potentially gives rise
to future subpart F income by reason of
section 952(c)(2). Furthermore, gross
tested income is not subject to an E&P
limitation analogous to the E&P
limitation on subpart F income under
section 952(c)(1)(A). In this regard, the
determination of tested income under
the GILTI regime is based on a taxable
income concept, similar to the
determination of income earned directly
by a U.S. taxpayer, whereas the subpart
F regime is rooted in a distributable
dividend model, and thus predicated on
the existence of E&P. Therefore, for
example, a CFC may have $100x of gross
tested income but no E&P in a taxable
year (due, for instance, to a loss in
foreign oil and gas extraction income),
and the U.S. shareholder of the CFC
(assuming no QBAI or other CFCs) will
nonetheless have a $100x GILTI
inclusion amount for the taxable year.
This is the result under section 951A
notwithstanding that the CFC in this
case has no net economic income and
no E&P for the year. If the same CFC for
the same taxable year also has $100x of
foreign base company sales income and
$100x of E&P related to such income, in
addition to the $100x GILTI inclusion
amount, the CFC’s U.S. shareholder
would have a $100x subpart F
inclusion. Under these facts, the U.S.
shareholder is taxed on an aggregate
amount of taxable income of the CFC
($200x) that exceeds the CFC’s net
economic income and E&P ($100x). In
this example, the U.S. shareholder is not
subject to tax twice with respect to a
single item of income, but rather is
subject to tax once with respect to each
of two items—the CFC’s subpart F
income of $100x and the CFC’s gross
tested income of $100x. The section
952(c) coordination rule merely ensures
that the same result obtains whether all
items of income and loss arise in a
single year (as in this example) or arise

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in different taxable years (as in the
example in proposed § 1.951A–
2(c)(4)(ii)(A)).
The Treasury Department and the IRS
have also determined that it is not
appropriate to exclude the E&P
recapture rule from the scope of the
section 952(c) coordination rule.
Because section 951A contains no
analog to the E&P limitation in section
952(c)(1)(A), it also contains no analog
to the E&P recapture rule in section
952(c)(2). Without a GILTI recapture
rule, the approach recommended by
comments would effectively allow prior
year losses in categories of income
excluded from gross tested income (for
example, subpart F income or foreign oil
and gas extraction income) to
permanently exempt gross tested
income in subsequent years. For
instance, if, in a taxable year, a CFC has
$100x of foreign base company sales
income, a $100x loss in foreign base
company services income, and thus no
subpart F income by reason of the E&P
limitation of section 952(c)(1)(A), any
gross tested income earned by the CFC
in a subsequent year would recapture
the foreign base company sales income
from the previous year, and thus such
gross income would never be subject to
section 951A.
In excluding certain categories of
income from gross tested income
(namely, subpart F income, foreign oil
and gas extraction income, and
effectively connected income), Congress
not only ensured that such income
would not be subject to the GILTI
regime, but also that losses with respect
to such income would not be permitted
to reduce income subject to the GILTI
regime. Likewise, section
951A(c)(2)(B)(ii) provides that a loss in
a category of income subject to the
GILTI regime (that is, tested loss) cannot
reduce the income subject to the subpart
F regime by reason of the E&P limitation
rule of section 952(c)(1)(A). See also
§ 1.951A–6(b) and part VIII.A of this
Summary of Comments and Explanation
of Revisions section. It is apparent,
based on the purpose and structure of
section 951A, that Congress intended for
the GILTI and subpart F regimes to act
as parallel, independent systems of
taxation with respect to prescribed
categories of CFC income, and losses
with respect to one regime (or subject to
neither regime) should not be permitted
to permanently exempt the income
subject to another regime. Therefore, an
interpretation of section 952(c) that
permits losses related to GILTI-exempt
categories of income to reduce gross
tested income would be contrary to the
purpose and structure of section 951A.

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A comment recommended, as an
alternative to taking into account
section 952(c)(2) recapture in
determining gross tested income, that
the recapture rules of section 952(c)(2)
be modified so that E&P derived from
gross tested income does not trigger
recapture under section 952(c)(2).
Although such amount would not be
recaptured as subpart F income, the
comment recommended that, in order to
avoid double taxation of the same
earnings, any recapture account should
nonetheless be reduced by the amount
treated as gross tested income. The
Treasury Department and the IRS have
determined that this recommendation is
inconsistent with the language and
purpose of section 952(c)(2). Section
952(c)(2) requires recapture in any
taxable year in which E&P exceed
subpart F income, and the
recommendation would not result in
recapture in these circumstances.
Further, the purpose of section 952(c)(2)
is to postpone the inclusion of subpart
F income to a subsequent taxable year
in which the CFC has sufficient E&P.
The recommendation, by reducing a
recapture account without recapture of
subpart F income, would result in the
permanent exemption of subpart F
income. Finally, as illustrated in this
part IV.C of the Summary of Comments
and Explanation of Revisions section,
the simultaneous recapture of subpart F
income and the inclusion of gross tested
income does not amount to double
taxation of a single item of income, but
rather the single taxation of each of two
items of income. Accordingly, this
recommendation is not adopted.
A comment recommended as another
alternative that the section 952(c)(2)
coordination rule not be applied with
respect to recapture accounts that
existed before the Act. The comment
asserted that it would be inappropriate
for income that triggers recapture under
section 952(c)(2) based on pre-Act
recapture account balances to also be
treated as gross tested income because
section 951A did not exist before 2018
and therefore no tested losses could
have reduced subpart F income. The
final regulations do not adopt this
recommendation. Nothing in the statute
or legislative history suggests that preAct recapture account balances should
be treated differently than post-Act
account balances. Further, there appears
to be no stronger policy rationale for
permitting losses that arose before the
Act to permanently exempt gross tested
income from taxation than for
permitting GILTI-exempt losses that
arise after the Act to do the same.
While the comments with respect to
the section 952(c) coordination rule

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generally pertained to the application of
the E&P limitation in section
952(c)(1)(A), the same issues as
discussed in respect to section
952(c)(1)(A) arise with respect to
application of the qualified deficit rule
in section 952(c)(1)(B) and the chain
deficit rule in section 952(c)(1)(C).
Accordingly, the final regulations revise
the section 952(c) coordination rule to
apply also to disregard the effect of a
qualified deficit or a chain deficit in
determining gross tested income. See
§ 1.951A–2(c)(4)(ii).
One comment requested clarification
that income subject to the high tax
exception of section 954(b)(4) is not
included in gross tested income even if
such income would also be excluded
from subpart F income by reason of
section 952(c)(1)(A). The comment
provided an example in which a CFC
has $100x of foreign base company
services income, a $100x loss in another
category of subpart F income, no E&P,
and thus no subpart F income by reason
of the E&P limitation of section
952(c)(1)(A). According to the comment,
if the election under section 954(b)(4) is
made with respect to the foreign base
company services income, one
interpretation of the proposed
regulations is that the $100x of foreign
base company services income is not
excluded from gross tested income by
either the subpart F exclusion under
section 951A(c)(2)(A)(i)(II) (because
such income is not included in subpart
F by reason of the high tax exception of
section 954(b)(4)) or the GILTI high tax
exclusion under section
951A(c)(2)(A)(i)(III) (because such
income is not excluded from subpart F
income ‘‘solely’’ by reason of the high
tax exception of section 954(b)(4)). The
Treasury Department and the IRS have
determined that such clarification is
unnecessary because an election under
section 954(b)(4) cannot be made with
respect to a net item eliminated by
reason of section 952(c)(1)(A). Section
1.954–1(d)(4)(ii) provides that the net
item of income to which the high tax
exception of section 954(b)(4) applies is
the subpart F income of a CFC
determined after taking into account the
earnings and profits limitation of
section 952(c)(1)(A). Therefore, the net
item of income that can be excluded
under the high tax exception is
determined after the application of
section 952(c)(1)(A). Indeed, in the
example presented by the comment,
because the subpart F income of the
CFC after application of the E&P
limitation is zero, there is no net item
of income for which an election under
section 954(b)(4) and § 1.954–1(d)(5) can

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be made. Accordingly, the $100x of
foreign base company services income is
excluded from gross tested income
solely by reason of the subpart F
exclusion under section
951A(c)(2)(A)(i)(II).

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b. Coordination With Qualified Deficit
Rule in Section 952(c)(1)(B)
The qualified deficit rule in section
952(c)(1)(B) reduces a U.S. shareholder’s
subpart F inclusion attributable to a
qualified activity (defined in section
952(c)(1)(B)(iii)) to the extent of that
shareholder’s pro rata share of any
qualified deficit (defined in section
952(c)(1)(B)(ii)). A comment suggested
that a tested loss could, in some cases,
also give rise to a qualified deficit that
could reduce subpart F income in a
subsequent taxable year. The comment
asserted that this could occur, for
example, if certain deductions and
losses that make up a qualified deficit
are also properly allocable to gross
tested income. Accordingly, the
comment recommended that the final
regulations deny a U.S. shareholder the
ability to both reduce its net CFC tested
income and increase a qualified deficit
by reason of the same economic loss.
The Treasury Department and the IRS
agree that the same deduction or loss
should not result in a double benefit
under section 951A and the qualified
deficit rule, but have not identified a
situation in which a single deduction or
loss can both reduce tested income (or
increase tested loss) and also give rise
to or increase a qualified deficit. A
deduction or loss that is properly
allocable to gross tested income cannot
also be attributable to a qualified
activity that gives rise to subpart F
income, and the same deduction cannot
be taken into account more than once
under sections 954(b)(5) and
951A(c)(2)(A)(ii). Nevertheless, for the
avoidance of doubt, the final regulations
provide that deductions that are
allocated and apportioned to gross
tested income are not attributable to a
qualified activity and thus do not also
increase or give rise to a qualified
deficit. See § 1.951A–2(c)(3).
c. Coordination With Section
952(c)(1)(B)(vii)
Section 952(c)(1)(B)(vii)(I) contains an
election to apply section 953(a) without
regard to the same country exception in
section 953(a)(1)(A). Comments
requested that the section 952(c)
coordination rule be modified to clarify
that gross tested income is determined
after giving effect to the election in
section 952(c)(1)(B)(vii)(I). The rule in
proposed § 1.951A–2(c)(4) was not
intended to address the election in

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section 952(c)(1)(B)(vii)(I). Accordingly,
the final regulations modify the section
952(c) coordination rule to apply only
with respect to the E&P limitation rules
of section 952(c)(1) (including the
qualified deficit and chain deficit rules)
and the E&P recapture rule of section
952(c)(2).
3. Coordination With De Minimis Rule,
Full Inclusion Rule, and High Tax
Exception
Section 954(a) provides that FBCI for
a taxable year is equal to the sum of
foreign personal holding company
income (as determined under section
954(c)) (‘‘FPHCI’’), foreign base
company sales income (as determined
under section 954(d)) and foreign base
company services income (as
determined under section 954(e)).
However, section 954(b)(3)(A) provides
that if the sum of FBCI (determined
without regard to allocable deductions)
(‘‘gross FBCI’’) and gross insurance
income for the taxable year is less than
the lesser of five percent of gross income
or $1,000,000, then no part of the gross
income for the taxable year is treated as
FBCI or insurance income (the ‘‘de
minimis rule’’). Conversely, section
954(b)(3)(B) provides that if the sum of
gross FBCI and gross insurance income
for the taxable year exceeds 70 percent
of gross income, the entire gross income
for the taxable year is treated as gross
FBCI or gross insurance income, as
appropriate (the ‘‘full inclusion rule’’).
One comment requested that the de
minimis and full inclusion rules be
taken into account for purposes of
determining ‘‘gross income taken into
account’’ in determining subpart F
income within the meaning of the
subpart F exclusion. The comment
asserted that such a rule would prevent
double taxation because full inclusion
subpart F income would be taxed solely
under section 951 (and not section
951A), whereas de minimis subpart F
income would be taxed solely under
section 951A (and not section 951).
The Treasury Department and the IRS
agree with this comment. Accordingly,
subject to the application of the section
952(c) coordination rule, discussed in
part IV.C.2 of this Summary of
Comments and Explanation of Revisions
section, the final regulations provide
that the subpart F exclusion applies to
gross income included in FBCI (adjusted
net FBCI as defined in § 1.954–1(a)(5))
or insurance income (adjusted net
insurance income as defined in § 1.954–
1(a)(6)). See § 1.951A–2(c)(4)(i). Thus,
for purposes of the subpart F exclusion,
gross income taken into account in
determining subpart F income does not
include any item of gross income

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excluded from FBCI or insurance
income under the de minimis rule or the
high tax exception of section 954(b)(4),
but generally does include any item of
gross income included in FBCI or
insurance income under the full
inclusion rule. In addition, for purposes
of the subpart F exclusion, gross income
taken into account in determining
subpart F income does not include gross
income that qualifies for an exception to
a category of FBCI described in section
954(a), including amounts excepted
from the definition of FPHCI, such as
rents and royalties derived from an
active business under section
954(c)(2)(A) and § 1.954–2(b)(5) and (6)
or active financing income under
section 954(h).
Section 1.954–1(d)(6) provides that an
item of gross income that is included in
FBCI or insurance income under the full
inclusion rule (‘‘full inclusion FBCI’’) is
excluded from subpart F income if more
than 90 percent of the gross FBCI and
gross insurance income for the taxable
year (determined without regard to the
full inclusion rule) is attributable to net
amounts excluded from subpart F
income under the high tax exception of
section 954(b)(4). The Treasury
Department and the IRS have
determined that it would be
inappropriate for an item of gross
income that would be included in gross
tested income but for the full inclusion
rule to be excluded from both gross
tested income (by reason of the subpart
F exclusion) and subpart F income (by
reason of § 1.954–1(d)(6)). Accordingly,
the final regulations provide that full
inclusion FBCI excluded from subpart F
income by reason of § 1.954–1(d)(6) is
not excluded from gross tested income
by reason of the subpart F exclusion.
See § 1.951A–2(c)(4)(iii)(C). The final
regulations further clarify that income
excluded from subpart F income under
§ 1.954–1(d)(6) is also not excluded
from gross tested income by reason of
the GILTI high tax exclusion (discussed
in part IV.B of this Summary of
Comments and Explanation of Revisions
section). See id. Accordingly, income
excluded from subpart F income by
reason of § 1.954–1(d)(6) is included in
gross tested income.
D. Effect of Basis Adjustments Under
Section 961(c)
Section 961(c) provides that, under
regulations prescribed by the Secretary,
if a U.S. shareholder is treated under
section 958(a)(2) as owning stock of a
CFC which is owned by another CFC,
then adjustments similar to those
provided under section 961(a) and (b)
are made to the basis in such stock, and
the basis in stock of any other CFC by

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reason of which the U.S. shareholder is
considered under section 958(a)(2) as
owning the stock. The provision further
provides, however, that these
adjustments are made only for the
purposes of determining the amount
included under section 951 in the gross
income of such U.S. shareholder (or any
successor U.S. shareholder). There are
no regulations in effect under section
961(c).
Comments have questioned whether
basis adjustments under section 961(c)
should be taken into account for
purposes of determining gross tested
income of a CFC upon the CFC’s
disposition of stock of another CFC. One
comment noted that, while section
951A(f)(1)(A) treats a GILTI inclusion in
the same manner as a subpart F
inclusion for purposes of basis
adjustments under section 961, the
resulting basis under section 961(c) only
applies for purposes of determining
amounts included in gross income
under section 951. The comment
recommended nonetheless that
regulations provide that section 961(c)
basis adjustments apply both for
purposes of determining subpart F
income and gross tested income to
prevent certain items of income from
being inappropriately taxed twice; the
comment further noted, however, that
unintentional non-taxation should also
be avoided.
The interaction of basis adjustments
under section 961(c) and section 951A
will be further considered in connection
with a guidance project addressing
previously taxed E&P (‘‘PTEP’’) under
sections 959 and 961. See Notice 2019–
1, 2019–2 I.R.B. 275, section 3
(announcing an intention to address
PTEP in forthcoming proposed
regulations). The Treasury Department
and the IRS are sensitive to the concern
expressed in the comment but are also
aware that taking into account section
961(c) basis adjustments for purposes of
determining gross tested income could
inappropriately reduce the amount of
stock gain subject to tax. This may occur
because, as was the case before the Act,
section 961(c) adjustments are not taken
into account for purposes of
determining E&P, and thus a disposition
of lower-tier CFC stock may generate
E&P for the upper-tier CFC to the extent
of the amount of the gain in the stock
determined without regard to section
961(c). If the resulting E&P give rise to
a dividend (including by reason of a
disposition under section 1248) to a
corporate U.S. shareholder, the
dividend may result in an offsetting
dividends received deduction. See
sections 245A(a) and 1248(j). If section
245A(a) applies to the dividend, the

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taxable portion of any unrealized
appreciation in the upper-tier CFC
stock, to the extent attributable to
unrealized appreciation in assets of the
upper-tier CFC, would effectively be
reduced in an amount equal to the
dividend, either because of a dividend
distribution that reduces the value in
the upper-tier CFC stock without a
corresponding basis reduction (section
961(d) applies only to the extent loss
would otherwise be recognized) or by
reason of a disposition to the extent the
gain is recharacterized under section
1248(j) as a dividend for purposes of
applying section 245A. Comments are
requested on this issue, including the
extent to which adjustments should be
made to minimize the potential for the
same item of income being subject to tax
more than once and to minimize the
inappropriate reduction of gain in CFC
stock held by corporate U.S.
shareholders.
E. Deduction or Loss Attributable to
Disqualified Basis
1. In General
The proposed regulations include a
rule that generally disallows, for
purposes of calculating tested income or
tested loss, any deduction or loss
attributable to disqualified basis in
depreciable or amortizable property
(including, for example, intangible
property) resulting from a disqualified
transfer of the property. See proposed
§ 1.951A–2(c)(5). The relevant terms for
purposes of applying the rule in
proposed § 1.951A–2(c)(5) are defined
by reference to certain provisions and
terms in proposed § 1.951A–3(h)(2)
(disregarding disqualified basis for
purposes of determining QBAI), with
certain modifications. See proposed
§ 1.951A–2(c)(5)(iii). In general, the term
‘‘disqualified basis’’ is defined as the
excess of a property’s adjusted basis
immediately after a disqualified
transfer, over the sum of the property’s
adjusted basis immediately before the
disqualified transfer and the amount of
gain recognized by the transferor in the
disqualified transfer that is subject to
tax as subpart F income or effectively
connected income. See proposed
§ 1.951A–3(h)(2)(ii)(A) and (B). The
term ‘‘disqualified transfer’’ is defined
as a transfer of property by a transferor
CFC during the transferor CFC’s
disqualified period to a related person
in which gain was recognized, in whole
or in part. See proposed § 1.951A–
3(h)(2)(ii)(C). Finally, the term
‘‘disqualified period’’ is defined with
respect to a transferor CFC as the period
that begins on January 1, 2018, and ends
as of the close of the transferor CFC’s

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last taxable year that is not a CFC
inclusion year. See proposed § 1.951A–
3(h)(2)(ii)(D). Income generated by
fiscal-year CFCs during the disqualified
period is subject to neither the
transition tax under section 965 nor the
tax on GILTI under section 951A.
In response to comments, the
Treasury Department and the IRS have
revised these rules in a manner
consistent with the purpose of the rule
in the proposed regulations, as
discussed in this part IV.E of the
Summary of Comments and Explanation
of Revisions section. Certain comments
and revisions related to the
determination of disqualified basis for
purposes of both proposed §§ 1.951A–
2(c)(5) and 1.951A–3(h)(2) are discussed
in part IV.E.3 and 4 of this Summary of
Comments and Explanation of Revisions
section. For a discussion of additional
comments and revisions related to the
determination of disqualified basis for
purposes of both proposed §§ 1.951A–
2(c)(5) and 1.951A–3(h)(2), see part V.G
of this Summary of Comments and
Explanation of Revisions section.
2. Authority
Several comments recommended that
the rule in proposed § 1.951A–2(c)(5) be
withdrawn or substantially narrowed
and re-proposed. Some of these
comments recommended that the rule
be revised to apply only to ‘‘noneconomic’’ transactions or transactions
engaged in with a tax-avoidance
purpose, or that avoidance-type
transactions be addressed through
existing statutory or judicial doctrines.
One comment recommended that the
rule continue to be limited to transfers
between related persons because thirdparty sales are fundamentally different
from the ‘‘non-economic transactions’’
described in the legislative history.
However, one comment opposed any
additional limitations or weakening of
the anti-abuse rules in the proposed
regulations.
Several comments questioned the
Treasury Department and the IRS’s
authority for issuing the rule. Many of
these comments asserted that section
951A(d)(4), which provides authority to
issue regulations that are ‘‘appropriate
to prevent the avoidance of the purposes
of this subsection,’’ does not authorize
the Treasury Department and the IRS to
promulgate rules that apply for any
purpose other than for purposes of
determining QBAI under section
951A(d). Also, two comments stated
that the disallowance of deductions
under proposed § 1.951A–2(c)(5) is
contrary to, and therefore not authorized
by, section 951A(c)(2)(A)(ii), which
requires that the deductions of the CFC

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be allocated to gross tested income
under rules similar to the rules of
section 954(b)(5) for purposes of
calculating tested income or tested loss.
In response to these comments, the
Treasury Department and the IRS have
revised the proposed rule in a manner
that better reflects the source of its
authority. Section 7805(a) provides that
‘‘the Secretary shall prescribe all
needful rules and regulations for the
enforcement of this title, including all
rules and regulations as may be
necessary by reason of any alteration of
law in relation to internal revenue.’’
Section 951A(c)(2)(A) defines ‘‘tested
income’’ by reference to certain items of
gross income, reduced by ‘‘the
deductions (including taxes) properly
allocable to such gross income under
rules similar to the rules of section
954(b)(5) (or to which such deductions
would be allocable if there were such
gross income).’’ Section 954(b)(5)
provides that FPHCI, foreign base
company sales income, and foreign base
company services income are reduced,
‘‘under regulations prescribed by the
Secretary,’’ by deductions ‘‘properly
allocable’’ to such income. Similarly,
section 882(c)(1)(A) provides that, for
purposes of determining a foreign
corporation’s income which is
effectively connected with the conduct
of a trade or business within the United
States (‘‘effectively connected income’’),
‘‘proper apportionment and allocation’’
of deductions of the foreign corporation
‘‘shall be determined as provided in
regulations prescribed by the
Secretary.’’ The rule, as revised in the
final regulations, provides guidance for
determining whether certain deductions
or losses are ‘‘properly allocable’’ to
gross tested income, subpart F income,
or effectively connected income within
the meaning of section 951A(c)(2)(A),
section 954(b)(5), or section
882(c)(1)(A), respectively. See, for
example, Redlark v. Commissioner, 141
F.3d 936, 940–41 (9th Cir. 1998) and
Miller v. United States, 65 F.3d 687, 690
(8th Cir. 1995) (determining that the
term ‘‘properly allocable’’ in section
163(e) is ambiguous and therefore there
is an implicit legislative delegation of
authority to the Commissioner to define
the term).
The legislative history to the Act
indicates that section 965 was intended
as a transition measure to the new
territorial tax system in which section
951A applies, and that Congress
intended that all earnings of a CFC
would be potentially subject to tax
under either section 965 or section
951A. Conference Report, at 613 (‘‘The
[transition tax applies in] the last
taxable year of a deferred foreign

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income corporation that begins before
January 1, 2018, which is that foreign
corporation’s last taxable year before the
transition to the new corporate tax
regime elsewhere in the bill goes into
effect.’’). Because the final date for
measuring the E&P of a CFC for
purposes of section 965 is December 31,
2017 (the ‘‘final E&P measurement
date’’), and the effective date of section
951A is the first taxable year of a CFC
beginning after December 31, 2017, all
the earnings of a calendar year CFC are
potentially subject to taxation under
either section 965 or section 951A.
However, a fiscal year CFC (for example,
a CFC with a taxable year ending
November 30) may have a gap between
its final E&P measurement date under
section 965 (December 31, 2017) and the
date on which section 951A first applies
with respect to its income (December 1,
2018, for a CFC with a taxable year
ending November 30). Congress was
aware that taxpayers could take
advantage of this period to create ‘‘costfree’’ basis in assets that could be used
to reduce their U.S. tax liability in
subsequent years, and expected the
Treasury Department and the IRS to
issue regulations to prevent this result.
See Conference Report, at 645 (‘‘The
conferees intend that non-economic
transactions intended to affect tax
attributes of CFCs and their U.S.
shareholders (including amounts of
tested income and tested loss, tested
foreign income taxes, net deemed
tangible income return, and QBAI) to
minimize tax under this provision be
disregarded. For example, the conferees
expect the Secretary to prescribe
regulations to address transactions that
occur after the measurement date of
post-1986 earnings and profits under
amended section 965, but before the
first taxable year for which new section
951A applies, if such transactions are
undertaken to increase a CFC’s QBAI.’’).
Consistent with the statute and the
legislative history, the Treasury
Department and the IRS have
determined that a deduction or loss
attributable to basis (disqualified basis)
created by reason of a transfer from a
CFC to a related CFC (a disqualified
transfer) during the period between the
final E&P measurement date and the
effective date of section 951A (the
disqualified period), to the extent no
taxpayer included an amount in gross
income by reason of such disqualified
transfer, should not be permitted to
reduce a taxpayer’s U.S. income tax
liability in subsequent years.
Accordingly, the final regulations treat
any deduction or loss attributable to
disqualified basis as not ‘‘properly

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allocable’’ to gross tested income,
subpart F income, or effectively
connected income of the CFC (‘‘residual
CFC gross income’’). See § 1.951A–
2(c)(5)(i).
While the rules that allocate and
apportion expenses generally depend on
the factual relationship between the
item of expense and the associated gross
income, the relevant statutory language
in sections 882(c)(1)(A),
951A(c)(2)(A)(ii), and 954(b)(5) does not
constrain the Secretary from taking into
account other considerations in
determining whether it is ‘‘proper’’ for
a certain item of expense to be allocated
to, and therefore reduce, a particular
item of gross income. Indeed, the
Treasury Department and the IRS are
not required to issue rules that
mechanically allocate an item of
expense to gross income to which such
expense factually relates if taxable
income would be distorted by reason of
such allocation. In this regard, the
Treasury Department and the IRS have
determined that the rule in § 1.951A–
2(c)(5) is necessary to ensure that
transactions during the disqualified
period, the income or earnings from
which are not subject to tax, are not
permitted to improperly reduce or
eliminate a taxpayer’s income that
would be subject to tax after the
disqualified period. This rule creates
symmetry between the category of
income generated by reason of a transfer
during the disqualified period and the
category of income to which any
deduction or loss attributable to the
resulting basis is allocated. That is, a
disqualified transfer, by definition,
generates residual CFC gross income
(income that is not subpart F income,
tested income, or effectively connected
income), and the rule in § 1.951A–
2(c)(5) allocates the deduction or loss
attributable to the disqualified basis to
the same category of income. In the case
of a depreciable or amortizable asset
with disqualified basis that is held until
the end of its useful life, the aggregate
amount of deduction or loss attributable
to the disqualified basis allocated to
residual CFC gross income under the
rule will equal the amount of residual
CFC gross income generated in the
disqualified transfer.
The rule in proposed § 1.951A–2(c)(5)
provides that any deduction or loss
attributable to disqualified basis is
disregarded for purposes of determining
tested income or tested loss. In contrast,
the rule in the final regulations allocates
and apportions any such deduction or
loss to gross income other than gross
tested income, subpart F income, or
effectively connected income. With
respect to the determination of tested

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income or tested loss, whether an item
of deduction or loss is disregarded
(under the proposed regulations) or
allocated to income other than gross
tested income (under the final
regulations) does not provide a different
result. In either case, the deduction or
loss is not permitted to reduce tested
income or increase tested loss. However,
by allocating an item of deduction or
loss to residual CFC gross income, the
rule in the final regulations ensures that
any deduction or loss attributable to
disqualified basis is also not taken into
account for purposes of determining the
CFC’s subpart F income or effectively
connected income. The broadening of
the rule to allocate any deduction or
loss attributable to disqualified basis
away from subpart F income and
effectively connected income is
intended to ensure that taxpayers
cannot simply circumvent the rule by
converting their gross tested income
into either subpart F income or
effectively connected income, and thus
be permitted to use the deduction or
loss attributable to the disqualified basis
against such income. The preamble to
the proposed regulations evidenced an
intention that taxpayers not be
permitted to claim tax benefits with
respect to cost-free disqualified basis,
and the rule in the final regulations
effectuates this intent by closing an
obvious loophole. Furthermore, the rule
ensures that the words ‘‘properly
allocable’’ are interpreted consistently
across provisions—sections
882(c)(1)(A), 951A(c)(2)(A)(ii), and
954(b)(5)—with respect to any
deduction or loss attributable to
disqualified basis.
The rule in proposed § 1.951A–2(c)(5)
applies only to deductions or losses
attributable to disqualified basis in
‘‘specified property,’’ which is defined
as property that is of a type with respect
to which a deduction is allowable under
section 167 or 197. See proposed
§ 1.951A–2(c)(5)(ii). The Treasury
Department and the IRS have
concluded, however, that the rule
should not be limited to specified
property because deductions or losses
attributable to disqualified basis in other
property may also be used to
inappropriately reduce a taxpayer’s U.S.
income tax liability. On the other hand,
the Treasury Department and the IRS
have concluded that it would be unduly
burdensome to require CFCs to
determine the disqualified basis in each
item of inventory and that it is
reasonable to expect that most inventory
acquired during the disqualified period
will be sold at a gain such that the
disqualified basis in an item of

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inventory would rarely be relevant.
Accordingly, the rule in the final
regulations applies to deductions or
losses attributable to disqualified basis
in any property, other than property
described in section 1221(a)(1),
regardless of whether the property is of
a type with respect to which a
deduction is allowable under section
167 or 197. See §§ 1.951A–2(c)(5)(iii)(A)
and 1.951A–3(h)(2)(ii).
One comment asserted that the use of
the phrase ‘‘non-economic transactions’’
in the Conference Report means that the
authority to draft anti-abuse rules
pursuant to sections 7805 and
951A(d)(4) is limited to non-economic
transactions, which necessitates a facts
and circumstances test. The rule in
§ 1.951A–2(c)(5) is not premised upon
facts and circumstances, such as a
taxpayer’s intent; rather, the rule is
based on an interpretation of the term
‘‘properly allocable’’ in the context of a
deduction or loss attributable to
disqualified basis. Moreover, the rule
applies only to a narrow subset of
transactions—that is, transfers by fiscal
year CFCs to related parties that occur
between the final E&P measurement
date under section 965 and the effective
date of section 951A—and only has the
effect of allocating a deduction or loss
attributable to the cost-free basis created
in such transaction to residual CFC
gross income. The Treasury Department
and the IRS have concluded that these
narrowly circumscribed transactions
will in almost all cases be motivated by
tax avoidance rather than business
exigencies, and that the allocation and
apportionment of deduction or loss to
residual CFC gross income is an
appropriately tailored measure to
address these transactions.
Based on the foregoing, the Treasury
Department and the IRS have concluded
that the rule in § 1.951A–2(c)(5), with
the modifications discussed in this part
IV.E of the Summary of Comments and
Explanation of Revisions section,
represents an appropriate exercise of its
authority under sections 951A and
7805.
3. Effect of Disqualified Basis for
Purposes of Determining Income or Gain
Some comments noted that the rule in
proposed § 1.951A–2(c)(5) addresses
only deductions or losses attributable to
disqualified basis and does not address
the effect of disqualified basis in
determining a CFC’s income or gain
upon the disposition of property. For
example, assume USP, a domestic
corporation, wholly owns CFC1, which
holds property with a fair market value
of $100x and an adjusted basis of $80x,
$70x of which is disqualified basis.

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CFC1 sells the property to an unrelated
party in exchange for $100x of cash and,
without regard to proposed § 1.951A–
2(c)(5), recognizes $20x of gain. The
comments asked whether, under the
rule, the disqualified basis of $70x in
the property is disregarded such that the
sale results in $90x (rather than $20x) of
gross tested income to CFC1.
The Treasury Department and the IRS
have determined that the rule in
§ 1.951A–2(c)(5) should apply only for
purposes of determining whether a
deduction or loss is properly allocable
to gross tested income, subpart F
income, or effectively connected
income. Thus, disqualified basis is not
disregarded for purposes of determining
income or gain recognized on the
disposition of the property. However,
because many taxpayers capitalize
depreciation or amortization expense to
other property, including inventory, and
recover those costs through cost of
goods sold or depreciation of the other
property, the final regulations also
provide that any depreciation,
amortization, or cost recovery
allowances attributable to disqualified
basis is not properly allocable to
property produced or acquired for resale
under section 263, 263A, or 471. See
§ 1.951A–2(c)(5)(i). This rule ensures
that depreciation or amortization
expenses attributable to disqualified
basis are not permitted to indirectly
reduce taxable income through the
depreciation expense of other property
or from the disposition of inventory.
As discussed in part V.G of this
Summary of Comments and Explanation
of Revisions section, disqualified basis
is generally reduced or eliminated to the
extent that such basis reduces taxable
income. Therefore, a sale of property
with disqualified basis generally results
in the elimination of the disqualified
basis, because the basis is taken into
account in determining the CFC’s
taxable income. As a result, absent a
special provision, a CFC could
‘‘cleanse’’ the disqualified basis in
property by selling the property to a
related person after the disqualified
period; the related person would have
no disqualified basis in the property,
and the selling CFC would recognize
income only to the extent the amount
realized exceeded its adjusted basis in
the property (for this purpose, including
its disqualified basis). To address this
obvious loophole, the final regulations
provide that, except to the extent that
any loss recognized on the transfer of
such property is treated as attributable
to disqualified basis under § 1.951A–
2(c)(5), or the basis is reduced or
eliminated in a nonrecognition
transaction within the meaning of

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section 7701(a)(45), a transfer of
property with disqualified basis in the
hands of a CFC to a related person does
not reduce the disqualified basis in the
hands of the transferee. See § 1.951A–
3(h)(2)(ii)(B)(1)(ii). Thus, for example, if
a CFC sells property with an adjusted
basis of $80x and disqualified basis of
$70x to a related person for $100x in a
fully taxable exchange, the selling CFC
would recognize $20x of gross income
on the sale, which income may be
included in gross tested income, and the
disqualified basis in the property
immediately after the transfer would
remain $70x in the hands of the related
person.
4. Concurrent Application of the Rule
With Other Provisions
One comment asserted that if the
Treasury Department and the IRS retain
the rule in proposed § 1.951A–2(c)(5),
then the disqualified transfer should be
disregarded for all U.S. tax purposes,
including for purposes of determining
the gain or loss recognized by the
transferor CFC by reason of the transfer
and the tax attributes of the transferor
CFC created by reason of the transfer.
The comment expressed concern with
potentially adverse consequences to the
transferor CFC from the concurrent
application of the rule and certain other
provisions, such as incremental subpart
F income generated by reason of the
transfer, additional E&P that could
dilute foreign tax credits with respect to
a subpart F inclusion, and immediate
U.S. taxation on any effectively
connected income under section 882
from the transfer.
As discussed in part IV.E.2 of this
Summary of Comments and Explanation
of Revisions section, the rule in
§ 1.951A–2(c)(5) is intended to provide
guidance on determining whether
deductions of a CFC attributable to
disqualified basis are properly allocable
to gross tested income, subpart F
income, and effectively connected
income. The rule is not intended to
disregard the transfer that created the
disqualified basis in its entirety.
Moreover, the Treasury Department and
the IRS have determined that
disregarding the transfer for all U.S. tax
purposes is not appropriate because the
property has in fact been transferred. In
addition, disqualified basis in property
does not include basis resulting from
‘‘qualified gain,’’ which is gain from the
transfer included by the transferor CFC
as effectively connected income or by a
U.S. shareholder as its pro rata share of
subpart F income. See § 1.951A–
3(h)(2)(ii)(C)(3). Thus, the rule in
§ 1.951A–2(c)(5) does not apply to basis
created in connection with amounts that

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are taxed under sections 882 and 951.
Accordingly, this recommendation is
not adopted.
Section 901(m) disallows certain
foreign tax credits on foreign income not
taken into account for U.S. tax purposes
as a result of a ‘‘covered asset
acquisition,’’ which includes an
acquisition of assets for U.S. tax
purposes that is treated as the
acquisition of stock of a corporation (or
is disregarded) for foreign tax purposes
and an acquisition of an interest in a
partnership which has an election in
effect under section 754. See section
901(m)(2)(B) and (C). One comment
noted that a disqualified transfer subject
to the rule in proposed § 1.951A–2(c)(5)
could also constitute a covered asset
acquisition under section 901(m), such
as the sale of an interest in a disregarded
entity during the disqualified period. In
such a case, according to the comment,
a deduction or loss that is not taken into
account for purposes of determining
tested income or tested loss under the
rule may nevertheless be taken into
account for purposes of section 901(m)
such that foreign tax credits under
section 960 might be disallowed. The
comment asserted that the concurrent
application of the rule and section
901(m) could be unduly punitive to
taxpayers that engaged in disqualified
transfers that were also covered asset
acquisitions and therefore
recommended that a deduction or loss
attributable to disqualified basis also be
disregarded for purposes of section
901(m).
Disqualified basis could give rise to
policy concerns under section 901(m)
even when a deduction attributable to
the disqualified basis is not taken into
account in determining tested income or
tested loss (or subpart F income or
effectively connected income). For
example, a deduction or loss
attributable to the disqualified basis can
reduce E&P for a taxable year, with the
result that subpart F income for the
taxable year may be limited under
section 952(c)(1)(A). Indeed, proposed
§ 1.901(m)–5(b)(1) provides that basis
differences must be taken into account
under section 901(m) regardless of
whether the deduction is deferred or
disallowed for U.S. income tax
purposes.
Based on the foregoing, the Treasury
Department and the IRS have
determined that it is not appropriate to
disregard disqualified basis for purposes
of section 901(m). However, in response
to this comment, the final regulations
permit taxpayers to make an election
pursuant to which the adjusted basis in
each property with disqualified basis
held by a CFC or a partnership is

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reduced by the amount of the
disqualified basis and the disqualified
basis is eliminated. See § 1.951A–
3(h)(2)(ii)(B)(3). This reduction in
adjusted basis is for all purposes of the
Code, including section 901(m). Thus, if
an election is made, a disqualified
transfer of property that is also a
covered asset acquisition of a relevant
foreign asset will result in neither
disqualified basis in the property within
the meaning of § 1.951A–3(h)(2)(ii) nor
a basis difference with respect to the
relevant foreign asset within the
meaning of section 901(m)(3)(C). As a
result, in the case of an election, the rule
in § 1.951A–2(c)(5) and section 901(m)
will not apply concurrently with respect
to a disqualified transfer that is also a
covered asset acquisition.
F. Other Comments and Revisions
1. Tested Loss Carryforward
In determining a U.S. shareholder’s
net CFC tested income for a taxable
year, the U.S. shareholder’s aggregate
pro rata share of tested losses for the
taxable year reduces the shareholder’s
aggregate pro rata share of tested income
for the taxable year. See section
951A(c)(1). Comments recommended
that the final regulations include a
provision allowing a U.S. shareholder’s
aggregate pro rata share of tested losses
in excess of the shareholder’s aggregate
pro rata share of tested income for the
taxable year to be carried forward to
offset the shareholder’s net CFC tested
income in subsequent years.
A GILTI inclusion amount is an
annual calculation, and nothing in the
statute or legislative history suggests
that unused items, such as a U.S.
shareholder’s aggregate pro rata share of
tested losses in excess of the
shareholder’s aggregate pro rata share of
tested income for the taxable year, can
or should be carried to another taxable
year. Accordingly, this recommendation
is not adopted.
2. Deemed Payments Under Section
367(d)
In general, section 367(d) provides
that if a U.S. person transfers intangible
property to a foreign corporation in an
exchange described in section 351 or
361, the person is treated as having sold
the property in exchange for payments
contingent upon the productivity, use,
or disposition of such property. The
regulations under section 367(d)
provide that the deemed payment may
be treated as an expense (whether or not
that amount is actually paid) of the
transferee foreign corporation that is
properly allocated and apportioned to
gross income subject to subpart F under

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the provisions of §§ 1.954–1(c) and
1.861–8. See § 1.367(d)–1T(c)(2)(ii) and
(e)(2)(ii).
In response to comments, the final
regulations clarify that a deemed
payment under section 367(d) is treated
as an allowable deduction for purposes
of determining tested income and tested
loss. See § 1.951A–2(c)(2)(ii).
Accordingly, consistent with the
regulations under section 367(d), such
deemed payments may be allocated and
apportioned to gross tested income to
the extent provided under § 1.951A–
2(c)(3).
3. Compute Tested Income in the Same
Manner as E&P
A comment requested that the final
regulations provide that tested income
and tested loss be determined under the
principles of section 964, which
provides rules for the calculation of E&P
of foreign corporations. Another
comment requested that the final
regulations permit small CFCs to make
an annual election to treat their tested
income or tested loss for a CFC
inclusion year to be equal to their E&P
for such CFC inclusion year. Section
951A(c)(2) is clear that tested income or
tested loss for a CFC inclusion year is
computed by subtracting properly
allocable deductions from gross tested
income, and there is nothing in the
statute or legislative history that
indicates that tested income or tested
loss should be limited by, or otherwise
determined by reference to, E&P for
such year. Accordingly, these
recommendations are not adopted.
4. Effect of Losses in Other Categories of
Income

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The proposed regulations provide that
allowable deductions are allocated and
apportioned to gross tested income
under the principles of section 954(b)(5)
and § 1.954–1(c), by treating gross tested
income within a single category (as
defined in § 1.904–5(a)) as a single item
of gross income, in addition to the items
in § 1.954–1(c)(1)(iii). See proposed
§ 1.951A–2(c)(3). The final regulations
clarify that losses in other categories of
income (such as FBCI) cannot reduce
gross tested income, and that tested
losses cannot reduce other categories of
income. See § 1.951A–2(c)(3).
V. Comments and Revisions to
Proposed § 1.951A–3—Qualified
Business Asset Investment
A. Inability of Tested Loss CFCs To
Have QBAI
A U.S. shareholder’s GILTI inclusion
amount is equal to the excess of its net
CFC tested income over its net DTIR for

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the taxable year. See section 951A(b)(1)
and § 1.951A–1(c)(1). A U.S.
shareholder’s net DTIR is equal to 10
percent of its aggregate pro rata share of
the QBAI of its CFCs. See section
951A(b)(2) and § 1.951A–1(c)(3). A
CFC’s QBAI is equal to its aggregate
average adjusted basis in specified
tangible property. See section 951A(1)
and proposed § 1.951A–3(b). Specified
tangible property is defined as tangible
property used in the production of
tested income. See section
951A(d)(2)(A) and proposed § 1.951A–
3(c)(1). Consistent with the statute and
the Conference Report, the proposed
regulations clarify that tangible property
of a tested loss CFC is not used in the
production of tested income within the
meaning of section 951A(d)(2)(A). See
Conference Report, at 642, fn. 1536. In
this regard, the proposed regulations
provide that tangible property of a
tested loss CFC is not specified tangible
property and thus a tested loss CFC’s
QBAI is zero (the ‘‘tested loss QBAI
exclusion’’). See proposed § 1.951A–
3(b), (c)(1), and (g)(1).
Comments recommended that the
final regulations eliminate the tested
loss QBAI exclusion, such that a tested
loss CFC could have specified tangible
property and therefore QBAI. One of the
comments noted that the version of
section 951A in the House bill defined
specified tangible property as any
tangible property to the extent such
property is used in the production of
tested income or tested loss. See H.R. 1,
115th Cong. § 4301(a) (2017). The
comment posited that the text of the
statute is ambiguous, the tested loss
QBAI exclusion is otherwise
inconsistent with section 951A, and the
exclusion is not compelled by the
statute. The comment also asserted that
this rule may be easily avoided by
combining a tested loss CFC with a
tested income CFC (including through
an election under § 301.7701–3 to
change the classification of either entity
for U.S. tax purposes) because there is
no corollary to the tested loss QBAI
exclusion for partnerships or
disregarded entities.
The Treasury Department and the IRS
reject this recommendation. The Senate
amendment to the House bill struck the
reference to ‘‘tested loss’’ in the
definition of specified tangible property,
and the Conference Report explains that
the term ‘‘used in the production of
tested income’’ means that ‘‘[s]pecified
tangible property does not include
property used in the production of a
tested loss, so that a CFC that has a
tested loss in a taxable year does not
have QBAI for the taxable year.’’ See
Conference Report, at 642, fn.1536.

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Thus, the statute, taking into account
the footnote in the Conference Report,
unambiguously provides that tested loss
CFCs cannot have QBAI. Accordingly,
the final regulations retain the tested
loss QBAI exclusion. But cf. part VI.D of
this Summary of Comments and
Explanation of Revisions section
regarding a reduction to tested interest
expense of a CFC for a ‘‘tested loss QBAI
amount,’’ a new component in
computing specified interest expense.
One comment requested that, if the
tested loss QBAI exclusion is retained,
proposed § 1.951A–3(b) and (c) should
be revised to clarify that the exclusion
applies only for a CFC inclusion year
with respect to which a CFC is a tested
loss CFC. The final regulations do not
revise these provisions because it is
sufficiently clear that the tested loss
QBAI exclusion rule applies only with
respect to a CFC inclusion year of a CFC
for which it is a tested loss CFC and that
a CFC is a tested loss CFC only for a
CFC inclusion year in which the CFC
does not have tested income. See
§ 1.951A–2(b)(2).
B. Determination of Depreciable
Property
Section 951A(d)(1)(B) provides that
specified tangible property is taken into
account in determining QBAI only if the
property is of a type with respect to
which a depreciation deduction is
allowable under section 167. Similarly,
the proposed regulations define
‘‘specified tangible property’’ as tangible
property used in the production of
tested income, and define ‘‘tangible
property’’ as property for which the
depreciation deduction provided by
section 167(a) is eligible to be
determined under section 168 (even if
the CFC has elected not to apply section
168). See proposed § 1.951A–3(c)(1) and
(2).
A comment recommended that, for
purposes of determining QBAI, the final
regulations take into account the entire
adjusted basis in precious metals and
other similar tangible property that are
used in the production of tested income,
even if only a portion of the adjusted
basis in such property is depreciable in
calculating regular taxable income. The
comment suggested that if property is
depreciable in part, then the entire asset
is ‘‘of a type’’ with respect to which a
deduction is allowable under section
167 within the meaning of section
951A(d)(1)(B).
In defining QBAI, section 951A(d)
distinguishes between depreciable
tangible property and non-depreciable
tangible property, such as land. Section
951A(d) defines QBAI as specified
tangible property ‘‘of a type’’ for which

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a deduction is allowable under section
167. The proposed and final regulations
interpret the phrase ‘‘of a type’’
consistent with the interpretation of the
phrase ‘‘of a character’’ with respect to
section 168. See Rev. Rul. 2015–11,
2015–21 I.R.B. 975. See § 1.951A–3(c)(2)
(defining tangible property as property
for which the depreciation deduction
provided by section 167(a) is eligible to
be determined under section 168 (with
certain exclusions)). The Treasury
Department and the IRS determined that
for consistency, the same standard for
determining whether property is
depreciable should apply for
determining whether property qualifies
as QBAI.
In Newark Morning Ledger Co. v.
United States, 507 U.S. 546 (1993), the
Supreme Court provided that
‘‘[w]hether or not . . . a tangible asset,
is depreciable for Federal income tax
purposes depends upon the
determination that the asset is actually
exhausting, and that such exhaustion is
susceptible of measurement.’’ Newark
Morning Ledger Co. v. United States at
566. Although unrecoverable
commodities used in a business are
depreciable, recoverable commodities
used in a business are not depreciable
because they do not suffer from
exhaustion, wear and tear, or
obsolescence over a determinable useful
life. O’Shaughnessy v. Commissioner,
332 F.3d 1125 (8th Cir. 2003); Arkla,
Inc. v. United States, 765 F.2d 487 (5th
Cir. 1985). The recoverable quantity of
a commodity used in the business
suffers no change in its physical
characteristics or value as a result of its
use in the business. The comment
seemed to imply that precious metals
were a single unit of property that was
partially depreciable and partially nondepreciable, rather than quantities of
metal in separate categories of property,
one of which is depreciable.
The Treasury Department and the IRS
have determined that it would not be
appropriate for purposes of determining
a CFC’s QBAI to take into account the
CFC’s entire adjusted basis in an asset
that is only partially depreciable. Taking
into account basis that is not subject to
a depreciation allowance would
overstate a CFC’s QBAI. For example, in
the case of precious metals that are
partially depreciable, such as platinum
used in a catalyst, a portion of the metal
may be subject to exhaustion, wear and
tear, or obsolescence during its useful
life. The remainder of the metal is
recoverable for reuse or sale. When
initially purchased, the value and tax
basis of the recoverable portion
generally should reflect the forward
price of such metal. The value and tax

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basis of the depreciable portion of the
metal generally should reflect the net
present value of the expected returns
generated by the metal. QBAI is a proxy
for the base upon which nonextraordinary, tangible returns should
be calculated. See S. Comm. on the
Budget, Reconciliation
Recommendations Pursuant to H. Con.
Res. 71, S. Print No. 115–20, at 371
(2017) (‘‘Senate Explanation’’) (The
provision approximates . . . tangible
income . . . as a 10-percent return on
. . . the adjusted basis in tangible
depreciable property.’’). Therefore, only
the depreciable portion of the precious
metal, which is associated with the
tangible returns, should be taken into
account in this measurement. Given that
liquid commodity markets exist for
these precious metals, taxpayers could
sell the future rights to the recoverable
portion of the asset (thereby reducing
their economic outlay and exposure
with respect to the property). Cf.
Guardian Industries v. Commissioner,
97 T.C. 308 (1991) (taxpayer regularly
sold silver waste from photographic
development process to refiners). Thus,
the depreciable portion of the asset
represents the taxpayer’s economic
investment in generating tangible
returns. Accordingly, the comment is
not adopted.
The comment also requested that in
calculating the adjusted basis in
precious metals for QBAI purposes, the
final regulations provide that class lives
applied to precious metals for purposes
of the alternative depreciation system
(‘‘ADS’’) are the same class lives
determined under the principles of Rev.
Rul. 2015–11, rather than the ADS class
lives of the equipment to which the
precious metals attach. This
recommendation is not adopted because
Rev. Rul. 2015–11 does not establish
principles for determining class lives of
the precious metals discussed therein,
but rather addresses whether certain
precious metals are depreciable under
the facts and circumstances described in
the ruling.
One comment requested that all
expenditures paid or incurred with
respect to the acquisition, exploration,
and development of a mine or other
natural deposit should be taken into
account in determining QBAI. The
comment stated that such exploration
and development costs for mining
operations are ‘‘of a type’’ for which
depreciation is allowed, even though
the costs are recovered through
depletion rather than depreciation. The
comment also recommended that the
adjusted basis in a mine or other natural
deposit included as QBAI should be

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determined using cost depletion, rather
than percentage depletion.
Section 951A(d)(1)(B) limits property
taken into account in determining QBAI
to tangible property of a type with
respect to which a deduction is
allowable under section 167. Congress
did not extend the definition of QBAI to
property of a type with respect to which
a deduction is allowed under section
611 (the allowance of deduction for
depletion). Although the comment
focused on the similarities between cost
depletion and depreciation, there are
also similarities between cost depletion
of mineral properties and the
acquisition cost of inventory. The
inventory cost of a severed mineral
includes the cost depletion attributable
to the severed mineral. See section 263A
and § 1.263A–1(e)(3)(ii)(J). In essence,
the acquisition cost of the mineral
property recovered through cost
depletion is the inventory cost of the
severed mineral, and QBAI does not
include inventory. Accordingly, the
recommendation is not adopted.
The proposed regulations define
‘‘tangible property’’ as property for
which the depreciation deduction
provided by section 167(a) is eligible to
be determined under section 168
without regard to section 168(f)(1), (2),
or (5) and the date placed in service. See
proposed § 1.951A–3(c)(2). Section
168(k) increases the depreciation
deduction allowed under section 167(a)
with respect to qualified property,
which includes tangible and certain
intangible property. The final
regulations revise the definition of
tangible property in § 1.951A–3(c)(2) to
exclude certain intangible property to
which section 168(k) applies, namely,
computer software, qualified film or
television productions, and qualified
live theatrical productions described in
section 168(k)(2)(A).
C. Determination of Basis Under
Alternative Depreciation System
For purposes of determining QBAI,
the adjusted basis in specified tangible
property is determined by using ADS
under section 168(g), and by allocating
the depreciation deduction with respect
to such property for the CFC inclusion
year ratably to each day during the
period in the taxable year to which such
depreciation relates. See section
951A(d)(3) 3 and § 1.951A–3(e)(1). ADS
3 As enacted, section 951A(d) contains two
paragraphs designated as paragraph (3). The section
951A(d)(3) discussed in this part V.C of the
Summary of Comments and Explanation of
Revisions section relates to the determination of the
adjusted basis in property for purposes of
calculating QBAI.

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applies to determine the adjusted basis
in property for purposes of determining
QBAI regardless of whether the property
was placed in service before the
enactment of section 951A, or whether
the basis in the property is determined
under another depreciation method for
other purposes of the Code. See section
951A(d)(3) and § 1.951A–3(e)(2). In
addition, for purposes of determining
income and E&P, a CFC is generally
required to use ADS for depreciable
property used predominantly outside
the United States. See section 168(g)
and §§ 1.952–2(c)(2)(ii) and (iv) and
1.964–1(a)(2). However, a CFC may
instead use for this purpose a
depreciation method used for its books
of account regularly maintained for
accounting to shareholders or a method
conforming to United States generally
accepted accounting principles (a ‘‘nonADS depreciation method’’) if the
differences between ADS and the nonADS depreciation method are
immaterial. See §§ 1.952–2(c)(2)(ii) and
(iv) and 1.964–1(a)(2).
A comment recommended that ADS
not be required under section 951A(d)
for specified tangible property placed in
service before the enactment of section
951A. This comment asserted that
section 951A(d)(3) does not compel the
conclusion that ADS must be used for
assets placed in service before the
enactment of section 951A, and cited
compliance concerns as a justification
for not requiring the use of ADS with
respect to such assets. Another
comment recommended that the final
regulations permit taxpayers to elect to
compute the adjusted basis in all
specified tangible property of a CFC—
not just specified tangible property
placed in service before the enactment
of section 951A—under the method that
the CFC uses to compute its tested
income and tested loss, even if such
method is not ADS.
Section 951A(d)(3) is clear that the
adjusted basis in specified tangible
property is determined using ADS
under section 168(g), and therefore the
final regulations do not adopt the
recommendation to permit taxpayers an
election to compute the adjusted basis
in all specified tangible property under
the CFC’s non-ADS depreciation
method. However, recognizing the
potential burden of re-determining the
basis under ADS of all specified tangible
property held by a CFC placed in
service before the enactment of section
951A, and given that a non-ADS
depreciation method is permissible only
when there are immaterial differences
between ADS and such other method,
the Treasury Department and the IRS
have determined that a transition rule is

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warranted for CFCs that are not required
to use ADS for purposes of computing
income and E&P. Accordingly, the final
regulations provide that a CFC that is
not required to use ADS for purposes of
computing income and E&P may elect,
for purposes of calculating QBAI, to use
its non-ADS depreciation method to
determine the adjusted basis in
specified tangible property placed in
service before the first taxable year
beginning after December 22, 2017,
subject to a special rule related to
salvage value. See § 1.951A–3(e)(3)(ii).
The election also applies to the
determination of a CFC’s partner
adjusted basis under § 1.951A–3(g)(3) in
partnership specified tangible property
placed in service before the CFC’s first
taxable year beginning after December
22, 2017. See id. This transition rule
does not apply for purposes of
determining the foreign-derived
intangible income (‘‘FDII’’) of a
domestic corporation. Cf. section
250(b)(2)(B) (in calculating deemed
tangible income return for purposes of
FDII, QBAI is generally determined
under section 951A(d)).
A comment requested that the final
regulations confirm that the use of ADS
in determining the basis in specified
tangible property, whether placed in
service before or after the enactment of
section 951A, for purposes of
determining QBAI is not a change in
method of accounting or, if it is a
change in method, that global approval
under section 446(e) be given for such
a change. Another comment
recommended that a CFC switching to
ADS for property placed in service
before the enactment of section 951A
should not be required to file Form 3115
to request an accounting method change
for depreciation, and that the
cumulative adjustment should be taken
into account for the adjusted basis in the
specified tangible property as of the
CFC’s first day of the first year to which
section 951A applies.
The determination of the adjusted
basis in property under section 951A(d)
is not a method of accounting subject to
the consent requirement of section
446(e). As a result, a CFC does not need
the Commissioner’s consent to use ADS
for purposes of determining its adjusted
basis in specified tangible property in
determining its QBAI. A CFC that uses
ADS for purposes of determining QBAI
should determine the correct basis in
the property under ADS as of the CFC’s
first day of the first taxable year to
which section 951A applies and apply
section 951A(d)(3) accordingly. The
final regulations also clarify that the
adjusted basis in property is determined
based on the cost capitalization methods

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of accounting used by the CFC for
purposes of determining its tested
income and tested loss. See § 1.951A–
3(e)(1).
A change to ADS from another
depreciation method for purposes of
computing tested income or tested loss
is a change in method of accounting
subject to section 446(e). The Treasury
Department and the IRS expect that
many CFCs that are not already using
ADS for purposes of computing income
and E&P will change their method of
accounting for depreciation to the
straight-line method, the applicable
recovery period, or the applicable
convention under ADS to comply with
§ 1.952–2(c)(2)(iv) and § 1.964–
1(c)(1)(iii)(c) and that most of such
changes are already eligible for
automatic consent under Rev. Proc.
2015–13, 2015–5 I.R.B. 419. The
Treasury Department and the IRS intend
to publish another revenue procedure
further expanding the availability of
automatic consent for depreciation
changes and updating the terms and
conditions in sections 7.07 and 7.09 of
Rev. Proc. 2015–13 (related to the
source, separate limitation
classification, and character of section
481(a) adjustments) to take into account
section 951A. After the change in
accounting method, the basis in
specified tangible property will be the
correct basis for purposes of
determining income, E&P, and QBAI.
The final regulations clarify the
interaction between the daily proration
of depreciation rule in section
951A(d)(3) and the applicable
convention under ADS. Under section
951A(d)(3), the adjusted basis in
property is determined by allocating the
depreciation deduction with respect to
property to each day during the period
in the taxable year to which the
depreciation relates. The half-year
convention, mid-month convention, and
mid-quarter convention in section
168(d) treat property as placed in
service (or disposed of) for purposes of
section 168 at the midpoint of the
taxable year, month, or quarter, as
applicable, irrespective of when the
property was placed in service (or
disposed of) during the taxable year.
The final regulations clarify that the
period in the CFC inclusion year to
which such depreciation relates is
determined without regard to the
applicable convention under section
168(d). See § 1.951A–3(e)(1).
Accordingly, in the year property is
placed in service, the depreciation
deduction allowed for the taxable year
is prorated from the day the property is
actually placed in service, and, in the
year property is disposed of, the

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depreciation deduction allowed for the
taxable year is prorated to the date of
disposition. Allocating depreciation to
each day during the period in which the
property is used irrespective of the
applicable convention ensures that the
average of the aggregate adjusted basis
as of the close of each quarter is
properly adjusted to reflect the
depreciation allowed for the taxable
year.
The Treasury Department and the IRS
continue to study issues related to the
determination of QBAI for purposes of
section 951A. In particular, the Treasury
Department and the IRS are aware that
a CFC that is a partner in a foreign
partnership may have difficulty
determining the basis in partnership
property under ADS, particularly when
the partnership is not controlled by U.S.
persons. Comments are requested on
methodologies for determining the basis
in partnership property owned by a
foreign partnership that is not
controlled directly or indirectly by U.S.
persons.
D. Dual Use Property
Section 951A(d)(2)(B) provides that if
property is used both in the production
of tested income and income that is not
tested income, the property is specified
tangible property in the same proportion
that the gross income described in
section 951A(c)(1)(A) produced with
respect to such property bears to the
total gross income produced with
respect to such property. The proposed
regulations provide that if tangible
property is used in both the production
of gross tested income and other
income, the portion of the adjusted basis
in the property treated as adjusted basis
in specified tangible property is
determined by multiplying the average
of the adjusted basis in the property by
the dual use ratio. See proposed
§ 1.951A–3(d)(1). If the property
produces directly identifiable income
for a CFC inclusion year, the dual use
ratio is the ratio of the gross tested
income produced by the property to the
total amount of gross income produced
by the property. See proposed § 1.951A–
3(d)(2)(i). In all other cases, the dual use
ratio is the ratio of the gross tested
income of the tested income CFC to the
total amount of gross income of the
tested income CFC. See proposed
§ 1.951A–3(d)(2)(ii).
Under the proposed regulations, the
dual use ratio requires a determination
of whether and how much gross income
is ‘‘directly identifiable’’ with particular
specified tangible property. The
Treasury Department and the IRS
recognize that application of the directly
identifiable standard could result in

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substantial uncertainty and controversy.
In addition, the Treasury Department
and the IRS have determined that the
rules under section 861 for allocating a
depreciation or amortization deduction
attributable to property owned by a CFC
to categories of income of the CFC
represent a reliable and well-understood
proxy for determining the type of
income produced by the property, even
in circumstances where there is no
income that is ‘‘directly identifiable’’
with the property. Accordingly, the final
regulations provide that the dual use
ratio, with respect to tangible property
for a CFC inclusion year, is the ratio
calculated as the sum of the amount of
the depreciation deduction with respect
to the property for the CFC inclusion
year that is allocated and apportioned to
gross tested income for the CFC
inclusion year under § 1.951A–2(c)(3)
and the depreciation with respect to the
property capitalized to inventory or
other property held for sale, the gross
income or loss from the sale of which
is taken into account in determining
tested income for the CFC inclusion
year, divided by the sum of the total
amount of the depreciation deduction
with respect to the property for the CFC
inclusion year and the total amount of
depreciation with respect to the
property capitalized to inventory or
other property held for sale, the gross
income or loss from the sale of which
is taken into account for the CFC
inclusion year. See § 1.951A–3(d)(3).
The dual use ratio also applies with
respect to partnership specified tangible
property, except, for this purpose,
determined by reference to a tested
income CFC’s distributive share of the
amounts described in the preceding
sentence. See § 1.951A–3(g)(3)(iii) and
part V.E of this Summary of Comments
and Explanation of Revisions section.
A comment recommended that the
final regulations clarify, through
additional examples, that the method
for determining the dual use ratio with
respect to specified tangible property
does not change if (i) the dual use
property becomes or ceases to be
specified tangible property during the
year, or (ii) the dual use property gives
rise to increasing or decreasing gross
tested income across quarters in a
taxable year. The Treasury Department
and the IRS have determined that
additional examples are unnecessary.
As the comment suggests, the dual use
ratio is not determined on the basis of
the type and amount of gross income
produced by the property as of any
particular quarter close, but rather is
determined based on the type and the
amount of gross income produced by

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the property for the entire taxable year.
In this regard, there is no ambiguity in
the language in the regulations, and
therefore no need for additional
clarification.
The rules in § 1.951A–3 do not apply
in determining QBAI for purposes of
computing the deduction of a domestic
corporation under section 250 for its
FDII. See proposed § 1.250(b)–2 (REG–
104464–18, 84 FR 8188 (March 6, 2019))
for the QBAI rules related to the FDII
deduction. However, it is anticipated
that, except as indicated in part V.D of
this Summary of Comments and
Explanation of Revisions section with
respect to the election to use a non-ADS
depreciation method for assets placed in
service before the enactment of section
951A, revisions similar to the revisions
to proposed § 1.951A–3 discussed in
parts V.B through E of this Summary of
Comments and Explanation of Revisions
section will be made to proposed
§ 1.250(b)–2.
E. Partnership QBAI
Section 951A(d)(3) 4 provides that, for
purposes of calculating QBAI, if a CFC
holds an interest in a partnership at the
close of the CFC’s taxable year, the CFC
takes into account its distributive share
of the aggregate of the partnership’s
adjusted basis in depreciable tangible
property used in its trade or business
that is used in the production of tested
income (determined with respect to the
CFC’s distributive share of income with
respect to such property). For this
purpose, a CFC’s distributive share of
the adjusted basis in any property is the
CFC’s distributive share of income with
respect to such property. See section
951A(d)(3) (flush language).
The proposed regulations implement
the rule in section 951A(d)(3) by
providing that, if a tested income CFC
holds an interest in one or more
partnerships as of the close of a CFC
inclusion year, the QBAI of the tested
income CFC for the CFC inclusion year
is increased by the sum of the tested
income CFC’s partnership QBAI with
respect to each partnership for the CFC
inclusion year. See proposed § 1.951A–
3(g)(1). A tested income CFC’s
partnership QBAI with respect to a
partnership is the sum of the tested
income CFC’s share of the partnership’s
adjusted basis in partnership specified
tangible property as of the close of a
partnership taxable year that ends with
4 As enacted, section 951A(d) contains two
paragraphs designated as paragraph (3). The section
951A(d)(3) discussed in this part V.E of the
Summary of Comments and Explanation of
Revisions section relates to tangible property held
by a partnership taken into account in calculating
the QBAI of a CFC partner.

