[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Rules and Regulations]
[Pages 53068-53097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18543]



[[Page 53067]]

Vol. 85

Thursday,

No. 167

August 27, 2020

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Limitation on Deduction for Dividends Received From Certain Foreign 
Corporations and Amounts Eligible for Section 954 Look-Through 
Exception; Coordination of Extraordinary Disposition and Disqualified 
Basis Rules; Coordination of Extraordinary Disposition and Disqualified 
Basis Rules; Final Rule and Proposed Rule

  Federal Register / Vol. 85 , No. 167 / Thursday, August 27, 2020 / 
Rules and Regulations  

[[Page 53068]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9909]
RIN 1545-BP35


Limitation on Deduction for Dividends Received From Certain 
Foreign Corporations and Amounts Eligible for Section 954 Look-Through 
Exception

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under sections 245A 
and 954 of the Internal Revenue Code (the ``Code'') that limit the 
deduction for certain dividends received by United States persons from 
foreign corporations under section 245A and the exception to subpart F 
income under section 954(c)(6) for certain dividends received by 
controlled foreign corporations. This document also contains final 
regulations under section 6038 of the Code regarding information 
reporting to facilitate administration of the final regulations. The 
guidance relates to changes made to the applicable law by the Tax Cuts 
and Jobs Act, which was enacted on December 22, 2017. This document 
finalizes proposed regulations published on June 18, 2019, and removes 
temporary regulations published on the same date.

DATES: 
    Effective date: These regulations are effective on August 27, 2020.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.245A-5(k), 1.954(c)(6)-1(b), and 1.6038-2(m)(2).

FOR FURTHER INFORMATION CONTACT: Arielle M. Borsos or Logan M. 
Kincheloe at (202) 317-6937 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Added to the Code by the Tax Cuts and Jobs Act, Public Law 115-97, 
131 Stat. 2054, 2189 (2017) (the ``Act''), section 245A provides a 100-
percent deduction to domestic corporations for certain dividends 
received from foreign corporations after December 31, 2017 (the 
``section 245A deduction''). Section 954(c)(6) provides that a dividend 
received by a controlled foreign corporation, as defined in section 957 
(a ``CFC''), from a related CFC is not included in the recipient CFC's 
income subject to current tax under sections 951(a) and 954(c) if 
certain requirements are satisfied (the ``section 954(c)(6) 
exception''). On June 18, 2019, the Department of the Treasury (the 
``Treasury Department'') and the IRS published temporary regulations 
(TD 9865) under sections 245A, 954(c)(6), and 6038 in the Federal 
Register (84 FR 28398, as corrected at 84 FR 38866) (the ``temporary 
regulations''). These temporary regulations limit the section 245A 
deduction and the section 954(c)(6) exception with respect to 
distributions supported by certain earnings and profits (``E&P'') not 
subject to the integrated international tax regime created by the Act. 
Also on June 18, 2019, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-106282-18) in the Federal Register 
(84 FR 28426, as corrected at 84 FR 38892) by cross-reference to the 
temporary regulations (the ``proposed regulations,'' and together with 
the temporary regulations, the ``2019 regulations''). A public hearing 
was held on November 22, 2019.
    This Treasury decision finalizes the proposed regulations, and 
removes the temporary regulations, after taking into account and 
addressing comments received by the Treasury Department and the IRS 
with respect to the 2019 regulations. Some of the comments received are 
outside the scope of the topics addressed in the 2019 regulations and 
are thus generally not further addressed in this preamble. However, 
those comments may be considered in connection with any future guidance 
projects regarding the issues discussed therein. For example, the 
Treasury Department and the IRS anticipate taking into account comments 
received regarding the availability of the section 245A deduction for 
dividends received by a CFC when issuing relevant future guidance. 
Comments that relate solely to the temporary regulations, such as 
comments relating to the temporary regulations' compliance with the 
procedural requirements in 5 U.S.C. 553(b) and (d) of the 
Administrative Procedure Act, will not be further addressed, as these 
issues were discussed in the preamble to the 2019 regulations and are 
not relevant to this document finalizing proposed regulations for which 
a 90-day comment period was provided. See 84 FR 28398. All written 
comments received in response to the 2019 regulations are available at 
www.regulations.gov or upon request.
    The preamble to the 2019 regulations solicits comments on whether 
and how to coordinate the rules in proposed Sec.  1.245A-5(c) and (d) 
(regarding extraordinary dispositions) with the rules in Sec.  1.951A-
2(c)(5) (regarding the allocation of deduction or loss attributable to 
disqualified basis under the global intangible low-taxed income rules 
in section 951A (such income, global intangible lowed-taxed income or 
``GILTI,'' and the rules, the ``GILTI regime'')).\1\ In response to the 
comments received pursuant to this solicitation, the Treasury 
Department and the IRS have issued proposed regulations (REG-103470-
19), the text of which is set forth in a notice of proposed rulemaking 
published in the Proposed Rules section of this issue of the Federal 
Register (the ``proposed coordination rules'').
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    \1\ Section 1.951A-2(c)(5) was published in the Federal Register 
on June 21, 2019, as part of final and temporary regulations 
regarding the GILTI regime. See TD 9866, 84 FR 29288. This provision 
prevents any deduction or loss attributable to basis generated 
without U.S. tax cost during the disqualified period from being 
allocated to reduce tested income, subpart F income, or income 
effectively connected with a U.S. trade or business. See Sec.  
1.951A-2(c)(5)(i).
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    Terms used but not defined in this preamble have the meaning 
provided in the final regulations.

Summary of Comments and Explanation of Revisions

I. Overview

    The final regulations retain the general approach and structure of 
the proposed regulations, with certain revisions. This Summary of 
Comments and Explanation of Revisions section discusses the revisions 
as well as relevant comments received.

II. Comments Relating to Authority To Issue the 2019 Regulations

    Several comments recommended that the Treasury Department and the 
IRS withdraw the temporary regulations, and not finalize the proposed 
regulations, due to a claimed lack of statutory authority to issue the 
rules therein. These comments asserted that the extraordinary 
disposition and extraordinary reduction rules in the 2019 regulations 
are contrary to the statutory text of section 245A and are therefore 
not authorized by section 245A(g). Some comments also asserted that the 
extraordinary disposition rules are contrary to section 245A because 
they attempt to alter the effective dates of section 965, which imposed 
a transition tax on certain untaxed foreign earnings measured as of no 
later than December 31, 2017, and section 951A, which created GILTI, a 
new category of income that is subject to current U.S. taxation 
starting in the first taxable year of a CFC beginning on or after 
January 1, 2018. Other comments asserted that the 2019 regulations are 
not reasonable

[[Page 53069]]

because the application of the rules may result in excess U.S. taxation 
in certain situations.

A. Authority

    The 2019 regulations were issued and are now being finalized under 
several statutory grants of authority. First, section 245A(g) grants 
the Secretary the authority to ``prescribe such regulations or other 
guidance as may be necessary or appropriate to carry out the provisions 
of [section 245A].'' Second, section 954(c)(6)(A) provides the 
Secretary the authority to ``prescribe such regulations as may be 
necessary or appropriate to carry out [section 954(c)(6)], including 
such regulations as may be necessary or appropriate to prevent the 
abuse of the purposes of [section 954(c)(6)].'' Third, section 7805(a) 
of the Code generally provides the Secretary the authority to 
``prescribe all needful rules and regulations for the enforcement of 
this title, including all rules and regulations as may be necessary by 
reason of any alteration of law in relation to internal revenue.''
    As stated in the preamble to the 2019 regulations, the Treasury 
Department and the IRS determined that sections 245A(g), 954(c)(6), and 
7805(a) provide authority for the 2019 regulations. After considering 
comments to the contrary, the Treasury Department and the IRS have 
determined that these provisions also provide authority to finalize the 
proposed regulations so that the section 245A deduction and section 
954(c)(6) exception are appropriately limited as contemplated by 
sections 245A(g) and 954(c)(6)(A). The phrase ``necessary or 
appropriate'' is broad, and its use in sections 245A(g) and 
954(c)(6)(A) reflects Congress's intent to confer extensive rulemaking 
authority upon the Treasury Department and the IRS with respect to 
those provisions. See Michigan v. Environmental Protection Agency, 135 
S. Ct. 2705, 2707 (2015) (concluding that the words ``appropriate and 
necessary'' in a statutory grant of regulatory authority are 
``capacious[ ]'' and noting that the term appropriate ``is the classic 
broad and all-encompassing term that naturally and traditionally 
includes consideration of all relevant factors,'' before going on to 
analyze the rulemaking at issue under the standard that the Court must 
``accept an agency's reasonable resolution of an ambiguity in a statute 
that the agency administers''). This includes the authority to limit 
the availability of the section 245A deduction and the section 
954(c)(6) exception when doing so is necessary or appropriate to the 
proper functioning of those provisions. Moreover, section 7805(a) 
provides additional rulemaking authority that may not be conferred in a 
specific statutory grant, including in cases where rules may be 
necessary due to alterations in law, such as those made by the Act. 
Under the authority of these provisions, the 2019 regulations and the 
final regulations are necessary and appropriate to the proper 
application of sections 245A and 954(c)(6) as components of the 
integrated international tax regime created by the Act.
    As explained in the preamble to the 2019 regulations, the Act 
established a new system for the taxation of foreign income through the 
section 245A deduction, which is available to domestic corporations 
with respect to certain dividends received from specified 10-percent 
owned foreign corporations (``SFCs'') after December 31, 2017. E&P 
generated before the applicability of the section 245A deduction and 
not previously subject to U.S. tax were generally subject to the 
transition tax under section 965. For taxable years starting in 2018, 
the Act generally retained the rules under section 951 that subject 
certain income of CFCs to current U.S. tax (the ``subpart F regime''). 
The Act also introduced the GILTI regime, an expanded anti-base erosion 
measure that subjects certain income of CFCs to current U.S. tax in 
order to address heightened base erosion concerns arising from the 
enactment of section 245A and other provisions of the Act.
    In a typical case, these provisions require E&P (or the income that 
gave rise to the E&P) to be tested for taxation under section 965 or 
the GILTI and subpart F regimes before the E&P can be distributed as 
dividends potentially eligible for the section 245A deduction. E&P that 
have been previously taxed by reason of section 965 or the subpart F or 
GILTI regimes are treated as being distributed before non-previously 
taxed E&P, and a distribution of previously taxed E&P is not treated as 
a distribution of a dividend for U.S. tax purposes and therefore would 
not be eligible for the section 245A deduction. See Sections 959(c) and 
(d). By contrast, section 245A applies to certain E&P when they are 
distributed as dividends (or deemed distributed under certain Code 
provisions). Understood together, this framework confirms that the 
section 245A deduction is intended to apply to residual E&P that is not 
subject to section 965 and properly determined to be exempt from 
current taxation under the GILTI and subpart F regimes.
    The legislative history to the Act provides further relevant 
context to understanding how the section 245A deduction interacts with 
section 965 and the GILTI and subpart F regimes. Congress enacted 
section 245A to increase the competitiveness of U.S. companies and 
reduce incentives to keep funds offshore to avoid the U.S. residual tax 
on those earnings. See Senate Committee on the Budget, 115th Cong., 
Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 353 
(Comm. Print 2017). Congress recognized, however, that the enactment of 
section 245A presented a potential windfall, allowing taxpayers who had 
held E&P offshore to distribute all of those E&P to a United States 
shareholder without incurring tax. See id. Congress did not intend for 
section 245A to apply to such pre-Act E&P, and thus enacted section 965 
``to ensure that all distributions from foreign subsidiaries are 
treated in the same manner under the participation exemption system.'' 
Id. at 358.
    Congress was also aware that the section 245A deduction was 
susceptible to manipulation in other ways. In this regard, Congress 
recognized that section 245A could provide incentives to allocate 
income susceptible to base erosion to certain foreign corporations, 
including those located in low-taxed foreign jurisdictions or tax 
havens, ``where the income could potentially be distributed back to the 
[domestic] corporation with no U.S. tax imposed.'' See id. at 365. To 
prevent these misuses, the Act implemented the GILTI regime and 
retained the subpart F regime.
    The Treasury Department and the IRS interpreted the scope of the 
section 245A deduction based on this structure and context. The 2019 
regulations and the final regulations ensure that the section 245A 
deduction appropriately operates within the statutory framework to 
complement, not contradict, the application of section 965 and the 
GILTI and subpart F regimes. The 2019 regulations limit the section 
245A deduction in connection with extraordinary dispositions because 
E&P generated in those transactions are not subject to tax under 
section 965 or the GILTI and subpart F regimes and, as a result, are 
not of the residual type for which the section 245A deduction is 
intended to potentially be available. The 2019 regulations limit the 
section 245A deduction in connection with extraordinary reductions 
because the section 245A deduction can result in complete avoidance of 
U.S. tax with respect to subpart F income or tested income that, absent 
the extraordinary reduction, would have been included in income by the 
selling United States shareholder under the subpart F or GILTI regimes, 
respectively. Limitations on the section 245A deduction in the

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2019 regulations and the final regulations are narrowly tailored to 
apply only in circumstances where allowing a section 245A deduction 
would conflict with Congress's intent to have the subpart F and GILTI 
regimes prevent base erosion. The 2019 regulations and the final 
regulations are therefore necessary and appropriate to ensure the 
proper application of the provisions of section 245A.
    Similarly, the 2019 regulations and the final regulations limit the 
section 954(c)(6) exception where its application would otherwise allow 
E&P that had accrued after December 31, 2017 (the last measurement date 
for determining the amount of E&P subject to section 965), and that was 
generated by income that had never been tested under the subpart F and 
GILTI regimes, to inappropriately qualify for an exception to the 
subpart F regime. While section 954(c)(6) was added to the Code to 
allow certain CFCs to reinvest E&P attributable to active foreign 
activities without incurring current U.S. tax, the section 954(c)(6) 
exception was not intended to apply where the effect would be to 
permanently eliminate income from the U.S. tax base, which would 
constitute an abuse of section 954(c)(6). See Notice 2007-9, 2007-1 
C.B. 401, at section 7(b). The 2019 regulations and the final 
regulations under section 954(c)(6) are designed to ensure that the 
section 954(c)(6) exception does not apply to permanently eliminate 
income from the U.S. tax base through certain transactions preventing 
the taxation of income that would otherwise be taxed under the subpart 
F regime when distributed to a CFC. Thus, these regulations are 
necessary and appropriate to prevent the abuse of the section 954(c)(6) 
exception.

B. Effective Dates

    Comments asserted that the 2019 regulations are an attempt by the 
Treasury Department and the IRS to apply section 965 or the GILTI 
regime during the period beginning on January 1, 2018, and ending on 
the last day of the last taxable year of a CFC before the GILTI regime 
applies (the ``disqualified period''). In support of their position, 
some of these comments cite Sec.  1.245A-5T(b) (and proposed Sec.  
1.245A-5(b)), which provides that 50 percent of extraordinary 
disposition E&P are ineligible for the section 245A deduction thereby 
subjecting extraordinary disposition amounts to tax at a 10.5 percent 
effective tax rate, rather than the general 21 percent corporate tax 
rate. The comments further alleged that the 2019 regulations contradict 
section 245A because Congress intentionally created the disqualified 
period and, therefore, intended section 245A to apply during this 
period to encourage repatriations. In support of this position, the 
comments cite a change to the effective date of section 245A in the 
final bill to align with the final E&P measurement date under section 
965, rather than the applicability date of section 951A.
    The Treasury Department and the IRS disagree with this 
characterization of the 2019 regulations. The 2019 regulations and the 
final regulations are not an attempt to change the effective dates of 
section 965 or the GILTI regime; rather, the regulations limit the 
availability of the section 245A deduction and the section 954(c)(6) 
exception in certain limited circumstances where the effect would be 
contrary to the appropriate application of those provisions in the 
context of the Act's integrated approach to the taxation of income, or 
E&P generated by income, of a CFC. Furthermore, the extraordinary 
disposition rules apply to a limited category of transactions--that is, 
transactions that take place outside the ordinary course of business, 
between related parties, and exceed the lesser of $50 million or 5 
percent of the CFC's total income for the taxable year. These 
exceptions demonstrate that the extraordinary disposition rules do not 
change the effective dates of section 965 or the GILTI regime; rather, 
they ensure the proper coordination of multiple statutory provisions in 
circumstances in which there is a heightened risk of base erosion.
    As explained in Part II.A of this Summary of Comments and 
Explanation of Revisions, section 245A must be read in context and in 
light of its role in the integrated international tax system created by 
the Act. Nothing in the statute or legislative history suggests that 
the change in effective date of section 245A during the drafting of the 
bill means that Congress intended for E&P generated through 
extraordinary dispositions during the disqualified period to qualify 
for the section 245A deduction. Moreover, such an interpretation would 
suggest, without support, that Congress purposefully amended the 
section 245A effective date to provide a tax benefit only to CFCs with 
a fiscal taxable year, giving them a significant advantage over CFCs 
with a calendar taxable year.

