[Federal Register Volume 84, Number 24 (Tuesday, February 5, 2019)]
[Rules and Regulations]
[Pages 1838-1915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00265]



[[Page 1837]]

Vol. 84

Tuesday,

No. 24

February 5, 2019

Part II





Department of the Treasury





-----------------------------------------------------------------------





Internal Revenue Service





-----------------------------------------------------------------------





26 CFR Part 1





Regulations Regarding the Transition Tax Under Section 965 and Related 
Provisions; Final Rule

  Federal Register / Vol. 84 , No. 24 / Tuesday, February 5, 2019 / 
Rules and Regulations  

[[Page 1838]]


-----------------------------------------------------------------------

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: 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 Sec. Sec.  
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 Sec. Sec.  
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 Sec. Sec.  1.965-5 and 1.965-6, Karen J. Cate at (202) 317-
6926 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

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.
    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-answers-about-reporting-related-to-section-965-on-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 Sec.  1.965-1--Overview, General 
Rules, and Definitions

    Proposed Sec.  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 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 Sec.  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 Sec.  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

[[Page 1839]]

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 Sec.  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 Post-1986 Deferred Foreign Income

1. Application of Previously Taxed E&P Exception to Non-CFCs
    Proposed Sec.  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 Sec.  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 Sec.  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 pre-inclusion 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 Sec.  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.
    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 Sec.  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

[[Page 1840]]

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 Sec.  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 cash-equivalent 
assets held by the corporation. Proposed Sec.  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 Sec.  
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, 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 
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 Sec.  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-to-administer rules to 
identify such cash, which may currently be or may have previously been 
comingled with foreign-derived 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

[[Page 1841]]

proposed regulations. See Sec.  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 Sec.  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 Sec.  1.965-1(f)(43). 
Comments requested that the definition of short-term obligation be 
modified to allow 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 short-term 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 Sec.  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 ``cash-equivalent 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 Sec.  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 Sec.  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 Sec.  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 
cash-equivalent assets and some of which are not cash-equivalent 
assets. See generally Sec.  1.954-2(a)(4)(ii)(A) (defining a bona fide 
hedging transaction, in part, by reference to the requirements of Sec.  
1.1221-2(a) through (d)); Sec.  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 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 cash-equivalent hedging transactions. 
Accordingly, the final regulations provide that an aggregate hedging 
transaction may be treated as a cash-equivalent asset hedging 
transaction and allocate the value of an aggregate hedging transaction 
between cash-equivalent hedging transactions and other assets, if any, 
being hedged. See Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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

[[Page 1842]]

cash measurement date of the specified foreign corporation. See 
proposed Sec.  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 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 Sec.  1.965-1(f)(8) and (f)(30)(iii), as illustrated by 
the example in Sec.  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 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 Sec.  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 pass-through 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 pass-
through 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 pass-
through 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

[[Page 1843]]

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 pass-through 
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 
post-1986 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 Sec.  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 post-1986 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 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 Sec.  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 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 Sec.  1.904-6 to 
associate foreign income taxes with taxable income computed under 
foreign law, such that the rule in Sec.  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 post-1986 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

[[Page 1844]]

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.
4. Alternative Measurement Methods
    A comment requested guidance permitting taxpayers to determine 
their specified foreign corporations' post-1986 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 post-1986 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.

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 Sec.  1.951-1(e), determined as of the last 
day of the inclusion year of the DFIC. Proposed Sec.  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 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 
Sec.  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 
Sec.  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 Sec.  
1.965-2(j)(6).

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 Sec.  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 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 Sec.  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

[[Page 1845]]

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 Sec.  
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 
Sec.  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 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 Sec.  
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 Sec.  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 Sec.  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 ten-percent 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, 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 Sec.  
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 Sec.  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).

[[Page 1846]]

III. Comments and Changes to Proposed Sec.  1.965-2--Adjustments to E&P 
and Basis

    Proposed Sec.  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 Sec.  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 Sec.  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 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 Sec.  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 Sec.  
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 Sec.  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 Sec.  
1.960-1(i)(2) applies except that section 902 is applied with respect 
to any distributions from the specified foreign corporation described 
in Sec.  1.965-2(b)(2) that are not disregarded under Sec.  1.965-4 
before section 960 is applied with respect to an inclusion or a 
distribution described in Sec.  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 Sec.  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 Sec.  
1.965-4 are redetermined after adjustments for section 965(a) 
inclusions, at the same time that the consequences of other 
distributions are determined. See Sec.  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 Sec.  
1.965-4. See Sec.  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 post-1986 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 Sec.  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 Sec.  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

[[Page 1847]]

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 Sec.  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 Sec.  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 
Sec.  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 Sec.  1.965-2(d)(1).

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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 
with respect to the section 958(a) U.S. shareholder. See proposed Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 1848]]

foreign corporation and does not reduce its pro rata share of any 
section 965(a) earnings amount under section 965(b), proposed Sec.  
1.965-1(b)(2), or proposed Sec.  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), Sec.  
1.965-1(b)(2), or Sec.  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 
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 Sec.  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 Sec.  1.965-2(h)(3) 
to the extent of such excess) if the corresponding upward basis 
adjustments are correspondingly limited. Accordingly, Sec.  1.965-
2(f)(2)(ii)(B)(2) provides that downward 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 Sec.  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 Sec.  1.965-2(h)(3) as 
necessary. See Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  1.965-1(f)(30)(i) and (f)(34) and

[[Page 1849]]

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 Sec.  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 Sec.  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 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 
Sec.  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 Sec.  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 Sec.  
1.986(c)-1(a). The proposed regulations also provide that any gain or 
loss recognized under section 986(c) with respect to distributions of 
section 965(a) previously taxed earnings and profits is reduced in the 
same proportion as the reduction by a section 965(c) deduction amount 
of the section 965(a) inclusion amount that gave rise to such section 
965(a) previously taxed earnings and profits. See proposed Sec.  
1.986(c)-1(b). Moreover, proposed Sec.  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 Sec.  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 
Sec.  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

[[Page 1850]]

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 Sec.  1.965-3--Section 965(c) 
Deductions

    Proposed Sec.  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 Sec.  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 Sec.  1.965-3(b)(1).
    A comment suggested that the rule in proposed Sec.  1.965-3(b)(1) 
be extended to permit the same treatment for third-party accounts 
payable and third-party accounts receivable held by related specified 
foreign corporations of a section 958(a) U.S. shareholder. The 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 third-party 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 Sec.  1.965-3(b)(1) to cover third-party 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 Sec.  1.965-3(b)(2). In order for the rule 
in proposed Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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).

