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Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9846]
RIN 1545–BO51
Regulations Regarding the Transition
Tax Under Section 965 and Related
Provisions
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
This document contains final
regulations implementing section 965 of
the Internal Revenue Code (the ‘‘Code’’).
Section 965 was amended by the Tax
Cuts and Jobs Act, which was enacted
on December 22, 2017. This document
finalizes the proposed regulations
published on August 9, 2018. The final
regulations affect United States persons
with direct or indirect ownership
interests in certain foreign corporations.
DATES: Effective date: These regulations
are effective on February 5, 2019.
Applicability dates: For dates of
applicability, see §§ 1.962–2(d), 1.965–
9(a), 1.965–9(b), and 1.986(c)–1(d).
FOR FURTHER INFORMATION CONTACT:
Concerning the regulations §§ 1.962–2,
1.965–1 through 1.965–4, 1.965–7
through 1.965–9, and 1.986(c)–1, Natalie
Punchak at (202) 317–6934; concerning
the regulations §§ 1.965–5 and 1.965–6,
Karen J. Cate at (202) 317–6926 (not tollfree numbers).
SUPPLEMENTARY INFORMATION:
SUMMARY:
Background
On August 9, 2018, the Department of
the Treasury (‘‘Treasury Department’’)
and the IRS published proposed
regulations (REG–104226–18) under
sections 962, 965, and 986 in the
Federal Register (83 FR 39514) (the
‘‘proposed regulations’’). The proposed
regulations were issued following
guidance announcing and describing
regulations intended to be issued under
section 965, which was amended by
section 14103 of the Tax Cuts and Jobs
Act, Public Law 115–97 (2017) (the
‘‘Act’’). 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. Additional guidance
describing certain provisions included
in these regulations (the ‘‘final
regulations’’) was published on October
15, 2018. See Notice 2018–78, 2018–42
I.R.B. 604. Terms used but not defined
in this preamble have the meaning
provided in the final regulations.
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A public hearing was held on October
22, 2018. The Treasury Department and
the IRS also received written comments
with respect to the proposed
regulations. Comments received before
the final regulations were substantially
developed, including all comments
received on or before the deadline for
comments on October 9, 2018, were
carefully considered in developing the
final regulations. Several comments
were received that do not pertain to the
rules in the proposed regulations or that
are otherwise outside the scope of this
rulemaking. For example, certain
comments regarding the payment and
reporting of net tax liability under
section 965 as addressed in the
document containing Questions and
Answers about Reporting Related to
Section 965 on 2017 Tax Returns
(available at https://www.irs.gov/
newsroom/questions-and-answersabout-reporting-related-to-section-965on-2017-tax-returns) are beyond the
scope of the final regulations.
Comments that are outside the scope of
this rulemaking are generally not
addressed in this preamble. The
Treasury Department and the IRS will
consider these comments in connection
with any future guidance projects
addressing the issues discussed in the
comments. All written comments
received in response to the proposed
regulations are available at
www.regulations.gov or upon request.
Summary of Comments and
Explanation of Revisions
I. Overview
The final regulations retain the basic
approach and structure of the proposed
regulations, with certain revisions. This
Summary of Comments and Explanation
of Revisions section discusses those
revisions as well as comments received
in response to the solicitation of
comments in the notice of proposed
rulemaking accompanying the proposed
regulations.
II. Comments and Changes to Proposed
§ 1.965–1—Overview, General Rules,
and Definitions
Proposed § 1.965–1 provides general
rules and definitions under section 965,
including general rules concerning
section 965(a) inclusion amounts,
general rules concerning section 965(c)
deduction amounts, and rules
concerning the treatment of certain
specified foreign corporations as
controlled foreign corporations (as
defined in section 957) (‘‘CFCs’’) and
certain controlled domestic partnerships
as foreign partnerships. The comments
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and modifications with respect to these
rules are discussed in this Part II.
A. Application of Exchange Rate for
Determining Section 965(a) Inclusion
Amount
The proposed regulations provide that
a section 965(a) inclusion amount is
determined by translating a section
958(a) U.S. shareholder’s pro rata share
of the section 965(a) earnings amount of
a deferred foreign income corporation
(‘‘DFIC’’) into U.S. dollars using the spot
rate on December 31, 2017. Proposed
§ 1.965–1(b)(1). A comment suggested
that the average exchange rate for the
section 958(a) U.S. shareholder’s 2017
fiscal year should be used under section
989(b)(3) and stated that the approach of
the proposed regulations created
unnecessary complexity but did not
elaborate on how complexity was
created. The Treasury Department and
the IRS have determined that while
section 989(b)(3) would generally apply
the average exchange rate for the
inclusion year of the DFIC (not the
section 958(a) U.S. shareholder, as the
comment suggested) for purposes of
translating an amount included in
income under section 951(a)(1)(A), like
a section 965(a) inclusion amount, it is
appropriate to use the grant of
regulatory authority in section 989 to
instead provide for translation at the
spot rate on December 31, 2017. As
explained in Notice 2018–13, a single
spot rate on December 31, 2017, is more
administrable for the IRS and less
burdensome for taxpayers than the
yearly average approach of section
989(b)(3) because under the yearly
average approach, certain amounts
required for the determination of the
section 965(a) inclusion amount (for
example, a DFIC’s allocable share of an
aggregate foreign E&P deficit) would not
be determinable until the closing of the
last year of a specified foreign
corporation beginning before January 1,
2018. Accordingly, the final regulations
do not adopt the comment.
B. Application of Controlled Domestic
Partnership Rule
Proposed § 1.965–1(e) contains a rule
treating certain controlled domestic
partnerships as foreign partnerships for
purposes of determining the section
958(a) U.S. shareholders of a specified
foreign corporation owned by the
controlled domestic partnership and the
section 958(a) stock owned by such
shareholders. A comment suggested that
because controlled domestic partnership
is defined by reference to a specific
United States shareholder, the rule
could be read to apply only with respect
to such shareholder but not with respect
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to other partners of the controlled
domestic partnership, for which it
would therefore still be treated as
domestic. The definition of controlled
domestic partnership is accordingly
revised to not be defined only with
respect to a United States shareholder,
so that a controlled domestic
partnership is clearly treated as a
foreign partnership for all partners if the
rule applies. See § 1.965–1(e)(2).
The comment also recommended that
a controlled domestic partnership
treated as a foreign partnership be
treated as such for purposes of the
specified basis adjustment rules
discussed in Part III.D of this Summary
of Comments and Explanation of
Revisions. The final regulations adopt
this recommendation and provide that a
controlled domestic partnership treated
as a foreign partnership is treated as a
foreign pass-through entity. Section
1.965–2(i)(2).
C. Determination of Accumulated Post1986 Deferred Foreign Income
1. Application of Previously Taxed E&P
Exception to Non-CFCs
Proposed § 1.965–1(f)(7)(i)(B) and (C)
exclude from accumulated post-1986
deferred foreign income certain earnings
and profits (‘‘E&P’’) described in section
959(c)(1) or 959(c)(2) (‘‘previously taxed
E&P’’) and amounts that would be
treated as previously taxed E&P in the
case of shareholders that are not United
States shareholders on an E&P
measurement date. These exclusions
(consistent with section 965(d)(2)(B))
apply only to E&P of a CFC. A comment
requested that the exclusion be
expanded to previously taxed E&P and
amounts that would be treated as
previously taxed E&P of specified
foreign corporations that are no longer
CFCs as of the relevant E&P
measurement date, given that section
959 can apply to distributions by foreign
corporations that are no longer CFCs.
The Treasury Department and the IRS
have determined that the
recommendation is inconsistent with
the clear statutory language of section
965(d)(2)(B), which applies solely to
CFCs. Accordingly, the final regulations
do not reflect this recommendation. See
Part II.J of this Summary of Comments
and Explanation of Revisions for a
discussion of the consequences of an
actual distribution of previously taxed
E&P for purposes of section 965.
2. Expansion of Previously Taxed E&P
Exception To Address Distributions
Another comment suggested that the
final regulations expand on the rationale
of section 965(d)(2)(B) and proposed
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§ 1.965–1(f)(7)(i)(B) and (C) to provide
that accumulated post-1986 deferred
foreign income is reduced by post-1986
earnings and profits described in section
959(c)(3) that have been distributed to
an unrelated foreign corporation
pursuant to a dividend pro rata to such
corporation and a specified foreign
corporation, given that the ‘‘no
diminution rule’’ discussed in Part
II.G.1 of this Summary of Comments
and Explanation of Revisions would
decrease the post-1986 earnings and
profits by the amount distributed to the
specified foreign corporation but not the
unrelated foreign corporation. As
discussed in more detail in Part II.G.1 of
this Summary of Comments and
Explanation of Revisions, the Treasury
Department and the IRS have
determined that the application of the
statutory ‘‘no diminution rule’’ is clear,
and the special rules in section
965(d)(2)(B) for previously taxed E&P
have no bearing on the fact pattern
highlighted by the comment.
Accordingly, the final regulations do not
adopt this comment, nor a similar
comment suggesting that step 2 of the
ordering rule in proposed § 1.965–2(b),
discussed in Part III.A of this Summary
of Comments and Explanation of
Revisions, permit such dividends to
persons other than specified foreign
corporations to be taken into account
before the application of section 965 is
determined.
3. Expansion of Previously Taxed E&P
Exception To Address Section
951(a)(1)(B) Inclusions
A comment suggested that a preinclusion year inclusion under sections
951(a)(1)(B) and 956 with respect to a
DFIC whose inclusion year ends
November 30, 2018, may not be
properly accounted for in determining
accumulated post-1986 deferred foreign
income as of the measurement date on
November 2, 2017. The comment notes
that a distribution of an amount of E&P
that would be described in section
959(c)(1) as a result of an inclusion
under sections 951(a)(1)(B) and 956
during a pre-inclusion year taxable year
would prevent sections 951(a)(1)(B) and
956 from applying. Accordingly, such
E&P would not qualify for the exception
from accumulated post-1986 deferred
foreign income for previously taxed E&P
in § 1.965–1(f)(7)(i)(B). The comment
suggested that the final regulations
provide an additional exception from
the definition of accumulated post-1986
deferred foreign income for E&P that
would be included in the income of a
United States shareholder under
sections 951(a)(1)(B) and 956.
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The Treasury Department and the IRS
have determined that the statutory
definition of accumulated post-1986
deferred foreign income is clear in not
excluding such E&P. Moreover,
modifications to reduce a section 965(a)
inclusion amount to the extent of an
inclusion under sections 951(a)(1)(B)
and 956 in such circumstances are not
warranted for the same reasons that
modifications to address dividends with
comparable results are not warranted, as
discussed in Part II.G.1 of this Summary
of Comments and Explanation of
Revisions. A new example illustrates
the treatment of E&P of a specified
foreign corporation as of the E&P
measurement date on November 2,
2017, which is described in section
959(c)(1) as a result of an inclusion
under section 951(a)(1)(B) with respect
to the specified foreign corporation’s
taxable year ending on November 30,
2017. See § 1.965–2(j)(5).
4. Application of Previously Taxed E&P
Exception in the Case of Section 962
Elections
Under section 962(d), E&P giving rise
to inclusions under section 951(a)(1)
with respect to which an election under
section 962 applies are, notwithstanding
section 959(a)(1), includible in the gross
income of a United States shareholder
when distributed except to the extent of
tax paid on the inclusions. Therefore,
those E&P (that is, the non-excludable
amount) are included in accumulated
post-1986 deferred foreign income in an
inclusion year. See section 965(d)(2)(B)
(excluding from accumulated post-1986
deferred foreign income earnings that, if
distributed, would be excluded from
gross income under section 959). A
comment suggested that accumulated
post-1986 deferred foreign income
should exclude all previously taxed E&P
attributable to a prior year inclusion
under section 951(a)(1) by a United
States shareholder when a section 962
election applied with respect to the
prior year inclusion. In the alternative,
the comment suggested that the final
regulations allow foreign income taxes
deemed paid with respect to the original
inclusion under section 951(a)(1) to be
treated as deemed paid again with
respect to a section 965(a) inclusion
with respect to such previously taxed
E&P. The Treasury Department and the
IRS have determined that the statute is
clear that a reduction to accumulated
post-1986 deferred income is allowed
only for E&P that would be excluded
from income under section 959 upon
distribution. In addition, there is no
authority under the Code to allow the
same foreign income taxes to be credited
twice. Therefore, because there is no
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statutory authority for such
modifications, the suggested
modifications to the statutory definition
of accumulated post-1986 deferred
foreign income and operation of the
foreign tax credit rules are not
warranted and are not adopted in the
final regulations.
D. Determination of Aggregate Foreign
Cash Position and Cash Position
The proposed regulations define
‘‘aggregate foreign cash position’’ to
mean the greater of the aggregate of a
section 958(a) U.S. shareholder’s pro
rata share of the cash position of each
specified foreign corporation
determined on the final cash
measurement date or the average of the
aggregate of a section 958(a) U.S.
shareholder’s pro rata share of the cash
position of each specified foreign
corporation determined as of each
specified foreign corporation’s first and
second cash measurement dates.
Proposed § 1.965–1(f)(8). For purposes
of this calculation, a specified foreign
corporation’s cash position consists of
cash held by the corporation, the net
accounts receivable of the corporation,
and the fair market value of the cashequivalent assets held by the
corporation. Proposed § 1.965–
1(f)(16)(i). Cash-equivalent assets
include (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) any obligation with a term
of less than one year (‘‘short-term
obligation’’); and (v) derivative financial
instruments, other than bona fide
hedging transactions. Proposed § 1.965–
1(f)(13).
1. Exclusions From Cash Position
Guidance was requested about the
exclusion of certain assets from the cash
position of a specified foreign
corporation. Specifically, comments
recommended that cash subject to local
regulatory restrictions, held in a
fiduciary or trust capacity, derived from
domestic E&P, earmarked to fund a
foreign acquisition pursuant to a legal
contract entered into before November
2, 2017, obligated to be paid to a third
party, or corresponding to previously
taxed E&P not be taken into account in
determining a specified foreign
corporation’s cash position. Comments
also requested that obligations with
respect to which there was an inclusion
under sections 951(a)(1)(B) and 956 be
excluded from a specified foreign
corporation’s cash position. In addition,
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comments requested guidance
exempting certain assets that would
otherwise be considered personal
property which is of a type that is
actively traded and for which there is an
established financial market. For
example, comments suggested that the
stock of a publicly traded company be
excluded from a specified foreign
corporation’s cash position if the stock
represents a controlling interest in a
corporation, meets an annual trading
volume threshold, is the stock of a
specified foreign corporation, is held in
the ordinary course of a section 958(a)
U.S. shareholder’s trade or business, or
was not reported as a current asset on
the audited financial statements of a
section 958(a) U.S. shareholder or its
specified foreign corporation. Similarly,
comments requested that certain
products or raw materials held as
inventory that are a type of property that
may be actively traded on, for example,
commodities markets, and forward
contracts with respect to those items be
excluded from a specified foreign
corporation’s cash position if the items
are part of the corporation’s ongoing
operations or are disposed of in the
normal course of business. One
comment requested guidance that
actively traded personal property be
presumptively treated as cash, subject to
the ability of the taxpayer to rebut the
presumption by submitting a statement
with its tax return that establishes,
based on all of the relevant facts and
circumstances, that the property is
illiquid. Another comment stated that
the proposed regulations struck an
appropriate balance and requested that
the exceptions from the definition of
cash position be limited to those in the
proposed regulations and that no
additional exceptions be given.
The Treasury Department and the IRS
have determined that a narrow
exemption from the definition of ‘‘cash
position’’ is appropriate for certain
assets held by a specified foreign
corporation in the ordinary course of its
trade or business as well as for certain
privately negotiated contracts to buy or
sell such assets. Therefore, in response
to comments, the final regulations
provide that a commodity that is
described in section 1221(a)(1) or
1221(a)(8) in the hands of the specified
foreign corporation is excluded from the
category of personal property which is
of a type that is actively traded and for
which there is an established market,
except with respect to dealers or traders
in commodities. Section 1.965–
1(f)(13)(i)(A) and (ii). Additionally, the
final regulations exclude forward
contracts and short positions with
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respect to such commodities from the
definition of derivative financial
instrument to the extent that they could
have been identified as a hedging
transaction with respect to such
commodities. See § 1.965–1(f)(18)(iii)
and (v). This exemption does not raise
the administrability concerns that are
inherent in a liquidity-based test of
widespread applicability.
However, the Treasury Department
and the IRS decline to adopt the
recommendations for additional cash
position exceptions. Congress
developed a statutory definition of
‘‘cash position’’ that includes all cash
and certain assets held by a specified
foreign corporation regardless of
whether the cash or assets are illiquid
or were transferred from the United
States. See section 965(c)(3)(B). The
legislative history is consistent with the
unambiguous language in the statute.
See, e.g., H.R. Rep. No. 115–446, at 609–
10 (2017) (‘‘The cash position of an
entity consists of all cash, net accounts
receivable, 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, foreign currency, and short-term
obligations.’’). Therefore, the final
regulations continue to provide that, for
example, the fair market value of
publicly traded stock held by a specified
foreign corporation is included in a
specified foreign corporation’s cash
position, regardless of the specified
foreign corporation’s ownership
percentage in the publicly traded
corporation, because such stock is ‘‘of a
type’’ that is actively traded on an
established securities market.
Additionally, creating broad
regulatory exceptions to the statutory
definition would require
administratively complex tracing and
facts-and-circumstances rules. For
example, an exclusion for cash that
originated in the United States and was
earmarked to fund a foreign acquisition
pursuant to a legal contract entered into
before November 2, 2017, would
necessarily require difficult-toadminister rules to identify such cash,
which may currently be or may have
previously been comingled with foreignderived cash in a single account.
Similarly, it would be challenging to
administer a presumption or a test that
assesses the liquidity of every asset
based on the facts and circumstances.
Accordingly, the final regulations
generally retain the definitions of
‘‘aggregate foreign cash position’’ and
‘‘cash position’’ set forth in the
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proposed regulations. See § 1.965–1(f)(8)
and (16).
2. Accounts Receivable and Accounts
Payable
The proposed regulations 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. Proposed § 1.965–1(f)(5) and
(6).
Comments requested that the
definition of accounts payable for
purposes of determining a specified
foreign corporation’s cash position be
expanded. Specifically, comments
recommended that accounts payable be
defined to include payables to
employees in the ordinary course of
business, payables arising from the
purchase of depreciable property,
payables related to the licensing of
intellectual property, payables for taxes
other than income taxes, payables for
debt with a term of less than one year,
and payables established under Revenue
Procedure 99–32, 1999–2 C.B. 296.
Although the statute does not define the
term ‘‘accounts payable,’’ generally
accepted accounting principles define
the term to mean amounts owed to
vendors and suppliers for the purchase
of goods and services on credit, to the
exclusion of obligations such as accrued
taxes, interest expense, commission or
royalty expense, and compensation
payable, which are treated as accrued
liabilities. The definition of accounts
payable set forth in the proposed
regulations therefore reflects the
ordinary meaning of the term, and the
final regulations do not adopt these
recommendations.
3. Short-Term Obligations
The proposed regulations provide that
for purposes of determining a specified
foreign corporation’s cash position, the
term ‘‘short-term obligation’’ means any
obligation with a term at 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.
Proposed § 1.965–1(f)(43). Comments
requested that the definition of shortterm obligation be modified to allow
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netting of short-term notes payable
against short-term notes receivable for
purposes of computing a specified
foreign corporation’s cash position.
The Treasury Department and the IRS
decline to adopt these comments. The
statute explicitly allows accounts
payable to be netted against accounts
receivable for purposes of determining
the cash position of a specified foreign
corporation but does not provide the
same treatment with respect to shortterm obligations. See section
965(c)(3)(B)(ii), (c)(3)(B)(iii)(IV), and
(c)(3)(C). The legislative history is
consistent with the statute’s plain
meaning. See H.R. Rep. No. 115–446, at
615 (2017). Accordingly, the final
regulations retain the definition of
‘‘short-term obligation’’ set forth in the
proposed regulations. See § 1.965–
1(f)(43).
4. Cash-Equivalent Asset Hedging
Transactions
For purposes of determining the cash
position of a specified foreign
corporation, the proposed regulations
include special rules regarding the
treatment of cash-equivalent asset
hedging transactions. The term ‘‘cashequivalent asset hedging transaction’’ is
defined as a bona fide hedging
transaction identified on a specified
foreign corporation’s books and records
as hedging a cash-equivalent asset.
Proposed § 1.965–1(f)(14). A bona fide
hedging transaction is defined to mean
a hedging transaction that meets (or that
would meet if the specified foreign
corporation were a CFC) the
requirements of a bona fide hedging
transaction described in § 1.954–
2(a)(4)(ii) (without regard to the
identification requirements, in the case
of a specified foreign corporation that is
not a CFC). Proposed § 1.965–1(f)(12).
The proposed regulations do not
address whether, and the extent to
which, a bona fide hedging transaction
that hedges an aggregate risk (an
‘‘aggregate hedging transaction’’),
including risks with respect to one or
more cash-equivalent assets, may be
treated as a cash-equivalent asset
hedging transaction. For example, a
bona fide hedging transaction may
hedge the risk with respect to multiple
assets, some of which are cashequivalent assets and some of which are
not cash-equivalent assets. See generally
§ 1.954–2(a)(4)(ii)(A) (defining a bona
fide hedging transaction, in part, by
reference to the requirements of
§ 1.1221–2(a) through (d)); § 1.1221–
2(c)(3) (providing that a hedging
transaction may manage aggregate risk).
The Treasury Department and the IRS
have determined that it is appropriate to
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permit bona fide hedging transactions
that are aggregate hedging transactions
to be treated as cash-equivalent asset
hedging transactions to the extent that
the risks managed by the aggregate
hedging transaction relate to cashequivalent hedging transactions.
Accordingly, the final regulations
provide that an aggregate hedging
transaction may be treated as a cashequivalent asset hedging transaction and
allocate the value of an aggregate
hedging transaction between cashequivalent hedging transactions and
other assets, if any, being hedged. See
§ 1.965–1(f)(14)(ii).
One comment requested guidance
clarifying that hedging transactions that
use cash-equivalent assets that are not
derivative financial instruments as
hedging instruments, in addition to
hedging transactions that use derivative
financial instruments as hedging
instruments, are eligible to be treated as
bona fide hedging transactions. The
Treasury Department and the IRS have
determined that it is clear that a hedging
transaction that uses a cash-equivalent
asset as a hedging instrument will
qualify as a bona fide hedging
transaction if the requirements in
proposed § 1.965–1(f)(12) are met, and
no clarification is necessary.
E. Cash Measurement Dates
The proposed regulations provide that
a specified foreign corporation’s final
cash measurement date 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. Proposed
§ 1.965–1(f)(24). 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. Proposed § 1.965–1(f)(31). The first
cash measurement date of a 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. Proposed § 1.965–1(f)(25). Under
the proposed regulations, a section
958(a) U.S. shareholder takes into
account its pro rata share of the cash
position of a specified foreign
corporation as of the close of any cash
measurement date of the specified
foreign corporation on which the
section 958(a) U.S. shareholder is a
section 958(a) U.S. shareholder of the
specified foreign corporation, without
regard to whether the section 958(a)
U.S. shareholder is a section 958(a) U.S.
shareholder as of any other cash
measurement date, including the final
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cash measurement date of the specified
foreign corporation. See proposed
§ 1.965–1(f)(30)(iii).
A comment recommended that the
proposed regulations be modified such
that a section 958(a) U.S. shareholder
would not take into account the pro rata
share of the cash position of any
specified foreign corporation liquidated
before November 2, 2017. The comment
is premised on the view that the
references to ‘‘each such specified
foreign corporation’’ in section
965(c)(3)(A)(ii) expressly link the
specified foreign corporations whose
cash positions are measured on the first
and second cash measurement dates to
those whose cash positions are
measured on the final cash
measurement date. Accordingly, the
comment reads the statute to provide
that if a specified foreign corporation
did not exist or was not held by a
section 958(a) U.S. shareholder on the
final cash measurement date, its cash
position may not be taken into account
under section 965(c)(3)(A)(ii).
The Treasury Department and the IRS
have determined that the comment’s
reading of section 965(c)(3)(A)(ii) is an
inferior reading and have determined
that the cash measurement date rules in
the proposed regulations are consistent
with the text and underlying purposes
of the relevant statutory provision and
that the legislative history supports this
conclusion. The phrase ‘‘each such
specified foreign corporation’’ in section
965(c)(3)(A)(ii)(I) and (II) refers only to
the phrase ‘‘each specified foreign
corporation of such United States
shareholder’’ in section 965(c)(3)(A)(i),
and not the additional language in
section 965(c)(3)(A)(i) referring to the
final cash measurement date.
Additionally, given that the purpose of
the multiple cash measurement dates
was to mitigate any incentive for
taxpayers to manipulate their cash
position as of the final cash
measurement date, it is appropriate to
ensure that the cash position of a
specified foreign corporation in
existence on a cash measurement date is
taken into account by a United States
shareholder on such date. For example,
a rule that ignored the cash position of
specified foreign corporations that did
not exist or were not held by a section
958(a) U.S. shareholder on the final cash
measurement date could allow a section
958(a) U.S. shareholder with an
aggregate foreign cash position that was
determined as of the earlier cash
measurement dates described in section
965(c)(3)(A) to retroactively reduce its
aggregate foreign cash position by
liquidating or otherwise disposing of
specified foreign corporations with
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significant cash positions, even when
cash and cash-equivalent assets of the
specified foreign corporation continued
to be held by one or more other
specified foreign corporations of the
section 958(a) U.S. shareholder.
Finally, the Joint Committee on
Taxation explanation of the Act also
indicates that, for purposes of section
965, the cash position of a specified
foreign corporation that no longer exists
must still be taken into account by a
section 958(a) U.S. shareholder in
determining its aggregate foreign cash
position. See Staff, Joint Committee on
Taxation, General Explanation of Public
Law 115–97, JCS–1–18, at 359–360
(2018) (‘‘If a specified foreign
corporation does not exist on any
particular cash measurement date, its
cash position would be zero with
respect to that date.’’). Accordingly, the
Treasury Department and the IRS do not
adopt this recommendation.
Another comment requested
confirmation that United States
shareholder status, the United States
shareholder’s pro rata share, and
specified foreign corporation status are
determined based on the facts and
applicable law at the time of each cash
measurement date. The Treasury
Department and the IRS have
determined that that is clear under
proposed § 1.965–1(f)(8) and (f)(30)(iii),
as illustrated by the example in § 1.965–
1(g)(7). Accordingly, no changes are
made in the final regulations in this
regard.
F. Domestic Pass-Through Entities
A comment made a number of
suggestions premised on the assumption
that aggregate foreign E&P deficits,
section 965(a) inclusion amounts, and
section 965(c) deductions are not
determined at the section 958(a) U.S.
shareholder level when the section
958(a) U.S. shareholder is a domestic
pass-through entity, and instead that
shares of the components of those
amounts (such as specified E&P deficits,
section 965(a) earnings amounts, and
aggregate foreign cash positions) are
taken into account separately by the
domestic pass-through owners. As
discussed in more detail in this Part II.F
with respect to the specific suggestions
made by the comment, the Treasury
Department and the IRS have
determined that the statute clearly
provides otherwise, and the proposed
regulations and final regulations are
consistent with the statute.
The comment requested that the final
regulations clarify that if a domestic
pass-through entity is a United States
shareholder of an E&P deficit foreign
corporation, a domestic pass-through
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owner of the domestic pass-through
entity can take into account its shares of
the domestic pass-through entity’s pro
rata share of the specified E&P deficit of
the E&P deficit foreign corporation to
reduce the domestic pass-through
owner’s pro rata share of a section
965(a) earnings amount of a DFIC. In
support of its recommendation, the
comment cited the rule provided in
proposed § 1.965–1(e) treating a
controlled domestic partnership as a
foreign partnership, such that its
partners could be treated as having a pro
rata share of specified E&P deficits of
E&P deficit foreign corporations owned
by the partnership. However, that rule is
intended to ensure that the accumulated
post-1986 deferred foreign income of
DFICs of such a partnership is subject to
U.S. tax. The Treasury Department and
the IRS have determined that it should
not be extended to structures that do not
present the same tax-avoidance
concerns, such as the one raised by the
comment involving a United States
person that is a partner in a domestic
partnership. The Treasury Department
and the IRS have determined that it is
clear under the statute that a domestic
pass-through entity’s pro rata share of a
specified E&P deficit can only be used
to reduce the domestic pass-through
entity’s pro rata share of section 965(a)
earnings amounts, and the proposed and
final regulations are consistent with the
statute.
Similarly, under the statute, a
domestic pass-through owner’s
distributive share of a domestic passthrough entity’s section 965(a) inclusion
amount cannot be reduced by the
domestic pass-through owner’s pro rata
share of a specified E&P deficit of an
E&P deficit foreign corporation of which
it is a section 958(a) U.S. shareholder.
The proposed and final regulations are
consistent with the statute. Accordingly,
the comment’s suggestion is not
adopted.
The comment also suggested
clarifying that if a domestic passthrough entity’s aggregate foreign cash
position exceeds its aggregate section
965(a) inclusion amounts, the domestic
pass-through owners of the domestic
pass-through entity need only take into
account their share of the excess
aggregate foreign cash position, and not
their share of the aggregate foreign cash
position taken into account in
determining the section 965(c)
deduction amount of the domestic passthrough entity. The Treasury
Department and the IRS have
determined that because only a section
958(a) U.S. shareholder can have an
aggregate foreign cash position, and
there is no mechanism for treating a
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domestic pass-through owner of a
domestic pass-through entity that is a
section 958(a) U.S. shareholder as
having a share of an aggregate foreign
cash position, it is clear under the
statute, the proposed regulations, and
the final regulations, that domestic passthrough owners do not take into account
any amount of a domestic pass-through
entity’s aggregate foreign cash position.
Accordingly, no clarification is needed,
and the comment is not adopted.
G. Post-1986 Earnings and Profits
1. Treatment of Distributions
Under the proposed regulations, a
specified foreign corporation’s post1986 earnings and profits are
determined 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 specified foreign corporation
(‘‘no diminution rule’’). Proposed
§ 1.965–1(f)(29)(i)(B). Comments noted
that the no diminution rule may result
in overinclusion of a specified foreign
corporation’s post-1986 earnings and
profits and suggested that the final
regulations limit the rule’s application
(that is, to allow diminution of a
specified foreign corporation’s post1986 earnings and profits) in the case of
dividends to a seller before a sale during
the inclusion year. The statute explicitly
provides that dividend distributions,
other than distributions to another
specified foreign corporation, must not
be taken into account for purposes of
computing a specified foreign
corporation’s post-1986 earnings and
profits. Section 965(d)(3)(B). The
legislative history supports the plain
language of the statute. See H.R. Rep.
No. 115–446, at 619 (2017). See Part II.H
of this Summary of Comments and
Explanation of Revisions for additional
discussion of rules affecting the
treatment of pre-sale distributions by a
DFIC. Therefore, the comments are not
adopted.
Similarly, comments have suggested
reducing post-1986 earnings and profits
by dividends to a United States
shareholder between November 2, 2017,
and December 1, 2017, by a DFIC with
an inclusion year ending November 30,
2018, in order to mitigate double
counting of E&P in connection with
such dividends. However, the legislative
history to section 965(o) makes clear
that the Treasury Department and the
IRS were expected to provide
regulations to address double counting
resulting from transactions between
specified foreign corporations but is
silent with respect to transactions
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between specified foreign corporations
and United States shareholders. Id.
Accordingly, the Treasury Department
and the IRS have determined that the
grant of regulatory authority in section
965 was not intended to address such
fact patterns. Further, and as the
preamble to the proposed regulations
notes, 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. For example, a
distribution to a United States
shareholder may permit that
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 shareholder’s section
965(a) inclusion amount. Accordingly,
the Treasury Department and the IRS
decline to adopt this recommendation.
The alternative recommendations in
some of the comments, to treat the
dividend as out of previously taxed E&P
arising in the subsequent taxable year or
to allow the same foreign income taxes
to be deemed paid with respect to both
the dividend and the section 965(a)
inclusion, are inconsistent with the
statute and the Code at large, and,
accordingly, these recommendations are
not adopted.
2. Foreign Income Tax Rule
The proposed regulations provide that
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. Proposed § 1.965–
1(f)(29)(ii). Comments requested that the
rule be expanded to permit reduction
for foreign income taxes accrued after
December 31, 2017, for purposes of
determining post-1986 earnings and
profits on the measurement dates on
both November 2, 2017, and December
31, 2017, and regardless of whether the
foreign corporation’s U.S. taxable year
includes November 2, 2017. The
Treasury Department and the IRS have
determined that it would be
inappropriate to allow taxes accrued in
a U.S. tax year after the one that
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1843
includes November 2, 2017, to be taken
into account in determining post-1986
earnings and profits on November 2,
2017, because such taxes could not have
accrued for the first year under the
general foreign tax credit rules.
Moreover, expanding the rule to take
into account taxes accrued after
December 31, 2017, would prevent
section 965-related amounts from being
determined with certainty as of
December 31, 2017. As discussed in Part
II.A of this Summary of Comments and
Explanation of Revisions, the Treasury
Department and the IRS have
determined that it continues to be
important to have certainty about
section 965-related amounts as of
December 31, 2017, and accordingly
decline to adopt the comments.
Another comment recommended
modifying how the applicable portion of
foreign income taxes taken into account
on November 2, 2017, is determined.
For ease of implementation, instead of
basing the determination on the portion
of the income for the foreign taxable
period that includes November 2, 2017,
as computed under foreign tax law, that
had accrued as of such date, this
comment recommended basing the
determination on the ratio of the E&P for
the U.S. taxable year, as computed
under U.S. tax principles, as of
November 2, 2017, to that as of
December 31, 2017. The Treasury
Department and the IRS have
determined that taxpayers are generally
required under § 1.904–6 to associate
foreign income taxes with taxable
income computed under foreign law,
such that the rule in § 1.965–1(f)(29)(ii)
does not create a significant additional
burden. Moreover, the suggested
approach could result in significant
distortions if the foreign corporation’s
U.S. and foreign taxable years differed.
Accordingly, the recommendation is not
adopted.
3. Other Exclusions From Post-1986
Earnings and Profits
A comment also requested that the
definition of post-1986 earnings and
profits exclude cashless earnings
generated by foreign corporations while
they were not controlled by United
States shareholders. In the same vein, it
requested that dividends paid out of
earnings earned before a foreign
corporation became a specified foreign
corporation be excluded from the post1986 earnings and profits of the
recipient specified foreign corporation.
Because the term ‘‘post-1986 earnings
and profits’’ clearly includes E&P
(which is not tied to cash and is often
attributable to cashless income) earned
while a corporation was a specified
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4. Alternative Measurement Methods
A comment requested guidance
permitting taxpayers to determine their
specified foreign corporations’ post1986 earnings and profits and cash
positions using an alternative
measurement method. The comment
noted that before the enactment of
section 965, foreign corporations other
than CFCs or section 902 corporations
(as defined under former section
909(d)(5)) had no reason to track E&P
under U.S. tax principles; therefore,
requiring a United States shareholder to
obtain information from a foreign
corporation that the corporation would
not have known to maintain is unduly
burdensome.
