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Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–104226–18]
RIN 1545–BO51
Guidance Regarding the Transition Tax
Under Section 965 and Related
Provisions
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations implementing
section 965 of the Internal Revenue
Code (‘‘Code’’) as amended by the Tax
Cuts and Jobs Act, which was enacted
on December 22, 2017. The proposed
regulations would affect United States
persons with direct or indirect
ownership interests in certain foreign
corporations.
SUMMARY:
Written or electronic comments
and requests for a public hearing must
be received by October 9, 2018.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–104226–18), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–104226–
18), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224, or sent
electronically via the Federal
eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–104226–18).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations
under §§ 1.962–1 and 1.962–2, 1.965–1
through 4, 1.965–7 through 9, and
1.986(c)–1, Leni C. Perkins at (202) 317–
6934; concerning the proposed
regulations under §§ 1.965–5 and
1.965–6, Karen J. Cate at (202) 317–
6936; concerning submissions of
comments and requests for a public
hearing, Regina Johnson at (202) 317–
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
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DATES:
Paperwork Reduction Act
The collections of information
contained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collections of information should be
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sent to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
October 9, 2018.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the duties of the IRS,
including whether the information will
have practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (including underlying
assumptions and methodology);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchases of services to provide
information.
The collections of information in
these proposed regulations are in
proposed §§ 1.965–2(d)(2)(ii)(B), 1.965–
2(f)(2)(iii)(B), 1.965–3(b)(2), 1.965–
3(c)(3), 1.965–4(b)(2)(i), 1.965–7(b)(2),
1.965–7(b)(3)(iii)(B), 1.965–7(c)(2),
1.965–7(c)(3)(iv)(B), 1.965–7(c)(3)(v)(D),
1.965–7(c)(6)(i), 1.965–7(d)(3), 1.965–
7(e)(2), 1.965–7(f)(5), and 1.965–8(c).
The information is required to be
provided by taxpayers that make an
election or rely on taxpayer-favorable
rules. The information provided will be
used by the IRS for tax compliance
purposes.
Estimated total annual reporting
burden: 500,000 hours.
Estimated average annual burden
hours per respondent: Five hours.
Estimated number of respondents:
100,000.
Estimated annual frequency of
responses: Once.
The number of respondents estimate
is a rough estimate of the number of
taxpayers completing the relevant parts
of tax forms. The estimate of five hours
per response is intended to capture the
burden in gathering the required
information for the election to
determine the post-1986 earnings and
profits and allocation of deficits and
transfer agreements. In addition, the IRS
intends that information collection
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requirements relating to the reporting
and payment of tax under section 965
will be set forth in forms and
instructions. For purposes of the
Paperwork Reduction Act, the reporting
burden associated with that collection
of information will be reflected in the
OMB Form 83–I, Paperwork Reduction
Act Submission, associated with those
forms.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
I. In General
This document contains proposed
amendments to 26 CFR part 1 under
sections 962, 965, and 986 (the
‘‘proposed regulations’’). As amended
by section 14103 of the Tax Cuts and
Jobs Act, Public Law 115–97 (2017) (the
‘‘Act’’), section 965 applies in the case
of the last taxable year of a deferred
foreign income corporation (‘‘DFIC’’)
that begins before January 1, 2018. The
Department of the Treasury (‘‘Treasury
Department’’) and the IRS have
previously issued guidance announcing
regulations intended to be issued under
section 965. See Notice 2018–07,
2018–4 I.R.B. 317; Notice 2018–13,
2018–6 I.R.B. 341; and Notice 2018–26,
2018–16 I.R.B. 480 (collectively, the
‘‘notices’’); see also Rev. Proc. 2018–17,
2018–9 I.R.B. 384. The proposed
regulations contain the rules related to
section 965 described in the notices,
with certain modifications, as well as
additional guidance related to section
965.
II. Section 965
A. Treatment of Accumulated Post-1986
Deferred Foreign Income as Subpart F
Income
Section 965(a) provides that for the
last taxable year of a DFIC (as defined
in Part II.F of this Background section)
that begins before January 1, 2018 (such
year of the DFIC, the ‘‘inclusion year’’),
the subpart F income of the corporation
(as otherwise determined for such
taxable year under section 952) shall be
increased by the greater of (i) the
accumulated post-1986 deferred foreign
income (as defined in Part II.F of this
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Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules
Background section) of such corporation
determined as of November 2, 2017, or
(ii) the accumulated post-1986 deferred
foreign income of such corporation
determined as of December 31, 2017
(each such date, an ‘‘E&P measurement
date’’). The greater of those two amounts
is the ‘‘section 965(a) earnings amount.’’
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B. Determination of United States
Shareholder’s Section 965(a) Inclusion
Section 965(b)(1) provides that, if a
taxpayer is a United States shareholder
with respect to at least one DFIC and at
least one E&P deficit foreign corporation
(as defined in Part II.C of this
Background section), then the portion of
the section 965(a) earnings amount
which would otherwise be taken into
account under section 951(a)(1) by a
United States shareholder with respect
to each DFIC is reduced by the amount
of such United States shareholder’s
aggregate foreign E&P deficit (as defined
in Part II.C of this Background section)
that is allocated to such DFIC. The
portion of the section 965(a) earnings
amount that is taken into account under
section 951(a)(1) by a United States
shareholder, after the reduction
described in the preceding sentence
and, as applicable, the reduction
described in Part II.D of this Background
section, is referred to as the ‘‘section
965(a) inclusion amount.’’
C. Allocation of Aggregate Foreign E&P
Deficit and Definition of E&P Deficit
Foreign Corporation
The aggregate foreign E&P deficit of
any United States shareholder is
allocated to each DFIC of the United
States shareholder in an amount that
bears the same proportion to such
aggregate as (i) the United States
shareholder’s pro rata share of the
section 965(a) earnings amount of the
DFIC bears to (ii) the aggregate of the
United States shareholder’s pro rata
shares of the section 965(a) earnings
amounts of all DFICs of the United
States shareholder. Section 965(b)(2).
The term ‘‘aggregate foreign E&P deficit’’
means, with respect to any United
States shareholder, the lesser of (A) the
aggregate of the shareholder’s pro rata
shares of the specified E&P deficits of
the E&P deficit foreign corporations of
the shareholder or (B) the aggregate of
the shareholder’s pro rata shares of the
section 965(a) earnings amounts of all
DFICs of the shareholder. Section
965(b)(3)(A)(i).
The term ‘‘E&P deficit foreign
corporation’’ means, with respect to any
taxpayer, any specified foreign
corporation (as defined in Part II.G of
this Background section) with respect to
which the taxpayer is a United States
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shareholder, if, as of November 2, 2017,
(i) the specified foreign corporation had
a deficit in post-1986 earnings and
profits (as defined in Part II.F of this
Background section), (ii) the corporation
was a specified foreign corporation, and
(iii) the taxpayer was a United States
shareholder of the corporation. Section
965(b)(3)(B). The term ‘‘specified E&P
deficit’’ means, with respect to an E&P
deficit foreign corporation, the amount
of the E&P deficit foreign corporation’s
deficit in post-1986 earnings and profits
as of November 2, 2017. See section
965(b)(3)(C).
For purposes of applying section 959
in any taxable year beginning with the
inclusion year, with respect to any
United States shareholder of a DFIC, an
amount equal to the reduction in the
shareholder’s pro rata share of the
section 965(a) earnings amount of the
DFIC by reason of the aggregate foreign
E&P deficit allocated to such DFIC is
treated as an amount which was
included in the gross income of such
United States shareholder under section
951(a). Section 965(b)(4)(A). With
respect to any taxable year beginning
with the inclusion year, a United States
shareholder’s pro rata share of the
earnings and profits (‘‘E&P’’) of any E&P
deficit foreign corporation is increased
by the amount of the specified E&P
deficit of the E&P deficit foreign
corporation taken into account by the
shareholder, and, for purposes of
section 952, the increase is attributable
to the same activity to which the deficit
taken into account was attributable.
Section 965(b)(4)(B).
D. Aggregate Unused E&P Deficit
Under section 965(b)(5), in the case of
any affiliated group which includes at
least one E&P net surplus shareholder
and one E&P net deficit shareholder, the
amount which would (but for section
965(b)(5)) be taken into account under
section 951(a)(1) by reason of section
965(a) by each E&P net surplus
shareholder is reduced (but not below
zero) by such shareholder’s applicable
share of the affiliated group’s aggregate
unused E&P deficit.
The term ‘‘affiliated group’’ has the
meaning provided in section 1504. The
term ‘‘E&P net surplus shareholder’’
means any United States shareholder
which would (but for section 965(b)(5))
take into account a section 965(a)
inclusion amount greater than zero.
Section 965(b)(5)(B). The term ‘‘E&P net
deficit shareholder’’ means any United
States shareholder if (i) the aggregate
foreign E&P deficit with respect to such
shareholder (as defined in section
965(b)(3)(A) without regard to clause
(i)(II) thereof, which limits the aggregate
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foreign E&P deficit of a United States
shareholder to the aggregate of the
United States shareholder’s pro rata
share of the section 965(a) earnings
amount of all DFICs of the United States
shareholder) exceeds (ii) the amount
that would (but for section 965(b)(5)) be
taken into account by such shareholder
under section 951(a)(1) by reason of
section 965(a) (the excess, the ‘‘excess
aggregate foreign E&P deficit’’). Section
965(b)(5)(C). The term ‘‘applicable
share’’ means, with respect to any E&P
net surplus shareholder in any affiliated
group, the amount which bears the same
proportion to the group’s aggregate
unused E&P deficit as (i) the product of
(A) the shareholder’s group ownership
percentage, multiplied by (B) the section
965(a) inclusion amount which would
otherwise be taken into account by a
United States shareholder, bears to (ii)
the aggregate amount determined under
clause (i) with respect to all E&P net
surplus shareholders in the group.
Section 965(b)(5)(E). The term
‘‘aggregate unused E&P deficit’’ means,
with respect to any affiliated group, the
lesser of (i) the sum of the excess
aggregate foreign E&P deficits
determined with respect to each E&P net
deficit shareholder in such affiliated
group, or (ii) with respect to all E&P net
surplus shareholders in the group, the
aggregate of the product of (A) the
shareholder’s group ownership
percentage, multiplied by (B) the
amount which would (but for section
965(b)(5)) be taken into account under
section 951(a)(1) by reason of section
965(a) by the shareholder. Section
965(b)(5)(D).
E. Application of the Participation
Exemption
Section 965(c)(1) provides that there
shall be allowed as a deduction for the
taxable year of a United States
shareholder in which a section 965(a)
inclusion amount is included in the
gross income of the United States
shareholder an amount equal to the sum
of (i) the United States shareholder’s 8
percent rate equivalent percentage (as
defined in section 965(c)(2)(A)) of the
excess (if any) of (A) the section 965(a)
inclusion amount, over (B) the amount
of such United States shareholder’s
aggregate foreign cash position, plus (ii)
the United States shareholder’s 15.5
percent rate equivalent percentage (as
defined in section 965(c)(2)(B)) of so
much of the United States shareholder’s
aggregate foreign cash position as does
not exceed the section 965(a) inclusion
amount. The amount of the deduction
allowed under section 965(c) to a
United States shareholder as described
in the preceding sentence is referred to
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as the ‘‘section 965(c) deduction
amount.’’
Section 965(c)(3)(A) provides that the
term ‘‘aggregate foreign cash position’’
means, with respect to any United
States shareholder, the greater of (i) the
aggregate of the United States
shareholder’s pro rata share of the cash
position of each specified foreign
corporation of the United States
shareholder determined as of the close
of the last taxable year of the specified
foreign corporation that begins before
January 1, 2018, or (ii) one half of the
sum of (A) the aggregate described in
clause (i) determined as of the close of
the last taxable year of each specified
foreign corporation that ends before
November 2, 2017, plus (B) the
aggregate described in clause (i)
determined as of the close of the taxable
year of each specified foreign
corporation which precedes the taxable
year referred to in subclause (A). Each
date referred to in the preceding
sentence is referred to as a ‘‘cash
measurement date.’’
The cash position of any specified
foreign corporation is the sum of (i) cash
held by the corporation, (ii) the net
accounts receivable of the corporation,
and (iii) the fair market value of the
following assets held by the corporation
(each asset, a ‘‘cash-equivalent asset’’):
(A) Personal property which is of a type
that is actively traded and for which
there is an established financial market
(‘‘actively traded property’’); (B)
commercial paper, certificates of
deposit, the securities of the Federal
government and of any State or foreign
government; (C) any foreign currency;
(D) any obligation with a term of less
than one year (‘‘short-term obligation’’);
and (E) any asset which the Secretary
identifies as being economically
equivalent to any asset described in
section 965(c)(3)(B). Section
965(c)(3)(B). Also, for purposes of
section 965(c), the term ‘‘net accounts
receivable’’ means, with respect to any
specified foreign corporation, the excess
(if any) of (i) the corporation’s accounts
receivable, over (ii) the corporation’s
accounts payable (determined
consistent with the rules of section 461).
Section 965(c)(3)(C).
Section 965(c)(3)(D) provides that net
accounts receivable, actively traded
property, and short-term obligations
shall not be taken into account by a
United States shareholder in
determining its aggregate foreign cash
position to the extent that the United
States shareholder demonstrates to the
satisfaction of the Secretary that the
amount of the net accounts receivable,
actively traded property, or short-term
obligations is taken into account by the
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United States shareholder with respect
to another specified foreign corporation.
Section 965(c)(3)(E) provides that an
entity (other than a corporation) will be
treated as a specified foreign
corporation of a United States
shareholder for purposes of determining
the United States shareholder’s
aggregate foreign cash position if any
interest in the entity is held by a
specified foreign corporation of the
United States shareholder (determined
after application of the rule in this
sentence) and the entity, if it were a
foreign corporation, would be a
specified foreign corporation of the
United States shareholder.
Section 965(c)(3)(F) provides that if
the Secretary determines that a
principal purpose of any transaction
was to reduce the aggregate foreign cash
position taken into account under
section 965(c), the transaction shall be
disregarded for purposes of section
965(c).
F. Definition of DFIC and Accumulated
Post-1986 Deferred Foreign Income
For purposes of section 965, a DFIC is,
with respect to any United States
shareholder, any specified foreign
corporation of the United States
shareholder that has accumulated post1986 deferred foreign income greater
than zero as of an E&P measurement
date. Section 965(d)(1). The term
‘‘accumulated post-1986 deferred
foreign income’’ means the post-1986
earnings and profits of the specified
foreign corporation except to the extent
such E&P (i) are attributable to income
of the specified foreign corporation that
is effectively connected with the
conduct of a trade or business within
the United States and subject to tax
under chapter 1, or (ii) in the case of a
controlled foreign corporation (‘‘CFC’’),
if distributed, would be excluded from
the gross income of a United States
shareholder under section 959
(‘‘previously taxed E&P’’). Section
965(d)(2). Section 965(d)(3) provides
that the term ‘‘post-1986 earnings and
profits’’ means the E&P of the foreign
corporation (computed in accordance
with sections 964(a) and 986, and by
taking into account only periods when
the foreign corporation was a specified
foreign corporation) accumulated in
taxable years beginning after December
31, 1986, and determined (i) as of the
E&P measurement date that is
applicable with respect to such foreign
corporation, and (ii) without diminution
by reason of dividends distributed
during the last taxable year of the
foreign corporation that begins before
January 1, 2018, other than dividends
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distributed to another specified foreign
corporation.
G. Specified Foreign Corporations and
United States Shareholders
Section 965(e)(1) provides that the
term ‘‘specified foreign corporation’’
means (i) any CFC (regardless of
whether there is a domestic corporate
shareholder) and (ii) any foreign
corporation with respect to which one
or more domestic corporations is a
United States shareholder (‘‘10-percent
corporation’’). However, if a passive
foreign investment company (as defined
in section 1297) (‘‘PFIC’’) with respect
to the shareholder is not a CFC, then
such corporation is not a specified
foreign corporation. Section 965(e)(3).
An S corporation is treated as a
partnership for purposes of sections 951
through 965. See section 1373(a). For
purposes of sections 951 and 961, a 10percent corporation is treated as a CFC
solely for purposes of taking into
account the subpart F income of such
corporation under section 965(a) (and
for purposes of determining a United
States shareholder’s pro rata share of
any amount with respect to a specified
foreign corporation under section
965(f)). Section 965(e)(2).
For taxable years of foreign
corporations beginning before January 1,
2018, under section 951(b), a United
States shareholder is a United States
person (within the meaning of section
957(c)) that 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 the stock of a foreign
corporation. Under section 957(c), a
United States person generally has the
meaning assigned to it by section
7701(a)(30), which includes a domestic
partnership or domestic trust. But see
Notice 2010–41, 2010–22 I.R.B. 715
(announcing that the Treasury
Department and the IRS intend to issue
regulations treating certain domestic
partnerships as foreign partnerships for
purposes of identifying which United
States shareholders are required to
include amounts in gross income under
section 951(a)). Special rules under
section 957(c) and § 1.957–3 apply in
determining when individuals residing
in certain possessions or territories of
the United States are considered United
States persons for purposes of sections
951 and 965.
H. Determination of Pro Rata Share
Section 965(f)(1) provides that the
determination of any United States
shareholder’s pro rata share of any
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amount with respect to any specified
foreign corporation shall be determined
under rules similar to the rules of
section 951(a)(2) by treating the amount
in the same manner as subpart F income
(and by treating the specified foreign
corporation as a CFC).
I. Special Rules for Domestic PassThrough Entities
Section 965(f)(2) provides that the
portion that is included in the income
of a United States shareholder under
section 951(a)(1) by reason of section
965(a) that is equal to the section 965(c)
deduction amount by reason of the
inclusion is treated as income exempt
from tax for purposes of sections
705(a)(1)(B) and 1367(a)(1)(A) but not
treated as income exempt from tax for
purposes of determining whether an
adjustment is made to an accumulated
adjustments account (‘‘AAA’’) of an S
corporation under section 1368(e)(1)(A).
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J. Foreign Tax Credit and Deduction
Section 965(g)(1) provides that no
credit is allowed under section 901 for
the applicable percentage of any taxes
paid or accrued (or treated as paid or
accrued) with respect to any amount for
which a section 965(c) deduction is
allowed.
The term ‘‘applicable percentage’’
means the amount (expressed as a
percentage) equal to the sum of the
following two amounts:
(i) 0.771 multiplied by the ratio of (A)
the section 965(a) inclusion amount in
excess of the United States
shareholder’s aggregate foreign cash
position divided by (B) the section
965(a) inclusion amount, and
(ii) 0.557 multiplied by the ratio of (A)
the amount of the section 965(a)
inclusion amount equal to the United
States shareholder’s aggregate cash
position, divided by (B) the section
965(a) inclusion amount.
Further, no deduction is allowed for
any tax for which credit is not allowable
under section 901 by reason of section
965(g)(1) (determined by treating the
taxpayer as having elected the benefits
of subpart A of part III of subchapter N).
With respect to the taxes treated as
paid or accrued by a domestic
corporation with respect to the section
965(a) inclusion amount, section 78
applies only to so much of such taxes
as bears the same proportion to the
amount of the taxes as (i) the excess of
(A) the section 965(a) inclusion amount,
over (B) the section 965(c) deduction
amount with respect to such amount,
bears to (ii) the section 965(a) inclusion
amount.
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K. Election Under Section 965(h)
Concerning Payment of Net Tax
Liability Under Section 965
Section 965(h)(1) provides that in the
case of a United States shareholder of a
DFIC, the United States shareholder
may elect to pay the net tax liability
under section 965 in eight installments.
Section 965(h)(6) defines the net tax
liability under section 965 with respect
to any United States shareholder as the
excess (if any) of (i) the taxpayer’s net
income tax for the taxable year in which
an amount is included in the gross
income of the United States shareholder
under section 951(a)(1) by reason of
section 965, over (ii) the taxpayer’s net
income tax for such taxable year
determined (A) without regard to
section 965, and (B) without regard to
any income or deduction properly
attributable to a dividend received by
the United States shareholder from any
DFIC. For this purpose, the term ‘‘net
income tax’’ means the regular tax
liability reduced by the credits allowed
under subparts A, B, and D of part IV
of subchapter A. Section 965(h)(6)(B).
Section 965(h)(2) provides that if a
taxpayer makes an election under
section 965(h), the first installment is
due on the due date (without regard to
extensions) for the return of tax for the
inclusion year. Each successive
installment is due on the due date
(without regard to extensions) for the
return of tax for the taxable year
following the taxable year for which the
previous installment payment was
made.
Section 965(h)(3) provides that if
there is an addition to tax for failure to
timely pay an installment required
under section 965(h), a liquidation or
sale of substantially all the assets of the
taxpayer (including in a title 11 or
similar case), a cessation of business by
the taxpayer, or any similar
circumstance, the unpaid portion of the
remaining installments will be due on
the date of such event (or in the case of
a title 11 or similar case, the day before
the petition is filed). The preceding
sentence does not apply in the case of
the sale of substantially all the assets of
a taxpayer to a buyer if the buyer enters
into an agreement with the Secretary
under which the buyer is liable for the
remaining installments due under
section 965(h) in the same manner as if
the buyer were the taxpayer.
Section 965(h)(4) provides that if a
taxpayer has made an election under
section 965(h), and subsequently, a
deficiency is assessed with respect to
the taxpayer’s net tax liability for
purposes of section 965(h), then the
amount of the deficiency will be
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prorated among the installments. The
part of the deficiency prorated to any
installment the date for payment of
which has not arrived will be collected
at the same time as, and as part of, such
installment. The part of the deficiency
prorated to any installment the date for
payment of which has arrived must be
paid upon notice and demand from the
Secretary. However, the proration rule
does not apply if the deficiency is due
to negligence, intentional disregard of
rules and regulations, or fraud with
intent to evade tax.
L. Election Under Section 965(i)
Concerning Payment of Net Tax
Liability Under Section 965 by an S
Corporation Shareholder and Related
Reporting Requirements
Section 965(i)(1) provides that in the
case of any S corporation that is a
United States shareholder of a DFIC,
each shareholder of the S corporation
may elect to defer payment of the
shareholder’s net tax liability under
section 965 with respect to the S
corporation until the shareholder’s
taxable year which includes the
triggering event with respect to such
liability.
Under section 965(i)(1), any net tax
liability, payment of which is deferred
under section 965(i)(1), will be assessed
on the return of tax as an addition to tax
for the shareholder’s taxable year which
includes the triggering event with
respect to such liability. As defined in
section 965(i)(2), in the case of any
shareholder’s net tax liability under
section 965 with respect to any S
corporation, the triggering event with
respect to such liability is whichever of
the following occurs first: (i) The
corporation ceases to be an S
corporation (determined as of the first
day of the first taxable year that the
corporation is not an S corporation); (ii)
a liquidation or sale of substantially all
the assets of the S corporation
(including in a title 11 or similar case),
a cessation of business by the S
corporation, the S corporation ceases to
exist, or any similar circumstance; or
(iii) a transfer of any share of stock in
the S corporation by the taxpayer
(including by reason of death, or
otherwise). In the case of a transfer of
less than all of the taxpayer’s shares of
stock in the S corporation, the transfer
is only a triggering event with respect to
the portion of the taxpayer’s net tax
liability under section 965 with respect
to the S corporation as is properly
allocable to the transferred stock.
Section 965(i)(2)(B). Moreover, a
transfer of stock in the S corporation is
not a triggering event if the transferee
enters into an agreement with the
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Secretary under which the transferee is
liable for the net tax liability under
section 965 with respect to the stock in
the same manner as if such transferee
were the taxpayer. Section 965(i)(2)(C).
If a triggering event occurs, section
965(i)(4) permits a taxpayer to make an
election under section 965(h) with
respect to the liability to which the
section 965(i) election applied by the
due date for the return of tax for the
taxable year in which the triggering
event occurred, and the first installment
under section 965(h) must also be paid
by the due date (without regard to
extensions) for the return for the taxable
year of the triggering event. However,
the election may only be made with the
consent of the Secretary in the case of
a triggering event that is a liquidation or
sale of substantially all of the assets of
the S corporation. See section
965(i)(4)(D).
Section 965(i)(3) defines a
shareholder’s net tax liability under
section 965 with respect to any S
corporation as the net tax liability under
section 965 which would be determined
under section 965(h)(6) if the only
amounts taken into account by the
shareholder under section 951(a)(1) by
reason of section 965 were allocations
from the S corporation.
Section 965(i)(5) provides that if any
shareholder of an S corporation makes
an election under section 965(i) to defer
payment of its net tax liability under
section 965 with respect to an S
corporation, the S corporation is jointly
and severally liable for the deferred
payment and any penalty, addition to
tax, or additional amount attributable
thereto.
Section 965(i)(6) provides that any
limitation on the time period for the
collection of a liability deferred under
section 965(i) is not treated as beginning
before the date of the triggering event
with respect to such liability.
Section 965(i)(7) requires any
shareholder of an S corporation that
makes an election under section 965(i)
to report the amount of the
shareholder’s deferred net tax liability
on the shareholder’s return of tax for the
taxable year for which the election is
made and on the return of tax for each
taxable year thereafter until the amount
has been fully assessed. ‘‘Deferred net
tax liability’’ means the amount of net
tax liability under section 965 payment
of which has been deferred under
section 965(i) and which has not been
assessed on a return of tax for any prior
taxable year. Section 965(i)(7)(B). In the
case of any failure to report any amount
required to be reported pursuant to
section 965(i)(7) with respect to any
taxable year before the due date for the
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return of tax for the taxable year, there
will be assessed on the return as an
addition to tax 5 percent of such
amount. Section 965(i)(7)(C).
M. Election Under Section 965(m)
Concerning Inclusions of Amounts
Under Section 965 and Related
Provisions
Under section 965(m)(1)(B), a real
estate investment trust (REIT) that is a
United States shareholder of a DFIC may
elect, in lieu of including any amount
required to be taken into account under
section 951(a)(1) by reason of section
965 in the taxable year in which it
would otherwise be included in gross
income (for purposes of the
computation of REIT taxable income
under section 857(b)), to include such
amount in gross income in eight
installments.
If this election is made, the REIT’s
aggregate section 965(c) deduction must
be determined without regard to the
election and allocated to each taxable
year for which an installment is
included in the same proportion as the
amount of the installment included in
gross income. See section
965(m)(2)(B)(i)(II). Furthermore, the
REIT may not make a section 965(h)
election for any taxable year for which
an installment is included. See section
965(m)(2)(B)(i)(III). Under section
965(m)(2)(B)(ii), if there is a liquidation
or sale of substantially all the assets of
the REIT (including in a title 11 or
similar case), a cessation of business by
the trust, or any similar circumstance,
then any amount not yet included in
gross income will be included in gross
income as of the day before the date of
the event, and the unpaid portion of any
tax liability with respect to the
inclusion will be due on the date of the
event (or in the case of a title 11 or
similar case, the day before the petition
is filed).
Section 965(m)(1)(A) provides that
any amount required to be taken into
account under section 951(a)(1) by
reason of section 965 by a REIT that is
a United States shareholder of a DFIC is
not taken into account as gross income
of the REIT for purposes of applying
paragraphs (2) and (3) of section 856(c)
to any taxable year for which the
amount is taken into account under
section 951(a)(1).
N. Election Under Section 965(n) Not To
Apply Net Operating Loss Deduction
Under section 965(n)(1), a United
States shareholder of a DFIC may make
an election pursuant to which the
amount described in section 965(n)(2)
shall not be taken into account (i) in
determining the amount of the
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shareholder’s net operating loss
(‘‘NOL’’) deduction under section 172
for the taxable year, or (ii) in
determining the amount of taxable
income for the taxable year which may
be reduced by NOL carryovers or
carrybacks to the taxable year under
section 172. The amount described in
section 965(n)(2) is the sum of (i) the
amount required to be taken into
account under section 951(a)(1) by
reason of section 965 (determined after
the application of section 965(c)), plus
(ii) in the case of a domestic corporation
which chooses to have the benefits of
subpart A of part III of subchapter N for
the taxable year, the taxes deemed to be
paid by the corporation under
subsections (a) and (b) of section 960 for
the taxable year with respect to the
amount described in section
965(n)(2)(A) which are treated as a
dividend under section 78.
O. Recapture for Expatriated Entities
Section 965(l) provides that if a
section 965(c) deduction is allowed to a
United States shareholder and the
shareholder first becomes an expatriated
entity (as defined under section
7874(a)(2), except not including an
entity if the surrogate foreign
corporation with respect to it is treated
as a domestic corporation under section
7874(b)) at any time during the 10-year
period beginning on the date of the
enactment of the Act (with respect to a
surrogate foreign corporation (as defined
under section 7874(a)(2)(B)) that first
becomes a surrogate foreign corporation
during such period), the tax imposed
under chapter 1 will be increased for the
first taxable year in which such taxpayer
becomes an expatriated entity by an
amount equal to 35 percent of the
amount of the section 965(c) deduction,
and no credits will be allowed against
such increase in tax.
P. Regulations or Other Guidance
Section 965(o) provides that the
Secretary shall prescribe such
regulations or other guidance as may be
necessary or appropriate to carry out the
provisions of section 965, including
regulations or other guidance to provide
appropriate basis adjustments and
regulations or other guidance to prevent
the avoidance of the purposes of section
965, including through a reduction in
E&P, changes in entity classification or
accounting methods, or otherwise.
III. Other Provisions
A. Section 962
As amended by the Act, section 962
provides that an individual who is a
United States shareholder may elect to
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have the tax imposed under chapter 1
on amounts that are included in the
individual’s gross income under section
951(a) be an amount equal to the tax
that would be imposed under section 11
if the amounts were received by a
domestic corporation. In addition, if an
election is made under section 962, the
amounts included in the individual’s
gross income under section 951(a) are
treated as if they were received by a
domestic corporation for purposes of
applying section 960 (relating to foreign
tax credits). See § 1.962–1(a). However,
the taxable income determined for
purposes of applying section 11 is not
reduced by any deduction of the United
States shareholder. See § 1.962–
1(b)(1)(i). An election under section 962
does not affect tax imposed under other
chapters, including under chapter 2A.
B. Attribution Rules in Sections 958(b)
and 318(a)
Section 958 provides rules for
determining direct, indirect, and
constructive stock ownership. Under
section 958(a)(1), stock is considered
owned by a person if it is owned
directly or is owned indirectly through
certain foreign entities under section
958(a)(2). Under section 958(b), section
318 applies, with certain modifications,
to the extent that the effect is to treat
any United States person as a United
States shareholder within the meaning
of section 951(b), to treat a person as a
related person within the meaning of
section 954(d)(3), to treat the stock of a
domestic corporation as owned by a
United States shareholder of a CFC for
purposes of section 956(c)(2), or to treat
a foreign corporation as a CFC under
section 957.
Section 318 provides rules that
attribute the ownership of stock to
certain family members, between certain
entities and their owners, and to holders
of options to acquire stock. Section
318(a)(1) provides rules attributing stock
ownership among members of a family.
Section 318(a)(2) provides rules
attributing stock ownership ‘‘upward’’
from partnerships, estates, trusts, and
corporations to partners, beneficiaries,
owners, and shareholders. In addition,
section 318(a)(3) provides specific rules
that attribute the ownership of stock
‘‘downward’’ from partners,
beneficiaries, owners, and shareholders
to partnerships, estates, trusts, and
corporations. In particular, section
318(a)(3)(A) provides that stock owned,
directly or indirectly, by or for a partner
in a partnership or a beneficiary of an
estate is considered as owned by the
partnership or estate. This provision
applies to all partners and beneficiaries
without regard to the size of their
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interest in the partnership or estate.
Section 318(a)(3)(B) similarly provides,
subject to certain exceptions, that stock
owned, directly or indirectly, by or for
a beneficiary of a trust (or a person who
is considered an owner of a trust) is
considered owned by the trust. In
comparison, section 318(a)(3)(C)
provides that stock owned, directly or
indirectly, by or for a shareholder in a
corporation is considered owned by the
corporation only if 50 percent or more
in value of the stock in the corporation
is owned, directly or indirectly, by such
person.
Effective for the last taxable year of
foreign corporations beginning before
January 1, 2018, and each subsequent
year of the foreign corporations, and for
the taxable years of United States
shareholders in which or with which
such taxable years of the foreign
corporations end, the Act repeals
section 958(b)(4). As in effect before
repeal, section 958(b)(4) provided that
subparagraphs (A), (B), and (C) of
section 318(a)(3) (providing for
‘‘downward’’ attribution) were not to be
applied so as to consider a United States
person as owning stock that is owned by
a person who is not a United States
person.
C. Miscellaneous Itemized Deductions
Under section 67(a), miscellaneous
itemized deductions are allowed only to
the extent that the aggregate of such
deductions exceeds 2 percent of
adjusted gross income. As amended by
the Act, section 67(g) provides that for
taxable years beginning after December
31, 2017, and before January 1, 2026, no
miscellaneous itemized deductions are
allowable under section 67(a). In
addition, under section 56(b)(1)(A)(i), an
individual subject to the alternative
minimum tax in 2017 is not allowed a
deduction for any miscellaneous
itemized deduction. Under section
63(d), itemized deductions generally
mean all allowable deductions except
for the deductions allowable in arriving
at adjusted gross income pursuant to
section 62(a), the deduction provided by
section 151, and the deduction provided
in section 199A (added by the Act).
Miscellaneous itemized deductions
include all itemized deductions other
than those listed in section 67(b), which
does not reference the section 965(c)
deduction.
D. Section 4940
An inclusion under section 951(a)(1),
including a section 965(a) inclusion,
generally is included in the calculation
of gross investment income of a private
foundation for purposes of determining
the excise tax imposed under section
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39519
4940 (generally 2 percent of net
investment income). Gross investment
income under section 4940 does not
include an inclusion under section
951(a)(1), including a section 965(a)
inclusion, to the extent the amount is
included in computing the unrelated
business income tax imposed by section
511. See section 4940(c)(2). Section
4940(c)(3) allows as a deduction all the
ordinary and necessary expenses paid or
incurred for the production or collection
of gross investment income or for the
management, conservation, or
maintenance of property held for the
production of income.
E. Extensions of Time for Filing Income
Tax Returns and Paying Tax for Certain
Citizens and Residents Abroad
In relevant part, regulations under
section 6081 provide an extension of
time to the fifteenth day of the sixth
month following the close of the taxable
year for filing returns of income taxes
and for paying any tax shown on the
return for United States citizens or
residents whose tax homes and abodes,
in a real and substantial sense, are
outside the United States and Puerto
Rico, and United States citizens and
residents in military or naval service on
duty, including non-permanent or short
term duty, outside the United States and
Puerto Rico (‘‘specified individuals’’).
See § 1.6081–5(a)(5) and (6).
Explanation of Provisions
I. Overview of Proposed Regulations
Proposed § 1.965–1 provides general
rules and definitions under section 965.
Proposed § 1.965–2 provides rules
relating to adjustments to E&P and basis
to determine and account for the
application of section 965 and a rule
that limits the amount of gain
recognized in connection with the
application of section 961(b)(2).
Proposed § 1.965–3 provides rules
regarding the determination of section
965(c) deductions. Proposed § 1.965–4
sets forth rules that disregard certain
transactions for purposes of section 965.
Proposed §§ 1.965–5 and 1.965–6
provide rules with respect to foreign tax
credits. Proposed § 1.965–7 provides
rules regarding elections and payments.
Proposed § 1.965–8 provides rules
regarding affiliated groups, including
consolidated groups. Proposed § 1.965–
9 provides dates of applicability.
Proposed §§ 1.962–1 and 1.962–2
provide rules relating to section 962
elections. Proposed § 1.986(c)–1
provides rules regarding the application
of section 986(c) in connection with
section 965.
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II. Definitions and General Rules
Section 1.965–1 of the proposed
regulations provides general rules and
definitions under section 965, including
general rules concerning section 965(a)
inclusions, general rules concerning
section 965(c) deductions, and rules
concerning the treatment of certain
specified foreign corporations as CFCs
and certain controlled domestic
partnerships as foreign partnerships.
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A. General Rules
Proposed § 1.965–1 provides the
general rules contained in section
965(a), (b), and (c). Proposed § 1.965–
1(b)(1) provides that the subpart F
income of a DFIC for its inclusion year
is increased by the section 965(a)
earnings amount. Proposed § 1.965–
1(b)(2) provides that the pro rata share
of the DFIC’s section 965(a) earnings
amount of a United States shareholder
that owns, within the meaning of
section 958(a), stock (the stock, ‘‘section
958(a) stock’’, and the shareholder, a
‘‘section 958(a) U.S. shareholder’’) is
reduced by the DFIC’s allocable share of
the section 958(a) U.S. shareholder’s
aggregate foreign E&P deficit. If a section
958(a) U.S. shareholder is a member of
a consolidated group, all section 958(a)
U.S. shareholders that are members of a
consolidated group are treated as a
single section 958(a) U.S. shareholder
for this purpose. See Part IX of this
Explanation of Provisions section for a
discussion of additional rules that apply
with respect to a section 958(a) U.S.
shareholder that is a member of an
affiliated group of which not all
members are part of a consolidated
group. The amount determined after the
reductions referenced in the preceding
sentences is defined as the section
965(a) inclusion amount, which is the
amount included by a section 958(a)
U.S. shareholder of a DFIC for its
taxable year in which or with which the
DFIC’s inclusion year ends (the ‘‘section
958(a) U.S. shareholder inclusion
year’’). See proposed § 1.965–1(b)(1); see
also Part II.B of the Background section
of this preamble. The proposed
regulations also clarify that because an
increase in subpart F income by reason
of section 965(a) is generally determined
after the subpart F income is otherwise
determined under section 952 for the
taxable year, neither the section 965(a)
earnings amount nor the section 965(a)
inclusion amount is subject to the rules
or limitations in section 952 or
otherwise limited by the accumulated
E&P of the DFIC. Id.
Proposed § 1.965–1(c) provides that a
section 958(a) U.S. shareholder is
generally allowed a deduction for a
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section 965(c) deduction amount for a
section 958(a) U.S. shareholder
inclusion year. The proposed
regulations clarify that a section 958(a)
U.S. shareholder’s aggregate foreign
cash position is applied against the
aggregate section 965(a) inclusion
amounts for a section 958(a) U.S.
shareholder inclusion year. See
proposed § 1.965–1(f)(1)–(4), (8), (42). In
the case of a section 958(a) U.S.
shareholder with more than one section
958(a) U.S. shareholder inclusion year,
its aggregate foreign cash position is
allocated to each year under proposed
§ 1.965–3(c)(2), and therefore the section
965(c) deduction amount is determined
separately for each section 958(a) U.S.
shareholder inclusion year.
Consistent with section 965(e)(2),
proposed § 1.965–1(d) provides that a
10-percent corporation is treated as a
CFC for purposes of sections 951 and
961, as well as for purposes of § 1.1411–
10, so that those rules, applicable to
CFCs, are also applicable to DFICs that
are not CFCs.
Moreover, the proposed regulations
provide that for purposes of identifying
section 958(a) U.S. shareholders of
specified foreign corporations and the
section 958(a) stock of such specified
foreign corporations owned by section
958(a) U.S. shareholders, a domestic
partnership is treated as a foreign
partnership if certain conditions are
satisfied. See proposed § 1.965–1(e)(1).
This is an expansion on the reference in
section 2.13 of Notice 2018–26 to Notice
2010–41, which referred to CFCs,
whereas the expanded rule includes
specified foreign corporations generally.
B. Definitions
Section 1.965–1(f) of the proposed
regulations sets forth definitions for
terms that apply for all of the proposed
regulations under section 965. Except as
otherwise described in this Explanation
of Provisions section, the definitions set
forth in the proposed regulations that
are also used in section 965 or one of
the notices have the meaning described
therein. This Part II.B of the Explanation
of Provisions section also describes
rules incorporated into certain defined
terms that are not described elsewhere
in this Explanation of Provisions
section.
1. Specified Foreign Corporation
The proposed regulations provide that
a specified foreign corporation means
any CFC or 10-percent corporation,
other than a foreign corporation that is
a PFIC with respect to a shareholder and
not a CFC. See proposed § 1.965–
1(f)(45)(i) and (iii).
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Section 3.01 of Notice 2018–26 noted
that as a result of the application of the
constructive ownership rule in section
318(a)(3)(A) (providing for ‘‘downward’’
attribution of stock from a partner to a
partnership), it may be difficult to
determine if a foreign corporation is a
specified foreign corporation under
certain circumstances. Consistent with
that section of the notice, the definition
of specified foreign corporation
provides that, solely for purposes of
determining whether a foreign
corporation is a specified foreign
corporation within the meaning of
section 965(e)(1)(B), stock owned,
directly or indirectly, by or for a partner
(‘‘tested partner’’) will not be considered
as being owned by a partnership under
sections 958(b) and 318(a)(3)(A) if the
tested partner owns less than five
percent of the interests in the
partnership’s capital and profits. See
proposed § 1.965–1(f)(45)(ii). For
purposes of the preceding sentence, an
interest in the partnership owned by
another partner will be considered as
being owned by the tested partner under
the principles of sections 958(b) and
318, as modified pursuant to the
preceding sentence, as if the interest in
the partnership were stock.
2. Post-1986 Earnings and Profits
Section 3.02(b) of Notice 2018–07
indicated that the reduction of post1986 earnings and profits of a specified
foreign corporation to reflect dividends
distributed during the corporation’s
inclusion year to another specified
foreign corporation (the ‘‘dividend
reduction rule’’) is intended to address
the potential double-counting of the
E&P of the distributing specified foreign
corporation in calculating the section
965(a) inclusion amounts of a United
States shareholder with respect to the
distributing specified foreign
corporation and the distributee
specified foreign corporation. It noted,
however, that to the extent that a
portion of a distribution reduces the
post-1986 earnings and profits of a
distributing specified foreign
corporation (for example, by reason of a
reduction pursuant to section 312(a)(3))
in an amount in excess of the increase
in the post-1986 earnings and profits of
the distributee specified foreign
corporation, the reduction would not
relieve double-counting and thus would
be inconsistent with the purpose of the
rule.
Accordingly, consistent with section
3.02(b) of Notice 2018–07, the definition
of ‘‘post-1986 earnings and profits’’
clarifies, in proposed § 1.965–
1(f)(29)(i)(B), that the amount by which
the post-1986 earnings and profits of a
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specified foreign corporation is reduced
under section 965(d)(3)(B) as a result of
a distribution made to a specified
foreign corporation in the last taxable
year of the foreign corporation that
begins before January 1, 2018, may not
exceed the amount by which the post1986 earnings and profits of the
distributee corporation is increased as a
result of the distribution. Additionally,
similar to section 3.03 of Notice 2018–
26, in computing post-1986 earnings
and profits on November 2, 2017, in
certain cases, a reduction is allowed for
a portion of foreign income taxes that
accrue after November 2, 2017, and on
or before December 31, 2017
(‘‘applicable taxes’’). In particular, post1986 earnings and profits on November
2, 2017, are reduced by the portion of
the applicable taxes that are attributable
to the portion of the taxable income (as
determined under foreign law) that
accrues on or before November 2, 2017,
and during the specified foreign
corporation’s U.S. taxable year that
includes November 2, 2017. See
proposed § 1.965–1(f)(29)(ii).
Moreover, consistent with the
Conference Report accompanying the
Act (the ‘‘Conference Report’’) and
section 3.03(b) of Notice 2018–13,
proposed § 1.965–1(f)(29)(iii) provides
that all deficits related to post-1986
earnings and profits, including hovering
deficits, are taken into account for
purposes of determining the post-1986
earnings and profits (including a deficit)
of a specified foreign corporation. See
H.R. Rep. No. 115–466, at 619 (2017)
(Conf. Rep.). The fact that hovering
deficits are taken into account for
purposes of determining post-1986
earnings and profits, and ultimately the
section 965(a) inclusion amount of a
section 958(a) U.S. shareholder, does
not mean that hovering deficits are
taken into account for any other
purpose. For example, this rule does not
result in hovering deficits being taken
into account for purposes of
determining post-1986 undistributed
earnings or pre-1987 accumulated
profits in computing the taxes deemed
paid for the foreign tax credit. The
Treasury Department and the IRS
request comments on whether
additional rules are needed to address
the treatment of hovering deficits that
reduce post-1986 earnings and profits of
a DFIC, for example when the hovering
deficit creates a specified E&P deficit.
Comments noted that a specified
foreign corporation that is not a CFC
does not generally track E&P under U.S.
tax principles and requested that
taxpayers be allowed to use an
alternative measurement method for
determining its post-1986 earnings and
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profits and cash position, such as
audited financial statements. This
comment is not adopted in the proposed
regulations. Generally, audited financial
statements may serve as a starting point
in the determination of a specified
foreign corporation’s E&P. See § 1.964–
1. The Treasury Department and the IRS
appreciate that obtaining accurate
information for U.S. federal income tax
purposes may present administrative
challenges, particularly in the case of
United States shareholders that do not
have a majority interest in a specified
foreign corporation. However, this
challenge is not unique to this context;
there are numerous longstanding
provisions in the Code where minority
shareholders of foreign corporations
must determine E&P consistent with
section 312 where no alternative
measurement method is provided. For
example, United States persons who
own stock in PFICs must, if they make
an election to treat the PFIC as a
qualified electing fund under section
1293, determine the E&P of the PFIC in
accordance with principles of section
312. See section 1293(e)(3).
Additionally, minority shareholders
who are nonetheless United States
shareholders of CFCs must know the
E&P of the CFC in order to apply the
rules under subpart F. Accordingly, the
Treasury Department and the IRS have
determined that it would not be
appropriate for the proposed regulations
to provide alternative methods for
determining a corporation’s E&P or cash
position.
3. E&P Deficit Foreign Corporation
Consistent with section 3.01 of Notice
2018–13, under the proposed
regulations, for purposes of determining
the status of a specified foreign
corporation as a DFIC or an E&P deficit
foreign corporation, it must first be
determined whether the specified
foreign corporation is a DFIC. Proposed
§ 1.965–1(f)(17)(ii) provides that, if a
specified foreign corporation meets the
definition of a DFIC, it is classified
solely as a DFIC and not also as an E&P
deficit foreign corporation, even if the
specified foreign corporation otherwise
satisfies the requirements of section
965(b)(3)(B) and proposed § 1.965–
1(f)(22). If a specified foreign
corporation does not meet the definition
of a DFIC, it then must be determined
whether it is an E&P deficit foreign
corporation. In some cases, a specified
foreign corporation may be classified as
neither a DFIC nor an E&P deficit
foreign corporation, despite having post1986 earnings and profits greater than
zero or a deficit in accumulated post-
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1986 deferred foreign income. See
proposed § 1.965–1(g), Example 5.
Comments requested that previously
taxed E&P should be disregarded in
determining a specified E&P deficit of
an E&P deficit foreign corporation.
Section 965(b)(3)(B) provides that a
specified foreign corporation is an E&P
deficit foreign corporation if it has a
deficit in post-1986 earnings and profits
as of November 2, 2017. For purposes of
section 965, the term post-1986 earnings
and profits is defined in section
965(d)(3) and is computed in
accordance with sections 964(a) and
986. Under section 964(a), earnings and
profits are determined according to
rules substantially similar to those
applicable to domestic corporations.
Previously taxed E&P are a type of
E&P. See section 959(c). No express
exclusion of previously taxed E&P is
provided in section 965(d)(3) for
purposes of determining post-1986
earnings and profits. In contrast, the
term accumulated post-1986 deferred
foreign income, as defined in section
965(d)(2), explicitly excludes previously
taxed E&P. See section 965(d)(2)(B)
(citing section 959). Accordingly, the
proposed regulations provide that
previously taxed E&P is not excluded in
determining the existence and amount
of a specified E&P deficit, which is
defined in reference to post-1986
earnings and profits and not in reference
to accumulated post-1986 deferred
foreign income. The Treasury
Department and the IRS are considering
other rules with respect to the
definitions of post-1986 earnings and
profits, accumulated post-1986 deferred
foreign income, and specified E&P
deficit in connection with the
finalization of these proposed
regulations. See section 965(o). The
Treasury Department and the IRS
welcome comments on this subject.
4. Accumulated Post-1986 Deferred
Foreign Income
Consistent with section 3.02(c) of
Notice 2018–07, proposed § 1.965–
1(f)(7)(i)(C) provides that in the case of
a CFC that has shareholders that are not
United States shareholders on an E&P
measurement date, the accumulated
post-1986 deferred foreign income of the
CFC on such E&P measurement date is
reduced by amounts that would be
described in section 965(d)(2)(B) if those
shareholders were United States
shareholders. In such cases, the
principles of Revenue Ruling 82–16,
1982–1 C.B. 106, apply in order to
determine the amounts by which
accumulated post-1986 deferred foreign
income is reduced.
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Proposed § 1.965–1(f)(7)(ii) clarifies
that, for purposes of determining the
accumulated post-1986 deferred foreign
income of a specified foreign
corporation as of an E&P measurement
date, the E&P of the specified foreign
corporation that are described in section
959(c)(2) (or that would be described in
section 959(c)(2) applying the principles
of Revenue Ruling 82–16, 1982–1 C.B.
106) by reason of subpart F income are
treated as described in section
965(d)(2)(B) and proposed § 1.965–
1(f)(7)(i)(B) or (f)(7)(i)(C) only to the
extent that such income is accrued by
the specified foreign corporation as of
such E&P measurement date. For rules
regarding the interaction of sections
951, 956, 959, and 965 generally, see
Part IV.A of this Explanation of
Provisions section.
5. Cash Measurement Dates
Consistent with section 3.02 of Notice
2018–26, the definitions of the cash
measurement dates, and of pro rata
share, provide the following:
(i) The final cash measurement date of
a specified foreign corporation is the
close of the last taxable year of the
specified foreign corporation that begins
before January 1, 2018, and ends on or
after November 2, 2017, if any;
(ii) The second cash measurement
date of a specified foreign corporation is
the close of the last taxable year of the
specified foreign corporation that ends
after November 1, 2016, and before
November 2, 2017, if any;
(iii) The first cash measurement date
of a specified foreign corporation is the
close of the last taxable year of the
specified foreign corporation that ends
after November 1, 2015, and before
November 2, 2016, if any; and
(iv) A United States shareholder takes
into account its pro rata share of the
cash position of a specified foreign
corporation as of any cash measurement
date of the specified foreign corporation
on which the United States shareholder
is a United States shareholder of the
specified foreign corporation, regardless
of whether the United States
shareholder is a United States
shareholder of the specified foreign
corporation as of any other cash
measurement date, including the final
cash measurement date of the specified
foreign corporation.