[[Page 1851]]

b. Clarification of Cash Measurement Dates
    Comments also recommended that the rule in proposed Sec.  1.965-
3(b)(2) be clarified so that relief from double-counting 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 Sec.  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 Sec.  
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. 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 ten-percent 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 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 Sec.  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 Sec.  1.965-3(b)(4)(v).

C. Increase of Income by Section 965(c) Deduction of Expatriated Entity

    Under proposed Sec.  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 Sec.  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 Sec.  1.965-3(f)(3) 
and (4). A comment recommended that the section 965(c) deduction be 
allowed for purposes of computing the amount

[[Page 1852]]

of tax due under section 1411. It suggested that the rule in proposed 
Sec.  1.965-3(f)(3) was inconsistent with the rule in Sec.  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, Sec.  1.1411-4(f)(3)(ii) is 
inapplicable because Sec.  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 Sec.  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 Sec.  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 
Sec.  1.965-3(f)(1).

V. Comments and Changes to Proposed Sec.  1.965-4--Disregard of Certain 
Transactions

    Proposed Sec.  1.965-4 sets forth rules that disregard certain 
transactions for purposes of applying section 965. Specifically, 
proposed Sec.  1.965-4 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 Anti-Abuse Rules Generally

    The rules under proposed Sec.  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 anti-abuse rules 
to a liquidation. Accordingly, Sec.  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 Sec.  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, 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 Sec.  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 Sec.  1.965-4(e)(3).

B. Transactions With a Principal Purpose of Changing a Section 965 
Element

1. General Rules
    Comments suggested that the anti-abuse rules be eliminated and 
that, if retained, the anti-abuse rules in proposed Sec.  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

[[Page 1853]]

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 Sec.  1.965-4(b)(2) that a taxpayer file a 
statement indicating that it takes the position that a presumption in 
proposed Sec.  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 Sec.  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 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 Sec.  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 
cash-equivalent 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 re-transfer 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 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 Sec.  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

[[Page 1854]]

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 Sec.  1.965-4(f) (disregarding 
specified payments in order to mitigate double-counting) and proposed 
Sec.  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 
Sec.  1.965-4(b)(2)(iv). The Treasury Department and the IRS have 
determined that if such a dividend is disregarded pursuant to Sec.  
1.965-4(f), then it is clear that it is irrelevant whether it would 
also be disregarded under Sec.  1.965-4(b), applying the presumption in 
Sec.  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 Sec.  1.965-4(f), and the 
taxpayer takes the position that it is also not disregarded under Sec.  
1.965-4(b), because it can rebut a presumption that applies under Sec.  
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 determined 
that this would be inappropriate and modify the rule in proposed Sec.  
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 Sec.  1.965-4(c)(1)(i).
    Comments suggested that the rule in proposed Sec.  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 Sec.  1.965-4(c)(2), which applies to any entity 
classification election under Sec.  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 shareholder from a domestic pass-through 
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 Sec.  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 Sec.  
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 Sec.  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

[[Page 1855]]

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 Sec.  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 Sec.  1.965-5 and Sec.  1.965-6--
Foreign Tax Credits

    Proposed Sec.  1.965-5 and Sec.  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 Sec.  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 Sec.  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 Sec.  1.965-
5(c). 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 Sec.  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 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)

[[Page 1856]]

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 Sec.  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 Sec.  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 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 Sec.  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 Sec.  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 Sec.  1.965-5(b). A comment recommended that the final 
regulations define ``net basis taxes'' and clarify that proposed Sec.  
1.965-5(b) does not apply to creditable gross basis income taxes.
    Section 965(g) and proposed Sec.  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 Sec.  1.965-5(b) are not an 
exhaustive list of the taxes subject to proposed Sec.  1.965-5(b). The 
final regulations clarify this accordingly. See Sec.  1.965-5(b).
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 Sec.  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 Sec.  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 Sec.  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

[[Page 1857]]

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 Sec.  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 Sec.  1.965-2(f)(2) by 
reason of section 965. The Treasury Department and the IRS have 
determined that under Sec.  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 Sec.  
1.965-1(b)(2) or proposed Sec.  1.965-8(b). Proposed Sec.  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 Sec.  1.965-1(b)(2) or proposed Sec.  1.965-8(b). As a 
policy matter, this 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) or otherwise removed from its 
post-1986 undistributed earnings. See Sec.  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.

[[Page 1858]]

    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. Pre-Act 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 post-1986 
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 lower-tier foreign corporation. 
Proposed Sec.  1.965-5(c)(1)(ii). A comment requested 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 first-tier 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 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 Sec.  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 Sec.  
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 Sec.  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), post-1986 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 post-1986 undistributed earnings as 
necessary to carry out the provisions of section 902. For example, 
under Sec.  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

[[Page 1859]]

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., Sec.  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 Sec.  
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 Sec.  
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.
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 Sec.  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 Sec.  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 Sec.  1.965-6(b) does not mean 
that section 965(a) inclusions should be treated as dividends for 
purposes of the ordering rule under Sec.  1.960-1(i)(2). The final 
regulations clarify that the ordering rules of Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  
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 
confirm that the ordering rule in Sec.  1.960-1(i)(2), as modified by 
Sec.  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 Sec.  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 Sec.  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 
Sec.  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

[[Page 1860]]

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, Sec.  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 Sec.  1.965-7--Elections and 
Payment Rules