Section 965(d)(3) provides, without
exception, that for purposes of
determining post-1986 earnings and
profits, the E&P of a specified foreign
corporation must be ‘‘computed in
accordance with sections 964(a) and
986.’’ Likewise, section 965(c)(3)(B),
which contains rules for determining a
specified foreign corporation’s cash
position, applies to ‘‘any specified
foreign corporation.’’ Moreover, there is
no indication in the legislative history
that Congress intended to ease the
requirements for computing the post1986 earnings and profits and the cash
position for those specified foreign
corporations that may not have
previously calculated E&P under U.S.
tax principles. Accordingly, the
Treasury Department and the IRS do not
adopt this comment.
be a specified foreign corporation
during its inclusion year. Under section
951, a section 958(a) U.S. shareholder of
such a specified foreign corporation
would generally have an inclusion
under section 951 with respect to the
corporation if it were a DFIC because it
would own stock of the specified
foreign corporation on the last day of
the inclusion year on which the
corporation was a specified foreign
corporation.
Because a specified foreign
corporation is treated as a CFC for
purposes of section 951, the Treasury
Department and the IRS have
determined that the final regulations
should be consistent with section 951 in
requiring a section 965(a) inclusion by
such a section 958(a) U.S. shareholder.
Moreover, the Treasury Department and
the IRS have concluded that it would
not be appropriate to prorate a section
965(a) earnings amount based on the
portion of the inclusion year that the
DFIC is a specified foreign corporation,
as the reference in proposed § 1.965–
1(f)(30)(i) to section 965(a)(2)(A) might
suggest, given that the limitation of
post-1986 earnings and profits to E&P
accumulated in periods in which the
DFIC was a specified foreign
corporation would already prevent E&P
accrued after the DFIC ceased to be a
specified foreign corporation from being
taken into account. The definitions of
‘‘pro rata share’’ and ‘‘section 958(a)
U.S. shareholder inclusion year’’ are
revised accordingly in the final
regulations. See § 1.965–1(f)(30) and
(f)(34). The definition of pro rata share
continues to preclude reduction by
distributions to other owners under
section 951(a)(2)(B) in order to be
consistent with section 965(d)(3)(B) and
prevent double non-taxation in the case
of certain 2018 dispositions of specified
foreign corporations. Id.; see § 1.965–
2(j)(6).
H. Determination of Pro Rata Share of
Section 965(a) Earnings Amount
The proposed regulations provide that
a section 958(a) U.S. shareholder’s pro
rata share of the section 965(a) earnings
amount of a DFIC is 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 DFIC. Proposed
§ 1.965–1(f)(30)(i). The Treasury
Department and the IRS have
determined that this definition is
inconsistent with the statutory language
of sections 951 and 965 in the case in
which a specified foreign corporation,
whether it is or is not a CFC, ceases to
I. Determination of Pro Rata Share of
Specified E&P Deficit
The proposed regulations provide
that, for purposes of determining a
section 958(a) U.S. shareholder’s pro
rata share of a specified E&P deficit of
an E&P deficit foreign corporation, the
specified E&P deficit is allocated among
the shareholders of the corporation’s
common stock in proportion to the
value of the common stock held by such
shareholders. Proposed § 1.965–
1(f)(30)(ii). The Treasury Department
and the IRS have determined that a
specified E&P deficit should be
allocated to shareholders of an E&P
deficit corporation’s preferred stock in
cases involving common stock with no
liquidation value. The final regulations
foreign corporation, without regard to
whether it was controlled by United
States shareholders, and because section
965(d)(3)(B) clearly evidences
consideration for the impact of
dividends between foreign corporations
on post-1986 earnings and profits, the
Treasury Department and the IRS
decline to adopt this comment.
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therefore provide that any amount of a
specified E&P deficit that would
otherwise be allocated in a hypothetical
distribution to a class of common stock
that has no liquidation value is instead
allocated to the most junior class of
equity with a positive liquidation value
to the extent of the liquidation value.
Section 1.965–1(f)(30)(ii)(A). The final
regulations also provide that, in cases in
which a corporation’s common stock
has a liquidation value of zero and there
is no class of equity with a liquidation
preference relative to the common stock,
the specified E&P deficit is allocated
among the common stock using any
reasonable method consistently applied.
Section 1.965–1(f)(30)(ii)(B).
J. Determination of Specified E&P
Deficit
The proposed regulations provide that
previously taxed E&P are not excluded
in determining the existence and
amount of an E&P deficit foreign
corporation’s specified E&P deficit. See
proposed § 1.965–1(f)(22)(ii). Comments
requested that the final regulations
provide to the contrary. The Treasury
Department and the IRS have
determined that it is clear that
previously taxed E&P are not excluded
in determining a specified E&P deficit.
Section 965(b)(3)(B) and (C) provide that
a specified E&P deficit is, with respect
to an E&P deficit foreign corporation, 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), E&P 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),
starts with post-1986 earnings and
profits and then explicitly excludes
previously taxed E&P. See section
965(d)(2)(B). Accordingly, the
comments are not adopted. While
previously taxed E&P is not excluded in
the statutory definition of post-1986
earnings and profits, there is no double
taxation of previously taxed E&P related
to the E&P deficit foreign corporations
because section 959 continues to apply
when the previously taxed E&P are
distributed.
A comment also requested that the
final regulations confirm that E&P or
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deficits in E&P attributable to income
that is effectively connected with the
conduct of a trade or business within
the United States and subject to tax
under chapter 1 (‘‘effectively connected
E&P’’) are taken into account in
determining the specified E&P deficit of
an E&P deficit foreign corporation. The
Treasury Department and the IRS have
determined that section 965 clearly
allows deficits in effectively connected
E&P to be included in an E&P deficit
foreign corporation’s specified E&P
deficit. No express exclusion for
effectively connected E&P is provided in
section 965(d)(3) for purposes of
determining post-1986 earnings and
profits. Moreover, the term accumulated
post-1986 deferred foreign income, as
defined in section 965(d)(2), expressly
excludes effectively connected E&P.
Accordingly, no clarification is made to
the proposed regulations with respect to
effectively connected E&P.
A comment also requested
confirmation that a distribution of
previously taxed E&P in the last taxable
year of a CFC beginning before January
1, 2018, can affect an E&P deficit foreign
corporation’s specified E&P deficit.
Because previously taxed E&P can only
be distributed pursuant to a dividend,
which, pursuant to section 316, requires
positive E&P, the Treasury Department
and IRS have determined that a
distribution of previously taxed E&P
could not affect a specified E&P deficit.
Accordingly, the comment is not
adopted.
K. Application of Attribution Rules for
Purposes of Determining Status of
Foreign Corporation as a Specified
Foreign Corporation
To limit the administrative and
compliance difficulties associated with
determining whether a foreign
corporation is a specified foreign
corporation solely by reason of
downward attribution of its stock under
section 318(a)(3)(A) from a partner to a
partnership when the partner has only
a de minimis interest in the partnership,
proposed § 1.965–1(f)(45)(ii) provides a
special attribution rule for purposes of
determining whether a foreign
corporation is a specified foreign
corporation within the meaning of
section 965(e)(1)(B) and proposed
§ 1.965–1(f)(45)(i)(B). Specifically, 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
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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.
Proposed § 1.965–1(f)(45)(ii). Similar
rules apply with respect to S
corporations. See sections 318(a)(5)(E)
and 1373(a).
1. Downward Attribution to Trusts
A comment requested that the final
regulations adopt a similar rule for
trusts, noting that downward attribution
of stock to trusts is also possible when
a beneficiary has a de minimis interest
in the trust, unless that interest is a
remote contingent interest. See section
318(a)(3)(B). The Treasury Department
and the IRS agree that downward
attribution of stock to a trust from de
minimis beneficiaries of the trust
presents similar administrative and
compliance difficulties to those
addressed in the proposed regulations.
Accordingly, the final regulations
extend the special rules concerning
downward attribution (as modified per
the discussion in Part II.K.2 of this
Summary of Comments and Explanation
of Revisions) to trusts. See § 1.965–
1(f)(45)(ii)(A)(2).
2. Other Relief From Attribution
A comment indicated that, in
determining specified foreign
corporation status under section
965(e)(1)(B), the final regulations should
take into account domestic corporations
that are United States shareholders only
if they own (within the meaning of
section 958(a)) stock of the specified
foreign corporation. Another comment
indicated that the Treasury Department
and the IRS should generally consider
additional de minimis constructive
ownership exceptions in determining
specified foreign corporation status
without specifically identifying the
nature of such relief. A comment also
recommended that the five percent
threshold in proposed § 1.965–
1(f)(45)(ii) be increased to a more
significant percentage, such as ten
percent. A similar comment suggested
that the five percent threshold apply
only to managing and controlling
partners, and that a threshold of fifteen
percent apply to partners who have no
ability to manage or control the
partnership. In response to these
comments, the Treasury Department
and the IRS have determined that a tenpercent threshold for application of the
special attribution rules relating to
partnerships and trusts would strike the
appropriate balance between mitigating
administrative and compliance burdens
and accurately identifying which
foreign corporations are, in fact,
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1845
specified foreign corporations.
Accordingly, the final regulations
increase the threshold for application of
this special attribution rule for
partnerships from five percent to ten
percent, and similarly use a ten-percent
threshold for the newly-added special
attribution rule for trusts.
Another comment suggested that a
foreign corporation that is a CFC solely
by reason of downward attribution not
be treated as a CFC for purposes of
determining whether it is a specified
foreign corporation with respect to a
United States shareholder that is not a
related person (within the meaning of
section 954(d)(3)) with respect to the
domestic corporation to which
ownership was attributed. Nothing in
the plain statutory language of section
965 or 958(b), as amended by the Act,
prevents the application of section
318(a)(3) so as to treat a foreign
corporation as a CFC with respect to a
United States shareholder as a result of
downward attribution of stock from a
foreign person to a United States person
if the United States person and the
United States shareholder are not
related persons as defined by section
954(d)(3). Furthermore, it may benefit
taxpayers for a specified foreign
corporation with respect to which
section 965 would otherwise apply to be
respected as a CFC for purposes of
section 965, as that could permit
deemed paid credits to be claimed with
respect to a section 965(a) inclusion
with respect to the specified foreign
corporation that would not otherwise be
permitted. Consistent with the statutory
text, the final regulations therefore do
not adopt the exclusion from the
definition of specified foreign
corporation recommended by the
comment.
3. Application of Section 318(a)(5)(A)
and (C)
A comment stated that Example 1 and
Example 2 in proposed § 1.965–1(g),
which illustrate the special attribution
rule, apply section 318(a)(5)(A) and
(a)(5)(C) inconsistently with informal
advice issued by the IRS. Because the
interpretation of those provisions
reflected in the examples is irrelevant to
the application of the special attribution
rule, the final regulations modify the
examples to avoid the issue raised by
the comment. See § 1.965–1(g)(1) and
(2). No inference, however, is intended
regarding the proper interpretation of
section 318(a)(5)(A) and (a)(5)(C).
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III. Comments and Changes to Proposed
§ 1.965–2—Adjustments to E&P and
Basis
Proposed § 1.965–2 contains rules
relating 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). The comments and
modifications with respect to these rules
are discussed in this Part III.
A. Ordering Rule
The proposed regulations set forth an
ordering rule relating to adjustments to
E&P for purposes of determining a
section 958(a) U.S. shareholder’s
inclusions under section 951(a)(1) and
the treatment of distributions under
section 959. See proposed § 1.965–2(b).
1. Application in the Case of E&P
Measurement Dates in Two Taxable
Years
The Treasury Department and the IRS
have determined that the ordering rule’s
limited application to E&P for a
specified foreign corporation’s last
taxable year beginning before January 1,
2018, is too narrow, given that it is
intended to apply for purposes of
determining post-1986 earnings and
profits and accumulated post-1986
deferred foreign income on the E&P
measurement date on November 2,
2017; that measurement date may not
fall within a specified foreign
corporation’s last taxable year beginning
before January 1, 2018. The final
regulations address this issue by
providing that the ordering rule applies
for the taxable year of a specified foreign
corporation in which an E&P
measurement date occurs, as well as for
the last taxable year of a specified
foreign corporation that begins before
January 1, 2018.
2. Section 1248
Comments have also raised questions
about the proper point in the sequence
at which to determine and take into
account inclusions under section 1248.
Although one comment suggested that
section 965 should be taken into
account before section 1248 amounts are
determined, the Treasury Department
and the IRS have determined that such
an approach would not mitigate double
taxation in the case of a sale in which
the buyer (as opposed to the seller, as
in the example provided by the
comment) was subject to tax under
section 965. However, such double
taxation is mitigated by the approach
suggested by another comment and
taken by the final regulations, which
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provide that, for purposes of the
ordering rules, section 1248 amounts are
determined at the same time as the
determination of amounts included
under section 951(a)(1)(A) other than
amounts included by reason of section
965. As a result, section 1248 amounts
are determined before, and may reduce,
a buyer’s section 965(a) inclusion
amount with respect to a DFIC. The
application of the ordering rule in
connection with a sale to which section
1248 applies is illustrated in a new
example in § 1.965–2(j)(6).
The comment also suggested that the
final regulations include an example
addressing the interaction of the section
367 gain recognition agreement rules
and the determination of section 965(a)
inclusions. The Treasury Department
and the IRS have determined that those
rules are outside of the scope of these
regulations and do not adopt the
comment.
3. Interaction of Ordering Rule, Foreign
Tax Credit Rules, and Disregard Rules
Comments have raised questions
concerning the interaction of the
ordering rule with the rule disregarding
payments in proposed § 1.965–4(f) and
the determination of the foreign tax
credit consequences of inclusions with
respect to, and distributions by, a
specified foreign corporation.
The final regulations address these
issues by providing rules concerning the
ordering of the determination of foreign
income taxes deemed paid with respect
to an inclusion or distribution, after the
E&P adjustments are determined in
accordance with § 1.965–2(b). The final
regulations provide that for purposes of
determining the consequences under
sections 902 and 960 of a dividend or
an inclusion under section 951(a)(1),
respectively, the ordering rule in
§ 1.960–1(i)(2) applies except that
section 902 is applied with respect to
any distributions from the specified
foreign corporation described in
§ 1.965–2(b)(2) that are not disregarded
under § 1.965–4 before section 960 is
applied with respect to an inclusion or
a distribution described in § 1.965–
2(b)(3), (b)(4), or (b)(5). Section 1.965–
2(b). As discussed in more detail in
Parts VI.C.3 and 4 of this Summary of
Comments and Explanation of
Revisions, the final regulations confirm
that the other rules of sections 902 and
960 apply. See § 1.965–6(b). The final
regulations also provide that the E&P
consequences of a distribution between
specified foreign corporations that is
disregarded for purposes of section 965
pursuant to § 1.965–4 are redetermined
after adjustments for section 965(a)
inclusions, at the same time that the
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consequences of other distributions are
determined. See § 1.965–2(b)(1) and (4).
Modified and new examples illustrate
the determination of the section 902
consequences of a distribution between
specified foreign corporations before
November 2, 2017, before the
determination of the section 960
consequences of a section 965(a)
inclusion and the foreign tax credit
consequences of a distribution
disregarded pursuant to § 1.965–4. See
§ 1.965–2(j)(1) and (4).
A comment recommended that the
ordering rule be further modified to
allow the foreign tax credit
consequences of a distribution to a
United States shareholder to be
determined before applying section 965.
The Treasury Department and the IRS
decline to adopt the recommendation
because ordering section 965(a)
inclusions before distributions to United
States shareholders is required to be
consistent with section 965(d)(3)(B),
which precludes diminution of post1986 earnings and profits by
distributions during the relevant year
other than by dividends distributed to
another specified foreign corporation, as
well as to be consistent with the general
treatment of inclusions under section
951 as being taken into account before
distributions, as discussed in this Part
III.A.3.
B. Adjustments to the E&P of DFICs
Under proposed § 1.965–2(c), the E&P
of a DFIC 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 DFIC’s section 965(a)
previously taxed earnings and profits. A
comment requested that the final
regulations clarify that earnings
described in section 959(c)(3) cannot be
reduced below zero by reason of the rule
in proposed § 1.965–2(c), in order to
ensure that the DFIC would be able to
make a distribution of the section 965(a)
previously taxed earnings and profits.
The comment was also concerned that
a deficit in E&P described in section
959(c)(3) could prevent foreign income
taxes accrued on future subpart F
income from being deemed paid with
respect to inclusions under section
951(a)(1)(A) with respect to such
income and requested that, in the
alternative, guidance be provided
allowing foreign income taxes to be
deemed paid under those
circumstances. The sum of a foreign
corporation’s E&P described in each of
the categories in section 959(c) must
equal the foreign corporation’s total
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E&P. See Rev. Rul. 86–131, 1986–2 C.B.
135 (‘‘[T]he section 959(c) components
are intended to reflect the composition
of the CFC’s total earnings and
profits. . . .’’). In order to ensure that a
specified foreign corporation’s E&P are
not distorted by the adjustment to
section 959(c)(2) E&P required by the
proposed regulations, the Treasury
Department and the IRS have
determined that it is appropriate for the
reduction provided for in proposed
§ 1.965–2(c) to create a deficit in E&P
described in section 959(c)(3) if there
are insufficient E&P to be reclassified
and accordingly do not adopt the
comment. The suggestion concerning
deemed paid taxes is outside of the
scope of this rulemaking.
Under proposed § 1.965–2(d)(1), the
E&P described in section 959(c)(2) of a
DFIC are increased by an amount equal
to the reduction to a section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount of the
DFIC under section 959(b), ‘‘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.’’
A comment noted that the rule would
seem to preclude the creation of section
965(b) previously taxed earnings and
profits in a DFIC if its section 965(a)
earnings amount was completely offset
by section 958(a) U.S. shareholders’
aggregate foreign E&P deficits. Because
the rule was intended to limit the
availability of section 965(b) previously
taxed earnings and profits to situations
in which a section 965(a) inclusion
amount was included only if there was
a section 965(a) inclusion amount, the
rule is revised to so clarify. See § 1.965–
2(d)(1).
Comments also requested that the
final regulations clarify that section
965(b) previously taxed earnings and
profits are treated as E&P attributable to
an amount previously included in the
income of a person under section 951
for purposes of section 1248(d)(1). The
Treasury Department and the IRS have
determined that this treatment is
appropriate, notwithstanding the fact
that, as discussed in Part III.D.2 of this
Summary of Comments and Explanation
of Revisions, these amounts have not
been included in income under section
951, because it is necessary to ensure
the ability to take into account section
965(b) previously taxed earnings and
profits upon a disposition of specified
foreign corporation stock. Accordingly,
the final regulations reflect this
clarification. See § 1.965–2(d)(1).
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C. Adjustments to the E&P Described in
Section 959(c)(3) of E&P Deficit Foreign
Corporations
Under the proposed regulations, 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 section 965(b), translated (if
necessary) into the functional currency
of the E&P deficit foreign corporation
using the spot rate on December 31,
2017. Proposed § 1.965–2(d)(2)(i)(A). A
comment recommended that the
proposed regulations be modified such
that any increase to the earnings and
profits described in section 959(c)(3) of
an E&P deficit foreign corporation is
allocated only to a section 958(a) U.S.
shareholder that takes into account its
E&P deficit foreign corporation’s
specified E&P deficit under section
965(b) and not to any other shareholders
of the E&P deficit foreign corporation.
E&P described in section 959(c)(3) are
not generally allocated to specific
shareholders, and creating a rule that
tracks section 959(c)(3) E&P resulting
from a section 958(a) U.S. shareholder’s
use of each E&P deficit foreign
corporation’s specified E&P deficit in a
shareholder-level account would entail
considerable complexity. Accordingly,
the final regulations do not adopt the
recommended change. See § 1.965–
2(d)(2)(i)(A).
D. Basis Election
1. Requirements for Making and
Revoking Basis Election
The proposed regulations clarify that,
in general, no adjustments to basis of
stock or property are made under
section 961 (or any other provision of
the Code) to account for the reduction
to a section 958(a) U.S. shareholder’s
pro rata share of the section 965(a)
earnings amount of a DFIC by a portion
of its aggregate foreign E&P deficit. See
proposed § 1.965–2(f)(1). However,
consistent with the legislative history,
the proposed regulations allow a section
958(a) U.S. shareholder to elect to make
certain basis adjustments (‘‘specified
basis adjustments’’) with respect to each
DFIC and each E&P deficit foreign
corporation. Proposed § 1.965–2(f)(2).
Specifically, an election under the
proposed regulations allows a section
958(a) U.S. shareholder’s basis in the
section 958(a) stock of a DFIC or
applicable property with respect to the
DFIC to be increased by an amount
equal to the section 965(b) previously
taxed earnings and profits of the DFIC
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1847
with respect to the section 958(a) U.S.
shareholder. See proposed § 1.965–
2(f)(2)(ii)(A). The basis election also
requires that the section 958(a) U.S.
shareholder’s basis in the section 958(a)
stock of an E&P deficit foreign
corporation or applicable property with
respect to an E&P deficit foreign
corporation be 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 the reduction rules. See proposed
§ 1.965–2(f)(2)(ii)(B).
The proposed regulations provide the
general rule that the basis election 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 DFIC or E&P deficit foreign
corporation of the section 958(a) U.S.
shareholder that begins before January
1, 2018. Proposed § 1.965–
2(f)(2)(iii)(B)(1)(i). If the relevant return
was due before September 10, 2018, the
proposed regulations provide that the
basis election must be made by October
9, 2018 (the ‘‘transition rule’’). Proposed
§ 1.965–2(f)(2)(iii)(B)(1)(ii). The
proposed regulations further require
that, in order for the basis election to be
effective, a section 958(a) U.S.
shareholder and each section 958(a)
U.S. shareholder that is related to the
section 958(a) U.S. shareholder under
section 267(b) or 707(b) (‘‘related
section 958(a) U.S. shareholder’’) must
make the election. Proposed § 1.965–
2(f)(2)(iii)(A).
Section 2 of Notice 2018–78
announced that the Treasury
Department and the IRS had determined
that requiring taxpayers to make a
binding basis election before the
finalization of the proposed regulations
would be too onerous for taxpayers.
Consistent with that announcement, the
final regulations provide that the
transition rule will apply with respect to
returns due (determined with regard to
any extension) before May 6, 2019, and
that in such cases the basis election
must be made no later than May 6, 2019.
Section 1.965–2(f)(2)(iii)(B)(1)(ii).
Additionally, as explained in section 2
of Notice 2018–78, the final regulations
provide that if a basis election was made
on or before February 5, 2019, the basis
election may be revoked by attaching a
statement to an amended return filed no
later than May 6, 2019. Id.
Clarification was requested regarding
whether a basis election must be made
by a related section 958(a) U.S.
shareholder if that shareholder owns a
DFIC but does not own an E&P deficit
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foreign corporation and does not reduce
its pro rata share of any section 965(a)
earnings amount under section 965(b),
proposed § 1.965–1(b)(2), or proposed
§ 1.965–8(b). The Treasury Department
and the IRS have concluded that the
requirement to make a basis election
should not apply to such persons.
Accordingly, the final regulations
provide that the basis election must be
made by a section 958(a) U.S.
shareholder and any related section
958(a) U.S. shareholder of an E&P
deficit foreign corporation or of a DFIC
with respect to which the section 958(a)
U.S. shareholder’s pro rata share of the
section 965(a) earnings amount is
reduced under section 965(b), § 1.965–
1(b)(2), or § 1.965–8(b). Section 1.965–
2(f)(2)(iii)(A). However, the final
regulations do not adopt a comment’s
suggestion that the consistency
requirement be eliminated in its entirety
because the Treasury Department and
the IRS have determined that the
requirement is necessary to prevent
related taxpayers from applying the
rules only where they are advantageous.
Another comment requested that the
basis election be considered made by
default unless a taxpayer affirmatively
elects not to make specified basis
adjustments. Given the potentially
significant ramifications of the specified
basis adjustments, the Treasury
Department and the IRS have
determined that providing for automatic
basis adjustments and putting the onus
on taxpayers to affirmatively elect out is
not appropriate. Accordingly, the
comment is not adopted.
2. Level and Consequences of Basis
Adjustments
Comments requested that the final
regulations provide that positive basis
adjustments with respect to section
965(b) previously taxed earnings and
profits apply down a chain of foreign
corporations under section 961(c) and
thus that they apply by default, such
that the basis election and its
concomitant downward basis
adjustments with respect to E&P deficit
foreign corporations need not be made.
Comments also suggested that even if
downward basis adjustments were
required, the final regulations should
not require them to be made for the
entire amount of a specified E&P deficit
taken into account, but instead allow
taxpayers to elect an amount of basis
that ‘‘shifted.’’ The comments were
particularly concerned that downward
adjustments not offset upward
adjustments. Comments also
recommended that the final regulations
not require gain recognition to the
extent that downward basis adjustments
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would exceed basis, and that, if such
gain recognition is required, a special
reduced rate of tax be provided for such
gain.
The Treasury Department and the IRS
have determined that it is clear under
proposed § 1.965–2(f)(1) that no
adjustments are made under section 961
with respect to section 965(b)
previously taxed earnings and profits,
given that section 965(b) previously
taxed earnings and profits do not
represent amounts included in income
by a section 958(a) U.S. shareholder, as
required by section 961, and that
adjustments apply only with respect to
section 958(a) stock or applicable
property owned directly by a section
958(a) U.S. shareholder (or in certain
cases, through foreign pass-through
entities). Id. Accordingly, the final
regulations do not modify the proposed
regulations in this regard.
The Treasury Department and the IRS
have also determined that it would
create economic distortions to provide
for upward basis adjustments with
respect to section 965(b) previously
taxed earnings and profits without
providing for corresponding downward
basis adjustments with respect to
portions of specified E&P deficits taken
into account to reduce section 965(a)
inclusion amounts and requiring gain
recognition to the extent such
adjustments exceed basis. Accordingly,
it would not be appropriate to provide
that section 965(b) previously taxed
earnings and profits are treated as
included in income under section 951
for purposes of section 961, even though
the final regulations provide as much
for purposes of section 1248(d), as
discussed in Part III.B of this Summary
of Comments and Explanation of
Revisions. Moreover, the Treasury
Department and the IRS have concluded
that rules coordinating upward and
downward tiered-basis adjustments are
not warranted. Additionally, given the
electivity of the specified basis
adjustments and the ability of taxpayers
to take into account factors like the tax
rate at which gain is recognized as a
result of the basis election, the Treasury
Department and the IRS decline to
provide rules resulting in the
application of a special tax rate to such
gain.
However, the Treasury Department
and the IRS have determined that it is
appropriate to not require downward
basis adjustments in excess of basis (in
order to avoid gain recognition under
§ 1.965–2(h)(3) to the extent of such
excess) if the corresponding upward
basis adjustments are correspondingly
limited. Accordingly, § 1.965–
2(f)(2)(ii)(B)(2) provides that downward
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basis adjustments to the stock of, or
applicable property with respect to, an
E&P deficit foreign corporation may be
limited to the available basis with the
result that gain is not recognized (the
‘‘to-the-extent rule’’). If the to-the-extent
rule limits downward basis adjustments,
the corresponding upward basis
adjustments are correspondingly
limited. See § 1.965–2(f)(2)(ii)(A)(2)(ii).
However, the section 958(a) U.S.
shareholder can (subject to certain
limitations) designate the stock of, or
applicable property with respect to, a
DFIC with respect to which the upward
adjustments are made. Id. A taxpayer
may also choose to make the full
amounts of the adjustments that would
have been required under the proposed
regulations and recognize gain under
§ 1.965–2(h)(3) as necessary. See
§ 1.965–2(f)(2)(ii)(A)(1) and
(f)(2)(ii)(B)(1).
3. Timing of Basis Adjustments
The proposed regulations provide that
the specified basis adjustments are
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. Proposed § 1.965–
2(h)(1). Questions have been raised
about the application of the proposed
rules in the case of a specified foreign
corporation that ceases to be a CFC
during its last taxable year of the
specified foreign corporation that begins
before January 1, 2018, due to a
disposition of its stock. As discussed in
Part II.H of this Summary of Comments
and Explanation of Revisions, under
section 951, a section 958(a) U.S.
shareholder of such a specified foreign
corporation would generally have an
inclusion under section 951 with
respect to the corporation if it were a
DFIC because it would own stock of the
specified foreign corporation on the last
day on which the corporation was a
controlled foreign corporation.
Accordingly, under § 1.961–1(a), a basis
adjustment would generally be allowed
as of the last day in the taxable year of
such corporation on which it is a
controlled foreign corporation.
As discussed in Part II.H of this
Summary of Comments and Explanation
of Revisions, because a specified foreign
corporation is treated as a CFC for
purposes of § 1.965–1(b) and sections
951 and 961, the Treasury Department
and the IRS have determined that
income inclusion provisions in the final
regulations should be consistent with
these rules, and thus the basis
adjustment provisions should as well,
and the relevant rules in the final
regulations are revised accordingly. See
§§ 1.965–1(f)(30)(i) and (f)(34) and
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1.965–2(h)(1) (providing that a specified
basis adjustment is made as of the last
day of the last taxable year of the
specified foreign corporation that begins
before January 1, 2018, on which it is a
specified foreign corporation).
4. Share-by-Share Requirement for Basis
Adjustments
Proposed § 1.965–2(h)(3) requires that
the specified basis adjustments be made
on a share-by-share basis. A comment
suggested that the specified basis
adjustments be made in the aggregate to
mitigate taxpayer burden in tracking
and prevent what it described as
inappropriate gain recognition.
However, adjustments to basis under
section 961 for inclusions under section
951 and distributions of previously
taxed E&P are generally required to be
made on a share-by-share basis, and it
will be necessary to have information
concerning basis share-by-share going
forward. Furthermore, the to-the-extent
rule included in the final regulations
will provide relief to taxpayers that have
low-basis and high-basis shares.
Accordingly, the comment is not
adopted.
5. Basis Adjustments With Respect to
Foreign Pass-Through Entity
A comment suggested that the final
regulations provide that for purposes of
the specified basis adjustments with
respect to foreign pass-through entities,
the principles of section 743(b) apply
for associating a specified basis
adjustment with a section 958(a) U.S.
shareholder with respect to whom it is
made. The comment also recommended
clarification of the basis consequences
of a distribution in a structure with a
foreign pass-through entity. The
Treasury Department and the IRS will
consider these recommendations in
connection with future guidance
concerning the application of sections
959 and 961 generally.
See Part II.B of this Summary of
Comments and Explanation of Revisions
for a discussion of the treatment of a
controlled domestic partnership treated
as a foreign partnership under § 1.965–
1(e) for purposes of the specified basis
adjustment rules relating to foreign
pass-through entities.
6. Section 962 Elections
The proposed regulations reserve on
the issue of basis adjustments with
respect to a section 958(a) U.S.
shareholder that made a section 962
election. A comment noted that section
961(a)’s limitation on a basis increase to
the amount of tax paid under chapter 1
of the Code with respect to amounts
required to be included in income under
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section 951(a) (in the case of a United
States shareholder who has made a
section 962 election for the taxable year)
means that a section 958(a) U.S.
shareholder that makes a section 965(h)
election may only increase its basis as
it pays its section 965(h) net tax liability
over time. As suggested by the
comment, the final regulations include
this rule. See § 1.965–2(e)(2) and (h)(1).
Consistent with this rule, no
adjustments apply for section 965(b)
previously taxed earnings and profits
and the use of specified E&P deficits.
See § 1.965–2(f)(2)(ii)(C).
A comment requested that the final
regulations provide guidance
concerning the consequences if an
individual section 958(a) U.S.
shareholder that made both a section
962 election and a section 965(h)
election that applied to a section 965(a)
inclusion with respect to a DFIC
disposed of the DFIC stock before all of
its section 965(h) net tax liability had
been paid, and thus before all
corresponding basis adjustments had
been made. The comment recommended
that the basis adjustments be treated as
made immediately before the
disposition. The Treasury Department
and the IRS have determined that this
treatment would not be appropriate,
because it would allow the shareholder
to obtain the benefits of the basis
increase without having paid the
corresponding tax, and do not adopt the
comment.
The comment also requested that the
final regulations clarify the basis
adjustments to be made in the case of
a domestic pass-through owner that has
made a section 962 election applicable
to its distributive share of a domestic
pass-through entity’s section 965(a)
inclusion amount. The issue raised by
the comment is a longstanding issue of
general applicability within subpart F
that is outside of the scope of
regulations concerning section 965.
Accordingly, the Treasury Department
and the IRS decline to adopt the
comment, and the final regulations, like
the proposed regulations, address only
basis adjustments applicable to section
958(a) U.S. shareholders of DFICs.
E. Gain Reduction Rule and Translation
Rates
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). The proposed
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1849
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. See proposed
§ 1.986(c)–1(b). Moreover, 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.
The proposed regulations also provide
that if a section 958(a) U.S. shareholder
receives a distribution from a DFIC
(including through a chain of ownership
described under section 958(a)) during
the inclusion year of the DFIC that is
attributable to section 965 previously
taxed earnings and profits of the DFIC,
then the amount of 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 DFIC or interest in
applicable property with respect to the
DFIC by reason of the distribution is
reduced (but not below zero) by an
amount equal to the section 965
previously taxed earnings and profits of
the DFIC with respect to the section
958(a) U.S. shareholder. Proposed
§ 1.965–2(g)(1)(i).
The proposed regulations do not
specify the translation rate to be used
for purposes of reducing the amount of
gain that otherwise would be recognized
under section 961(b)(2) when a DFIC
that has a functional currency other
than the U.S. dollar distributes section
965(b) previously taxed earnings and
profits. In the absence of a rule
providing that section 965(b) previously
taxed earnings and profits should be
translated into U.S. dollars at the spot
rate on December 31, 2017, fluctuations
in exchange rates would cause
distortions in the application of the gain
reduction rule to distributions of section
965(b) previously taxed earnings and
profits. For example, distributions of
section 965(b) previously taxed earnings
and profits denominated in a currency
other than the U.S. dollar during an
inclusion year could result in gain
recognition attributable to fluctuations
in exchange rates, notwithstanding the
fact that proposed § 1.986(c)–1
specifically provides that a taxpayer is
not required to recognize foreign
currency gain or loss on such
distributions. To prevent recognition of
gain under these circumstances, the
final regulations provide that the
translation rate to be used with respect
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to section 965(b) previously taxed
earnings and profits for purposes of the
gain reduction rule is the spot rate on
December 31, 2017.
The Treasury Department and the IRS
are considering proposing regulations
under section 961 to similarly ensure
that a taxpayer is not required to
recognize gain by reason of fluctuations
in exchange rates on distributions of
section 965(b) previously taxed earnings
and profits in taxable years after the
inclusion year. In addition, the Treasury
Department and the IRS intend to study
the proper amount of gain or loss,
including foreign currency gain or loss,
to be recognized on distributions of
previously taxed E&P, including
previously taxed E&P other than section
965(a) previously taxed earnings and
profits and section 965(b) previously
taxed earnings and profits.