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or within a CFC inclusion year. See
proposed § 1.951A–3(g)(2)(i). A tested
income CFC’s share of the partnership’s
adjusted basis in partnership specified
tangible property is determined by
multiplying the partnership’s adjusted
basis in the property by the tested
income CFC’s partnership QBAI ratio
with respect to the property. See id.
Similar to the rule for dual use property,
under the proposed regulations, the
tested income CFC’s partnership QBAI
ratio with respect to partnership
specified tangible property depends on
whether the property produces directly
identifiable income. In the case of
partnership specified tangible property
that produces directly identifiable
income for a partnership taxable year, a
tested income CFC’s partnership QBAI
ratio with respect to the property is the
tested income CFC’s distributive share
of the gross income produced by the
property for the partnership taxable year
that is included in the gross tested
income of the tested income CFC for the
CFC inclusion year to the total gross
income produced by the property for the
partnership taxable year. See proposed
§ 1.951A–3(g)(2)(ii)(A). In the case of
partnership specified tangible property
that does not produce directly
identifiable income for a partnership
taxable year, a tested income CFC’s
partnership QBAI ratio with respect to
the property is the tested income CFC’s
distributive share of the gross income of
the partnership for the partnership
taxable year that is included in the gross
tested income of the tested income CFC
for the CFC inclusion year to the total
amount of gross income of the
partnership for the partnership taxable
year. See proposed § 1.951A–
3(g)(2)(ii)(B).
The partnership QBAI ratio in the
proposed regulations is effectively an
amalgamation of two ratios—a ratio that
describes the portion of the partnership
specified tangible property that is used
in the production of gross tested income
(that is, the dual use ratio) and a ratio
that describes a tested income CFC’s
proportionate interest in all the income
produced by the property. The final
regulations disaggregate the partnership
QBAI ratio into these two ratios—the
dual use ratio (as defined in § 1.951A–
3(d)(3)) and a new proportionate share
ratio (as defined in § 1.951A–3(g)(4)(ii)).
Accordingly, the final regulations
provide that a tested income CFC’s
‘‘partner adjusted basis’’ with respect to
partnership specified tangible
property—that is, the adjusted basis in
partnership specified tangible property
taken into account in determining the
tested income CFC’s partnership

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QBAI—is generally, in the case of
partnership specified tangible property
used in the production of only gross
tested income (‘‘sole use partnership
property’’), the tested income CFC’s
proportionate share of the partnership’s
adjusted basis in the property for the
partnership taxable year. See § 1.951A–
3(g)(3)(ii). A tested income CFC’s
partner adjusted basis with respect to
partnership specified tangible property
used in the production of gross tested
income and gross income that is not
gross tested income (‘‘dual use
partnership property’’) is generally the
tested income CFC’s proportionate share
of the partnership’s adjusted basis in the
property for the partnership taxable
year, multiplied by the tested income
CFC’s dual use ratio with respect to the
property (determined by reference to the
tested income CFC’s distributive share
of amounts described in § 1.951A–
3(d)(3)). See § 1.951A–3(g)(3)(iii). In
either case, a tested income CFC’s
proportionate share of the partnership’s
adjusted basis in partnership specified
tangible property is the partnership’s
adjusted basis in the property for the
partnership taxable year multiplied by
the tested income CFC’s proportionate
share ratio with respect to the property
for the partnership taxable year.
As discussed in part V.D of this
Summary of Comments and Explanation
of Revisions section, a rule that
determines adjusted basis in specified
tangible property taken into account in
determining QBAI by reference to the
‘‘directly identifiable income’’
attributable to such property would lead
to substantial uncertainty and
controversy, whereas the rules under
section 861 for allocating and
apportioning depreciation attributable
to property owned by a CFC to
categories of income represent a
longstanding proxy for determining the
types of income produced by the
property. For this reason, the final
regulations determine the dual use ratio
by reference to the amount of
depreciation deductions allocated to
gross tested income under § 1.951A–
2(c)(3). Similarly, the Treasury
Department and the IRS have
determined that calculating partnership
QBAI by reference to the ‘‘directly
identifiable income’’ produced by
partnership specified tangible property
would lead to substantial uncertainty
and controversy, and that a partner’s
share of a depreciation deduction with
respect to partnership specified tangible
property is a reliable proxy for
determining a CFC’s distributive share
of income with respect to such property.
Accordingly, the final regulations

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determine the proportionate share ratio
with respect to partnership specified
tangible property also by reference to
the depreciation with respect to the
property, rather than the directly
identifiable income attributable to the
property or the gross income of the
partner. See § 1.951A–3(g)(4)(ii).
A comment requested clarification
that the partnership QBAI ratio in the
proposed regulations, which references
the amount of ‘‘gross income’’ produced
by the property, is determined by
reference to ‘‘gross taxable income,’’
rather than gross section 704(b) income.
The comment also recommended that if
the partnership QBAI ratio is
determined by reference to a
partnership’s gross taxable income, that
section 704(c) allocations (including
items of income under the remedial
method) be taken into account in
determining the CFC’s distributive share
of the gross income produced by the
property for the partnership taxable
year. The specific comment regarding
the calculation of gross income
produced by property has been mooted
by the change to determining the dual
use and proportionate share ratios by
reference to the depreciation with
respect to the property. However, the
comment remains relevant to the
calculation of the depreciation with
respect to property for purposes of
determining the dual use ratio and
proportionate share ratio.
For purposes of the proportionate
share ratio, the final regulations do not
adopt this recommendation. Section
704(b) income represents a partner’s
economic interest in the partnership
and therefore more closely aligns with
the economic production of income
from partnership property that QBAI is
intended to measure. Accordingly, the
final regulations clarify that the
proportionate share ratio is determined
by reference to the amount of
depreciation with respect to property
(and a tested income CFC’s distributive
share of such amount) determined
under section 704(b). See § 1.951A–
3(g)(4)(i). Therefore, items determined
under section 704(c) are not taken into
account for purposes of determining a
tested income CFC’s partner adjusted
basis in partnership specified tangible
property held by a partnership and thus
the tested income CFC’s partnership
QBAI with respect to the partnership.
However, because the dual use ratio is
determined by reference to the
allocation and apportionment of
depreciation deductions to gross tested
income of a tested income CFC, and
thus is based on a taxable income
concept, items determined under
section 704(c) are taken into account for

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purposes of determining the dual use
ratio.
The proposed regulations provide that
partnership QBAI is the sum of the
tested income CFC’s share of the
partnership’s adjusted basis in
partnership specified tangible property.
See proposed § 1.951A–3(g)(2)(i). A
comment recommended that the final
regulations clarify that the adjusted
basis in partnership specified tangible
property includes any basis adjustment
under section 743(b). In response to this
comment, the final regulations clarify
that an adjustment under section 743(b)
to the adjusted basis in partnership
specified tangible property with respect
to a tested income CFC is taken into
account in determining the tested
income CFC’s partner adjusted basis in
the partnership specified tangible
property. See § 1.951A–3(g)(3) and (7).
In addition, to ensure that the adjusted
basis in property other than tangible
property is not inappropriately shifted
to tangible property for purposes of
determining QBAI, the final regulations
provide that basis adjustments to
partnership specified tangible property
under section 734(b) are taken into
account only if they are basis
adjustments under section 734(b)(1)(B)
or 734(b)(2)(B) attributable to
distributions of tangible property or
basis adjustments under section
734(b)(1)(A) or 734(b)(2)(A) by reason of
gain or loss recognized by a distributee
partner under section 731(a). See
§ 1.951A–3(g)(6).
A comment also requested that the
final regulations clarify that a CFC’s
QBAI is increased not only for
partnership specified tangible property
owned by partnerships in which the
CFC is a direct partner, but also for
lower-tier partnerships in which the
CFC indirectly owns an interest through
one or more upper-tier partnerships.
The final regulations make this
clarification. See § 1.951A–3(g)(1).
Finally, a comment suggested that,
under section 951A(d)(3) and the
proposed regulations, a disposition of a
partnership interest by a tested income
CFC could result in the CFC including
its distributive share of partnership
income in its gross tested income, but
not taking into account any of the
partnership’s basis in partnership
specified tangible property for purposes
of calculating the CFC’s QBAI. Under
section 951A(d)(3) and proposed
§ 1.951A–3(g)(1), if a CFC holds an
interest in a partnership at the close of
the taxable year of the CFC, the CFC
takes into account its share of a
partnership’s adjusted basis in certain
tangible property for QBAI purposes.
However, neither section 951A(d)(3) nor

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the proposed regulations have a rule
that would allow a tested income CFC
to increase its QBAI for its share of
partnership QBAI if the tested income
CFC owned the partnership interest for
part of the year but not at the close of
the CFC taxable year. However, a
partner that disposes of its entire
partnership interest before the close of
the CFC taxable year could have a
distributive share of partnership income
if the partnership taxable year closes
before the close of the CFC taxable year,
including by reason of the disposition
itself. See section 706(c)(2)(A) (taxable
year of partnership closes with respect
to partner whose entire interest
terminates, including by reason of a
disposition).
The Treasury Department and the IRS
agree that a partner that has a
distributive share of income from a
partnership should also be permitted
partnership QBAI with respect to the
partnership. Therefore, the final
regulations are revised to provide that a
partner need only hold an interest in a
partnership during the CFC inclusion
year to have partnership QBAI with
respect to the partnership. See
§ 1.951A–3(g)(1). The final regulations
also provide that section 706(d) applies
to determine a tested income CFC’s
partner adjusted basis in partnership
specified tangible property owned by a
partnership if there is a change in the
tested income CFC’s interest in the
partnership during the CFC inclusion
year. See § 1.951A–3(g)(3)(i).
F. Disregard of Basis in Specified
Tangible Property Held Temporarily
Section 951A(d)(4) authorizes the
issuance of regulations or other
guidance that the Secretary determines
are appropriate to prevent the avoidance
of the purposes of section 951A(d),
including regulations or other guidance
which provide for the treatment of
property that is transferred, or held,
temporarily. The proposed regulations
provide that if a tested income CFC
(‘‘acquiring CFC’’) acquires specified
tangible property with a principal
purpose of reducing the GILTI inclusion
amount of a U.S. shareholder for any
U.S. shareholder inclusion year, and the
tested income CFC holds the property
temporarily but over at least the close of
one quarter, the specified tangible
property is disregarded in determining
the acquiring CFC’s average adjusted
basis in specified tangible property for
purposes of determining the acquiring
CFC’s QBAI for any CFC inclusion year
during which the tested income CFC
held the property (the ‘‘temporary
ownership rule’’). See proposed
§ 1.951A–3(h)(1). If an acquisition of

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29307

specified tangible property would, but
for the temporary ownership rule,
reduce the GILTI inclusion amount of a
U.S. shareholder, then the property is
‘‘per se’’ treated as temporarily held and
acquired with a principal purpose of
reducing the GILTI inclusion amount of
a U.S. shareholder if the tested income
CFC holds the property for less than a
12-month period that includes at least
the close of one quarter during its
taxable year (the ‘‘12-month per se
rule’’). See id. Therefore, the specified
tangible property is disregarded under
the proposed regulations for purposes of
determining QBAI.
Although some comments supported
the temporary ownership rule and, in
particular, stated that the principal
purpose standard was a reasonable
interpretation of section 951A(d)(4),
many comments asserted that it was
overbroad. Comments expressed
particular concern with the scope of the
12-month per se rule, noting for
example that it could (i) apply to
transactions not motivated by tax
avoidance such as ordinary course
transactions, (ii) require burdensome
asset-level tracking of CFC property, and
(iii) lead to uncertain return filing
positions or financial accounting
volatility if property acquired by a CFC
has not yet been held for 12 months
when a U.S. shareholder files its return
or publishes a financial statement.
Comments suggested various ways to
minimize the scope of the temporary
ownership rule, including (i)
eliminating the 12-month per se rule;
(ii) converting the 12-month per se rule
into a rebuttable presumption; (iii)
providing an exception for property
transferred among related CFCs owned
by a U.S. shareholder when there is no
decrease in that shareholder’s GILTI
inclusion amount (for this purpose,
treating a consolidated group as a single
entity); (iv) providing that, for purposes
of applying the 12-month per se rule, a
CFC’s holding period in property
received in a nonrecognition transaction
include a tacked holding period under
section 1223(2); (v) providing de
minimis or ordinary course transaction
exceptions; (vi) excepting acquisitions
of property that result in effectively
connected income or subpart F income
to the transferor; (vii) tailoring the rule’s
application depending on whether
property is acquired from or transferred
to unrelated parties; and (viii)
establishing a period of ownership that
will not be considered temporary.
In response to the comments, the
Treasury Department and the IRS have
determined that it is appropriate to
narrow the scope of the temporary
ownership rule, and that the following

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changes strike the appropriate balance
between mitigating the compliance
burden and identifying transactions that
have the potential to avoid the purposes
of section 951A(d). First, the final
regulations make certain technical
changes that are intended to refine and
clarify the application of the temporary
ownership rule. For example, the rule
applies, in part, based on a principal
purpose of increasing the DTIR of a U.S.
shareholder (‘‘applicable U.S.
shareholder’’) and, for this purpose,
certain related U.S. persons are treated
as a single applicable U.S. shareholder.
See § 1.951A–3(h)(1)(i) and (vi). Further,
in response to comments, the final
regulations clarify that property held
temporarily over a quarter close is
subject to the temporary ownership rule
only if the holding of the property over
the quarter close would, without regard
to the temporary ownership rule,
increase the DTIR of an applicable U.S.
shareholder for its taxable year. See
§ 1.951A–3(h)(1)(i).
The final regulations also clarify that
a CFC’s holding period for purposes of
this rule does not include the holding
period for which the property was held
by any other person under section 1223.
See § 1.951A–3(h)(1)(v). The final
regulations do not adopt the request to
permit a tacking of holding periods for
purpose of the temporary ownership
rule, because temporary acquisitions of
property through nonrecognition
transactions, particularly between
related parties, can artificially increase
a U.S. shareholder’s DTIR by, for
instance, causing the property to be
taken into account for an additional
quarter close for purposes of calculating
QBAI.
The final regulations also modify the
12-month per se rule to make it a
presumption rather than a per se rule.
Therefore, under the final regulations
the temporary ownership rule is
presumed to apply only if property is
held for less than 12 months. See
§ 1.951A–3(h)(1)(iv)(A). This
presumption may be rebutted if the facts
and circumstances clearly establish that
the subsequent transfer of the property
was not contemplated when the
property was acquired by the acquiring
CFC and that a principal purpose of the
acquisition of the property was not to
increase the DTIR of the applicable U.S.
shareholder. See id. As a result of this
change, a taxpayer generally will know
when it files its return whether the
temporary ownership rule will apply. In
order to rebut the presumption, a
taxpayer must attach a statement to the
Form 5471 filed with the taxpayer’s
return for the taxable year of the CFC in
which the subsequent transfer occurs

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disclosing that it rebuts the
presumption. See id. In response to a
comment, the final regulations include
a second presumption that generally
provides that property is presumed not
to be subject to the temporary
ownership rule if held for more than 36
months. See § 1.951A–3(h)(1)(iv)(B).
The final regulations clarify that the
adjusted basis in property may be
disregarded under the rule for multiple
quarter closes. See § 1.951A–3(h)(1)(ii).
However, in the case that the temporary
holding results in the property being
taken into account for only one
additional quarter close of a tested
income CFC in determining the DTIR of
a U.S. shareholder inclusion year, the
adjusted basis in the property is
disregarded under this rule only as of
the first tested quarter close that follows
the acquisition. See id.; see also
§ 1.951A–3(h)(1)(vii)(C) (Example 2)
(disregarding the adjusted basis in
specified tangible property for a single
quarter due to differences in CFC
taxable years). This rule ensures that the
adjusted basis in property is not
inappropriately disregarded in excess of
the amount necessary to eliminate the
increase in the DTIR of the applicable
U.S. shareholder by reason of the
temporary holding.
The final regulations also include a
safe harbor for certain transfers
involving CFCs. See § 1.951A–
3(h)(1)(iii). Under the safe harbor, the
holding of property as of a tested quarter
close is not treated as increasing the
DTIR if certain conditions are satisfied.
In general, the safe harbor applies to
transfers between CFCs that are owned
in the same proportion by the U.S.
shareholder, have the same taxable
years, and are all tested income CFCs.
The safe harbor is intended to exempt
non-tax motivated transfers from the
rule when the temporary holding of the
property does not have the potential for
increasing the DTIR of an applicable
U.S. shareholder. The addition of the
safe harbor responds to the comment
requesting that the rule be tailored
depending on whether the transfers
involve related or unrelated parties.
In addition, in response to comments,
the final regulations include four new
examples to illustrate the application of
the rule. See § 1.951A–3(h)(1)(vii). The
examples identify a transaction that is
not subject to the rule due to the
application of the safe harbor, and three
transactions that are subject to the rule,
including transfers of property between
CFCs that have different taxable years,
and an acquisition of property by a
tested income CFC from a tested loss
CFC, which cannot have QBAI pursuant
to § 1.951A–3(b) and (c)(1).

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The final regulations do not adopt the
comments requesting a de minimis or
ordinary course transaction exception.
The Treasury Department and the IRS
have determined that these types of
exceptions are unnecessary due to the
narrowed and refined scope of the rule
in the final regulations, including as a
result of converting the 12-month per se
rule into a rebuttable presumption,
adding the safe harbor, and illustrating
certain transactions that are targeted by
the rule through new examples.
Moreover, because the rule is limited to
the temporary holding of depreciable
property used in a CFC’s trade or
business (that is, specified tangible
property), the Treasury Department and
the IRS do not anticipate that many
such assets will be acquired and
disposed of in the ‘‘ordinary course’’ of
a CFC’s business, however that standard
is defined.
Finally, the final regulations do not
adopt the comment requesting an
exception for acquisitions of property
that result in effectively connected
income or subpart F income to the
transferor. The Treasury Department
and the IRS have concluded that, unlike
the rule that addresses disqualified basis
in § 1.951A–2(c)(5) and § 1.951A–
3(h)(2), the treatment of gain recognized
by the transferor (if any) is not relevant
for purposes of determining whether it
is appropriate to take into account
specified tangible property held
temporarily for purposes of determining
QBAI. Nothing in section 951A(d)(4) or
the legislative history suggests that
transfers of property that result in
income or gain that is subject to U.S. tax
should be exempt from the rule. Indeed,
the policy concern underlying this
rule—the temporary holding of
specified tangible property with a
principal purpose of increasing the
DTIR of a U.S. shareholder—is present
regardless of whether the basis in the
specified tangible property reflects gain
that is subject to U.S. tax.
G. Determination of Disqualified Basis
The determination of disqualified
basis is relevant for purposes of both the
rule in § 1.951A–2(c)(5) (allocating
deductions attributable to disqualified
basis to residual CFC gross income) and
the rule in § 1.951A–3(h)(2)
(disregarding disqualified basis for
purposes of calculating QBAI). This part
V.G of the Summary of Comments and
Explanation of Revisions section
describes comments and revisions
related to the computation of
disqualified basis both for purposes of
§ 1.951A–2(c)(5) and § 1.951A–3(h)(2).
For other comments and revisions
related to the computation of

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disqualified basis discussed in the
context of the application of § 1.951A–
2(c)(5), see part IV.E.3 and 4 of this
Summary of Comments and Explanation
of Revisions section.
As described in part IV.E.1 of this
Summary of Comments and Explanation
of Revisions section, the proposed
regulations define ‘‘disqualified basis’’
in property as the excess of the
property’s adjusted basis immediately
after a disqualified transfer, over the
sum of the property’s adjusted basis
immediately before the disqualified
transfer and the qualified gain amount
with respect to the disqualified transfer.
See proposed § 1.951A–3(h)(2)(ii)(A). In
addition, the proposed regulations
define ‘‘disqualified transfer’’ as a
transfer of property by a transferor CFC
during a transferor CFC’s disqualified
period to a related person in which gain
was recognized, in whole or in part. See
proposed § 1.951A–3(h)(2)(ii)(C). One
comment recommended that the
definition of disqualified transfer not be
expanded to include transfers of
property to unrelated persons. The final
regulations do not modify the definition
of disqualified transfer, and therefore
the term continues to be limited to
transfers of property by a CFC to a
related person. See § 1.951A–
3(h)(2)(ii)(C)(2).
A comment noted that the proposed
regulations do not explain whether the
computation of disqualified basis in
property takes into account basis
adjustments under section 743(b) or
section 734(b) allocated to that property
under section 755 during the
disqualified period. The final
regulations clarify that adjustments
under sections 732(d), 734(b), and
743(b) can create, increase, or reduce
disqualified basis in property. See
§ 1.951A–3(h)(2)(ii)(A) and (B).
The proposed regulations provide that
disqualified basis may be reduced or
eliminated through depreciation,
amortization, sales or exchanges, section
362(e), and other methods. See
proposed § 1.951A–3(h)(2)(ii)(A). The
final regulations clarify the
circumstances under which disqualified
basis is reduced. Specifically, the final
regulations provide that disqualified
basis in property is reduced to the
extent that a deduction or loss
attributable to the disqualified basis in
the property is taken into account in
reducing gross income, including any
deduction or loss allocated to residual
CFC gross income by reason of the rule
in § 1.951A–2(c)(5). See § 1.951A–
3(h)(2)(ii)(B)(1)(i).
The proposed regulations provide
that, if the adjusted basis in property
with disqualified basis and adjusted

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basis other than disqualified basis is
reduced or eliminated, then the
disqualified basis in the property is
reduced or eliminated in the same
proportion that the disqualified basis
bears to the total adjusted basis in the
property. See proposed § 1.951A–
3(h)(2)(ii)(A). The final regulations
adopt this rule without substantial
modification, except that the final
regulations provide a special rule where
a loss is recognized on a taxable sale or
exchange. See §§ 1.951A–2(c)(5)(ii) and
1.951A–3(h)(2)(ii)(B)(1)(i). In the case of
a loss recognized on a taxable sale or
exchange of the property, the loss is
treated as attributable to disqualified
basis to the extent thereof. See id.
Therefore, to the extent of the
disqualified basis, the loss on the sale is
allocated to residual CFC gross income
and the disqualified basis in the
property is reduced.
A comment noted that the proposed
regulations do not specify when the
proportion of the disqualified basis to
the total adjusted basis in the property
is determined for purposes of
determining the reduction to
disqualified basis. The comment
recommended that the Treasury
Department and the IRS clarify that this
proportion is determined immediately
after the disqualified transfer and does
not change throughout the useful life of
the property absent a subsequent
disqualified transfer. The final
regulations do not adopt this
recommendation, because the
proportion of disqualified basis to total
adjusted basis in property can change by
reason of one or more transactions
subsequent to a disqualified transfer.
For instance, a loss recognized on a
taxable sale of property with
disqualified basis and adjusted basis
other than disqualified basis, which
reduces disqualified basis to the extent
of the loss under § 1.951A–
3(h)(2)(ii)(B)(1)(i), will have the effect of
decreasing the proportion of
disqualified basis to total adjusted basis.
See, generally, 1.951A–3(h)(2)(ii)(B) and
this part V.G of the Summary of
Comments and Explanation of Revisions
for additional adjustments to
disqualified basis.
A comment recommended that the
Treasury Department and the IRS clarify
that depreciation or amortization that is
disregarded for purposes of determining
tested income or tested loss under
proposed § 1.951A–2(c)(5) nonetheless
reduces the adjusted basis in the
property. The final regulations do not
disregard a deduction or loss
attributable to disqualified basis, but
rather allocate and apportion such
deduction or loss to residual CFC gross

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income. Depreciation or amortization
that is allocated and apportioned to
residual CFC gross income continues to
reduce the adjusted basis in the
property in accordance with section
1016(a)(2). Accordingly, clarification
that any depreciation or amortization
attributable to disqualified basis in
property reduces adjusted basis in the
property is unnecessary.
Disqualified basis in property is
generally an attribute specific to the
property itself, rather than an attribute
of a CFC or a U.S. shareholder with
respect to the property. The final
regulations, however, provide rules to
treat basis in other property as
disqualified basis if such basis was
determined, in whole or in part, by
reference to the basis in property with
disqualified basis. See § 1.951A–
3(h)(2)(ii)(B)(2). These rules are
intended to prevent taxpayers from
eliminating disqualified basis in
nonrecognition transactions that would
otherwise have the effect of granting
taxpayers the benefit of the disqualified
basis. This could occur, for example, if
property with disqualified basis is
transferred in a nonrecognition
transaction, such as a like-kind
exchange under section 1031, in
exchange for other depreciable property.
In that case, a portion of the basis in the
newly acquired property is treated as
disqualified basis. Also, disqualified
basis may be duplicated through certain
nonrecognition transactions. For
example, if property with disqualified
basis is transferred in a section 351
exchange, both the stock received by the
transferor and the property received by
the transferee will have disqualified
basis, in each case determined by
reference to the disqualified basis in the
property in the hands of the transferor
immediately before the transaction. See
§ 1.951A–3(h)(2)(ii)(B)(2)(ii). The final
regulations also provide that basis
arising from other transactions, such as
distributions of property from a
partnership to a partner, can create
disqualified basis in property to the
extent the transaction has the effect of
shifting disqualified basis from one
property to another. See § 1.951A–
3(h)(2)(ii)(B)(2)(i). This might occur, for
example, if low-basis property is
distributed in liquidation of a high-basis
partner under section 732(b) resulting in
a decrease to disqualified basis in other
partnership property under section
734(b)(2)(B). See § 1.951A–3(h)(2)(iii)(D)
Example 4.
The final regulations also clarify how
disqualified basis is disregarded under
§ 1.951A–3(h)(2)(i) in the case of dual
use property and partnership specified
tangible property for purposes of

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determining QBAI and partnership
QBAI, respectively. The portion of the
adjusted basis in dual use property with
disqualified basis that is taken into
account for determining QBAI is the
average adjusted basis in the property,
multiplied by the dual use ratio, and
then reduced by the disqualified basis
in the property. See § 1.951A–
3(h)(2)(i)(B); see also § 1.951A–3(d)(4)
Example. For purposes of determining
partnership QBAI, a CFC’s partner
adjusted basis with respect to
partnership specified tangible property
with disqualified basis is first
determined under the general rules of
§ 1.951A–3(g)(3)(i) and then reduced by
the partner’s share of the disqualified
basis in the property. See § 1.951A–
3(h)(2)(i)(C). In either case, the
allocation and apportionment rules of
§ 1.951A–2(c)(5) are not taken into
account for purposes of applying the
dual use ratio and the proportionate
share ratio to determine the amount of
the adjusted basis in property that is
reduced by the disqualified basis. See
§ 1.951A–3(h)(2)(i)(B) and (C).
The Treasury Department and the IRS
request comments on the application of
the rules that reduce or increase
disqualified basis including, for
example, how the rules should apply in
an exchange under section 1031 where
property with disqualified basis is
exchanged for property with no
disqualified basis.

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VI. Comments and Revisions to
Proposed § 1.951A–4—Tested Interest
Expense and Tested Interest Income
A. Determination of Specified Interest
Expense Under Netting Approach
Section 951A(b)(2)(B) reduces net
DTIR of a U.S. shareholder by interest
expense that reduces tested income (or
increases tested loss) for the taxable year
of the shareholder to the extent the
interest income attributable to such
expense is not taken into account in
determining such shareholder’s net CFC
tested income. The proposed regulations
adopt a netting approach to determine
the amount of interest expense of a U.S.
shareholder described in section
951A(b)(2)(B) (‘‘specified interest
expense’’), defining such amount as the
excess of such shareholder’s pro rata
share of ‘‘tested interest expense’’ of
each CFC over its pro rata share of
‘‘tested interest income’’ of each CFC.
See proposed § 1.951A–1(c)(3)(iii).
Several comments agreed with the
adoption of the netting approach,
principally on the grounds of
administrability and policy. However,
one comment noted that the netting
approach for determining specified

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interest expense is potentially more
favorable to taxpayers than permitted by
the statute because it provides that
specified interest expense is reduced by
all interest income included in the
tested income of the U.S. shareholder
(subject to certain exceptions), even if
earned from unrelated parties.
The Treasury Department and the IRS
have determined that the netting
approach appropriately balances
administrability concerns with the
purpose and language of section
951A(b)(2)(B). As discussed in the
preamble to the proposed regulations,
the netting approach avoids the
complexity related to a tracing
approach, under which a U.S.
shareholder’s pro rata share of each item
of interest expense of a CFC would have
to be matched to the shareholder’s pro
rata share of the interest income
attributable to such interest expense
received by a CFC. Furthermore, the
amount of specified interest expense
should, in most cases, be the same
whether determined under a netting
approach or under a tracing approach.
In this regard, while the netting
approach does not require a factual link
between the interest income and interest
expense, only interest income included
in gross tested income, other than
income included by reason of section
954(h) or (i) (that is, ‘‘qualified interest
income’’), is taken into account for this
purpose. Because interest income is
generally FPHCI under section
954(c)(1)(A) and qualified interest
income is not taken into account under
the netting approach, interest income
taken into account under the netting
approach is generally limited to interest
income that is excluded from subpart F
income by reason of section 954(c)(3) or
(6). Furthermore, because the exceptions
under section 954(c)(3) and (6) apply
only to interest income paid or accrued
by related party foreign corporations,
both the interest income excluded by
reason of section 954(c)(3) or (6) and the
interest expense attributable to such
interest income will generally be taken
into account in determining the net CFC
tested income of either the same U.S.
shareholder or a related U.S.
shareholder. Accordingly, the final
regulations retain the netting approach
for determining specified interest
expense, with certain modifications
described in part VI.B through D of this
Summary of Comments and Explanation
of Revisions section. See § 1.951A–
1(c)(3)(iii).
B. Definition of Tested Interest Expense
and Tested Interest Income
For purposes of determining specified
interest expense, ‘‘tested interest

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expense’’ is defined in the proposed
regulations as interest expense paid or
accrued by a CFC that is taken into
account in determining the tested
income or tested loss of the CFC,
reduced by the qualified interest
expense of the CFC. See proposed
§ 1.951A–4(b)(1)(i). For this purpose,
‘‘interest expense’’ is defined as any
expense or loss treated as interest
expense under the Code or regulations,
and any other expense or loss incurred
in a transaction or series of integrated or
related transactions in which the use of
funds is secured for a period of time if
such expense or loss is predominantly
incurred in consideration of the time
value of money. See proposed § 1.951A–
4(b)(1)(ii). The proposed regulations
include similar definitions for ‘‘tested
interest income’’ and ‘‘interest income.’’
See proposed § 1.951A–4(b)(2)(i) and
(ii).
One comment asserted that the
concepts of ‘‘predominantly incurred in
consideration of the time value of
money’’ and ‘‘predominantly derived
from consideration of the time value of
money’’ are new and unclear, and lack
analogies in other authorities. The
comment also stated that this new
standard is further complicated by
references to ‘‘a transaction or series of
integrated or related transactions.’’
Other comments asserted that creating a
new standard for interest expense and
interest income specifically for specified
interest expense would result in
additional confusion and complexity.
Another comment questioned the
inclusion of interest equivalents in the
definition of interest in the proposed
regulations and noted that, because the
definition covers both interest income
and interest expense, there is a
particular risk of whipsaw to the
government unless the authority for the
regulations is clear. Some comments
recommended that the final regulations
replace the definitions of interest
expense and interest income in the
proposed regulations with references to
interest expense or interest income
under any provision of the Code or
regulations, or as a consequence of
issuing or holding an instrument that is
treated as indebtedness for Federal
income tax purposes, such as
instruments characterized as
indebtedness under judicial factors or
administrative guidance, or payments
‘‘equivalent to interest.’’
The Treasury Department and the IRS
did not intend to create a new standard
of interest solely for purposes of
determining specified interest expense.
In this regard, the reduction of net DTIR
by specified interest expense under
section 951A(b)(2)(B) and the limitation

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on business interest under section 163(j)
are meant to achieve similar policy
goals, namely preventing certain interest
expense in excess of interest income
from being taken into account in
determining taxable income. Further,
because the amount of interest expense
subject to each of these provisions is
determined, in part, by reference to
interest income received, each of these
provisions need clear and consistent
definitions of both interest expense and
interest income, including when and to
what extent transactions that result in a
financing from an economic perspective
may be treated as generating interest
expense and interest income. Finally,
the relevant terms used in each
provision—‘‘interest expense’’ and
‘‘interest income’’ in section
951A(b)(2)(B) and ‘‘business interest’’
and ‘‘business interest income’’ in
section 163(j)—do not differ
meaningfully in their respective
contexts and therefore do not
necessitate different definitions. As a
result of the foregoing, and in order to
reduce administrative complexity, the
Treasury Department and the IRS have
determined that taxpayers and the
government would benefit from the
application of a single definition of
interest for both section 951A(b)(2)(B)
and section 163(j) (rather than the
application of two partially overlapping,
but ultimately different standards).
Accordingly, the final regulations define
‘‘interest expense’’ and ‘‘interest
income’’ by reference to the definition
of interest expense and interest income
under section 163(j). See § 1.951A–
4(b)(1)(ii) and (2)(ii).
The regulations under section 163(j),
when finalized, will address comments
on the validity of the definition of
interest expense and interest income
that are used in those regulations.
Because the final regulations adopt this
definition for purposes of determining
specified interest expense, the
discussion in the regulations under
section 163(j) will, by extension,
address the validity of the definitions as
used in these final regulations.
Finally, the definition of tested
interest expense is revised in the final
regulations to mean interest expense
that is ‘‘allocated and apportioned to
gross tested income’’ of a CFC under
§ 1.951A–2(c)(3). See § 1.951A–
4(b)(1)(i). This revision does not reflect
a substantive change to the definition in
the proposed regulations—interest
expense ‘‘taken into account in
determining the tested income or tested
loss’’—but rather is intended to more
clearly articulate that definition.

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C. Determination of Qualified Interest
Expense and Qualified Interest Income
The proposed regulations provide
that, for purposes of determining the
specified interest expense of a U.S.
shareholder, the tested interest expense
and tested interest income of a
‘‘qualified CFC’’ are reduced by its
‘‘qualified interest expense’’ and
‘‘qualified interest income,’’
respectively. See proposed § 1.951A–
4(b)(1) and (2). The reduction for
qualified interest expense and qualified
interest income is intended to neutralize
the effect of interest expense and
interest income attributable to the active
conduct of a financing or insurance
business on a U.S. shareholder’s net
DTIR. For example, absent the rule for
qualified interest expense, the thirdparty interest expense of a captive
finance company—to the extent its
interest expense exceeds its interest
income—could inappropriately increase
specified interest expense (and thus
reduce the net DTIR) of its U.S.
shareholder. Alternatively, under a
netting approach to calculating
specified interest expense, the thirdparty interest income of a captive
finance company—to the extent its
interest income exceeds interest
expense—could inappropriately reduce
the specified interest expense (and thus
increase the net DTIR) of its U.S.
shareholder.
For purposes of these rules, the
proposed regulations define a ‘‘qualified
CFC’’ as an eligible controlled foreign
corporation (within the meaning of
section 954(h)(2)) or a qualifying
insurance company (within the meaning
of section 953(e)(3)). See proposed
§ 1.951A–4(b)(1)(iv). Further, ‘‘qualified
interest income’’ is defined as interest
income included in the gross tested
income of the qualified CFC that is
excluded from FPHCI by reason of
section 954(h) or (i). See proposed
§ 1.951A–4(b)(2)(iii). The proposed
regulations define ‘‘qualified interest
expense’’ as the portion of the interest
expense of a qualified CFC, which
portion is determined based on a twostep approach. First, a qualified CFC’s
interest expense is multiplied by a
fraction, the numerator of which is the
CFC’s average basis in assets which give
rise to income excluded from FPHCI by
reason of section 954(h) or (i), and the
denominator is the CFC’s average basis
in all its assets. See proposed § 1.951A–
4(b)(1)(iii)(A). Second, the product of
the first step is reduced by the interest
income of the qualified CFC that is
excluded from FPHCI by reason of
section 954(c)(3) or (6). See proposed
§ 1.951A–4(b)(1)(iii)(B). This two-step

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approach effectively treats all interest
expense of a qualified CFC as
attributable ratably to the assets of the
qualified CFC that give rise to income
excluded from FPHCI by reason of
section 954(h) and (i), but then traces
such interest expense, after attribution
to such assets, to any interest income
received from related CFCs to the extent
thereof.
A comment indicated that the twostep approach in the proposed
regulations can understate the amount
of qualified interest expense.
Specifically, the comment noted that the
proposed regulations include related
party receivables in the denominator of
the fraction under the first step, thus
diluting the fraction and resulting in
less qualified interest expense, and then
interest income from such receivables
further reduce qualified interest expense
dollar-for-dollar under the second step.
The comment recommended that, to
avoid double counting, related party
receivables should be excluded from the
fraction in the first step.
The Treasury Department and the IRS
agree with the comment that, under the
two-step approach to the proposed
regulations, related party receivables are
effectively double-counted, and
therefore the final regulations eliminate
the second step reduction for interest
income included in the gross tested
income of a qualified CFC that is
excluded from FPHCI by reason of
section 954(c)(3) or (6). See § 1.951A–
4(b)(1)(iii)(A). This revision ensures that
a related party receivable is not doublecounted in the determination of
qualified interest expense, and thus
qualified interest expense as calculated
under the final regulations more
accurately reflects the interest expense
incurred to earn income earned from
unrelated parties in an active financing
or insurance business. Further, the
Treasury Department and the IRS
preferred the elimination of the second
step reduction for resolving the doublecounting issue, rather than the
recommended alternative of excluding
related party receivables from the
fraction in the first step, because the
elimination of an additional step
substantially simplifies the calculation
of qualified interest expense.
In addition, with regard to the effect
of related party receivables on the
computation of qualified interest
expense, the final regulations clarify
that a receivable that gives rise to
income that is excludible from FPHCI
by reason of section 954(c)(3) or (6) is
excluded from the numerator of the
fraction (that is, the receivable is not a
‘‘qualified asset’’ within the meaning of
§ 1.951A–4(b)(1)(iii)(B), a new term in

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the final regulations), notwithstanding
that such receivable may also give rise
to income excluded from FPHCI by
reason of section 954(h) or (i). See
§ 1.951A–4(b)(1)(iii)(B)(2). Similarly, the
final regulations clarify that interest
income that is excludible from FPHCI
by reason of section 954(c)(3) or (6) is
excluded from qualified interest
income, notwithstanding that such
income may also be excluded from
FPHCI by reason of section 954(h) or (i).
See § 1.951A–4(b)(2)(iii)(B). These
clarifications ensure that the
computation of qualified interest
income and qualified interest expense is
determined by reference only to interest
expense and interest income attributable
to a CFC’s active conduct of a financing
or insurance business with unrelated
persons.
A comment recommended that, for
purposes of determining the amount of
qualified interest expense of a CFC,
instruments or obligations that give rise
to interest income derived by active
securities and derivatives dealers that is
excluded from FPHCI under section
954(c)(2)(C) should also be included in
the numerator for calculating qualified
interest expense. The final regulations
adopt this recommendation by
including such instruments or
obligations in the definition of qualified
assets. See § 1.951A–4(b)(1)(iii)(B)(1).
Similarly, interest income excluded
from FPHCI under section 954(c)(2)(C)
is included in the definition of qualified
interest income. See § 1.951A–
4(b)(2)(iii)(A).
A comment suggested that the benefit
to some U.S. shareholders from the
exclusion for qualified interest expense
may not justify the difficulty and
expense to determine the amount
excluded. Therefore, the comment
recommended that the final regulations
provide taxpayers the ability to either
establish the amount of their qualified
interest expense or, alternatively, to
assume that none of their interest
expense constitutes qualified interest
expense. The Treasury Department and
the IRS agree that taxpayers should not
be required to reduce their CFCs’ tested
interest expense by their CFCs’ qualified
interest expense if the taxpayer
determines that the value of such
reduction is outweighed by the cost of
compliance. Accordingly, the final
regulations provide that a CFC’s
qualified interest expense is taken into
account only to the extent established
by the CFC. See § 1.951A–4(b)(1)(iii)(A).
Thus, if a CFC does not establish an
amount of qualified interest expense,
the taxpayer can assume that none of
the CFC’s interest expense is qualified
interest expense. However, regardless of

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whether a CFC avails itself of the
reduction for qualified interest expense,
the exclusion for qualified interest
income is mandatory. See § 1.951A–
4(b)(2)(iii)(A).
A comment recommended an
exception from the qualified interest
rules for a CFC that is a qualified
insurance company under section
954(i), or in the alternative, an
exception from the qualified interest
rules for any CFC that is part of a
financial services group defined in
section 904(d)(2)(C)(ii), with the result
that all interest income and interest
expense of such CFCs would be tested
interest income and tested interest
expense taken into account in
determining a U.S. shareholder’s
specified interest expense. The
comment speculated that the qualified
interest rules may have been crafted to
address a CFC involved in a financial
services business that was not a member
of a business group primarily engaged in
a financial services business. The
Treasury Department and the IRS
decline to adopt this recommendation.
The qualified interest rules are intended
to neutralize the effect of an active
finance business or an active business of
a CFC on the specified interest expense
(and thus net DTIR) of its U.S.
shareholder, irrespective of whether the
CFC is a member of a business group
primarily engaged in such activities. In
contrast, the recommended exception
would permit interest income from an
active finance business or active
insurance business in excess of the
associated interest expense to net
against other interest expense in the
computation of specified interest
expense.
The same comment also explained
that some foreign financial service
groups borrow externally through a
holding company to fund their
qualifying insurance company
subsidiaries that earn qualified interest
income. The comment noted that the
proposed regulations create a mismatch
between the treatment of the interest
income of the subsidiaries, which is
qualified interest income of a qualified
CFC and thus not taken into account in
calculating specified interest expense,
and the interest expense of the holding
company, which is not qualified interest
expense of a qualified CFC and thus is
taken into account in calculating
specified interest expense. To address
this mismatch, the final regulations
eliminate the term ‘‘qualified CFC.’’
Therefore, if a holding company that is
not engaged in an active financing or
insurance business borrows to fund the
activities of subsidiaries that are
engaged in an active financing or

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insurance business, the interest expense
of the holding company may constitute
qualified interest expense and thus be
disregarded in determining specified
interest expense. In this regard, the final
regulations retain the rule that the
adjusted basis in stock of a subsidiary is
treated as basis in a qualified asset to
the extent that the assets of the
subsidiary are qualified assets. See
§ 1.951A–4(b)(1)(iii)(B)(3). In addition,
the final regulations provide a new rule
that treats a CFC that owns 25 percent
or more of the capital or profits interest
in a partnership as owning its
attributable share of any property held
by the partnership, as determined under
the principles of § 1.956–4(b). See
§ 1.951A–4(b)(1)(iii)(B)(4). Therefore,
under the final regulations, whether,
and to what extent, the interest expense
of a CFC is qualified interest expense
depends entirely on the nature of the
assets it holds directly and indirectly,
and not on whether the CFC itself is
engaged in an active financing or
insurance business.
Finally, the definition of qualified
interest expense in the proposed
regulations includes a parenthetical that
indicates that the fraction for
determining qualified interest expense
cannot exceed one. See proposed
§ 1.951A–4(b)(1)(iii). The Treasury
Department and the IRS have
determined that, because the numerator
(average basis in qualified assets) is a
subset of the denominator (average basis
in all assets), this fraction can never
exceed one, even without regard to the
parenthetical. Therefore, the final
regulations eliminate the parenthetical
in the definition of qualified interest
expense as surplusage. See § 1.951A–
4(b)(1)(iii)(A).
D. Interest Expense Paid or Accrued by
a Tested Loss CFC
Under the proposed regulations,
tested interest expense includes interest
expense paid or accrued by a tested loss
CFC, notwithstanding that the proposed
regulations provide that a tested loss
CFC has no QBAI. See proposed
§ 1.951A–3(b) and § 1.951A–4(b)(1). As
discussed in part V.A of this Summary
of Comments and Explanation of
Revisions section, the final regulations
continue to provide that a tested loss
CFC has no QBAI. See § 1.951A–3(b).
Comments recommended that, if the
rule excluding the QBAI of a tested loss
CFC were retained, the final regulations
should also exclude all interest expense
of a tested loss CFC from the calculation
of tested interest expense. Comments
asserted that exempting interest expense
of tested loss CFCs from the calculation
of specified interest expense, in

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conjunction with the exclusion of the
QBAI of tested loss CFCs, would
produce appropriate results, though one
comment acknowledged that such a rule
might need to be accompanied by an
anti-abuse rule. One comment asserted
that excluding interest expense of a
tested loss CFC would be appropriate
under section 951A(b)(2)(B), because
that subparagraph refers only to interest
expense ‘‘taken into account under
subsection (c)(2)(A)(ii),’’ which,
according to the comment, describes
only deductions taken into account in
determining tested income. Another
comment recommended that, rather
than excluding all the interest expense
of a tested loss CFC, the final
regulations should exclude the interest
expense incurred to fund acquisitions of
tangible property held by the tested loss
CFC. The comments suggested that
including interest expense of a tested
loss CFC (or incurred to acquire tangible
property of the tested loss CFC), which
reduces net DTIR of a U.S. shareholder,
while excluding the QBAI of a tested
loss CFC, which increases the net DTIR
of a U.S. shareholder, results in unfair
and asymmetrical treatment of tested
loss CFCs.
The final regulations do not adopt the
recommendation to exclude all interest
expense of a tested loss CFC, because
such exclusion would be inconsistent
with the text of section 951A(d)(2)(A)
and footnote 1563 of the Conference
Report and could create an incentive to
inappropriately shift interest expense to
a tested loss CFC in order to avoid
reducing a U.S. shareholder’s net DTIR.
The reference to section
951A(c)(2)(A)(ii) in section
951A(b)(2)(B) encompasses all
deductions properly allocable to gross
tested income, including deductions
taken into account in determining tested
loss. See section 951A(c)(2)(B)(i)
(defining tested loss as the excess of
deduction described in section
951A(c)(2)(A)(ii) over gross tested
income described in section
951A(c)(2)(A)(i)).
However, in response to the
comments, the final regulations reduce
a tested loss CFC’s tested interest
expense by its tested loss QBAI amount,
an amount equal to 10 percent of the
QBAI that the tested loss CFC would
have had if it were instead a tested
income CFC. See § 1.951A–4(b)(1)(i) and
(iv) and (c) Example 5. This rule has the
effect of not taking into account the
tested interest expense of a tested loss
CFC to the extent that such tested
interest expense is less than or equal to
a notional 10 percent return on the
tested loss CFC’s tangible assets that are

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used in the production of gross tested
income.
E. Interest Expense Paid or Accrued to
a U.S. Shareholder
As discussed in part VI.A of this
Summary of Comments and Explanation
of Revisions section, the proposed
regulations adopt a netting approach
with the result that specified interest
expense is the excess of a U.S.
shareholder’s pro rata share of tested
interest expense of each CFC over its
pro rata share of tested interest income
of each CFC. See proposed § 1.951A–
1(c)(3)(ii). Several comments
recommended that the final regulations
exclude interest expense paid by a CFC
to a U.S. shareholder or a related U.S.
person from the definition of tested
interest expense. One comment
recommended that this exclusion be
applied to a payment of interest to any
U.S. person, whereas two comments
suggested that this exclusion also apply
to interest expense to the extent the
related interest income is subject to U.S.
tax as effectively connected income or
subpart F income. These comments
asserted that interest expense should
not generally increase specified interest
expense to the extent that the related
interest income is subject to U.S. tax at
the regular statutory rate, at least in the
hands of a U.S. shareholder or related
person. According to these comments,
excluding interest expense under these
circumstance would be consistent with
the policy of section 951A(b)(2)(B),
which does not reduce a U.S.
shareholder’s net DTIR for a CFC’s
interest expense to the extent that the
related income increases the U.S.
shareholder’s net CFC tested income.
The final regulations do not adopt
these recommendations. Section
951A(b)(2)(B) generally reduces net
DTIR of a U.S. shareholder by the full
amount of its pro rata share of the
interest expense of a CFC, but then
provides a limited exception for the
CFC’s interest expense to the extent the
related interest income is taken into
account in determining the net CFC
tested income of the U.S. shareholder.
In effect, the rule generally reduces net
DTIR of a U.S. shareholder by its pro
rata share of the net external interest
expense incurred by its CFCs. Thus,
borrowing between commonly-owned
CFCs generally does not reduce net
DTIR, whereas external borrowing
generally does. The statute does not
provide a similar exception for any
payment of interest to the extent the
related interest income is subject to U.S.
tax, nor is there any indication in the
legislative history of the Act that
Congress intended that the Treasury

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Department and the IRS should provide
such an exception. Further, an
exception for interest paid to U.S.
persons could permit taxpayers to
circumvent section 951A(b)(2)(B) by
borrowing externally at the U.S.
shareholder level and then on-lending
the borrowed funds to CFCs. In this
case, the borrowing by the U.S.
shareholder would not reduce net DTIR,
notwithstanding that the borrowing is
factually traceable to the acquisition by
the CFC of specified tangible property
and net DTIR would have been reduced
if instead the CFC had borrowed
directly from the third party.
VII. Comments and Revisions to
Proposed § 1.951A–5—Domestic
Partnerships and Their Partners
A. Proposed Hybrid Approach
The proposed regulations provide
that, in general, a domestic partnership
that is a U.S. shareholder (‘‘U.S.
shareholder partnership’’) of a CFC
(‘‘partnership CFC’’) determines a GILTI
inclusion amount, and partners of the
partnership that are not also U.S.
shareholders of the partnership CFC
take into account their distributive share
of the partnership’s GILTI inclusion
amount. See proposed § 1.951A–5(b).
Partners that are U.S. shareholders of a
partnership CFC (‘‘U.S. shareholder
partners’’), however, do not take into
account their distributive share of the
partnership’s GILTI inclusion amount to
the extent determined by reference to
the partnership CFC but instead are
treated as proportionately owning the
stock of the partnership CFC within the
meaning of section 958(a) as if the
domestic partnership were an aggregate
of its partners. To accomplish this
result, the proposed regulations, with
respect to U.S. shareholder partners,
treat the domestic partnership in the
same manner as a foreign partnership,
which is treated as an aggregate of its
partners under section 958(a)(2). As a
result, a U.S. shareholder partner
determines its GILTI inclusion amount
taking into account its pro rata share of
any tested item of the partnership CFC.
If the U.S. shareholder partnership
holds other partnership CFCs in which
the partner is not a U.S. shareholder,
then a separate GILTI computation is
made at the partnership level with
respect to such partnership CFCs’ tested
items, and the partner includes its
distributive share of this separately
determined GILTI inclusion amount as
well. See proposed § 1.951A–5(c). This
hybrid approach (‘‘proposed hybrid
approach’’) of treating a domestic
partnership as an entity with respect to
partners that are not U.S. shareholders,

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but as an aggregate of its partners with
respect to partners that are U.S.
shareholders, is intended to balance the
policies underlying GILTI with the
relevant statutory provisions. In
particular, a domestic partnership is a
U.S. person under sections 957(c) and
7701(a)(30) and thus a U.S. shareholder
under section 951(b), which suggests
that a domestic partnership should
generally be treated as an entity for
purposes of subpart F. On the other
hand, if a domestic partnership were
treated strictly as an entity for purposes
of section 951A, a domestic partnership
with a GILTI inclusion amount would
be ineligible for foreign tax credits
under section 960(d) or a deduction
under section 250 with respect to its
GILTI inclusion amount.
In the proposed regulations, the
Treasury Department and the IRS
rejected an approach that would treat a
domestic partnership as an entity with
respect to all its partners (‘‘pure entity
approach’’) for purposes of section
951A, because treating a domestic
partnership as the section 958(a) owner
of stock in all cases would frustrate the
GILTI framework by creating
unintended planning opportunities for
well-advised taxpayers and traps for the
unwary. However, the Treasury
Department and the IRS also did not
adopt an approach that would treat a
domestic partnership as an aggregate
with respect to all its partners (‘‘pure
aggregate approach’’) for purposes of
GILTI, because such an approach would
be inconsistent with the treatment of
domestic partnerships as entities for
purposes of subpart F.
B. Comments on Proposed Hybrid
Approach
Two comments were received on the
treatment of domestic partnerships and
their partners under the proposed
regulations. These comments raised
concerns regarding the procedural and
computational complexity of the
proposed hybrid approach. The
comments highlighted the difficulty that
some partnerships would have in
determining whether and to what extent
its partners are U.S. shareholder
partners of partnership CFCs in order to
determine whether and with respect to
which partnership CFCs to calculate a
partnership-level GILTI inclusion
amount for each of its partners. In this
regard, a partner of a U.S. shareholder
partnership may itself be a U.S.
shareholder of one or more partnership
CFCs, but not a U.S. shareholder of one
or more others. According to the
comments, the proposed hybrid
approach also raises administrability
concerns under the centralized

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partnership audit regime enacted by
section 1101 of the Bipartisan Budget
Act of 2015, Public Law 114–74 (BBA)
as some determinations are made at the
partnership level and others at the
partner level.
The comments also raised concerns
that the determination of a GILTI
inclusion amount at the partnership
level and the disparate treatment of U.S.
shareholder partners and non-U.S.
shareholder partners under the
proposed hybrid approach leads to
uncertainty regarding the application of
sections 959 and 961 (regarding PTEP
and corresponding basis adjustments)
with respect to domestic partnerships
and partnership CFCs, basis adjustments
with respect to partnership interests and
partnership CFCs, and capital accounts
determined and maintained in
accordance with § 1.704–1(b)(2). For
instance, there are no rules in the
proposed regulations regarding whether
and to what extent a U.S. shareholder
partner’s capital account in a
partnership is adjusted when the U.S.
shareholder partner computes its GILTI
inclusion amount based on its pro rata
shares of tested items of partnership
CFCs. The comments noted that if the
capital account of a U.S. shareholder
partner is not adjusted for its pro rata
shares of tested items of a partnership
CFC, then the economic arrangement
between the U.S. shareholder partner
and other partners could be distorted.
Neither comment recommended a
pure entity approach as its primary
recommendation. One comment
supported a pure entity approach over
the proposed hybrid approach, although
it recommended a pure entity approach
only if a pure aggregate approach were
not adopted. Another comment
recommended that the pure entity
approach not be adopted in any case.
Both comments noted that the pure
entity approach would avoid the
complexities inherent in the proposed
hybrid approach and conform the
treatment of domestic partnerships for
GILTI purposes with the treatment
under subpart F before the enactment of
section 951A. However, the comments
noted that a pure entity approach is
inconsistent with the purpose of section
951A, which is to compute a single
GILTI inclusion amount for a taxpayer
by reference to the items of all the
taxpayer’s CFCs. The comments agreed
that the preamble to the proposed
regulations articulated valid policy
reasons for rejecting the pure entity
approach, namely, that such approach
presents both an inappropriate planning
opportunity as well as a trap for the
unwary.

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Both comments primarily
recommended a pure aggregate
approach. Under a pure aggregate
approach, a domestic partnership would
not have a GILTI inclusion amount, and
thus no partner of the partnership
would have a distributive share of such
amount. Rather, for purposes of
determining the partner’s GILTI
inclusion amount, a partner would be
treated as owning directly the stock of
CFCs owned by a domestic partnership
for purposes of determining its own
GILTI inclusion amount. Thus, under a
pure aggregate approach, unlike under
the proposed hybrid approach or a pure
entity approach, a partner that is not a
U.S. shareholder of a partnership CFC
would not have a pro rata share of the
partnership CFC’s tested items or a
distributive share of a GILTI inclusion
amount of the partnership. According to
comments, a pure aggregate approach
would reduce complexities inherent in
the proposed hybrid approach in terms
of administration and compliance. A
pure aggregate approach would also
avoid the disparate and arbitrary effects
of a pure entity approach, under which
a U.S. shareholder’s GILTI inclusion
amount may vary significantly
depending on whether it owns CFCs
through a domestic partnership as
opposed to directly or through a foreign
partnership. The comments
acknowledged that while domestic
partnerships have historically been
treated as entities for purposes of
subpart F, the enactment of section
951A and its reliance on shareholderlevel calculations justifies a
reconsideration of this approach.
One comment recommended that the
pure aggregate approach apply also to
the determination of whether a foreign
corporation owned by a domestic
partnership is a CFC. Under this
approach, a domestic partnership would
also be treated as a foreign partnership
for purposes of determining whether a
domestic partnership is a U.S.
shareholder of a foreign corporation and
therefore whether the foreign
corporation is owned in the aggregate
more than 50 percent (by voting power
or value) by U.S. shareholders. The
same comment suggested that if this
approach were not adopted, the final
regulations should either adopt the
proposed hybrid approach or an
aggregate approach that would require
even non-U.S. shareholder partners to
take into account their pro rata shares of
tested items of CFCs owned by a
domestic partnership. This approach, in
contrast to the pure entity approach and
the proposed hybrid approach, would
permit a partner that is not a U.S.