    Proposed Sec.  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 Sec. Sec.  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 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 Sec.  
1.6001-1(e). See Sec. Sec.  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 Sec.  1.965-7(b)(3)(ii) clarifies what events 
are acceleration events and what is considered a similar circumstance. 
Proposed Sec.  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 Sec.  1.965-7(c)(3)(ii) clarifies 
the similar circumstances treated as triggering events. Specifically, 
proposed Sec.  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 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 Sec.  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 tax-free 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 
Sec.  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

[[Page 1861]]

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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 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 Sec.  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 Sec.  1.965-7(b)(3)(iii)(B)(2)(ii) and Sec.  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 Sec.  1.965-7(b)(3)(iii)(B)(2)(i) and 
Sec.  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 Sec.  
1.965-7(b)(3)(iii)(B)(2)(i) and Sec.  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 Sec.  1.965-7(b)(3)(iii)(B)(2)(ii) and Sec.  
1.965-7(c)(3)(iv)(B)(2)(ii) have been updated to provide that if a 
triggering event or 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 Sec.  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 Sec.  
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 Sec.  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 pass-through 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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.965-7(b)(3)(iii)), a covered 
acceleration event includes, with respect to an acceleration event 
under proposed Sec.  1.965-7(b)(3)(ii)(F), an event resulting from the 
acquisition of a consolidated group within the meaning of Sec.  1.1502-
13(j)(6) if the acquired consolidated group members join a

[[Page 1862]]

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, Sec.  1.965-7(b)(3)(iii)(A)(1)(v) includes 
this scenario as a covered acceleration event. In addition, Sec.  
1.965-7(b)(3)(iii)(B)(1)(v) provides that, with respect to the 
acceleration event in Sec.  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 Sec.  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, 
Sec.  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 members of the 
former consolidated group. In addition, Sec.  1.965-
7(b)(3)(iii)(B)(1)(vi) provides that, with respect to the acceleration 
event in Sec.  1.965-7(b)(3)(iii)(A)(1)(vi), the agent (within the 
meaning of Sec.  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 Sec.  1.965-7(b)(3)(iii)(B)(1)).
5. Joint and Several Liability
    Proposed Sec.  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 Sec.  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 Sec.  
1.965-7(c)(3)(ii)(C) and (c)(3)(iv)(A)(1), the death of an S 
corporation shareholder 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 Sec.  1.965-7(c)(3)(iv)(B)(1)). 
Proposed Sec.  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 Sec.  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 Sec.  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.

[[Page 1863]]

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 Sec.  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 Sec.  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 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 Sec.  1.965-
7(b)(3)(iii)(C)(2).
    Third, Sec.  1.965-7(b)(3)(iii)(B)(4)(xi) clarifies, consistent 
with the requirement in proposed Sec.  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 Sec.  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).

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 Sec.  
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 Sec.  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).

[[Page 1864]]

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 Sec.  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 pass-through 
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 Sec.  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 pass-through entities for purposes of proposed Sec.  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 Sec.  
1.1361-1(j)(1)(i). The same is true for grantor trusts. See section 671 
and Sec.  1.1361-1(h)(1)(i). The Treasury Department and the IRS have 
determined that, because the beneficiary of a QSST or the grantor (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 Sec. Sec.  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 Sec.  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 Sec.  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, 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 Sec.  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 non-
grantor 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

[[Page 1865]]

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 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.

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 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 Sec.  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 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 Sec.  
1.1411-4(h) if an election under Sec.  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 
Sec.  1.965-7(e), like proposed Sec.  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 Sec.  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 
Sec.  1.964-1(c)(5)) pursuant to the rules of Sec.  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 Sec.  
1.964-1(c)(3) be deleted because the requirements, particularly with 
respect to the statement required by Sec.  1.964-1(c)(3)(ii) and the 
notice to minority shareholders required by Sec.  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 
Sec.  1.964-1(c)(ii) in order to make the election described in 
proposed Sec.  1.965-7(f) is duplicative in light of the requirement to 
provide an election statement described in proposed Sec.  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

[[Page 1866]]

the same amounts for post-1986 earnings and profits to calculate their 
section 965(a) inclusions. Accordingly, Sec.  1.965-7(f)(5)(i) retains 
the reference to Sec.  1.964-1(c)(3) but provides that the statement 
described in Sec.  1.964-1(c)(3)(ii) is not required. In addition, 
proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 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 Sec.  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'' 
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 Sec.  1.965-8--Affiliated Groups 
(Including Consolidated Groups)

    Proposed Sec.  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 Sec.  1.1502-1(h)). The comments 
and modifications with respect to these rules are discussed in this 
Part VIII.

[[Page 1867]]

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 Sec.  
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 Sec.  1.965-3(b). Proposed Sec.  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 Sec.  
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 Sec.  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 Sec.  
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 Sec.  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 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 
anti-abuse 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 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 Sec.  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

[[Page 1868]]

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 
Sec.  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 pass-through 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 Sec.  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.

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 Sec. Sec.  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 Sec.  301.9100-2 or Sec.  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.
    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.


[[Page 1869]]


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 one-time 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 cash-equivalent assets 
held by a foreign corporation result in a higher rate of repatriation 
tax than non-cash assets, such as plant, property, and equipment. The 
tax applies to the accumulated stock of deferred 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.

D. Consideration of Alternatives

    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 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 non-counting 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.

[[Page 1870]]

    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 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.
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.