IV. Comments and Changes to Proposed
§ 1.965–3—Section 965(c) Deductions
Proposed § 1.965–3 provides rules
regarding the determination of section
965(c) deductions and section 965(c)
deduction amounts. The comments and
modifications with respect to these rules
are discussed in this Part IV.
A. Disregard of Certain Assets To
Prevent Double Counting
The proposed regulations contain
rules for disregarding certain assets for
purposes of determining the aggregate
foreign cash position of a section 958(a)
U.S. shareholder. See proposed § 1.965–
3(b).
1. Disregard of Certain Obligations
Between Related Specified Foreign
Corporations
One such rule in the proposed
regulations provides 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 a cash measurement date
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 cash measurement
date. Proposed § 1.965–3(b)(1).
A comment suggested that the rule in
proposed § 1.965–3(b)(1) be extended to
permit the same treatment for thirdparty accounts payable and third-party
accounts receivable held by related
specified foreign corporations of a
section 958(a) U.S. shareholder. The
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comment also suggested that all
members of a consolidated group that
are section 958(a) U.S. shareholders be
treated as a single section 958(a) U.S.
shareholder for purposes of such a rule.
The Treasury Department and the IRS
do not adopt this comment for several
reasons. First, although the statute
explicitly allows third-party accounts
payable held by a specified foreign
corporation to be netted against the
same specified foreign corporation’s
third-party accounts receivable for
purposes of determining its cash
position, it does not provide for netting
of third-party payables and third-party
receivables among a section 958(a) U.S.
shareholder’s specified foreign
corporations for purposes of
determining that section 958(a) U.S.
shareholder’s aggregate foreign cash
position. See section 965(c)(3)(B)(ii) and
(c)(3)(C). Second, the statutory language
and the legislative history direct the
Secretary to address the double
counting of accounts receivable and
accounts payable between related
specified foreign corporations of a
section 958(a) U.S. shareholder but do
not grant authority to issue rules
allowing one specified foreign
corporation’s third-party accounts
payable to offset another specified
foreign corporation’s third-party
accounts receivable. See section
965(c)(3)(D); H.R. Rep. No. 115–446, at
615 (2017). Furthermore, allowing thirdparty payables and third-party
receivables of all related specified
foreign corporations of a section 958(a)
U.S. shareholder to be netted would
require administratively onerous
allocation rules. The final regulations
therefore do not extend the rule in
proposed § 1.965–3(b)(1) to cover thirdparty accounts payable and third-party
accounts receivable held by related
specified foreign corporations with a
common section 958(a) U.S.
shareholder.
2. Disregard of Other Assets Upon
Demonstration of Double-Counting
Another rule in the proposed
regulations intended to prevent double
counting provides that, in determining
the aggregate foreign cash position of a
section 958(a) U.S. shareholder,
amounts of net accounts receivable,
actively traded property, and short-term
obligations of a specified foreign
corporation are disregarded 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 specified foreign
corporation on the same cash
measurement date. Proposed § 1.965–
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3(b)(2). In order for the rule in proposed
§ 1.965–3(b)(2) to apply, a section 958(a)
U.S. shareholder must explain, in a
statement attached to its timely filed
return for its inclusion year, why there
would otherwise be double-counting. Id.
a. Expansion
Comments recommended that the rule
in proposed § 1.965–3(b)(2) be expanded
to cover all assets constituting a
specified foreign corporation’s cash
position, which are enumerated in
section 965(c)(3)(B). Under this
formulation, a section 958(a) U.S.
shareholder would be able to disregard
cash held by its specified foreign
corporation (or any other asset
described in section 965(c)(3)(B)) on a
cash measurement date to the extent
attributable to amounts already taken
into account in determining the section
958(a) U.S. shareholder’s pro rata share
of the cash position of another specified
foreign corporation on such cash
measurement date.
The Treasury Department and the IRS
do not adopt this recommendation for a
number of reasons. First, extending the
rule in proposed § 1.965–3(b)(2) to
apply to assets other than net accounts
receivable, actively traded property, and
short-term obligations would be
inconsistent with section 965(c)(3)(D),
which expressly identifies net accounts
receivable, actively traded property, and
short-term obligations as assets not to be
taken into account by a section 958(a)
U.S. shareholder for purposes of
determining its aggregate foreign cash
position to the extent the shareholder
demonstrates to the Secretary’s
satisfaction that such amount is so taken
into account by the shareholder with
respect to another specified foreign
corporation. The other assets described
in section 965(c)(3)(C), including cash,
are not mentioned in section
965(c)(3)(D). Second, the Treasury
Department and the IRS have
determined that expanding the rule in
proposed § 1.965–3(b)(2) to cover all
assets taken into account in determining
a specified foreign corporation’s cash
position would require complex tracing
rules to ensure that each asset was
already taken into account by a section
958(a) U.S. shareholder with respect to
another specified foreign corporation
and have determined that such rules
would entail significant administrative
and compliance challenges.
Accordingly, the final regulations do not
expand the rule in proposed § 1.965–
3(b)(2) to allow a section 958(a) U.S.
shareholder to disregard assets other
than those specifically enumerated in
section 965(c)(3)(D).
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b. Clarification of Cash Measurement
Dates
Comments also recommended that the
rule in proposed § 1.965–3(b)(2) be
clarified so that relief from doublecounting is available with respect to a
specified foreign corporation when an
amount is taken into account in
determining the section 958(a) U.S.
shareholder’s pro rata share of the cash
position of another specified foreign
corporation on such other specified
foreign corporation’s corresponding
cash measurement date even if the cash
measurement date is not the same
calendar date for both specified foreign
corporations.
The Treasury Department and the IRS
have concluded that section 965(c)(3)(D)
allows relief from double counting
whenever a section 958(a) U.S.
shareholder can establish that net
accounts receivable, actively traded
property, or short-term obligations are
‘‘taken into account . . . with respect to
another specified foreign corporation.’’
The statute does not require that an
amount must have been taken into
account with respect to another
specified foreign corporation on the
same day. Therefore, in response to the
comments, the final regulations amend
the rule in proposed § 1.965–3(b)(2) to
clarify that double-counting relief with
respect to a specified foreign
corporation is available when an
amount is taken into account in
determining the section 958(a) U.S.
shareholder’s pro rata share of the cash
position of another specified foreign
corporation on the other specified
foreign corporation’s corresponding
cash measurement date. Section 1.965–
3(b)(2). Corresponding clarifications are
made for consistency in § 1.965–3(b)(1).
3. Notional Cash Pooling Arrangements
Comments requested guidance
providing that for purposes of
computing a section 958(a) U.S.
shareholder’s aggregate foreign cash
position, notional cash pooling
arrangements are treated as creating
intercompany receivables. The facts and
circumstances of each notional cash
pool, including the underlying
contractual rights and obligations of the
parties to the arrangement and the role
of the unrelated cash pool provider in
the arrangement, are varied. Whether a
notional cash pooling arrangement is
treated as in substance creating a loan
between and among participants, rather
than between the participant and the
unrelated cash pool provider, depends
on the application of federal income tax
principles to the particular facts and
circumstances of the arrangement.
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Accordingly, the Treasury Department
and the IRS do not adopt these
comments.
B. Disregard of Portion of Cash Position
of Noncorporate Entities Treated as
Specified Foreign Corporations
Section 965(c)(3)(E) provides that an
entity (other than a corporation) is
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. A comment
requested confirmation that application
of section 965(c)(3)(E) to treat a
noncorporate entity as a specified
foreign corporation could depend on
ownership by other owners of the
noncorporate entity and on the
definition of United States shareholder
applicable for the year in which the
status of a foreign corporation as a
specified foreign corporation is being
determined. The Treasury Department
and the IRS have determined that this
point is clear from the definition of
specified foreign corporation. The
comment also suggested that the
Treasury Department and the IRS
consider limitations on attribution for
purposes of determining whether a
noncorporate entity would be a
specified foreign corporation if it were
a foreign corporation. The Treasury
Department and the IRS have
determined that the special attribution
rule described in Part II.K of this
Summary of Comments and Explanation
of Revisions, as modified to a tenpercent threshold in the final
regulations, would apply for purposes of
the noncorporate entity rule and that no
additional limitations are warranted.
The Treasury Department and the IRS
have also determined that it is clear
under the statute that section 951(b) as
in effect for years of foreign corporations
beginning before January 1, 2018,
applies for purposes of determining
whether a noncorporate entity would be
a specified foreign corporation if it were
a foreign corporation for purposes of
section 965(c)(3)(E), given that the
relevant year for application of the rule
is the last taxable year of a foreign
corporation beginning before January 1,
2018.
A comment also requested guidance
clarifying the application of section
965(c)(3)(E) to noncorporate entities
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1851
only partially owned by a specified
foreign corporation. The legislative
history to section 965(c)(3)(E) indicates
that it was intended that ‘‘the cash
position of a U.S. shareholder . . . not
generally include the cash attributable
to a direct ownership interest in a
partnership,’’ and that the Treasury
Department and the IRS ‘‘provide
guidance for taking into account only
the specified foreign corporation’s share
of the partnership’s cash position, and
not [an] interest directly owned by the
U.S. shareholder.’’ H.R. Rep. No. 115–
446, at 621 (2017). Accordingly, the
final regulations include a rule in
§ 1.965–3(b)(3) providing that if section
965(c)(3)(E) applies to an entity, the
section 958(a) U.S. shareholder’s pro
rata share of the cash position of the
entity is reduced by the amount
attributable to deemed stock of the
entity not owned (within the meaning of
section 958(a)) by a specified foreign
corporation of the section 958(a) U.S.
shareholder. This rule is illustrated in
the example in § 1.965–3(b)(4)(v).
C. Increase of Income by Section 965(c)
Deduction of Expatriated Entity
Under proposed § 1.965–3(d)(1), if a
person is allowed a section 965(c)
deduction and becomes an expatriated
entity, in certain circumstances, the
person must pay tax equal to 35 percent
of the person’s section 965(c)
deductions. See also section 965(l)(1). A
comment recommended clarifying and
limiting the definition of expatriated
entity to exclude United States
individuals on the theory that the
reference to ‘‘entity’’ in section 965(l)(2)
was intended to so provide. Section
965(l)(2) defines expatriated entity by
cross-reference to the definition
provided in section 7874(a)(2), which
includes not only entities but certain
persons (which could be individuals)
related to the entity at issue; therefore,
the Treasury Department and the IRS
have determined that section 965(l)(2)
does not apply only to an entity but
potentially to any person that is an
expatriated entity, and the final
regulations are clarified accordingly.
See § 1.965–3(d)(2).
D. Treatment of Section 965(c)
Deductions
Under the proposed regulations, a
United States person that must pay tax
under section 4940 or 1411 on a section
965(a) inclusion cannot take into
account a section 965(c) deduction for
purposes of determining the amount of
such tax. See proposed § 1.965–3(f)(3)
and (4). A comment recommended that
the section 965(c) deduction be allowed
for purposes of computing the amount
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of tax due under section 1411. It
suggested that the rule in proposed
§ 1.965–3(f)(3) was inconsistent with the
rule in § 1.1411–4(f)(3)(ii), which takes
into account in determining net
investment income itemized deductions
that are investment expenses (as defined
in section 163(d)(4)(C)). However,
§ 1.1411–4(f)(3)(ii) is inapplicable
because § 1.965–3(f)(1) provides that a
section 965(c) deduction is not an
itemized deduction. The Treasury
Department and the IRS have
determined that the section 965(c)
deduction was only intended to reduce
the rate of tax attributable to income
taxes contained in chapter 1 of the
Code. See H.R. Rep. No. 115–466, at 620
(2017). Accordingly, the final
regulations continue to provide 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. Section 1.965–3(f)(3).
Another comment suggested that the
final regulations clarify whether a
section 965(c) deduction is taken into
account for purposes of the tax imposed
under section 4968. Because section
4968(c) provides that net investment
income subject to the tax is determined
under rules similar to the rules of
section 4940(c), and § 1.965–3(f)(4)
provides that 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, the Treasury
Department and the IRS have
determined that it is clear that a section
965(c) deduction is not taken into
account for purposes of section 4968,
and no clarification is necessary. The
comment also requested rules
addressing the basis of the stock of a
DFIC for purposes of section 4968;
however, such rules would be outside of
the scope of this rulemaking, and the
request for such guidance is declined.
The comment also recommended that
the final regulations clarify that a
section 965(c) deduction is a deduction
taken into account under section 62(a)
in determining an individual’s adjusted
gross income. The Treasury Department
and the IRS have determined that such
treatment is appropriate and the final
regulations are modified to so provide.
See § 1.965–3(f)(1).
V. Comments and Changes to Proposed
§ 1.965–4—Disregard of Certain
Transactions
Proposed § 1.965–4 sets forth rules
that disregard certain transactions for
purposes of applying section 965.
Specifically, proposed § 1.965–4
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provides rules that disregard (i)
transactions undertaken with a
principal purpose of changing a section
965 element of 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. The comments and
modifications with respect to these rules
are discussed in this Part V.
A. Scope and Consequences of AntiAbuse Rules Generally
The rules under proposed § 1.965–
4(b) through (e) (‘‘anti-abuse rules’’)
relate to transactions undertaken with a
principal purpose of changing a section
965 element of a United States
shareholder and certain changes in
method of accounting and entity
classification elections. They provide
that transactions subject to those rules
are ‘‘disregarded for purposes of
determining the amounts of all section
965 elements’’ of a United States
shareholder. Comments questioned the
consequences of disregarding a
transaction under these rules, including
with respect to certain E&P and foreign
tax credit calculations. The final
regulations retain the approach in the
proposed regulations, which do not
describe the consequences of
disregarding a transaction other than the
consequences with respect to the
section 965 elements of a United States
shareholder. A discussion of, or rules
regarding, the consequences of these
transactions for other purposes is
outside the scope of the final
regulations. However, the Treasury
Department and the IRS have
determined that it is appropriate to
mitigate double taxation that could
result from the application of the antiabuse rules to a liquidation.
Accordingly, § 1.965–4(e)(4) provides
that in the case of a liquidation of a
specified foreign corporation that is
disregarded for purposes of determining
the section 965 elements of a United
States shareholder pursuant to § 1.965–
4(b) or (c)(2), for purposes of
determining the amounts of the section
965 elements of the United States
shareholder, the date of the liquidation
generally is treated as the last day of the
taxable year of the specified foreign
corporation. Special rules apply with
respect to liquidations resulting from
entity classification elections, including
a rule that may defer the date of
liquidation for this purpose to the date
on which the entity classification
election is filed. For example, if a
domestic corporation (USP) wholly
owns a foreign subsidiary (FS) that has
a taxable year ending on November 30,
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and an entity classification election is
filed on November 15, 2017, to treat FS
as an entity that is disregarded as an
entity separate from its owner for U.S.
federal income tax purposes
(‘‘disregarded entity’’) effective on
October 1, 2017, then any transactions
undertaken by FS through and
including November 30, 2017, would be
taken into account for purposes of
determining the post-1986 earnings and
profits and accumulated post-1986
deferred foreign income of FS, and any
transactions involving FS after
November 30, 2017, would not be taken
into account for such purposes.
Furthermore, any section 965(a)
previously taxed earnings and profits
and section 965(b) previously taxed
earnings and profits of FS would be
taken into account in determining the
all earnings and profits amount under
§ 1.367(b)–3(b) with respect to FS.
Comments also requested various
exceptions from the anti-abuse rules for
transactions that do not reduce the
overall U.S. federal income tax liability
of United States persons resulting from
the application of section 965. In
response to these comments, the final
regulations provide an exception from
the anti-abuse rules for certain
incorporation transactions. Under the
exception, the anti-abuse rules do not
apply to disregard a transfer of stock of
a specified foreign corporation by a
United States shareholder to a domestic
corporation (for this purpose, including
an S corporation), provided that the
section 965(a) inclusion amount with
respect to the transferred stock of the
specified foreign corporation is not
reduced and that the aggregate foreign
cash position of both the transferor and
the transferee is determined as if each
had held the transferred stock of the
specified foreign corporation owned by
the other on each of the cash
measurement dates. See § 1.965–4(e)(3).
B. Transactions With a Principal
Purpose of Changing a Section 965
Element
1. General Rules
Comments suggested that the antiabuse rules be eliminated and that, if
retained, the anti-abuse rules in
proposed § 1.965–4(b) not contain
rebuttable presumptions or per se rules.
The Treasury Department and the IRS
have determined that the rebuttable
presumptions and per se rules are
appropriate for tax administration
reasons. They identify situations in
which tax avoidance is highly likely or
unlikely in order to minimize the
number of circumstances in which more
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detailed facts and circumstances
analyses are required.
A comment also suggested that
ordinary course exceptions be provided
for all of the anti-abuse rules, so that the
rules can never apply to ordinary course
transactions. The Treasury Department
and the IRS have determined that
excluding ordinary course transactions
from the presumptions in the anti-abuse
rules, rather than the overall application
of the rules, while still applying those
rules to transactions that were actually
undertaken with a principal purpose of
changing a section 965 element, strikes
the appropriate balance between
administrability and taxpayer certainty,
and therefore do not adopt the
comment.
A comment also suggested that the
final regulations omit the requirement
in proposed § 1.965–4(b)(2) that a
taxpayer file a statement indicating that
it takes the position that a presumption
in proposed § 1.965–4(b) is rebutted.
The Treasury Department and the IRS
have determined that it is important for
fair and effective tax administration that
the IRS be aware of transactions for
which there is a presumption of a
principal purpose of changing a section
965 element and do not adopt the
suggestion.
2. Cash Reduction Transactions and
Specified Distributions
The proposed regulations provide that
a cash reduction transaction is
presumed to be undertaken with a
principal purpose of changing a section
965 element of a United States
shareholder unless the cash reduction
transaction occurs in the ordinary
course of business. Proposed § 1.965–
4(b)(2)(iii)(A). A cash reduction
transaction includes a transfer of cash,
accounts receivable, or cash-equivalent
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 if the
transfer or assumption reduces the
aggregate foreign cash position of the
United States shareholder. Id. The
presumption may be rebutted only if the
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, and a
taxpayer taking the position that the
presumption is rebutted must attach a
statement to its tax return disclosing
that it has rebutted the presumption.
Section 1.965–4(b)(2)(i).
The proposed regulations also set
forth a ‘‘per se’’ rule providing that a
cash reduction transaction will be
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treated per se as being undertaken with
a principal purpose of changing the
amount of a section 965 element of a
United States shareholder if it is a
specified distribution. Proposed
§ 1.965–4(b)(2)(iii)(B). The proposed
regulations provide, in part, that a cash
reduction transaction that is a
distribution by a specified foreign
corporation of a United States
shareholder will be considered a
specified distribution 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 cashequivalent assets to any specified
foreign corporation of the United States
shareholder. Id. Under the proposed
regulations, a cash reduction transaction
that is a distribution by a specified
foreign corporation to a United States
shareholder of the specified foreign
corporation, other than a specified
distribution, is 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. Id.
The Treasury Department and the IRS
received requests that the final
regulations exempt certain transactions
from the definition of cash reduction
transaction and specified distribution. A
comment requested that a cash
reduction transaction not be treated as
a specified distribution if, and to the
extent that, the distributee does not,
within 24 months following the
distribution, transfer cash, accounts
receivable, or cash equivalents to a
specified foreign corporation of the
United States shareholder. Although the
Treasury Department and the IRS have
determined that the amount of time
between a distribution and a transfer of
cash may be relevant in determining
whether there was a plan or intent for
the distributee to transfer the cash, the
Treasury Department and the IRS have
determined that a per se rule
disregarding transfers outside of a
certain window is not warranted, as
long-term plans for a transfer could
exist, and providing such a rule would
facilitate tax avoidance. A comment also
suggested that it be clarified that any
transferred amount disregarded be
limited to the amount of the subsequent
transfer. Because a specified
distribution is defined as a cash
reduction transaction ‘‘to the extent
that’’ there is a plan or intent to retransfer cash, the Treasury Department
and the IRS have determined that it is
already clear that the amount of a
specified distribution is limited to the
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amount re-transferred, and accordingly
no additional clarification is required.
Another comment requested that the
per se rule not apply to cash reduction
transactions planned before November
2, 2017. The final regulations do not
adopt this requested change, as the
Treasury Department and the IRS have
determined that a rule exempting cash
reduction transactions in planning
stages before November 2, 2017, from
the application of the per se rule would
necessarily have to account for the
possibility of subsequent plan
modification or amendment and would
require an inquiry regarding a taxpayer’s
subjective intent, resulting in a standard
that is difficult to administer.
Comments also suggested that a cash
reduction transaction should not be
considered a specified distribution to a
United States shareholder by reason of
a transfer of cash to a specified foreign
corporation of the United States
shareholder in the ordinary course of
business. The Treasury Department and
the IRS agree that payments pursuant to
a legal obligation entered into before the
Act’s introduction in Congress should
not be considered to give rise to a plan
or intention for the distributee in a cash
reduction transaction to transfer cash,
accounts receivable, or cash-equivalent
assets to a specified foreign corporation
of the distributee. Accordingly, the final
regulations provide that in the case of a
cash reduction transaction that is a
distribution by a specified foreign
corporation of a United States
shareholder, there is not considered to
be 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 if the transfer is made by
the distributee pursuant to a legal
obligation entered into before November
2, 2017. Section 1.965–4(b)(2)(iii)(B). If
the taxpayer relies on this rule in
determining that a cash reduction
transaction is not a specified
distribution, it must attach a statement
to its return indicating that position. Id.
3. Pro Rata Share Transactions
The proposed regulations provide that
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 and treat certain internal
group transactions as per se being
undertaken with a principal purpose of
changing the amount of a section 965
element of a United States shareholder.
Proposed § 1.965–4(b)(2)(v). A comment
requested that internal group
transactions not be treated as per se
having a principal purpose of changing
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a section 965 element. The Treasury
Department and the IRS have
determined that the definition of
internal group transactions is
sufficiently narrowly tailored to apply
the per se rule to tax-motivated
transactions of the type that Congress
intended the Treasury Department and
the IRS to address and do not adopt the
comment.
4. E&P Reduction Transactions
A comment noted that dividends paid
by one specified foreign corporation to
another between E&P measurement
dates could potentially be subject to the
rules in both proposed § 1.965–4(f)
(disregarding specified payments in
order to mitigate double-counting) and
proposed § 1.965–4(b)(2)(iv) (which can
result in disregarding certain
transactions that reduce accumulated
post-1986 deferred foreign income or
post-1986 earnings and profits) and
argued that the overlapping rules create
a burden on taxpayers that should be
ameliorated by exempting dividends
between E&P measurement dates from
the rules in § 1.965–4(b)(2)(iv). The
Treasury Department and the IRS have
determined that if such a dividend is
disregarded pursuant to § 1.965–4(f),
then it is clear that it is irrelevant
whether it would also be disregarded
under § 1.965–4(b), applying the
presumption in § 1.965–4(b)(2)(iv), such
that there would be no need for a
taxpayer to bear the burden of rebutting
the presumption. If, however, the
dividend is not disregarded pursuant to
§ 1.965–4(f), and the taxpayer takes the
position that it is also not disregarded
under § 1.965–4(b), because it can rebut
a presumption that applies under
§ 1.965–4(b)(2)(iv), then it is appropriate
that the taxpayer be required to
document that rebuttal for the reasons
discussed in Part V.B.1 of this Summary
of Comments and Explanation of
Revisions. Accordingly, the comment is
not adopted.
C. Changes of Accounting Method and
Entity Classification Elections
A comment noted that a positive
section 481 adjustment resulting from a
change of accounting method could
increase the section 965(a) inclusion
amount and the amount of foreign
income taxes deemed paid by a United
States shareholder and thus be
disregarded for purposes of determining
the United States shareholder’s section
965(a) inclusion amount, allowing some
or all of the adjustment to escape
taxation under section 965, even though
the increase in foreign income taxes
deemed paid was minimal. The
Treasury Department and the IRS have
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determined that this would be
inappropriate and modify the rule in
proposed § 1.965–4(c)(1) to apply only if
there is a reduction in a section 965(a)
inclusion amount or an aggregate
foreign cash position, or an increase in
section 960 deemed paid taxes other
than by reason of an increase in a
section 965(a) inclusion amount. See
§ 1.965–4(c)(1)(i).
Comments suggested that the rule in
proposed § 1.965–4(c)(1), which applies
to changes in methods of accounting,
not apply to changes from
impermissible methods of accounting to
permissible methods of accounting, and
that the rule be conditioned on a
principal purpose of changing a section
965 element. However, a principal
purpose-based rule would be difficult to
administer and unwarranted, given that
changes after November 2, 2017, relating
to specified foreign corporations likely
would be tax-motivated. Moreover, the
Treasury Department and the IRS have
determined that allowing changes from
impermissible methods of accounting to
permissible methods of accounting to be
taken into account will allow similarly
situated taxpayers to take different
positions in a way that is detrimental to
the government, as taxpayers will
choose to make currently those changes
that result in reductions of tax due
under section 965 while deferring such
changes that would result in increases
of tax due under section 965 until later
years. Accordingly, the comments are
not adopted.
Another comment requested that the
final regulations permit the taxable year
of a specified foreign corporation to be
changed to a calendar year taxable year.
Because neither the proposed
regulations nor the final regulations
affect the possibility of changing the
accounting period of a specified foreign
corporation, the final regulations do not
adopt this comment. But see Rev. Proc.
2018–17, 2018–9 I.R.B. 384 (limiting
certain changes in accounting periods of
a specified foreign corporation).
In addition, comments raised
questions regarding the scope of the rule
in proposed § 1.965–4(c)(2), which
applies to any entity classification
election under § 301.7701–3 that is filed
on or after November 2, 2017, and
whether it is appropriate for that rule to
be a per se rule that applies to all entity
classification elections filed on or after
that date. A comment suggested that the
rule would inappropriately apply to a
transaction that would have no impact
on section 965 elements. Another
comment suggested that certain
transactions effectuated by entity
classification elections, such as
conversion of a United States
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shareholder from a domestic passthrough entity to a C corporation, or
vice versa, should be excepted from the
application of the rule. However,
because an entity classification election
is an election made specifically for tax
purposes that could be made
retroactively in order to be effective
before November 2, 2017, and because
the rule would only disregard such an
election if it had the effect of changing
a section 965 element, the final
regulations do not change the rule from
the proposed regulations. But see
§ 1.965–4(e)(3) (discussed in Part V.A of
this Summary of Comments and
Explanation of Revisions).
D. Application of Specified Payment
Rule
The proposed regulations provide that
certain amounts paid or incurred
between related specified foreign
corporations of a section 958(a) U.S.
shareholder 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)(1).
Comments indicated that the
requirement that the two specified
foreign corporations have different
tentative measurement dates in order for
specified payments to be disregarded
resulted in complexity and
inappropriate results when there were
multiple payments among specified
foreign corporations during the period,
such as in a series of dividends up a
multi-level chain of specified foreign
corporations. They also indicated that it
was unclear how the tentative
measurement date was to be determined
in the case of a specified foreign
corporation that was neither an E&P
deficit foreign corporation nor a DFIC.
Moreover, comments indicated that
disregarding specified payments that
were deductible payments only for
purposes of section 965, but not other
purposes, could create unintended
foreign tax credit results, which results
would not be remedied by the changes
to the ordering rule in § 1.965–2(b)
discussed in Part III.A of this Summary
of Comments and Explanation of
Revisions. One comment suggested that
the specified payment rule should be
refined to have an anti-abuse function.
The Treasury Department and the IRS
have determined that detailed rules to
address the fact patterns raised in the
comments, such as rules to determine
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the extent of double-counting, to except
ordinary course payments, or to add
ordering rules to determine whether a
payment is a specified payment, would
introduce more complexity than
warranted and would be difficult to
administer. However, in response to the
comments, the final regulations
eliminate the requirement that the
specified foreign corporations between
which a payment is made have different
tentative measurement dates in order for
the payment to be a specified payment
disregarded under the rule and provide
that a section 958(a) U.S. shareholder
may choose not to apply the rule in
§ 1.965–4(f)(1), provided that it and all
related section 958(a) U.S. shareholders
do so with respect to all of their
specified foreign corporations. Section
1.965–4(f)(1), (2), and (3).
VI. Comments and Changes to Proposed
§ 1.965–5 and § 1.965–6—Foreign Tax
Credits
Proposed § 1.965–5 and § 1.965–6
provide rules with respect to foreign tax
credits. The proposed regulations
include, in addition to 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. The
comments and modifications with
respect to these rules are discussed in
this Part VI.
A. Application and Determination of the
Disallowance of the Applicable
Percentage of Foreign Income Taxes
1. Disallowance of the Applicable
Percentage of Foreign Income Taxes
Attributable to Distributions of
Previously Taxed Earnings and Profits
Under the proposed regulations, no
deduction (including under section 164)
or credit under section 901 is allowed
for the applicable percentage (as defined
in proposed § 1.965–5(d)) 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. Proposed § 1.965–5(b).
This includes foreign income taxes
directly paid or accrued by a taxpayer
attributable to a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits. A similar
rule applies to deny 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. Proposed § 1.965–5(c).
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For these purposes, foreign income
taxes ‘‘treated as paid or accrued’’
include foreign income taxes deemed
paid by the taxpayer under section 960
with respect to distributions of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits.
Comments recommended that the
proposed regulations be modified to
allow a credit for the applicable
percentage of foreign income taxes
directly paid or accrued under section
901 or treated as paid or accrued under
section 960 on a distribution of section
965(a) previously taxed earnings and
profits or section 965(b) previously
taxed earnings and profits. In general,
these comments asserted that the
disallowance of taxes attributable to a
distribution of previously taxed E&P
discourages the distribution of the
previously taxed E&P, which the
comments assert is inconsistent with the
purpose of section 965. Comments also
argued that the rule created
administrative complexity and asked for
guidance on how to track previously
taxed E&P for purposes of applying this
rule. Other comments acknowledged
that providing a reduction for the
foreign tax credits attributable to a
distribution of previously taxed E&P
based on the applicable percentage was
appropriate.
The final regulations do not adopt the
recommended changes. As an initial
matter, guidance on tracking previously
taxed E&P is outside the scope of this
rulemaking. In addition, the Treasury
Department and the IRS have
determined that the rules under § 1.965–
5(b) are consistent with the statutory
purpose of sections 960 and 965 and do
not discourage the repatriation of
previously taxed E&P. In any event, the
purpose of the foreign tax credit is not
to encourage repatriation of E&P to the
United States but to relieve double
taxation. To the extent the income is
subject to a lower effective rate of U.S.
tax, it is consistent with the purpose of
section 965(g) to reduce the credits
allowed as part of relieving double
taxation on such income.
Moreover, the statutory language of
section 965(g) contemplates that the
disallowance for the applicable
percentage will apply to distributions of
previously taxed E&P. Section 965(g)(1)
provides, ‘‘[n]o credit shall be allowed
under section 901 for the applicable
percentage of any foreign income taxes
paid or accrued (or treated as paid or
accrued). . . .’’ In addition, section
965(g)(3) provides that no deduction is
allowed for any tax for which credit is
not allowable under section 901 by
reason of section 965(g)(1). A deduction
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is allowed only for taxes directly paid
or accrued by the taxpayer, not taxes
deemed paid by the taxpayer. Because a
U.S. taxpayer would ordinarily be
subject to foreign tax only on a
distribution from a foreign corporation,
not on an income inclusion under U.S.
tax law, ‘‘taxes paid or accrued’’ can
only be understood to refer to foreign
income taxes directly paid or accrued
under section 901 with respect to a
distribution to the taxpayer of
previously taxed E&P. Allowing a full
credit for all such foreign income taxes
would render section 965(g)(3)
meaningless. Accordingly, in order to
give effect to the language of section
965(g)(3), foreign taxes paid or accrued
on distributions of section 965(a)
previously taxed earnings and profits
and section 965(b) previously taxed
earnings and profits are subject to the
credit disallowance rules of section
965(g)(1).
Furthermore, there is no policy reason
to differentiate between foreign income
taxes attributable to a distribution of
previously taxed E&P that are paid or
accrued directly by the United States
shareholder and are creditable under
section 901 and those foreign income
taxes that are paid or accrued by other
CFCs as part of the distribution of the
earnings to the United States
shareholder and are creditable under
section 960(a)(3). Thus, because section
965(g)(3) contemplates the disallowance
of foreign tax credits attributable to
distributions of previously taxed E&P
when the foreign income taxes are
directly paid or accrued by the United
States shareholder, the final regulations
continue to provide that the foreign tax
credit is disallowed with respect to the
applicable percentage of foreign income
taxes deemed paid under section
960(a)(3) with respect to a distribution
of previously taxed E&P in the same
manner as credits are disallowed for
foreign taxes deemed paid under section
960(a)(1) with respect to a section 965(a)
inclusion.
Additionally, some comments raised
specific objections about the application
of these rules to foreign income taxes
paid and deemed paid with respect to
distributions of section 965(b)
previously taxed earnings and profits,
asserting that the disallowance is
inappropriate because these earnings do
not represent an amount for which a
section 965(c) deduction is allowed.
One comment also asserted that it was
inappropriate to disallow the applicable
percentage of foreign income taxes paid
and deemed paid with respect to
distributions of section 965(b)
previously taxed earnings and profits
because a distribution of section 965(b)
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previously taxed earnings and profits
results in a dollar-for-dollar reduction to
basis (to the extent thereof), followed by
gain recognition, because there is no
automatic basis increase in the amount
of such earnings under section 961.
Additionally, the comment pointed out
that the proposed regulations could
create inequities between taxpayers
because the proposed regulations could
be read to imply that a taxpayer that had
no section 965(a) inclusion amount
because of the operation of section
965(b) had no applicable percentage,
and thus no reduction in creditable
foreign income taxes paid or deemed
paid on distributions of the section
965(b) previously taxed earnings and
profits.
As discussed in Part VI.B.1 of this
Summary of Comments and Explanation
of Revisions, the Treasury Department
and the IRS have determined that
section 965(b) previously taxed earnings
and profits are treated as included in
income under section 951(a) for
purposes of section 960, and thus are
treated similarly to section 965(a)
previously taxed earnings and profits for
purposes of applying section 965(g).
Additionally, with respect to the
reduction in basis associated with a
distribution of section 965(b) previously
taxed earnings and profits, the final
regulations provide that a section 958(a)
U.S. shareholder may elect to make
certain basis adjustments to increase the
basis of DFICs with section 965(b)
previously taxed earnings and profits.
See § 1.965–2(f)(2). Finally, comments
concerning the applicable percentage for
distributions of section 965(b)
previously taxed earnings and profits
are addressed in Part VI.A.4 of this
Summary of Comments and Explanation
of Revisions.