See proposed § 1.965–1(f)(24), (31),
(25), and (30)(iii), respectively. Section
3.02 of Notice 2018–26 also announced
that for purposes of applying the rules
contained therein, a 52–53-week taxable
year is deemed to begin on the first day
of the calendar month nearest to the first
day of the 52–53-week taxable year and
is deemed to end or close on the last day
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of the calendar month nearest to the last
day of the 52–53-week taxable year, as
the case may be. See § 1.441–2(c). The
Treasury Department and the IRS have
determined that the rules contained in
§ 1.441–2(c), which relate to the
application of effective dates, are not
relevant in determining when a 52–53week taxable year is considered to begin
or end for purposes of the cash
measurement dates; instead, the actual
dates on which such a year begins and
ends should be taken into account in
determining cash measurement dates.
Therefore, the proposed regulations do
not contain the rule in section 3.02 of
Notice 2018–26 referring to § 1.441–2(c).
Comments requested guidance on the
measurement of cash when a section
381 transaction occurs during the last
year of a specified foreign corporation
that begins before January 1, 2018. The
Treasury Department and the IRS have
defined cash measurement date in the
notices and largely adopted the
definition in the proposed regulations.
The Treasury Department and the IRS
have determined that these rules
provide appropriate guidance, and
therefore additional rules are not
necessary. See also Part V.A.2 of this
Explanation of Provisions section, for a
discussion of the rules for disregarding
certain assets to prevent doublecounting under section 965(c)(3)(D), and
Part VI.A of this Explanation of
Provisions section, for a discussion of
the anti-avoidance rule in proposed
§ 1.965–4(b), which could apply, for
example, to liquidations that reduce a
section 958(a) U.S. shareholder’s
aggregate foreign cash position.
6. Cash Position & Derivative Financial
Instruments
Consistent with section 3.01(c) of
Notice 2018–07, the proposed
regulations address the treatment of
derivative financial instruments for
purposes of measuring the cash position
of a specified foreign corporation.
Generally, the cash position of any
specified foreign corporation includes,
among other things, the fair market
value of the cash-equivalent assets held
by the corporation. See proposed
§ 1.965–1(f)(16)(i)(C). Consistent with
section 3.01(c) of Notice 2018–07, the
proposed regulations define the term
cash-equivalent asset to include
derivative financial instruments held by
the specified foreign corporation that is
not a bona fide hedging transaction. See
proposed § 1.965–1(f)(13)(v). Derivative
financial instruments include notional
principal contracts, options contracts,
forward contracts, futures contracts,
short positions in securities and
commodities, and any similar financial
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instruments. See proposed § 1.965–
1(f)(18).
The proposed regulations provide that
the value of each derivative financial
instrument that must be taken into
account in determining the cash
position of a specified foreign
corporation may be positive or negative,
but that the aggregate amount taken into
account for all derivative financial
instruments (excluding bona fide
hedging transactions) of a specified
foreign corporation cannot be less than
zero. See proposed § 1.965–1(f)(16)(iii).
Consistent with section 3.01(c) of
Notice 2018–07, the proposed
regulations also provide that if a
derivative financial transaction is a bona
fide hedging transaction that is used to
hedge a cash-equivalent asset, the value
of the cash-equivalent asset identified
on the taxpayer’s books and records as
the asset being hedged must be adjusted
by the fair market value of the bona fide
hedging transaction that is used to
hedge such cash-equivalent asset (such
hedging transaction, a ‘‘cash-equivalent
asset hedging transaction’’). See
proposed § 1.965–1(f)(16)(ii). The value
of a cash-equivalent asset hedging
transaction must be taken into account
in determining the cash position of a
specified foreign corporation whether
the cash-equivalent asset hedging
transaction has positive or negative
value, but only to the extent that the
cash-equivalent asset hedging
transaction (or transactions) does not
reduce the fair market value of the asset
being hedged below zero. Id. A bona
fide hedging transaction with respect to
an asset that is not a cash-equivalent
asset or with respect to a liability (as
described in § 1.1221–2(b)(2)) is not
included in a specified foreign
corporation’s cash position for purposes
of section 965(c)(3)(B).
The proposed regulations define a
bona fide hedging transaction as a
hedging transaction that meets the
requirements of a bona fide hedging
transaction described in § 1.954–
2(a)(4)(ii) and that is properly identified
as such in accordance with the
requirements of that subparagraph.
Proposed § 1.965–1(f)(12). Consistent
with the definition of a bona fide
hedging transaction in § 1.954–
2(a)(4)(ii), in the case of an asset
hedging transaction, the risk being
hedged may be with respect to ordinary
property, section 1231 property, or a
section 988 transaction. Because the
identification requirements of § 1.954–
2(a)(4)(ii) are generally relevant only to
CFCs, whereas section 965 applies to all
specified foreign corporations, the
proposed regulations provide that the
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identification requirements apply only
with respect to CFCs. Id.
7. Accounts Receivable and Accounts
Payable
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Consistent with section 3.04(a) of
Notice 2018–13 as well as the
clarification provided in section 3.06 of
Notice 2018–26, the definitions of
‘‘accounts payable’’ and ‘‘accounts
receivable’’ in proposed § 1.965–1(f)(5)
and (6) provide that for purposes of
determining net accounts receivable
taken into account in determining the
cash position of a specified foreign
corporation, the term ‘‘accounts
receivable’’ means receivables described
in section 1221(a)(4), and the term
‘‘accounts payable’’ means payables
arising from the purchase of property
described in section 1221(a)(1) or
1221(a)(8) or the receipt of services from
vendors or suppliers, and only
receivables or payables with a term
upon issuance that is less than one year
are taken into account. In addition,
receivables that are treated as accounts
receivable within the meaning of section
965(c)(3)(C)(i) and proposed § 1.965–
1(f)(6) are not also treated as short-term
obligations. See proposed § 1.965–
1(f)(43).
Comments requested modifications to
the definition of accounts payable for
purposes of determining a specified
foreign corporation’s cash position,
including that accounts payable be
defined to include payables related to
the licensing of intellectual property,
payables to employees in the ordinary
course of business, and payables arising
from property described in section
1221(a)(2). The term ‘‘accounts payable’’
is not defined in the statute, and the
Treasury Department and the IRS have
determined that the definition in the
proposed regulations is consistent with
the ordinary meaning of accounts
payable. Therefore no change is made in
the proposed regulations to the
definition of accounts payable.
determining whether an obligation is a
short-term obligation.
A comment requested that taxpayers
be able to prove, based on facts and
circumstances, that a demand loan
should not be treated as a short-term
obligation. The Treasury Department
and the IRS have determined that any
facts-and-circumstances test would not
be administrable, particularly to the
extent that the test required a
determination of a taxpayer’s subjective
intent with respect to the payment of
the loan. Accordingly, this comment is
not adopted.
8. Short-Term Obligations
9. Pro Rata Share
Consistent with section 3.03(a) of
Notice 2018–13, the proposed
regulations provide that, for purposes of
determining a United States
shareholder’s pro rata share of the
specified E&P deficit of an E&P deficit
foreign corporation that has multiple
classes of stock outstanding, the
specified E&P deficit is allocated among
the shareholders of the corporation’s
common stock and in proportion to the
value of the common stock held by such
shareholders. See proposed § 1.965–
1(f)(30)(ii). Comments are requested
regarding whether there are
circumstances in which a specified E&P
deficit should be allocated to
shareholders of an E&P deficit foreign
corporation’s preferred stock and, if so,
how to allocate as between shareholders
of common stock and shareholders of
preferred stock as well as among
shareholders of preferred stock. The
proposed regulations also clarify that,
for purposes of determining a
shareholder’s pro rata share of a
specified E&P deficit, the value of the
common stock is determined as of the
last day of the last taxable year of the
E&P deficit foreign corporation that
begins before January 1, 2018. Id.
See Part II.B.5 of this Explanation of
Provisions section for a discussion of
the definition of pro rata share with
respect to the cash position of a
specified foreign corporation.
Consistent with section 3.04(b) of
Notice 2018–13, proposed § 1.965–
1(f)(43) provides that, for purposes of
determining a specified foreign
corporation’s cash position, a loan that
must be repaid on the demand of the
lender (or that must be repaid within
one year of such demand) is treated as
a short-term obligation, regardless of the
stated term of the instrument, and thus
is included in the specified foreign
corporation’s cash position. In response
to a comment, proposed § 1.965–1(f)(43)
clarifies that an instrument’s term upon
issuance is used for purposes of
10. Domestic Pass-Through Entities
As explained in section 3.05(b) of
Notice 2018–26, section 965 increases
the amount included in the gross
income of a United States shareholder
under section 951(a)(1) only if the
United States shareholder owns section
958(a) stock of one or more specified
foreign corporations. See section
951(a)(2)(A). Accordingly, if a domestic
pass-through entity is a United States
shareholder of a DFIC and owns section
958(a) stock of the DFIC, the section
965(a) inclusion amount with respect to
the section 958(a) stock and the section
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39523
965(c) deduction amount with respect to
the section 965(a) inclusion amount are
each determined at the level of the
domestic pass-through entity. See
section 951(a)(1). However, the
domestic pass-through owners of the
domestic pass-through entity are subject
to federal income tax on their share of
the aggregate section 965(a) inclusion
amount with respect to section 958(a)
stock owned by the domestic passthrough entity. Accordingly, in the case
of a domestic pass-through entity that is
a section 958(a) U.S. shareholder with
respect to one or more DFICs, each
domestic pass-through owner takes into
account its share of the aggregate section
965(a) inclusion amount with respect to
section 958(a) stock of one or more
DFICs of the domestic pass-through
entity and its share of the section 965(c)
deduction amount with respect to such
amount (each, a ‘‘domestic pass-through
owner share’’), regardless of whether
such domestic pass-through owner is
also a United States shareholder with
respect to such DFIC, giving rise to a
‘‘section 965(a) inclusion’’ and a
‘‘section 965(c) deduction’’ to the
domestic pass-through owner. See
proposed § 1.965–1(f)(21), (37) and (41).
For this purpose, a pass-through
owner’s share is determined under the
provisions of subchapter K of the Code.
Proposed § 1.965–3(g) provides that
an aggregate section 965(a) inclusion
amount for a section 958(a) U.S.
shareholder inclusion year and the
related section 965(c) deduction amount
must be allocated in the same
proportion. For example, if a domestic
pass-through owner is allocated 50
percent of an aggregate section 965(a)
inclusion amount with respect to
section 958(a) stock of a domestic passthrough entity, the domestic passthrough owner must be allocated 50
percent of the related section 965(c)
deduction amount. If the domestic passthrough owner is also a section 958(a)
U.S. shareholder with respect to the
DFIC because it owns section 958(a)
stock of the DFIC, the section 965(a)
inclusion amount with respect to the
section 958(a) stock of the domestic
pass-through owner and the section
965(c) deduction amount with respect to
such amount are determined separately
from the domestic pass-through owner’s
share of the aggregate section 965(a)
inclusion amount and section 965(c)
deduction amount of the domestic passthrough entity.
Consistent with section 3.05(b) of
Notice 2018–26, proposed § 1.965–
1(f)(19) defines the term ‘‘domestic passthrough entity’’ to mean a pass-through
entity that is a United States person (as
defined in section 7701(a)(30)), and
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proposed § 1.965–1(f)(28) defines the
term ‘‘pass-through entity’’ to mean a
partnership, S corporation, or any other
person to the extent that the income or
deductions of such person are included
in the income of one or more direct or
indirect owners or beneficiaries of the
person. Accordingly, if, for example, a
domestic trust owns section 958(a) stock
of a single DFIC and is subject to federal
income tax on a portion of its section
965(a) inclusion amount and its
domestic pass-through owners are
subject to tax on the remaining portion,
the domestic trust is treated as a
domestic pass-through entity with
respect to such remaining portion. As
defined, a pass-through entity does not
include a REIT or a regulated
investment company (‘‘RIC’’). The term
‘‘domestic pass-through owner’’ means a
United States person that is a partner,
shareholder, beneficiary, grantor, or
owner, as the case may be, in a domestic
pass-through entity, except that, in the
case of tiered pass-through entities, the
term does not include a partner,
shareholder, beneficiary, grantor, or
owner that is itself a domestic passthrough entity. See proposed § 1.965–
1(f)(20). In the case of tiered passthrough entities, a reference to a
domestic pass-through owner includes a
United States person that is an indirect
partner, shareholder, beneficiary,
grantor, or owner through one or more
other pass-through entities, and a
reference to a domestic pass-through
owner share of the aggregate section
965(a) inclusion amount and section
965(c) deduction amount of a domestic
pass-through entity includes such
domestic pass-through owner’s share of
the aggregate section 965(a) inclusion
amount and section 965(c) deduction
amount of a domestic pass-through
entity owned indirectly by the domestic
pass-through owner through one or
more other pass-through entities. See
proposed § 1.965–1(f)(20) and (21).
C. Foreign Currency Translation
Consistent with section 3.05(a) of
Notice 2018–13, the proposed
regulations provide that, for purposes of
determining the section 965(a) earnings
amount of a specified foreign
corporation, the accumulated post-1986
deferred foreign income of the specified
foreign corporation as of each of the E&P
measurement dates must be compared
in the functional currency of the
specified foreign corporation. See
proposed § 1.965–1(f)(36). If the
functional currency of a specified
foreign corporation changes between the
two E&P measurement dates, the
comparison must be made in the
functional currency of the specified
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foreign corporation as of December 31,
2017, by translating the specified
foreign corporation’s E&P as of
November 2, 2017, into the new
functional currency using the spot rate
on November 2, 2017. Id.; see also
proposed § 1.965–4(c)(1) (disregarding
any such change in functional currency
for purposes of applying section 965 to
a United States shareholder of the
specified foreign corporation under
certain circumstances).
Furthermore, the proposed
regulations are consistent with section
3.05(b) of Notice 2018–13, which
indicates that the spot rate on December
31, 2017, is to be used for translating the
section 965(a) earnings amount of a
DFIC into U.S. dollars for purposes of
determining the section 965(a) inclusion
amount of a United States shareholder
with respect to the DFIC, as well as for
purposes of translating other amounts
necessary for the application of section
965(b), including (i) translating a section
965(a) earnings amount into U.S. dollars
in computing amounts described in
section 965(b)(2)(A) and (B), (ii)
translating a specified E&P deficit into
U.S. dollars in order to determine a
United States shareholder’s aggregate
foreign E&P deficit under section
965(b)(3)(A), (iii) translating a section
965(a) inclusion amount with respect to
a DFIC (if the amount was reduced by
an aggregate foreign E&P deficit under
section 965(b)(1)) back into the
functional currency of the DFIC for
purposes of determining the E&P of the
DFIC described in section 959(c)(2), and
(iv) translating the portion of the U.S.
dollar-denominated aggregate foreign
E&P deficit allocated to a DFIC under
section 965(b)(2) into the functional
currency of the DFIC for purposes of
determining its E&P described in section
959(c)(2) by reason of section
965(b)(4)(A). See proposed §§ 1.965–
1(b)(1), (f)(9) and (11), and 1.965–2(c)
and (d). Proposed § 1.965–6(b) also
provides that in applying section 902,
the section 965(a) inclusion amount
must be translated (if necessary) back
into the DFIC’s functional currency
using the spot rate on December 31,
2017.
Section 3.05(c) of Notice 2018–13
describes regulations to ensure that the
cash position of a specified foreign
corporation with respect to any cash
measurement date is expressed in U.S.
dollars, so that the amount of a United
States shareholder’s aggregate foreign
cash position is the greater of the
aggregate amounts on each cash
measurement date. In determining the
cash position attributable to net
accounts receivable, the amount of
accounts receivable and accounts
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payable (in each case, if not otherwise
denominated in U.S. dollars) must be
translated into U.S. dollars at the spot
rate on the relevant cash measurement
date. The fair market value of assets
described in section 965(c)(3)(B)(iii)
must also be determined in U.S. dollars
on the relevant cash measurement date.
For example, in the case of foreign
currency, the fair market value equals
the currency amount translated at the
spot rate on the relevant cash
measurement date. Consistent with
section 3.05(c) of Notice 2018–13, the
proposed regulations provide that
amounts taken into account in
determining the cash position are
translated (if necessary) using the spot
rate on the relevant cash measurement
date. See proposed § 1.965–1(f)(16)(iv).
III. Section 962 Elections
The proposed regulations provide
rules consistent with section 5 of Notice
2018–26 related to elections under
section 962. Proposed § 1.962–2(a)
clarifies that an individual domestic
pass-through owner that is a United
States shareholder with respect to a
DFIC may make an election under
section 962 with respect to the
individual’s share of the section 965(a)
inclusion amount of a domestic passthrough entity with respect to the DFIC,
and an individual who is not a United
States shareholder of a DFIC is not
permitted to make an election under
section 962 with respect to the
individual’s share of a section 965(a)
inclusion amount of a domestic passthrough entity with respect to the DFIC.
See also proposed § 1.962–
1(b)(1)(i)(A)(1)(ii).
In addition, notwithstanding the rule
in current § 1.962–1(b)(1)(i) providing
that a deduction of a United States
shareholder does not reduce the amount
included in gross income under section
951(a) for purposes of computing the
amount of tax that would be imposed
under section 11, the Treasury
Department and the IRS have
determined that in the case of a taxpayer
making an election under section 962,
the section 965(c) deduction (which is
generally available to United States
shareholders of DFICs, including
individuals) should be allowed with
respect to the tax imposed under section
11 rather than under section 1. See H.R.
Rep. No. 115–466, at 620 (2017) (Conf.
Rep.). Thus, under proposed § 1.962–
1(b)(1)(i)(B), ‘‘taxable income’’ as used
in section 11 is reduced by a taxpayer’s
section 965(c) deduction with respect to
a section 965(a) inclusion to which the
section 962 election applies. However,
the proposed regulations clarify that,
subject to future guidance, ‘‘taxable
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income’’ as used in section 11 is not
reduced by any other amounts,
including any other deductions.
To clarify that a section 965(c)
deduction taken into account in
determining ‘‘taxable income’’ as used
in section 11 cannot then be deducted
again at the individual level, the
proposed regulations provide that any
section 965(c) deduction allowed in
determining ‘‘taxable income’’ as used
in section 11 for purposes of computing
the tax due as a result of a section 962
election is not also allowed for purposes
of determining an individual’s actual
taxable income. See proposed § 1.965–
3(e)(1).
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IV. Adjustments to E&P and Basis
Proposed § 1.965–2 contains rules
related to adjustments to E&P and basis
to determine and account for the
application of section 965(a) and (b) and
proposed § 1.965–1(b) and a rule that
limits the amount of gain recognized in
connection with the application of
section 961(b)(2).
A. Determination of and Adjustments to
E&P in the Last Taxable Year of a
Specified Foreign Corporation That
Begins Before January 1, 2018, for
Purposes of Applying Sections 959 and
965
Consistent with section 3.02(d) of
Notice 2018–07, the proposed
regulations clarify the interaction
between the rules under sections 959
and 965 in the last taxable year of a
specified foreign corporation that begins
before January 1, 2018, and the taxable
year of a section 958(a) U.S. shareholder
of the specified foreign corporation in
which or with which such year ends.
Proposed § 1.965–2(b) provides the
following rules relating to adjustments
to E&P for determining a section 958(a)
U.S. shareholder’s inclusion under
section 951(a)(1), including by reason of
section 965(a) and proposed § 1.965–
1(b), and the treatment of distributions
under section 959: First, the subpart F
income of the specified foreign
corporation is determined without
regard to section 965(a), and a section
958(a) U.S. shareholder’s inclusion
under section 951(a)(1)(A) by reason of
such amount is taken into account.
Second, the treatment of a
distribution from the specified foreign
corporation to another specified foreign
corporation that is made before January
1, 2018, is determined under section
959.
Third, each of the post-1986 earnings
and profits (including a deficit) of the
specified foreign corporation, the
accumulated post-1986 deferred foreign
income of the specified foreign
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corporation, the section 965(a) earnings
amount of the specified foreign
corporation, and the section 965(a)
inclusion amount of the section 958(a)
U.S. shareholder with respect to the
specified foreign corporation, if any, is
determined, and the E&P (including a
deficit) of the specified foreign
corporation are adjusted as provided in
proposed § 1.965–2(c) and (d) (as
discussed in Part IV.B of this
Explanation of Provisions section). For
a rule disregarding subpart F income
earned after an E&P measurement date
for purposes of calculating accumulated
post-1986 deferred foreign income as of
the E&P measurement date, see Part
II.B.4 of this Explanation of Provisions
section and proposed § 1.965–2(j),
Example 2 and Example 3.
Fourth, the treatment of all
distributions from the specified foreign
corporation other than those described
in step 2 is determined under section
959.
Fifth, an amount is determined under
section 956 with respect to the specified
foreign corporation and the section
958(a) U.S. shareholder, and the
shareholder’s inclusion under section
951(a)(1)(B) is taken into account.
B. Adjustments to E&P by Reason of
Section 965(a) and (b)
1. Adjustments to E&P by Reason of
Section 965(a)
Proposed § 1.965–2(c) provides that if
a section 958(a) U.S. shareholder has a
section 965(a) inclusion with respect to
a DFIC, the DFIC will have previously
taxed E&P with respect to the section
958(a) U.S. shareholder in an amount
equal to the section 965(a) inclusion
amount (referred to as ‘‘section 965(a)
previously taxed earnings and profits’’).
Because section 965(a) previously taxed
earnings and profits must be tracked in
functional currency whereas the section
965(a) inclusion amount is in U.S.
dollars, as noted in Part II.C of this
Explanation of Provisions section, the
proposed regulations provide that the
section 965(a) inclusion amount must be
translated (if necessary) into the
functional currency of the DFIC using
the spot rate on December 31, 2017, in
determining the amount of the section
965(a) previously taxed earnings and
profits.
Under proposed § 1.965–2(c), the E&P
of a DFIC described in section 959(c)(3)
are reduced by an amount equal to the
section 965(a) previously taxed earnings
and profits of the corporation. In certain
cases, the section 965(a) inclusion
amount with respect to the DFIC, and
therefore the section 965(a) previously
taxed earnings and profits of the DFIC
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with respect to a section 958(a) U.S.
shareholder, may exceed the E&P
described in section 959(c)(3) of the
DFIC. For example, this will be the case
when a DFIC incurs a loss after the E&P
measurement date on which it
determines its section 965(a) earnings
amount and before the end of its
inclusion year. In such a case, under the
proposed regulations, a deficit in E&P
described in section 959(c)(3) will be
created or increased.
2. Adjustments to E&P by Reason of
Section 965(b)
Proposed § 1.965–2(d) provides rules
relating to E&P of DFICs and E&P deficit
foreign corporations by reason of a
reduction under section 965(b)(1) and
proposed § 1.965–1(b)(2) (reduction by
the DFIC’s allocable share of a section
958(a) U.S. shareholder’s aggregate
foreign E&P deficit) or section 965(b)(5)
and proposed § 1.965–8(b) (reduction by
the DFIC’s allocable share of a section
958(a) U.S. shareholder’s applicable
share of an affiliated group’s aggregate
unused E&P deficit) (collectively, the
‘‘reduction rules’’).
i. Adjustments to E&P of DFICs
Under proposed § 1.965–2(d)(1), if a
section 958(a) U.S. shareholder’s pro
rata share of the section 965(a) earnings
amount of a DFIC is reduced under the
reduction rules, the DFIC will have
previously taxed E&P (referred to as
‘‘section 965(b) previously taxed
earnings and profits’’) with respect to
the section 958(a) U.S. shareholder in an
amount equal to the amount of the
reduction, if any, translated (if
necessary) into the functional currency
of the DFIC using the spot rate on
December 31, 2017. For purposes of
applying section 959, section 965(b)
previously taxed earnings and profits
are treated as E&P that are included in
the gross income of the section 958(a)
U.S. shareholder under section
951(a)(1)(A). Furthermore, the E&P
(including a deficit) described in section
959(c)(3) of the DFIC are reduced (or, in
the case of a deficit, increased) by an
amount equal to the section 965(b)
previously taxed earnings and profits.
ii. Adjustments to E&P of E&P Deficit
Foreign Corporations
Under proposed § 1.965–2(d)(2)(i)(A),
the E&P described in section 959(c)(3) of
an E&P deficit foreign corporation are
increased by an amount equal to the
portion of a section 958(a) U.S.
shareholder’s pro rata share of the
specified E&P deficit of the E&P deficit
foreign corporation taken into account
under the reduction rules, translated (if
necessary) into the functional currency
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of the E&P deficit foreign corporation
using the spot rate on December 31,
2017. The proposed regulations clarify
that the E&P increased by reason of this
provision are not treated as E&P of the
taxable year described in section
316(a)(2). See also proposed § 1.965–
6(c)(3) for a rule on the timing of this
adjustment for purposes of determining
a deemed paid credit allowed under
sections 902 and 960 with respect to the
E&P deficit foreign corporation (which
is discussed in Part VII.C.1 of this
Explanation of Provisions section).
In addition, proposed § 1.965–
2(d)(2)(i)(B) provides that, for purposes
of section 952, a section 958(a) U.S.
shareholder’s pro rata share of the E&P
of an E&P deficit foreign corporation is
increased by an amount equal to the
portion of the section 958(a) U.S.
shareholder’s pro rata share of the
specified E&P deficit of the E&P deficit
foreign corporation taken into account
under the reduction rules, translated (if
necessary) into the functional currency
of the E&P deficit foreign corporation
using the spot rate on December 31,
2017, and such increase is attributable
to the same activity to which the deficit
so taken into account was attributable.
Proposed § 1.965–2(d)(2)(ii) provides
rules for determining the portion of a
section 958(a) U.S. shareholder’s pro
rata share of a specified E&P deficit of
an E&P deficit foreign corporation taken
into account under the reduction rules.
Proposed § 1.965–2(d)(2)(ii)(A) details
the circumstances in which all of a pro
rata share of a specified E&P deficit will
be taken into account. Proposed
§ 1.965–2(d)(2)(ii)(B) provides that if the
rule in the preceding sentence does not
apply, a section 958(a) U.S. shareholder
must designate the portion taken into
account.
C. Adjustments to Basis by Reason of
Section 965(a) and (b)
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1. Adjustments to Basis by Reason of
Section 965(a)
Proposed § 1.965–2(e) provides that,
under section 961(a), a section 958(a)
U.S. shareholder’s basis in section
958(a) stock of a DFIC, or property by
reason of which the section 958(a) U.S.
shareholder is considered under section
958(a)(2) as owning section 958(a) stock
of a DFIC (‘‘applicable property’’), is
increased by the section 958(a) U.S.
shareholder’s section 965(a) inclusion
amount with respect to the DFIC.
However, rules relating to basis
adjustments in the case of a section 962
election are reserved. Comments are
requested as to the appropriate amount
of a basis adjustment with respect to a
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DFIC with respect to which a section
962 election is effective.
2. Adjustments to Basis by Reason of
Section 965(b)
Proposed § 1.965–2(f)(1) clarifies that,
in general, no adjustments to basis of
stock or property are made under
section 961 (or any other provision of
the Code) to take into account the
reduction to a section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount of a
DFIC under the reduction rules.
However, section 965(o) provides
authority to write regulations
concerning basis adjustments in
contemplation of the fact that ‘‘basis
adjustments (increases or decreases)
may be necessary with respect to both
the stock of the DFIC and the E&P
deficit foreign corporation.’’ H.R. Rep.
No. 115–466, at 620 (2017) (Conf. Rep.).
The Conference Report stated:
For example, with respect to the stock of
the deferred foreign income corporation, the
Secretary may determine that a basis increase
is appropriate in the taxable year of the
section 951A [sic] inclusion or, alternatively,
the Secretary may modify the application of
section 961(b)(1) with respect to such stock.
Moreover, with respect to the stock of the
E&P deficit [foreign] corporation, the
Secretary may require a reduction in basis for
the taxable year in which the U.S.
shareholder’s pro rata share of the earnings
of the E&P deficit [foreign] corporation are
increased.
Id. at 620–21.
The Treasury Department and the IRS
have determined that an increase to the
basis of stock of DFICs is appropriate
only if there is a corollary reduction to
the basis of the stock of E&P deficit
foreign corporations. However, the
Treasury Department and the IRS
recognize that such reduction, which
could in certain cases give rise to gain,
could be overly burdensome for
taxpayers. Accordingly, proposed
§ 1.965–2(f)(2) allows taxpayers to elect
to make the relevant basis adjustments,
in which case such adjustments must be
consistently made with respect to all
section 958(a) stock of specified foreign
corporations owned by a section 958(a)
U.S. shareholder and related persons.
The relevant basis adjustments are (i) an
increase in the section 958(a) U.S.
shareholder’s basis in the section 958(a)
stock of a DFIC or applicable property
with respect to a DFIC by an amount
equal to the section 965(b) previously
taxed earnings and profits of the DFIC
with respect to the section 958(a) U.S.
shareholder, and (ii) a reduction in the
section 958(a) U.S. shareholder’s basis
in the section 958(a) stock of an E&P
deficit foreign corporation or applicable
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property with respect to an E&P deficit
foreign corporation by an amount equal
to the portion of the section 958(a) U.S.
shareholder’s pro rata share of the
specified E&P deficit of the E&P deficit
foreign corporation taken into account
under the reduction rules. However, as
noted in Part IV.C.1 of this Explanation
of Provisions section, rules relating to
basis adjustments in the case of a
section 962 election are reserved. An
election under § 1.965–2(f)(2) is
generally made by attaching a statement,
signed under penalties of perjury, to the
section 958(a) U.S. shareholder’s return
for the first taxable year that includes
the last day of the last taxable year of
a DFIC or E&P deficit foreign
corporation of the shareholder that
begins before January 1, 2018, including
the shareholder’s name and taxpayer
identification number and a statement
that the shareholder and all related
persons make the election. See proposed
§ 1.965–2(f)(2)(iii)(B).
D. Gain-Reduction Rule
Consistent with section 3.03 of Notice
2018–07, and with the modification
described in section 4 of Notice 2018–
13, proposed § 1.965–2(g)(1) provides a
gain-reduction rule pursuant to which,
if a section 958(a) U.S. shareholder
receives distributions through a chain of
ownership described under section
958(a) from a DFIC during the inclusion
year that are attributable to section
965(a) previously taxed earnings and
profits, the amount of gain that would
otherwise be recognized under section
961(b)(2) by the section 958(a) U.S.
shareholder with respect to the section
958(a) stock of the DFIC, or applicable
property with respect to the DFIC, is
reduced (but not below zero) by an
amount equal to the section 965(a)
previously taxed earnings and profits of
the DFIC with respect to the section
958(a) U.S. shareholder.
If a taxpayer makes the election
described in proposed § 1.965–2(f)(2),
the gain-reduction rule will also apply
to distributions attributable to section
965(b) previously taxed earnings and
profits, and the amount of gain that
would otherwise be recognized by the
section 958(a) U.S. shareholder is also
reduced by the amount of the section
965(b) previously taxed earnings and
profits of the DFIC with respect to the
section 958(a) U.S. shareholder.
In order to ensure that the amount of
gain in the section 958(a) stock or
applicable property that would have
been recognized under section 961(b)(2)
remains reflected in the section 958(a)
stock or applicable property, proposed
§ 1.965–2(g)(2) provides that the basis in
the section 958(a) stock or applicable
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property must be reduced by the
amount that would have been
recognized as gain.
E. Rules of Application for Basis
Adjustments
The proposed regulations provide
certain rules of application common to
all basis adjustments described in
proposed § 1.965–2(e), (f)(2), and (g)(2)
(‘‘specified basis adjustments’’). See
proposed § 1.965–2(h). The rules
address the timing and allocation among
shares of the specified basis
adjustments. See proposed § 1.965–
2(h)(1) and (4). They also require netting
of the specified basis adjustments and
gain recognition to the extent that a net
downward adjustment would exceed
basis. See proposed § 1.965–2(h)(2) and
(3). In addition, they make clear that the
specified basis adjustments are limited
to adjustments to property held by a
section 958(a) U.S. shareholder, except
in circumstances involving foreign passthrough entities. See proposed § 1.965–
2(h)(5).
V. Section 965(c) Deductions
Proposed § 1.965–3 provides rules
regarding section 965(c) deductions and
section 965(c) deduction amounts.
A. Determination of Aggregate Foreign
Cash Position
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1. Disregard of Certain Obligations
Between Related Specified Foreign
Corporations
Consistent with section 3.01(b) and (c)
of Notice 2018–07, the proposed
regulations provide that, for purposes of
determining the aggregate foreign cash
position of a section 958(a) U.S.
shareholder, accounts receivable,
accounts payable, short-term
obligations, and derivative financial
instruments between related specified
foreign corporations are disregarded, if
applicable, on the corresponding cash
measurement dates of the specified
foreign corporations to the extent of the
smallest of the section 958(a) U.S.
shareholder’s ownership percentages of
section 958(a) stock of the specified
foreign corporations owned by the
section 958(a) U.S. shareholder on the
corresponding cash measurement dates.
See proposed § 1.965–3(b)(1).
2. Disregard of Certain Assets To
Prevent Double Counting
Section 3.05(a) of Notice 2018–26
announced the intent to issue forms,
publications, regulations, or other
guidance specifying the documentation
that a United States shareholder must
maintain or provide, and the time and
manner for providing any such
documentation, in order to make the
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required demonstration to the Secretary
to rely on section 965(c)(3)(D) in
excluding net accounts receivable,
actively traded property, and short-term
obligations in determining its aggregate
foreign cash position. To disregard
assets under this rule, the proposed
regulations provide that a section 958(a)
U.S. shareholder must attach a
statement to its timely filed return
(taking into account extensions, if any)
containing a description of the asset that
would be taken into account with
respect to both specified foreign
corporations; a statement of the amount
by which its pro rata share of the cash
position of one specified foreign
corporation is reduced; a detailed
explanation of why there would
otherwise be double-counting, including
the computation of the amount taken
into account with respect to the other
specified foreign corporation; and an
explanation of why the rule described in
Part V.A.1 of this Explanation of
Provisions section does not apply to
disregard such amounts. See proposed
§ 1.965–3(b)(2).
B. Determination of Aggregate Foreign
Cash Position for Section 958(a) U.S.
Shareholder Inclusion Year
Consistent with section 3.05(a) of
Notice 2018–07, the proposed
regulations provide that in the case of a
section 958(a) U.S. shareholder that has
a section 965(a) inclusion amount in
more than one taxable year, the amount
of the aggregate foreign cash position
taken into account in the first taxable
year will equal the lesser of the section
958(a) U.S. shareholder’s aggregate
foreign cash position or the aggregate
965(a) inclusion amount taken into
account by the section 958(a) U.S.
shareholder in that taxable year.
Furthermore, the amount of the section
958(a) U.S. shareholder’s aggregate
foreign cash position taken into account
in any succeeding taxable year will be
the lesser of the excess, if any, of its
aggregate foreign cash position over the
amount of its aggregate foreign cash
position taken into account in preceding
taxable years, or the aggregate section
965(a) inclusion amount taken into
account by the section 958(a) U.S.
shareholder in such succeeding taxable
year. See proposed § 1.965–3(c)(2).
In addition, also consistent with
section 3.05(a) of Notice 2018–07, the
proposed regulations provide that, for
purposes of determining the aggregate
foreign cash position of a section 958(a)
U.S. shareholder for a taxable year in
which it takes into account a section
965(a) inclusion amount, a section
958(a) U.S. shareholder can assume that
its pro rata share of the cash position of
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any specified foreign corporation whose
last taxable year beginning before
January 1, 2018, ends after the date the
return for such taxable year of the
section 958(a) U.S. shareholder is timely
filed (taking into account extensions, if
any) will be zero as of the cash
measurement date with which the year
of the specified foreign corporation
ends. If a section 958(a) U.S.
shareholder’s pro rata share of the cash
position of a specified foreign
corporation was treated as zero pursuant
to the preceding sentence for a section
958(a) U.S. shareholder inclusion year
(an ‘‘estimated section 958(a) U.S.
shareholder inclusion year’’), the final
cash measurement date amount in fact
exceeds the average of the first and
second cash measurement date amounts
with respect to the section 958(a)
shareholder, and the shareholder’s
aggregate section 965(a) inclusion
amount in fact exceeds the final cash
measurement date amount, interest and
penalties will not be imposed if the
section 958(a) U.S. shareholder makes
appropriate adjustments by amending
the return for the estimated section
958(a) U.S. shareholder inclusion year
to reflect the correct aggregate foreign
cash position by the due date (taking
into account extensions, if any) for the
return for the year after the estimated
section 958(a) U.S. shareholder
inclusion year. See proposed § 1.965–
3(c)(3).
C. Recapture of Section 965(c)
Deductions for Expatriated Entities
Proposed § 1.965–3(d) harmonizes the
rule provided in section 965(l) requiring
the recapture of a section 965(c)
deduction by an expatriated entity with
the expanded scope of availability of
section 965(c) deductions (that is, to a
domestic pass-through owner that is not
itself a United States shareholder) by
requiring recapture of all section 965(c)
deductions taken into account by an
expatriated entity without regard to
whether the expatriated entity was itself
a United States shareholder.
D. Treatment of Section 965(c)
Deductions Under Certain Code
Provisions
Consistent with section 3.06 of Notice
2018–26, proposed § 1.965–3(f)(1)
provides that a section 965(c) deduction
will not be treated as an itemized
deduction for any purpose of the Code
(including, as described in Notice 2018–
26, for purposes of sections 56 and 67).
The Treasury Department and the IRS
are aware that the rules of subchapter K
and subchapter S may prevent a partner
or S corporation shareholder from
taking into account its domestic pass-
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through owner share of a section 965(c)
deduction amount in certain
circumstances if allocated by a
partnership or S corporation separately
from the corresponding section 965(a)
inclusion amount, particularly to the
extent that a partnership or S
corporation makes distributions to one
or more partners or shareholders (as the
case may be) during the year of its
section 965(a) inclusion. See, e.g.,
section 1366(d). Accordingly, proposed
§ 1.965–3(f)(2)(i) provides that in the
case of a domestic partnership or S
corporation, the aggregate amount of its
section 965(a) inclusions net of the
aggregate amount of its section 965(c)
deductions is treated as a separately
stated item of net income solely for
purposes of calculating basis under
section 705(a) and § 1.705–1(a) and
section 1367(a)(1) and § 1.1367–1(f).
Furthermore, the proposed regulations
incorporate the rules concerning basis
and AAA adjustments contained in
section 965(f)(2) and provide an
example illustrating the application of
the rules described in this paragraph.
See proposed § 1.965–3(f)(2)(i)(B), (ii),
and (iii).
The proposed regulations clarify
whether a United States person that
must pay tax under section 1411 on a
section 965(a) inclusion is entitled to
take into account a section 965(c)
deduction for purposes of determining
the amount of such tax. Section 965(c)
deductions are intended to reduce the
rate of income tax to which section
965(a) inclusions are subject. See H.R.
Rep. No. 115–466, at 620 (2017) (Conf.
Rep.). The Treasury Department and the
IRS have determined that the section
965(c) deduction was not intended to
reduce the rate of tax imposed by nonincome tax provisions outside of
chapter 1. Accordingly, proposed
§ 1.965–3(f)(3) provides that for
purposes of section 1411 and § 1.1411–
4(f)(6), a section 965(c) deduction is not
treated as a deduction properly
allocable to a corresponding section
965(a) inclusion. Consistent with the
rule for section 1411, proposed § 1.965–
3(f)(4) provides that a section 965(c)
deduction is not treated as an ordinary
and necessary expense paid or incurred
for the production or collection of gross
investment income for purposes of
section 4940(c)(3)(A).
VI. Disregard of Certain Transactions
Proposed § 1.965–4 provides rules
that disregard certain transactions for
purposes of applying section 965. In
particular, proposed § 1.965–4 provides
rules that disregard (i) transactions
undertaken with a principal purpose of
reducing the section 965 tax liability of
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a United States shareholder, (ii) certain
changes in method of accounting and
entity classification elections, and (iii)
certain transactions occurring between
E&P measurement dates.
A. Anti-Avoidance Rules
The proposed regulations provide
rules, consistent with section 3.04 of
Notice 2018–26, to prevent the
avoidance of section 965, including an
anti-avoidance rule disregarding certain
transactions and rules disregarding
certain changes in accounting methods
and entity classification elections. See
proposed § 1.965–4(b) through (e). The
application of the anti-avoidance rule is
based on whether there is a ‘‘change in
the amount of a section 965 element’’
rather than a change in the section 965
tax liability, as described in the notice.
See proposed § 1.965–4(b)(1). For this
purpose, generally there is a change in
the amount of a section 965 element if
there is a reduction of a section 958(a)
inclusion amount or aggregate foreign
cash position or an increase in deemed
paid foreign income taxes as a result of
a section 965(a) inclusion. See proposed
§ 1.965–4(d) and (e)(1).
Comments requested that the antiavoidance rule not apply to the extent
a reduction in tax liability by reason of
section 965 is offset by an equal amount
of tax increase pursuant to a different
Code provision. This comment is not
adopted. The Conference Report reflects
an intent for the Treasury Department
and the IRS to address all strategies for
avoiding a section 965(a) inclusion,
without regard to the effect on overall
tax liability. See H.R. Rep. No. 115–466,
at 619 (2017) (Conf. Rep.). Furthermore,
it would be difficult for the IRS to
determine whether a particular increase
in tax liability for non-section 965
reasons is related to the reduction in the
taxpayer’s section 965(a) inclusion.
Finally, the anti-avoidance rule
generally does not apply without a
principal purpose of changing the
amount of a section 965 element.
Depending on the facts and
circumstances, transactions that do not
reduce overall tax liability may not meet
the principal purpose test described in
proposed § 1.965–4(b)(1).
Comments also requested a de
minimis exception for the antiavoidance rule. This comment is not
adopted. The Treasury Department and
the IRS have determined that any
reduction in tax imposed by reason of
section 965 through tax avoidance
strategies occurring after November 2,
2017, is inconsistent with congressional
intent and should not be respected.
Comments to Notice 2018–26
requested that the rule disregarding
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changes to methods of accounting not
apply when the change is from an
impermissible to a permissible method,
and that a principal purpose test should
apply. These comments are not adopted.
Proposed § 1.965–4(c)(1) does not affect
a taxpayer’s ability to change its method
of accounting, including to change to a
permissible method. Instead, the rule
disregarding an accounting method
change is relevant only for the limited
purpose of determining the amount of a
taxpayer’s section 965 elements.
The choice of a November 2, 2017,
measurement date reflects an intent to
impose a transition tax on a snapshot of
earnings as of a date that coincides with
the introduction of the Act in Congress,
and reflects a general policy of
disregarding taxpayer actions occurring
after November 2, 2017, that reduce the
taxpayer’s liability imposed by reason of
section 965, even if such future actions
are otherwise respected under the Code.
Such actions can include changes in
accounting methods, whether to
methods that are permissible or
impermissible and regardless of the
principal purpose for such change. A
rule disregarding such changes is also
consistent with the Conference Report,
which reflects a clear intent for the
Treasury Department and the IRS to
exercise their authority under section
965(o) to disregard accounting method
changes that reduce a taxpayer’s tax
liability under section 965. See H.R.
Rep. No. 115–466, at 619 (2017) (Conf.
Rep.).
B. Disregard of Certain Transactions
Occurring Between E&P Measurement
Dates
In section 3.02(a) of Notice 2018–07,
the Treasury Department and the IRS
announced the intent to issue
regulations to address the possibility of
double-counting or double non-counting
in the computation of post-1986
earnings and profits arising from
amounts paid or incurred (including
certain dividends) between related
specified foreign corporations of a
United States shareholder that occur
between E&P measurement dates and
that would otherwise reduce the post1986 earnings and profits as of
December 31, 2017, of the specified
foreign corporation that paid or incurred
such amounts. The notice contained
examples illustrating fact patterns
involving double-counting or double
non-counting to be addressed by the
future regulations. The proposed
regulations provide, consistent with
section 3.02(a) of Notice 2018–07, that
amounts paid or incurred between
related specified foreign corporations of
a section 958(a) U.S. shareholder
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between E&P measurement dates that
would otherwise reduce the post-1986
earnings and profits as of December 31,
2017, of the specified foreign
corporation that paid or incurred such
amounts are disregarded for purposes of
determining the post-1986 earnings and
profits of both of the specified foreign
corporations as of the E&P measurement
date on December 31, 2017. See
proposed § 1.965–4(f).
A number of comments requested that
these rules be expanded to cover other
transactions that could lead to double
counting and double non-counting in
the computation of post-1986 earnings
and profits of a specified foreign
corporation, including: (i) Deductible
payments by a specified foreign
corporation to a United States
shareholder or to a partnership owned
by the United States shareholder; and
(ii) distributions by specified foreign
corporations to a United States
shareholder. The recommendations in
these comments are not adopted. The
Treasury Department and the IRS have
determined that the concerns regarding
issues of double counting and double
non-counting in the computation of
post-1986 earnings and profits of a
specified foreign corporation relate to
transactions occurring between
specified foreign corporations rather
than between a specified foreign
corporation and a United States
shareholder. See H.R. Rep. No. 115–466,
at 619 (2017) (Conf. Rep.). Payments by
a specified foreign corporation to a
United States shareholder only affect
the post-1986 earnings and profits of a
single specified foreign corporation, and
thus do not result in double counting in
determining a United States
shareholder’s section 965(a) inclusion
amount. Additionally, payments by a
specified foreign corporation to a United
States shareholder can have attendant
U.S. tax effects that do not occur with
respect to payments between specified
foreign corporations and that would
need to be considered if such payments
were disregarded. For example, a
distribution from a specified foreign
corporation to its United States
shareholder may permit the United
States shareholder to take into account
foreign tax credits under section 902
and avoid the limitation under section
965(g)(1) that would apply if the
underlying foreign taxes had been
deemed paid with respect to the United
States shareholder’s section 965(a)
inclusion amount.
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VII. Foreign Tax Credits
A. In General
Section 14301 of the Act repealed
section 902 effective for taxable years of
foreign corporations beginning after
December 31, 2017, and taxable years of
United States shareholders in which or
with which such taxable years of foreign
corporations end. The proposed
regulations include, in addition to rules
under the foreign tax credit specific
rules of section 965, rules coordinating
the provisions of section 965 with the
foreign tax credit provisions as in effect
before their repeal or amendment by the
Act.
B. Allowance of a Credit or Deduction
for Foreign Income Taxes
1. Scope
Section 965(g)(1) provides that no
credit is allowed under section 901 for
the applicable percentage of any taxes
paid or accrued (or treated as paid or
accrued) with respect to any amount for
which a section 965(c) deduction
amount is allowed. The Conference
Report does not elaborate on the
meaning of ‘‘taxes paid or accrued’’ or
‘‘taxes treated as paid or accrued.’’
Comments requested clarification of the
meaning of these terms and the scope of
section 965(g). Under the proposed
regulations, ‘‘taxes paid or accrued’’
refers to foreign income taxes paid or
accrued directly by the taxpayer under
section 901, and ‘‘taxes treated as paid
or accrued’’ includes foreign income
taxes deemed paid by the taxpayer
under section 960, foreign income taxes
allocated to an entity under § 1.901–
2(f)(4), and a distributive share of taxes
paid by a partnership.
2. Applicable Percentage
The proposed regulations clarify that
the term ‘‘applicable percentage’’ is
determined with respect to a section
958(a) U.S. shareholder and a section
958(a) U.S. shareholder inclusion year.
As a result, if a section 958(a) U.S.
shareholder has more than one section
958(a) U.S. shareholder inclusion year,
the shareholder might have more than
one applicable percentage as a result of
differing aggregate foreign cash
positions for those different section
958(a) U.S. shareholder inclusion years.
See proposed § 1.965–5(d)(1). In
addition, if a person is a domestic passthrough owner with respect to more
than one domestic pass-through entity,
each of which is a section 958(a) U.S.
shareholder, the person might have a
different applicable percentage with
respect to each of those domestic passthrough entities because of differing
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aggregate foreign cash positions of those
entities, as well as a different applicable
percentage with respect to the person’s
section 958(a) stock, if any. See
proposed § 1.965–5(d)(2). Therefore, the
amount of foreign tax credits disallowed
under section 965(g) and proposed
§ 1.965–5(b) and (c) could differ
depending on the section 958(a) U.S.
shareholder inclusion year and section
958(a) U.S. shareholder to which the
foreign income taxes relate.
3. Foreign Income Taxes Paid or
Accrued Directly by Taxpayer
For purposes of section 965(g)(1),
foreign income taxes paid or accrued
directly by a taxpayer include foreign
income taxes imposed on the taxpayer
on a distribution of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits. Section 965(g)(3) provides
that no deduction is allowed for any tax
for which a credit is not allowable
under section 901 by reason of section
965(g)(1). The proposed regulations
provide that neither a deduction
(including under section 164) nor a
credit under section 901 is allowed for
the applicable percentage of any foreign
income taxes paid or accrued with
respect to any amount for which a
section 965(c) deduction is allowed for
a section 958(a) U.S. shareholder
inclusion year. The proposed
regulations also provide that neither a
deduction nor a credit under section
901 is allowed for the applicable
percentage of any foreign income taxes
attributable to a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits. See proposed
§ 1.965–5(b).
Accordingly, no deduction or credit is
allowed for the applicable percentage of
any withholding taxes imposed on a
United States shareholder by the
jurisdiction of residence of the
distributing foreign corporation with
respect to a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits. Similarly, no
deduction or credit is allowed for the
applicable percentage of net basis taxes
imposed on a United States citizen by
the citizen’s jurisdiction of residence
upon receipt of a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits.
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4. Foreign Income Taxes Treated as Paid
or Accrued by Taxpayer
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i. Section 960(a)(1)
For taxable years of foreign
corporations beginning before January 1,
2018, and taxable years of United States
shareholders in which or with which
such taxable years of foreign
corporations end, section 960(a)(1)
provides that, if there is included under
section 951(a) in the gross income of a
domestic corporation any amount
attributable to E&P of a foreign
corporation which is a member of a
qualified group (as defined in section
902(b)) with respect to the domestic
corporation, then, except to the extent
provided in regulations, section 902
shall be applied as if the amount so
included were a dividend paid by such
foreign corporation (determined by
applying section 902(c) in accordance
with section 904(d)(3)(B)). The proposed
regulations provide that a credit under
section 901 is not allowed for the
applicable percentage of any foreign
income taxes treated as paid or accrued
under section 960(a)(1) (for taxable
years of foreign corporations beginning
before January 1, 2018, and to taxable
years of United States persons in which
or with which such taxable years of
foreign corporations end) with respect
to any amount for which a section
965(c) deduction is allowed for a section
958(a) U.S. shareholder inclusion year.
ii. Section 960(a)(3)
For a taxable year of a foreign
corporation beginning before January 1,
2018, section 960(a)(3) provides that any
portion of a distribution from such a
foreign corporation received by a
domestic corporation which is excluded
from gross income under section 959(a)
is treated by the domestic corporation as
a dividend, solely for purposes of taking
into account under section 902 any
foreign taxes, on or with respect to the
accumulated profits of such foreign
corporation from which such
distribution is made, which were not
deemed paid by the domestic
corporation for any prior taxable year.