C. Excess Taxation

    Several comments asserted that the 2019 regulations are 
unreasonable because they could result in excess U.S. taxation. For 
example, comments cited the potential for the extraordinary disposition 
rules and the disqualified basis rules in Sec.  1.951A-2(c)(5) to apply 
to the same transaction. Comments also asserted that, due to the 
unavailability of foreign tax credits and other tax attributes (such as 
net deemed tangible income return as defined in section 951A(b)(2)), 
the extraordinary disposition rules impose a different tax cost on 
extraordinary disposition E&P than would have been imposed had the 
income or gain to which such E&P is attributable been subject to tax 
under the GILTI regime when it was generated. Another comment asserted 
that the extraordinary reduction rules are contrary to sections 1248(j) 
and 964(e)(4) because those provisions govern extraordinary reductions 
and the 2019 regulations in effect override those provisions. Finally, 
one comment stated that the extraordinary reduction rules result in 
excess U.S. taxation in the context of dividends that partially fail to 
qualify for the section 954(c)(6) exception because they are partly 
attributable to subpart F income. Each of these comments is addressed 
in turn.
    First, and as noted in the Background section, the proposed 
coordination rules consider the application of the rules of Sec. Sec.  
1.245A-5(c) and (d) and 1.951A-2(c)(5) to the same transaction and, 
accordingly, address excess taxation concerns.
    Second, the U.S. tax cost of an extraordinary disposition is not, 
and is not intended to be, equivalent to the cost of applying section 
965 or the GILTI regime to the same transaction. Instead, the Treasury 
Department and the IRS determined that the extraordinary disposition 
E&P is not of the type that Congress intended to qualify for the 
section 245A deduction and the section 954(c)(6) exception. As an act 
of administrative grace, the 2019 regulations deny only 50 percent of 
the section 245A deduction and the section 954(c)(6) exception to 
approximate the tax rate that taxpayers may have expected to pay on 
similar E&P under section 965 or the GILTI regime. However, this is not 
intended to place taxpayers in an equivalent position as if they had 
been subject to those provisions. Instead, it is intended to prevent 
extraordinary disposition E&P from inappropriately qualifying for the 
section 245A deduction or the section 954(c)(6) exception.
    Third, the 2019 regulations do not override the application of 
section 1248(j) or 964(e)(4). Both provisions impose taxation on built-
in stock gain (to the extent of certain E&P of the CFC) as if it were a 
dividend, but neither one

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expressly permits the section 245A deduction. To the contrary, both 
provisions envision that there will be contexts in which the deemed 
dividend under section 1248(j) or 964(e)(4) could fail to qualify for 
the section 245A deduction. The fact that the statutory text of these 
provisions ties their eligibility for tax-exemption to their ability to 
qualify for the section 245A deduction demonstrates that the same 
policies underlying the application of section 245A to actual dividends 
is also intended to apply to deemed dividends under section 1248(j) or 
964(e)(4). Accordingly, the 2019 regulations further the policies 
underlying sections 1248(j) and 964(e)(4) by limiting the availability 
of the section 245A deduction for both actual and deemed dividends in 
the same manner.
    Finally, one comment asserted that the interaction of the 
extraordinary reduction rules with the rules under Sec.  1.245A-5T(f) 
(and proposed Sec.  1.245A-5(f)) that limit the section 954(c)(6) 
exception, could result in subpart F income being subject to U.S. tax 
more than once in certain cases where a portion of the amount 
distributed would not otherwise qualify for the section 954(c)(6) 
exception. While not discussed in the comment, the same issue could 
arise in the context of tiered extraordinary disposition amounts. In 
response to this comment, the Treasury Department and the IRS have 
modified the rules in Sec.  1.245A-5(d)(1) and (f)(1) and related 
provisions of Sec.  1.245A-5 that limit application of the section 
954(c)(6) exception.

III. Comments and Revisions Related to Extraordinary Dispositions

A. Exceptions to Extraordinary Dispositions

    Under the 2019 regulations, an SFC is generally considered to have 
undertaken an extraordinary disposition with respect to an asset if the 
SFC (1) disposes of that asset outside of its ordinary course of 
activities to a related party during its disqualified period and (2) 
the sum of all extraordinary dispositions undertaken by the SFC exceeds 
the lesser of $50 million or 5 percent of the gross value of the SFC's 
assets. See proposed Sec.  1.245A-5(c)(3)(ii). Determining whether the 
disposition of an asset is outside the ordinary course of the SFC's 
business is a facts and circumstances determination. See proposed Sec.  
1.245A-5(c)(3)(ii)(B). In addition, dispositions occurring with a 
principal purpose of generating E&P during the disqualified period and 
dispositions of intangible property (as defined in section 367(d)(4)) 
are per se outside the ordinary course of an SFC's activities. See 
proposed Sec.  1.245A-5(c)(3)(ii)(C). This Part III.A of the Summary of 
Comments and Explanation of Revisions discusses comments requesting 
exceptions from the definition of an extraordinary disposition.
1. Post-Acquisition Integration Safe Harbor
    Comments recommended that transactions occurring pursuant to a plan 
of integration after an acquisition of an unrelated group be excluded 
from the definition of extraordinary disposition. One comment suggested 
that any integration of an acquired group that was acquired within 12 
months of January 1, 2018, should be excluded. The comments noted that 
post-acquisition integration, including through mergers and asset 
sales, may occur for a variety of non-tax business reasons, including 
consolidating ownership of certain assets, aligning business segments, 
creating synergies, and combining legal entities. Further, the comments 
noted that certain acquisitions and the related post-integration 
transactions were planned before the Act was enacted and would likely 
have occurred regardless of whether the Act was in effect at the time 
of the acquisition and post-acquisition integration. One comment 
acknowledged, however, that courts have typically found mergers to not 
be within the ordinary course of a business's activities.
    The Treasury Department and the IRS have determined that recently 
acquired assets are indistinguishable from non-recently acquired assets 
for the purposes of determining whether an extraordinary disposition 
has occurred. First, an extraordinary disposition that occurs during 
the disqualified period implicates the policy concerns of the 
extraordinary disposition rule regardless of whether the taxpayer 
intended to avoid tax. That is, regardless of the taxpayer's subjective 
intent, such transactions, absent rules to address them, could give 
rise to inappropriate results, such as E&P that are not of the type for 
which the section 245A deduction was intended to be available giving 
rise to a section 245A deduction. Second, the regulations apply only to 
post-acquisition integrations occurring during the disqualified period. 
The Treasury Department and the IRS are aware that some taxpayers 
undertook extraordinary dispositions for the purpose of increasing the 
basis of an asset or generating E&P eligible for the section 245A 
deduction, without being subject to U.S. tax on the recognition of the 
built-in gain in the asset. There are a number of ways that an asset 
could be transferred within an organizational structure that, even in 
the absence of special rules, would not give rise to inappropriate tax 
results. The fact that an asset was recently acquired does not change 
this fact; the length of time that an asset was held does not impact 
the potential ways in which the asset can be transferred within a group 
of related entities. Therefore, the final regulations do not adopt this 
recommendation.
2. Intangible Property
a. Extraordinary Disposition Exception for Intangible Property
    The comment requesting a general exception for transfers of 
intangible property asserted that (1) the rules as drafted would 
penalize the repatriation of intangible property to the United States, 
contrary to one of the Act's goals; and (2) other transfers of 
intangible property (that is, those between related CFCs) are addressed 
under Sec.  1.951A-2(c)(5). The extraordinary disposition rules were 
issued in response to a concern regarding highly-structured 
transactions that took place during the disqualified period to create 
stepped-up basis for the transferee and generate E&P for the 
transferor. Such transactions are especially concerning when they occur 
outside the ordinary course of business, between related parties, and 
involve large amounts of gain. A transfer of intangible property often 
will fall within these criteria, and thus would raise the same concerns 
as other highly-structured asset dispositions during the disqualified 
period. Contrary to the argument in the comment, the concerns addressed 
by the extraordinary disposition rules are heightened when the property 
in question is highly mobile and highly valuable, as is generally true 
of intangible property (and less frequently true of tangible property). 
Accordingly, the final regulations do not adopt this comment and 
continue to treat transfers of intangible property as extraordinary 
dispositions subject to the per se rule (but see the exception 
discussed in Part III.A.2.b of the Summary of Comments and Explanation 
of Revisions).
b. Exception to the Per Se Rule for Inventory Property
    A comment recommended that the final regulations adopt an exception 
to the per se rule for transfers of intangible property described in 
section 1221(a)(1). The comment noted that the disqualified basis 
rules, which similarly address transfers of property occurring during 
the disqualified period, provide

[[Page 53072]]

for an exception with respect to property described in section 
1221(a)(1). See Sec.  1.951A-2(h)(2)(ii). The comment further indicated 
that the facts and circumstances test in Sec.  1.245A-5T(c)(3)(ii)(B) 
(and proposed Sec.  1.245A-5(c)(3)(ii)(B)) would be sufficient to 
address any concerns of abuse.
    The Treasury Department and the IRS agree that it is appropriate to 
except certain ordinary course transfers of intangible property 
ultimately sold to unrelated customers from the per se rule. However, 
the Treasury Department and the IRS have determined that the exception 
from the per se rule should not be based on whether such property is 
described in section 1221(a)(1). Accordingly, the final regulations 
provide that a disposition of certain types of intangible property 
defined in section 367(d)(4) is not per se treated as an extraordinary 
disposition if the intangible property is transferred to a related 
party during the disqualified period with a reasonable expectation that 
such property would be sold to an unrelated customer within one year of 
the transfer. See Sec.  1.245A-5(c)(3)(ii)(C)(2)(i). This rule is 
intended to apply primarily to routine transfers of limited intangible 
property rights in furtherance of transactions with unrelated 
customers. Accordingly, transfers of intangible property described in 
section 367(d)(4)(C) or (F), such as trademarks and goodwill, are not 
eligible for this exception because, in general, these types of 
intangible property are not routinely transferred to unrelated 
customers. Additionally, transfers of copyright rights within the 
meaning of Sec.  1.861-18 or intangible property described in section 
367(d)(4)(A) that qualify for the exception to the per se rule are 
still subject to a presumption that they occur outside the ordinary 
course of the transferor SFC's activities. See Sec.  1.245A-
5(c)(3)(ii)(C)(2)(ii). This presumption can be rebutted only if the 
taxpayer shows that the facts and circumstances clearly establish that 
the disposition took place in the ordinary course of the SFC's 
activities. See id.
c. Platform Contribution Payments
    A comment recommended that transfers of intangible property from a 
CFC to a related CFC that occur as a result of a platform contribution 
transaction under Sec.  1.482-7 (a ``PCT'') be excluded from the per se 
rule. The comment noted that, when PCT payments represent payments from 
a United States shareholder to a CFC as consideration for a deemed 
transfer of intangible property, the result is that intangible property 
is effectively transferred into the United States from abroad. The 
comment described such transfers as broadly consistent with the 
policies of the Act and noted that PCT payments may not arise directly 
as a result of U.S. tax planning.
    The final regulations do not adopt this recommendation. The 
ultimate destination of the intangible property transferred in an 
extraordinary disposition, and the motivations of the taxpayers 
involved in the transfer, are generally irrelevant in determining 
whether a transfer should be treated as an extraordinary disposition. 
Whether or not the intangible property is transferred to the United 
States or for non-tax business reasons, a transfer during the 
disqualified period generates E&P that have not been subject to U.S. 
tax, and an associated increase in the basis of the transferred 
property, to the benefit of a related person. Accordingly, the final 
regulations continue to treat transfers of intangible property as 
subject to the per se rule (subject to the exception discussed in Part 
III.A.2.b of this Summary of Comments and Explanation of Revisions) 
without regard to whether such transfers occur in connection with a 
PCT.

B. Extraordinary Disposition Accounts

1. In General
    The 2019 regulations generally limit the section 245A deduction to 
the extent the dividend is paid out of the extraordinary disposition 
account of the section 245A shareholder. For this purpose, the 2019 
regulations provide an ordering rule pursuant to which a dividend is 
considered paid out of non-extraordinary disposition E&P before it is 
considered paid out of the extraordinary disposition E&P account. See 
proposed Sec.  1.245A-5(c)(2)(i). Similar rules apply with respect to 
the limitation on amounts eligible for the section 954(c)(6) exception. 
See proposed Sec.  1.245A-5(d)(2)(i). The 2019 regulations generally 
define non-extraordinary disposition E&P based on the section 245A 
shareholder's share of the E&P of the SFC described in section 
959(c)(3) in excess of the balance in the section 245A shareholder's 
extraordinary disposition account determined immediately before the 
distribution. See proposed Sec.  1.245A-5(c)(2)(ii).
    The 2019 regulations measure a section 245A shareholder's share of 
the E&P of an SFC described in section 959(c)(3) based on the 
percentage of stock (by value) of the SFC owned, directly or 
indirectly, by the section 245A shareholder after the distribution and 
all related transactions. See proposed Sec.  1.245A-5(c)(2)(ii)(A)(2). 
Thus, in cases in which the section 245A shareholder sells all of its 
stock of the SFC, the section 245A shareholder's share of E&P described 
in section 959(c)(3) is considered to be zero with respect to any 
dividend that is related to the sale under the measurement rule. As a 
result, the measurement rule treats no portion of the dividend as being 
distributed from non-extraordinary disposition E&P even though, 
assuming that a dividend is first sourced from E&P other than E&P 
generated in an extraordinary disposition, none of the dividend may be 
sourced from E&P generated in an extraordinary disposition. The final 
regulations revise this rule to measure the section 245A shareholder's 
share of E&P described in section 959(c)(3) based on the percentage of 
stock of the SFC that the section 245A shareholder owns immediately 
before the distribution. See Sec.  1.245A-5(c)(2)(ii)(A)(2).
2. Effect of Losses Incurred After Extraordinary Dispositions
    One comment noted that a dividend will avoid being sourced from an 
extraordinary disposition account only to the extent the non-
extraordinary disposition E&P equals or exceeds the amount of the 
dividend. The comment requested that regulations clarify the 
determination of non-extraordinary disposition E&P and the sourcing of 
dividends from an extraordinary disposition account to address cases 
involving losses generated after the extraordinary disposition and 
distributions giving rise to ``nimble'' dividends subject to section 
316(a)(2).
    This comment implicates two issues, the first of which is whether 
losses incurred after the disqualified period should reduce an 
extraordinary disposition account to the extent that such losses reduce 
E&P generated in an extraordinary disposition. The Treasury Department 
and the IRS have determined that losses incurred after the disqualified 
period should not reduce the extraordinary disposition account because 
extraordinary disposition E&P that are offset by losses provide a tax 
benefit to a section 245A shareholder. Specifically, extraordinary 
disposition E&P prevent offsetting losses from decreasing other E&P or 
creating a deficit that must be offset by future E&P that could give 
rise to future dividends. For every dollar of decreased E&P, an 
additional dollar distributed would be unable to qualify for the 
section 245A deduction and would instead reduce the distributee's basis 
in stock in the distributing corporation under section 301(c)(2) or 
constitute taxable gain to

[[Page 53073]]

the distributee under section 301(c)(3). In this way, extraordinary 
disposition E&P prevents post-extraordinary disposition losses from 
reducing the SFC's ability to pay dividends eligible for the section 
245A deduction. Thus, the extraordinary disposition E&P provide the 
same benefit when offset by a loss as they do absent a loss: That E&P 
increases the SFC's ability to pay dividends otherwise eligible for the 
section 245A deduction. Accordingly, like the 2019 regulations, the 
final regulations do not reduce an extraordinary disposition account by 
reason of losses incurred after the disqualified period. See Sec.  
1.245A-5(c)(3)(i)(A).
    The comment implicates a second issue, which is whether a nimble 
dividend should be considered paid out of extraordinary disposition E&P 
when the distributing SFC has an overall deficit in E&P, even factoring 
in the E&P supporting the nimble dividend. The Treasury Department and 
the IRS are studying the extent to which nimble dividends should 
qualify for the section 245A deduction generally and may address this 
issue in future guidance under section 245A.
3. Prior Extraordinary Disposition Amounts
    A section 245A shareholder reduces the balance of its extraordinary 
disposition account with respect to an SFC by the prior extraordinary 
disposition amount. See proposed Sec.  1.245A-5(c)(3)(i)(A). In 
general, the prior extraordinary disposition amount is intended to 
measure the extent to which the section 245A shareholder's 
extraordinary disposition account has disallowed the section 245A 
deduction or caused a subpart F inclusion due to prior dividends of an 
SFC. However, this amount also includes certain other prior dividends 
of an SFC to generally ensure that the extraordinary disposition 
account is reduced to the extent a dividend out of extraordinary 
disposition E&P does not give rise to a section 245A deduction under 
other provisions (such as under section 245A(e) for hybrid dividends). 
See Sec.  1.245A-5(c)(3)(i)(D)(1).
    A comment stated that the definition of a prior extraordinary 
disposition amount did not appropriately take into account section 956 
and as a result, Sec.  1.956-1(a)(2) can in effect deny the section 
245A deduction with respect to the same extraordinary disposition E&P 
more than once. Section 1.956-1(a)(2) reduces a United States 
shareholder's section 956 amount to the extent that the United States 
shareholder's tentative amount determined under section 956(a) with 
respect to a CFC for a taxable year would be eligible for a section 
245A deduction if the United States shareholder received that tentative 
amount as a distribution from the CFC. The comment recommended reducing 
the extraordinary disposition account by 200 percent of the amount 
included in the income of a section 245A shareholder under section 
951(a)(1)(B) by reason of the application of Sec.  1.245A-5T(b) (and 
proposed Sec.  1.245A-5(b)) to the hypothetical distribution under 
Sec.  1.956-1(a)(2).
    The Treasury Department and the IRS generally agree with this 
comment. As a result, the final regulations modify the definition of a 
prior extraordinary disposition amount to take into account certain 
income inclusions under section 956. See Sec.  1.245A-
5(c)(3)(i)(D)(1)(iv). In addition, the final regulations add a new type 
of prior extraordinary disposition amount for prior dividends that 
would have been subject to Sec.  1.245A-5(c) but failed to qualify for 
the section 245A deduction because they did not satisfy the requirement 
that the recipient domestic corporation be a United States shareholder 
with respect to the distributing SFC. See Sec.  1.245A-5(c)(3)(i)(C). 
Finally, the final regulations clarify that an extraordinary 
disposition account is maintained in the same currency as the 
extraordinary disposition E&P. See Sec.  1.245A-5(c)(3).