[[Page 1871]]

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 
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 Sec. Sec.  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 taxpayers of $47,500,000. This is a one-time 
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

[[Page 1872]]

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
----------------------------------------------------------------------------------------------------------------
                                                                          Revision of     Number of respondents
                                                          New forms      existing form         (estimated)
----------------------------------------------------------------------------------------------------------------
Form 965.............................................               X   ...............          50,000--100,000
Form 965-A...........................................               X   ...............            35,000-70,000
Form 965-B...........................................               X   ...............            15,000-30,000
Form 990-PF..........................................  ...............               X                    <1,000
Form 990-T...........................................  ...............               X                    <1,000
Form 1040............................................  ...............               X             27,000-57,000
Form 1041............................................  ...............               X                    <1,000
Form 1065............................................  ...............               X              8,000-10,000
Form 1120............................................  ...............               X             12,000-20,000
Form 1120-C..........................................  ...............               X                    <1,000
Form 1120-L..........................................  ...............               X                    <1,000
Form 1120-PC.........................................  ...............               X                    <1,000
Form 1120-REIT.......................................  ...............               X                    <1,000
Form 1120-RIC........................................  ...............               X                    <1,000
Form 1120-S..........................................  ...............               X               3,000-5,000
----------------------------------------------------------------------------------------------------------------

    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 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 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.

----------------------------------------------------------------------------------------------------------------
                 Form                         Type of filer          OMB No.(s)                Status
----------------------------------------------------------------------------------------------------------------
Form 965 (including Schedules A-H)....  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-comment-
                                        request-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-comment-
                                        request-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=201808-1545-031 031.
----------------------------------------------------------------------------------------------------------------

[[Page 1873]]

 
Forms 990-PF, 990-T...................  Tax exempt entities (NEW        1545-0047  Published 60-day FRN on 8/22/
                                         Model).                                    18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/08/22/2018-18135/proposed-collection-comment-
                                        request-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=201808-1545-031 031.
----------------------------------------------------------------------------------------------------------------
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=201806-1545-014 014.
----------------------------------------------------------------------------------------------------------------
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-comment-
                                        request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------
Forms 1120, 1120-C, 1120-L, 1120-PC,    Business (NEW Model).....       1545-0123  Published in the FRN on 10/11/
 1120-REIT, 1120-RIC, 1120-S.                                                       18. Public Comment period
                                                                                    closed on 12/10/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-
                                        request-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 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 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.

[[Page 1874]]



                             Net Section 965 Tax Revenue as a Fraction of Total Sales for Small Multinational Businesses \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Fiscal years                    2018       2019       2020       2021       2022       2023       2024       2025       2026       2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net Tax Collected ($ billions)............        1.2        0.8        0.2        0.2        0.2        0.4        0.7        1.0        0.5       -0.1
Total Sales ($ billions)..................       54.0       56.7       59.6       62.6       65.7       69.0       72.4       76.0       79.8       83.8
Percent...................................       2.20       1.32       0.42       0.38       0.36       0.60       0.99       1.28       0.63      -0.17
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Small 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 Sec. Sec.  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 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

0
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 * * *
* * * * *
    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).
* * * * *

0
Par. 2. Section 1.962-1 is amended by:
0
1. Revising paragraph (b)(1)(i).
0
2. Redesignating paragraphs (b)(2)(iv)(a) and (b) as paragraph 
(b)(2)(iv)(A) and (B), respectively.
0
3. Adding paragraph (d).
    The revision and addition read as follows:


Sec.  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 Sec.  
1.965-1(f)(38)); and
    (ii) His domestic pass-through owner shares (as defined in Sec.  
1.965-1(f)(21)) of section 965(a) inclusion amounts with respect to 
deferred foreign income corporations (as defined in Sec.  1.965-

[[Page 1875]]

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 Sec.  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.
0
Par. 3. Section 1.962-2 is amended by revising paragraph (a) and adding 
paragraph (d) to read as follows:


Sec.  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 pass-through entity (as defined in Sec.  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.
0
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.
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.
* * * * *


Sec.  1.965-0  Outline of section 965 regulations.

    This section lists the headings for Sec. Sec.  1.965-1 through 
1.965-9.

Sec.  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.
    (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.

Sec.  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).

[[Page 1876]]

    (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.
    (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.
    (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.

Sec.  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.

[[Page 1877]]

    (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.

Sec.  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.
    (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.

Sec.  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.

Sec.  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 post-1986 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.

Sec.  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.
    (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.

[[Page 1878]]

    (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.
    (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.

Sec.  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.
    (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.

Sec.  1.965-9 Applicability dates.

    (a) In general.
    (b) Applicability dates for rules disregarding certain 
transactions.


Sec.  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 Sec.  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 
Sec. Sec.  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 Sec. Sec.  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

[[Page 1879]]

determined for the inclusion year under section 952 and Sec.  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 Sec.  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 Sec.  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 Sec.  1.965-8(e), all section 
958(a) U.S. shareholders that are members of the consolidated group are 
treated as a single section 958(a) U.S. shareholder for purposes of 
this paragraph (b)(2).
    (c) Section 965(c) deduction amounts. For a section 958(a) U.S. 
shareholder inclusion year, a section 958(a) U.S. shareholder is 
generally allowed a deduction in an amount equal to the section 965(c) 
deduction amount.
    (d) Treatment of specified foreign corporation as a controlled 
foreign corporation. A specified foreign corporation described in 
section 965(e)(1)(B) and paragraph (f)(45)(i)(B) of this section that 
is not otherwise a controlled foreign corporation is treated as a 
controlled foreign corporation solely for purposes of paragraph (b) of 
this section and sections 951, 961, and Sec.  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 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 Sec. Sec.  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 Sec.  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 
Sec.  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

[[Page 1880]]