Accordingly, the proposed regulations
provide that the credit allowed under
section 960(a)(3) is only with respect to
foreign income taxes imposed on an
upper-tier foreign corporation on
distributions of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits from a lower-tier foreign
corporation. See proposed § 1.965–
5(c)(1)(ii). Furthermore, section
960(a)(3) does not allow a credit for
foreign income taxes attributable to the
portion of a section 965(a) earnings
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amount that was reduced pursuant to
section 965(b) since such taxes were not
imposed on a distribution of previously
taxed E&P. Instead, because section
965(b) previously taxed earnings and
profits are treated as having been
included in a United States
shareholder’s income under section
951(a), foreign income taxes that would
have been deemed paid with respect to
section 965(b) previously taxed earnings
and profits under section 960(a)(1) had
such amounts actually been included in
income are treated as having been
deemed paid, with the result that no
credit is allowed under section 960(a)(3)
or any other provision of the Code for
such taxes. Id.
The proposed regulations also provide
that the disallowance under section
965(g) applies to foreign taxes deemed
paid under section 960(a)(3) with
respect to distributions of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits with respect to a section
958(a) U.S. shareholder inclusion year.
For example, if a lower-tier foreign
corporation distributes section 965(a)
previously taxed earnings and profits to
an upper-tier foreign corporation, and
the upper-tier foreign corporation pays
a foreign withholding tax with respect
to the distribution of the section 965(a)
previously taxed earnings and profits,
such withholding tax would be
creditable under section 960(a)(3) upon
a distribution by the upper-tier foreign
corporation to an eligible domestic
corporation. However, the domestic
corporation cannot claim a credit for the
applicable percentage of such
withholding tax. See proposed § 1.965–
5(c)(ii).
The Act replaces section 960(a)(3)
with section 960(b). The proposed
regulations only address distributions
out of section 965(a) previously taxed
earnings and profits and section 965(b)
previously taxed earnings and profits in
years before the effective date of section
960(b) in the Act. The Treasury
Department and the IRS anticipate that
future regulations will provide similar
rules in connection with new section
960(b).
iii. Disallowance of Deduction
The proposed regulations clarify that
no deduction, including under section
164, is allowed for the applicable
percentage of any foreign income taxes
treated as paid or accrued with respect
to any amount for which a section
965(c) deduction is allowed. See
proposed § 1.965–5(c)(2).
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C. Computation of Foreign Income
Taxes Deemed Paid
1. General Rule and Exception
Comments requested clarification
regarding the determination of deemed
paid taxes under section 960 in
connection with section 965. One
comment also requested specific
changes to the application of sections
902 and 960 that would permit a
taxpayer to reduce the post-1986
undistributed earnings of a DFIC by the
amount of any deficit from an E&P
deficit foreign corporation that reduced
the section 965(a) earnings amount of
the DFIC. In general, the proposed
regulations confirm that sections 902
and 960 apply in the same manner for
section 965(a) inclusions as for other
inclusions under section 951(a)(1)(A),
and therefore a DFIC’s post-1986
undistributed earnings is not reduced by
specified E&P deficits from an E&P
deficit foreign corporation.
A comment noted that in determining
the indirect credit with respect to a
section 965(a) inclusion, the numerator
of the section 902 fraction (as defined in
proposed § 1.965–6(c)(1)) may be greater
than the denominator given that the
section 965(a) inclusion is determined
on one of two measurement dates. For
example, if the amount of the
accumulated post-1986 deferred foreign
income of a DFIC is greater on
November 2, 2017, than such amount is
on December 31, 2017, the section
965(a) earnings amount of the DFIC will
be based on E&P as of the November 2,
2017 date. However, the denominator of
the section 902 fraction, post-1986
undistributed earnings, is determined as
of the close of the taxable year of the
foreign corporation and without
diminution by reason of earnings
distributed or otherwise included in
income during the year. Section
902(c)(1). Where the post-1986
undistributed earnings as of the close of
the DFIC’s U.S. taxable year is positive,
but less than the section 965(a) earnings
amount, this could result in a section
902 fraction greater than one.
The section 902 fraction cannot
exceed one. See H.H. Robertson Co. v.
Commissioner of Internal Revenue, 59
T.C. 53 (1972), aff’d 500 F.2d 1399 (3d
Cir. 1974). For the avoidance of doubt,
the proposed regulations clarify that
when the denominator of the section
902 fraction is positive but less than the
numerator of such fraction, the section
902 fraction is one. See proposed
§ 1.965–6(c)(2).
Comments also requested that
taxpayers be deemed to pay taxes when
the denominator of the section 902
fraction is zero or less than zero, either
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by treating the DFIC as having post-1986
undistributed earnings equal to the
DFIC’s post-1986 foreign income taxes,
or by determining the DFIC’s post-1986
undistributed earnings as of the
measurement date used to determine its
section 965(a) earnings amount. This
comment is not adopted. The Treasury
Department and the IRS have
determined that the Act was not
intended to alter the application of
sections 902 and 960 with respect to
section 965. Thus, the proposed
regulations confirm that when the
denominator of the section 902 fraction
is zero or less than zero, no taxes are
deemed paid with respect to the section
965(a) inclusion. See proposed § 1.965–
6(c)(2); cf. § 1.902–1(b)(4) (providing
that no foreign income taxes are deemed
paid in the case of a distribution out of
current E&P that is treated as a ‘‘nimble’’
dividend under section 316(a)(2) when
there is a deficit in accumulated E&P).
Section 965(b)(4)(B), which provides
that a United States shareholder’s pro
rata share of the E&P of any E&P deficit
foreign corporation is increased by the
amount of the specified E&P deficit of
such corporation taken into account by
such shareholder by reason of allocation
of such deficit to a DFIC, does not
indicate whether that increase applies
for purposes of determining the post1986 undistributed earnings in the last
taxable year of an E&P deficit foreign
corporation that begins before January 1,
2018. The Treasury Department and the
IRS have determined that section
965(b)(4)(B) should not apply for
purposes of section 902 in that year.
Therefore, the proposed regulations
provide that post-1986 undistributed
earnings of an E&P deficit foreign
corporation are increased by reason of
section 965(b)(4)(B) or proposed
§ 1.965–2(d)(2)(i) as of the first day of
the foreign corporation’s first taxable
year following the E&P deficit foreign
corporation’s last taxable year that
begins before January 1, 2018.
Comments also recommended that, to
the extent that a hovering deficit is
treated as reducing the post-1986
earnings and profits of a DFIC, those
taxes should be added to the DFIC’s
post-1986 foreign income taxes in the
inclusion year with respect to the DFIC.
The Treasury Department and the IRS
have determined that the existing rules
adequately address this issue and
decline to adopt this comment. The
proposed regulations do not provide
special rules for foreign income taxes
that are related to hovering deficits; as
a result, the rules in § 1.367(b)–7
continue to apply with respect to such
foreign income taxes.
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2. Taxes Deemed Paid in the Case of
Certain Lower-Tier Corporations
A credit is allowable under section
960(a)(1) for taxes paid or accrued by a
foreign corporation only if it is a
member of a qualified group (as defined
in section 902(b)) with respect to the
domestic corporation. Section 902(b)(2)
states that the term ‘‘qualified group’’
does not include any foreign
corporation below the third tier in the
chain unless the foreign corporation is
a CFC and the domestic corporation is
a United States shareholder with respect
to it. Comments requested clarification
as to whether a 10-percent corporation
treated as a CFC under section 965(e)(2)
for purposes of sections 951 and 961 is
treated as a CFC for purposes of section
902(b).
Section 965(e)(2) applies to treat a 10percent corporation as a CFC solely for
purposes of taking into account the
subpart F income of such corporation
under section 965(a) and for purposes of
determining the United States
shareholder’s pro rata share of the
section 965(a) inclusion amount. The
proposed regulations also treat a 10percent corporation as a CFC for other
limited purposes. See Part I.A of this
Explanation of Provisions. However,
section 965 does not modify the
computation of foreign income taxes
deemed paid under sections 902 and
960, or for purposes of any other Code
section. Therefore, the proposed
regulations clarify that a United States
shareholder is not entitled to an indirect
credit with respect to a 10-percent
corporation that is below the third tier
in a chain of foreign corporations of the
United States shareholder. See proposed
§ 1.965–1(d).
D. Allocation and Apportionment of
Expenses
The generally applicable rules of
sections 861 through 865 and the
regulations thereunder for allocating
and apportioning deductions to separate
categories of income described in
section 904(d)(1) and § 1.904–4(m)
apply for purposes of determining the
foreign tax credits allowed by reason of
a section 965(a) inclusion. For purposes
of allocating and apportioning any
deductible expense, any tax-exempt
asset (and any income from such asset)
is not taken into account. See section
864(e)(3). A similar rule applies in the
case of the portion of any dividend
(other than a qualifying dividend as
defined in section 243(b)) equal to the
deduction allowable under section 243
or 245(a) with respect to such dividend
and in the case of a like portion of any
stock the dividends on which would be
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so deductible and would not be
qualifying dividends (as so defined).
The proposed regulations confirm that
the allowance of a deduction under
section 965(c) with respect to the
section 965(a) inclusion does not result
in any portion of the section 965(a)
inclusion being treated as exempt
income. In addition, the assets to which
the section 965(a) inclusion relates are
not treated as exempt assets under
section 864(e)(3) or § 1.861–8T(d).
The proposed regulations also
confirm that section 965(a) previously
taxed earnings and profits and 965(b)
previously taxed earnings and profits,
like all previously taxed E&P, do not
give rise to exempt treatment under
section 864(e)(3). See proposed § 1.965–
6(d).
Under section 864(e)(4), for purposes
of allocating and apportioning expenses
on the basis of assets, the adjusted basis
in stock of any nonaffiliated 10-percent
owned corporation is increased by the
E&P accumulated during the period the
taxpayer held the stock, or reduced (but
not below zero) by deficits in E&P of the
corporation attributable to the stock for
such period. The purpose for this
adjustment is to better approximate the
value of such stock. 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.87
(adjustment to E&P ‘‘takes account of
some changes in value attributable to
taxpayer’s equity interests in such
corporations’’).
In order to avoid double counting of
previously taxed E&P and the basis
adjustments under section 961, section
864(e)(4)(D) provides that proper
adjustments must be made to the E&P of
a corporation to account for previously
taxed E&P and reflected in the adjusted
basis of the stock. 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.91.
Section 1.861–12T(c)(2)(i)(B) provides
that a taxpayer’s basis in stock of a CFC
shall not include any amount included
in basis under section 961. At the same
time, all E&P (including previously
taxed E&P) generally increase the
taxpayer’s adjusted basis in stock of a
CFC.
As a result of the enactment of section
965, the Treasury Department and the
IRS recognize that the application of
section 965(b)(4)(A) and (B) may
warrant the issuance of special rules for
the determination of adjusted basis.
Furthermore, a different rule may be
needed if a taxpayer has made an
election under proposed § 1.965–2(f)(2)
to adjust its basis to reflect the use of a
specified E&P deficit. The Treasury
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Department and the IRS request
comments on what rules may be
appropriate, including whether the rules
under § 1.861–12(c)(2) should be
modified.
E. Application of Section 904
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The proposed regulations do not
address the assignment of a section
965(a) inclusion and the related taxes to
a separate category of income. The
Treasury Department and the IRS have
determined that the application of
section 904 is clear with respect to
section 951(a) inclusions regardless of
whether the DFIC is a CFC or a 10percent corporation. Furthermore, the
Treasury Department and the IRS have
determined that no clarification is
necessary with respect to § 1.904–6 for
purposes of relating the creditable
portion of the foreign income taxes with
respect to a section 965(a) inclusion to
a separate category of income. For
example, withholding tax imposed on a
distribution of section 965(a) previously
taxed earnings and profits and section
965(b) previously taxed earnings and
profits will be related to the separate
category of income to which the original
section 965(a) inclusion was assigned.
See § 1.904–6(b)(2) and (c), Example 7.
The Treasury Department and the IRS
request comments on whether more
guidance is necessary with respect to
the assignment of the section 965(a)
inclusion and the related taxes to a
separate category or categories of
income.
In addition, comments are requested
on whether additional rules are needed
for determining the amount of the
increase in the section 904 limitation
with respect to distributions of section
965(a) previously taxed earnings and
profits and section 965(b) previously
taxed earnings and profits, taking into
account the section 965(c) deduction
and the disallowed foreign taxes under
section 965(g). See section 960(b)
(effective with respect to taxable years
of foreign corporations beginning before
January 1, 2018, and to taxable years of
United States shareholders with or
within which such taxable years of
those foreign corporations end) and
section 960(c) for later years.
VIII. Election, Payment, and Other
Special Rules
A. In General
Section 965 provides certain elections
that taxpayers can make with respect to
the application of section 965. See Parts
II.K through N of the Background
section of this preamble. As discussed
in Part II.B.10 of this Explanation of
Provisions section and in section 3.05(b)
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of Notice 2018–26, if the United States
shareholder of a DFIC is a domestic
pass-through entity and owns section
958(a) stock of the DFIC, then each
domestic pass-through owner of the
domestic pass-through entity will take
into account its share of the section
965(a) inclusion amount with respect to
the section 958(a) stock of the DFIC of
the domestic pass-through entity and
the section 965(c) deduction amount
with respect to such amount, regardless
of whether the domestic pass-through
owner is itself also a United States
shareholder with respect to the DFIC.
The elections described in Parts II.K
through N of the Background section of
this preamble under sections 965(h) (the
‘‘section 965(h) election’’), 965(m) (the
‘‘section 965(m) election’’), and 965(n)
(the ‘‘section 965(n) election’’) are
available to a United States shareholder
of a DFIC under the terms of section
965. However, because a domestic passthrough owner will take into account its
share of a section 965(a) inclusion
amount (and the related section 965(c)
deduction amount) whether or not it is
itself a United States shareholder, the
proposed regulations provide,
consistent with section 3.05(b) of Notice
2018–26, that a domestic pass-through
owner may make the section 965(h)
election, the section 965(m) election,
and the section 965(n) election.
B. Net Tax Liability Under Section 965
The proposed regulations define a
new term, ‘‘total net tax liability under
section 965,’’ which reflects the
definition of net tax liability under
section 965 in section 965(h)(6) with
respect to a person as if the person were
a United States shareholder of all DFICs
with respect to which it has section
965(a) inclusions, consistent with
section 3.05(c) of Notice 2018–26. See
proposed § 1.965–7(g)(10). However, the
proposed regulations provide that the
dividends excluded pursuant to the
second prong of the computation (the
‘‘without’’ prong) include dividends
received directly or through a chain of
ownership described in section 958(a).
See proposed § 1.965–7(g)(10)(i)(B)(2).
For purposes of determining a
person’s total net tax liability under
section 965, the proposed regulations
also clarify the computation of the
foreign tax credit for purposes of the
amount described in section
965(h)(6)(A)(ii)(II) and proposed
§ 1.965–7(g)(10)(i)(B) (the net income
tax liability determined without regard
to section 965 and dividends from
DFICs). Specifically, the proposed
regulations provide that the foreign tax
credits disregarded in determining net
income tax determined under section
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965(h)(6)(A)(ii)(II) and proposed
§ 1.965–7(g)(10)(i)(B) includes the
credits for foreign income taxes deemed
paid with respect to section 965(a)
inclusions or foreign income taxes
deemed paid with respect to a dividend,
including a distribution that would have
been treated as a dividend in the
absence of section 965, as well as the
credits for foreign income taxes imposed
on distributions of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits made in the taxable year in
which the person includes a section
965(a) inclusion in income.
C. Section 965(h) Election
The proposed regulations provide that
the section 965(h) election may be made
by any person with a section 965(h) net
tax liability (which includes a section
958(a) U.S. shareholder or a domestic
pass-through owner in a domestic passthrough entity that is a section 958(a)
U.S. shareholder, but not a domestic
pass-through entity itself). Under the
proposed regulations, the section 965(h)
election may be revoked only by paying
the full amount of the unpaid section
965(h) net tax liability. See proposed
§ 1.965–7(b)(1). The proposed
regulations also provide that a section
965(h) election is made with respect to
the section 965(h) net tax liability of a
person, which is the person’s total net
tax liability under section 965 reduced
by the aggregate amount of the person’s
section 965(i) net tax liabilities, if any,
with respect to which elections under
section 965(i) are effective. See
proposed § 1.965–7(g)(4).
1. Underpayment of an Installment
As noted in Part II.K of the
Background section of this preamble,
section 965(h)(3) provides that an
addition to tax for failure to timely pay
an installment required under section
965(h) is an acceleration event with
respect to the unpaid portion of the
remaining installments. Section
965(h)(4) provides that if a taxpayer has
made an election under section 965(h),
and subsequently a deficiency is
assessed with respect to the taxpayer’s
net tax liability for purposes of section
965(h), then the amount of the
deficiency will be prorated among the
installments.
Comments requested clarification
regarding whether the underpayment of
an installment (including payment of
the first installment that reflects a
section 965(h) net tax liability lower
than what is calculated on a tax return
filed by the extended due date) would
constitute an acceleration event under
section 965(h)(3) or would result in the
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proration under section 965(h)(4) of the
difference between the section 965(h)
net tax liability initially calculated and
the subsequently determined section
965(h) net tax liability. The proposed
regulations provide that if a person is
assessed a deficiency with respect to the
person’s section 965(h) net tax liability,
or the person timely files a return
increasing the amount of its section
965(h) net tax liability above the amount
taken into account in the payment of the
first installment, or the person files an
amended return increasing the amount
of its section 965(h) net tax liability, the
deficiency or additional amount will be
prorated among the installments under
section 965(h)(4). This proration rule
does not apply if the deficiency or
additional liability is due to negligence,
intentional disregard of rules and
regulations, or fraud with intent to
evade tax, in which case, the proposed
regulations clarify that the deficiency is
payable on notice and demand. See
proposed § 1.965–7(b)(1)(ii)(C).
A comment also requested guidance
regarding whether an underpayment of
the first installment would prevent a
taxpayer from making an election under
section 965(h). The proposed
regulations provide that if a taxpayer
makes a section 965(h) election and
does not pay the correct amount for the
first installment, and if the rule in the
preceding paragraph applies to prorate
the additional liability, the remaining
installment payments due pursuant to
the section 965(h) election will not be
accelerated, and the taxpayer’s section
965(h) election will not be affected. See
proposed § 1.965–7(b)(1)(ii).
2. Acceleration Events
The proposed regulations provide that
if a taxpayer makes a section 965(h)
election, and subsequently an
acceleration event described in section
965(h)(3) and proposed § 1.965–
7(b)(3)(ii) occurs, the unpaid portion of
all remaining installments of the
taxpayer’s section 965(h) net tax
liability generally will be accelerated
and due on the date of the event.
Proposed § 1.965–7(b)(3)(ii) lists the
events treated as acceleration events for
this purpose. As noted in Section II.K of
the Background section of this
preamble, acceleration events include
an addition to tax for failure to timely
pay an installment required under
section 965(h), a liquidation or sale of
substantially all the assets of the
taxpayer (including in a title 11 or
similar case), a cessation of business by
the taxpayer, or any similar
circumstance. The proposed regulations
identify circumstances similar to those
referenced in section 965(h)(3).
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Proposed § 1.965–7(b)(3)(ii)(B) provides
that, in addition to a liquidation or sale
of substantially all of the assets of a
taxpayer, any exchange or other
disposition of substantially all of the
assets of a taxpayer constitutes an
acceleration event. In addition,
proposed § 1.965–7(b)(3)(ii)(D) provides
that any event that results in a person
no longer being a United States person
(including, for example, a resident alien
becoming a nonresident alien) is an
acceleration event. Proposed § 1.965–
7(b)(3)(ii)(E) provides that a person that
was not a member of any consolidated
group becoming a member of a
consolidated group is treated as an
acceleration event with respect to the
person. Proposed § 1.965–7(b)(3)(ii)(F)
provides that when a consolidated
group ceases to exist, or otherwise no
longer files a consolidated return, that
constitutes an acceleration event.
A comment requested guidance
specifying that the liquidation of a
member of a consolidated group, other
than the consolidated parent, would not
constitute an acceleration event for
purposes of section 965(h)(3). Because
proposed § 1.965–8(e)(1) provides that
all of the members of a consolidated
group are treated as a single person for
purposes of the section 965(h) election,
a liquidation of one member of the
group would not constitute an
acceleration event for purposes of
section 965(h)(3) and proposed § 1.965–
7(b).
The proposed regulations provide an
exception (the ‘‘eligible section 965(h)
transferee exception’’) pursuant to
which the acceleration provisions of
section 965(h)(3) and proposed § 1.965–
7(b)(3)(ii) do not apply (such that the
unpaid portion of all remaining
installments will not be due as of the
date specified therein) to a person with
respect to which an acceleration event
occurs if the requirements described in
proposed § 1.965–7(b)(3)(iii)(A)(1)
(describing the acceleration events
eligible for this exception) and (2)
(setting forth the terms of a required
transfer agreement) are satisfied.
Generally, acceleration events eligible
for this exception include (i)
liquidations, sales, exchanges, or other
dispositions of substantially all of the
assets of a person (with the exception of,
in the case of an individual, by reason
of death, and with special rules
applying in the case of a consolidated
group), (ii) a corporation that was not a
member of any consolidated group
becoming a member of a consolidated
group, and (iii) a consolidated group
ceasing to exist by reason of acquisition
and immediately joining another
consolidated group. In each case, the
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39533
exception applies only to the extent that
the person with respect to which an
acceleration event occurs (an ‘‘eligible
section 965(h) transferor’’) and an
eligible section 965(h) transferee
(generally, a United states person that is
not a domestic pass-through entity and
that satisfies certain requirements set
forth in the proposed regulations) enter
into a transfer agreement described in
proposed § 1.965–7(b)(3)(iii)(B).
Generally, a transfer agreement must
include various acknowledgments,
representations, and information,
including an agreement by the eligible
section 965(h) transferee to assume the
liability of the eligible section 965(h)
transferor for any unpaid installment
payments of the eligible section 965(h)
transferor under section 965(h); an
agreement that the eligible section
965(h) transferee agrees to comply with
all of the conditions and requirements
of section 965(h) and proposed § 1.965–
7(b), as well as any other applicable
requirements in the section 965
regulations; a representation that the
eligible section 965(h) transferee is able
to make the remaining payments
required under section 965(h) and
proposed § 1.965–7(b) with respect to
the section 965(h) net tax liability being
assumed; and, if the eligible section
965(h) transferor continues to exist
immediately after the acceleration
event, an acknowledgement that the
eligible section 965(h) transferor and
any successor to the eligible section
965(h) transferor will remain jointly and
severally liable for any unpaid
installment payments of the eligible
section 965(h) transferor under section
965(h), including, if applicable, under
§ 1.1502–6. See proposed § 1.965–
7(b)(3)(iii)(B)(4). The proposed
regulations also provide procedural
rules regarding the completion and
submission of a transfer agreement, as
well as rules relating to the
Commissioner’s review of such
agreements. See generally proposed
§ 1.965–7(b)(3)(iii)(B) and (C).
3. Election Mechanics
Section 965(h)(5) provides that a
section 965(h) election must be made no
later than the due date (taking into
account extensions, if any) for the return
for the taxable year in which the
taxpayer has the section 965(a)
inclusions to which the section 965(h)
net tax liability is attributable and must
be made in the manner prescribed by
the Secretary. A comment requested that
taxpayers with section 965(a) inclusions
be treated as having made a section
965(h) election by default. The Treasury
Department and the IRS decline to
adopt this comment because the statute
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provides for an affirmative election, and
the proposed regulations provide an
extended period in which to make it.
Under proposed § 1.965–7(b)(2)(ii), a
section 965(h) election must be made no
later than 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, without regard to
whether an extension request was made.
The election is made by attaching a
statement, signed under penalties of
perjury, to the taxpayer’s return for the
relevant taxable year including the
taxpayer’s name, taxpayer identification
number, total net tax liability under
section 965, section 965(h) net tax
liability, section 965(i) net tax liability
with respect to which a section 965(i)
election is effective (if applicable), and
anticipated amounts of each
installment. Proposed § 1.965–
7(b)(2)(iii).
States shareholder of a DFIC, whether it
owns section 958(a) stock of such DFIC
or not, may make the election. However,
if the S corporation is not a United
States shareholder with respect to a
DFIC, the shareholders of that S
corporation may not make a section
965(i) election for their shares of the
section 965(a) inclusion or section
965(c) deduction with respect to that
DFIC. See proposed § 1.965–7(c) and
(g)(6).
Furthermore, the proposed
regulations implement the statutory
reporting requirements in section
965(i)(7) until the section 965(i) net tax
liability is fully assessed. See proposed
§ 1.965–7(c)(6).
4. Application to Non-Chapter 1 Taxes
Comments requested that the
Treasury Department and the IRS
provide that tax imposed under section
1411 on section 965(a) inclusions be
payable in installments under section
965(h). However, because the definition
of net income tax in section 965(h)(6)(B)
refers to credits allowed under subparts
A, B, and D of part IV of subchapter A
of chapter 1 of subtitle A of the Code,
the Treasury Department and the IRS
have determined that section 965(h)
applies only with respect to tax imposed
under subchapter A of chapter 1 of
subtitle A of the Code. Accordingly,
elections may not be made under
section 965(h) to pay tax imposed under
other subchapters or chapters (such as,
for example, the taxes imposed under
sections 1411 and 4940) in eight
installments. See also sections 55(a)(2)
and 26(b)(2) (excluding the minimum
tax under section 55 from the definition
of regular tax).
1. Election Mechanics
The proposed regulations provide
procedural rules regarding how an S
corporation shareholder can make the
section 965(i) election. A section 965(i)
election must be made no later than the
due date (taking into account
extensions, if any) for the S corporation
shareholder’s return for the taxable year
that includes the last day of the taxable
year of the S corporation in which the
S corporation has a section 965(a)
inclusion to which the shareholder’s
section 965(i) net tax liability is
attributable by attaching a statement,
signed under penalties of perjury, to its
return for that year. The statement must
include the shareholder’s name,
taxpayer identification number, the
name and taxpayer identification
number of the S corporation with
respect to which the election is made,
the amount described in § 1.965–
7(g)(10)(i)(A) as modified by § 1.965–
1(f)–7(g)(6) for purposes of determining
the section 965(i) net tax liability with
respect to the S corporation, the amount
described in § 1.965–7(g)(10)(i)(B), and
the section 965(i) net tax liability with
respect to the S corporation. See
proposed § 1.965–7(c)(2)(ii) and (iii).
D. Section 965(i) Election
As discussed in Part II.L of the
Background section of this preamble,
section 965(i) provides that a
shareholder of an S corporation that is
itself a United States shareholder of a
DFIC may elect to defer payment of its
net tax liability under section 965 with
respect to such S corporation until the
shareholder’s taxable year which
includes a triggering event with respect
to such liability. The proposed
regulations provide guidance regarding
how an S corporation shareholder can
make a section 965(i) election and,
consistent with section 3.05(b) of Notice
2018–26, provide that any shareholder
of an S corporation that is a United
2. Triggering Events
The proposed regulations also provide
rules concerning triggering events
described in section 965(i)(2). An event
will not be treated as a triggering event
(such that a shareholder’s section 965(i)
net tax liability with respect to an S
corporation will not be assessed as an
addition to tax for the shareholder’s
taxable year that includes the triggering
event) if the triggering event is the
transfer of any share of stock of the S
corporation by the shareholder
(including by reason of death or
otherwise), and the shareholder (an
‘‘eligible section 965(i) transferor’’) and
an eligible section 965(i) transferee (a
United States person that is not a
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domestic pass-through entity) enter into
a transfer agreement. See generally
proposed § 1.965–7(c)(3)(iv); see also
§ 1.965–7(c)(4)(iv)(B)(4) (setting forth
the required terms of a transfer
agreement).
3. Consent for Section 965(h) Election in
the Event of a Triggering Event
The proposed regulations also provide
rules for an S corporation shareholder to
obtain the consent of the Secretary to
make a section 965(h) election in the
event of a triggering event that is a
liquidation, sale, exchange, or other
disposition of substantially all of the
assets of the S corporation (including in
a title 11 or similar case), a cessation of
business by the S corporation, or the S
corporation ceasing to exist. See
proposed § 1.965–7(c)(3)(v)(D). To
obtain consent, the shareholder
intending to make the section 965(h)
election must file the agreement
described in proposed § 1.965–
7(c)(3)(v)(D)(4) and must provide, with
its timely-filed return for the taxable
year during which the triggering event
occurs (taking into account extensions,
if any), the election statement for the
section 965(h) election. See proposed
§ 1.965–7(c)(3)(v)(D)(2). For the required
terms of the agreement, see generally
proposed § 1.965–7(c)(3)(v)(D).
A comment requested guidance
specifying that if an S corporation
shareholder makes a section 965(i)
election, the S corporation’s income
inclusion is not deferred, and the S
corporation’s AAA should be increased
by the gross amount (and not the net
amount after the application of the
section 965(c) deduction). Because, by
its terms, a section 965(i) election affects
only the timing of assessment and
payment of an S corporation
shareholder’s section 965(a) net tax
liability and not the timing or amount
of the section 965(a) inclusion of either
the S corporation or the S corporation
shareholder, the Treasury Department
and the IRS have determined that it is
not necessary that the proposed
regulations provide this additional
guidance. See Part V.D of this
Explanation of Provisions section for a
discussion of the consequences of
section 965(a) inclusions and section
965(c) deductions for the AAA of an S
corporation.
E. Section 965(m) Election
The proposed regulations provide
procedural rules regarding how a REIT
can make the section 965(m) election. A
REIT makes a section 965(m) election by
attaching a statement, signed under
penalties of perjury, to its return for the
taxable year in which it would
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otherwise be required to include REIT
section 965 amounts (as defined in
proposed § 1.965–7(g)(2)) in gross
income. The statement must include the
REIT’s name, taxpayer identification
number, REIT section 965 amounts, and
anticipated amounts of each portion of
the REIT section 965 amounts to be
included in each year. Proposed
§ 1.965–7(d)(3)(ii) and (iii). With respect
to a REIT that has made the section
965(m) election, adjustments described
in proposed § 1.965–2 to the E&P of any
specified foreign corporations held by
the REIT, and the basis of stock of a
specified foreign corporation and other
applicable property held by a REIT, are
made as of the close of each year in
which an installment is included in the
gross income of the REIT. A comment
requested that RICs also be allowed to
make a similar election to include any
amount required to be taken into
account under section 951(a)(1) by
reason of section 965 in eight
installments. This comment is not
adopted because the statute provides the
election solely for REITs.
For the reasons discussed in Part
VIII.A of this Explanation of Provisions
section, the proposed regulations also
provide that no section 965(a)
inclusions of a REIT are taken into
account as gross income for purposes of
section 856(c)(2) and (3), regardless of
whether the REIT is a United States
shareholder with respect to the DFIC
with respect to which it has a section
965(a) inclusion. See section
965(m)(1)(A) and proposed § 1.965–
7(d)(6).
F. Section 965(n) Election
As discussed in Part II.N of the
Background section of this preamble,
section 965(n) provides that a United
States shareholder of a DFIC may elect
to exclude the amount described in
section 965(n)(2) from the determination
of the amount of the NOL deduction
under section 172 of such shareholder
for such taxable year or the amount of
taxable income for such taxable year
which may be reduced by NOL
carryovers or carrybacks to such taxable
year under section 172. The proposed
regulations provide procedural rules
regarding how a taxpayer may make the
section 965(n) election, clarify the effect
of the election, and provide that the
election is irrevocable.
1. Scope of Election
As discussed in section 3.05(d) of
Notice 2018–26, comments have
requested clarification regarding the
scope of the section 965(n) election as
a result of the use of the term
‘‘deduction’’ in section 965(n)(1)(A). An
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NOL ‘‘deduction’’ for a taxable year
generally refers to the amount of an
NOL carried to such taxable year from
a prior or subsequent year rather than
the NOL arising from such year.
Compare section 172(a) and (c).
However, interpreting ‘‘deduction’’ in
section 965(n)(1)(A) to refer to
carryovers or carrybacks to the taxable
year (and not the NOL for the taxable
year) would cause that paragraph to be
duplicative of section 965(n)(1)(B),
which already provides that amounts
described in section 965(n)(2) are
disregarded for purposes of applying
NOL carryovers or carrybacks to such
taxable year under section 172. The
Treasury Department and the IRS have
determined that section 965(n)(1)(A)
was intended to apply to a different set
of losses than those to which section
965(n)(1)(B) applies. A comment also
requested clarification regarding
whether taxpayers could make the
section 965(n) election for only a
portion of their NOLs. The Treasury
Department and the IRS have
determined that the election was
intended to apply to the NOL amount in
its entirety. Accordingly, the proposed
regulations provide that if a section
965(n) election is made for a taxable
year, the election applies to NOLs for
the taxable year for which the election
is made as well as the NOL carryovers
or carrybacks to such taxable year, each
in their entirety. See proposed § 1.965–
7(e)(1)(iii).
A comment also requested
clarification regarding whether
consolidated groups could make the
section 965(n) election. The proposed
regulations clarify that the section
965(n) election also applies to all
components of the consolidated NOL
deduction (as defined in § 1.1502–
21(a)). Id.
2. Election Mechanics
A person makes a section 965(n)
election by attaching a statement, signed
under penalties of perjury, to its return
for the taxable year (taking into account
extensions, if any) to which the election
applies. Proposed § 1.965–7(e)(2)(ii).
The statement must include the person’s
name, taxpayer identification number,
the amounts described in section
965(n)(2)(A) and proposed § 1.965–
7(e)(1)(ii)(A) and section 965(n)(2)(B)
and proposed § 1.965–7(e)(1)(ii)(B), and
the sum thereof. Proposed § 1.965–
7(e)(2)(iii).
G. Election To Use Alternative Method
for Calculation of Post-1986 Earnings
and Profits
Under section 965(a) and (d)(3), a
United States shareholder of a specified
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foreign corporation must determine its
accumulated post-1986 deferred foreign
income as of either of the two E&P
measurement dates (November 2, 2017,
and December 31, 2017) by determining
its post-1986 earnings and profits as of
each of those dates. As discussed in
section 3.02 of Notice 2018–13, it may
be impractical for some taxpayers to
determine the post-1986 earnings and
profits of a specified foreign corporation
as of the November 2, 2017, E&P
measurement date because it does not
fall on the last day of a month.
Therefore, the proposed regulations
provide that an election may be made to
determine the post-1986 earnings and
profits of a specified foreign corporation
using the alternative method. See
proposed § 1.965–7(f).
Under the alternative method, for a
specified foreign corporation other than
a specified foreign corporation with a
52–53-week taxable year (as described
in § 1.441–2(a)(1)), the amount of its
post-1986 earnings and profits as of the
November 2, 2107, E&P measurement
date equals the sum of (1) the specified
foreign corporation’s post-1986 earnings
and profits as of October 31, 2017, and
(2) the specified foreign corporation’s
‘‘annualized earnings and profits
amount.’’ For this purpose, the term
‘‘annualized earnings and profits
amount’’ means the amount equal to the
product of two (the number of days after
October 31, 2017, and on or before the
measurement date on November 2,
2017) and the ‘‘daily earnings amount’’
of the specified foreign corporation. The
‘‘daily earnings amount’’ of the
specified foreign corporation is the post1986 earnings and profits (including a
deficit) of the specified foreign
corporation as of the close of October
31, 2017, that were accumulated during
the specified foreign corporation’s
taxable year that includes October 31,
2017, divided by the number of days
that have elapsed in that taxable year as
of the close of October 31, 2017. A
specified foreign corporation that does
not have a 52–53-week taxable year may
not use the alternative method to
determine its post-1986 earnings and
profits as of the December 31, 2017,
measurement date. See proposed
§ 1.965–7(f)(1), (3), and (4).
For a specified foreign corporation
that has a 52–53-week taxable year, an
election to use the alternative method
applies to both measurement dates, in
each case determining the post-1986
earnings and profits consistent with the
method described in the previous
paragraph as of the closest end of a
fiscal month to each measurement date.
For example, if the closest end of a
fiscal month of a specified foreign
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corporation that has a 52–53-week
taxable year occurs after a measurement
date, the annualized earnings amount is
subtracted from (rather than added to)
the post-1986 earnings and profits of the
specified foreign corporation as of the
fiscal month end. See proposed § 1.965–
7(f)(2), (3), and (4). See proposed
§ 1.965–7(f)(5) for details on how to
make the election.
A comment requested that individuals
be permitted to calculate post-1986
earnings and profits by prorating E&P
for the November 2, 2017, measurement
date based on year-end numbers. This
comment is not adopted. Allowing
individuals to use year-end numbers
and prorate to November 2, 2017, would
allow taxpayers to base their post-1986
earnings and profits for both dates on
the E&P as of a single date, contrary to
the intent of the two E&P measurement
dates in the statute.
IX. Affiliated Groups (Including
Consolidated Groups)
Proposed § 1.965–8 provides rules for
applying section 965 and the section
965 regulations to members of an
affiliated group (as defined in section
1504(a)), including members of a
consolidated group (as defined in
§ 1.1502–1(h)).
A. Treatment of Consolidated Groups
sradovich on DSK3GMQ082PROD with PROPOSALS2
1. Treated as a Single United States
Shareholder
The proposed regulations provide that
all members of a consolidated group
that are section 958(a) U.S. shareholders
of a specified foreign corporation are
treated as a single section 958(a) U.S.
shareholder for purposes of section
965(b) and proposed § 1.965–1(b)(2),
and that all members of a consolidated
group are treated as a single person for
purposes of paragraphs (h), (k), and (n)
of section 965 and proposed § 1.965–7.
See proposed § 1.965–8(e). Thus, for
example, the determination of whether
the sale of assets by a member of a
consolidated group to a non-member
would constitute a sale of substantially
all of the assets of the taxpayer for
purposes of causing an acceleration
event under section 965(h)(3) and
proposed § 1.965–7(b)(3) takes into
account all of the assets of the
consolidated group, which for purposes
of this determination, includes all of the
assets of each consolidated group
member (but generally does not include
the stock of another consolidated group
member).
This rule does not apply to treat all
members of a consolidated group as a
single section 958(a) U.S. shareholder or
single person, as applicable, for
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purposes of determining the amount of
any member’s inclusion under section
951 (including a section 965(a)
inclusion), any member’s section 965(c)
deduction, or any purpose other than
those specifically listed in proposed
§ 1.965–8(e)(1). The proposed
regulations also clarify that for purposes
of computing the foreign income taxes
deemed paid with respect to a section
965(a) inclusion, the foreign income
taxes deemed paid must be computed
on a separate member basis. Therefore,
a domestic corporation is not deemed to
pay any foreign income taxes with
respect to a section 965(a) inclusion
from a foreign corporation that is not a
member of a qualified group with
respect to the domestic corporation,
even if other members of the domestic
corporation’s consolidated group qualify
to compute deemed paid credits with
respect to that foreign corporation.
Sections 960(a)(3), 902(b).
2. Aggregate Foreign Cash Position of a
Member of a Consolidated Group
For purposes of computing a
member’s section 965(c) deduction, the
member’s aggregate foreign cash
position generally is determined by
reference to its pro rata share of the
consolidated group’s aggregate foreign
cash position as a whole. Specifically,
the proposed regulations provide that
the aggregate foreign cash position with
respect to a section 958(a) U.S.
shareholder that is a member of a
consolidated group equals the aggregate
section 965(a) inclusion amount of the
section 958(a) U.S. shareholder
multiplied by the group cash ratio of the
consolidated group. For this purpose,
the term ‘‘group cash ratio’’ means the
ratio of the consolidated group aggregate
foreign cash position (generally, the sum
of the aggregate foreign cash positions of
the members of a consolidated group) to
the sum of the aggregate section 965(a)
inclusion amounts of all members of the
consolidated group. See proposed
§ 1.965–8(e)(3), (f)(4), and (f)(8).
3. Adjustments to E&P and Stock Basis
As described in section 3.04 of Notice
2018–07, the proposed regulations
indicate that the regulations under
§ 1.1502–32 provide for adjustments to
the basis of the stock of each member of
the consolidated group. See proposed
§ 1.965–8(d)(2).
B. Affiliated Groups
The proposed regulations include
guidance regarding the application of
section 965(b)(5) to determine the
section 965(a) inclusion amounts of a
member of an affiliated group. Proposed
§ 1.965–8(b) applies when, after the
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application of the rules in proposed
§ 1.965–1(b)(2) (which generally
implements the operative rule of section
965(b)(1)), a section 958(a) U.S.
shareholder is both an E&P net surplus
shareholder and a member of an
affiliated group in which not all
members are members of the same
consolidated group. When proposed
§ 1.965–8(b) applies, the U.S. dollar
amount of a section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount of a
DFIC is reduced (but not below zero) by
the DFIC’s allocable share of the section
958(a) U.S. shareholder’s applicable
share of the affiliated group’s aggregate
unused E&P deficit. The proposed
regulations include rules and
definitions for determining,
respectively, a DFIC’s allocable share
and a section 958(a) U.S. shareholder’s
applicable share of an affiliated group’s
aggregate unused E&P deficit. See
proposed § 1.965–8(f)(2) and (3).
For purposes of this rule, if some but
not all members of an affiliated group
are properly treated as members of a
consolidated group, then the
consolidated group is treated as a single
member of the affiliated group.
Proposed § 1.965–8(b)(2).
C. Source of Aggregate Unused E&P
Deficits
Proposed § 1.965–8(c) provides
guidance for designating the source of
an aggregate unused E&P deficit of an
affiliated group that is not a
consolidated group when, generally, the
amount of the affiliated group’s
aggregate unused E&P deficit exceeds
the aggregate section 965(a) inclusion
amounts of E&P net surplus
shareholders of the affiliated group
determined without regard to the
application of section 965(b)(5) and
proposed § 1.965–8(b)). Generally, when
proposed § 1.965–8(c) applies, each
member of an affiliated group that is an
E&P net deficit shareholder must
designate by maintaining in its books
and records a statement (identical to the
statement maintained by all other such
members of the affiliated group) setting
forth the portion of its excess aggregate
foreign E&P deficit that is taken into
account by one or more net E&P net
surplus shareholders of the affiliated
group.
If some but not all members of an
affiliated group are properly treated as
members of a consolidated group, then
the consolidated group is treated as a
single member of the affiliated group for
purposes of this rule. Proposed § 1.965–
8(c)(2).
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X. Application of Section 986(c)
The proposed regulations provide
that, for purposes of section 986(c),
foreign currency gain or loss with
respect to distributions of section 965(a)
previously taxed earnings and profits is
determined based on movements in the
exchange rate between December 31,
2017, and the date on which such E&P
are actually distributed. See proposed
§ 1.986(c)–1(a).
Consistent with section 3.05 of Notice
2018–07, the proposed regulations also
provide that any gain or loss recognized
under section 986(c) with respect to
distributions of section 965(a)
previously taxed earnings and profits is
reduced in the same proportion as the
reduction by a section 965(c) deduction
amount of the section 965(a) inclusion
amount that gave rise to such section
965(a) previously taxed earnings and
profits, consistent with the statute and
other indicia of congressional intent.
See H.R. Rep. No. 115–466, at 620
(2017) (Conf. Rep.), and proposed
§ 1.986(c)–1(b).
Because section 965(b) previously
taxed earnings and profits are not
included in gross income under section
951(a)(1), the Treasury Department and
the IRS have determined it would not be
appropriate to apply section 986(c) with
respect to distributions of those E&P.
Therefore, proposed § 1.986(c)–1(c)
provides that section 986(c) does not
apply with respect to distributions of
section 965(b) previously taxed earnings
and profits.
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XI. Other Comments
A. Repeal of Section 958(b)(4)
Effective for the last taxable year of
foreign corporations beginning before
January 1, 2018, and each subsequent
year, and for the taxable years of United
States shareholders in which or with
which such taxable years of the foreign
corporations end, the Act repealed
section 958(b)(4). Before repeal, section
958(b)(4) provided that subparagraphs
(A), (B), and (C) of section 318(a)(3)
were not to be applied to consider a
United States person to own stock
which is owned by a person who is not
a United States person. As discussed in
Part III.B of the Background section of
this preamble, the subparagraphs of
section 318(a)(3) generally attribute
stock owned by a person to a
partnership, estate, trust, or corporation
in which such person has an interest
(so-called ‘‘downward’’ attribution).
Multiple comments requested
guidance be issued addressing the
repeal of section 958(b)(4). This issue is
beyond the scope of the proposed
regulations.
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However, consistent with section 5.02
of Notice 2018–13, the instructions to
Form 5471 will be amended to provide
an exception from certain filing
requirements for a United States person
that is a United States shareholder with
respect to a CFC or other specified
foreign corporation if no United States
shareholder (including the United States
person) owns, within the meaning of
section 958(a), stock of the CFC or other
specified foreign corporation, and the
foreign corporation is a CFC or specified
foreign corporation solely because a
United States person is considered to
own the stock of the CFC or other
specified foreign corporation owned by
a foreign person under section 318(a)(3).
Consistent with section 6 of Notice
2018–13 and section 7 of Notice 2018–
26, taxpayers may rely on this exception
with respect to the last taxable year of
a foreign corporation beginning before
January 1, 2018, and each subsequent
year of the foreign corporation, and for
the taxable years of a United States
shareholder in which or with which
these taxable years of the foreign
corporation end.
B. Reporting and Filing
1. Section 965 Reporting and Filing
Requirements
The proposed regulations provide
guidance regarding filing and reporting
with respect to section 965(h) elections,
section 965(i) elections, section 965(m)
elections, and section 965(n) elections,
as well as the election to use the
alternative method to calculate post–
1986 earnings and profits. In addition,
the relevant forms and instructions will
be updated, as necessary, for taxpayers
to properly report amounts under
section 965 and the proposed
regulations. For the 2017 tax year,
instructions for how and when to
properly report section 965-related
amounts and file returns reporting such
amounts, as well as instructions for how
and when to make payments with
respect to a net tax liability under
section 965, were provided in
Frequently Asked Questions (FAQs) that
are available at the IRS website. The
FAQs were posted on March 13, 2018,
and updated on April 13, 2018, and
June 4, 2018.
2. Extensions
Comments requested an extension of
time for reporting and paying section
965-related amounts and an extension of
time for making the section 965(h)
election. The statute provides for an
extended time to file returns reporting
section 965-related amounts and to
make applicable elections. In addition,
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39537
with the section 965(h) election, the
statute provides a method for taxpayers
to delay payment of the total net tax
liability under section 965.
Furthermore, as discussed in Part
VIII.C.3 of this Explanation of
Provisions section, the proposed
regulations provide that a taxpayer
eligible to make a section 965(h)
election may make the election on its
timely-filed return taking into account
extensions, if any, or any additional
time that would have been granted if the
person had made an extension request.
In addition, as described in section
3.05(e) of Notice 2018–26, the proposed
regulations provide that for a person
who is a specified individual (as
defined in proposed § 1.965–7(g)(9)) for
the year within which an installment
payment would be required to be made
who makes a section 965(h) election and
who otherwise receives an extension of
time to file and pay under § 1.6081–
5(a)(5) or (6), the due date for an
installment payment will be the
fifteenth day of the sixth month
following the close of the prior taxable
year, regardless of whether the person
was a specified individual for the year
of the person’s section 965(a) inclusion.
See proposed § 1.965–7(b)(1)(iii)(B).
Moreover, the IRS has announced relief
from additions to tax (and related
acceleration events under section
965(h)(3)) for certain individual filers
that do not timely pay their first
installment of tax due with respect to
the 2017 tax year under section 965(h).
For more information, see ‘‘Questions
and Answers about Reporting Related to
Section 965 on 2017 Tax Returns,’’ Q&A
16, available at https://www.irs.gov/
newsroom/questions-and-answersabout-reporting-related-to-section-965on-2017-tax-returns. Thus, comments
requesting additional extensions are not
adopted.
C. Individuals
1. In General
Numerous comments were received
requesting guidance exempting
individuals from the application of
section 965. The statute is clear that
section 965 applies to all United States
shareholders. In addition, the
Conference Report makes clear that
section 965 applies to individuals as
well as corporate shareholders by
providing, ‘‘In contrast to the
participation exemption deduction [in
section 245A] available only to domestic
corporations that are U.S. shareholders
under subpart F, the transition rule
applies to all U.S. shareholders.’’ H.R.
Rep. No. 115–466, at 606 (2017) (Conf.
Rep.). Because the statute and legislative
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history are clear that section 965 was
intended to apply to all United States
shareholders, including individuals, the
Treasury Department and the IRS have
determined that providing the requested
relief is not appropriate.
2. Rates of Tax on Section 965(a)
Inclusions
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Comments also requested that
guidance be provided changing the
application of the participation
exemption to individuals. As discussed
in Part II.E of the Background section of
this preamble, the amount of the
participation exemption depends on the
application of the United States
shareholder’s 8 percent rate equivalent
percentage (as defined in section
965(c)(2)(A) and proposed § 1.965–
1(f)(2)) and its 15.5 percent rate
equivalent percentage (as defined in
section 965(c)(2)(B) and proposed
§ 1.965–1(f)(4)). Both the 8 percent rate
equivalent percentage and the 15.5
percent rate equivalent percentage are
based off of the highest rate of tax
specified in section 11, which is
applicable to corporations. As a result,
when the participation exemption is
calculated for individuals, the
applicable rates of tax may not be 8
percent and 15.5 percent.
However, this result was anticipated
by Congress. The Conference Report
provides, ‘‘Individual U.S. shareholders,
and the investors in U.S. shareholders
that are pass-through entities generally
can elect application of corporate rates
for the year of inclusion.’’ H.R. Rep. No.
115–466, at 620 (2017) (Conf. Rep.). As
discussed in Part III of this Explanation
of Provisions section, individuals may
make an election under section 962 to
have the tax imposed under chapter 1
on amounts that are included in the
individual’s gross income under section
951(a) with respect to a foreign
corporation with respect to which it is
a United States shareholder be equal to
the tax that would be imposed under
section 11 if the amounts were received
by a domestic corporation. Accordingly,
because of the availability of the section
962 election and Congress’s express
intent with respect to the rate equivalent
percentages, these comments are not
adopted.