C. Successor Rules for Extraordinary Disposition Accounts

1. In General
    Under the 2019 regulations, Sec.  1.245A-5T(c)(4) (and proposed 
Sec.  1.245A-5(c)(4)) provides rules for the transfer of an 
extraordinary disposition account. Generally, when certain transactions 
occur (for example, a transfer of stock of an SFC for which a section 
245A shareholder has an extraordinary disposition account), the 2019 
regulations provide that the balance of the extraordinary disposition 
account is preserved by either transferring the account balance to 
another section 245A shareholder or requiring the section 245A 
shareholder to maintain the account with respect to a different SFC 
(``successor rules''). In general, the purpose of the successor rules 
is to ensure that a section 245A shareholder succeeds to (or is 
attributed) an extraordinary disposition account upon certain 
transactions to the extent, after the transaction, the section 245A 
shareholder would likely be able to access the E&P as to which the 
extraordinary disposition account relates. Absent these rules, an 
extraordinary disposition account could be separated from the E&P to 
which it relates, which could give rise to inappropriate results.
    A comment recommended that extraordinary disposition accounts 
should terminate after a certain period. The Treasury Department and 
the IRS have concluded that it would be inappropriate to terminate the 
accounts when a dividend out of extraordinary disposition E&P can still 
give rise to a section 245A deduction (or the application of the 
section 954(c)(6) exception). Accordingly, this comment is not adopted. 
However, the proposed coordination rules, which are published in the 
Proposed Rules section of this issue of the Federal Register, alleviate 
the concerns raised by this comment by generally eliminating a section 
245A shareholder's extraordinary disposition account in certain cases 
as the property that gave rise to the account is amortized or 
depreciated and those deductions reduce E&P otherwise potentially 
eligible for the section 245A deduction. Moreover, as discussed in Part 
III.C.5 of this Summary of Comments and Explanation of Revisions, the 
final regulations also alleviate these concerns by generally 
eliminating the extraordinary disposition account if no person is a 
section 245A shareholder of the SFC after certain transfers of stock of 
the SFC.
2. Nonrecognition Transactions
    The successor rules under the 2019 regulations address certain 
nonrecognition transactions in order to carry out the purposes of the 
rules. Specifically, the 2019 regulations provide that upon certain 
distributions of stock under section 355 made pursuant to a 
reorganization described in section 368(a)(1)(D) a section 245A 
shareholder's extraordinary disposition account with respect to the 
distributing SFC is allocated between the distributing SFC and the 
controlled SFC. See proposed Sec.  1.245A-5(c)(4)(iii). Other than this 
rule, the 2019 regulations do not provide any other special rules for 
transfers of extraordinary disposition accounts in nonrecognition 
transactions where a section 245A shareholder transfers stock of an 
SFC. In addition, proposed Sec.  1.245A-5(c)(4)(i) provides that a 
transaction described in Sec.  1.1248-8(a)(1) in which a section 245A 
shareholder transfers a share of stock of an SFC does not result in any 
transfer of the section 245A shareholder's extraordinary disposition 
account. This result arises because after the transfer the section 245A 
shareholder could access the E&P as to which the extraordinary

[[Page 53074]]

disposition account relates, by reason of section 1248 and Sec.  
1.1248-8.
    A comment recommended that the rule addressing extraordinary 
disposition account transfers in reorganizations pursuant to sections 
368(a)(1)(D) and 355 be extended to stand-alone section 355 
distributions in which E&P of the distributing SFC are allocated to the 
controlled SFC. The Treasury Department and the IRS agree with this 
comment; as the comment noted, certain stand-alone section 355 
distributions could otherwise potentially separate extraordinary 
disposition accounts from related extraordinary disposition E&P, which 
could give rise to inappropriate results. Thus, the final regulations 
provide that a section 245A shareholder's extraordinary disposition 
account with respect to a distributing SFC is allocated between the 
distributing SFC and the controlled SFC in any section 355 distribution 
in which E&P of the distributing SFC are decreased and the E&P of the 
controlled SFC are increased by reason of Sec.  1.312-10. See Sec.  
1.245A-5(c)(4)(iii).
    To address similar issues, the final regulations provide additional 
rules regarding the transfer of extraordinary disposition accounts in 
nonrecognition transactions. The final regulations provide that in a 
transaction described in Sec.  1.1248-8(a)(1) where stock of an SFC is 
transferred to a foreign acquiring corporation in exchange for stock of 
a foreign corporation, any extraordinary disposition account with 
respect to the SFC remains with the pre-transaction section 245A 
shareholder. See Sec.  1.245A-5(c)(4)(vi)(A). An exception to this rule 
applies in the case of a transaction described in Sec.  1.1248(f)-
1(b)(2) or (3); in this type of transaction, the extraordinary 
disposition account is transferred in the manner provided in Sec.  
1.245A-5(c)(4)(i), with certain adjustments, in order generally to 
ensure that a section 245A shareholder succeeds to an extraordinary 
disposition account to the extent that, after the transaction, the 
section 245A shareholder would likely be able to access the E&P as to 
which the extraordinary disposition account relates. See Sec.  1.245A-
5(c)(4)(vi)(B). Under the final regulations, other transactions 
described in Sec.  1.1248-8(a)(1) cause the extraordinary disposition 
account to be transferred to the extent and in the manner provided 
under the general rule of Sec.  1.245A-5(c)(4)(i).
    Similarly, the final regulations also provide a rule addressing 
transactions in which an SFC acquires the assets of another SFC in a 
triangular asset reorganization and the section 245A shareholder of the 
target SFC receives stock of a domestic corporation that controls the 
acquiring SFC. In these triangular reorganizations, the domestic 
corporation whose stock was issued in the triangular reorganization 
succeeds to the extraordinary disposition account of the section 245A 
shareholder with respect to the target SFC. See Sec.  1.245A-
5(c)(4)(ii)(B).
3. Related Domestic Corporations
    Although the 2019 regulations provide anti-abuse rules, the 2019 
regulations do not provide explicit rules addressing issuances of stock 
of an SFC. For example, if a section 245A shareholder owns all the 
stock of an SFC and the SFC issues new stock to another section 245A 
shareholder, the second section 245A shareholder does not inherit any 
portion of the first section 245A shareholder's extraordinary 
disposition account with respect to the SFC under the successor rules 
of the 2019 regulations. However, in certain cases issuances raise the 
same policy concerns as those addressed by the successor rules and, 
absent rules to address, could facilitate the avoidance of the 
extraordinary disposition rules by separating an extraordinary 
disposition account from the E&P to which it relates.
    Consider, for instance, a case in which FP, a foreign corporation, 
owns all the stock of US1 and US2, each of which is a domestic 
corporation, and US1 owns all the stock of CFC1, an SFC whose E&P is 
maintained in U.S. dollars and as to which US1 has an extraordinary 
disposition account of $100 x. In such a case, if US2 contributes 
property to CFC1 in exchange for stock representing 99 percent of the 
stock of CFC1 and thereafter CFC1 pays $100 x of dividends pro rata to 
US1 and US2, only the $1 x dividend received by US1 would be an 
extraordinary disposition amount (US2's $99 x dividend would not, as 
US2 did not inherit any of US1's extraordinary disposition account), 
even though, as a factual matter, the entire $100 x of dividends may 
represent E&P generated by CFC1 in an extraordinary disposition. 
Moreover, for example, if US1 were to subsequently transfer all of its 
stock of CFC1 to a U.S. individual, the remaining balance of US1's 
extraordinary disposition account with respect to CFC1 may never give 
rise to an extraordinary disposition amount.
    Rather than addressing such transactions solely through the anti-
abuse rules in Sec.  1.245A-5, the final regulations provide a rule 
that treats related domestic corporations as a single domestic 
corporation for purposes of determining the extent to which a dividend 
is an extraordinary disposition amount or a tiered extraordinary 
disposition amount. See Sec.  1.245A-5(g)(7); see also Sec.  1.245A-
5(i)(19) (defining related based on a relationship described in section 
267(b) or 707(b)). Thus, in the example above, the $100 x of dividends 
paid by CFC1 are extraordinary disposition amounts with respect to both 
US1 and US2 as a result of US1's extraordinary disposition account. The 
final regulations also treat related domestic corporations as a single 
domestic corporation for purposes of reducing a section 245A 
shareholder's extraordinary disposition account by prior extraordinary 
disposition amounts. See id.
4. Effect of Section 338(g) Election
    The 2019 regulations do not address whether a section 245A 
shareholder of the new target succeeds to an extraordinary disposition 
account with respect to the old target when a section 338(g) election 
is made with respect to an SFC target. Because, in general, the new 
target does not inherit any of the E&P of the old target--and, as a 
result, no distributions by the new target could represent a 
distribution of E&P of the old target generated in an extraordinary 
disposition--the final regulations clarify that, in connection with an 
election under section 338(g), a section 245A shareholder of the new 
target generally does not succeed to an extraordinary disposition 
account with respect to the old target. See Sec.  1.245A-5(c)(4)(v)(A). 
Special rules are provided for transactions in which a section 338(g) 
election is made and not all of the stock of the SFC target is subject 
to the qualified stock purchase. See Sec.  1.245A-5(c)(4)(v)(B).
5. Elimination of Remaining Account Balance After Certain Stock 
Transfers
    In general, the 2019 regulations do not provide rules addressing 
the treatment of the remaining balance of a section 245A shareholder's 
extraordinary disposition account with respect to an SFC when the 
section 245A shareholder directly or indirectly transfers all of its 
stock of the SFC and, following the transfer, no person is a section 
245A shareholder of the SFC. However, under the 2019 regulations, if a 
section 245A shareholder ceases to be a section 245A shareholder with 
respect to a lower-tier CFC as a result of a direct or indirect 
transfer of stock of the lower-tier CFC by an upper-tier CFC, a special 
rule preserves the section 245A shareholder's remaining balance of its 
extraordinary disposition account with

[[Page 53075]]

respect to the lower-tier CFC. See proposed Sec.  1.245A-5(c)(4)(iv). 
Under this rule, the section 245A shareholder's extraordinary 
disposition account is preserved by increasing the account with respect 
to the upper-tier CFC by the remaining balance. See proposed Sec.  
1.245A-5(c)(4)(iv).
    The Treasury Department and the IRS have determined that proposed 
Sec.  1.245A-5(c)(5)(iv) should be revised to address the treatment of 
the remaining balance of a section 245A shareholder's extraordinary 
disposition account with respect to an SFC when the section 245A 
shareholder directly or indirectly transfers all of its stock of an SFC 
(such section 245A shareholder, the ``transferor''). See Sec.  1.245A-
5(c)(4)(iv). In cases in which no related party with respect to the 
transferor is a section 245A shareholder of the SFC following the 
transfer, the transferor's remaining extraordinary disposition account 
balance is eliminated, to the extent not allocated or attributed to 
another extraordinary disposition account. See Sec.  1.245A-
5(c)(4)(iv)(A). In these cases, the remaining balance generally 
represents an individual's or a foreign (non-CFC) person's share of E&P 
of the SFC, such that, after the transfer, distributions of the E&P are 
unlikely to give rise to a dividend eligible for the section 245A 
deduction. Therefore, there is generally not a policy need to continue 
tracking such E&P.
    The elimination rule does not apply, however, if a section 245A 
shareholder that is a related party with respect the transferor 
continues to own stock of the SFC after the transfer; instead the 
related section 245A shareholder succeeds to the remaining account 
balance. See Sec.  1.245A-5(c)(4)(iv)(B). Moreover, transactions with a 
principal purpose of avoiding this limitation on the application of the 
elimination rule are disregarded. For example, if a U.S. individual 
acquires all of the stock of an SFC from a section 245A shareholder and 
subsequently, pursuant to a plan that included the acquisition, 
transfers all of the stock of the SFC to a domestic corporation that is 
a section 245A shareholder of the SFC, the transfer to the U.S. 
individual would be disregarded. See Sec.  1.245A-5(c)(4)(vii). The 
final regulations add a rule that a transfer of stock of an SFC 
otherwise subject to Sec.  1.245A-5(c)(4)(iv)(A) is deemed to have been 
undertaken with a principal purpose of avoiding the purposes described 
in this anti-abuse rule if stock of the SFC is transferred to a section 
245A shareholder within one year after the transaction that would be 
subject to Sec.  1.245A-5(c)(4)(vii). See id.

D. Tiered Extraordinary Disposition Amounts

    The 2019 regulations limit the application of the section 954(c)(6) 
exception with respect to certain dividends attributable to 
extraordinary disposition E&P from a lower-tier CFC to an upper-tier 
CFC. See proposed Sec.  1.245A-5(d). A comment noted that this 
limitation on the section 954(c)(6) exception gives rise to an 
incentive to avoid making a distribution (or otherwise generating a 
dividend to shareholders) to avoid subpart F income. Furthermore, the 
comment noted that, in certain cases, a dividend subject to this 
limitation on the section 954(c)(6) exception may nonetheless qualify 
for an exception under section 954(c)(3), permitting deferral with 
respect to distributed E&P. Accordingly, the comment recommended that 
the final regulations instead adopt a tracking approach, under which 
dividends from a lower-tier CFC attributable to extraordinary 
disposition E&P would be eligible for the section 954(c)(6) exception, 
and the extraordinary disposition account of an upper-tier CFC 
receiving a dividend attributable to extraordinary disposition E&P 
would be increased by the amount of the dividend attributable to 
extraordinary disposition E&P (while making corresponding downward 
adjustments to the extraordinary disposition account of the lower-tier 
CFC). In the alternative, the comment recommended that this approach 
apply solely with respect to lower-tier dividends paid before June 18, 
2019 (the date on which the 2019 regulations were published), to 
provide relief with respect to dividends from lower-tier CFCs that were 
expected to qualify for the section 954(c)(6) exception.
    Consistent with a statement in the preamble to the 2019 
regulations, the Treasury Department and the IRS have concluded that 
limiting the application of the section 954(c)(6) exception in this 
context is necessary to prevent the inappropriate deferral of tax and 
minimizes the administrative and compliance burdens associated with a 
rule that would adjust upper-tier and lower-tier CFCs' extraordinary 
disposition accounts. The limitation on the section 954(c)(6) exception 
achieves the appropriate balance between preventing deferral of U.S. 
tax with respect to extraordinary disposition E&P and avoiding 
incentives to defer distributions. Similar to the rules limiting the 
application of the section 245A deduction to distributions attributable 
to extraordinary disposition E&P under Sec.  1.245A-5(b), the incentive 
to defer distributions is mitigated by the fact that the limitation on 
the section 954(c)(6) exception generally applies only after other E&P 
(including E&P accumulated after the disqualified period and previously 
taxed E&P) are distributed.
    Furthermore, failing to limit the application of the section 
954(c)(6) exception would allow taxpayers to use extraordinary 
disposition E&P to defer U.S. tax on subsequent taxable transactions. 
For example, assume that USP owns 100 percent of the stock of CFC1, 
CFC1 owns 100 percent of the stock of CFC2, and CFC2's E&P is 
maintained in the U.S. dollar. USP has a $100 x extraordinary 
disposition account with respect to CFC2, which has no E&P other than 
$100 x of extraordinary disposition E&P. Finally, assume that CFC1 has 
$100 x of built-in gain with respect to its stock in CFC2. In the 
absence of the extraordinary disposition E&P, a sale of the stock of 
CFC2 by CFC1 generally would result in $100 x of capital gain that is 
subpart F income taken into account by USP in the year of sale pursuant 
to sections 954(c) and 951(a). With the extraordinary disposition E&P, 
however, CFC2 could (in the absence of any rule denying the section 
954(c)(6) exception) distribute a $100 x dividend to CFC1 before the 
sale, and the dividend could be eligible for the section 954(c)(6) 
exception while eliminating the built-in gain in the stock of CFC2. If 
the rules only transferred the extraordinary disposition account from 
CFC2 to CFC1, the section 245A shareholder could effectively 
indefinitely defer recognizing the built-in gain in the stock of CFC2 
until it causes CFC1 to pay a $100 x dividend. While similar benefits 
may be obtained in the case of same-country dividends under section 
954(c)(3), the Treasury Department and the IRS have determined that 
such transactions are relatively infrequent.
    For these reasons, the final regulations do not adopt this 
recommendation and, accordingly, continue to limit the application of 
the section 954(c)(6) exception with respect to certain dividends 
attributable to extraordinary disposition E&P from a lower-tier CFC to 
an upper-tier CFC. The final regulations also clarify that transactions 
structured to use section 954(c)(3) to avoid the purposes of the final 
regulations are subject to adjustments under the anti-abuse rule in 
Sec.  1.245A-5(h). See Sec.  1.245A-5(j)(10) for an example of the 
application of the anti-abuse rule to a transaction utilizing section 
954(c)(3) to avoid the purposes of Sec.  1.245A-5.

[[Page 53076]]

IV. Comments and Revisions Related to Extraordinary Reductions

A. Bilateral Election To Close Taxable Year

    If an extraordinary reduction occurs with respect to a CFC and 
there is an extraordinary reduction amount or tiered extraordinary 
reduction amount greater than zero, the controlling section 245A 
shareholder (or shareholders) of a CFC can elect to close the CFC's 
taxable year for all purposes of the Code and, as a result, be 
considered to not have undertaken an extraordinary reduction. See Sec.  
1.245A-5(e)(3)(i). As a condition for making the election, however, the 
controlling section 245A shareholders must enter into a written, 
binding agreement concerning the election with certain U.S. tax 
resident shareholders of the CFC. See proposed Sec.  1.245A-
5(e)(3)(i)(C). Because the election can only be made if there is an 
extraordinary reduction amount or tiered extraordinary reduction amount 
greater than zero, the election cannot be made if the CFC only has a 
tested loss for the taxable year.
    A comment stated that it was unclear who is required to enter into 
this agreement and that only the controlling section 245A shareholders 
at the time of the extraordinary reduction should be required to make 
such an election. The final regulations clarify that each controlling 
section 245A shareholder participating in the extraordinary reduction 
with an extraordinary reduction amount greater than zero, and each U.S. 
tax resident that is a United States shareholder of the CFC at the end 
of the day of the extraordinary reduction (thus including a person that 
becomes a United States shareholder of the CFC by reason of the 
extraordinary reduction), must enter into a binding agreement to close 
the taxable year of the CFC. This rule is reflected in the analysis in 
an example in proposed Sec.  1.245A-5(j)(4)(iii), which is retained in 
the final regulations. This approach is not modified as requested by 
the comment because closing the taxable year of a CFC affects the tax 
consequences of both the transferors and transferees in an 
extraordinary reduction, and inconsistent treatment could give rise to 
inappropriate results (for example, both a transferor and transferee 
could claim to have income inclusions under section 951(a) or 951A(a) 
and claim deemed-paid foreign credits under section 960(a) or (d), with 
respect to the same income of the CFC).
    The final regulations also allow a U.S. tax resident that owns its 
interest in the CFC through a partnership to delegate the authority to 
enter into the binding agreement on its behalf provided that the 
delegation is pursuant to a written partnership agreement (within the 
meaning of Sec.  1.704-1(b)(2)(ii)(h)). See Sec.  1.245A-
5(e)(3)(i)(C)(2).
    Finally, changes are made to clarify the scope of the reference to 
Sec.  1.964-1(c) with respect to the election to close the taxable year 
for extraordinary reductions and to the consistency requirement of 
Sec.  1.245A-5(e)(3)(i)(E).