2. Compatibility of Applicable
Percentage Credit Disallowance With
U.S. Bilateral Income Tax Treaties
A comment stated that proposed
§ 1.965–5 is incompatible with the
provisions of U.S. bilateral income tax
treaties that provide for relief from
double taxation. However, the credit
against U.S. income tax provided for in
these treaties is generally allowed ‘‘[i]n
accordance with the provisions and
subject to the limitations of the law of
the United States (as it may be amended
from time to time without changing the
general principle hereof).’’ See, for
example, paragraph 1 of Article 24
(Elimination of Double Taxation) of the
income tax convention between the
United States and Canada, as amended
by the protocol signed June 14, 1983.
This language provides that foreign tax
credits allowed under the treaty are
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subject to the terms of the U.S. statutory
credit, including ‘‘provisions such as
Code sections 901(c), 904, 905, 907, 908,
and 911,’’ but the applicable limitations
of U.S. law are not limited to the
illustrative listed provisions. See, for
example, the U.S. Treasury Department
Technical Explanation to the income tax
convention between the United States
and Canada, concerning Article 24, as
amended by the protocol signed June
14, 1983.
The disallowance of the applicable
percentage of foreign income taxes
under section 965(g)(1) and § 1.965–5 is
similar to the application of section 904
and other provisions in the Code that
limit the allowable foreign tax credit.
The disallowance takes into account the
section 965(c) deduction and reflects the
fact that, because of the section 965(c)
deduction, the income included under
section 965 is subject to an effective rate
of U.S. tax that is significantly lower
than the U.S. tax rates ordinarily
imposed on corporations or individuals.
Absent this disallowance, foreign
income tax incurred with respect to the
income included under section 965
could inappropriately be used to offset
U.S. tax on unrelated foreign source
income, rather than to mitigate double
taxation incurred with respect to the
taxable amount of the section 965(a)
inclusion. Accordingly, the application
of section 965(g)(1) and § 1.965–5 is
consistent with the provisions of U.S.
bilateral income tax treaties that provide
for relief from double taxation.
3. Applicable Percentage With Respect
to Foreign Income Taxes That Are Not
Net Basis Taxes
The proposed regulations provide that
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. Proposed
§ 1.965–5(b). A comment recommended
that the final regulations define ‘‘net
basis taxes’’ and clarify that proposed
§ 1.965–5(b) does not apply to creditable
gross basis income taxes.
Section 965(g) and proposed § 1.965–
5(b) apply to all creditable foreign
income taxes. The reference to ‘‘net
basis taxes’’ was included in the
proposed regulations for illustrative
purposes only, and the taxes listed in
proposed § 1.965–5(b) are not an
exhaustive list of the taxes subject to
proposed § 1.965–5(b). The final
regulations clarify this accordingly. See
§ 1.965–5(b).
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4. Applicable Percentage With Respect
to Distributions of Section 965(b)
Previously Taxed Earnings and Profits
The definition of applicable
percentage in section 965(g) and
proposed § 1.965–5(d) is computed
based on a taxpayer’s section 965(a)
inclusion for a section 958(a) U.S.
shareholder inclusion year. Comments
noted that it was not clear under the
proposed regulations how the
applicable percentage with respect to
section 965(b) previously taxed earnings
and profits should be determined when
a DFIC has section 965(b) previously
taxed earnings and profits but the
section 958(a) U.S. shareholder does not
have an aggregate section 965(a)
inclusion amount, because its pro rata
shares of accumulated post-1986
deferred foreign income are entirely
offset by its pro rata shares of specified
E&P deficits. The final regulations
provide that if there is no aggregate
section 965(a) inclusion amount, the
applicable percentage is 55.7 percent
(that is, the applicable percentage that
would apply if the section 965(b)
previously taxed earnings and profits
had been included in income and were
an amount to which section 965(c)(1)(B)
applied). See § 1.965–5(d)(2).
The final regulations also clarify how
the applicable percentage applies with
respect to domestic pass-through
owners and with respect to distributions
of previously taxed E&P. With respect to
domestic pass-through owners, the final
regulations provide that the applicable
percentage determined under § 1.965–
5(d)(1) or (2) with respect to a domestic
pass-through entity applies with respect
to taxes deemed paid by a domestic
pass-through owner even if the domestic
pass-through entity does not have a
section 965(a) inclusion amount.
Section 1.965–5(d)(3). With respect to
foreign income taxes imposed on
distributions of previously taxed E&P,
the final regulations provide that the
applicable percentage that is applied is
the applicable percentage with respect
to the section 958(a) U.S. shareholder
and the section 958(a) U.S. inclusion
year in which the section 958(a) U.S.
shareholder had the section 965(a)
inclusion as a result of which the
section 965(a) previously taxed earnings
and profits or the section 965(b)
previously taxed earnings and profits
first arose. Section 1.965–5(d)(4).
5. Applicable Percentage With Respect
to Tax on Gain From Sale of Stock
The proposed regulations provide that
the disallowance of foreign tax credits
under section 965(g)(1) applies with
respect to the applicable percentage of
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foreign income taxes attributable to
distributions of section 965(a)
previously taxed earnings and profits
and section 965(b) previously taxed
earnings and profits. Proposed § 1.965–
5(b). A comment requested guidance on
whether the applicable percentage also
applies to foreign income taxes imposed
on an amount of a shareholder’s gain
from the sale of the specified foreign
corporation’s stock taken into account
for foreign, but not U.S., income tax
purposes, equal to its tax basis increase
under section 961(a) or § 1.965–2(f)(2)
by reason of section 965. The Treasury
Department and the IRS have
determined that under § 1.904–6,
foreign tax imposed on a disposition of
stock is associated with the gain (or
other income) that is (or would be)
recognized for U.S. tax purposes upon a
taxable disposition, without regard to
whether the taxpayer’s basis in the stock
(and, accordingly, the amount of gain
recognized) is a different amount for
U.S. and foreign tax purposes. Because
no portion of a foreign tax imposed on
the sale of a specified foreign
corporation’s stock is considered
imposed with respect to its previously
taxed E&P, the final regulations do not
expand the scope of the rule in the
proposed regulations.
B. Operation of Section 960(a)(3)
1. Disallowance of Credits for Foreign
Taxes Treated as Deemed Paid Under
Section 960(a)(1) With Respect to
Section 965(b) Previously Taxed
Earnings and Profits
The proposed regulations provide that
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 section 965(a)
earnings amount that is reduced under
proposed § 1.965–1(b)(2) or proposed
§ 1.965–8(b). Proposed § 1.965–
5(c)(1)(ii). The Treasury Department and
the IRS have received comments
asserting that this rule should not be
included in the final regulations. The
final regulations maintain the rule from
the proposed regulations.
Comments stated that allowing a
deemed paid credit under section
960(a)(3) is necessary to avoid double
taxation; however, there is no double
taxation associated with section 965(b)
previously taxed earnings and profits.
The section 965(a) earnings amount
offset by an aggregate foreign E&P deficit
is excluded from U.S. taxable income
and thereby effectively exempted from
U.S. tax under section 965(b)(4)(A) and
proposed § 1.965–1(b)(2) or proposed
§ 1.965–8(b). As a policy matter, this
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exclusion eliminates the need for a
foreign tax credit. The purpose of the
foreign tax credit is to mitigate double
taxation by allowing foreign income
taxes to reduce the U.S. tax that would
otherwise be imposed on foreign source
income. Allowing foreign income taxes
imposed on income that is not subject
to U.S. tax by reason of section 965(b)
to be credited against U.S. tax on
unrelated income would confer a
windfall double benefit for taxpayers
with section 965(b) previously taxed
earnings and profits.
As a technical matter, section
965(b)(4)(A) treats section 965(a)
earnings amounts offset by an aggregate
foreign E&P deficit as previously
included in income under section 951(a)
‘‘for purposes of applying section 959.’’
Accordingly, section 965(b) previously
taxed earnings and profits are treated as
previously taxed E&P resulting from a
section 951(a) inclusion, despite never
actually having been included in U.S.
taxable income. Under section 960(a)(1),
a domestic corporate shareholder that
includes an amount in income under
section 951(a) is deemed to have paid a
ratable portion of the foreign
corporation’s foreign income taxes at the
time of the income inclusion. Amounts
treated as previously taxed E&P
resulting from an income inclusion
under section 951(a) should similarly be
treated as having resulted in foreign
taxes deemed paid under section
960(a)(1).
Section 960(a)(3) allows a credit for
foreign income taxes paid by CFCs upon
a subsequent distribution of the section
965(b) previously taxed earnings and
profits through a chain of CFCs to the
domestic corporate shareholder, but
does not allow a credit for foreign
income taxes that were previously
deemed paid (or treated as deemed
paid) under section 960(a)(1) when the
amounts were included (or treated as
included) in income under section
951(a). Because foreign income taxes
attributable to a section 965(a) earnings
amount that were offset by an aggregate
foreign E&P deficit were treated as
deemed paid under section 960(a)(1)
when those earnings were treated as
included in income under section
951(a), those taxes are not available to
be deemed paid again under section
960(a)(3) upon a subsequent distribution
of the section 965(b) previously taxed
earnings and profits. Consistent with
that treatment and with section
960(a)(2), the regulations under section
902 remove from the foreign
corporation’s pool of post-1986 foreign
income taxes the foreign income taxes
that are attributable to earnings
included in income under section 951(a)
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1857
or otherwise removed from its post-1986
undistributed earnings. See § 1.902–
1(a)(8)(i).
Comments argue that the plain
language of section 965(b)(4)(A) means
that section 965(a) earnings amounts
offset by an aggregate foreign E&P deficit
are treated as income previously
included under section 951(a) solely for
purposes of applying section 959, and
not for purposes of applying section
960(a). However, the application of
section 959 is a precondition to the
application of section 960(a)(3). The
Treasury Department and the IRS have
determined that section 960(a)(3) cannot
be applied independently of section 959
and that the Act did not change the
relationship between these sections.
Indeed, the comments recognize the
interaction between sections 959 and
960(a)(3) by recommending that a credit
be allowed under section 960(a)(3) upon
a distribution of section 965(b)
previously taxed earnings and profits,
which requires treating such amounts as
previously taxed E&P for purposes of
section 960(a)(3) as well as for purposes
of section 959. If the section 965(b)
previously taxed earnings and profits
are treated as previously taxed E&P
excluded from gross income on
distribution under section 959(a) in
applying section 960(a)(3), it necessarily
follows that in applying that same
section those amounts are treated as
having been included in income under
section 951(a) and resulted in foreign
taxes deemed paid under section
960(a)(1) as well.
Some comments raised the concern
that U.S. companies would face a higher
U.S. tax burden by not being able to
claim foreign tax credits under section
960(a)(3) for foreign income tax imposed
on E&P that is not subject to tax in the
United States by reason of section
965(b). The comments argued that this
would reduce the competitive advantage
Congress sought to confer through the
enactment of the foreign tax credit
regime and discourage repatriation of
previously taxed E&P. However, the
purpose of the foreign tax credit regime
is to relieve double taxation of foreign
source income by reducing U.S. tax on
that income, not to guarantee that U.S.
taxpayers will be able to use all foreign
income taxes paid to reduce their U.S.
tax burden. See section 904. The foreign
tax credit regime was never intended to
subsidize foreign income taxes that are
paid in excess of the U.S. tax burden on
the foreign source income. Because
these earnings are not subject to U.S.
tax, any foreign tax credits related to
these earnings would only be used to
offset other unrelated foreign source
income.
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One comment explained that allowing
a deemed paid credit under section
960(a)(3) with respect to section 965(b)
previously taxed earnings and profits is
equivalent to allowing a deemed paid
credit for foreign income tax paid in a
year in which losses recognized for U.S.
(but not foreign) tax purposes reduced
post-1986 undistributed earnings. PreAct law, however, associated foreign
income taxes paid by a foreign
corporation in post-1986 years with its
post-1986 undistributed earnings, but
did not treat earnings offset by losses as
giving rise to previously taxed E&P.
Therefore, the statutory scheme allowed
a credit for those taxes in connection
with dividends or inclusions of those
earnings, and not in connection with
distributions of previously taxed E&P.
Relatedly, comments also suggested
that the premise of section 965(b) is to
treat an E&P deficit foreign corporation
and a DFIC as a single corporation to the
extent that a DFIC’s accumulated post1986 deferred foreign income is offset
by an aggregate foreign E&P deficit.
However, Congress did not adopt the
single corporation approach, as
evidenced by the allocation of the
aggregate foreign E&P deficit to the
DFICs under section 965(b). Section 965
as enacted requires a foreign
corporation-by-foreign corporation
determination, which method extends
to the computation of the foreign tax
credit. Congress did not change the
computation of the deemed-paid credit
to apply other than on a foreign
corporation-by-foreign corporation
basis.
After consideration of the comments,
the Treasury Department and the IRS
maintain the rule in the final regulations
based upon both the technical analysis
of the relevant sections of the Code and
the underlying policy. As a result, no
credit is allowed under section 960(a)(3)
or any other provision of the Code for
taxes attributable to section 965(a)
earnings amounts offset by an aggregate
foreign E&P deficit that would have
been deemed paid under section
960(a)(1) had the amounts actually been
included in income under section
951(a).
2. Definition of Upper-Tier Foreign
Corporation
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 lowertier foreign corporation. Proposed
§ 1.965–5(c)(1)(ii). A comment requested
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that the final regulations clarify that
references to ‘‘upper-tier foreign
corporation’’ includes a disregarded
entity or partnership that is legally an
owner of the specified foreign
corporation in question, and that
references to distributions similarly
refer to legal distributions not to U.S.
tax characterizations.
The final regulations do not broaden
the definition of ‘‘upper-tier foreign
corporation’’ as requested by the
comment. To the extent that there is a
distribution of previously taxed E&P
from a foreign corporation to a
disregarded entity or partnership that is
owned by a foreign corporation, the
foreign corporate owner would be
considered an ‘‘upper-tier foreign
corporation.’’ See, e.g., section 702(a).
Therefore, a credit would be allowed
under section 960(a)(3), upon ultimate
distribution of the previously taxed E&P
to an eligible United States shareholder,
for creditable foreign income taxes
imposed on the disregarded entity or
partnership that are considered paid by
the foreign corporate owner for U.S. tax
purposes with respect to the
distribution of previously taxed E&P
from the lower-tier foreign corporation.
To the extent that there is a distribution
of previously taxed E&P from a foreign
corporation to a disregarded entity or
partnership that is owned by a domestic
corporation, the domestic corporate
owner should be entitled to a credit
under section 901 for the creditable
foreign income taxes imposed on the
disregarded entity or partnership that
are considered paid by the domestic
corporation for U.S. tax purposes.
Therefore, there is no need to broaden
the definition of ‘‘upper-tier foreign
corporation’’ to include disregarded
entities and partnerships.
Similar comments requested that the
final regulations clarify that a tax
imposed on a disregarded payment from
a disregarded entity to an upper-tier
foreign corporation that owns the
disregarded entity is related to a
distribution of previously taxed E&P.
Another comment stated that the
limitation of the credit allowed under
section 960(a)(3) to foreign income taxes
imposed on an upper-tier foreign
corporation impedes the avoidance of
double taxation with respect to foreign
income taxes imposed on a lower-tier
CFC upon distribution of its previously
taxed E&P to an upper-tier CFC or
foreign income taxes imposed on a firsttier CFC upon distribution of its
previously taxed E&P to its United
States shareholder. The Treasury
Department and the IRS do not address
these comments in the final regulations
because the characterization of taxes
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incurred with respect to disregarded
payments for purposes of section
960(a)(3) is outside of the scope of this
rulemaking.
Finally, clarification was requested on
whether the requirement that the
previously taxed E&P be distributed by
a lower-tier foreign corporation in order
for taxes to be deemed paid with respect
to the previously taxed E&P under
section 960(a)(3) applies to both section
965(a) previously taxed earnings and
profits and section 965(b) previously
taxed earnings and profits, or just to the
latter. The Treasury Department and the
IRS have determined that regulations
are clear that the requirement applies to
both section 965(a) previously taxed
earnings and profits and section 965(b)
previously taxed earnings and profits.
See § 1.965–5(c)(1)(ii).
C. Deemed Paid Credit Computation
1. Treatment of Adjustment Under
Section 965(b)(4)(B)
The proposed regulations provide
that, 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. Proposed
§ 1.965–6(c)(3). Comments
recommended that the final regulations
conform to the language of section
965(b)(4)(B) to provide that these
adjustments happen in the last taxable
year that begins before January 1, 2018.
Section 965(b)(4)(B) provides that, for
purposes of the Code, 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 the shareholder by
reason of allocation of the deficit to a
DFIC. Under section 902(c)(1), post1986 undistributed earnings are based
on the E&P of the foreign corporation,
computed in accordance with sections
964(a) and 986, without diminution for
dividends distributed during the taxable
year. Pursuant to section 902(c)(8),
Treasury regulations modify the
computation of E&P included in post1986 undistributed earnings as
necessary to carry out the provisions of
section 902. For example, under
§ 1.902–1(a)(9)(i), previously taxed
earnings and profits arising in prior
post-1986 taxable years are not included
in post-1986 undistributed earnings.
Section 965(o) also provides that the
Treasury Department and IRS may issue
regulations necessary to prevent the
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avoidance of the purposes of section
965.
Given this background, the Treasury
Department and the IRS have
determined that post-1986 undistributed
earnings should not be increased during
the last taxable year of an E&P deficit
foreign corporation beginning before
January 1, 2018, as a result of section
965(b)(4)(B). An immediate increase
could allow shareholders to claim
deemed paid credits with respect to
amounts earned after November 2, 2017,
by E&P deficit foreign corporations even
though such earnings were not in excess
of accumulated deficits. That would
result in a windfall to section 958(a)
U.S. shareholders of DFICs and E&P
deficit foreign corporations because
such shareholders are not taxable on
accumulated post-1986 deferred foreign
income of a DFIC to the extent of the
DFIC’s allocable share of an aggregate
foreign E&P deficit and, with respect to
the E&P deficit corporation, they would
be entitled to deemed paid taxes that
they would not otherwise be eligible to
claim because of the accumulated
deficit, a result inconsistent with
general operation of section 902. See,
e.g., § 1.902–1(b)(4). Additionally, the
deemed paid taxes would not be subject
to the disallowance for the applicable
percentage provided for in section
965(g), even though the foreign income
taxes were able to be deemed paid only
as a result of the operation of section
965. Accordingly, the Treasury
Department and the IRS do not amend
this rule in the final regulations. See
§ 1.965–6(b)(3).
2. Deemed Paid Credits for E&P Deficit
Foreign Corporations
The proposed regulations clarify that
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. Proposed
§ 1.965–6(c)(2). A comment requested
that the foreign taxes of an E&P deficit
foreign corporation could be deemed
paid with respect to a section 965(a)
inclusion, for example, by allocation of
such taxes pro rata to DFICs.
The Treasury Department and the IRS
do not adopt the suggestion to treat the
post-1986 foreign income taxes of an
E&P deficit foreign corporation as taxes
paid or accrued by a DFIC because there
is no basis in the statute for modifying
the computation of deemed paid credits
in this manner. In addition, neither
section 902 nor 960 nor the regulations
issued under those sections provide for
the allocation of taxes from one foreign
corporation to another as suggested by
the comment.
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3. Application of Section 902 as if
Section 965(a) Inclusion Were a
Dividend
The proposed regulations provide, in
relevant part, that for purposes of
determining foreign taxes deemed paid
under section 960(a)(1) with respect to
a section 965(a) inclusion with respect
to a DFIC, section 902 applies as if the
section 965(a) inclusion were a
dividend paid by the DFIC. Proposed
§ 1.965–6(b). Questions have arisen as to
the effect of treating a section 965(a)
inclusion as a dividend for this purpose.
This language merely incorporates the
language of section 960(a)(1) into the
regulations, as section 960(a)(1) also
provides in relevant part that ‘‘section
902 shall be applied as if the amount so
included were a dividend paid by such
foreign corporation.’’ The language in
proposed § 1.965–6(b) does not mean
that any of the requirements of sections
902 and 960 should be considered
inapplicable for purposes of
determining deemed paid taxes with
respect to section 965(a) inclusions.
Further, the language in proposed
§ 1.965–6(b) does not mean that section
965(a) inclusions should be treated as
dividends for purposes of the ordering
rule under § 1.960–1(i)(2). The final
regulations clarify that the ordering
rules of § 1.960–1(i)(2) continue to
apply, subject to the modification
described in Part III.A of this Summary
of Comments and Explanation of
Revisions. See § 1.965–2(b).
4. Section 902 Fraction
The proposed regulations provide that
the term ‘‘section 902 fraction’’ means,
with respect to either a DFIC or an E&P
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, divided by (ii) the foreign
corporation’s post-1986 undistributed
earnings. Proposed § 1.965–6(c). A
question was raised as to whether
dividends and inclusions under section
951(a)(1) are combined for purposes of
the section 902 fraction. Another
comment concerned whether the
definition of ‘‘section 902 fraction’’
implied that the ordering rule in
§ 1.960–1(i)(2) was no longer effective.
The final regulations continue to
include a defined term, ‘‘section 902
fraction,’’ that is consistent with section
902(a), while tying it to the computation
of deemed paid taxes in section 902(a).
See § 1.965–6(b)(2) and (4). As noted in
Part VI.C.3 of this Summary of
Comments and Explanation of
Revisions, the final regulations also
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1859
confirm that the ordering rule in
§ 1.960–1(i)(2), as modified by § 1.965–
2(b), applies in years in which a
taxpayer may have a section 965(a)
inclusion; accordingly, the section 902
fraction must be computed separately
with respect to dividends and
inclusions under section 951(a)(1). As
noted in Part III.A.3 of this Summary of
Comments and Explanation of
Revisions, the examples in § 1.965–
2(j)(1) and (4) illustrate the
determination of deemed paid taxes
(including the computation of section
902 fractions) under sections 902 and
960 in fact patterns involving section
965(a) inclusions.
5. Ownership Requirements for Deemed
Paid Taxes
The proposed regulations provide that
the rule treating members of a
consolidated group as a single
corporation does not apply for purposes
of computing the foreign taxes deemed
paid with respect to a section 965(a)
inclusion, and that the foreign taxes
deemed paid must be computed on a
separate member basis. See proposed
§ 1.965–8(e)(2). A comment requested
that the final regulations treat all the
members of a consolidated group as a
single taxpayer for all purposes of
section 965, such that members owning
less than ten percent of a DFIC would
be able to claim deemed paid credits
with respect to the DFIC.
Another comment requested relief in
the case in which a domestic
corporation satisfied the ownership
requirements under section 902 with
respect to a DFIC when it received a
distribution from the DFIC, but did not
satisfy the ownership requirements
under section 960 on the date of the
section 965(a) inclusion.
The final regulations continue to
follow the statute under section 960
regarding the ownership requirements
for eligibility for a foreign tax credit
and, therefore, do not adopt either of
these comments. See § 1.965–8(e)(2).
6. Hovering Deficits
In response to comments, the
preamble to the proposed regulations
stated that the regulations would not
provide a rule that, to the extent that a
hovering deficit is treated as reducing
the post-1986 earnings and profits of a
DFIC, related taxes would be added to
the DFIC’s post-1986 foreign income
taxes in the inclusion year with respect
to the DFIC. After the issuance of the
proposed regulations, the Treasury
Department and the IRS received
additional comments requesting
reconsideration of this issue. Comments
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highlighted the following language in
the legislative history to section 965:
[T]he conferees expect the Secretary may
issue guidance to provide that, solely for
purposes of calculating the amount of foreign
income taxes deemed paid by the U.S.
shareholder with respect to an inclusion
under section 965, a hovering deficit may be
absorbed by current year earnings and profits
and the foreign income taxes related to the
hovering deficit may be added to the
specified foreign corporation’s post-1986
foreign income taxes in that separate category
on a pro rata basis in the year of inclusion.
H.R. Rep. No. 115–466, at 619 (2017).
To effectuate the legislative history,
the final regulations provide that to the
extent the hovering deficit would have
been absorbed by E&P accrued during
the taxable year but for a section 965(a)
inclusion, taxes that relate to the
hovering deficit are taken into account
for purposes of determining post-1986
foreign income taxes. Therefore,
§ 1.965–6(d) provides that in the last
taxable year that begins before January
1, 2018, of a DFIC that is also a foreign
surviving corporation, for purposes of
determining the related taxes that are
included in post-1986 foreign income
taxes, the post-transaction earnings that
can be offset by a hovering deficit
include any current year earnings which
were included under section 965 by a
section 958(a) U.S. shareholder; and the
hovering deficit offset is treated as
occurring as of the last day of the DFIC’s
inclusion year.
VII. Comments and Changes to
Proposed § 1.965–7—Elections and
Payment Rules
Proposed § 1.965–7 provides rules
regarding the timing and manner of
certain elections that may be available
to taxpayers under section 965, and
payments to be made pursuant to those
elections. The comments and
modifications with respect to these rules
are discussed in this Part VII.
A. Election Statements
The proposed regulations provide
that, in order to make elections with
respect to section 965, the person
making the election must attach an
election statement, signed under
penalties of perjury, to its return for the
relevant taxable year. Proposed
§§ 1.965–2(f)(2)(iii)(B)(2), 1.965–
7(b)(2)(iii), 1.965–7(c)(2)(iii), 1.965–
7(d)(3)(iii), 1.965–7(e)(2)(iii), and 1.965–
7(f)(5)(iii). The proposed regulations do
not address whether the election
statement attached to or included with
the return must be signed or whether
the person making the election can
attach an unsigned statement and retain
the signed copy in its records. The final
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regulations provide that the signature
requirement is satisfied if the unsigned
copy is attached to a timely-filed return
of the person making the election,
provided that the person retains the
signed original in the manner specified
in § 1.6001–1(e). See §§ 1.965–
2(f)(2)(iii)(B)(2), 1.965–7(b)(2)(iii),
1.965–7(c)(2)(iii), 1.965–7(d)(3)(iii),
1.965–7(e)(2)(iii), and 1.965–7(f)(5)(iii).
In addition, comments requested
clarification regarding whether the
election statement could be signed by a
return preparer and who must sign the
statement in the case of a married filing
jointly income tax return. The final
regulations do not specifically address
who must sign a statement but indicate
that general rules concerning who is
authorized to sign tax returns apply. Id.
B. Acceleration Events and Triggering
Events
Section 965(h)(3) provides that an
acceleration event occurs when 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 of the assets of the
person who made the section 965(h)
election (including in a title 11 or
similar case), a cessation of business by
the person who made the section 965(h)
election, or any similar circumstance.
Proposed § 1.965–7(b)(3)(ii) clarifies
what events are acceleration events and
what is considered a similar
circumstance. Proposed § 1.965–
7(b)(3)(ii)(B) provides that a liquidation,
sale, exchange, or other disposition of
substantially all of the assets of the
person making the election (including
in a title 11 or similar case or, in the
case of an individual, death) is an
acceleration event.
Similarly, section 965(i)(2) lists
triggering events that end the payment
deferral for purposes of the section
965(i) election, including a liquidation
or sale 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, the S
corporation ceasing to exist, or any
similar circumstance. Proposed § 1.965–
7(c)(3)(ii) clarifies the similar
circumstances treated as triggering
events. Specifically, proposed § 1.965–
7(c)(3)(ii)(B) provides that 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) is a triggering event.
In addition, section 965(m)(2)(B)(ii)
provides that, with respect to a real
estate investment trust (‘‘REIT’’) that
made a section 965(m) election, a
liquidation or sale of substantially all of
the assets of the REIT (including in a
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title 11 or similar case), a cessation of
business by the REIT, or any similar
circumstance will cause any amount not
yet included in gross income (due to the
section 965(m) election) to be included
in gross income as of the day before the
date of the event. Proposed § 1.965–
7(d)(5) clarifies what a similar
circumstance is by providing that a
liquidation, sale, exchange, or other
disposition of substantially all of the
assets of the REIT will cause the
acceleration of the remaining inclusion.
1. Disposition or Exchange of
Substantially All of the Assets
Comments questioned whether a
disposition of substantially all of the
assets resulting from a downstream taxfree reorganization or an exchange
described in section 351 or 721 should
constitute an acceleration event or
triggering event, particularly when the
assets remain under the control of the
taxpayer, and whether a reorganization
described in section 368(a)(1)(F) should
be treated as an acceleration event or
triggering event. One comment, relating
only to triggering events under section
965(i), proposed multiple alternatives,
including removing the ‘‘exchange or
other disposition’’ language from
proposed § 1.965–7(c)(3)(ii)(B) and
providing that any nonrecognition
transaction is not an exchange.
The Treasury Department and the IRS
have determined that any disposition of
substantially all of the assets of the
person making the section 965(h)
election, the S corporation, or the REIT,
including in a tax-free reorganization or
an exchange described in section 351 or
721, poses a risk to the IRS’s ability to
collect the full amount of the section
965(h) net tax liability, section 965(i)
net tax liability, or total net tax liability
under section 965, as the case may be.
The Treasury Department and the IRS
have determined that it is essential for
tax administration purposes for the IRS
to be apprised of these dispositions.
Providing an exclusion to the general
rule that an exchange or other
disposition of substantially all of the
assets of the person making the section
965(h) election, the S corporation with
respect to which a section 965(i)
election is in effect, or the REIT with a
section 965(m) election in effect for
nonrecognition transactions could
hamper the IRS’s ability to collect the
outstanding tax liabilities and could
enable certain taxpayers to
inappropriately dilute their interests in
their assets or change their businesses in
a way that is inconsistent with the
purposes behind the elections and
related triggering and acceleration
events. The final regulations also do not
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include a special exception for
reorganizations under section
368(a)(1)(F) because requiring a transfer
agreement, if applicable, in those
situations is necessary for tax
administration purposes.
A comment also requested
clarification of the meaning of
‘‘substantially all’’ for purposes of the
acceleration event and triggering event
rules. The phrase ‘‘substantially all’’ is
used in various Code provisions and in
regulations, and often is determined
based on all of the facts and
circumstances. Consistent with this
general approach, the Treasury
Department and the IRS decline to
provide a bright-line definition of
‘‘substantially all’’ in the final
regulations.
2. Death of Transferor
Proposed § 1.965–7(b)(3)(ii)(B)
provides that for a person who made a
section 965(h) election, the liquidation,
sale, exchange, or other disposition of
substantially all of the assets of the
person, including, for an individual, by
reason of death, is an acceleration event.
Proposed § 1.965–7(b)(3)(iii)(A)(1)(ii)
specifically excludes death of an
individual from the covered
acceleration events that allow for a
transfer agreement. A comment
requested that, because death is
specifically mentioned as a triggering
event in section 965(i)(2)(A)(iii) but not
section 965(h)(3), death not be treated as
an acceleration event for purposes of the
section 965(h) election. In addition, the
comment requested that, if death is
treated as an acceleration event for
purposes of the section 965(h) election,
it be treated as a covered acceleration
event (as described in proposed § 1.965–
7(b)(3)(iii)(A)(1)) and thus be eligible for
a transfer agreement. Under section
965(h)(3), an acceleration event includes
a liquidation or sale of substantially all
of the assets of the taxpayer or any
similar circumstance, and proposed
§ 1.965–7(b)(3)(ii)(B) provides that an
exchange or other disposition of
substantially all of the assets of the
taxpayer (outside of the context of the
death of an individual) is an
acceleration event. The death of an
individual taxpayer is similar to any
transfer or other disposition of
substantially all of the assets of a
taxpayer, and, accordingly, is a similar
circumstance that should be an
acceleration event. The Treasury
Department and the IRS have
determined that there are administrative
difficulties with transferring liabilities
and executing transfer agreements in the
event of death. Moreover, in many
cases, there would be multiple
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beneficiaries in the case of death, and
multiple transferees are not permitted
for purposes of section 965(h). For those
reasons, and because the section 965(i)
rules more clearly contemplate allowing
transfers on death (and allowing
transfers to multiple transferees or
beneficiaries), the Treasury Department
and the IRS have determined that it is
appropriate not to treat the death of an
individual shareholder as a covered
acceleration event for purposes of
section 965(h), and the comment is not
adopted.
C. Transfer Agreements
1. Inclusion of Form 965–A or 965–B
The proposed regulations provide that
transfer agreements for purposes of
section 965(h) and section 965(i) are
required to include the eligible section
965(h) transferor’s or eligible section
965(i) transferor’s most recent Form
965–A or 965–B, as applicable, among
other information. Proposed § 1.965–
7(b)(3)(iii)(B)(4)(v) and (c)(3)(iv)(B)(4)(v).
In some cases, no Form 965–A or 965–
B will have been required to be filed
before the transfer agreement.
Accordingly, the final regulations clarify
that the Form 965–A or 965–B is only
required to be filed with a transfer
agreement if the eligible section 965(h)
transferor or eligible section 965(i)
transferor was required to file the form.
Section 1.965–7(b)(3)(iii)(B)(4)(v) and
(c)(3)(iv)(B)(4)(v).
2. Due Date for Transfer Agreements
Proposed § 1.965–7(b)(3)(iii)(B)(2)(ii)
and § 1.965–7(c)(3)(iv)(B)(2)(ii) provide
that, if an acceleration event or a
triggering event occurs before
September 10, 2018, a transfer
agreement must be filed by October 9,
2018, in order to be considered timely
filed. In addition, proposed § 1.965–
7(b)(3)(iii)(B)(2)(i) and § 1.965–
7(c)(3)(iv)(B)(2)(i) provide that, if an
acceleration event or a triggering event
occurs on or after September 10, 2018,
a transfer agreement must be filed
within thirty days of the acceleration or
triggering event in order to be
considered timely filed. Proposed
§ 1.965–7(b)(3)(iii)(B)(2)(i) and § 1.965–
7(c)(3)(iv)(B)(2)(i) provide that transfer
agreements must be filed in accordance
with the rules provided in publications,
forms, instructions, or other guidance.
Because additional guidance, including
where to file the agreements, was not
issued before certain transfer
agreements would have been due, the
transition rules in § 1.965–
7(b)(3)(iii)(B)(2)(ii) and § 1.965–
7(c)(3)(iv)(B)(2)(ii) have been updated to
provide that if a triggering event or
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1861
acceleration event occurs on or before
February 5, 2019, the transfer agreement
must be filed by March 7, 2019, in order
to be considered timely filed. See also
§ 1.965–7(c)(3)(v)(D)(2)(ii) (similarly
extending the deadline for filing
agreements to make a section 965(h)
election after a triggering event).
3. Multiple Transferees
With respect to a section 965(h)
acceleration event, proposed § 1.965–
7(b)(3)(iii)(B)(1) defines an eligible
section 965(h) transferee as a ‘‘single
United States person that is not a
domestic pass-through entity’’ that
meets additional requirements. With
respect to a section 965(i) triggering
event, proposed § 1.965–7(c)(3)(iv)(B)(1)
defines an eligible section 965(i)
transferee as a ‘‘single United States
person that is not a domestic passthrough entity.’’ A comment requested
that multiple transferees be allowed to
be eligible transferees for purposes of
both section 965(h) and section 965(i).