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 post-1986 earnings and 
profits of the specified foreign corporation except to the extent such 
earnings and profits--
    (A) Are attributable to income of the specified foreign corporation 
that is effectively connected with the conduct of a trade or business 
within the United States and subject to tax under chapter 1;
    (B) If distributed, would, in the case of a controlled foreign 
corporation, be excluded from the gross income of a United States 
shareholder under section 959; or
    (C) If distributed, would, in the case of a controlled foreign 
corporation that has shareholders that are not United States 
shareholders on an E&P measurement date, be excluded from the gross 
income of such shareholders under section 959 if such shareholders were 
United States shareholders, determined by applying the principles of 
Revenue Ruling 82-16, 1982-1 C.B. 106.
    (ii) Earnings and profits attributable to subpart F income in the 
same taxable year as an E&P measurement date. For purposes of 
determining the accumulated post-1986 deferred foreign income of a 
specified foreign corporation as of an E&P measurement date, earnings 
and profits of the specified foreign corporation that are or would be, 
applying the principles of Revenue Ruling 82-16, 1982-1 C.B. 106, 
described in section 959(c)(2) by reason of subpart F income (as 
defined in section 952 without regard to section 965(a)) are described 
in section 965(d)(2)(B) and paragraph (f)(7)(i)(B) or (f)(7)(i)(C) of 
this section only to the extent that such income has been accrued by 
the specified foreign corporation as of the E&P measurement date. For 
rules regarding the interaction of sections 951, 956, 959, and 965 
generally, see Sec.  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 Sec.  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 Sec.  
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 Sec.  1.965-3(b).
    (9) Aggregate foreign E&P deficit. The term aggregate foreign E&P 
deficit means, with respect to a section 958(a) U.S. shareholder, the 
lesser of--
    (i) The aggregate of the section 958(a) U.S. shareholder's pro rata 
share of the specified E&P deficit of each E&P deficit foreign 
corporation, translated (if necessary) into U.S. dollars using the spot 
rate on December 31, 2017, or
    (ii) The aggregate of the section 958(a) U.S. shareholder's pro 
rata share of the section 965(a) earnings amount of each deferred 
foreign income corporation, translated (if necessary) into U.S. dollars 
using the spot rate on December 31, 2017.
    (10) Aggregate section 965(a) inclusion amount. The term aggregate 
section 965(a) inclusion amount means, with respect to a section 958(a) 
U.S. shareholder, the sum of all of the section 958(a) U.S. 
shareholder's section 965(a) inclusion amounts.
    (11) Allocable share. The term allocable share means, with respect 
to a deferred foreign income corporation and an aggregate foreign E&P 
deficit of a section 958(a) U.S. shareholder, the product of the 
aggregate foreign E&P deficit and the ratio determined by dividing--
    (i) The section 958(a) U.S. shareholder's pro rata share of the 
section 965(a) earnings amount of the deferred foreign income 
corporation, 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 Sec.  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 Sec.  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 Sec.  1.1221-2(c)(3) (an aggregate hedging 
transaction) that is treated as a cash-equivalent asset hedging 
transaction is

[[Page 1881]]

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 cash-equivalent assets held by the 
corporation.
    (ii) Fair market value of cash-equivalent 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 cash- equivalent 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 cash-equivalent 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 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 Sec.  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 Sec.  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 pass-through 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 pass-through entity that is itself a domestic 
pass-through entity but does include any other United States person 
that is an indirect partner, shareholder, beneficiary, grantor, or 
owner of the domestic pass-through entity through one or more other 
pass-through entities.
    (21) Domestic pass-through owner share. The term domestic pass-
through owner share means, with respect to a domestic pass-through 
owner and a domestic pass-through entity, the domestic pass-through 
owner's share of the aggregate section 965(a) inclusion amount and the 
section 965(c) deduction amount, as applicable, of the domestic pass-
through entity, including the domestic pass-through owner's share of 
the aggregate section 965(a) inclusion amount and section 965(c) 
deduction amount, as applicable, of a domestic pass-through entity 
owned indirectly by the domestic pass-through owner through one or more 
other pass-through 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 post-1986 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 Sec.  1.367(b)-7(d)(2)(i)), 
the specified foreign corporation has a deficit in post-1986 earnings 
and profits described in paragraph (f)(22)(i)(A) of this section only 
to the extent the deficit in post-1986 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

[[Page 1882]]

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 Sec.  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 post-1986 
earnings and profits of the distributee specified foreign corporation.
    (ii) Foreign income taxes. For purposes of determining a specified 
foreign corporation's post-1986 earnings and profits as of the E&P 
measurement date on November 2, 2017, in the case in which foreign 
income taxes (as defined in section 901(m)(5)) of the specified foreign 
corporation accrue after November 2, 2017, but on or before December 
31, 2017, and during the specified foreign corporation's U.S. taxable 
year that includes November 2, 2017, the specified foreign 
corporation's post-1986 earnings and profits as of November 2, 2017, 
are reduced by the applicable portion of such foreign income taxes. For 
purposes of the preceding sentence, the applicable portion of the 
foreign income taxes is the amount of the taxes that are attributable 
to the portion of the taxable income (as determined under foreign law) 
that accrues on or before November 2, 2017.
    (iii) Deficits in earnings and profits. Any deficit related to 
post-1986 earnings and profits, including a hovering deficit (as 
defined in Sec.  1.367(b)-7(d)(2)(i)), of a specified foreign 
corporation is taken into account for purposes of determining the post-
1986 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 Sec.  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 Sec.  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 Sec.  1.951-
1(e) by substituting ``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 Sec.  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

[[Page 1883]]

regulations under Sec. Sec.  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 pass-through 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 Sec.  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 Sec.  1.965-2(d).
    (41) Section 965(c) deduction. The term section 965(c) deduction 
means, with respect to a person, an amount allowed as a deduction to 
the person by reason of section 965(c), whether because the person is a 
section 958(a) U.S. shareholder with a section 965(c) deduction amount 
or because the person is a domestic pass-through owner with respect to 
a domestic pass-through entity that is a section 958(a) U.S. 
shareholder and the person takes into account its domestic pass-through 
owner share of the section 965(c) deduction amount of the domestic 
pass-through 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 Sec.  
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 by a trust under sections 958(b) and 318(a)(3)(B) and Sec.  
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 
Sec.  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 Sec.  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 Sec.  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 
Sec.  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.