B. Timing of Election To Close Taxable Year

    Comments stated that it may not be clear in certain instances 
whether an election to close the taxable year is beneficial. 
Accordingly, the comments recommended that the final regulations 
provide additional flexibility as to when this election is required to 
be made. The final regulations do not adopt this recommendation. The 
election is timely made when filed with the controlling section 245A 
shareholder's timely filed (including extensions) original tax return 
for the taxable year in which the extraordinary reduction occurred; 
thus, taxpayers have considerable time to decide whether to make the 
election. Furthermore, permitting later elections would potentially 
result in amended tax returns and considerable administrative 
complexity.

C. Allocation of Subpart F Income and Tested Income Between Taxable 
Periods

    If an election is made under Sec.  1.245A-5(e)(3)(i) to close a 
CFC's taxable year for all purposes of the Code, then all United States 
shareholders that own (within the meaning of section 958(a)) stock of 
the CFC on such date compute and take into account their pro rata share 
of subpart F income or tested income earned by the CFC as of that date.
    A comment recommended modifying the ``closing-of-the-books'' 
approach under Sec.  1.245A-5T(e)(3)(i) (and proposed Sec.  1.245A-
5(e)(3)(i)) because of administrative complexity for the CFC, and 
because the closing-of-the-books method may provide inconsistent 
results. The comment also suggested that this approach would provide 
tax planning opportunities and traps for the unwary because an 
extraordinary item of income (for example, gain from the disposition of 
a capital asset) might arise pre- or post-sale, but the item would only 
be allocated to the period in which it arises when an election under 
Sec.  1.245A-5(e)(3)(i) is in place. The comment instead recommended 
adopting principles similar to those in Sec.  1.1248-3 to allocate 
subpart F income and tested income of a CFC between the pre- and post-
sale portions of the year based on a daily proration. The comment 
acknowledged, however, that this approach could delay restructuring or 
commercial decisions and suggested allowing a taxpayer to elect to 
allocate extraordinary items to the period in which they arise, similar 
to an approach under Sec.  1.1502-76(b).
    The final regulations do not adopt this comment for several 
reasons. First, the election under Sec.  1.245A-5(e)(3)(i) is provided 
to allow controlling section 245A shareholders and U.S. tax residents 
to agree to close the CFC's taxable year and take into account their 
pro rata share of subpart F or tested income earned by that date in 
lieu of being subject to the extraordinary reduction rules. The 
Treasury Department and the IRS have determined that closing the 
taxable year provides a more precise method for determining the amount 
of subpart F income and tested income attributable to each owner. 
Second, the rule provides taxpayers with flexibility, given that 
controlling section 245A shareholders may choose not to make the 
election (or U.S. tax residents may choose not to agree to make the 
election) when it would not provide the preferred outcome. Finally, the 
comment's recommended approaches present administrative complexities 
and may delay commercial transactions.

D. Reporting on U.S. tax Residents' pro Rata Shares

    The 2019 regulations provide that, for purposes of determining a 
controlling section 245A shareholder's extraordinary reduction amount, 
the shareholder's pre-reduction pro rata share of subpart F income or 
tested income is reduced by certain amounts taken into account by 
transferee shareholders. See Sec.  1.245A-5(e)(2)(ii)(B). A comment 
indicated that it may be difficult for a controlling section 245A 
shareholder to determine a transferee's pro rata share of subpart F 
income or tested income and recommended that the final regulations 
provide that a controlling section 245A shareholder may make this 
determination by relying on information provided by a transferee 
pursuant to IRS forms and instructions.
    While the Treasury Department and the IRS may consider whether 
information reporting would be appropriate in this context in future 
guidance, the final regulations do not adopt this recommendation. 
Parties to an extraordinary reduction transaction can negotiate to 
share the needed information, however. Furthermore, in some instances, 
parties to an extraordinary reduction transaction are

[[Page 53077]]

related, and therefore readily have access to such information.

E. Nonrecognition Transactions

    The 2019 regulations and the final regulations do not contain 
special rules for extraordinary reductions occurring as a result of 
nonrecognition transactions such as reorganizations or transfers 
subject to section 351(a) or 721(a). The Treasury Department and the 
IRS continue to study these transactions and the potential to use them 
to avoid the purposes of the extraordinary reduction rules. For 
example, the Treasury Department and the IRS are concerned that 
taxpayers may avail themselves of partnerships to attempt to shift the 
tax liability, in whole or in part, with respect to E&P of a CFC 
attributable to subpart F income or tested income to a related foreign 
partner that is not owned by a United States shareholder. The Treasury 
Department and the IRS request comments on this matter and other cases 
in which nonrecognition transactions could be used to avoid the 
purposes of the extraordinary reduction rules.

V. Anti-Abuse Rule

    The 2019 regulations include a general anti-abuse rule that 
provides that the Commissioner may make appropriate adjustments to any 
amounts determined under proposed Sec.  1.245A-5 if a transaction is 
entered into with a principal purpose of avoiding the purposes of such 
section. See proposed Sec.  1.245A-5(h).
    One comment appreciated the desire to use a principles-based 
backstop to mechanical rules, and recognized the legitimate concerns of 
the government, but nevertheless asserted that the anti-abuse rule is 
vague and overly broad. The comment stated that although the policies 
underlying the extraordinary disposition rules and the extraordinary 
reduction rules are related, the origins of the transactions giving 
rise to the concerns and the focus of the two rules differ. 
Accordingly, the comment recommended that the final regulations clarify 
the purposes of Sec.  1.245A-5 and include examples regarding the 
applicability of the anti-abuse rule and the scope of the adjustments 
that may be made pursuant to the rule.
    In response to this comment, the final regulations include examples 
illustrating the application of the anti-abuse rule. See Sec.  1.245A-
5(h) and (j)(8)-(10). In addition, the Treasury Department and the IRS 
have determined that the anti-abuse rule should be self-executing, 
rather than applicable under the discretion of the Commissioner. 
Accordingly, the anti-abuse rule is modified to this effect.

VI. Applicability Date

    The proposed regulations incorporated the applicability date of the 
temporary regulations by cross-reference. The temporary regulations 
apply to distributions made after December 31, 2017, consistent with 
the applicability date of section 245A. The temporary regulations were 
issued under sections 7805(b)(2), which permits the Treasury Department 
and the IRS to issue retroactive regulations within 18 months of the 
enactment of the statutory provision to which the regulations relate.
    The final regulations apply to tax periods ending on or after June 
14, 2019, the date the proposed regulations were filed with the Federal 
Register. See section 7805(b)(1)(B). This formulation of the 
applicability date is consistent with numerous other regulations. See, 
e.g., Sec. Sec.  1.59A-10; 1.960-7. It differs from the one 
incorporated in the proposed regulations because the final regulations 
are not being issued within 18 months of the enactment of the 
provisions to which the regulations relate.
    In a case where both the temporary regulations and the final 
regulations could apply, only the final regulations apply. See Sec.  
1.245A-5(k)(1). For example, if a CFC has a tax period ending on 
November 30, 2019, and it made a distribution during that period on 
December 1, 2018, a portion of which would be an ineligible amount, the 
final regulations apply to the distribution. Distributions made after 
December 31, 2017, and before the final regulations apply, continue to 
be subject to the rules set forth in the temporary regulations. See 
T.D. 9865. However, a taxpayer may choose to apply the final 
regulations to distributions made during this period, provided that the 
taxpayer and all related parties consistently apply the final 
regulations in their entirety. See Sec.  1.245A-5(k)(2).

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13771, 13563, and 12866 direct agencies to assess 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. The Executive Order 13771 designation for this regulation 
is regulatory.
    The Office of Information and Regulatory Affairs (OIRA) has 
designated these final regulations as subject to review under the 
Memorandum of Agreement between the Treasury Department and the Office 
of Management and Budget (OMB) regarding review of tax regulations 
(April 11, 2018). OIRA has determined that the final rulemaking is 
significant and subject to review under Executive Order 12866 and 
section 1(b) of the Memorandum of Agreement. Accordingly, the final 
regulations have been reviewed by OMB.

A. Background

    The Tax Cuts and Jobs Act (the ``Act'') transitioned the United 
States from a primarily deferral-based international tax system 
(subject to the immediate taxation of generally mobile or passive 
income under the subpart F regime) to a participation exemption system 
coupled with immediate taxation of certain offshore earnings (in some 
cases, at a reduced rate of tax).\2\ This transition was effected 
through several interlocking provisions of the Code--sections 245A, 
951A, and 965. The three provisions have different effective dates, and 
thus it was possible, absent these regulations, for certain 
transactions to gain the benefits of section 245A without the potential 
imposition of U.S. tax as a result of the application of sections 951A 
and 965. The new system operates alongside the pre-Act subpart F regime 
that taxes certain offshore earnings using a longstanding rule for 
attributing pro rata shares of a foreign corporation's earnings to its 
U.S. shareholders.
---------------------------------------------------------------------------

    \2\ A deferral-based system is a system in which taxable 
foreign-source income generally is taxed only when it is repatriated 
to the United States. A participation exemption system is one in 
which foreign-source income is generally not taxed by the resident 
country of the shareholder (in this case, the United States). As 
explained further below, in the United States the participation 
exemption system is coupled with immediate taxation of certain types 
of earnings to reduce incentives for erosion of the U.S. tax base. 
These taxed foreign earnings can then be repatriated to the United 
States without further tax.
---------------------------------------------------------------------------

1. Background: Dividends Received Deduction (Section 245A)
    The Act included section 245A, which provides a deduction for U.S. 
taxpayers for dividends received out of certain offshore earnings (the 
``section 245A deduction''). Prior to the Act, dividends paid by 
foreign corporations to their U.S. shareholders were

[[Page 53078]]

generally taxable. Section 245A(a) reverses this treatment for most 
shareholders that are U.S. corporations (``corporate U.S. 
shareholders'') by providing, subject to certain conditions and 
exceptions, a deduction for any dividend received by a corporate U.S. 
shareholder from a specified 10-percent owned foreign corporation 
(``SFC'').\3\ A 100-percent deduction for dividends essentially means 
that the dividend income is not taxed in the United States at the 
corporate level.
---------------------------------------------------------------------------

    \3\ A specified 10-percent owned foreign corporation is any 
foreign corporation, other than a passive foreign investment 
corporation with respect to a shareholder that is not also a CFC, 
with at least one corporate U.S. shareholder.
---------------------------------------------------------------------------

    Income subject to taxation under the subpart F and global 
intangible low-taxed income (``GILTI'') regimes generally gives rise to 
previously taxed earnings and profits (``PTEP''). Distributions of 
those PTEP are not treated as dividends and thus do not qualify for the 
section 245A deduction, which only applies to dividends made by SFCs 
after December 31, 2017, provided certain other requirements are met.
2. Background: Section 965--Transition Tax
    Section 965 imposed a new tax (the ``transition tax'') on the post-
1986 earnings and profits of certain foreign corporations that had gone 
untaxed under the pre-Act international tax regime (primarily, the 
subpart F regime). Earning subject to tax under section 965 gave rise 
to PTEP, such that future distributions of these earnings are not 
treated as dividends and thus would not be eligible for a section 245A 
deduction. By subjecting post-1986 earnings and profits to a transition 
tax, section 965 generally ensured that post-1986 earnings must be 
tested under the new international tax regime introduced by the Act in 
order to qualify for the section 245A deduction (that is, the earnings 
must not be taxed under subpart F or GILTI). Absent section 965, such 
untaxed earnings and profits would have been eligible for tax-free 
distribution under section 245A after December 31, 2017.
    The transition tax generally ensures that only post-1986 earnings 
and profits subject to the new international tax system can qualify for 
the section 245A deduction.\4\ This is clearly the case for calendar 
year CFCs, because earnings and profits that are earned after December 
31, 2017, are subject to the subpart F and GILTI regimes. This is not 
necessarily the case, however, for fiscal year CFCs (i.e., CFCs with a 
taxable year that starts after January 1). For these fiscal year CFCs, 
earnings and profits that are earned between January 1, 2018, and the 
start of the CFC's first fiscal year beginning on or after January 1, 
2018, are not subject to taxation under the GILTI regime. But for these 
regulations, those earnings could potentially be distributed tax-free 
at any time after December 31, 2017 under section 245A. Thus, certain 
earnings may escape U.S. taxation absent these regulations.
---------------------------------------------------------------------------

    \4\ The legislative history of the Act provides that ``[t]he 
[transition tax applies in] the last taxable year of a deferred 
foreign income corporation that begins before January 1, 2018, which 
is that foreign corporation's last taxable year before the 
transition to the new corporate tax regime elsewhere in the bill 
goes into effect.'' H. Rep. 115-466 at 613.
---------------------------------------------------------------------------

3. Background: Section 951A--GILTI Regime
    While the Act preserved the existing subpart F regime, legislative 
history shows congressional concern that the participation exemption 
system could heighten the incentive to shift profits to low-taxed 
foreign jurisdictions or tax havens after the Act. See Senate Committee 
on the Budget, 115th Cong., Reconciliation Recommendations Pursuant to 
H. Con. Res. 71, at 365 (the ``Senate Explanation''). For example, 
Congress expressed concern that a domestic corporation might allocate 
income susceptible to base erosion to certain foreign affiliates 
``where the income could potentially be distributed back to the 
[domestic] corporation with no U.S. tax imposed.'' See id. As a result 
of these concerns, the Act added another, complementary regime to 
address the additional base erosion incentives resulting from the 
participation exemption. This regime taxes a U.S. shareholder on its 
global intangible low-taxed income, or GILTI, with respect to its CFCs 
at a reduced rate (by reason of a section 250 deduction) under new 
section 951A.
    Section 951A(a) generally subjects a U.S. shareholder to current 
taxation each year on its GILTI with respect to its CFCs. The GILTI 
regime applies in the first taxable year of a CFC beginning after 
December 31, 2017. Thus, in the case of calendar year CFCs, the 
application of the GILTI regime generally must be taken into account 
with respect to all new earnings and profits of a CFC earned starting 
immediately after the final date for measuring earnings and profits 
subject to section 965. On the other hand, the tested income of a 
fiscal year CFC is not subject to the GILTI regime until potentially as 
late as taxable years beginning on December 1, 2018.
    As is the case with respect to the subpart F regime, certain CFC 
income is taxed under the GILTI regime in section 951A regardless of 
whether the associated earnings and profits are distributed before the 
end of the CFC's year, thus converting such earnings into PTEP and 
turning distributions by the CFC into PTEP distributions that do not 
constitute dividends eligible for the section 245A deduction. See 
Section 959(c), (d).

B. Need for the Final Regulations

    Sections 245A, 965, and 951A generally act to tax foreign source 
income consistently across taxpayers and sources so long as a U.S. 
shareholder owns the same amount of stock of a calendar year CFC 
throughout the CFC's entire taxable year. Deviations from that 
condition, however, potentially allow taxpayers to avoid tax by 
claiming a section 245A deduction in situations where otherwise 
identical income would be subject to U.S. tax. For a description of 
these situations, see Part II of the Summary of Comments and 
Explanation of Revisions. This circumstance is inconsistent with the 
purposes of the international tax regime enacted by Congress. These 
final regulations are needed to limit the section 245A deduction to its 
intended scope and, thereby, prevent the provision from converting 
income that should be subject to U.S. tax into non-taxable dividends. 
In addition, these final regulations respond to comments received in 
relation to the proposed and temporary regulations.

C. Overview of the Final Regulations

    On June 18, 2019, the Treasury Department and the IRS published 
temporary and proposed regulations that limit the section 245A 
deduction with respect to a dividend received by a U.S. corporation 
from certain SFCs so that the deduction is not available for the 
earnings and profits attributable to base erosion-type income. The 
temporary and proposed regulations limit the deduction to the portion 
of the dividend that exceeds the ``ineligible amount'' of the dividend.
    Under the regulations, the term ``ineligible amount'' generally 
means the amount of the dividend that comprises (i) certain earnings 
and profits of the CFC that were accrued prior to the application of 
the GILTI regime in section 951A but after December 31, 2017, the last 
measurement date under section 965 (``extraordinary disposition 
amounts'' created in ``extraordinary dispositions''), and (ii) current 
year earnings and profits of the CFC that are attributable to the CFC's 
subpart F income or tested income under the GILTI regime and that would 
have given rise to income inclusions under the

[[Page 53079]]

subpart F or GILTI regimes, but for a certain change in CFC ownership 
(``extraordinary reduction amounts'' created in ``extraordinary 
reductions''). Absent the temporary and proposed regulations, the 
section 245A deduction could apply with respect to a dividend composed 
of such earnings, and, as a result, such earnings and profits would 
inappropriately escape U.S. tax.
    A public hearing was held on November 22, 2019. The Treasury 
Department and the IRS also received written comments with respect to 
the temporary and proposed regulations. Written and oral comments were 
carefully considered in developing the final regulations.
    In general, the final regulations retain the approach and structure 
of the temporary and proposed regulations. However, in response to 
comments, the final regulations make certain revisions to the rules in 
the temporary and proposed regulations, some of which are explained in 
part I.D.3 of these Special Analyses below.