Section 965(h) and proposed § 1.965–
7(b) do not allow for a partial transfer
of the section 965(h) net tax liability.
Allowing multiple transferees would be
similar to allowing for partial transfers.
Furthermore, the existence of multiple
transferees poses significant
administrative challenges for the IRS.
Accordingly, the Treasury Department
and the IRS do not adopt the
recommendation. However, section
965(i)(2)(B) specifically contemplates
partial transfers of the section 965(i) net
tax liability. As a result, the final
regulations clarify in § 1.965–
7(c)(3)(iv)(B)(1) that if a transfer
(including as a result of the death of an
eligible section 965(i) transferor)
consists of multiple partial transfers (as
described in § 1.965–7(c)(3)(iii)), then
the eligible section 965(i) transferor can
enter into multiple transfer agreements,
one for each partial transfer, with
different eligible section 965(i)
transferees.
4. Consolidated Groups
Proposed § 1.965–7(b)(3)(ii)(F)
provides that an acceleration event
includes, in the case of a consolidated
group, the consolidated group ceasing to
exist. Proposed § 1.965–
7(b)(3)(iii)(A)(1)(iv) provides that, for
purposes of the eligible section 965(h)
transferee exception (as defined in
proposed § 1.965–7(b)(3)(iii)), a covered
acceleration event includes, with
respect to an acceleration event under
proposed § 1.965–7(b)(3)(ii)(F), an event
resulting from the acquisition of a
consolidated group within the meaning
of § 1.1502–13(j)(6) if the acquired
consolidated group members join a
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different consolidated group as of the
day following the acquisition. The
proposed regulations do not provide for
covered acceleration events related to
other fact patterns in which a
consolidated group ceases to exist.
Comments requested that there be an
additional covered acceleration event to
account for a situation in which the
consolidated group ceases to exist by
reason of one or more members of the
consolidated group transferring all of
their assets to other members, with only
one member remaining (for example, a
consolidated group consisting only of a
parent and a subsidiary ceasing to exist
by reason of the subsidiary liquidating
into the parent). The Treasury
Department and the IRS have
determined that it is appropriate to
permit the remaining member to enter
into a transfer agreement in these
circumstances. Accordingly, § 1.965–
7(b)(3)(iii)(A)(1)(v) includes this
scenario as a covered acceleration event.
In addition, § 1.965–7(b)(3)(iii)(B)(1)(v)
provides that, with respect to the
acceleration event in § 1.965–
7(b)(3)(iii)(A)(1)(v), the remaining
member of the consolidated group to
which all of the other members’ assets
are transferred is an eligible section
965(h) transferee (provided that it meets
the remaining requirements of § 1.965–
7(b)(3)(iii)(B)(1)).
Another comment requested that
there be an additional covered
acceleration event to account for a
situation in which a consolidated group
is wholly owned by a corporation that
is not an includible corporation (within
the meaning of section 1504(b)) when a
section 965(h) election was made but
subsequently becomes an includible
corporation even though the situation
does not involve the acquisition of stock
of the common parent. For example, this
situation could arise when the
corporation that owns the consolidated
group is an S corporation and
subsequently revokes its S corporation
election. The Treasury Department and
the IRS have determined that it is
appropriate to permit transfer
agreements in these circumstances.
Accordingly, § 1.965–
7(b)(3)(iii)(A)(1)(vi) provides that a
covered acceleration event occurs when
the group ceases to exist as a result of
the termination of the subchapter S
election pursuant to section 1362(d) of
a shareholder of the common parent of
the consolidated group and, for the
shareholder’s taxable year immediately
following the termination, the
shareholder joins in the filing a
consolidated return as of a consolidated
group that includes all of the former
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members of the former consolidated
group. In addition, § 1.965–
7(b)(3)(iii)(B)(1)(vi) provides that, with
respect to the acceleration event in
§ 1.965–7(b)(3)(iii)(A)(1)(vi), the agent
(within the meaning of § 1.1502–77) of
the new consolidated group that
includes the shareholder whose
subchapter S election was terminated
and all of the former members of the
former consolidated group is an eligible
section 965(h) transferee (provided that
it meets the remaining requirements of
§ 1.965–7(b)(3)(iii)(B)(1)).
5. Joint and Several Liability
Proposed § 1.965–7(b)(3)(iii)(D)(2)
provides that an eligible section 965(h)
transferor remains jointly and severally
liable for any unpaid installments
assumed by the eligible section 965(h)
transferee, as well as any penalties,
additions to tax, or other additional
amounts attributable to the section
965(h) net tax liability that was
transferred. A representation to this
effect is required in the transfer
agreement if the section 965(h)
transferor remains in existence after the
transfer. Proposed § 1.965–
7(b)(3)(iii)(B)(4)(viii). A comment
questioned whether the joint and
several liability requirement was
necessary, given that the eligible section
965(h) transferee has agreed to assume
the liability and has the assets from
which the liability would be satisfied,
and whether there should be differing
treatment between eligible section
965(h) transferors that liquidate
immediately after the transfer and those
that do not. The comment also noted
that in many cases, the section 965(h)
net tax liability would be taken into
account in the purchase price of a sale
of substantially all of the assets of the
eligible section 965(h) transferor. The
final regulations do not adopt this
comment. Requiring the eligible section
965(h) transferor to be jointly and
severally liability for the unpaid section
965(h) net tax liability, as well as any
penalties, additions to tax, or other
additional amounts attributable to the
section 965(h) net tax liability, protects
the IRS’s ability to collect the full
amount of the section 965(h) net tax
liability and helps guard against abusive
transactions. In addition, as the
comment noted, taxpayers are able to
account for the joint and several liability
in their transactions.
6. Death of an S Corporation
Shareholder
Under section 965(i)(2)(A)(iii) and
(i)(2)(C) and proposed § 1.965–
7(c)(3)(ii)(C) and (c)(3)(iv)(A)(1), the
death of an S corporation shareholder
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who made a section 965(i) election is a
triggering event, and the deferred
liability can be transferred if a transfer
agreement is entered into with an
eligible section 965(i) transferee (as
defined in proposed § 1.965–
7(c)(3)(iv)(B)(1)). Proposed § 1.965–
7(c)(3)(iv)(B)(2)(i) requires that any
transfer agreement with respect to a
section 965(i) election be filed within 30
days of the date that the transfer
occurred. The Treasury Department and
the IRS have determined that when the
triggering event is the death of the
eligible section 965(i) transferor, filing a
transfer agreement within 30 days may
be impractical. Accordingly, the final
regulations provide, in § 1.965–
7(c)(3)(iv)(B)(2)(iii), that in the case of
the death of an eligible section 965(i)
transferor, the transfer agreement is
required to be filed by the later of the
unextended due date for the eligible
section 965(i) transferor’s final income
tax return and March 7, 2019.
In addition, the final regulations
clarify in § 1.965–7(c)(3)(iv)(B)(5) what
transfer agreements are required
following the death of an eligible
section 965(i) transferor. In order to
make the transfer agreements more
administrable for both taxpayers and the
IRS, the final regulations provide that,
except in the case of transfers to trusts,
in the event of the death of an eligible
section 965(i) transferor, if the
beneficiary or beneficiaries are known
and determined as of the due date for
the transfer agreement (that is,
generally, the unextended due date for
the eligible section 965(i) transferor’s
final income tax return), then the
transfer will be treated as a transfer
directly between the eligible section
965(i) transferor and the eligible section
965(i) transferee beneficiary or
beneficiaries, and only one transfer
agreement for each eligible section
965(i) transferee is required. If, however,
the beneficiary or beneficiaries are not
known and determined by the due date
for the transfer agreement, then the
transfer will be treated as two transfers:
First, the transfer on death between the
eligible section 965(i) transferor and his
or her estate, and, second, a transfer (not
on death) between the estate and the
eligible section 965(i) transferee
beneficiary or beneficiaries, and
separate transfer agreements are
required for each transfer. The general
rule concerning transfers to trusts will
continue to apply as discussed in Part
VII.E.1 of this Summary of Comments
and Explanation of Revisions.
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7. Terms of Transfer Agreements
a. Transfer Agreements After
Acceleration Events
The proposed regulations provide
specific information and representations
that a transfer agreement must contain,
including a statement that the transferee
agrees to assume the transferor’s
liability for any unpaid installment
payments. The final regulations include
modifications to certain requirements
for the terms of a transfer agreement.
First, the final regulations clarify that an
eligible section 965(h) transferee must
consent to an assessment with respect to
the liability that it assumes.
Specifically, when an eligible section
965(h) transferor and an eligible section
965(h) transferee enter into a transfer
agreement, the amount of the section
965(h) net tax liability will already be
assessed against the transferor. For the
transfer agreements to be administrable,
the final regulations add the
requirement that an eligible section
965(h) transferee waive the right to a
notice of liability and consent to the
immediate assessment of the portion of
the eligible section 965(h) transferor’s
section 965(h) net tax liability
remaining unpaid as a term of the
transfer agreement. Section 1.965–
7(b)(3)(iii)(B)(4)(ix).
Second, the final regulations retain
the proposed regulations’ requirement
that an eligible section 965(h) transferee
represent that it is able to make the
remaining payments with respect to the
section 965(h) net tax liability being
assumed. Because the transfer of
substantially all of the assets of the
eligible section 965(h) transferor
presents a risk to the IRS’s ability to
collect the outstanding section 965(h)
net tax liability, the final regulations
require a transfer agreement to include
a statement as to whether the leverage
ratio of the eligible section 965(h)
transferee exceeds three to one, subject
to modification by future guidance. See
§ 1.965–7(b)(3)(iii)(B)(4)(ix) and
(b)(3)(iii)(B)(6).
A taxpayer with a leverage ratio in
excess of three to one may be an eligible
section 965(h) transferee and may file a
valid transfer agreement, provided the
requirements of § 1.965–7(b)(3)(iii)(B)
are met. The IRS may, however, use the
information provided regarding an
eligible section 965(h) transferee’s
leverage ratio in connection with a
subsequent evaluation of the accuracy of
an eligible section 965(h) transferee’s
representation that it has the ability to
pay the outstanding section 965(h) net
tax liability. The ability of an eligible
section 965(h) transferee to pay the
outstanding section 965(h) net tax
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liability depends on all of the relevant
facts and circumstances, including its
leverage ratio and also including the
eligible section 965(h) transferee’s
revenue, the value of its assets, its
access to capital, the volatility of its
business, the size of the section 965(h)
net tax liability assumed, and other
factors. The IRS may request further
information when evaluating a transfer
agreement in order to assess these
aspects of the transferee. Section 1.965–
7(b)(3)(iii)(C)(1) and (c)(3)(iv)(C)(1).
If the Commissioner determines that
this representation (or any of the other
information contained in the transfer
agreement) is incorrect, then the transfer
agreement may be rejected as of the date
of the acceleration event or 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. See § 1.965–
7(b)(3)(iii)(C)(2).
Third, § 1.965–7(b)(3)(iii)(B)(4)(xi)
clarifies, consistent with the
requirement in proposed § 1.965–
7(b)(3)(iii)(B)(2)(i) that a transfer
agreement be filed consistent with other
guidance, that additional terms for
transfer agreements may be prescribed
pursuant to publications, forms,
instructions, or other guidance.
b. Transfer Agreements and Consent
Agreements After Triggering Eevents
The final regulations also include
changes to the terms of the transfer
agreements to be entered into by eligible
section 965(i) transferees and the
consent agreements to be entered into
by certain shareholders after certain
triggering events consistent with the
changes to the terms of the transfer
agreements to be entered into in
connection with acceleration events
discussed in Part VI.C.7.a of this
Summary of Comments and Explanation
of Revisions. The final regulations
require a transfer agreement or consent
agreement to include a statement as to
whether the leverage ratio of the eligible
section 965(i) transferee or the taxpayer
making the section 965(h) election after
a triggering events exceeds three to one.
See § 1.965–7(c)(3)(iv)(B)(4)(ix),
(c)(3)(iv)(B)(6), (c)(3)(v)(D)(4)(v), and
(c)(3)(v)(D)(6). The final regulations also
clarify that additional terms for transfer
agreements and consent agreements in
connection with triggering events may
be prescribed pursuant to publications,
forms, instructions, or other guidance.
Section 1.965–7(c)(3)(iv)(B)(4)(x) and
(c)(3)(v)(D)(4)(vi).
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1863
D. Section 965(h) Elections
1. Deficiencies or Additional Liabilities
Section 965(h)(4) provides that if a
deficiency is assessed with respect to a
person’s section 965(h) net tax liability,
other than in cases of negligence,
intentional disregard of rules and
regulations, or fraud with intent to
evade tax, the amount of the deficiency
will be prorated among the installments,
and for any installment the due date of
which has already passed, the part of
the deficiency prorated to that
installment will be due on notice and
demand. Proposed § 1.965–7(b)(1)(ii)
extends this rule to apply in the case of
a person that increases the amount of its
section 965(h) net tax liability when it
files a return after payment of the first
installment or files an amended return.
Requiring notice and demand before
payment of the additional amount when
it is not due to a deficiency that has
been assessed is administratively
difficult and inconsistent with the rule
provided in proposed § 1.965–
7(b)(1)(ii)(C), applicable in the case of
negligence, intentional disregard of
rules and regulations, or fraud with
intent to evade tax. Therefore, the final
regulations have been modified to
provide that in the case of an additional
liability reported on a return or
amended return, any amount that is
prorated to an installment, the due date
of which has already passed, will be due
with the return reporting the additional
amount. Section 1.965–7(b)(1)(ii)(B).
The rule with respect to deficiencies
remains the same, and payment for a
deficiency prorated to an installment,
the due date of which has already
passed, is due on notice and demand.
Id.
2. Elections in Multiple Years
A comment requested clarification
regarding whether a person who has
section 965(h) net tax liabilities in
multiple taxable years due to ownership
of DFICs with different inclusion years
can make the section 965(h) election for
each year individually. Because the
section 965(h) election is made with
respect to the section 965(h) net tax
liability for a taxable year and is made
with the person’s tax return, it must be
made separately for each year that the
person has a section 965(h) net tax
liability. The Treasury Department and
the IRS have determined that no
additional clarification is necessary.
Section 1.965–7(b)(2) and (g)(4).
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E. Section 965(i) Elections
1. Trusts and Estates
Comments requested clarification of
the application of the rules regarding
elections in the case of trusts and
estates. These comments can largely be
divided into two categories: (a) Requests
for guidance concerning which persons
are treated as S corporation
shareholders for purposes of the section
965(i) election and entering into transfer
agreements after a triggering event, and
(b) requests for guidance concerning
what events constitute triggering events.
a. Persons Eligible To Make Section
965(i) Elections and Eligible Section
965(i) Transferees
The comments requested that the final
regulations clarify the definition of
‘‘pass-through entity’’ in proposed
§ 1.965–1(f)(28) to provide more
certainty on the status of grantor trusts
and qualified subchapter S trusts
(‘‘QSSTs’’). Comments further noted
that it may be unclear whether grantor
trust owners and beneficiaries of QSSTs
are eligible to make a section 965(i)
election and enter into transfer
agreements as eligible section 965(i)
transferees because it is not clear
whether such persons are treated as
shareholders of an S corporation for
purposes of section 965. They also
requested that the final regulations
provide that a person with a section
965(i) net tax liability be permitted to
make a section 965(i) election and that
a person that would be subject to tax on
a section 965(i) net tax liability be
permitted to enter into a transfer
agreement after a triggering event.
Similarly, they requested that when an
S corporation is owned by a domestic
pass-through entity, the domestic passthrough owners be able to make the
section 965(i) election. The comments
also requested guidance on who is an
eligible section 965(i) transferee when
there is a death and a grantor trust
becomes a non-grantor trust, given that
an eligible section 965(i) transferee does
not include a pass-through entity, as
defined in proposed § 1.965–1(f)(28).
The Treasury Department and the IRS
have determined that the proposed
regulations are clear that both grantor
trusts and QSSTs constitute passthrough entities for purposes of
proposed § 1.965–1(f)(28). The entire
portion of the income attributable to the
S corporation stock is taxed to the
beneficiary of a QSST. See § 1.1361–
1(j)(1)(i). The same is true for grantor
trusts. See section 671 and § 1.1361–
1(h)(1)(i). The Treasury Department and
the IRS have determined that, because
the beneficiary of a QSST or the grantor
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(or beneficiary) of a grantor trust is
treated as an S corporation shareholder
for subchapter S purposes, it is
appropriate that the beneficiary or
grantor makes the section 965(i) election
and signs a transfer agreement as the
eligible section 965(i) transferee. While
the beneficiaries of an electing small
business trust (‘‘ESBT’’) are treated as S
corporation shareholders for section
1361 purposes, they are not treated as
such for purposes of consenting to an S
corporation election or taking into
account shares of an S corporation’s
items of income, loss, or deduction. See
§§ 1.1361–1(h)(3) and 1.1362–6(b)(2).
Thus, the trustee of the S corporation
portion of an ESBT should make a
section 965(i) election and be the
eligible section 965(i) transferee.
In the case of death, in which a
grantor trust becomes a non-grantor
trust, who can enter the transfer
agreement should depend on whether,
for example, an election is made to treat
the trust as a QSST or an ESBT, whether
the trust is treated as a testamentary
trust, or whether a section 645 election
is made to treat the trust as part of the
estate. Generally, the QSST beneficiary,
the trustee of an ESBT, or the executor
of an estate should be permitted to enter
into the transfer agreement.
Accordingly, in response to these
comments, the rules in § 1.965–7(c)(1)
and (c)(3)(iv)(B)(1) are revised to clarify
that persons required to consent with
respect to a trust or estate for purposes
of section 1362 are eligible to make a
section 965(i) election and be an eligible
section 965(i) transferee.
The comments also requested
clarification concerning whether an
ESBT or QSST that is treated as
bifurcated under trust rules is also
treated as bifurcated for purposes of
section 965, including elections,
acceleration events, and triggering
events. The comments noted that certain
trusts, in particular ESBTs, are divided
into different portions when they hold
stock of an S corporation. See
§ 1.641(c)–1(a). Accordingly, separate
section 965(h) elections and section
965(i) elections must be made. The final
regulations do not, however, address the
application of the trust bifurcation rules,
which are outside of the scope of this
rulemaking.
b. Triggering Events
Comments requested that certain
transactions that occur frequently with
respect to S corporation trusts not be
treated as triggering events and that
guidance be provided concerning how
to enter into a transfer agreement if such
a transaction is a triggering event. For
example, family settlement agreements,
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disclaimers, and certain decanting
transactions result in a legal transfer but
are not considered a transfer for either
U.S. federal transfer tax or income tax
purposes. The comments also noted that
certain trust transactions may result in
a change in taxpayer for U.S. federal
income tax reporting purposes although
no legal transfer occurred. These
transactions may include a conversion
of a grantor trust to a non-grantor trust,
a trust making a QSST or ESBT election,
a merger of two or more trusts, or a
severance of trusts into separate shares.
A comment also recommended that a
material modification of a trust, such as
through an amendment, decanting, or
judicial reformation, or a material
modification in a trust’s beneficiaries,
not constitute a triggering event where
there is no change in ownership for U.S.
federal income tax purposes.
In response to the comments, the final
regulations clarify that a transfer of S
corporation stock can only be a
triggering event if it is a transfer that
results in a change in ownership for
U.S. federal income tax purposes. Thus,
for example, a transfer of S corporation
stock between a person and a grantor
trust of which the person is an owner,
which is disregarded for U.S. federal
income tax purposes, is not a transfer
that can constitute a triggering event
because it does not result in an
ownership change for U.S. federal
income tax purposes. Cf. Rev. Rul. 85–
13, 1985–1 C.B. 184 (providing that no
sale occurred upon the transfer of trust
assets from a grantor trust to the
grantor). Specific guidance concerning
what transactions are treated as transfers
that result in a change in ownership for
U.S. federal income tax purposes is
outside the scope of these regulations.
Comments also requested guidance on
whether a trust’s conversion from
grantor status to non-grantor status due
to the death of a grantor, regardless of
whether the trust is treated as part of the
decedent’s estate under section 645, is
a triggering event. Section 965(i)(2)(iii)
and § 1.965–7(c)(3)(ii)(C) are clear that a
transfer includes a transfer by reason of
death, so a trust’s conversion to nongrantor status due to a death is a
triggering event. Accordingly, no further
guidance is warranted.
2. Section 962 Elections
A comment requested guidance
concerning the interaction of a section
962 election and a section 965(i)
election. The Treasury Department and
the IRS have determined that it is clear
that an eligible taxpayer may make a
section 962 election that applies with
respect to a section 965(a) inclusion that
results in a section 965(i) net tax
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liability that the taxpayer defers
payment of pursuant to a section 965(i)
election, because there are no
limitations in the section 962
regulations or the section 965
regulations that would preclude the
elections. Accordingly, no change is
made to the final regulations in this
regard.
The comment also requested guidance
concerning whether making both the
section 962 election and the section
965(i) election would result in the
treatment of distributions from a DFIC
owned by the S corporation to which
the section 965(i) election relates
occurring before a triggering event as
dividends not excluded from gross
income. The Treasury Department and
the IRS have determined that it is clear
that amounts attributable to a section
965(a) inclusion with respect to which
a section 962 election applies that
would otherwise be excluded from gross
income under section 959 are prevented
from being excluded before a triggering
event due to the application of section
962(d), because no tax will have been
paid with respect to the section 965(a)
inclusion. See Part III.D.6 of this
Summary of Comments and Explanation
of Revisions for a discussion of the
application of section 962(d) to section
965(h) elections, the concepts of which
apply equally for section 965(i)
elections. However, as discussed in Part
III.D.6 of this Summary of Comments
and Explanation of Revisions with
regard to the basis adjustments to be
made in the similar case of a domestic
pass-through owner that has made a
section 962 election applicable to its
distributive share of a domestic passthrough entity’s section 965(a) inclusion
amount, the issue raised by the
comment is a longstanding issue of
general applicability within subpart F
that is outside of the scope of
regulations concerning section 965.
Accordingly, the Treasury Department
and the IRS decline to adopt the
comment.
F. Section 965(m) Elections
Section 965(m) allows a real estate
investment trust (REIT) to make an
election to include its section 965(a)
inclusions (and correspondingly deduct
its section 965(c) deductions) over an
eight-year period, rather than all in one
taxable year. The schedule for
inclusions over the eight-year period is
similar to the schedule for payments for
the section 965(h) election. See sections
965(h)(1) and 965(m)(1)(B). A comment
requested that REITs making section
965(m) elections be treated the same as
taxpayers making section 965(h)
elections and be allowed to make
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adjustments to previously taxed E&P
and basis under sections 959 and 961 as
if the REIT had included the full section
965(a) inclusion (and deducted the full
section 965(c) deduction) in the taxable
year or years in which its DFICs had
subpart F income as a result of section
965(a). Notwithstanding the similarities
in the eight-year schedules for section
965(h) elections and section 965(m)
elections, the statute is clear that the
section 965(h) election defers payments
while the section 965(m) election defers
inclusions (and deductions). Thus,
allowing REITs making section 965(m)
elections to make adjustments under
sections 959 and 961 as if they had not
made the section 965(m) election would
be inconsistent with the statute;
therefore, the final regulations do not
adopt the comment.
Another comment requested that if
adjustments under sections 959 and 961
were not permitted until the
corresponding amounts were included
in income, the final regulations provide
guidance concerning the consequences
if the REIT disposed of DFIC stock
before all section 965(a) inclusions with
respect to the stock had been included
in income, and thus before all
corresponding adjustments under
sections 959 and 961 had been made.
The comment recommended that the
section 959 and 961 adjustments be
treated as made immediately before the
disposition. For the reasons discussed
in the preceding paragraph, the
Treasury Department and the IRS have
determined that such treatment would
not be appropriate and do not adopt the
comment.
G. Section 965(n) Elections
Proposed § 1.965–7(e) provides that if
a taxpayer makes a section 965(n)
election for a taxable year, certain
section 965-related amounts are not
taken into account in determining the
taxpayer’s net operating loss under
section 172 for the year or in
determining the taxpayer’s 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. A comment
requested clarification that the section
965(n) election applies for purposes of
the alternative minimum tax (‘‘AMT’’)
and section 1411. The Treasury
Department and the IRS have
determined that because the section
965(n) election affects the net operating
loss deduction and taxable income,
which are starting points for
determining alternative minimum tax
net operating loss deduction and
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1865
alternative minimum taxable income
under sections 56(d) and 55(b)(2),
respectively, it is clear that the section
965(n) election applies for purposes of
the AMT. Similarly, it is clear that the
section 965(n) election affects the
computations under § 1.1411–4(h) if an
election under § 1.1411–10(g) has been
made, and no clarification is needed.
A comment also requested
clarification that a section 965(n)
election can be made for every year in
which a REIT has a section 965(a)
inclusion by reason of a section 965(m)
election. Given that § 1.965–7(e), like
proposed § 1.965–7(e), provides that a
section 965(n) election can be made for
a taxable year in which a person has a
section 965(a) inclusion, the Treasury
Department and the IRS have
determined that no additional
clarification is necessary.
H. Election To Use Alternative Method
of Calculating Post-1986 Earnings and
Profits
Proposed § 1.965–7(f)(5)(i) provides
for an election to use an alternative
method for calculating post-1986
earnings and profits and provides that
the election is made for each specified
foreign corporation by its controlling
domestic shareholder (as defined in
§ 1.964–1(c)(5)) pursuant to the rules of
§ 1.964–1(c)(3). A comment requested
modifications regarding multiple
aspects of this election.
First, the comment requested that
references to the rules in § 1.964–1(c)(3)
be deleted because the requirements,
particularly with respect to the
statement required by § 1.964–1(c)(3)(ii)
and the notice to minority shareholders
required by § 1.964–1(c)(3)(iii), are too
onerous for this purpose. Second, the
comment requested that United States
shareholders be allowed to make a
blanket election for all of their specified
foreign corporations or be allowed to
make a single election and specifically
provide a schedule of those specified
foreign corporations for which they do
not want to make the election. Third,
the comment requested that the
penalties of perjury statement
requirement be eliminated.
The Treasury Department and the IRS
have determined that requiring a
controlling domestic shareholder to file
the statement required by § 1.964–
1(c)(ii) in order to make the election
described in proposed § 1.965–7(f) is
duplicative in light of the requirement
to provide an election statement
described in proposed § 1.965–
7(f)(5)(iii). However, the requirement to
give notice to minority shareholders is
not a duplicative requirement, and it
helps ensure that all taxpayers are using
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the same amounts for post-1986
earnings and profits to calculate their
section 965(a) inclusions. Accordingly,
§ 1.965–7(f)(5)(i) retains the reference to
§ 1.964–1(c)(3) but provides that the
statement described in § 1.964–
1(c)(3)(ii) is not required. In addition,
proposed § 1.965–7(f) provides that the
election is made on a specified foreign
corporation by specified foreign
corporation basis, in part because the
ability to use the November 2, 2017,
measurement date might differ among
specified foreign corporations. While it
is important for the IRS to know what
method is being used for each specified
foreign corporation in order to properly
determine the amount of post-1986
earnings and profits, it is not necessary
for a separate statement to be filed with
respect to each specified foreign
corporation. Therefore, the final
regulations permit a single election
statement to be filed that provides the
necessary information with respect to
each specified foreign corporation.
Finally, the election statement required
by proposed § 1.965–7(f)(5)(iii) contains
additional information beyond the
making of the election, including the
name and taxpayer identification
number (if any) of both the person
making the election and the specified
foreign corporation, so the request that
the penalties of perjury statement be
eliminated is not adopted. See Part
VII.A of this Summary of Comments and
Explanation of Revisions for more
discussion of the election statements.
I. Total Net Tax Liability Under Section
965
Section 965(h) elections and section
965(i) elections allow the deferral of
payment of amounts based on a
taxpayer’s total net tax liability under
section 965. See § 1.965–7(b)(1), (c)(1),
(g)(4), and (g)(6). Total net tax liability
is calculated on the basis of a taxpayer’s
net income tax ‘‘with’’ and ‘‘without’’
the application of section 965, which is
intended to isolate the portion of a
taxpayer’s net income tax attributable to
section 965.
1. ‘‘Without’’ Prong
The second prong of the definition of
total net tax liability under section 965
(the ‘‘without’’ prong) in the proposed
regulations calculates the taxpayer’s net
income tax without regard to section
965 but also disregards dividends
received directly or through a chain of
ownership described in section 958(a).
Proposed § 1.965–7(g)(10)(i)(B)(2).
Dividends are disregarded because,
absent section 965, they would
generally be taxed in the hands of the
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taxpayer, but such dividends may
instead be distributions of previously
taxed E&P if section 965 applies, and
thus not subject to additional tax if
section 965 applies. Therefore, absent
this rule, the tax imposed on dividends
would be included in the ‘‘without’’
prong but not in the ‘‘with’’ prong,
distorting the ‘‘with’’ and ‘‘without’’
calculation so that it no longer isolates
the net income tax attributable to
section 965. However, this rule does not
disregard investments in United States
property that would give rise to
inclusions under sections 951(a)(1)(B)
and 956, even though these inclusions,
like dividends, could result in income
inclusions that would be taxable in the
‘‘without’’ prong absent section 965, but
may instead be sheltered by previously
taxed E&P if section 965 does apply.
Comments recommended that the final
regulations disregard inclusions under
sections 951(a)(1)(B) and 956 for
purposes of the ‘‘without’’ computation
in order to ensure that the total net tax
liability under section 965 reflects an
accurate measure of a taxpayer’s tax due
to section 965. The final regulations
adopt this recommendation. See
§ 1.965–7(g)(10)(i)(B)(2).
A comment also suggested that the
final regulations clarify whether the
‘‘without’’ prong disregards dividends
received by a United States shareholder
from a DFIC before the DFIC’s inclusion
year. The Treasury Department and the
IRS have determined that disregarding
such dividends would distort the
measurement of the taxpayer’s tax due
to section 965, as those dividends
would not become distributions of
previously taxed E&P solely as a result
of disregarding section 965 in a year for
which there was no section 965(a)
inclusion with respect to a DFIC.
Accordingly, consistent with the change
discussed in the preceding paragraph
and in response to the comment, the
final regulations clarify that the
dividends disregarded are limited to
those paid by a DFIC during the DFIC’s
inclusion year. See id.
A comment also noted that the
‘‘without’’ prong of the definition of
total net tax liability under section 965
under the proposed regulations
disregards credits, as well as income or
deductions properly attributable to
dividends from a DFIC, even though
section 965(h)(6)(A)(ii)(II) only
specifically disregards income or
deductions. The comment suggested
that because credits were specifically
included in the House version of the
rule, but not the Senate version,
Congress specifically intended to take
into account credits in the ‘‘without’’
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prong. However, there is no legislative
history explaining the change. A similar
comment recommended that the
‘‘without’’ prong of the definition of
total net tax liability under section 965
take into account foreign income taxes
that the taxpayer would have been able
to use as credits in subsequent years had
section 965 not been enacted.
The term ‘‘net income tax’’ is defined
to mean the regular tax liability reduced
by the credits allowed under subparts A,
B, and D of part IV of subchapter A of
the Code and is not defined as such
solely with respect to the ‘‘with’’ prong
in section 965(h)(6)(A)(i), but also the
‘‘without’’ prong in section
965(h)(6)(A)(ii). See section
965(h)(6)(B). Subpart B includes section
27, which allows for a foreign tax credit.
The disregard of credits clearly follows
from the statutory definition of the
‘‘without’’ prong, as there could be no
credits attributable to a dividend if
income attributable to the dividend
were disregarded. Accordingly, the
Treasury Department and the IRS have
determined that the approach of the
proposed regulations is appropriate, and
do not adopt the recommendations.
2. Effect on Total Tax Liability
A comment suggested that the rules
for determining a total net tax liability
under section 965 can result in the total
tax liability of a United States person
who makes a section 965(i) election
being higher than it would have been
had a section 965(i) election not been
made. However, the Treasury
Department and the IRS have
determined that because such rules
apply only for purposes of the definition
of total net tax liability under section
965, and thus for purposes of
determining how much can be deferred
pursuant to a section 965(h) election or
a section 965(i) election, they have no
impact on a person’s actual total tax
liability. Accordingly, no changes are
made in response to the comment.
VIII. Comments and Changes to
Proposed § 1.965–8—Affiliated Groups
(Including Consolidated Groups)
Proposed § 1.965–8 sets forth rules
governing the application of 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)). The
comments and modifications with
respect to these rules are discussed in
this Part VIII.
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A. Treatment of Consolidated Groups
1. Treatment for Purposes of
Determining Aggregate Foreign Cash
Position
The proposed regulations provide
rules allowing a section 958(a) U.S.
shareholder to disregard certain assets
for purposes of determining its aggregate
foreign cash position. See proposed
§ 1.965–3(b). The proposed regulations
further 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 certain enumerated purposes that do
not include proposed § 1.965–3(b).
Proposed § 1.965–8(e). Section 3 of
Notice 2018–78 explained that, to
prevent the overstatement of the
aggregate foreign cash position, the final
regulations would provide that all
members of a consolidated group that
are section 958(a) U.S. shareholders of
a specified foreign corporation would
also be treated as a single section 958(a)
U.S. shareholder for purposes of
§ 1.965–3(b).
However, comments have noted that
treating all members of a consolidated
group that are section 958(a) U.S.
shareholders of a specified foreign
corporation as a single section 958(a)
U.S. shareholder for purposes of
§ 1.965–3(b) but not for all purposes of
determining the aggregate foreign cash
position could still result in
overstatement of the aggregate foreign
cash position, if, for example, stock of
a specified foreign corporation was
transferred between such shareholders
between cash measurement dates.
Accordingly, the final regulations
provide that the consolidated group
aggregate foreign cash position is
determined as if all members of a
consolidated group that are section
958(a) U.S. shareholders of a specified
foreign corporation were a single section
958(a) U.S. shareholder. See § 1.965–
8(e)(1), (e)(3), and (f)(4).
2. Treatment for Other Purposes
Comments also requested that the
final regulations treat all members of a
consolidated group as a single United
States shareholder for all purposes of
section 965. One comment highlighted a
fact pattern in which it argues that the
anti-abuse rule in § 1.965–4(b) applies
and causes double taxation if the
members are treated as separate but
would not apply if the members were
treated as a single United States
shareholder. However, the Treasury
Department and the IRS have
determined that treatment of members
of a consolidated group as a single
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United States shareholder would not
alter the application of the anti-abuse
rule in the fact pattern raised. Even if it
did, however, broadly changing the
consequences of well-established
principles concerning the determination
of inclusions under section 951 in a
consolidated group would not be
justified by the application of an antiabuse rule to a transaction that falls
within its parameters. See Part VI.C.5 of
this Summary of Comments and
Explanation of Revisions for a
discussion of why the final regulations
do not adopt recommendations to treat
all members of a consolidated group
that are section 958(a) U.S. shareholders
of a specified foreign corporation as a
single section 958(a) U.S. shareholder
for purposes of determining foreign
income taxes deemed paid with respect
to section 965(a) inclusions.