[[Page 1884]]

    (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 Sec.  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 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 post-1986 earnings and profits because no 
adjustment to post-1986 earnings and profits is made under section 
965(d)(2) or Sec.  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 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 post-1986 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

[[Page 1885]]

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 x ($100/$400)) and CFC4's allocable share of USP's 
aggregate foreign E&P deficit is $195 ($260 x ($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 Sec.  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 Sec.  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 Sec.  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, 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
----------------------------------------------------------------------------------------------------------------
                                                Final                    Second                   First
----------------------------------------------------------------------------------------------------------------
CFC1.................................  December 31, 2017......  December 31, 2016......  December 31, 2015.
CFC2.................................  N/A....................  N/A....................  December 31, 2015.
CFC3.................................  November 30, 2018......  November 30, 2016......  November 30, 2015.
CFC4.................................  N/A....................  N/A....................  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 
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.


Sec.  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 Sec.  1.965-1(b) and a rule 
that limits the amount of gain recognized under section 961(b)(2) by 
reason of distributions attributable to section 965 previously taxed 
earnings and profits (as defined in paragraph (g)(1)(ii) of this 
section) in the inclusion year. Paragraph (b) of this section provides 
rules relating to adjustments to earnings and profits of a specified 
foreign corporation 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

[[Page 1886]]

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 Sec.  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 Sec.  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 Sec.  1.965-4, and the earnings and profits (including a 
deficit) of the specified foreign corporation are adjusted as provided 
in paragraphs (c) and (d) of this section. For a rule disregarding 
subpart F income earned after an E&P measurement date for purposes of 
calculating accumulated post-1986 deferred foreign income as of the E&P 
measurement date, see Sec.  1.965-1(f)(7)(ii).
    (4) The treatment of distributions described in paragraph (b)(2) of 
this section that are disregarded under Sec.  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, 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), Sec.  
1.965-1(b)(2), and Sec.  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

[[Page 1887]]

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), Sec.  1.965-1(b)(2), and Sec.  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 Sec.  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), Sec.  1.965-
1(b)(2), or Sec.  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), 
Sec.  1.965-1(b)(2), or Sec.  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 Sec.  
1.965-8(f)(7)(i)), or
    (2) If the section 958(a) U.S. shareholder is a member of an 
affiliated group in which not all members are members of the same 
consolidated group, the amount described in Sec.  1.965-8(f)(1)(i)(B) 
with respect to the affiliated group is equal to or greater than the 
amount described Sec.  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), Sec.  1.965-
1(b)(2), or Sec.  1.965-8(b), as designated under Sec.  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 Sec.  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 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), Sec.  1.965-1(b)(2), or Sec.  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

[[Page 1888]]

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), 
Sec.  1.965-1(b)(2), and Sec.  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 section 
958(a) U.S. shareholder's pro rata share of the section 965(a) earnings 
amount is reduced under section 965(b), Sec.  1.965-1(b)(2), or Sec.  
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 Sec.  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), Sec.  
1.965-1(b)(2), or Sec.  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 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), Sec.  1.965-1(b)(2), or Sec.  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 Sec.  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)

[[Page 1889]]

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 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.
    (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 Sec.  1.965-
1(e)).
    (3) Property. The term property has the meaning provided in Sec.  
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

[[Page 1890]]

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 Sec.  1.965-
1(f)(7)(i)(B). Under section 965(d)(3)(B) and Sec.  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 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 Sec.  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 Sec.  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 Sec.  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, Sec.  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 x (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) x (20u/120u-20u)). Under 
section 960, USP is deemed to pay $14x (($21x-$3.50x-$3.50x) x 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 post-
1986 foreign income taxes. Under section 960, USP is deemed to pay 
$2.10x ($3.50x x (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) x 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 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 post-1986 deferred foreign 
income as of November 2, 2017, 20u, 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) 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 Sec.  1.965-1(f)(7)(i)(B) and (ii), and
    (ii) The amount of its accumulated post-1986 deferred foreign 
income as of December 31, 2017, 20u, which is equal to 120u of post-
1986 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 Sec.  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).

[[Page 1891]]

     (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 post-1986 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 Sec.  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 post-1986 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 post-1986 earnings and profits because no adjustment is made 
under section 965(d)(2) or Sec.  1.965-1(f)(7), as CFC2 does not 
have earnings and profits that are attributable to income of the 
specified foreign corporation that is effectively connected with the 
conduct 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 Sec.  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 Sec.  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 any E&P 
measurement date, Sec.  1.965-4(f) is not relevant.
    (ii) The amount of its accumulated post-1986 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 Sec.  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 Sec.  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 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 Sec.  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 post-1986 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 Sec.  1.965-1(f)(7). But for Sec.  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,

[[Page 1892]]

under Sec.  1.965-4(f). Under section 965(d)(3)(B) and Sec.  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 post-1986 
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 Sec.  1.965-1(f)(7). But for Sec.  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 Sec.  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 x (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 x (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 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 Sec.  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 Sec.  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 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 post-1986 
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 Sec.  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

[[Page 1893]]

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 Sec.  1.965-
1(b)(2). USP makes the election described in paragraph (f)(2) of 
this section.
    (ii) Analysis. (A) Application of the gain reduction rule. Under 
paragraph (d)(1) of this section, CFC2 has $100x of section 965(b) 
previously taxed earnings and profits with respect to USP, and, 
under paragraph (d)(2) of this section, CFC1's earnings and profits 
described in section 959(c)(3) are increased by $100x to $0. USP 
receives a distribution from CFC2 through a chain of ownership 
described in section 958(a) during the inclusion year of CFC2 that 
is attributable to the $100x of section 965(b) previously taxed 
earnings and profits of CFC2. Under paragraph (g)(1) of this 
section, the amount of gain that USP otherwise would recognize with 
respect to the stock of CFC1 under section 961(b)(2) is reduced (but 
not below zero) by $100x, the amount of CFC2's section 965(b) 
previously taxed earnings and profits with respect to USP under 
paragraph (d)(1) of this section.
    (B) Adjustments to the basis of CFC1. Because USP makes the 
election described in paragraph (f)(2) of this section, as of the 
close of November 30, 2018, USP's basis in CFC1 is increased under 
paragraph (f)(2)(ii)(A) of this section by an amount equal to CFC2's 
section 965(b) previously taxed earnings and profits with respect to 
USP under paragraph (d)(1) of this section ($100x), reduced under 
paragraph (f)(2)(ii)(B) of this section by an amount equal to the 
portion of the specified E&P deficit of CFC1 taken into account in 
determining USP's section 965(a) inclusion amount with respect to 
CFC2 ($100x), and reduced under paragraph (g)(2) of this section by 
the amount of gain that would have been recognized by USP with 
respect to the stock of CFC1 under section 961(b)(2) but for the 
application of paragraph (g)(1) of this section ($100x). Under 
paragraph (h)(2) and (3) of 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 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.