D. Economic Analysis of the Final Regulations

1. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the final regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these final regulations.
2. Summary of Economic Effects Relative to No-Action Baseline
    To assess the economic effects of these regulations, the Treasury 
Department and the IRS considered economic effects from limiting the 
section 245A deduction for (i) extraordinary disposition amounts and 
(ii) extraordinary reduction amounts.
    (i) Because the disallowance of the section 245A deduction for 
extraordinary disposition amounts generally applies only to earnings 
and profits accrued prior to the publication of the final regulations, 
economic activity will generally not be affected by the regulations. 
Thus, these provisions will largely not give rise to material economic 
effects. The Treasury Department and the IRS have, however, identified 
certain circumstances under which the regulations may affect business 
activity relative to the no-action baseline, which are described below. 
It is projected that the economic effects of the provisions in these 
circumstances will be minor.
    (ii) Extraordinary reductions stem from certain transfers of 
ownership of CFC stock.\5\ The final regulations may reduce the number 
of such ownership transfers relative to the no-action baseline. To the 
extent that these particular extraordinary reductions would have been 
undertaken under the no-action baseline and will not be undertaken 
under the final regulations, the regulations may have associated 
economic effects.
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    \5\ Under the Code, and absent these final regulations, a U.S. 
corporation that transfers stock in its CFC to a different U.S. 
corporation generally could avoid tax with respect to all of the 
subpart F and tested income of the CFC for that year (this type of 
transaction is generally an extraordinary reduction).
---------------------------------------------------------------------------

    With respect to extraordinary reductions between unrelated parties, 
there may be economic losses from efficient transactions that no longer 
take place as a result of the final regulations. However, this effect 
should be minor because taxpayers can elect to close the taxable year 
of the corporation being transferred and, as a result, generally suffer 
no additional tax cost from extraordinary reductions compared to not 
undertaking the transaction.
    The Treasury Department and the IRS project that under the no-
action baseline, the majority of extraordinary reductions between 
related parties would be undertaken for tax avoidance purposes rather 
than for market-driven reasons. Thus, there would be an economic gain 
from the reduction in these transfers under the final regulations. The 
Treasury Department and the IRS project, however, that this gain will 
be minor because these transfers would be between related parties and 
should result in only negligible losses in economic performance due to 
inefficient changes in management, risk-bearing, or other economic 
activity; thus, there should be little gain from reducing the frequency 
of such transfers. There may also be an economic loss from these 
transfers (and thus a source of gain from the final regulations 
relative to the no-action baseline) due to taxpayer resources expended 
to carry out such tax planning activities. It is projected that the 
election to close the taxable year will not meaningfully counter the 
decrease in these tax avoidance transactions because the election 
generally prevents tax from being avoided in an extraordinary 
reduction.
    The Treasury Department and the IRS recognize that some related-
party extraordinary reductions might take place under the no-action 
baseline for non-tax-driven reasons, such as for more efficient risk-
bearing or other benefits related to managerial control or financing. 
If these transfers are deterred by the final regulations, this 
deterrence represents an economic loss from the final regulations. The 
Treasury Department and the IRS project that the aggregate value of 
these foregone benefits will be minimal because these transactions 
could still be undertaken with no additional tax cost relative to not 
undertaking the transaction if the taxpayer makes an election to close 
the taxable year of the corporation being transferred. Thus, an overall 
economic benefit from a reduction in related-party extraordinary 
reductions under these regulations is projected relative to the no-
action baseline.
    The final regulations require taxpayers to compute, track, and 
report information relevant for determination of extraordinary 
dispositions and extraordinary reductions. The Treasury Department and 
the IRS project that these additional costs, relative to the no-action 
baseline, will be modest. In general, with respect to the initial year 
of an extraordinary disposition or any extraordinary reduction, 
taxpayers are already required to keep track of the required 
information for other purposes. For example, to the extent that a U.S. 
taxpayer sells stock in its CFC, earns income in its CFC, or receives a 
dividend from a CFC, the taxpayer would otherwise record the 
information needed to determine eligibility for the section 245A 
deduction. Additionally, once calculated, the costs to track amounts 
related to extraordinary dispositions in future years are expected to 
be minimal (the extraordinary reduction rules only apply on a year-by-
year basis and thus generally do not require any additional information 
to be tracked and reported across multiple years). Thus, the Treasury 
Department and the IRS expect the compliance burden from these final 
regulations to be modest relative to the no-action baseline.

[[Page 53080]]

    The Treasury Department and the IRS have not undertaken a 
quantitative estimate of the economic effects arising from any 
reduction in extraordinary reductions. Any such estimates would be 
highly uncertain because these tax provisions are new and because many 
of the transfers would be between related parties and possibly of short 
duration, both of which make estimating the number and economic value 
of such transfers difficult. The tax planning costs of effecting these 
transfers are also highly uncertain because these specific tax planning 
efforts are new. Because it is projected that the economic effects 
arising from the final regulations will be small, this question is not 
pursued further.
    While it is not currently feasible for the Treasury Department and 
the IRS to quantify these economic effects, part I.D.3 of these Special 
Analyses explains the rationale behind certain provisions of these 
final regulations and provides a qualitative assessment of the 
alternatives considered.
3. Economic Effects of Specific Provisions
i. Treatment of Extraordinary Disposition Accounts Following Transfers 
of SFC Stock
a. Background and Alternatives Considered
    An extraordinary disposition account is a way to measure the amount 
of earnings and profits of an SFC that cannot qualify for the section 
245A deduction when distributed because they were generated in an 
extraordinary disposition during the disqualified period. Guidance is 
needed for the treatment of these accounts when a section 245A 
shareholder of an SFC holding such an account transfers stock of the 
SFC to an entity that is not a section 245A shareholder.\6\ Such 
transfers may occur, for example, when the SFC is acquired by a foreign 
corporation that is not a controlled foreign corporation (a ``CFC'').
---------------------------------------------------------------------------

    \6\ A section 245A shareholder is any U.S. corporation that owns 
10 percent of the stock of an SFC and is thus generally eligible to 
claim a 245A deduction.
---------------------------------------------------------------------------

    Under the temporary and proposed regulations, a transfer of SFC 
stock to a different section 245A shareholder generally resulted in the 
transferee assuming the extraordinary disposition account attached to 
the transferred SFC stock. If there was no successor (i.e., the stock 
was sold to someone other than a section 245A shareholder), the 
temporary and proposed regulations contained a rule providing that the 
account generally was transferred to an upper-tier SFC of the 
transferred SFC.
    The final regulations remove the rule that transfers an 
extraordinary disposition account to an upper-tier SFC where there is 
no successor and instead provide that if an SFC is sold and there is no 
section 245A shareholder of the target SFC after the transaction, the 
extraordinary disposition account of the target SFC is generally 
eliminated.
    This modified rule recognizes that extraordinary disposition E&P in 
an extraordinary disposition account remaining at the time the SFC 
stock is sold to a third party were never used to obtain a tax benefit. 
If an SFC is sold to a non-section 245A shareholder when it still has 
an extraordinary disposition account, that means the seller did not 
need some or all of its extraordinary disposition E&P to support a 
dividend eligible for a section 245A deduction. Similarly, the acquiror 
cannot use the extraordinary disposition E&P to claim the section 245A 
deduction because it is not a section 245A shareholder. In these cases, 
the Treasury Department and the IRS determined that it would be more 
appropriate to eliminate the extraordinary disposition account with 
respect to the SFC, as the section 245A shareholder did not obtain a 
tax benefit from those earnings and the transferred account would cause 
tax to be imposed on a distribution of earnings and profits that were 
not generated in an extraordinary disposition and did not need 
extraordinary disposition E&P to qualify as tax-free dividends.
    The Treasury Department and the IRS considered alternatives that 
would (i) retain the rule in the temporary and proposed regulations; 
(ii) expand the rule to transfer the account to any other SFC owned by 
the section 245A shareholder rather than only a direct upper-tier SFC 
that owned the SFC whose stock was sold; or (iii) transfer the account 
to a non-section 245A shareholder that acquires the SFC, who would not 
be able to make distributions that are denied the section 245A 
deduction under Sec.  1.245A-5, but would be required to track the 
account in the event the SFC was ever transferred back to a section 
245A shareholder. The first two alternatives were rejected because they 
were viewed as being punitive to taxpayers who had an extraordinary 
disposition account but never benefited from extraordinary disposition 
E&P as they never used those earnings and profits to support a tax-free 
dividend. The third alternative was rejected due to the difficulty of 
administration and compliance in cases where an SFC is sold outside the 
U.S. tax system, as well as the fact that any potential tax avoidance 
appeared to be sufficiently protected by clarification of the anti-
abuse rule in Sec.  1.245A-5(c)(4)(vii).
    Although rules governing extraordinary dispositions generally will 
not have economic effects (because the underlying transactions occurred 
during the disqualified period), the Treasury Department and the IRS 
recognize that rules governing extraordinary disposition accounts upon 
the transfer of SFC stock may affect the decision to sell or transfer 
the SFC. Such decisions would then potentially have economic effects. 
The Treasury Department and the IRS do not have readily available data 
or models to provide further information about the economic 
consequences of this provision relative to the no-action baseline or 
regulatory alternatives.
b. Affected Taxpayers
    The taxpayers potentially affected by this provision are taxpayers 
who (i) have extraordinary disposition accounts with respect to an SFC 
and (ii) transfer stock of that SFC to an entity that is not a 245A 
shareholder.
    Taxpayers who potentially have extraordinary disposition accounts 
are direct or indirect U.S. shareholders of certain foreign 
corporations that are eligible for the section 245A deduction with 
respect to distributions from the foreign corporation, and the foreign 
corporation uses a fiscal year, as opposed to the calendar year, as its 
taxable year. The foreign corporation must have engaged in a sale of 
property to a related party (1) during the period between January 1, 
2018, and the end of the foreign corporation's last taxable year 
beginning before January 1, 2018, (2) outside the ordinary course of 
the foreign corporation's activities, and (3) generally, while the 
corporation was a CFC. Additionally, the property sold must be of a 
type that would give rise to tested income and the value of the 
property sold must exceed the lesser of $50 million or 5 percent of the 
total value of all of the property of the foreign corporation.
    The Treasury Department and the IRS have not estimated how many 
taxpayers are likely to be affected by these regulations because data 
on the taxpayers that may have engaged in these particular transactions 
are not readily available. Based on tabulations of the 2014 Statistics 
of Income Study file the Treasury Department and the IRS estimate that 
there are approximately 5,000 domestic corporations with at least one 
fiscal year CFC. However, the actual number of affected taxpayers is 
smaller than this because a domestic corporation will not

[[Page 53081]]

be affected unless its fiscal year CFC engages in a non-routine sale 
with a related party that is of sufficient magnitude that the final 
regulations apply. The Treasury Department and the IRS do not have 
readily available data on the number of taxpayers that transfer SFC 
stock to persons that are not section 245A shareholders.
ii. Election To Close the CFC's Taxable Year
a. Background and Alternatives Considered
    In the absence of further regulations, section 245A could 
facilitate the avoidance of the subpart F and GILTI regimes through 
extraordinary reductions by allowing a U.S. shareholder to transfer 
stock of a CFC to a shareholder who, based on various legal criteria, 
would not be taxed on the CFC's subpart F income or tested income. In 
these cases, current year subpart F income and GILTI could escape U.S. 
taxation altogether. This result would undermine the Act's system for 
taxing foreign earnings.
    In the temporary and proposed regulations, the Treasury Department 
and the IRS provided taxpayers with an election to close the taxable 
year of the CFC for all purposes of the Code on the date of an 
extraordinary reduction. Instead of denying the section 245A deduction, 
such an election would subject the CFC's earnings and profits for the 
taxable year up to the date of the extraordinary reduction to taxation 
under the subpart F or GILTI regimes in the seller's hands, while the 
remaining earnings and profits of the CFC for the year would be subject 
to taxation under the subpart F or GILTI regimes in the buyer's hands. 
The election allows taxpayers to choose the tax treatment that would 
have been imposed in the absence of the interactions among provisions 
that otherwise generates inappropriate tax results in the taxable year 
of an extraordinary reduction. Taxpayers who did not take this election 
with respect to an extraordinary reduction would be denied a section 
245A deduction for certain amounts distributed as part of the 
extraordinary reduction. The Treasury Department and the IRS have 
determined that providing this election would result in similar tax 
treatment of otherwise similar income, a result that generally leads to 
economically efficient outcomes.
    The election in the temporary and proposed regulations was intended 
to be bilateral, requiring filing of the seller and consent of the 
buyer of the CFC. Comments expressed confusion about whether the 
election was unilateral or bilateral, and some of them recommended a 
unilateral election. The final regulations clarify that the election 
must reflect a consensus between the buyer and seller of the CFC that 
was the subject of the extraordinary reduction, since the election has 
potentially important tax implications for both sides. Since the 
election to close the taxable year affects the amount of taxable income 
included by both the buyer and the seller for the year of the 
extraordinary reduction with respect to the target CFC, it is now 
clarified that buyers and sellers must mutually agree to make the 
election.
    The Treasury Department and the IRS considered as an alternative 
adopting certain requests to make the election unilateral, but 
determined that doing so would inappropriately allow one party to a 
transaction to affect the tax consequences of the other party without 
their consent.
b. Affected Taxpayers
    The taxpayers potentially affected by this provision are U.S. 
shareholders that own directly or indirectly stock of a CFC that has a 
controlling section 245A shareholder that owns more than 50 percent of 
the stock of the CFC. Additionally, during the taxable year, the 
controlling section 245A shareholder generally must directly or 
indirectly sell stock in the CFC that exceeds 10 percent of the 
controlling section 245A shareholder's interest in the CFC and 5 
percent of the total value of the stock of the CFC. Furthermore, in the 
year of the ownership reduction, the subpart F income and tested income 
of the CFC must exceed the lesser of $50 million or 5 percent of the 
CFC's total income for the year.
    The Treasury Department and the IRS have not estimated the number 
of taxpayers that are likely to be affected by these regulations 
because data on the taxpayers that have engaged or would engage in 
these particular transactions are not readily available. Based on 2014 
Statistics of Income tax data, the Treasury Department and the IRS 
estimate that there are approximately 15,000 domestic corporations with 
CFCs. The actual number of affected taxpayers is likely much smaller 
than this because the regulations affect only those domestic 
corporations with CFCs for which the controlling section 245A 
shareholder engages in a sale of the CFC's stock of in a year in which 
the CFC pays a dividend (or deemed dividend).
iii. Ownership Change Thresholds in the Definition of an Extraordinary 
Reduction
a. Background and Alternatives Considered
    Under the extraordinary reduction rules, the final regulations 
generally limit the amount of the section 245A deduction when either 
(i) a controlling section 245A shareholder transfers more than 10 
percent of its stock of the CFC or (ii) there is a greater than 10 
percent change in the controlling section 245A shareholder's overall 
ownership of the CFC.
    In defining an extraordinary reduction, the Treasury Department and 
the IRS considered other percentage thresholds for these conditions. 
The Treasury Department and the IRS expect that the ownership change 
threshold specified in the final regulations provides a reasonable 
balance between effective administration of section 245A and similar 
tax treatment of other similar income. The Treasury Department and the 
IRS do not have readily available data or models to compute an optimal 
percentage threshold.
b. Affected Taxpayers
    The taxpayers potentially affected by this aspect of the final 
regulations are the same as discussed in section D.3.ii.b.

II. Paperwork Reduction Act

    The collection of information in the final regulations are in 
Sec. Sec.  1.245A-5(e)(3) and 1.6038-2(f)(16).
    The collection of information in Sec.  1.245A-5(e)(3) is elective 
for a domestic corporation that is a controlling section 245A 
shareholder of a CFC receiving a dividend from the CFC and wants to 
elect to have none of the dividend considered an extraordinary 
reduction amount by closing the CFC's tax year. The collection of 
information is satisfied by timely filing of the ``Elective Section 
245A Year-Closing Statement'' with the domestic corporation's original 
Form 1120, U.S. Corporation Income Tax Return, for the taxable year in 
which the dividend is received. For purposes of the Paperwork Reduction 
Act, the reporting burden associated with Sec.  1.245A-5 will be 
reflected in the Paperwork Reduction Act submission associated with 
Form 1120 (OMB control no. 1545-0123).
    The collection of information in Sec.  1.6038-2(f)(16) is mandatory 
for every U.S. person that controls a foreign corporation and files 
Form 5471 for that period (OMB control number 1545-0123

[[Page 53082]]

in the case of business taxpayers, formerly, OMB control number 1545-
0704) that (1) has paid a dividend for which a deduction under section 
245A was limited by an ineligible amount under Sec.  1.245A-5(b) or 
paid a dividend for which the section 954(c)(6) exception was limited 
by a tiered extraordinary disposition amount or tiered extraordinary 
reduction amount under Sec.  1.245A-5(d) and (f), respectively, (2) 
maintains an extraordinary disposition account with respect to the CFC 
for which the Form is being filed, or (3) applies the exception to the 
extraordinary disposition per se rule pursuant to Sec.  1.245A-
5(c)(3)(ii)(C)(2) during an annual accounting period. The collection of 
information in Sec.  1.6038-2(f)(16) is satisfied by providing 
information about the ineligible amount, tiered extraordinary 
disposition amount, tiered extraordinary reduction amount, balance of 
the U.S. person's extraordinary disposition account, or reliance on the 
exception to the extraordinary disposition per se rule for the 
corporation's accounting period as Form 5471 and its instructions may 
prescribe. For purposes of the Paperwork Reduction Act, the reporting 
burden associated with Sec.  1.6038-2(f)(16) will be reflected in the 
applicable Paperwork Reduction Act submission, associated with Form 
5471. The estimated number of respondents for the reporting burden 
associated with Sec.  1.6038-2(f)(16) is 12,000-18,000, based on 
estimates provided by the Research, Applied Analytics and Statistics 
Division of the IRS.
    The related new or revised tax form is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                  Number of
                                                     New                    Revision of          respondents
                                                                           existing form          (estimate)
----------------------------------------------------------------------------------------------------------------
Schedule to Form 5471...............  ................................             [check]        12,000-18,000
----------------------------------------------------------------------------------------------------------------

    The current status of the Paperwork Reduction Act submissions 
related to the new revised Form 5471 as a result of the information 
collections in the temporary regulations is provided in the 
accompanying table. The reporting burdens associated with the 
information collections in Sec. Sec.  1.245A-5(e)(3) and 1.6038-
2(f)(16) are included in the aggregated burden estimates for OMB 
control number 1545-0123, which represents a total estimated burden 
time for all forms and schedules for corporations of 3.157 billion 
hours and total estimated monetized costs of $58.148 billion ($2017). 
The overall burden estimates provided in 1545-0123 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 the tax forms that will be revised as a result of 
the information collections in the proposed regulations. These numbers 
are therefore unrelated to the future calculations needed to assess the 
burden imposed by the temporary regulations. The Treasury Department 
and the IRS urge readers to recognize that these numbers are duplicates 
of estimates provided for informational purposes in other proposed and 
final regulatory actions and to guard against over-counting the burden 
that international tax provisions imposed before the Act.
    No burden estimates specific to the final regulations are currently 
available. The Treasury Department and the IRS have not identified any 
burden estimates, including those for new information collections, 
related to the requirements under the final regulations. Those 
estimates would capture both changes made by the Act and those that 
arise out of discretionary authority exercised in the final 
regulations.
    The Treasury Department and the IRS requested comments on all 
aspects of information collection burdens related to the temporary 
regulations, including estimates for how much time it would take to 
comply with the paperwork burdens described above for each relevant 
form and ways for the IRS to minimize the paperwork burden. Proposed 
revisions (if any) to these forms that reflect the information 
collections contained in the final regulations will be made available 
for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be finalized until after these forms 
have been approved by OMB under the PRA.