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shareholder with respect to a
partnership CFC to nonetheless
aggregate its pro rata shares of the tested
items of such partnership CFC with its
pro rata shares of the tested items of any
non-partnership CFCs with respect to
which the partner is a U.S. shareholder
for purposes of determining a single
GILTI inclusion amount for the partner.
The other comment recommended
that if the pure aggregate approach or
the pure entity approach were not
adopted, the final regulations adopt an
approach under which a domestic
partnership would be treated as an
entity for purposes of determining its
GILTI inclusion amount and each
partner’s distributive share of such
amount, but then each partner’s overall
GILTI inclusion amount would be
adjusted by its separately-computed
GILTI inclusion amount with respect to
non-partnership CFCs of the partner.
This adjustment would be positive to
the extent of the partner’s net CFC
tested income with respect to CFCs
owned outside a domestic partnership,
but it could be negative if the partner
had a ‘‘net CFC tested loss’’ (that is,
aggregate pro rata shares of tested loss
in excess of aggregate pro rata share of
tested income) with respect to such
CFCs.
C. Adoption of Aggregate Treatment for
Purposes of Determining GILTI
Inclusion Amounts
After consideration of the comments
received, the Treasury Department and
the IRS have decided not to adopt the
proposed hybrid approach in the final
regulations. Instead, the final
regulations adopt an approach that
treats a domestic partnership as an
aggregate for purposes of determining
the level (that is, partnership or partner)
at which a GILTI inclusion amount is
calculated and taken into gross income.
Specifically, the final regulations
provide that, in general, for purposes of
section 951A and the section 951A
regulations, and for purposes of any
other provision that applies by reference
to section 951A or the section 951A
regulations (for instance, sections 959,
960, and 961), a domestic partnership is
not treated as owning stock of a foreign
corporation within the meaning of
section 958(a). See § 1.951A–1(e)(1).
Rather, the partners of a domestic
partnership are treated as owning
proportionately the stock of CFCs
owned by the partnership in the same
manner as if the partnership were a
foreign partnership under section
958(a)(2). See id. Because a domestic
partnership is not treated as owning
section 958(a) stock for purposes of
section 951A, a domestic partnership

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does not have a GILTI inclusion amount
and thus no partner of the partnership
has a distributive share of a GILTI
inclusion amount. Furthermore, because
only a U.S. shareholder can have a pro
rata share of a tested item of a CFC
under section 951A(e)(1) and § 1.951A–
1(d), a partner that is not a U.S.
shareholder of a CFC owned by the
partnership does not have a pro rata
share of any tested item of the CFC. For
the reasons discussed in this part VII.C
of the Summary of Comments and
Explanation of Revisions section, the
Treasury Department and the IRS have
determined that this approach best
reconciles the relevant statutory
provisions, the policies underlying
GILTI, and the administrative and
compliance concerns raised by the
comments.
Since the enactment of subpart F,
domestic partnerships have generally
been treated as entities, rather than as
aggregates of their partners, for purposes
of determining whether a foreign
corporation is a CFC. See § 1.701–2(f)
Example 3 (concluding that a domestic
partnership that wholly owns a foreign
corporation is treated as an entity and
the U.S. shareholder of the foreign
corporation, and that the foreign
corporation is a CFC for section 904
purposes). In addition, domestic
partnerships have generally been treated
as entities for purposes of determining
the U.S. shareholder that has the
subpart F inclusion with respect to such
foreign corporation. But cf. §§ 1.951–
1(h) and 1.965–1(e) (treating certain
domestic partnerships owned by CFCs
as foreign partnerships for purposes of
determining the U.S. shareholder that
has a subpart F inclusion with respect
to CFCs owned by such domestic
partnerships).
The GILTI rules employ the basic
subpart F architecture in several
regards, such as for purposes of
determining a U.S. shareholder’s pro
rata share of tested items. See section
951A(e)(1). Nevertheless, there is no
indication that Congress intended to
incorporate the historical treatment of
domestic partnerships under subpart F
into the GILTI regime, particularly given
that respecting a domestic partnership
as the owner under section 958(a) of the
stock of a CFC for purposes of GILTI
would frustrate the statutory framework.
In addition, no provision in the Code
prescribes the treatment of domestic
partnerships for purposes of section
958(a) in determining GILTI.
Given the silence in the statute with
respect to the treatment of domestic
partnerships for purposes of GILTI, the
Act’s legislative history, and the overall
significance of the GILTI regime with

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respect to the taxation of CFC earnings
after the Act, the Treasury Department
and the IRS have determined that it is
an appropriate occasion to reexamine
whether a domestic partnership should
be treated as an entity or an aggregate in
determining the owners of section
958(a) stock for purposes of sections 951
and 951A. The 1954 legislative history
makes clear that this determination
should be based on the policies of the
provision at issue. See H.R. Rep. No.
83–2543, at 59 (1954) (Conf. Rep.). In
this regard, the Act fundamentally
changed the policies relating to the
taxation of CFC earnings relative to
those in 1962. Moreover, an aggregate
approach applies if it is appropriate to
carry out the purpose of a provision of
the Code, unless an entity approach is
specifically prescribed and clearly
contemplated by the relevant statute. Cf.
§ 1.701–2(e).
As discussed in the preamble to the
proposed regulations, an aggregate
approach to domestic partnerships
furthers the purposes of the GILTI
regime. It is consistent with the general
intent of the GILTI regime to determine
tax liability at the U.S. shareholder level
on an aggregate basis rather than on a
CFC-by-CFC basis. See Senate
Explanation at 371 (‘‘The committee
believes that calculating GILTI on an
aggregate basis, instead of on a CFC-byCFC basis, reflects the interconnected
nature of a U.S. corporation’s global
operations and is a more accurate way
of determining a U.S. corporation’s
global intangible income.’’); see also
House Ways and Means Committee,
115th Cong., Rep. on H.R. 1, H.R. Rep.
No. 115–409, at 389 (Comm. Print 2017)
(‘‘[I]n making this measurement, the
Committee recognizes the integrated
nature of modern supply chains and
believes it is more appropriate to look
at a multinational enterprise’s foreign
operations on an aggregate basis, rather
than by entity or by country.’’). A pure
entity approach undermines this overall
framework in two ways. First, under a
pure entity approach, well-advised
taxpayers might avail themselves of
domestic partnerships to segregate
tested items in a manner that is
inconsistent with the overall framework
of section 951A. In this regard,
taxpayers generally would lower their
tax liability by separating through one
or more domestic partnerships their
CFCs with high-taxed tested income and
tested interest expense from their CFCs
with low-taxed tested income, QBAI,
and tested losses. Second, a pure entity
approach would represent a trap for an
unwary taxpayer by, for example,
preventing the use of the tested losses

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of CFCs directly held by a taxpayer to
offset the tested income of CFCs held by
the taxpayer through one or more
domestic partnerships. This result
would not occur if the domestic
partnership were treated as an aggregate
of its partners. In this regard, the
proposal to ‘‘adjust’’ a partner’s
distributive shares of its domestic
partnerships’ GILTI inclusion amount
by the partner’s net CFC tested income
and the net CFC tested loss calculated
with respect to the partner’s CFCs held
outside the partnership would not fully
address these concerns. That is, the
partner would be permitted the full
benefit of its aggregate pro rata share of
tested losses with respect to CFCs
outside the partnership, but the
specified interest expense with respect
to CFCs outside the partnership would
be effectively segregated from the QBAI
of CFCs inside the partnership (and
therefore would not reduce the partner’s
net DTIR), and vice versa.
In addition, an aggregate approach
with respect to section 958(a) furthers
the policies of other provisions related
to section 951A. The legislative history
makes clear that Congress intended for
a domestic corporate partner of a
domestic partnership to obtain the
benefit of a foreign tax credit under
section 960(d) and a deduction under
section 250 with respect to a GILTI
inclusion amount. See Conference
Report, at 623, fn. 1517. However, only
domestic corporations (not domestic
partnerships) are eligible for a foreign
tax credit under section 960(d) or a
deduction under section 250. Moreover,
absent treating a domestic partnership
as an aggregate for purposes of section
951A, a domestic corporate partner’s
inclusion percentage under section
960(d)(2) is determined without regard
to any CFC owned by the partnership
because such partner has no pro rata
share of the tested income of such CFC.
See section 960(d)(2)(B) (the
denominator of the inclusion percentage
of a domestic corporation is the
corporation’s aggregate pro rata share of
tested income amount under section
951A(c)(1)(A)). Therefore, a strict entity
approach to section 960(d) might
suggest that domestic corporate partners
of a domestic partnership are ineligible
for foreign tax credits with respect to a
GILTI inclusion amount of the
partnership. On the other hand, an
aggregate approach to domestic
partnerships furthers Congressional
policy by treating domestic corporate
partners as owning (within the meaning
of section 958(a)) stock of CFCs owned
by domestic partnerships and thus
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partner’s GILTI inclusion amount by
reference to CFCs owned by the
domestic partnership.
The final regulations treat a domestic
partnership as an aggregate of its
partners in determining section 958(a)
stock ownership by providing that, for
purposes of section 951A and the
section 951A regulations, a domestic
partnership is treated in the same
manner as a foreign partnership. See
§ 1.951A–1(e)(1). For purposes of
subpart F, a foreign partnership is
explicitly treated as an aggregate of its
partners, and rules regarding
aggregation of foreign partnerships are
relatively well-developed and
understood. See section 958(a)(2).
Therefore, rather than developing a new
standard for the treatment of domestic
partnerships as an aggregate, the
Treasury Department and the IRS have
determined that it would be simpler and
more administrable to incorporate the
aggregate approach by reference to the
rules related to foreign partnerships
under section 958(a)(2).
The final regulations do not adopt the
recommendation to extend the
treatment of a domestic partnership as
an aggregate of its partners to the
determination of U.S. shareholder and
CFC status. The Treasury Department
and the IRS have determined that an
approach that treats a domestic
partnership as an aggregate of its
partners for purposes of determining
CFC status would not be consistent with
the relevant statutory provisions. A
domestic partnership is a U.S. person
under section 957(c) and section
7701(a)(30) and, therefore, can be a U.S.
shareholder under section 951(b).
Indeed, when subpart F was enacted in
1962, the legislative history indicated
that domestic partnerships generally
should be treated as U.S. shareholders.
See S. Rep. No. 1881, 87th Cong., 2d
Sess. 80 n.1 (1962) (‘‘U.S. shareholders
are defined in the bill as ‘U.S. persons’
with 10-percent stockholding. U.S.
persons, in general, are U.S. citizens and
residents and domestic corporations,
partnerships and estates or trusts.’’).
Furthermore, sections 958(b) and
318(a)(3) treat a partnership (including
a domestic partnership) as owning the
stock of its partners for purposes of
determining whether the foreign
corporation is owned more than 50
percent by U.S. shareholders, which
suggests that partnerships are treated as
entities for purposes of determining
ownership under section 958(b). See
also sections 958(b) and 318(a)(2)
(treating stock owned by a partnership,
domestic or foreign, as owned
proportionately by its partners).

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The final regulations also do not
extend aggregate treatment to the
determination of the controlling
domestic shareholders (as defined in
§ 1.964–1(c)(5)) of a CFC for purposes of
any election made under the section
951A regulations. See § 1.951A–
3(e)(3)(ii) (election to use a non-ADS
depreciation method for pre-enactment
property) and § 1.951A–3(h)(2)(ii)(B)(3)
(election to eliminate disqualified
basis). As a result, a domestic
partnership that satisfies the ownership
requirements of § 1.964–1(c)(5) with
respect to a CFC, and not its partners,
is treated as the controlling domestic
shareholder of the CFC and the
partnership files the relevant elections
with respect to the CFC. The treatment
of a domestic partnership as the
controlling domestic shareholder
reduces the number of persons that need
to comply with the rules of § 1.964–
1(c)(3), and ensures that any election
with respect to a CFC that could affect
the tax consequences of a U.S. person
that is a partner of a domestic
partnership is made by such
partnership. Accordingly, the final
regulations provide that the aggregation
rule for domestic partnerships does not
apply for purposes of determining
whether a U.S. person is a U.S.
shareholder, whether a U.S. shareholder
is a controlling domestic shareholder (as
defined in § 1.964–1(c)(5)), or whether a
foreign corporation is a CFC. See
§ 1.951A–1(e)(2).
The treatment of domestic
partnerships as foreign partnerships in
the final regulations is solely for
purposes of section 951A and the
section 951A regulations and for
purposes of any other provision that
applies by reference to a GILTI
inclusion amount (such as sections 959
and 961). The rule does not affect the
determination of ownership under
section 958(a) for any other provision of
the Code (such as section 1248(a)), nor
does it change whether such partner has
a distributive share of a domestic
partnership’s subpart F inclusion under
section 951(a). However, the Treasury
Department and the IRS are proposing
in a notice of proposed rulemaking
published in the same issue of the
Federal Register as these final
regulations to apply a similar aggregate
treatment to domestic partnerships for
purposes of section 951.
Under section 1373(a), an S
corporation is treated as a partnership
and its shareholders as partners for
purposes of subpart F, including section
951A. Therefore, for purposes of
determining a GILTI inclusion amount
of a shareholder of an S corporation,
under § 1.951A–1(e), the S corporation

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is not treated as owning stock of a
foreign corporation within the meaning
of section 958(a) but instead is treated
in the same manner as a foreign
partnership. The Treasury Department
and the IRS are studying the application
of section 1373(a) with respect to
section 951A, as well as the broader
implications of treating S corporations
as partnerships for purposes of subpart
F. Comments are requested in this
regard.
Conforming changes are also made to
other aspects of the final regulations to
account for the aggregate treatment of
domestic partnerships under § 1.951A–
1(e). For instance, the proposed
regulations provide that, for purposes of
determining whether a U.S. shareholder
has a pro rata share of an accrual for
purposes of sections 163(e)(3)(B)(i) and
267(a)(3)(B), a domestic partnership’s
pro rata share of the accrual is taken
into account only to the extent that U.S.
persons include in gross income a
distributive share of the domestic
partnership’s GILTI inclusion amount.
See proposed § 1.951A–5(c)(2). This rule
is no longer necessary under the final
regulations because a domestic
partnership does not have a GILTI
inclusion amount, and partners that are
U.S. shareholders have their own pro
rata shares of the accrual. Therefore, this
rule is eliminated in the final
regulations. See § 1.951A–5(c). In
addition, the partnership blocker rule is
modified such that it no longer applies
for purposes of section 951A. See
§ 1.951–1(h)(1). It is no longer necessary
to apply the rule for purposes of section
951A because, for such purposes, a
domestic partnership is not treated as
owning stock of a foreign corporation
within the meaning of section 958(a).

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VIII. Comments and Revisions to
Proposed § 1.951A–6—Treatment of
GILTI Inclusion Amount and
Adjustments to E&P and Basis Related
to Tested Loss CFCs
A. Increase of E&P by Tested Losses for
Purposes of Section 952(c)(1)(A)
Section 951A(c)(2)(B)(ii) provides that
section 952(c)(1)(A) is applied by
increasing the E&P of a tested loss CFC
by the amount of its tested loss. See also
proposed § 1.951A–6(d). Comments
asserted that proposed § 1.951A–6(d)
has the effect of increasing E&P by a
tested loss even if, and to the extent, the
tested loss does not provide a benefit to
a U.S. shareholder because its aggregate
pro rata share of tested losses exceeds
its aggregate pro rata share of tested
income. These comments argued that
this result is not appropriate because,
based on the heading of section

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951A(c)(2)(B)(ii) (‘‘Coordination with
subpart F to deny double benefit of
losses’’), the provision is limited to
denying a double benefit from a tested
loss (that is, a reduction in both net CFC
tested income and subpart F income),
and that there can be no such double
benefit to the extent that the tested loss
does not reduce a U.S. shareholder’s net
CFC tested income. These comments
recommended that proposed § 1.951A–
6(d) be modified such that it applies
only to a tested loss to the extent the
tested loss is ‘‘used’’ within the meaning
of proposed § 1.951A–6(e).
The final regulations do not adopt this
recommendation. Section
951A(c)(2)(B)(ii), by its terms, increases
E&P for purposes of section 952(c)(1)(A)
by the amount of any tested loss. There
is no indication in the provision or
legislative history that limiting the
application of section 951A(c)(2)(B)(ii)
to a tested loss that reduces net CFC
tested income would be appropriate,
and the heading of the provision has no
legal effect. See section 7806(b).
Accordingly, the rule is adopted
without modification in § 1.951A–6(b).
B. Treating GILTI Inclusion Amounts as
Subpart F Inclusions for Purposes of the
Personal Holding Company Rules
A comment requested clarification
regarding the treatment of a GILTI
inclusion amount for purposes of the
personal holding company rules in
sections 541 through 547. Section 541(a)
imposes a 20-percent tax on the
undistributed personal holding
company income of a personal holding
company. Section 542(a) defines a
‘‘personal holding company’’ as a
corporation if at least 60 percent of its
adjusted ordinary gross income for the
taxable year is personal holding
company income and certain ownership
requirements are satisfied. Section
543(a) defines ‘‘personal holding
company income’’ by reference to
certain categories of passive income,
including dividends. However, for this
purpose, dividends received by a U.S.
shareholder from a CFC are excluded
from the definition of personal holding
company income. See section
543(a)(1)(C). The comment noted that
the existing regulations under section
951 provide that for purposes of
determining whether a corporate U.S.
shareholder is a personal holding
company, the character of a subpart F
inclusion of such domestic corporation
is determined as if the amount that
results in the subpart F inclusion were
realized directly by the corporation from
the source from which it is realized by
the CFC. See § 1.951–1(a)(3).

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The Treasury Department and the IRS
have determined that it would be
inappropriate to treat any portion of a
GILTI inclusion amount as personal
holding company income. A GILTI
inclusion amount is determined by
reference to income that would have
been taxed, if at all, as dividends from
CFCs before the enactment of section
951A, which are specifically excluded
from the definition of personal holding
company income under section
543(a)(1)(C). Further, there is no
indication in the legislative history that
Congress intended through the
enactment of section 951A to
substantially change the types of income
that would be taken into account in
determining personal holding company
status. Accordingly, the final regulations
clarify that in determining whether a
corporate U.S. shareholder is a personal
holding company, a GILTI inclusion
amount is not treated as personal
holding company income (as defined in
section 543(a)). See § 1.951A–5(d).
C. Adjustments to Basis Related to Net
Used Tested Loss
To eliminate the potential for the
duplicative use of a loss, the proposed
regulations set forth rules providing for
downward adjustments to the adjusted
basis in stock of a tested loss CFC to the
extent its tested loss was used to offset
tested income of another CFC. See
proposed § 1.951A–6(e). These
adjustments are generally made at the
time of a direct or indirect disposition
of stock of the tested loss CFC. See
proposed § 1.951A–6(e)(1). Comments
raised many significant issues with
respect to these rules.
The Treasury Department and the IRS
remain concerned that, absent basis
adjustments, a tested loss can result in
the creation of uneconomic or
duplicative loss, but have determined
that the rules in the proposed
regulations related to basis adjustments
should not be adopted in these final
regulations. Instead, the rules related to
basis adjustments, including the
comments received with respect to such
rules, will be considered in a separate
project. Accordingly, the final
regulations reserve on the rules related
to adjustments to stock of tested loss
CFCs. See § 1.951A–6(c). Any rules
issued under § 1.951A–6(c) will apply
only with respect to tested losses
incurred in taxable years of CFCs and
their U.S. shareholders ending after the
date of publication of any future
guidance.
For a discussion of corresponding
rules for basis adjustments within a
consolidated group, as provided for in
proposed §§ 1.1502–13, 1.1502–32, and

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1.1502–51, see part IX.C of this
Summary of Comments and Explanation
of Revisions section.

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IX. Comments and Revisions to
Proposed §§ 1.1502–13, 1.1502–32, and
1.1502–51—Consolidated Section 951A
A. Calculation of GILTI Inclusion
Amount
Section 1502 provides that
consolidated return regulations will be
promulgated to clearly reflect the
income tax liability of a consolidated
group and each member of the
consolidated group (a ‘‘member’’).
However, in the context of section
951A, clear reflection of the GILTI
inclusion amounts of both individual
members and the consolidated group as
a whole is not feasible. Section 951A
requires a U.S. shareholder-level
calculation, where, for example, the
shareholder’s pro rata share of the tested
income of one CFC may be offset by its
pro rata share of the tested loss or QBAI
of another CFC, to produce a smaller
GILTI inclusion amount. Accordingly,
calculating a member’s GILTI inclusion
amount on a completely separate-entity
basis, solely based on its pro rata share
of the items of its CFCs, would clearly
reflect the income tax liability of the
member. However, such an approach
would mean that the consolidated
group’s GILTI inclusion amount would
vary depending on which members own
each CFC, particularly in cases in which
the CFCs held by some members
produce tested income, but the CFCs
held by other members produce tested
loss. This variability undermines the
clear reflection of the income tax
liability of the consolidated group as a
whole. The Treasury Department and
the IRS determined in the proposed
regulations that members’ GILTI
inclusion amounts should be
determined in a manner that clearly
reflects the income tax liability of the
consolidated group and that creates
consistent results regardless of which
member of a consolidated group owns
the stock of the CFCs (‘‘single-entity
treatment’’). This approach removes
incentives for inappropriate planning
and also eliminates traps for the
unwary.
The proposed regulations accomplish
these goals by providing that the GILTI
inclusion amount of a member is
determined pursuant to a multi-step
process. As in the case of a nonmember, the GILTI inclusion amount of
a member equals the excess (if any) of
the member’s net CFC tested income
over the member’s net DTIR for the
taxable year. See proposed § 1.951A–
1(c)(1) and proposed § 1.1502–51(b). For

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purposes of determining a member’s net
CFC tested income, a member’s
aggregate pro rata share of tested income
is determined on a separate-entity basis
by aggregating its pro rata share of the
tested income of each of its CFCs. See
proposed § 1.1502–51(e)(1) and (12).
However, a member’s aggregate pro rata
share of tested loss and its net DTIR for
the taxable year is calculated in three
steps—first, each member’s pro rata
share of each tested item other than
tested income is determined on a
separate-entity basis by reference to its
pro rata share of each CFC; second, each
member’s pro rata share of each tested
item other than tested income is
aggregated into a consolidated sum; and
third, each member is then allocated a
portion of the consolidated sum of each
such tested item based on its relative
amount of tested income (the
‘‘aggregation approach’’). See proposed
§ 1.1502–51(e)(2), (3), (4), (5), (7), and
(10). The aggregation approach has the
effect of determining the aggregate
amount of GILTI inclusion amounts of
members on a single-entity basis, but
then determining each member’s share
of the consolidated group’s aggregate
GILTI inclusion amount based on its
relative pro rata share of tested income
as determined on a separate-entity basis.
The Treasury Department and the IRS
received several comments addressing
the calculation of a member’s GILTI
inclusion amount. These comments
generally supported single-entity
treatment, but they expressed concern
about the lack of clear reflection of
income at the member level. The
concern arises from the movement of
the economic benefit (in the GILTI
computation) of one member’s pro rata
share of a tested loss with respect to
stock held by the member to other
members, including those not holding
such stock. The comments considered
whether alternative methods could be
used that both provide for single-entity
treatment and minimize uneconomic
results to members. In particular, the
comments raised the possibility that the
tested loss of a CFC should first offset
the tested income of a CFC owned by
the same member (the ‘‘priority
allocation approach’’).
One comment evaluated the merits of
the priority allocation approach versus
the aggregation approach. The comment
identified the tension in the section
951A context between clearly reflecting
income tax liability at the consolidated
group level and doing so at the member
level, and it considered possible ways to
alleviate this conflict. The comment
ultimately endorsed maintaining the
approach in proposed § 1.1502–51, due
to the additional rules and complexities

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required to rationalize the priority
allocation approach.
Two of the comments proposed
similar methods for determining a
member’s GILTI inclusion amount. One
of these comments suggested calculating
the consolidated group’s GILTI
inclusion amount as if members holding
CFC stock were divisions of a single
corporation, then allocating the
resulting consolidated group amount
among members based on each
member’s net CFC tested income. For
this purpose, net CFC tested income is
calculated in a manner consistent with
the priority allocation approach, by
allowing the member’s tested losses to
be used first to offset the same member’s
tested income. The other comment
suggested calculating and allocating the
consolidated group’s GILTI inclusion
amount in the same manner, but would
extend application of this method to
foreign tax credits with respect to tested
income. This second comment proposed
using the aggregation approach to
determine the amount of such credits
available to the consolidated group (and
the identity of the CFCs to whom the
credits are attributable), but allocating
certain basis adjustments in member
stock related to such credits under the
priority allocation approach. As an
alternative, the second comment would
base the allocations on the relative
amounts of foreign tax credits paid by
each member’s CFCs.
The Treasury Department and the IRS
decline to adopt these comments
because they do not produce reasonable
results that are consistent with singleentity treatment. In particular, the first
of these comments does not provide for
single-entity treatment when foreign tax
credits are taken into account, instead
allowing for wide variation in the
availability of foreign tax credits
depending on which member of a
consolidated group owns the stock of
the CFCs. The variation arises because
a corporate U.S. shareholder is deemed
to pay a portion of the foreign income
taxes paid or accrued by its CFCs based
on the shareholder’s GILTI inclusion
amount. See section 960(d). A priority
allocation approach, like the separate
entity calculations discussed in a
preceding paragraph, would change
members’ GILTI inclusion amounts
based on which member owns the stock
of the CFCs. By extension, a priority
allocation approach would also change
the amount of foreign tax credits that are
available to the consolidated group
based on which member owns the stock
of the CFCs. This disparity would allow
for tax planning to maximize the
availability of foreign tax credits with
respect to tested income.

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The second of these comments
contains proposals that contravene
longstanding foreign tax credit
principles, by divorcing a member’s
income inclusion from the member’s
deemed payments of foreign tax. Absent
a GILTI inclusion amount and
ownership of a CFC that has paid or
accrued foreign taxes on tested income,
a U.S. shareholder can claim no foreign
tax credits with respect to tested
income. And yet under the proposed
method, a consolidated group’s foreign
tax credits may reflect foreign taxes paid
or accrued by CFCs of members that
have no GILTI inclusion amount. For
these reasons, the Treasury Department
and the IRS do not adopt this method.
Based on the foregoing, the Treasury
Department and the IRS continue to
believe that the aggregation approach
balances, to the greatest extent possible,
the clear reflection of the income tax
liability under section 951A of a
consolidated group with reasonable
results to its individual members.
Accordingly, the final regulations
generally adopt the aggregation
approach from the proposed regulations
without substantial changes.

D. Portion of Proposed Regulations not
Being Finalized
The proposed regulations would treat
a member as receiving tax-exempt
income immediately before another
member recognizes income, gain,
deduction, or loss with respect to a
share of the first member’s stock (the ‘‘F
adjustment’’). See proposed § 1.1502–
32(b)(3)(ii)(F). The amount of the taxexempt income would be determined
based in part on the aggregate tested
income and aggregate tested losses of
the member’s CFCs in prior taxable
years.
The Treasury Department and the IRS
have become aware of serious flaws
with the F adjustment. Examples of the
problems include unintended and
duplicative tax benefits, distortive
effects, and possible avoidance of Code
provisions and regulations. Therefore,
the Treasury Department and the IRS
have decided not to finalize the F
adjustment. As a result, taxpayers may
not rely on the F adjustment. The
Treasury Department and the IRS
continue to study a number of issues
regarding consolidated stock basis in
this area.

B. Applicability Date for Consolidated
Groups
For a discussion of the applicability
date for § 1.1502–51, see part XI.A of
this Summary of Comments and
Explanation of Revisions section.

X. Comments and Revisions to
Proposed §§ 1.78–1, 1.861–12(c)(2), and
1.965–7(e) of the Foreign Tax Credit
Proposed Regulations

C. Basis Adjustments to Member Stock
The proposed regulations contain
special rules, applicable to consolidated
groups, that reflect the downward basis
adjustments set forth in proposed
§ 1.951A–6(e) with respect to the stock
of tested loss CFCs. See proposed
§§ 1.1502–32(b)(3)(ii)(E) and
(b)(3)(iii)(C), and 1.1502–51(c) and (d).
As discussed above in part VIII.C of this
Summary of Comments and Explanation
of Revisions section, the Treasury
Department and the IRS have
determined that the rules related to
basis adjustments for tested loss CFCs
should not be adopted in these final
regulations and will instead be
considered in a separate project.
Correspondingly, the special rules for
consolidated groups that reflect such
rules are likewise reserved. See
§§ 1.1502–32(b)(3)(ii)(E) and
(b)(3)(iii)(C), and 1.1502–51(c) and (d).
These special rules, along with related
comments, will be considered in the
same project as the rules related to basis
adjustments for tested loss CFCs and
will apply only to taxable years of U.S.
shareholders that are members of a
consolidated group ending after the date
of publication of the final rules.

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A. Special Applicability Date Under
Section 78
The foreign tax credit proposed
regulations revise § 1.78–1 to reflect the
amendments to section 78 made by the
Act, as well as make conforming
changes to reflect pre-Act statutory
amendments. In addition, the foreign
tax credit proposed regulations provide
that amounts treated as dividends under
section 78 (‘‘section 78 dividends’’) that
relate to taxable years of foreign
corporations that begin before January 1,
2018 (as well as section 78 dividends
that relate to later taxable years), are not
treated as dividends for purposes of
section 245A.
Comments questioned whether the
Treasury Department and the IRS have
authority to treat section 78 dividends
relating to taxable years of foreign
corporations beginning before January 1,
2018, as ineligible for the dividendsreceived deduction under section 245A,
which generally applies to certain
dividends paid after December 31, 2017.
Although some comments
acknowledged that allowing a
dividends-received deduction for
section 78 dividends would provide
taxpayers with a double benefit that
clearly was not intended by Congress,
the comments claimed that the statutory

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language directly provides for the
dividends-received deduction, and
therefore the rule applying proposed
§ 1.78–1(c) to taxable years beginning
before January 1, 2018, should be
eliminated.
The Treasury Department and the IRS
have determined that sections 7805(a),
7805(b)(2), and 245A(g) provide ample
authority for the rule and therefore
finalize the proposed applicability date
without change. Section 7805(a)
provides that the Treasury Department
and the IRS shall prescribe all needful
rules and regulations for the
enforcement of title 26, including all
rules and regulations as may be
necessary by reason of any alteration of
law in relation to internal revenue. The
enactment of the Act and the addition
of section 245A necessitated regulations
to ensure that section 78 continues to
serve its intended purpose. The purpose
of the section 78 dividend is to ensure
that a U.S. shareholder cannot
effectively both deduct and credit the
foreign taxes paid by a foreign
subsidiary that are deemed paid by the
U.S. shareholder. See Elizabeth A.
Owens & Gerald T. Ball, The Indirect
Credit § 2.2B1a n.54 (1975); Stanley
Surrey, ‘‘Current Issues in the Taxation
of Corporate Foreign Investment,’’ 56
Columbia Law Rev. 815, 828 (June 1956)
(describing the ‘‘mathematical quirk’’
that necessitated enactment of section
78). Allowing a dividends-received
deduction for a section 78 dividend
would undermine the purpose of the
section 78 dividend because taxpayers
would effectively be allowed both a
credit and deduction for the same
foreign tax. For this reason, section 78
(as revised by the Act) provides that a
section 78 dividend is not eligible for a
dividends-received deduction under
section 245A.
As noted in the preamble to the
foreign tax credit proposed regulations,
the special applicability date rule under
§ 1.78–1(c) is necessary to ensure that
this principle is consistently applied
with respect to a CFC that uses a fiscal
year beginning in 2017 as its U.S.
taxable year (a ‘‘fiscal year CFC’’) in
order to prevent the arbitrary disparate
treatment of similarly situated
taxpayers. Otherwise, a U.S. shareholder
of a fiscal year CFC would effectively be
able to take both a credit and a
deduction for foreign taxes by claiming
a section 245A deduction with respect
to its section 78 dividend. In contrast,
section 78 (as revised by the Act) would
apply correctly to a U.S. shareholder of
a CFC using the calendar year as its U.S.
taxable year that was also subject to
section 245A.

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The special applicability date is also
consistent with the grant of authority
under section 245A(g) to provide rules
as may be necessary or appropriate to
carry out the provisions of section 245A.
Section 245A was intended to provide
for tax-exempt treatment of certain E&P
earned through foreign subsidiaries as
part of a new participation exemption
system. See Conference Report, at 470
(2017) (section 245A ‘‘allows an
exemption for certain foreign income’’).
Notably, the amount of a dividend
eligible for a dividends-received
deduction under section 245A is
determined based on the amount of a
foreign corporation’s ‘‘undistributed
foreign earnings.’’ It would be
incompatible with the purpose of
section 245A to exempt income arising
by reason of a section 78 dividend,
which is not paid out of a foreign
corporation’s undistributed foreign
earnings but instead represents earnings
that could not be distributed since they
were used to pay foreign tax.
B. Application of Basis Adjustment for
Purposes of Characterizing Certain
Stock
Proposed § 1.861–12(c)(2) clarifies
certain rules for adjusting the stock
basis in a 10 percent owned corporation,
including that the adjustment to basis
for E&P includes PTEP. Proposed
§ 1.861–12(c)(2)(i)(B)(2). Additionally,
in order to account for the application
of section 965(b)(4)(A) and (B), relating
to the treatment of reduced E&P of a
deferred foreign income corporation and
increased E&P of an E&P deficit foreign
corporation, proposed § 1.861–
12(c)(2)(i)(B)(1)(ii) provides that, for
purposes of § 1.861–12(c)(2), a taxpayer
determines the basis in the stock of a
specified foreign corporation as if it had
made the election under § 1.965–2(f)(2),
even if the taxpayer did not in fact make
the election. However, the taxpayer does
not include the amount by which basis
with respect to a deferred foreign
income corporation is increased under
§ 1.965–2(f)(2)(ii)(A), because the
amount of that increase would be
reversed if the increase were by
operation of section 961. After issuance
of the foreign tax credit proposed
regulations, final regulations issued
under section 965 (TD 9864, 84 FR 1838
(February 5, 2019)) altered the election
under § 1.965–2(f)(2) to allow taxpayers
to limit the reduction in basis with
respect to an E&P deficit foreign
corporation under the election to the
amount of the taxpayer’s basis in the
respective share of stock of the relevant
foreign corporation.
One comment requested a special rule
with respect to the adjustment to basis

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for E&P to account for the increase to
E&P of an E&P deficit foreign
corporation under section 965(b)(4)(B).
Alternatively, the comment requested
that the adjustment for E&P not include
PTEP. However, proposed § 1.861–
12(c)(2)(i)(B)(1)(ii) already accounts for
the increase in E&P of an E&P deficit
foreign corporation under section
965(b)(4)(B) by providing for an
equivalent reduction in the adjusted
basis of the foreign corporation.
Accordingly, the recommendation is not
adopted.
Another comment requested that the
rule in proposed § 1.861–
12(c)(2)(i)(B)(1)(ii) be revised in light of
the changes to § 1.965–2(f)(2) to
similarly provide that any reductions in
basis be limited to the amount of the
taxpayer’s basis in the 10 percent owned
corporation. This comment noted that in
the absence of such a rule, the
application of proposed § 1.861–
12(c)(2)(i)(B)(1)(ii) could reduce the
adjusted basis of the stock below zero,
which would be inappropriate for
purposes of applying the expense
allocation rules. The Treasury
Department and the IRS agree that, for
purposes of applying the expense
allocation rules, a taxpayer should not
have an adjusted basis below zero in the
stock of a 10 percent owned
corporation. However, rather than limit
the reduction in stock basis to the
amount of the taxpayer’s basis in the 10
percent owned corporation, the final
regulations provide that § 1.861–
12(c)(2)(i)(B)(1)(ii) may cause the
taxpayer’s adjusted basis in the stock of
the corporation to be negative, as long
as the adjustment for E&P provided for
in § 1.861–12(c)(2)(i)(A) increases the
taxpayer’s adjusted basis to zero or an
amount above zero. If the taxpayer’s
adjusted basis in the 10 percent owned
corporation is still below zero after
application of § 1.861–12(c)(2)(i)(A)(1)
and (2), then for purposes of § 1.861–12,
the taxpayer’s adjusted basis in the 10
percent owned corporation is zero for
the taxable year. Section 1.861–
12(c)(2)(i)(A)(3); see also § 1.861–
12(c)(2)(i)(C)(3) (Example 3) and (4)
(Example 4). The Treasury Department
and the IRS have determined that
allowing the adjusted basis in stock to
be negative before the application of the
adjustment for E&P most accurately
reflects the value of the stock in the 10
percent owned corporation.
Additionally, these final regulations
modify proposed § 1.861–
12(c)(2)(i)(B)(1)(ii) to make clear that the
adjustment in § 1.861–
12(c)(2)(i)(B)(1)(ii) may cause a
taxpayer’s adjusted basis in stock in the
10 percent owned corporation to be

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negative, and to account for the changes
made to § 1.965–2(f)(2). Specifically,
§ 1.861–12(c)(2)(i)(B)(1)(ii) now
provides that the taxpayer first adjusts
its basis in the 10 percent owned
corporation as if it did not make the
election in § 1.965–2(f)(2)(i) and then, if
applicable, adjusts the basis in the 10
percent owned corporation by the
amount described in § 1.965–
2(f)(2)(ii)(B)(1). These changes are not
intended to alter the outcome of the
application of the rule to the taxpayer’s
adjusted basis in the stock of the 10
percent owned corporation as compared
to the rule articulated in the foreign tax
credit proposed regulations; rather, the
changes are intended to make the rule
more straightforward for taxpayers to
apply and to clarify any ambiguities
about the application of the rule where
the adjustment exceeded the taxpayer’s
adjusted basis in the stock. See § 1.861–
12(c)(2)(i)(C)(1) (Example 1) and (2)
(Example 2).
C. Effect of Section 965(n) Election
Under section 965(n), a taxpayer may
elect to exclude the amount of section
965(a) inclusions (reduced by section
965(c) deductions) and associated
section 78 dividends in determining the
amount of the net operating loss
carryover or carryback that is deductible
in the taxable year of the inclusions.
Section 1.965–7(e)(1), as added by TD
9846, 84 FR 1838 (February 5, 2019),
provides that, if the taxpayer makes a
section 965(n) election, the taxpayer
does not take into account the amount
of the section 965(a) inclusions (reduced
by section 965(c) deductions) and
associated section 78 dividends in
determining the amount of the net
operating loss for the taxable year.
Proposed § 1.965–7(e)(1)(i), included
in the foreign tax credit proposed
regulations, provides that the amount by
which the section 965(n) election
creates or increases the net operating
loss for the taxable year is the ‘‘deferred
amount.’’ Proposed § 1.965–
7(e)(1)(iv)(B) provides ordering rules to
coordinate the election’s effect on
section 172 with the computation of the
foreign tax credit limitations under
section 904. The foreign tax credit
proposed regulations provide that the
deferred amount comprises a ratable
portion of the deductions (other than
the section 965(c) deduction) allocated
and apportioned to each statutory and
residual grouping for section 904
purposes.
Before the issuance of the foreign tax
credit proposed regulations, the
Treasury Department and the IRS were
aware that some taxpayers were taking
the position that the source and separate

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category of the deferred amount
consisted solely of deductions allocated
and apportioned to the section 965(a)
inclusion. Under this approach, the
deferred amount would likely consist
primarily of deductions allocated and
apportioned to foreign source general
category income because that is the
likely source and separate category of
the section 965(a) inclusion; as a result,
the electing taxpayer would generally
have a greater amount of foreign source
general category income and thus be
able to credit more foreign taxes paid or
accrued with respect to general category
income (relative to the result under the
foreign tax credit proposed regulations).
After publication of the foreign tax
credit proposed regulations, a comment
recommended not finalizing the
proposed ordering rules because
taxpayers did not have a chance to
consider those ordering rules before
deciding to make an election under
section 965(n). The comment also
argued that the foreign tax credit
proposed regulations are inconsistent
with the statutory language in section
965(n), and with existing rules on the
allocation and apportionment of
expenses under section 904, to the
extent they defer deductions that would
be taken against income other than the
section 965(a) inclusion. In addition, the
comment stated that the foreign tax
credit proposed regulations are
inconsistent with the operation of
section 965 and section 904 to the
extent they treat the section 965(a)
inclusion net of the section 965(c)
deduction, rather than the section 965(a)
inclusion without reduction for the
section 965(c) deduction, as the gross
income in the statutory grouping for
section 904 purposes. The comment also
suggested that the exclusion of the
section 965(c) deductions from the
deferred amount was inappropriate. The
comment further stated that, if the
regulations are finalized as proposed,
taxpayers should be allowed to revoke
the section 965(n) election. Finally, the
comment recommended that proposed
§ 1.965–7(e)(1)(iv)(B) be revised to refer
to allocation of all deductions (other
than the net operating loss carryover or
carryback to that year that is not
allowed by reason of the section 965(n)
election), rather than refer solely to
allocation of deductions that would
have been allowed for the year but for
the section 965(n) election.
The final regulations include the
ordering rules from the foreign tax
credit proposed regulations, with some
modifications to take into account the
comments. In general, the Treasury
Department and the IRS have
determined that these rules are

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consistent with sections 965(n) and 904.
Section 965(n) does not modify the
generally applicable rules concerning
the allocation and apportionment of
expenses for section 904 purposes, nor
does it provide an ordering rule for
determining which deductions create or
increase the amount of a current year
net operating loss by reason of the
section 965(n) election. Section 965(n)
applies solely to determine the amount
of the net operating loss for the election
year and the amount of net operating
loss carryover or carryback to that year.
It does not require or permit the
reallocation of deductions that are
allocated and apportioned to the
separate category containing the section
965(a) inclusion and associated section
78 dividends, regardless of whether any
deductions are deferred by reason of the
section 965(n) election. For example, if
a taxpayer with only U.S. source and
general category income has U.S. source
taxable income exceeding the amount of
deductions allocated and apportioned to
foreign source general category income
that includes a section 965(a) inclusion
and associated section 78 dividends, a
section 965(n) election would not result
in a deferred amount and would not
affect the calculation of the taxpayer’s
foreign tax credit limitation. Similarly, a
taxpayer with U.S. source income in
excess of its net operating loss carryover
would have no basis to prevent general
category income that includes a section
965(a) inclusion from being reduced by
a general category section 172
deduction. A pro rata convention for
determining the source and separate
category of the deferred amount is more
neutral and more consistent with the
operation of the expense allocation rules
in the absence of a deferred amount
than a rule stacking the deferred amount
first out of deductions that would
reduce the section 965(a) inclusion and
associated section 78 dividends.
Therefore, the final regulations include
the proposed rules applying the existing
rules on the allocation and
apportionment of expenses for purposes
of section 904, and determining the
source and separate category of the
deferred amount on a pro rata basis.
However, in response to the comment
regarding the exclusion of the section
965(c) deductions from the deferred
amount, the Treasury Department and
the IRS agree that section 965(n) does
not provide that the deferred amount
includes or excludes specific
deductions for purposes of section 904.
Therefore, the final regulations include
the section 965(c) deduction in
determining the source and separate

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category of the deferred amount. See
§ 1.965–7(e)(1)(iv)(B)(2).
Separately, the Treasury Department
and the IRS have determined that
nothing in proposed § 1.965–
7(e)(1)(iv)(B)(2) suggests that the
allocation and apportionment of
expenses is based on the section 965(a)
inclusion net of the section 965(c)
deduction, as opposed to the section
965(a) inclusion not reduced by the
section 965(c) deduction. All expenses
are allocated and apportioned according
to the regulations under §§ 1.861–8
through 1.861–17. See proposed
§ 1.965–7(e)(1)(iv)(B)(1). The section
965(c) deduction is definitely related to
the section 965(a) inclusion. See
§ 1.861–8(b). Other deductions are
allocated and apportioned according to
the regulations under §§ 1.861–8
through 1.861–17. For example, a
deduction that is not definitely related
to any gross income must be ratably
apportioned between the statutory
grouping of gross income and the
residual grouping. The gross income
utilized for such ratable apportionment
is not reduced by the section 965(c)
deduction. See § 1.861–8(c)(3).
The final regulations also adopt the
comment’s alternative suggestion to
allow taxpayers a limited period to
revoke a prior election under section
965(n) in order to account for the fact
that the foreign tax credit proposed
regulations were issued after some
taxpayers were required to make the
election under section 965(n). See
§ 1.965–7(e)(2)(ii)(B). For
administrability reasons, in order to
minimize the number of amended
returns that a taxpayer may need to file
in connection with section 965, the
deadline for a revocation is based on the
extended due dates for the taxpayer’s
returns. In addition, in response to the
comment’s request for clarification,
proposed § 1.965–7(e)(1)(iv)(B)(1) is
revised in the final regulation to clarify
that it refers to all deductions (other
than the net operating loss carryover or
carryback to that year that is not
allowed by reason of the section 965(n)
election).
Another comment requested guidance
providing that a taxpayer that had made
a timely election under section 965(n)
be treated as having made a timely
election under section 965(h). Under
section 965(h), a taxpayer may elect to
pay its section 965(h) net tax liability in
eight installments. Section 965(h)(5)
provides that the election must be made
no later than the due date for the tax
return for the inclusion year and in the
manner prescribed by the Secretary.
Section 1.965–7(b)(2)(ii) provides that
relief is not available under § 301.9100–

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2 or § 301.9100–3 to file a late election.
The comment explained that, as a result
of the ordering rules in the foreign tax
credit proposed regulations, some
taxpayers will have a section 965(h) net
tax liability in excess of amounts paid
with respect to the tax year ending
December 31, 2017. Those taxpayers did
not make a timely election under
section 965(h) because they may have
determined that they did not have a
section 965(h) net tax liability in excess
of amounts paid because they calculated
their section 904 foreign tax credit
limitation in the inclusion year without
allocating or apportioning any expenses
to reduce the amount described in
§ 1.965–7(e)(1)(ii), which is inconsistent
with the rules in the foreign tax credit
proposed regulations.
The final regulations do not adopt this
recommendation. The statute requires
that the election must be made not later
than the due date for the tax return for
the inclusion year. See section
965(h)(5); see also TD 9846, 84 FR 1838,
1868 (February 5, 2019) (denying a
similar request to permit late elections
under section 965). Moreover,
regulations deeming an election to be
made by default would not be
appropriate, because the statute requires
an affirmative election. Cf. 83 FR 39514,
39533–39534 (August 9, 2018) (denying
a similar request to provide for default
section 965(h) elections). For these
reasons, these regulations do not treat a
taxpayer that has made a timely election
under section 965(n) as having made a
timely election under section 965(h).
Finally, the final regulations include
two new examples to illustrate the
application of § 1.965–7(e)(1). See
§ 1.965–7(e)(3).
Consistent with § 1.965–9, the final
regulations in § 1.965–7(e) apply to the
last taxable year of a foreign corporation
that begins before January 1, 2018, and
with respect to a U.S. person, beginning
the taxable year in which or with which
such taxable year of the foreign
corporation ends.

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XI. Comments and Revisions Regarding
Applicability Dates
A. Proposed Regulations
The proposed regulations provide that
§ 1.951–1(e), other than paragraph
(e)(1)(ii)(B) (regarding the determination
of allocable E&P), applies to taxable
years of U.S. shareholders ending on or
after October 3, 2018. Comments
requested certain changes and guidance
related to the applicability date of
proposed § 1.951–1(e)(6), the substance
of which is discussed more fully in part
II.B of this Summary of Comments and
Explanation of Revisions section.

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Comments recommended that the pro
rata share anti-abuse rule in proposed
§ 1.951–1(e)(6) not be applied to
transactions or arrangements entered
into before the general applicability date
of § 1.951–1(e). Under this
recommendation, transactions or
arrangements entered into before the
general applicability date of § 1.951–
1(e)(6), regardless of whether they
would be subject to the pro rata share
anti-abuse rule, would be given effect
for purposes of determining a U.S.
shareholder’s pro rata share of subpart
F income and tested items for taxable
years ending after the general
applicability date. The Treasury
Department and the IRS do not adopt
this recommendation because it would
have the effect of grandfathering
existing transactions or arrangements
entered into with a principal purpose of
avoiding Federal income taxation.
A comment also recommended that
taxpayers be permitted, but not
required, to apply the facts and
circumstances method under § 1.951–
1(e)(3), the substance of which is
discussed more fully in part II.C of this
Summary of Comments and Explanation
of Revisions section, to taxable years
ending on or after December 31, 2017,
and before October 3, 2018. The
comment stated that, under section 965,
a U.S. shareholder with a taxable year
ending on December 31 may be required
to determine its pro rata share of the
increase to subpart F income of its
foreign subsidiaries in both its 2017
taxable year with respect to foreign
subsidiaries with a taxable year ending
December 31, and its 2018 taxable year
with respect to foreign subsidiaries with
a taxable year ending November 30.
Accordingly, given the applicability
date in the proposed regulations, for
purposes of determining such U.S.
shareholder’s inclusion under section
965, the U.S. shareholder could be
required to apply, with respect to its
calendar year foreign subsidiaries, the
fair market value method under the
existing regulations for classes of stock
with discretionary distribution rights,
but then apply, with respect to its fiscal
year foreign subsidiaries, the facts and
circumstances method for stock with the
same characteristics. The comment
suggested that allowing U.S.
shareholders to rely on the facts and
circumstances method for taxable years
ending on or after December 31, 2017,
and before October 3, 2018, would
enable taxpayers to apply a uniform
method for allocating the section 965(a)
earnings amounts of all relevant foreign
subsidiaries among or between U.S.
shareholders, would provide more

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certainty, would be less
administratively burdensome, and
would not result in improper allocations
of subpart F income because the method
is consistent with each shareholder’s
economic rights and interests.
The Treasury Department and the IRS
have determined that it would be
inappropriate to permit U.S.
shareholders the ability to choose
whether to rely on the new allocation
rules under § 1.951–1(e)(3) for taxable
years of foreign corporations that end
within the U.S. shareholder’s taxable
year ending before October 3, 2018, the
general applicability date of § 1.951–
1(e). See § 1.951–1(i). Rather than
simplifying the process of determining
their pro rata shares with respect to
their calendar year foreign subsidiaries,
the proposal would incentivize
taxpayers to invest additional time and
resources to determine their U.S. tax
liability under both sets of pro rata share
rules in order to determine the rules that
result in the least amount of U.S. tax
liability. In addition, because most tax
returns of U.S. shareholders that include
income from a foreign subsidiary with a
taxable year ending on December 31,
2017, by reason of section 965 have
already been filed, the proposal would
increase the number of amended returns
filed for those taxable years, thus
creating additional compliance burdens
for taxpayers and administrative costs
for the government. Accordingly, the
final regulations do not adopt this
proposal.
There were no comments related to
the applicability dates of other
provisions of the proposed regulations.
The final regulations adopt the
applicability dates of the proposed
regulations without substantial changes.
Therefore, consistent with the
applicability date of section 951A,
§§ 1.951A–1 through 1.951A–6,
including §§ 1.951A–2(c)(5) and
–3(h)(2), apply to taxable years of
foreign corporations beginning after
December 31, 2017, and to taxable years
of U.S. shareholders in which or with
which such taxable years of foreign
corporations end. The applicability
dates with respect to the rules in
§ 1.951–1 are as follows. Paragraphs (a),
(b)(1)(ii), (b)(2), (e)(1)(ii)(B), and (g)(1)
apply to taxable years of foreign
corporations beginning after December
31, 2017, and to taxable years of U.S.
shareholders in which or with which
such taxable years of foreign
corporations end. Paragraph (e), except
for paragraph (e)(1)(ii)(B), applies to
taxable years of U.S. shareholders
ending on or after October 3, 2018.
Paragraph (h) applies to taxable years of
domestic partnerships ending on or after

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May 14, 2010. Sections 1.6038–2(a) and
§ 1.6038–5 apply to taxable years of
foreign corporations beginning on or
after October 3, 2018.
These final regulations modify
applicability dates in the proposed
regulations related to consolidated
groups. Proposed § 1.1502–51 applies to
taxable years of foreign corporations
beginning after December 31, 2017, and
to taxable years of U.S. shareholders in
which or with which such taxable years
of foreign corporations end. The
Treasury Department and the IRS have
determined that for U.S. shareholders
that are members of a consolidated
group, the applicability date for
§ 1.1502–51 should be postponed to
taxable years of such members for
which the due date (without extensions)
of the consolidated return is after the
date on which these final regulations are
published in the Federal Register.
However, the final regulations provide
that a consolidated group may apply the
rules of § 1.1502–51 in their entirety to
all of its members for all taxable years
described in § 1.951A–7. See § 1.1502–
51(g).
B. Foreign Tax Credit Proposed
Regulations
No significant changes were made to
the applicability dates of the portions of
the final regulations that relate to rules
that were in the foreign tax credit
proposed regulations. Under § 1.965–
9(a), the provisions of § 1.965–7
contained in this final regulation apply
beginning the last taxable year of a
foreign corporation that begins before
January 1, 2018, and with respect to a
United States person, beginning the
taxable year in which or with which
such taxable year of the foreign
corporation ends. In general, § 1.78–1
applies to taxable years of foreign
corporations that begin after December
31, 2017, and to taxable years of U.S.
shareholders in which or with which
such taxable years of foreign
corporations end, and § 1.861–12(c)
applies to taxable years that both begin
after December 31, 2017, and end on or
after December 4, 2018.
A special applicability date was
provided in proposed § 1.861–12(k) in
order to apply § 1.861–
12(c)(2)(i)(B)(1)(ii) to the last taxable
year of a foreign corporation beginning
before January 1, 2018, since there may
be an inclusion under section 965 for
that taxable year. In the final
regulations, this special applicability
date is extended to § 1.861–12(c)(2)(i)(A)
to accommodate the changes that were
made to that rule to further implement
the rule in § 1.861–12(c)(2)(i)(B)(1)(ii). A
special applicability date is provided in

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§ 1.78–1(c) in order to apply the second
sentence of § 1.78–1(a) to section 78
dividends received after December 31,
2017, with respect to a taxable year of
a foreign corporation beginning before
January 1, 2018. See part X.A of this
Summary of Comments and Explanation
of Revisions section regarding
comments received about the special
applicability date in § 1.78–1(c).
XII. Comment Regarding Special
Analyses
One comment asserted that in issuing
the proposed regulations, the Treasury
Department and the IRS did not comply
with the Regulatory Flexibility Act
(‘‘RFA’’) due to the number of small
business entities impacted. The
comment also stated that the Treasury
Department and the IRS did not comply
with the Paperwork Reduction Act
(‘‘PRA’’) when they authorized the
collection of information. Lastly, the
comment claimed that the Treasury
Department and the IRS did not comply
with Executive Orders 12866 and 13563,
as well as the Memorandum of
Understanding, Review of Tax
Regulations under Executive Order
12866, when they issued the proposed
regulations.
The Treasury Department and the IRS
complied with the applicable
requirements under the RFA, the PRA,
and Executive Orders 12866 and 13563
when issuing the proposed regulations.
See 83 FR 51072, 51084 Special
Analyses section. The comment’s
assertion regarding the number of small
business entities impacted by the
proposed regulations is addressed in
part III of the Special Analyses section.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13563 and 12866
direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility.
These final regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and
Budget (OMB) regarding review of tax

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regulations. OMB has designated this
final regulation as economically
significant under section 1(c) of the
Memorandum of Agreement.
Accordingly, the final regulations have
been reviewed by OMB’s Office of
Information and Regulatory Affairs. For
purposes of E.O. 13771 this rule is
regulatory. For more detail on the
economic analysis, please refer to the
following analysis.
A. Need for the Final Regulations
The final regulations are needed to
address remaining open questions
regarding the application of section
951A and comments received on the
proposed regulations. In addition,
certain rules in the foreign tax credit
proposed regulations need to be
finalized to ensure that the applicability
dates of these rules coincide with the
applicability dates of the statutory
provisions to which they relate.
B. Background
The Tax Cuts and Jobs Act (the Act)
established a system under which
certain earnings of a foreign corporation
can be repatriated to a corporate U.S.
shareholder without U.S. tax. See
section 14101(a) of the Act and section
245A. However, Congress recognized
that, without any base protection
measures, this system, known as a
participation exemption system, could
incentivize taxpayers to allocate
income—in particular, mobile income
from intangible property—that would
otherwise be subject to the full U.S.
corporate tax rate to controlled foreign
corporations (CFCs) operating in low- or
zero-tax jurisdictions. See Senate
Explanation at 365. Therefore, Congress
enacted section 951A in order to subject
intangible income earned by a CFC to
U.S. tax on a current basis, similar to the
treatment of a CFC’s subpart F income
under section 951(a)(1)(A). However, in
order to not harm the competitive
position of U.S. corporations relative to
their foreign peers, the global intangible
low-taxed income (GILTI) of a corporate
U.S. shareholder is taxed at a reduced
rate by reason of the deduction under
section 250 (with the resulting U.S. tax
further reduced by a portion of foreign
tax credits under section 960(d)). Id.
Also, due to the administrative
difficulty in identifying income
attributable to intangible assets,
intangible income (and thus GILTI) is
determined for purposes of section
951A based on a formulaic approach.
Intangible income for this purpose is
generally all net income (other than
certain excluded items) less a 10percent return (‘‘normal return’’) on
certain tangible assets (‘‘qualified

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business asset investment’’ or ‘‘QBAI’’).
Id. at 366.
The final regulations address open
questions regarding the application of
section 951A and comments received on
the proposed regulations. In addition,
certain rules in the foreign tax credit
proposed regulations are being finalized
in this Treasury decision to ensure that
the applicability dates of these rules
coincide with the applicability dates of
the statutory provisions to which they
relate. The final regulations retain the
basic approach and structure of the
proposed regulations and foreign tax
credit proposed regulations, with
certain revisions.
The final regulations relating to GILTI
provide general rules and definitions,
guidance on the computation of a GILTI
inclusion amount, rules regarding the
interaction of certain aspects of section
951A with other provisions, guidance
for consolidated groups and their
members and partnerships and their
partners, information reporting
requirements, and rules to prevent the
avoidance of GILTI. The regulations
under sections 78, 861, and 965 finalize
certain discrete provisions included in
the foreign tax credit proposed
regulations that relate to section 965.
C. Economic Analysis
1. Baseline
The Treasury Department and the IRS
have assessed the economic effects of
the final regulations relative to a noaction baseline reflecting anticipated
Federal income tax-related behavior in
the absence of these final regulations.

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2. Summary of Economic Effects
To assess the economic effects of
these final regulations, the Treasury
Department and the IRS considered
economic effects arising from three sorts
of provisions of these final regulations.
These are (i) effects arising from
provisions that provide enhanced
certainty and clarity; (ii) effects arising
from provisions to prevent taxavoidance behavior; and (iii) effects
arising from other provisions.
These final regulations provide
certainty and clarity to taxpayers
regarding terms and calculations they
are required to apply under the statute.
Because a tax had not been imposed on
GILTI before the enactment of section
951A and because the statute is silent
on certain aspects of definitions and
calculations, taxpayers can particularly
benefit from enhanced specificity
regarding the relevant terms and
necessary calculations they are required
to apply under the statute. In the
absence of this enhanced specificity,

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similarly situated taxpayers might
interpret the statutory rules of section
951A differently, potentially resulting in
inefficient patterns of economic activity
or litigation in the event that a
taxpayer’s interpretation of the statute
differs from that of the IRS. For
example, different taxpayers might
pursue income-generating activities
based on different assumptions about
whether that income will be counted as
GILTI, and some taxpayers may forego
specific investments that other
taxpayers deem worthwhile based on
different interpretations of the tax
consequences alone. If the foregone
activities would have been more
profitable than those that were
undertaken, U.S. economic performance
would be negatively affected. The
guidance provided in these regulations
helps to ensure that taxpayers face more
uniform incentives when making
economic decisions, thereby improving
U.S. economic performance. This
guidance also helps to ensure that
taxpayers make tax-related decisions
under interpretations that are more
consistent with the intent and purpose
of the statute.
The Treasury Department and the IRS
have not undertaken quantitative
estimates of these effects. Any such
quantitative estimates would be highly
uncertain because the mix of
interpretations that taxpayers might
have pursued in the absence of this
guidance and the mix of economic
behaviors stemming from those
interpretations are not readily known.
More importantly, the relationship
between a taxpayer’s interpretation
absent this guidance and the taxpayer’s
GILTI inclusion under the final
regulations, a difference that is key to
understanding the economic effects of
the final regulations, is also not readily
known.
For example, the final regulations
include provisions to address the
treatment of domestic partnerships and
partners for purposes of section 951A
and the section 951A regulations. Part
I.C.3.a.i of this Special Analyses section
lays out some of the possible
interpretations that taxpayers might
have adopted in calculating their GILTI
inclusion with respect to CFCs owned
by a domestic partnership in the
absence of specific guidance. Because
GILTI and the GILTI partnership
provisions are new and because
taxpayers’ ownership shares of CFCs
both through and separate from
domestic partnerships are not readily
available, the Treasury Department and
the IRS cannot readily predict the
difference in taxpayers’ marginal GILTI
inclusion between any given

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interpretation under the baseline and
the final regulation. Thus it is not
feasible for the Treasury Department
and the IRS to quantify with any
reasonable precision the difference in
economic activity that might be
undertaken by those taxpayers based on
those marginal GILTI inclusions.5 As
data become available, the Treasury
Department and the IRS will observe
and monitor partner GILTI inclusions
resulting from the statute and these
supporting regulations.
With these considerations in mind,
part I.C.3.a.i of this Special Analyses
section explains the rationale behind
the final regulations’ approach to the
treatment of partnerships and provides
a qualitative assessment of the
alternatives considered.
The final regulations also include
provisions designed to curtail improper
tax avoidance behavior. In the absence
of these provisions, taxpayers could
potentially reduce their GILTI by
holding specified tangible property over
an additional quarter close. See part
I.C.3.d.i of this Special Analyses
section. This activity is economically
inefficient to the extent that the
taxpayer acquires the property or holds
property longer than the taxpayer would
have held it in the absence of this taxavoidance opportunity. The cost of this
inefficiency (relative to the final
regulations, which reduce the incentives
for such behavior) is roughly
proportional to the amount of specified
tangible property held longer than
optimal, multiplied by the length of the
extra holding period, multiplied by the
difference between the use value of this
property to the taxpayer and its
alternative use. The benefit of the final
regulations is the reduction in this
inefficiency.
The Treasury Department and the IRS
have not undertaken a quantitative
estimate of this benefit but expect it to
be small because the difference between
the use value to the taxpayer of property
held for tax avoidance purposes and its
alternative use is not likely to be large.6
The Treasury Department and the IRS
do not have readily available data on the
amount of specified tangible property
that might otherwise be used for tax
avoidance purposes, the taxpayers who
might hold this property, or the value
differential of the property that would
be held for tax avoidance purposes.
While it is not currently feasible for
the Treasury Department and the IRS to
5 Part I.C.3.a.ii of this Special Analyses section
provides further discussion of data limitations in
identifying the set of affected taxpayers.
6 This claim refers solely to the economic benefit
arising from this provision and does not refer to any
estimate of the tax revenue effects of the provision.