B. Treatment of Affiliated Groups Other
Than Consolidated Groups
A comment also suggested that
section 958(a) U.S. shareholders that are
members of an affiliated group that do
not file a consolidated U.S. federal
income tax return also be treated as a
single United States shareholder for
purposes of determining the aggregate
foreign cash position of each member. It
suggested that the statute evidences
Congressional intent for such treatment.
The Treasury Department and the IRS
have determined that the rules in
section 965(b)(5) concerning the
allocation of an affiliated group
member’s aggregate unused E&P deficit
to certain members of its affiliated group
do not evidence an intent to treat all
members of an affiliated, but not
consolidated, group as a single United
States shareholder and decline to adopt
the recommendation.
IX. Other Comments
A. Application to Individuals
Numerous comments recommended
that guidance exempt individuals from
the application of section 965. A
comment also recommended that
section 965(c)(3)(E), which provides that
the cash position of certain
noncorporate entities must be taken into
account in determining a United States
shareholder’s aggregate foreign cash
position, not apply with respect to
individuals but did not supply any
reasoning for the recommendation. The
statute applies to increase the subpart F
income of all DFICs, with no exception
to the extent that a DFIC has one or
more United States shareholders that are
individuals. See section 965(a). Further,
the legislative history expressly
provides that all United States
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shareholders, including individuals, are
subject to section 965. See H.R. Rep. No.
115–446, at 606 (2017) (‘‘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.’’). Accordingly, the final
regulations do not adopt these
recommendations. The final regulations
also do not adopt a related
recommendation to permit retroactive
entity classification elections to treat
DFICs as disregarded for U.S. federal
income tax purposes, which would be
out of scope and contrary to the
legislative history indicating that the
Treasury Department and the IRS were
expected to prevent the avoidance of
section 965. See H.R. Rep. No. 115–466,
at 619 (2017).
Another comment disputed the
description of the clear application of
section 965(c) and the proposed
regulations thereunder in Part XI.C.2 of
the Explanation of Provisions in the
proposed regulations but did not suggest
any changes to the rules in the proposed
regulations. The Treasury Department
and the IRS have determined that the
proposed regulations are consistent with
the statute and that Part XI.C.2 of the
Explanation of Provisions in the
proposed regulations accurately
describes the rules, and thus that no
changes are needed in response to the
comment.
B. Section 962 Elections
A comment requested that the
Treasury Department and the IRS
consider providing relief for individuals
who make a section 962 election and
subsequently receive a distribution of
section 965(a) previously taxed earnings
and profits or section 965(b) previously
taxed earnings and profits from a DFIC
to provide parity with corporations.
However, as the comment
acknowledges, section 962(d) limits the
application of section 959 in the case of
an individual that has made a section
962 election, and, as discussed in Part
III.D.6 of this Summary of Comments
and Explanation of Revisions, section
961 similarly limits the availability of
basis for a distribution of previously
taxed E&P in the case of a section 962
election. Accordingly, the Treasury
Department and the IRS have
determined that no relief is appropriate.
Another comment requested guidance
concerning the interaction of a section
962 election and a § 1.1411–10(g)
election; specifically, whether tax is
imposed under section 1411 on a
distribution of previously taxed E&P
that are not excluded from an
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individual’s income as a result of the
application of section 959(d) and what
the effects are on the section 1411 tax
basis in DFIC stock. Because this is an
issue of general applicability with
respect to previously taxed E&P and not
specific to the application of section
965, the final regulations do not address
this issue.
C. RICs
A comment requested that guidance
affirm that section 965(a) inclusions do
not affect regulated investment
company (‘‘RIC’’) qualification. The
application of the RIC qualification
rules is outside of the scope of the final
regulations.
D. Extension of Limitation on
Assessment
A comment suggested that the final
regulations clarify whether the
extension of the limitation on the time
period for assessment under section
965(k) applies to domestic pass-through
owners. The comment also suggested
that the final regulations clarify that the
extension does not apply for purposes of
the alternative minimum tax, the tax
under section 1411, the tax under
section 4968, or the tax under section
4940. In addition, the comment
recommended clarifying the interaction
of the extension of the limitation on the
time period for collection in section
965(i)(6) with the extension in section
965(k) and the interaction of section
965(k) with partnership audit rules
enacted by the Bipartisan Budget Act of
2015, Public Law 114–74, 129 Stat. 587
(‘‘BBA’’). The Treasury Department and
the IRS have determined that, because
section 965(k) applies to the net tax
liability under section 965 (as defined in
section 965(h)(6)), and § 1.965–7(g)(10)
defines total net tax liability under
section 965 consistently with the
definition under section 965(h)(6), it is
clear that section 965(k) applies to any
total net tax liability under section 965,
including that of a domestic passthrough owner. Moreover, the
definitions of net tax liability under
section 965 in section 965(h)(6) and
total net tax liability under section 965
in § 1.965–7(g)(10) are clear that they do
not include the taxes mentioned by the
comment. The Treasury Department and
the IRS have also determined that it is
clear that section 965(k) does not limit
section 965(i)(6). Accordingly, the
comment is not adopted. The final
regulations do not address the
interaction of section 965(k) with the
BBA rules, as those are outside of the
scope of this rulemaking.
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E. Late Election Relief
Section 965 includes statutory due
dates for making section 965(h)
elections, section 965(i) elections,
section 965(m) elections, and section
965(n) elections. In addition to
furnishing guidance with respect to
statutory elections, the proposed
regulations provide taxpayers with two
additional elections in proposed
§§ 1.965–2(f)(2) and 1.965–7(f) and
prescribe due dates for making these
regulatory elections. The proposed
regulations indicate that relief under
§ 301.9100–2 or § 301.9100–3 is not
available with respect to any election
under section 965. A comment
recommended that the Treasury
Department and the IRS reverse its
position in the proposed regulations and
grant section 9100 relief for the statutory
and regulatory elections with respect to
section 965. The IRS does not have the
discretion to provide section 9100 relief
with respect to an election whose due
date is prescribed by statute.
Furthermore, in addition to providing
additional time for the basis election, as
discussed in Part III.D.1 of this
Summary of Comments and Explanation
of Revisions, Notice 2018–78 provided a
postponement for taxpayers affected by
Hurricane Florence to make and revoke
all elections with respect to section 965.
The Treasury Department and the IRS
have determined that providing
additional election relief would create
administrative difficulties and is
therefore inappropriate. Accordingly,
the recommendation is not adopted.
X. Applicability Dates
No comments were received with
respect to the applicability dates of the
proposed regulations. The final
regulations retain the applicability dates
that were in the proposed regulations
and, consistent with the applicability
date of section 965, 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. See section
7805(b)(2).
Effect on Other Documents
Notice 2018–07 (2018–4 I.R.B. 317) is
obsolete as of February 5, 2019.
Sections 1 through 4 and 6 of Notice
2018–13 (2018–6 I.R.B. 341) are obsolete
as of February 5, 2019.
Sections 1 through 5 and 7 of Notice
2018–26 (2018–16 I.R.B. 480) are
obsolete as of February 5, 2019.
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Sections 1 through 3 and 5 of Notice
2018–78 (2018–42 I.R.B. 604) are
obsolete as of February 5, 2019.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance
cited in this document are published in
the Internal Revenue Bulletin or
Cumulative Bulletin and are available
from the Superintendent of Documents,
U.S. Government Printing Office,
Washington, DC 20402, or by visiting
the IRS website at http://www.irs.gov.
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. OIRA has
designated this rule as an economically
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 rule has been
reviewed by the Office of Management
and Budget.
A. Need for the Final Regulations
These final regulations implement
section 965 of the Code as amended by
the Act. The final regulations provide
rules for determining the section 965(a)
inclusion amount of a United States
shareholder of a foreign corporation
with accumulated post-1986 deferred
foreign income. The final regulations
directly implement the statutory
requirements. The Senate Committee on
Finance stated with respect to section
965:
To 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.
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D. Consideration of Alternatives
Senate Committee on Finance,
Explanation of the Bill, at 358
(November 22, 2017).
B. Background
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
E&P not previously taxed by the United
States, regardless of whether those
earnings are repatriated. Cash or cashequivalent 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 E&P 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 final
regulations.
The final regulations address open
questions regarding the application of
section 965 and comments received on
the proposed regulations. They provide
rules related to section 965 described in
the four 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 final regulations are designed to
provide clarity and reduce unnecessary
burdens on taxpayers, including by
providing guidance on how to apply
particular mechanical rules.
C. Baseline
The baseline constitutes a world in
which no regulations pertaining to
section 965 had been promulgated. The
following qualitative analysis describes
the anticipated impacts of the
regulations relative to the baseline.
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For a discussion of the alternatives
considered in the promulgation of the
proposed regulations, see Parts II
through IX of the Summary of
Comments and Explanation of
Revisions. For example, see Part II of the
Summary of Comments and Explanation
of Revisions for a discussion of the
alternatives considered with respect to
the determination of, among other
things, post-1986 earnings and profits,
cash measurement dates, and short-term
obligations, and Part III.D of the
Summary of Comments and Explanation
of Revisions for a discussion of the
alternatives considered to the rule
permitting elective basis adjustments to
the stock of certain DFICs and E&P
deficit foreign corporations. For a
discussion of additional alternatives
considered in the promulgation of the
final regulations, see Part G of this
Special Analyses.
E. Economic Analysis of Provisions
Substantially Unchanged From the
Proposed Regulations
The final regulations enhance the
performance of the U.S. economy by
reducing uncertainty and ambiguity
over interpretation of the section 965
requirements. Absent these final
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
and therefore possibly to make
organizational or investment decisions
under different signals of economic
value, an economically inefficient
outcome. The final regulations,
following the proposed regulations with
primarily only technical modifications,
reduce uncertainty and ambiguity by:
(1) Providing that all members of a
consolidated group that are United
States shareholders of a specified
foreign corporation are treated as a
single United States shareholder for
certain purposes; (2) introducing
definitions of terminology used; (3)
coordinating foreign tax credit rules; (4)
providing explicit mechanical rules for
applying section 965 in a variety of
complex scenarios; (5) making explicit
the process for making elections and
paying the tax; and (6) providing dates
of applicability.
In consultation with taxpayers, the
Treasury Department and the IRS also
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
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1869
counting, as well as non-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 or non-counting. As a
result of this analysis, the final
regulations, following the proposed
regulations with only technical
modifications, reduce double counting
and non-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.
F. Responses to Comments
The Treasury Department and the IRS
received comments from the public in
response to the proposed regulations.
This section discusses significant issues
brought up in the comments for which
economic reasoning is insightful. For a
full discussion of comments received,
see the Summary of Comments and
Explanation of Revisions section of this
preamble.
1. Basis Election Rules
To understand the basis election, it is
useful to understand that when a United
States shareholder includes an amount
in income related to the subpart F
income of its CFC, the CFC’s earnings
that are associated with the income
inclusion are considered as previously
taxed. Thus, when those previously
taxed E&P are distributed to the United
States shareholder, the United States
shareholder generally does not include
them in income. Additionally, in
general, the subpart F inclusion also
causes an upward basis adjustment in
the stock of the CFC equal to the amount
of the income inclusion. This also
prevents double taxation through capital
gain recognized in the event that the
CFC is sold. Because this increase in
basis is only needed to avoid double
taxation until the previously taxed E&P
are distributed, once the earnings are
distributed, there is a corresponding
downward adjustment in basis of the
CFC. If there is insufficient basis in the
stock to account for the decrease, then
the United States shareholder must
recognize gain equal to the difference
between the amount of the basis and the
reduction.
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When applying the framework laid
out above in the context of section 965,
there are several places where
additional rules were needed. Under
section 965(b)(4)(A), earnings of DFICs
are treated as previously taxed E&P
(‘‘section 965(b) previously taxed
earnings and profits’’) if a deficit is used
to offset those earnings for purposes of
determining the United States
shareholder’s inclusion under section
965(a). However, the statute does not
provide for a basis increase to the stock
of the DFIC, even though other
provisions of the Code still require a
basis decrease when the section 965(b)
previously taxed earnings and profits
are distributed. Thus, under the statute,
there could be a disincentive to
distribute section 965(b) previously
taxed earnings and profits because the
United States shareholder has to reduce
its basis in its CFC, and in some
instances, recognize gain, because the
initial offsetting basis increase did not
occur.
Under section 965(b)(4)(B), the deficit
in E&P in an E&P deficit foreign
corporation is generally eliminated to
the extent that it is used to offset
earnings of a DFIC. The increase in E&P
without a corresponding decrease in the
basis of the E&P deficit foreign
corporation introduces a distortion into
the system because it preserves a loss in
the stock of the entity even though the
loss in earnings and profits has been
utilized and eliminated.
Consistent with the legislative history,
under the proposed regulations, a
taxpayer could elect to make certain
basis adjustments related to the
taxpayer’s section 965(b) previously
taxed earnings and profits. This election
was allowed in order to eliminate the
distortions in the basis of the stock of
the DFIC and E&P deficit foreign
corporations. The proposed regulations
allowed the taxpayer to elect to increase
the basis of certain stock of its DFICs
pro rata by the amount of its section
965(b) previously taxed earnings and
profits. However, for consistency, the
taxpayer was then also required to
reduce the basis of certain stock of its
E&P deficit foreign corporations by an
equivalent amount, and recognize gain
to the extent the reduction exceeded the
amount of basis the taxpayer had in the
stock. The proposed regulations
therefore reduced the disincentive to
repatriate section 965(b) previously
taxed earnings and profits. However, the
forced gain recognition could have
discouraged some taxpayers from
making the election, which would
continue the disincentive to repatriate
section 965(b) previously taxed earnings
and profits, retaining the distortion in
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the basis of their E&P deficit foreign
corporations and thereby distorting
taxpayers’ investment and planning
decisions.
The final regulations therefore revise
this rule slightly to provide an even
more flexible election. The final
regulations permit a taxpayer to increase
its basis in the stock of its DFICs by the
lesser of its section 965(b) previously
taxed earnings and profits or the amount
it can reduce the stock basis of its E&P
deficit foreign corporations without
recognizing gain. Additionally, subject
to certain limitations, the taxpayer is
allowed to designate which stock of a
DFIC is increased and by how much.
This new election further incentivizes
taxpayers to make an election to reduce
some of the distortions created by the
statute, by providing some basis in the
DFICs with section 965(b) previously
taxed earnings and profits that can be
used to repatriate those earnings, and by
reducing some of the basis in the E&P
deficit foreign corporations to account
for the utilization and elimination of the
deficit. Additionally, allowing taxpayers
the flexibility to assign basis increases
to stock in a way which benefits them
the most, rather than merely allocating
the increases pro rata among the
taxpayers’ DFICs, further neutralizes
any negative impact of the statute on the
incentive to repatriate section 965(b)
previously taxed earnings and profits.
In developing the final regulations,
the Treasury Department and the IRS
considered a number of options related
to the basis election, including retaining
the rule in the proposed regulations,
requiring that the taxpayer increase the
basis in the stock of its DFICs on a pro
rata basis rather than by designation,
and a more complex rule that would
have permitted additional basis
adjustments where an E&P deficit
foreign corporation had basis in excess
of its deficit. The rules in the final
regulation balance administrative and
compliance concerns, while still
allowing the maximum amount of
flexibility for taxpayers in their
investment and repatriation planning.
This increased flexibility and clarity
provided by the final regulations helps
to ensure that taxpayers face more
uniform incentives regarding section
965(b) previously taxed earnings and
profits, and minimizes distortions to
taxpayer behavior resulting from the
adjustments provided for by the statute.
See Part III.D of the Summary of
Comments and Explanation of Revisions
for additional discussion of the
considerations taken into account with
respect to this issue.
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2. Cash Position Calculation
In the case of a domestic corporate
United States shareholder, section 965
generally taxes foreign earnings at a
15.5% rate if held in cash, but only at
8% otherwise. The cash definition in
the statute and the proposed regulations
includes both cash and cash
equivalents. A number of comments
were received requesting that certain
assets be excluded from the list of assets
counted as cash equivalents, including
commodities held as inventories or
supplies and stock of publicly traded
companies. The final regulations
provide a narrow exception from the
definition of ‘‘cash position’’ for certain
commodities held by a specified foreign
corporation in the ordinary course of its
trade or business as well as for certain
privately negotiated contracts to buy or
sell such assets.
The Treasury Department and the IRS
have determined that assets that would
otherwise constitute cash equivalents
should not be treated as such for
purposes of section 965 if they
constitute inventory or supplies under
longstanding tax principles. These types
of assets have been defined by statute
and decades of case law as property
used in the ordinary course of a
taxpayer’s business, typically for sale to
customers or further use via processes
such as manufacturing and refinement.
In general, these types of assets are not
held for investment with the goal of
recognizing appreciation over a
substantial period of time, but are rather
turned over (or used to make property
that is turned over) routinely in the
ordinary conduct of business.
These well-settled delineations of
what constitute inventory or supplies
are consistent with the statutory
definition of and legislative history
explaining cash-equivalent assets in
section 965(c)(3)(B)(iii). Moreover, the
contours of this category have been
carefully defined through common law
and are generally well-understood by
taxpayers. As a result, an exception
from cash-equivalent assets for this type
of property is well-defined and
understood, consistent with statutory
intent, and appropriately narrow. By
contrast, other potential exceptions
would have required the creation of new
terms and concepts, led to potential
over- or under-inclusiveness, and
created uncertainty. For these reasons,
the Treasury Department and the IRS
determined that the general approach in
the proposed regulations was most
consistent with the statute and
legislative history, subject to the narrow
exception added to the final regulations
for the reasons discussed above.
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Further, providing broad exceptions
could create complexity and increased
administrative and compliance burdens.
See Part II.D of the Summary of
Comments and Explanation of Revisions
for a more complete discussion of the
considerations taken into account with
respect to this issue.
3. Total Net Tax Liability Under Section
965
Section 965(h) elections and section
965(i) elections allow a taxpayer to defer
payment of its total net tax liability
under section 965. (For section 965(h),
the election provides deferral over 8
years, whereas for section 965(i) the
election provides indefinite deferral
until the occurrence of certain triggering
events.) Total net tax liability under
section 965, which defines the portion
of a taxpayer’s income tax eligible for
deferral, is equal to the difference
between a taxpayer’s net income tax
‘‘with’’ and ‘‘without’’ the application of
section 965; this is intended to isolate
the portion of a taxpayer’s net income
tax attributable solely to section 965.
Under the statute, the ‘‘without’’ prong
calculates a taxpayer’s net income tax
without regard to section 965, but also
disregards dividends received from a
foreign subsidiary. Dividends are
disregarded because, absent section 965,
the dividends generally would be taxed
in the hands of the taxpayer, but such
dividends would be distributions of
previously taxed E&P if section 965
applies, and thus not subject to
additional tax.
Absent the provision in the statute
that disregards dividends received from
a foreign subsidiary in the ‘‘without’’
prong, the tax imposed on dividends
would be included in the ‘‘without’’
prong but not in the ‘‘with’’ prong,
distorting the ‘‘with’’ and ‘‘without’’
calculation so that it no longer isolates
the net income tax attributable to
section 965, and under-counting income
eligible for deferral.
In response to comments, the final
regulations also disregard effective
repatriations taxed in a manner similar
to dividends under section 951(a)(1)(B)
resulting from a foreign subsidiary’s
investments in United States property
under section 956 for purposes of
calculating the ‘‘without’’ prong. In the
year that section 965 applied, taxpayers
may have chosen to borrow funds from
their CFCs instead of receiving a regular
dividend distribution, because such
loans would not be subject to tax as
effective repatriations of previously
taxed E&P and their annual cash
distribution policies could not be easily
adjusted following passage of the Act.
Without the final regulations, taxpayers
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that received these loans from their
CFCs would be required to include the
loan amount in the ‘‘without’’
calculation, leading to a distortion in
the ‘‘with’’ and ‘‘without’’ calculation so
that it no longer isolates the net income
tax attributable to section 965, resulting
in a reduced net income tax attributable
to section 965, and a loss of some of the
deferral benefit of section 965(h) and (i).
While the Treasury Department and
the IRS considered retaining the
proposed rule, the final regulations do
not do so because the amounts of
inbound loans, like dividends, will
generally be non-taxable investments of
previously taxed E&P ‘‘with’’ section
965, but taxable as effective
repatriations ‘‘without’’ section 965, and
thus, as stated previously, including
these amounts in the ‘‘without’’
calculation would inappropriately
decrease the amount of the taxpayer’s
net tax liability eligible for the deferral
elections and fail to isolate the portion
of the taxpayer’s net tax liability
attributable solely to section 965. See
Part VII.I.1 of the Summary of
Comments and Explanation of Revisions
for a more complete discussion of the
considerations taken into account with
respect to this issue.
II. Paperwork Reduction Act
A. Collection of Information Imposed by
the Regulations
The collection of information
imposed directly by these regulations is
contained in §§ 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–
4(b)(2)(iii)(B), 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
collection of information provided by
these regulations has been reviewed and
approved by the Office of Management
and Budget under control number 1545–
2280. The information is required in
order for the IRS to be aware if a
taxpayer makes an election, transfers a
section 965(h) net tax liability or section
965(i) net tax liability pursuant to a
transfer agreement, or takes a position
that the anti-abuse rules (described in
Part V of the Summary of Comments
and Explanation of Revisions section of
this preamble) do not apply.
The estimates for the collection of
information provided by these final
regulations 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 ($2017) leads to a PRA-based
estimate of the reporting costs to
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1871
taxpayers of $47,500,000. This is a onetime paperwork burden. The Treasury
Department and the IRS anticipate
substantially all paperwork burdens
related to the final regulations to be
incurred only with respect to the
inclusion year. Any subsequent
reporting (such as in connection with a
transfer of a section 965(h) net tax
liability or section 965(i) net tax
liability) would be negligible burdens
that implement elections made and
payments calculated in the inclusion
year. These burden estimates capture
only those burdens imposed by the final
regulations and do not include burden
estimates for forms associated with the
statute.
Comments suggested that the burden
reported in connection with the
collection of information requirements
under the proposed regulations did not
appropriately take into account the time
necessary for determining net tax
liability under section 965 and
performing other computations related
to the determination of such net tax
liability. However, the collections of
information under the proposed
regulations do not relate to such
computations; they relate solely to the
making of elections, filing of transfer
agreements, and reporting of positions
concerning the application of anti-abuse
rules. Limited information is required to
make such elections, file such transfer
agreements, or do such reporting, and
accordingly, five hours is an appropriate
estimate of the burden imposed by the
collections of information in the final
regulations.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid OMB control number.
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. The IRS has
posted information for taxpayers on
their recordkeeping requirements at
https://www.irs.gov/taxtopics/tc305.
Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
B. Forms Created or Modified To Collect
Information
In addition to the collection of
information requirements in the final
regulations, the enactment of section
965 necessitated the creation and
modification of certain forms, which are
needed to capture changes solely made
by the Act and do not reflect a burden
imposed by the final regulations. The
Treasury Department and the IRS intend
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that the collections of information
relating to the reporting and payment of
tax under section 965 will be conducted
by way of the forms and instructions
identified thus far in the following table.
As a result, for purposes of the
Paperwork Reduction Act (44 U.S.C.
3507(d)), the reporting burden
associated with the collection of
information in those forms will be
reflected in the Form 14029, Paperwork
Reduction Act Submission, associated
with those forms.
RELATED NEW OR REVISED TAX FORMS
Form
Form
Form
Form
Form
Form
Form
Form
Form
Form
Form
Form
Form
Form
Form
965 .....................................................................................................................
965–A .................................................................................................................
965–B .................................................................................................................
990–PF ...............................................................................................................
990–T .................................................................................................................
1040 ...................................................................................................................
1041 ...................................................................................................................
1065 ...................................................................................................................
1120 ...................................................................................................................
1120–C ...............................................................................................................
1120–L ...............................................................................................................
1120–PC ............................................................................................................
1120–REIT .........................................................................................................
1120–RIC ...........................................................................................................
1120–S ...............................................................................................................
The current status of the Paperwork
Reduction Act submissions related to
the tax forms that will be created or
revised as a result of section 965 is
provided in the following table. The
burdens associated with the information
collections in the forms are included in
aggregated burden estimates for the
OMB control numbers listed in the
following table which, in the case of
1545–0123, represents a total estimated
burden time, including all other related
forms and schedules for corporations, of
3.157 billion hours and total estimated
monetized costs of $58.148 billion
($2017) and, in the case of 1545–0074,
a total estimated burden time, including
all other related forms and schedules for
individuals, of 1.784 billion hours and
Form
Revision of
existing form
X
X
X
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
X
X
X
X
X
X
X
X
X
X
X
X
total estimated monetized costs of
$31.764 billion ($2017). The burden
estimates provided in the OMB control
numbers in the following table are
aggregate amounts that relate to the
entire package of forms associated with
the OMB control number, and will in
the future include but not isolate the
estimated burden of only those
information collections associated with
section 965. These numbers are
therefore unrelated to the future
calculations needed to assess the burden
imposed by these regulations. To guard
against over-counting the burden that
international tax provisions imposed
prior to the Act, the Treasury
Department and the IRS urge readers to
recognize that these burden estimates
Type of filer
Form 965 (including Schedules A–
H).
New forms
Business (NEW
Model).
50,000—100,000
35,000–70,000
15,000–30,000
<1,000
<1,000
27,000–57,000
<1,000
8,000–10,000
12,000–20,000
<1,000
<1,000
<1,000
<1,000
<1,000
3,000–5,000
have also been cited by regulations
(such as the foreign tax credit
regulations, 83 FR 63200) that rely on
the applicable OMB control numbers in
order to collect information from the
applicable types of filers. With respect
to the final regulations, the only
relevant burden estimates are those
associated with OMB control number
1545–2280. Future estimates would
capture both changes made by the Act
and those that arise out of discretionary
authority exercised in the regulations. In
addition, when available, drafts of IRS
forms are posted for comment at https://
apps.irs.gov/app/picklist/list/
draftTaxForms.htm.
OMB No.(s)
1545–0123
Number of respondents
(estimated)
Status
Published in the FRN on 10/11/18. Public Comment period closed on
12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
Form 965–B ...................................
Business (NEW
Model).
1545–0123
Published in the FRN on 10/11/18. Public Comment period closed on
12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
Form 965–A ...................................
Individual (NEW
Model).
1545–0074
Limited Scope submission (1040 only) approved on 12/7/18. Full ICR
submission for all forms in 3/2019. 60 Day FRN not published yet
for full collection.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031.
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Form
Type of filer
OMB No.(s)
Forms 990–PF, 990–T ...................
Tax exempt entities (NEW
Model).
1545–0047
1873
Status
Published 60-day FRN on 8/22/18.
Link: https://www.federalregister.gov/documents/2018/08/22/2018-18135/proposed-collection-commentrequest-for-forms-990-990-ez-sch-b-br-br-990-ez-sch-l-lp-990-ez-990-pf.
Form 1040 ......................................
Individual (NEW
Model).
1545–0074
Limited Scope submission (1040 only) approved on 12/7/18. Full ICR
submission for all forms in 3/2019. 60 Day FRN not published yet
for full collection.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031.
Form 1041 ......................................
Trusts and estates.
1545–0092
Submitted to OIRA for review on 9/27/18.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014.
Form 1065 ......................................
Business (NEW
Model).
1545–0123
Published in the FRN on 10/11/18. Public Comment period closed on
12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
Forms 1120, 1120–C, 1120–L,
1120–PC, 1120–REIT, 1120–
RIC, 1120–S.
Business (NEW
Model).
1545–0123
Published in the FRN on 10/11/18. Public Comment period closed on
12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby
certified that the final regulations will
not have a significant economic impact
on a substantial number of small entities
within the meaning of section 601(6) of
the Regulatory Flexibility Act (‘‘small
entities’’).
Section 965 and the final regulations
generally affect U.S. taxpayers who are
at least 10-percent shareholders of a
foreign corporation. As an initial matter,
foreign corporations are not considered
small entities. Nor are U.S. taxpayers
considered small entities to the extent
the taxpayers are natural persons or
entities other than small entities.
Although the Treasury Department and
the IRS received a number of comments
asserting that a substantial number of
small entities would be affected by the
proposed regulations, those comments
were principally concerned with U.S.
citizens living abroad that owned
foreign corporations directly or
indirectly through other foreign entities.
No small entity is affected in this
scenario. Thus, the final regulations
generally only affect small entities if a
U.S. taxpayer that is a 10-percent
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shareholder of a foreign corporation is a
small entity.
While comprehensive counts of all
types of small businesses affected by
section 965 and these regulations are
not readily available, in-house estimates
of section 965 suggest that very roughly
20,000 multinational domestic
corporations are potentially subject to
section 965, and that about half of these
corporations have less than $25 million
in gross receipts. Therefore, very
roughly 10,000 small multinational
corporations (defined as corporations
with less than $25 million in gross
receipts) are potentially subject to
section 965. The in-house estimates
further suggest that about 25% of these
small multinational corporations would
not owe any tax under section 965,
because they do not have any
accumulated E&P to which the tax
would be applied.
Regardless of the number of small
entities potentially affected by section
965 or the final regulations, the
Treasury Department and the IRS have
concluded that there is no significant
economic impact on such entities as a
result of the final regulations. Based on
published information from the
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Conference Report accompanying the
Act, H.R. Rep. No. 115–446, at 688
(2017), and Bureau of Economic
Analysis aggregate data, which were
adjusted to reflect the tax burden and
total sales of small businesses, the
projected net tax proceeds from section
965 are estimated to be only a small
fraction of the total sales of small U.S.
parented multinational enterprises
projected to 2027.1 See the table in this
Part III. The tax amounts to less than 3
to 5 percent of receipts (as defined in 13
CFR 121.04), an economic impact that is
not regarded as significant under the
Regulatory Flexibility Act. Moreover,
while most affected small entities are
likely to pay the tax in (unequal)
installments over 8 years, the percentage
in any particular year does not exceed
2.2 percent.
1 In-house estimates of section 965 tax liability
and total receipts of small businesses are used to
scale the published aggregate figures. In this case,
a small business is defined as a multinational
corporation with less than $25 million in gross
receipts. Data on total sales of all U.S. parented
companies are drawn from the Bureau of Economic
Analysis Interactive Data accessed at this web
address in December, 2018: https://apps.bea.gov/
iTable/iTable.cfm?ReqID=2&step=1.
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NET SECTION 965 TAX REVENUE AS A FRACTION OF TOTAL SALES FOR SMALL MULTINATIONAL BUSINESSES 1
Fiscal years
2018
Net Tax Collected ($ billions) ....................
Total Sales ($ billions) ..............................
Percent ......................................................
1 Small
2019
1.2
54.0
2.20
2020
0.8
56.7
1.32
2021
0.2
59.6
0.42
2022
0.2
62.6
0.38
2023
0.2
65.7
0.36
2024
0.4
69.0
0.60
2025
0.7
72.4
0.99
2026
1.0
76.0
1.28
0.5
79.8
0.63
2027
¥0.1
83.8
¥0.17
Multinational Businesses are not necessarily small entities as defined by the Regulatory Flexibility Act.
Thus, even if the economic impact of
the final regulations is interpreted
broadly to include the tax liability due
under section 965, which small entities
would be required to pay even if the
final regulations were not issued, the
economic impact should not be
regarded as significant under the
Regulatory Flexibility Act.
Additionally, the economic impact of
the final regulations when considered
alone should be minimal. Any economic
impact of the final regulations stems
from the collection of information
requirements imposed by §§ 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), 1.965–4(b)(2)(iii)(B), 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 Treasury Department
and the IRS have determined that the
average burden associated with these
collection of information requirements
is 5 hours, which is minimal,
particularly in comparison with other
regulatory requirements related to
owning stock in a specified foreign
corporation. Furthermore, these
requirements apply only if a taxpayer
chooses to make an election or rely on
a favorable rule. The comments received
regarding the economic impact of the
proposed regulations principally focus
on burdens imposed by the statute (i.e.,
the tax due as a result of section 965)
rather than any additional burdens
resulting from the proposed regulations.
For the reasons explained above, the
Treasury Department and the IRS have
determined that the final regulations
will not have a significant economic
impact on a substantial number of small
entities. Accordingly, a regulatory
flexibility analysis under the Regulatory
Flexibility Act is not required. Pursuant
to section 7805(f), the notice of
proposed rulemaking preceding these
final regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business. No
comments were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated
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costs and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in
the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. In 2018, that
threshold is approximately $150
million. This rule does not include any
Federal mandate that may result in
expenditures by state, local, or tribal
governments, or by the private sector in
excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
final rule does not have federalism
implications and does not impose
substantial direct compliance costs on
state and local governments or preempt
state law within the meaning of the
Executive Order.
Drafting Information
The principal authors of the final
regulations are Leni C. Perkins, Natalie
Punchak, 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 final regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding new
entries in numerical order to read as
follows:
■
Authority: 26 U.S.C. 7805 * * *
*
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*
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*
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*
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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)(8) (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:
■
§ 1.962–1 Limitation of tax for individuals
on amounts included in gross income
under section 951(a).
*
*
*
*
*
(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–
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1(f)(17)) of which he is a United States
shareholder; plus
(2) [Reserved]
(3) 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)
and (2) of this section if the shareholder
were a domestic corporation; over
(B) The sum of the following
deductions, but no other deductions or
amounts—
(1) His section 965(c) deduction
amount (as defined in § 1.965–1(f)(42))
for the taxable year;
(2) His domestic pass-through 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; and
(3) [Reserved]
*
*
*
*
*
(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 corporation 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.
(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 passthrough 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
corporation ends.
■ Par. 4. Sections 1.965–0 through
1.965–9 are added to read as follows:
*
*
*
*
*
1.965–0 Outline of section 965 regulations.
1.965–1 Overview, general rules, and
definitions.
1.965–2 Adjustments to earnings and
profits and basis.
1.965–3 Section 965(c) deductions.
1.965–4 Disregard of certain transactions.
1.965–5 Allowance of credit or deduction
for foreign income taxes.
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1.965–6 Computation of foreign income
taxes deemed paid and allocation and
apportionment of deductions.
1.965–7 Elections, payment, and other
special rules.
1.965–8 Affiliated groups (including
consolidated groups).
1.965–9 Applicability dates.
*
*
*
*
*
§ 1.965–0 Outline of section 965
regulations.
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.
(i) In general.
(ii) Specified commodity.
(14) Cash-equivalent asset hedging
transaction.
(i) In general.
(ii) Aggregate hedging transactions.
(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.
(23) E&P measurement dates.
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1875
(24) Final cash measurement date.
(25) First cash measurement date.
(26) Inclusion year.
(27) 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.
(A) In general.
(B) Attribution for purposes of the ten
percent standard.
(iii) Passive foreign investment companies.
(46) Spot rate.
(47) United States shareholder.
(g) Examples.
(1) Example 1.
(i) Facts.
(ii) Analysis.
(2) Example 2.
(i) Facts.
(ii) Analysis.
(3) Example 3.
(i) Facts.
(ii) Analysis.
(4) Example 4.
(i) Facts.