Sec.  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

[[Page 1894]]

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 Sec.  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 
double-counting, 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 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.
     (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 short-term obligation of CFC2 held by CFC1 outstanding on 
both of their first cash measurement dates, November 30, 2015, and 
December 31, 2015, respectively, is disregarded under paragraph 
(b)(1) of this section to the extent of 90%, the smallest ownership 
percentage of section 958(a) stock of CFC1 and CFC2 by USP on such 
first cash measurement dates. Accordingly, USP takes into account 
$10 ($100-90% of $100) of the short-term obligation in determining 
CFC1's cash position for purposes of determining its aggregate 
foreign cash position.
     (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 Sec.  
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

[[Page 1895]]

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% x 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 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. 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 Sec.  1.965-1(f)(8)(i)(A) with 
respect to such section 958(a) U.S. shareholder in fact exceeds the 
amount described in Sec.  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 Sec.  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,

[[Page 1896]]

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 Sec.  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 
Sec.  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 Sec.  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 
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 
Sec.  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 Sec.  
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 Sec.  1.705-1(a) and section 1367(a)(1) 
and Sec.  1.1367-1(f), and
    (B) The aggregate amount of its section 965(a) inclusions equal to 
the aggregate amount of its section 965(c) deductions is treated as 
income exempt from tax solely for purposes of calculating basis under 
sections 705(a)(1)(B), 1367(a)(1)(A), and Sec.  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 Sec.  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 Sec.  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 Sec.  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 tax-exempt income for purposes of Sec.  
1.1368-2(a)(2).

    (3) Section 1411. For purposes of section 1411 and Sec.  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

[[Page 1897]]

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.


Sec.  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 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 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 pass-through 
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 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, 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

[[Page 1898]]

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 cash-equivalent 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 post-1986 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 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 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 post-1986 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

[[Page 1899]]

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 Sec.  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 
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 pass-through 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--
    (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

[[Page 1900]]

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 Sec.  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 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 Sec.  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 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 post-1986 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

[[Page 1901]]

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.


Sec.  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 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 Sec.  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 lower-tier 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 Sec.  1.965-1(b)(2) or Sec.  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 Sec.  1.901-2(f)(4) and a 
distributive share of foreign income taxes paid or accrued by a 
partnership.
    (3) Coordination with section 78--(i) In general. With respect to 
foreign income taxes deemed paid by a domestic corporation with respect 
to its section 965(a) inclusion amount for a section 958(a) U.S. 
shareholder inclusion year, section 78 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

[[Page 1902]]

    (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 
pass-through 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 Sec.  1.965-2(c)) or 
the section 965(b) previously taxed earnings and profits first arose 
(as described in Sec.  1.965-2(d)).


Sec.  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 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), 
Sec. Sec.  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 Sec.  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 post-1986 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 Sec.  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 Sec.  1.861-8T(d). In 
addition, consistent with the general inapplicability of Sec.  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 Sec.  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 Sec.  1.367(b)-
7(d)(2)(iii)--
    (1) The post-transaction earnings described in Sec.  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 
Sec.  1.965-1(b)(1) by a section 958(a) U.S. shareholder; and
    (2) Any offset for purposes of Sec.  1.367(b)-7(d)(2)(ii) is 
treated as occurring on the last day of the foreign surviving 
corporation's inclusion year.


Sec.  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

[[Page 1903]]

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.
    (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 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 Sec.  301.9100-2 or Sec.  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 Sec.  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

[[Page 1904]]

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 Sec.  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 Sec.  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 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 Sec.  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 Sec.  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
    (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 Sec.  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 Sec.  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

[[Page 1905]]

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 Sec.  
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 (b)(3)(iii)(B) must be entered into by the agent (as defined 
in Sec.  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 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 Sec.  1.965-8(e)(1)) 
being treated as transferring substantially all of its assets

[[Page 1906]]

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 Sec.  1.965-8(e)(1).
    (c) Section 965(i) election--(1) In general. Each shareholder of an 
S corporation (including a person listed in Sec.  1.1362-6(b)(2) with 
respect to a trust or estate, but not a domestic pass-through 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 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 Sec.  
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 Sec.  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.
    (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

[[Page 1907]]

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 Sec.  1.1362-6(b)(2) with respect to a 
trust or estate, but not a domestic pass-through 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 Sec.  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 
(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 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).

[[Page 1908]]

    (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) 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 Sec.  301.9100-2 or Sec.  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) 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 Sec.  301.9100-2 or Sec.  
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

[[Page 1909]]

    (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).
    (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 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 Sec.  
301.9100-2 or Sec.  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 Sec.  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

[[Page 1910]]

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 made by the agent (within the 
meaning of Sec.  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 Sec.  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 Sec.  301.9100-2 or Sec.  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 Sec.  
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-
53-week taxable year may not use the alternative method of 
determination in paragraph (f)(3) of this section for purposes of 
determining its post-1986 earnings and profits on the E&P measurement 
date on December 31, 2017.
    (2) Effect of election for specified foreign corporations that have 
a 52-53-week 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 Sec.  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.

[[Page 1911]]

    (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 post-1986 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 Sec.  1.964-1(c)(5)) pursuant to the rules 
of Sec.  1.964-1(c)(3), except that the controlling domestic 
shareholder is not required to file the statement described in Sec.  
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 Sec.  
301.9100-2 or Sec.  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 the 
original signed election statement in the manner specified by Sec.  
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) 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 pass-through 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 Sec.  1.6081-5(a)(5) 
or (6) who receives an extension of time to file and pay under Sec.  
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))

[[Page 1912]]

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.