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Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Rules and Regulations
quantify these effects, part I.C.3.c.i of
these Special Analyses explains the
rationale behind the final regulations’
approach to the temporary holding of
specified tangible property and provides
a qualitative assessment of the
alternatives considered.
This economic analysis further
considered the economic effects of all
other provisions in the final regulations.
For example, the statute dictates that,
for the purpose of calculating QBAI,
taxpayers should depreciate assets
placed in service before the enactment
of section 951A using the alternative
depreciation system (ADS) but grants
authority to the Secretary under
951A(d)(4) to issue regulations to
prevent the avoidance of the purposes of
section 951A(d). By providing taxpayers
an alternative to ADS, the final
regulations reduce taxpayers’
compliance burden and, by effecting
changes in QBAI, change some
taxpayers’ marginal GILTI inclusion, an
effect that may result in changes in
economic activity and the location of
such activity. Furthermore, the final
regulations determine partnership QBAI
by reference to the depreciation
deductions generated by partnership
specified tangible property because a
CFC partner’s share of these
depreciation deductions can be used as
a reliable proxy for determining a CFC’s
distributive share of tested income
produced with respect to such property.
The use of the proxy simplifies, and
reduces the uncertainty in the
computation for taxpayers, thereby
reducing taxpayer burden relative to the
baseline.
The netting approach for specified
interest expense adopted in these final
regulations also reduces uncertainty and
the complexity involved in
characterizing income and matching
expense to income which would be
required under a tracing approach.
Therefore, the netting approach
simplifies the taxpayers’ computations
and reduces their compliance costs.
With respect to partially depreciable
assets, such as platinum catalysts, the
final regulations treat a portion of the
adjusted basis of the asset as giving rise
to QBAI, rather than the asset’s entire
adjusted basis. The Treasury
Department and the IRS determined that
applying the same standard for
determining whether property qualifies
as QBAI and whether the property is
depreciable is simpler for tax
administration and compliance
purposes than having two standards.
Moreover, since QBAI generally is
determined for purposes of FDII under
section 951A(d), it is expected that the
final rule will incentivize the use of

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partially depreciable assets within the
United States versus without relative to
an alternative of treating the entire
adjusted basis of the asset as QBAI.
Because GILTI is new and because tax
filings do not report taxpayers’
accounting methods for assets placed in
service before the enactment of section
951A, the Treasury Department and the
IRS do not have readily available data
to project which taxpayers are affected
by these regulations or to project their
marginal GILTI inclusion for current
income-generating activities. Thus it is
not currently feasible for the Treasury
Department and the IRS to estimate the
economic effects of the final regulations
relative to the baseline.
With these considerations in mind,
part I.C.3 of these Special Analyses
explains the rationale behind the final
regulations and provides a qualitative
assessment of the alternatives
considered.
3. Economic Effects of Provisions
Substantially Revised From the
Proposed Regulations
a. Treatment of Domestic Partnerships
Under Section 951A
i. Background and Alternatives
Considered
Section 951A does not contain any
specific rules on the treatment of a
domestic partnership and their partners
that directly or indirectly own stock of
CFCs. The proposed regulations contain
a rule that requires a domestic
partnership that is a U.S. shareholder of
a CFC to determine its GILTI inclusion
amount. The proposed regulations then
provide that partners of the partnership
that are not separately U.S. shareholders
of the CFC take into account their
distributive share of the partnership’s
GILTI inclusion amount. In contrast,
partners that are U.S. shareholders of
the CFC are required to take into
account their proportionate share of the
partnership’s pro rata share of tested
items of the CFC for purposes of
determining the U.S. shareholder’s own
GILTI inclusion amount. The proposed
regulations thus adopt a hybrid
approach under which the domestic
partnership is treated as an entity with
respect to partners that are not
themselves U.S. shareholders of a CFC
but as an aggregate with respect to
partners that are themselves U.S.
shareholders of the CFC. While the
hybrid approach is consistent with the
framework of section 951A, a number of
comments pointed to administrative and
procedural complexities with the
approach of the proposed regulations.
Thus the Treasury Department and the

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IRS re-evaluated this approach for the
final regulations.
The Treasury Department and the IRS
considered a number of alternatives for
addressing the treatment of domestic
partnerships in the final regulations.
These alternatives were: (i) The hybrid
approach set forth in the proposed
regulations; (ii) an approach under
which the domestic partnership would
be treated as an entity for all purposes
of section 951A; and (iii) an approach
under which a domestic partnership
would be treated as an entity for
purposes of determining whether any
U.S. person is a U.S. shareholder and
any foreign corporation is a CFC, but as
an aggregate for purposes of determining
whether, and to what extent, any U.S.
person has a GILTI inclusion. A fourth
option, to apply a pure aggregate
approach under which a domestic
partnership would be treated as an
aggregate of all of its partners for all
purposes of section 951A, was rejected
because the Treasury Department and
the IRS determined that it is
inconsistent with other sections of the
Code.
The first option was to finalize the
hybrid approach set forth in the
proposed regulations. While the hybrid
approach is consistent with the
framework of section 951A, a number of
comments pointed to administrative and
procedural complexities with the
approach of the proposed regulations,
including coordination with partners’
capital accounts and basis adjustments
with respect to partnership interests and
CFCs. In particular, comments noted the
uncertainty under the hybrid approach
whether, and to what extent, a U.S.
shareholder partner’s pro rata share of
tested income or tested loss of a
partnership CFC should increase or
decrease the partner’s capital account
with respect to the partnership or its
basis in the partnership interest.
Comments also noted that the hybrid
approach can result in varied GILTI
computations for partners depending on
whether the partner is a U.S.
shareholder of a CFC owned by a
domestic partnership. Finally,
comments noted that the hybrid
approach would result in disparate
treatment between partners that own
stock in a CFC through a domestic
partnership and partners that own stock
in a CFC through a foreign partnership.
These latter outcomes have clearly
detrimental economic effects because
they do not treat similar taxpayers in a
similar fashion.
The second option was to adopt a
pure entity approach, meaning that the
domestic partnership would determine
its own GILTI inclusion amount and

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each partner would take into account its
distributive share of the partnership’s
GILTI inclusion amount. This approach
is consistent with the historical
treatment of domestic partnerships for
purposes of subpart F. However, this
approach is inconsistent with the
policies underlying the GILTI
provisions and interrelated rules, such
as the deduction under section 250 and
certain foreign tax credits for GILTI that
are determined at the partner level
(rather than the partnership level).
Further, under this approach, many
taxpayers would be compelled to
reorganize their ownership structure—
for instance, by eliminating their
ownership of CFCs through domestic
partnerships—to obtain full aggregation
of tested items of their CFCs as
envisioned by Congress. Yet other
taxpayers would be incentivized to
reorganize in an attempt to avoid full
aggregation so as to reduce their
inclusion below an amount that
accurately reflects their GILTI. For
instance, taxpayers could separate
tested items that generally decrease a
U.S. shareholder’s GILTI (for example,
qualified business asset investment)
from certain tested items that reduce the
benefit of such tested items (for
example, specified interest expense),
thus minimizing the U.S. shareholder’s
aggregate GILTI inclusion amount.
Potentially reorganizing to realize a
specific GILTI treatment suggests that
tax instead of market signals are
determining business structures. This
can lead to higher compliance costs and
inappropriate investment.
The third option, which is adopted in
the final regulations, is to apply an
approach that treats a domestic
partnership as an entity for purposes of
determining whether any U.S. person is
a U.S. shareholder and whether any
foreign corporation is a CFC, but treats
a domestic partnership as an aggregate
for purposes of determining whether,
and to what extent, a partner of a
domestic partnership has a GILTI
inclusion. Such an approach is
consistent with the framework of
section 951A and gives effect to the
relevant statutory language that treats a
domestic partnership as a U.S.
shareholder and as owning stock for
purposes of determining U.S.
shareholder and CFC status. Moreover,
this approach eliminates the
administrative complexity identified by
comments with respect to the hybrid
approach in the proposed regulations by
calculating a U.S. shareholder partner’s
GILTI inclusion amount solely at the
partner level.
The final regulations treat a domestic
partnership as an aggregate by providing

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that, in general, for purposes of section
951A and the section 951A regulations,
a domestic partnership is treated in the
same manner as a foreign partnership.
The final regulations employ the
existing framework for foreign
partnerships (which are generally
treated as an aggregate of their partners
for purposes of subpart F), rather than
creating new aggregation rules
specifically for the treatment of
domestic partnerships, because such
framework is relatively well-developed
and understood. Using the same
treatment for domestic and foreign
partnerships is more likely to result in
market forces determining organization
form instead of tax law. In addition, by
eliminating the complexity and traps for
the unwary associated with the hybrid
and entity approaches, respectively, the
chosen approach reduces compliance
costs relative to the alternatives.
ii. Affected Taxpayers
The Treasury Department and the IRS
estimate that there were approximately
7,000 U.S. partnerships with CFCs that
e-filed at least one Form 5471 as
Category 4 or 5 filers in 2015 and 2016.7
The identified partnerships had
approximately 2 million partners, as
indicated by the number of Schedules
K–1 filed by the partnerships. This
number includes both domestic and
foreign partners, so it substantially
overstates the number of partners that
would actually be affected by the final
regulations by including foreign
partners.8 The final regulations affect
domestic partners that are U.S.
shareholders of a CFC owned by the
domestic partnership because such
partners will determine their GILTI
inclusion amount by reference to their
pro rata shares of tested items of CFCs
owned by the partnership. Domestic
partners that are not U.S. shareholders
of a CFC owned by the domestic
partnership will neither determine their
own GILTI inclusion amount by
reference to their pro rata shares of
7 Data are from IRS’s Research, Applied
Analytics, and Statistics division based on data
available in the Compliance Data Warehouse.
Category 4 filer includes a U.S. person who had
control of a foreign corporation during the annual
accounting period of the foreign corporation.
Category 5 includes a U.S. shareholder who owns
stock in a foreign corporation that is a CFC and who
owned that stock on the last day in the tax year of
the foreign corporation in that year in which it was
a CFC. For full definitions, see https://www.irs.gov/
pub/irs-pdf/i5471.pdf.
8 This analysis is based on the tax data readily
available to the Treasury Department at this time.
Some variables may be available on tax forms that
are not available for statistical purposes. Moreover,
with new tax provisions, such as section 951A,
relevant data may not be available for a number of
years for statistical purposes.

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tested items of CFCs owned by the
partnership nor include in their income
a distributive share of the partnership’s
GILTI inclusion amount. This latter
group is likely to be a substantial
portion of domestic partners given the
high number of partners per partnership
and have lower compliance costs as a
result of the final regulations. Because it
is not possible to readily identify these
types of partners based on available
data, this number is an upper bound of
partners who would have been affected
by this rule had this rule been in effect
in 2015 or 2016.
b. Rule for Transfers During the
Disqualified Period
i. Background and Alternatives
Considered
The proposed regulations include a
rule in § 1.951A–2(c)(5) to address
transactions intended to reduce a GILTI
inclusion amount as a result of a
stepped-up basis in CFC assets
attributable to related party transfers
that occur during the disqualified
period. The disqualified period of a CFC
is the period between December 31,
2017, which is the last earnings and
profits (E&P) measurement date under
section 965, and the beginning of the
CFC’s first taxable year that begins after
December 31, 2017, which is the first
taxable year with respect to which
section 951A is effective. A taxpayer
that caused a CFC to sell its assets to a
related party during the disqualified
period would not be subject to taxation
on the income or earnings from such
sales under either section 965 (because
it was after the final E&P measurement
date) or section 951A (because it was
before its effective date). However,
absent a special rule, in subsequent
years, the transaction would reduce a
U.S. shareholder’s GILTI, by either
reducing the transferee CFC’s tested
income (or increase its tested loss)
through the depreciation or
amortization attributable to the ‘‘costfree’’ basis (disqualified basis) in assets
created by reason of such related party
transfer. Accordingly, the rule in the
proposed regulations prevents the
benefits of the disqualified basis by
disallowing any deduction or loss
attributable to the disqualified basis for
purposes of determining tested income
or tested loss.
Because the rule in proposed
§ 1.951A–2(c)(5) only disallows the
stepped-up basis created by reason of a
disqualified transfer for purposes of
determining a CFC’s tested income and
tested loss, under the proposed
regulations, a taxpayer would have to
keep track of both a CFC’s disqualified

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basis in an asset for purposes of section
951A and the CFC’s adjusted basis in
the asset for all other purposes of the
Code. In addition, if the disqualified
basis was not allowed for purposes of
determining tested income and tested
loss, a comment noted that it would be
unfair for the basis to still be taken into
account for purposes of section 901(m),
which disallows foreign tax credits for
foreign income not subject to U.S. tax by
reason of certain basis differences that
arise by reason of covered asset
acquisitions. A transfer subject to the
rule (a disqualified transfer) can also be
a covered asset acquisition, and
therefore section 901(m) and proposed
§ 1.951A–2(c)(5) could apply
concurrently by reason of the same
transaction.
The Treasury Department and the IRS
considered three options to address the
treatment of disqualified basis. These
options were: (i) Adopt the proposed
regulations without change; (ii) revise
the regulations to provide that
disqualified basis is also not taken into
account for purposes of certain other
provisions (in addition to section 951A)
to ensure that the rule only prevents the
GILTI benefits that taxpayers were
trying to achieve; or (iii) allow taxpayers
to make an election that would
disregard the disqualified basis for all
purposes of the Code.
The first option was to finalize
without change the rule contained in
the proposed regulations. On the one
hand, this approach could be viewed as
simple and targeted, because this rule
would only disregard disqualified basis
for purposes of determining GILTI, and
the transactions subject to the rule were
primarily intended to reduce GILTI. On
the other hand, this rule could be
considered unfair in certain cases
because the concurrent application of
both the rule and section 901(m),
without a means for avoiding such
concurrent application, could be viewed
as unduly punitive to taxpayers that
engaged in such transactions. In
addition, this option would require
taxpayers to track and maintain separate
bases in the property for purposes of
GILTI and all other purposes of the
Code.
The second option was to not take
into account disqualified basis for
certain other provisions (in addition to
section 951A) to ensure that the rule
only prevented the GILTI benefits that
taxpayers were trying to achieve. Such
an approach would result in additional
and considerable complexity because
numerous other provisions would have
to be considered. In addition, simply
not taking into account the basis for
purposes of these other provisions may

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not alone provide appropriate results,
without taking into account the policies
underlying the specific provisions. Such
particular policy considerations could
require additional special and detailed
rules or modifications to the general
disallowance rules. In addition, it
would be difficult to assess the effect
that the disqualified basis would have
on other provisions of the Code, or how
it could affect different taxpayers with
different tax postures.
The third option, which is adopted in
the final regulations, is to allow
taxpayers to make an election that
eliminates disqualified basis in property
by reducing a commensurate amount of
adjusted basis in the property for all
purposes of the Code. Although this
option was not as targeted as the second
option, it was the simplest of the three
options because it results in the
property only having a single tax basis
for all purposes of the Code such that
different bases need not be tracked for
different purposes. In addition, it does
not result in additional complex rules,
as would be required in the second
option, because it simply applies for all
purposes; once the basis is reduced, the
Code simply applies to the property as
if the basis were never stepped up.
Finally, this approach permits taxpayers
to decide whether the benefit of the
additional adjusted basis associated
with the disqualified basis outweighs
the cost of complexity in applying the
rule or, alternatively, whether the value
of simplicity outweighs the benefit of
the additional adjusted basis. By
allowing this flexibility and adopting a
single adjusted basis for all purposes of
the Code, the adopted approach reduces
complexity and compliance costs,
relative to both alternatives considered.
ii. Affected Taxpayers
The final regulations apply to any
deduction or loss attributable to
disqualified basis. Disqualified basis is
created by reason of a disqualified
transfer, which is defined as a transfer
of property by a fiscal year CFC during
the disqualified period to a related
person in which gain was recognized, in
whole or in part. A fiscal year CFC’s
disqualified period is the period that
begins on January 1, 2018, and ends as
of the close of the CFC’s last taxable
year that is not a CFC inclusion year.
The taxpayer affected is a U.S.
shareholder of any CFC that holds
property with disqualified basis. In
general these final regulations affect
U.S. shareholders with at least one fiscal
year CFC that has at least one other CFC
where the fiscal-year CFC has property
with unrealized gains that can be

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transferred during the disqualified
period.
The Treasury Department and the IRS
do not have data identifying CFCs that
engaged in transactions with related
CFCs during the period after December
31, 2017 but before the effective date of
section 951A. As an upper-bound
estimate, there are approximately 3,000
U.S. shareholders of fiscal year CFCs
with at least one related CFC that could
potentially engage in a transaction.9
This is an overestimate since only those
fiscal year CFCs with unrealized gains
could take advantage of this disqualified
period. The Treasury Department does
not have data readily available to
estimate these unrealized gains.
c. Transition Rule To Determine Normal
Return Using the Alternative
Depreciation System
i. Background and Alternatives
Considered
A U.S. shareholder’s GILTI inclusion
amount is based on a formulaic
approach under which a 10-percent
return attributed to certain tangible
assets (QBAI) is computed and then
each dollar of certain income above
such ‘‘normal return’’ is effectively
treated as intangible income. Under the
statute, QBAI is measured by
determining the adjusted basis in
certain tangible property using the
alternative depreciation system (ADS).
Section 951A(d)(4) directs the Secretary
to issue regulations or other guidance
that is appropriate to prevent the
avoidance of the purposes of section
951A(d), including with respect to the
treatment of temporarily held or
transferred property.
The proposed regulations require the
adjusted basis of all specified tangible
property to be determined using ADS
under section 168(g) for purposes of
determining the QBAI of a CFC. In
general, the Code requires that tangible
property used by a CFC outside the
United States must be depreciated using
ADS. Accordingly, in most instances,
the depreciation method required under
the proposed regulations will
correspond to the CFC’s depreciation
method used for computing income.
However, under existing regulations
under section 952, a CFC may compute
its income and E&P using the
depreciation method used in keeping its
accounting books and records or a
method conforming to United States
generally accepted accounting
principles (‘‘non-ADS depreciation
method’’) if the differences between
9 Based on IRS Statistics of Income 2014 study
file of C corporations with Form 5471 category 4
filers. Includes full and part year returns.

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ADS and the non-ADS depreciation
method are immaterial. In the case of a
CFC that is permitted to use a non-ADS
depreciation method, the proposed
regulations would nonetheless require
the CFC to determine its adjusted basis
in its assets for purposes of calculating
QBAI based on ADS. In particular, with
respect to assets placed in service before
the enactment of section 951A, the
proposed regulations would require the
CFC to determine the date the assets
were placed in service, the ADS class
life, and other information about the
asset to correctly apply ADS as if the
asset had been depreciated using ADS
since the date the asset was placed in
service. Several comments noted that
this requirement could be onerous for
specified tangible property acquired
before the enactment of section 951A
and requested relief from this
requirement for such property.
Although section 951A(d)(3)
specifically requires use of ADS to
determine the adjusted basis in
specified tangible property, section
951A(d)(4) authorizes the Secretary to
issue regulations that are appropriate for
purposes of determining QBAI. Thus,
the Treasury Department and the IRS
considered three options to address the
use of ADS for specified tangible
property placed in service prior to the
enactment of section 951A. These
options were: (i) Require the use of ADS
for all property placed in service before
the enactment of section 951A,
consistent with the proposed
regulations; (ii) require ADS for
determining the adjusted basis of
specified tangible property, but on a
‘‘cut-off basis’’; or (iii) allow the CFC to
continue using its non-ADS
depreciation method for property placed
in service prior to the enactment of
section 951A, and to include a special
rule that requires depreciation of the
‘‘salvage value.’’ These options apply
only where the CFC is not required to
use ADS to compute its income under
§ 1.952–2 or E&P under § 1.964–1 with
respect to such property.
The first option considered was to
require the use of ADS for all property
placed in service before the enactment
of section 951A, consistent with the
proposed regulations. However,
Treasury and the IRS recognize that redetermining the adjusted basis in assets
using a new depreciation method could
be a difficult, uncertain, and timeconsuming process for CFCs that have
numerous items of specified tangible
property acquired before the enactment
of section 951A, in part, because the
CFCs may not have kept the records
necessary to make the determinations.
Notably as described above, CFCs are

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permitted to compute their income and
E&P using their non-ADS depreciation
method for specified tangible property
used outside the United States when the
differences between the non-ADS
depreciation method and ADS are
immaterial. Therefore, the Treasury
Department and the IRS determined that
some relief from the administrative
burden of re-determining the adjusted
basis of each property placed in service
before December 22, 2017, should be
available to CFCs that are not required
to use ADS for computing income and
E&P. Such relief will alleviate this
administrative burden, but will not
impact taxpayer incentives or cost of
capital, because it pertains only to
property already placed in service.
The second option considered seeks
to relieve burden by requiring ADS for
determining the adjusted basis in
specified tangible property, but on a
‘‘cut-off basis.’’ Under this option, the
CFC would apply ADS to the adjusted
basis determined using its non-ADS
depreciation method as of the beginning
of the first taxable year subject to
section 951A. This option eliminates the
need to re-determine the adjusted basis
in the property as if ADS had been used
since the property was placed in
service. This approach could be
implemented by applying ADS for the
remaining ADS class life of the property
or by treating the property as newly
placed in service and applying the full
ADS class life to the property. Each of
those options would still require the
CFC to determine when the property
was placed in service and its ADS class
life. In addition, applying ADS for the
remaining ADS class life of the property
would also require special rules for
situations in which the property would
have been fully depreciated under ADS
before the first taxable year subject to
section 951A, and applying ADS to the
property based on the full ADS class life
of the property would extend the period
that the property is taken into account
in the computation of QBAI. The
Treasury Department and the IRS
concluded that applying ADS on a cutoff basis under either approach did not
significantly reduce the administrative
burden of computing QBAI with respect
to property placed in service prior to the
enactment of section 951A.
The third option considered was to
allow the CFC to elect to use its nonADS depreciation method for property
acquired prior to the enactment of
section 951A, and to include a special
rule that requires depreciation of the
‘‘salvage value’’ (in other words, the
portion of the basis of property that
would not be fully depreciated under
the non-ADS depreciation method). The

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special rule is required because
otherwise the salvage value would be
included in the CFC’s QBAI until the
CFC disposed of the asset. This option
was the least administratively
burdensome, and the least likely to
result in controversy between taxpayers
and the IRS. It reduces compliance costs
relative to the two alternatives by
eliminating the need to redetermine the
adjusted basis, class life and date placed
in service of property for which good
records may not exist. As noted above,
it does not impact taxpayers’ incentives
or cost of capital, because it applies to
property already placed in service.
Further, because relief is provided in
instances in which the difference
between ADS and a non-ADS
depreciation method is immaterial, it is
likely to result in only minimal
differences in depreciation deductions
and QBAI.10 Small changes in the QBAI
have an even more muted impact on the
determination of GILTI, because net
DTIR, a component of the GILTI
calculation, is only 10 percent of QBAI.
Therefore, the impact of using a nonADS depreciation method versus ADS
for property placed in service before the
enactment of section 951A is minimal.
Accordingly, this is the option adopted
in the final regulations.
ii. Affected Taxpayers
The population of taxpayers
potentially affected by this aspect of
these final regulations are the U.S.
shareholders of CFCs that are not
required to use ADS when computing
E&P, subpart F income, and tested
income or tested loss, because the
differences in the tax liability of such
U.S. shareholders resulting from the use
of the CFCs’ non-ADS depreciation
method are immaterial relative to the
use of ADS. Only those taxpayers whose
CFCs use a non-ADS depreciation
method for property placed in service
before December 22, 2017 instead of
ADS when computing E&P would be
affected by these final regulations.
The Treasury Department and the IRS
have previously projected that between
25,000 and 35,000 direct shareholders of
CFCs would be potentially subject to
GILTI and thus could be affected by this
rule. This is an upper-bound estimate of
taxpayers affected because it is not
limited to those with CFCs that are
permitted to use a non-ADS
depreciation method with respect to
property placed in service before the
10 Treasury Depreciation Model tabulations of
depreciation rates by 2 digit industry indicate that,
on average, book depreciation and ADS
depreciation for property in the manufacturing,
mining, construction, utilities, and wholesale trade
industries, are within 10 percent of one another.

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enactment of section 951A. Precise
identification of these taxpayers is not
possible from readily available data
because taxpayers do not report on
Form 5471 what depreciation method
they used in computing E&P.
d. Anti-Abuse Rule for Specified
Tangible Property Held Temporarily

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i. Background and Alternatives
Considered
The proposed regulations include an
anti-abuse rule to address property that
is held temporarily over the quarter
close of a CFC with a principal purpose
of reducing the GILTI inclusion amount
of a U.S. shareholder of the CFC. In the
absence of an anti-abuse rule, taxpayers
could reduce their GILTI inclusion by
having a CFC temporarily hold property
over an additional quarter close in order
to artificially increase the U.S.
shareholder’s ‘‘normal return’’ on
tangible assets. The anti-abuse rule for
temporarily held property in the
proposed regulations included a ‘‘per
se’’ rule, which deemed property to be
held temporarily and acquired with a
principal purpose of reducing a GILTI
inclusion amount if held by the CFC for
less than a 12-month period. Comments
asserted that the anti-abuse rule was
overbroad. In particular, comments
expressed concerns that the 12-month
per se rule could affect transactions not
motivated by tax avoidance, such as
ordinary course transactions, and create
burdens resulting from having to track
how long the specified tangible property
is held.
The Treasury Department and the IRS
considered four options to address these
concerns. These options were: (i) Adopt
the proposed regulations without
change; (ii) shorten the per se rule; (iii)
eliminate the per se rule and rely on a
principal purpose rule; or (iv) convert
the per se rule into a rebuttable
presumption, add a safe harbor, and
clarify the scope of the rule.
The first option was to finalize
without change the rule contained in
the proposed regulations. This approach
is a simple and administrable rule for
the IRS and taxpayers because it would
not consider the taxpayer’s motivation
for holding property for less than 12
months; however, it would not address
the concern raised by comments that the
rule can potentially apply to
transactions that were not tax motivated
and could therefore lead to a reduction
in otherwise economically valuable
transactions.
The second option was to shorten the
12-month per se rule to, for example, six
months. While this option could
significantly reduce the number of

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transactions subject to the rule relative
to the first option, and would be
administrable for the IRS and taxpayers
(because a taxpayer’s motivation for
holding the property would not be
relevant), it could still apply to
transactions that were not taxmotivated. In addition, it could increase
the burden on IRS to enforce
compliance because it would require
additional resources to assert the rule
for property held longer than six
months, even though the property may
still be held temporarily for taxmotivated reasons.
The third option was to eliminate the
per se rule and rely on a principal
purpose rule. The rule would disregard
the adjusted basis in property for
purposes of computing QBAI if the
property is held temporarily and is
acquired with a principal purpose of
reducing a GILTI inclusion amount.
While this option would have the
benefit of being flexible and, therefore,
in theory could apply only to temporary
holdings that were intended to reduce a
U.S. shareholder’s GILTI inclusion
amount, it could create uncertainty for
both taxpayers and the IRS. This
uncertainty would result, in part, from
the need to determine the taxpayer’s
principal purposes for each relevant
acquisition and not having general
guidelines for when property is
considered to be held temporarily. It
would also increase administrative and
compliance costs for the IRS and
taxpayers because there could be more
disputes over the taxpayer’s principal
purpose and when a property is held
temporarily.
The fourth option that was considered
involved several components. First, this
option would convert the per se rule to
a rebuttable presumption. Under this
rule, property would be presumed to be
temporarily held and acquired with a
principal purpose of reducing a GILTI
inclusion amount if the property is held
for less than twelve months. However,
the presumption could be rebutted if, in
general, the facts and circumstances
clearly establish that the subsequent
transfer of the property by the CFC was
not contemplated when the property
was acquired and that a principal
purpose of the acquisition of the
property was not to increase the normal
return of a U.S. shareholder. This option
also would add a second presumption
that generally provides that property is
presumed to not be subject to the rule
if held for more than 36 months. In
addition, this option would include a
‘‘safe harbor’’ that generally applies to
transfers between CFCs that are owned
in the same proportion by U.S.
shareholders, have the same taxable

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29329

years, and are all tested income CFCs.
Finally, this option would include
examples to indicate types of
transactions that are, and are not,
subject to the rule.
This fourth option more accurately
identifies cases of potential abuse in
comparison to the proposed regulations
and the other options discussed in this
part I.C.3.d.i of the Special Analyses
section. Because it more accurately
identifies cases of potential abuse, it
yields more efficient outcomes because
it does not penalize taxpayers with a
legitimate business purpose for
temporarily holding tangible property.
This option provides flexibility to
taxpayers holding property less than 12
months to either accept the presumption
(and thus disregard the basis of the
property under the anti-abuse rule) or,
if appropriate, to choose to rebut the
presumption by filing the appropriate
statement. Taxpayers will have the
flexibility to make the choice that
appropriately balances the compliance
costs related to rebutting the
presumption with the tax cost of not
rebutting the presumption depending on
their particular circumstances. This
option also relieves taxpayers of the
burden of monitoring assets that are
held more than 36 months, relative to
the other options. In addition, the safe
harbor would provide additional
certainty to both taxpayers and the IRS,
and eliminate any resulting compliance
and administrative costs, because these
transactions, which generally do not
give rise to avoidance concerns, would
be entirely excluded from the
application of the rule. Although the
compliance costs associated with a
rebuttal based on facts and
circumstances will likely be higher than
under the first and second alternatives,
those alternatives do not provide
taxpayers with an opportunity to
demonstrate the economic substance of
the transaction, and the electivity of the
rebuttal leaves taxpayers no worse off
than under the first and second options.
It is not clear whether the adopted
approach has higher or lower
compliance costs than the third
approach, but Treasury and IRS
determined the adopted approach to be
superior for the reasons discussed
above.
The Treasury and the IRS determined
that these changes strike an appropriate
balance between (i) mitigating
compliance burdens relative to the
proposed regulations and providing
certainty and flexibility to taxpayers and
(ii) identifying transactions that have
the potential for abuse. Thus, this is the
approach adopted in the final
regulations.

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ii. Affected Taxpayers
In principle, this aspect of the final
regulations could apply to any tested
income CFC that purchases tangible
property and holds it temporarily.
Therefore, this aspect of the regulations
could affect any of the 25,000–35,000
persons with a potential GILTI inclusion
and should be treated as an upperbound estimate. In practice, however, it
would only apply to U.S. shareholders
of CFC that temporarily hold tangible
property for tax minimization purposes,
which would only be a small subset of
sophisticated tax planners. The
Treasury Department and the IRS do not
have readily available data to enable
estimating how many taxpayers could
minimize tax in this way, nor which
taxpayers would likely undertake such
behavior in the absence of these
regulations.

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e. Application of Basis Adjustment for
Purposes of Characterizing Certain
Stock
i. Background and Alternatives
Considered
Under the Code, certain expenses,
including interest, must be allocated
based on the adjusted basis of the assets
held by the taxpayer. For purposes of
allocating expenses to stock of certain
foreign corporations held directly by a
taxpayer, section 864(e)(4) generally
requires that a taxpayer adjust the
adjusted basis of the stock by the
aggregate amount of E&P of the foreign
corporation and its subsidiaries. The
combination of the adjusted basis of the
stock of the foreign corporation and the
increase or decrease (if the foreign
corporation and its subsidiaries have a
deficit in E&P) in that amount by the
E&P of the foreign corporation
approximate the value of the stock of
the foreign corporation for purposes of
the expense allocation rules. See Joint
Committee on Tax’n, General
Explanation of the Tax Reform Act of
1986 (Pub. L. 99–514) (May 4, 1987),
JCS–10–87, at p. 946 (noting that ‘‘the
failure to consider earnings and profits
caused significant distortion’’ for
purposes of expense allocation rules
because the value of the earnings and
profits is reflected in the fair market
value of the stock).
Under section 965(b)(4)(B), if a
taxpayer used a deficit in E&P to offset
its inclusion under section 965(a), the
deficit is eliminated by increasing the
E&P of the foreign corporation with the
deficit. However, because there is no
offsetting reduction to the basis of the
stock of the foreign corporation, the
adjusted basis of that foreign
corporation for purposes of section

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864(e)(4) is increased as a result of the
application of section 965(b)(4)(B), even
though there has been no economic
change to the value of the foreign
corporation. Under final regulations
under section 965, in general, a taxpayer
may elect to reduce the basis in the
stock of the foreign corporation, on a
share by share basis, by the amount of
the increase to the E&P of the foreign
corporation under section 965(b)(4)(B).
See § 1.965–2(f)(2)(i). However, the
election does not cause the taxpayer’s
basis to be reduced below zero, even if
the amount of the increase to the E&P
of the foreign corporation under section
965(b)(4)(B) exceeds the taxpayer’s basis
in the stock.
The foreign tax credit proposed
regulations provide that, for purposes of
determining the adjusted basis of the
stock of the foreign corporation under
section 864(e)(4), a taxpayer should
determine its adjusted basis in the stock
of the foreign corporation as if the
taxpayer had made in the election in
§ 1.965–2(f)(2)(i). See proposed § 1.861–
12(c)(2)(i)(B)(1)(ii). After this
adjustment, the taxpayer then follows
the existing rule under section 864(e)(4)
to increase or decrease the adjusted
basis in the stock by the E&P of the
foreign corporation and its subsidiaries.
A comment requested that the foreign
tax credit proposed regulations be
amended to make clear that, for
purposes of section 864(e)(4), that the
reduction in basis under proposed
§ 1.861–12(c)(2)(i)(B)(1)(ii) does not
cause the taxpayer’s basis in the stock
in the foreign corporation to be less than
zero. This could happen, for example,
where the increase in the foreign
corporation’s E&P under section
965(b)(4)(B) exceeded the taxpayer’s
adjusted basis in the stock of that
foreign corporation.
The Treasury Department and the IRS
agreed that, for purposes of applying the
expense allocation rules, a taxpayer
should not have an adjusted basis below
zero in the stock of a foreign
corporation. When the adjusted basis of
an asset is zero, no expenses are
allocated to that asset and thus allowing
a negative adjusted basis would serve no
purpose for the expense allocation rules.
However, because the adjustment to the
stock of the foreign corporation in this
case is two steps—the adjusted basis is
reduced to account for the application
of section 965(b)(4)(B) and then
increased or decreased by the amount of
E&P of the foreign corporation and its
subsidiaries—the adjusted basis could
be less than zero after the initial
adjustment but still be positive after the
second adjustment is taken into
account. Accordingly, the Treasury

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Department and the IRS considered two
options to address the concern
expressed by the comment. These
options were: (i) Adopt the foreign tax
credit proposed regulations described
above with a statement that the
reduction in basis is limited to the
taxpayer’s adjusted basis in the stock of
the foreign corporation; or (ii) allow a
taxpayer’s adjusted basis in the stock of
the foreign corporation to be reduced
below zero as a result of the adjustment
for section 965(b)(4)(B) as long as the
adjustment for E&P provided in section
864(e)(4) increased the adjusted basis of
the foreign corporation to or above zero.
The first option was to adopt the
proposed regulations with a statement
that the reduction in basis is limited to
the taxpayer’s adjusted basis in the
stock of the foreign corporation. On one
hand, this would address the concerns
that the adjustment could cause a
taxpayer’s adjusted basis in the stock of
the foreign corporation to be less than
zero for purposes of the expense
allocation rules. On the other hand, this
would perpetuate some of the distortion
created by the application of section
965(b)(4)(B). That is, because the
increase in the E&P of the foreign
corporation would exceed the
downward adjustment in the basis of
the foreign corporation, the adjusted
basis in the stock of the foreign
corporation would still be higher for
purposes of section 864(e)(4) than if
section 965(b)(4)(B) had not applied.
The second option was to provide that
the taxpayer’s adjusted basis in the
stock of the foreign corporation may be
reduced below zero as a result of the
adjustment for section 965(b)(4)(B) as
long as the adjustment for E&P provided
in section 864(e)(4) increased the
adjusted basis of the foreign corporation
to or above zero. This option fully
addresses the non-economic increase to
the E&P of the foreign corporation under
section 965(b)(4)(B) because the
adjusted basis of the foreign corporation
is reduced by the full amount of the
increase. However, it also still ensures
that, for expense allocation purposes,
the adjusted basis of the stock of the
foreign corporation will not be below
zero, after accounting for the E&P
adjustment in section 864(e)(4). The
Treasury Department and the IRS
selected this option for the final
regulations because it addressed the
concerns regarding negative adjusted
basis while most accurately reflecting
the value of the stock in the foreign
corporation for purposes of the expense
allocation rules, and did not increase
compliance costs relative to the
alternatives.

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ii. Affected Taxpayers
The taxpayers potentially affected by
this aspect of the final regulations are
those taxpayers that own at least 10
percent of a foreign corporation that had
its E&P increased under section
965(b)(4)(B). The Treasury Department
and the IRS have not estimated how
many taxpayers are likely to be affected
by these regulations because this level
of detail regarding taxpayer filings
under section 965 is not readily
available. However, 100,000 taxpayers
were estimated to pay the section 965
one-time tax. This is an upper-bound
estimate of affected taxpayers since only
those with an E&P adjustment under
section 965(b)(4)(B) would be affected.
Information on those taxpayers is not
readily available to the Treasury
Department and the IRS.
II. Paperwork Reduction Act
In response to comments addressing
the notices of proposed rulemaking
preceding the final regulations, the
Treasury Department and the IRS have
added new collections of information
with respect to section 951A and
revised a collection of information with
respect to section 965(n).
The new collections of information in
these regulations with respect to section
951A are in § 1.951A–3(e)(3)(ii),
(h)(1)(iv)(A), and (h)(2)(ii)(B)(3). The
revised collection of information with
respect to the election under section
965(n) is in § 1.965–7(e)(2)(ii)(B).
The collection of information in
§ 1.951A–3(e)(3)(ii) is an election that
the controlling domestic shareholders of
a CFC may make in order for the CFC
to continue to use its book depreciation
method (rather than converting to ADS)
for purposes of determining the adjusted
basis in specified tangible property
placed in service before its first taxable
year beginning after December 22, 2017
if certain conditions are met. This
election is made by controlling domestic
shareholders by attaching a statement
meeting the requirements of § 1.964–
1(c)(3)(ii) with their income tax returns
following the notice requirements of
§ 1.964–1(c)(3)(iii). This election, if
made by a CFC, simplifies the
calculation of the QBAI for the CFC
attributable to property placed in
service before December 22, 2017,
which, and in turn, simplifies the
calculation of the DTIR of the CFC’s
U.S. shareholders attributable to such
property. For purposes of the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) (‘‘PRA’’), the reporting burden
associated with § 1.951A–3(e)(3)(ii) will
be reflected in the PRA submission
associated with the Form 990 series,

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Form 1120 series, Form 1040 series,
Form 1041 series, and Form 1065 series
(see chart at the end of this part II of this
Special Analyses section for the status
of the PRA submissions for these forms).
The collection of information in
§ 1.951A–3(h)(1)(iv)(A) is a statement
that a U.S. shareholder must attach to a
Form 5471 with respect to a CFC in
order to rebut the presumption that a
transfer of specified tangible property
held by the CFC for less than 12 months
was held temporarily with a principal
purpose of increasing the DTIR of the
U.S. shareholder. The information
included in the statement is required in
order for the IRS to be aware if the
taxpayer takes the position that the
temporary ownership rule of § 1.951A–
3(h)(1) does not apply. Without this
statement, there is a presumption that
such property is held temporarily with
a principal purpose of increasing DTIR
of a U.S. shareholder and a portion of
the basis in the property may be
disregarded for purposes of calculating
QBAI of the CFC that holds the property
temporarily. The statement indicates
that the U.S. shareholder should be
allowed the benefit of basis that would
otherwise be disregarded for purposes of
calculating QBAI. For purposes of the
PRA, the reporting burden associated
with § 1.951A–3(h)(1)(iv)(A) will be
reflected in the PRA submission
associated with Form 5471,
‘‘Information Return of U.S. Persons
With Respect to Certain Foreign
Corporations’’ (OMB control number
1545–0123).
The collection of information in
§ 1.951A–3(h)(2)(ii)(B)(3) is an election
to disregard disqualified basis, which is
certain basis that was created by reason
of a disqualified transfer during the
disqualified period of a transferor CFC,
as those terms are defined in § 1.951A–
3(h)(2)(ii)(C). This election would
simplify recordkeeping with respect to
the property because a separate record
of the disqualified basis and total
adjusted basis in the property would not
have to be tracked. For purposes of
determining disqualified basis, a
disqualified transfer includes both a
direct transfer during the disqualified
period by one CFC to a related person,
and also an indirect transfer of property
owned by a partnership through, for
example, a transfer by a CFC to a related
person of an interest in the partnership,
for which a section 754 election is in
effect. Therefore, disqualified basis may
exist in both property held by a CFC and
property held by a partnership.
Accordingly, there are two methods for
making this election based upon
whether the property with disqualified

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basis is held directly by a CFC or
indirectly through a partnership in
which the CFC is a partner. With respect
to property held directly by the CFC,
this election is made by controlling
domestic shareholders of the CFC by
attaching a statement meeting the
requirements of § 1.964–1(c)(3)(ii) with
their income tax returns following the
notice requirements of § 1.964–
1(c)(3)(iii). See § 1.951A–
3(h)(2)(ii)(B)(3)(ii). With respect to
property held in a partnership in which
the CFC is a partner, this election is
made by the partnership by filing a
statement as described in § 1.754–1(b)(1)
attached to the partnership return. See
§ 1.951A–3(h)(2)(ii)(B)(3)(iii). For
purposes of the PRA, the reporting
burden associated with § 1.951A–
3(h)(2)(ii)(B)(3)(ii) will be reflected in
the PRA submission associated with the
Form 990 series, Form 1120 series, Form
1040 series, Form 1041 series, and Form
1065 series (see chart at the end of this
part II of the Special Analysis section
for the status of the PRA submissions for
these forms). For purposes of the PRA,
the reporting burden associated with
§ 1.951A–3(h)(2)(ii)(B)(3)(iii) will be
reflected in the PRA submission
associated with Form 1065 (see chart at
the end of this part II of the Special
Analysis section for the status of the
PRA submissions for this form).
The collection of information in
§ 1.965–7(e)(2)(ii)(B) requires a taxpayer
revoking a section 965(n) election to
attach a statement to that effect to an
amended income tax return. The
information is required in order for the
IRS to be aware if a taxpayer revokes an
election. The Treasury Department and
the IRS have determined that the
reporting burden associated with
§ 1.965–7(e)(2)(ii)(B) to revoke a section
965(n) election is reflected in the
reporting burden associated with
making the election. For purposes of the
PRA, the reporting burden associated
with § 1.965–7(e)(2)(ii)(B) will be
reflected in the PRA submission
associated with TD 9846, 84 FR 1838
(February 5, 2019) (OMB control
number 1545–2280).
The estimates for the number of
impacted filers with respect to the
collections of information described in
this part II of the Special Analysis
section are based on filers of income tax
returns with a Form 5471 attached
because only filers that are U.S.
shareholders of CFCs or that have at
least a 10 percent ownership in a foreign
corporation would be subject to the
information collection requirements.
The IRS estimates the number of
affected filers to be the following:

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TAX FORMS IMPACTED
Number of
respondents
(estimated)

Collection of information
§ 1.951A–3(e)(3)(ii) Election to continue to use income and
E&P depreciation method for property placed in service before the first taxable year beginning after December 22,
2017.
§ 1.951A–3(h)(1)(iv)(A) Statement for less than 12 month property.
§ 1.951A–3(h)(2)(ii)(B)(3) Election to disregard disqualified
basis.
§ 1.965–7(e)(2)(ii)(B) Statement to revoke section 965(n) election.

Forms to which the information may be attached

25,000–35,000

Form 990 series, Form 1120 series, Form 1040 series, Form
1041 series, and Form 1065 series.

25,000–35,000

Form 5471.

25,000–35,000

Form 990 series, Form 1120 series, Form 1040 series, Form
1041 series, and Form 1065 series.
Form 990 series, Form 1120 series, Form 1040 series, Form
1041 series, and Form 1065 series.

25,000–35,000

Source: MeF, DCS, and CDW.

The current status of the PRA
submissions related to the tax forms that
will be revised as a result of the
information collections in the section
951A regulations is provided in the
accompanying table. As described
above, the reporting burdens associated
with the information collections in the
regulations are included in the
aggregated burden estimates for OMB
control numbers 1545–0123 (which
represents a total estimated burden time
for all forms and schedules for
corporations of 3.157 billion hours and
total estimated monetized costs of
$58.148 billion ($2017)), 1545–0074
(which represents a total estimated
burden time, including all other related
forms and schedules for individuals, of
1.784 billion hours and total estimated
monetized costs of $31.764 billion
($2017)), 1545–0092 (which represents a
total estimated burden time, including
all other related forms and schedules for
trusts and estates, of 307,844,800 hours
and total estimated monetized costs of
$9.950 billion ($2016)), and 1545–0047
(which represents a total estimated
burden time, including all other related

forms and schedules for tax-exempt
organizations, of 50.450 million hours
and total estimated monetized costs of
$1,297,300,000 ($2017). The overall
burden estimates provided for the OMB
control numbers below are aggregate
amounts that relate to the entire package
of forms associated with the applicable
OMB control number and will in the
future include, but not isolate, the
estimated burden of the tax forms that
will be revised as a result of the
information collections in the
regulations. These numbers are
therefore unrelated to the future
calculations needed to assess the burden
imposed by the regulations. These
burdens have been reported for other
regulations related to the taxation of
cross-border income and the Treasury
Department and the IRS urge readers to
recognize that these numbers are
duplicates and to guard against
overcounting the burden that
international tax provisions imposed
prior to the Act. No burden estimates
specific to the forms affected by the
regulations are currently available. The
Treasury Department and the IRS have

not estimated the burden, including that
of any new information collections,
related to the requirements under the
regulations. The Treasury Department
and the IRS estimate PRA burdens on a
taxpayer-type basis rather than a
provision-specific basis. Those
estimates would capture both changes
made by the Act and those that arise out
of discretionary authority exercised in
the final regulations.
The Treasury Department and the IRS
request comments on all aspects of
information collection burdens related
to the final regulations, including
estimates for how much time it would
take to comply with the paperwork
burdens described above for each
relevant form and ways for the IRS to
minimize the paperwork burden.
Proposed revisions (if any) to these
forms that reflect the information
collections contained in these final
regulations will be made available for
public comment at https://apps.irs.gov/
app/picklist/list/draftTaxForms.html
and will not be finalized until after
these forms have been approved by
OMB under the PRA.

Form

Type of filer

OMB No.(s)

Status

Forms 990 ..................

Tax exempt entities (NEW
Model).

1545–0047 ...............

Approved by OIRA 12/21/2018 until 12/31/2019. The Form will be
updated with OMB number 1545–0047 and the corresponding
PRA Notice on the next revision.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201811-1545-003
Form 1040 ..................

Individual (NEW Model) ....

1545–0074 ...............

Limited Scope submission (1040 only) approved on 12/7/2018 until
12/31/2019. Full ICR submission for all forms in 6/2019. 60 Day
FRN not published yet for full collection.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031

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Form 1041 ..................

Trusts and estates ............

1545–0092 ...............

Submitted to OIRA for review on 9/27/2018.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014
Form 1065 and 1120

Business (NEW Model) ....

1545–0123 ...............

Approved by OIRA 12/21/2018 until 12/31/2019.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-019

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Form

Type of filer

OMB No.(s)

Status

Form 5471 ..................

Business (NEW Model) ....

1545–0123 ...............

Published in the FRN on 10/8/18. Public Comment period closes
on 12/10/18.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-019
Individual (NEW Model) ....

1545–0074 ...............

Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. Full ICR submission for all forms in 3–2019. 60 Day FRN
not published yet for full collection.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031

In 2018, the IRS released and invited
comments on drafts of the above forms
in order to give members of the public
advance notice and an opportunity to
submit comments. The IRS received no
comments on the portions of the forms
that relate to section 951A during the
comment period. Consequently, the IRS
made the forms available in late 2018
and early 2019 for use by the public.
The IRS is contemplating making
additional changes to forms in order to
implement these final regulations.
III. Regulatory Flexibility Act
It is hereby certified that this final
regulation will not have a significant
economic impact on a substantial
number of small entities within the
meaning of section 601(6) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6).
Sections 951 and 951A generally
affect U.S. shareholders of CFCs.
Section 965 generally affects U.S.
2017
billion
JCT tax revenue ........................................
Total gross receipts ...................................
Percent ......................................................

taxpayers who are at least 10-percent
shareholders of a foreign corporation.
The reporting burdens in § 1.951A–
3(e)(3)(ii), (h)(1)(iv)(A), and
(h)(2)(ii)(B)(3), and § 1.965–7(e)(2)(ii)(B)
generally affect U.S. taxpayers that elect
to make or revoke certain elections or
rebut a presumption. In general, foreign
corporations are not considered small
entities. Nor are U.S. taxpayers
considered small entities to the extent
the taxpayers are natural persons or
entities other than small entities. For
purposes of the PRA, the Treasury
Department and the IRS estimate that
there are 25,000–35,000 respondents of
all sizes that are likely to file Form
5471. Only a small proportion of these
filers are likely to be small business
entities. This estimate was used in the
proposed regulations (REG–104390–18),
and comments were requested on the
number of small entities that are likely
to be impacted by the section 951A
regulations.
2018
billion

7.7
30,727
0.03

12.5
53,870
0.02

2019
billion
9.6
566,676
0.02

2020
billion
9.5
59,644
0.02

2021
billion

Examining the gross receipts of the efiled Forms 5471 that is the basis of the
25,000–35,000 respondent estimates, the
Treasury Department and the IRS have
determined that the tax revenue from
section 951A estimated by the Joint
Committee on Taxation for businesses of
all sizes is less than 0.3 percent of gross
receipts as shown in the table below.
Based on data for 2015 and 2016, total
gross receipts for all businesses with
gross receipts under $25 million is $60
billion while those over $25 million is
$49.1 trillion. Given that tax on GILTI
inclusion amounts is correlated with
gross receipts, this results in businesses
with less than $25 million in gross
receipts accounting for approximately
0.01 percent of the tax revenue. Data are
not readily available to determine the
sectoral breakdown of these entities.
Based on this analysis, smaller
businesses are not significantly
impacted by these final regulations.

2022
billion

9.3
62,684
0.01

9.0
65,865
0.01

2023
billion
9.2
69,201
0.01

2024
billion
9.3
72,710
0.01

2025
billion
15.1
76,348
0.02

2026
billion
21.2
80,094
0.03

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Source: RAAS, CDW (E-filed Form 5471, category 4 or 5, C and S corporations and partnerships); Conference Report, at 689.

Although the Treasury Department
and the IRS received one comment
asserting that a substantial number of
small entities would be affected by the
proposed regulations, that comment was
principally concerned with U.S. citizens
living abroad that owned foreign
corporations directly or indirectly
through other foreign entities. U.S.
citizens living abroad are not small
business entities; thus, no small entity
is affected in this scenario.
Specifically, the small business
entities that are subject to the
requirements of § 1.951A–3(e)(3)(ii),
(h)(1)(iv)(A), and (h)(2)(ii)(B)(3) of the
final regulations are domestic small
entities that are U.S. shareholders of one
or more CFCs. The data to assess the
number of small entities potentially
affected by § 1.951A–3(e)(3)(ii),
(h)(1)(iv)(A), and (h)(2)(ii)(B)(3) are not

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readily available. However, businesses
that are U.S. shareholders of CFCs are
generally not small businesses because
the ownership of sufficient stock of a
CFC in order to be a U.S. shareholder
generally entails significant resources
and investment. Therefore, the Treasury
Department and the IRS have
determined that a substantial number of
domestic small business entities will
not be subject to § 1.951A–3(e)(3)(ii),
(h)(1)(iv)(A), and (h)(2)(ii)(B)(3).
Moreover, as discussed above, smaller
businesses are not significantly
impacted by the final regulations.
Consequently, the Treasury Department
and the IRS have determined that
§ 1.951A–3(e)(3)(ii), (h)(1)(iv)(A), and
(h)(2)(ii)(B)(3) will not have a significant
economic impact on a substantial
number of small entities. Accordingly, it

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is hereby certified that the collection of
information requirements of § 1.951A–
3(e)(3)(ii), (h)(1)(iv)(A), and
(h)(2)(ii)(B)(3) will not have a significant
economic impact on a substantial
number of small entities.
With respect to § 1.965–7(e)(2)(ii)(B)
regarding the revocation of the election
under section 965(n), the Treasury
Department and the IRS have
determined that § 1.965–7(e)(2)(ii)(B)
will not have a significant economic
impact on a substantial number of small
entities for the reasons described in part
III of the Special Analyses section in TD
9864, 84 FR 1838 (February 5, 2019).
Accordingly, it is hereby certified that
the collection of information
requirements of § 1.965–7(e)(2)(ii)(B)
will not have a significant economic
impact on a substantial number of small
entities.

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Pursuant to section 7805(f), the
proposed regulations preceding these
final regulations (REG–104390–18 and
REG–105600–18) were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in
the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. In 2019, that
threshold is approximately $154
million. These regulations do not
include any Federal mandate that may
result in expenditures by state, local, or
tribal governments, or by the private
sector in excess of that threshold.

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V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order.
These regulations do not have
federalism implications and do not
impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
VI. Congressional Review Act
The Administrator of the Office of
Information and Regulatory Affairs of
the OMB has determined that this
Treasury decision is a major rule for
purposes of the Congressional Review
Act (5 U.S.C. 801 et seq.) (‘‘CRA’’).
Under section 801(3) of the CRA, a
major rule takes effect 60 days after the
rule is published in the Federal
Register. Notwithstanding this
requirement, section 808(2) of the CRA
allows agencies to dispense with the
requirements of section 801 of the CRA
when the agency for good cause finds
that such procedure would be
impracticable, unnecessary, or contrary
to the public interest and that the rule
shall take effect at such time as the
agency promulgating the rule
determines.
Pursuant to section 808(2) of the CRA,
the Treasury Department and the IRS
find, for good cause, that a 60-day delay

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in the effective date is unnecessary and
contrary to the public interest. The
statutory provisions to which these
rules relate were enacted on December
22, 2017 and apply to taxable years of
foreign corporations and to the taxable
years of United States persons in which
or with which such taxable years of
foreign corporations end. In certain
cases, these taxable years have already
ended. This means that the statutory
provisions are currently effective, and
taxpayers may be subject to Federal
income tax liability for their 2017 or
2018 taxable years reflecting these
provisions. In certain cases, taxpayers
may be required to file returns reflecting
this Federal income liability during the
60-day period that begins after this rule
is published in the Federal Register.
These final regulations provide
crucial guidance for taxpayers on how
to apply the relevant statutory rules,
compute their tax liability and
accurately file their Federal income tax
returns. These final regulations resolve
statutory ambiguity, prevent abuse and
grant taxpayer relief that would not be
available based solely on the statute.
Because taxpayers must already comply
with the statute, a 60-day delay in the
effective date of the final regulations is
unnecessary and contrary to the public
interest. A delay would place certain
taxpayers in the unusual position of
having to determine whether to file tax
returns during the pre-effective date
period based on final regulations that
are not yet effective. If taxpayers chose
not to follow the final regulations and
did not amend their returns after the
regulations became effective, it would
place significant strain on the IRS to
ensure that taxpayers correctly
calculated their tax liabilities. For
example, in cases where taxpayers and
their CFCs have engaged in disqualified
transfers or other abusive transactions, a
delayed effective date may hamper the
IRS’ ability to detect such transactions.
Moreover, a delayed effective date could
create uncertainty and possible
restatements with respect to financial
statement audits. Therefore, the rules in
this Treasury decision are effective on
the date of publication in the Federal
Register and apply in certain cases to
taxable years of foreign corporations and
United States persons beginning before
such date.
The foregoing good cause statement
only applies to the 60-day delayed
effective date provision of section 801(3)
of the CRA and is permitted under
section 808(2) of the CRA. The Treasury
Department and the IRS hereby comply
with all aspects of the CRA and the
Administrative Procedure Act (5 U.S.C.
551 et seq.).

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Drafting Information
The principal authors of the
regulations are Jorge M. Oben, Michael
A. Kaercher, and Karen Cate of the
Office of Associate Chief Counsel
(International), Jennifer N. Keeney of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries),
and Katherine H. Zhang and Kevin M.
Jacobs of the Office of Associate Chief
Counsel (Corporate). However, other
personnel from the Treasury
Department and the IRS participated in
the development of the regulations.
Effect on Other Documents
The following publications are
obsolete as of June 21, 2019:
Notice 2009–7 (2009–3 I.R.B. 312).
Notice 2010–41 (2010–22 I.R.B. 715).
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance
cited in this document are published in
the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting
the IRS website at http://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
for §§ 1.78–1, 1.861–12, 1.951–1,
1.951A–2, 1.951A–3, 1.951A–5, 1.1502–
51, 1.6038–5 in numerical order to read
in part as follows:

■

Authority: 26 U.S.C. 7805 * * *
Section 1.78–1 also issued under 26 U.S.C.
245A(g).

*

*

*

*

*

Section 1.861–12 also issued under 26
U.S.C. 864(e)(7).

*

*

*

*

*

Section 1.951–1 also issued under 26
U.S.C. 7701(a).
Section 1.951A–2 also issued under 26
U.S.C. 882(c)(1)(A) and 954(b)(5).
Section 1.951A–3 also issued under 26
U.S.C. 951A(d)(4).
Section 1.951A–5 also issued under 26
U.S.C. 951A(f)(1)(B).

*

*

*

*

*

Section 1.1502–51 also issued under 26
U.S.C. 1502.

*

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*

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*

Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Rules and Regulations
Section 1.6038–5 also issued under 26
U.S.C. 6038.

*

*

*

*

*

Par. 2. Section 1.78–1 is revised to
read as follows:

■

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§ 1.78–1 Gross up for deemed paid foreign
tax credit.

(a) Taxes deemed paid by certain
domestic corporations treated as a
dividend. If a domestic corporation
chooses to have the benefits of the
foreign tax credit under section 901 for
any taxable year, an amount that is
equal to the U.S. dollar amount of
foreign income taxes deemed to be paid
by the corporation for the year under
section 960 (in the case of section
960(d), determined without regard to
the phrase ‘‘80 percent of’’ in section
960(d)(1)) is, to the extent provided by
this section, treated as a dividend (a
section 78 dividend) received by the
domestic corporation from the foreign
corporation. A section 78 dividend is
treated as a dividend for all purposes of
the Code, except that it is not treated as
a dividend for purposes of section 245
or 245A, and does not increase the
earnings and profits of the domestic
corporation or decrease the earnings and
profits of the foreign corporation. Any
reduction under section 907(a) of the
foreign income taxes deemed paid with
respect to combined foreign oil and gas
income does not affect the amount
treated as a section 78 dividend. See
§ 1.907(a)–1(e)(3). Similarly, any
reduction under section 901(e) of the
foreign income taxes deemed paid with
respect to foreign mineral income does
not affect the amount treated as a
section 78 dividend. See § 1.901–
3(a)(2)(i), (b)(2)(i)(b), and (d) Example 8.
Any reduction under section
6038(c)(1)(B) in the foreign taxes paid or
accrued by a foreign corporation is
taken into account in determining
foreign taxes deemed paid and the
amount treated as a section 78 dividend.
See, for example, § 1.6038–2(k)(5)
Example 1. To the extent provided in
the Code, section 78 does not apply to
any tax not allowed as a credit. See, for
example, sections 901(j)(3), 901(k)(7),
901(l)(4), 901(m)(6), and 908(b). For
rules on determining the source of a
section 78 dividend in computing the
limitation on the foreign tax credit
under section 904, see §§ 1.861–3(a)(3),
1.862–1(a)(1)(ii), and 1.904–5(m)(6). For
rules on assigning a section 78 dividend
to a separate category, see § 1.904–4.
(b) Date on which section 78 dividend
is received. A section 78 dividend is
considered received by a domestic
corporation on the date on which—

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(1) The corporation includes in gross
income under section 951(a)(1)(A) the
amounts by reason of which there are
deemed paid under section 960(a) the
foreign income taxes that give rise to
that section 78 dividend,
notwithstanding that the foreign income
taxes may be carried back or carried
over to another taxable year and deemed
to be paid or accrued in such other
taxable year under section 904(c); or
(2) The corporation includes in gross
income under section 951A(a) the
amounts by reason of which there are
deemed paid under section 960(d) the
foreign income taxes that give rise to
that section 78 dividend.
(c) Applicability date. This section
applies to taxable years of foreign
corporations that begin after December
31, 2017, and to taxable years of United
States shareholders in which or with
which such taxable years of foreign
corporations end. The second sentence
of paragraph (a) of this section also
applies to section 78 dividends that are
received after December 31, 2017, by
reason of taxes deemed paid under
section 960(a) with respect to a taxable
year of a foreign corporation beginning
before January 1, 2018.
■ Par. 3. Section 1.861–12 is amended
by revising paragraph (c)(2) and adding
paragraph (k) to read as follows.
§ 1.861–12 Characterization rules and
adjustments for certain assets.

*

*
*
*
*
(c) * * *
(2) Basis adjustment for stock in 10
percent owned corporations—(i)
Taxpayers using the tax book value
method—(A) General rule. For purposes
of apportioning expenses on the basis of
the tax book value of assets, the adjusted
basis of any stock in a 10 percent owned
corporation owned by the taxpayer
either directly or indirectly through a
partnership or other pass-through entity
(after taking into account the
adjustments described in paragraph
(c)(2)(i)(B)(1) of this section) shall be—
(1) Increased by the amount of the
earnings and profits of such corporation
(and of lower-tier 10 percent owned
corporations) attributable to such stock
and accumulated during the period the
taxpayer or other members of its
affiliated group held 10 percent or more
of such stock; or
(2) Reduced by any deficit in earnings
and profits of such corporation (and of
lower-tier 10 percent owned
corporations) attributable to such stock
for such period; or
(3) Zero, if after application of
paragraphs (c)(2)(i)(A)(1) and (2) of this
section, the adjusted basis of the stock
is less than zero.