----------------------------------------------------------------------------------------------------------------
        Information collection                Type of filer           OMB Nos.                 Status
----------------------------------------------------------------------------------------------------------------
Form 5471.............................  Business (NEW Model).....       1545-0123  Published in the Federal
                                                                                    Register on 9/30/19.
                                                                                   Public Comment period closed
                                                                                    on 11/29/19.
                                                                                   Approved by OMB through 1/31/
                                                                                    2021.
                                       -------------------------------------------------------------------------
                                        https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-for-forms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s.
----------------------------------------------------------------------------------------------------------------

III. Regulatory Flexibility Act

    It is hereby certified that this rulemaking will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6). The small entities that are subject to Sec.  
1.245A-5 are small entities that are U.S. shareholders of certain 
foreign corporations that are otherwise eligible for the section 245A 
deduction on distributions from the foreign corporation. Additionally, 
to be subject to the final regulations, the foreign corporation that is 
owned by the small entity must have engaged in certain related party 
transactions during its last fiscal taxable year beginning before 
January 1, 2018, or the U.S. shareholder must have transferred certain 
stock in the foreign corporation during the taxable year. Based on 2014 
Statistics of Income tax data, the Department of the Treasury 
(``Treasury Department'') and the IRS estimate that there are 
approximately 15,000 U.S. corporations with controlled foreign 
corporations (``CFCs''), of which approximately half (6,000-9,000) have 
less than $25 million in gross receipts. Not all of these corporations 
will be affected by the final regulations. In particular, only U.S. 
taxpayers with fiscal year CFCs that transfer assets in related party 
transactions during the gap period, or

[[Page 53083]]

U.S. taxpayers that transfer more than 10 percent of their stock of a 
CFC in a taxable year or U.S. taxpayers that reduce their ownership of 
stock of a CFC by more than 10 percent, have the potential to be 
affected by these regulations. There are several industries that may be 
identified as small even through their annual receipts are above $25 
million or because they have fewer employees than the size standard for 
that industry. The Treasury Department and the IRS do not have more 
precise data indicating the number of small entities that will be 
potentially affected by the regulations. The rule may affect a 
substantial number of small entities, but data are not readily 
available to assess how many entities will be affected. Nevertheless, 
for the reasons described below, the Treasury Department and the IRS 
have determined that the regulations will not have a significant 
economic impact on small entities.
    The Treasury Department and the IRS have concluded that there is no 
significant economic impact on such entities as a result of these final 
regulations. To make this determination, the Treasury Department 
calculated the ratio of estimated global intangible lowed-taxed income 
(``GILTI'') and subpart F income tax attributable to these businesses 
to aggregate total sales data. Bureau of Economic Analysis data on the 
activities of multinational enterprises report total sales of all 
foreign affiliates of U.S. parents of $7,183 billion in 2017 (accessed 
at this web address in December, 2018: https://apps.bea.gov/iTable/iTable.cfm?ReqID=2&step=1). Projections for GILTI and Subpart F tax 
revenues average $20 billion per year over the ten-year budget window 
(see Joint Committee on Taxation, Estimated Budget Effects of the 
Conference Agreement for H.R. 1, The ``Tax Act and Jobs Act, JCX-67-17, 
December 18, 2017), resulting in a less than 1% share of GILTI and 
Subpart F tax in total sales of U.S.-parented affiliates. Compliance 
costs for these regulations will be a small fraction of the revenue 
amounts. The tax thus amounts to less than 3 to 5 percent of receipts 
(as defined in 13 CFR 121.104), an economic impact that the Treasury 
Department and IRS regard as the threshold for significant under the 
Regulatory Flexibility Act. This calculated percentage is furthermore 
an upper bound on the true expected effect of the final regulations 
because not all the GILTI and subpart F revenue estimated to be 
attributable to small entities will be captured by the final 
regulations. Consequently, the Treasury Department and the IRS have 
determined that Sec.  1.245A-5 will not have a significant economic 
impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
(REG-106282-18) preceding these final regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on the impact on small businesses and no comments were 
received.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The final regulations do not include any Federal mandate 
that may result in expenditures by state, local, or tribal governments, 
or by the private sector in excess of that threshold.

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. The final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on state and local governments or preempt state law within the 
meaning of the Executive order.

Drafting Information

    The principal authors of the final regulations are Arielle M. 
Borsos and Logan M. Kincheloe, Office of Associate Chief Counsel 
(International). However, other personnel from the Treasury Department 
and the IRS participated in their development.

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 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *

0
Par. 2. Reserved Sec. Sec.  1.245A-1 through 1.245A-4 and Sec.  1.245A-
5 are added to read as follows:


Sec. Sec.  1.245A-1--1.245A-4  [Reserved]


Sec.  1.245A-5  Limitation of section 245A deduction and section 
954(c)(6) exception.

    (a) Overview. This section provides rules that limit a deduction 
under section 245A(a) to the portion of a dividend that exceeds the 
ineligible amount of such dividend or the applicability of section 
954(c)(6) when a portion of a dividend is paid out of an extraordinary 
disposition account or when an extraordinary reduction occurs. 
Paragraph (b) of this section provides rules regarding ineligible 
amounts. Paragraph (c) of this section provides rules for determining 
ineligible amounts attributable to an extraordinary disposition. 
Paragraph (d) of this section provides rules that limit the application 
of section 954(c)(6) when one or more section 245A shareholders of a 
lower-tier CFC have an extraordinary disposition account. Paragraph (e) 
of this section provides rules for determining ineligible amounts 
attributable to an extraordinary reduction. Paragraph (f) of this 
section provides rules that limit the application of section 954(c)(6) 
when a lower-tier CFC has an extraordinary reduction amount. Paragraph 
(g) of this section provides special rules for purposes of applying 
this section. Paragraph (h) of this section provides an anti-abuse 
rule. Paragraph (i) of this section provides definitions. Paragraph (j) 
of this section provides examples illustrating the application of this 
section. Paragraph (k) of this section provides the applicability date 
of this section.
    (b) Limitation of deduction under section 245A--(1) In general. A 
section 245A shareholder is allowed a section 245A deduction for any 
dividend received from an SFC (provided all other applicable 
requirements are satisfied) only to the extent that the dividend 
exceeds the ineligible amount of the dividend. See paragraphs (j)(2), 
(4), and (5) of this section for examples illustrating the application 
of this paragraph (b)(1).
    (2) Definition of ineligible amount. The term ineligible amount 
means, with respect to a dividend received by a section 245A 
shareholder from an SFC, an amount equal to the sum of--

[[Page 53084]]

    (i) 50 percent of the extraordinary disposition amount (as 
determined under paragraph (c) of this section); and
    (ii) The extraordinary reduction amount (as determined under 
paragraph (e) of this section).
    (c) Rules for determining extraordinary disposition amount--(1) 
Definition of extraordinary disposition amount. The term extraordinary 
disposition amount means the portion of a dividend received by a 
section 245A shareholder from an SFC that is paid out of the 
extraordinary disposition account with respect to the section 245A 
shareholder. See paragraph (j)(2) of this section for an example 
illustrating the application of this paragraph (c).
    (2) Determination of portion of dividend paid out of extraordinary 
disposition account--(i) In general. For purposes of determining the 
portion of a dividend received by a section 245A shareholder from an 
SFC that is paid out of the extraordinary disposition account with 
respect to the section 245A shareholder, the following rules apply--
    (A) The dividend is first considered paid out of non-extraordinary 
disposition E&P with respect to the section 245A shareholder; and
    (B) The dividend is next considered paid out of the extraordinary 
disposition account to the extent of the section 245A shareholder's 
extraordinary disposition account balance.
    (ii) Definition of non-extraordinary disposition E&P. The term non-
extraordinary disposition E&P means, with respect to a section 245A 
shareholder and an SFC, an amount of earnings and profits of the SFC 
equal to the excess, if any, of--
    (A) The product of--
    (1) The amount of the SFC's earnings and profits described in 
section 959(c)(3), determined as of the end of the SFC's taxable year 
(for purposes of paragraph (c)(2)(ii) of this section, without regard 
to distributions during the taxable year other than as provided in this 
paragraph (c)(2)(ii)(A)(1)), but, if during the taxable year the SFC 
pays more than one dividend, reduced (but not below zero) by the 
amounts of any dividends paid by the SFC earlier in the taxable year; 
and
    (2) The percentage of the stock (by value) of the SFC that the 
section 245A shareholder owns directly or indirectly immediately before 
the distribution; over
    (B) The balance of the section 245A shareholder's extraordinary 
disposition account with respect to the SFC, determined immediately 
before the distribution.
    (3) Definitions with respect to extraordinary disposition 
accounts--(i) Extraordinary disposition account--(A) In general. The 
term extraordinary disposition account means, with respect to a section 
245A shareholder of an SFC, an account, the balance of which is equal 
to the product of the extraordinary disposition ownership percentage 
and the extraordinary disposition E&P, reduced (but not below zero) by 
the prior extraordinary disposition amount, and adjusted under 
paragraph (c)(4) of this section, as applicable. An extraordinary 
disposition account is maintained in the same functional currency as 
the extraordinary disposition E&P.
    (B) Extraordinary disposition ownership percentage. The term 
extraordinary disposition ownership percentage means the percentage of 
stock (by value) of an SFC that a section 245A shareholder owns 
directly or indirectly at the beginning of the disqualified period or, 
if later, on the first day during the disqualified period on which the 
SFC is a CFC, regardless of whether the section 245A shareholder owns 
directly or indirectly such stock of the SFC on the date of an 
extraordinary disposition giving rise to extraordinary disposition E&P 
if not, see paragraph (c)(4) of this section.
    (C) Extraordinary disposition E&P. The term extraordinary 
disposition E&P means an amount of earnings and profits of an SFC equal 
to the sum of the net gain recognized by the SFC with respect to 
specified property in each extraordinary disposition. In the case of an 
extraordinary disposition with respect to the SFC arising as a result 
of a disposition of specified property by a specified entity (other 
than a foreign corporation), an interest of which is owned directly or 
indirectly (through one or more other specified entities that are not 
foreign corporations) by the SFC, the net gain taken into account for 
purposes of the preceding sentence is the SFC's distributive share of 
the net gain recognized by the specified entity with respect to the 
specified property.
    (D) Prior extraordinary disposition amount--(1) General rule. The 
term prior extraordinary disposition amount means, with respect to an 
SFC and a section 245A shareholder, the sum of the extraordinary 
disposition amount of each prior dividend received by the section 245A 
shareholder from the SFC by reason of paragraph (c)(1) of this section 
and 200 percent of the sum of the amounts included in the section 245A 
shareholder's gross income under section 951(a) by reason of paragraph 
(d) of this section (in the case in which the SFC is, or has been, a 
lower-tier CFC). A section 245A shareholder's prior extraordinary 
disposition amount also includes--
    (i) A prior dividend received by the section 245A shareholder from 
the SFC to the extent not an extraordinary reduction amount and to the 
extent the dividend would have been an extraordinary disposition amount 
but for the failure of the dividend to qualify for the section 245A 
deduction by reason of one or more of the following: Application of 
section 245A(e); the recipient domestic corporation does not satisfy 
the holding period requirement of section 246; or the recipient 
domestic corporation is not a United States shareholder with respect to 
the foreign corporation from whose earnings and profits the dividend is 
sourced;
    (ii) The portion of a prior dividend (to the extent not a tiered 
extraordinary disposition amount by reason of paragraph (d) of this 
section) received by an upper-tier CFC from the SFC that by reason of 
section 245A(e) or being properly allocable to subpart F income of the 
SFC for the taxable year of the dividend pursuant to section 
954(c)(6)(A) was included in the upper-tier CFC's foreign personal 
holding company income and was included in gross income by the section 
245A shareholder under section 951(a) but would have been a tiered 
extraordinary disposition amount by reason of paragraph (d) of this 
section had paragraph (d) applied to the dividend;
    (iii) If a prior dividend received by an upper-tier CFC from a 
lower-tier CFC gives rise to a tiered extraordinary disposition amount 
with respect to the section 245A shareholder by reason of paragraph (d) 
of this section, the qualified portion; and
    (iv) 200 percent of an amount included in the gross income of a 
domestic corporation under section 951(a)(1)(B) with respect to a CFC 
for the taxable year of the domestic corporation in which or with which 
the CFC's taxable year ends, to the extent so included by reason of the 
application of this section to the hypothetical distribution described 
in Sec.  1.956-1(a)(2), or to the extent the amount would have been so 
included by reason of the application of this section to the 
hypothetical distribution but for the application of section 245A(e) or 
the holding period requirement in section 246 to the hypothetical 
distribution.
    (2) Definition of qualified portion--(i) In general. The term 
qualified portion means, with respect to a tiered extraordinary 
disposition amount of a section 245A shareholder and a lower-tier CFC, 
200 percent of the portion of the disqualified amount with respect to

[[Page 53085]]

the tiered extraordinary disposition amount equal to the sum of the 
amounts included in gross income by each U.S. tax resident under 
section 951(a) in the taxable year in which the tiered extraordinary 
disposition amount arose with respect to the lower-tier CFC by reason 
of paragraph (d) of this section. For purposes of the preceding 
sentence, the reference to a U.S. tax resident does not include any 
section 245A shareholder with a tiered extraordinary disposition amount 
with respect to the lower-tier CFC.
    (ii) Determining a qualified portion if multiple section 245A 
shareholders have tiered extraordinary disposition amounts. For the 
purposes of applying paragraph (c)(3)(i)(D)(2)(i) of this section, if 
more than one section 245A shareholder has a tiered extraordinary 
disposition amount with respect to a dividend received by an upper-tier 
CFC from a lower-tier CFC, then the qualified portion with respect to 
each section 245A shareholder is equal to the amount described in 
paragraph (c)(3)(i)(D)(2)(i) of this section, without regard to this 
paragraph (c)(3)(i)(D)(2)(ii), multiplied by a fraction, the numerator 
of which is the section 245A shareholder's tiered extraordinary 
disposition amount with respect to the lower-tier CFC and the 
denominator of which is the sum of the tiered extraordinary disposition 
amounts with respect to each section 245A shareholder and the lower-
tier CFC.
    (ii) Extraordinary disposition--(A) In general. Except as provided 
in paragraph (c)(3)(ii)(E) of this section, the term extraordinary 
disposition means, with respect to an SFC, any disposition of specified 
property by the SFC on a date on which it was a CFC and during the 
SFC's disqualified period to a related party if the disposition occurs 
outside of the ordinary course of the SFC's activities. An 
extraordinary disposition also includes a disposition during the 
disqualified period on a date on which the SFC is not a CFC if there is 
a plan, agreement, or understanding involving a section 245A 
shareholder to cause the SFC to recognize gain that would give rise to 
an extraordinary disposition if the SFC were a CFC.
    (B) Facts and circumstances. A determination as to whether a 
disposition is undertaken outside of the ordinary course of an SFC's 
activities is made on the basis of facts and circumstances, taking into 
account whether the transaction is consistent with the SFC's past 
activities, including with respect to quantity and frequency. In 
addition, a disposition of specified property by an SFC to a related 
party may be considered outside of the ordinary course of the SFC's 
activities notwithstanding that the SFC regularly disposes of property 
of the same type of, or similar to, the specified property to persons 
that are not related parties.
    (C) Per se rules--(1) In general. Even if a disposition would 
otherwise be considered to be undertaken in the ordinary course of an 
SFC's activities under the requirements of paragraph (c)(3)(ii)(B) of 
this section, that disposition is treated as occurring outside of the 
ordinary course of an SFC's activities if the disposition is undertaken 
with a principal purpose of generating earnings and profits during the 
disqualified period or, except as provided in paragraph 
(c)(3)(ii)(C)(2) of this section, if the disposition is of intangible 
property, as defined in section 367(d)(4).
    (2) Exception to the per se rule for certain property--(i) 
Exception. Paragraph (c)(3)(ii)(C)(1) of this section does not apply to 
a disposition of intangible property that is not described in section 
367(d)(4)(C) or (F), provided that the property is transferred to a 
related person during the disqualified period with a reasonable 
expectation that the related person will resell the property to an 
unrelated customer within one year. Subject to paragraph 
(c)(3)(ii)(C)(2)(ii) of this section, a disposition of intangible 
property that satisfies the requirements of this paragraph 
(c)(3)(ii)(C)(2)(i) is determined to be within or without the ordinary 
course of an SFC's activities based on the test described in paragraph 
(c)(3)(ii)(B) of this section.
    (ii) Facts and circumstances presumption for property described in 
section 367(d)(4)(A). Notwithstanding paragraph (c)(3)(ii)(B) of this 
section, any disposition described in paragraph (c)(3)(ii)(C)(2)(i) of 
this section of a copyright right within the meaning of Sec.  1.861-18 
or of intangible property described in section 367(d)(4)(A) is presumed 
to take place outside of the ordinary course of an SFC's activities for 
purposes of paragraph (c)(3)(ii)(A) of this section. The presumption in 
the preceding sentence may be rebutted only if the taxpayer can show 
that the facts and circumstances clearly establish that the disposition 
took place in the ordinary course of the SFC's activities.
    (D) Treatment of dispositions by certain specified entities. For 
purposes of paragraph (c)(3)(ii)(A) of this section, an extraordinary 
disposition with respect to an SFC includes a disposition by a 
specified entity other than a foreign corporation, provided that 
immediately before or immediately after the disposition the specified 
entity is a related party with respect to the SFC, the SFC directly or 
indirectly (through one or more other specified entities other than 
foreign corporations) owns an interest in the specified entity, and the 
disposition would have otherwise qualified as an extraordinary 
disposition had the specified entity been a foreign corporation.
    (E) De minimis exception to extraordinary disposition. If the sum 
of the net gain recognized by an SFC with respect to specified property 
in all dispositions otherwise described in paragraph (c)(3)(ii)(A) of 
this section does not exceed the lesser of $50 million or 5 percent of 
the gross value of all of the SFC's property held immediately before 
the beginning of its disqualified period, then no disposition of 
specified property by the SFC is an extraordinary disposition.
    (iii) Disqualified period. The term disqualified period means, with 
respect to an SFC that is a CFC on any day during the taxable year that 
includes January 1, 2018, the period beginning on January 1, 2018, and 
ending as of the close of the taxable year of the SFC, if any, that 
begins before January 1, 2018, and ends after December 31, 2017.
    (iv) Specified property. The term specified property means any 
property if gain recognized with respect to such property during the 
disqualified period is not described in section 951A(c)(2)(A)(i)(I) 
through (V). If only a portion of the gain recognized with respect to 
property during the disqualified period is gain that is not described 
in section 951A(c)(2)(A)(i)(I) through (V), then a portion of the 
property is treated as specified property in an amount that bears the 
same ratio to the value of the property as the amount of gain not 
described in section 951A(c)(2)(A)(i)(I) through (V) bears to the total 
amount of gain recognized with respect to such property during the 
disqualified period. Specified property is also property with respect 
to which a loss was recognized during the disqualified period if the 
loss is properly allocable to income not described in section 
951A(c)(2)(A)(i)(I) through (V) under the principles of section 
954(b)(5) (specified loss). If only a portion of the loss recognized 
with respect to property during the disqualified period is specified 
loss, then a portion of the property is treated as specified property 
in an amount that bears the same ratio to the value of the property as 
the amount of specified loss bears to the total amount of loss 
recognized with respect to such property during the disqualified 
period.
    (4) Successor rules for extraordinary disposition accounts. This 
paragraph (c)(4) applies with respect to an