(ii) Analysis.
(5) Example 5.
(i) Facts.
(ii) Analysis.
(A) Determination of status as a deferred
foreign income corporation.
(B) Determination of status as an E&P
deficit foreign corporation.
(6) Example 6.
(i) Facts.
(ii) Analysis.
(7) Example 7.
(i) Facts.
(ii) Analysis.
(8) Example 8.
(i) Facts.
(ii) Analysis.
§ 1.965–2 Adjustments to earnings and
profits and basis.
(a) Scope.
(b) Determination of and adjustments to
earnings and profits of a specified foreign
corporation for purposes of applying sections
902, 959, 960, 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).
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(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).
(i) In general.
(ii) Basis adjustments.
(A) Increase in basis with respect to a
deferred foreign income corporation.
(1) In general.
(2) Limited basis adjustment.
(B) Reduction in basis with respect to an
E&P deficit foreign corporation.
(1) In general.
(2) Limited basis adjustment.
(C) Section 962 election.
(iii) Rules regarding the election.
(A) Consistency requirement.
(B) Manner 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.
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(1) Example 1.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c)
classification of earnings and profits for
inclusion under section 951(a)(1)(A) without
regard to section 965.
(B) Distributions between specified foreign
corporations before January 1, 2018.
(C) Section 965(a) inclusion amount.
(1) CFC1 section 965(a) earnings amount.
(2) CFC2 section 965(a) earnings amount.
(3) Effect on earnings and profits described
in section 959(c)(2) and (3).
(D) Distribution to United States
shareholder.
(E) Section 902 and section 960
consequences.
(1) Distribution by and inclusions with
respect to CFC2.
(2) Inclusions with respect to CFC1.
(2) Example 2.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c)
classification of earnings and profits for
inclusion under section 951(a)(1)(A) without
regard to section 965.
(B) Distributions between specified foreign
corporations before January 1, 2018.
(C) Section 965(a) inclusion amount.
(1) CFC1 section 965(a) earnings amount.
(2) CFC2 section 965(a) earnings amount.
(3) Effect on earnings and profits described
in section 959(c)(2) and (3).
(D) Distribution to United States
shareholder.
(3) Example 3.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c)
classification of earnings and profits for
inclusion under section 951(a)(1)(A) without
regard to section 965.
(B) Distributions between specified foreign
corporations before January 1, 2018.
(C) Section 965(a) inclusion amount.
(1) CFC1 section 965(a) earnings amount.
(2) CFC2 section 965(a) earnings amount.
(3) Effect on earnings and profits described
in section 959(c)(2) and (3).
(D) Distribution to United States
shareholder.
(4) Example 4.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c)
classification of earnings and profits for
inclusion under section 951(a)(1)(A) without
regard to section 965.
(B) Distributions between specified foreign
corporations before January 1, 2018.
(C) Section 965(a) inclusion amount.
(1) CFC1 section 965(a) earnings amount.
(2) CFC2 section 965(a) earnings amount.
(3) Effect on earnings and profits described
in section 959(c)(2) and (3).
(D) Distribution to United States
shareholder.
(1) Distribution that is a specified payment.
(2) Distribution to United States
shareholder.
(E) Section 902 and section 960
consequences.
(5) Example 5.
(A) Section 965(a) inclusion amount.
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(1) CFC section 965(a) earnings amount.
(2) Effect on earnings and profits described
in section 959(c)(2) and (3).
(6) Example 6.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c)
classification of earnings and profits for
section 1248 inclusion.
(B) Section 965(a) inclusion amount.
(C) Distributions to United States
shareholders.
(7) Example 7.
(i) Facts.
(ii) Analysis.
(8) Example 8.
(i) Facts.
(ii) Analysis.
(A) Application of the gain reduction rule.
(B) Adjustments to the basis of CFC1.
(9) Example 9.
(i) Facts.
(ii) Analysis.
(A) Application of the gain reduction rule.
(B) Adjustments to the basis of CFC1 and
CFC2.
§ 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) Disregard of portion of cash position of
noncorporate entities treated as specified
foreign corporations.
(4) Examples.
(i) Example 1.
(A) Facts.
(B) Analysis.
(1) Loan from CFC1 to CFC2.
(2) Account receivable of CFC1 held by
CFC2.
(3) Loan from CFC1 to CFC3.
(ii) Example 2.
(A) Facts.
(B) Analysis.
(iii) Example 3.
(A) Facts.
(B) Analysis.
(iv) Example 4.
(A) Facts.
(B) Analysis.
(v) Example 5.
(A) Facts.
(B) Analysis.
(1) Treatment of PS1.
(2) Treatment of PS2.
(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.
(i) Example 1.
(A) Facts.
(B) Analysis.
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(ii) Example 2.
(A) Facts.
(B) Analysis.
(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.
(i) Facts.
(ii) Analysis.
(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.
(A) Facts.
(B) Analysis.
(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.
(ii) Definitions.
(A) Relatedness.
(B) Transfer.
(1) In general.
(2) Indirect transfer.
(iii) Cash reduction transactions.
(A) General rule.
(B) Per se rules for certain distributions.
(iv) E&P reduction transactions.
(A) General rule.
(1) Definition of pro rata share reduction
transaction.
(2) Definition of E&P deficit transaction.
(B) Per se rule for internal group
transactions.
(C) Example.
(1) Facts.
(2) Analysis.
(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.
(3) Exception for certain incorporation
transactions.
(i) In general.
(ii) Aggregate foreign cash position.
(4) Consequences of liquidation.
(i) In general.
(ii) Specified liquidation date.
(f) Disregard of certain transactions
occurring between E&P measurement dates.
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(1) Disregard of specified payments.
(2) Definition of specified payment.
(3) Non-application of disregard rule.
(4) Examples.
(i) Example 1.
(A) Facts.
(B) Analysis.
(ii) Example 2.
(A) Facts.
(B) Analysis.
(iii) Example 3.
(A) Facts.
(B) Analysis.
(iv) Example 4.
(A) Facts.
(B) Analysis.
(v) Example 5.
(A) Facts.
(B) Analysis.
(vi) Example 6.
(A) Facts.
(B) Analysis.
§ 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) [Reserved]
(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) No section 965(a) inclusion amount.
(3) Applicable percentage for domestic
pass-through owners.
(4) Applicable percentage with respect to
certain distributions of previously taxed
earnings and profits.
§ 1.965–6 Computation of foreign income
taxes deemed paid and allocation and
apportionment of deductions.
(a) Scope.
(b) Computation of foreign income taxes
deemed paid.
(1) In general.
(2) Dividend or inclusion in excess of post1986 undistributed earnings.
(3) Treatment of adjustment under section
965(b)(4)(B).
(4) Section 902 fraction.
(c) Allocation and apportionment of
deductions.
(d) Hovering deficits.
§ 1.965–7 Elections, payment, and other
special 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.
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(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.
(6) Leverage ratio.
(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.
(B) Transfer agreement.
(1) Eligibility.
(2) Filing requirements.
(i) In general.
(ii) Transition rule.
(iii) Death of eligible section 965(i)
transferor.
(3) Signature requirement.
(4) Terms of agreement.
(5) Special rule in the case of death of
eligible section 965(i) transferor.
(6) Leverage ratio.
(C) Consent of Commissioner.
(1) In general.
(2) Material misrepresentations and
omissions.
(D) Effect of assumption.
(1) In general.
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(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.
(6) Leverage ratio.
(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.
(iv) [Reserved]
(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.
(i) Eligibility.
(ii) Timing.
(iii) Election statement.
(6) Examples.
(i) Example 1.
(A) Facts.
(B) Analysis.
(ii) Example 2.
(A) Facts.
(B) Analysis.
(g) Definitions.
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(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) [Reserved]
(1) [Reserved]
(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) Example 1.
(i) Facts.
(A) In general.
(B) Facts relating to section 965.
(ii) Analysis.
(A) Section 965(a) inclusion amounts
before application of section 965(b)(5).
(B) Application of section 965(b)(5).
(1) Determination of E&P net surplus
shareholders and E&P net deficit
shareholders.
(2) Determining section 965(a) inclusion
amounts under section 965(b)(5).
(C) Aggregate foreign cash position.
(D) Section 965(c) deduction amount.
(2) Example 2.
(i) Facts.
(ii) Analysis.
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(A) Section 965(a) inclusion amount.
(1) Single section 958(a) U.S. shareholder
treatment.
(2) Determination of inclusion amount.
(B) Consolidated group aggregate foreign
cash position.
(C) Section 965(a) deduction amount.
§ 1.965–9 Applicability dates.
(a) In general.
(b) Applicability dates for rules
disregarding certain transactions.
§ 1.965–1 Overview, general rules, and
definitions.
(a) Overview—(1) In general. 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 foreign partnerships 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
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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
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
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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
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 a domestic
partnership that is controlled by a
United States shareholder described in
paragraph (e)(1)(ii)(B) of this section 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
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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.
(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
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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
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
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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
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; or
(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
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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,
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—(i) In
general. The term cash-equivalent asset
means any of the following assets—
(A) Personal property which is of a
type that is actively traded and for
which there is an established financial
market, other than a specified
commodity;
(B) Commercial paper, certificates of
deposit, the securities of the Federal
government and of any State or foreign
government;
(C) Any foreign currency;
(D) A short-term obligation; or
(E) Derivative financial instruments,
other than bona fide hedging
transactions.
(ii) Specified commodity. The term
specified commodity means a
commodity held by a specified foreign
corporation that, in the hands of the
specified foreign corporation, is
property described in section 1221(a)(1)
or 1221(a)(8). This paragraph (f)(13)(ii)
does not apply with respect to a
specified foreign corporation that is a
dealer or trader in commodities.
(14) Cash-equivalent asset hedging
transaction—(i) In general. 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 cash-equivalent asset.
(ii) Aggregate hedging transactions.
For purposes of paragraph (f)(14)(i) of
this section, the amount of a bona fide
hedging transaction described in
§ 1.1221–2(c)(3) (an aggregate hedging
transaction) that is treated as a cashequivalent asset hedging transaction is
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the amount that bears the same
proportion to the fair market value of
the aggregate hedging transaction as the
value of the cash-equivalent assets being
hedged by the aggregate hedging
transaction bears to the value of all
assets being hedged by the aggregate
hedging transaction.
(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
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) of this section 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
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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, other than a
forward contract with respect to a
specified commodity (as defined in
paragraph (f)(13)(ii) of this section), but
solely to the extent that the specified
foreign corporation identified, or could
have identified, the forward contract as
a hedging transaction (within the
meaning of § 1.1221–2(b)) with respect
to one or more specified commodities
held by the specified foreign
corporation,
(iv) A futures contract,
(v) A short position in securities or
commodities, other than a forward
contract with respect to a specified
commodity, but solely to the extent that
the specified foreign corporation
identified, or could have identified, the
forward contract as a hedging
transaction (within the meaning of
§ 1.1221–2(b)) with respect to one or
more specified commodities held by the
specified foreign corporation, 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,
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
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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
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
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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
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
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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
§ 1.951–1(e), determined as of the last
day of the inclusion year of the deferred
foreign income corporation on which it
is a specified foreign 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, determined by
allocating the specified E&P deficit
among the shareholders of the
corporation’s common stock in
proportion to the liquidation 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, provided that—
(A) If the corporation’s common stock
has a liquidation value of zero and there
is at least one other class of equity with
a liquidation preference relative to the
common stock, then the specified E&P
deficit is allocated as if it were
distributed in a hypothetical
distribution described in § 1.951–
1(e)(1)(i) with respect to the most junior
class of equity with a positive
liquidation value to the extent of such
liquidation value, and then to the next
most junior class of equity to the extent
of its liquidation value, and so on,
applying § 1.951–1(e) by substituting
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‘‘specified E&P deficit’’ for ‘‘subpart F
income’’ each place it appears and
treating the amount of current earnings
and profits of the corporation for the
year as being equal to the specified E&P
deficit of the corporation for the year;
and
(B) If the corporation’s common stock
has a liquidation value of zero and there
is no other class of equity with a
liquidation preference relative to the
common stock, the specified E&P deficit
is allocated among the common stock
using any reasonable method
consistently applied; and
(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 § 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
last day of the inclusion year of a
deferred foreign income corporation on
which it is a specified foreign
corporation occurs.
(35) Section 965 regulations. The term
section 965 regulations means the
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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
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
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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—
(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—(A) In
general. 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—
(1) 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 ten
percent of the interests in the
partnership’s capital and profits; and
(2) A beneficiary (tested beneficiary)
will not be considered as being owned
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by a trust under sections 958(b) and
318(a)(3)(B) and § 1.958–2(d)(1)(ii) if the
value of the interest of the tested
beneficiary, computed actuarially,
whether vested or contingent, current or
remainder, is less than ten percent of
the value of the trust property, assuming
the maximum exercise of discretion in
favor of the beneficiary.
(B) Attribution for purposes of the ten
percent standard. For purposes of
paragraph (f)(45)(ii)(A) of this section,
an interest in a partnership or trust
owned by a partner or beneficiary other
than the tested partner or tested
beneficiary will be considered as being
owned by the tested partner or tested
beneficiary under the principles of
sections 958(b) and 318, as modified by
this paragraph (f)(45)(ii), as if interests
in a partnership or trust 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 of
the United States shareholder.
(46) Spot rate. The term spot rate has
the meaning provided in § 1.988–1(d).
(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.
(1) Example 1. Definition of specified
foreign corporation. (i) Facts. A, an
individual, owns 1% of the interests in a
partnership, PS, and 10% by vote and value
of the stock of a foreign corporation, FC. PS
owns 100% of the stock of a domestic
corporation, DC. A United States citizen, USI,
owns an additional 10% by vote and value
of the stock of FC. The remaining 80% 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 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 be the same whether A or PS
or both are domestic or foreign persons.
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(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 FC 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 10% 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.
(2) Example 2. Definition of specified
foreign corporation. (i) Facts. The facts are
the same as in paragraph(g)(1)(i) of this
section (the facts in Example 1), except that
A is a foreign corporation wholly owned by
B, a foreign corporation, and B directly owns
9% 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 10% 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 FC for purposes of
determining whether FC is a specified foreign
corporation within the meaning of section
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 paragraph (g)(1) of this section, FC is a
specified foreign corporation within the
meaning of section 965(e)(1)(B) and
paragraph (f)(45)(i)(B) of this section.
(3) 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
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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).
(4) 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
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.
(5) 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
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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
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.
(6) 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
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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)(1), 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.
(7) 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,
1885
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
of 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
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 ................................................
(8) 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
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
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which is a controlled foreign corporation. If
DPS were treated as foreign, CFC3 and CFC4
would each continue to be a controlled
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
section 958(a) U.S. shareholder with respect
to either CFC3 or CFC4.
§ 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
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First
December 31, 2015.
December 31, 2015.
November 30, 2015.
N/A.
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 for purposes of
applying sections 902, 959, 960, 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
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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 of a specified
foreign corporation for purposes of
applying sections 902, 959, 960, and
965. For the taxable year of a specified
foreign corporation in which an E&P
measurement date occurs, and 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 any such year ends, the
adjustments to earnings and profits
described in paragraphs (b)(1) through
(b)(5) of this section apply in sequence.
For purposes of determining the
consequences under sections 902 and
960 of a distribution or an inclusion
under section 951(a)(1), after the
application of those paragraphs, the
ordering rule in § 1.960–1(i)(2) applies
except that section 902 is applied with
respect to any distributions from the
specified foreign corporation described
in paragraph (b)(2) of this section that
are not disregarded under § 1.965–4
before section 960 is applied with
respect to an inclusion or distribution
described in paragraph (b)(3), (b)(4), or
(b)(5) of this section.
(1) Each of the subpart F income of
the specified foreign corporation and
the amount required to be included in
income under section 1248, if any, are
determined without regard to section
965(a), but taking into account any
relevant distributions, and earnings and
profits of the specified foreign
corporation that are 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) (including to the extent provided
in section 959(e)).
(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, taking into account the
rules of § 1.965–4, and the earnings and
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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 distributions
described in paragraph (b)(2) of this
section that are disregarded under
§ 1.965–4 is redetermined and 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 section
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
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,
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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 (if any) 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, and are
treated as having been previously
included in the gross income of the
section 958(a) U.S. shareholder under
section 951 for purposes of section
1248(d)(1). 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 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
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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(b)(3) for the timing of this
adjustment for purposes of determining
foreign taxes deemed paid 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
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
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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)
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 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) Section 962 election. In the case of
a section 958(a) U.S. shareholder who
has made an election under section 962
for a section 958(a) U.S. shareholder’s
inclusion year, the increase in basis in
the section 958(a) U.S. shareholder’s
section 958(a) stock of, or applicable
property with respect to, a deferred
foreign income corporation cannot
exceed an amount equal to the amount
of tax paid under chapter 1 of the Code
with respect to the section 958(a) U.S.
shareholder’s section 965(a) inclusion
amount with respect to the deferred
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1887
foreign income corporation, taking into
account any section 965(h) election
made by the section 958(a) U.S.
shareholder.
(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—(1) In general.
Except as provided in paragraphs
(f)(2)(ii)(A)(2) and (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.
(2) Limited basis adjustment. A
section 958(a) U.S. shareholder may, in
lieu of applying paragraph (f)(2)(ii)(A)(1)
of this section, designate the amount by
which it increases its basis in section
958(a) stock of, or applicable property
with respect to, a deferred foreign
income corporation, provided that—
(i) The increase does not exceed 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; and
(ii) The aggregate amount of a section
958(a) U.S. shareholder’s increases in
basis with respect to stock or applicable
property pursuant to paragraph
(f)(2)(ii)(A)(2) of this section does not
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exceed the aggregate amount of the
section 958(a) U.S. shareholder’s
reductions in basis pursuant to
paragraph (f)(2)(ii)(B) of this section
subject to the limitation under
paragraph (f)(2)(ii)(B)(2) of this section.
(B) Reduction in basis with respect to
an E&P deficit foreign corporation—(1)
In general. Except as provided in
paragraphs (f)(2)(ii)(B)(2) and (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. For rules requiring gain
recognition, see paragraph (h)(3) of this
section.
(2) Limited basis adjustment. If a
section 958(a) U.S. shareholder adjusts
its basis in section 958(a) stock of, or
applicable property with respect to, one
or more deferred foreign income
corporations under paragraph
(f)(2)(ii)(A)(2) of this section, the section
958(a) U.S. shareholder’s aggregate
reductions in basis in section 958(a)
stock of, or applicable property with
respect to, an E&P deficit foreign
corporation pursuant to paragraph
(f)(2)(ii)(B)(1) of this section on a day
may not exceed the amount of the
section 958(a) U.S. shareholder’s basis
in the section 958(a) stock of, or
applicable property with respect to,
such E&P deficit foreign corporation,
determined without taking into account
specified basis adjustments to the
section 958(a) stock of, or applicable
property with respect to, such E&P
deficit foreign corporation.
(C) Section 962 election. In the case of
a section 958(a) U.S. shareholder who
has made an election under section 962
for a section 958(a) U.S. shareholder’s
inclusion year, the adjustments
provided in paragraphs (f)(2)(ii)(A) and
(B) of this section do not apply.
(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)
U.S. shareholder and each section
958(a) U.S. shareholder of an E&P
deficit foreign corporation or of a
deferred foreign income corporation
with respect to which the second
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18:12 Feb 04, 2019
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section 958(a) U.S. shareholder’s pro
rata share of the section 965(a) earnings
amount is reduced under section 965(b),
§ 1.965–1(b)(2), or § 1.965–8(b) that is
related to the first 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. Except as provided in
paragraph (f)(2)(iii)(B)(1)(ii) of this
section, the election provided in this
paragraph (f)(2) is irrevocable.
(ii) Transition rule. If the due date
referred to in paragraph (f)(2)(iii)(B)(1)(i)
of this section occurs before May 6,
2019, the election must be made by May
6, 2019. In the case of an election made
before February 5, 2019, the election
may be revoked by attaching a
statement, signed under penalties of
perjury, to an amended return filed by
May 6, 2019. The statement must
contain 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,
that are section 958(a) U.S. shareholders
of E&P deficit foreign corporations or of
deferred foreign income corporations
with respect to which the section 958(a)
U.S. shareholder’s pro rata share of the
section 965(a) earnings amount is
reduced under section 965(b), § 1.965–
1(b)(2), or § 1.965–8(b) revoke the
election provided in this paragraph
(f)(2).
(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
consistent with the rules for signatures
applicable to the section 958(a) U.S.
shareholders return, to its return for the
first taxable year that includes the last
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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,
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, that are section 958(a) U.S.
shareholders of E&P deficit foreign
corporations or of deferred foreign
income corporations with respect to
which the section 958(a) U.S.
shareholder’s pro rata share of the
section 965(a) earnings amount is
reduced under section 965(b), § 1.965–
1(b)(2), or § 1.965–8(b) make the
election provided in this paragraph
(f)(2). If the section 958(a) U.S.
shareholder increases its basis in stock
or applicable property under paragraph
(f)(2)(ii)(A)(2) of this section and
decreases its basis in stock or applicable
property pursuant to paragraph
(f)(2)(ii)(B) of this section subject to the
limitation under paragraph
(f)(2)(ii)(B)(2) of this section, the
election statement must so indicate. The
attachment of an unsigned copy of the
election statement to the timely-filed
return for the relevant taxable year
satisfies the signature requirement of
this paragraph (f)(2)(iii)(B)(2) if the
section 958(a) U.S. shareholder retains
the original signed election statement in
the manner specified by § 1.6001–1(e).
(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
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, translated (if necessary)
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into U.S. dollars at the spot rate on
December 31, 2017.
(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.
Except as provided in paragraph (e)(2)
of this section, a specified basis
adjustment to section 958(a) stock or
applicable property with respect to a
specified foreign corporation is made as
of the last day of the last taxable year
of the specified foreign corporation that
begins before January 1, 2018, on which
it is a specified foreign corporation.
(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
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18:12 Feb 04, 2019
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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
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.
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1889
(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)) (including a controlled
domestic partnership treated as a
foreign partnership pursuant to § 1.965–
1(e)).
(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.
(1) 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, and $21x of post-1986 foreign
income taxes. None of CFC2’s earnings and
profits are attributable to income treated as
effectively connected with the conduct of a
trade or business within the United States.
On March 1, 2017, CFC1 earns 30u of subpart
F income (as defined in section 952), and
CFC2 earns 20u of subpart F income. No
foreign income tax is imposed on CFC1’s or
CFC2’s subpart F income. For purposes of
section 904, the post-1986 undistributed
earnings, subpart F income, and post-1986
foreign income taxes are in the general
category. 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. USP
includes in gross income all amounts that it
is required to include under section 951. No
foreign income tax is imposed or withheld on
the distribution by CFC2 to CFC1 or the
distribution by CFC1 to USP.
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
for inclusion under section 951(a)(1)(A)
without regard to section 965. The
distribution from CFC2 to CFC1 does not give
rise to subpart F income to CFC1 due to the
application of section 954(c)(6). Accordingly,
USP’s inclusion under section 951(a)(1)(A)
without regard to section 965(a) is 30u with
respect to CFC1 and 20u with respect to
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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
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
so, determines its section 965(a) inclusion
amounts with respect to CFC1 and CFC2.
CFC1 and CFC2 are specified foreign
corporations, and CFC1 and CFC2 each have
accumulated post-1986 deferred foreign
income greater than zero as of an E&P
measurement date. Accordingly, CFC1 and
CFC2 are deferred foreign income
corporations. 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
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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
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.
(E) Section 902 and section 960
consequences. (1) Distribution by and
inclusions with respect to CFC2. Under
section 960, USP is deemed to pay $3.50x
($21x × (20u/120u)) of CFC2’s post-1986
foreign income taxes as a result of its
inclusion under section 951(a)(1)(A) without
regard to section 965(a) with respect to CFC2.
As a result of the distribution from CFC2 to
CFC1, CFC2’s post-1986 foreign income taxes
are reduced, and CFC1’s post-1986 foreign
income taxes are increased, by the foreign
income taxes deemed paid by CFC1 under
section 902 of $3.50x (($21x¥$3.50x) × (20u/
120u¥20u)). Under section 960, USP is
deemed to pay $14x (($21x¥$3.50x¥$3.50x)
× 80u/(120u¥40u)) of CFC2’s post-1986
foreign income taxes as a result of its section
965(a) inclusion with respect to CFC2. The
taxes deemed paid by USP as a result of its
section 965(a) inclusion with respect to CFC2
are subject to the applicable percentage
disallowance under section 965(g).
(2) Inclusions with respect to CFC1. As
determined in paragraph (j)(1)(ii)(E)(1) of this
section (paragraph (E)(1) in the analysis in
this Example 1), as a result of the distribution
from CFC2 to CFC1, CFC1 is deemed under
section 902 to pay $3.50x of CFC2’s post1986 foreign income taxes. Under section
960, USP is deemed to pay $2.10x ($3.50x ×
(30u/(30u + 20u))) of CFC1’s post-1986
foreign income taxes as a result of its
inclusion under section 951(a)(1)(A) without
regard to section 965(a) with respect to CFC1.
Under section 960, USP is deemed to pay
$1.40x (($3.50x¥$2.10x) × 20u/(30u +
20u¥30u)) of CFC1’s post-1986 foreign
income taxes as a result of its section 965(a)
inclusion with respect to CFC1. The taxes
deemed paid by USP as a result of its section
965(a) inclusion with respect to CFC1 are
subject to the applicable percentage
disallowance under section 965(g).
(2) 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 (j)(1)(i) of this section (the facts in
Example 1), except that on December 1, 2017,
CFC1 earns an additional 50u of subpart F
income (as defined in section 952), and
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neither CFC1 nor CFC2 has any post-1986
foreign income taxes.
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
for inclusion under section 951(a)(1)(A)
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
(j)(1)(ii)(B) of this section (paragraph (B) in
the analysis in Example 1).
(C) Section 965(a) inclusion amount. USP
determines whether CFC1 and CFC2 are
deferred foreign income corporations and, if
so, determines its section 965(a) inclusion
amounts with respect to CFC1 and CFC2.
CFC1 and CFC2 are specified foreign
corporations, and CFC1 and CFC2 each have
accumulated post-1986 deferred foreign
income greater than zero as of an E&P
measurement date. Accordingly, CFC1 and
CFC2 are deferred foreign income
corporations. 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
(j)(1)(ii)(C)(2) of this section (paragraph (C)(2)
in the analysis in Example 1)).
(3) Effect on earnings and profits described
in section 959(c)(2) and (3). The analysis is
the same as in paragraph (j)(1)(ii)(C)(3) of this
section (paragraph (C)(3) in the analysis in
Example 1).
(D) Distribution to United States
shareholder. The analysis is the same as in
paragraph (j)(1)(ii)(D) of this section
(paragraph (D) in the analysis in Example 1).
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(3) 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 (j)(1)(i) of this section
(the facts in Example 1), except that on
December 1, 2017, CFC2 earns an additional
50u of subpart F income (as defined in
section 952), and neither CFC1 nor CFC2 has
any post-1986 foreign income taxes.
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
for inclusion under section 951(a)(1)(A)
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
so, 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 the
amounts in paragraph (j)(3)(ii)(C)(2)(i) and (ii)
of this section (paragraph (C)(2)(i) and (ii) in
the analysis in this Example 3)—
(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
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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, 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 (j)(1)(ii)(D) of this section
(paragraph (D) in the analysis in Example 1).
(4) Example 4. Determination of
accumulated post-1986 deferred foreign
income with distribution made after 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 10u
of earnings and profits described in section
959(c)(3) that were accumulated in taxable
years beginning after December 31, 1986,
while CFC1 was a specified foreign
corporation, and $2x of post-1986 foreign
income taxes; 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 and $10x of
post-1986 foreign income taxes. For purposes
of section 904, the post-1986 undistributed
earnings and post-1986 foreign income taxes
are in the general category. None of CFC1’s
or CFC2’s earnings and profits are
attributable to income treated as effectively
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1891
connected with the conduct of a trade or
business within the United States. On
December 1, 2017, CFC2 distributes 100u to
CFC1, and CFC1 distributes 10u to USP. USP
does not have an aggregate foreign E&P
deficit. USP includes in gross income all
amounts that it is required to include under
section 951. No foreign income tax is
imposed or withheld on the distribution by
CFC2 to CFC1 or the distribution by CFC1 to
USP. USP does not apply § 1.965–4(f)(3) to
determine the post-1986 earnings and profits
of CFC1 and CFC2.
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
for inclusion under section 951(a)(1)(A)
without regard to section 965. The
distribution from CFC2 to CFC1 does not give
rise to subpart F income to CFC1 due to the
application of section 954(c)(6). Accordingly,
USP does not have an inclusion under
section 951(a)(1)(A) without regard to section
965(a) with respect to CFC1 or CFC2 for their
taxable years ending December 31, 2017. As
a result, neither CFC1 nor CFC2 has earnings
and profits described in section 959(c)(2).
(B) Distributions between specified foreign
corporations before January 1, 2018. The
distribution of 100u from CFC2 to CFC1 is
initially treated as a distribution 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
so, determines its section 965(a) inclusion
amounts with respect to CFC1 and CFC2.
CFC1 and CFC2 are specified foreign
corporations, and CFC1 and CFC2 each have
accumulated post-1986 deferred foreign
income greater than zero as of an E&P
measurement date. Accordingly, CFC1 and
CFC2 are deferred foreign income
corporations. 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 10u, 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 CFC1’s post-1986 earnings and
profits of 10u. CFC1’s accumulated post-1986
deferred foreign income is equal to its post1986 earnings and profits because CFC1 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). But for § 1.965–4(f), CFC1’s post-1986
earnings and profits as of December 31, 2017,
would be 110u, but because the distribution
from CFC2 is a specified payment, it is
disregarded in determining CFC1’s post-1986
earnings and profits as of December 31, 2017,
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under § 1.965–4(f). 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 10u distribution to USP.
(2) CFC2 section 965(a) earnings amount.
The section 965(a) earnings amount with
respect to CFC2 is 100u, 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 100u. CFC2’s accumulated post1986 deferred foreign income is equal to its
post-1986 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). But for § 1.965–4(f), CFC2’s post-1986
earnings and profits as of December 31, 2017,
would be 0u, but because the distribution to
CFC1 is a specified payment, it is disregarded
in determining CFC2’s post-1986 earnings
and profits as of December 31, 2017, under
§ 1.965–4(f).
(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, 10u and 100u, respectively, and
reduce their earnings and profits described in
section 959(c)(3) by an equivalent amount.
(D) Distributions—(1) Distribution that is a
specified payment. The distribution from
CFC2 to CFC1 is recharacterized as a
distribution of 100u out of the earnings and
profits of CFC2 described in section
959(c)(2), which include earnings and profits
attributable to the section 965(a) inclusion
amount taken into account by USP.
(2) Distribution to United States
shareholder. The distribution from CFC1 to
USP is treated as a distribution of 10u 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.
(E) Section 902 and section 960
consequences. Under section 960, USP is
deemed to pay $10x ($10x × (100u/100u)) of
CFC2’s post-1986 foreign income taxes as a
result of its section 965(a) inclusion with
respect to CFC2 and $2x ($2x × (10u/10u) of
CFC1’s post-1986 foreign income taxes as a
result of its section 965(a) inclusion with
respect to CFC1. Such taxes are subject to the
applicable percentage disallowance under
section 965(g).
(5) Example 5. Determination of
accumulated post-1986 deferred foreign
income with section 951(a)(1)(B) inclusion
after E&P measurement date on November 2,
2017. (i) Facts. USP, a domestic corporation,
owns all of the stock of CFC, a foreign
corporation. USP has a taxable year ending
December 31, 2017, and CFC has a taxable
year ending November 30, 2017. As of
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December 1, 2016, CFC has 110u of earnings
and profits described in section 959(c)(3) that
were accumulated in taxable years beginning
after December 31, 1986, while CFC was a
specified foreign corporation. CFC holds
150u of United States property throughout its
taxable year ending November 30, 2017, but
disposes of it on December 1, 2017,
recognizing no gain or loss on the property.
Between December 1, 2017, and December
31, 2017, CFC earns an additional 10u of
income that does not constitute subpart F
income or income treated as effectively
connected with the conduct of a trade or
business within the United States that gives
rise to 10u of earnings and profits. USP
includes in income all amounts that it is
required to include under section 951.
(ii) Analysis. (A) Section 965(a) inclusion
amount. USP determines whether CFC is a
deferred foreign income corporation, and, if
so, determines its section 965(a) inclusion
amount with respect to CFC. CFC is a
specified foreign corporation, and CFC has
accumulated post-1986 deferred foreign
income greater than zero as of an E&P
measurement date. Accordingly, CFC is a
deferred foreign income corporation. USP’s
section 965(a) inclusion amount with respect
to CFC equals the section 965(a) earnings
amount of CFC.
(1) CFC section 965(a) earnings amount.
The section 965(a) earnings amount with
respect to CFC is 110u, the greater of the
amount of its accumulated post-1986
deferred foreign income as of November 2,
2017, which is 110u, and the amount of its
accumulated post-1986 deferred foreign
income as of December 31, 2017, which is
10u. CFC’s accumulated post-1986 deferred
foreign income as of November 2, 2017, is
equal to its 110u of post-1986 earnings and
profits, which are not reduced by the 110u
of earnings and profits described in section
959(c)(1) as a result of USP’s section
951(a)(1)(B) inclusion with respect to CFC as
of December 31, 2017, because such amounts
would not be excluded from the gross income
of a United States shareholder under section
959 under section 965(d)(2) or § 1.965–1(f)(7)
if distributed on November 2, 2017. CFC’s
accumulated post-1986 deferred foreign
income as of December 31, 2017, is equal to
its 120u of post-1986 earnings and profits
reduced by the 110u of earnings and profits
described in section 959(c)(1) as a result of
USP’s section 951(a)(1)(B) inclusion with
respect to CFC as of December 31, 2017,
which would be excluded from the gross
income of a United States shareholder under
section 959 under section 965(d)(2) or
§ 1.965–1(f)(7) if distributed on December 31,
2017.
(2) Effect on earnings and profits described
in section 959(c)(2) and (3). In USP’s taxable
year ending December 31, 2018, CFC
increases its earnings and profits described in
section 959(c)(2) by USP’s section 965(a)
inclusion amount with respect to CFC, 110u,
and reduces its earnings and profits
described in section 959(c)(3) by an
equivalent amount.
(B) Section 956 inclusion. In USP’s taxable
year ending December 31, 2017, USP
increases its earnings and profits described in
section 959(c)(1) by USP’s amount included
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under sections 951(a)(1)(B) and 956 with
respect to CFC, 110u, and reduces its
earnings and profits described in section
959(c)(3) by an equivalent amount.
