[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