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(B) Computational rules—(1)
Adjustments to basis—(i) Application of
section 961 or 1293(d). For purposes of
this section, a taxpayer’s adjusted basis
in the stock of a foreign corporation
does not include any amount included
in basis under section 961 or 1293(d) of
the Code.
(ii) Application of section 965(b). For
purposes of this section, if a taxpayer
owned the stock of a specified foreign
corporation (as defined in § 1.965–
1(f)(45)) as of the close of the last
taxable year of the specified foreign
corporation that began before January 1,
2018, the taxpayer’s adjusted basis in
the stock of the specified foreign
corporation for that taxable year and any
subsequent taxable year is determined
as if the taxpayer did not make the
election described in § 1.965–2(f)(2)(i)
(regardless of whether the election was
actually made) and is further adjusted as
described in this paragraph
(c)(2)(i)(B)(1)(ii). If § 1.965–2(f)(2)(ii)(B)
applied (or would have applied if the
election had been made) with respect to
the stock of a specified foreign
corporation, the taxpayer’s adjusted
basis in the stock of the specified
foreign corporation is reduced by the
amount described in § 1.965–
2(f)(2)(ii)(B)(1) (without regard to the
rule for limited basis adjustments in
§ 1.965–2(f)(2)(ii)(B)(2) and the
limitation in § 1.965–2(f)(2)(ii)(C), and
without regard to the rules regarding the
netting of basis adjustments in § 1.965–
2(h)(2)). The reduction in the taxpayer’s
adjusted basis in the stock may reduce
the taxpayer’s adjusted basis in the
stock below zero prior to the application
of paragraphs (c)(2)(i)(A)(1) and (2) of
this section. No adjustment is made in
the taxpayer’s adjusted basis in the
stock of a specified foreign corporation
for an amount described in § 1.965–
2(f)(2)(ii)(A). To the extent that, in an
exchange described in section 351, 354,
or 356, a taxpayer receives stock of a
foreign corporation in exchange for
stock of a specified foreign corporation
described in this paragraph
(c)(2)(i)(B)(1)(ii), this paragraph
(c)(2)(i)(B)(1)(ii) applies to such stock
received.
(2) Amount of earnings and profits.
For purposes of this paragraph (c)(2),
earnings and profits (or deficits) are
computed under the rules of section 312
and, in the case of a foreign corporation,
sections 964(a) and 986 for taxable years
of the 10 percent owned corporation
ending on or before the close of the
taxable year of the taxpayer.
Accordingly, the earnings and profits of
a controlled foreign corporation include
all earnings and profits described in
section 959(c). The amount of the

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earnings and profits with respect to
stock of a foreign corporation held by
the taxpayer is determined according to
the attribution principles of section
1248 and the regulations under section
1248. The attribution principles of
section 1248 apply without regard to the
requirements of section 1248 that are
not relevant to the determination of a
shareholder’s pro rata portion of
earnings and profits, such as whether
earnings and profits (or deficits) were
derived (or incurred) during taxable
years beginning before or after
December 31, 1962.
(3) Annual noncumulative
adjustment. The adjustment required by
paragraph (c)(2)(i)(A) of this section is
made annually and is noncumulative.
Thus, the adjusted basis of the stock
(determined without regard to prior
years’ adjustments under paragraph
(c)(2)(i)(A) of this section) is adjusted
annually by the amount of accumulated
earnings and profits (or deficits)
attributable to the stock as of the end of
each year.
(4) Translation of non-dollar
functional currency earnings and
profits. Earnings and profits (or deficits)
of a qualified business unit that has a
functional currency other than the
dollar must be computed under this
paragraph (c)(2) in functional currency
and translated into dollars using the
exchange rate at the end of the
taxpayer’s current taxable year (and not
the exchange rates for the years in
which the earnings and profits or
deficits were derived or incurred).
(C) Examples. The following
examples illustrate the application of
paragraph (c)(2)(i) of this section.
(1) Example 1: No election described in
§ 1.965–2(f)(2)(i)—(i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2, both controlled foreign
corporations. USP, CFC1, and CFC2 all use
the calendar year as their U.S. taxable year.
USP owned CFC1 and CFC2 as of December
31, 2017, and CFC1 and CFC2 were specified
foreign corporations with respect to USP.
USP’s basis in each share of stock of each of
CFC1 and CFC2 is identical. USP did not
make the election described in § 1.965–
2(f)(2)(i), but if USP had made the election,
§ 1.965–2(f)(2)(ii)(B) would have applied to
the stock of CFC2 and the amount described
in § 1.965–2(f)(2)(ii)(B)(1) (without regard to
the rule for limited basis adjustments in
§ 1.965–2(f)(2)(ii)(B)(2) and without regard to
the rules regarding the netting of basis
adjustments in § 1.965–2(h)(2)) with respect
to the stock of CFC2, in aggregate, is $75x.
For purposes of determining the value of the
stock of CFC1 and CFC2 at the beginning of
the 2019 taxable year, without regard to
amounts included in basis under section 961
or 1293(d), USP’s adjusted basis in the stock
of CFC1 is $100x and its adjusted basis in the
stock of CFC2 is $350x (before the

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application of paragraph (c)(2)(i)(B) of this
section).
(ii) Analysis. Under paragraph
(c)(2)(i)(B)(1)(ii) of this section, USP’s
adjusted basis in the stock of CFC1 is
determined as if USP did not make the
election described in § 1.965–2(f)(2)(i). USP’s
adjusted basis in the stock of CFC2 is then
reduced by $75x, the amount described in
§ 1.965–2(f)(2)(ii)(B)(1), without regard to the
rule for limited basis adjustments in § 1.965–
2(f)(2)(ii)(B)(2) and without regard to the
rules regarding the netting of basis
adjustments in § 1.965–2(h)(2). No
adjustment is made to USP’s adjusted basis
in the stock in CFC1. Accordingly, for
purposes of determining the value of stock of
CFC1 and CFC2 at the beginning of the 2019
taxable year, USP’s adjusted basis in the
stock of CFC1 is $100x and USP’s adjusted
basis in the stock of CFC2 is $275x
($350x¥$75x).
(2) Example 2: Election described in
§ 1.965–2(f)(2)(i)—(i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1,
which owns all of the stock of CFC2, both
controlled foreign corporations. USP, CFC1,
and CFC2 all use the calendar year as their
U.S. taxable year. USP owned CFC1, and
CFC1 owned CFC2 as of December 31, 2017,
and CFC1 and CFC2 were specified foreign
corporations with respect to USP. USP’s basis
in each share of stock of CFC1 is identical.
USP made the election described in § 1.965–
2(f)(2)(i). As a result of the election, USP was
required to increase its basis in the stock of
CFC1 by $90x under § 1.965–2(f)(2)(ii)(A)(1),
and to decrease its basis in the stock of CFC1
by $90x under § 1.965–2(f)(2)(ii)(B)(1).
Pursuant to § 1.965–2(h)(2), USP netted the
increase of $90x against the decrease of $90x
and made no net adjustment to the basis in
the stock of CFC1. For purposes of
determining the value of the stock of CFC1
at the beginning of the 2019 taxable year,
without regard to amounts included in basis
under section 961 or 1293(d), USP’s adjusted
basis in the stock of CFC1 is $600x (before
the application of paragraph (c)(2)(i)(B) of
this section).
(ii) Analysis. Under paragraph
(c)(2)(i)(B)(1)(ii) of this section, USP’s
adjusted basis in the stock of CFC1 is
determined as if USP did not make the
election described in § 1.965–2(f)(2)(i). While
USP made the election, no adjustment was
made to the stock of CFC1 as a result of the
election. However, USP’s adjusted basis in
the stock of CFC1 is then reduced by $90x,
the amount described in § 1.965–
2(f)(2)(ii)(B)(1), without regard to the rules
regarding the netting of basis described in
§ 1.965–2(h)(2). No adjustment is made to
USP’s basis in the stock of CFC1 for the
amount described in § 1.965–2(f)(2)(ii)(A)(1).
Accordingly, for purposes of determining the
value of stock of CFC1 at the beginning of the
2019 taxable year, USP’s adjusted basis in the
stock of CFC1 is $510x ($600x¥$90x).
(3) Example 3: Adjusted basis below zero—
(i) Facts. The facts are the same as in
paragraph (c)(2)(i)(C)(1)(i) of this section (the
facts in Example 1), except that for purposes
of determining the value of the stock of CFC2
at the beginning of the 2019 taxable year,
without regard to amounts included in basis

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under section 961 or 1293(d), USP’s adjusted
basis in the stock of CFC2 is $0 (before the
application of paragraph (c)(2)(i)(B) of this
section). Additionally, the adjusted basis of
USP in the stock of CFC1 and CFC2 at the
end of the 2019 taxable year is the same as
at the beginning of that year, and as of the
end of the 2019 taxable year, CFC1 has
earnings and profits of $25x and CFC2 has
earnings and profits of $50x that are
attributable to the stock owned by USP and
accumulated during the period that USP held
the stock of CFC1 and CFC2.
(ii) Analysis. The analysis is the same as in
paragraph (c)(2)(i)(C)(1)(ii) of this section (the
analysis in Example 1) except that for
purposes of determining the value of stock of
CFC1 and CFC2 at the beginning of the 2019
taxable year, USP’s adjusted basis in the
stock of CFC2 is ¥$75x ($0¥$75x). Because
USP’s basis in the stock of CFC1 and CFC2
is the same at the end of the 2019 taxable
year, prior to the application of the
adjustments in paragraphs (c)(2)(i)(A)(1) and
(2) of this section, USP’s adjusted basis in the
stock of CFC1 is $100x and USP’s adjusted
basis in the stock of CFC2 is ¥$75x. Under
paragraph (c)(2)(i)(A)(1) of this section, for
purposes of apportioning expenses on the
basis of the tax book value of assets, USP’s
adjusted basis in the stock of CFC1 is $125x
($100x + $25x). Under paragraph
(c)(2)(i)(A)(3) of this section, for purposes of
apportioning expenses on the basis of the tax
book value of assets, USP’s adjusted basis in
the stock of CFC2 is $0 because after
applying paragraph (c)(2)(i)(A)(1) of this
section, USP’s adjusted basis in the stock of
CFC2 is less than zero (¥$75x + $50x).
(4) Example 4: Election described in
§ 1.965–2(f)(2)(i) and adjusted basis below
zero—(i) Facts. The facts are the same as in
paragraph (c)(2)(i)(C)(3)(i) of this section (the
facts in Example 3), except that USP made
the election described in § 1.965–2(f)(2)(i)
and, as result, recognized $75x of gain under
§ 1.965–2(h)(3).
(ii) Analysis. The analysis is the same as in
paragraph (c)(2)(i)(C)(3)(ii) of this section (the
analysis in Example 3).

(c)(2)(ii) through (c)(2)(vi) [Reserved].
For further guidance, see § 1.861–
12T(c)(2)(ii) through (c)(2)(vi).
*
*
*
*
*
(k) Applicability date. This section
applies to taxable years that both begin
after December 31, 2017, and end on or
after December 4, 2018. Paragraphs
(c)(2)(i)(A) and (c)(2)(i)(B)(1)(ii) of this
section also apply to the last taxable
year of a foreign corporation that begins
before January 1, 2018, and with respect
to a United States person, the taxable
year in which or with which such
taxable year of the foreign corporation
ends.
■ Par. 4. Section 1.861–12T is amended
by revising paragraph (c)(2)(i) to read as
follows:
§ 1.861–12T Characterization rules and
adjustments for certain assets (temporary).

*

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Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Rules and Regulations
(c) * * *
(c)(2)(i)(A) through (C) [Reserved]. For
further guidance, see § 1.861–
12(c)(2)(i)(A) through (c)(2)(i)(C).
*
*
*
*
*
■ Par. 5. Section 1.951–1 is amended
by:
■ 1. Revising paragraph (a) introductory
text.
■ 2. Revising paragraphs (b)(1)(ii), (b)(2),
(c), (e), and (g)(1).
■ 3. Adding paragraphs (h) and (i).
The revisions and addition read as
follows:
§ 1.951–1 Amounts included in gross
income of United States shareholders.

(a) In general. If a foreign corporation
is a controlled foreign corporation
(within the meaning of section 957) at
any time during any taxable year of such
corporation, every person—
*
*
*
*
*
(b) * * *
(1) * * *
(ii) The lesser of—
(A) The amount of distributions
received by any other person during
such taxable year as a dividend with
respect to such stock multiplied by a
fraction, the numerator of which is the
subpart F income of such corporation
for the taxable year and the denominator
of which is the sum of the subpart F
income and the tested income (as
defined in section 951A(c)(2)(A) and

§ 1.951A–2(b)(1)) of such corporation for
the taxable year, and
(B) The dividend which would have
been received by such other person if
the distributions by such corporation to
all its shareholders had been the amount
which bears the same ratio to the
subpart F income of such corporation
for the taxable year as the part of such
year during which such shareholder did
not own (within the meaning of section
958(a)) such stock bears to the entire
taxable year.
(2) Examples. The following examples
illustrate the application of this
paragraph (b).
(i) Facts. The following facts are
assumed for purposes of the examples.
(A) A is a United States shareholder.
(B) M is a foreign corporation that has
only one class of stock outstanding.
(C) B is a nonresident alien
individual, and stock owned by B is not
considered owned by a domestic entity
under section 958(b).
(D) P and R are foreign corporations.
(E) All persons use the calendar year
as their taxable year.
(F) Year 1 ends on or after October 3,
2018, and has 365 days.
(ii) Example 1—(A) Facts. A owns 100% of
the stock of M throughout Year 1. For Year
1, M derives $100x of subpart F income, has
$100x of earnings and profits, and makes no
distributions.
(B) Analysis. Under section 951(a)(2) and
paragraph (b)(1) of this section, A’s pro rata

share of the subpart F income of M for Year
1 is $100x.
(iii) Example 2—(A) Facts. The facts are
the same as in paragraph (b)(2)(ii)(A) of this
section (the facts in Example 1), except that
instead of holding 100% of the stock of M for
the entire year, A sells 60% of such stock to
B on May 26, Year 1. Thus, M is a controlled
foreign corporation for the period January 1,
Year 1, through May 26, Year 1.
(B) Analysis. Under section 951(a)(2)(A)
and paragraph (b)(1)(i) of this section, A’s pro
rata share of the subpart F income of M is
limited to the subpart F income of M which
bears the same ratio to its subpart F income
for such taxable year ($100x) as the part of
such year during which M is a controlled
foreign corporation bears to the entire taxable
year (146/365). Accordingly, under section
951(a)(2) and paragraph (b)(1) of this section,
A’s pro rata share of the subpart F income of
M for Year 1 is $40x ($100x × 146/365).
(iv) Example 3—(A) Facts. The facts are the
same as in paragraph (b)(2)(ii)(A) of this
section (the facts in Example 1), except that
instead of holding 100% of the stock of M for
the entire year, A holds 60% of such stock
on December 31, Year 1, having acquired
such stock on May 26, Year 1, from B, who
owned such stock from January 1, Year 1.
Before A’s acquisition of the stock, M had
distributed a dividend of $15x to B in Year
1 with respect to the stock so acquired by A.
M has no tested income for Year 1.
(B) Analysis. Under section 951(a)(2) and
paragraph (b)(1) of this section, A’s pro rata
share of the subpart F income of M for Year
1 is $21x, such amount being determined as
follows:

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Table 1 to paragraph (b)(2)(iv)(B):
M’s subpart F income for Year 1 .........................................................................................................................................................
Less: Reduction under section 951(a)(2)(A) for period (1–1 through 5–26) during which M is not a controlled foreign corporation
($100x × 146/365) ............................................................................................................................................................................
Subpart F income for Year 1 as limited by section 951(a)(2)(A) ........................................................................................................
A’s pro rata share of subpart F income as determined under section 951(a)(2)(A) (0.6 × $60x) ......................................................
Less: Reduction under section 951(a)(2)(B) for dividends received by B during Year 1 with respect to the stock of M acquired
by A:
(i) Dividend received by B ($15x), multiplied by a fraction ($100x/$100x), the numerator of which is the subpart F income of
such corporation for the taxable year ($100x) and the denominator of which is the sum of the subpart F income and the
tested income of such corporation for the taxable year ($100x) ($15x × ($100x/$100x)) .......................................................
(ii) B’s pro rata share (60%) of the amount which bears the same ratio to the subpart F income of such corporation for the
taxable year ($100x) as the part of such year during which A did not own (within the meaning of section 958(a)) such
stock bears to the entire taxable year (146/365) (0.6 × $100x × (146/365)) ...........................................................................
(iii) Amount of reduction under section 951(a)(2)(B) (lesser of (i) or (ii)) ....................................................................................
A’s pro rata share of subpart F income as determined under section 951(a)(2) ...............................................................................

(v) Example 4—(A) Facts. A owns 100% of
the only class of stock of P throughout Year
1, and P owns 100% of the only class of stock
of R throughout Year 1. For Year 1, R derives
$100x of subpart F income, has $100x of
earnings and profits, and distributes a
dividend of $20x to P. R has no gross tested
income. P has no income for Year 1 other
than the dividend received from R.
(B) Analysis. Under section 951(a)(2) and
paragraph (b)(1) of this section, A’s pro rata
share of the subpart F income of R for Year
1 is $100x. A’s pro rata share of the subpart
F income of R is not reduced under section

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951(a)(2)(B) and paragraph (b)(1)(ii) of this
section for the dividend of $20x paid to P
because there was no part of Year 1 during
which A did not own (within the meaning of
section 958(a)) the stock of R. Under section
959(b), the $20x distribution from R to P is
not again includible in the gross income of
A under section 951(a). The $20x distribution
from R to P is not includible in the gross
tested income of P.
(vi) Example 5—(A) Facts. The facts are the
same as in paragraph (b)(2)(v)(A) of this
section (the facts in Example 4), except that
instead of holding 100% of the stock of R for

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29337

$100x
40x
60x
36x

15x
24x
15x
21x

the entire year, P holds 60% of such stock
on December 31, Year 1, having acquired
such stock on March 14, Year 1, from B.
Before P’s acquisition of the stock, R had
distributed a dividend of $100x to B in Year
1 with respect to the stock so acquired by P.
The stock interest so acquired by P was
owned by B from January 1, Year 1, until
acquired by P. R also has $300x of tested
income for Year 1.
(B) Analysis—(1) Limitation of pro rata
share of subpart F income. Under section
951(a)(2) and paragraph (b)(1) of this section,
A’s pro rata share of the subpart F income of

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Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Rules and Regulations

M for Year 1 is $28x, such amount being
determined as follows:

Table 1 to paragraph (b)(2)(vi)(B)(1):
R’s subpart F income for Year 1 .........................................................................................................................................................
Less: Reduction under section 951(a)(2)(A) for period (1–1 through 3–14) during which R is not a controlled foreign corporation
($100x × 73/365) ..............................................................................................................................................................................
Subpart F income for Year 1 as limited by section 951(a)(2)(A) ........................................................................................................
A’s pro rata share of subpart F income as determined under section 951(a)(2)(A) (0.6 × $80x) ......................................................
Less: Reduction under section 951(a)(2)(B) for dividends received by B during Year 1 with respect to the stock of R indirectly
acquired by A:
(i) Dividend received by B ($100x) multiplied by a fraction ($100x/$400x), the numerator of which is the subpart F income
of such corporation for the taxable year ($100x) and the denominator of which is the sum of the subpart F income and
the tested income of such corporation for the taxable year ($400x) ($100x × ($100x/$400x)) ..............................................
(ii) B’s pro rata share (60%) of the amount which bears the same ratio to the subpart F income of such corporation for the
taxable year ($100x) as the part of such year during which A did not own (within the meaning of section 958(a)) such
stock bears to the entire taxable year (73/365) (0.6 × $100x × (73/365)) ...............................................................................
(iii) Amount of reduction under section 951(a)(2)(B) (lesser of (i) or (ii)) ....................................................................................
A’s pro rata share of subpart F income as determined under section 951(a)(2) ........................................................................

(2) Limitation of pro rata share of tested
income. Under section 951A(e)(1) and
§ 1.951A–1(d)(2), A’s pro rata share of the

(c) [Reserved]
*
*
*
*
(e) Pro rata share of subpart F income
defined—(1) In general—(i)
Hypothetical distribution. For purposes
of paragraph (b) of this section, a United
States shareholder’s pro rata share of a
controlled foreign corporation’s subpart
F income for a taxable year is the
amount that bears the same ratio to the
corporation’s subpart F income for the
taxable year as the amount of the
corporation’s allocable earnings and
profits that would be distributed with
respect to the stock of the corporation
which the United States shareholder
owns (within the meaning of section
958(a)) for the taxable year bears to the
total amount of the corporation’s
allocable earnings and profits that
would be distributed with respect to the
stock owned by all the shareholders of
the corporation if all the allocable
earnings and profits of the corporation

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20x
80x
48x

25x
12x
12x
36x

tested income of M for Year 1 is $108x, such
amount being determined as follows:

Table 1 to paragraph (b)(2)(vi)(B)(2):
R’s tested income for Year 1 ...............................................................................................................................................................
Less: Reduction under section 951(a)(2)(A) for period (1–1 through 3–14) during which R is not a controlled foreign corporation
($300x × 73/365) ..............................................................................................................................................................................
Tested income for Year 1 as limited by under section 951(a)(2)(A) ..................................................................................................
A’s pro rata share of tested income as determined under § 1.951A–1(d)(2) (0.6 × $240x) ...............................................................
Less: Reduction under section 951(a)(2)(B for dividends received by B during Year 1 with respect to the stock of R indirectly
acquired by A:
(i) Dividend received by B ($100x) multiplied by a fraction ($300x/$400x), the numerator of which is the tested income of
such corporation for the taxable year ($300x) and the denominator of which is the sum of the subpart F income and the
tested income of such corporation for the taxable year ($400x) ($100x × ($300x/$400x)) .....................................................
(ii) B’s pro rata share (60%) of the amount which bears the same ratio to the tested income of such corporation for the taxable year ($300x) as the part of such year during which A did not own (within the meaning of section 958(a)) such stock
bears to the entire taxable year (73/365) (0.6 × $300x × (73/365)) ........................................................................................
(iii) Amount of reduction under section 951(a)(2)(B) (lesser of (i) or (ii)) ....................................................................................
A’s pro rata share of tested income under section 951A(e)(1) ...................................................................................................

*

$100x

for the taxable year (not reduced by
actual distributions during the year)
were distributed (hypothetical
distribution) on the last day of the
corporation’s taxable year on which
such corporation is a controlled foreign
corporation (hypothetical distribution
date).
(ii) Definition of allocable earnings
and profits. For purposes of this
paragraph (e), the term allocable
earnings and profits means, with respect
to a controlled foreign corporation for a
taxable year, the amount that is the
greater of—
(A) The earnings and profits of the
corporation for the taxable year
determined under section 964; and
(B) The sum of the subpart F income
(as determined under section 952 after
the application of section
951A(c)(2)(B)(ii) and § 1.951A–6(b)) of
the corporation for the taxable year and
the tested income (as defined in section

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$300x
60x
240x
144x

75x
36x
36x
108x

951A(c)(2)(A) and § 1.951A–2(b)(1)) of
the corporation for the taxable year.
(2) One class of stock. If a controlled
foreign corporation for a taxable year
has only one class of stock outstanding
on the hypothetical distribution date,
the amount of the corporation’s
allocable earnings and profits
distributed in the hypothetical
distribution with respect to each share
in the class of stock is determined as if
the hypothetical distribution were made
pro rata with respect to each share in
the class of stock.
(3) More than one class of stock. If a
controlled foreign corporation for a
taxable year has more than one class of
stock outstanding on the hypothetical
distribution date, the amount of the
corporation’s allocable earnings and
profits distributed in the hypothetical
distribution with respect to each class of
stock is determined based on the
distribution rights of each class of stock

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on the hypothetical distribution date,
which amount is then further
distributed pro rata with respect to each
share in the class of stock. Subject to
paragraphs (e)(4) through (6) of this
section, the distribution rights of a class
of stock are determined taking into
account all facts and circumstances
related to the economic rights and
interest in the allocable earnings and
profits of the corporation of each class,
including the terms of the class of stock,
any agreement among the shareholders
and, if and to the extent appropriate, the
relative fair market value of shares of
stock. For purposes of this paragraph
(e)(3), facts and circumstances do not
include actual distributions (including
distributions by redemption) or any
amount treated as a dividend under any
other provision of subtitle A of the
Internal Revenue Code (for example,
under section 78, 356(a)(2), 367(b), or
1248) made during the taxable year that
includes the hypothetical distribution
date.
(4) Special rules—(i) Redemptions,
liquidations, and returns of capital. No
amount of allocable earnings and profits
is distributed in the hypothetical
distribution with respect to a particular
class of stock based on the terms of the
class of stock of the controlled foreign
corporation or any agreement or
arrangement with respect thereto that
would result in a redemption (even if
such redemption would be treated as a
distribution of property to which
section 301 applies pursuant to section
302(d)), a distribution in liquidation, or
a return of capital.
(ii) Certain cumulative preferred
stock. If a controlled foreign corporation
has outstanding a class of redeemable
preferred stock with cumulative
dividend rights and dividend arrearages
on such stock do not compound at least
annually at a rate that equals or exceeds
the applicable Federal rate (as defined
in section 1274(d)(1)) that applies on the
date the stock is issued for the term
from such issue date to the mandatory
redemption date based on a comparable
compounding assumption (the relevant
AFR), the amount of the corporation’s
allocable earnings and profits
distributed in the hypothetical
distribution with respect to the class of
stock may not exceed the amount of
dividends actually paid during the
taxable year with respect to the class of
stock plus the present value at the end
of the controlled foreign corporation’s
taxable year of the unpaid current
dividends with respect to the class
determined using the relevant AFR and
assuming the dividends will be paid at
the mandatory redemption date. For
purposes of this paragraph (e)(4)(ii), if

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the class of preferred stock does not
have a mandatory redemption date, the
mandatory redemption date is the date
that the class of preferred stock is
expected to be redeemed based on all
facts and circumstances.
(iii) Dividend arrearages. If there is an
arrearage in dividends for prior taxable
years with respect to a class of preferred
stock of a controlled foreign
corporation, an amount of the
corporation’s allocable earnings and
profits is distributed in the hypothetical
distribution to the class of preferred
stock by reason of the arrearage only to
the extent the arrearage exceeds the
accumulated earnings and profits of the
controlled foreign corporation
remaining from prior taxable years
beginning after December 31, 1962, as of
the beginning of the taxable year, or the
date on which such stock was issued,
whichever is later (the applicable date).
If there is an arrearage in dividends for
prior taxable years with respect to more
than one class of preferred stock, the
previous sentence is applied to each
class in order of priority, except that the
accumulated earnings and profits
remaining after the applicable date are
reduced by the allocable earnings and
profits necessary to satisfy arrearages
with respect to classes of stock with a
higher priority. For purposes of this
paragraph (e)(4)(iii), the amount of any
arrearage with respect to stock described
in paragraph (e)(4)(ii) of this section is
determined in the same manner as the
present value of unpaid current
dividends on such stock under
paragraph (e)(4)(ii) of this section.
(5) Restrictions or other limitations on
distributions—(i) In general. A
restriction or other limitation on
distributions of an amount of earnings
and profits by a controlled foreign
corporation is not taken into account in
determining the amount of the
corporation’s allocable earnings and
profits distributed in a hypothetical
distribution to a class of stock of the
controlled foreign corporation.
(ii) Definition. For purposes of
paragraph (e)(5)(i) of this section, a
restriction or other limitation on
distributions includes any limitation
that has the effect of limiting the
distribution of an amount of earnings
and profits by a controlled foreign
corporation with respect to a class of
stock of the corporation, other than
currency or other restrictions or
limitations imposed under the laws of
any foreign country as provided in
section 964(b).
(iii) Exception for certain preferred
distributions. For purposes of paragraph
(e)(5)(i) of this section, the right to
receive periodically a fixed amount

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(whether determined by a percentage of
par value, a reference to a floating
coupon rate, a stated return expressed in
terms of a certain amount of U.S. dollars
or foreign currency, or otherwise) with
respect to a class of stock the
distribution of which is a condition
precedent to a further distribution of
earnings and profits that year with
respect to any class of stock (not
including a distribution in partial or
complete liquidation) is not a restriction
or other limitation on the distribution of
earnings and profits by a controlled
foreign corporation.
(iv) Illustrative list of restrictions and
limitations. Except as provided in
paragraph (e)(5)(iii) of this section,
restrictions or other limitations on
distributions include, but are not
limited to—
(A) An arrangement that restricts the
ability of a controlled foreign
corporation to pay dividends on a class
of stock of the corporation until a
condition or conditions are satisfied (for
example, until another class of stock is
redeemed);
(B) A loan agreement entered into by
a controlled foreign corporation that
restricts or otherwise affects the ability
to make distributions on its stock until
certain requirements are satisfied; or
(C) An arrangement that conditions
the ability of a controlled foreign
corporation to pay dividends to its
shareholders on the financial condition
of the corporation.
(6) Transactions and arrangements
with a principal purpose of changing
pro rata shares. Appropriate
adjustments must be made to the
allocation of allocable earnings and
profits that would be distributed
(without regard to this paragraph (e)(6))
in a hypothetical distribution with
respect to any share of stock outstanding
as of the hypothetical distribution date
to disregard the effect on the
hypothetical distribution of any
transaction or arrangement that is
undertaken as part of a plan a principal
purpose of which is the avoidance of
Federal income taxation by changing the
amount of allocable earnings and profits
distributed in any hypothetical
distribution with respect to such share.
This paragraph (e)(6) also applies for
purposes of the pro rata share rules
described in § 1.951A–1(d) that
reference this paragraph (e), including
the rules in § 1.951A–1(d)(3) that
determine the pro rata share of qualified
business asset investment based on the
pro rata share of tested income.
(7) Examples. The following examples
illustrate the application of this
paragraph (e).

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(i) Facts. Except as otherwise stated,
the following facts are assumed for
purposes of the examples:
(A) FC1 is a controlled foreign
corporation.
(B) USP1 and USP2 are domestic
corporations.
(C) Individual A is a foreign
individual, and FC2 is a foreign
corporation that is not a controlled
foreign corporation.
(D) All persons use the calendar year
as their taxable year.
(E) Any ownership of FC1 by any
shareholder is for all of Year 1.
(F) The common shareholders of FC1
are entitled to dividends when declared
by FC1’s board of directors.
(G) There are no accrued but unpaid
dividends with respect to preferred
shares, the preferred stock is not
described in paragraph (e)(4)(ii) of this
section, and common shares have
positive liquidation value.
(H) There are no other facts and
circumstances related to the economic
rights and interest of any class of stock
in the allocable earnings and profits of
a foreign corporation, and no
transaction or arrangement was entered
into as part of a plan a principal
purpose of which is the avoidance of
Federal income taxation.
(I) FC1 has neither tested income
within the meaning of section
951A(c)(2)(A) and § 1.951A–2(b)(1) nor
tested loss within the meaning of
section 951A(c)(2)(B)(i) and § 1.951A–
2(b)(2).
(ii) Example 1: Single class of stock—(A)
Facts. FC1 has outstanding 100 shares of one
class of stock. USP1 owns 60 shares of FC1.
USP2 owns 40 shares of FC1. For Year 1, FC1
has $1,000x of earnings and profits and
$100x of subpart F income within the
meaning of section 952.
(B) Analysis. FC1 has one class of stock.
Therefore, under paragraph (e)(2) of this
section, FC1’s allocable earnings and profits
of $1,000x are distributed in the hypothetical
distribution pro rata to each share of stock.
Accordingly, under paragraph (e)(1) of this
section, for Year 1, USP1’s pro rata share of
FC1’s subpart F income is $60x ($100x ×
$600x/$1,000x) and USP2’s pro rata share of
FC1’s subpart F income is $40x ($100x ×
$400x/$1,000x).
(iii) Example 2: Common and preferred
stock—(A) Facts. FC1 has outstanding 70
shares of common stock and 30 shares of 4%
nonparticipating, voting preferred stock with
a par value of $10x per share. USP1 owns all
of the common shares. Individual A owns all
of the preferred shares. For Year 1, FC1 has
$100x of earnings and profits and $50x of
subpart F income within the meaning of
section 952.
(B) Analysis. The distribution rights of the
preferred shares are not a restriction or other
limitation within the meaning of paragraph
(e)(5) of this section. Under paragraph (e)(3)

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of this section, the amount of FC1’s allocable
earnings and profits distributed in the
hypothetical distribution with respect to
Individual A’s preferred shares is $12x (0.04
× $10x × 30) and with respect to USP1’s
common shares is $88x ($100x¥$12x).
Accordingly, under paragraph (e)(1) of this
section, USP1’s pro rata share of FC1’s
subpart F income is $44x ($50x ¥ $88x/
$100x) for Year 1.
(iv) Example 3: Restriction based on
cumulative income—(A) Facts. FC1 has
outstanding 10 shares of common stock and
400 shares of 2% nonparticipating, voting
preferred stock with a par value of $1x per
share. USP1 owns all of the common shares.
FC2 owns all of the preferred shares. USP1
and FC2 cause the governing documents of
FC1 to provide that no dividends may be
paid to the common shareholders until FC1
cumulatively earns $100,000x of income. For
Year 1, FC1 has $50x of earnings and profits
and $50x of subpart F income within the
meaning of section 952.
(B) Analysis. The agreement restricting
FC1’s ability to pay dividends to common
shareholders until FC1 cumulatively earns
$100,000x of income is a restriction or other
limitation within the meaning of paragraph
(e)(5) of this section. Therefore, the
restriction is disregarded for purposes of
determining the amount of FC1’s allocable
earnings and profits distributed in the
hypothetical distribution to a class of stock.
The distribution rights of the preferred shares
are not a restriction or other limitation within
the meaning of paragraph (e)(5) of this
section. Under paragraph (e)(3) of this
section, the amount of FC1’s allocable
earnings and profits distributed in the
hypothetical distribution with respect to
FC2’s preferred shares is $8x (0.02 × $1x ×
400) and with respect to USP1’s common
shares is $42x ($50x ¥ $8x). Accordingly,
under paragraph (e)(1) of this section, USP1’s
pro rata share of FC1’s subpart F income is
$42x for Year 1.
(v) Example 4: Redemption rights—(A)
Facts. FC1 has outstanding 40 shares of
common stock and 10 shares of 4%
nonparticipating, preferred stock with a par
value of $50x per share. Pursuant to the
terms of the preferred stock, FC1 has the right
to redeem at any time, in whole or in part,
the preferred stock. FC2 owns all of the
preferred shares. USP1, wholly owned by
FC2, owns all of the common shares.
Pursuant to the governing documents of FC1,
no dividends may be paid to the common
shareholders while the preferred stock is
outstanding. For Year 1, FC1 has $100x of
earnings and profits and $100x of subpart F
income within the meaning of section 952.
(B) Analysis. The agreement restricting
FC1’s ability to pay dividends to common
shareholders while the preferred stock is
outstanding is a restriction or other limitation
within the meaning of paragraph (e)(5) of this
section. Therefore, the restriction is
disregarded for purposes of determining the
amount of FC1’s allocable earnings and
profits distributed in the hypothetical
distribution to a class of stock. Under
paragraph (e)(4)(i) of this section, no amount
of allocable earnings and profits is
distributed in the hypothetical distribution to

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the preferred shareholders on the
hypothetical distribution date as a result of
FC1’s right to redeem the preferred shares.
This is the case regardless of the restriction
on paying dividends to the common
shareholders while the preferred stock is
outstanding, and regardless of the fact that a
redemption of FC2’s preferred shares would
be treated as a distribution to which section
301 applies under section 302(d) (due to
FC2’s constructive ownership of the common
shares). Thus, neither the restriction on
paying dividends to the common
shareholders while the preferred stock is
outstanding nor FC1’s redemption rights with
respect to the preferred shares affects the
distribution of allocable earnings and profits
in the hypothetical distribution to FC1’s
shareholders. However, the distribution
rights of the preferred shares are not a
restriction or other limitation within the
meaning of paragraph (e)(5) of this section.
As a result, the amount of FC1’s allocable
earnings and profits distributed in the
hypothetical distribution with respect to
FC2’s preferred shares is $20x (0.04 × $50x
× 10) and with respect to USP1’s common
shares is $80x ($100x¥$20x). Accordingly,
under paragraph (e)(1) of this section, USP1’s
pro rata share of FC1’s subpart F income is
$80x for Year 1.
(vi) Example 5: Shareholder owns common
and preferred stock—(A) Facts. FC1 has
outstanding 40 shares of common stock and
60 shares of 6% nonparticipating, nonvoting
preferred stock with a par value of $100x per
share. USP1 owns 30 shares of the common
stock and 15 shares of the preferred stock
during Year 1. The remaining 10 shares of
common stock and 45 shares of preferred
stock of FC1 are owned by Individual A. For
Year 1, FC1 has $1,000x of earnings and
profits and $500x of subpart F income within
the meaning of section 952.
(B) Analysis. The right of the holder of the
preferred stock to receive 6% of par value is
not a restriction or other limitation within
the meaning of paragraph (e)(5) of this
section. The amount of FC1’s allocable
earnings and profits distributed in the
hypothetical distribution with respect to
FC1’s preferred shares is $360x (0.06 × $100x
× 60) and with respect to its common shares
is $640x ($1,000x¥$360x). As a result, the
amount of FC1’s allocable earnings and
profits distributed in the hypothetical
distribution to USP1 is $570x, the sum of
$90x ($360x × 15/60) with respect to its
preferred shares and $480x ($640x × 30/40)
with respect to its common shares.
Accordingly, under paragraph (e)(1) of this
section, USP1’s pro rata share of the subpart
F income of FC1 is $285x ($500x × $570x/
$1,000x).
(vii) Example 6: Subpart F income and
tested income—(A) Facts. FC1 has
outstanding 700 shares of common stock and
300 shares of 4% nonparticipating, voting
preferred stock with a par value of $100x per
share. USP1 owns all of the common shares.
USP2 owns all of the preferred shares. For
Year 1, FC1 has $10,000x of earnings and
profits, $2,000x of subpart F income within
the meaning of section 952, and $9,000x of
tested income within the meaning of section
951A(c)(2)(A) and § 1.951A–2(b)(1).

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(B) Analysis—(1) Hypothetical distribution.
The allocable earnings and profits of FC1
determined under paragraph (e)(1)(ii) of this
section are $11,000x, the greater of FC1’s
earnings and profits as determined under
section 964 ($10,000x) or the sum of FC1’s
subpart F income and tested income ($2,000x
+ $9,000x). The amount of FC1’s allocable
earnings and profits distributed in the
hypothetical distribution with respect to
USP2’s preferred shares is $1,200x (0.04 ×
$100x × 300) and with respect to USP1’s
common shares is $9,800x
($11,000x¥$1,200x).
(2) Pro rata share of subpart F income.
Accordingly, under paragraph (e)(1) of this
section, USP1’s pro rata share of FC1’s
subpart F income is $1,782x ($2,000x ×
$9,800x/$11,000x), and USP2’s pro rata share
of FC1’s subpart F income is $218x ($2,000x
× $1,200x/$11,000x).
(3) Pro rata share of tested income.
Accordingly, under § 1.951A–1(d)(2), USP1’s
pro rata share of FC1’s tested income is
$8,018x ($9,000x × $9,800x/$11,000x), and
USP2’s pro rata share of FC1’s tested income
is $982x ($9,000x × $1,200x/$11,000x) for
Year 1.
(viii) Example 7: Subpart F income and
tested loss—(A) Facts. The facts are the same
as in paragraph (e)(7)(vii)(A) of this section
(the facts in Example 6), except that for Year
1, FC1 has $8,000x of earnings and profits,
$10,000x of subpart F income within the
meaning of section 952 (but without regard
to the limitation in section 952(c)(1)(A)), and
$2,000x of tested loss within the meaning of
section 951A(c)(2)(B)(i) and § 1.951A–2(b)(2).
Under section 951A(c)(2)(B)(ii) and
§ 1.951A–6(b), the earnings and profits of
FC1 are increased for purposes of section
952(c)(1)(A) by the amount of FC1’s tested
loss. Accordingly, after the application of
section 951A(c)(2)(B)(ii) and § 1.951A–6(b),
the subpart F income of FC1 is $10,000x.
(B) Analysis—(1) Pro rata share of subpart
F income. The allocable earnings and profits
determined under paragraph (e)(1)(ii) of this
section are $10,000x, the greater of the
earnings and profits of FC1 determined under
section 964 ($8,000x) or the sum of FC1’s
subpart F income and tested income
($10,000x + $0). The amount of FC1’s
allocable earnings and profits distributed in
the hypothetical distribution with respect to
USP2’s preferred shares is $1,200x (.04 ×
$100x × 300) and with respect to USP1’s
common shares is $8,800x
($10,000x¥$1,200x). Accordingly, under
paragraph (e)(1) of this section, for Year 1,
USP1’s pro rata share of FC1’s subpart F
income is $8,800x and USP2’s pro rata share
of FC1’s subpart F income is $1,200x.
(2) Pro rata share of tested loss. The
allocable earnings and profits determined
under § 1.951A–1(d)(4)(i)(B) are $2,000x, the
amount of FC1’s tested loss. Under § 1.951A–
1(d)(4)(i)(C), the entire $2,000x of tested loss
is allocated in the hypothetical distribution
to USP1’s common shares. Accordingly,
USP1’s pro rata share of the tested loss is
$2,000x.

*

*
*
*
*
(g) * * *
(1) In general. For purposes of
sections 951 through 964, the term

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United States shareholder means, with
respect to a foreign corporation, a
United States person (as defined in
section 957(c)) who owns within the
meaning of section 958(a), or is
considered as owning by applying the
rules of ownership of section 958(b), 10
percent or more of the total combined
voting power of all classes of stock
entitled to vote of such foreign
corporation, or 10 percent or more of the
total value of shares of all classes of
stock of such foreign corporation.
*
*
*
*
*
(h) Special rule for partnership
blocker structures—(1) In general. For
purposes of sections 951 through 964,
other than for purposes of 951A, a
controlled domestic partnership is
treated as a foreign partnership in
determining the stock of a controlled
foreign corporation owned (within the
meaning of section 958(a)) by a United
States person if the following conditions
are satisfied—
(i) Without regard to paragraph (h) of
this section, the controlled domestic
partnership owns (within the meaning
of section 958(a)) stock of a controlled
foreign corporation; and
(ii) If the controlled domestic
partnership (and all other controlled
domestic partnerships in the chain of
ownership of the controlled foreign
corporation) were treated as foreign—
(A) The controlled foreign corporation
would continue to be a controlled
foreign corporation; and
(B) At least one United States
shareholder of the controlled foreign
corporation would be treated as owning
(within the meaning of section 958(a))
stock of the controlled foreign
corporation through another foreign
corporation that is a direct or indirect
partner in the controlled domestic
partnership.
(2) Definition of a controlled domestic
partnership. For purposes of paragraph
(h)(1) of this section, the term controlled
domestic partnership means a domestic
partnership that is controlled by a
United States shareholder described in
paragraph (h)(1)(ii)(B) of this section
and persons related to the United States
shareholder. For purposes of this
paragraph (h)(2), control is determined
based on all the facts and
circumstances, except that a partnership
will be deemed to be controlled by a
United States shareholder and related
persons in any case in which those
persons, in the aggregate, own (directly
or indirectly through one or more
partnerships) more than 50 percent of
the interests in the partnership capital
or profits. For purposes of this
paragraph (h)(2), a related person is,

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29341

with respect to a United States
shareholder, a person that is related to
the United States shareholder within the
meaning of section 267(b) or 707(b)(1).
(3) Example—(i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2. CFC1 and CFC2 own 60% and
40%, respectively, of the interests in the
capital and profits of DPS, a domestic
partnership. DPS owns all of the stock of
CFC3. Each of CFC1, CFC2, and CFC3 is a
controlled foreign corporation. USP, DPS,
CFC1, CFC2, and CFC3 all use the calendar
year as their taxable year. For Year 1, CFC3
has $100x of subpart F income and $100x of
earnings and profits.
(ii) Analysis. DPS is a controlled domestic
partnership within the meaning of paragraph
(h)(2) of this section because more than 50%
of the interests in its capital or profits are
owned by persons related to USP within the
meaning of section 267(b) (that is, CFC1 and
CFC2), and thus DPS is controlled by USP
and related persons. The conditions of
paragraph (h)(1) of this section are satisfied
because, without regard to paragraph (h) of
this section, DPS is a United States
shareholder that owns (within the meaning of
section 958(a)) stock of CFC3, a controlled
foreign corporation, and if DPS were treated
as foreign, CFC3 would continue to be a
controlled foreign corporation, and USP
would be treated as owning (within the
meaning of section 958(a)) stock of CFC3
through CFC1 and CFC2, which are both
partners in DPS. Thus, under paragraph
(h)(1) of this section, DPS is treated as a
foreign partnership for purposes of
determining the stock of CFC3 owned (within
the meaning of section 958(a)) by USP.
Accordingly, USP’s pro rata share of CFC3’s
subpart F income for Year 1 is $100x, and
USP includes in its gross income $100x
under section 951(a)(1)(A). DPS is not a
United States shareholder of CFC3 for
purposes of sections 951 through 964.

(i) Applicability dates. Paragraphs (a),
(b)(1)(ii), (b)(2), (e)(1)(ii)(B), and (g)(1) of
this section apply to taxable years of
foreign corporations beginning after
December 31, 2017, and to taxable years
of United States shareholders in which
or with which such taxable years of
foreign corporations end. Except for
paragraph (e)(1)(ii)(B) of this section,
paragraph (e) of this section applies to
taxable years of United States
shareholders ending on or after October
3, 2018. Paragraph (h) of this section
applies to taxable years of domestic
partnerships ending on or after May 14,
2010.
■ Par. 6. Sections 1.951A–0 through
1.951A–7 are added to read as follows:
§ 1.951A–0 Outline of section 951A
regulations.

This section lists the headings for
§§ 1.951A–1 through 1.951A–7.
§ 1.951A–1 General provisions.
(a) Overview.
(1) In general.

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(2) Scope.
(b) Inclusion of global intangible low-taxed
income.
(c) Determination of GILTI inclusion
amount.
(1) In general.
(2) Definition of net CFC tested income.
(3) Definition of net deemed tangible
income return.
(i) In general.
(ii) Definition of deemed tangible income
return.
(iii) Definition of specified interest
expense.
(4) Determination of GILTI inclusion
amount for consolidated groups.
(d) Determination of pro rata share.
(1) In general.
(2) Tested income.
(i) In general.
(ii) Special rule for prior allocation of
tested loss.
(3) Qualified business asset investment.
(i) In general.
(ii) Special rule for excess hypothetical
tangible return.
(A) In general.
(B) Determination of pro rata share of
hypothetical tangible return.
(C) Definition of hypothetical tangible
return.
(iii) Examples.
(A) Example 1.
(1) Facts.
(2) Analysis.
(i) Determination of pro rata share of tested
income.
(ii) Determination of pro rata share of
qualified business asset investment.
(B) Example 2.
(1) Facts.
(2) Analysis.
(i) Determination of pro rata share of tested
income.
(ii) Determination of pro rata share of
qualified business asset investment.
(C) Example 3.
(1) Facts.
(2) Analysis.
(i) Determination of pro rata share of tested
income.
(ii) Determination of pro rata share of
qualified business asset investment.
(4) Tested loss.
(i) In general.
(ii) Special rule in case of accrued but
unpaid dividends.
(iii) Special rule for stock with no
liquidation value.
(iv) Examples.
(A) Example 1.
(1) Facts.
(2) Analysis.
(B) Example 2.
(1) Facts.
(2) Analysis.
(i) Year 1.
(ii) Year 2.
(5) Tested interest expense.
(6) Tested interest income.
(e) Treatment of domestic partnerships.
(1) In general.
(2) Non-application for determination of
status as United States shareholder and
controlled foreign corporation.
(3) Examples.

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(i) Example 1.
(A) Facts.
(B) Analysis.
(1) CFC and United States shareholder
determinations.
(2) Application of section 951A.
(ii) Example 2.
(A) Facts.
(B) Analysis.
(1) CFC and United States shareholder
determination.
(2) Application of section 951A.
(f) Definitions.
(1) CFC inclusion year.
(2) Controlled foreign corporation.
(3) Hypothetical distribution date.
(4) Section 958(a) stock.
(5) Tested item.
(6) United States shareholder.
(7) U.S. shareholder inclusion year.
§ 1.951A–2 Tested income and tested loss.
(a) Scope.
(b) Definitions related to tested income and
tested loss.
(1) Tested income and tested income CFC.
(2) Tested loss and tested loss CFC.
(c) Rules relating to the determination of
tested income and tested loss.
(1) Definition of gross tested income.
(2) Determination of gross income and
allowable deductions.
(i) In general.
(ii) Deemed payment under section 367(d).
(3) Allocation of deductions to gross tested
income.
(4) Gross income taken into account in
determining subpart F income.
(i) In general.
(ii) Items of gross income included in
subpart F income.
(A) Insurance income.
(B) Foreign base company income.
(C) International boycott Income.
(D) Illegal bribes, kickbacks, or other
payments.
(E) Income earned in certain foreign
countries.
(iii) Coordination rules.
(A) Coordination with E&P limitation.
(B) Coordination with E&P recapture.
(C) Coordination with full inclusion rule
and high tax exception.
(iv) Examples.
(A) Example 1.
(1) Facts.
(2) Analysis.
(i) Year 1.
(ii) Year 2.
(B) Example 2.
(1) Facts.
(2) Analysis.
(i) FC1.
(ii) FC2.
(C) Example 3.
(1) Facts.
(2) Analysis.
(i) Foreign base company income.
(ii) Recapture of subpart F income.
(iii) Gross tested income.
(5) Allocation of deduction or loss
attributable to disqualified basis.
(i) In general.
(ii) Determination of deduction or loss
attributable to disqualified basis.
(iii) Definitions.
(A) Disqualified basis.

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(B) Residual CFC gross income.
(iv) Examples.
(A) Example 1: Sale of intangible property
during the disqualified period.
(1) Facts.
(2) Analysis.
(B) Example 2: Related party transfer after
the disqualified period; gain recognition.
(1) Facts.
(2) Analysis.
(C) Example 3: Related party transfer after
the disqualified period; loss recognition.
(1) Facts.
(2) Analysis.
§ 1.951A–3 Qualified business asset
investment.
(a) Scope.
(b) Qualified business asset investment.
(c) Specified tangible property.
(1) In general.
(2) Tangible property.
(d) Dual use property.
(1) In general.
(2) Definition of dual use property.
(3) Dual use ratio.
(4) Example.
(i) Facts.
(ii) Analysis.
(A) Dual use property.
(B) Depreciation not capitalized to
inventory.
(C) Depreciation capitalized to inventory.
(e) Determination of adjusted basis in
specified tangible property.
(1) In general.
(2) Effect of change in law.
(3) Specified tangible property placed in
service before enactment of section 951A.
(i) In general.
(ii) Election to use income and earnings
and profits depreciation method for property
placed in service before the first taxable year
beginning after December 22, 2017.
(A) In general.
(B) Manner of making the election.
(f) Special rules for short taxable years.
(1) In general.
(2) Determination of quarter closes.
(3) Reduction of qualified business asset
investment.
(4) Example.
(i) Facts.
(ii) Analysis.
(A) Determination of short taxable years
and quarters.
(B) Calculation of qualified business asset
investment for the first short taxable year.
(C) Calculation of qualified business asset
investment for the second short taxable year.
(g) Partnership property.
(1) In general.
(2) Determination of partnership QBAI.
(3) Determination of partner adjusted basis.
(i) In general.
(ii) Sole use partnership property.
(A) In general.
(B) Definition of sole use partnership
property.
(iii) Dual use partnership property.
(A) In general.
(B) Definition of dual use partnership
property.
(4) Determination of proportionate share of
the partnership’s adjusted basis in
partnership specified tangible property.
(i) In general.

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(ii) Proportionate share ratio.
(5) Definition of partnership specified
tangible property.
(6) Determination of partnership adjusted
basis.
(7) Determination of partner-specific QBAI
basis.
(8) Examples.
(i) Facts.
(ii) Example 1: Sole use partnership
property.
(A) Facts.
(B) Analysis.
(1) Sole use partnership property.
(2) Proportionate share.
(3) Partner adjusted basis.
(4) Partnership QBAI.
(iii) Example 2: Dual use partnership
property.
(A) Facts.
(1) Asset C.
(2) Asset D.
(3) Asset E.
(B) Analysis.
(1) Asset C.
(i) Proportionate share.
(ii) Dual use ratio.
(iii) Partner adjusted basis.
(3) Asset D.
(i) Proportionate share.
(ii) Dual use ratio.
(iii) Partner adjusted basis.
(4) Asset E.
(i) Proportionate share.
(ii) Dual use ratio.
(iii) Partner adjusted basis.
(5) Partnership QBAI.
(iv) Example 3: Sole use partnership
specified tangible property; section 743(b)
adjustments.
(A) Facts.
(B) Analysis.
(v) Example 4: Tested income CFC with
distributive share of loss from a partnership.
(A) Facts.
(B) Analysis.
(vi) Example 5: Tested income CFC sale of
partnership interest before CFC inclusion
date.
(A) Facts.
(B) Analysis.
(1) FC1.
(2) FC2.
(vii) Example 6: Partnership adjusted basis;
distribution of property in liquidation of
partnership interest.
(A) Facts.
(B) Analysis.
(h) Anti-avoidance rules related to certain
transfers of property.
(1) Disregard of adjusted basis in specified
tangible property held temporarily.
(i) In general.
(ii) Disregard of first quarter close.
(iii) Safe harbor for certain transfers
involving CFCs.
(iv) Determination of principal purpose
and transitory holding.
(A) Presumption for ownership less than
12 months.
(B) Presumption for ownership greater than
36 months.
(v) Determination of holding period.
(vi) Treatment as single applicable U.S.
shareholder.
(vii) Examples.

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(A) Facts.
(B) Example 1: Qualification for safe
harbor.
(1) Facts.
(2) Analysis.
(C) Example 2: Transfers between CFCs
with different taxable year ends.
(1) Facts.
(2) Analysis.
(D) Example 3: Acquisition from unrelated
person.
(1) Facts.
(2) Analysis.
(E) Example 4: Acquisitions from tested
loss CFCs.
(1) Facts.
(2) Analysis.
(2) Disregard of adjusted basis in property
transferred during the disqualified period.
(i) Operative rules.
(A) In general.
(B) Application to dual use property.
(C) Application to partnership specified
tangible property.
(ii) Determination of disqualified basis.
(A) In general.
(B) Adjustments to disqualified basis.
(1) Reduction or elimination of disqualified
basis.
(i) In general.
(ii) Exception for related party transfers.
(2) Increase to disqualified basis for
nonrecognition transactions.
(i) Increase corresponding to adjustments
in other property.
(ii) Exchanged basis property.
(iii) Increase by reason of section 732(d).
(3) Election to eliminate disqualified basis.
(i) In general.
(ii) Manner of making the election with
respect to a controlled foreign corporation.
(iii) Manner of making the election with
respect to a partnership.
(iv) Conditions of making an election.
(C) Definitions related to disqualified basis.
(1) Disqualified period.
(2) Disqualified transfer.
(3) Qualified gain amount.
(4) Related person.
(5) Transfer.
(6) Transferor CFC.
(iii) Examples.
(A) Example 1: Sale of asset; disqualified
period.
(1) Facts.
(2) Analysis.
(B) Example 2: Sale of asset; no
disqualified period.
(1) Facts.
(2) Analysis.
(C) Example 3: Sale of partnership interest.
(1) Facts.
(2) Analysis.
(D) Example 4: Distribution of property in
liquidation of partnership interest.
(1) Facts.
(2) Analysis.
(E) Example 5: Distribution of property to
a partner in basis reduction transaction.
(1) Facts.
(2) Analysis.
(F) Example 6: Dual use property with
disqualified basis.
(1) Facts.
(2) Analysis.
§ 1.951A–4 Tested interest expense and
tested interest income.

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(a) Scope.
(b) Definitions related to specified interest
expense.
(1) Tested interest expense.
(i) In general.
(ii) Interest expense.
(iii) Qualified interest expense.
(A) In general.
(B) Qualified asset.
(1) In general.
(2) Exclusion for related party receivables.
(3) Look-through rule for subsidiary stock.
(4) Look-through rule for certain
partnership interests.
(iv) Tested loss QBAI amount.
(2) Tested interest income.
(i) In general.
(ii) Interest income.
(iii) Qualified interest income.
(A) In general.
(B) Exclusion for related party interest.
(c) Examples.
(1) Example 1: Wholly-owned CFCs.
(i) Facts.
(ii) Analysis.
(A) CFC-level determination; tested interest
expense and tested interest income.
(1) Tested interest expense and tested
interest income of FS1.
(2) Tested interest expense and tested
interest income of FS2.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense.
(2) Example 2: Less than wholly-owned
CFCs.
(i) Facts.
(ii) Analysis.
(A) CFC-level determination; tested interest
expense and tested interest income.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense.
(3) Example 3: Operating company;
qualified interest expense.
(i) Facts.
(ii) Analysis.
(A) CFC-level determination; tested interest
expense and tested interest income.
(1) Tested interest expense and tested
interest income of FS1.
(2) Tested interest expense and tested
interest income of FS2.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense.
(4) Example 4: Holding company; qualified
interest expense.
(i) Facts.
(ii) Analysis.
(A) CFC-level determination; tested interest
expense and tested interest income.
(1) Tested interest expense and tested
interest income of FS1.
(2) Tested interest expense and tested
interest income of FS2.
(3) Tested interest expense and tested
interest income of FS3.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense.
(5) Example 5: Specified interest expense
and tested loss QBAI amount.
(i) Facts.
(ii) Analysis.
(A) CFC-level determination; tested interest
expense and tested interest income.

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(1) Tested interest expense and tested
interest income of FS1.
(2) Tested interest expense and tested
interest income of FS2.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense.
§ 1.951A–5 Treatment of GILTI inclusion
amounts.
(a) Scope.
(b) Treatment as subpart F income for
certain purposes.
(1) In general.
(2) Allocation of GILTI inclusion amount to
tested income CFCs.
(i) In general.
(ii) Example.
(A) Facts.
(B) Analysis.
(3) Translation of portion of GILTI
inclusion amount allocated to tested income
CFC.
(c) Treatment as an amount includible in
the gross income of a United States person.
(d) Treatment for purposes of personal
holding company rules.
§ 1.951A–6 Adjustments related to tested
losses.
(a) Scope.
(b) Increase of earnings and profits of
tested loss CFC for purposes of section
952(c)(1)(A).
(c) [Reserved]
§ 1.951A–7 Applicability dates.
§ 1.951A–1 General provisions.

(a) Overview—(1) In general. This
section and §§ 1.951A–2 through
1.951A–7 (collectively, the section 951A
regulations) provide rules to determine
a United States shareholder’s income
inclusion under section 951A, describe
certain consequences of an income
inclusion under section 951A with
respect to controlled foreign
corporations and their United States
shareholders, and define certain terms
for purposes of section 951A and the
section 951A regulations. This section
provides general rules for determining a
United States shareholder’s inclusion of
global intangible low-taxed income,
including a rule relating to the
application of section 951A and the
section 951A regulations to domestic
partnerships and their partners. Section
1.951A–2 provides rules for determining
a controlled foreign corporation’s tested
income or tested loss. Section 1.951A–
3 provides rules for determining a
controlled foreign corporation’s
qualified business asset investment.
Section 1.951A–4 provides rules for
determining a controlled foreign
corporation’s tested interest expense
and tested interest income. Section
1.951A–5 provides rules relating to the
treatment of the inclusion of global
intangible low-taxed income for certain
purposes. Section 1.951A–6 provides
certain adjustments to earnings and
profits and basis of a controlled foreign

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corporation related to a tested loss.
Section 1.951A–7 provides dates of
applicability.
(2) Scope. Paragraph (b) of this section
provides the general rule requiring a
United States shareholder to include in
gross income its global intangible lowtaxed income for a U.S. shareholder
inclusion year. Paragraph (c) of this
section provides rules for determining
the amount of a United States
shareholder’s global intangible lowtaxed income for the U.S. shareholder
inclusion year, including a rule for the
application of section 951A and the
section 951A regulations to
consolidated groups. Paragraph (d) of
this section provides rules for
determining a United States
shareholder’s pro rata share of certain
items for purposes of determining the
United States shareholder’s global
intangible low-taxed income. Paragraph
(e) of this section provides rules for the
treatment of a domestic partnership and
its partners for purposes of section 951A
and the section 951A regulations.
Paragraph (f) of this section provides
additional definitions for purposes of
this section and the section 951A
regulations.
(b) Inclusion of global intangible lowtaxed income. Each person who is a
United States shareholder of any
controlled foreign corporation and owns
section 958(a) stock of any such
controlled foreign corporation includes
in gross income in the U.S. shareholder
inclusion year the shareholder’s GILTI
inclusion amount, if any, for the U.S.
shareholder inclusion year.
(c) Determination of GILTI inclusion
amount—(1) In general. Except as
provided in paragraph (c)(4) of this
section, the term GILTI inclusion
amount means, with respect to a United
States shareholder and a U.S.
shareholder inclusion year, the excess
(if any) of—
(i) The shareholder’s net CFC tested
income (as defined in paragraph (c)(2) of
this section) for the year, over
(ii) The shareholder’s net deemed
tangible income return (as defined in
paragraph (c)(3) of this section) for the
year.
(2) Definition of net CFC tested
income. The term net CFC tested income
means, with respect to a United States
shareholder and a U.S. shareholder
inclusion year, the excess (if any) of—
(i) The aggregate of the shareholder’s
pro rata share of the tested income of
each tested income CFC (as defined in
§ 1.951A–2(b)(1)) for a CFC inclusion
year that ends with or within the U.S.
shareholder inclusion year, over
(ii) The aggregate of the shareholder’s
pro rata share of the tested loss of each

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tested loss CFC (as defined in § 1.951A–
2(b)(2)) for a CFC inclusion year that
ends with or within the U.S.
shareholder inclusion year.
(3) Definition of net deemed tangible
income return—(i) In general. The term
net deemed tangible income return
means, with respect to a United States
shareholder and a U.S. shareholder
inclusion year, the excess (if any) of—
(A) The shareholder’s deemed
tangible income return (as defined in
paragraph (c)(3)(ii) of this section) for
the U.S. shareholder inclusion year,
over
(B) The shareholder’s specified
interest expense (as defined in
paragraph (c)(3)(iii) of this section) for
the U.S. shareholder inclusion year.
(ii) Definition of deemed tangible
income return. The term deemed
tangible income return means, with
respect to a United States shareholder
and a U.S. shareholder inclusion year,
10 percent of the aggregate of the
shareholder’s pro rata share of the
qualified business asset investment (as
defined in § 1.951A–3(b)) of each tested
income CFC for a CFC inclusion year
that ends with or within the U.S.
shareholder inclusion year.
(iii) Definition of specified interest
expense. The term specified interest
expense means, with respect to a United
States shareholder and a U.S.
shareholder inclusion year, the excess
(if any) of—
(A) The aggregate of the shareholder’s
pro rata share of the tested interest
expense (as defined in § 1.951A–4(b)(1))
of each controlled foreign corporation
for a CFC inclusion year that ends with
or within the U.S. shareholder inclusion
year, over
(B) The aggregate of the shareholder’s
pro rata share of the tested interest
income (as defined in § 1.951A–4(b)(2))
of each controlled foreign corporation
for a CFC inclusion year that ends with
or within the U.S. shareholder inclusion
year.
(4) Determination of GILTI inclusion
amount for consolidated groups. For
purposes of section 951A and the
section 951A regulations, a member of
a consolidated group (as defined in
§ 1.1502–1(h)) determines its GILTI
inclusion amount taking into account
the rules provided in § 1.1502–51.
(d) Determination of pro rata share—
(1) In general. For purposes of
paragraph (c) of this section, each
United States shareholder that owns
section 958(a) stock of a controlled
foreign corporation as of a hypothetical
distribution date determines its pro rata
share (if any) of each tested item of the
controlled foreign corporation for the
CFC inclusion year that includes the

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hypothetical distribution date and ends
with or within the U.S. shareholder
inclusion year. Except as otherwise
provided in this paragraph (d), a United
States shareholder’s pro rata share of
each tested item is determined
independently of its pro rata share of
each other tested item. In no case may
the sum of the pro rata share of any
tested item of a controlled foreign
corporation for a CFC inclusion year
allocated to stock under this paragraph
(d) exceed the amount of such tested
item of the controlled foreign
corporation for the CFC inclusion year.
Except as modified in this paragraph
(d), a United States shareholder’s pro
rata share of any tested item is
determined under the rules of section
951(a)(2) and § 1.951–1(b) and (e) in the
same manner as those provisions apply
to subpart F income. Under section
951(a)(2) and § 1.951–1(b) and (e), as
modified by this paragraph (d), a United
States shareholder’s pro rata share of
any tested item for a U.S. shareholder
inclusion year is determined with
respect to the section 958(a) stock of the
controlled foreign corporation owned by
the United States shareholder on a
hypothetical distribution date with
respect to a CFC inclusion year that
ends with or within the U.S.
shareholder inclusion year. A United
States shareholder’s pro rata share of
any tested item is translated into United
States dollars using the average
exchange rate for the CFC inclusion year
of the controlled foreign corporation.
Paragraphs (d)(2) through (5) of this
section provide rules for determining a
United States shareholder’s pro rata
share of each tested item of a controlled
foreign corporation.
(2) Tested income—(i) In general.
Except as provided in paragraph
(d)(2)(ii) of this section, a United States
shareholder’s pro rata share of the tested
income of each tested income CFC for
a U.S. shareholder inclusion year is
determined under section 951(a)(2) and
§ 1.951–1(b) and (e), substituting ‘‘tested
income’’ for ‘‘subpart F income’’ each
place it appears, other than in § 1.951–
1(e)(1)(ii)(B) and the denominator of the
fraction described in § 1.951–
1(b)(1)(ii)(A).
(ii) Special rule for prior allocation of
tested loss. In any case in which tested
loss has been allocated to any class of
stock in a prior CFC inclusion year
under paragraph (d)(4)(iii) of this
section, tested income is first allocated
to each such class of stock in the order
of its liquidation priority to the extent
of the excess (if any) of the sum of the
tested loss allocated to each such class
of stock for each prior CFC inclusion
year under paragraph (d)(4)(iii) of this

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section, over the sum of the tested
income allocated to each such class of
stock for each prior CFC inclusion year
under this paragraph (d)(2)(ii).
Paragraph (d)(2)(i) of this section
applies for purposes of determining a
United States shareholder’s pro rata
share of the remainder of the tested
income, except that, for purposes of the
hypothetical distribution of section
951(a)(2)(A) and § 1.951–1(b)(1)(i) and
(e)(1)(i), the amount of allocable
earnings and profits of the tested
income CFC is reduced by the amount
of tested income allocated under the
first sentence of this paragraph (d)(2)(ii).
For an example of the application of this
paragraph (d)(2), see paragraph
(d)(4)(iv)(B) of this section (Example 2).
(3) Qualified business asset
investment—(i) In general. Except as
provided in paragraphs (d)(3)(ii) of this
section, a United States shareholder’s
pro rata share of the qualified business
asset investment of a tested income CFC
for a U.S. shareholder inclusion year
bears the same ratio to the total
qualified business asset investment of
the tested income CFC for the CFC
inclusion year as the United States
shareholder’s pro rata share of the tested
income of the tested income CFC for the
U.S. shareholder inclusion year bears to
the total tested income of the tested
income CFC for the CFC inclusion year.
(ii) Special rule for excess
hypothetical tangible return—(A) In
general. If the tested income of a tested
income CFC for a CFC inclusion year is
less than the hypothetical tangible
return of the tested income CFC for the
CFC inclusion year, a United States
shareholder’s pro rata share of the
qualified business asset investment of
the tested income CFC for a United
States shareholder inclusion year bears
the same ratio to the qualified business
asset investment of the tested income
CFC as the United States shareholder’s
pro rata share of the hypothetical
tangible return of the CFC for the U.S.
shareholder inclusion year bears to the
total hypothetical tangible return of the
CFC for the CFC inclusion year.
(B) Determination of pro rata share of
hypothetical tangible return. For
purposes of paragraph (d)(3)(ii)(A) of
this section, a United States
shareholder’s pro rata share of the
hypothetical tangible return of a CFC for
a CFC inclusion year is determined in
the same manner as the United States
shareholder’s pro rata share of the tested
income of the CFC for the CFC inclusion
year under paragraph (d)(2) of this
section by treating the amount of the
hypothetical tangible return as the
amount of tested income.