(6) Example 6. Section 1248 inclusion. (i)
Facts. USP1, a domestic corporation, owns
all of the stock of CFC, a foreign corporation,
until it sells all of such stock to USP2, a
domestic corporation, on December 1, 2017,
in a sale on which USP1 recognizes $100x of
gain. Throughout 2017, 1u=$1x. USP1, USP2,
and CFC all have taxable years ending
December 31, 2017. As of January 1, 2017,
CFC has 100u of earnings and profits
described in section 959(c)(3) that were
accumulated in taxable years beginning after
December 31, 1986, while CFC was wholly
owned by USP1. On March 1, 2017, CFC
distributes 20u to USP1. None of CFC’s
earnings and profits are attributable to
income treated as effectively connected with
the conduct of a trade or business within the
United States. USP2 does not have an
aggregate foreign E&P deficit. USP1 and
USP2 include in income all amounts that
they are required to include under sections
951 and 1248.
(ii) Analysis. (A) Adjustments to section
959(c) classification of earnings and profits
for section 1248 inclusion. USP1’s inclusion
under section 1248 with respect to CFC is
$80x ($100x¥$20x). As a result of the
inclusion under section 1248, under section
959(e), CFC increases its earnings and profits
described in section 959(c)(2) by 80u.
(B) Section 965(a) inclusion amount. USP2
determines whether CFC is a deferred foreign
income corporation and, if so, determines its
section 965(a) inclusion amount with respect
to CFC. CFC is a specified foreign
corporation, and CFC has accumulated post1986 deferred foreign income greater than
zero as of an E&P measurement date.
Accordingly, CFC is a deferred foreign
income corporation. USP2’s section 965(a)
inclusion amount with respect to CFC equals
the section 965(a) earnings amount of CFC.
The section 965(a) earnings amount with
respect to CFC 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 100u
of post-1986 earnings and profits reduced by
80u of such post-1986 earnings and profits
described in section 959(c)(2) under section
965(d)(2)(B) and § 1.965–1(f)(7)(i)(B). CFC
increases its earnings and profits described in
section 959(c)(2) by USP2’s section 965(a)
inclusion amount with respect to CFC, 20u,
and reduces its earnings and profits that
would be described in section 959(c)(3) but
for the application of section 965(a) by an
equivalent amount.
(C) Distributions to United States
shareholders. The distributions from CFC to
USP1 (including the deemed dividend under
section 1248) are treated as distributions out
of the earnings and profits of CFC described
in section 959(c)(3).
(7) Example 7. 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
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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. 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)
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).
(8) Example 8. Distribution attributable to
section 965(b) previously taxed earnings and
profits; parent-subsidiary. (i) Facts. The facts
are the same as in paragraph (j)(7)(i) of this
section (the facts in Example 7), 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.
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(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
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.
(9) Example 9. Distribution attributable to
section 965(b) previously taxed earnings and
profits; brother-sister. (i) Facts. The facts are
the same as in paragraph (j)(8)(i) of this
section (the facts in Example 8), 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
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1893
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.
§ 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
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 corresponding cash
measurement dates is disregarded to the
extent of the smallest of the product of
the amount of the item on such
corresponding cash measurement dates
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
dates. 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
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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
specified foreign corporation on the
corresponding cash measurement date
of such other specified corporation 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) Disregard of portion of cash
position of noncorporate entities treated
as specified foreign corporations. If an
entity is treated as a specified foreign
corporation of a section 958(a) U.S.
shareholder pursuant to section
965(c)(3)(E), for purposes of determining
the aggregate foreign cash position of
the section 958(a) U.S. shareholder, the
section 958(a) U.S. shareholder’s pro
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rata share of the cash position of the
entity (determined taking into account
paragraphs (b)(1) and (b)(2) of this
section) is reduced by the amount of the
pro rata share attributable to deemed
stock of the entity not owned (within
the meaning of section 958(a), applied
by treating domestic pass-through
entities as foreign) by a specified foreign
corporation of the section 958(a) U.S.
shareholder (determined without taking
into account section 965(c)(3)(E)).
(4) Examples. The following examples
illustrate the application of this
paragraph (b).
(i) Example 1. (A) 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.
(B) Analysis—(1) 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
(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.
(2) 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.
(3) 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 short-term
obligation.
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(ii) Example 2. (A) Facts. The facts are the
same as in paragraph (b)(4)(i)(A) of this
section (the facts in Example 1), except that
on December 1, 2015, CFC1 sells 5% of the
stock of CFC2 to an unrelated person.
(B) Analysis. The analysis is the same as
in paragraph (b)(4)(i)(B) of this section (the
analysis in Example 1), except that the shortterm 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.
(iii) Example 3. (A) 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.
(B) 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
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.
(iv) Example 4. (A) 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.
(B) Analysis. For purposes of determining
USP’s aggregate foreign cash position, on the
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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
$110x 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.
(v) Example 5. (A) Facts. USP, a domestic
corporation, owns all of the stock of CFC1
and CFC2, each a foreign corporation. USP
and CFC1 own 60% and 40%, respectively,
of the interests in the capital and profits of
PS1, a partnership. PS1 and CFC2 own 70%
and 30%, respectively, of the interests in the
capital and profits of PS2, a partnership. On
each cash measurement date, PS1’s cash
position of $100x consists entirely of cash,
and PS2’s cash position of $200x includes a
$50x short-term obligation of CFC2.
(B) Analysis. (1) Treatment of PS1. Because
an interest in PS1 is held by CFC1, a
specified foreign corporation of USP, and
PS1 would be a specified foreign corporation
of USP if it were a foreign corporation, PS1
is treated as a specified foreign corporation
of USP for purposes of determining USP’s
aggregate foreign cash position. Without
regard to paragraph (b)(3) of this section, USP
must take into account $100x, its pro rata
share of PS1’s cash position, for purposes of
determining its aggregate foreign cash
position. However, 60% of that amount is
attributable to deemed stock of PS1 that is
not owned (within the meaning of section
958(a)) by a specified foreign corporation of
USP. Accordingly, pursuant to paragraph
(b)(3) of this section, the amount of PS1’s
cash position that USP must take into
account for purposes of determining its
aggregate foreign cash position is reduced by
$60x (60% of $100x) to $40x ($100x¥$60x).
(2) Treatment of PS2. Because an interest
in PS2 is held by CFC2, a specified foreign
corporation of USP, and PS2 would be a
specified foreign corporation of USP if it
were a foreign corporation, PS2 is treated as
a specified foreign corporation of USP for
purposes of determining USP’s aggregate
foreign cash position. USP, CFC1, CFC2, PS1,
and PS2 all have calendar year taxable years.
For purposes of determining the aggregate
foreign cash position of USP, a section 958(a)
U.S. shareholder of PS2, under paragraph
(b)(1) of this section, the short-term
obligation of CFC2 held by PS2 outstanding
on each cash measurement date of each
specified foreign corporation is disregarded
on such cash measurement dates.
Accordingly, without regard to paragraph
(b)(3) of this section, USP must take into
account $150x ($200x¥$50x) of PS2’s cash
position for purposes of determining its
aggregate foreign cash position. However,
42% (60% × 70%) of that amount is
attributable to deemed stock of PS2 that is
not owned (within the meaning of section
958(a), applied by treating PS1 as foreign if
it is a domestic pass-through entity) by a
specified foreign corporation of USP
(determined without taking into account
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section 965(c)(3)(E)). Accordingly, pursuant
to paragraph (b)(3) of this section, the amount
of PS2’s cash position that USP must take
into account for purposes of determining its
aggregate foreign cash position is reduced by
$63x (42% of $150x) to $87x ($150x¥$63x).
(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.
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.
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1895
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
(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).
(i) Example 1. Estimation of aggregate
foreign cash position for a section 958(a) U.S.
shareholder inclusion year—(A) 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.
(B) 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 $300x, 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,
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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 $200x, 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).
(ii) Example 2. Allocation of aggregate
foreign cash position among section 958(a)
U.S. shareholder inclusion years—(A) Facts.
The facts are the same as in paragraph
(c)(4)(i)(A) of this section (the facts in
Example 1), except that the cash position of
each of CFC1 and CFC2 on all relevant cash
measurement dates is $200x, with the result
that USP has an aggregate foreign cash
position determined under § 1.965–1(f)(8)(i)
of $400x. For its 2017 taxable year, USP has
a section 965(a) inclusion amount with
respect to CFC1 of $300x, and for its 2018
taxable year, USP has a section 965(a)
inclusion amount with respect to CFC2 of
$300x.
(B) Analysis. Under paragraph (c)(2)(i) of
this section, USP’s aggregate foreign cash
position for 2017 is $300x, which is the
lesser of USP’s aggregate foreign cash
position determined under § 1.965–1(f)(8)(i)
($400x) or the section 965(a) inclusion
amount ($300x) 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 $100x,
USP’s aggregate foreign cash position
determined under § 1.965–1(f)(8)(i) ($400x)
reduced by the amount of its aggregate
foreign cash position for 2017 ($300x) 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
expatriated entity if the surrogate
foreign corporation with respect to the
expatriated entity is treated as a
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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).
(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
$1,000x and has a section 965(c) deduction
amount of $700x. FS has no post-1986
foreign income taxes. 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 $100x
(USI’s domestic pass-through owner share of
USPRS’s section 965(a) inclusion amount)
minus $70x (USI’s domestic pass-through
owner share of USPRS’s section 965(c)
deduction amount), or $30x. No other
deductions are allowed in determining this
amount. USI’s tax on the $30x 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 $70x 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) Sections
62(a) and 63(d). A section 965(c)
deduction is treated as a deduction
described in section 62(a) and 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 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), and
(B) The aggregate amount of its
section 965(a) inclusions equal to the
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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).
(A) 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 $1,000x with
respect to FS and has a $700x section 965(c)
deduction.
(B) 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 $300x (its pro rata share of the net
of S Corp’s $1,000x aggregate section 965(a)
inclusion and S Corp’s $700x aggregate
section 965(c) deduction). Accordingly, USI’s
basis in S Corp is increased under section
1367(a)(1) by $300x. As a result of the
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, $700x, 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, $700x. S Corp’s
accumulated adjustments account (‘‘AAA’’)
is increased under section 1368(e)(1)(A) by
the $1,000x section 965(a) inclusion taken
into account and reduced by the $700x
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, $700x, 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
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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.
§ 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
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. Except as otherwise
provided in paragraph (e)(3) of this
section, 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
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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
(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
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1897
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
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
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any specified foreign corporation of the
United States shareholder or a
distribution that is a non pro rata
distribution to a foreign person that is
related to the United States shareholder.
For purposes of the preceding sentence,
there is no 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 if the transfer
is pursuant to a legal obligation entered
into before November 2, 2017. A
taxpayer that takes the position that a
cash reduction transaction is not a
specified distribution because a transfer
of cash, accounts receivable, or cashequivalent asset is pursuant to a legal
obligation entered into before November
2, 2017, 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 the
position.
(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
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
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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), the term 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 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
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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).
(1) 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.
(2) 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
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
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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 described in
paragraph (d)(1) or (2) of this section
with respect to the United States
shareholder, or change the amount of
the section 965 element described in
paragraph (d)(3) of this section other
than by reason of an increase in a
section 965(a) inclusion amount with
respect to the specified foreign
corporation, 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.
Except as otherwise provided in
paragraph (e)(3) of this section, 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,
without regard to this paragraph (c)(2),
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
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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 paragraphs (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
paragraphs (b) and (c) of this section, if
a domestic pass-through entity is a
United States shareholder, then a
domestic pass-through owner with
respect to the domestic pass-through
entity that is not otherwise a United
States shareholder is treated as a United
States shareholder.
(3) Exception for certain
incorporation transactions—(i) In
general. Paragraphs (b) and (c)(2) of this
section do not apply to disregard a
transfer of stock of a specified foreign
corporation by a United States
shareholder to a domestic corporation
(for this purpose, including an S
corporation), provided that—
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1899
(A) The transferee’s section 965(a)
inclusion amount with respect to the
transferred stock of the specified foreign
corporation is no lower than the
transferor’s section 965(a) inclusion
amount with respect to the transferred
stock of the specified foreign
corporation, determined without regard
to the transfer; and
(B) The transferee and the transferor
determine their aggregate foreign cash
position under paragraph (e)(3)(ii) of
this section.
(ii) Aggregate foreign cash position. In
the case of a transfer described in
paragraph (e)(3)(i) of this section, in
order to rely on the exception in
paragraph (e)(3)(i) of this section—
(A) The transferee must treat its pro
rata share of the cash position of a
specified foreign corporation as of a
cash measurement date as of which it
did not own the transferred stock of the
specified foreign corporation as
including the transferor’s pro rata share
of the cash position of the specified
foreign corporation with respect to the
transferred stock of the specified foreign
corporation as of such cash
measurement date for purposes of
determining its aggregate foreign cash
position; and
(B) The transferor must treat its pro
rata share of the cash position of a
specified foreign corporation as of a
cash measurement date as of which it
did not own the transferred stock of the
specified foreign corporation as
including the transferee’s pro rata share
of the cash position of the specified
foreign corporation with respect to the
transferred stock of the specified foreign
corporation as of such cash
measurement date for purposes of
determining its aggregate foreign cash
position.
(4) Consequences of liquidation—(i)
In general. In the case of a liquidation
of a specified foreign corporation that is
disregarded for purposes of determining
the section 965 elements of a United
States shareholder pursuant to
paragraph (b) or (c)(2) of this section, for
purposes of determining the amounts of
the section 965 elements of the United
States shareholder, the date that is
treated as the last day of the taxable year
of the specified foreign corporation is
the later of—
(A) The date of the liquidation; and
(B) The specified liquidation date, if
any.
(ii) Specified liquidation date. The
term specified liquidation date means,
in the case of a liquidation of a specified
foreign corporation pursuant to an
entity classification election that is
disregarded for purposes of determining
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the section 965 elements of a United
States shareholder—
(A) November 30, 2017, with respect
to a United States shareholder that must
include in income under § 1.367(b)–3 as
a deemed dividend the all earnings and
profits amount with respect to the
United States shareholder’s stock of the
liquidating specified foreign
corporation; or
(B) The date of filing of the entity
classification election, with respect to
all other United States shareholders.
(f) Disregard of certain transactions
occurring between E&P measurement
dates—(1) Disregard of specified
payments. Except as provided in
paragraph (f)(3) of this section, a
specified payment made by 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 payment or accrual of the
amount occurs after November 2, 2017,
and on or before December 31, 2017;
and
(iii) 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) Non-application of disregard rule.
A section 958(a) U.S. shareholder may
determine the post-1986 earnings and
profits of a specified foreign corporation
without regard to paragraph (f)(1) of this
section, provided that it and every
section 958(a) U.S. shareholder related
to the first section 958(a) U.S.
shareholder determines the post-1986
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earnings and profits of each of its
specified foreign corporations without
regard to paragraph (f)(1) of this section.
For purposes of this paragraph (f)(3), 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).
(4) Examples. The following examples
illustrate the application of the rules in
this paragraph (f).
(i) Example 1. Deductible payment between
wholly owned specified foreign corporations
is a specified payment. (A) 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.
(B) Analysis. The payment from CFC2 to
CFC1 is a specified payment because (1)
CFC1 and CFC2 are related specified foreign
corporations; (2) the payment occurs after
November 2, 2017, and on or before
December 31, 2017; and (3) 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.
(ii) Example 2. Distribution is a specified
payment. (A) Facts. The facts are the same as
in paragraph (f)(4)(i)(A) of this section (the
facts in Example 1), 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
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.
(B) Analysis. The distribution is a specified
payment because (1) CFC1 and CFC2 are
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related specified foreign corporations; (2) the
distribution occurs after November 2, 2017,
and on or before December 31, 2017; and (3)
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.
(iii) Example 3. Deductible payment
between related (but not wholly owned)
specified foreign corporations is a specified
payment. (A) Facts. The facts are the same as
in paragraph (f)(4)(i)(A) of this section (the
facts in Example 1), 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.
(B) Analysis. The analysis is the same as
in paragraph (f)(4)(i)(B) of this section (the
analysis in Example 1); 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.
(iv) Example 4. Deductible payment
between unrelated specified foreign
corporations is not a specified payment. (A)
Facts. The facts are the same as in paragraph
(f)(4)(i)(A) of this section (the facts in
Example 1), 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.
(B) 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.
(v) Example 5. Deductible payment and
income accrued from unrelated persons are
not specified payments. (A) Facts. The facts
are the same as in paragraph (f)(4)(i)(A) of
this section (the facts in Example 1), 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.
(B) 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.
(vi) 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.
(A) Facts. The facts are the same as in
paragraph (f)(4)(v)(A) of this section (the facts
in Example 5), except that CFC2 also makes
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a deductible payment of 10u to CFC1 on
November 3, 2017.
(B) Analysis. The deductible payment is a
specified payment because (1) CFC1 and
CFC2 are related specified foreign
corporations; (2) the payment occurs after
November 2, 2017, and on or before
December 31, 2017; and (3) 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.
§ 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
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, for example, 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, for example, no
deduction or credit is allowed for the
applicable percentage of foreign income
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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) (as in effect on
December 21, 2017) or section 960(b) (as
applicable to taxable years of controlled
foreign corporations beginning after
December 31, 2017) 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
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
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1901
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 applies 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
applies 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,
except as provided in paragraph (d)(2)
and (d)(3) 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
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
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(B) The amount described in
paragraph (d)(1)(i)(B) of this section.
(2) No section 965(a) inclusion
amount. If a section 958(a) U.S.
shareholder does not have an aggregate
section 965(a) inclusion amount, the
section 958(a) U.S. shareholder’s
applicable percentage is 55.7 percent.
(3) Applicable percentage for
domestic pass-through owners. In the
case of a domestic pass-through owner
with respect to a domestic pass-through
entity, the domestic pass-through
owner’s applicable percentage that is
applied to foreign income taxes
attributable to the domestic passthrough owner share of the section
965(a) inclusion amount or of
distributions of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits is equal to the applicable
percentage determined under paragraph
(d)(1) or (2) of this section, as
applicable, with respect to the domestic
pass-through entity.
(4) Applicable percentage with respect
to certain distributions of previously
taxed earnings and profits. In the case
of a distribution of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits (other than with respect to
a section 958(a) U.S. shareholder
described in paragraph (d)(2) of this
section), the applicable percentage that
is applied to foreign income taxes
attributable to the distribution is the
applicable percentage that applied with
respect to the section 958(a) U.S.
shareholder and the section 958(a) U.S.
inclusion year in which, or with which,
the inclusion year of the relevant
deferred foreign income corporation
ends. For this purpose, the relevant
deferred foreign income corporation is
the deferred foreign income corporation
with respect to which the section 958(a)
U.S. shareholder had the section 965(a)
inclusion as a result of which the
section 965(a) previously taxed earnings
and profits first arose (as described in
§ 1.965–2(c)) or the section 965(b)
previously taxed earnings and profits
first arose (as described in § 1.965–2(d)).
§ 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.
Paragraph (b) of this section provides
the general rules for the computation of
foreign income taxes deemed paid
under sections 902 and 960. Paragraph
(c) of this section provides rules for
allocation and apportionment of
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expenses. Paragraph (d) of this section
provides rules for foreign income taxes
associated with hovering deficits.
(b) Computation of foreign incomes
taxes deemed paid—(1) In general. 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 that is a
member of a qualified group (as defined
in section 902(b)(2)), 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. For purposes of
computing the amount of foreign
income taxes deemed paid under
section 960(a)(1), §§ 1.965–2(b), 1.965–
5, sections 902 and 960, the regulations
under those sections, and this section
apply.
(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.
(4) Section 902 fraction. The term
section 902 fraction means, with respect
to either a deferred foreign income
corporation or an E&P deficit foreign
corporation, the fraction that is—
(i) The dividends 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 or pre-1987
accumulated profits, as applicable (the
denominator).
(c) 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
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§ 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.
(d) Hovering deficits. In the last
taxable year that begins before January
1, 2018, of a deferred foreign income
corporation that is also a foreign
surviving corporation, as defined in
§ 1.367(b)–7(a), solely for purposes of
determining the amount of related taxes
that are included in post-1986 foreign
income taxes under § 1.367(b)–
7(d)(2)(iii)—
(1) The post-transaction earnings
described in § 1.367(b)–7(d)(2)(ii) that
can be offset by a hovering deficit
include any post-transaction earnings
earned in that year that were not
considered accumulated because they
were included in income under section
965 and § 1.965–1(b)(1) by a section
958(a) U.S. shareholder; and
(2) Any offset for purposes of
§ 1.367(b)–7(d)(2)(ii) is treated as
occurring on the last day of the foreign
surviving corporation’s inclusion year.
§ 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
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.
(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
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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 of the return (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
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 is prorated has passed, the
amount prorated to such installment
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. 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.
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(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
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 has
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
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1903
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 consistent
with the rules for signatures applicable
to the person’s return, 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.
The attachment of an unsigned copy of
the election statement to the timely-filed
return for the relevant taxable year
satisfies the signature requirement of
this paragraph (b)(2)(iii) if the person
making the election retains the original
signed election statement in the manner
specified by § 1.6001–1(e).
(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
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
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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;
(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;
(v) Paragraph (b)(3)(ii)(F) of this
section, and the group ceases to exist as
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18:12 Feb 04, 2019
Jkt 247001
a result of the transfer of all of the assets
of one or more members of the
consolidated group to other members
with only one entity remaining (the
successor entity); or
(vi) Paragraph (b)(3)(ii)(F) of this
section, and the group ceases to exist as
a result of the termination of the
subchapter S election pursuant to
section 1362(d) of a shareholder of the
common parent of the consolidated
group and, for the shareholder’s taxable
year immediately following the
termination, the shareholder joins in the
filing of a consolidated return as a
consolidated group that includes all of
the former members of the former
consolidated group.
(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)(1) 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;
(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;
(v) With respect to an acceleration
event described in paragraph
(b)(3)(iii)(A)(1)(v) of this section, is the
successor entity (within the meaning of
paragraph (b)(3)(iii)(A)(1)(v) of this
section); or
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(vi) With respect an acceleration event
described in paragraph
(b)(3)(iii)(A)(1)(vi) of this section, is the
agent (within the meaning of § 1.1502–
77) of the consolidated group that
includes the shareholder whose
subchapter S election was terminated
and all of the former members of the
former 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 publications
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
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 on or before February 5,
2019, the transfer agreement must be
filed by March 7, 2019, to be considered
timely filed.
(3) Signature requirement. The
transfer agreement that is filed within
30 days of the acceleration event or by
the due date specified in paragraph
(b)(3)(iii)(B)(2)(ii) of this section 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
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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 amount 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, if
the eligible section 965(h) transferor has
been required to file a Form 965–A or
Form 965–B;
(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;
(viii) 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;
(ix) A statement as to whether the
leverage ratio of the eligible section
965(h) transferee and all subsidiary
members of its affiliated group
immediately after the acceleration event
exceeds three to one, which ratio may
be modified as provided in publications,
forms, instructions, or other guidance;
(x) A certification by the eligible
section 965(h) transferee stating that the
eligible section 965(h) transferee waives
the right to a notice of liability and
consents to the immediate assessment of
the portion of the section 965(h) net tax
liability remaining unpaid; and
(xi) Any additional information,
representation, or certification required
by the Commissioner in publications,
forms, instructions, or other guidance.
(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
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Jkt 247001
(b)(3)(iii)(B) must be entered into by the
agent (as defined in § 1.1502–77) of the
relevant consolidated group.
(6) Leverage ratio. For purposes of
paragraph (b)(3)(iii)(B)(4)(ix) of this
section, and except as otherwise
provided in publications, forms,
instructions, or other guidance, the term
leverage ratio means the ratio that the
total indebtedness of the eligible section
965(h) transferee bears to the sum of its
money and all other assets reduced (but
not below zero) by such total
indebtedness. For this purpose, the
amount taken into account with respect
to any asset is the adjusted basis thereof
for purposes of determining gain, and
the amount taken into account with
respect to any indebtedness with
original issue discount is its issue price
plus the portion of the original issue
discount previously accrued as
determined under the rules of section
1272 (determined without regard to
subsection (a)(7) or (b)(4) thereof).
(C) Consent of Commissioner—(1) In
general. Except as otherwise provided
in publications, forms, instructions, 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, or if the eligible
section 965(h) transferee does not
provide the additional information
requested under paragraph
(b)(3)(iii)(C)(1) of this section within a
reasonable timeframe communicated by
the Commissioner to the eligible section
965(h) transferee, 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
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1905
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
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
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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
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 of an S
corporation (including a person listed in
§ 1.1362–6(b)(2) with respect to a trust
or estate, but not a domestic passthrough entity itself) 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)(iv) 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
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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
shareholder must attach a statement,
signed under penalties of perjury
consistent with the rules for signatures
applicable to the person’s return, 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. The
attachment of an unsigned copy of the
election statement to the timely-filed
return for the relevant taxable year
satisfies the signature requirement of
this paragraph (c)(2)(iii) if the
shareholder retains the original signed
election statement in the manner
specified by § 1.6001–1(e).
(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.
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(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;
(C) The transfer of any share of stock
of the S corporation by the shareholder
(including by reason of death or
otherwise) that results in a change of
ownership for federal income tax
purposes; or
(D) A determination by the
Commissioner described in the second
sentence of paragraph (c)(3)(iv)(C)(2) of
this section.
(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)(v)(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
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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
becomes a shareholder of the S
corporation (including a person listed in
§ 1.1362–6(b)(2) with respect to a trust
or estate, but not a domestic passthrough entity itself). In the case of a
transfer that consists of multiple partial
transfers (as described in paragraph
(c)(3)(iii) of this section), 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 each
partial transfer.
(2) Filing requirements—(i) In general.
A transfer agreement must be timely
filed. Except as provided in paragraphs
(c)(3)(iv)(B)(2)(ii) and (iii) 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
publications, 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 § 301.9100–2 or 301.9100–3 to
file a transfer agreement late.
(ii) Transition rule. If a triggering
event occurs on or before February 5,
2019, the transfer agreement must be
filed by March 7, 2019, to be considered
timely filed.
(iii) Death of eligible section 965(i)
transferor. If the triggering event is the
death of the eligible section 965(i)
transferor, the transfer agreement must
be filed by the later of the unextended
due date for the eligible section 965(i)
transferor’s final income tax return or
March 7, 2019.
(3) Signature requirement. The
transfer agreement that is filed within
30 days of the triggering event or by the
due date specified in paragraph
(c)(3)(iv)(B)(2)(ii) or (iii) of this section
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
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Jkt 247001
(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 amount
is subject to adjustment by the
Commissioner;
(v) A copy of the eligible section
965(i) transferor’s most recent Form
965–A, if the eligible section 965(i)
transferor has been required to file a
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;
(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.
(ix) A statement as to whether the
leverage ratio of the eligible section
965(i) transferee immediately after the
triggering event exceeds three to one,
which ratio may be modified as
provided in publications, forms,
instructions, or other guidance;
(x) Any additional information,
representation, or certification required
PO 00000
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1907
by the Commissioner in publications,
forms, instructions, or other guidance.
(5) Special rule in the case of death
of eligible section 965(i) transferor.
Except in the case of transfers to trusts,
if the triggering event is the death of the
eligible section 965(i) transferor, and the
identity of the beneficiary or
beneficiaries (in the case of multiple
partial transfers) is determined as of the
due date for the transfer agreement
described in paragraph
(c)(3)(iv)(B)(2)(iii) of this section, then
the transfer may be treated as a transfer
directly between the eligible 965(i)
transferor and the beneficiary or
beneficiaries. If, however, the identity of
the beneficiary or beneficiaries is not
determined as of the due date for the
transfer agreement described in
paragraph (c)(3)(iv)(B)(2)(iii) of this
section, then the transfer must be
treated first as a transfer between the
eligible section 965(i) transferor and his
or her estate at the time of death and
second as a transfer between the estate
and the beneficiary or beneficiaries
when the shares are actually transferred
to the beneficiary or beneficiaries.
Separate transfer agreements must be
filed for each transfer. The transfer from
the eligible section 965(i) transferor to
his or her estate is a transfer resulting
from a triggering event that is the death
of the eligible section 965(i) transferor,
and the transfer agreement is subject to
the timing rules in paragraph
(c)(3)(iv)(B)(2)(iii) of this section. The
transfer from the estate to the
beneficiary or beneficiaries is not a
transfer resulting from a triggering event
that is the death of the eligible section
965(i) transferor, and the transfer
agreement is subject to the timing rules
in paragraph (c)(3)(iv)(B)(2)(i) and (ii) of
this section.
(6) Leverage ratio. For purposes of
paragraph (c)(3)(iv)(B)(4)(ix) of this
section, and except as otherwise
provided in publications, forms,
instructions, or other guidance, the term
leverage ratio means the ratio that the
total indebtedness of the eligible section
965(i) transferee bears to the sum of its
money and all other assets reduced (but
not below zero) by such total
indebtedness. For this purpose, the
amount taken into account with respect
to any asset is the adjusted basis thereof
for purposes of determining gain, and
the amount taken into account with
respect to any indebtedness with
original issue discount is its issue price
plus the portion of the original issue
discount previously accrued as
determined under the rules of section
1272 (determined without regard to
subsection (a)(7) or (b)(4) thereof).
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(C) Consent of Commissioner—(1) In
general. Except as otherwise provided
in publications, forms, instructions, 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 section 965(i) net 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, or if the eligible
section 965(i) transferee does not
provide the additional information
requested under paragraph
(c)(3)(iv)(C)(1) of this section within a
reasonable timeframe communicated by
the Commissioner to the eligible section
965(i) transferee, 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.
Accordingly, the eligible section 965(i)
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18:12 Feb 04, 2019
Jkt 247001
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 makes 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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Fmt 4701
Sfmt 4700
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 publications,
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 on or before February 5,
2019, the agreement must be filed by
March 7, 2019, in order to be considered
timely filed.
(3) Signature requirement. The
agreement that is filed within 30 days of
the triggering event or by the due date
specified in paragraph (c)(3)(v)(D)(2)(ii)
of this section 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
amount is subject to adjustment by the
Commissioner; and
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(iv) A representation that the
shareholder is able to make the
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)(4)(iii) of this section.
(v) A statement as to whether the
leverage ratio of the shareholder and all
subsidiary members of its affiliated
group immediately following the
triggering event exceeds three to one;
and
(vi) Any additional information,
representation, or certification required
by the Commissioner in publications,
forms, instructions, or other guidance.
(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, or if the shareholder
does not provide the additional
information requested under paragraph
(c)(3)(v)(D)(5)(i) of this section within a
reasonable timeframe communicated by
the Commissioner to the shareholder,
then the Commissioner may reject the
agreement (effective as of the date of the
related triggering event).
(6) Leverage ratio. For purposes of
paragraph (c)(3)(v)(D)(4)(v) of this
section, and except as otherwise
provided in publications, forms,
instructions, or other guidance, the term
leverage ratio means the ratio that the
total indebtedness of the shareholder
bears to the sum of its money and all
other assets reduced (but not below
zero) by such total indebtedness. For
this purpose, the amount taken into
account with respect to any asset is the
adjusted basis thereof for purposes of
determining gain, and the amount taken
into account with respect to any
indebtedness with original issue
discount is its issue price plus the
portion of the original issue discount
previously accrued as determined under
the rules of section 1272 (determined
without regard to subsection (a)(7) or
(b)(4) thereof).
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18:12 Feb 04, 2019
Jkt 247001
(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
liable 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 section 965(i) net tax liability.
(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
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
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1909
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 consistent with the rules for
signatures applicable to the person’s
return, 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
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.
The attachment of an unsigned copy of
the election statement to the timely-filed
return for the relevant taxable year
satisfies the signature requirement of
this paragraph (d)(3)(iii) if the real estate
investment trust retains the original
signed election statement in the manner
specified by § 1.6001–1(e).
(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
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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
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
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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)).
(iv) [Reserved]
(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 consistent
with the rules for signatures applicable
to the person’s return, 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 publications,
forms, instructions, or other guidance.
The attachment of an unsigned copy of
the election statement to the timely-filed
return for the relevant taxable year
satisfies the signature requirement of
this paragraph (e)(2)(iii) if the person
making the election retains the original
signed election statement in the manner
specified by § 1.6001–1(e).
(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
(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
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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
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.
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(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), except that
the controlling domestic shareholder is
not required to file the statement
described in § 1.964–1(c)(3)(ii).
(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 consistent with the rules for
signatures applicable to the person’s
return, 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 each of the specified
foreign corporations with respect to
which the election is made, and the
statement must be filed in the manner
prescribed in instructions or other
guidance. The attachment of an
unsigned copy of the election statement
to the timely-filed return for the relevant
taxable year satisfies the signature
requirement of this paragraph (f)(5)(iii)
if the person making the election retains
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the original signed election statement in
the manner specified by § 1.6001–1(e).
(6) Examples. The following examples
illustrate the application of this
paragraph (f).
Example 1. (i)(A) Facts. FS, a foreign
corporation, has a calendar year taxable year,
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.
(B) 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. (ii)(A) Facts. The facts are the
same as in paragraph (f)(6)(i)(A) of this
section (the facts in Example 1), except that
a deficit of 3,040u was incurred during the
taxable year that includes October 31, 2017.
(B) Analysis. The analysis is the same as
in paragraph (f)(6)(i)(B) of this section (the
analysis in Example 1), 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)
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1911
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.
(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))
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by the person (or, in the case of a
domestic pass-through owner, by the
person’s domestic pass-through entity)
from, or an inclusion under sections
951(a)(1)(B) and 956 with respect to, a
deferred foreign income corporation and
paid during, or included with respect to,
the deferred foreign income
corporation’s inclusion year.
(ii) Net income tax. For purposes of
this paragraph (g)(10), the term net
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.
§ 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.
(b) Reduction of E&P net surplus
shareholder’s pro rata share of the
section 965(a) earnings amount of a
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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
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
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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.
(d) Adjustments to earning and profits
and stock basis.
(1) [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), § 1.965–
1(b)(2), and § 1.965–3. 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. 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
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foreign cash position of the section
958(a) U.S. shareholder is equal to 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.
(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.
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(4) Consolidated group aggregate
foreign cash position. The term
consolidated group aggregate foreign
cash position means, with respect to a
consolidated group, the aggregate
foreign cash position (as defined in
§ 1.965–1(f)(8)(i)) determined by treating
each member of the consolidated group
that is a section 958(a) U.S. shareholder
as a single section 958(a) U.S.
shareholder pursuant to paragraph (e)(1)
of this section.
(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.
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(g) Examples. The following examples
illustrate the application of this section.
Example 1. (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. The
cash positions all consist solely of cash.
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–
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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
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
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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
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. (2) Application to members of
a consolidated group. (i) Facts. The facts are
the same as in paragraph (g)(1)(i) of this
section (the facts in Example 1), 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
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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 +
$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
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($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)
inclusion amount, it has no section 965(c)
deduction amount and therefore is not
allowed a section 965(c) deduction.
§ 1.965–9
Applicability dates.
(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. 5. 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
reduced in the same proportion as the
reduction by a section 965(c) deduction
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1915
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.
Approved: December 19, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2019–00265 Filed 2–4–19; 8:45 am]
BILLING CODE 4830–01–P
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| File Type | application/pdf |
| File Modified | 2019-02-05 |
| File Created | 2019-02-05 |