Sec.  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 Sec.  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 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 Sec.  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 Sec.  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 Sec.  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), Sec.  1.965-
1(b)(2), and paragraph (b) of this section, as applicable.
    (2) Consolidated group as part of an affiliated group. If some, but 
not all, members of an affiliated group are properly treated as members 
of a consolidated group, then the consolidated group is treated as a 
single member of the affiliated group for purposes of applying 
paragraph (c)(1) of this section.
    (d) Adjustments to earning and profits and stock basis.
    (1) [Reserved]
    (2) Consolidated groups. See Sec.  1.1502-33(d)(1) for adjustments 
to members' earnings and profits and Sec.  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), Sec.  1.965-1(b)(2), 
and Sec.  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 Sec.  1.965-7. Thus, for example, any election 
governed by section 965(h) and Sec.  1.965-7(b) must be made by the 
agent (within the meaning of Sec.  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 Sec.  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

[[Page 1913]]

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 Sec.  1.965-1(f)(11) with respect to the 
deferred foreign income corporation.
    (3) Applicable share. The term applicable share means, with respect 
to an E&P net surplus shareholder and an aggregate unused E&P deficit 
of an affiliated group, the amount that bears the same proportion to 
the affiliated group's aggregate unused E&P deficit as--
    (i) The product of--
    (A) The E&P net surplus shareholder's group ownership percentage, 
multiplied by
    (B) The amount that would (but for section 965(b)(5) and paragraph 
(b) of this section) constitute the E&P net surplus shareholder's 
aggregate section 965(a) inclusion amount, bears to
    (ii) The aggregate amount determined under paragraph (f)(3)(i) of 
this section with respect to all E&P net surplus shareholders that are 
members of the group.
    (4) Consolidated group aggregate foreign cash position. The term 
consolidated group aggregate foreign cash position means, with respect 
to a consolidated group, the aggregate foreign cash position (as 
defined in Sec.  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 Sec.  
1.965-1(f)(9)(i) with respect to the section 958(a) U.S. shareholder 
exceeds the amount described in Sec.  1.965-1(f)(9)(ii) with respect to 
the section 958(a) U.S. shareholder.
    (8) Group cash ratio. The term group cash ratio means, with respect 
to a consolidated group, the ratio of--
    (i) The consolidated group aggregate foreign cash position, to
    (ii) The sum of the aggregate section 965(a) inclusion amounts of 
all members of the consolidated group.
    (9) Group ownership percentage. The term group ownership percentage 
means, with respect to a section 958(a) U.S. shareholder that is a 
member of an affiliated group, the percentage of the value of the stock 
of the United States shareholder which is held by other includible 
corporations in the affiliated group. Notwithstanding the preceding 
sentence, the group ownership percentage of the common parent of the 
affiliated group is 100 percent. Any term used in this paragraph (f)(9) 
that is also used in section 1504 has the same meaning as when used in 
such section. Additionally, if the term is used in the context of a 
rule for which all members of a consolidated group are treated as a 
single section 958(a) U.S. shareholder under paragraph (e)(1) of this 
section, then the group ownership percentage is determined solely with 
respect to the value of the stock of the common parent of the 
consolidated group held by other includible corporations that are not 
members of the consolidated group.
    (g) Examples. The following examples illustrate the application of 
this section.

    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 Sec.  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 Sec.  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 Sec.  1.965-
1(f)(9)(ii) with respect to USS1 ($600x). Under section 965(b) and 
Sec.  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 Sec.  1.965-1(f)(9)(ii) with respect to USS1 
($600x). Accordingly, under section 965(b) and Sec.  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 Sec.  1.965-

[[Page 1914]]

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 Sec.  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 x ($200x/($200x + $300x))) and USS2's applicable share of 
the USP Group's aggregate unused E&P deficit is $60x ($100x x 
($300x/($200x + $300x))). Because USS1 is a section 958(a) U.S. 
shareholder with respect to only one deferred foreign income 
corporation, the entire $60x of USS1's applicable share of the USP 
Group's aggregate unused E&P deficit is treated as CFC1's allocable 
share of USS1's applicable share of the USP Group's aggregate unused 
E&P deficit, and thus USS1's section 965(a) inclusion amount with 
respect to CFC1 is reduced to $160x ($200x-$40x). Because USS2 is a 
section 958(a) U.S. shareholder with respect to only one deferred 
foreign income corporation, the entire $60x of USS2's applicable 
share of the USP Group's aggregate unused E&P deficit is treated as 
CFC3's allocable share of USS2's applicable 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 
Sec.  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 
Sec.  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 Sec.  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 Sec.  1.965-1(b)(2), in determining USS1's section 965(a) 
inclusion amount, the single section 958(a) U.S. shareholder 
decreases its pro rata share of the U.S. dollar amount of the 
section 965(a) earnings amount of CFC1 by CFC1's allocable share of 
the aggregate foreign E&P deficit of the single section 958(a) U.S. 
shareholder. CFC1's allocable share of the aggregate foreign E&P 
deficit is $333.33x, which is the product of the aggregate foreign 
E&P deficit of the single section 958(a) U.S. shareholder ($500x 
($400x + $100x)) and .67, which is the ratio determined by dividing 
its pro rata share of the section 965(a) earnings amount of CFC1 
($600x) by the amount described in Sec.  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 Sec.  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 Sec.  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 x ($200x/$400x)) and $66.67 
($133.33x x ($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

[[Page 1915]]

($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.


Sec.  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 Sec.  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, the transaction, effective date of a change in 
method of accounting, effective date of an entity classification 
election, or specified payment described in Sec.  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.
0
Par. 5. Section 1.986(c)-1 is added to read as follows:


Sec.  1.986(c)-1  Coordination with section 965.

    (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 Sec.  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 
amount (as defined in Sec.  1.965-1(f)(42)) of the section 965(a) 
inclusion amount (as defined in Sec.  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 Sec.  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