[[Page 53086]]

extraordinary disposition account upon certain direct or indirect 
transfers of stock of an SFC by a section 245A shareholder.
    (i) Another section 245A shareholder succeeds to all or portion of 
account. Except as provided in paragraph (c)(4)(vi) of this section, 
paragraphs (c)(4)(i)(A) through (D) of this section apply when a 
section 245A shareholder of an SFC (the transferor) transfers directly 
or indirectly a share of stock (or a portion of a share of stock) of 
the SFC that it owns directly or indirectly (the share or portion 
thereof, a transferred share).
    (A) If immediately after the transfer (taking into account all 
transactions related to the transfer) another person is a section 245A 
shareholder of the SFC, then such other person's extraordinary 
disposition account with respect to the SFC is increased by the 
person's proportionate share of the amount allocated to the transferred 
share.
    (B) For purposes of paragraph (c)(4)(i)(A) of this section, the 
amount allocated to a transferred share is equal to the product of--
    (1) The balance of the transferor's extraordinary disposition 
account with respect to the SFC, determined after any reduction 
pursuant to paragraph (c)(3) of this section by reason of dividends and 
before the application of this paragraph (c)(4)(i)(B); and
    (2) A fraction, the numerator of which is the value of the 
transferred share and the denominator of which is the value of all of 
the stock of the SFC that the transferor owns directly or indirectly 
immediately before the transfer.
    (C) For purposes of paragraph (c)(4)(i)(A) of this section, a 
person's proportionate share of the amount allocated to a transferred 
share under paragraph (c)(4)(i)(B) of this section is equal to the 
product of--
    (1) The amount allocated to the share; and
    (2) The percentage of the share (by value) that the person owns 
directly or indirectly immediately after the transfer (taking into 
account all transactions related to the transfer).
    (D) The transferor's extraordinary disposition account with respect 
to the SFC is decreased by the amount by which another person's 
extraordinary disposition account with respect to the SFC is increased 
pursuant to paragraph (c)(4)(i)(A) of this section.
    (ii) Certain section 381 transactions--(A) In general. If assets of 
an SFC (the acquired corporation) are acquired by another SFC (the 
acquiring corporation) pursuant to a transaction described in section 
381(a) in which the acquired corporation is the transferor corporation 
for purposes of section 381, then a section 245A shareholder's 
extraordinary disposition account with respect to the acquiring 
corporation is increased by the balance of its extraordinary 
disposition account with respect to the acquired corporation, 
determined after any reduction pursuant to paragraph (c)(3) of this 
section by reason of dividends and before the application of this 
paragraph (c)(4)(ii)(A).
    (B) Certain triangular asset reorganizations. If, in a transaction 
described in paragraph (c)(4)(ii)(A) of this section, the section 245A 
shareholder receives stock of a domestic corporation that controls 
(within the meaning of section 368(c)) the acquiring corporation, the 
domestic corporation's extraordinary disposition account with respect 
to the acquiring corporation is increased by the balance of the section 
245A shareholder's extraordinary disposition account with respect to 
the acquired corporation, determined after any reduction pursuant to 
paragraph (c)(3) of this section by reason of dividends and before the 
application of this paragraph (c)(4)(ii)(B).
    (iii) Certain distributions involving section 355 or 356. In the 
case of a transaction involving a distribution under section 355 (or so 
much of section 356 as it relates to section 355) by an SFC (the 
distributing corporation) of stock of another SFC (the controlled 
corporation), a section 245A shareholder's extraordinary disposition 
account with respect to the distributing corporation is attributed to 
(and treated as) an extraordinary disposition account with respect to 
the controlled corporation in a manner similar to how earnings and 
profits of the distributing corporation and the controlled corporation 
are adjusted under Sec.  1.312-10. To the extent that a section 245A 
shareholder's extraordinary disposition account with respect to the 
distributing CFC is not so attributed to (and treated as) an 
extraordinary disposition account with respect to the controlled 
corporation, the extraordinary disposition account remains as an 
extraordinary disposition account with respect to the distributing 
corporation.
    (iv) Transfer of all of the stock of the SFC owned by a section 
245A shareholder--(A) In general. If, in a transaction described in 
paragraph (c) of this section, a section 245A shareholder of an SFC 
transfers directly or indirectly all of the stock of the SFC that it 
owns directly or indirectly, then, except as provided in paragraph 
(c)(4)(iv)(B) of this section, any remaining balance of the section 
245A shareholder's extraordinary disposition account that is not 
allocated or attributed under paragraph (c) of this section is 
eliminated and therefore not taken into account by any person.
    (B) Related party retains the extraordinary distribution account. 
If any related party with respect to the section 245A shareholder 
described in paragraph (c)(4)(iv)(A) of this section is a section 245A 
shareholder with respect to the SFC immediately after the transfer 
(taking into account all transactions related to the transfer), then 
the remaining balance of the section 245A shareholder's extraordinary 
disposition account with respect to the SFC is added to the related 
party's extraordinary disposition account. If multiple related parties 
are section 245A shareholders of the SFC, then the remaining balance of 
the extraordinary disposition account is allocated between the related 
parties in proportion to the value of the stock of the SFC that they 
own directly or indirectly immediately after the transfer (taking into 
account all transactions related to the transfer).
    (v) Effect of section 338(g) election--(A) In general. Except as 
provided in paragraph (c)(4)(v)(B) of this section, if an election 
under section 338(g) is made with respect to a qualified stock purchase 
(as defined in section 338(d)(3)) of stock of an SFC, then a section 
245A shareholder's extraordinary disposition account with respect to 
the old target (as defined in Sec.  1.338-2(c)(17)) is not treated as 
(or attributed to) an extraordinary disposition account with respect to 
the new target (as defined in Sec.  1.338-2(c)(17)). Accordingly, the 
remaining balance of the old target's extraordinary disposition account 
is eliminated and is not thereafter taken into account by any person. 
(B) Special rules regarding carryover foreign target stock. If an 
election under section 338(g) is made with respect to a qualified stock 
purchase (as described in section 338(d)(3)) of stock of an SFC and 
there are one or more shares of carryover foreign target stock (``FT 
stock'') (as described in Sec.  1.338-9(b)(3)(i)), then the following 
rules apply as to a section 245A shareholder of the new target that 
after the qualified stock purchase directly or indirectly owns 
carryover FT stock (such shareholder, the carryover FT stock 
shareholder):
    (1) In a case in which before the qualified stock purchase the 
carryover FT stock shareholder directly or indirectly owned carryover 
FT stock, the carryover FT stock shareholder's extraordinary 
disposition account with respect to the old target, determined after 
any reduction pursuant to paragraph (c)(3) of this section by reason

[[Page 53087]]

of dividends, is treated as its extraordinary disposition account with 
respect to the new target.
    (2) In a case in which before the qualified stock purchase the 
carryover FT stock shareholder did not directly or indirectly own 
carryover FT stock, but the stock retains its character as carryover FT 
stock (taking into account Sec.  1.338-9(b)(3)(vi)), a ratable portion 
of each section 245A shareholder's extraordinary disposition account 
with respect to the old target, determined after any reduction pursuant 
to paragraph (c)(3) of this section by reason of dividends, is treated 
as the carryover FT stock shareholder's extraordinary disposition 
account with respect to the new target, based on the value of the 
carryover FT stock that the carryover FT stock shareholder owns 
directly or indirectly after the qualified stock purchase relative to 
the value of all of the stock of the new target.
    (vi) Certain transfers described in Sec.  1.1248-8(a)(1)--(A) In 
general. If a person transfers stock of an SFC with respect to which a 
section 245A shareholder has an extraordinary disposition account to a 
foreign acquiring corporation in a transaction described Sec.  1.1248-
8(a)(1) (other than a transfer that is also described in Sec.  
1.1248(f)-1(b)(2) or (3)) in which stock of a foreign corporation is 
received by the transferor, then, except in the case in which the 
transfer is also described in paragraph (c)(4)(ii) or (iii) of this 
section, the section 245A shareholder's extraordinary disposition 
account is not adjusted under this paragraph (c)(4).
    (B) Certain transfers described in Sec.  1.1248(f)-1(b). In the 
case of a transfer directly or indirectly of stock of an SFC by a 
section 245A shareholder described in Sec.  1.1248(f)-1(b)(2) or (3), 
but which does not result in an income inclusion, in whole or in part, 
by reason of Sec.  1.1248-2, the section 245A shareholder's 
extraordinary disposition account with respect to the SFC, determined 
after any reduction pursuant to paragraph (c)(3) of this section by 
reason of dividends and before the application of this paragraph 
(c)(4)(vi)(B), is allocated and adjusted in the same manner as under 
paragraph (c)(4)(i) of this section, except that, for purposes of 
applying paragraphs (c)(4)(i)(B) and (C) of this section, stock of the 
SFC that is owned directly or indirectly by persons who are not section 
1248 shareholders (as defined in Sec.  1.1248(f)-1(c)(12)) is 
disregarded.
    (vii) Anti-abuse rule. Pursuant to paragraph (h) of this section, 
if a principal purpose of a transaction or series of transactions is to 
shift to another person, or to avoid, an amount of a section 245A 
shareholder's extraordinary disposition account with respect to an SFC 
or otherwise avoid the purposes of this section, then appropriate 
adjustments are made for purposes of this section, including 
disregarding the transaction or series of transactions. A principal 
purpose described in the preceding sentence is deemed to exist if stock 
of an SFC is directly or indirectly acquired by one of more section 
245A shareholders within one year of a transaction or transactions to 
which paragraph (c)(4)(iv)(A) of this section would otherwise apply.
    (d) Limitation of amount eligible for section 954(c)(6) when there 
is an extraordinary disposition account with respect to a lower-tier 
CFC--(1) In general. If an upper-tier CFC receives a dividend from a 
lower-tier CFC, then the dividend is eligible for the exception to 
foreign personal holding company income under section 954(c)(6) 
(provided all other applicable requirements are satisfied) with respect 
to the portion of the dividend that exceeds the disqualified amount. 
With respect to the portion of the dividend that does not exceed the 
disqualified amount, the exception to foreign personal holding company 
income under section 954(c)(6) is allowed (provided all other 
applicable requirements are satisfied) only for the amount equal to 50 
percent of the portion of the dividend that does not exceed the 
disqualified amount. The disqualified amount is the quotient of the 
amounts described in paragraphs (d)(1)(i) and (ii) of this section.
    (i) The sum of each section 245A shareholder's tiered extraordinary 
disposition amount with respect to the lower-tier CFC.
    (ii) The percentage of stock of the upper-tier CFC (by value) 
owned, in the aggregate, by U.S. tax residents that include in gross 
income their pro rata share of the upper-tier CFC's subpart F income 
under section 951(a) on the last day of the upper-tier CFC's taxable 
year. If a U.S. tax resident is a direct or indirect partner in a 
domestic partnership that is a United States shareholder of the upper-
tier CFC, the amount of stock owned by the U.S. tax resident for 
purposes of the preceding sentence is determined under the principles 
of paragraph (g)(3) of this section.
    (2) Definition of tiered extraordinary disposition amount--(i) In 
general. The term tiered extraordinary disposition amount means, with 
respect to a dividend received by an upper-tier CFC from a lower-tier 
CFC and a section 245A shareholder, the portion of the dividend that 
would be an extraordinary disposition amount if the section 245A 
shareholder received as a dividend its pro rata share of the dividend 
from the lower-tier CFC. The preceding sentence does not apply to an 
amount treated as a dividend received by an upper-tier CFC from a 
lower-tier CFC by reason of section 964(e)(4) (in such case, see 
paragraphs (b)(1) and (g)(2) of this section).
    (ii) Section 245A shareholder's pro rata share of a dividend 
received by an upper-tier CFC. For the purposes of paragraph (d)(2)(i) 
of this section, a section 245A shareholder's pro rata share of the 
amount of a dividend received by an upper-tier CFC from a lower-tier 
CFC equals the amount by which the dividend would increase the section 
245A shareholder's pro rata share of the upper-tier CFC's subpart F 
income under section 951(a)(2) and Sec.  1.951-1(b) and (e) if the 
dividend were included in the upper-tier CFC's foreign personal holding 
company income under section 951(a)(1), determined without regard to 
section 952(c) and as if the upper-tier CFC had no deductions properly 
allocable to the dividend under section 954(b)(5).
    (e) Extraordinary reduction amount--(1) In general. Except as 
provided in paragraph (e)(3) of this section, the term extraordinary 
reduction amount means, with respect to a dividend received by a 
controlling section 245A shareholder from a CFC during a taxable year 
of the CFC ending after December 31, 2017, in which an extraordinary 
reduction occurs with respect to the controlling section 245A 
shareholder's ownership of the CFC, the lesser of the amounts described 
in paragraph (e)(1)(i) or (ii) of this section. See paragraphs (j)(4) 
through (6) of this section for examples illustrating the application 
of this paragraph (e).
    (i) The amount of the dividend.
    (ii) The amount equal to the sum of the controlling section 245A 
shareholder's pre-reduction pro rata share of the CFC's subpart F 
income (as defined in section 952(a)) and tested income (as defined in 
section 951A(c)(2)(A)) for the taxable year, reduced, but not below 
zero, by the prior extraordinary reduction amount.
    (2) Rules regarding extraordinary reduction amounts--(i) 
Extraordinary reduction--(A) In general. Except as provided in 
paragraph (e)(2)(i)(C) of this section, an extraordinary reduction 
occurs, with respect to a controlling section 245A shareholder's 
ownership of a CFC during a taxable year of the CFC, if either of the 
conditions described in paragraph (e)(2)(i)(A)(1) or (2) of this 
section is satisfied. See paragraphs (j)(4) and (5) of this section