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(C) Definition of hypothetical tangible
return. For purposes of this paragraph
(d)(3)(ii), the term hypothetical tangible
return means, with respect to a tested
income CFC for a CFC inclusion year, 10
percent of the qualified business asset
investment of the tested income CFC for
the CFC inclusion year.
(iii) Examples. The following
examples illustrate the application of
paragraphs (d)(2) and (3) of this section.
See also § 1.951–1(e)(7)(vii) (Example 6)
(illustrating a United States
shareholder’s pro rata share of tested
income).
(A) Example 1—(1) Facts. FS, a controlled
foreign corporation, has outstanding 70
shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock
with a par value of $10x per share. P Corp,
a domestic corporation and a United States
shareholder of FS, owns all of the common
shares. Individual A, a United States citizen
and a United States shareholder, owns all of
the preferred shares. Individual A, FS, and P
Corp use the calendar year as their taxable
year. Individual A and P Corp are
shareholders of FS for all of Year 4. At the
beginning of Year 4, FS had no dividend
arrearages with respect to its preferred stock.
For Year 4, FS has $100x of earnings and
profits, $120x of tested income, and no
subpart F income within the meaning of
section 952. FS also has $750x of qualified
business asset investment for Year 4.
(2) Analysis—(i) Determination of pro rata
share of tested income. For purposes of
determining P Corp’s pro rata share of FS’s
tested income under paragraph (d)(2) of this
section, the amount of FS’s allocable earnings
and profits for purposes of the hypothetical
distribution described in § 1.951–1(e)(1)(i) is
$120x, the greater of its earnings and profits
as determined under section 964 ($100x) and
the sum of its subpart F income and tested
income ($0 + $120x). Under paragraph (d)(2)
of this section and § 1.951–1(e)(3), the
amount of FS’s allocable earnings and profits
distributed in the hypothetical distribution
with respect to Individual A’s preferred
shares is $12x (0.04 × $10x × 30) and the
amount distributed with respect to P Corp’s
common shares is $108x ($120x ¥ $12x).
Accordingly, under paragraph (d)(2) of this
section and § 1.951–1(e)(1), Individual A’s
pro rata share of FS’s tested income is $12x,
and P Corp’s pro rata share of FS’s tested
income is $108x for Year 4.
(ii) Determination of pro rata share of
qualified business asset investment. The
special rule of paragraph (d)(3)(ii)(A) of this
section does not apply because FS’s tested
income of $120x is not less than FS’s
hypothetical tangible return of $75x, which
is 10% of FS’s qualified business asset
investment of $750x. Accordingly, under the
general rule of paragraph (d)(3)(i) of this
section, Individual A’s and P Corp’s
respective pro rata shares of FS’s qualified
business asset investment bears the same
ratio to FS’s total qualified business asset
investment as their respective pro rata shares
of FS’s tested income bears to FS’s total
tested income. Thus, Individual A’s pro rata

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share of FS’s qualified business asset
investment is $75x ($750x × $12x/$120x),
and P Corp’s pro rata share of FS’s qualified
business asset investment is $675x ($750x ×
$108x/$120x).
(B) Example 2—(1) Facts. The facts are the
same as in paragraph (d)(3)(iv)(A)(1) of this
section (the facts in Example 1 of this
section), except that FS has $1,500x of
qualified business asset investment for Year
4.
(2) Analysis—(i) Determination of pro rata
share of tested income. The analysis and the
result are the same as in paragraph
(d)(3)(iv)(A)(2)(i) of this section (paragraph (i)
of the analysis in Example 1 of this section).
(ii) Determination of pro rata share of
qualified business asset investment. The
special rule of paragraph (d)(3)(ii)(A) of this
section applies because FS’s tested income of
$120x is less than FS’s hypothetical tangible
return of $150x, which is 10% of FS’s
qualified business asset investment of
$1,500x. Under paragraph (d)(3)(ii)(A) of this
section, Individual A’s and P Corp’s
respective pro rata shares of FS’s qualified
business asset investment bears the same
ratio to FS’s qualified business asset
investment as their respective pro rata shares
of the hypothetical tangible return of FS
bears to the total hypothetical tangible return
of FS. Under paragraph (d)(3)(ii)(B) of this
section, P Corp’s and Individual A’s
respective pro rata share of FS’s hypothetical
tangible return is determined under
paragraph (d)(2) of this section in the same
manner as their respective pro rata shares of
the tested income of FS by treating the
hypothetical tangible return as the amount of
tested income. The amount of FS’s allocable
earnings and profits for purposes of the
hypothetical distribution described in
§ 1.951–1(e)(1)(i) is $150x, the greater of its
earnings and profits as determined under
section 964 ($100x) and the sum of its
subpart F income and hypothetical tangible
return ($0 + $150x). The amount of FS’s
allocable earnings and profits distributed in
the hypothetical distribution is $12x (.04 ×
$10x × 30) with respect to Individual A’s
preferred shares and $138x ($150x ¥ $12x)
with respect to P Corp’s common shares.
Accordingly, Individual A’s pro rata share of
FS’s qualified business asset investment is
$120x ($1,500x × $12x/$150x), and P Corp’s
pro rata share of FS’s qualified business asset
investment is $1,380x ($1,500x × $138x/
$150x).
(C) Example 3—(1) Facts. P Corp, a
domestic corporation and a United States
shareholder, owns 100% of the only class of
stock of FS, a controlled foreign corporation,
from January 1 of Year 1, until May 26 of
Year 1. On May 26 of Year 1, P Corp sells
all of its FS stock to R Corp, a domestic
corporation that is not related to P Corp, and
recognizes no gain or loss on the sale. R Corp,
a United States shareholder of FS, owns
100% of the stock of FS from May 26 through
December 31 of Year 1. For Year 1, FS has
$50x of earnings and profits, $50x of tested
income, and no subpart F income within the
meaning of section 952. FS also has $1,500x
of qualified business asset investment for
Year 1. On May 1 of Year 1, FS distributes
a $20x dividend to P Corp. P Corp, R Corp,

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and FS all use the calendar year as their
taxable year.
(2) Analysis—(i) Determination of pro rata
share of tested income. For purposes of
determining R Corp’s pro rata share of FS’s
tested income under paragraph (d)(2) of this
section, the amount of FS’s allocable earnings
and profits for purposes of the hypothetical
distribution described in § 1.951–1(e)(1)(i) is
$50x, the greater of its earnings and profits
as determined under section 964 ($50x) or
the sum of its subpart F income and tested
income ($0 + $50x). Under paragraph (d)(2)
of this section and § 1.951–1(e)(1), FS’s
allocable earnings and profits of $50x are
distributed in the hypothetical distribution
pro rata to each share of stock. R Corp’s pro
rata share of FS’s tested income for Year 1
is its pro rata share under section
951(a)(2)(A) and § 1.951–1(b)(1)(i) ($50x),
reduced under section 951(a)(2)(B) and
§ 1.951–1(b)(1)(ii) by $20x, which is the
lesser of $20x, the dividend received by P
Corp during Year 1 with respect to the FS
stock acquired by R Corp ($20x), multiplied
by a fraction, the numerator of which is the
tested income ($50x) of FS for Year 1 and the
denominator of which is the sum of the
subpart F income ($0) and the tested income
($50x) of FS for Year 1 ($20x × $50x/$50x),
and $20x, which is P Corp’s pro rata share
(100%) of the amount which bears the same
ratio to FS’s tested income for Year 1 ($50x)
as the period during which R Corp did not
own (within the meaning of section 958(a))
the FS stock (146 days) bears to the entire
taxable year (1 × $50x × 146/365).
Accordingly, R Corp’s pro rata share of tested
income of FS for Year 1 is $30x ($50x ¥
$20x).
(ii) Determination of pro rata share of
qualified business asset investment. The
special rule of paragraph (d)(3)(ii) of this
section applies because FS’s tested income of
$50x is less than FS’s hypothetical tangible
return of $150x, which is 10% of FS’s
qualified business asset investment of
$1,500x. Under paragraph (d)(3)(ii) of this
section, R Corp’s pro rata share of FS’s
qualified business asset investment is the
amount that bears the same ratio to FS’s
qualified business asset investment as R
Corp’s pro rata share of the hypothetical
tangible return of FS bears to the total
hypothetical tangible return of FS. R Corp’s
pro rata share of FS’s hypothetical tangible
return is its pro rata share under section
951(a)(2)(A) and § 1.951–1(b)(1)(i) ($150x),
reduced under section 951(a)(2)(B) and
§ 1.951–1(b)(1)(ii) by $20x, which is the
lesser of $20x, the dividend received by P
Corp during Year 1 with respect to the FS
stock acquired by R Corp ($20x) multiplied
by a fraction, the numerator of which is the
hypothetical tangible return ($150x) of FS for
Year 1 and the denominator of which is the
sum of the subpart F income ($0) and the
hypothetical tangible return ($150x) of FS for
Year 1 ($20x × $150x/$150x), and $60x,
which is P Corp’s pro rata share (100%) of
the amount which bears the same ratio to
FS’s hypothetical tangible return for Year 1
($150x) as the period during which R Corp
did not own (within the meaning of section
958(a)) the FS stock (146 days) bears to the
entire taxable year (1 × $150x × 146/365).

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Accordingly, R Corp’s pro rata share of the
hypothetical tangible return of FS for Year 1
is $130x ($150x ¥ $20x), and R Corp’s pro
rata share of FS’s qualified business asset
investment is $1,300x ($1,500x × $130x/
$150x).

(4) Tested loss—(i) In general. A
United States shareholder’s pro rata
share of the tested loss of each tested
loss CFC for a U.S. shareholder
inclusion year is determined under
section 951(a)(2) and § 1.951–1(b) and
(e) with the following modifications—
(A) ‘‘Tested loss’’ is substituted for
‘‘subpart F income’’ each place it
appears;
(B) For purposes of the hypothetical
distribution described in section
951(a)(2)(A) and § 1.951–1(b)(1)(i) and
(e)(1)(i), the amount of allocable
earnings and profits of a controlled
foreign corporation for a CFC inclusion
year is treated as being equal to the
tested loss of the tested loss CFC for the
CFC inclusion year;
(C) Except as provided in paragraphs
(d)(4)(ii) and (iii) of this section, the
hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–
1(b)(1)(i) and (e)(1)(i) is treated as made
solely with respect to the common stock
of the tested loss CFC; and
(D) In lieu of applying section
951(a)(2)(B) and § 1.951–1(b)(1)(ii), the
United States shareholder’s pro rata
share of the tested loss allocated to
section 958(a) stock of the tested loss
CFC is reduced by an amount that bears
the same ratio to the amount of the
tested loss as the part of such year
during which such shareholder did not
own (within the meaning of section
958(a)) such stock bears to the entire
taxable year.
(ii) Special rule in case of accrued but
unpaid dividends. If a tested loss CFC’s
earnings and profits that have
accumulated since the issuance of
preferred shares are reduced below the
amount necessary to satisfy any accrued
but unpaid dividends with respect to
such preferred shares, then the amount
by which the tested loss reduces the
earnings and profits below the amount
necessary to satisfy the accrued but
unpaid dividends is allocated in the
hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–
1(b)(1)(i) and (e)(1)(i) to the preferred
stock of the tested loss CFC and the
remainder of the tested loss is allocated
in the hypothetical distribution to the
common stock of the tested loss CFC.
(iii) Special rule for stock with no
liquidation value. If a tested loss CFC’s
common stock has a liquidation value of
zero and there is at least one other class
of equity with a liquidation preference
relative to the common stock, then the

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tested loss is allocated in the
hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–
1(b)(1)(i) and (e)(1)(i) to the most junior
class of equity with a positive
liquidation value to the extent of such
liquidation value. Thereafter, tested loss
is allocated to the next most junior class
of equity to the extent of its liquidation
value and so on. All determinations of
liquidation value are to be made as of
the beginning of the CFC inclusion year
of the tested loss CFC.
(iv) Examples. The following
examples illustrate the application of
this paragraph (d)(4). See also § 1.951–
1(e)(7)(viii) (Example 7) (illustrating a
United States shareholder’s pro rata
share of subpart F income and tested
loss).
(A) Example 1—(1) Facts. FS, a controlled
foreign corporation, has outstanding 70
shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock
with a par value of $10x per share. P Corp,
a domestic corporation and a United States
shareholder of FS, owns all of the common
shares. Individual A, a United States citizen
and a United States shareholder, owns all of
the preferred shares. FS, Individual A, and P
Corp all use the calendar year as their taxable
year. Individual A and P Corp are
shareholders of FS for all of Year 5. At the
beginning of Year 5, FS had earnings and
profits of $120x, which accumulated after the
issuance of the preferred stock. At the end of
Year 5, the accrued but unpaid dividends
with respect to the preferred stock are $36x.
For Year 5, FS has a $100x tested loss, and
no other items of income, gain, deduction or
loss. At the end of Year 5, FS has earnings
and profits of $20x.
(2) Analysis. FS is a tested loss CFC for
Year 5. Before taking into account the tested
loss in Year 5, FS had sufficient earnings and
profits to satisfy the accrued but unpaid
dividends of $36x. The amount of the
reduction in earnings below the amount
necessary to satisfy the accrued but unpaid
dividends attributable to the tested loss is
$16x ($36x ¥ ($120x ¥ $100x)).
Accordingly, under paragraph (d)(4)(ii) of
this section, $16x of the tested loss is
allocated to Individual A’s preferred stock in
the hypothetical distribution described in
section 951(a)(2)(A) and § 1.951–1(b)(1)(i)
and (e)(1)(i), and $84x ($100x ¥ $16x) of the
tested loss is allocated to P Corp’s common
shares in the hypothetical distribution.
(B) Example 2—(1) Facts. FS, a controlled
foreign corporation, has outstanding 100
shares of common stock and 50 shares of 4%
nonparticipating, cumulative preferred stock
with a par value of $100x per share. P Corp,
a domestic corporation and a United States
shareholder of FS, owns all of the common
shares. Individual A, a United States citizen
and a United States shareholder, owns all of
the preferred shares. FS, Individual A, and P
Corp all use the calendar year as their taxable
year. Individual A and P Corp are
shareholders of FS for all of Year 1 and Year
2. At the beginning of Year 1, the common
stock has no liquidation value and the

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preferred stock has a liquidation value of
$5,000x and no accrued but unpaid
dividends. In Year 1, FS has a tested loss of
$1,000x and no other items of income, gain,
deduction, or loss. In Year 2, FS has tested
income of $3,000x and no other items of
income, gain, deduction, or loss. FS has
earnings and profits of $3,000x for Year 2. At
the end of Year 2, FS has accrued but unpaid
dividends of $400x with respect to the
preferred stock, the sum of $200x for Year 1
(0.04 × $100x × 50) and $200x for Year 2
(0.04 × $100x × 50).
(2) Analysis—(i) Year 1. FS is a tested loss
CFC in Year 1. The common stock of FS has
liquidation value of zero, and the preferred
stock has a liquidation preference relative to
the common stock. The tested loss ($1,000x)
does not exceed the liquidation value of the
preferred stock ($5,000x). Accordingly, under
paragraph (d)(4)(iii) of this section, the tested
loss is allocated to the preferred stock in the
hypothetical distribution described in section
951(a)(2)(A) and § 1.951–1(b)(1)(i) and
(e)(1)(i). Individual A’s pro rata share of the
tested loss is $1,000x, and P Corp’s pro rata
share of the tested loss is $0.
(ii) Year 2. FS is a tested income CFC in
Year 2. Because $1,000x of tested loss was
allocated to the preferred stock in Year 1
under paragraph (d)(4)(iii) of this section, the
first $1,000x of tested income in Year 2 is
allocated to the preferred stock under
paragraph (d)(2)(ii) of this section. P Corp’s
and Individual A’s pro rata shares of the
remaining $2,000x of tested income are
determined under the general rule of
paragraph (d)(2)(i) of this section, except that
for purposes of the hypothetical distribution
the amount of FS’s allocable earnings and
profits is reduced by the tested income
allocated under paragraph (d)(2)(ii) of this
section to $2,000x ($3,000x ¥ $1,000x).
Accordingly, under paragraph (d)(2)(i) of this
section and § 1.951–1(e), the amount of FS’s
allocable earnings and profits distributed in
the hypothetical distribution with respect to
Individual A’s preferred stock is $400x
($400x of accrued but unpaid dividends) and
with respect to P Corp’s common stock is
$1,600x ($2,000x ¥ $400x). Individual A’s
pro rata share of the tested income is $1,400x
($1,000x + $400x), and P Corp’s pro rata
share of the tested income is $1,600x.

(5) Tested interest expense. A United
States shareholder’s pro rata share of
tested interest expense of a controlled
foreign corporation for a U.S.
shareholder inclusion year is equal to
the amount by which the tested interest
expense reduces the shareholder’s pro
rata share of tested income of the
controlled foreign corporation for the
U.S. shareholder inclusion year,
increases the shareholder’s pro rata
share of tested loss of the controlled
foreign corporation for the U.S.
shareholder inclusion year, or both.
(6) Tested interest income. A United
States shareholder’s pro rata share of
tested interest income of a controlled
foreign corporation for a U.S.
shareholder inclusion year is equal to
the amount by which the tested interest

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income increases the shareholder’s pro
rata share of tested income of the
controlled foreign corporation for the
U.S. shareholder inclusion year, reduces
the shareholder’s pro rata share of tested
loss of the controlled foreign
corporation for the U.S. shareholder
inclusion year, or both.
(e) Treatment of domestic
partnerships—(1) In general. For
purposes of section 951A and the
section 951A regulations, and for
purposes of any other provision that
applies by reference to section 951A or
the section 951A regulations, a domestic
partnership is not treated as owning
stock of a foreign corporation within the
meaning of section 958(a). When the
preceding sentence applies, a domestic
partnership is treated in the same
manner as a foreign partnership under
section 958(a)(2) for purposes of
determining the persons that own stock
of the foreign corporation within the
meaning of section 958(a).
(2) Non-application for determination
of status as United States shareholder
and controlled foreign corporation.
Paragraph (e)(1) of this section does not
apply for purposes of determining
whether any United States person is a
United States shareholder (as defined in
section 951(b)), whether any United
States shareholder is a controlling
domestic shareholder (as defined in
§ 1.964–1(c)(5)), or whether any foreign
corporation is a controlled foreign
corporation (as defined in section
957(a)).
(3) Examples. The following examples
illustrate the application of this
paragraph (e).
(i) Example 1—(A) Facts. USP, a domestic
corporation, and Individual A, a United
States citizen unrelated to USP, own 95%
and 5%, respectively, of PRS, a domestic
partnership. PRS owns 100% of the single
class of stock of FC, a foreign corporation.
(B) Analysis—(1) CFC and United States
shareholder determinations. Under
paragraph (e)(2) of this section, the
determination of whether PRS, USP, and
Individual A (each a United States person)
are United States shareholders of FC and
whether FC is a controlled foreign
corporation is made without regard to
paragraph (e)(1) of this section. PRS, a United
States person, owns 100% of the total
combined voting power or value of the FC
stock within the meaning of section 958(a).
Accordingly, PRS is a United States
shareholder under section 951(b), and FC is
a controlled foreign corporation under
section 957(a). USP is a United States
shareholder of FC because it owns 95% of the
total combined voting power or value of the
FC stock under sections 958(b) and
318(a)(2)(A). Individual A, however, is not a
United States shareholder of FC because
Individual A owns only 5% of the total
combined voting power or value of the FC
stock under sections 958(b) and 318(a)(2)(A).

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(2) Application of section 951A. Under
paragraph (e)(1) of this section, for purposes
of determining a GILTI inclusion amount
under section 951A and paragraph (b) of this
section, PRS is not treated as owning (within
the meaning of section 958(a)) the FC stock;
instead, PRS is treated in the same manner
as a foreign partnership for purposes of
determining the FC stock owned by USP and
Individual A under section 958(a)(2).
Therefore, for purposes of determining the
GILTI inclusion amount of USP and
Individual A, USP is treated as owning 95%
of the FC stock under section 958(a), and
Individual A is treated as owning 5% of the
FC stock under section 958(a). USP is a
United States shareholder of FC, and
therefore USP determines its pro rata share
of any tested item of FC based on its
ownership of section 958(a) stock of FC.
However, because Individual A is not a
United States shareholder of FC, Individual
A does not have a pro rata share of any tested
item of FC.
(ii) Example 2—(A) Facts. USP, a domestic
corporation, and Individual A, a United
States citizen, own 90% and 10%,
respectively, of PRS1, a domestic
partnership. PRS1 and Individual B, a
nonresident alien individual, own 90% and
10%, respectively, of PRS2, a domestic
partnership. PRS2 owns 100% of the single
class of stock of FC, a foreign corporation.
USP, Individual A, and Individual B are
unrelated to each other.
(B) Analysis—(1) CFC and United States
shareholder determination. Under paragraph
(e)(2) of this section, the determination of
whether PRS1, PRS2, USP, and Individual A
(each a United States person) are United
States shareholders of FC and whether FC is
a controlled foreign corporation is made
without regard to paragraph (e)(1) of this
section. PRS2 owns 100% of the total
combined voting power or value of the FC
stock within the meaning of section 958(a).
Accordingly, PRS2 is a United States
shareholder under section 951(b), and FC is
a controlled foreign corporation under
section 957(a). Under sections 958(b) and
318(a)(2)(A), PRS1 is treated as owning 90%
of the FC stock owned by PRS2. Accordingly,
PRS1 is a United States shareholder under
section 951(b). Further, under section
958(b)(2), PRS1 is treated as owning 100% of
the FC stock for purposes of determining the
FC stock treated as owned by USP and
Individual A under section 318(a)(2)(A).
Therefore, USP is treated as owning 90% of
the FC stock under section 958(b) (100% ×
100% × 90%), and Individual A is treated as
owning 10% of the FC stock under section
958(b) (100% × 100% × 10%). Accordingly,
both USP and Individual A are United States
shareholders of FC under section 951(b).
(2) Application of section 951A. Under
paragraph (e)(1) of this section, for purposes
of determining a GILTI inclusion amount
under section 951A and paragraph (b) of this
section, PRS1 and PRS2 are not treated as
owning (within the meaning of section
958(a)) the FC stock; instead, PRS1 and PRS2
are treated in the same manner as foreign
partnerships for purposes of determining the
FC stock owned by USP and Individual A
under section 958(a)(2). Therefore, for

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purposes of determining the GILTI inclusion
of USP and Individual A, USP is treated as
owning 81% (100% × 90% × 90%) of the FC
stock under section 958(a), and Individual A
is treated as owning 9% (100% × 90% ×
10%) of the FC stock under section 958(a).
Because USP and Individual A are both
United States shareholders of FC, USP and
Individual A determine their respective pro
rata shares of any tested item of FC based on
their ownership of section 958(a) stock of FC.

(f) Definitions. This paragraph (f)
provides additional definitions that
apply for purposes of this section and
the section 951A regulations. Other
definitions relevant to the section 951A
regulations are included in §§ 1.951A–2
through 1.951A–4.
(1) CFC inclusion year. The term CFC
inclusion year means any taxable year of
a foreign corporation beginning after
December 31, 2017, at any time during
which the corporation is a controlled
foreign corporation.
(2) Controlled foreign corporation.
The term controlled foreign corporation
has the meaning set forth in section
957(a).
(3) Hypothetical distribution date.
The term hypothetical distribution date
has the meaning set forth in § 1.951–
1(e)(1)(i).
(4) Section 958(a) stock. The term
section 958(a) stock means stock of a
controlled foreign corporation owned
(directly or indirectly) by a United
States shareholder within the meaning
of section 958(a), as modified by
paragraph (e)(1) of this section.
(5) Tested item. The term tested item
means tested income, tested loss,
qualified business asset investment,
tested interest expense, or tested interest
income.
(6) United States shareholder. The
term United States shareholder has the
meaning set forth in section 951(b).
(7) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion
year means any taxable year of a United
States shareholder in which or with
which a CFC inclusion year of a
controlled foreign corporation ends.
§ 1.951A–2

Tested income and tested loss.

(a) Scope. This section provides rules
for determining the tested income or
tested loss of a controlled foreign
corporation for purposes of determining
a United States shareholder’s net CFC
tested income under § 1.951A–1(c)(2).
Paragraph (b) of this section provides
definitions related to tested income and
tested loss. Paragraph (c) of this section
provides rules for determining the gross
tested income of a controlled foreign
corporation and the deductions that are
properly allocable to gross tested
income.

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(b) Definitions related to tested
income and tested loss—(1) Tested
income and tested income CFC. The
term tested income means the excess (if
any) of a controlled foreign
corporation’s gross tested income for a
CFC inclusion year, over the allowable
deductions (including taxes) properly
allocable to the gross tested income for
the CFC inclusion year (a controlled
foreign corporation with tested income
for a CFC inclusion year, a tested
income CFC).
(2) Tested loss and tested loss CFC.
The term tested loss means the excess (if
any) of a controlled foreign
corporation’s allowable deductions
(including taxes) properly allocable to
gross tested income (or that would be
allocable to gross tested income if there
were gross tested income) for a CFC
inclusion year, over the gross tested
income of the controlled foreign
corporation for the CFC inclusion year
(a controlled foreign corporation
without tested income for a CFC
inclusion year, a tested loss CFC).
(c) Rules relating to the determination
of tested income and tested loss—(1)
Definition of gross tested income. The
term gross tested income means the
gross income of a controlled foreign
corporation for a CFC inclusion year
determined without regard to—
(i) Items of income described in
section 952(b),
(ii) Gross income taken into account
in determining the subpart F income of
the corporation,
(iii) Gross income excluded from the
foreign base company income (as
defined in section 954) or the insurance
income (as defined in section 953) of the
corporation solely by reason of an
election made under section 954(b)(4)
and § 1.954–1(d)(5),
(iv) Dividends received by the
corporation from related persons (as
defined in section 954(d)(3)), and
(v) Foreign oil and gas extraction
income (as defined in section 907(c)(1))
of the corporation.
(2) Determination of gross income and
allowable deductions—(i) In general.
For purposes of determining tested
income and tested loss, the gross
income and allowable deductions of a
controlled foreign corporation for a CFC
inclusion year are determined under the
rules of § 1.952–2 for determining the
subpart F income of the controlled
foreign corporation, except, for a
controlled foreign corporation which is
engaged in the business of reinsuring or
issuing insurance or annuity contracts
and which, if it were a domestic
corporation engaged only in such
business, would be taxable as an
insurance company to which subchapter

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Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Rules and Regulations
L of chapter 1 of the Code applies,
substituting ‘‘the rules of sections 953
and 954(i)’’ for ‘‘the principles of
§§ 1.953–4 and 1.953–5’’ in § 1.952–
2(b)(2).
(ii) Deemed payment under section
367(d). The allowable deductions of a
controlled foreign corporation include a
deemed payment of the controlled
foreign corporation under section
367(d)(2)(A).
(3) Allocation of deductions to gross
tested income. Except as provided in
paragraph (c)(5) of this section, any
deductions of a controlled foreign
corporation allowable under paragraph
(c)(2) of this section are allocated and
apportioned to gross tested income
under the principles of section 954(b)(5)
and § 1.954–1(c), by treating gross tested
income that falls within a single
separate category (as defined in § 1.904–
5(a)) as a single item of gross income,
separate and in addition to the items set
forth in § 1.954–1(c)(1)(iii). Losses in
other separate categories of income
resulting from the application of
§ 1.954–1(c)(1)(i) cannot reduce any
separate category of gross tested income,
and losses in a separate category of gross
tested income cannot reduce income in
a category of subpart F income. In
addition, deductions of a controlled
foreign corporation that are allocated
and apportioned to gross tested income
under this paragraph (c)(3) are not taken
into account for purposes of
determining a qualified deficit as
defined in section 952(c)(1)(B)(ii).
(4) Gross income taken into account
in determining subpart F income—(i) In
general. Except as provided in
paragraph (c)(4)(iii) of this section, gross
income of a controlled foreign
corporation for a CFC inclusion year
described in section 951A(c)(2)(A)(i)(II)
and paragraph (c)(1)(ii) of this section is
gross income described in paragraphs
(c)(4)(ii)(A) through (E) of this section.
(ii) Items of gross income included in
subpart F income—(A) Insurance
income. Gross income described in this
paragraph (c)(4)(ii)(A) is any item of
gross income included in the insurance
income (adjusted net insurance income
as defined in § 1.954–1(a)(6)) of the
controlled foreign corporation for the
CFC inclusion year.
(B) Foreign base company income.
Gross income described in this
paragraph (c)(4)(ii)(B) is any item of
gross income included in the foreign
base company income (adjusted net
foreign base company income as defined
in § 1.954–1(a)(5)) of the controlled
foreign corporation for the CFC
inclusion year.
(C) International boycott income.
Gross income described in this

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paragraph (c)(4)(ii)(C) is the product of
the gross income of the controlled
foreign corporation for the CFC
inclusion year that gives rise to the
income described in section 952(a)(3)(A)
multiplied by the international boycott
factor described in section 952(a)(3)(B).
(D) Illegal bribes, kickbacks, or other
payments. Gross income described in
this paragraph (c)(4)(ii)(D) is the sum of
the amounts of the controlled foreign
corporation for the CFC inclusion year
described in section 952(a)(4).
(E) Income earned in certain foreign
countries. Gross income described in
this paragraph (c)(4)(ii)(E) is income of
the controlled foreign corporation for
the CFC inclusion year described in
section 952(a)(5).
(iii) Coordination rules—(A)
Coordination with E&P limitation. Gross
income of a controlled foreign
corporation for a CFC inclusion year
described in section 951A(c)(2)(A)(i)(II)
and paragraph (c)(1)(ii) of this section
includes any item of gross income that
is excluded from subpart F income of
the controlled foreign corporation for
the CFC inclusion year, or that is
otherwise excluded from the amount
included under section 951(a)(1)(A) in
the gross income of a United States
shareholder of the controlled foreign
corporation for the U.S. shareholder
inclusion year in which or with which
the CFC inclusion year ends, under
section 952(c)(1) and § 1.952–1(c), (d),
or (e).
(B) Coordination with E&P recapture.
Gross income of a controlled foreign
corporation for a CFC inclusion year
described in section 951A(c)(2)(A)(i)(II)
and paragraph (c)(1)(ii) of this section
does not include any item of gross
income that results in the
recharacterization of earnings and
profits as subpart F income of the
controlled foreign corporation for the
CFC inclusion year under section
952(c)(2) and § 1.952–1(f)(2).
(C) Coordination with full inclusion
rule and high tax exception. Gross
income of a controlled foreign
corporation for a CFC inclusion year
described in section 951A(c)(2)(A)(i)(II)
and paragraph (c)(1)(ii) of this section
does not include full inclusion foreign
base company income that is excluded
from subpart F income under § 1.954–
1(d)(6). Full inclusion foreign base
company income that is excluded from
subpart F income under § 1.954–1(d)(6)
is also not included in gross income of
a controlled foreign corporation for a
CFC inclusion year described in section
951A(c)(2)(A)(i)(III) and paragraph
(c)(1)(iii) of this section.

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(iv) Examples. The following
examples illustrate the application of
this paragraph (c)(4).
(A) Example 1—(1) Facts. A Corp, a
domestic corporation, owns 100% of the
single class of stock of FS, a controlled
foreign corporation. Both A Corp and FS use
the calendar year as their taxable year. In
Year 1, FS has passive category foreign
personal holding company income of $100x,
a general category loss in foreign oil and gas
extraction income of $100x, and earnings and
profits of $0. FS has no other income. In Year
2, FS has general category gross income of
$100x and earnings and profits of $100x.
Without regard to section 952(c)(2), in Year
2 FS has no income described in any of the
categories of income excluded from gross
tested income in paragraphs (c)(1)(i) through
(v) of this section. FS has no allowable
deductions properly allocable to gross tested
income for Year 2.
(2) Analysis—(i) Year 1. As a result of the
earnings and profits limitation of section
952(c)(1)(A), FS has no subpart F income in
Year 1, and A Corp has no inclusion with
respect to FS under section 951(a)(1)(A).
Under paragraph (c)(4)(ii)(A) of this section,
gross income described in section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section includes any item of gross
income excluded from the subpart F income
of FS for Year 1 under section 952(c)(1)(A)
and § 1.952–1(c). Therefore, the $100x
foreign personal holding company income of
FS in Year 1 is excluded from gross tested
income by reason of section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section, and FS has no gross tested
income in Year 1.
(ii) Year 2. In Year 2, under section
952(c)(2) and § 1.952–1(f)(2), FS’s general
category earnings and profits ($100x) in
excess of its subpart F income ($0) give rise
to the recharacterization of its passive
category recapture account as subpart F
income. Therefore, FS has passive category
subpart F income of $100x in Year 2, and A
Corp has an inclusion of $100x with respect
to FS under section 951(a)(1)(A). Under
paragraph (c)(4)(ii)(B) of this section, gross
income described in section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section does not include any item of
gross income that results in the
recharacterization of earnings and profits as
subpart F income in FS’s taxable year under
section 952(c)(2) and § 1.952–1(f)(2).
Accordingly, the $100x of general category
gross income of FS in Year 2 is not excluded
from gross tested income by reason of section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section, and FS has $100x of general
category gross tested income in Year 2.
(B) Example 2—(1) Facts. A Corp, a
domestic corporation, owns 100% of the
single class of stock of FC1 and FC2,
controlled foreign corporations. A Corp, FC1,
and FC2 use the calendar year as their
taxable year. In Year 1, FC1 has gross income
of $290x from product sales to unrelated
persons within its country of incorporation,
gross interest income of $10x (an amount that
is less than $1,000,000) that does not qualify
for an exception to foreign personal holding

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company income, and earnings and profits of
$300x. In Year 1, FC2 has gross income of
$45x for performing consulting services
within its country of incorporation for
unrelated persons, gross interest income of
$150x (an amount that is not less than
$1,000,000) that does not qualify for an
exception to foreign personal holding
company income, and earnings and profits of
$195x.
(2) Analysis—(i) FC1. In Year 1, by
application of the de minimis rule of section
954(b)(3)(A) and § 1.954–1(b)(1)(i), the $10x
of gross interest income earned by FC1 is not
treated as foreign base company income
($10x of gross foreign base company income
is less than $15x, the lesser of 5% of $300x,
FC’s total gross income for Year 1, or
$1,000,000). Accordingly, FC1 has no subpart
F income in Year 1, and A Corp has no
inclusion with respect to FC1 under section
951(a)(1)(A). Under paragraph (c)(4)(i) of this
section, gross income described in section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section is any item of gross income
included in foreign base company income,
and thus gross income described in section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section does not include any item of
gross income excluded from foreign base
company income under the de minimis rule
in section 954(b)(3)(A) and § 1.954–1(b)(1)(i).
Accordingly, FS’s $10x of gross interest
income in Year 1 is not excluded from gross
tested income by reason of section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section, and FC1 has $300x ($290x of
gross sales income and $10x of gross interest
income) of gross tested income in Year 1.
(ii) FC2. In Year 1, by application of the
full inclusion rule in section 954(b)(3)(B) and
§ 1.954–1(b)(1)(ii), the $45x of gross income
earned by FC2 for performing consulting
services within its country of incorporation
for unrelated persons is treated as foreign
base company income ($150x of gross foreign
base company income exceeds $136.5x,
which is 70% of $195x, FC2’s total gross
income for Year 1). Therefore, FC2 has $195x
of foreign base company income in Year 1,
including $45x of full inclusion foreign base
company income as defined in § 1.954–
1(b)(2), and A Corp has an inclusion of $195x
with respect to FC2 under section
951(a)(1)(A). Under paragraph (c)(4)(i) of this
section, gross income described in section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section is any item of gross income
included in foreign base company income,
and thus gross income described in section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section includes any item of gross
income included as foreign base company
income under the full inclusion rule in
section 954(b)(3)(B) and § 1.954–1(b)(1)(ii).
Accordingly, FC2’s $45x of gross services
income and its $150x of gross interest income
in Year 1 are excluded from gross tested
income by reason of section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section, and FC2 has no gross tested
income in Year 1.
(C) Example 3—(1) Facts. A Corp, a
domestic corporation, owns 100% of the
single class of stock of FS, a controlled
foreign corporation. A Corp and FS use the

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calendar year as their taxable year. In Year
1, FS has gross income of $1,000x, of which
$720x is general category foreign base
company sales income and $280x is general
category income from sales within its country
of incorporation; FS has expenses of $650x
(including creditable foreign income taxes),
of which $500x are allocated and
apportioned to foreign base company sales
income and $150x are allocated and
apportioned to sales income from sales
within FS’s country of incorporation; and FS
has earnings and profits of $350x for Year 1.
Foreign income tax of $55x is considered
imposed on the $220x ($720x¥$500x) of net
foreign base company sales income, and $26x
is considered imposed on the $130x
($280x¥$150x) of net income from sales
within FS’s country of operation. The
maximum rate of tax in section 11 for the
taxable year is 21%, and FS elects the high
tax exception of section 954(b)(4) under
§ 1.954–1(d)(1) for Year 1 for its foreign base
company sales income. In a prior taxable
year, FS had losses with respect to income
other than foreign base company or insurance
income that, by reason of the limitation in
section 952(c)(1)(A), reduced the subpart F
income of FS (consisting entirely of foreign
source general category income) by $600x; as
of the beginning of Year 1, such amount has
not been recharacterized as subpart F income
in a subsequent taxable year under section
952(c)(2).
(2) Analysis—(i) Foreign base company
income. In Year 1, by application of the full
inclusion rule in section 954(b)(3)(B) and
§ 1.954–1(b)(1)(ii), the $280x of gross income
earned by FS for sales within its country of
incorporation is treated as foreign base
company income ($720x of gross foreign base
company income exceeds $700x, which is
70% of $1,000x, FS’s total gross income for
the taxable year). However, the $220x of
foreign base company sales income qualifies
for the high tax exception of section 954(b)(4)
and § 1.954–1(d)(1), because the effective rate
of tax with respect to the net foreign base
company sales income ($220x) is 20% ($55x/
($220x + $55x)) which is greater than 18.9%
(90% of 21%, the maximum rate of tax in
section 11 for the taxable year). Because the
$220x of net foreign base company sales
income qualifies for the high tax exception of
section 954(b)(4) and § 1.954–1(d)(1), the
$130x of full inclusion foreign base company
income is also excluded from subpart F
income under § 1.954–1(d)(6).
(ii) Recapture of subpart F income. Under
section 952(c)(2) and § 1.952–1(f)(2), FS’s
general category earnings and profits ($350x)
in excess of its subpart F income ($0) give
rise to the recharacterization of its general
category recapture account ($600x) as subpart
F income to the extent of current year
earnings and profits. Therefore, FS has
general category subpart F income of $350x
in Year 1, and A Corp has an inclusion of
$350x with respect to FS under section
951(a)(1)(A).
(iii) Gross tested income. The $720x of
gross foreign base company income is
excluded from gross tested income under
section 951A(c)(2)(A)(i)(III) and paragraph
(c)(1)(iii) of this section. However, the $280x
of gross sales income earned from sales

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within FS’s country of incorporation is not
excluded from gross tested income under
either section 951A(c)(2)(A)(i)(II) and
paragraph (c)(1)(ii) of this section or section
951A(c)(2)(A)(i)(III) and paragraph (c)(1)(iii)
of this section. Under paragraph (c)(4)(ii)(B)
of this section, the $280x of gross sales
income earned from sales within FS’s
country of incorporation is not excluded
from gross tested income under section
951A(c)(2)(A)(i)(II) and paragraph (c)(1)(ii) of
this section, because gross income described
in paragraph (c)(1)(ii) of this section does not
include any item of gross income that results
in the recharacterization of earnings and
profits as subpart F income under section
952(c)(2) and § 1.952–1(f)(2). Further, under
paragraph (c)(4)(iii) of this section, the $280x
of gross sales income earned from sales
within FS’s country of incorporation is not
excluded from gross tested income under
either section 951A(c)(2)(A)(i)(II) and
paragraph (c)(1)(ii) of this section or section
951A(c)(2)(A)(i)(III) and paragraph (c)(1)(iii)
of this section, because gross income
described in section 951A(c)(2)(A)(i)(II) and
paragraph (c)(1)(ii) of this section or section
951A(c)(2)(A)(i)(III) and paragraph (c)(1)(iii)
of this section does not include full inclusion
foreign base company income that is
excluded from subpart F income under
§ 1.954–1(d)(6). Accordingly, FS has $280x of
gross tested income for Year 1.

(5) Allocation of deduction or loss
attributable to disqualified basis—(i) In
general. A deduction or loss attributable
to disqualified basis is allocated and
apportioned solely to residual CFC gross
income, and any depreciation,
amortization, or cost recovery
allowances attributable to disqualified
basis is not properly allocable to
property produced or acquired for resale
under section 263, 263A, or 471.
(ii) Determination of deduction or loss
attributable to disqualified basis. Except
as otherwise provided in this paragraph
(c)(5)(ii), in the case of a depreciation or
amortization deduction with respect to
property with disqualified basis and
adjusted basis other than disqualified
basis, the deduction or loss is treated as
attributable to the disqualified basis in
the same proportion that the
disqualified basis bears to the total
adjusted basis in the property. In the
case of a loss from a taxable sale or
exchange of property with disqualified
basis and adjusted basis other than
disqualified basis, the loss is treated as
attributable to disqualified basis to the
extent thereof.
(iii) Definitions. The following
definitions apply for purposes of this
paragraph (c)(5).
(A) Disqualified basis. The term
disqualified basis has the meaning set
forth in § 1.951A–3(h)(2)(ii).
(B) Residual CFC gross income. The
term residual CFC gross income means
gross income other than gross tested
income, gross income taken into

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account in determining subpart F
income, or gross income that is
effectively connected, or treated as
effectively connected, with the conduct
of a trade or business in the United
States (as described in § 1.882–4(a)(1)).
(iv) Examples. The following
examples illustrate the application of
this paragraph (c)(5).
(A) Example 1: Sale of intangible property
during the disqualified period—(1) Facts.
USP, a domestic corporation, owns all of the
stock in CFC1 and CFC2, each a controlled
foreign corporation. Both USP and CFC2 use
the calendar year as their taxable year. CFC1
uses a taxable year ending November 30. On
November 1, 2018, before the start of its first
CFC inclusion year, CFC1 sells Asset A to
CFC2 in exchange for $100x of cash. Asset A
is intangible property that is amortizable
under section 197. Immediately before the
sale, the adjusted basis in Asset A is $20x,
and CFC1 recognizes $80x of gain as a result
of the sale ($100x¥$20x). CFC1’s gain is not
subject to U.S. tax or taken into account in
determining an inclusion to USP under
section 951(a)(1)(A).
(2) Analysis. The sale by CFC1 is a
disqualified transfer (within the meaning of
§ 1.951A–3(h)(2)(ii)(C)(2)) because it is a
transfer of property in which gain was
recognized by CFC1, CFC1 and CFC2 are
related persons, and the transfer occurs
during the disqualified period (within the
meaning of § 1.951A–3(h)(2)(ii)(C)(1)). The
disqualified basis in Asset A is $80x, the
excess of CFC2’s adjusted basis in Asset A
immediately after the disqualified transfer
($100x), over the sum of CFC1’s basis in
Asset A immediately before the transfer
($20x) and the qualified gain amount (as
defined in § 1.951A–3(h)(2)(ii)(C)(3)) ($0).
Accordingly, under paragraph (c)(5)(i) of this
section, any deduction or loss of CFC2
attributable to the disqualified basis is
allocated and apportioned solely to residual
CFC gross income of CFC2 and, therefore, is
not taken into account in determining the
tested income, tested loss, subpart F income,
or effectively connected income of CFC2 for
any CFC inclusion year.
(B) Example 2: Related party transfer after
the disqualified period; gain recognition—(1)
Facts. The facts are the same as in paragraph
(c)(5)(iv)(A)(1) of this section (the facts in
Example 1), except that, on November 30,
2020, CFC2 sells Asset A to CFC3, a
controlled foreign corporation wholly-owned
by CFC2, in exchange for $120x of cash.
Immediately before the sale, the adjusted
basis in Asset A is $90x, $72x of which is
disqualified basis. The gain recognized by
CFC2 on the sale of Asset A is not described
in paragraphs (c)(1)(i) through (v) of this
section.
(2) Analysis. Paragraph (c)(5)(i) of this
section does not apply to the sale of Asset A
from CFC2 to CFC3 because the sale does not
give rise to a deduction or loss attributable
to disqualified basis, but instead gives rise to
gain. Therefore, CFC2 recognizes $30x
($120x¥$90x) of gain that is included in
gross tested income for its CFC inclusion year
ending November 30, 2019. Under § 1.951A–
3(h)(2)(ii)(B)(1)(ii), because CFC2 sold Asset

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A to CFC3, a related person, and CFC2 did
not recognize a deduction or loss on the sale,
the disqualified basis in Asset A is not
reduced or eliminated by reason of the sale.
Accordingly, under paragraph (c)(5)(i) of this
section, any deduction or loss of CFC3
attributable to the $72x of disqualified basis
in Asset A is allocated and apportioned
solely to residual CFC gross income of CFC3.
(C) Example 3: Related party transfer after
the disqualified period; loss recognition—(1)
Facts. The facts are the same as in paragraph
(c)(5)(iv)(B)(1) of this section (the facts in
Example 2), except that CFC2 sells Asset A
to CFC3 in exchange for $70x of cash.
(2) Analysis. Under paragraph (c)(5)(ii) of
this section, the $20x loss recognized by
CFC2 on the sale is attributable to
disqualified basis, to the extent thereof,
notwithstanding that the loss may be
deferred under section 267(f). Thus, under
paragraph (c)(5)(i) of this section, the loss is
allocated and apportioned solely to residual
CFC gross income of CFC2 in the CFC
inclusion year in which the loss is taken into
account pursuant to section 267(f). Under
§ 1.951A–3(h)(2)(ii)(B)(1)(ii), the disqualified
basis in Asset A is reduced by $20x, the loss
of CFC2 that is attributable to disqualified
basis under paragraph (c)(5)(ii) of this
section. Accordingly, under paragraph
(c)(5)(i) of this section, any deduction or loss
of CFC3 attributable to the remaining $52x of
disqualified basis in Asset A is allocated and
apportioned solely to residual CFC gross
income of CFC3.
§ 1.951A–3 Qualified business asset
investment.

(a) Scope. This section provides rules
for determining the qualified business
asset investment of a controlled foreign
corporation for purposes of determining
a United States shareholder’s deemed
tangible income return under § 1.951A–
1(c)(3)(ii). Paragraph (b) of this section
defines qualified business asset
investment. Paragraph (c) of this section
defines tangible property and specified
tangible property. Paragraph (d) of this
section provides rules for determining
the portion of tangible property that is
specified tangible property when the
property is used in the production of
both gross tested income and gross
income that is not gross tested income.
Paragraph (e) of this section provides
rules for determining the adjusted basis
in specified tangible property.
Paragraph (f) of this section provides
rules for determining qualified business
asset investment of a tested income CFC
with a short taxable year. Paragraph (g)
of this section provides rules for
increasing the qualified business asset
investment of a tested income CFC by
reason of property owned by a
partnership. Paragraph (h) of this
section provides anti-avoidance rules
that disregard the basis in property
transferred in certain transactions when

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determining the qualified business asset
investment of a tested income CFC.
(b) Qualified business asset
investment. The term qualified business
asset investment means the average of a
tested income CFC’s aggregate adjusted
bases as of the close of each quarter of
a CFC inclusion year in specified
tangible property that is used in a trade
or business of the tested income CFC
and is of a type with respect to which
a deduction is allowable under section
167. In the case of partially depreciable
property, only the depreciable portion
of the property is of a type with respect
to which a deduction is allowable under
section 167. A tested loss CFC has no
qualified business asset investment.
(c) Specified tangible property—(1) In
general. The term specified tangible
property means, with respect to a tested
income CFC and a CFC inclusion year,
tangible property of the tested income
CFC used in the production of gross
tested income for the CFC inclusion
year. For purposes of the preceding
sentence, tangible property of a tested
income CFC is used in the production
of gross tested income for a CFC
inclusion year if some or all of the
depreciation or cost recovery allowance
with respect to the tangible property is
either allocated and apportioned to the
gross tested income of the tested income
CFC for the CFC inclusion year under
§ 1.951A–2(c)(3) or capitalized to
inventory or other property held for
sale, some or all of the gross income or
loss from the sale of which is taken into
account in determining tested income of
the tested income CFC for the CFC
inclusion year. None of the tangible
property of a tested loss CFC is specified
tangible property.
(2) Tangible property. The term
tangible property means property for
which the depreciation deduction
provided by section 167(a) is eligible to
be determined under section 168
without regard to section 168(f)(1), (2),
or (5), section 168(k)(2)(A)(i)(II), (IV), or
(V), and the date placed in service.
(d) Dual use property—(1) In general.
The amount of the adjusted basis in
dual use property of a tested income
CFC for a CFC inclusion year that is
treated as adjusted basis in specified
tangible property for the CFC inclusion
year is the average of the tested income
CFC’s adjusted basis in the property
multiplied by the dual use ratio with
respect to the property for the CFC
inclusion year.
(2) Definition of dual use property.
The term dual use property means, with
respect to a tested income CFC and a
CFC inclusion year, specified tangible
property of the tested income CFC that
is used in both the production of gross

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tested income and the production of
gross income that is not gross tested
income for the CFC inclusion year. For
purposes of the preceding sentence,
specified tangible property of a tested
income CFC is used in the production
of gross tested income and the
production of gross income that is not
gross tested income for a CFC inclusion
year if less than all of the depreciation
or cost recovery allowance with respect
to the property is either allocated and
apportioned to the gross tested income
of the tested income CFC for the CFC
inclusion year under § 1.951A–2(c)(3) or
capitalized to inventory or other
property held for sale, the gross income
or loss from the sale of which is taken
into account in determining the tested
income of the tested income CFC for the
CFC inclusion year.
(3) Dual use ratio. The term dual use
ratio means, with respect to dual use
property, a tested income CFC, and a
CFC inclusion year, a ratio (expressed as
a percentage) calculated as—
(i) The sum of—
(A) The depreciation deduction or
cost recovery allowance with respect to
the property that is allocated and
apportioned to the gross tested income
of the tested income CFC for the CFC
inclusion year under § 1.951A–2(c)(3),
and
(B) The depreciation or cost recovery
allowance with respect to the property
that is capitalized to inventory or other
property held for sale, the gross income
or loss from the sale of which is taken
into account in determining the tested
income of the tested income CFC for the
CFC inclusion year, divided by
(ii) The sum of—
(A) The total amount of the tested
income CFC’s depreciation deduction or
cost recovery allowance with respect to
the property for the CFC inclusion year,
and
(B) The total amount of the tested
income CFC’s depreciation or cost
recovery allowance with respect to the
property capitalized to inventory or
other property held for sale, the gross
income or loss from the sale of which
is taken into account in determining the
income or loss of the tested income CFC
for the CFC inclusion year.
(4) Example. The following example
illustrates the application of this paragraph
(d).
(i) Facts. FS is a tested income CFC and a
wholesale distributor of Product A. FS owns
a warehouse and trucks that store and deliver
Product A, respectively. The warehouse has
an average adjusted basis for Year 1 of
$20,000x. The depreciation with respect to
the warehouse for Year 1 is $2,000x, which
is capitalized to inventory of Product A. Of
the $2,000x depreciation capitalized to

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inventory of Product A, $500x is capitalized
to FS’s ending inventory of Product A,
$1,200x is capitalized to inventory of Product
A, the gross income or loss from the sale of
which is taken into account in determining
FS’s tested income for Year 1, and $300x is
capitalized to inventory of Product A, the
gross income or loss from the sale of which
is taken into account in determining FS’s
foreign base company sales income for Year
1. The trucks have an average adjusted basis
for Year 1 of $4,000x. FS does not capitalize
depreciation with respect to the trucks to
inventory or other property held for sale. FS’s
depreciation deduction with respect to the
trucks is $20x for Year 1, $15x of which is
allocated and apportioned to FS’s gross
tested income under § 1.951A–2(c)(3).
(ii) Analysis—(A) Dual use property. The
warehouse and trucks are property for which
the depreciation deduction provided by
section 167(a) is eligible to be determined
under section 168 (without regard to section
168(f)(1), (2), or (5), section 168(k)(2)(A)(i)(II),
(IV), or (V), and the date placed in service).
Therefore, under paragraph (c)(2) of this
section, the warehouse and trucks are
tangible property. Furthermore, because the
warehouse and trucks are used in the
production of gross tested income in Year 1
within the meaning of paragraph (c)(1) of this
section, the warehouse and trucks are
specified tangible property. Finally, because
the warehouse and trucks are used in both
the production of gross tested income and the
production of gross income that is not gross
tested income in Year 1 within the meaning
of paragraph (d)(2) of this section, the
warehouse and trucks are dual use property.
Therefore, under paragraph (d)(1) of this
section, the amount of FS’s adjusted basis in
the warehouse and trucks that is treated as
adjusted basis in specified tangible property
for Year 1 is determined by multiplying FS’s
adjusted basis in the warehouse and trucks
by FS’s dual use ratio with respect to the
warehouse and trucks determined under
paragraph (d)(3) of this section.
(B) Depreciation not capitalized to
inventory. Because none of the depreciation
with respect to the trucks is capitalized to
inventory or other property held for sale, FS’s
dual use ratio with respect to the trucks is
determined entirely by reference the
depreciation deduction with respect to the
trucks. Therefore, under paragraph (d)(3) of
this section, FS’s dual use ratio with respect
to the trucks for Year 1 is 75%, which is FS’s
depreciation deduction with respect to the
trucks that is allocated and apportioned to
gross tested income under § 1.951A–2(c)(3)
for Year 1 ($15x), divided by the total amount
of FS’s depreciation deduction with respect
to the trucks for Year 1 ($20x). Accordingly,
under paragraph (d)(1) of this section,
$3,000x ($4,000x × 0.75) of FS’s average
adjusted bases in the trucks is taken into
account under paragraph (b) of this section
in determining FS’s qualified business asset
investment for Year 1.
(C) Depreciation capitalized to inventory.
Because all of the depreciation with respect
to the warehouse is capitalized to inventory,
FS’s dual use ratio with respect to the
warehouse is determined entirely by
reference to the depreciation with respect to

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the warehouse that is capitalized to inventory
and included in cost of goods sold.
Therefore, under paragraph (d)(3) of this
section, FS’s dual use ratio with respect to
the warehouse for Year 1 is 80%, which is
FS’s depreciation with respect to the
warehouse that is capitalized to inventory of
Product A, the gross income or loss from the
sale of which is taken into account in
determining in FS’s tested income for Year 1
($1,200x), divided by FS’s depreciation with
respect to the warehouse that is capitalized
to inventory of Product A, the gross income
or loss from the sale of which is taken into
account in determining FS’s income for Year
1 ($1,500x). Accordingly, under paragraph
(d)(1) of this section, $16,000x ($20,000x ×
0.8) of FS’s average adjusted basis in the
warehouse is taken into account under
paragraph (b) of this section in determining
FS’s qualified business asset investment for
Year 1.

(e) Determination of adjusted basis in
specified tangible property—(1) In
general. Except as provided in
paragraph (e)(3)(ii) of this section, the
adjusted basis in specified tangible
property for purposes of this section is
determined by using the cost
capitalization methods of accounting
used by the controlled foreign
corporation for purposes of determining
the gross income and allowable
deductions of the controlled foreign
corporation under § 1.951A–2(c)(2) and
the alternative depreciation system
under section 168(g), and by allocating
the depreciation deduction with respect
to such property for a CFC inclusion
year ratably to each day during the
period in the CFC inclusion year to
which such depreciation relates. For
purposes of the preceding sentence, the
period in the CFC inclusion year to
which such depreciation relates is
determined without regard to the
applicable convention under section
168(d).
(2) Effect of change in law. The
adjusted basis in specified tangible
property is determined without regard
to any provision of law enacted after
December 22, 2017, unless such later
enacted law specifically and directly
amends the definition of qualified
business asset investment under section
951A.
(3) Specified tangible property placed
in service before enactment of section
951A—(i) In general. Except as provided
in paragraph (e)(3)(ii) of this section, the
adjusted basis in specified tangible
property placed in service before
December 22, 2017, is determined using
the alternative depreciation system
under section 168(g), as if this system
had applied from the date that the
property was placed in service.
(ii) Election to use income and
earnings and profits depreciation

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method for property placed in service
before the first taxable year beginning
after December 22, 2017—(A) In
general. If a controlled foreign
corporation is not required to use, and
does not in fact use, the alternative
depreciation system under section
168(g) for purposes of determining
income under § 1.952–2 and earnings
and profits under § 1.964–1 with respect
to property placed in service before the
first taxable year beginning after
December 22, 2017, and the controlling
domestic shareholders (as defined in
§ 1.964–1(c)(5)) of the controlled foreign
corporation make an election described
in this paragraph (e)(3)(ii), the adjusted
basis in specified tangible property of
the controlled foreign corporation that
was placed in service before the first
taxable year of the controlled foreign
corporation beginning after December
22, 2017, and the partner adjusted basis
in partnership specified tangible
property of any partnership of which
the controlled foreign corporation is a
partner that was placed in service before
the first taxable year of the partnership
beginning after December 22, 2017, is
determined for purposes of this section
based on the method of accounting for
depreciation used by the controlled
foreign corporation for purposes of
determining income under § 1.952–2,
subject to the modification described in
this paragraph (e)(3)(ii)(A). If the
controlled foreign corporation’s method
of accounting for depreciation takes into
account salvage value of the property,
the salvage value is reduced to zero by
allocating the salvage value ratably to
each day of the taxable year
immediately after the last taxable year
in which the method of accounting
determined an amount of depreciation
deduction for the property.
(B) Manner of making the election.
The controlling domestic shareholders
making the election described in this
paragraph (e)(3) must file a statement
that meets the requirements of § 1.964–
1(c)(3)(ii) with their income tax returns
for the taxable year that includes the last
day of the controlled foreign
corporation’s applicable taxable year
and follow the notice requirements of
§ 1.964–1(c)(3)(iii). The controlled
foreign corporation’s applicable taxable
year is the first CFC inclusion year that
begins after December 31, 2017, and
ends within the controlling domestic
shareholder’s taxable year. For purposes
of § 301.9100–3 of this chapter
(addressing requests for extensions of
time for filing certain regulatory
elections), a controlling domestic
shareholder is qualified to make the
election described in this paragraph

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(e)(3) only if the shareholder determined
the adjusted basis in specified tangible
property placed in service before the
first taxable year beginning after
December 22, 2017, by applying the
method described in paragraph
(e)(3)(ii)(A) of this section with respect
to the first taxable year of the controlled
foreign corporation beginning after
December 22, 2017, and each
subsequent taxable year. The election
statement must be filed in accordance
with the rules provided in forms or
instructions.
(f) Special rules for short taxable
years—(1) In general. In the case of a
tested income CFC that has a CFC
inclusion year that is less than twelve
months (a short taxable year), the rules
for determining the qualified business
asset investment of the tested income
CFC under this section are modified as
provided in paragraphs (f)(2) and (3) of
this section with respect to the CFC
inclusion year.
(2) Determination of quarter closes.
For purposes of determining quarter
closes, in determining the qualified
business asset investment of a tested
income CFC for a short taxable year, the
quarters of the tested income CFC for
purposes of this section are the full
quarters beginning and ending within
the short taxable year (if any),
determining quarter length as if the
tested income CFC did not have a short
taxable year, plus one or more short
quarters (if any).
(3) Reduction of qualified business
asset investment. The qualified business
asset investment of a tested income CFC
for a short taxable year is the sum of—
(i) The sum of the tested income
CFC’s aggregate adjusted bases in
specified tangible property as of the
close of each full quarter (if any) in the
CFC inclusion year divided by four,
plus
(ii) The tested income CFC’s aggregate
adjusted bases in specified tangible
property as of the close of each short
quarter (if any) in the CFC inclusion
year multiplied by the sum of the
number of days in each short quarter
divided by 365.
(4) Example. The following example
illustrates the application of this paragraph
(f).
(i) Facts. USP1, a domestic corporation,
owns all of the stock of FS, a controlled
foreign corporation. USP1 owns FS from the
beginning of Year 1. On July 15, Year 1, USP1
sells FS to USP2, an unrelated person. USP2
makes a section 338(g) election with respect
to the purchase of FS, as a result of which
FS’s taxable year is treated as ending on July
15. USP1, USP2, and FS all use the calendar
year as their taxable year. FS’s aggregate
adjusted bases in specified tangible property
is $250x as of March 31, $300x as of June 30,

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$275x as of July 15, $500x as of September
30, and $450x as of December 31.
(ii) Analysis—(A) Determination of short
taxable years and quarters. FS has two short
taxable years in Year 1. The first short taxable
year is from January 1 to July 15, with two
full quarters (January 1 through March 31
and April 1 through June 30) and one short
quarter (July 1 through July 15). The second
taxable year is from July 16 to December 31,
with one short quarter (July 16 through
September 30) and one full quarter (October
1 through December 31).
(B) Calculation of qualified business asset
investment for the first short taxable year.
Under paragraph (f)(2) of this section, for the
first short taxable year in Year 1, FS has three
quarter closes (March 31, June 30, and July
15). Under paragraph (f)(3) of this section, the
qualified business asset investment of FS for
the first short taxable year is $148.80x, the
sum of $137.50x (($250x + $300x)/4)
attributable to the two full quarters and
$11.30x ($275x × 15/365) attributable to the
short quarter.
(C) Calculation of qualified business asset
investment for the second short taxable year.
Under paragraph (f)(2) of this section, for the
second short taxable year in Year 1, FS has
two quarter closes (September 30 and
December 31). Under paragraph (f)(3) of this
section, the qualified business asset
investment of FS for the second short taxable
year is $217.98x, the sum of $112.50x
($450x/4) attributable to the one full quarter
and $105.48x ($500x × 77/365) attributable to
the short quarter.