D. Determination of Aggregate Foreign
Cash Position
1. Liquidity-Based Exceptions
A number of comments were received
requesting guidance modifying the
definition of a specified foreign
corporation’s cash position or the
calculation of a United States
shareholder’s aggregate foreign cash
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position. For example, comments
requested guidance excluding certain
assets from a specified foreign
corporation’s cash position, or
otherwise providing special rules with
respect to those assets, including (i)
cash used, or intended to be used, to
fund foreign acquisitions; (ii) blocked,
restricted, or segregated cash; (iii) cash
used, or to be used, to pay third-party
payables within a specified period (for
example, 12 months after a cash
measurement date); (iv) obligations with
respect to which there was an inclusion
under section 956; (v) cash held in a
fiduciary or trust capacity; (vi) cash held
or attributable to an entity that is
engaged in a regulated industry, such as
life insurance; and (vii) cash pledged
against defined liabilities as well as
potential or contingent liabilities. In
addition, comments requested
exceptions for commodities
representing inventory or supplies and
stock of a publicly traded company in
which the specified foreign corporation
holds at least 10 percent of the stock,
each of which is personal property of a
type that is actively traded and for
which there is an established financial
market, and thus included in the cash
position of a specified foreign
corporation.
In general, these comments are
premised on the view that an asset that
otherwise would be included in the
cash position of a specified foreign
corporation should be excluded to the
extent that the asset cannot be otherwise
employed; that is, if the asset is not
sufficiently ‘‘liquid.’’ Although the
legislative history describing a specified
foreign corporation’s cash position
refers to earnings that are ‘‘liquid,’’
neither the legislative history nor the
statute indicates that the cash position
of a specified foreign corporation should
be determined by reference to an
analysis of whether any particular asset
should be considered a liquid asset. See,
e.g., Senate Committee on Finance,
Explanation of the Bill, at 360–361
(November 22, 2017) (‘‘The cash
position of an entity consists of all cash,
net accounts receivables, and the fair
market value of similarly liquid assets,
specifically including personal property
that is actively traded on an established
financial market . . . , government
securities, certificates of deposit,
commercial paper, and short-term
obligations.’’). Instead, as the
Conference Report notes, the statute
includes a specific list of assets that are
included in the cash position of a
specified foreign corporation.
The Treasury Department and the IRS
have determined that the definition of
cash position in section 965(c)(3)(B) is
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the best indication of what Congress
believed was a liquid asset. Depending
on the facts, any particular asset may be
required to be used for a specific
purpose, or a taxpayer may intend to
retain the asset for a lengthy period of
time. However, the Treasury
Department and the IRS have
determined that it would not be
administrable to create individual
regulatory exceptions to the statute in
the absence of a statutory standard for
liquidity because it would likely require
introducing a facts-and-circumstances
test that analyzes the liquidity of every
asset, which would be difficult to
administer. Furthermore, while some
assets that would otherwise be treated
as cash-equivalent assets could be
excluded from a specified foreign
corporation’s cash position for being
insufficiently liquid, other assets that
are not treated as cash-equivalent assets
but are liquid would need to be
included in a specified foreign
corporation’s cash position.
Accordingly, the proposed regulations
do not introduce new regulatory
exceptions to the definition of cash
position. The Treasury Department and
the IRS welcome comments with respect
to the definition of cash position of a
specified foreign corporation.
2. Other Modifications Requested to
Statutory Rules
Comments also requested
modifications to the rules regarding the
calculation of a specified foreign
corporation’s cash position or a United
States shareholder’s aggregate foreign
cash position, including requests that (i)
accounts payable be allowed to offset
both accounts receivable and other
components of a specified foreign
corporation’s cash position; (ii) the pro
rata share of cash held through a passthrough entity be limited to the amount
of cash that a specified foreign
corporation would have been entitled to
on liquidation of the pass-through
entity; (iii) the cash position be reduced
by section 301(c) cash distributions by
the specified foreign corporation when
using the average of the aggregate cash
positions on the first two cash
measurement dates; and (iv) the cash
position be reduced by undistributed
previously taxed E&P. The Treasury
Department and the IRS have
determined that the statute is
unambiguous as to how, in each of these
circumstances, a specified foreign
corporation’s cash position or a United
States shareholder’s aggregate foreign
cash position should be determined,
such that it is unnecessary to provide
guidance or to revise the operation of
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the statute by regulation under these
circumstances.
3. Notional Cash Pooling Arrangements
Comments requested that the
proposed regulations provide that
notional cash pooling arrangements are
treated as creating intercompany
receivables for purposes of section 965.
The proposed regulations do not adopt
this recommendation. The
determination of whether transactions
in a notional cash pooling arrangement
are treated as occurring among
participants in the arrangement, or
between the participants and a third
party, depends on the application of
federal income tax principles. Cf. Rev.
Rul. 87–89, 1987–2 C.B. 195.
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4. Non-Corporate Entities Under Section
965(c)(3)(E)
A comment requested clarification
regarding whether section 965(c)(3)(E),
which treats a non-corporate entity held
by a specified foreign corporation as a
specified foreign corporation (if it
would otherwise be a specified foreign
corporation if it was a foreign
corporation) for purposes of taking into
account its cash position, applies to an
entity that is disregarded as an entity
separate from its owner for U.S. federal
income tax purposes (‘‘disregarded
entity’’). The Treasury Department and
the IRS have determined that it is clear
under existing law that the assets of a
disregarded entity are considered as
held directly by the disregarded entity’s
owner, such that the rule in section
965(c)(3)(E) does not apply with respect
to disregarded entities, and no specific
rules addressing the application of
section 965(c)(3)(E) are necessary. See
generally § 301.7701–2(a).
E. Blocked Foreign Income
Comments requested that the
proposed regulations provide rules with
respect to income subject to certain
exchange controls or other foreign legal
restrictions. Generally, section 964(b)
and § 1.964–2 (the blocked foreign
income rules) provide that no part of the
E&P of a CFC are included in the CFC’s
E&P for purposes of sections 952 and
956 if it is established to the satisfaction
of the Secretary that the E&P could not
have been distributed by the CFC to
United States shareholders that own the
stock of the CFC due to currency or
other foreign legal restrictions. Section
965(a) inclusion amounts are not,
however, limited by section 952, such
that the blocked foreign income rules do
not affect the determination of such
amounts. Comments requested that the
proposed regulations adopt rules similar
to the blocked foreign income rules for
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purposes of section 965 by reducing the
post-1986 earnings and profits of a
specified foreign corporation by an
amount equal to any amounts subject to
restrictions on distributions by a
specified foreign corporation.
The Treasury Department and the IRS
have determined that it is not
appropriate to provide rules similar to
the blocked foreign income rules for
purposes of computing post-1986
earnings and profits. Section 965(d)(3)
expressly provides that the term post1986 earnings and profits means E&P
‘‘computed in accordance with section
964(a) and 986,’’ giving rise to a clear
inference that the principles of section
964(b) should not be given effect in
computing post-1986 earnings and
profits.
F. Additional Comments
Several other comments were
received that did not pertain to section
965 or were otherwise outside the scope
of the section 965 regulations. Some of
those comments related to reporting and
payment requirements and have been
addressed in the FAQs that are available
at the IRS website. Other comments that
did not relate to the rules described in
Notices 2018–07, 2018–17, or 2018–26
or that were outside the scope of this
notice of proposed rulemaking are not
addressed in this preamble. In addition,
other comments were received after the
proposed regulations had been
substantially developed, such that the
Treasury Department and the IRS did
not have time to fully consider the
comments. The Treasury Department
and the IRS will include these
comments in the administrative record
for the notice of proposed rulemaking
on this subject in the Proposed Rules
section of this issue of the Federal
Register and fully consider the
comments in connection with
finalization of the proposed regulations.
XII. Applicability Dates
Consistent with the applicability date
of section 965, as amended by the Act,
under section 7805(b)(2), the proposed
regulations generally 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. Taxpayers may choose to apply
the rules in proposed § 1.965–7 in their
entirety to all tax years as if they were
final regulations.
For the avoidance of doubt, proposed
§ 1.965–9(b) clarifies that the rules
described in proposed §§ 1.965–4 apply
to all foreign corporation and
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39539
shareholder taxable years described in
proposed § 1.965–9(b), even if the
relevant transaction, the effective date of
a change in method of accounting or
entity classification election, or
specified payment occurred in a prior
taxable year. This is because the
proposed regulations affect only the tax
consequences in taxable years described
in proposed § 1.965–9(b) and do not
affect any prior taxable year.
Special Analyses
I. Regulatory Planning and Review
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,
reducing costs, harmonizing rules, and
promoting flexibility. This proposed
rule has been designated a ‘‘significant
regulatory action’’ under section 3(f) of
Executive Order 12866 and the
Memorandum of Agreement (MOA),
Review of Tax Regulations under
Executive Order 12866 (April 11, 2018).
Accordingly, the proposed rule has been
reviewed by the Office of Management
and Budget. The Treasury Department
requests comment on this designation.
A. Need for the Proposed Regulations
These regulations implement section
965 of the Internal Revenue Code as
amended by the Act. The proposed
regulations provide rules for
determining the section 965(a) inclusion
amount of a U.S. shareholder of a
foreign corporation with deferred
foreign income. The proposed
regulations directly implement the
statutory requirements. The Senate
Committee on Finance stated with
respect to section 965 that, ‘‘[t]o ensure
that all distributions from foreign
subsidiaries are treated in the same
manner under the participation
exemption system, the Committee
believes that it is appropriate to tax such
earnings as if they had been repatriated
under present law, but at a reduced rate.
The Committee believes the tax on
accumulated foreign earnings should
apply without requiring an actual
distribution of earnings, and further
believes that the tax rate should take
into account the liquidity of the
accumulated earnings.’’ See Senate
Committee on Finance, Explanation of
the Bill, at 358 (November 22, 2017).
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B. Background
D. Consideration of Alternatives
The international tax system prior to
the Act created strong incentives for
U.S. companies to keep their earnings
and profits overseas, an action known as
deferral, in order to avoid paying a
sizeable residual U.S. tax. The Act
ended deferral and the resulting
‘‘lockout effect.’’ It introduced a onetime tax on the stock of any deferred
earnings and profits not previously
taxed by the United States, regardless of
whether those earnings are repatriated.
Cash or cash-equivalent assets held by
a foreign corporation result in a higher
rate of repatriation tax than non-cash
assets, such as plant, property, and
equipment. The tax applies to the
accumulated stock of deferred earnings
and profits as of the last taxable year of
a foreign corporation beginning before
January 1, 2018, and with respect to
United States shareholders, for taxable
years in which or with which the
taxable year of the foreign corporation
ends; these details are important for
understanding the economic impacts of
the proposed regulations.
The proposed regulations address
open questions regarding the
application of section 965. They provide
rules related to section 965 described in
the three notices issued since December
22, 2017, with certain modifications, as
well as additional guidance related to
section 965. Specifically, the guidance
provides general rules and definitions,
as well as rules related to the
determination and treatment of section
965(c) deductions, rules that disregard
certain transactions in connection with
section 965, rules related to foreign tax
credits, rules regarding elections and
payments, rules regarding the
application of the section 965
regulations to affiliated groups,
including consolidated groups, rules on
dates of applicability, rules relating to
section 962 elections, and rules
regarding the application of section
986(c) in connection with section 965.
These proposed regulations are
designed to provide clarity and reduce
unnecessary burdens on taxpayers,
including by providing guidance on
how to apply particular mechanical
rules.
For a discussion of the alternatives
considered in the promulgation of the
proposed regulations, see the
Explanation of Provisions section of this
preamble. For example, see Part II.B of
the Explanation of the Provisions
section for a discussion of the
alternatives considered with respect to
the determination of, among other
things, post-1986 earnings and profits
(E&P), cash measurement dates, and
short-term obligations and Part IV.C.2 of
the Explanation of Provisions section for
a discussion of the alternatives
considered to the rule permitting
elective basis adjustments to the stock of
certain deferred foreign income
corporations and E&P deficit foreign
corporations.
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C. Baseline
The baseline constitutes a world in
which no regulations pertaining to
section 965 had been promulgated, and
thus taxpayers would have made
decisions relevant to section 965 in the
absence of specific guidance. The
following qualitative analysis describes
the anticipated impacts of the proposed
regulations relative to the baseline.
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E. Anticipated Benefits
In consultation with taxpayers, the
Treasury Department determined that
there are multiple instances throughout
the statute where the transition tax may
be artificially inflated because of double
counting of cash and E&P due to
multiple testing dates and chains of
ownership. Double counting is
inequitable because similarly situated
taxpayers may differ in terms of the
amounts of income that fall into the
specific categories that may be subject to
double counting. As a result of this
analysis, the regulations aim to reduce
double counting and produce more
equitable tax outcomes across otherwise
similarly situated taxpayers by: (1)
Preventing double counting in
computing the aggregate foreign cash
position, for example by disregarding
receivables and payables between
related specified foreign corporations
with a common U.S. shareholder; and
(2) preventing double-counting and noncounting in the computation of deferred
earnings arising from amounts paid or
incurred between related parties
between measurement dates.
Inequitable outcomes may also arise
in the absence of the proposed
regulations due to uncertainty and
ambiguity over interpretation of the
section 965 requirements. Absent these
regulations, different parties would
likely interpret the statute in different
ways. Such disparate interpretations
could lead similarly situated taxpayers
to calculate their tax liability differently,
an inequitable situation. The proposed
regulations aim to reduce uncertainty
and ambiguity by: (1) Providing that all
members of a consolidated group that
are U.S. shareholders of a specified
foreign corporation are treated as a
single U.S. shareholder; (2) introducing
definitions of terminology used; (3)
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coordinating foreign tax credit rules; (4)
making explicit the process for making
elections and paying the tax, and (5)
providing dates of applicability.
F. Anticipated Impacts on
Administrative and Compliance Costs
Absent these regulations, different
parties would likely interpret the statute
in different ways. In addition to the
impacts described above, different
parties interpreting the statute in
different ways implies increased
administrative costs for the Internal
Revenue Service and increased
compliance costs for taxpayers while
the inevitable disputes are dealt with
through sub-regulatory guidance or
resolved through litigation.
For a discussion of the one-time
annual reporting burden associated with
the statute see the Paperwork Reduction
Act (PRA) section of this preamble,
which provides further detail regarding
the assumptions underlying these
estimates. These estimates are that
100,000 respondents will require 5
hours per response for a total reporting
burden of 500,000 hours. A valuation of
the burden hours at $95/hour leads to a
PRA-based estimate of the reporting
costs to taxpayers of $47,500,000. This
is a one-time paperwork burden
associated with a one-time tax, and
Treasury anticipates all paperwork
burdens to be incurred within the next
year. Any subsequent reporting (such as
over the eight-year payment period)
would be nominal burdens that
implement payments calculated in the
initial year. This estimate does not
disaggregate the cost specifically due to
the proposed regulations. The Treasury
Department solicits comments on the
assumptions and appropriateness of the
methodology used to calculate the
compliance costs imposed by the
proposed regulations relative to the
baseline.
II. Executive Order 13771
This proposed rule is expected to be
an Executive Order 13771 regulatory
action. Details on the estimated costs of
this proposed rule can be found in the
rule’s economic analysis.
III. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply
because the regulations do not impose a
collection of information on small
entities. Any burden on small entities in
these regulations stems from the
collection of information requirements
in proposed §§ 1.965–2(d)(2)(ii)(B),
1.965–2(f)(2)(iii)(B), 1.965–3(b)(2),
1.965–3(c)(3), 1.965–4(b)(2)(i), 1.965–
7(b)(2), 1.965–7(b)(3)(iii)(B), 1.965–
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7(c)(2), 1.965–7(c)(3)(iv)(B), 1.965–
7(c)(3)(v)(D), 1.965–7(c)(6)(i), 1.965–
7(d)(3), 1.965–7(e)(2), 1.965–7(f)(5), and
1.965–8(c). It is hereby certified that
these collection of information
requirements will not have a significant
economic impact on a substantial
number of small entities. Accordingly,
an initial regulatory flexibility analysis
is not required. This certification is
based on several facts. First, the average
burden is five hours, which is minimal,
particularly in comparison to other
regulatory requirements related to
owning stock in a specified foreign
corporation. Second, the requirements
apply only if a taxpayer chooses to make
an election or rely on a favorable rule.
Third, the collections of information
apply to the owners of specified foreign
corporations. Because it takes
significant resources and investment for
a foreign business to be operated in
corporate form by a United States
person, specified foreign corporations
will infrequently be small entities.
Moreover, because the collection of
information requirements apply to the
owners of specified foreign corporations
rather than the specified foreign
corporations themselves, a specified
foreign corporation that was a small
entity would not be subject to the
collections of information. Fourth, the
collection of information requirements
in this regulation apply primarily to
persons that are United States
shareholders of specified foreign
corporations. The ownership of
sufficient stock in specified foreign
corporations in order to constitute a
United States shareholder generally
entails significant resources and
investment, such that businesses that
are United States shareholders are
generally not small businesses. Pursuant
to section 7805(f), this notice of
proposed rulemaking has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before the proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this preamble
under the ADDRESSES heading. The
Treasury Department and the IRS
request comments on all aspects of the
proposed rules. All comments will be
available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written
comments. If a public hearing is
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scheduled, notice of the date, time, and
place for the public hearing will be
published in the Federal Register.
The principal authors of the proposed
regulations are Leni C. Perkins and
Karen J. Cate of the Office of Associate
Chief Counsel (International). However,
other personnel from the Treasury
Department and the IRS participated in
the development of the proposed
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read as follows:
■
Authority: 26 U.S.C. 7805.
*
*
*
*
Section 1.962–1 also issued under 26
U.S.C. 965(o).
Section 1.965–1 also issued under 26
U.S.C. 965(c)(3)(B)(iii)(V), 965(d)(2), 965(o),
989(c), and 7701(a).
Section 1.965–2 also issued under 26
U.S.C. 965(b)(3)(A)(ii), 965(o) and 961(a) and
(b).
Section 1.965–3 also issued under 26
U.S.C. 965(c)(3)(D) and 965(o).
Section 1.965–4 also issued under 26
U.S.C. 965(c)(3)(F) and 965(o).
Sections 1.965–5 through 1.965–6 also
issued under 26 U.S.C. 965(o) and 26 U.S.C.
902(c)(7) (as in effect on December 21, 2017).
Section 1.965–7 also issued under 26
U.S.C. 965(h)(3), 965(h)(5), 965(i)(2),
965(i)(8)(B), 965(m)(2)(A), 965(n)(3), and
965(o).
Section 1.965–8 also issued under 26
U.S.C. 965(o).
Section 1.965–9 also issued under 26
U.S.C. 965(o).
*
*
*
*
*
Section 1.986(c)–1 also issued under 26
U.S.C. 965(o) and 26 U.S.C. 989(c).
*
*
*
*
Par. 2. Section 1.962–1 is amended
by:
■ 1. Revising paragraph (b)(1)(i).
■ 2. Redesignating paragraphs
(b)(2)(iv)(a) and (b) as paragraph
(b)(2)(iv)(A) and (B), respectively.
■ 3. Adding paragraph (d).
The revision and addition read as
follows:
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*
*
*
*
(b) * * *
(1) * * *
(i) Determination of taxable income.
The term taxable income means the
excess of—
(A) The sum of—
(1) All amounts required to be
included in his gross income under
section 951(a) for the taxable year with
respect to a foreign corporation of which
he is a United States shareholder,
including—
(i) His section 965(a) inclusion
amounts (as defined in § 1.965–1(f)(38));
and
(ii) His domestic pass-through owner
shares (as defined in § 1.965–1(f)(21)) of
section 965(a) inclusion amounts with
respect to deferred foreign income
corporations (as defined in § 1.965–
1(f)(17)) of which he is a United States
shareholder; plus
(2) All amounts which would be
required to be included in his gross
income under section 78 for the taxable
year with respect to the amounts
referred to in paragraph (b)(1)(i)(A)(1) of
this section if the shareholder were a
domestic corporation; over
(B) The sum of his section 965(c)
deduction amount (as defined in
§ 1.965–1(f)(42)) and his domestic passthrough owner shares of section 965(c)
deduction amounts corresponding to the
amounts referred to in paragraph
(b)(1)(i)(A)(1)(ii) of this section for the
taxable year, but not any other
deductions or amounts.
*
*
*
*
*
(d) Applicability dates. Paragraph
(b)(1)(i) of this section applies beginning
the last taxable year of a foreign
corporation that begins before January 1,
2018, and with respect to a United
States person, for the taxable year in
which or with which such taxable year
of the foreign corporations ends.
■ Par. 3. Section 1.962–2 is amended by
revising paragraph (a) and adding
paragraph (d) to read as follows:
§ 1.962–2 Election of limitation of tax for
individuals.
*
■
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§ 1.962–1 Limitation of tax for individuals
on amounts included in gross income
under section 951(a).
*
Drafting Information
*
39541
(a) Who may elect. The election under
section 962 may be made only by an
individual (including a trust or estate)
who is a United States shareholder
(including an individual who is a
United States shareholder because, by
reason of section 958(b), he is
considered to own stock of a foreign
corporation owned (within the meaning
of section 958(a)) by a domestic pass-
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through entity (as defined in § 1.965–
1(f)(19))).
*
*
*
*
*
(d) Applicability dates. Paragraph (a)
of this section applies beginning the last
taxable year of a foreign corporation that
begins before January 1, 2018, and with
respect to a United States person, for the
taxable year in which or with which
such taxable year of the foreign
corporations ends.
■ Par. 4. Section 1.965–0 is added to
read as follows:
§ 1.965–0 Outline of section 965
regulations.
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This section lists the headings for
§§ 1.965–1 through 1.965–9.
§ 1.965–1 Overview, general rules, and
definitions.
(a) Overview.
(1) In general.
(2) Scope.
(b) Section 965(a) inclusion amounts.
(1) Inclusion of the pro rata share of the
section 965(a) earnings amount.
(2) Reduction by the allocable share of the
aggregate foreign E&P deficit.
(c) Section 965(c) deduction amounts.
(d) Treatment of specified foreign
corporation as a controlled foreign
corporation.
(e) Special rule for certain controlled
domestic partnerships.
(1) In general.
(2) Definition of a controlled domestic
partnership.
(f) Definitions.
(1) 8 percent rate amount.
(2) 8 percent rate equivalent percentage.
(3) 15.5 percent rate amount.
(4) 15.5 percent rate equivalent percentage.
(5) Accounts payable.
(6) Accounts receivable.
(7) Accumulated post-1986 deferred
foreign income.
(8) Aggregate foreign cash position.
(9) Aggregate foreign E&P deficit.
(10) Aggregate section 965(a) inclusion
amount.
(11) Allocable share.
(12) Bona fide hedging transaction.
(13) Cash-equivalent asset.
(14) Cash-equivalent asset hedging
transaction.
(15) Cash measurement dates.
(16) Cash position.
(i) General rule.
(ii) Fair market value of cash-equivalent
assets.
(iii) Measurement of derivative financial
instruments.
(iv) Translation of cash position amounts.
(17) Deferred foreign income corporation.
(i) In general.
(ii) Priority rule.
(18) Derivative financial instrument.
(19) Domestic pass-through entity.
(20) Domestic pass-through owner.
(21) Domestic pass-through owner share.
(22) E&P deficit foreign corporation.
(i) In general.
(ii) Determination of deficit in post-1986
earnings and profits.
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(23) E&P measurement dates.
(24) Final cash measurement date.
(25) First cash measurement date.
(25) Inclusion year.
(26) Net accounts receivable.
(28) Pass-through entity.
(29) Post-1986 earnings and profits.
(i) General rule.
(ii) Foreign income taxes.
(iii) Deficits in earnings and profits.
(30) Pro rata share.
(31) Second cash measurement date.
(32) Section 958(a) stock.
(33) Section 958(a) U.S. shareholder.
(34) Section 958(a) U.S. shareholder
inclusion year.
(35) Section 965 regulations.
(36) Section 965(a) earnings amount.
(37) Section 965(a) inclusion.
(38) Section 965(a) inclusion amount.
(39) Section 965(a) previously taxed
earnings and profits.
(40) Section 965(b) previously taxed
earnings and profits.
(41) Section 965(c) deduction.
(42) Section 965(c) deduction amount.
(43) Short-term obligation.
(44) Specified E&P deficit.
(45) Specified foreign corporation.
(i) General rule.
(ii) Special attribution rule.
(iii) Passive foreign investment companies.
(46) Spot rate.
(47) United States shareholder.
(g) Examples.
§ 1.965–2 Adjustments to earnings and
profits and basis.
(a) Scope.
(b) Determination of and adjustments to
earnings and profits in the last taxable year
of a specified foreign corporation that begins
before January 1, 2018, for purposes of
applying sections 959 and 965.
(c) Adjustments to earnings and profits by
reason of section 965(a).
(d) Adjustments to earnings and profits by
reason of section 965(b).
(1) Adjustments to earnings and profits
described in section 959(c)(2) and (c)(3) of
deferred foreign income corporations.
(2) Adjustments to earnings and profits
described in section 959(c)(3) of E&P deficit
foreign corporations.
(i) Increase in earnings and profits by an
amount equal to the portion of the section
958(a) U.S. shareholder’s pro rata share of the
specified E&P deficit.
(A) In general.
(B) Reduction of a qualified deficit.
(ii) Determination of portion of a section
958(a) U.S. shareholder’s pro rata share of a
specified E&P deficit taken into account.
(A) In general.
(B) Designation of portion of a section
958(a) U.S. shareholder’s pro rata share of a
specified E&P deficit taken into account.
(e) Adjustments to basis by reason of
section 965(a).
(1) General rule.
(2) Section 962 election.
(f) Adjustments to basis by reason of
section 965(b).
(1) In general.
(2) Election to make adjustments to basis
to account for the application of section
965(b).
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(i) In general.
(ii) Basis adjustments.
(A) Increase in basis with respect to a
deferred foreign income corporation.
(B) Reduction in basis with respect to an
E&P deficit foreign corporation.
(C) Section 962 election.
(iii) Rules regarding the election.
(A) Consistency requirement.
(B) Making of making election.
(1) Timing.
(i) In general.
(ii) Transition rule.
(2) Election statement.
(g) Gain reduction rule.
(1) Reduction in gain recognized under
section 961(b)(2) by reason of distributions
attributable to section 965 previously taxed
earnings and profits in the inclusion year.
(i) In general.
(ii) Definition of section 965 previously
taxed earnings and profits.
(2) Reduction in basis by an amount equal
to the gain reduction amount.
(h) Rules of application for specified basis
adjustments.
(1) Timing of basis adjustments.
(2) Netting of basis adjustments.
(3) Gain recognition for reduction in excess
of basis.
(4) Adjustments with respect to each share.
(i) Section 958(a) stock.
(ii) Applicable property.
(5) Stock or property for which
adjustments are made.
(i) In general.
(ii) Special rule for an interest in a foreign
pass-through entity.
(i) Definitions.
(1) Applicable property.
(2) Foreign pass-through entity.
(3) Property.
(j) Examples.
§ 1.965–3 Section 965(c) deductions.
(a) Scope.
(b) Rules for disregarding certain assets for
determining aggregate foreign cash position.
(1) Disregard of certain obligations between
related specified foreign corporations.
(2) Disregard of other assets upon
demonstration of double-counting.
(3) Examples.
(c) Determination of aggregate foreign cash
position for a section 958(a) U.S. shareholder
inclusion year.
(1) Single section 958(a) U.S. shareholder
inclusion year.
(2) Multiple section 958(a) U.S.
shareholder inclusion years.
(i) Allocation to first section 958(a) U.S.
shareholder inclusion year.
(ii) Allocation to succeeding section 958(a)
U.S. shareholder inclusion years.
(3) Estimation of aggregate foreign cash
position.
(4) Examples.
(d) Increase of income by section 965(c)
deduction of an expatriated entity.
(1) In general.
(2) Definition of expatriated entity.
(3) Definition of surrogate foreign
corporation.
(e) Section 962 election.
(1) In general.
(2) Example.
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(f) Treatment of section 965(c) deduction
under certain provisions of the Internal
Revenue Code.
(1) Section 63(d).
(2) Sections 705, 1367, and 1368.
(i) Adjustments to basis
(ii) S corporation accumulated adjustments
account.
(iii) Example.
(3) Section 1411.
(4) Section 4940.
(g) Domestic pass-through entities.
§ 1.965–4 Disregard of certain transactions.
(a) Scope.
(b) Transactions undertaken with a
principal purpose of changing the amount of
a section 965 element.
(1) General rule.
(2) Presumptions and exceptions for the
application of the general rule.
(c) Disregard of certain changes in method
of accounting and entity classification
elections.
(1) Changes in method of accounting.
(2) Entity classification elections.
(d) Definition of a section 965 element.
(e) Rules for applying paragraphs (b) and
(c) of this section.
(1) Determination of whether there is a
change in the amount of a section 965
element.
(2) Treatment of domestic pass-through
owners as United States shareholders.
(f) Disregard of certain transactions
occurring between E&P measurement dates.
(1) Disregard of specified payments.
(2) Definition of specified payment.
(3) Definition of tentative E&P
measurement date.
(g) Examples.
§ 1.965–5 Allowance of credit or deduction
for foreign income taxes.
(a) Scope.
(b) Rules for foreign income taxes paid or
accrued.
(c) Rules for foreign income taxes treated
as paid or accrued.
(1) Disallowed credit.
(i) In general.
(ii) Foreign income taxes deemed paid
under section 960(a)(3) (as in effect on
December 21, 2017).
(iii) Foreign income taxes deemed paid
under section 960(b) (as applicable to taxable
years of foreign corporations beginning after
December 31, 2017, and to taxable years of
United States persons in which or with
which such taxable years of foreign
corporations end).
(2) Disallowed deduction.
(3) Coordination with section 78.
(i) In general.
(ii) Domestic corporation that is a domestic
pass-through owner.
(d) Applicable percentage.
(1) In general.
(2) Applicable percentage for domestic
pass-through owners.
§ 1.965–6 Computation of foreign income
taxes deemed paid and allocation and
apportionment of deductions.
(a) Scope.
(b) Computation of foreign incomes taxes
deemed paid.
(c) Section 902 fraction.
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(1) In general.
(2) Dividend or inclusion in excess of post1986 undistributed earnings.
(3) Treatment of adjustment under section
965(b)(4)(B).
(d) Allocation and apportionment of
deductions.
§ 1.965–7 Elections and payment rules.
(a) Scope.
(b) Section 965(h) election.
(1) In general.
(i) Amount of installments.
(ii) Increased installments due to a
deficiency or a timely filed or amended
return.
(A) In general.
(B) Timing.
(C) Exception for negligence, intentional
disregard, or fraud.
(iii) Due date of installments.
(A) In general.
(B) Extension for specified individuals.
(2) Manner of making election.
(i) Eligibility.
(ii) Timing.
(iii) Election statement.
(3) Acceleration of payment.
(i) Acceleration.
(ii) Acceleration events.
(iii) Eligible section 965(h) transferee
exception.
(A) In general.
(1) Requirement to have a covered
acceleration event.
(2) Requirement to enter into a transfer
agreement.
(B) Transfer agreement.
(1) Eligibility.
(2) Filing requirements.
(i) In general.
(ii) Transition rule.
(3) Signature requirement.
(4) Terms of agreement.
(5) Consolidated groups.
(C) Consent of Commissioner.
(1) In general.
(2) Material misrepresentations and
omissions.
(D) Effect of assumption.
(1) In general.
(2) Eligible section 965(h) transferor
liability.
(E) Qualifying consolidated group member
transaction.
(1) Definition of qualifying consolidated
group member transaction.
(2) Definition of qualified successor.
(3) Departure of multiple members of a
consolidated group.
(c) Section 965(i) election.
(1) In general.
(2) Manner of making election.
(i) Eligibility.
(ii) Timing.
(iii) Election statement.
(3) Triggering events.
(i) In general.
(ii) Triggering events.
(iii) Partial transfers.
(iv) Eligible section 965(i) transferee
exception.
(A) In general.
(1) Requirement to have a covered
triggering event.
(2) Requirement to enter into a transfer
agreement.
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(B) Transfer agreement.
(1) Eligibility.
(2) Filing requirements.
(i) In general.
(ii) Transition rule.
(3) Signature requirement.
(4) Terms of agreement.
(C) Consent of Commissioner.
(1) In general.
(2) Material misrepresentations and
omissions.
(D) Effect of assumption.
(1) In general.
(2) Eligible section 965(i) transferor
liability.
(v) Coordination with section 965(h)
election.
(A) In general.
(B) Timing for election.
(C) Due date for installment.
(D) Limitation.
(1) In general.
(2) Manner of obtaining consent.
(i) In general.
(ii) Transition rule.
(3) Signature requirement.
(4) Terms of agreement.
(5) Consent of Commissioner.
(i) In general.
(ii) Material misrepresentations and
omissions.
(4) Joint and several liability.
(5) Extension of limitation on collection.
(6) Annual reporting requirement.
(i) In general.
(ii) Failure to report.
(d) Section 965(m) election and special
rule for real estate investment trusts.
(1) In general.
(2) Inclusion schedule for section 965(m)
election.
(3) Manner of making election.
(i) Eligibility.
(ii) Timing.
(iii) Election statement.
(4) Coordination with section 965(h).
(5) Acceleration of inclusion.
(6) Treatment of section 965(a) inclusions
of a real estate investment trust.
(e) Section 965(n) election.
(1) In general.
(i) General rule.
(ii) Applicable amount for section 965(n)
election.
(iii) Scope of section 965(n) election.
(2) Manner of making election.
(i) Eligibility.
(ii) Timing.
(iii) Election statement.
(f) Election to use alternative method for
calculating post-1986 earnings and profits.
(1) Effect of election for specified foreign
corporations that do not have a 52–53-week
taxable year.
(2) Effect of election for specified foreign
corporations that have a 52–53 -week taxable
year.
(3) Computation of post-1986 earnings and
profits using alternative method.
(4) Definitions.
(i) 52–53-week taxable year.
(ii) Annualized earnings and profits
amount.
(iii) Daily earnings amount.
(iv) Notional measurement date.
(5) Manner of making election.
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(i) Eligibility.
(ii) Timing.
(iii) Election statement.
(6) Examples.
(g) Definitions.
(1) Deferred net tax liability.
(2) REIT section 965 amounts.
(3) Section 965(h) election.
(4) Section 965(h) net tax liability.
(5) Section 965(i) election.
(6) Section 965(i) net tax liability.
(7) Section 965(m) election.
(8) Section 965(n) election.
(9) Specified individual.
(10) Total net tax liability under section
965.
(i) General rule.
(ii) Net income tax.
(iii) Foreign tax credits.
§ 1.965–8 Affiliated groups (including
consolidated groups).
(a) Scope.
(b) Reduction of E&P net surplus
shareholder’s pro rata share of the section
965(a) earnings amount of a deferred foreign
income corporation by the allocable share of
the applicable share of the aggregate unused
E&P deficit.
(1) In general.
(2) Consolidated group as part of an
affiliated group.
(c) Designation of portion of excess
aggregate foreign E&P deficit taken into
account.
(1) In general.
(2) Consolidated group as part of an
affiliated group.
(d) Adjustments to earnings and profits and
stock basis.
(1) Affiliated groups that are not
consolidated groups.
(2) Consolidated groups.
(e) Treatment of a consolidated group as a
single section 958(a) U.S. shareholder or a
single person.
(1) In general.
(2) Limitation.
(3) Determination of section 965(c)
deduction amount.
(f) Definitions.
(1) Aggregate unused E&P deficit.
(i) In general.
(ii) Reduction with respect to E&P net
deficit shareholders that are not wholly
owned by the affiliated group.
(2) Allocable share.
(3) Applicable share.
(4) Consolidated group aggregate foreign
cash position.
(5) E&P net deficit shareholder.
(6) E&P net surplus shareholder.
(7) Excess aggregate foreign E&P deficit.
(8) Group cash ratio.
(9) Group ownership percentage.
(g) Examples.
§ 1.965–9 Applicability dates.
(a) In general.
(b) Applicability dates for rules
disregarding certain transactions.
Par. 5. Section 1.965–1 is added to
read as follows:
■
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§ 1.965–1 Overview, general rules, and
definitions.
(a) Overview—(1) In general. The
section 965 regulations provide rules
under section 965. This section provides
general rules and definitions under
section 965. Section 1.965–2 provides
rules relating to adjustments to earnings
and profits and basis to determine and
account for the application of section
965 and a rule that limits the amount of
gain recognized under section 961(b)(2)
by reason of distributions attributable to
section 965 previously taxed earnings
and profits (as defined in § 1.965–
2(g)(1)(ii)) in the inclusion year. Section
1.965–3 provides rules regarding the
determination of section 965(c)
deductions. Section 1.965–4 sets forth
rules that disregard certain transactions
for purposes of section 965. Sections
1.965–5 and 1.965–6 provide rules with
respect to foreign tax credits. Section
1.965–7 provides rules regarding
elections and payments. Section 1.965–
8 provides rules regarding affiliated
groups, including consolidated groups.
Section 1.965–9 provides dates of
applicability. See also §§ 1.962–1 and
1.962–2 (providing rules regarding the
application of section 962) and
1.986(c)–1 (providing rules regarding
the application of section 986(c)).
(2) Scope. Paragraph (b) of this section
provides the general rules concerning
section 965(a) inclusion amounts.
Paragraph (c) of this section provides
the general rule concerning section
965(c) deduction amounts. Paragraph
(d) of this section provides a rule for
specified foreign corporations that are
not controlled foreign corporations.
Paragraph (e) of this section treats
certain controlled domestic partnerships
as a foreign partnership for purposes of
section 965. Paragraph (f) of this section
provides definitions applicable for the
section 965 regulations and §§ 1.962–1,
1.962–2, and 1.986(c)–1. Paragraph (g)
of this section contains examples
illustrating the general rules and
definitions set forth in this section.
(b) Section 965(a) inclusion
amounts—(1) Inclusion of the pro rata
share of the section 965(a) earnings
amount. For an inclusion year of a
deferred foreign income corporation, the
subpart F income of the deferred foreign
income corporation (as otherwise
determined for the inclusion year under
section 952 and § 1.952–1) is increased
by the section 965(a) earnings amount of
the deferred foreign income corporation.
See section 965(a). Accordingly, a
section 958(a) U.S. shareholder with
respect to a deferred foreign income
corporation generally includes in gross
income under section 951(a)(1) for the
section 958(a) U.S. shareholder
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inclusion year its pro rata share of the
section 965(a) earnings amount of the
deferred foreign income corporation,
translated (if necessary) into U.S. dollars
using the spot rate on December 31,
2017, and subject to reduction under
section 965(b), paragraph (b)(2) of this
section, and § 1.965–8(b). The amount of
the section 958(a) U.S. shareholder’s
inclusion with respect to a deferred
foreign income corporation as a result of
section 965(a) and this paragraph (b)(1),
as reduced under section 965(b),
paragraph (b)(2) of this section, and
§ 1.965–8(b), as applicable, is referred to
as the section 965(a) inclusion amount.
Neither the section 965(a) earnings
amount nor the section 965(a) inclusion
amount is subject to the rules or
limitations in section 952 or limited by
the accumulated earnings and profits of
the deferred foreign income corporation
on the date of the inclusion.
(2) Reduction by the allocable share of
the aggregate foreign E&P deficit. For
purposes of determining a section 958(a)
U.S. shareholder’s section 965(a)
inclusion amount with respect to a
deferred foreign income corporation, the
U.S. dollar amount of the section 958(a)
U.S. shareholder’s pro rata share of the
section 965(a) earnings amount of the
deferred foreign income corporation,
translated (if necessary) into U.S. dollars
using the spot rate on December 31,
2017, is reduced by the deferred foreign
income corporation’s allocable share of
the section 958(a) U.S. shareholder’s
aggregate foreign E&P deficit. See
section 965(b). If the section 958(a) U.S.
shareholder is a member of a
consolidated group, under § 1.965–8(e),
all section 958(a) U.S. shareholders that
are members of the consolidated group
are treated as a single section 958(a)
U.S. shareholder for purposes of this
paragraph (b)(2).
(c) Section 965(c) deduction amounts.
For a section 958(a) U.S. shareholder
inclusion year, a section 958(a) U.S.
shareholder is generally allowed a
deduction in an amount equal to the
section 965(c) deduction amount.
(d) Treatment of specified foreign
corporation as a controlled foreign
corporation. A specified foreign
corporation described in section
965(e)(1)(B) and paragraph (f)(45)(i)(B)
of this section that is not otherwise a
controlled foreign corporation is treated
as a controlled foreign corporation
solely for purposes of paragraph (b) of
this section and sections 951, 961, and
§ 1.1411–10. See 965(e)(2).
(e) Special rule for certain controlled
domestic partnerships—(1) In general.
For purposes of the section 965
regulations, a controlled domestic
partnership is treated as a foreign
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partnership for purposes of determining
the section 958(a) U.S. shareholder of a
specified foreign corporation and the
section 958(a) stock of the specified
foreign corporation owned by the
section 958(a) U.S. shareholder if the
following conditions are satisfied—
(i) Without regard to this paragraph
(e), the controlled domestic partnership
is a section 958(a) U.S. shareholder of
the specified foreign corporation and
thus owns section 958(a) stock of the
specified foreign corporation (tested
section 958(a) stock);
(ii) If the controlled domestic
partnership (and all other controlled
domestic partnerships in the chain of
ownership of the specified foreign
corporation) were treated as foreign—
(A) The specified foreign corporation
would continue to be a specified foreign
corporation; and
(B) At least one United States
shareholder of the specified foreign
corporation—
(1) Would be treated as a section
958(a) U.S. shareholder of the specified
foreign corporation; and
(2) Would be treated as owning
(within the meaning of section 958(a))
tested section 958(a) stock of the
specified 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
(e)(1) of this section, the term controlled
domestic partnership means, with
respect to a United States shareholder
described in paragraph (e)(1)(ii)(B) of
this section, a domestic partnership that
is controlled by the United States
shareholder and persons related to the
United States shareholder. For purposes
of this paragraph (e)(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 if 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 (e)(2), a
related person is, with respect to a
United States shareholder, a person that
is related (within the meaning of section
267(b) or 707(b)(1)) to the United States
shareholder.
(f) Definitions. This paragraph (f)
provides definitions that apply for
purposes of the section 965 regulations
and §§ 1.962–1, 1.962–2, and 1.986(c)–
1. Unless otherwise indicated, all
amounts are expressed as positive
numbers.
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(1) 8 percent rate amount. The term
8 percent rate amount means, with
respect to a section 958(a) U.S.
shareholder and a section 958(a) U.S.
shareholder inclusion year, the excess,
if any, of the section 958(a) U.S.
shareholder’s aggregate section 965(a)
inclusion amount for the section 958(a)
U.S. shareholder inclusion year over the
amount of the section 958(a) U.S.
shareholder’s aggregate foreign cash
position for the section 958(a) U.S.
shareholder inclusion year as
determined under § 1.965–3(c).
(2) 8 percent rate equivalent
percentage. The term 8 percent rate
equivalent percentage means, with
respect to a section 958(a) U.S.
shareholder and a section 958(a) U.S.
shareholder inclusion year, the
percentage that would result in the 8
percent rate amount being subject to an
8 percent rate of tax determined by only
taking into account a deduction equal to
such percentage of such amount and the
highest rate of tax specified in section
11 for the section 958(a) U.S.
shareholder inclusion year. In the case
of a section 958(a) U.S. shareholder
inclusion year of a section 958(a) U.S.
shareholder to which section 15 applies,
the highest rate of tax under section 11
before the effective date of the change in
rates and the highest rate of tax under
section 11 after the effective date of
such change will each be taken into
account under the preceding sentence in
the same proportions as the portion of
the section 958(a) U.S. shareholder
inclusion year that is before and after
such effective date, respectively.
(3) 15.5 percent rate amount. The
term 15.5 percent rate amount means,
with respect to a section 958(a) U.S.
shareholder and a section 958(a) U.S.
shareholder inclusion year, the amount
of the section 958(a) U.S. shareholder’s
aggregate foreign cash position for the
section 958(a) U.S. shareholder
inclusion year as determined under
§ 1.965–3(c) to the extent it does not
exceed the section 958(a) U.S.
shareholder’s aggregate section 965(a)
inclusion amount for the section 958(a)
U.S. shareholder inclusion year.
(4) 15.5 percent rate equivalent
percentage. The term 15.5 percent rate
equivalent percentage, with respect to a
section 958(a) U.S. shareholder and a
section 958(a) U.S. shareholder
inclusion year, has the meaning
provided for the term ‘‘8 percent rate
equivalent percentage’’ applied by
substituting ‘‘15.5 percent rate amount’’
for ‘‘8 percent rate amount’’ and ‘‘15.5
percent rate of tax’’ for ‘‘8 percent rate
of tax.’’
(5) Accounts payable. The term
accounts payable means payables
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arising from the purchase of property
described in section 1221(a)(1) or
section 1221(a)(8) or the receipt of
services from vendors or suppliers,
provided the payables have a term upon
issuance of less than one year.
(6) Accounts receivable. The term
accounts receivable means receivables
described in section 1221(a)(4) that have
a term upon issuance of less than one
year.
(7) Accumulated post-1986 deferred
foreign income—(i) In general. The term
accumulated post-1986 deferred foreign
income means, with respect to a
specified foreign corporation, the post1986 earnings and profits of the
specified foreign corporation except to
the extent such earnings and profits—
(A) Are attributable to income of the
specified foreign corporation that is
effectively connected with the conduct
of a trade or business within the United
States and subject to tax under chapter
1;
(B) If distributed, would, in the case
of a controlled foreign corporation, be
excluded from the gross income of a
United States shareholder under section
959; or
(C) If distributed, would, in the case
of a controlled foreign corporation that
has shareholders that are not United
States shareholders on an E&P
measurement date, be excluded from the
gross income of such shareholders
under section 959 if such shareholders
were United States shareholders,
determined by applying the principles
of Revenue Ruling 82–16, 1982–1 C.B.
106.
(ii) Earnings and profits attributable
to subpart F income in the same taxable
year as an E&P measurement date. For
purposes of determining the
accumulated post-1986 deferred foreign
income of a specified foreign
corporation as of an E&P measurement
date, earnings and profits of the
specified foreign corporation that are or
would be, applying the principles of
Revenue Ruling 82–16, 1982–1 C.B. 106,
described in section 959(c)(2) by reason
of subpart F income (as defined in
section 952 without regard to section
965(a)) are described in section
965(d)(2)(B) and paragraph (f)(7)(i)(B) or
(f)(7)(i)(C) of this section only to the
extent that such income has been
accrued by the specified foreign
corporation as of the E&P measurement
date. For rules regarding the interaction
of sections 951, 956, 959, and 965
generally, see § 1.965–2(b).
(8) Aggregate foreign cash position—
(i) In general. The term aggregate foreign
cash position means, with respect to a
section 958(a) U.S. shareholder that is
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not a member of a consolidated group,
the greater of—
(A) The aggregate of the section 958(a)
U.S. shareholder’s pro rata share of the
cash position of each specified foreign
corporation determined as of the final
cash measurement date of the specified
foreign corporation.
(B) One half of the sum of—
(1) The aggregate described in
paragraph (f)(8)(i)(A) of this section
determined as of the second cash
measurement date of each specified
foreign corporation, plus
(2) The aggregate described in
paragraph (f)(8)(i)(A) of this section
determined as of the first cash
measurement date of each specified
foreign corporation.
(ii) Other rules. For rules for
determining the aggregate foreign cash
position for a section 958(a) U.S.
shareholder inclusion year of the
section 958(a) U.S. shareholder, see
§ 1.965–3(c). For the rule for
determining the aggregate foreign cash
position of a section 958(a) U.S.
shareholder that is a member of a
consolidated group, see § 1.965–8(e)(3).
For rules disregarding certain assets for
purposes of determining the aggregate
foreign cash position of a section 958(a)
U.S. shareholder, see § 1.965–3(b).
(9) Aggregate foreign E&P deficit. The
term aggregate foreign E&P deficit
means, with respect to a section 958(a)
U.S. shareholder, the lesser of—
(i) The aggregate of the section 958(a)
U.S. shareholder’s pro rata share of the
specified E&P deficit of each E&P deficit
foreign corporation, translated (if
necessary) into U.S. dollars using the
spot rate on December 31, 2017, or
(ii) The aggregate of the section 958(a)
U.S. shareholder’s pro rata share of the
section 965(a) earnings amount of each
deferred foreign income corporation,
translated (if necessary) into U.S. dollars
using the spot rate on December 31,
2017.
(10) Aggregate section 965(a)
inclusion amount. The term aggregate
section 965(a) inclusion amount means,
with respect to a section 958(a) U.S.
shareholder, the sum of all of the
section 958(a) U.S. shareholder’s section
965(a) inclusion amounts.
(11) Allocable share. The term
allocable share means, with respect to a
deferred foreign income corporation and
an aggregate foreign E&P deficit of a
section 958(a) U.S. shareholder, the
product of the aggregate foreign E&P
deficit and the ratio determined by
dividing—
(i) The section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount of the
deferred foreign income corporation,
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translated (if necessary) into U.S. dollars
using the spot rate on December 31,
2017, by
(ii) The amount described in
paragraph (f)(9)(ii) of this section with
respect to the section 958(a) U.S.
shareholder.
(12) Bona fide hedging transaction.
The term bona fide hedging transaction
means a hedging transaction that meets
(or that would meet if the specified
foreign corporation were a controlled
foreign corporation) the requirements of
a bona fide hedging transaction
described in § 1.954–2(a)(4)(ii), except
that in the case of a specified foreign
corporation that is not a controlled
foreign corporation, the identification
requirements of § 1.954–2(a)(4)(ii)(B) do
not apply.
(13) Cash-equivalent asset. The term
cash-equivalent asset means any of the
following assets—
(i) Personal property which is of a
type that is actively traded and for
which there is an established financial
market;
(ii) Commercial paper, certificates of
deposit, the securities of the Federal
government and of any State or foreign
government;
(iii) Any foreign currency;
(iv) A short-term obligation; or
(v) Derivative financial instruments,
other than bona fide hedging
transactions.
(14) Cash-equivalent asset hedging
transaction. The term cash-equivalent
asset hedging transaction means a bona
fide hedging transaction identified on a
specified foreign corporation’s books
and records as hedging a cashequivalent asset.
(15) Cash measurement dates. The
term cash measurement dates means,
with respect to a specified foreign
corporation, the first cash measurement
date, the second cash measurement
date, and the final cash measurement
date, collectively, and each a cash
measurement date.
(16) Cash position—(i) General rule.
The term cash position means, with
respect to a specified foreign
corporation, the sum of—
(A) Cash held by the corporation;
(B) The net accounts receivable of the
corporation; and
(C) The fair market value of the cashequivalent assets held by the
corporation.
(ii) Fair market value of cashequivalent assets. For purposes of
determining the fair market value of a
cash-equivalent asset of a specified
foreign corporation, the value of the
cash-equivalent asset must be adjusted
by the fair market value of any cashequivalent asset hedging transaction
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with respect to the cash-equivalent
asset, but only to the extent that the
cash-equivalent asset hedging
transaction does not reduce the fair
market value of the cash-equivalent
asset below zero.
(iii) Measurement of derivative
financial instruments. The amount of
derivative financial instruments taken
into account in determining the cash
position of a specified foreign
corporation is the aggregate fair market
value of its derivative financial
instruments that constitute cashequivalent assets, provided such
amount is not less than zero.
(iv) Translation of cash position
amounts. The cash position of a
specified foreign corporation with
respect to a cash measurement date
must be expressed in U.S. dollars. For
this purpose, the amounts described in
paragraph (f)(16)(i) must be translated (if
necessary) into U.S. dollars using the
spot rate on the relevant cash
measurement date.
(17) Deferred foreign income
corporation—(i) In general. The term
deferred foreign income corporation
means a specified foreign corporation
that has accumulated post-1986 deferred
foreign income greater than zero as of an
E&P measurement date.
(ii) Priority rule. If a specified foreign
corporation satisfies the definition of a
deferred foreign income corporation
under section 965(d)(1) and paragraph
(f)(17)(i) of this section, it is classified
solely as a deferred foreign income
corporation and not also as an E&P
deficit foreign corporation even if it
otherwise satisfies the requirements of
section 965(b)(3)(B) and paragraph
(f)(22) of this section.
(18) Derivative financial instrument.
The term derivative financial
instrument includes a financial
instrument that is one of the following—
(i) A notional principal contract,
(ii) An option contract,
(iii) A forward contract,
(iv) A futures contract,
(v) A short position in securities or
commodities, or
(vi) Any financial instrument similar
to one described in paragraphs (f)(18)(i)
through (v) of this section.
(19) Domestic pass-through entity.
The term domestic pass-through entity
means a pass-through entity that is a
United States person (as defined in
section 7701(a)(30)).
(20) Domestic pass-through owner.
The term domestic pass-through owner
means, with respect to a domestic passthrough entity, a United States person
(as defined in section 7701(a)(30)) that
is a partner, shareholder, beneficiary,
grantor, or owner, as the case may be,
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in the domestic pass-through entity.
Notwithstanding the preceding
sentence, the term does not include a
partner, shareholder, beneficiary,
grantor, or owner of the domestic passthrough entity that is itself a domestic
pass-through entity but does include
any other United States person that is an
indirect partner, shareholder,
beneficiary, grantor, or owner of the
domestic pass-through entity through
one or more other pass-through entities.
(21) Domestic pass-through owner
share. The term domestic pass-through
owner share means, with respect to a
domestic pass-through owner and a
domestic pass-through entity, the
domestic pass-through owner’s share of
the aggregate section 965(a) inclusion
amount and the section 965(c)
deduction amount, as applicable, of the
domestic pass-through entity, including
the domestic pass-through owner’s
share of the aggregate section 965(a)
inclusion amount and section 965(c)
deduction amount, as applicable, of a
domestic pass-through entity owned
indirectly by the domestic pass-through
owner through one or more other passthrough entities.
(22) E&P deficit foreign corporation—
(i) In general. The term E&P deficit
foreign corporation means, with respect
to a section 958(a) U.S. shareholder, a
specified foreign corporation, other than
a deferred foreign income corporation,
if, as of November 2, 2017—
(A) The specified foreign corporation
had a deficit in post-1986 earnings and
profits,
(B) The corporation was a specified
foreign corporation, and
(C) The shareholder was a United
States shareholder of the corporation.
(ii) Determination of deficit in post1986 earnings and profits. In the case of
a specified foreign corporation that has
post-1986 earnings and profits that
include earnings and profits described
in section 959(c)(1) or 959(c)(2) (or both)
and a deficit in earnings and profits
(including hovering deficits, as defined
in § 1.367(b)–7(d)(2)(i)), the specified
foreign corporation has a deficit in post1986 earnings and profits described in
paragraph (f)(22)(i)(A) of this section
only to the extent the deficit in post1986 earnings and profits exceeds the
aggregate of its post-1986 earnings and
profits described in section 959(c)(1)
and 959(c)(2).
(23) E&P measurement dates. The
term E&P measurement dates means
November 2, 2017, and December 31,
2017, collectively, and each an E&P
measurement date.
(24) Final cash measurement date.
The term final cash measurement date
means, with respect to a specified
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foreign corporation, the close of the last
taxable year of the specified foreign
corporation that begins before January 1,
2018, and ends on or after November 2,
2017, if any.
(25) First cash measurement date. The
term first cash measurement date
means, with respect to a specified
foreign corporation, the close of the last
taxable year of the specified foreign
corporation that ends after November 1,
2015, and before November 2, 2016, if
any.
(26) Inclusion year. The term
inclusion year means, with respect to a
deferred foreign income corporation, the
last taxable year of the deferred foreign
income corporation that begins before
January 1, 2018.
(27) Net accounts receivable. The
term net accounts receivable means,
with respect to a specified foreign
corporation, the excess (if any) of—
(i) The corporation’s accounts
receivable, over
(ii) The corporation’s accounts
payable (determined consistent with the
rules of section 461).
(28) Pass-through entity. The term
pass-through entity means a
partnership, S corporation, or any other
person (whether domestic or foreign)
other than a corporation to the extent
that the income or deductions of the
person are included in the income of
one or more direct or indirect owners or
beneficiaries of the person. For example,
if a domestic trust is subject to federal
income tax on a portion of its section
965(a) inclusion amount and its
domestic pass-through owners are
subject to tax on the remaining portion,
the domestic trust is treated as a
domestic pass-through entity with
respect to such remaining portion.
(29) Post-1986 earnings and profits—
(i) General rule. The term post-1986
earnings and profits means, with respect
to a specified foreign corporation and an
E&P measurement date, the earnings
and profits (including earnings and
profits described in section 959(c)(1)
and 959(c)(2)) of the specified foreign
corporation (computed in accordance
with sections 964(a) and 986, subject to
§ 1.965–4(f), and by taking into account
only periods when the foreign
corporation was a specified foreign
corporation) accumulated in taxable
years beginning after December 31,
1986, and determined—
(A) As of the E&P measurement date,
except as provided in paragraph
(f)(29)(ii) of this section, and
(B) Without diminution by reason of
dividends distributed during the last
taxable year of the foreign corporation
that begins before January 1, 2018, other
than dividends distributed to another
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specified foreign corporation to the
extent the dividends increase the post1986 earnings and profits of the
distributee specified foreign
corporation.
(ii) Foreign income taxes. For
purposes of determining a specified
foreign corporation’s post-1986 earnings
and profits as of the E&P measurement
date on November 2, 2017, in the case
in which foreign income taxes (as
defined in section 901(m)(5)) of the
specified foreign corporation accrue
after November 2, 2017, but on or before
December 31, 2017, and during the
specified foreign corporation’s U.S.
taxable year that includes November 2,
2017, the specified foreign corporation’s
post-1986 earnings and profits as of
November 2, 2017, are reduced by the
applicable portion of such foreign
income taxes. For purposes of the
preceding sentence, the applicable
portion of the foreign income taxes is
the amount of the taxes that are
attributable to the portion of the taxable
income (as determined under foreign
law) that accrues on or before November
2, 2017.
(iii) Deficits in earnings and profits.
Any deficit related to post-1986
earnings and profits, including a
hovering deficit (as defined in
§ 1.367(b)–7(d)(2)(i)), of a specified
foreign corporation is taken into account
for purposes of determining the post1986 earnings and profits (including a
deficit) of the specified foreign
corporation.
(30) Pro rata share. The term pro rata
share means, with respect to a section
958(a) U.S. shareholder of a specified
foreign corporation, a deferred foreign
income corporation, or an E&P deficit
foreign corporation, as applicable—
(i) With respect to the section 965(a)
earnings amount of a deferred foreign
income corporation, the portion of the
section 965(a) earnings amount that
would be treated as distributed to the
section 958(a) U.S. shareholder under
section 951(a)(2)(A) and § 1.951–1(e),
determined as of the last day of the
inclusion year of the deferred foreign
income corporation;
(ii) With respect to the specified E&P
deficit of an E&P deficit foreign
corporation, the portion of the specified
E&P deficit allocated to the section
958(a) U.S. shareholder by allocating the
specified E&P deficit among the
shareholders of the corporation’s
common stock and in proportion to the
value of the common stock held by the
shareholders, determined as of the last
day of the last taxable year of the E&P
deficit foreign corporation that begins
before January 1, 2018; and
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(iii) With respect to the cash position
of a specified foreign corporation on a
cash measurement date, the portion of
the cash position that would be treated
as distributed to the section 958(a) U.S.
shareholder under section 951(a)(2)(A)
and § 1.951–1(e) if the cash position
were subpart F income, determined as
of the close of the cash measurement
date and without regard to whether the
section 958(a) U.S. shareholder is a
section 958(a) U.S. shareholder of the
specified foreign corporation as of any
other cash measurement date of the
specified foreign corporation, including
the final cash measurement date of the
specified foreign corporation.
(31) Second cash measurement date.
The term second cash measurement
date means, with respect to a specified
foreign corporation, the close of the last
taxable year of the specified foreign
corporation that ends after November 1,
2016, and before November 2, 2017, if
any.
(32) Section 958(a) stock. The term
section 958(a) stock means, with respect
to a specified foreign corporation, a
deferred foreign income corporation, or
an E&P deficit foreign corporation, as
applicable, stock of the corporation
owned (directly or indirectly) by a
United States shareholder within the
meaning of section 958(a).
(33) Section 958(a) U.S. shareholder.
The term section 958(a) U.S.
shareholder means, with respect to a
specified foreign corporation, a deferred
foreign income corporation, or an E&P
deficit foreign corporation, as
applicable, a United States shareholder
of such corporation that owns section
958(a) stock of the corporation.
(34) Section 958(a) U.S. shareholder
inclusion year. The term section 958(a)
U.S. shareholder inclusion year means
the taxable year of a section 958(a) U.S.
shareholder in which or with which the
inclusion year of a deferred foreign
income corporation ends.
(35) Section 965 regulations. The term
section 965 regulations means the
regulations under §§ 1.965–1 through
1.965–9, collectively.
(36) Section 965(a) earnings amount.
The term section 965(a) earnings
amount means, with respect to a
deferred foreign income corporation, the
greater of the accumulated post-1986
deferred foreign income of the deferred
foreign income corporation as of the
E&P measurement date on November 2,
2017, or the accumulated post-1986
deferred foreign income of the deferred
foreign income corporation as of the
E&P measurement date on December 31,
2017, determined in each case in the
functional currency of the specified
foreign corporation. If the functional
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currency of a specified foreign
corporation changes between the two
E&P measurement dates, the comparison
must be made in the functional currency
of the specified foreign corporation as of
December 31, 2017, by translating the
specified foreign corporation’s
accumulated post-1986 deferred foreign
income as of November 2, 2017, into the
new functional currency using the spot
rate on November 2, 2017.
(37) Section 965(a) inclusion. The
term section 965(a) inclusion means,
with respect to a person and a deferred
foreign income corporation, an amount
included in income by the person by
reason of section 965 with respect to the
deferred foreign income corporation,
whether because the person is a section
958(a) U.S. shareholder of the deferred
foreign income corporation with a
section 965(a) inclusion amount with
respect to the deferred foreign income
corporation or because the person is a
domestic pass-through owner with
respect to a domestic pass-through
entity that is a section 958(a) U.S.
shareholder of the deferred foreign
income corporation and the person
includes in income its domestic passthrough owner share of the section
965(a) inclusion amount of the domestic
pass-through entity with respect to the
deferred foreign income corporation.
(38) Section 965(a) inclusion amount.
The term section 965(a) inclusion
amount has the meaning provided in
paragraph (b)(1) of this section.
(39) Section 965(a) previously taxed
earnings and profits. The term section
965(a) previously taxed earnings and
profits has the meaning provided in
§ 1.965–2(c).
(40) Section 965(b) previously taxed
earnings and profits. The term section
965(b) previously taxed earnings and
profits has the meaning provided in
§ 1.965–2(d).
(41) Section 965(c) deduction. The
term section 965(c) deduction means,
with respect to a person, an amount
allowed as a deduction to the person by
reason of section 965(c), whether
because the person is a section 958(a)
U.S. shareholder with a section 965(c)
deduction amount or because the person
is a domestic pass-through owner with
respect to a domestic pass-through
entity that is a section 958(a) U.S.
shareholder and the person takes into
account its domestic pass-through
owner share of the section 965(c)
deduction amount of the domestic passthrough entity.
(42) Section 965(c) deduction amount.
The term section 965(c) deduction
amount means an amount equal to the
sum of—
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(i) A section 958(a) U.S. shareholder’s
8 percent rate equivalent percentage of
the section 958(a) U.S. shareholder’s 8
percent rate amount for the section
958(a) U.S. shareholder inclusion year,
plus
(ii) The section 958(a) U.S.
shareholder’s 15.5 percent rate
equivalent percentage of the section
958(a) U.S. shareholder’s 15.5 percent
rate amount for the section 958(a) U.S.
shareholder inclusion year.
(43) Short-term obligation. The term
short-term obligation means any
obligation with a term upon issuance
that is less than one year and any loan
that must be repaid at the demand of the
lender (or that must be repaid within
one year of such demand), but does not
include any accounts receivable.
(44) Specified E&P deficit. The term
specified E&P deficit means, with
respect to an E&P deficit foreign
corporation, the amount of the deficit
described in paragraph (f)(22)(i)(A) of
this section.
(45) Specified foreign corporation—(i)
General rule. Except as provided in
paragraph (f)(45)(iii) of this section, the
term specified foreign corporation
means—
(A) A controlled foreign corporation,
or
(B) A foreign corporation of which
one or more domestic corporations is a
United States shareholder.
(ii) Special attribution rule. Solely for
purposes of determining whether a
foreign corporation is a specified foreign
corporation within the meaning of
section 965(e)(1)(B) and paragraph
(f)(45)(i)(B) of this section, stock owned,
directly or indirectly, by or for a partner
(tested partner) will not be considered
as being owned by a partnership under
sections 958(b) and 318(a)(3)(A) and
§ 1.958–2(d)(1)(i) if the tested partner
owns less than five percent of the
interests in the partnership’s capital and
profits. For purposes of the preceding
sentence, an interest in the partnership
owned by another partner will be
considered as being owned by the tested
partner under the principles of sections
958(b) and 318, as modified by this
paragraph (f)(45)(ii), as if the interest in
the partnership were stock.
(iii) Passive foreign investment
companies. A foreign corporation that is
a passive foreign investment company
(as defined in section 1297) with respect
to a United States shareholder and that
is not a controlled foreign corporation is
not a specified foreign corporation with
respect to the United States shareholder.
(46) Spot rate. The term spot rate has
the meaning provided in § 1.988–1(d).
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(47) United States shareholder. The
term United States shareholder has the
meaning provided in section 951(b).
(g) Examples. The following examples
illustrate the definitions and general
rules set forth in this section.
Example 1. Definition of specified foreign
corporation. (i) Facts. A, an individual, owns
100% of the stock of a domestic corporation,
DC, and 1% of the interests in a partnership,
PS. A United States citizen, USI, owns 10%
of the interests in PS and 10% by vote and
value of the stock of a foreign corporation,
FC. The remaining 90% by vote and value of
the stock of FC is owned by non-United
States persons that are unrelated to A, USI,
DC, and PS.
(ii) Analysis. (A) Absent the application of
sections 958(b), 318(a)(3)(A), and
318(a)(3)(C), and § 1.958–2(d)(1)(i) and (iii),
FC would not be a specified foreign
corporation, because FC is not a controlled
foreign corporation and there would be no
domestic corporation that is a United States
shareholder of FC. However, under sections
958(b) and 318(a)(3)(A) and § 1.958–
2(d)(1)(i), absent the special attribution rule
in paragraph (f)(45)(ii) of this section, PS
would be treated as owning 100% of the
stock of DC and 10% of the stock of FC. As
a result, under sections 958(b), 318(a)(5)(A),
and 318(a)(3)(C), and § 1.958–2(f)(1)(i) and
(d)(1)(iii), DC would be treated as owning the
stock of FC treated as owned by PS, and thus
DC would be a United States shareholder
with respect to FC, causing FC to be a
specified foreign corporation within the
meaning of section 965(e)(1)(B) and
paragraph (f)(45)(i)(B) of this section. The
results would the same whether A or PS or
both are domestic or foreign persons.
(B) Under the special attribution rule in
paragraph (f)(45)(ii) of this section, solely for
purposes of determining whether a foreign
corporation is a specified foreign corporation
within the meaning of section 965(e)(1)(B)
and paragraph (f)(45)(i)(B) of this section, the
stock of DC owned by A is not considered as
being owned by PS under sections 958(b) and
318(a)(3)(A) and § 1.958–2(d)(1)(i), because A
owns less than 5% of the interests in PS’s
capital and profits. Accordingly, FC is not a
specified foreign corporation within the
meaning of section 965(e)(1)(B) and
paragraph (f)(45)(i)(B) of this section.
Example 2. Definition of specified foreign
corporation. (i) Facts. The facts are the same
as in paragraph (i) of Example 1 of this
paragraph (g), except that A is a corporation
wholly owned by B, and B directly owns 4%
of the interests in PS.
(ii) Analysis. Applying the principles of
sections 958(b) and 318, as modified by
paragraph (f)(45)(ii) of this section, as if the
interest in PS were stock, A is treated as
owning the interests in PS owned by B (in
addition to the 1% interest in PS that A owns
directly), and thus A is not treated as owning
less than 5% of the interests in PS’s capital
and profits. Accordingly, the special
attribution rule in paragraph (f)(45)(ii) of this
section does not apply, and PS is treated as
owning A’s stock of DC for purposes of
determining whether FC is a specified foreign
corporation within the meaning of section
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965(e)(1)(B) and paragraph (f)(45)(i)(B) of this
section. Accordingly, under the analysis
described in paragraph (ii)(A) of Example 1
of this paragraph (g), FC is a specified foreign
corporation within the meaning of section
965(e)(1)(B) and paragraph (f)(45)(i)(B) of this
section.
Example 3. Determination of accumulated
post-1986 deferred foreign income. (i) Facts.
USP, a domestic corporation, and FP, a
foreign corporation unrelated to USP, have
owned 70% and 30% respectively, by vote
and value, of the only class of stock of FS,
a foreign corporation, from January 1, 2016,
until December 31, 2017. USP and FS both
have a calendar year taxable year. FS had no
income until its taxable year ending
December 31, 2016, in which it had 100u of
income, all of which constituted subpart F
income, and USP included 70u in income
with respect to FS under section 951(a)(1) for
such year. FS earned no income in 2017.
Therefore, FS’s post-1986 earnings and
profits are 100u as of both E&P measurement
dates.
(ii) Analysis. Because USP included 70u in
income with respect to FS under section
951(a)(1), 70u of such post-1986 earnings and
profits would, if distributed, be excluded
from the gross income of USP under section
959. Thus, FS’s accumulated post-1986
deferred foreign income would be reduced by
70u pursuant to section 965(d)(2)(B) and
paragraph (f)(7)(i)(B) of this section.
Furthermore, under paragraph (f)(7)(i)(C) of
this section, the accumulated post-1986
deferred foreign income of FS is reduced by
amounts that would be excluded from the
gross income of FP if FP were a United States
shareholder, consistent with the principles of
Revenue Ruling 82–16. Accordingly, FS’s
accumulated post-1986 deferred foreign
income is reduced by the remaining 30u of
the 100u of post-1986 earnings and profits to
which USP’s 70u of section 951(a)(1) income
inclusions were attributable. As a result, FS’s
accumulated post-1986 deferred foreign
income is 0u (100u minus 70u minus 30u).
Example 4. Determination of status as a
deferred foreign income corporation or an
E&P deficit foreign corporation; specified
foreign corporation is solely a deferred
foreign income corporation. (i) Facts. USP,
a domestic corporation, owns all of the stock
of FS, a foreign corporation. As of November
2, 2017, FS has a deficit in post-1986
earnings and profits of 150u. As of December
31, 2017, FS has 200u of post-1986 earnings
and profits. FS does not have earnings and
profits that are attributable to income of the
specified foreign corporation that is
effectively connected with the conduct of a
trade or business within the United States
and subject to tax under chapter 1, or that,
if distributed, would be excluded from the
gross income of a United States shareholder
under section 959 or from the gross income
of another shareholder if such shareholder
were a United States shareholder.
(ii) Analysis. FS’s accumulated post-1986
deferred foreign income is equal to its post1986 earnings and profits because no
adjustment to post-1986 earnings and profits
is made under section 965(d)(2) or § 1.965–
1(f)(7). Under paragraph (f)(17)(i) of this
section, FS is a deferred foreign income
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corporation because FS has accumulated
post-1986 deferred foreign income greater
than zero as of the E&P measurement date on
December 31, 2017. In addition, under
paragraph (f)(17)(ii) of this section, because
FS is a deferred foreign income corporation,
FS is not also an E&P deficit foreign
corporation, notwithstanding that FS has a
deficit in post-1986 earnings and profits as of
the E&P measurement date on November 2,
2017.
Example 5. Determination of status as a
deferred foreign income corporation or an
E&P deficit foreign corporation; specified
foreign corporation is neither a deferred
foreign income corporation nor an E&P
deficit foreign corporation. (i) Facts. USP, a
domestic corporation, owns all of the stock
of FS, a foreign corporation. As of both
November 2, 2017, and December 31, 2017,
FS has 100u of earnings and profits described
in section 959(c)(2) and a deficit of 90u in
earnings and profits described in section
959(c)(3), all of which were accumulated in
taxable years beginning after December 31,
1986, while FS was a specified foreign
corporation. Accordingly, as of both
November 2, 2017, and December 31, 2017,
FS has 10u of post-1986 earnings and profits.
(ii) Analysis. (A) Determination of status as
a deferred foreign income corporation. Under
paragraph (f)(17) of this section, for purposes
of determining whether FS is a deferred
foreign income corporation, a determination
must be made whether FS has accumulated
post-1986 deferred foreign income greater
than zero as of either the E&P measurement
date on November 2, 2017, or the E&P
measurement date on December 31, 2017.
Under section 965(d)(2) and paragraph (f)(7)
of this section, FS’s accumulated post-1986
deferred foreign income is its post-1986
earnings and profits, except to the extent
such earnings and profits are attributable to
income of the specified foreign corporation
that is effectively connected with the conduct
of a trade or business within the United
States and subject to tax under chapter 1, or
that, if distributed, would be excluded from
the gross income of a United States
shareholder under section 959 or from the
gross income of another shareholder if such
shareholder were a United States
shareholder. Disregarding FS’s 100u of post1986 earnings and profits described in
paragraph (f)(7)(i)(B) of this section, FS has
a 90u deficit in accumulated post-1986
deferred foreign income as of both E&P
measurement dates. Accordingly, FS does not
have accumulated post-1986 deferred foreign
income greater than zero as of either E&P
measurement date and therefore FS is not a
deferred foreign income corporation.
(B) Determination of status as an E&P
deficit foreign corporation. Under paragraph
(f)(22)(i) of this section, for purposes of
determining whether FS is an E&P deficit
foreign corporation, a determination must be
made whether FS has a deficit in post-1986
earnings and profits as of the E&P
measurement date on November 2, 2017.
Under paragraph (f)(22)(ii) of this section,
because the deficit in the earnings and profits
of FS described in section 959(c)(3) of 90u
does not exceed the earnings and profits of
FS described in section 959(c)(2) of 100u, FS
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does not have a deficit in post-1986 earnings
and profits as of the E&P measurement date
on November 2, 2017, and therefore FS is not
an E&P deficit foreign corporation.
Accordingly, FS is neither a deferred foreign
income corporation nor an E&P deficit
foreign corporation.
Example 6. Application of currency
translation rules. (i) Facts. As of November
2, 2017, and December 31, 2017, USP, a
domestic corporation, owns all of the stock
of CFC1, an E&P deficit foreign corporation
with the ‘‘u’’ as its functional currency;
CFC2, an E&P deficit foreign corporation
with the ‘‘v’’ as its functional currency;
CFC3, a deferred foreign income corporation
with the ‘‘y’’ as its functional currency; and
CFC4, a deferred foreign income corporation
with the ‘‘z’’ as its functional currency. USP,
CFC1, CFC2, CFC3, and CFC4 each have a
calendar year taxable year. As of December
31, 2017, 1u = $1, .75v = $1, .50y = $1, and
.25z = $1. CFC1 has a specified E&P deficit
of 100u, CFC2 has a specified E&P deficit of
120v, CFC3 has a section 965(a) earnings
amount of 50y, and CFC4 has a section 965(a)
earnings amount of 75z.
(ii) Analysis. (A) Under paragraph (f)(38) of
this section, for purposes of determining
USP’s section 965(a) inclusion amounts with
respect to CFC3 and CFC4, the section 965(a)
earnings amount of each of CFC3 and CFC4
is translated into U.S. dollars at the spot rate
on December 31, 2017, which equals $100
(50y at .50y = $1) and $300 (75z at .25z = $1),
respectively. Furthermore, USP’s pro rata
share of the section 965(a) earnings amounts,
as translated, is $100 and $300, respectively,
or 100% of each section 965(a) earnings
amount.
(B) Under paragraph (f)(9) of this section,
for purposes of determining USP’s aggregate
foreign E&P deficit, the specified E&P deficit
of each of CFC1 and CFC2 is translated into
U.S. dollars at the spot rate on December 31,
2017, which equals $100 (100u at 1u = $1)
and $160 (120v at .75v = $1), respectively.
Furthermore USP’s pro rata share of each
specified E&P deficit, as translated, is $100
and $160, respectively, or 100% of each
specified E&P deficit. Therefore, USP’s
aggregate foreign E&P deficit is $260.
(C) Under section 965(b)(1) and paragraph
(b)(2) of this section, for purposes of
determining USP’s section 965(a) inclusion
amount with respect to each of CFC3 and
CFC4, the U.S. dollar amount of USP’s pro
rata share of the section 965(a) earnings
amount of each of CFC3 and CFC4 is reduced
by each of CFC3 and CFC4’s allocable share
of USP’s aggregate foreign E&P deficit. Under
section 965(b)(2) and paragraph (f)(11) of this
section, CFC3’s allocable share of USP’s
aggregate foreign E&P deficit of $260 is $65
($260 × ($100/$400)) and CFC4’s allocable
share of USP’s aggregate foreign E&P deficit
is $195 ($260 × ($300/400)). After reduction
under section 965(b)(1) and paragraph (b)(2)
of this section, the section 965(a) inclusion
amount of USP with respect to CFC3 is $35
($100 ¥ $65) and the section 965(a)
inclusion amount of USP with respect to
CFC4 is $105 ($300 ¥ $195). Under § 1.965–
2(c), the section 965(a) previously taxed
earnings and profits of each of CFC3 and
CFC4, translated into the respective
functional currencies of CFC3 and CFC4 at
the spot rate on December 31, 2017, are 17.5y
($35 at .50y = $1) and 26.25z ($105 at .25z
= $1), respectively. Under § 1.965–6(b), for
purposes of applying section 960(a)(1), the
amounts treated as a dividend paid by each
of CFC3 and CFC4, translated into the
respective functional currencies of CFC3 and
CFC4 at the spot rate on December 31, 2017,
are 17.5y ($35 at .50y = $1) and 26.25z ($105
at .25z = $1).
(D) For purposes of determining the section
965(b) previously taxed earnings and profits
of each of CFC3 and CFC4 under section
965(b)(4)(A) and § 1.965–2(d)(1) as a result of
the reduction to USP’s section 965(a)
inclusion amounts with respect to CFC3 and
CFC4, the amount of the aggregate foreign
E&P deficit of USP allocated to each of CFC3
and CFC4 under section 965(b)(2) and
paragraph (f)(11) of this section, translated
into the respective functional currencies of
CFC3 and CFC4 at the spot rate on December
31, 2017, is 32.5y ($65 at .50y = $1) and
48.75z ($195 at .25z = $1), respectively.
Example 7. Determination of cash
measurement dates and pro rata shares of
cash positions. (i) Facts. Except as otherwise
provided, for all relevant periods, USP, a
domestic corporation, has owned directly at
least 10% of the stock of CFC1, CFC2, CFC3,
and CFC4, each a foreign corporation. CFC1
and CFC2 have calendar year taxable years.
CFC3 and CFC4 have taxable years that end
on November 30. No entity has a short
taxable year, except as a result of the
transactions described below.
(A) USP transferred all of its stock of CFC2
to an unrelated person on June 30, 2016, at
which point USP ceased to be a United States
shareholder with respect to CFC2.
(B) CFC4 dissolved on December 30, 2010,
and, as a result, its final taxable year ended
on December 30, 2010.
(ii) Analysis. Each of CFC1, CFC2, CFC3,
and CFC4 is a specified foreign corporation
with respect to USP, subject to the sale of
CFC2 on June 30, 2016, and the dissolution
of CFC4 on December 30, 2010. Under the
definition of aggregate foreign cash position
in paragraph (f)(8)(i) of this section, the
definition of pro rata share of a cash position
in paragraph (f)(30)(iii) of this section, and
the definitions of the final cash measurement
date, second cash measurement date, and
first cash measurement date in paragraphs
(f)(24), (25), and (31) of this section, the cash
measurement dates of the specified foreign
corporations to be taken into account by USP
in determining its aggregate foreign cash
position are summarized in the following
table:
CASH MEASUREMENT DATES
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CFC1
CFC2
CFC3
CFC4
....................................................
....................................................
....................................................
....................................................
Final
Second
December 31, 2017 .............................
N/A .......................................................
November 30, 2018 .............................
N/A .......................................................
December 31, 2016 .............................
N/A .......................................................
November 30, 2016 .............................
N/A .......................................................
Example 8. Determination of section 958(a)
U.S. shareholder in case of a controlled
domestic partnership. (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 and CFC4. This ownership structure
has existed since the date of formation of
CFC1, CFC2, CFC3, and CFC4. CFC1, CFC2,
CFC3, and CFC4 are each a foreign
corporation. USP, DPS, CFC1, CFC2, CFC3,
and CFC4 have calendar year taxable years.
On both E&P measurement dates, CFC3 has
50u of accumulated post-1986 deferred
foreign income. On both E&P measurement
dates, CFC4 has a deficit in post-1986
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earnings and profits of 30u. On all cash
measurement dates, CFC1, CFC2, and CFC3
each have a cash position of 0u, and CFC4
has a cash position of 200u.
(ii) Analysis. DPS is a controlled domestic
partnership with respect to USP within the
meaning of paragraph (e)(2) of this section,
because more than 50% of the interests in its
capital and profits are owned by persons
related to USP within the meaning of section
267(b), CFC1 and CFC2, and thus DPS is
controlled by USP and related persons.
Without regard to paragraph (e) of this
section, DPS is a section 958(a) U.S.
shareholder of CFC3 and CFC4, each of
which is a controlled foreign corporation. If
DPS were treated as foreign, CFC3 and CFC4
would each continue to be a controlled
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First
December 31, 2015.
December 31, 2015.
November 30, 2015.
N/A.
foreign corporation, and USP would be
treated as a section 958(a) U.S. shareholder
of each of CFC3 and CFC4, and would be
treated as owning (within the meaning of
section 958(a)) tested section 958(a) stock of
each of CFC3 and CFC4 through CFC1 and
CFC2, which are both partners in DPS. Thus,
under paragraph (e)(1) of this section, DPS is
treated as a foreign partnership for purposes
of determining the section 958(a) U.S.
shareholder of both CFC3 and CFC4 and the
section 958(a) stock of both CFC3 and CFC4
owned by the section 958(a) U.S.
shareholder. Thus, USP’s pro rata share of
CFC3’s section 965(a) earnings amount is
50u, and its pro rata share of CFC4’s
specified E&P deficit is 30u. USP’s aggregate
foreign cash position is 200u. DPS is not a
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section 958(a) shareholder with respect to
either CFC3 or CFC4.
Par. 6. Section 1.965–2 is added to
read as follows:
■
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§ 1.965–2 Adjustments to earnings and
profits and basis.
(a) Scope. This section provides rules
relating to adjustments to earnings and
profits and basis to determine and
account for the application of section
965(a) and (b) and § 1.965–1(b) and a
rule that limits the amount of gain
recognized under section 961(b)(2) by
reason of distributions attributable to
section 965 previously taxed earnings
and profits (as defined in paragraph
(g)(1)(ii) of this section) in the inclusion
year. Paragraph (b) of this section
provides rules relating to adjustments to
earnings and profits of a specified
foreign corporation in its last taxable
year that begins before January 1, 2018,
for purposes of applying sections 959
and 965. Paragraph (c) of this section
provides rules regarding adjustments to
earnings and profits by reason of section
965(a). Paragraph (d) of this section
provides rules regarding adjustments to
earnings and profits by reason of section
965(b). Paragraph (e) provides rules
regarding adjustments to basis by reason
of section 965(a). Paragraph (f) of this
section provides an election to make
certain adjustments to basis
corresponding to adjustments to
earnings and profits by reason of section
965(b). Paragraph (g) of this section
provides rules that limit the amount of
gain recognized in connection with the
application of section 961(b)(2) and that
require related reductions in basis.
Paragraph (h) of this section provides
rules regarding basis adjustments.
Paragraph (i) of this section provides
definitions that apply for purposes of
this section. Paragraph (j) of this section
provides examples illustrating the
application of this section.
(b) Determination of and adjustments
to earnings and profits in the last
taxable year of a specified foreign
corporation that begins before January
1, 2018, for purposes of applying
sections 959 and 965. For the last
taxable year of a specified foreign
corporation that begins before January 1,
2018, and the taxable year of a section
958(a) U.S. shareholder in which or
with which such year ends, the
adjustments to earnings and profits
described in paragraphs (b)(1) through
(b)(5) of this section are applied in
sequence.
(1) The subpart F income of the
specified foreign corporation is
determined without regard to section
965(a), and earnings and profits of the
specified foreign corporation that are
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described in section 959(c)(2) with
respect to the section 958(a) U.S.
shareholder are increased to the extent
of the section 958(a) U.S. shareholder’s
inclusion under section 951(a)(1)(A)
without regard to section 965(a).
(2) The treatment of a distribution by
the specified foreign corporation to
another specified foreign corporation
that is made before January 1, 2018, is
determined under section 959.
(3) Each of the post-1986 earnings and
profits (including a deficit) of the
specified foreign corporation, the
accumulated post-1986 deferred foreign
income of the specified foreign
corporation, the section 965(a) earnings
amount of the specified foreign
corporation, and the section 965(a)
inclusion amount with respect to the
specified foreign corporation, if any, is
determined, and the earnings and
profits (including a deficit) of the
specified foreign corporation are
adjusted as provided in paragraphs (c)
and (d) of this section. For a rule
disregarding subpart F income earned
after an E&P measurement date for
purposes of calculating accumulated
post-1986 deferred foreign income as of
the E&P measurement date, see § 1.965–
1(f)(7)(ii).
(4) The treatment of all distributions
from the specified foreign corporation
other than those described in paragraph
(b)(2) of this section is determined
under section 959.
(5) An amount is determined under
section 956 with respect to the specified
foreign corporation and the section
958(a) U.S. shareholder; earnings and
profits of the specified foreign
corporation described in sections
959(c)(2) with respect to the section
958(a) U.S. shareholder are reclassified
as earnings and profits described in
section 959(c)(1) with respect to the
section 958(a) U.S. shareholder to the
extent the amount determined under
section 956 would, but for section
959(a)(2), be included by the section
958(a) U.S. shareholder under section
951(a)(1)(B); and earnings and profits
described in section 959(c)(1) with
respect to the section 958(a) U.S.
shareholder are further increased to the
extent of the section 958(a) U.S.
shareholder’s inclusion under section
951(a)(1)(B).
(c) Adjustments to earnings and
profits by reason of section 965(a). The
earnings and profits of a deferred
foreign income corporation described in
section 959(c)(2) with respect to a
section 958(a) U.S. shareholder are
increased by an amount equal to the
section 965(a) inclusion amount of the
section 958(a) U.S. shareholder with
respect to the deferred foreign income
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39551
corporation, if any, translated (if
necessary) into the functional currency
of the deferred foreign income
corporation using the spot rate on
December 31, 2017, provided the
section 965(a) inclusion amount is
included in income by the section
958(a) U.S. shareholder. For purposes of
the section 965 regulations, the earnings
and profits described in section
959(c)(2) by reason of this paragraph (c)
and the earnings and profits initially
described in section 959(c)(2) by reason
of this paragraph (c) but subsequently
reclassified as earnings and profits
described in section 959(c)(1), if any, are
referred to as section 965(a) previously
taxed earnings and profits. Furthermore,
the earnings and profits (including a
deficit) of the deferred foreign income
corporation that are described in section
959(c)(3) (or that would be described in
section 959(c)(3) but for the application
of section 965(a) and the section 965
regulations) are reduced (or, in the case
of a deficit, increased) by an amount
equal to the section 965(a) previously
taxed earnings and profits.
(d) Adjustments to earnings and
profits by reason of section 965(b)—(1)
Adjustments to earnings and profits
described in section 959(c)(2) and (c)(3)
of deferred foreign income corporations.
The earnings and profits of a deferred
foreign income corporation described in
section 959(c)(2) with respect to a
section 958(a) U.S. shareholder are
increased by an amount equal to the
reduction to the section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount of the
deferred foreign income corporation
under section 965(b), § 1.965–1(b)(2),
and § 1.965–8(b), as applicable,
translated (if necessary) into the
functional currency of the deferred
foreign income corporation using the
spot rate on December 31, 2017,
provided the section 958(a) U.S.
shareholder includes the section 965(a)
inclusion amount with respect to the
deferred foreign income corporation in
income. For purposes of the section 965
regulations, the earnings and profits
described in section 959(c)(2) by reason
of this paragraph (d) and the earnings
and profits initially described in section
959(c)(2) by reason of this paragraph (d)
but subsequently reclassified as
earnings and profits described in section
959(c)(1) are referred to as section
965(b) previously taxed earnings and
profits. Furthermore, the earnings and
profits (including a deficit) described in
section 959(c)(3) of the deferred foreign
income corporation (or that would be
described in section 959(c)(3) but for the
application of section 965(b) and the
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section 965 regulations) are reduced (or,
in the case of a deficit, increased) by an
amount equal to the section 965(b)
previously taxed earnings and profits.
(2) Adjustments to earnings and
profits described in section 959(c)(3) of
E&P deficit foreign corporations—(i)
Increase in earnings and profits by an
amount equal to the portion of the
section 958(a) U.S. shareholder’s pro
rata share of the specified E&P deficit
taken into account—(A) In general. For
an E&P deficit foreign corporation’s last
taxable year that begins before January
1, 2018, the earnings and profits of the
E&P deficit foreign corporation
described in section 959(c)(3) are
increased by an amount equal to the
portion of a section 958(a) U.S.
shareholder’s pro rata share of the
specified E&P deficit of the E&P deficit
foreign corporation taken into account
under section 965(b), § 1.965–1(b)(2),
and § 1.965–8(b), as determined under
paragraph (d)(2)(ii) of this section,
translated (if necessary) into the
functional currency of the E&P deficit
foreign corporation using the spot rate
on December 31, 2017. For purposes of
section 316, the earnings and profits of
the E&P deficit foreign corporation
attributable to the increase described in
the preceding sentence are not treated as
earnings and profits of the taxable year
described in section 316(a)(2). See also
§ 1.965–6(c)(3) for the timing of this
adjustment for purposes of determining
a deemed paid credit allowed under
sections 902 and 960.
(B) Reduction of a qualified deficit.
For purposes of section 952, a section
958(a) U.S. shareholder’s pro rata share
of the earnings and profits of an E&P
deficit foreign corporation is increased
by an amount equal to the portion of the
section 958(a) U.S. shareholder’s pro
rata share of the specified E&P deficit of
the E&P deficit foreign corporation
taken into account under section 965(b),
§ 1.965–1(b)(2), or § 1.965–8(b), as
applicable, as determined under
paragraph (d)(2)(ii) of this section,
translated (if necessary) into the
functional currency of the E&P deficit
foreign corporation using the spot rate
on December 31, 2017, and such
increase is attributable to the same
activity to which the deficit so taken
into account was attributable.
(ii) Determination of portion of a
section 958(a) U.S. shareholder’s pro
rata share of a specified E&P deficit
taken into account—(A) In general. The
portion of a section 958(a) U.S.
shareholder’s pro rata share of a
specified E&P deficit of an E&P deficit
foreign corporation taken into account
under section 965(b), § 1.965–1(b)(2), or
§ 1.965–8(b), as applicable, is 100
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percent of the section 958(a) U.S.
shareholder’s pro rata share of the
specified E&P deficit if either of the
following conditions is satisfied:
(1) The section 958(a) U.S.
shareholder (including a consolidated
group of which the section 958(a) U.S.
shareholder is a member) does not have
an excess aggregate foreign E&P deficit
(as defined in § 1.965–8(f)(7)(i)), or
(2) If the section 958(a) U.S.
shareholder is a member of an affiliated
group in which not all members are
members of the same consolidated
group, the amount described in § 1.965–
8(f)(1)(i)(B) with respect to the affiliated
group is equal to or greater than the
amount described § 1.965–8(f)(1)(i)(A).
(B) Designation of portion of a section
958(a) U.S. shareholder’s pro rata share
of a specified E&P deficit taken into
account. If neither the condition in
paragraph (d)(2)(ii)(A)(1) nor the
condition in paragraph (d)(2)(ii)(A)(2) is
satisfied with respect to a section 958(a)
U.S. shareholder, then the section 958(a)
U.S. shareholder must designate the
portion taken into account by reporting
to each E&P deficit foreign corporation
of the section 958(a) U.S. shareholder,
and maintaining in its books and
records a statement setting forth, the
following information—
(1) The portion of the section 958(a)
shareholder’s pro rata share of the
specified E&P deficit of the E&P deficit
foreign corporation taken into account
under section 965(b), § 1.965–1(b)(2), or
§ 1.965–8(b), as designated under
§ 1.965–8(c), as applicable, and
(2) In the case of an E&P deficit
foreign corporation that has a qualified
deficit (as determined under section 952
and § 1.952–1), the portion (if any) of
the section 958(a) shareholder’s pro rata
share of the specified E&P deficit of the
E&P deficit foreign corporation taken
into account under paragraph
(d)(2)(ii)(B)(1) of this section that is
attributable to a qualified deficit,
including the qualified activities to
which such portion is attributable.
(e) Adjustments to basis by reason of
section 965(a)—(1) General rule. Except
as provided in paragraph (e)(2) of this
section, a section 958(a) U.S.
shareholder’s basis in section 958(a)
stock of a deferred foreign income
corporation, or a section 958(a) U.S.
shareholder’s basis in applicable
property with respect to a deferred
foreign income corporation, is increased
by the section 958(a) U.S. shareholder’s
section 965(a) inclusion amount with
respect to the deferred foreign income
corporation included in income by the
section 958(a) U.S. shareholder. See
section 961(a).
(2) [Reserved]
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(f) Adjustments to basis by reason of
section 965(b)—(1) In general. Except as
provided in paragraph (f)(2) of this
section, no adjustments to basis of stock
or property are made under section 961
(or any other provision of the Code) to
take into account the reduction to a
section 958(a) U.S. shareholder’s pro
rata share of the section 965(a) earnings
amount of a deferred foreign income
corporation under section 965(b),
§ 1.965–1(b)(2), or § 1.965–8(b), as
applicable.
(2) Election to make adjustments to
basis to account for the application of
section 965(b)—(i) In general. If a
section 958(a) U.S. shareholder makes
the election as provided in this
paragraph (f)(2), the adjustments to basis
described in paragraph (f)(2)(ii) of this
section are made with respect to each
deferred foreign income corporation and
each E&P deficit foreign corporation in
which the section 958(a) U.S.
shareholder owns section 958(a) stock.
(ii) Basis adjustments—(A) Increase in
basis with respect to a deferred foreign
income corporation. Except as provided
in paragraph (f)(2)(ii)(C) of this section,
a section 958(a) U.S. shareholder’s basis
in section 958(a) stock of a deferred
foreign income corporation, or a section
958(a) U.S. shareholder’s basis in
applicable property with respect to a
deferred foreign income corporation, is
increased by an amount equal to the
section 965(b) previously taxed earnings
and profits of the deferred foreign
income corporation with respect to the
section 958(a) U.S. shareholder,
translated (if necessary) into U.S. dollars
using the spot rate on December 31,
2017.
(B) Reduction in basis with respect to
an E&P deficit foreign corporation.
Except as provided in paragraph
(f)(2)(ii)(C) of this section, a section
958(a) U.S. shareholder’s basis in
section 958(a) stock of an E&P deficit
foreign corporation, or a section 958(a)
U.S. shareholder’s basis in applicable
property with respect to an E&P deficit
foreign corporation, is reduced by an
amount equal to the portion of the
section 958(a) U.S. shareholder’s pro
rata share of the specified E&P deficit of
the E&P deficit foreign corporation
taken into account under section 965(b),
§ 1.965–1(b)(2), and § 1.965–8(b), as
applicable, as determined under
paragraph (d)(2)(ii) of this section,
translated (if necessary) into U.S. dollars
using the spot rate on December 31,
2017.
(C) Section 962 election. [Reserved]
(iii) Rules regarding the election—(A)
Consistency requirement. In order for
the election described in this paragraph
(f)(2) to be effective, a section 958(a)
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U.S. shareholder and each person that is
a section 958(a) U.S. shareholder that is
related to the section 958(a) U.S.
shareholder must make the election
described in this paragraph (f)(2). For
purposes of this paragraph (f)(2)(iii)(A),
a person is treated as related to a section
958(a) U.S. shareholder if the person
bears a relationship to the section 958(a)
U.S. shareholder described in section
267(b) or 707(b).
(B) Manner of making election—(1)
Timing—(i) In general. Except as
provided in paragraph (f)(2)(iii)(B)(1)(ii)
of this section, the election provided in
this paragraph (f)(2) must be made no
later than the due date (taking into
account extensions, if any) for the
section 958(a) U.S. shareholder’s return
for the first taxable year that includes
the last day of the last taxable year of
a deferred foreign income corporation or
E&P deficit foreign corporation of the
shareholder that begins before January
1, 2018. Relief is not available under
§ 301.9100–2 or 301.9100–3 to file a late
election.
(ii) Transition rule. If the due date
referred to in paragraph (f)(2)(iii)(B)(1)(i)
of this section occurs before September
10, 2018, the election must be made by
October 9, 2018.
(2) Election statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance,
to make the election provided in this
paragraph (f)(2), a section 958(a) U.S.
shareholder must attach a statement,
signed under penalties of perjury, to its
return for the first taxable year that
includes the last day of the last taxable
year of a deferred foreign income
corporation or E&P deficit foreign
corporation of the shareholder that
begins before January 1, 2018. The
statement must include the section
958(a) U.S. shareholder’s name and
taxpayer identification number and a
statement that the section 958(a) U.S.
shareholder and all related persons, as
defined in paragraph (f)(2)(iii)(A) of this
section, make the election provided in
this paragraph (f)(2).
(g) Gain reduction rule—(1) Reduction
in gain recognized under section
961(b)(2) by reason of distributions
attributable to section 965 previously
taxed earnings and profits in the
inclusion year—(i) In general. If a
section 958(a) U.S. shareholder receives
a distribution from a deferred foreign
income corporation (including through
a chain of ownership described under
section 958(a)) during the inclusion year
of the deferred foreign income
corporation that is attributable to
section 965 previously taxed earnings
and profits of the deferred foreign
income corporation, then the amount of
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gain that otherwise would be recognized
under section 961(b)(2) by the section
958(a) U.S. shareholder with respect to
the section 958(a) U.S. shareholder’s
section 958(a) stock of the deferred
foreign income corporation or interest in
applicable property with respect to the
deferred foreign income corporation is
reduced (but not below zero) by an
amount equal to the section 965
previously taxed earnings and profits of
the deferred foreign income corporation
with respect to the section 958(a) U.S.
shareholder.
(ii) Definition of section 965
previously taxed earnings and profits.
For purposes of paragraph (g)(1)(i) of
this section, the term section 965
previously taxed earnings and profits
means, with respect to a deferred
foreign income corporation and a
section 958(a) U.S. shareholder, the sum
of the section 965(a) previously taxed
earnings and profits of the deferred
foreign income corporation with respect
to the section 958(a) U.S. shareholder,
and, if the section 958(a) U.S.
shareholder has made the election
described in paragraph (f)(2) of this
section, the section 965(b) previously
taxed earnings and profits of the
deferred foreign income corporation
with respect to the section 958(a) U.S.
shareholder.
(2) Reduction in basis by an amount
equal to the gain reduction amount. If
a section 958(a) U.S. shareholder does
not recognize gain under section
961(b)(2) by reason of paragraph (g)(1) of
this section with respect to a
distribution from a deferred foreign
income corporation (including through
a chain of ownership described under
section 958(a)), the section 958(a) U.S.
shareholder’s basis in the section 958(a)
stock of the deferred foreign income
corporation, or the section 958(a) U.S.
shareholder’s basis in the applicable
property with respect to the deferred
foreign income corporation, is reduced
by the amount of gain that would
otherwise be recognized by the section
958(a) U.S. shareholder without regard
to paragraph (g)(1) of this section.
(h) Rules of application for specified
basis adjustments. This paragraph (h)
applies for purposes of making any
adjustment to the basis of section 958(a)
stock or applicable property with
respect to a specified foreign
corporation described in paragraph (e),
(f)(2), or (g)(2) of this section
(collectively, specified basis
adjustments, and each a specified basis
adjustment).
(1) Timing of basis adjustments. A
specified basis adjustment to section
958(a) stock or applicable property with
respect to a specified foreign
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39553
corporation is made as of the close of
the last day of the last taxable year of
the specified foreign corporation that
begins before January 1, 2018.
(2) Netting of basis adjustments. If one
or more specified basis adjustments
occur on the same day with respect to
the same section 958(a) stock or
applicable property, a single basis
adjustment is made as of the close of
such day with respect to such stock or
applicable property in an amount equal
to the net amount, if any, of the increase
or reduction, as applicable.
(3) Gain recognition for reduction in
excess of basis. The excess (if any) of a
net reduction in basis with respect to
section 958(a) stock or applicable
property of a section 958(a) U.S.
shareholder by reason of one or more
specified basis adjustments, over the
section 958(a) U.S. shareholder’s basis
in such stock or applicable property
without regard to the specified basis
adjustments is treated as gain from the
sale or exchange of property.