(g) Partnership property—(1) In
general. If a tested income CFC holds an
interest in one or more partnerships
during a CFC inclusion year (including
indirectly through one or more
partnerships that are partners in a
lower-tier partnership), the qualified
business asset investment of the tested
income CFC for the CFC inclusion year
(determined without regard to this
paragraph (g)(1)) is increased by the sum
of the tested income CFC’s partnership
QBAI with respect to each partnership
for the CFC inclusion year. A tested loss
CFC has no partnership QBAI for a CFC
inclusion year.
(2) Determination of partnership
QBAI. For purposes of paragraph (g)(1)
of this section, the term partnership
QBAI means, with respect to a
partnership, a tested income CFC, and a
CFC inclusion year, the sum of the
tested income CFC’s partner adjusted
basis in each partnership specified
tangible property of the partnership for
each partnership taxable year that ends
with or within the CFC inclusion year.
If a partnership taxable year is less than
twelve months, the principles of
paragraph (f) of this section apply in
determining a tested income CFC’s
partnership QBAI with respect to the
partnership.
(3) Determination of partner adjusted
basis—(i) In general. For purposes of

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paragraph (g)(2) of this section, the term
partner adjusted basis means the
amount described in paragraph (g)(3)(ii)
of this section with respect to sole use
partnership property or paragraph
(g)(3)(iii) of this section with respect to
dual use partnership property. The
principles of section 706(d) apply to this
determination.
(ii) Sole use partnership property—
(A) In general. The amount described in
this paragraph (g)(3)(ii), with respect to
sole use partnership property, a
partnership taxable year, and a tested
income CFC, is the sum of the tested
income CFC’s proportionate share of the
partnership adjusted basis in the sole
use partnership property for the
partnership taxable year and the tested
income CFC’s partner-specific QBAI
basis in the sole use partnership
property for the partnership taxable
year.
(B) Definition of sole use partnership
property. The term sole use partnership
property means, with respect to a
partnership, a partnership taxable year,
and a tested income CFC, partnership
specified tangible property of the
partnership that is used in the
production of only gross tested income
of the tested income CFC for the CFC
inclusion year in which or with which
the partnership taxable year ends. For
purposes of the preceding sentence,
partnership specified tangible property
of a partnership is used in the
production of only gross tested income
for a CFC inclusion year if all the tested
income CFC’s distributive share of the
partnership’s depreciation deduction or
cost recovery allowance with respect to
the property (if any) for the partnership
taxable year that ends with or within the
CFC inclusion year is allocated and
apportioned to the tested income CFC’s
gross tested income for the CFC
inclusion year under § 1.951A–2(c)(3)
and, if any of the partnership’s
depreciation or cost recovery allowance
with respect to the property is
capitalized to inventory or other
property held for sale, all the tested
income CFC’s distributive share of the
partnership’s gross income or loss from
the sale of such inventory or other
property for the partnership taxable year
that ends with or within the CFC
inclusion year is taken into account in
determining the tested income of the
tested income CFC for the CFC
inclusion year.
(iii) Dual use partnership property—
(A) In general. The amount described in
this paragraph (g)(3)(iii), with respect to
dual use partnership property, a
partnership taxable year, and a tested
income CFC, is the sum of the tested
income CFC’s proportionate share of the

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partnership adjusted basis in the
property for the partnership taxable year
and the tested income CFC’s partnerspecific QBAI basis in the property for
the partnership taxable year, multiplied
by the tested income CFC’s dual use
ratio with respect to the property for the
partnership taxable year determined
under the principles of paragraph (d)(3)
of this section, except that the ratio
described in paragraph (d)(3) of this
section is determined by reference to the
tested income CFC’s distributive share
of the amounts described in paragraph
(d)(3) of this section.
(B) Definition of dual use partnership
property. The term dual use partnership
property means partnership specified
tangible property other than sole use
partnership property.
(4) Determination of proportionate
share of the partnership’s adjusted basis
in partnership specified tangible
property—(i) In general. For purposes of
paragraph (g)(3) of this section, the
tested income CFC’s proportionate share
of the partnership adjusted basis in
partnership specified tangible property
for a partnership taxable year is the
partnership adjusted basis in the
property multiplied by the tested
income CFC’s proportionate share ratio
with respect to the property for the
partnership taxable year. Solely for
purposes of determining the
proportionate share ratio under
paragraph (g)(4)(ii) of this section, the
partnership’s calculation of, and a
partner’s distributive share of, any
income, loss, depreciation, or cost
recovery allowance is determined under
section 704(b).
(ii) Proportionate share ratio. The
term proportionate share ratio means,
with respect to a partnership, a
partnership taxable year, and a tested
income CFC, the ratio (expressed as a
percentage) calculated as—
(A) The sum of—
(1) The tested income CFC’s
distributive share of the partnership’s
depreciation deduction or cost recovery
allowance with respect to the property
for the partnership taxable year, and
(2) The amount of the partnership’s
depreciation or cost recovery allowance
with respect to the property that is
capitalized to inventory or other
property held for sale, the gross income
or loss from the sale of which is taken
into account in determining the tested
income CFC’s distributive share of the
partnership’s income or loss for the
partnership taxable year, divided by
(B) The sum of—
(1) The total amount of the
partnership’s depreciation deduction or
cost recovery allowance with respect to

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the property for the partnership taxable
year, and
(2) The total amount of the
partnership’s depreciation or cost
recovery allowance with respect to the
property capitalized to inventory or
other property held for sale, the gross
income or loss from the sale of which
is taken into account in determining the
partnership’s income or loss for the
partnership taxable year.
(5) Definition of partnership specified
tangible property. The term partnership
specified tangible property means, with
respect to a tested income CFC, tangible
property (as defined in paragraph (c)(2)
of this section) of a partnership that is—
(i) Used in the trade or business of the
partnership,
(ii) Of a type with respect to which a
deduction is allowable under section
167, and
(iii) Used in the production of gross
income included in the tested income
CFC’s gross tested income.
(6) Determination of partnership
adjusted basis. For purposes of this
paragraph (g), the term partnership
adjusted basis means, with respect to a
partnership, partnership specified
tangible property, and a partnership
taxable year, the amount equal to the
average of the partnership’s adjusted
basis in the partnership specified
tangible property as of the close of each
quarter in the partnership taxable year
determined without regard to any
adjustments under section 734(b) except
for adjustments under section
734(b)(1)(B) or section 734(b)(2)(B) that
are attributable to distributions of
tangible property (as defined in
paragraph (c)(2) of this section) and for
adjustments under section 734(b)(1)(A)
or 734(b)(2)(A). The principles of
paragraphs (e) and (h) of this section
apply for purposes of determining a
partnership’s adjusted basis in
partnership specified tangible property
and the proportionate share of the
partnership’s adjusted basis in
partnership specified tangible property.
(7) Determination of partner-specific
QBAI basis. For purposes of this
paragraph (g), the term partner-specific
QBAI basis means, with respect to a
tested income CFC, a partnership, and
partnership specified tangible property,
the amount that is equal to the average
of the basis adjustment under section
743(b) that is allocated to the
partnership specified tangible property
of the partnership with respect to the
tested income CFC as of the close of
each quarter in the partnership taxable
year. For this purpose, a negative basis
adjustment under section 743(b) is
expressed as a negative number. The
principles of paragraphs (e) and (h) of

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this section apply for purposes of
determining the partner-specific QBAI
basis with respect to partnership
specified tangible property.
(8) Examples. The following examples
illustrate the rules of this paragraph (g).
(i) Facts. Except as otherwise stated,
the following facts are assumed for
purposes of the examples:
(A) FC, FC1, FC2, and FC3 are tested
income CFCs.
(B) PRS is a partnership and its
allocations satisfy the requirements of
section 704.
(C) All properties are partnership
specified tangible property.
(D) All persons use the calendar year
as their taxable year.
(E) There is neither disqualified basis
nor partner-specific QBAI basis with
respect to any property.
(ii) Example 1: Sole use partnership
property—(A) Facts. FC is a partner in PRS.
PRS owns two properties, Asset A and Asset
B. The average of PRS’s adjusted basis as of
the close of each quarter of PRS’s taxable year
in Asset A is $100x and in Asset B is $500x.
In Year 1, PRS’s section 704(b) depreciation
deduction is $10x with respect to Asset A
and $5x with respect to Asset B, and FC’s
section 704(b) distributive share of the
depreciation deduction is $8x with respect to
Asset A and $1x with respect to Asset B.
None of the depreciation with respect to
Asset A or Asset B is capitalized to inventory
or other property held for sale. FC’s entire
distributive share of the depreciation
deduction with respect to Asset A and Asset
B is allocated and apportioned to FC’s gross
tested income for Year 1 under § 1.951A–
2(c)(3).
(B) Analysis—(1) Sole use partnership
property. Because all of FC’s distributive
share of the depreciation deduction with
respect to Asset A and B is allocated and
apportioned to gross tested income for Year
1, Asset A and Asset B are sole use
partnership property within the meaning of
paragraph (g)(3)(ii)(B) of this section.
Therefore, under paragraph (g)(3)(ii)(A) of
this section, FC’s partner adjusted basis in
Asset A and Asset B is equal to the sum of
FC’s proportionate share of PRS’s partnership
adjusted basis in Asset A and Asset B for
Year 1 and FC’s partner-specific QBAI basis
in Asset A and Asset B for Year 1,
respectively.
(2) Proportionate share. Under paragraph
(g)(4)(i) of this section, FC’s proportionate
share of PRS’s partnership adjusted basis in
Asset A and Asset B is PRS’s partnership
adjusted basis in Asset A and Asset B for
Year 1, multiplied by FC’s proportionate
share ratio with respect to Asset A and Asset
B for Year 1, respectively. Because none of
the depreciation with respect to Asset A or
Asset B is capitalized to inventory or other
property held for sale, FC’s proportionate
share ratio with respect to Asset A and Asset
B is determined entirely by reference to the
depreciation deduction with respect to Asset
A and Asset B. Therefore, FC’s proportionate
share ratio with respect to Asset A for Year

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1 is 80%, which is the ratio of FC’s section
704(b) distributive share of PRS’s section
704(b) depreciation deduction with respect to
Asset A for Year 1 ($8x), divided by the total
amount of PRS’s section 704(b) depreciation
deduction with respect to Asset A for Year
1 ($10x). FC’s proportionate share ratio with
respect to Asset B for Year 1 is 20%, which
is the ratio of FC’s section 704(b) distributive
share of PRS’s section 704(b) depreciation
deduction with respect to Asset B for Year 1
($1x), divided by the total amount of PRS’s
section 704(b) depreciation deduction with
respect to Asset B for Year 1 ($5x).
Accordingly, under paragraph (g)(4)(i) of this
section, FC’s proportionate share of PRS’s
partnership adjusted basis in Asset A is $80x
($100x × 0.8), and FC’s proportionate share
of PRS’s partnership adjusted basis in Asset
B is $100x ($500x × 0.2).
(3) Partner adjusted basis. Because FC has
no partner-specific QBAI basis with respect
to Asset A and Asset B, FC’s partner adjusted
basis in Asset A and Asset B is determined
entirely by reference to its proportionate
share of PRS’s partnership adjusted basis in
Asset A and Asset B. Therefore, under
paragraph (g)(3)(ii)(A) of this section, FC’s
partner adjusted basis in Asset A is $80x,
FC’s proportionate share of PRS’s partnership
adjusted basis in Asset A, and FC’s partner
adjusted basis in Asset B is $100x, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset A.
(4) Partnership QBAI. Under paragraph
(g)(2) of this section, FC’s partnership QBAI
with respect to PRS is $180x, the sum of FC’s
partner adjusted basis in Asset A ($80x) and
FC’s partner adjusted basis in Asset B
($100x). Accordingly, under paragraph (g)(1)
of this section, FC increases its qualified
business asset investment for Year 1 by
$180x.
(iii) Example 2: Dual use partnership
property—(A) Facts. FC owns a 50% interest
in PRS. All section 704(b) and tax items are
identical and are allocated equally between
FC and its other partner. PRS owns three
properties, Asset C, Asset D, and Asset E.
PRS sells two products, Product A and
Product B. All of FC’s distributive share of
the gross income or loss from the sale of
Product A is taken into account in
determining FC’s tested income, and none of
FC’s distributive share of the gross income or
loss from the sale of Product B is taken into
account in determining FC’s tested income.
(1) Asset C. The average of PRS’s adjusted
basis as of the close of each quarter of PRS’s
taxable year in Asset C is $100x. In Year 1,
PRS’s depreciation is $10x with respect to
Asset C, none of which is capitalized to
inventory or other property held for sale.
FC’s distributive share of the depreciation
deduction with respect to Asset C is $5x
($10x × 0.5), $3x of which is allocated and
apportioned to FC’s gross tested income
under § 1.951A–2(c)(3).
(2) Asset D. The average of PRS’s adjusted
basis as of the close of each quarter of PRS’s
taxable year in Asset D is $500x. In Year 1,
PRS’s depreciation is $50x with respect to
Asset D, $10x of which is capitalized to
inventory of Product A and $40x is
capitalized to inventory of Product B. None
of the $10x depreciation with respect to

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Asset D capitalized to inventory of Product
A is capitalized to ending inventory.
However, of the $40x capitalized to inventory
of Product B, $10x is capitalized to ending
inventory. Therefore, the amount of
depreciation with respect to Asset D
capitalized to inventory of Product A that is
taken into account in determining FC’s
distributive share of the income or loss of
PRS for Year 1 is $5x ($10x × 0.5), and the
amount of depreciation with respect to Asset
D capitalized to inventory of Product B that
is taken into account in determining FC’s
distributive share of the income or loss of
PRS for Year 1 is $15x ($30x × 0.5).
(3) Asset E. The average of PRS’s adjusted
basis as of the close of each quarter of PRS’s
taxable year in Asset E is $600x. In Year 1,
PRS’s depreciation is $60x with respect to
Asset E. Of the $60x depreciation with
respect to Asset E, $20x is allowed as a
deduction, $24x is capitalized to inventory of
Product A, and $16x is capitalized to
inventory of Product B. FC’s distributive
share of the depreciation deduction with
respect to Asset E is $10x ($20x × 0.5), $8x
of which is allocated and apportioned to FC’s
gross tested income under § 1.951A–2(c)(3).
None of the $24x depreciation with respect
to Asset E capitalized to inventory of Product
A is capitalized to ending inventory.
However, of the $16x depreciation with
respect to Asset E capitalized to inventory of
Product B, $10x is capitalized to ending
inventory. Therefore, the amount of
depreciation with respect to Asset E
capitalized to inventory of Product A that is
taken into account in determining FC’s
distributive share of the income or loss of
PRS for Year 1 is $12x ($24x × 0.5), and the
amount of depreciation with respect to Asset
E capitalized to inventory of Product B that
is taken into account in determining FC’s
distributive share of the income or loss of
PRS for Year 1 is $3x ($6x × 0.5).
(B) Analysis. Because Asset C, Asset D, and
Asset E are not used in the production of
only gross tested income in Year 1 within the
meaning of paragraph (g)(3)(ii)(B) of this
section, Asset C, Asset D, and Asset E are
partnership dual use property within the
meaning of paragraph (g)(3)(iii)(B) of this
section. Therefore, under paragraph
(g)(3)(iii)(A) of this section, FC’s partner
adjusted basis in Asset C, Asset D, and Asset
E is the sum of FC’s proportionate share of
PRS’s partnership adjusted basis in Asset C,
Asset D, and Asset E, respectively, for Year
1, and FC’s partner-specific QBAI basis in
Asset C, Asset D, and Asset E, respectively,
for Year 1, multiplied by FC’s dual use ratio
with respect to Asset C, Asset D, and Asset
E, respectively, for Year 1, determined under
the principles of paragraph (d)(3) of this
section, except that the ratio described in
paragraph (d)(3) of this section is determined
by reference to FC’s distributive share of the
amounts described in paragraph (d)(3) of this
section.
(1) Asset C—(i) Proportionate share. Under
paragraph (g)(4)(i) of this section, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset C is PRS’s partnership
adjusted basis in Asset C for Year 1,
multiplied by FC’s proportionate share ratio
with respect to Asset C for Year 1. Because

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none of the depreciation with respect to
Asset C is capitalized to inventory or other
property held for sale, FC’s proportionate
share ratio with respect to Asset C is
determined entirely by reference to the
depreciation deduction with respect to Asset
C. Therefore, FC’s proportionate share ratio
with respect to Asset C is 50%, which is the
ratio calculated as the amount of FC’s section
704(b) distributive share of PRS’s section
704(b) depreciation deduction with respect to
Asset C for Year 1 ($5x), divided by the total
amount of PRS’s section 704(b) depreciation
deduction with respect to Asset C for Year 1
($10x). Accordingly, under paragraph (g)(4)(i)
of this section, FC’s proportionate share of
PRS’s partnership adjusted basis in Asset C
is $50x ($100x × 0.5).
(ii) Dual use ratio. Because none of the
depreciation with respect to Asset C is
capitalized to inventory or other property
held for sale, FC’s dual use ratio with respect
to Asset C is determined entirely by reference
to the depreciation deduction with respect to
Asset C. Therefore, FC’s dual use ratio with
respect to Asset C is 60%, which is the ratio
calculated as the amount of FC’s distributive
share of PRS’s depreciation deduction with
respect to Asset C that is allocated and
apportioned to FC’s gross tested income
under § 1.951A–2(c)(3) for Year 1 ($3x),
divided by the total amount of FC’s
distributive share of PRS’s depreciation
deduction with respect to Asset C for Year 1
($5x).
(iii) Partner adjusted basis. Because FC has
no partner-specific QBAI basis with respect
to Asset C, FC’s partner adjusted basis in
Asset C is determined entirely by reference
to FC’s proportionate share of PRS’s
partnership adjusted basis in Asset C,
multiplied by FC’s dual use ratio with
respect to Asset C. Under paragraph
(g)(3)(iii)(A) of this section, FC’s partner
adjusted basis in Asset C is $30x, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset C for Year 1 ($50x),
multiplied by FC’s dual use ratio with
respect to Asset C for Year 1 (60%).
(3) Asset D—(i) Proportionate share. Under
paragraph (g)(4)(i) of this section, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset D is PRS’s partnership
adjusted basis in Asset D for Year 1,
multiplied by FC’s proportionate share ratio
with respect to Asset D for Year 1. Because
all of the depreciation with respect to Asset
D is capitalized to inventory, FC’s
proportionate share ratio with respect to
Asset D is determined entirely by reference
to the depreciation with respect to Asset D
that is capitalized to inventory and included
in cost of goods sold. Therefore, FC’s
proportionate share ratio with respect to
Asset D is 50%, which is the ratio calculated
as the amount of PRS’s section 704(b)
depreciation with respect to Asset D
capitalized to Product A and Product B that
is taken into account in determining FC’s
section 704(b) distributive share of PRS’s
income or loss for Year 1 ($20x), divided by
the total amount of PRS’s section 704(b)
depreciation with respect to Asset D
capitalized to Product A and Product B that
is taken into account in determining PRS’s
section 704(b) income or loss for Year 1

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($40x). Accordingly, under paragraph (g)(4)(i)
of this section, FC’s proportionate share of
PRS’s partnership adjusted basis in Asset D
is $250x ($500x × 0.5).
(ii) Dual use ratio. Because all of the
depreciation with respect to Asset D is
capitalized to inventory, FC’s dual use ratio
with respect to Asset D is determined
entirely by reference to the depreciation with
respect to Asset D that is capitalized to
inventory and included in cost of goods sold.
Therefore, FC’s dual use ratio with respect to
Asset D is 25%, which is the ratio calculated
as the amount of depreciation with respect to
Asset D capitalized to inventory of Product
A and Product B that is taken into account
in determining FC’s tested income for Year
1 ($5x), divided by the total amount of
depreciation with respect to Asset D
capitalized to inventory of Product A and
Product B that is taken into account in
determining FC’s income or loss for Year 1
($20x).
(iii) Partner adjusted basis. Because FC has
no partner-specific QBAI basis with respect
to Asset D, FC’s partner adjusted basis in
Asset D is determined entirely by reference
to FC’s proportionate share of PRS’s
partnership adjusted basis in Asset D,
multiplied by FC’s dual use ratio with
respect to Asset D. Under paragraph
(g)(3)(iii)(A) of this section, FC’s partner
adjusted basis in Asset D is $62.50x, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset D for Year 1 ($250x),
multiplied by FC’s dual use ratio with
respect to Asset D for Year 1 (25%).
(4) Asset E—(i) Proportionate share. Under
paragraph (g)(4)(i) of this section, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset E is PRS’s partnership
adjusted basis in Asset E for Year 1,
multiplied by FC’s proportionate share ratio
with respect to Asset E for Year 1. Because
the depreciation with respect to Asset E is
partly deducted and partly capitalized to
inventory, FC’s proportionate share ratio
with respect to Asset E is determined by
reference to both the depreciation that is
deducted and the depreciation that is
capitalized to inventory and included in cost
of goods sold. Therefore, FC’s proportionate
share ratio with respect to Asset E is 50%,
which is the ratio calculated as the sum
($25x) of the amount of FC’s section 704(b)
distributive share of PRS’s section 704(b)
depreciation deduction with respect to Asset
E for Year 1 ($10x) and the amount of PRS’s
section 704(b) depreciation with respect to
Asset E capitalized to inventory of Product A
and Product B that is taken into account in
determining FC’s section 704(b) distributive
share of PRS’s income or loss for Year 1
($15x), divided by the sum ($50x) of the total
amount of PRS’s section 704(b) depreciation
deduction with respect to Asset E for Year 1
($20x) and the total amount of PRS’s section
704(b) depreciation with respect to Asset E
capitalized to inventory of Product A and
Product B that is taken into account in
determining PRS’s section 704(b) income or
loss for Year 1 ($30x). Accordingly, under
paragraph (g)(4)(i) of this section, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset E is $300x ($600x ×
0.5).

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(ii) Dual use ratio. Because the
depreciation with respect to Asset E is partly
deducted and partly capitalized to inventory,
FC’s dual use ratio with respect to Asset E
is determined by reference to the
depreciation that is deducted and the
depreciation that is capitalized to inventory
and included in cost of goods sold.
Therefore, FC’s dual use ratio with respect to
Asset E is 80%, which is the ratio calculated
as the sum ($20x) of the amount of FC’s
distributive share of PRS’s depreciation
deduction with respect to Asset E that is
allocated and apportioned to FC’s gross
tested income under § 1.951A–2(c)(3) for
Year 1 ($8x) and the amount of depreciation
with respect to Asset E capitalized to
inventory of Product A and Product B that is
taken into account in determining FC’s tested
income for Year 1 ($12x), divided by the sum
($25x) of the total amount of FC’s distributive
share of PRS’s depreciation deduction with
respect to Asset E for Year 1 ($10x) and the
total amount of depreciation with respect to
Asset E capitalized to inventory of Product A
and Product B that is taken into account in
determining FC’s income or loss for Year 1
($15x).
(iii) Partner adjusted basis. Because FC has
no partner-specific QBAI basis with respect
to Asset E, FC’s partner adjusted basis in
Asset E is determined entirely by reference
to FC’s proportionate share of PRS’s
partnership adjusted basis in Asset E,
multiplied by FC’s dual use ratio with
respect to Asset E. Under paragraph
(g)(3)(iii)(A) of this section, FC’s partner
adjusted basis in Asset E is $240x, FC’s
proportionate share of PRS’s partnership
adjusted basis in Asset E for Year 1 ($300x),
multiplied by FC’s dual use ratio with
respect to Asset E for Year 1 (80%).
(5) Partnership QBAI. Under paragraph
(g)(2) of this section, FC’s partnership QBAI
with respect to PRS is $332.50x, the sum of
FC’s partner adjusted basis in Asset C ($30x),
FC’s partner adjusted basis in Asset D
($62.50x), and FC’s partner adjusted basis in
Asset E ($240x). Accordingly, under
paragraph (g)(1) of this section, FC increases
its qualified business asset investment for
Year 1 by $332.50x.
(iv) Example 3: Sole use partnership
specified tangible property; section 743(b)
adjustments—(A) Facts. The facts are the
same as in paragraph (g)(8)(ii)(A) of this
section (the facts in Example 1), except that
there is an average of $40x positive
adjustment to the adjusted basis in Asset A
as of the close of each quarter of PRS’s
taxable year with respect to FC under section
743(b) and an average of $20x negative
adjustment to the adjusted basis in Asset B
as of the close of each quarter of PRS’s
taxable year with respect to FC under section
743(b).
(B) Analysis. Under paragraph (g)(3)(ii)(A)
of this section, FC’s partner adjusted basis in
Asset A is $120x, which is the sum of $80x
(FC’s proportionate share of PRS’s
partnership adjusted basis in Asset A as
illustrated in paragraph (g)(8)(ii)(B)(2) of this
section (paragraph (B)(2) of the analysis in
Example 1)) and $40x (FC’s partner-specific
QBAI basis in Asset A). Under paragraph
(g)(3)(ii)(A) of this section, FC’s partner

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adjusted basis in Asset B is $80x, the sum of
$100x (FC’s proportionate share of the
partnership adjusted basis in the property as
illustrated in paragraph (g)(8)(ii)(B)(2) of this
section (paragraph (B)(2) of the analysis in
Example 1)) and (¥$20x) (FC’s partnerspecific QBAI basis in Asset B). Therefore,
under paragraph (g)(2) of this section, FC’s
partnership QBAI with respect to PRS is
$200x ($120x + $80x). Accordingly, under
paragraph (g)(1) of this section, FC increases
its qualified business asset investment for
Year 1 by $200x.
(v) Example 4: Tested income CFC with
distributive share of loss from a
partnership—(A) Facts. FC owns a 50%
interest in PRS. All section 704(b) and tax
items are identical and are allocated equally
between FC and its other partner. PRS owns
Asset F. None of the depreciation with
respect to Asset F is capitalized to inventory
or other property held for sale. The average
of PRS’s adjusted basis as of the close of each
quarter of PRS’s taxable year in Asset F is
$220x. PRS has $20x of gross income, a $22x
depreciation deduction with respect to Asset
F, and no other income or expense in Year
1. FC’s distributive share of the gross income
is $10x, all of which is includible in FC’s
gross tested income in Year 1, and FC’s
distributive share of PRS’s depreciation
deduction with respect to Asset F is $11x in
Year 1, all of which is allocated and
apportioned to FC’s gross tested income
under § 1.951A–2(c)(3). FC’s distributive
share of loss from PRS is $1x. FC also has $8x
of gross tested income from other sources in
Year 1 and no other deductions. Therefore,
FC has tested income of $7x for Year 1.
(B) Analysis. FC’s partner adjusted basis in
Asset F is $110x, which is the sum of FC’s
proportionate share of the partnership
adjusted basis in the property ($220x × 0.5)
and FC’s partnership-specific QBAI basis in
Asset F ($0). Therefore, FC’s partnership
QBAI with respect to PRS is $110x.
Accordingly, under paragraph (g)(1) of this
section, FC increases its qualified business
asset investment by $110x, notwithstanding
that FC would not be a tested income CFC
but for its $8x of gross tested income from
other sources.
(vi) Example 5: Tested income CFC sale of
partnership interest before CFC inclusion
date—(A) Facts. FC1 owns a 50% interest in
PRS on January 1 of Year 1. On July 1 of Year
1, FC1 sells its entire interest in PRS to FC2.
PRS owns Asset G. The average of PRS’s
adjusted basis as of the close of each quarter
of PRS’s taxable year in Asset G is $100x.
FC1’s section 704(b) distributive share of the
depreciation deduction with respect to Asset
G is 25% with respect to PRS’s entire year.
FC2’s section 704(b) distributive share of the
depreciation deduction with respect to Asset
G is also 25% with respect to PRS’s entire
year. Both FC1’s and FC2’s entire distributive
shares of the depreciation deduction with
respect to Asset G are allocated and
apportioned under § 1.951A–2(c)(3) to FC1’s
and FC2’s gross tested income, respectively,
for Year 1. PRS’s allocations satisfy section
706(d).
(B) Analysis—(1) FC1. Because FC1 owns
an interest in PRS during FC1’s CFC
inclusion year and receives a distributive

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share of partnership items of the partnership
under section 706(d), FC1 has partnership
QBAI with respect to PRS in the amount
determined under paragraph (g)(2) of this
section. Under paragraph (g)(3)(i) of this
section, FC1’s partner adjusted basis in Asset
G is $25x, the product of $100x (the
partnership’s adjusted basis in the property)
and 25% (FC1’s section 704(b) distributive
share of depreciation deduction with respect
to Asset G). Therefore, FC1’s partnership
QBAI with respect to PRS is $25x.
Accordingly, under paragraph (g)(1) of this
section, FC1 increases its qualified business
asset investment by $25x for Year 1.
(2) FC2. FC2’s partner adjusted basis in
Asset G is also $25x, the product of $100x
(the partnership’s adjusted basis in the
property) and 25% (FC2’s section 704(b)
distributive share of depreciation deduction
with respect to Asset G). Therefore, FC2’s
partnership QBAI with respect to PRS is
$25x. Accordingly, under paragraph (g)(1) of
this section, FC2 increases its qualified
business asset investment by $25x for Year 1.
(vii) Example 6: Partnership adjusted
basis; distribution of property in liquidation
of partnership interest—(A) Facts. FC1, FC2,
and FC3 are equal partners in PRS, a
partnership. FC1 and FC2 each has an
adjusted basis of $100x in its partnership
interest. FC3 has an adjusted basis of $50x in
its partnership interest. PRS has a section 754
election in effect. PRS owns Asset H with a
fair market value of $50x and an adjusted
basis of $0, Asset I with a fair market value
of $100x and an adjusted basis of $100x, and
Asset J with a fair market value of $150x and
an adjusted basis of $150x. Asset H and Asset
J are tangible property, but Asset I is not
tangible property. PRS distributes Asset I to
FC3 in liquidation of FC3’s interest in PRS.
None of FC1, FC2, FC3, or PRS recognizes
gain on the distribution. Under section
732(b), FC3’s adjusted basis in Asset I is
$50x. PRS’s adjusted basis in Asset H is
increased by $50x to $50x under section
734(b)(1)(B), which is the amount by which
PRS’s adjusted basis in Asset I immediately
before the distribution exceeds FC3’s
adjusted basis in Asset I.
(B) Analysis. Under paragraph (g)(6) of this
section, PRS’s adjusted basis in Asset H is
determined without regard to any
adjustments under section 734(b) except for
adjustments under section 734(b)(1)(B) or
section 734(b)(2)(B) that are attributable to
distributions of tangible property and for
adjustments under section 734(b)(1)(A) or
734(b)(2)(A). The adjustment to the adjusted
basis in Asset H is under section 734(b)(1)(B)
and is attributable to the distribution of Asset
I, which is not tangible property.
Accordingly, for purposes of applying
paragraph (g)(1) of this section, PRS’s
adjusted basis in Asset H is $0.

(h) Anti-avoidance rules related to
certain transfers of property—(1)
Disregard of adjusted basis in specified
tangible property held temporarily—(i)
In general. For purposes of determining
a controlled foreign corporation’s
aggregate adjusted bases in specified
tangible property as of the close of a
quarter (tested quarter close), the

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adjusted basis in specified tangible
property is disregarded as of the tested
quarter close if the controlled foreign
corporation (acquiring CFC) acquires the
property temporarily before the tested
quarter close with a principal purpose
of increasing the deemed tangible
income return of a U.S. shareholder
(applicable U.S. shareholder) for a U.S.
shareholder year, and the holding of the
property by the acquiring CFC as of the
tested quarter close would, without
regard to this paragraph (h)(1)(i),
increase the deemed tangible income
return of the applicable U.S.
shareholder for the U.S. shareholder
inclusion year.
(ii) Disregard of first quarter close.
The adjusted basis in specified tangible
property may be disregarded under
paragraph (h)(1)(i) of this section for
purposes of multiple tested quarter
closes that follow an acquisition and on
which the acquiring CFC holds the
property. However, if the holding of
specified tangible property would,
without regard to paragraph (h)(1)(i) of
this section, increase the deemed
tangible income return of an applicable
U.S. shareholder because the adjusted
basis in such property is taken into
account for only one additional quarter
close of a tested income CFC of the
applicable U.S. shareholder in
determining the deemed tangible
income return of the applicable U.S.
shareholder of the U.S. shareholder
inclusion year, the adjusted basis in the
property is disregarded for purposes of
determining the acquiring CFC’s
aggregate adjusted bases in specified
tangible property only as of the first
tested quarter close that follows the
acquisition.
(iii) Safe harbor for certain transfers
involving CFCs. The holding of specified
tangible property as of a tested quarter
close does not increase the deemed
tangible income return of an applicable
U.S. shareholder within the meaning of
paragraph (h)(1)(i) of this section if each
of the following conditions is satisfied
with respect to the acquisition and
subsequent transfer of property by the
acquiring CFC—
(A) A controlled foreign corporation
(predecessor CFC) holds the property on
a quarter close of the predecessor CFC
(preceding quarter close) that occurs on
the same date as the last quarter close
of the acquiring CFC preceding the
acquisition.
(B) A controlled foreign corporation
(successor CFC) holds the property on a
quarter close of the successor CFC
(succeeding quarter close) that occurs
on the same date as the first quarter
close of the acquiring CFC following the
subsequent transfer.

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(C) The proportion of the stock that
the applicable U.S. shareholder owns
(within the meaning of section 958(a)) of
the acquiring CFC on the tested quarter
close does not exceed the proportion of
the stock that the applicable U.S.
shareholder owns of either the
predecessor CFC on the preceding
quarter close or the successor CFC on
the succeeding quarter close; and
(D) Each of the predecessor CFC and
the successor CFC is a tested income
CFC for its CFC inclusion year that
includes the date of the tested quarter
close.
(iv) Determination of principal
purpose and transitory holding—(A)
Presumption for ownership less than 12
months. For purposes of paragraph
(h)(1)(i) of this section, specified
tangible property is presumed to be
acquired temporarily with a principal
purpose of increasing the deemed
tangible income return of an applicable
U.S. shareholder for a U.S. shareholder
inclusion year if the property is held by
the acquiring CFC for less than 12
months and the holding of the property
by the acquiring CFC as of the tested
quarter close would have the effect of
increasing the deemed tangible income
return of the applicable U.S.
shareholder for a U.S. shareholder
inclusion year. The presumption
described in the preceding sentence
may be rebutted only if the facts and
circumstances clearly establish that the
subsequent transfer of the property by
the acquiring CFC was not contemplated
when the property was acquired by the
acquiring CFC and that a principal
purpose of the acquisition of the
property was not to increase the deemed
tangible income return of the applicable
U.S. shareholder for a U.S. shareholder
inclusion year. In order to rebut the
presumption, a statement must be
attached to the Form 5471 filed by the
taxpayer for the taxable year of the CFC
in which the subsequent transfer occurs
and include any information required
by applicable administrative
announcements, forms or instructions.
The statement must explain the facts
and circumstances supporting the
rebuttal and be in accordance with any
rules provided in forms and
instructions.
(B) Presumption for ownership greater
than 36 months. For purposes of
paragraph (h)(1)(i) of this section,
specified tangible property is presumed
not to be acquired temporarily with a
principal purpose of increasing the
deemed tangible income return of an
applicable U.S. shareholder for a U.S.
shareholder inclusion year if the
property is held by the acquiring CFC
for more than 36 months. The

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presumption described in the preceding
sentence may be rebutted only if the
facts and circumstances clearly establish
that the subsequent transfer of the
property by the acquiring CFC was
contemplated when the property was
acquired by the acquiring CFC and that
a principal purpose of the acquisition of
the property was to increase the deemed
tangible income return of the applicable
U.S. shareholder for a U.S. shareholder
inclusion year.
(v) Determination of holding period.
For purposes of this paragraph (h)(1),
the period during which an acquiring
CFC holds specified tangible property is
determined without regard to section
1223.
(vi) Treatment as single applicable
U.S. shareholder. For purposes of this
paragraph (h)(1), all U.S. persons that
are related persons are treated as a
single applicable U.S. shareholder. For
purposes of the preceding sentence, U.S.
persons are related if they bear a
relationship described in section 267(b)
or 707(b) immediately before or
immediately after a transaction.
(vii) Examples. The following
examples illustrate the application of
this paragraph (h)(1).
(A) Facts. Except as otherwise stated,
the following facts are assumed for
purposes of the examples:
(1) USP is a domestic corporation.
(2) CFC1, CFC2 and CFC3 are tested
income CFCs.
(3) R is unrelated to USP.
(4) All persons use the calendar year
as their taxable year.
(5) Asset A is specified tangible
property.
(6) Both Year 1 and Year 2 begin on
or after January 1, 2018, and have 365
days.
(7) USP has no specified interest
expense (as defined in § 1.951A–
1(c)(3)(iii)).
(B) Example 1: Qualification for safe
harbor—(1) Facts. USP owns all of the stock
of CFC1, which owns all of the stock of
CFC2, which owns all the stock of CFC3. As
of January 1, Year 1, CFC1 owns Asset A,
which is specified tangible property. On
December 30, Year 1, CFC1 transfers Asset A
to CFC2. On April 10, Year 2, CFC2 transfers
Asset A to CFC3. CFC3 holds Asset A for the
rest of Year 2.
(2) Analysis. Under the safe harbor of
paragraph (h)(1)(iii) of this section, CFC2’s
holding of Asset A as of each of the
December 31, Year 1 tested quarter close and
the March 31, Year 2 tested quarter close
does not increase the deemed tangible
income return of USP, the applicable United
States shareholder, for Year 1 or Year 2
because each of the requirements in
paragraphs (h)(1)(iii)(A) through (D) of this
section is satisfied. The requirement in
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satisfied because CFC1, a predecessor CFC,
held Asset A on September 30, Year 1, a
quarter close of CFC1 that occurs on the same
date as the last quarter close of CFC2, the
acquiring CFC, preceding the December 30,
Year 1 acquisition of Asset A. The
requirement in paragraph (h)(1)(iii)(B) of this
section is satisfied because CFC3, a successor
CFC, holds Asset A on June 30, Year 2, a
quarter close of CFC3 that occurs on the same
date as the first quarter close of CFC2
following April 10, Year 2, the date of the
subsequent transfer of Asset A. The
requirement in paragraph (h)(1)(iii)(C) of this
section is satisfied because the proportion of
stock that USP, the applicable U.S.
shareholder, owns (within the meaning of
section 958(a)) of CFC2, the acquiring CFC,
on each of the December 31, Year 1 tested
quarter close and the March 31, Year 2 tested
quarter close (100%), does not exceed the
proportion of the stock that USP owns of
either CFC1 (100%) on the preceding quarter
close (September 30, Year 1) or of CFC3
(100%) on the succeeding quarter close (June
30, Year 2). Finally, the requirement in
paragraph (h)(1)(iii)(D) of this section is
satisfied because each of CFC1 and CFC3 is
a tested income CFC for Year 1 and Year 2,
the CFC inclusion years that include the
December 31, Year 1 tested quarter close and
the March 31, Year 2 tested quarter close.
Accordingly, paragraph (h)(1)(i) of this
section does not apply to disregard the
adjusted basis in Asset A in determining
CFC2’s aggregate adjusted basis in specified
tangible property as of December 31, Year 1,
or March 30, Year 2.
(C) Example 2: Transfers between CFCs
with different taxable year ends—(1) Facts.
The facts are the same as in paragraph
(h)(1)(vii)(B)(1) of this section (the facts in
Example 1), except that CFC1 has a taxable
year ending November 30, and the facts and
circumstances do not clearly establish that
the April 10, Year 2 transfer of Asset A by
CFC2 was not contemplated when Asset A
was acquired by CFC2 and that a principal
purpose of the acquisition of the property
was not to increase the deemed tangible
income return of USP, the applicable U.S.
shareholder.
(2) Analysis. CFC2’s holding of Asset A as
of each of the December 31, Year 1 tested
quarter close and the March 31, Year 2 tested
quarter close does not satisfy the safe harbor
under paragraph (h)(1)(iii) of this section
because CFC1, the predecessor CFC, does not
hold Asset A on a quarter close of CFC1 that
occurs on the same date as the September 30,
Year 1, quarter close of CFC2, the acquiring
CFC, which is the last quarter close of CFC2
preceding the December 30, Year 1
acquisition of Asset A. In addition, because
CFC2 held Asset A for less than 12 months
(from December 31, Year 1, until April 10,
Year 2), the presumption in paragraph
(h)(1)(iv)(A) of this section applies such that
CFC2 is presumed to have acquired Asset A
temporarily with a principal purpose of
increasing the deemed tangible income
return of USP for the shareholder inclusion
year, and the facts and circumstances do not
clearly establish that CFC2 did not acquire
Asset A with such a principal purpose.
Because CFC2 holds Asset A as of December

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31, Year 1, the tested quarter close, the
adjusted basis in Asset A would be, without
regard to paragraph (h)(1)(i) of this section,
taken into account for purposes of
determining USP’s deemed tangible income
return for its Year 1 taxable year as of five
quarter closes (CFC1’s quarter closes on
February 28, May 31, August 31, and
November 30, and CFC2’s quarter close on
December 31). If instead CFC1 had retained
Asset A during the period CFC2 temporarily
held the asset and had transferred Asset A
directly to CFC3 on January 10, Year 2, the
adjusted basis in Asset A would have been
taken into account for purposes of
determining USP’s deemed tangible income
return for its Year 1 taxable year as of only
four quarter closes (CFC1’s quarter closes on
February 28, May 30, August 30, and
November 30). Under paragraph (h)(1)(ii) of
this section, because the adjusted basis in
Asset A would (without regard to paragraph
(h)(1)(i) of this section) be taken into account
for only one additional quarter close of a
tested income CFC of USP in determining
USP’s deemed tangible income return for
Year 1 and Year 2, the adjusted basis in Asset
A is disregarded for purposes of determining
CFC’s aggregate adjusted bases in specified
tangible property only as of December 31,
Year 1, the first tested quarter close that
follows the acquisition. Accordingly, under
paragraph (h)(1)(i) of this section, the
adjusted basis in Asset A is disregarded in
determining CFC2’s aggregate adjusted basis
in specified tangible property as of December
31, Year 1.
(D) Example 3: Acquisition from unrelated
person—(1) Facts. USP owns all of the stock
of CFC1 and CFC2. CFC1 has a taxable year
ending November 30. On October 30, Year 1,
CFC1 acquires Asset B from R. On December
30, Year 1, CFC1 transfers Asset B to CFC2.
The facts and circumstances do not clearly
establish that the December 31, Year 1,
transfer of Asset B by CFC1 was not
contemplated when Asset B was acquired by
CFC1 and that a principal purpose of the
acquisition of the property was not to
increase the deemed tangible income return
of USP, the applicable U.S. shareholder.
(2) Analysis. CFC1’s holding of Asset B as
of the November 30, Year 1 tested quarter
close does not satisfy the safe harbor under
paragraph (h)(1)(iii) of this section because
the requirements in paragraphs (h)(1)(iii)(A)
through (D) of this section are not satisfied.
Because CFC1 held Asset B for less than 12
months (from October 30, Year 1, until
December 30, Year 1), the presumption in
paragraph (h)(1)(iv)(A) of this section applies
such that CFC1 is presumed to have held
Asset B temporarily with a principal purpose
of increasing the deemed tangible income
return of USP for the taxable year, and the
facts and circumstances do not clearly
establish that CFC1 did not acquire Asset B
with a principal purpose of increasing the
deemed tangible income return of USP.
Because CFC1 holds Asset B as of November
30, Year 1, the adjusted basis in Asset B
would be, without regard to paragraph
(h)(1)(i) of this section, taken into account for
purposes of determining USP’s deemed
tangible income return for its Year 1 taxable
year as of two quarter closes (CFC1’s quarter

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close on November 30, Year 1, and CFC2’s
quarter close on December 31, Year 1). If
instead CFC2 had acquired Asset B directly
from R, the adjusted basis in Asset B would
have been taken into account for purposes of
determining USP’s deemed tangible income
return for its Year 1 taxable year as of only
one quarter close (CFC2’s quarter close on
December 31, Year 1). Accordingly, under
paragraph (h)(1)(i) of this section, the
adjusted basis in Asset B is disregarded in
determining CFC1’s aggregate adjusted basis
in specified tangible property as of November
30, Year 1.
(E) Example 4: Acquisitions from tested
loss CFCs—(1) Facts. USP owns all of the
stock of CFC1 and CFC2. As of January 1,
Year 1, CFC1 owns Asset C. On March 30,
Year 1, CFC1 transfers Asset C to CFC2. For
Year 1, CFC1 is a tested loss CFC and CFC2
is a tested income CFC. On March 30, Year
2, CFC2 transfers Asset C back to CFC1. For
Year 2, both CFC1 and CFC2 are tested
income CFCs. A principal purpose of CFC2
holding Asset C as of March 31, Year 1, June
30, Year 1, September 30, Year 1, and
December 31, Year 1, was to increase USP’s
deemed tangible income return.
(2) Analysis. CFC2’s holding of Asset C as
of March 31, Year 1, June 30, Year 1,
September 30, Year 1, and December 31, Year
1 does not satisfy the safe harbor under
paragraph (h)(1)(iii) of this section because
CFC1 is not a tested income CFC for Year 1
and thus the requirement in paragraph
(h)(1)(iii)(D) of this section is not satisfied.
Because CFC2 acquired Asset C before, and
temporarily held as of, March 31, Year 1,
June 30, Year 1, September 30, Year 1,
December 31, Year 1 and the holding of the
property by CFC2 as of each such tested
quarter close would increase the deemed
tangible income return of USP, under
paragraph (h)(1)(i) of this section, the
adjusted basis in Asset C is disregarded in
determining CFC2’s aggregate adjusted basis
in specified tangible property as of each of
March 31, Year 1, June 30, Year 1, September
30, Year 1, and December 31, Year 1.

(2) Disregard of adjusted basis in
property transferred during the
disqualified period—(i) Operative
rules—(A) In general. For purposes of
determining the qualified business asset
investment of a tested income CFC for
any CFC inclusion year, disqualified
basis in property is disregarded.
(B) Application to dual use property.
In the case of dual use property (as
defined in paragraph (d)(2) of this
section), paragraph (h)(2)(i)(A) of this
section applies by reducing the amount
of the adjusted basis in the property
treated as adjusted basis in specified
tangible property for the CFC inclusion
year under paragraph (d)(1) of this
section by the amount of the
disqualified basis in the property. For
purposes of determining the amount
described in paragraph (d)(1) of this
section, including for purposes of
determining whether tangible property
is dual use property within the meaning

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of paragraph (d)(2) of this section and
for purposes of determining the dual use
ratio with respect to dual use property
under paragraph (d)(3) of this section,
the rules of § 1.951A–2(c)(5) are not
taken into account.
(C) Application to partnership
specified tangible property. In the case
of partnership specified tangible
property (as defined in paragraph (g)(5)
of this section), paragraph (h)(2)(i)(A) of
this section applies by reducing a tested
income CFC’s partner adjusted basis
with respect to partnership specified
tangible property under paragraph
(g)(3)(i) of this section by the tested
income CFC’s share of the disqualified
basis in the partnership specified
tangible property. A tested income
CFC’s share of disqualified basis in
partnership specified tangible property
is the sum of the tested income CFC’s
proportionate share of the disqualified
basis in the partnership specified
tangible property determined under the
principles of paragraph (g)(4) of this
section and the tested income CFC’s
partner-specific QBAI basis in the
property determined under the
principles of paragraph (g)(7) of this
section that is disqualified basis. For
purposes of determining the amount
described in paragraph (g)(3)(i) of this
section, including for purposes of
determining whether partnership
specified tangible property is sole use
partnership property within the
meaning of paragraph (g)(3)(ii)(B) of this
section or dual use partnership property
within the meaning of paragraph
(g)(3)(iii)(B) of this section and for
purposes of determining the dual use
ratio with respect to dual use
partnership property under the
principles of paragraph (d)(3) of this
section, the rules of § 1.951A–2(c)(5) are
not taken into account.
(ii) Determination of disqualified
basis—(A) In general. Subject to the
adjustments described in paragraph
(h)(2)(ii)(B) of this section, the term
disqualified basis means, with respect to
property (other than property described
in section 1221(a)(1)), the excess (if any)
of the property’s adjusted basis
immediately after a disqualified
transfer, over the sum of the property’s
adjusted basis immediately before the
disqualified transfer and the qualified
gain amount with respect to the
disqualified transfer. For this purpose,
the adjusted basis in property
immediately after a disqualified transfer
includes a positive adjustment to the
adjusted basis in partnership property
with respect to a partner under section
734(b)(1)(A) or 743(b).
(B) Adjustments to disqualified
basis—(1) Reduction or elimination of

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disqualified basis—(i) In general. Except
to the extent provided in this paragraph
(h)(2)(ii)(B)(1), disqualified basis in
property is reduced or eliminated to the
extent that such basis reduces taxable
income through, for example,
depreciation, amortization, and taxable
sales or exchanges, or is otherwise
reduced or eliminated, for example,
through the application of section 362(e)
or 732(a) or (b). In such circumstances,
in the case of property with disqualified
basis and adjusted basis other than
disqualified basis, disqualified basis in
the property is reduced or eliminated in
the same proportion that the
disqualified basis bears to the total
adjusted basis in the property. However,
in the case of a loss from a taxable sale
or exchange, disqualified basis in the
property is reduced or eliminated to the
extent the loss is treated as attributable
to disqualified basis under § 1.951A–
2(c)(5)(ii).
(ii) Exception for related party
transfers. Disqualified basis in property
is not reduced or eliminated by reason
of any transfer of the property to a
related person, except to the extent any
loss recognized on the transfer of such
property is treated as attributable to the
disqualified basis under § 1.951A–
2(c)(5)(ii), or the basis is reduced or
eliminated in a nonrecognition
transaction within the meaning of
section 7701(a)(45), for example,
through the application of section 362(e)
or 732(a) or (b).
(2) Increase to disqualified basis for
nonrecognition transactions—(i)
Increase corresponding to adjustments
in other property. If the adjusted basis
in property is increased by reason of a
nonrecognition transaction (as defined
in section 7701(a)(45)), for example,
through the application of section
732(b) or section 734(b)(1)(B), the
disqualified basis in the property is
increased by a proportionate share of
the aggregate reduction to the
disqualified basis (if any) in one or more
other properties by reason of such
nonrecognition transaction under
paragraph (h)(2)(ii)(B)(1) of this section.
(ii) Exchanged basis property.
Disqualified basis in exchanged basis
property (as defined in section
7701(a)(44)) includes the amount of the
disqualified basis in any property by
reference to which the adjusted basis in
the exchanged basis property was
determined, in whole or in part,
provided that the nonrecognition
transaction giving rise to such
exchanged basis did not also increase
the disqualified basis in the exchanged
basis property under paragraph
(h)(2)(ii)(B)(2)(i) of this section.

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(iii) Increase by reason of section
732(d). Disqualified basis in property is
increased by the amount of a positive
adjustment to the adjusted basis in
property under section 732(d) to the
extent that, if an election provided in
section 754 were in effect at the time of
the acquisition described in section
732(d), the adjusted basis in the
property immediately after the
acquisition would have been
disqualified basis under paragraph
(h)(2)(ii)(A) of this section.
(3) Election to eliminate disqualified
basis—(i) In general. If an election made
under this paragraph (h)(2)(ii)(B)(3) with
respect to a controlled foreign
corporation or a partnership is effective,
the adjusted basis in each property with
disqualified basis held by the controlled
foreign corporation or the partnership is
reduced by the amount of the
disqualified basis and the disqualified
basis in each property is eliminated.
The reduction of the adjusted basis and
the elimination of the disqualified basis
described in the preceding sentence is
treated as occurring immediately after
the disqualified transfer of each
property.
(ii) Manner of making the election
with respect to a controlled foreign
corporation. The election described in
this paragraph (h)(2)(ii)(B)(3) with
respect to a controlled foreign
corporation is made by each controlling
domestic shareholder (as defined in
§ 1.964–1(c)(5)) of the controlled foreign
corporation by filing a statement as
described in § 1.964–1(c)(3)(ii) with its
income tax return for its taxable year
that includes the last day of the taxable
year of the controlled foreign
corporation that includes the
disqualified transfer and follow the
notice requirements of § 1.964–
1(c)(3)(iii). If the return for the taxable
year has been filed before July 22, 2019,
the statement must be included with an
amended return filed within 180 days
June 21, 2019. The election statement
must be filed in accordance with the
rules provided in forms or instructions.
(iii) Manner of making the election
with respect to a partnership. The
election described in this paragraph
(h)(2)(ii)(B)(3) with respect to a
partnership is made by the partnership
by filing a statement as described in
§ 1.754–1(b)(1) for the taxable year that
includes the date of the disqualified
transfer. If a return for the taxable year
has been filed before July 22, 2019, the
statement must be included with an
amended return filed within 180 days of
June 21, 2019. The election statement
must be filed in accordance with the
rules provided in forms or instructions.

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(iv) Conditions of making an election.
An election under this paragraph
(h)(2)(ii)(B)(3) with respect to a
controlled foreign corporation or a
partnership is not effective unless the
election is made with respect to each
controlled foreign corporation or
partnership that holds property with
disqualified basis and that is related
(within the meaning of section 267(b)
and 707(b)) to the controlled foreign
corporation or partnership and unless
any return that has been filed that is
inconsistent with the elimination of the
adjusted basis and disqualified basis
immediately after the disqualified
transfer by reason of this paragraph
(h)(2)(ii)(B)(3) is amended to take into
account the elimination of the adjusted
basis and disqualified basis immediately
after the disqualified transfer by reason
of this paragraph (h)(2)(ii)(B)(3).
(C) Definitions related to disqualified
basis. The following definitions apply
for purposes of this paragraph (h)(2).
(1) Disqualified period. The term
disqualified period means, with respect
to a transferor CFC, the period
beginning on January 1, 2018, and
ending as of the close of the transferor
CFC’s last taxable year that is not a CFC
inclusion year. A transferor CFC that
has a CFC inclusion year beginning
January 1, 2018, has no disqualified
period.
(2) Disqualified transfer. The term
disqualified transfer means a transfer of
property during a transferor CFC’s
disqualified period by the transferor
CFC to a related person in which gain
was recognized, in whole or in part, by
the transferor CFC.
(3) Qualified gain amount. The term
qualified gain amount means, with
respect to a disqualified transfer by a
transferor CFC, the sum of the following
amounts:
(i) The amount of gain recognized by
the transferor CFC on the disqualified
transfer of property that is subject to
Federal income tax under section 882
(except to the extent the gain is exempt
from tax pursuant to an applicable
treaty obligation of the United States);
and
(ii) Any United States shareholder’s
pro rata share of the gain recognized by
the transferor CFC on the disqualified
transfer of property (determined without
regard to properly allocable deductions)
taken into account in determining the
United States shareholder’s inclusion
under section 951(a)(1)(A), excluding
any amount that is described in
paragraph (h)(2)(ii)(C)(3)(i) of this
section.
(4) Related person. The term related
person means, with respect to a person
that transfers property, any person that

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bears a relationship to such person
described in section 267(b) or 707(b)
immediately before or immediately after
the transfer.
(5) Transfer. The term transfer
includes any disposition of property,
including any sale, exchange,
contribution, or distribution of property,
and includes an indirect transfer. For
example, a transfer of an interest in a
partnership is treated as an indirect
transfer of the property of the
partnership and a transfer by or to a
partnership is treated as an indirect
transfer by or to its partners. In addition,
a distribution of property to a partner
with respect to which gain is recognized
to the distributee partner under section
731(a)(1) is treated as an indirect
transfer of the property of the
partnership.
(6) Transferor CFC. The term
transferor CFC means any controlled
foreign corporation that transfers
property during the disqualified period
of the controlled foreign corporation.
(iii) Examples. The following
examples illustrate the application of
this paragraph (h)(2).
(A) Example 1: Sale of asset; disqualified
period—(1) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2, each a controlled foreign
corporation. Both USP and CFC2 use the
calendar year as their taxable year. CFC1 uses
a taxable year ending November 30. On
November 1, 2018, before the start of its first
CFC inclusion year, CFC1 sells Asset A,
which has an adjusted basis of $10x in the
hands of CFC1, to CFC2 in exchange for
$100x of cash. CFC1 recognizes $90x of gain
as a result of the sale ($100x ¥ $10x), $30x
of which is foreign base company income.
USP includes in gross income under section
951(a)(1)(A) its pro rata share of the subpart
F income of $30x. CFC1’s gain is not
otherwise subject to U.S. tax or taken into
account in determining USP’s inclusion
under section 951(a)(1)(A).
(2) Analysis. The transfer of Asset A is a
disqualified transfer of Asset A because it is
a transfer of property (other than property
described in section 1221(a)(1)) by CFC1;
CFC1 and CFC2 are related persons; and the
transfer occurs during the disqualified
period, the period that begins on January 1,
2018, and ends the last day before the first
CFC inclusion year of CFC1 (November 30,
2018). Accordingly, under paragraph
(h)(2)(ii)(A) of this section, the disqualified
basis in Asset A immediately after the
disqualified transfer is $60x, the excess of
CFC2’s adjusted basis in Asset A
immediately after the disqualified transfer
($100x), over the sum of CFC1’s adjusted
basis in Asset A immediately before the
transfer ($10x) and USP’s pro rata share of
the gain recognized by CFC1 on the transfer
of the property taken into account by USP
under section 951(a)(1)(A) ($30x).
(B) Example 2: Sale of asset; no
disqualified period—(1) Facts. The facts are
the same as in paragraph (h)(2)(iii)(A)(1) of

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this section (the facts in Example 1), except
that CFC1 uses the calendar year as its
taxable year.
(2) Analysis. Because CFC1 has a taxable
year beginning January 1, 2018, CFC1 has no
disqualified period. Accordingly, the
property was not transferred during a
disqualified period of CFC1, and there is no
disqualified basis with respect to the
property.
(C) Example 3: Sale of partnership
interest—(1) Facts. USP, a domestic
corporation, owns all of the stock of CFC1,
CFC2, and CFC3, each a controlled foreign
corporation. CFC1 and CFC2 are equal
partners in PRS, a partnership. PRS owns
Asset B with an adjusted basis of $20x and
a fair market value of $100x. PRS has a
section 754 election in effect. USP, CFC2,
and CFC3 all use the calendar year as their
taxable year. CFC1 uses a taxable year ending
November 30. On November 1, 2018, before
the start of its first CFC inclusion year, CFC1
sells its interest in the partnership to CFC3
for $50x of cash. CFC1 has an adjusted basis
of $10x in its partnership interest, and thus
CFC1 recognizes $40x of gain as a result of
the sale ($50x ¥ $10x), none of which is
foreign base company income or otherwise
subject to U.S. tax. As a result of the sale,
there is a $40x adjustment to the adjusted
basis in Asset B with respect to CFC3 under
section 743(b).
(2) Analysis. The transfer of the PRS
partnership interest is a disqualified transfer
of Asset B because it is an indirect transfer
of property (other than property described in
section 1221(a)(1)) by CFC1; CFC1 and CFC3
are related persons; and the transfer occurs
during the disqualified period, the period
that begins on January 1, 2018, and ends the
last day before the first CFC inclusion year
of CFC1 (November 30, 2018). Accordingly,
under paragraph (h)(2)(ii)(A) of this section,
the disqualified basis in Asset B immediately
after the disqualified transfer is $40x, the
excess of CFC3’s share of adjusted basis in
Asset B immediately after the disqualified
transfer ($50x), taking into account the basis
adjustment with respect to CFC3 under
section 743(b), over CFC1’s share of adjusted
basis in the property immediately before the
transfer ($10x).
(D) Example 4: Distribution of property in
liquidation of partnership interest—(1) Facts.
FC1, FC2, and FC3 are controlled foreign
corporations that are equal partners in PRS,
a partnership. FC1’s adjusted basis in its
partnership interest in PRS is $0, FC2’s basis
is $50x, and FC3’s basis is $50x. PRS has a
section 754 election in effect. PRS owns
Asset C with a fair market value of $50x and
an adjusted basis of $0, Asset D with a fair
market value of $50x and an adjusted basis
of $50x, and Asset E with a fair market value
of $50x and an adjusted basis of $50x, and
all the adjusted basis in Asset D and Asset
E is disqualified basis. PRS distributes Asset
C to FC3 in liquidation of FC3’s interest in
PRS. None of FC1, FC2, FC3, or PRS
recognizes gain on the distribution. Under
section 732(b), FC3’s adjusted basis in Asset
C is $50x. PRS’s adjusted bases in Asset D
and Asset E are decreased, in the aggregate,
by $50x under section 734(b)(2)(B), which is
the amount by which FC3’s adjusted basis in

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Asset C exceeds PRS’s adjusted basis in Asset
C immediately before the distribution.
(2) Analysis. The distribution of Asset C is
a nonrecognition transaction under section
7701(a)(45). Under paragraph
(h)(2)(ii)(B)(1)(i) of this section, the
disqualified bases in Asset D and Asset E are
reduced, in the aggregate, by $50x. Further,
under paragraph (h)(2)(ii)(B)(2)(i) of this
section, the disqualified basis in Asset C is
increased by $50x, the aggregate reduction to
the disqualified basis in Asset D and Asset
E.
(E) Example 5: Distribution of property to
a partner in basis reduction transaction—(1)
Facts. The facts are the same as in paragraph
(h)(2)(iii)(D)(1) of this section (the facts in
Example 4), except PRS distributes Asset D
to FC1. Under section 732(a), FC1’s adjusted
basis in Asset D is $0. PRS’s adjusted basis
in Asset C is increased by $50x under section
734(b)(1)(B), which is the amount by which
PRS’s adjusted basis in Asset D immediately
before the distribution exceeds FC1’s
adjusted basis in Asset D under section
732(a).
(2) Analysis. The distribution of Asset D is
a nonrecognition transaction under section
7701(a)(45). Under paragraph
(h)(2)(ii)(B)(1)(i) of this section, the
disqualified basis in Asset D is reduced by
$50x. Further, under paragraph
(h)(2)(ii)(B)(2)(i) of this section, the
disqualified basis in Asset C is increased by
$50x, the reduction to the disqualified basis
in Asset D.
(F) Example 6: Dual use property with
disqualified basis—(1) Facts. FS is a tested
income CFC and a wholesale distributor of
Product A. FS owns trucks that deliver
Product A. The trucks are specified tangible
property. In Year 1, FS earns $250x in total
gross income from inventory sales of Product
A, $200x of which is included in gross tested
income. The trucks have an average adjusted
basis for Year 1 of $4,000x, of which $2,500x
is disqualified basis. FS does not capitalize
depreciation with respect to the trucks to
inventory or other property held for sale. The
depreciation deduction with respect to the
trucks is $20x, $15x of which would be
allocated and apportioned to gross tested
income under § 1.951A–2(c)(3) without
regard to § 1.951A–2(c)(5).
(2) Analysis. Because the trucks are used in
both the production of gross tested income
and the production of gross income that is
not gross tested income in Year 1, the trucks
are dual use property within the meaning of
paragraph (d)(2) of this section. Under
paragraph (h)(2)(i)(A) of this section, the
disqualified basis in the trucks is disregarded
for purposes of determining FS’s qualified
business asset investment for Year 1. Under
paragraph (h)(2)(i)(B) of this section,
paragraph (h)(2)(i)(A) of this section applies
by reducing the amount of FS’s adjusted
basis in the trucks treated as adjusted basis
in specified tangible property for Year 1
under paragraph (d)(1) of this section
(determined without regard to § 1.951A–
2(c)(5)) by the amount of the disqualified
basis in the trucks. Without regard to
§ 1.951A–2(c)(5), FS’s adjusted basis in the
trucks treated as adjusted basis in specified
tangible property for Year 1 under paragraph

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(d)(1) of this section is FS’s adjusted basis in
the trucks multiplied by FS’s dual use ratio
with respect to the trucks for Year 1. Because
none of the depreciation with respect to the
trucks is capitalized into inventory or other
property held for sale, FS’s dual use ratio
with respect to the trucks is determined
entirely by reference to the depreciation
deduction with respect to the trucks.
Therefore, under paragraph (d)(3) of this
section, without regard to § 1.951A–2(c)(5),
FS’s dual use ratio with respect to the trucks
for Year 1 is 75%, which is FS’s depreciation
deduction with respect to the trucks that is
allocated and apportioned to gross tested
income under § 1.951A–2(c)(3) for Year 1
($15x), divided by FS’s depreciation
deduction with respect to the trucks for Year
1 ($20x). Accordingly, paragraph (d)(1) of
this section, without regard to paragraph
(h)(2)(i)(A) of this section, FS’s adjusted basis
in the trucks treated as adjusted basis in
specified tangible property is $3,000x
($4,000x × 0.75). Under paragraph (h)(2)(i)(A)
and (B) of this section, the amount of the
adjusted basis in the trucks treated as
adjusted basis in specified tangible property
is reduced by the $2,500x of disqualified
basis in the trucks. Accordingly, $500x
($3,000x ¥ $2,500x) of FS’s average adjusted
basis in the trucks is taken into account
under paragraph (b) of this section in
determining FS’s qualified business asset
investment for Year 1.