(4) Adjustments with respect to each
share—(i) Section 958(a) stock. If a
specified basis adjustment is made with
respect to section 958(a) stock, the
specified basis adjustment is made with
respect to each share of the section
958(a) stock in a manner consistent with
the section 958(a) U.S. shareholder’s pro
rata share of the section 965(a) earnings
amount or specified E&P deficit, as
applicable, by reason of such share.
(ii) Applicable property. If a specified
basis adjustment is made with respect to
applicable property, the adjustment is
made with respect to the applicable
property in a manner consistent with
the application of paragraph (h)(4)(i) of
this section.
(5) Stock or property for which
adjustments are made—(i) In general.
Except as provided in paragraph
(h)(5)(ii) of this section, a specified basis
adjustment is made solely with respect
to section 958(a) stock owned by the
section 958(a) U.S. shareholder within
the meaning of section 958(a)(1)(A) or
applicable property owned directly by
the section 958(a) U.S. shareholder.
(ii) Special rule for an interest in a
foreign pass-through entity. If the
applicable property of the section 958(a)
U.S. shareholder described in paragraph
(h)(5)(i) of this section is an interest in
a foreign pass-through entity, then, for
purposes of determining the foreign
pass-through entity’s basis in section
958(a) stock or applicable property, as
applicable, with respect to the section
958(a) U.S. shareholder, a specified
basis adjustment is made with respect to
section 958(a) stock or applicable
property of the section 958(a) U.S.
shareholder owned through the foreign
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pass-through entity in the same manner
as if the section 958(a) stock or
applicable property were owned
directly by the section 958(a) U.S.
shareholder. In the case of tiered foreign
pass-through entities, this paragraph
(h)(5)(ii) applies with respect to each
foreign pass-through entity.
(i) Definitions. This paragraph (i)
provides definitions that apply for
purposes of this section.
(1) Applicable property. The term
applicable property means, with respect
to a section 958(a) U.S. shareholder and
a specified foreign corporation, property
owned by the section 958(a) U.S.
shareholder (including through one or
more foreign pass-through entities) by
reason of which the section 958(a) U.S.
shareholder is considered under section
958(a)(2) as owning section 958(a) stock
of the specified foreign corporation.
(2) Foreign pass-through entity. The
term foreign pass-through entity means
a foreign partnership or a foreign estate
or trust (as defined in section
7701(a)(31)).
(3) Property. The term property has
the meaning provided in § 1.961–1(b)(1).
(j) Examples. The following examples
illustrate the application of this section.
Example 1. Determination of accumulated
post-1986 deferred foreign income with
subpart F income earned before E&P
measurement date on November 2, 2017. (i)
Facts. USP, a domestic corporation, owns all
of the stock of CFC1, a foreign corporation,
which owns all of the stock of CFC2, also a
foreign corporation. USP, CFC1, and CFC2 all
have taxable years ending December 31,
2017. As of January 1, 2017, CFC1 has no
earnings and profits, and CFC2 has 100u of
earnings and profits described in section
959(c)(3) that were accumulated in taxable
years beginning after December 31, 1986,
while CFC2 was a specified foreign
corporation. On March 1, 2017, CFC1 earns
30u of subpart F income (as defined in
section 952), and CFC2 earns 20u of subpart
F income. On July 1, 2017, CFC2 distributes
40u to CFC1. On November 1, 2017, CFC1
distributes 60u to USP. USP does not have
an aggregate foreign E&P deficit.
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
without regard to section 965. USP
determines its inclusion under section
951(a)(1)(A) without regard to section 965(a),
which is 30u with respect to CFC1 and 20u
with respect to CFC2 for their taxable years
ending December 31, 2017. As a result of the
inclusions under section 951(a)(1)(A), CFC1
and CFC2 increase their earnings and profits
described in section 959(c)(2) by 30u and
20u, respectively.
(B) Distributions between specified foreign
corporations before January 1, 2018. The
distribution of 40u from CFC2 to CFC1 is
treated as a distribution of 20u out of
earnings and profits described in section
959(c)(2) (attributable to inclusions under
section 951(a)(1)(A) without regard to section
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965(a)) and 20u out of earnings and profits
described in section 959(c)(3).
(C) Section 965(a) inclusion amount. USP
determines whether CFC1 and CFC2 are
deferred foreign income corporations, and, if
they are, determines its section 965(a)
inclusion amounts with respect to CFC1 and
CFC2. Because USP wholly owns CFC1 and
CFC2 under section 958(a) and USP does not
have an aggregate foreign E&P deficit, USP’s
section 965(a) inclusion amount with respect
to each of CFC1 and CFC2, respectively,
equals the section 965(a) earnings amount of
CFC1 and CFC2, respectively.
(1) CFC1 section 965(a) earnings amount.
The section 965(a) earnings amount with
respect to CFC1 is 20u, the amount of its
accumulated post-1986 deferred foreign
income as of both November 2, 2017, and
December 31, 2017, which is equal to 70u of
post-1986 earnings and profits (30u earned
and 40u attributable to the CFC2 distribution)
reduced by 50u of such post-1986 earnings
and profits described in section 959(c)(2)
(30u earned and 20u attributable to the CFC2
distribution) under section 965(d)(2)(B) and
§ 1.965–1(f)(7)(i)(B). Under section
965(d)(3)(B) and § 1.965–1(f)(29)(i)(B), the
post-1986 earnings and profits of CFC1 are
not reduced by the 60u distribution to USP.
(2) CFC2 section 965(a) earnings amount.
The section 965(a) earnings amount with
respect to CFC2 is 80u, the amount of its
accumulated post-1986 deferred foreign
income as of both November 2, 2017, and
December 31, 2017, which is equal to the
amount of CFC2’s post-1986 earnings and
profits of 80u. CFC2’s accumulated post-1986
deferred foreign income is equal to its post1986 earnings and profits because CFC2 does
not have earnings and profits that are
attributable to income of the specified foreign
corporation that is effectively connected with
the conduct of a trade or business within the
United States and subject to tax under
chapter 1, or that, if distributed, would be
excluded from the gross income of a United
States shareholder under section 959 or from
the gross income of another shareholder if
such shareholder were a United States
shareholder, and therefore no adjustment is
made under section 965(d)(2) or § 1.965–
1(f)(7). CFC2’s 80u of post-1986 earnings and
profits consists of 120u of earnings and
profits that it earned, reduced by the 40u
distribution to CFC1 under section
965(d)(3)(B) and § 1.965–1(f)(29)(i)(B). The
amount of the reduction to the post-1986
earnings and profits of CFC2 for the 40u
distribution is not limited by § 1.965–
1(f)(29)(i)(B) because CFC1’s post-1986
earnings and profits are increased by 40u as
a result of the distribution. Furthermore,
because the 40u distribution was made on
July 1, 2017, which is before the E&P
measurement date on November 2, 2017,
§ 1.965–4(f) is not relevant.
(3) Effect on earnings and profits described
in section 959(c)(2) and (3). CFC1 and CFC2
increase their earnings and profits described
in section 959(c)(2) by USP’s section 965(a)
inclusion amounts with respect to CFC1 and
CFC2, 20u and 80u, respectively, and reduce
their earnings and profits described in
section 959(c)(3) by an equivalent amount.
(D) Distribution to United States
shareholder. The distribution from CFC1 to
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USP is treated as a distribution of 60u out of
the earnings and profits of CFC1 described in
section 959(c)(2), which include earnings and
profits attributable to the section 965(a)
inclusion amount taken into account by USP.
Example 2. Determination of accumulated
post-1986 deferred foreign income with
subpart F income earned after E&P
measurement date on November 2, 2017. (i)
Facts. The facts are the same as in paragraph
(i) of Example 1 of this paragraph (j), except
that on December 1, 2017, CFC1 earns an
additional 50u of subpart F income (as
defined in section 952).
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
without regard to section 965. USP
determines its inclusion under section
951(a)(1)(A) without regard to section 965(a),
which is 80u with respect to CFC1 and 20u
with respect to CFC2 for their taxable years
ending December 31, 2017. As a result of the
inclusions under section 951(a)(1)(A), CFC1
and CFC2 increase their earnings and profits
described in section 959(c)(2) by 80u and
20u, respectively.
(B) Distributions between specified foreign
corporations before January 1, 2018. The
analysis is the same as in paragraph (ii)(B) of
Example 1 of this paragraph (j).
(C) Section 965(a) inclusion amount. USP
determines whether CFC1 and CFC2 are
deferred foreign income corporations, and, if
they are, determines its section 965(a)
inclusion amounts with respect to CFC1 and
CFC2. Because USP wholly owns CFC1 and
CFC2 under section 958(a) and USP does not
have an aggregate foreign E&P deficit, USP’s
section 965(a) inclusion amount with respect
to each of CFC1 and CFC2, respectively,
equals the section 965(a) earnings amount of
CFC1 and CFC2, respectively.
(1) CFC1 section 965(a) earnings amount.
The section 965(a) earnings amount with
respect to CFC1 is 20u, the greater of—
(i) The amount of its accumulated post1986 deferred foreign income as of November
2, 2017, 20u, which is equal to 70u of post1986 earnings and profits (30u earned and
40u attributable to the CFC2 distribution)
reduced by 50u of such post-1986 earnings
and profits described in section 959(c)(2)
without regard to the subpart F income
earned after November 2, 2017 (30u earned
and 20u attributable to the CFC2 distribution)
under section 965(d)(2)(B) and § 1.965–
1(f)(7)(i)(B) and (ii), and
(ii) The amount of its accumulated post1986 deferred foreign income as of December
31, 2017, 20u, which is equal to 120u of post1986 earnings and profits (80u earned and
40u attributable to the CFC2 distribution)
reduced by 100u of such post-1986 earnings
and profits described in section 959(c)(2)
with regard to the subpart F income earned
on or before December 31, 2017 (80u earned
and 20u attributable to the CFC2 distribution)
under section 965(d)(2)(B) and § 1.965–
1(f)(7)(i)(B) and (ii).
(2) CFC2 section 965(a) earnings amount.
The analysis is the same as in paragraph
(ii)(C)(2) of Example 1 of this paragraph (j).
(3) Effect on earnings and profits described
in section 959(c)(2) and (3). The analysis is
the same as in paragraph (ii)(C)(3) of
Example 1 of this paragraph (j).
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(D) Distribution to United States
shareholder. The analysis is the same as in
paragraph (ii)(D) of Example 1 of this
paragraph (j).
Example 3. Determination of accumulated
post-1986 deferred foreign income with
subpart F income earned after E&P
measurement date on November 2, 2017, but
previously taxed earnings and profits
attributable to the subpart F income
distributed before E&P measurement date on
November 2, 2017. (i) Facts. The facts are the
same as in paragraph (i) of Example 1 of this
paragraph (j), except that on December 1,
2017, CFC2 earns an additional 50u of
subpart F income (as defined in section 952).
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
without regard to section 965. USP
determines its inclusion under section
951(a)(1)(A) without regard to section 965(a),
which is 30u with respect to CFC1 and 70u
with respect to CFC2 for their taxable years
ending December 31, 2017. As a result of the
inclusions under section 951(a)(1)(A), CFC1
and CFC2 increase their earnings and profits
described in section 959(c)(2) by 30u and
70u, respectively.
(B) Distributions between specified foreign
corporations before January 1, 2018. The
distribution of 40u from CFC2 to CFC1 is
treated as a distribution of 40u out of
earnings and profits described in section
959(c)(2) (attributable to inclusions under
section 951(a)(1)(A) without regard to section
965(a)).
(C) Section 965(a) inclusion amount. USP
determines whether CFC1 and CFC2 are
deferred foreign income corporations, and, if
they are, determines its section 965(a)
inclusion amounts with respect to CFC1 and
CFC2. Because USP wholly owns CFC1 and
CFC2 under section 958(a) and USP does not
have an aggregate foreign E&P deficit, USP’s
section 965(a) inclusion amount with respect
to each of CFC1 and CFC2, respectively,
equals the section 965(a) earnings amount, if
any, of CFC1 and CFC2, respectively.
(1) CFC1 section 965(a) earnings amount.
CFC1 is not a deferred foreign income
corporation and does not have a section
965(a) earnings amount, because the amount
of its accumulated post-1986 deferred foreign
income as of both November 2, 2017, and
December 31, 2017, is 0u, which is equal to
70u of post-1986 earnings and profits (30u
earned and 40u attributable to the CFC2
distribution) reduced by 70u of such post1986 earnings and profits described in
section 959(c)(2) (30u earned and 40u
attributable to the CFC2 distribution) under
section 965(d)(2)(B) and § 1.965–1(f)(7)(i)(B).
(2) CFC2 section 965(a) earnings amount.
The section 965(a) earnings amount with
respect to CFC2 is 100u, the greater of—
(i) The amount of its accumulated post1986 deferred foreign income as of November
2, 2017, 80u. CFC2’s 80u of accumulated
post-1986 deferred foreign income as of
November 2, 2017 is equal to its 80u of post1986 earnings and profits because no
adjustment is made under section 965(d)(2)
or § 1.965–1(f)(7), as CFC2 does not have
earnings and profits that are attributable to
income of the specified foreign corporation
that is effectively connected with the conduct
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of a trade or business within the United
States and subject to tax under chapter 1, or
that, if distributed, would be excluded from
the gross income of a United States
shareholder under section 959 or from the
gross income of another shareholder if such
shareholder were a United States
shareholder, without regard to the subpart F
income earned after November 2, 2017.
CFC2’s 80u of post-1986 earnings and profits
consists of 120u of earnings and profits that
it earned, reduced by the 40u distribution to
CFC1 under section 965(d)(3)(B) and § 1.965–
1(f)(29)(i)(B). The amount of the reduction to
the post-1986 earnings and profits of CFC2
for the 40u distribution is not limited by
§ 1.965–1(f)(29)(i)(B) because CFC1’s post1986 earnings and profits are increased by
40u as a result of the distribution.
Furthermore, because the 40u distribution
was made on July 1, 2017, which is before
any E&P measurement date, § 1.965–4(f) is
not relevant.
(ii) The amount of its accumulated post1986 deferred foreign income as of December
31, 2017, 100u, which is equal to 130u of
post-1986 earnings and profits reduced by
30u of such post-1986 earnings and profits
described in section 959(c)(2) with regard to
the subpart F income earned before
December 31, 2017, under section
965(d)(2)(B) and § 1.965–1(f)(7)(i)(B) and (ii).
CFC2’s 130u of post-1986 earnings and
profits consists of 170u of earnings and
profits that it earned, reduced by the 40u
distribution to CFC1 under section
965(d)(3)(B) and § 1.965–1(f)(29)(i)(B).
(3) Effect on earnings and profits described
in section 959(c)(2) and (3). CFC2 increases
its earnings and profits described in section
959(c)(2) by USP’s section 965(a) inclusion
amount with respect to CFC2, 100u, and
reduces its earnings and profits described in
section 959(c)(3) by an equivalent amount.
(D) Distribution to United States
shareholder. The analysis is the same as in
paragraph (ii)(D) of Example 1 of this
paragraph (j).
Example 4. Distribution attributable to
section 965(a) previously taxed earnings and
profits. (i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1,
a specified foreign corporation that has no
post-1986 earnings and profits (or deficit in
post-1986 earnings and profits), and CFC1
owns all the stock of CFC2, a deferred foreign
income corporation. USP is a calendar year
taxpayer. CFC1’s last taxable year beginning
before January 1, 2018, ends on November
30, 2018; CFC2 has an inclusion year that
ends on November 30, 2018. The functional
currency of CFC1 and CFC2 is the U.S.
dollar. USP’s adjusted basis in the stock of
CFC1 is zero, and CFC1’s adjusted basis in
the stock of CFC2 is zero. On January 1, 2018,
CFC2 distributes $100x to CFC1, and CFC1
distributes $100x to USP. USP has a section
965(a) inclusion amount of $100x with
respect to CFC2 that is taken into account for
USP’s taxable year ending December 31,
2018. CFC2 has no earnings and profits
described in section 959(c)(1) or (2) other
than section 965(a) previously taxed earnings
and profits.
(ii) Analysis. Under paragraph (c) of this
section, CFC2 has $100x of section 965(a)
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previously taxed earnings and profits with
respect to USP. USP receives a distribution
from CFC2 through a chain of ownership
described in section 958(a) during the
inclusion year of CFC2 that is attributable to
the $100x of section 965(a) previously taxed
earnings and profits of CFC2. Under
paragraph (g)(1) of this section, the amount
of gain that USP otherwise would recognize
with respect to the stock of CFC1 under
section 961(b)(2) is reduced (but not below
zero) by $100x, the amount of CFC2’s section
965(a) previously taxed earnings and profits
with respect to USP. As of the close of
November 30, 2018, USP’s basis in CFC1 is
increased under paragraph (e) of this section
by USP’s section 965(a) inclusion amount
with respect to CFC2 ($100x), and is reduced
under paragraph (g)(2) of this section by the
amount of gain that would have been
recognized by USP under section 961(b)(2)
but for the application of paragraph (g)(1) of
this section ($100x).
Example 5. Distribution attributable to
section 965(b) previously taxed earnings and
profits; parent-subsidiary. (i) Facts. The facts
are the same as in paragraph (i) of Example
4 of this paragraph (j), except that CFC1 has
a specified E&P deficit of $100x. Because of
the specified E&P deficit of CFC1, USP’s
section 965(a) inclusion amount with respect
to CFC2 is reduced to zero pursuant to
section 965(b)(1) and § 1.965–1(b)(2). USP
makes the election described in paragraph
(f)(2) of this section.
(ii) Analysis. (A) Application of the gain
reduction rule. Under paragraph (d)(1) of this
section, CFC2 has $100x of section 965(b)
previously taxed earnings and profits with
respect to USP, and, under paragraph (d)(2)
of this section, CFC1’s earnings and profits
described in section 959(c)(3) are increased
by $100x to $0. USP receives a distribution
from CFC2 through a chain of ownership
described in section 958(a) during the
inclusion year of CFC2 that is attributable to
the $100x of section 965(b) previously taxed
earnings and profits of CFC2. Under
paragraph (g)(1) of this section, the amount
of gain that USP otherwise would recognize
with respect to the stock of CFC1 under
section 961(b)(2) is reduced (but not below
zero) by $100x, the amount of CFC2’s section
965(b) previously taxed earnings and profits
with respect to USP under paragraph (d)(1)
of this section.
(B) Adjustments to the basis of CFC1.
Because USP makes the election described in
paragraph (f)(2) of this section, as of the close
of November 30, 2018, USP’s basis in CFC1
is increased under paragraph (f)(2)(ii)(A) of
this section by an amount equal to CFC2’s
section 965(b) previously taxed earnings and
profits with respect to USP under paragraph
(d)(1) of this section ($100x), reduced under
paragraph (f)(2)(ii)(B) of this section by an
amount equal to the portion of the specified
E&P deficit of CFC1 taken into account in
determining USP’s section 965(a) inclusion
amount with respect to CFC2 ($100x), and
reduced under paragraph (g)(2) of this section
by the amount of gain that would have been
recognized by USP with respect to the stock
of CFC1 under section 961(b)(2) but for the
application of paragraph (g)(1) of this section
($100x). Under paragraph (h)(2) and (3) of
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this section, the excess of the net reduction
from the adjustments under paragraphs (f)
and (g) of this section over USP’s basis in the
stock of CFC1 (in this case, $100x) is treated
as gain recognized by USP from the sale or
exchange of property.
Example 6. Distribution attributable to
section 965(b) previously taxed earnings and
profits; brother-sister. (i) Facts. The facts are
the same as in paragraph (i) of Example 5 of
this paragraph (j), except that USP owns all
the stock of CFC2, USP’s adjusted basis in the
stock of CFC2 is zero, CFC1 made no
distributions, and on January 1, 2018, CFC2
distributes $100x to USP.
(ii) Analysis. (A) Application of the gain
reduction rule. Under paragraph (d)(1) of this
section, CFC2 has $100x of section 965(b)
previously taxed earnings and profits with
respect to USP, and, under paragraph (d)(2)
of this section, CFC1’s earnings and profits
described in section 959(c)(3) (deficit of
$100x) are increased by $100x to $0. USP
receives a distribution from CFC2 during the
inclusion year of CFC2 that is attributable to
the $100x of section 965(b) previously taxed
earnings and profits of CFC2. Under
paragraph (g)(1) of this section, the amount
of gain that USP otherwise would recognize
with respect to the stock of CFC2 under
section 961(b)(2) is reduced (but not below
zero) by $100x, the amount of CFC2’s section
965(b) previously taxed earnings and profits
with respect to USP under paragraph (d)(1)
of this section.
(B) Adjustments to the basis of CFC1 and
CFC2. Because USP makes the election
described in paragraph (f)(2) of this section,
as of the close of November 30, 2018, USP’s
basis in the stock of CFC2 is increased under
paragraph (f)(2)(ii)(A) of this section by the
amount of CFC2’s section 965(b) previously
taxed earnings and profits with respect to
USP under paragraph (d)(1) of this section
($100x) and reduced under paragraph (g)(2)
of this section by the amount of gain that
would have been recognized by USP with
respect to the stock of CFC2 under section
961(b)(2) but for the application of paragraph
(g)(1) of this section ($100x). As of the close
of November 30, 2018, USP’s basis in CFC1
is reduced under paragraph (f)(2)(ii)(B) of this
section by an amount equal to the portion of
USP’s pro rata share of the specified E&P
deficit of CFC1 taken into account in
determining USP’s section 965(a) inclusion
amount with respect to CFC2 ($100x). Under
paragraph (h)(3) of this section, the excess of
the reduction under paragraph (f) of this
section over USP’s basis in the stock of CFC1
(in this case, $100x) is treated as gain
recognized by USP from the sale or exchange
of property.
Par. 7. Section 1.965–3 is added to
read as follows:
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■
§ 1.965–3
Section 965(c) deductions.
(a) Scope. This section provides rules
regarding section 965(c) deductions and
section 965(c) deduction amounts.
Paragraph (b) of this section provides
rules for disregarding certain assets for
purposes of determining the aggregate
foreign cash position of a section 958(a)
U.S. shareholder. Paragraph (c) of this
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section provides rules for determining
the aggregate foreign cash position for a
section 958(a) U.S. shareholder
inclusion year. Paragraph (d) of this
section provides a rule regarding certain
expatriated entities. Paragraph (e) of this
section provides a rule for the treatment
of section 965(c) deductions in
connection with an election under
section 962. Paragraph (f) of this section
provides rules regarding the treatment
of a section 965(c) deduction under
certain provisions of the Internal
Revenue Code. Paragraph (g) of this
section provides a rule for domestic
pass-through entities.
(b) Rules for disregarding certain
assets for determining aggregate foreign
cash position—(1) Disregard of certain
obligations between related specified
foreign corporations. In determining the
aggregate foreign cash position of a
section 958(a) U.S. shareholder, any
account receivable, account payable,
short-term obligation, or derivative
financial instrument between a
specified foreign corporation with
respect to which the section 958(a) U.S.
shareholder owns section 958(a) stock
and a related specified foreign
corporation on a cash measurement date
is disregarded to the extent of the
smallest of the product of the amount of
the item on such cash measurement date
of each specified foreign corporation
and the section 958(a) U.S.
shareholder’s ownership percentage of
section 958(a) stock of the specified
foreign corporation owned by the
section 958(a) U.S. shareholder on such
date. For purposes of this paragraph
(b)(1)(i), a specified foreign corporation
is treated as a related specified foreign
corporation with respect to another
specified foreign corporation if, as of the
cash measurement date referred to in
the preceding sentence of each specified
foreign corporation, the specified
foreign corporations are related persons
within the meaning of section 954(d)(3),
substituting the term ‘‘specified foreign
corporation’’ for ‘‘controlled foreign
corporation’’ in each place that it
appears.
(2) Disregard of other assets upon
demonstration of double-counting. For
purposes of determining the aggregate
foreign cash position of a section 958(a)
U.S. shareholder, the section 958(a) U.S.
shareholder’s pro rata share of the cash
position of a specified foreign
corporation on a cash measurement date
is reduced by amounts of net accounts
receivable, actively traded property, and
short-term obligations to the extent such
amounts are attributable to amounts
taken into account in determining the
section 958(a) U.S. shareholder’s pro
rata share of the cash position of another
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specified foreign corporation on such
cash measurement date and to the
extent not disregarded pursuant to
paragraph (b)(1) of this section.
However, the preceding sentence
applies only if the section 958(a) U.S.
shareholder attaches a statement
containing the information outlined in
paragraphs (b)(2)(i) through (v) of this
section to its timely filed return (taking
into account extensions, if any) for the
section 958(a) U.S. shareholder
inclusion year, or, if the section 958(a)
U.S. shareholder has multiple section
958(a) U.S. shareholder inclusion years,
the later of such years. Relief is not
available under § 301.9100–2 or
§ 301.9100–3 to allow late filing of the
statement. The statement must contain
the following information with respect
to each specified foreign corporation for
which the cash position is reduced
under this paragraph (b)(2)—
(i) A description of the asset that
would be taken into account with
respect to both specified foreign
corporations,
(ii) A statement of the amount by
which its pro rata share of the cash
position of one specified foreign
corporation is reduced,
(iii) A detailed explanation of why
there would otherwise be doublecounting, including the computation of
the amount taken into account with
respect to the other specified foreign
corporation, and
(iv) An explanation of why paragraph
(b)(1) of this section does not apply to
disregard such amount.
(3) Examples. The following examples
illustrate the application of this
paragraph (b).
Example 1. (i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1,
a foreign corporation. CFC1 owns 95% of the
only class of stock of CFC2, also a foreign
corporation, and 40% of the only class of
stock of CFC3, also a foreign corporation. The
remaining 5% of the only class of stock of
CFC2 is owned by a person unrelated to USP,
CFC1, and CFC2; and the remaining 60% of
the only class of stock of CFC3 is owned by
a person unrelated to USP and CFC1. USP,
CFC1, and CFC3 have calendar year taxable
years. CFC2 has a taxable year ending on
November 30. On November 15, 2015, CFC1
makes a loan of $100x to CFC2, which is
required to be and is, in fact, repaid on
January 1, 2016. On November 15, 2016,
CFC2 sells inventory to CFC1 in exchange for
an account receivable of $200x, which is
required to be and is, in fact, repaid on
December 15, 2016. On August 1, 2017, CFC1
makes a loan of $300x to CFC3, which is
required to be and is, in fact, repaid on
January 31, 2018.
(ii) Analysis—(A) Loan from CFC1 to CFC2.
For purposes of determining the aggregate
foreign cash position of USP, a section 958(a)
U.S. shareholder of CFC1, under paragraph
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(b)(1) of this section, because CFC1 and CFC2
are related within the meaning of paragraph
(b)(1) of this section, the short-term
obligation of CFC2 held by CFC1 outstanding
on the first cash measurement date of each
specified foreign corporation, November 30,
2015, and December 31, 2015, respectively, is
disregarded to the extent of 95%, the smallest
ownership percentage of section 958(a) stock
of CFC1 and CFC2 owned by USP on such
first cash measurement dates. Accordingly,
USP only takes into account $5 ($100 ¥ 95%
of $100) of the short-term obligation in
determining CFC1’s cash position for
purposes of determining its aggregate foreign
cash position.
(B) Account receivable of CFC1 held by
CFC2. Because the account receivable of
CFC1 held by CFC2 on its second cash
measurement date, November 30, 2016, is not
outstanding on CFC1’s second cash
measurement date, December 31, 2016,
paragraph (b)(1) of this section does not
apply to disregard any portion of such
account receivable.
(C) Loan from CFC1 to CFC3. Because
CFC3 is not related to CFC1 within the
meaning of paragraph (b)(1) of this section,
paragraph (b)(1) of this section does not
apply to disregard any portion of such shortterm obligation.
Example 2. (i) Facts. The facts are the same
as in Example 1, except that on December 1,
2015, CFC1 sells 5% of the stock of CFC2 to
an unrelated person.
(ii) Analysis. The analysis is the same as
in Example 1, except that the short-term
obligation of CFC2 held by CFC1 outstanding
on both of their first cash measurement dates,
November 30, 2015, and December 31, 2015,
respectively, is disregarded under paragraph
(b)(1) of this section to the extent of 90%, the
smallest ownership percentage of section
958(a) stock of CFC1 and CFC2 by USP on
such first cash measurement dates.
Accordingly, USP takes into account $10
($100 ¥ 90% of $100) of the short-term
obligation in determining CFC1’s cash
position for purposes of determining its
aggregate foreign cash position.
Example 3. (i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1,
a foreign corporation, which owns 45% of
the only class of stock of CFC2, also a foreign
corporation. The remainder of the CFC2 stock
is actively traded on an established financial
market but is not owned by any person
related to USP or CFC1. USP, CFC1, and
CFC2 have calendar year taxable years. The
value of the CFC2 stock owned by CFC1 is
$500x on each of the cash measurement
dates. Also on each of the cash measurement
dates, CFC2 has $300x of assets described in
section 965(c)(3)(B) and § 1.965–1(f)(16) that
are taken into account in determining its cash
position.
(ii) Analysis. For purposes of determining
USP’s aggregate foreign cash position, USP’s
pro rata share of the cash position of CFC1
on each cash measurement date may be
reduced by the amount of the stock of CFC2
to the extent attributable to amounts taken
into account in determining USP’s pro rata
share of the cash position of CFC2 on such
cash measurement date (that is, to the extent
of the $135x taken into account with respect
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to CFC2), provided USP attaches a statement
to its timely filed return (taking into account
extensions, if any) containing the following:
A description of the CFC2 stock and the
assets of CFC2 taken into account in
determining its cash position; a statement
that USP’s pro rata share of the cash position
of CFC1 is being reduced by $135x; the
computation of the $135x taken into account
with respect to CFC2; and an explanation of
why paragraph (b)(1) of this section does not
apply to disregard such amount.
Example 4. (i) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2, each a foreign corporation. USP,
CFC1, and CFC2 have calendar year taxable
years. CFC1 buys goods on credit from a third
party for $100x and thus has an account
payable of $100x. CFC1 modifies the goods
and sells to CFC2 for $105x in exchange for
an account receivable of $105x. CFC2
modifies the goods and sells to another third
party for $110x in exchange for an account
receivable of $110x. All of the accounts
payable and accounts receivable are
outstanding on the final cash measurement
date.
(ii) Analysis. For purposes of determining
USP’s aggregate foreign cash position, on the
final cash measurement date, CFC1 has net
accounts receivable of $0, because, pursuant
to paragraph (b)(1) of this section, CFC1’s
account receivable from CFC2 is disregarded,
and CFC2 has net accounts receivable of
$110, because, pursuant to paragraph (b)(1) of
this section, CFC2’s account payable to CFC1
is disregarded. USP cannot rely on the rule
in paragraph (b)(2) of this section because no
amounts attributable to CFC2’s net accounts
receivable are taken into account with
respect to another specified foreign
corporation.
(c) Determination of aggregate foreign
cash position for a section 958(a) U.S.
shareholder inclusion year—(1) Single
section 958(a) U.S. shareholder
inclusion year. If a section 958(a) U.S.
shareholder has a single section 958(a)
U.S. shareholder inclusion year, then
the section 958(a) U.S. shareholder’s
aggregate foreign cash position for the
section 958(a) U.S. shareholder
inclusion year is equal to the aggregate
foreign cash position of the section
958(a) U.S. shareholder.
(2) Multiple section 958(a) U.S.
shareholder inclusion years. If a section
958(a) U.S. shareholder has multiple
section 958(a) U.S. shareholder
inclusion years, then the section 958(a)
U.S. shareholder’s aggregate foreign
cash position for each section 958(a)
U.S. shareholder inclusion year is
determined by allocating the aggregate
foreign cash position to a section 958(a)
U.S. shareholder inclusion year under
paragraphs (c)(2)(i) and (c)(2)(ii) of this
section.
(i) Allocation to first section 958(a)
U.S. shareholder inclusion year. A
portion of the aggregate foreign cash
position of the section 958(a) U.S.
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39557
shareholder is allocated to the first
section 958(a) U.S. shareholder
inclusion year in an amount equal to the
lesser of the section 958(a) U.S.
shareholder’s aggregate foreign cash
position, or the section 958(a) U.S.
shareholder’s aggregate section 965(a)
inclusion amount for the section 958(a)
U.S. shareholder inclusion year.
(ii) Allocation to succeeding section
958(a) U.S. shareholder inclusion years.
The amount of the section 958(a) U.S.
shareholder’s aggregate foreign cash
position allocated to any succeeding
section 958(a) U.S. shareholder
inclusion year equals the lesser of the
excess, if any, of the section 958(a) U.S.
shareholder’s aggregate foreign cash
position over the aggregate amount of its
aggregate foreign cash position allocated
to preceding section 958(a) U.S.
shareholder inclusion years under
paragraph (c)(2)(i) of this section and
this paragraph (c)(2)(ii), or the section
958(a) U.S. shareholder’s aggregate
section 965(a) inclusion amount for
such succeeding section 958(a) U.S.
shareholder inclusion year.
(3) Estimation of aggregate foreign
cash position. For purposes of
determining the aggregate foreign cash
position of a section 958(a) U.S.
shareholder, the section 958(a) U.S.
shareholder may assume that its pro rata
share of the cash position of any
specified foreign corporation whose last
taxable year beginning before January 1,
2018, ends after the date the return for
such section 958(a) U.S. shareholder
inclusion year (the estimated section
958(a) U.S. shareholder inclusion year)
is timely filed (taking into account
extensions, if any) is zero as of the cash
measurement date with which the
taxable year of such specified foreign
corporation ends. If a section 958(a) U.S.
shareholder’s pro rata share of the cash
position of a specified foreign
corporation is treated as zero pursuant
to the preceding sentence, the amount
described in § 1.965–1(f)(8)(i)(A) with
respect to such section 958(a) U.S.
shareholder in fact exceeds the amount
described in § 1.965–1(f)(8)(i)(B) with
respect to such section 958(a) U.S.
shareholder, and the aggregate section
965(a) inclusion amount for the
estimated section 958(a) U.S.
shareholder inclusion year exceeds the
amount described in § 1.965–1(f)(8)(i)(B)
with respect to such section 958(a) U.S.
shareholder, interest and penalties will
not be imposed if such section 958(a)
U.S. shareholder amends the return for
the estimated section 958(a) U.S.
shareholder inclusion year to account
for the correct aggregate foreign cash
position for the year. The amended
return must be filed by the due date
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(taking into account extensions, if any)
for the return for the year after the
estimated section 958(a) U.S.
shareholder inclusion year.
(4) Examples. The following examples
illustrate the application of this
paragraph (c).
Example 1. Estimation of aggregate foreign
cash position for a section 958(a) U.S.
shareholder inclusion year—(i) Facts. USP, a
domestic corporation, owns all of the stock
of CFC1, a foreign corporation, which owns
all of the stock of CFC2, also a foreign
corporation. USP is a calendar year taxpayer.
CFC1 has a taxable year ending on December
31, and CFC2 has a taxable year ending on
November 30. The cash position of CFC1 on
each of December 31, 2015, December 31,
2016, and December 31, 2017, is $100x. The
cash position of CFC2 on each of November
30, 2015, and November 30, 2016, is $200x.
USP has a section 965(a) inclusion amount of
$300x with respect to CFC1.
(ii) Analysis. In determining its aggregate
foreign cash position for its 2017 taxable
year, USP may assume that its pro rata share
of the cash position of CFC2 will be zero as
of November 30, 2018, for purposes of filing
its return due on April 18, 2018 (or due on
October 15, 2018, with extension). Therefore,
USP’s aggregate foreign cash position is
treated as $300, which is the greater of (a)
$300x, 50% of the sum of USP’s pro rata
shares of the cash position of CFC1 as of
December 31, 2015, and December 31, 2016,
and of the cash position of CFC2 as of
November 30, 2015, and November 30, 2016,
and (b) $100x, USP’s pro rata share of the
cash position of CFC1 as of December 31,
2017. If USP’s pro rata share of the cash
position of CFC2 as of November 30, 2018,
in fact exceeds $200, USP must amend its
return for its 2017 taxable year to reflect the
correct aggregate foreign cash position by the
due date for its return for its 2018 taxable
year, April 15, 2019 (or October 15, 2019,
with extension).
Example 2. Allocation of aggregate foreign
cash position among section 958(a) U.S.
shareholder inclusion years—(i) Facts. The
facts are the same as in paragraph (i) of
Example 1 of this paragraph (c)(4), except
that the cash position of each of CFC1 and
CFC2 on all relevant cash measurement dates
is $200, with the result that USP has an
aggregate foreign cash position determined
under § 1.965–1(f)(8)(i) of $400. For its 2017
taxable year, USP has a section 965(a)
inclusion amount with respect to CFC1 of
$300, and for its 2018 taxable year, USP has
a section 965(a) inclusion amount with
respect to CFC2 of $300.
(ii) Analysis. Under paragraph (c)(2)(i) of
this section, USP’s aggregate foreign cash
position for 2017 is $300, which is the lesser
of USP’s aggregate foreign cash position
determined under § 1.965–1(f)(8)(i) ($400) or
the section 965(a) inclusion amount ($300)
that USP takes into account in 2017. Under
paragraph (c)(2)(ii) of this section, the
amount of USP’s aggregate foreign cash
position for 2018 is $100, USP’s aggregate
foreign cash position determined under
§ 1.965–1(f)(8)(i) ($400) reduced by the
amount of its aggregate foreign cash position
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for 2017 ($300) under paragraph (c)(2)(i) of
this section.
(d) Increase of income by section
965(c) deduction of an expatriated
entity—(1) In general. If a person is
allowed a section 965(c) deduction and
the person (or a successor) first becomes
an expatriated entity, with respect to a
surrogate foreign corporation, at any
time during the 10-year period
beginning on December 22, 2017, then
the tax imposed by chapter 1 of the
Internal Revenue Code is increased for
the first taxable year in which such
person becomes an expatriated entity by
an amount equal to 35 percent of the
person’s section 965(c) deductions, and
no credits are allowed against such
increase in tax. The preceding sentence
applies only if the surrogate foreign
corporation first becomes a surrogate
foreign corporation on or after December
22, 2017.
(2) Definition of expatriated entity.
For purposes of paragraph (d)(1) of this
section, the term expatriated entity has
the same meaning given such term
under section 7874(a)(2), except that
such term does not include an entity if
the surrogate foreign corporation with
respect to the entity is treated as a
domestic corporation under section
7874(b).
(3) Definition of surrogate foreign
corporation. For purposes of paragraph
(d)(1) of this section, the term surrogate
foreign corporation has the meaning
given such term in section 7874(a)(2)(B).
(e) Section 962 election—(1) In
general. In the case of an individual
(including a trust or estate) that makes
an election under section 962, any
section 965(c) deduction taken into
account under § 1.962–1(b)(1)(i)(B) in
determining taxable income as used in
section 11 is not taken into account for
purposes of determining the
individual’s taxable income under
section 1.
(2) Example. The following example
illustrates the application of the rule in
this paragraph (e).
Example. (i) Facts. USI, a United States
citizen, owns 10% of the capital and profits
of USPRS, a domestic partnership that has a
calendar year taxable year, the remainder of
which is owned by foreign persons unrelated
to USI or USPRS. USPRS owns all of the
stock of FS, a foreign corporation that is a
controlled foreign corporation with a
calendar year taxable year. USPRS has a
section 965(a) inclusion amount with respect
to FS of $1,000 and has a section 965(c)
deduction amount of $700. FS has no post1986 foreign income taxes (as defined in
section 902(c)(1) as in effect before December
22, 2017). USI makes a valid election under
section 962 for 2017.
(ii) Analysis. USI’s ‘‘taxable income’’
described in § 1.962–1(b)(1)(i) equals $100
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(USI’s domestic pass-through owner share of
USPRS’s section 965(a) inclusion amount)
minus $70 (USI’s domestic pass-through
owner share of USPRS’s section 965(c)
deduction amount), or $30. No other
deductions are allowed in determining this
amount. USI’s tax on the $30 section 965(a)
inclusion will be equal to the tax that would
be imposed on such amount under section 11
if USI were a domestic corporation. Under
paragraph (e)(1) of this section, USI cannot
deduct $70 for purposes of determining USI’s
taxable income that is subject to tax under
section 1.
(f) Treatment of section 965(c)
deduction under certain provisions of
the Internal Revenue Code—(1) Section
63(d). A section 965(c) deduction is not
treated as an itemized deduction for any
purpose of the Internal Revenue Code.
(2) Sections 705, 1367, and 1368—(i)
Adjustments to basis. In the case of a
domestic partnership or S corporation—
(A) The aggregate amount of its
section 965(a) inclusions net the
aggregate amount of its section 965(c)
deductions is treated as a separately
stated item of net income solely for
purposes of calculating basis under
section 705(a) and § 1.705–1(a) and
section 1367(a)(1) and § 1.1367–1(f), and
(B) The aggregate amount of its
section 965(a) inclusions equal to the
aggregate amount of its section 965(c)
deductions is treated as income exempt
from tax solely for purposes of
calculating basis under sections
705(a)(1)(B), 1367(a)(1)(A), and
§ 1.1367–1(f).
(ii) S corporation accumulated
adjustments account. In the case of an
S corporation, the aggregate amount of
its section 965(a) inclusions equal to the
aggregate amount of its section 965(c)
deductions is treated as income not
exempt from tax solely for purposes of
determining whether an adjustment is
made to an accumulated adjustments
account under section 1368(e)(1)(A) and
§ 1.1368–2(a)(2).
(iii) Example. The following example
illustrates the application of this
paragraph (f)(2).
Example. (i) Facts. USI, a United States
citizen, owns all of the stock of S Corp, an
S corporation, which owns all of the stock of
FS, a foreign corporation. S Corp has a
section 965(a) inclusion of $1,000 with
respect to FS and has a $700 section 965(c)
deduction.
(ii) Analysis. As a result of the application
of paragraph (f)(2)(i)(A) of this section, solely
for purposes of calculating basis under
section 1367(a)(1) and § 1.1367–1(f), USI
treats as a separately stated item of net
income $300 (its pro rata share of the net of
S Corp’s $1,000 aggregate section 965(a)
inclusion and S Corp’s $700 aggregate section
965(c) deduction). Accordingly, USI’s basis
in S Corp is increased under section
1367(a)(1) by $300. As a result of the
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application of paragraph (f)(2)(i)(B) of this
section, an amount of S Corp’s aggregate
section 965(a) inclusion equal to its aggregate
section 965(c) deduction, $700, is treated as
tax exempt income solely for purposes of
calculating basis under section 1367(a)(1)(A)
and § 1.1367–1(f), and accordingly, USI’s
basis in S Corp is further increased by its pro
rata share of such amount, $700. S Corp’s
accumulated adjustments account (AAA) is
increased under section 1368(e)(1)(A) by the
$1,000 section 965(a) inclusion taken into
account and reduced by the $700 section
965(c) deduction taken into account. In
addition, as a result of the application of
paragraph (f)(2)(ii) of this section, S Corp’s
AAA is further increased by an amount of S
Corp’s aggregate section 965(a) inclusion
equal to its aggregate section 965(c)
deduction, $700, which is not treated as taxexempt income for purposes of § 1.1368–
2(a)(2).
(3) Section 1411. For purposes of
section 1411 and § 1.1411–4(f)(6), a
section 965(c) deduction is not treated
as being properly allocable to any
section 965(a) inclusion.
(4) Section 4940. For purposes of
section 4940(c)(3)(A), a section 965(c)
deduction is not treated as an ordinary
and necessary expense paid or incurred
for the production or collection of gross
investment income.
(g) Domestic pass-through entities.
For purposes of determining a domestic
pass-through owner share, a section
965(c) deduction amount of a domestic
pass-through entity must be allocated to
a domestic pass-through owner in the
same proportion as an aggregate section
965(a) inclusion amount of the domestic
pass-through entity for a section 958(a)
U.S. shareholder inclusion year is
allocated to the domestic pass-through
owner.
■ Par. 8. Section 1.965–4 is added to
read as follows:
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§ 1.965–4 Disregard of certain
transactions.
(a) Scope. This section provides rules
that disregard certain transactions for
purposes of applying section 965 to a
United States shareholder. Paragraph (b)
of this section provides rules that
disregard transactions undertaken with
a principal purpose of changing the
amount of a section 965 element of a
United States shareholder. Paragraph (c)
of this section provides rules that
disregard certain changes in method of
accounting and entity classification
elections that would otherwise change
the amount of a section 965 element.
Paragraph (d) of this section defines the
term section 965 element. Paragraph (e)
of this section provides rules of
application concerning paragraphs (b)
and (c) of this section. Paragraph (f) of
this section provides rules that
disregard certain transactions occurring
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between E&P measurement dates.
Paragraph (g) of this section provides
examples illustrating the application of
this section.
(b) Transactions undertaken with a
principal purpose of changing the
amount of a section 965 element—(1)
General rule. A transaction is
disregarded for purposes of determining
the amounts of all section 965 elements
of a United States shareholder if each of
the following conditions is satisfied
with respect to any section 965 element
of the United States shareholder—
(i) The transaction occurs, in whole or
in part, on or after November 2, 2017
(the specified date);
(ii) The transaction is undertaken
with a principal purpose of changing
the amount of a section 965 element of
the United States shareholder; and
(iii) The transaction would, without
regard to this paragraph (b)(1), change
the amount of the section 965 element
of the United States shareholder.
(2) Presumptions and exceptions for
the application of the general rule—(i)
Overview. Under paragraphs (b)(2)(iii)
through (v) of this section, certain
transactions are presumed to be
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder
for purposes of paragraph (b)(1) of this
section. The presumptions described in
paragraphs (b)(2)(iii) through (v) of this
section may be rebutted only if facts and
circumstances clearly establish that the
transaction was not undertaken with a
principal purpose of changing the
amount of a section 965 element of a
United States shareholder. A taxpayer
that takes the position that the
presumption is rebutted must attach a
statement to its return for its taxable
year in which or with which the
relevant taxable year of the relevant
specified foreign corporation ends
disclosing that it has rebutted the
presumption. In the case of a transaction
described in paragraph (b)(2)(iii) or (iv)
of this section, if the presumption does
not apply because the transaction occurs
in the ordinary course of business,
whether the transaction was undertaken
with a principal purpose of changing
the amount of a section 965 element of
a United States shareholder must be
determined under all the facts and
circumstances. Under paragraphs
(b)(2)(iii) through (v) of this section,
certain transactions are treated per se as
being undertaken with a principal
purpose of changing the amount of a
section 965 element of a United States
shareholder and therefore such
transactions are disregarded under
paragraph (b)(1) of this section if the
conditions of paragraphs (b)(1)(i) and
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(iii) of this section are satisfied. Further,
under paragraph (b)(2)(iii) of this
section, certain distributions are treated
per se as not being undertaken with a
principal purpose of changing the
amount of a section 965 element of a
United States shareholder and therefore
are not disregarded under paragraph
(b)(1) of this section.
(ii) Definitions—(A) Relatedness. For
purposes of paragraphs (b)(2)(iii)
through (v) of this section, a person is
treated as related to a United States
shareholder if, either immediately
before or immediately after the
transaction (or series of related
transactions), the person bears a
relationship to the United States
shareholder described in section 267(b)
or section 707(b).
(B) Transfer—(1) In general. For
purposes of paragraphs (b)(2)(iii) and (v)
of this section, the term transfer
includes any disposition of stock or
property, including a sale or exchange,
contribution, distribution, issuance,
redemption, recapitalization, or loan of
stock or property, and includes an
indirect transfer of stock or property.
(2) Indirect transfer. For purposes of
paragraph (b)(2)(ii)(B)(1) of this section,
the term indirect transfer includes a
transfer of property or stock owned by
an entity through a transfer of an
interest in such entity (or an interest in
an entity that has a direct or indirect
interest in such entity), and a transfer of
property or stock to a person through a
transfer of property or stock to a passthrough entity of which such person is
a direct or indirect owner.
(iii) Cash reduction transactions—(A)
General rule. For purposes of paragraph
(b)(1) of this section, a cash reduction
transaction is presumed to be
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder.
For this purpose, the term cash
reduction transaction means a transfer
of cash, accounts receivable, or cashequivalent assets by a specified foreign
corporation to a United States
shareholder of the specified foreign
corporation or a person related to a
United States shareholder of the
specified foreign corporation, or an
assumption by a specified foreign
corporation of an account payable of a
United States shareholder of the
specified foreign corporation or a person
related to a United States shareholder of
the specified foreign corporation, if such
transfer or assumption would, without
regard to paragraph (b)(1) of this section,
reduce the aggregate foreign cash
position of the United States
shareholder. The presumption described
in this paragraph (b)(2)(iii) does not
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apply to a cash reduction transaction
that occurs in the ordinary course of
business.
(B) Per se rules for certain
distributions. Notwithstanding the
presumption described in paragraph
(b)(2)(iii)(A) of this section, except in
the case of a specified distribution, a
cash reduction transaction that is a
distribution by a specified foreign
corporation to a United States
shareholder of the specified foreign
corporation is treated per se as not being
undertaken with a principal purpose of
changing the amount of a section 965
element of the United States
shareholder for purposes of paragraph
(b)(1) of this section. A specified
distribution is treated per se as being
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder
for purposes of paragraph (b)(1) of this
section. For purposes of this paragraph
(b)(2)(iii)(B), the term specified
distribution means a cash reduction
transaction that is a distribution by a
specified foreign corporation of a United
States shareholder if and to the extent
that, at the time of the distribution,
there was a plan or intention for the
distributee to transfer cash, accounts
receivable, or cash-equivalent assets to
any specified foreign corporation of the
United States shareholder or the
distribution is a non pro rata
distribution to a foreign person that is
related to the United States shareholder.
(iv) E&P reduction transactions—(A)
General rule. For purposes of paragraph
(b)(1) of this section, an E&P reduction
transaction is presumed to be
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder.
For purposes of this paragraph (b)(2)(iv),
the term E&P reduction transaction
means a transaction between a specified
foreign corporation and any of a United
States shareholder of the specified
foreign corporation, another specified
foreign corporation of a United States
shareholder of the specified foreign
corporation, or any person related to a
United States shareholder of the
specified foreign corporation, if the
transaction would, without regard to
paragraph (b)(1) of this section, reduce
either the accumulated post-1986
deferred foreign income or the post1986 undistributed earnings (as defined
in section 902(c)(1)) of the specified
foreign corporation or another specified
foreign corporation of any United States
shareholder of such specified foreign
corporation. The presumption described
in this paragraph (b)(2)(iv)(A) does not
apply to an E&P reduction transaction
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that occurs in the ordinary course of
business.
(B) Per se rule for specified
transactions. A specified transaction is
treated per se as being undertaken with
a principal purpose of changing the
amount of a section 965 element of a
United States shareholder for purposes
of paragraph (b)(1) of this section. For
purposes of the preceding sentence, the
term specified transaction means an
E&P reduction transaction that involves
one or more of the following: A
complete liquidation of a specified
foreign corporation to which section 331
applies; a sale or other disposition of
stock by a specified foreign corporation;
or a distribution by a specified foreign
corporation that reduces the earnings
and profits of the specified foreign
corporation pursuant to section
312(a)(3).
(v) Pro rata share transactions—(A)
General rule. For purposes of paragraph
(b)(1) of this section, a pro rata share
transaction is presumed to be
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder.
For this purpose, the term pro rata share
transaction means either a pro rata share
reduction transaction or an E&P deficit
transaction.
(1) Definition of pro rata share
reduction transaction. For purposes of
this paragraph (b)(2)(v)(A), the term pro
rata share reduction transaction means
a transfer of the stock of a specified
foreign corporation by either a United
States shareholder of the specified
foreign corporation or a person related
to a United States shareholder of the
specified foreign corporation (including
by the specified foreign corporation
itself) to a person related to the United
States shareholder if the transfer would,
without regard to paragraph (b)(1) of
this section, reduce the United States
shareholder’s pro rata share of the
section 965(a) earnings amount of the
specified foreign corporation, reduce the
United States shareholder’s pro rata
share of the cash position of the
specified foreign corporation, or both.
(2) Definition of E&P deficit
transaction. For purposes of this
paragraph (b)(2)(v)(A), an E&P deficit
transaction means a transfer to either a
United States shareholder or a person
related to the United States shareholder
of the stock of an E&P deficit foreign
corporation by a person related to the
United States shareholder (including by
the E&P deficit foreign corporation
itself) if the transfer would, without
regard to paragraph (b)(1) of this section,
increase the United States shareholder’s
pro rata share of the specified E&P
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deficit of the E&P deficit foreign
corporation.
(B) Per se rule for internal group
transactions. An internal group
transaction is treated per se as being
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder
for purposes of paragraph (b)(1) of this
section. For purposes of the preceding
sentence, the term internal group
transaction means a pro rata share
transaction if, immediately before or
after the transfer, the transferor of the
stock of the specified foreign
corporation and the transferee of such
stock are members of an affiliated group
in which the United States shareholder
is a member. For this purpose, the term
affiliated group has the meaning set
forth in section 1504(a), determined
without regard to paragraphs (1) through
(8) of section 1504(b), and the term
members of an affiliated group means
entities included in the same affiliated
group. For purposes of identifying an
affiliated group and the members of
such group, each partner in a
partnership, as determined without
regard to this sentence, is treated as
holding its proportionate share of the
stock held by the partnership, as
determined under the rules and
principles of sections 701 through 777,
and if one or more members of an
affiliated group own, in the aggregate, at
least 80 percent of the interests in a
partnership’s capital or profits, the
partnership will be treated as a
corporation that is a member of the
affiliated group.
(C) Example. The following example
illustrates the application of the rules in
this paragraph (b)(2)(v).
Example. (i) Facts. FP, a foreign
corporation, owns all of the stock of USP, a
domestic corporation. USP owns all of the
stock of FS, a foreign corporation. USP has
a calendar year taxable year; FS’s taxable year
ends November 30. On January 2, 2018, USP
transfers all of the stock of FS to FP in
exchange for cash. On January 3, 2018, FS
makes a distribution with respect to the stock
transferred to FP. USP treats the transaction
as a taxable sale of the FS stock and claims
a dividends received deduction under
section 245A with respect to its deemed
dividend under section 1248(j) as a result of
the sale. FS has post-1986 earnings and
profits as of December 31, 2017, and no post1986 earnings and profits that are attributable
to income effectively connected with the
conduct of a trade or business within the
United States and subject to tax under
chapter 1 or that, if distributed, would be
excluded from the gross income of a United
States shareholder under section 959.
(ii) Analysis. The transfer of the stock of FS
is a pro rata share reduction transaction and
thus a pro rata share transaction because
such transfer is by USP, a United States
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shareholder, to FP, a person related to USP,
and the transfer would, without regard to the
rule in paragraph (b)(1) of this section,
reduce USP’s pro rata share of the section
965(a) earnings amount of FS. Because USP
and FP are also members of an affiliated
group within the meaning of paragraph
(b)(2)(v)(B) of this section, the transfer of the
stock of FS is also an internal group
transaction and is treated per se as being
undertaken with a principal purpose of
changing the amount of a section 965
element of USP. Accordingly, because the
transfer occurs after the specified date and
reduces USP’s section 965(a) inclusion
amount with respect to FS, the transfer is
disregarded for purposes of determining any
section 965 element of USP with the result
that, among other things, USP’s pro rata share
of FS’s section 965(a) earnings amount is
determined as if USP owned (within the
meaning of section 958(a)) 100% of the stock
of FS on the last day of FS’s inclusion year
and no other person received a distribution
with respect to such stock during such year.
See section 951(a)(2)(A) and (B).
(c) Disregard of certain changes in
method of accounting and entity
classification elections—(1) Changes in
method of accounting. Any change in
method of accounting made for a taxable
year of a specified foreign corporation
that ends in 2017 or 2018 is disregarded
for purposes of determining the
amounts of all section 965 elements
with respect to a United States
shareholder if the change in method of
accounting would, without regard to
this paragraph (c)(1), change the amount
of any section 965 element with respect
to the United States shareholder,
regardless of whether the change in
method of accounting is made with a
principal purpose of changing the
amount of a section 965 element with
respect to the United States shareholder.
The rule described in the preceding
sentence applies regardless of whether
the change in method of accounting was
made in accordance with the procedures
described in Rev. Proc. 2015–13, 2015–
5 I.R.B. 419 (or successor), and
regardless of whether the change in
method of accounting was properly
made, but it does not apply to a change
in method of accounting for which the
original and/or duplicate copy of any
Form 3115, ‘‘Application for Change in
Accounting Method,’’ requesting the
change was filed before the specified
date (as defined in paragraph (b)(1) of
this section).
(2) Entity classification elections. An
election under § 301.7701–3 to change
the classification of an entity that is
filed on or after the specified date (as
defined in paragraph (b)(1) of this
section) is disregarded for purposes of
determining the amounts of all section
965 elements of a United States
shareholder if the election would,
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without regard to this paragraph (c)(2) of
this section, change the amount of any
section 965 element of the United States
shareholder, regardless of whether the
election is made with a principal
purpose of changing the amount of a
section 965 element of the United States
shareholder. An election filed on or
after the specified date is subject to the
preceding sentence even if the election
was filed with an effective date that is
before the specified date.
(d) Definition of a section 965
element. For purposes of paragraphs (b)
and (c) of this section, the term section
965 element means, with respect to a
United States shareholder, any of the
following amounts (collectively, section
965 elements)—
(1) The United States shareholder’s
section 965(a) inclusion amount with
respect to a specified foreign
corporation;
(2) The aggregate foreign cash position
of the United States shareholder; or
(3) The amount of foreign income
taxes of a specified foreign corporation
deemed paid by the United States
shareholder under section 960 as a
result of a section 965(a) inclusion.
(e) Rules for applying paragraphs (b)
and (c) of this section—(1)
Determination of whether there is a
change in the amount of a section 965
element. For purposes of paragraph (b)
and (c) of this section, there is a change
in the amount of a section 965 element
of a United States shareholder as a
result of a transaction, change in
accounting method, or election to
change an entity’s classification, if,
without regard to paragraph (b)(1),
(c)(1), or (c)(2) of this section, the
transaction, change in accounting
method, or change in entity
classification would—
(i) Reduce the amount described in
paragraph (d)(1) of this section,
(ii) Reduce the amount described in
paragraph (d)(2) of this section, but only
if such amount is less than the United
States shareholder’s aggregate section
965(a) inclusion amount, or
(iii) Increase the amount described in
paragraph (d)(3) of this section.
(2) Treatment of domestic passthrough owners as United States
shareholders. For purposes of paragraph
(b) and (c) of this section, if a domestic
pass-through entity is a United States
shareholder, then a domestic passthrough owner, with respect to the
domestic pass-through entity, that is not
otherwise a United States shareholder is
treated as a United States shareholder.
(f) Disregard of certain transactions
occurring between E&P measurement
dates—(1) Disregard of specified
payments. A specified payment made by
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a specified foreign corporation (payor
specified foreign corporation) to another
specified foreign corporation (payee
specified foreign corporation) is
disregarded for purposes of determining
the post-1986 earnings and profits of
each of the payor specified foreign
corporation and the payee specified
foreign corporation as of the E&P
measurement date on December 31,
2017.
(2) Definition of specified payment.
For purposes of paragraph (f)(1) of this
section, the term specified payment
means any amount paid or accrued by
the payor specified foreign corporation,
including a distribution by the payor
specified foreign corporation with
respect to its stock, if each of the
following conditions are satisfied:
(i) Immediately before or immediately
after the payment or accrual of the
amount, the payor specified foreign
corporation and the payee specified
foreign corporation are related within
the meaning of section 954(d)(3),
substituting the term ‘‘specified foreign
corporation’’ for ‘‘controlled foreign
corporation’’ in each place that it
appears;
(ii) The payor specified foreign
corporation and the payee specified
foreign corporation do not have the
same tentative E&P measurement date;
(iii) The payment or accrual of the
amount occurs after November 2, 2017,
and on or before December 31, 2017;
and
(iv) The payment or accrual of the
amount would, without regard to the
application of paragraph (f)(1) of this
section, reduce the post-1986 earnings
and profits of the payor specified
foreign corporation as of the E&P
measurement date on December 31,
2017.
(3) Definition of tentative E&P
measurement date. For purposes of
paragraph (f)(2) of this section, the term
tentative E&P measurement date
means—
(i) With respect to a specified foreign
corporation that is not described in
paragraph (f)(3)(ii) of this section, the
E&P measurement date of the specified
foreign corporation that, without regard
to the application of paragraph (f)(1) of
this section, would result in the ‘‘greater
of’’ amount of accumulated post-1986
deferred foreign income described in
section 965(a) and § 1.965–1(f)(36); and
(ii) With respect to a specified foreign
corporation that, without regard to the
application of paragraph (f)(1) of this
section, would be an E&P deficit foreign
corporation, the E&P measurement date
as of November 2, 2017.
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(4) Examples. The following examples
illustrate the application of the rules in
this paragraph (f).
Example 1. Deductible payment between
wholly owned specified foreign corporations
is a specified payment. (i) Facts. USP, a
domestic corporation, owns all of the stock
of CFC1, a foreign corporation, which owns
all of the stock of CFC2, also a foreign
corporation. USP, CFC1, and CFC2 have
calendar year taxable years. On November 2,
2017, each of CFC1 and CFC2 has post-1986
earnings and profits of 100u. Neither CFC1
nor CFC2 has post-1986 earnings and profits
that are attributable to income of the
specified foreign corporation that is
effectively connected with the conduct of a
trade or business within the United States
and subject to tax under chapter 1 or that, if
distributed, would be excluded from the
gross income of a United States shareholder
under section 959 or from the gross income
of another shareholder if such shareholder
were a United States shareholder; therefore,
no adjustment is made under section
965(d)(2) or § 1.965–1(f)(7) and each of
CFC1’s and CFC2’s accumulated post-1986
deferred foreign income is equal to such
corporation’s post-1986 earnings and profits.
On November 3, 2017, CFC2 makes a
deductible payment of 10u to CFC1. The
payment does not constitute subpart F
income. CFC1 and CFC2 have no other items
of income or deduction.
(ii) Analysis. (A) Determination of tentative
E&P measurement date. Without regard to
paragraph (f)(1) of this section, as of the E&P
measurement date on December 31, 2017,
CFC1 has post-1986 earnings and profits of
110u (100u plus 10u income from the
payment from CFC2), and CFC2 has post1986 earnings and profits of 90u (100u minus
10u deduction from the payment to CFC1).
Therefore, the tentative E&P measurement
date of CFC1 is December 31, 2017 (110u),
and the tentative E&P measurement date of
CFC2 is November 2, 2017 (100u).
(B) Application of the requirements for a
specified payment. The payment from CFC2
to CFC1 is a specified payment because (A)
CFC1 and CFC2 are related specified foreign
corporations; (B) CFC1 and CFC2 do not have
the same tentative measurement date; (C) the
payment occurs after November 2, 2017, and
on or before December 31, 2017; and (D) the
payment would, without regard to the
application of the rule in paragraph (f)(1) of
this section, reduce the post-1986 earnings
and profits of CFC2 as of the E&P
measurement date on December 31, 2017.
Under paragraph (f)(1) of this section, the
payment is disregarded and CFC1 and CFC2
each have post-1986 earnings and profits of
100u as of December 31, 2017. Accordingly,
the section 965(a) earnings amount of each of
CFC1 and CFC2 is 100u.
Example 2. Distribution is a specified
payment. (i) Facts. The facts are the same as
in paragraph (i) of Example 1 of this
paragraph (f)(4), except instead of a
deductible payment to CFC1, CFC2 makes a
10u distribution on November 3, 2017, that,
without regard to paragraph (f)(1) of this
section would reduce the post-1986 earnings
and profits of CFC2 as of the E&P
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measurement date on December 31, 2017,
and increase the post-1986 earnings and
profits of CFC1 as of the E&P measurement
date on December 31, 2017, by 10u.
(ii) Analysis. (A) Determination of tentative
E&P measurement date. The analysis is the
same as in paragraph (ii)(A) of Example 1 of
this paragraph (f)(4).
(B) Application of the requirements for a
specified payment. The distribution is a
specified payment because (A) CFC1 and
CFC2 are related specified foreign
corporations; (B) CFC1 and CFC2 do not have
the same tentative measurement date; (C) the
distribution occurs after November 2, 2017,
and on or before December 31, 2017; and (D)
the distribution would, without regard to the
application of the rule in paragraph (f)(1) of
this section, reduce the post-1986 earnings
and profits of CFC2 as of the E&P
measurement date on December 31, 2017.
Under paragraph (f)(1) of this section, the
distribution is disregarded with the result
that CFC1 and CFC2 each have post-1986
earnings and profits of 100u as of the E&P
measurement date on December 31, 2017 and
a section 965(a) earnings amount of 100u.
Example 3. Deductible payment between
related (but not wholly owned) specified
foreign corporations is a specified payment.
(i) Facts. The facts are the same as in
paragraph (i) of Example 1 of this paragraph
(f)(4), except that CFC1 owns only 51% of the
only class of stock of CFC2, the remainder of
which is owned by USI, a United States
citizen unrelated to USP, CFC1, and CFC2.
(ii) Analysis. The analysis is the same as
in paragraph (ii) of Example 1 of this
paragraph (f)(4); thus the payment is
disregarded with the result that CFC1 and
CFC2 each have post-1986 earnings and
profits of 100u as of the E&P measurement
date on December 31, 2017, and a section
965(a) earnings amount of 100u.
Example 4. Deductible payment between
unrelated specified foreign corporations is
not a specified payment. (i) Facts. The facts
are the same as in paragraph (i) of Example
1 of this paragraph (f)(4), except that CFC1
owns only 50% of the only class of stock of
CFC2, the remainder of which is owned by
USI, a United States citizen unrelated to USP,
CFC1, and CFC2.
(ii) Analysis. Paragraph (f)(1) of this section
does not apply because CFC1 and CFC2 are
not related. Thus, the payment is taken into
account with the result that CFC1 has post1986 earnings and profits of 110u as of the
E&P measurement date on December 31,
2017, and a section 965(a) earnings amount
of 110u.
Example 5. Deductible payment and
income accrued from unrelated persons are
not specified payments. (i) Facts. The facts
are the same as in paragraph (i) of Example
1 of this paragraph (f)(4), except that CFC2
does not make a deductible payment to
CFC1, and, between E&P measurement dates,
CFC2 accrues gross income of 20u from a
person that is not related to CFC2, and CFC1
incurs a deductible expense of 20u to a
person that is not related to CFC1.
(ii) Analysis. Paragraph (f)(1) of this section
does not apply because neither the
deductible expense of CFC1 nor the income
accrual by CFC2 are attributable to a
specified payment.
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Example 6. Deductible payment and
income accrued with respect to unrelated
persons are not specified payments;
deductible payment between wholly specified
foreign corporations is a specified payment.
(i) Facts. The facts are the same as in
paragraph (i) of Example 5 of this paragraph
(f)(4), except that CFC2 also makes a
deductible payment of 10u to CFC1 on
November 3, 2017.
(ii) Analysis. (A) Determination of tentative
E&P measurement date. Without regard to
paragraph (f)(1) of this section, as of the E&P
measurement date on December 31, 2017,
CFC1 has post-1986 earnings and profits of
90u (100u minus 20u deductible expense
plus 10u income from the payment from
CFC2), and CFC2 has post-1986 earnings and
profits of 110u (100u plus 20u gross income
minus 10u deduction from the deductible
payment to CFC1). Therefore, the tentative
E&P measurement date of CFC1 is November
2, 2017 (100u) and the tentative E&P
measurement date of CFC2 is December 31,
2017 (110u).
(B) Application of the requirements for a
specified payment. The deductible payment
is a specified payment because (A) CFC1 and
CFC2 are related specified foreign
corporations; (B) CFC1 and CFC2 do not have
the same tentative measurement date; (C) the
payment occurs after November 2, 2017, and
on or before December 31, 2017; and (D) the
deductible payment would, without regard to
the application of the rule in paragraph (f)(1)
of this section, reduce the post-1986 earnings
and profits of CFC2 as of the E&P
measurement date on December 31, 2017.
Accordingly, under paragraph (f)(1) of this
section, the deductible payment is
disregarded with the result that CFC1 and
CFC2 have 80u and 120u of post-1986
earnings and profits as of the E&P
measurement date on December 31, 2017,
respectively. Accordingly, CFC1 and CFC2
have section 965(a) earnings amounts of 100u
and 120u, respectively.
Par. 9. Section 1.965–5 is added to
read as follows:
■
§ 1.965–5 Allowance of a credit or
deduction for foreign income taxes.
(a) Scope. This section provides rules
for the allowance of a credit or
deduction for foreign income taxes in
connection with the application of
section 965. Paragraph (b) of this section
provides rules under section 965(g) for
the allowance of a credit or deduction
for foreign income taxes paid or
accrued. Paragraph (c) of this section
provides rules for the allowance of a
credit or deduction for foreign income
taxes treated as paid or accrued in
connection with the application of
section 965. Paragraph (d) of this section
defines the term ‘‘applicable
percentage.’’
(b) Rules for foreign income taxes
paid or accrued. Neither a deduction
(including under section 164) nor a
credit under section 901 is allowed for
the applicable percentage of any foreign
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income taxes paid or accrued with
respect to any amount for which a
section 965(c) deduction is allowed for
a section 958(a) U.S. shareholder
inclusion year. Neither a deduction
(including under section 164) nor a
credit under section 901 is allowed for
the applicable percentage of any foreign
income taxes attributable to a
distribution of section 965(a) previously
taxed earnings and profits or section
965(b) previously taxed earnings and
profits. Accordingly, no deduction or
credit is allowed for the applicable
percentage of any withholding taxes
imposed on a United States shareholder
by the jurisdiction of residence of the
distributing foreign corporation with
respect to a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits. Similarly, no
deduction or credit is allowed for the
applicable percentage of net basis taxes
imposed on a United States citizen by
the citizen’s jurisdiction of residence
upon receipt of a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits.
(c) Rules for foreign income taxes
treated as paid or accrued—(1)
Disallowed credit—(i) In general. A
credit under section 901 is not allowed
for the applicable percentage of any
foreign income taxes treated as paid or
accrued with respect to any amount for
which a section 965(c) deduction is
allowed for a section 958(a) U.S.
shareholder inclusion year. For
purposes of the preceding sentence,
taxes treated as paid or accrued include
foreign income taxes deemed paid
under section 960(a)(1) with respect to
a section 965(a) inclusion, foreign
income taxes deemed paid under
section 960(a)(3) with respect to
distributions of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits, foreign income taxes
allocated to an entity under § 1.901–
2(f)(4), and a distributive share of
foreign income taxes paid or accrued by
a partnership.
(ii) Foreign income taxes deemed paid
under section 960(a)(3) (as in effect on
December 21, 2017). Foreign income
taxes deemed paid by a domestic
corporation under section 960(a)(3) with
respect to a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits include only
the foreign income taxes paid or accrued
by an upper-tier foreign corporation
with respect to a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
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taxed earnings and profits from a lowertier foreign corporation. No credit is
allowed under section 960(a)(3) or any
other section for foreign income taxes
that would have been deemed paid
under section 960(a)(1) with respect to
the portion of a section 965(a) earnings
amount that is reduced under § 1.965–
1(b)(2) or § 1.965–8(b).
(iii) [Reserved]
(2) Disallowed deduction. No
deduction (including under section 164)
is allowed for the applicable percentage
of any foreign income taxes treated as
paid or accrued with respect to any
amount for which a section 965(c)
deduction is allowed. Such taxes
include foreign income taxes allocated
to an entity under § 1.901–2(f)(4) and a
distributive share of foreign income
taxes paid or accrued by a partnership.
(3) Coordination with section 78—(i)
In general. With respect to foreign
income taxes deemed paid by a
domestic corporation with respect to its
section 965(a) inclusion amount for a
section 958(a) U.S. shareholder
inclusion year, section 78 shall apply
only to so much of such taxes as bears
the same proportion to the amount of
such taxes as—
(A) The excess of—
(1) The section 965(a) inclusion
amount for a section 958(a) U.S.
shareholder inclusion year, over
(2) The section 965(c) deduction
amount allowable with respect to such
section 965(a) inclusion amount, bears
to
(B) Such section 965(a) inclusion
amount.
(ii) Domestic corporation that is a
domestic pass-through owner. With
respect to foreign income taxes deemed
paid by a domestic corporation
attributable to such corporation’s
domestic pass-through owner share of a
section 965(a) inclusion amount of a
domestic pass-through entity, section 78
shall apply only to so much of such
taxes as bears the same proportion to the
amount of such taxes as the proportion
determined under paragraph (c)(3)(i) of
this section as applied to the domestic
pass-through entity’s section 965(a)
inclusion amount for a section 958(a)
U.S. shareholder inclusion year.
(d) Applicable percentage—(1) In
general. For purposes of this section, the
term applicable percentage means, with
respect to a section 958(a) U.S.
shareholder and a section 958(a) U.S.
shareholder inclusion year, the amount
(expressed as a percentage) equal to the
sum of—
(i) 0.771 multiplied by the ratio of—
(A) The section 958(a) U.S.
shareholder’s 8 percent rate amount for
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the section 958(a) U.S. shareholder
inclusion year, divided by
(B) The sum of the section 958(a) U.S.
shareholder’s 8 percent rate amount for
the section 958(a) U.S. shareholder
inclusion year plus the section 958(a)
U.S. shareholder’s 15.5 percent rate
amount for the section 958(a) U.S.
shareholder inclusion year; plus
(ii) 0.557 multiplied by the ratio of—
(A) The section 958(a) U.S.
shareholder’s 15.5 percent rate amount
for the section 958(a) U.S. shareholder
inclusion year, divided by
(B) The amount described in
paragraph (d)(1)(i)(B) of this section.
(2) Applicable percentage for
domestic pass-through owners. In the
case of a domestic pass-through owner
that has a domestic pass-through owner
share of a domestic pass-through
entity’s section 965(a) inclusion
amount, the domestic pass-through
owner’s applicable percentage that is
applied to foreign income taxes
attributable to such section 965(a)
inclusion amount is equal to the
applicable percentage determined under
paragraph (d)(1) of this section with
respect to the domestic pass-through
entity that is the section 958(a) U.S.
shareholder.
■ Par. 10. Section 1.965–6 is added to
read as follows:
§ 1.965–6 Computation of foreign income
taxes deemed paid and allocation and
apportionment of deductions.
(a) Scope. This section provides rules
for the computation of foreign income
taxes deemed paid and the allocation
and apportionment of deductions.
Paragraphs (b) and (c) of this section
provide the general rules for the
computation of foreign income taxes
deemed paid under sections 902 and
960. Paragraph (d) of this section
provides rules for allocation and
apportionment of expenses.
(b) Computation of foreign incomes
taxes deemed paid. For purposes of
determining foreign income taxes
deemed paid under section 960(a)(1)
with respect to a section 965(a)
inclusion attributable to a deferred
foreign income corporation, section 902
applies as if the section 965(a)
inclusion, translated (if necessary) into
the functional currency of the deferred
foreign income corporation using the
spot rate on December 31, 2017, were a
dividend paid by the deferred foreign
income corporation.
(c) Section 902 fraction—(1) In
general. The term section 902 fraction
means, with respect to a foreign
corporation that is either a deferred
foreign income corporation or an E&P
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deficit foreign corporation, the fraction
that is—
(i) The dividend paid by, or the
inclusion under section 951(a)(1)
(including a section 965(a) inclusion)
with respect to, the foreign corporation,
as applicable (the numerator), divided
by
(ii) The foreign corporation’s post1986 undistributed earnings (the
denominator). See section 902(a).
(2) Dividend or inclusion in excess of
post-1986 undistributed earnings. When
the denominator of the section 902
fraction is positive but less than the
numerator of such fraction, the section
902 fraction is one. When the
denominator of the section 902 fraction
is zero or less than zero, the section 902
fraction is zero and no foreign taxes are
deemed paid.
(3) Treatment of adjustment under
section 965(b)(4)(B). For purposes of
section 902(c)(1), the post-1986
undistributed earnings of an E&P deficit
foreign corporation are increased under
section 965(b)(4)(B) and § 1.965–
2(d)(2)(i)(A) as of the first day of the
foreign corporation’s first taxable year
following the E&P deficit foreign
corporation’s last taxable year that
begins before January 1, 2018.
(d) Allocation and apportionment of
deductions. For purposes of allocating
and apportioning expenses, a section
965(c) deduction does not result in any
gross income, including a section 965(a)
inclusion, being treated as exempt,
excluded, or eliminated income within
the meaning of section 864(e)(3) or
§ 1.861–8T(d). Similarly, a section
965(c) deduction does not result in the
treatment of stock as an exempt asset
within the meaning of section 864(e)(3)
or § 1.861–8T(d). In addition, consistent
with the general inapplicability of
§ 1.861–8T(d)(2) to earnings and profits
described in section 959(c)(1) or
959(c)(2), neither section 965(a)
previously taxed earnings and profits
nor section 965(b) previously taxed
earnings and profits are treated as giving
rise to gross income that is exempt,
excluded, or eliminated income.
Similarly, the asset that gives rise to a
section 965(a) inclusion, section 965(a)
previously taxed earnings and profits, or
section 965(b) previously taxed earnings
and profits is not treated as a tax-exempt
asset.
■ Par. 11. Section 1.965–7 is added to
read as follows:
§ 1.965–7 Elections, payment, and other
special rules.
(a) Scope. This section provides rules
regarding certain elections and
payments. Paragraph (b) of this section
provides rules regarding the section
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965(h) election. Paragraph (c) of this
section provides rules regarding the
section 965(i) election. Paragraph (d) of
this section provides rules regarding the
section 965(m) election and a special
rule for real estate investment trusts.
Paragraph (e) of this section provides
rules regarding the section 965(n)
election. Paragraph (f) of this section
provides rules regarding the election to
use the alternative method for
calculating post-1986 earnings and
profits. Paragraph (g) of this section
provides definitions that apply for
purposes of this section. For additional
definitions that apply for purposes of
the section 965 regulations, see § 1.965–
1(f).
(b) Section 965(h) election—(1) In
general. Any person with a section
965(h) net tax liability (that is, a section
958(a) U.S. shareholder or a domestic
pass-through owner with respect to a
domestic pass-through entity that is a
section 958(a) U.S. shareholder, but not
a domestic pass-through entity itself)
may elect under section 965(h) and this
paragraph (b) to pay its section 965(h)
net tax liability in eight installments.
This election may be revoked only by
paying the full amount of the remaining
unpaid section 965(h) net tax liability.
(i) Amount of installments. Except as
provided in paragraph (b)(3) of this
section, if a person makes a section
965(h) election, the amounts of the
installments are—
(A) Eight percent of the section 965(h)
net tax liability in the case of each of the
first five installments;
(B) Fifteen percent of the section
965(h) net tax liability in the case of the
sixth installment;
(C) Twenty percent of the section
965(h) net tax liability in the case of the
seventh installment; and
(D) Twenty-five percent of the section
965(h) net tax liability in the case of the
eighth installment.
(ii) Increased installments due to a
deficiency or a timely filed or amended
return—(A) In general. If a person makes
a section 965(h) election, except as
provided in paragraph (b)(1)(ii)(C) of
this section, any deficiency or
additional liability will be prorated to
the installments described under
paragraph (b)(1)(i) of this section if any
of the following occur:
(1) A deficiency is assessed with
respect to the person’s section 965(h)
net tax liability;
(2) The person files a return by the
due date (taking into account
extensions, if any) increasing the
amount of its section 965(h) net tax
liability beyond that taken into account
in paying the first installment described
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under paragraph (b)(1)(i) of this section;
or
(3) The person files an amended
return that reflects an increase in the
amount of its section 965(h) net tax
liability.
(B) Timing. If the due date for the
payment of an installment to which the
deficiency or additional liability is
prorated has passed, the amount
prorated to such installment must be
paid on notice and demand by the
Secretary. If the due date for the
payment of an installment to which the
deficiency or additional liability is
prorated has not passed, then such
amount will be due at the same time as,
and as part of, the relevant installment.
(C) Exception for negligence,
intentional disregard, or fraud. If a
deficiency or additional liability is due
to negligence, intentional disregard of
rules and regulations, or fraud with
intent to evade tax, the proration rule of
this paragraph (b)(1)(ii) will not apply
and the deficiency or additional liability
(as well as any applicable interest and
penalties) must be paid on notice and
demand by the Secretary or, in the case
of an additional liability reported on a
return increasing the amount of the
section 965(h) net tax liability after
payment of the first installment or on an
amended return, with the filing of the
return.
(iii) Due date of installments—(A) In
general. If a person makes a section
965(h) election, the first installment
payment is due on the due date (without
regard to extensions) for the return for
the relevant taxable year. For purposes
of this paragraph (b), the term relevant
taxable year means, in the case in which
the person is a section 958(a) U.S.
shareholder, the section 958(a) U.S.
shareholder inclusion year, or, in the
case in which the person is a domestic
pass-through owner, the taxable year in
which the person has the section 965(a)
inclusion to which the section 965(h)
net tax liability is attributable. Each
succeeding installment payment is due
on the due date (without regard to
extensions) for the return for the taxable
year following the taxable year with
respect to which the previous
installment payment was made.
(B) Extension for specified
individuals. If a person is a specified
individual with respect to a taxable year
within which an installment payment is
due pursuant to paragraph (b)(1)(iii)(A)
of this section, then, for purposes of
determining the due date of an
installment payment under paragraph
(b)(1)(iii)(A) of this section, the due date
of the return (without regard to
extensions) due within the taxable year
will be treated as the fifteenth day of the
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sixth month following the close of the
prior taxable year. This paragraph
(b)(1)(iii)(B) is applicable regardless of
whether the person is a specified
individual with respect to the relevant
taxable year.
(2) Manner of making election—(i)
Eligibility. Any person with a section
965(h) net tax liability may make the
section 965(h) election, provided that,
with respect to the person, none of the
acceleration events described in
paragraph (b)(3)(ii) of this section have
occurred before the election is made.
Notwithstanding the preceding
sentence, a person that would be
eligible to make the section 965(h)
election but for the occurrence of an
event described in paragraph (b)(3)(ii) of
this section may make the section
965(h) election if the exception
described in paragraph (b)(3)(iii)(A) of
this section applies.
(ii) Timing. A section 965(h) election
must be made no later than 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
relevant taxable year. Relief is not
available under § 301.9100–2 or
301.9100–3 to file a late election.
(iii) Election statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance,
to make a section 965(h) election, a
person must attach a statement, signed
under penalties of perjury, to its return
for the relevant taxable year. The
statement must include the person’s
name, taxpayer identification number,
total net tax liability under section 965,
section 965(h) net tax liability, section
965(i) net tax liability with respect to
which a section 965(i) election is
effective (if applicable), and the
anticipated amounts of each installment
described under paragraph (b)(1)(i) of
this section. The statement must be filed
in the manner prescribed in
publications, forms, instructions, or
other guidance.
(3) Acceleration of payment—(i)
Acceleration. Notwithstanding
paragraph (b)(1)(i) of this section, if a
person makes a section 965(h) election,
and an acceleration event described in
paragraph (b)(3)(ii) of this section
subsequently occurs, then, except as
provided in paragraph (b)(3)(iii) of this
section, the unpaid portion of the
remaining installments will be due on
the date of the acceleration event (or in
the case of a title 11 or similar case, the
day before the petition is filed).
(ii) Acceleration events. The following
events are acceleration events for
purposes of paragraph (b)(3)(i) of this
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section with respect to a person that has
made a section 965(h) election:
(A) An addition to tax is assessed for
the failure to timely pay an installment
described in paragraph (b)(1)(i) of this
section;
(B) A liquidation, sale, exchange, or
other disposition of substantially all of
the assets of the person (including in a
title 11 or similar case, or, in the case
of an individual, by reason of death);
(C) In the case of a person that is not
an individual, a cessation of business by
the person;
(D) Any event that results in the
person no longer being a United States
person, including a resident alien (as
defined in section 7701(b)(1)(A))
becoming a nonresident alien (as
defined in section 7701(b)(1)(B));
(E) In the case of a person that was not
a member of any consolidated group,
the person becoming a member of a
consolidated group;
(F) In the case of a consolidated
group, the group ceasing to exist
(including by reason of the acquisition
of a consolidated group within the
meaning of § 1.1502–13(j)(5)) or the
group otherwise discontinuing in the
filing of a consolidated return; or
(G) A determination by the
Commissioner described in the second
sentence of paragraph (b)(3)(iii)(C)(2) of
this section.
(iii) Eligible section 965(h) transferee
exception—(A) In general. Paragraph
(b)(3)(i) of this section does not apply
(such that the unpaid portion of all
remaining installments will not be due
as of the date of the acceleration event)
to a person with respect to which an
acceleration event occurs if the
requirements described in paragraphs
(b)(3)(iii)(A)(1) and (2) of this section are
satisfied. A person with respect to
which an acceleration event described
in this paragraph (b)(3)(iii)(A) occurs is
referred to as an eligible section 965(h)
transferor.
(1) Requirement to have a covered
acceleration event. The acceleration
event satisfies the requirements of this
paragraph (b)(3)(iii)(A)(1) if it is
described in—
(i) Paragraph (b)(3)(ii)(B) of this
section and the acceleration event is a
qualifying consolidated group member
transaction within the meaning of
paragraph (b)(3)(iii)(E) of this section;
(ii) Paragraph (b)(3)(ii)(B) of this
section (other than, in the case of an
individual, an acceleration event caused
by reason of death) in a transaction that
is not a qualifying consolidated group
member transaction;
(iii) Paragraph (b)(3)(ii)(E) of this
section; or
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(iv) Paragraph (b)(3)(ii)(F) of this
section, and the acceleration event
results from the acquisition of a
consolidated group within the meaning
of § 1.1502–13(j)(5) and the acquired
consolidated group members join a
different consolidated group as of the
day following the acquisition.
(2) Requirement to enter into a
transfer agreement. An eligible section
965(h) transferor and an eligible section
965(h) transferee (as defined in
paragraph (b)(3)(iii)(B) of this section)
must enter into an agreement with the
Commissioner that satisfies the
requirements of paragraph (b)(3)(iii)(B)
of this section.
(B) Transfer agreement—(1)
Eligibility. A transfer agreement that
satisfies the requirements of this
paragraph (b)(3)(iii)(B) must be entered
into by an eligible section 965(h)
transferor and an eligible section 965(h)
transferee. For this purpose, the term
eligible section 965(h) transferee refers
to a single United States person that is
not a domestic pass-through entity and
that—
(i) With respect to an acceleration
event described in paragraph
(b)(3)(iii)(A)(1)(i) of this section, is a
departing member (as defined in
paragraph (b)(3)(iii)(E)(1)(i) of this
section) or its qualified successor (as
defined in paragraph (b)(3)(iii)(E)(2) of
this section);
(ii) With respect to an acceleration
event described in paragraph
(b)(3)(iii)(A)(1)(ii) of this section,
acquires substantially all of the assets of
an eligible section 965(h) transferor;
(iii) With respect to an acceleration
event described in paragraph
(b)(3)(iii)(A)(1)(iii) of this section, is the
agent (within the meaning of § 1.1502–
77) of the consolidated group that the
eligible section 965(h) transferor joins;
or
(iv) With respect to an acceleration
event described in paragraph
(b)(3)(iii)(A)(1)(iv) of this section, is the
agent (within the meaning of § 1.1502–
77) of the surviving consolidated group.
(2) Filing requirements—(i) In general.
A transfer agreement must be timely
filed. Except as provided in paragraph
(b)(3)(iii)(B)(2)(ii) of this section, a
transfer agreement is considered timely
filed only if the transfer agreement is
filed within 30 days of the date that the
acceleration event occurs. The transfer
agreement must be filed in accordance
with the rules provided in forms,
instructions, or other guidance. In
addition, a duplicate copy of the
transfer agreement must be attached to
the returns of both the eligible section
965(h) transferee and the eligible section
965(h) transferor for the taxable year
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during which the acceleration event
occurs filed by the due date for such
returns (taking into account extensions,
if any). Relief is not available under
§ 301.9100–2 or 301.9100–3 to file a
transfer agreement late.
(ii) Transition rule. If an acceleration
event occurs before September 10, 2018,
the transfer agreement must be filed by
October 9, 2018 in order to be
considered timely filed.
(3) Signature requirement. The
transfer agreement that is filed within
30 days of the acceleration event must
be signed under penalties of perjury by
a person who is authorized to sign a
return on behalf of the eligible section
965(h) transferor and a person who is
authorized to sign a return on behalf of
the eligible section 965(h) transferee.
(4) Terms of agreement. A transfer
agreement under this paragraph
(b)(3)(iii)(B) must be entitled ‘‘Transfer
Agreement Under Section 965(h)(3)’’
and must contain the following
information and representations—
(i) A statement that the document
constitutes an agreement by the eligible
section 965(h) transferee to assume the
liability of the eligible section 965(h)
transferor for any unpaid installment
payments of the eligible section 965(h)
transferor under section 965(h);
(ii) A statement that the eligible
section 965(h) transferee (and, if the
eligible section 965(h) transferor
continues in existence immediately after
the acceleration event, the eligible
section 965(h) transferor) agrees to
comply with all of the conditions and
requirements of section 965(h) and
paragraph (b) of this section, as well as
any other applicable requirements in the
section 965 regulations;
(iii) The name, address, and taxpayer
identification number of the eligible
section 965(h) transferor and the eligible
section 965(h) transferee;
(iv) The amount of the eligible section
965(h) transferor’s section 965(h) net tax
liability remaining unpaid, as
determined by the eligible section
965(h) transferor, which is subject to
adjustment by the Commissioner;
(v) A copy of the eligible section
965(h) transferor’s most recent Form
965–A or Form 965–B, as applicable;
(vi) A detailed description of the
acceleration event that led to the
transfer agreement;
(vii) A representation that the eligible
section 965(h) transferee is able to make
the remaining payments required under
section 965(h) and paragraph (b) of this
section with respect to the section
965(h) net tax liability being assumed;
and
(viii) If the eligible section 965(h)
transferor continues to exist
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immediately after the acceleration
event, an acknowledgement that the
eligible section 965(h) transferor and
any successor to the eligible section
965(h) transferor will remain jointly and
severally liable for any unpaid
installment payments of the eligible
section 965(h) transferor under section
965(h), including, if applicable, under
§ 1.1502–6.
(5) Consolidated groups. For purposes
of this paragraph (b)(3)(iii)(B), in the
case of a consolidated group, the terms
‘‘eligible section 965(h) transferor’’ and
‘‘eligible section 965(h) transferee’’ each
refer to a consolidated group that is a
party to a covered acceleration event
described in paragraph (b)(3)(iii)(A)(1)
of this section. In such a case, any
transfer agreement under this paragraph
(b)(3)(iii)(B) must be entered into by the
agent (as defined in § 1.1502–77) of the
relevant consolidated group.
(C) Consent of Commissioner—(1) In
general. Except as otherwise provided
in publications, instructions, forms, or
other guidance, if an eligible section
965(h) transferor and an eligible section
965(h) transferee file a transfer
agreement in accordance with the
provisions of paragraph (b)(3)(iii)(B) of
this section, the eligible section 965(h)
transferor and the eligible section 965(h)
transferee will be considered to have
entered into an agreement described in
paragraph (b)(3)(iii)(A)(2) of this section
with the Commissioner for purposes of
section 965(h)(3) and paragraph
(b)(3)(iii) of this section. If the
Commissioner determines that
additional information is necessary (for
example, additional information
regarding the ability of the eligible
section 965(h) transferee to fully pay the
remaining section 965(h) net tax
liability), the eligible section 965(h)
transferee must provide such
information upon request.
(2) Material misrepresentations and
omissions. If the Commissioner
determines that an agreement filed by
an eligible section 965(h) transferor and
an eligible section 965(h) transferee
contains a material misrepresentation or
material omission, then the
Commissioner may reject the transfer
agreement (effective as of the date of the
related acceleration event). In the
alternative, on the date that the
Commissioner determines that the
transfer agreement includes a material
misrepresentation or material omission,
the Commissioner may determine that
an acceleration event has occurred with
respect to the eligible section 965(h)
transferee as of the date of the
determination, such that any unpaid
installment payments of the eligible
section 965(h) transferor that were
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assumed by the eligible section 965(h)
transferee become due on the date of the
determination.
(D) Effect of assumption—(1) In
general. If the exception in this
paragraph (b)(3)(iii) applies with respect
to an eligible section 965(h) transferor
and an eligible section 965(h) transferee,
the eligible section 965(h) transferee
assumes all of the outstanding
obligations and responsibilities of the
eligible section 965(h) transferor with
respect to the section 965(h) net tax
liability as though the eligible section
965(h) transferee had included the
section 965(a) inclusion in income.
Accordingly, the eligible section 965(h)
transferee is responsible for making
payments and reporting with respect to
any unpaid installment payments. In
addition, for example, if an acceleration
event described in paragraph (b)(3)(ii) of
this section occurs with respect to an
eligible section 965(h) transferee, any
unpaid installment payments of the
eligible section 965(h) transferor that
were assumed by the eligible section
965(h) transferee will become due on
the date of such event, subject to any
applicable exception in paragraph
(b)(3)(iii) of this section.
(2) Eligible section 965(h) transferor
liability. An eligible section 965(h)
transferor (or a successor) remains
jointly and severally liable for any
unpaid installment payments of the
eligible section 965(h) transferor that
were assumed by the eligible section
965(h) transferee, as well as any
penalties, additions to tax, or other
additional amounts attributable to such
net tax liability.
(E) Qualifying consolidated group
member transaction—(1) Definition of
qualifying consolidated group member
transaction. For purposes of this
paragraph (b)(3), the term qualifying
consolidated group member transaction
means a transaction in which—
(i) A member of a consolidated group
(the departing member) ceases to be a
member of the consolidated group
(including by reason of the distribution,
sale, or exchange of the departing
member’s stock);
(ii) The transaction results in the
consolidated group (which is treated as
a single person for this purpose under
§ 1.965–8(e)(1)) being treated as
transferring substantially all of its assets
for purposes of paragraph (b)(3)(ii)(B) of
this section; and
(iii) The departing member either
continues to exist immediately after the
transaction or has a qualified successor.
(2) Definition of qualified successor.
For purposes of this paragraph (b)(3),
the term qualified successor means,
with respect to a departing member
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described in this paragraph (b)(3)(iii)(E),
another domestic corporation (or
consolidated group) that acquires
substantially all of the assets of the
departing member (including in a
transaction described in section
381(a)(2)).
(3) Departure of multiple members of
a consolidated group. Multiple members
that deconsolidate from the same
consolidated group as a result of a single
transaction are treated as a single
departing member to the extent that,
immediately after the transaction, they
become members of the same (second)
consolidated group, which would be
treated as a single person under § 1.965–
8(e)(1).
(c) Section 965(i) election—(1) In
general. Each shareholder, other than a
domestic pass-through entity, of an S
corporation that is a United States
shareholder of a deferred foreign income
corporation may elect under section
965(i) and this paragraph (c) to defer the
payment of the shareholder’s section
965(i) net tax liability with respect to
the S corporation until the shareholder’s
taxable year that includes a triggering
event described in paragraph (c)(3) of
this section. This election may be
revoked only by paying the full amount
of the unpaid section 965(i) net tax
liability.
(2) Manner of making election—(i)
Eligibility. Each shareholder with a
section 965(i) net tax liability with
respect to an S corporation may make
the section 965(i) election with respect
to such S corporation, provided that,
with respect to the shareholder, none of
the triggering events described in
paragraph (c)(3)(ii) of this section have
occurred before the election is made.
Notwithstanding the preceding
sentence, a shareholder that would be
eligible to make the section 965(i)
election but for the occurrence of an
event described in paragraph (c)(3)(ii) of
this section may make the section 965(i)
election if an exception described in
paragraph (c)(3)(ii) of this section
applies.
(ii) Timing. A section 965(i) election
must be made no later than the due date
(taking into account extensions, if any)
for the shareholder’s return for each
taxable year that includes the last day of
the taxable year of the S corporation in
which the S corporation has a section
965(a) inclusion to which the
shareholder’s section 965(i) net tax
liability is attributable. Relief is not
available under § 301.9100–2 or
301.9100–3 to make a late election.
(iii) Election statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance,
to make a section 965(i) election, a
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shareholder must attach a statement,
signed under penalties of perjury, to its
return for the taxable year that includes
the last day of a taxable year of the S
corporation in which the S corporation
has a section 965(a) inclusion to which
the shareholder’s section 965(i) net tax
liability is attributable. The statement
must include the shareholder’s name,
taxpayer identification number, the
name and taxpayer identification
number of the S corporation with
respect to which the election is made,
the amount described in paragraph
(g)(10)(i)(A) of this section as modified
by paragraph (g)(6) of this section for
purposes of determining the section
965(i) net tax liability with respect to
the S corporation, the amount described
in paragraph (g)(10)(i)(B) of this section,
and the section 965(i) net tax liability
with respect to the S corporation. The
statement must be filed in the manner
prescribed in publications, forms,
instructions, or other guidance.
(3) Triggering events—(i) In general. If
a shareholder makes a section 965(i)
election with respect to an S
corporation, the shareholder defers
payment of its section 965(i) net tax
liability with respect to the S
corporation until the shareholder’s
taxable year that includes the
occurrence of a triggering event
described in paragraph (c)(3)(ii) of this
section with respect to the section 965(i)
net tax liability with respect to the S
corporation. If a triggering event
described in paragraph (c)(3)(ii) of this
section with respect to an S corporation
occurs, except as provided in paragraph
(c)(3)(iv) of this section, the
shareholder’s section 965(i) net tax
liability with respect to the S
corporation will be assessed as an
addition to tax for the shareholder’s
taxable year that includes the triggering
event.
(ii) Triggering events. The following
events are considered triggering events
for purposes of paragraph (c)(3)(i) of this
section with respect to a shareholder’s
section 965(i) net tax liability with
respect to an S corporation—
(A) The corporation ceases to be an S
corporation (determined as of the first
day of the first taxable year that the
corporation is not an S corporation);
(B) A liquidation, sale, exchange, or
other disposition of substantially all of
the assets of the S corporation
(including in a title 11 or similar case),
a cessation of business by the S
corporation, or the S corporation
ceasing to exist; or
(C) The transfer of any share of stock
of the S corporation by the shareholder
(including by reason of death or
otherwise).
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(iii) Partial transfers. If an S
corporation shareholder transfers less
than all of its shares of stock of the S
corporation, the transfer will be a
triggering event only with respect to the
portion of a shareholder’s section 965(i)
net tax liability that is properly
allocable to the transferred shares.
(iv) Eligible section 965(i) transferee
exception—(A) In general. Paragraph
(c)(3)(i) of this section will not apply
(such that a shareholder’s section 965(i)
net tax liability with respect to an S
corporation will not be assessed as an
addition to tax for the shareholder’s
taxable year that includes the triggering
event) if the requirements described in
paragraphs (c)(3)(iv)(A)(1) and (2) of this
section are satisfied. A shareholder with
respect to which a triggering event
described in this paragraph (c)(3)(iv)(A)
occurs is referred to as an eligible
section 965(i) transferor.
(1) Requirement to have a covered
triggering event. The triggering event
satisfies the requirements of this
paragraph (c)(3)(iv)(A)(1) if it is
described in paragraph (c)(3)(ii)(C) of
this section.
(2) Requirement to enter into a
transfer agreement. The shareholder
with respect to which a triggering event
occurs and an eligible section 965(i)
transferee (as defined in paragraph
(c)(3)(iv)(B)(1) of this section) must
enter into an agreement with the
Commissioner that satisfies the
requirements of paragraph (c)(3)(iv)(B)
of this section.
(B) Transfer agreement—(1)
Eligibility. A transfer agreement that
satisfies the requirements of this
paragraph (c)(3)(iv)(B) may be entered
into by an eligible section 965(i)
transferor and an eligible section 965(i)
transferee. For this purpose, the term
eligible section 965(i) transferee refers to
a single United States person that is not
a domestic pass-through entity.
(2) Filing requirements—(i) In general.
A transfer agreement must be timely
filed. Except as provided in paragraph
(c)(3)(iv)(B)(2)(ii) of this section, a
transfer agreement is considered timely
filed only if the transfer agreement is
filed within 30 days of the date that the
triggering event occurs. The transfer
agreement must be filed in accordance
with the rules provided in forms,
instructions, or other guidance. In
addition, a duplicate copy of the
transfer agreement must be attached to
the returns of both the eligible section
965(i) transferee and the eligible section
965(i) transferor for the taxable year
during which the triggering event occurs
filed by the due date (taking into
account extensions, if any) for such
returns. Relief is not available under
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§ 301.9100–2 or 301.9100–3 to file a
transfer agreement late.
(ii) Transition rule. If a triggering
event occurs before September 10, 2018,
the transfer agreement must be filed by
October 9, 2018 in order to be
considered timely filed.
(3) Signature requirement. The
transfer agreement that is filed within
30 days of the triggering event must be
signed under penalties of perjury by a
person who is authorized to sign a
return on behalf of the eligible section
965(i) transferor and a person who is
authorized to sign a return on behalf of
the eligible section 965(i) transferee.