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§ 1.951A–4 Tested interest expense and
tested interest income.

(a) Scope. This section provides rules
for determining the tested interest
expense and tested interest income of a
controlled foreign corporation for
purposes of determining a United States
shareholder’s specified interest expense
under § 1.951A–1(c)(3)(iii). Paragraph
(b) of this section provides definitions
related to tested interest expense and
tested interest income. Paragraph (c) of
this section provides examples
illustrating these definitions and the
application of § 1.951A–1(c)(3)(iii). The
amount of specified interest expense
determined under § 1.951A–1(c)(3)(iii)
and this section is the amount of
interest expense described in section
951A(b)(2)(B).
(b) Definitions related to specified
interest expense—(1) Tested interest
expense—(i) In general. The term tested
interest expense means, with respect to
a controlled foreign corporation for a
CFC inclusion year, interest expense
paid or accrued by the controlled
foreign corporation that is allocated and
apportioned to gross tested income of
the controlled foreign corporation for
the CFC inclusion year under § 1.951A–
2(c)(3), reduced (but not below zero) by
the sum of the qualified interest expense
of the controlled foreign corporation for
the CFC inclusion year and the tested
loss QBAI amount of the controlled
foreign corporation for the CFC
inclusion year.

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(ii) Interest expense. The term interest
expense means any expense or loss that
is treated as interest expense under
section 163(j).
(iii) Qualified interest expense—(A) In
general. The term qualified interest
expense means, with respect to a
controlled foreign corporation for a CFC
inclusion year, to the extent established
by the controlled foreign corporation,
the interest expense paid or accrued by
the controlled foreign corporation that is
allocated and apportioned to gross
tested income of the controlled foreign
corporation for the CFC inclusion year
under § 1.951A–2(c)(3), multiplied by a
fraction, the numerator of which is the
average of the aggregate adjusted bases
as of the close of each quarter of the CFC
inclusion year of qualified assets held
by the controlled foreign corporation,
and the denominator of which is the
average of the aggregate adjusted bases
as of the close of each quarter of the CFC
inclusion year of all assets held by the
controlled foreign corporation.
(B) Qualified asset—(1) In general.
Except as provided in paragraph
(b)(1)(iii)(B)(2) of this section, the term
qualified asset means, with respect to a
controlled foreign corporation for a CFC
inclusion year, any obligation or
financial instrument held by the
controlled foreign corporation that gives
rise to income included in the gross
tested income of the controlled foreign
corporation for the CFC inclusion year
that is excluded from foreign personal
holding company income (as defined in
section 954(c)(1)) by reason of section
954(c)(2)(C)(ii) or section 954(h) or (i).
(2) Exclusion for related party
receivables. A qualified asset does not
include an asset that gives rise to
interest income that is also excludible
from foreign personal holding company
income by reason of section 954(c)(3) or
(6).
(3) Look-through rule for subsidiary
stock. For purposes of paragraph
(b)(1)(iii)(A) of this section, the adjusted
basis in the stock of another controlled
foreign corporation held by a controlled
foreign corporation is treated as
adjusted basis in a qualified asset in an
amount equal to the adjusted basis in
the stock multiplied by the fraction
described in paragraph (b)(1)(iii)(A) of
this section determined with respect to
the assets of such other controlled
foreign corporation.
(4) Look-through rule for certain
partnership interests. For purposes of
paragraph (b)(1)(iii)(A) of this section, if
a controlled foreign corporation owns
25 percent or more of the capital or
profits interest in a partnership the
controlled foreign corporation is treated
as holding its attributable share of any

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property held by the partnership, as
determined under the principles of
§ 1.956–4(b), and the controlled foreign
corporation’s basis in the partnership
interest is not taken into account.
(iv) Tested loss QBAI amount. The
term tested loss QBAI amount means,
with respect to a tested loss CFC for a
CFC inclusion year, 10 percent of the
amount that would be the qualified
business asset investment of the tested
loss CFC for the CFC inclusion year
under section 951A(d) and § 1.951A–3 if
the tested loss CFC were a tested income
CFC for the CFC inclusion year.
(2) Tested interest income—(i) In
general. The term tested interest income
means, with respect to a controlled
foreign corporation for a CFC inclusion
year, interest income included in gross
tested income of the controlled foreign
corporation for the CFC inclusion year,
reduced by qualified interest income of
the controlled foreign corporation for
the CFC inclusion year.
(ii) Interest income. The term interest
income means any income or gain that
is treated as interest income under
section 163(j).
(iii) Qualified interest income—(A) In
general. Except as provided in
paragraph (b)(2)(iii)(B) of this section,
the term qualified interest income
means, with respect to a controlled
foreign corporation for a CFC inclusion
year, interest income of the controlled
foreign corporation for the CFC
inclusion year included in the gross
tested income of the controlled foreign
corporation for the CFC inclusion year
that is excluded from foreign personal
holding company income (as defined in
section 954(c)(1)) by reason of section
954(c)(2)(C)(ii) or section 954(h) or (i).
(B) Exclusion for related party
interest. Qualified interest income does
not include interest income that is also
excludable from foreign personal
holding company income by reason of
section 954(c)(3) or (6).
(c) Examples. The following examples
illustrate the application of this section.
(1) Example 1: Wholly-owned CFCs—(i)
Facts. A Corp, a domestic corporation, owns
100% of the single class of stock of each of
FS1 and FS2, each a controlled foreign
corporation. A Corp, FS1, and FS2 all use the
calendar year as their taxable year. For Year
1, FS1 and FS2 are both tested income CFCs.
In Year 1, FS1 pays $100x of interest to FS2.
The interest expense of FS1 is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). The interest income of FS2
is excluded from its foreign personal holding
company income under section 954(c)(6).
Also, in Year 1, FS2 pays $100x of interest
to a bank that is not related to FS2, which
interest expense is allocated and apportioned
to FS2’s gross tested income under § 1.951A–
2(c)(3). Neither FS1 nor FS2 holds qualified

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assets or owns stock of another controlled
foreign corporation.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income—(1) Tested interest expense and
tested interest income of FS1. FS1 has $100x
of interest expense that is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). FS1 has no interest income.
Accordingly, FS1 has $100x of tested interest
expense and no tested interest income for
Year 1.
(2) Tested interest expense and tested
interest income of FS2. FS2 has $100x of
interest expense that is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3) and $100x of interest
income that is included in its gross tested
income. Accordingly, FS2 has $100x of tested
interest expense and $100x of tested interest
income for Year 1.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), A Corp’s pro rata share of FS1’s tested
interest expense is $100x, its pro rata share
of FS2’s tested interest expense is $100x, and
its pro rata share of FS2’s tested interest
income is $100x. For Year 1, A Corp’s
aggregate pro rata share of tested interest
expense is $200x and its aggregate pro rata
share of tested interest income is $100x.
Accordingly, under § 1.951A–1(c)(3)(iii), A
Corp’s specified interest expense is $100x
($200x¥$100x) for Year 1.
(2) Example 2: Less than wholly-owned
CFCs—(i) Facts. The facts are the same as in
paragraph (c)(1)(i) of this section (the facts in
Example 1), except that A Corp owns 50% of
the single class of stock of FS1 and 80% of
the single class of stock of FS2.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income. The analysis is the same as in
paragraph (c)(1)(ii)(A) of this section
(paragraph (A) of the analysis in Example 1).
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), A Corp’s pro rata share of FS1’s tested
interest expense is $50x ($100x × 0.50), its
pro rata share of FS2’s tested interest expense
is $80x ($100x × 0.80), and its pro rata share
of FS2’s tested interest income is $80x ($100x
× 0.80). For Year 1, A Corp’s aggregate pro
rata share of the tested interest expense is
$130x ($50x + $80x) and its aggregate pro
rata share of the tested interest income is
$80x ($0 + $80x). Accordingly, under
§ 1.951A–1(c)(3)(iii), A Corp’s specified
interest expense is $50x ($130x¥$80x) for
Year 1.
(3) Example 3: Operating company;
qualified interest expense—(i) Facts. B Corp,
a domestic corporation, owns 100% of the
single class of stock of each of FS1 and FS2,
each a controlled foreign corporation. For
Year 1, FS1 and FS2 are both tested income
CFCs. B Corp, FS1, and FS2 all use the
calendar year as their taxable year. FS2 is an
eligible controlled foreign corporation within
the meaning of section 954(h)(2). In Year 1,
FS1 pays $100x of interest to FS2. The
interest expense of FS1 is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). The interest income of FS2

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is excluded from its foreign personal holding
company income by reason of section
954(c)(6). In addition, in Year 1, FS2 receives
$300x of interest from customers that are not
related to FS2, which interest income is
excluded from FS2’s foreign personal holding
company income by reason of section 954(h),
and FS2 pays $300x of interest to a bank,
which interest expense is allocated and
apportioned to FS2’s gross tested income
under § 1.951A–2(c)(3). Neither FS1 nor FS2
owns stock of another controlled foreign
corporation. FS1 does not hold qualified
assets. FS2’s average adjusted bases in
qualified assets is $8,000x, and FS2’s average
adjusted bases in all its assets is $12,000x.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income—(1) Tested interest expense and
tested interest income of FS1. FS1 has $100x
of interest expense that is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). FS1 has no interest income.
Accordingly, FS1 has $100x of tested interest
expense and no tested interest income for
Year 1.
(2) Tested interest expense and tested
interest income of FS2. FS2 has $300x of
interest expense that is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3) and $400x of interest
income that is included in gross tested
income. However, a portion of FS2’s interest
income is excluded from foreign personal
holding company income by reason of
section 954(h), and a portion of FS2’s assets
are qualified assets. As a result, in
determining the tested interest income and
tested interest expense of FS2, the qualified
interest income and qualified interest
expense of FS2 are excluded. FS2 has
qualified interest income of $300x, the
amount of FS2’s interest income that is
excluded from foreign personal holding
company income by reason of section 954(h).
In addition, FS2 has qualified interest
expense of $200x, the amount of FS2’s
interest expense that is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3) ($300x), multiplied by a
fraction, the numerator of which is FS2’s
average adjusted bases in qualified assets
($8,000x), and the denominator of which is
FS2’s average adjusted bases in all its assets
($12,000x). Accordingly, FS2 has tested
interest income of $100x ($400x¥$300x) and
tested interest expense of $100x
($300x¥$200x) for Year 1.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), B Corp’s pro rata share of FS1’s tested
interest expense is $100x, its pro rata share
of FS2’s tested interest expense is $100x, and
its pro rata share of FS2’s tested interest
income is $100x. For Year 1, B Corp’s
aggregate pro rata share of tested interest
expense is $200x ($100x + $100x) and its
aggregate pro rata share of tested interest
income is $100x ($0 + $100x). Accordingly,
under § 1.951A–1(c)(3)(iii), B Corp’s
specified interest expense is $100x
($200x¥$100x) for Year 1.
(4) Example 4: Holding company; qualified
interest expense—(i) Facts. C Corp, a
domestic corporation, owns 100% of the

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single class of stock of each of FS1 and FS2,
each a controlled foreign corporation. FS2
owns 100% of the single class of stock of
FS3, a qualifying insurance company within
the meaning of section 953(e)(3). For Year 1,
FS1, FS2, and FS3 are all tested income
CFCs. C Corp, FS1, FS2, and FS3 all use the
calendar year as their taxable year. In Year
1, FS1 pays $100x of interest to FS3. The
interest expense of FS1 is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). The interest income of FS3
is excluded from its foreign personal holding
company income by reason of section
954(c)(6). In addition, FS3 receives $300x of
interest from persons that are not related to
FS3, which interest income is excluded from
FS’s foreign personal holding company
income by reason of section 954(i). Also in
Year 1, FS2 pays $300x of interest to a bank,
which interest expense is allocated and
apportioned to FS2’s gross tested income
under § 1.951A–2(c)(3). None of FS1, FS2, or
FS3 owns stock of another controlled foreign
corporation, except for the stock of FS3
owned by FS2. FS2 has no assets other than
the stock of FS3. Neither FS1 nor FS2 hold
qualified assets directly. FS2’s average
adjusted bases in the FS3 stock is $6,000x.
FS3’s average adjusted bases in qualified
assets is $8,000x, and FS3’s average adjusted
bases in all its assets is $12,000x.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income—(1) Tested interest expense and
tested interest income of FS1. In Year 1, FS1
has $100x of interest expense allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). FS1 has no interest income.
Accordingly, FS1 has $100x of tested interest
expense and no tested interest income for
Year 1.
(2) Tested interest expense and tested
interest income of FS2. FS2 has $300x of
interest expense that is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). FS2 has no interest income.
While FS2 holds no qualified assets directly,
$4,000x of FS3’s average adjusted basis in
FS3 stock is treated as adjusted basis in a
qualified asset, which is equal to FS3’s
average adjusted basis in FS3 stock ($6,000x)
multiplied by a fraction, the numerator of
which is FS3’s average adjusted bases in
qualified assets ($8,000x), and the
denominator of which is FS3’s average
adjusted bases in all its assets ($12,000x).
Accordingly, FS2 has qualified interest
expense of $200x, the amount of FS2’s
interest expense allocated and apportioned to
FS2’s gross tested income under § 1.951A–
2(c)(3) ($300x), multiplied by a fraction, the
numerator of which is FS2’s average adjusted
bases in qualified assets ($4,000x), and the
denominator of which is FS2’s average
adjusted bases in all its assets ($6,000x).
Therefore, FS2 has tested interest expense of
$100x ($300x¥$200x) and no tested interest
income for Year 1.
(3) Tested interest expense and tested
interest income of FS3. In Year 1, FS3 has no
interest expense, but FS3 has $400x of
interest income that is included in gross
tested income. However, a portion of FS3’s
interest income is excluded from foreign
personal holding company income by reason

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of section 954(i). As a result, in determining
the tested interest income of FS3, the
qualified interest income of FS3 is excluded.
FS3 has qualified interest income of $300x,
the amount of FS3’s interest income that is
excluded from foreign personal holding
company income by reason of section 954(i).
Therefore, FS2 has tested interest income of
$100x ($400x¥$300x) and no tested interest
expense for Year 1.
(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), C Corp’s pro rata share of FS1’s tested
interest expense is $100x, its pro rata share
of FS2’s tested interest expense is $100x, and
its pro rata share of FS3’s tested interest
income is $100x. For Year 1, C Corp’s
aggregate pro rata share of tested interest
expense is $200x ($100x + $100x + $0) and
its aggregate pro rata share of tested interest
income is $100x ($0 + $0 + $100x).
Accordingly, under § 1.951A–1(c)(3)(iii), C
Corp’s specified interest expense is $100x
($200x¥$100x) for Year 1.
(5) Example 5: Specified interest expense
and tested loss QBAI amount—(i) Facts. D
Corp, a domestic corporation, owns 100% of
a single class of stock of each of FS1 and FS2,
each a controlled foreign corporation. For
Year 1, FS1 is a tested income CFC and FS2
is a tested loss CFC. D Corp, FS1, and FS2
all use the calendar year as their taxable year.
In Year 1, FS1 pays $100x of interest to FS2.
The interest expense of FS1 is allocated and
apportioned to its gross tested income under
§ 1.951A–2(c)(3). The interest income of FS2
is excluded from its foreign personal holding
company income by reason of section
954(c)(6). Also, in Year 1, FS2 pays $100x of
interest to a bank that is not related to FS2,
which interest expense is allocated and
apportioned to FS2’s gross tested income
under § 1.951A–2(c)(3). Neither FS1 nor FS2
holds qualified assets or owns stock of
another controlled foreign corporation.
Because FS2 is a tested loss CFC, FS2 has no
QBAI. See § 1.951A–3(b). However, if FS2
were a tested income CFC, FS2 would have
QBAI of $1,000x.
(ii) Analysis—(A) CFC-level determination;
tested interest expense and tested interest
income—(1) Tested interest expense and
tested interest income of FS1. In Year 1, FS1
has $100x of interest expense that is
allocated and apportioned to its gross tested
income under § 1.951A–2(c)(3). FS1 has no
interest income. Accordingly, FS1 has $100x
of tested interest expense and no tested
interest income for Year 1.
(2) Tested interest expense and tested
interest income of FS2. FS2 has $100x of
interest income that is included in gross
tested income. Accordingly, FS2 has $100x of
tested interest income. FS2 also has 100x of
interest expense that is allocated and
apportioned to its gross tested income.
However, because FS2 is a tested loss CFC,
FS2’s tested interest expense is reduced by
its tested loss QBAI amount. FS2’s tested loss
QBAI amount is $100x (10% of $1,000x, the
amount that would be QBAI if FS2 were a
tested income CFC). Accordingly, FS2’s
tested interest expense is $0 ($100x interest
expense¥$100x tested loss QBAI amount)
for Year 1.

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(B) United States shareholder-level
determination; pro rata share and specified
interest expense. Under § 1.951A–1(d)(5) and
(6), D Corp’s pro rata share of FS1’s tested
interest expense is $100x, its pro rata share
of FS2’s tested interest expense is $0, and its
pro rata share of FS2’s tested interest income
is $100x. For Year 1, D Corp’s aggregate pro
rata share of tested interest expense is $100x,
and its aggregate pro rata share of tested
interest income is $100x. Accordingly, under
§ 1.951A–1(c)(3)(iii), D Corp’s specified
interest expense is $0 ($100x¥$100x) for
Year 1.
§ 1.951A–5
amounts.

Treatment of GILTI inclusion

(a) Scope. This section provides rules
relating to the treatment of GILTI
inclusion amounts and adjustments to
earnings and profits to account for
tested losses. Paragraph (b) of this
section provides that a GILTI inclusion
amount is treated in the same manner as
an amount included under section
951(a)(1)(A) for purposes of applying
certain Code sections. Paragraph (c) of
this section provides rules for the
treatment of amounts taken into account
in determining the net CFC tested
income of a United States shareholder
when applying sections 163(e)(3)(B)(i)
and 267(a)(3)(B). Paragraph (d) of this
section provides a rule for the treatment
of a GILTI inclusion amount for
purposes of determining the personal
holding company income of a United
States shareholder that is a domestic
corporation under section 543.
(b) Treatment as subpart F income for
certain purposes—(1) In general. A
GILTI inclusion amount is treated in the
same manner as an amount included
under section 951(a)(1)(A) for purposes
of applying sections 168(h)(2)(B),
535(b)(10), 851(b), 904(h)(1), 959, 961,
962, 993(a)(1)(E), 996(f)(1), 1248(b)(1),
1248(d)(1), 1411, 6501(e)(1)(C),
6654(d)(2)(D), and 6655(e)(4).
(2) Allocation of GILTI inclusion
amount to tested income CFCs—(i) In
general. For purposes of the sections
referred to in paragraph (b)(1) of this
section, the portion of the GILTI
inclusion amount of a United States
shareholder for a U.S. shareholder
inclusion year treated as being with
respect to each controlled foreign
corporation of the United States
shareholder for the U.S. shareholder
inclusion year is—
(A) In the case of a tested loss CFC,
zero, and
(B) In the case of a tested income CFC,
the portion of the GILTI inclusion
amount of the United States shareholder
which bears the same ratio to such
amount as the United States
shareholder’s pro rata share of the tested
income of the tested income CFC for the

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U.S. shareholder inclusion year bears to
the aggregate amount of the United
States shareholder’s pro rata share of the
tested income of each tested income
CFC for the U.S. shareholder inclusion
year.
(ii) Example. The following example
illustrates the application of paragraph
(b)(2)(i) of this section.
(A) Facts. USP, a domestic corporation,
owns all of the stock of three controlled
foreign corporations, CFC1, CFC2, and CFC3.
USP, CFC1, CFC2, and CFC3 all use the
calendar year as their taxable year. In Year
1, CFC1 has tested income of $100x, CFC2
has tested income of $300x, and CFC3 has
tested loss of $50x. USP has no net deemed
tangible income return for Year 1.
(B) Analysis. In Year 1, USP has net CFC
tested income (as defined in § 1.951A–
1(c)(2)) of $350x ($100x + $300x¥$50x) and,
because USP has no net deemed tangible
income return, a GILTI inclusion amount (as
defined in § 1.951A–1(c)(1)) of $350x
($350x¥$0). The aggregate amount of USP’s
pro rata share of tested income is $400x
($100x from CFC1 + $300x from CFC2).
Therefore, under paragraph (b)(2)(i) of this
section, the portion of USP’s GILTI inclusion
amount treated as being with respect to CFC1
is $87.50x ($350x × $100x/$400x). The
portion of USP’s GILTI inclusion amount
treated as being with respect to CFC2 is
$262.50x ($350x × $300x/$400x). The portion
of USP’s GILTI inclusion amount treated as
being with respect to CFC3 is $0 because
CFC3 is a tested loss CFC.

(3) Translation of portion of GILTI
inclusion amount allocated to tested
income CFC. The portion of the GILTI
inclusion amount of a United States
shareholder allocated to a tested income
CFC under section 951A(f)(2) and
paragraph (b)(2)(i) of this section is
translated into the functional currency
of the tested income CFC using the
average exchange rate for the CFC
inclusion year of the tested income CFC.
(c) Treatment as an amount
includible in the gross income of a
United States person. For purposes of
sections 163(e)(3)(B)(i) and 267(a)(3)(B),
an item (including original issue
discount) is treated as includible in the
gross income of a United States person
to the extent that the item increases a
United States shareholder’s pro rata
share of tested income of a controlled
foreign corporation for a U.S.
shareholder inclusion year, reduces the
shareholder’s pro rata share of tested
loss of a controlled foreign corporation
for the U.S. shareholder inclusion year,
or both.
(d) Treatment for purposes of
personal holding company rules. For
purposes of determining whether a
United States shareholder that is a
domestic corporation is a personal
holding company under section 542, no
portion of the adjusted ordinary gross

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income of such domestic corporation
that consists of its GILTI inclusion
amount for the U.S. shareholder
inclusion year is personal holding
company income (as defined in section
543(a)).
§ 1.951A–6
losses.

Adjustments related to tested

(a) Scope. This section provides rules
relating to adjustments related to tested
losses. Paragraph (b) of this section
provides rules that increase the earnings
and profits of a tested loss CFC for
purposes of section 952(c)(1)(A).
Paragraph (c) of this section is reserved
for a rule for tested loss adjustments.
(b) Increase of earnings and profits of
tested loss CFC for purposes of section
952(c)(1)(A). For purposes of section
952(c)(1)(A) with respect to a CFC
inclusion year, the earnings and profits
of a tested loss CFC are increased by an
amount equal to the tested loss of the
tested loss CFC for the CFC inclusion
year.
(c) [Reserved]
§ 1.951A–7

Applicability dates.

Sections 1.951A–1 through 1.951A–6
apply to taxable years of foreign
corporations beginning after December
31, 2017, and to taxable years of United
States shareholders in which or with
which such taxable years of foreign
corporations end.
■ Par. 7. Section 1.965–7 is amended by:
■ 1. Revising the last sentence of
paragraph (e)(1)(i).
■ 2. Adding three sentences at the end
of paragraph (e)(1)(i).
■ 3. Adding paragraph (e)(1)(iv).
■ 4. Revising paragraph (e)(2)(ii).
■ 5. Adding paragraph (e)(3).
The revisions and additions read as
follows:
§ 1.965–7 Elections, payment, and other
special rules.

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*

*
*
*
*
(e) * * *
(1) . . . (i) . . . Except as provided in
paragraph (e)(2)(ii)(B) of this section, the
election for each taxable year is
irrevocable. If the section 965(n)
election creates or increases a net
operating loss under section 172 for the
taxable year, then the taxable income of
the person for the taxable year cannot be
less than the amount described in
paragraph (e)(1)(ii) of this section. The
amount of deductions equal to the
amount by which a net operating loss is
created or increased for the taxable year
by reason of the section 965(n) election
(the deferred amount) is not taken into
account in computing taxable income or
the separate foreign tax credit
limitations under section 904 for that

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year. The source and separate category
(as defined in § 1.904–5(a)) components
of the deferred amount are determined
in accordance with paragraph (e)(1)(iv)
of this section.
*
*
*
*
*
(iv) Effect of section 965(n) election—
(A) In general. The section 965(n)
election for a taxable year applies solely
for purposes of determining the amount
of net operating loss under section 172
for the taxable year and determining the
amount of taxable income for the
taxable year (computed without regard
to the deduction allowable under
section 172) that may be reduced by net
operating loss carryovers or carrybacks
to such taxable year under section 172.
Paragraph (e)(1)(iv)(B) of this section
provides a rule for coordinating the
section 965(n) election’s effect on
section 172 with the computation of the
separate foreign tax credit limitations
under section 904.
(B) Ordering rule for allocation and
apportionment of deductions for
purposes of the section 904 limitation.
The effect of a section 965(n) election
with respect to a taxable year on the
computation of the separate foreign tax
credit limitations under section 904 is
computed as follows and in the
following order.
(1) Deductions, including those that
create or increase a net operating loss
for the taxable year by reason of the
section 965(n) election, are allocated
and apportioned under §§ 1.861–8
through 1.861–17 to the relevant
statutory and residual groupings, taking
into account the amount described in
paragraph (e)(1)(ii) of this section. The
source and separate category of the net
operating loss carryover or carryback to
the taxable year, if any, is determined
under the rules of § 1.904(g)–3(b), taking
into account the amount described in
paragraph (e)(1)(ii) of this section.
Therefore, if the amount of the net
operating loss carryover or carryback to
the taxable year (as reduced by reason
of the section 965(n) election) exceeds
the U.S. source loss component of the
net operating loss that is carried over
under § 1.904(g)–3(b)(3)(i), but such
excess is less than the potential
carryovers (or carrybacks) of the
separate limitation losses that are part of
the net operating loss, the potential
carryovers (or carrybacks) are
proportionately reduced as provided in
§ 1.904(g)–3(b)(3)(ii) or (iii), as
applicable.
(2) If a net operating loss is created or
increased for the taxable year by reason
of the section 965(n) election, the
deferred amount (as defined in
paragraph (e)(1)(i) of this section) is not

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29365

allowed as a deduction for the taxable
year. See paragraph (e)(1)(i) of this
section. The deferred amount (which is
the corresponding addition to the net
operating loss for the taxable year)
comprises a ratable portion of the
deductions (including the deduction
allowed under section 965(c)) allocated
and apportioned to each statutory and
residual grouping under paragraph
(e)(1)(iv)(B)(1) of this section. Such
ratable portion equals the deferred
amount multiplied by a fraction, the
numerator of which is the deductions
allocated and apportioned to the
statutory or residual grouping under
paragraph (e)(1)(iv)(B)(1) of this section
and the denominator of which is the
total deductions described in paragraph
(e)(1)(iv)(B)(1) of this section.
Accordingly, the fraction described in
the previous sentence takes into account
the deferred amount.
(3) Taxable income and the separate
foreign tax credit limitations under
section 904 for the taxable year are
computed without taking into account
any deferred amount. Deductions
allocated and apportioned to the
statutory and residual groupings under
paragraph (e)(1)(iv)(B)(1) of this section,
to the extent deducted in the taxable
year rather than deferred to create or
increase a net operating loss, are
combined with income in the statutory
and residual groupings to which those
deductions are assigned in order to
compute the amount of separate
limitation income or loss in each
separate category and U.S. source
income or loss for the taxable year.
Section 904(b), (f), and (g) are then
applied to determine the applicable
foreign tax credit limitations for the
taxable year.
(2) * * *
(ii) Timing—(A) In general. A section
965(n) election must be made no later
than the due date (taking into account
extensions, if any) for the person’s
return for the taxable year to which the
election applies. Relief is not available
under § 301.9100–2 or § 301.9100–3 of
this chapter to make a late election.
(B) Transition rule. In the case of a
section 965(n) election made before June
21, 2019, the election may be revoked
by attaching a statement, signed under
penalties of perjury, to an amended
return for the taxable year to which the
election applies (the election year). The
statement must include the person’s
name, taxpayer identification number,
and a statement that the person revokes
the section 965(n) election. The
amended return to which the statement
is attached must be filed by—
(1) In the case of a revocation with
respect to an election due before

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February 5, 2019, the due date (taking
into account extensions, if any, or any
additional time that would have been
granted if the person had made an
extension request) for the return for the
taxable year following the election year;
or
(2) In the case of a revocation with
respect to an election due on or after
February 5, 2019, the due date (taking
into account extensions, if any, or any
additional time that would have been
granted if the person had made an
extension request) for the return for the
election year.
*
*
*
*
*
(3) Examples. The following examples
illustrate the application of paragraph
(e)(1)(iv) of this section.
(i) Example 1: Net operating loss in
inclusion year—(A) Facts. USP, a domestic
corporation, has a section 965(a) inclusion of
$100x and has a section 965(c) deduction of
$70x for its taxable year ending December 31,
2017. USP also includes in gross income the
amount treated as dividends under section 78
of $50x (the foreign taxes deemed paid under
section 960(a) for the taxable year with
respect to USP’s section 965(a) inclusion).
The section 965(a) inclusion and the section
78 dividends are foreign source general
category income. During the 2017 taxable
year, USP also has U.S. source gross income
of $150x and other deductions of $210x,
comprising $60x of interest expense and
$150x of other deductible expenses that are
not definitely related to any gross income.
USP’s total tax book value of its assets, as
determined under §§ 1.861–9(g)(2) and
1.861–9T(g)(3), is divided equally between
assets that generate foreign source general
category income and assets that generate U.S.
source income. USP elects under paragraph
(e)(1)(i) of this section to not take into
account the amount described in paragraph
(e)(1)(ii) of this section in determining its net
operating loss under section 172 for the
taxable year. Before taking into account the
section 965(n) election, USP’s total
deductions are $280x ($210x + $70x) and
USP’s taxable income is $20x ($100x + $50x
+ $150x¥$70x¥$210x).

(B) Analysis—(1) The amount described in
paragraph (e)(1)(ii) of this section is $80x
($100x section 965(a) inclusion¥$70x
section 965(c) deduction + $50x section 78
dividends). Not taking into account the $80x
creates a net operating loss under section 172
of $60x ($20x taxable income without regard
to the section 965(n) election¥$80x) for the
taxable year (the ‘‘deferred amount’’). Under
paragraph (e)(1)(i) of this section, the
deferred amount of $60x constitutes a net
operating loss and is not allowed as a
deduction for the taxable year. USP’s taxable
income for the year is $80x ($100x + $50x +
$150x¥($280x¥$60x)).
(2) Under paragraph (e)(1)(iv)(B)(1) of this
section, deductions are allocated and
apportioned under §§ 1.861–8 through 1.861–
17 to the relevant statutory and residual
groupings, taking into account the amount
described in paragraph (e)(1)(ii) of this
section. Under § 1.861–8(b), USP’s section
965(c) deduction is definitely related to the
section 965(a) inclusion, and, therefore, is
allocated solely to foreign source general
category income. Under § 1.861–9T, based on
USP’s asset values, the interest expense of
$60x is ratably apportioned $30x to foreign
source general category income and $30x to
U.S. source income. Under § 1.861–8(c)(3),
based on $150x of gross U.S. source income
and $150x of gross foreign source general
category income, the other expenses of $150x
are ratably apportioned $75x to foreign
source general category income and $75x to
U.S. source income. Therefore, USP’s
deductions allocated and apportioned to
foreign source general category income are
$175x ($70x + $30x + $75x) and its
deductions allocated and apportioned to U.S.
source income are $105x ($30x + $75x).
(3) Under paragraph (e)(1)(iv)(B)(2) of this
section, the deferred amount of $60x
comprises a ratable portion of the allocated
and apportioned deductions. Therefore,
$37.5x ($60x × $175x/$280x) of the deferred
amount comprises deductions allocated and
apportioned to foreign source general
category income, and $22.5x ($60x × $105x/
$280x) comprises deductions allocated and
apportioned to U.S. source income.
(4) Under paragraph (e)(1)(iv)(B)(3) of this
section, for purposes of the separate foreign
tax credit limitation under section 904,

foreign source general category income for
the taxable year is computed without taking
into account the $37.5x of the deferred
amount that is attributable to the deductions
allocated and apportioned to the foreign
source general category. Therefore, for the
2017 taxable year, foreign source general
category income is $12.5x ($100x section
965(a) inclusion + $50x section 78
dividends¥($175x deductions¥$37.5x
deferred amount). The remaining taxable
income of $67.5x is U.S. source income.
(ii) Example 2: Net operating loss carryover
to the inclusion year—(A) Facts. USP, a
domestic corporation, has a section 965(a)
inclusion of $100x and has a section 965(c)
deduction of $60x for its taxable year ending
December 31, 2017. USP also includes in
gross income the amount treated as
dividends under section 78 of $40x (the
foreign taxes deemed paid under section
960(a) for the taxable year with respect to
USP’s section 965(a) inclusion). The section
965(a) inclusion and the section 78 dividends
are foreign source general category income.
USP also has U.S. source gross income of
$200x, foreign source passive category gross
income of $100x, and other deductions of
$140x. Under § 1.861–8(b), USP’s $60x
section 965(c) deduction is definitely related
to the section 965(a) inclusion, and,
therefore, is allocated solely to foreign source
general category income. Under §§ 1.861–8
through 1.861–17, USP allocates and
apportions the other $140x of deductions as
follows: $40x to foreign source general
category income, $40x to foreign source
passive category income, and $60x to U.S.
source income. USP has a net operating loss
of $260x for the 2016 taxable year consisting
of a $120x U.S. source loss, a $75x general
category separate limitation loss, and a $65x
passive category separate limitation loss.
Under paragraph (e)(1)(i) of this section, USP
elects to not take into account the amount
described in paragraph (e)(1)(ii) of this
section in determining the amount of taxable
income that may be reduced by net operating
loss carryovers and carrybacks to the taxable
year under section 172. USP’s taxable income
before taking into account the section 965(n)
election and any net operating loss carryover
deduction is $240x:

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TABLE 1 TO PARAGRAPH (e)(3)(ii)(A)
General

Passive

U.S.

Section 965(a) inclusion ..................................................................................
Section 78 dividend .........................................................................................
Other gross income .........................................................................................
Section 965(c) deduction .................................................................................
Other deductions .............................................................................................

$100x
40x
........................
(60x)
(40x)

........................
........................
100x
........................
(40x)

........................
........................
200x
........................
(60x)

$100x
40x
300x
(60x)
(140x)

Net Income ...............................................................................................

40x

60x

140x

240x

(B) Analysis—(1) The amount described in
paragraph (e)(1)(ii) of this section is $80x
($100x section 965(a) inclusion¥$60x
section 965(c) deduction + $40x section 78
dividends). As a result of the section 965(n)
election, the net operating loss deduction
allowed in the 2017 taxable year is reduced

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from $240x to $160x (the amount of USP’s
taxable income reduced by the amount
described in paragraph (e)(1)(ii) of this
section).
(2) Under paragraph (e)(1)(iv)(B)(1) of this
section, the source and separate category of
the net operating loss deduction allowed in

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Total

the 2017 taxable year is determined under
the rules of § 1.904(g)–3(b), taking into
account the amount described in paragraph
(e)(1)(ii) of this section. Under § 1.904(g)–
3(b)(3)(i), first the $120x U.S. source
component of the net operating loss is
allocated to U.S. source income for the 2017

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Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 / Rules and Regulations
taxable year. Because the total tentative
carryover under § 1.904(g)–3(b)(3)(ii) of
$100x ($40x in the general category and $60x
in the passive category) exceeds the
remaining net operating loss deduction of
$40x ($160x¥$120x), the tentative carryover
amount from each separate category is

reduced proportionately, to $16x ($40x ×
$40x/$100x) for the general category and
$24x ($40x × $60x/$100x) for the passive
category. Accordingly, $16x of the general
category component of the net operating loss
is carried forward, and $24x of the passive
category component of the net operating loss

29367

is carried forward and combined with
income in the same respective categories for
the 2017 taxable year. After allocation of the
net operating loss carryover from 2016, USP’s
taxable income for the 2017 taxable year is
as follows:

TABLE 1 TO PARAGRAPH (e)(3)(ii)(B)(2)
General
Net income before NOL deduction ..................................................................
NOL deduction .................................................................................................
Net income after NOL deduction ..............................................................

*

*
*
*
*
Par. 8. Section 1.1502–12 is amended
by adding paragraph (s) to read as
follows:

■

§ 1.1502–12

Separate taxable income.

*

*
*
*
*
(s) See § 1.1502–51 for rules relating
to the computation of a member’s GILTI
inclusion amount under section 951A
and related basis adjustments.
■ Par. 9. Section 1.1502–32 is amended
by adding and reserving paragraphs
(b)(3)(ii)(E) and (b)(3)(iii)(C).
§ 1.1502–32

Investment adjustments.

*

*
*
*
*
(b) * * *
(3) * * *
(ii) * * *
(E) [Reserved]
(iii) * * *
(C) [Reserved]
*
*
*
*
*
■ Par. 10. Section 1.1502–51 is added to
read as follows:

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§ 1.1502–51

Consolidated section 951A.

(a) In general. This section provides
rules for applying section 951A to each
member of a consolidated group (each,
a member) that is a United States
shareholder of any controlled foreign
corporation. Paragraph (b) of this
section describes the inclusion of the
GILTI inclusion amount by a member of
a consolidated group. Paragraphs (c) and
(d) of this section are reserved.
Paragraph (e) of this section provides
definitions for purposes of this section.
Paragraph (f) of this section provides
examples illustrating the rules of this
section. Paragraph (g) of this section
provides an applicability date.
(b) Calculation of the GILTI inclusion
amount for a member of a consolidated
group. Each member who is a United
States shareholder of any controlled
foreign corporation includes in gross
income in the U.S. shareholder
inclusion year the member’s GILTI
inclusion amount, if any, for the U.S.
shareholder inclusion year. See section

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$40x
(16x)
24x

951A(a) and § 1.951A–1(b). The GILTI
inclusion amount of a member for a U.S.
shareholder inclusion year is the excess
(if any) of the member’s net CFC tested
income for the U.S. shareholder
inclusion year, over the member’s net
deemed tangible income return for the
U.S. shareholder inclusion year,
determined using the definitions
provided in paragraph (e) of this
section. In addition, see § 1.951A–1(e).
(c) [Reserved]
(d) [Reserved]
(e) Definitions. Any term used but not
defined in this section has the meaning
set forth in §§ 1.951A–1 through
1.951A–6. In addition, the following
definitions apply for purposes of this
section.
(1) Aggregate tested income. With
respect to a member, the term aggregate
tested income means the aggregate of the
member’s pro rata share (determined
under § 1.951A–1(d)(2)) of the tested
income of each tested income CFC for
a CFC inclusion year that ends with or
within the U.S. shareholder inclusion
year.
(2) Aggregate tested loss. With respect
to a member, the term aggregate tested
loss means the aggregate of the
member’s pro rata share (determined
under § 1.951A–1(d)(4)) of the tested
loss of each tested loss CFC for a CFC
inclusion year that ends with or within
the U.S. shareholder inclusion year.
(3) Allocable share. The term
allocable share means, with respect to a
member that is a United States
shareholder and a U.S. shareholder
inclusion year—
(i) With respect to consolidated QBAI,
the product of the consolidated QBAI of
the member’s consolidated group and
the member’s GILTI allocation ratio.
(ii) With respect to consolidated
specified interest expense, the product
of the consolidated specified interest
expense of the member’s consolidated
group and the member’s GILTI
allocation ratio.
(iii) With respect to consolidated
tested loss, the product of the

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Passive
$60x
(24x)
36x

U.S.
$140x
(120x)
20x

Total
$240x
(160x)
80x

consolidated tested loss of the member’s
consolidated group and the member’s
GILTI allocation ratio.
(4) Consolidated QBAI. With respect
to a consolidated group, the term
consolidated QBAI means the sum of
each member’s pro rata share
(determined under § 1.951A–1(d)(3)) of
the qualified business asset investment
of each tested income CFC for a CFC
inclusion year that ends with or within
the U.S. shareholder inclusion year.
(5) Consolidated specified interest
expense. With respect to a consolidated
group, the term consolidated specified
interest expense means the excess (if
any) of—
(i) The sum of each member’s pro rata
share (determined under § 1.951A–
1(d)(5)) of the tested interest expense of
each controlled foreign corporation for a
CFC inclusion year that ends with or
within the U.S. shareholder inclusion
year, over
(ii) The sum of each member’s pro
rata share (determined under § 1.951A–
1(d)(6)) of the tested interest income of
each controlled foreign corporation for a
CFC inclusion year that ends with or
within the U.S. shareholder inclusion
year.
(6) Consolidated tested income. With
respect to a consolidated group, the
term consolidated tested income means
the sum of each member’s aggregate
tested income for the U.S. shareholder
inclusion year.
(7) Consolidated tested loss. With
respect to a consolidated group, the
term consolidated tested loss means the
sum of each member’s aggregate tested
loss for the U.S. shareholder inclusion
year.
(8) Controlled foreign corporation.
The term controlled foreign corporation
has the meaning provided in § 1.951A–
1(f)(2).
(9) Deemed tangible income return.
With respect to a member, the term
deemed tangible income return means
10 percent of the member’s allocable
share of the consolidated QBAI.

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(10) GILTI allocation ratio. With
respect to a member, the term GILTI
allocation ratio means the ratio of—
(i) The aggregate tested income of the
member for the U.S. shareholder
inclusion year, to
(ii) The consolidated tested income of
the consolidated group of which the
member is a member for the U.S.
shareholder inclusion year.
(11) GILTI inclusion amount. With
respect to a member, the term GILTI
inclusion amount has the meaning
provided in paragraph (b) of this
section.
(12) Net CFC tested income. With
respect to a member, the term net CFC
tested income means the excess (if any)
of—
(i) The member’s aggregate tested
income, over
(ii) The member’s allocable share of
the consolidated tested loss.
(13) Net deemed tangible income
return. With respect to a member, the
term net deemed tangible income return
means the excess (if any) of the
member’s deemed tangible income
return over the member’s allocable share
of the consolidated specified interest
expense.
(14) through (16) [Reserved]
(17) Qualified business asset
investment. The term qualified business
asset investment has the meaning
provided in § 1.951A–3(b).
(18) Tested income. The term tested
income has the meaning provided in
§ 1.951A–2(b)(1).
(19) Tested income CFC. The term
tested income CFC has the meaning
provided in § 1.951A–2(b)(1).
(20) Tested interest expense. The term
tested interest expense has the meaning
provided in § 1.951A–4(b)(1).
(21) Tested interest income. The term
tested interest income has the meaning
provided in § 1.951A–4(b)(2).
(22) Tested loss. The term tested loss
has the meaning provided in § 1.951A–
2(b)(2).
(23) Tested loss CFC. The term tested
loss CFC has the meaning provided in
§ 1.951A–2(b)(2).
(24) United States shareholder. The
term United States shareholder has the
meaning provided in § 1.951A–1(f)(6).
(25) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion
year has the meaning provided in
§ 1.951A–1(f)(7).
(f) Examples. The following examples
illustrate the rules of this section. For
purposes of the examples in this
section, unless otherwise stated: P is the
common parent of the P consolidated
group; P owns all of the single class of
stock of subsidiaries USS1, USS2, and
USS3, all of whom are members of the

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P consolidated group; CFC1, CFC2,
CFC3, and CFC4 are all controlled
foreign corporations (within the
meaning of paragraph (e)(8) of this
section); and the taxable year of all
persons is the calendar year.
(1) Example 1: Calculation of net CFC
tested income within a consolidated group
when all CFCs are wholly owned by a
member—(i) Facts. USS1 owns all of the
single class of stock of CFC1. USS2 owns all
of the single class of stock of each of CFC2
and CFC3. USS3 owns all of the single class
of stock of CFC4. In Year 1, CFC1 has tested
loss of $100x, CFC2 has tested income of
$200x, CFC3 has tested loss of $200x, and
CFC4 has tested income of $600x. None of
CFC1, CFC2, CFC3, or CFC4 has qualified
business asset investment in Year 1.
(ii) Analysis—(A) Consolidated tested
income and GILTI allocation ratio. USS1 has
no aggregate tested income; USS2’s aggregate
tested income is $200x, its pro rata share
(determined under § 1.951A–1(d)(2)) of
CFC2’s tested income; and USS3’s aggregate
tested income is $600x, its pro rata share
(determined under § 1.951A–1(d)(2)) of
CFC4’s tested income. Therefore, under
paragraph (e)(6) of this section, the P
consolidated group’s consolidated tested
income is $800x ($200x + $600x). As a result,
the GILTI allocation ratios of USS1, USS2,
and USS3 are 0 ($0/$800x), 0.25 ($200x/
$800x), and 0.75 ($600x/$800x), respectively.
(B) Consolidated tested loss. Under
paragraph (e)(7) of this section, the P
consolidated group’s consolidated tested loss
is $300x ($100x + $200x), the sum of USS1’s
aggregate tested loss, which is equal to its pro
rata share (determined under § 1.951A–
1(d)(4)) of CFC1’s tested loss ($100x), and
USS2’s aggregate tested loss, which is equal
to its pro rata share (determined under
§ 1.951A–1(d)(4)) of CFC3’s tested loss
($200x). Under paragraph (e)(3)(iii) of this
section, a member’s allocable share of the
consolidated tested loss is the product of the
consolidated tested loss of the member’s
consolidated group and the member’s GILTI
allocation ratio. Therefore, the allocable
shares of the consolidated tested loss of
USS1, USS2, and USS3 are $0 (0 × $300x),
$75x (0.25 × $300x), and $225x (0.75 ×
$300x), respectively.
(C) Calculation of net CFC tested income.
Under paragraph (e)(12) of this section, a
member’s net CFC tested income is the
excess (if any) of the member’s aggregate
tested income over the member’s allocable
share of the consolidated tested loss. As a
result, the net CFC tested income of USS1,
USS2, and USS3 are $0 ($0¥$0), $125x
($200x¥$75x), and $375x ($600x¥$225x),
respectively.
(2) Example 2: Calculation of net CFC
tested income within a consolidated group
when ownership of a tested loss CFC is split
between members—(i) Facts. The facts are the
same as in paragraph (f)(1)(i) of this section
(the facts in Example 1), except that USS2
and USS3 each own 50% of the single class
of stock of CFC3.
(ii) Analysis. As in paragraph (f)(1)(ii)(A) of
this section (paragraph (A) of the analysis in
Example 1), USS1 has no aggregate tested

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income and a GILTI allocation ratio of 0,
USS2 has $200x of aggregate tested income
and a GILTI allocation ratio of 0.25, and
USS3 has $600x of aggregate tested income
and a GILTI allocation ratio of 0.75.
Additionally, the P consolidated group’s
consolidated tested loss is $300x (the
aggregate of USS1’s aggregate tested loss,
which is equal to its pro rata share
(determined under § 1.951A–1(d)(4)) of
CFC1’s tested loss ($100x); USS2’s aggregate
tested loss, which is equal to its pro rata
share (determined under § 1.951A–1(d)(4)) of
CFC3’s tested loss ($100x); and USS3’s
aggregate tested loss, which is equal to its pro
rata share (determined under § 1.951A–
1(d)(4)) of CFC3’s tested loss ($100x)). As a
result, under paragraph (e)(12) of this section,
as in paragraph (f)(1)(ii)(C) of this section
(paragraph (C) of the analysis in Example 1),
the net CFC tested income of USS1, USS2,
and USS3 are $0 ($0¥$0), $125x
($200x¥$75x), and $375x ($600x¥$225x),
respectively.
(3) Example 3: Calculation of GILTI
inclusion amount—(i) Facts. The facts are the
same as in paragraph (f)(1)(i) of this section
(the facts in Example 1), except that CFC2
and CFC4 have qualified business asset
investment of $500x and $2,000x,
respectively, for Year 1. In Year 1, CFC1 and
CFC4 each have tested interest expense
(within the meaning of § 1.951A–4(b)(1)) of
$25x, and none of CFC1, CFC2, CFC3, and
CFC4 have tested interest income (within the
meaning of § 1.951A–4(b)(2)). CFC1’s tested
loss of $100x and CFC4’s tested income of
$600x take into account the tested interest
expense.
(ii) Analysis—(A) GILTI allocation ratio. As
in paragraph (f)(1)(ii)(A) of this section
(paragraph (A) of the analysis in Example 1),
the GILTI allocation ratios of USS1, USS2,
and USS3 are 0 ($0/$800x), 0.25 ($200x/
$800x), and 0.75 ($600x/$800x), respectively.
(B) Consolidated QBAI. Under paragraph
(e)(4) of this section, the P consolidated
group’s consolidated QBAI is $2,500x ($500x
+ $2,000x), the aggregate of USS2’s pro rata
share (determined under § 1.951A–1(d)(3)) of
the qualified business asset investment of
CFC2 and USS3’s pro rata share (determined
under § 1.951A–1(d)(3)) of the qualified
business asset investment of CFC4. Under
paragraph (e)(3)(i) of this section, a member’s
allocable share of consolidated QBAI is the
product of the consolidated QBAI of the
member’s consolidated group and the
member’s GILTI allocation ratio. Therefore,
the allocable shares of the consolidated QBAI
of each of USS1, USS2, and USS3 are $0 (0
× $2,500x), $625x (0.25 × $2,500x), and
$1,875x (0.75 × $2,500x), respectively.
(C) Consolidated specified interest
expense—(1) Pro rata share of tested interest
expense. USS1’s pro rata share (determined
under § 1.951A–1(d)(5)) of the tested interest
expense of CFC1 is $25x, the amount by
which the tested interest expense increases
USS1’s pro rata share of CFC1’s tested loss
(from $75x to $100x) for Year 1. USS3’s pro
rata share (determined under § 1.951A–
1(d)(5)) of the tested interest expense of CFC4
is also $25x, the amount by which the tested
interest expense decreases USS3’s pro rata
share of CFC4’s tested income (from $625x to
$600x).

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(2) Consolidated specified interest expense.
Under paragraph (e)(5) of this section, the P
consolidated group’s consolidated specified
interest expense is $50x, the excess of the
sum of each member’s pro rata share of the
tested interest expense of each controlled
foreign corporation ($50x, $25x from USS1 +
$25x from USS3), over the sum of each
member’s pro rata share of tested interest
income ($0). Under paragraph (e)(3)(ii) of this
section, a member’s allocable share of
consolidated specified interest expense is the
product of the consolidated specified interest
expense of the member’s consolidated group
and the member’s GILTI allocation ratio.
Therefore, the allocable shares of
consolidated specified interest expense of
USS1, USS2, and USS3 are $0 (0 × $50x),
$12.50x (0.25 × $50x), and $37.50x (0.75 ×
$50x), respectively.
(D) Calculation of deemed tangible income
return. Under paragraph (e)(9) of this section,
a member’s deemed tangible income return
means 10 percent of the member’s allocable
share of the consolidated QBAI. As a result,
the deemed tangible income returns of USS1,
USS2, and USS3 are $0 (0.1 × $0), $62.50x
(0.1 × $625x), and $187.50x (0.1 × $1,875x),
respectively.
(E) Calculation of net deemed tangible
income return. Under paragraph (e)(13) of
this section, a member’s net deemed tangible
income return means the excess (if any) of a
member’s deemed tangible income return
over the member’s allocable share of the
consolidated specified interest expense. As a
result, the net deemed tangible income
returns of USS1, USS2, and USS3 are $0
($0¥$0), $50x ($62.50x¥$12.50x), and
$150x ($187.50x¥$37.50x), respectively.
(F) Calculation of GILTI inclusion amount.
Under paragraph (b) of this section, a
member’s GILTI inclusion amount for a U.S.
shareholder inclusion year is the excess (if
any) of the member’s net CFC tested income
for the U.S. shareholder inclusion year, over
the shareholder’s net deemed tangible
income return for the U.S. shareholder
inclusion year. As described in paragraph
(f)(1)(ii)(C) of this section (paragraph (C) of
the analysis in Example 1), the net CFC
tested income of USS1, USS2, and USS3 are
$0, $125x, and $375x, respectively. As
described in paragraph (f)(3)(ii)(E) of this
section (paragraph (E) of the analysis in this
example), the net deemed tangible income
returns of USS1, USS2, and USS3 are $0,
$50x, and $150x, respectively. As a result,
under paragraph (b) of this section, the GILTI
inclusion amounts of USS1, USS2, and USS3
are $0 ($0¥$0), $75x ($125x¥$50x), and
$225x ($375x¥$150x), respectively.

(g) Applicability date—(1) In general.
Except as otherwise provided in this
paragraph (g), this section applies to
taxable years of United States
shareholders for which the due date
(without extensions) of the consolidated
return is after June 21, 2019. However,
a consolidated group may apply the
rules of this section in their entirety to
all taxable years of its members that are
described in § 1.951A–7. In such a case,
the consolidated group must apply the

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rules of this section to all taxable years
described in § 1.951A–7 and with
respect to all members.
(2) [Reserved]
■ Par. 11. Section 1.6038–2 is amended
by revising the section heading, the
introductory text of paragraph (a), and
paragraph (m) to read as follows:
§ 1.6038–2 Information returns required of
United States persons with respect to
annual accounting periods of certain
foreign corporations.

(a) Requirement of return. Every U.S.
person shall make a separate annual
information return with respect to each
annual accounting period (described in
paragraph (e) of this section) of each
foreign corporation which that person
controls (as defined in paragraph (b) of
this section) at any time during such
annual accounting period.
*
*
*
*
*
(m) Applicability dates—(1) In
general. This section applies to taxable
years of foreign corporations beginning
on or after October 3, 2018. See 26 CFR
1.6038–2 (revised as of April 1, 2018)
for rules applicable to taxable years of
foreign corporations beginning before
such date.
(2) [Reserved]
■ Par. 12. Section 1.6038–5 is added to
read as follows:
§ 1.6038–5 Information returns required of
certain United States persons to report
amounts determined with respect to certain
foreign corporations for global intangible
low-taxed income (GILTI) purposes.

(a) Requirement of return. Except as
provided in paragraph (d) of this
section, each United States person who
is a United States shareholder (as
defined in section 951(b)) of any
controlled foreign corporation (as
defined in section 957) must make an
annual return on Form 8992, ‘‘U.S.
Shareholder Calculation of Global
Intangible Low-Taxed Income (GILTI),’’
(or successor form) for each U.S.
shareholder inclusion year (as defined
in § 1.951A–1(f)(7)) setting forth the
information with respect to each such
controlled foreign corporation, in such
form and manner, as Form 8992 (or
successor form) prescribes.
(b) Time and manner for filing.
Returns on Form 8992 (or successor
form) required under paragraph (a) of
this section for a taxable year must be
filed with the United States person’s
income tax return on or before the due
date (taking into account extensions) for
filing that person’s income tax return.
(c) Failure to furnish information—(1)
Penalties. If any person required to file
Form 8992 (or successor form) under
section 6038 and this section fails to

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furnish the information prescribed on
Form 8992 within the time prescribed
by paragraph (b) of this section, the
penalties imposed by section 6038(b)
and (c) apply.
(2) Increase in penalty. If a failure
described in paragraph (c)(1) of this
section continues for more than 90 days
after the date on which the Director of
Field Operations, Area Director, or
Director of Compliance Campus
Operations mails notice of such failure
to the person required to file Form 8992,
such person shall pay a penalty of
$10,000, in addition to the penalty
imposed by section 6038(b)(1), for each
30-day period (or a fraction of) during
which such failure continues after such
90-day period has expired. The
additional penalty imposed by section
6038(b)(2) and this paragraph (c)(2)
shall be limited to a maximum of
$50,000 for each failure.
(3) Reasonable cause—(i) For
purposes of section 6038(b) and (c) and
this section, the time prescribed for
furnishing information under paragraph
(b) of this section, and the beginning of
the 90-day period after mailing of notice
by the director under paragraph (c)(2) of
this section, shall be treated as being not
earlier than the last day on which
reasonable cause existed for failure to
furnish the information.
(ii) To show that reasonable cause
existed for failure to furnish information
as required by section 6038 and this
section, the person required to report
such information must make an
affirmative showing of all facts alleged
as reasonable cause for such failure in
a written statement containing a
declaration that it is made under the
penalties of perjury. The statement must
be filed with the director where the
return is required to be filed. The
director shall determine whether the
failure to furnish information was due
to reasonable cause, and if so, the period
of time for which such reasonable cause
existed. In the case of a return that has
been filed as required by this section
except for an omission of, or error with
respect to, some of the information
required, if the person who filed the
return establishes to the satisfaction of
the director that the person has
substantially complied with this
section, then the omission or error shall
not constitute a failure under this
section.
(d) Exception from filing requirement.
Any United States person that does not
own, within the meaning of section
958(a), stock of a controlled foreign
corporation in which the United States
person is a United States shareholder for
a taxable year is not required to file
Form 8992. For this purpose, whether a

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U.S. person owns, within the meaning
of section 958(a), stock of a controlled
foreign corporation is determined under
§ 1.951A–1(e).
(e) Applicability date. This section
applies to taxable years of controlled

foreign corporations beginning on or
after October 3, 2018.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
Approved: June 6, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2019–12437 Filed 6–14–19; 4:15 pm]

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