(4) Terms of agreement. A transfer
agreement under this paragraph
(c)(3)(iv)(B) must be entitled ‘‘Transfer
Agreement Under Section 965(i)(2)’’ and
must contain the following information
and representations:
(i) A statement that the document
constitutes an agreement by the eligible
section 965(i) transferee to assume the
liability of the eligible section 965(i)
transferor for the unpaid portion of the
section 965(i) net tax liability, or, in the
case of a partial transfer, for the unpaid
portion of the section 965(i) net tax
liability attributable to the transferred
stock;
(ii) A statement that the eligible
section 965(i) transferee agrees to
comply with all of the conditions and
requirements of section 965(i) and
paragraph (c) of this section, including
the annual reporting requirement, as
well as any other applicable
requirements in the section 965
regulations;
(iii) The name, address, and taxpayer
identification number of the eligible
section 965(i) transferor and the eligible
section 965(i) transferee;
(iv) The amount of the eligible section
965(i) transferor’s unpaid section 965(i)
net tax liability or, in the case of a
partial transfer, the unpaid portion of
the section 965(i) net tax liability
attributable to the transferred stock,
each as determined by the eligible
section 965(i) transferor, which is
subject to adjustment by the
Commissioner;
(v) A copy of the eligible section
965(i) transferor’s most recent Form
965–A;
(vi) A detailed description of the
triggering event that led to the transfer
agreement, including the name and
taxpayer identification number of the S
corporation with respect to which the
section 965(i) election was effective;
(vii) A representation that the eligible
section 965(i) transferee is able to pay
the section 965(i) net tax liability being
assumed; and
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(viii) An acknowledgement that the
eligible section 965(i) transferor and any
successor to the eligible section 965(i)
transferor will remain jointly and
severally liable for the section 965(i) net
tax liability being assumed by the
eligible section 965(i) transferee.
(C) Consent of Commissioner—(1) In
general. Except as otherwise provided
in publications, instructions, forms, or
other guidance, if an eligible section
965(i) transferor and an eligible section
965(i) transferee file a transfer
agreement in accordance with the
provisions of paragraph (c)(3)(iv)(B) of
this section, the eligible section 965(i)
transferor and the eligible section 965(i)
transferee will be considered to have
entered into an agreement with the
Commissioner for purposes of section
965(i)(2) and paragraph (c)(3)(iv) of this
section. If the Commissioner determines
that additional information is necessary
(for example, additional information
regarding the ability of the eligible
section 965(i) transferee to pay the
eligible section 965(i) transferor’s
unpaid net section 965(i) tax liability),
the eligible section 965(i) transferee
must provide such information upon
request.
(2) Material misrepresentations and
omissions. If the Commissioner
determines that an agreement filed by
an eligible section 965(i) transferor and
an eligible section 965(i) transferee
contains a material misrepresentation or
material omission, then the
Commissioner may reject the transfer
agreement (effective as of the date of the
related triggering event). In the
alternative, on the date that the
Commissioner determines that the
transfer agreement includes a material
misrepresentation or material omission,
the Commissioner may determine that a
triggering event has occurred with
respect to the eligible section 965(i)
transferee as of the date of the
determination, such that the unpaid
section 965(i) net tax liability of the
eligible section 965(i) transferor that
was assumed by the eligible section
965(i) transferee becomes due on the
date of the determination.
(D) Effect of assumption—(1) In
general. When the exception in this
paragraph (c)(3)(iv) applies with respect
to an eligible section 965(i) transferor
and an eligible section 965(i) transferee,
the eligible section 965(i) transferee
assumes all of the outstanding
obligations and responsibilities of the
eligible section 965(i) transferor with
respect to the section 965(i) net tax
liability with respect to the S
corporation as though the eligible
section 965(i) transferee had included
the section 965(a) inclusion in income.
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Accordingly, the eligible section 965(i)
transferee is responsible for making
payments and reporting with respect to
any unpaid section 965(i) net tax
liability with respect to the S
corporation. In addition, for example, if
a triggering event described in
paragraph (c)(3)(ii) of this section occurs
with respect to an eligible section 965(i)
transferee, any unpaid portion of the
section 965(i) net tax liability of the
eligible section 965(i) transferor that
was assumed by the eligible section
965(i) transferee becomes due on the
date of such event, subject to any
applicable exception in paragraph
(c)(3)(iv) or (v) of this section.
(2) Eligible section 965(i) transferor
liability. An eligible section 965(i)
transferor remains jointly and severally
liable for any unpaid installment
payments of the eligible section 965(i)
transferor that were assumed by the
eligible section 965(i) transferee, as well
as any penalties, additions to tax, or
other additional amounts attributable to
such net tax liability.
(v) Coordination with section 965(h)
election—(A) In general. Subject to the
limitation described in paragraph
(c)(3)(v)(D) of this section, a shareholder
that has made a section 965(i) election
with respect to an S corporation, upon
the occurrence of a triggering event with
respect to such S corporation, may make
a section 965(h) election with respect to
the portion of the shareholder’s section
965(i) net tax liability with respect to
such S corporation that is assessed as an
addition to tax for the shareholder’s
taxable year that includes the triggering
event pursuant to paragraph (c)(3)(i) of
this section as if such portion were a
section 965(h) net tax liability.
(B) Timing for election. A section
965(h) election made pursuant to
section 965(i)(4) and paragraph
(c)(3)(v)(A) of this section must be made
no later than the due date (taking into
account extensions, if any) for the
shareholder’s return for the taxable year
in which the triggering event with
respect to the S corporation occurs.
Relief is not available under § 301.9100–
2 or 301.9100–3 to make a late election.
(C) Due date for installment. If a
shareholder has made a section 965(h)
election pursuant to section 965(i)(4)
and paragraph (c)(3)(v)(A) of this
section, the payment of the first
installment (as described in paragraph
(b)(1)(i) of this section) must be made no
later than the due date (without regard
to extensions) for the shareholder’s
return of tax for the taxable year in
which the triggering event with respect
to the S corporation occurs.
(D) Limitation—(1) In general.
Notwithstanding paragraph (c)(3)(v)(A)
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of this section, if the triggering event
with respect to an S corporation is a
triggering event described in paragraph
(c)(3)(ii)(B) of this section, then the
section 965(h) election may only be
made with the consent of the
Commissioner.
(2) Manner of obtaining consent—(i)
In general. In order to obtain the consent
of the Commissioner as required by
paragraph (c)(3)(v)(D)(1) of this section,
the shareholder intending to make the
section 965(h) election must file the
agreement described in paragraph
(c)(3)(v)(D)(4) of this section within 30
days of the occurrence of the triggering
event, except as described in paragraph
(c)(3)(v)(D)(2)(ii) of this section. The
agreement must be filed in accordance
with the rules provided in forms,
instructions, or other guidance. In
addition, a duplicate copy of the
agreement must be filed, with the
shareholder’s timely-filed return for the
taxable year during which the triggering
event occurs (taking into account
extensions, if any), along with the
election statement described in
paragraph (b)(2)(iii) of this section.
Relief is not available under § 301.9100–
2 or 301.9100–3 to file an agreement
late.
(ii) Transition rule. If a triggering
event occurs before September 10, 2018,
the agreement must be filed by October
9, 2018 in order to be considered timely
filed.
(3) Signature requirement. The
agreement that is filed within 30 days of
the triggering event must be signed
under penalties of perjury by the
shareholder.
(4) Terms of agreement. The
agreement under this paragraph
(c)(3)(v)(D) must be entitled ‘‘Consent
Agreement Under Section 965(i)(4)(D)’’
and must contain the following
information and representations—
(i) A statement that the shareholder
agrees to comply with all of the
conditions and requirements of section
965(h) and paragraph (b) of this section,
as well as any other applicable
requirements in the section 965
regulations;
(ii) The name, address, and taxpayer
identification number of the
shareholder;
(iii) The amount of the section 965(i)
net tax liability under section 965
remaining unpaid with respect to which
the section 965(h) election is made
pursuant to section 965(i)(4)(D) and
paragraph (c)(3)(v)(A) of this section, as
determined by the shareholder, which is
subject to adjustment by the
Commissioner; and
(iv) A representation that the
shareholder is able to make the
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payments required under section 965(h)
and paragraph (b) of this section with
respect to the portion of the total net tax
liability under section 965 remaining
unpaid described in paragraph
(c)(3)(v)(D)(iii) of this section.
(5) Consent of Commissioner—(i) In
general. If a shareholder files an
agreement in accordance with the
provisions of paragraph (c)(3)(v)(D) of
this section, the shareholder will be
considered to have obtained the consent
of the Commissioner for purposes of
section 965(i)(4)(D) and paragraph
(c)(3)(v)(D)(1) of this section. However,
if the Commissioner reviews the
agreement and determines that
additional information is necessary, the
shareholder must provide such
information upon request.
(ii) Material misrepresentations and
omissions. If the Commissioner
determines that an agreement filed by a
shareholder in accordance with the
provisions of this paragraph (c)(3)(v)(D)
contains a material misrepresentation or
material omission, then the
Commissioner may reject the agreement
(effective as of the date of the related
triggering event).
(4) Joint and several liability. If any
shareholder of an S corporation makes
a section 965(i) election, the S
corporation is jointly and severally
liability for the payment of the
shareholder’s section 965(i) net tax
liability with respect to the S
corporation, as well as any penalties,
additions to tax, or other additional
amounts attributable to such net tax
liability.
(5) Extension of limitation on
collection. If an S corporation
shareholder makes a section 965(i)
election with respect to its section 965(i)
net tax liability with respect to an S
corporation, any limitation on the time
period for the collection of the net tax
liability shall not begin before the date
of the triggering event with respect to
the S corporation.
(6) Annual reporting requirement—(i)
In general. A shareholder that makes a
section 965(i) election with respect to its
section 965(i) net tax liability with
respect to an S corporation is required
to report the amount of its deferred net
tax liability on its return of tax for the
taxable year in which the election is
made and on the return of tax for each
subsequent taxable year until such net
tax liability has been fully assessed.
(ii) Failure to report. If a shareholder
fails to report the amount of its deferred
net tax liability as required with respect
to any taxable year by the due date
(taking into account extensions, if any)
for the return of tax for that taxable year,
five percent of such deferred net tax
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liability will be assessed as an addition
to tax for such taxable year.
(d) Section 965(m) election and
special rule for real estate investment
trusts—(1) In general. A real estate
investment trust may elect under
section 965(m) and this paragraph (d) to
defer the inclusion in gross income (for
purposes of the computation of real
estate investment trust taxable income
under section 857(b)) of its REIT section
965 amounts and include them in
income according to the schedule
described in paragraph (d)(2) of this
section. This election is revocable only
by including in gross income (for
purposes of the computation of real
estate investment trust taxable income
under section 857(b)) the full amount of
the REIT section 965 amounts.
(2) Inclusion schedule for section
965(m) election. If a real estate
investment trust makes the section
965(m) election, the REIT section 965
amounts will be included in the real
estate investment trust’s gross income as
follows—
(i) Eight percent of the REIT section
965 amounts in each taxable year in the
five-taxable year period beginning with
the taxable year the amount would
otherwise be included;
(ii) Fifteen percent of the REIT section
965 amounts in the first year following
the five year period described in
paragraph (d)(2)(i) of this section;
(iii) Twenty percent of the REIT
section 965 amounts in the second year
following the five year period described
in paragraph (d)(2)(i) of this section; and
(iv) Twenty-five percent of the REIT
section 965 amounts in the third year
following the five year period described
in paragraph (d)(2)(i) of this section.
(3) Manner of making election—(i)
Eligibility. A real estate investment trust
with section 965(a) inclusions may
make the section 965(m) election.
(ii) Timing. A section 965(m) election
must be made no later than the due date
(taking into account extensions, if any)
for the return for the first year of the five
year period described in paragraph
(d)(2)(i) of this section. Relief is not
available under § 301.9100–2 or
301.9100–3 to make a late election.
(iii) Election statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance,
to make a section 965(m) election, a real
estate investment trust must attach a
statement, signed under penalties of
perjury, to its return for the taxable year
in which it would otherwise be required
to include the REIT section 965 amounts
in gross income. The statement must
include the real estate investment trust’s
name, taxpayer identification number,
REIT section 965 amounts, and the
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anticipated amounts of each portion of
the REIT section 965 amounts described
under paragraph (d)(2) of this section,
and the statement must be filed in the
manner prescribed in publications,
forms, instructions, or other guidance.
(4) Coordination with section 965(h).
A real estate investment trust that makes
the section 965(m) election may not also
make a section 965(h) election for any
year with respect to which a section
965(m) election is in effect.
(5) Acceleration of inclusion. If a real
estate investment trust makes a section
965(m) election and subsequently there
is a liquidation, sale, exchange, or other
disposition of substantially all of the
assets of the real estate investment trust
(including in a title 11 or similar case),
or a cessation of business by the real
estate investment trust, any amount not
yet included in gross income (for
purposes of the computation of real
estate investment trust taxable income
under section 857(b)) as a result of the
section 965(m) election will be so
included as of the day before the date
of the event. The unpaid portion of any
tax liability with respect to such
inclusion will be due on the date of the
event (or in the case of a title 11 or
similar case, the day before the petition
is filed).
(6) Treatment of section 965(a)
inclusions of a real estate investment
trust. Regardless of whether a real estate
investment trust has made a section
965(m) election, and regardless of
whether it is a United States
shareholder of a deferred foreign income
corporation, any section 965(a)
inclusions of the real estate investment
trust are not taken into account as gross
income of the real estate investment
trust for purposes of applying
paragraphs (2) and (3) of section 856(c)
for any taxable year for which the real
estate investment trust takes into
account a section 965(a) inclusion,
including pursuant to paragraph (d)(2)
of this section.
(e) Section 965(n) election—(1) In
general—(i) General rule. A person may
elect 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 or in determining the
amount of taxable income for such
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.
The election for each taxable year is
irrevocable.
(ii) Applicable amount for section
965(n) election. If a person makes a
section 965(n) election, the amount
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referred to in paragraph (e)(1)(i) of this
section is the sum of—
(A) The person’s section 965(a)
inclusions for the taxable year reduced
by the person’s section 965(c)
deductions for the taxable year, and
(B) In the case of a domestic
corporation, the taxes deemed paid
under section 960(a)(1) for the taxable
year with respect to the person’s section
965(a) inclusions that are treated as
dividends under section 78.
(iii) Scope of section 965(n) election.
If a person makes a section 965(n)
election, the election applies to both net
operating losses for the taxable year for
which the election is made and the net
operating loss carryovers or carrybacks
to such taxable year, each in their
entirety. Any section 965(n) election
made by the agent (within the meaning
of § 1.1502–77) of a consolidated group
applies to all net operating losses
available to the consolidated group,
including all components of the
consolidated net operating loss
deduction (as defined in § 1.1502–
21(a)).
(2) Manner of making election—(i)
Eligibility. A person with a section
965(a) inclusion may make the section
965(n) election.
(ii) Timing. 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 to make a late election.
(iii) Election statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance,
to make a section 965(n) election, a
person must attach a statement, signed
under penalties of perjury, to its return
for the taxable year to which the
election applies. The statement must
include the person’s name, taxpayer
identification number, the amounts
described in section 965(n)(2)(A) and
paragraph (e)(1)(ii)(A) of this section
and section 965(n)(2)(B) and paragraph
(e)(1)(ii)(B) of this section, and the sum
thereof, and the statement must be filed
in the manner prescribed in instructions
or other guidance.
(f) Election to use alternative method
for calculating post-1986 earnings and
profits—(1) Effect of election for
specified foreign corporations that do
not have a 52–53-week taxable year. If
an election is made under this
paragraph (f) with respect to a specified
foreign corporation that does not have a
52–53-week taxable year, the amount of
the post-1986 earnings and profits
(including a deficit) as of the E&P
measurement date on November 2,
2017, is determined under paragraph
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(f)(3) of this section. The election
described in this paragraph (f) is
irrevocable. A specified foreign
corporation that does not have a 52–53week taxable year may not use the
alternative method of determination in
paragraph (f)(3) of this section for
purposes of determining its post-1986
earnings and profits on the E&P
measurement date on December 31,
2017.
(2) Effect of election for specified
foreign corporations that have a 52–53week taxable year. If an election is made
under this paragraph (f) with respect to
a specified foreign corporation that has
a 52–53-week taxable year, the amount
of the post-1986 earnings and profits
(including a deficit) as of both E&P
measurement dates is determined under
paragraph (f)(3) of this section. The
election described in this paragraph (f)
is irrevocable.
(3) Computation of post-1986 earnings
and profits using alternative method.
With respect to an E&P measurement
date, the post-1986 earnings and profits
of a specified foreign corporation for
which an election is properly made
equals the sum of—
(i) The specified foreign corporation’s
post-1986 earnings and profits
(including a deficit) determined as of
the notional measurement date, as if it
were an E&P measurement date, plus
(ii) The specified foreign corporation’s
annualized earnings and profits amount
with respect to the notional
measurement date.
(4) Definitions—(i) 52–53-week
taxable year. The term 52–53-week
taxable year means a taxable year
described in § 1.441–2(a)(1).
(ii) Annualized earnings and profits
amount. The term annualized earnings
and profits amount means, with respect
to a specified foreign corporation, an
E&P measurement date, and a notional
measurement date, the amount equal to
the product of the number of days
between the notional measurement date
and the E&P measurement date (not
including the former, but including the
latter) multiplied by the daily earnings
amount of the specified foreign
corporation. The annualized earnings
and profits amount is expressed as a
negative number if the E&P
measurement date precedes the notional
measurement date.
(iii) Daily earnings amount. The term
daily earnings amount means, with
respect to a specified foreign
corporation and a notional measurement
date, the post-1986 earnings and profits
(including a deficit) of the specified
foreign corporation determined as of the
close of the notional measurement date
that were earned (or incurred) during
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the specified foreign corporation’s
taxable year that includes the notional
measurement date, divided by the
number of days that have elapsed in
such taxable year as of the close of the
notional measurement date.
(iv) Notional measurement date. The
term notional measurement date
means—
(A) With respect to an E&P
measurement date of a specified foreign
corporation with a 52–53-week taxable
year, the closest end of a fiscal month
to such E&P measurement date, and
(B) With respect to the E&P
measurement date on November 2,
2017, of all specified foreign
corporations not described in paragraph
(f)(4)(iv)(A) of this section, October 31,
2017.
(5) Manner of making election—(i)
Eligibility. An election with respect to a
specified foreign corporation to use the
alternative method of calculating post1986 earnings and profits as of an E&P
measurement date pursuant to this
paragraph (f) must be made on behalf of
the specified foreign corporation by a
controlling domestic shareholder (as
defined in § 1.964–1(c)(5)) pursuant to
the rules of § 1.964–1(c)(3).
(ii) Timing. An election under this
paragraph (f) must be made no later than
the due date (taking into account
extensions, if any) for the person’s
return for the first taxable year in which
the person has a section 965(a)
inclusion amount with respect to the
specified foreign corporation or in
which the person takes into account a
specified E&P deficit with respect to the
specified corporation for purposes of
computing a section 965(a) inclusion
amount with respect to another
specified foreign corporation. Relief is
not available under § 301.9100–2 or
301.9100–3 to make a late election.
(iii) Election statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance,
to make an election under this
paragraph (f), a person must attach a
statement, signed under penalties of
perjury, to the person’s return for the
taxable year described in paragraph
(f)(5)(ii) of this section. The statement
must include the person’s name,
taxpayer identification number, and the
name and taxpayer identification
number, if any, of the specified foreign
corporation with respect to which the
election is made, and the statement
must be filed in the manner prescribed
in instructions or other guidance.
(6) Examples. The following examples
illustrate the application of this
paragraph (f).
Example 1. (i) Facts. FS, a foreign
corporation, has a calendar year taxable year,
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and as of October 31, 2017, FS has post-1986
earnings and profits of 10,000u, 3,040u of
which were earned during the taxable year
that includes October 31, 2017. An election
is properly made under paragraph (f)(5) of
this section with respect to FS, allowing FS
to determine its post-1986 earnings and
profits under the alternative method with
respect to its E&P measurement date on
November 2, 2017.
(ii) Analysis. As of the close of October 31,
2017, the notional measurement date with
respect to the E&P measurement date on
November 2, 2017, 304 days have elapsed in
the taxable year of FS that includes October
31, 2017. Therefore, FS’s daily earnings
amount is 10u (3,040u divided by 304), and
FS’s annualized earnings and profits amount
is 20u (10u multiplied by 2 (the number of
days between the notional measurement date
on October 31, 2017, and the E&P
measurement date on November 2, 2017)).
Accordingly, FS’s post-1986 earnings and
profits as of November 2, 2017, are 10,020u
(its post-1986 earnings and profits as of
October 31, 2017 (10,000u), plus its
annualized earnings and profits amount
(20u)).
Example 2. (i) Facts. The facts are the
same as in paragraph (i) of Example 1 of this
paragraph (f)(6), except that a deficit of
3,040u was incurred during the taxable year
that includes October 31, 2017.
(ii) Analysis. The analysis is the same as
in paragraph (ii) of Example 1 of this
paragraph (f)(6), except that FS’s daily
earnings amount is (10u) ((3,040u) divided by
304), and FS’s annualized earnings and
profits amount is (20u) ((10u) multiplied by
2 (the number of days between the notional
measurement date on October 31, 2017, and
the E&P measurement date on November 2,
2017)). Accordingly, FS’s post-1986 earnings
and profits as of November 2, 2017, are
9,980u (its post-1986 earnings and profits as
of October 31, 2017 (10,000u), plus its
annualized earnings and profits amount
((20u))).
(g) Definitions. This paragraph (g)
provides definitions that apply for
purposes of this section.
(1) Deferred net tax liability. The term
deferred net tax liability means, with
respect to any taxable year of a person,
the amount of the section 965(i) net tax
liability the payment of which has been
deferred under section 965(i) and
paragraph (c) of this section.
(2) REIT section 965 amounts. The
term REIT section 965 amounts means,
with respect to a real estate investment
trust and a taxable year of the real estate
investment trust, the aggregate amount
of section 965(a) inclusions and section
965(c) deductions that would (but for
section 965(m)(1)(B) and paragraph (d)
of this section) be taken into account in
determining the real estate investment
trust’s income for the taxable year.
(3) Section 965(h) election. The term
section 965(h) election means the
election described in section 965(h)(1)
and paragraph (b)(1) of this section.
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39571
(4) Section 965(h) net tax liability.
The term section 965(h) net tax liability
means, with respect to a person that has
made a section 965(h) election, the total
net tax liability under section 965
reduced by the aggregate amount of the
person’s section 965(i) net tax liabilities,
if any, with respect to which section
965(i) elections are effective.
(5) Section 965(i) election. The term
section 965(i) election means the
election described in section 965(i)(1)
and paragraph (c)(1) of this section.
(6) Section 965(i) net tax liability. The
term section 965(i) net tax liability
means, with respect to an S corporation
and a shareholder of the S corporation,
in the case in which a section 965(i)
election is made, the amount
determined pursuant to paragraph
(g)(10)(i) of this section by adding before
the word ‘‘over’’ in (g)(10)(i)(A) of this
section ‘‘determined as if the only
section 965(a) inclusions included in
income by the person are domestic passthrough entity shares of section 965(a)
inclusions by the S corporation with
respect to deferred foreign income
corporations of which the S corporation
is a United States shareholder.’’
(7) Section 965(m) election. The term
section 965(m) election means the
election described in section
965(m)(1)(B) and paragraph (d)(1) of this
section.
(8) Section 965(n) election. The term
section 965(n) election means the
election described in section 965(n)(1)
and paragraph (e)(1)(i) of this section.
(9) Specified individual. The term
specified individual means, with respect
to a taxable year, a person described in
§ 1.6081–5(a)(5) or (6) who receives an
extension of time to file and pay under
§ 1.6081–5(a) for the taxable year.
(10) Total net tax liability under
section 965—(i) General rule. The term
total net tax liability under section 965
means, with respect to a person, the
excess (if any) of—
(A) The person’s net income tax for
the taxable year in which the person
includes a section 965(a) inclusion in
income, over—
(B) The person’s net income tax for
the taxable year determined—
(1) Without regard to section 965, and
(2) Without regard to any income,
deduction, or credit properly
attributable to a dividend received
(directly or through a chain of
ownership described in section 958(a))
by the person (or, in the case of a
domestic pass-through owner, by the
person’s domestic pass-through entity)
from a deferred foreign income
corporation.
(ii) Net income tax. For purposes of
this paragraph (g)(10), the term net
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income tax means the regular tax
liability (as defined in section 26(b))
reduced by the credits allowed under
subparts A, B, and D of part IV of
subchapter A of chapter 1 of subtitle A
of the Internal Revenue Code.
(iii) Foreign tax credits. The foreign
tax credit disregarded in determining
net income tax determined under
paragraph (g)(10)(i)(B) of this section
includes the credit for foreign income
taxes deemed paid with respect to
section 965(a) inclusions or foreign
income taxes deemed paid with respect
to a dividend, including a distribution
that would have been treated as a
dividend in the absence of section 965.
The foreign tax credit disregarded under
paragraph (g)(10)(i)(B) of this section
also includes the credit for foreign
income taxes imposed on distributions
of section 965(a) previously taxed
earnings and profits or 965(b)
previously taxed earnings and profits
made in the taxable year in which the
person includes a section 965(a)
inclusion in income.
■ Par. 12. Section 1.965–8 is added to
read as follows:
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§ 1.965–8 Affiliated groups (including
consolidated groups).
(a) Scope. This section provides rules
for applying section 965 and the section
965 regulations to members of an
affiliated group (as defined in section
1504(a)), including members of a
consolidated group (as defined in
§ 1.1502–1(h)). Paragraph (b) of this
section provides guidance regarding the
application of section 965(b)(5) to
determine the section 965(a) inclusion
amounts of a member of an affiliated
group. Paragraph (c) of this section
provides guidance for designating the
source of aggregate unused E&P deficits.
Paragraph (d) provides rules regarding
earning and profits and stock basis
adjustments. Paragraph (e) of this
section provides rules that treat
members of a consolidated group as a
single person for certain purposes.
Paragraph (f) of this section provides
definitions that apply for purposes of
this section. Paragraph (g) of this section
provides examples illustrating the
application of this section. For
additional definitions that apply for
purposes of the section 965 regulations,
see § 1.965–1(f).
(b) Reduction of E&P net surplus
shareholder’s pro rata share of the
section 965(a) earnings amount of a
deferred foreign income corporation by
the allocable share of the applicable
share of the aggregate unused E&P
deficit—(1) In general. This paragraph
(b) applies after the application of
§ 1.965–1(b)(2) for purposes of
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determining the section 965(a) inclusion
amount with respect to a deferred
foreign income corporation of a section
958(a) U.S. shareholder that is both an
E&P net surplus shareholder and a
member of an affiliated group in which
not all members are members of the
same consolidated group. If this
paragraph (b) applies, the U.S. dollar
amount of the section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount of the
deferred foreign income corporation is
further reduced (but not below zero) by
the deferred foreign income
corporation’s allocable share of the
section 958(a) U.S. shareholder’s
applicable share of the affiliated group’s
aggregate unused E&P deficit.
(2) Consolidated group as part of an
affiliated group. If some, but not all,
members of an affiliated group are
members of a consolidated group, then
the consolidated group is treated as a
single member of the affiliated group for
purposes of § 1.965–1(b)(2) and
paragraph (b)(1) of this section.
(c) Designation of portion of excess
aggregate foreign E&P deficit taken into
account—(1) In general. This paragraph
(c) provides rules for designating the
source of an aggregate unused E&P
deficit of an affiliated group that is not
also a consolidated group taken into
account under section 965(b)(5) and
paragraph (b) of this section if the
amount described in paragraph
(f)(1)(i)(A) of this section with respect to
the affiliated group exceeds the amount
described in paragraph (f)(1)(i)(B) of this
section with respect to the affiliated
group. If this paragraph (c)(1) applies,
each member of the affiliated group that
is an E&P net deficit shareholder must
designate by maintaining in its books
and records a statement (identical to the
statement maintained by all other such
members) setting forth the portion of the
excess aggregate foreign E&P deficit of
the E&P net deficit shareholder taken
into account under section 965(b)(5) and
paragraph (b) of this section. See
§ 1.965–2(d)(2)(ii)(B) for a rule for
designating the portion of a section
958(a) U.S. shareholder’s pro rata share
of a specified E&P deficit of an E&P
deficit foreign corporation taken into
account under section 965(b), § 1.965–
1(b)(2), and paragraph (b) of this section,
as applicable.
(2) Consolidated group as part of an
affiliated group. If some, but not all,
members of an affiliated group are
properly treated as members of a
consolidated group, then the
consolidated group is treated as a single
member of the affiliated group for
purposes of applying paragraph (c)(1) of
this section.
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(d) [Reserved]
(2) Consolidated groups. See
§ 1.1502–33(d)(1) for adjustments to
members’ earnings and profits and
§ 1.1502–32(b)(3) for adjustments to
members’ basis.
(e) Treatment of a consolidated group
as a single section 958(a) U.S.
shareholder or a single person—(1) In
general. All members of a consolidated
group that are section 958(a) U.S.
shareholders of a specified foreign
corporation are treated as a single
section 958(a) U.S. shareholder for
purposes of section 965(b) and § 1.965–
1(b)(2). Furthermore, all members of a
consolidated group are treated as a
single person for purposes of paragraphs
(h), (k), and (n) of section 965 and
§ 1.965–7. Thus, for example, any
election governed by section 965(h) and
§ 1.965–7(b) must be made by the agent
(within the meaning of § 1.1502–77) of
the group as a single election on behalf
of all members of the consolidated
group. Similarly, the determination of
whether the transfer of assets by one
member to a non-member of the
consolidated group would constitute an
acceleration event under section
§ 1.965–7(b)(3)(ii)(B) takes into account
all of the assets of the consolidated
group, which for purposes of this
determination, includes all of the assets
of each consolidated group member. In
analyzing issues relating to the transfer
of assets of a consolidated group,
appropriate adjustments are made to
prevent the duplication of assets or asset
value.
(2) Limitation. Paragraph (e)(1) of this
section does not apply to treat all
members of a consolidated group as a
single section 958(a) U.S. shareholder or
a single person, as applicable, for
purposes of determining the amount of
any member’s inclusion under section
951 (including a section 965(a)
inclusion), the foreign income taxes
deemed paid with respect to a section
965(a) inclusion (see sections 960 and
902), or any purpose other than those
specifically listed in paragraph (e)(1) of
this section or another provision of the
section 965 regulations.
(3) Determination of section 965(c)
deduction amount. Paragraph (e)(1) of
this section does not apply to treat all
members of a consolidated group as a
single section 958(a) U.S. shareholder
for purposes of determining the amount
of any member’s section 965(c)
deduction amount. However, for
purposes of determining the section
965(c) deduction amount of any section
958(a) U.S. shareholder that is a member
of a consolidated group, the aggregate
foreign cash position of the section
958(a) U.S. shareholder is equal to the
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aggregate section 965(a) inclusion
amount of the section 958(a) U.S.
shareholder multiplied by the group
cash ratio of the consolidated group.
(f) Definitions. This paragraph (f)
provides definitions that apply for
purposes of applying the section 965
regulations to members of an affiliated
group, including members of a
consolidated group.
(1) Aggregate unused E&P deficit—(i)
General rule. The term aggregate unused
E&P deficit means, with respect to an
affiliated group, the lesser of—
(A) The sum of the excess aggregate
foreign E&P deficit with respect to each
E&P net deficit shareholder that is a
member of the affiliated group, or
(B) The amount determined under
paragraph (f)(3)(ii) of this section.
(ii) Reduction with respect to E&P net
deficit shareholders that are not wholly
owned by the affiliated group. If the
group ownership percentage of an E&P
net deficit shareholder is less than 100
percent, the amount of the excess
aggregate foreign E&P deficit with
respect to the E&P net deficit
shareholder that is taken into account
under paragraph (f)(1)(i) of this section
is the product of the group ownership
percentage multiplied by the excess
aggregate foreign E&P deficit.
(2) Allocable share. The term
allocable share means, with respect to a
deferred foreign income corporation and
an E&P net surplus shareholder’s
applicable share of an aggregate unused
E&P deficit of an affiliated group, the
product of the E&P net surplus
shareholder’s applicable share of the
affiliated group’s aggregate unused E&P
deficit and the ratio described in
§ 1.965–1(f)(11) with respect to the
deferred foreign income corporation.
(3) Applicable share. The term
applicable share means, with respect to
an E&P net surplus shareholder and an
aggregate unused E&P deficit of an
affiliated group, the amount that bears
the same proportion to the affiliated
group’s aggregate unused E&P deficit
as—
(i) The product of—
(A) The E&P net surplus shareholder’s
group ownership percentage, multiplied
by
(B) The amount that would (but for
section 965(b)(5) and paragraph (b) of
this section) constitute the E&P net
surplus shareholder’s aggregate section
965(a) inclusion amount, bears to
(ii) The aggregate amount determined
under paragraph (f)(3)(i) of this section
with respect to all E&P net surplus
shareholders that are members of the
group.
(4) Consolidated group aggregate
foreign cash position. The term
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consolidated group aggregate foreign
cash position means, with respect to a
consolidated group, the sum of the
amount that would be the aggregate
foreign cash position (as defined in
§ 1.965–1(f)(8)(i)) of each member of the
consolidated group that is a section
958(a) U.S. shareholder determined as if
each such member were not a member
of a consolidated group.
(5) E&P net deficit shareholder. The
term E&P net deficit shareholder means
a section 958(a) U.S. shareholder that
has an excess aggregate foreign E&P
deficit.
(6) E&P net surplus shareholder. The
term E&P net surplus shareholder
means a section 958(a) U.S. shareholder
that would (but for section 965(b)(5) and
paragraph (b) of this section) have an
aggregate section 965(a) inclusion
amount greater than zero.
(7) Excess aggregate foreign E&P
deficit. The term excess aggregate
foreign E&P deficit means, with respect
to a section 958(a) U.S. shareholder, the
amount, if any, by which the amount
described in § 1.965–1(f)(9)(i) with
respect to the section 958(a) U.S.
shareholder exceeds the amount
described in § 1.965–1(f)(9)(ii) with
respect to the section 958(a) U.S.
shareholder.
(8) Group cash ratio. The term group
cash ratio means, with respect to a
consolidated group, the ratio of—
(i) The consolidated group aggregate
foreign cash position, to
(ii) The sum of the aggregate section
965(a) inclusion amounts of all
members of the consolidated group.
(9) Group ownership percentage. The
term group ownership percentage
means, with respect to a section 958(a)
U.S. shareholder that is a member of an
affiliated group, the percentage of the
value of the stock of the United States
shareholder which is held by other
includible corporations in the affiliated
group. Notwithstanding the preceding
sentence, the group ownership
percentage of the common parent of the
affiliated group is 100 percent. Any term
used in this paragraph (f)(9) that is also
used in section 1504 has the same
meaning as when used in such section.
Additionally, if the term is used in the
context of a rule for which all members
of a consolidated group are treated as a
single section 958(a) U.S. shareholder
under paragraph (e)(1) of this section,
then the group ownership percentage is
determined solely with respect to the
value of the stock of the common parent
of the consolidated group held by other
includible corporations that are not
members of the consolidated group.
(g) Examples. The following examples
illustrate the application of this section.
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Example 1. Application of affiliated group
rule. (i) Facts. (A) In general. USP owns all
of the stock of USS1, USS2, and USS3. Each
of USP, USS1, USS2 and USS3 is a domestic
corporation and is a member of an affiliated
group of which USP is the common parent
(the ‘‘USP Group’’). The USP Group has not
elected to file a consolidated federal income
tax return. USS1 owns all of the stock of
CFC1 and CFC2, USS2 owns all of the stock
of CFC3, and USS3 owns all of the stock of
CFC4. Each of CFC1, CFC2, CFC3, and CFC4
is a controlled foreign corporation within the
meaning of section 957(a) and, therefore,
each is a specified foreign corporation under
section 965(e) and § 1.965–1(f)(45). Each of
USP, USS1, USS2, USS3, CFC1, CFC2, CFC3,
and CFC4 has the calendar year as its taxable
year.
(B) Facts relating to section 965. CFC1 and
CFC3 are deferred foreign income
corporations with section 965(a) earnings
amounts of $600x and $300x, respectively.
CFC1 and CFC3 have cash positions of $0x
and $50x, respectively, on each of their cash
measurement dates. CFC2 and CFC4 are E&P
deficit foreign corporations with specified
E&P deficits of $400x and $100x,
respectively. CFC2 and CFC4 have cash
positions of $100x and $50x, respectively, on
each of their cash measurement dates. CFC1,
CFC2, CFC3, and CFC4 all use the U.S. dollar
as their functional currency.
(ii) Analysis. (A) Section 965(a) inclusion
amounts before application of section
965(b)(5). USS1 is a section 958(a) U.S.
shareholder with respect to CFC1 and CFC2;
USS2 is a section 958(a) U.S. shareholder
with respect to CFC3; and USS3 is a section
958(a) U.S. shareholder with respect to CFC4.
USS1’s pro rata share of CFC1’s section
965(a) earnings amount is $600x. Under
section 965(b)(3)(A) and § 1.965–1(f)(9),
USS1’s aggregate foreign E&P deficit is
$400x, the lesser of the aggregate of USS1’s
pro rata share of the specified E&P deficit of
each E&P deficit foreign corporation ($400x)
and the amount described in § 1.965–
1(f)(9)(ii) with respect to USS1 ($600x).
Under section 965(b) and § 1.965–1(b)(2), in
determining its section 965(a) inclusion
amount with respect to CFC1, USS1 reduces
its pro rata share of the U.S. dollar amount
of section 965(a) earnings amount of CFC1 by
CFC1’s allocable share of USS1’s aggregate
foreign E&P deficit. CFC1’s allocable share of
USS1’s aggregate foreign E&P deficit is
$400x, which is the product of USS1’s
aggregate foreign E&P deficit ($400x) and 1,
which is the ratio determined by dividing
USS1’s pro rata share of the section 965(a)
earnings amount of CFC1 ($600x), by the
amount described in § 1.965–1(f)(9)(ii) with
respect to USS1 ($600x). Accordingly, under
section 965(b) and § 1.965–1(b)(2) (before
applying section 965(b)(5) and paragraph (b)
of this section), USS1’s section 965(a)
inclusion amount with respect to CFC1
would be $200x (USS1’s pro rata share of the
section 965(a) earnings amount of CFC1 of
$600x reduced by CFC1’s allocable share of
USS1’s aggregate foreign E&P deficit of
$400x). Under section 965(b) and § 1.965–
1(b)(2) (before applying section 965(b)(5) and
paragraph (b) of this section), USS2’s section
965(a) inclusion amount with respect to
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CFC3 would be $300x (USS2’s pro rata share
of the section 965(a) earnings amount of
CFC3).
(B) Application of section 965(b)(5)—(1)
Determination of E&P net surplus
shareholders and E&P net deficit
shareholders. USS1 is an E&P net surplus
shareholder because it would have an
aggregate section 965(a) inclusion amount of
$200x but for the application of section
965(b)(5) and paragraph (b) of this section.
USS2 is also an E&P net surplus shareholder
because it would have an aggregate section
965(a) inclusion amount of $300x but for the
application of section 965(b)(5) and
paragraph (b) of this section. USS3 is an E&P
net deficit shareholder because it has an
excess aggregate foreign E&P deficit of $100x.
(2) Determining section 965(a) inclusion
amounts under section 965(b)(5). Under
section 965(b) and paragraph (b) of this
section, for purposes of determining the
section 965(a) inclusion amount of a section
958(a) U.S. shareholder with respect to a
deferred foreign income corporation, if, after
applying § 1.965–1(b)(2), the section 958(a)
U.S. shareholder is an E&P net surplus
shareholder, then the U.S. dollar amount of
the section 958(a) U.S. shareholder’s pro rata
share of the section 965(a) earnings amount
of the deferred foreign income corporation is
further reduced (but not below zero) by the
deferred foreign income corporation’s
allocable share of the section 958(a) U.S.
shareholder’s applicable share of the
affiliated group’s aggregate unused E&P
deficit. USS3 is the only E&P net deficit
shareholder in the USP Group, and therefore
the aggregate unused E&P deficit of the USP
Group is equal to USS3’s excess aggregate
foreign E&P deficit ($100x). The applicable
share of the USP Group’s aggregate unused
E&P deficit of each of USS1 and USS2,
respectively, is an amount that bears the
same proportion to the USP Group’s
aggregate unused E&P deficit as the product
of the group ownership percentage of USS1
and USS2, respectively, multiplied by the
amount that would (but for section 965(b)(5)
and paragraph (b) of this section) constitute
the aggregate section 965(a) inclusion amount
of USS1 and USS2, respectively, bears to the
aggregate of such amounts with respect to
both USS1 and USS2. Therefore, USS1’s
applicable share of the USP Group’s
aggregate unused E&P deficit is $40 ($100x ×
($200x/($200x + $300x))) and USS2’s
applicable share of the USP Group’s
aggregate unused E&P deficit is $60x ($100x
× ($300x/($200x + $300x))). Because USS1 is
a section 958(a) U.S. shareholder with
respect to only one deferred foreign income
corporation, the entire $60x of USS1’s
applicable share of the USP Group’s
aggregate unused E&P deficit is treated as
CFC1’s allocable share of USS1’s applicable
share of the USP Group’s aggregate unused
E&P deficit, and thus USS1’s section 965(a)
inclusion amount with respect to CFC1 is
reduced to $160x ($200x ¥ $40x). Because
USS2 is a section 958(a) U.S. shareholder
with respect to only one deferred foreign
income corporation, the entire $60x of
USS2’s applicable share of the USP Group’s
aggregate unused E&P deficit is treated as
CFC3’s allocable share of USS2’s applicable
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share of the USP Group’s aggregate unused
E&P deficit, and thus USS2’s section 965(a)
inclusion amount with respect to CFC3 is
reduced to $240x ($300x¥$60x).
(C) Aggregate foreign cash position. Under
section 965(c) and § 1.965–1(c), a section
958(a) U.S. shareholder that includes a
section 965(a) inclusion amount in income is
allowed a deduction equal to the section
965(c) deduction amount. The section 965(c)
deduction amount is computed by taking into
account the aggregate foreign cash position of
the section 958(a) U.S. shareholder. Under
§ 1.965–1(f)(8)(i), the aggregate foreign cash
position of USS1 is $100x, and the aggregate
foreign cash position of USS2 is $50x.
(D) Section 965(c) deduction amount. The
section 965(c) deduction amount of USS1 is
$102x, which is equal to (i) USS1’s 8 percent
rate equivalent percentage (77.1428571%) of
its 8 percent rate amount for USS1’s 2017
year ($60x ($160x¥$100x)), plus USS1’s 15.5
percent rate equivalent percentage
(55.7142857%) of its 15.5 percent rate
amount for USS1’s 2017 year ($100x). The
section 965(c) deduction amount of USS2 is
$174.43x, which is equal to (i) USS2’s 8
percent rate equivalent percentage
(77.1428571%) of its 8 percent rate amount
for USS2’s 2017 year ($190x ($240x ¥
$50x)), plus USS2’s 15.5 percent rate
equivalent percentage (55.7142857%) of its
15.5 percent rate amount for USS2’s 2017
year ($50x). Because USS3 has no section
965(a) inclusion amount, it has no section
965(c) deduction amount and therefore is not
allowed a section 965(c) deduction.
Example 2. Application to members of a
consolidated group. (i) Facts. The facts are
the same as in paragraph (i) of Example 1 of
this paragraph (g), except that the USP Group
has elected to file a consolidated return.
(ii) Analysis—(A) Section 965(a) inclusion
amount—(1) Single section 958(a) U.S.
shareholder treatment. Because each of
USS1, USS2, and USS3 is a section 958(a)
U.S. shareholder of a specified foreign
corporation and is a member of a
consolidated group, paragraph (e)(1) of this
section applies to treat USS1, USS2, and
USS3 as a single section 958(a) U.S.
shareholder for purposes of section 965(b)
and § 1.965–1(b)(2).
(2) Determination of inclusion amount. The
single section 958(a) U.S. shareholder
composed of USS1, USS2, and USS3 is a
section 958(a) U.S. shareholder with respect
to CFC1, CFC2, CFC3, and CFC4. Under
§ 1.965–1(b)(2), in determining USS1’s
section 965(a) inclusion amount, the single
section 958(a) U.S. shareholder decreases its
pro rata share of the U.S. dollar amount of
the section 965(a) earnings amount of CFC1
by CFC1’s allocable share of the aggregate
foreign E&P deficit of the single section
958(a) U.S. shareholder. CFC1’s allocable
share of the aggregate foreign E&P deficit is
$333.33x, which is the product of the
aggregate foreign E&P deficit of the single
section 958(a) U.S. shareholder ($500x
($400x + $100x)) and .67, which is the ratio
determined by dividing its pro rata share of
the section 965(a) earnings amount of CFC1
($600x) by the amount described in § 1.965–
1(f)(9)(ii) with respect to the single section
958(a) U.S. shareholder ($900x ($600x +
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$300x)). Therefore, USS1’s section 965(a)
inclusion amount with respect to CFC1 is
$266.67 (its pro rata share of the section
965(a) earnings amount of CFC1 ($600) less
CFC1’s allocable share of the aggregate
foreign E&P deficit of the single section
958(a) U.S. shareholder ($333.33x)).
Similarly, under § 1.965–1(b)(2), in
determining the section 965(a) inclusion
amount of USS2, the single section 958(a)
U.S. shareholder decreases its pro rata share
of the U.S. dollar amount of the section
965(a) earnings amount of CFC3 by CFC3’s
allocable share of the aggregate foreign E&P
deficit of the single section 958(a) U.S.
shareholder. CFC3’s allocable share of the
aggregate foreign E&P deficit is $166.67x,
which is the product of the aggregate foreign
E&P deficit of the single section 958(a) U.S.
shareholder ($500x) and .33, which is the
ratio determined by dividing its pro rata
share of the section 965(a) earnings amount
of CFC3 ($300x) by the amount described in
§ 1.965–1(f)(9)(ii) with respect to the single
section 958(a) U.S. shareholder ($900x
($600x + $300x)). Therefore, USS2’s section
965(a) inclusion amount with respect to
CFC3 is $133.33x (its pro rata share of the
section 965(a) earnings amount of CFC3
($300x) less CFC3’s allocable share of the
aggregate foreign E&P deficit of the single
section 958(a) U.S. shareholder ($166.67x)).
(B) Consolidated group aggregate foreign
cash position. Because USS1 and USS2 are
members of a consolidated group, the
aggregate foreign cash position of each of
USS1 and USS2 is determined under
paragraph (e)(3) of this section. Under
paragraph (e)(3) of this section, the aggregate
foreign cash position of each of USS1 and
USS2 is equal to the aggregate section 965(a)
inclusion amount of USS1 and USS2,
respectively, multiplied by the group cash
ratio of the USP Group, as determined
pursuant to paragraph (f)(8) of this section.
The group cash ratio of the USP Group is .50,
which is the ratio of the USP Group’s
consolidated group aggregate foreign cash
position ($200x ($50x + $100x + $50x)) and
the sum of the aggregate section 965(a)
inclusion amounts of all members of the USP
Group ($400x ($266.67x + $133.33x)).
Therefore, under paragraph (e)(3) of this
section, the aggregate foreign cash positions
of USS1 and USS2 are, respectively,
$133.34x ($266.67x × ($200x/$400x)) and
$66.67 ($133.33x × ($200x/400x)).
(C) Section 965(c) deduction amount. The
section 965(c) deduction amount of USS1 is
$177.14x, which is equal to (i) USS1’s 8
percent rate equivalent percentage
(77.1428571%) of its 8 percent rate amount
for USS1’s 2017 year ($133.33x ($266.67x ¥
$133.34x)), plus USS1’s 15.5 percent rate
equivalent percentage (55.7142857%) of its
15.5 percent rate amount for USS1’s 2017
year ($133.34x). The section 965(c) deduction
amount of USS2 is $88.56x, which is equal
to (i) USS2’s 8 percent rate equivalent
percentage (77.1428571%) of its 8 percent
rate amount for USS2’s 2017 year ($66.66x
($133.33x ¥ $66.67x)), plus USS2’s 15.5
percent rate equivalent percentage
(55.7142857%) of its 15.5 percent rate
amount for USS2’s 2017 year ($66.67x).
Because USS3 has no section 965(a)
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inclusion amount, it has no section 965(c)
deduction amount and therefore is not
allowed a section 965(c) deduction.
Par. 13. Section 1.965–9 is added to
read as follows:
■
§ 1.965–9
Applicability dates.
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(a) In general. Sections 1.965–1
through 1.965–8 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.
(b) Applicability dates for rules
disregarding certain transactions.
Section 1.965–4 applies regardless of
whether, with respect to a foreign
corporation, the transaction, effective
date of a change in method of
accounting, effective date of an entity
classification election, or specified
payment described in § 1.965–4
occurred before the first day of the
foreign corporation’s last taxable year
that begins before January 1, 2018, or,
with respect to a United States person,
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the transaction, effective date of a
change in method of accounting,
effective date of an entity classification
election, or specified payment described
in § 1.965–4 occurred before the first
day of the taxable year of the United
States person in which or with which
the taxable year of the foreign
corporation ends.
■ Par. 14. Section 1.986(c)–1 is added to
read as follows:
§ 1.986(c)–1
965.
Coordination with section
(a) Amount of foreign currency gain or
loss. Foreign currency gain or loss with
respect to distributions of section 965(a)
previously taxed earnings and profits (as
defined in § 1.965–1(f)(39)) is
determined based on movements in the
exchange rate between December 31,
2017, and the time such distributions
are made.
(b) Section 965(a) previously taxed
earnings and profits. Any gain or loss
recognized under section 986(c) with
respect to distributions of section 965(a)
previously taxed earnings and profits is
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reduced in the same proportion as the
reduction by a section 965(c) deduction
amount (as defined in § 1.965–1(f)(42))
of the section 965(a) inclusion amount
(as defined in § 1.965–1(f)(38)) that gave
rise to such section 965(a) previously
taxed earnings and profits.
(c) Section 965(b) previously taxed
earnings and profits. Section 986(c)
does not apply with respect to
distributions of section 965(b)
previously taxed earnings and profits (as
defined in § 1.965–1(f)(40)).
(d) Applicability dates. The section
applies beginning the last taxable year
of a foreign corporation that begins
before January 1, 2018, and with respect
to a United States person, for the taxable
year in which or with which such
taxable year of the foreign corporation
ends.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2018–16476 Filed 8–3–18; 4:15 pm]
BILLING CODE 4830–01–P
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| File Type | application/pdf |
| File Modified | 2018-08-09 |
| File Created | 2018-08-09 |