[[Page 53088]]

for examples illustrating an extraordinary reduction.
    (1) The condition of this paragraph (e)(2)(i)(A)(1) requires that 
during the taxable year, the controlling section 245A shareholder 
transfers directly or indirectly (other than by reason of a transfer 
occurring pursuant to an exchange described in section 368(a)(1)(E) or 
(F)), in the aggregate, more than 10 percent (by value) of the stock of 
the CFC that the section 245A shareholder owns directly or indirectly 
as of the beginning of the taxable year of the CFC, provided the stock 
transferred, in the aggregate, represents at least 5 percent (by value) 
of the outstanding stock of the CFC as of the beginning of the taxable 
year of the CFC; or
    (2) The condition of this paragraph (e)(2)(i)(A)(2) requires that, 
as a result of one or more transactions occurring during the taxable 
year, the percentage of stock (by value) of the CFC that the 
controlling section 245A shareholder owns directly or indirectly as of 
the close of the last day of the taxable year of the CFC is less than 
90 percent of the percentage of stock (by value) that the controlling 
section 245A shareholder owns directly or indirectly on either of the 
dates described in paragraphs (e)(2)(i)(B)(1) and (2) of this section 
(such percentage, the initial percentage), provided the difference 
between the initial percentage and percentage at the end of the year is 
at least five percentage points.
    (B) Dates for purposes of the initial percentage. For purposes of 
paragraph (e)(2)(i)(A)(2) of this section, the dates described in 
paragraphs (e)(2)(i)(B)(1) and (2) of this section are--
    (1) The day of the taxable year on which the controlling section 
245A shareholder owns directly or indirectly its highest percentage of 
stock (by value) of the CFC; and
    (2) The day immediately before the first day on which stock was 
transferred directly or indirectly in the preceding taxable year in a 
transaction (or a series of transactions) occurring pursuant to a plan 
to reduce the percentage of stock (by value) of the CFC that the 
controlling section 245A shareholder owns directly or indirectly.
    (C) Transactions pursuant to which CFC's taxable year ends. A 
controlling section 245A shareholder's direct or indirect transfer of 
stock of a CFC that but for this paragraph (e)(2)(i)(C) would give rise 
to an extraordinary reduction under paragraph (e)(2)(i)(A) of this 
section does not give rise to an extraordinary reduction if the taxable 
year of the CFC ends immediately after the transfer, provided that the 
controlling section 245A shareholder directly or indirectly owns the 
stock on the last day of such year. Thus, for example, if a controlling 
section 245A shareholder exchanges all the stock of a CFC pursuant to a 
complete liquidation of the CFC, the exchange does not give rise to an 
extraordinary reduction.
    (ii) Rules for determining pre-reduction pro rata share--(A) In 
general. Except as provided in paragraph (e)(2)(ii)(B) of this section, 
the term pre-reduction pro rata share means, with respect to a 
controlling section 245A shareholder and the subpart F income or tested 
income of a CFC, the controlling section 245A shareholder's pro rata 
share of the CFC's subpart F income or tested income under section 
951(a)(2) and Sec.  1.951-1(b) and (e) or section 951A(e)(1) and Sec.  
1.951A-1(d)(1), respectively, determined based on the controlling 
section 245A shareholder's direct or indirect ownership of stock of the 
CFC immediately before the extraordinary reduction (or, if the 
extraordinary reduction occurs by reason of multiple transactions, 
immediately before the first transaction) and without regard to section 
951(a)(2)(B) and Sec.  1.951-1(b)(1)(ii), but only to the extent that 
such subpart F income or tested income is not included in the 
controlling section 245A shareholder's pro rata share of the CFC's 
subpart F income or tested income under section 951(a)(2) and Sec.  
1.951-1(b) and (e) or section 951A(e)(1) and Sec.  1.951A-1(d)(1), 
respectively.
    (B) Decrease in section 245A shareholder's pre-reduction pro rata 
share for amounts taken into account by U.S. tax resident. A 
controlling section 245A shareholder's pre-reduction pro rata share of 
subpart F income or tested income of a CFC for a taxable year is 
reduced by an amount equal to the sum of the amounts by which each U.S. 
tax resident's pro rata share of the subpart F income or tested income 
is increased as a result of a transfer directly or indirectly of stock 
of the CFC by the controlling section 245A shareholder or an issuance 
of stock by the CFC (such an amount with respect to a U.S. tax 
resident, a specified amount), in either case, during the taxable year 
in which the extraordinary reduction occurs. For purposes of this 
paragraph (e)(2)(ii)(B), if there are extraordinary reductions with 
respect to more than one controlling section 245A shareholder during 
the CFC's taxable year, then a U.S. tax resident's specified amount 
attributable to an acquisition of stock from the CFC is prorated with 
respect to each controlling section 245A shareholder based on its 
relative decrease in ownership of the CFC. See paragraph (j)(5) of this 
section for an example illustrating a decrease in a section 245A 
shareholder's pre-reduction pro rata share for amounts taken into 
account by a U.S. tax resident.
    (C) Prior extraordinary reduction amount. The term prior 
extraordinary reduction amount means, with respect to a CFC and section 
245A shareholder and a taxable year of the CFC in which an 
extraordinary reduction occurs, the sum of the extraordinary reduction 
amount of each prior dividend received by the section 245A shareholder 
from the CFC during the taxable year. A section 245A shareholder's 
prior extraordinary reduction amount also includes--
    (1) A prior dividend received by the section 245A shareholder from 
the CFC during the taxable year to the extent the dividend was not 
eligible for the section 245A deduction by reason of section 245A(e) or 
the holding period requirement of section 246 not being satisfied but 
would have been an extraordinary reduction amount had this paragraph 
(e) applied to the dividend;
    (2) If the CFC is a lower-tier CFC for a portion of the taxable 
year during which the lower-tier CFC pays any dividend to an upper 
tier-CFC, the portion of a prior dividend received by an upper-tier CFC 
from the lower-tier CFC during the taxable year of the lower-tier CFC 
that, by reason of section 245A(e), was included in the upper-tier 
CFC's foreign personal holding company income and that by reason of 
section 951(a) was included in income of the section 245A shareholder, 
and that would have given rise to a tiered extraordinary reduction 
amount by reason of paragraph (f) of this section had paragraph (f) 
applied to the dividend of which the section 245A shareholder would 
have included a pro rata share of the tiered extraordinary reduction 
amount in income by reason of section 951(a); and
    (3) If the CFC is a lower-tier CFC for a portion of the taxable 
year during which the lower-tier CFC pays any dividend to an upper-tier 
CFC, the sum of the portion of the tiered extraordinary reduction 
amount of each prior dividend received by an upper-tier CFC from the 
lower-tier CFC during the taxable year that is included in income of 
the section 245A shareholder by reason of section 951(a).
    (3) Exceptions--(i) Elective exception to close CFC's taxable 
year--(A) In general. For a taxable year of a CFC in which an 
extraordinary reduction occurs with respect to a controlling

[[Page 53089]]

section 245A shareholder and for which, absent this paragraph 
(e)(3)(i), there would be an extraordinary reduction amount or tiered 
extraordinary reduction amount greater than zero, no amount is 
considered an extraordinary reduction amount or tiered extraordinary 
reduction amount with respect to the controlling section 245A 
shareholder if each controlling section 245A shareholder elects, and 
each U.S. tax resident described in paragraph (e)(3)(i)(C)(2) of this 
section agrees, pursuant to this paragraph (e)(3)(i), to close the 
CFC's taxable year for all purposes of the Internal Revenue Code (and, 
therefore, as to all shareholders of the CFC) as of the end of the date 
on which the extraordinary reduction occurs, or, if the extraordinary 
reduction occurs by reason of multiple transactions, as of the end of 
each date on which a transaction forming a part of the extraordinary 
reduction occurs. If an election is made pursuant to this paragraph 
(e)(3)(i), all shareholders of the CFC that are a controlling section 
245A shareholder or a U.S. tax resident described in paragraph 
(e)(3)(i)(C)(2) of this section must file their respective U.S. income 
tax and information returns consistently with the election. If each 
controlling section 245A shareholder elects to close the CFC's taxable 
year, that closing will be treated as a change in accounting period for 
purposes of the notice requirement in Sec.  1.964-1(c)(3)(iii), 
treating any controlling section 245A shareholders as controlling 
domestic shareholders for this purpose. However, the notice described 
in Sec.  1.964-1(c)(3)(iii) does not need to be provided to persons 
that are U.S. tax residents described in paragraph (e)(3)(i)(C) of this 
section. For purposes of applying this paragraph (e)(3)(i), a 
controlling section 245A shareholder that has an extraordinary 
reduction (or a transaction forming a part thereof) with respect to a 
CFC is treated as owning the same amount of stock it owned in the CFC 
immediately before the extraordinary reduction (or a transaction 
forming a part thereof) on the end of the date on which the 
extraordinary reduction occurs (or such transaction forming a part 
thereof occurs). To the extent that shares of a CFC are treated as 
owned by a controlling section 245A shareholder as of the close of the 
CFC's taxable year pursuant to the preceding sentence, such shares are 
treated as not being owned by any other person as of the close of the 
CFC's taxable year.
    (B) Allocation of foreign taxes. If an election is made pursuant to 
this paragraph (e)(3) to close a CFC's taxable year and the CFC's 
taxable year under foreign law (if any) does not close at the end of 
the date on which the CFC's taxable year closes as a result of the 
election, foreign taxes paid or accrued with respect to such foreign 
taxable year are allocated between the period of the foreign taxable 
year that ends with, and the period of the foreign taxable year that 
begins after, the date on which the CFC's taxable year closes as a 
result of the election. If there is more than one date on which the 
CFC's taxable year closes as a result of the election, foreign taxes 
paid or accrued with respect to the foreign taxable year are allocated 
to all such periods. The allocation is made based on the respective 
portions of the taxable income of the CFC (as determined under foreign 
law) for the foreign taxable year that are attributable under the 
principles of Sec.  1.1502-76(b) to the periods during the foreign 
taxable year. Foreign taxes allocated to a period under this paragraph 
(e)(3)(i)(B) are treated as paid or accrued by the CFC as of the close 
of that period.
    (C) Time and manner of making election--(1) Election by controlling 
section 245A shareholder. An election pursuant to this paragraph (e)(3) 
is made and effective if the statement described in paragraph 
(e)(3)(i)(D) of this section is timely filed (including extensions) by 
each controlling section 245A shareholder making the election with its 
original U.S. tax return for the taxable year in which the 
extraordinary reduction occurs. If a controlling section 245A 
shareholder is a member of a consolidated group (within the meaning of 
Sec.  1.1502-1(h)) and participates in the extraordinary reduction, the 
agent for such group (within the meaning of Sec.  1.1502-77(c)(1)) must 
file the election described in this paragraph (e)(3) on behalf of such 
member.
    (2) Binding agreement. Before the filing of the statement described 
in paragraph (e)(3)(i)(D) of this section, each controlling section 
245A shareholder must enter into a written, binding agreement with each 
U.S. tax resident that on the end of the date on which the 
extraordinary reduction occurs (or, if the extraordinary reduction 
occurs by reason of multiple transactions, each U.S. tax resident that 
on the end of each date on which a transaction forming a part of the 
extraordinary reduction occurs) owns directly or indirectly, without 
regard to the final two sentences of paragraph (e)(3)(i)(A) of this 
section, stock of the CFC and is a United States shareholder with 
respect to the CFC. In the case of a U.S. tax resident that owns stock 
of the CFC indirectly through one or more partnerships, the partnership 
that directly owns the stock of the CFC may enter into the binding 
agreement on behalf of the U.S. tax resident partner provided that, 
before the due date of the partner's original Federal income tax 
return, including extensions, the partner delegated the authority to 
the partnership to enter into the binding agreement pursuant to a 
written partnership agreement (within the meaning of Sec.  1.704-
1(b)(2)(ii)(h)). The written, binding agreement must provide that each 
controlling section 245A shareholder will elect to close the taxable 
year of the CFC.
    (3) Transition rule. In the case of an extraordinary reduction 
occurring before August 27, 2020, the statement described in paragraph 
(e)(3)(i)(D) of this section is considered timely filed if it is 
attached by each controlling section 245A shareholder to an original or 
amended return for the taxable year in which the extraordinary 
reduction occurs. In the case of an amended return, the statement is 
considered timely filed only if it is filed with an amended return no 
later than February 23, 2021.
    (D) Form and content of statement. The statement required by 
paragraph (e)(3)(i)(C) of this section is to be titled ``Elective 
Section 245A Year-Closing Statement.'' The statement must--
    (1) Identify (by name and tax identification number, if any) each 
controlling section 245A shareholder, each U.S tax resident described 
in paragraph (e)(3)(i)(C) of this section, and the CFC;
    (2) State the date of the extraordinary reduction (or, if the 
extraordinary reduction includes transactions on more than one date, 
the dates of all such transactions) to which the election applies;
    (3) State the filing controlling section 245A shareholder's pro 
rata share of the subpart F income, tested income, and foreign taxes 
described in section 960 with respect to the stock of the CFC subject 
to the extraordinary reduction, and, if applicable, the amount of 
earnings and profits attributable to such stock within the meaning of 
section 1248, as of the date of the extraordinary reduction;
    (4) State that each controlling section 245A shareholder and each 
U.S tax resident described in paragraph (e)(3)(i)(C) of this section 
have entered into a written, binding agreement to elect to close the 
CFC's taxable year in accordance with paragraph (e)(3)(i)(C) of this 
section; and
    (5) Be filed in the manner, if any, prescribed by forms, 
publications, or other guidance published in the Internal Revenue 
Bulletin.

[[Page 53090]]

    (E) Consistency requirements. If multiple extraordinary reductions 
occur with respect to one or more controlling section 245A 
shareholders' ownership in a single CFC during one or more taxable 
years of the CFC, then to the extent those extraordinary reductions 
occur pursuant to a plan or series of related transactions, the 
election described in this paragraph (e)(3) section may be made only if 
it is made for all such extraordinary reductions with respect to the 
CFC for which there was an extraordinary reduction amount. Furthermore, 
if an extraordinary reduction occurs with respect to a controlling 
section 245A shareholders' ownership in one or more CFCs, then, to the 
extent those extraordinary reductions occur pursuant to a plan or 
series of related transactions, the election described in this 
paragraph (e)(3) may be made only if it is made for each extraordinary 
reduction for which there was an extraordinary reduction amount with 
respect to all of the CFCs that have the same or related (within the 
meaning of section 267(b) or 707(b)) controlling section 245A 
shareholders.
    (ii) De minimis subpart F income and tested income. For a taxable 
year of a CFC in which an extraordinary reduction occurs, no amount is 
considered an extraordinary reduction amount (or, with respect to a 
lower-tier CFC, a tiered extraordinary reduction amount under paragraph 
(f) of this section) with respect to a controlling section 245A 
shareholder of the CFC if the sum of the CFC's subpart F income and 
tested income (as defined in section 951A(c)(2)(A)) for the taxable 
year does not exceed the lesser of $50 million or 5 percent of the 
CFC's total income for the taxable year.
    (f) Limitation of amount eligible for section 954(c)(6) where 
extraordinary reduction occurs with respect to lower-tier CFCs--(1) In 
general. If an extraordinary reduction occurs with respect to a lower-
tier CFC and an upper-tier CFC receives a dividend from the lower-tier 
CFC in the taxable year in which the extraordinary reduction occurs, 
then the dividend is eligible for the exception to foreign personal 
holding company income under section 954(c)(6) (provided all other 
applicable requirements are satisfied) only with respect to the portion 
of the dividend that exceeds the tiered extraordinary reduction amount. 
The preceding sentence does not apply to an amount treated as a 
dividend received by an upper-tier CFC by reason of section 964(e)(4) 
(in this case, see paragraphs (b)(1) and (g)(2) of this section). See 
paragraph (j)(7) of this section for an example illustrating the 
application of this paragraph (f)(1).
    (2) Definition of tiered extraordinary reduction amount. The term 
tiered extraordinary reduction amount means, with respect to the 
portion of a dividend received by an upper-tier CFC from a lower-tier 
CFC during a taxable year of the lower-tier CFC, the amount of such 
dividend equal to the excess, if any, of--
    (i) The product of--
    (A) The sum of the amount of the subpart F income and tested income 
of the lower-tier CFC for the taxable year; and
    (B) The percentage (by value) of stock of the lower-tier CFC owned 
(within the meaning of section 958(a)(2)) by the upper-tier CFC 
immediately before the extraordinary reduction (or the first 
transaction forming a part thereof); over
    (ii) The following amounts--
    (A) The sum of each U.S. tax resident's pro rata share of the 
lower-tier CFC's subpart F income and tested income under section 
951(a) or 951A(a), respectively, that is attributable to shares of the 
lower-tier CFC owned (within the meaning of section 958(a)(2)) by the 
upper-tier CFC immediately prior to the extraordinary reduction (or the 
first transaction forming a part thereof), computed without the 
application of this paragraph (f);
    (B) The sum of each prior tiered extraordinary reduction amount and 
sum of each amount included in an upper-tier CFC's subpart F income by 
reason of section 245A(e) with respect to prior dividends from the 
lower-tier CFC during the taxable year;
    (C) The sum of each U.S. tax resident's pro rata share of an upper-
tier CFC's subpart F income under section 951(a) and Sec.  1.951-1(e) 
that is attributable to dividends received from the lower-tier CFC in 
the taxable year of the extraordinary reduction that do not qualify for 
the exception to foreign personal holding company income under section 
954(c)(6) because the dividends, or portions thereof, are properly 
allocable to subpart F income of the lower-tier CFC for the taxable 
year of the extraordinary reduction pursuant to section 954(c)(6)(A);
    (D) The sum of the prior extraordinary reduction amounts (but, for 
this purpose, computed without regard to amounts described in 
paragraphs (e)(2)(ii)(C)(2) and (3) of this section) of each 
controlling section 245A shareholder with respect to shares of the 
lower-tier CFC that were owned by such controlling section 245A 
shareholder (including indirectly through a specified entity other than 
a foreign corporation) for a portion of the taxable year but are owned 
by an upper-tier CFC (including indirectly through a specified entity 
other than a foreign corporation) at the time of the distribution of 
the dividend; and
    (E) The product of the amount described in paragraph (f)(2)(i)(B) 
of this section and the sum of the amounts of each U.S. tax resident's 
pro rata share of subpart F income and tested income for the taxable 
year under section 951(a) or 951A(a), respectively, attributable to 
shares of the lower-tier CFC directly or indirectly acquired by the 
U.S. tax resident from the lower-tier CFC during the taxable year.
    (3) Transition rule for computing tiered extraordinary reduction 
amount. Solely for purposes of applying this paragraph (f) in taxable 
years of a lower-tier CFC beginning on or after January 1, 2018, and 
ending before June 14, 2019, a tiered extraordinary reduction amount is 
determined by treating the lower-tier CFC's subpart F income for the 
taxable year as if it were neither subpart F income nor tested income.
    (g) Special rules. The rules in this paragraph (g) apply for 
purposes of this section.
    (1) Source of dividends. A dividend received by any person is 
considered received directly by such person from the foreign 
corporation whose earnings and profits give rise to the dividend. 
Therefore, for example, if a section 245A shareholder sells or 
exchanges stock of an upper-tier CFC and the gain recognized on the 
sale or exchange is included in the gross income of the section 245A 
shareholder as a dividend under section 1248(a), then, to the extent 
the dividend is attributable under section 1248(c)(2) to the earnings 
and profits of a lower-tier CFC owned, within the meaning of section 
958(a)(2), by the section 245A shareholder through the upper-tier CFC, 
the dividend is considered received directly by the section 245A 
shareholder from the lower-tier CFC.
    (2) Certain section 964(e) inclusions treated as dividends. An 
amount included in the gross income of a section 245A shareholder under 
section 951(a)(1)(A) by reason of section 964(e)(4) is considered a 
dividend received by the section 245A shareholder directly from the 
foreign corporation whose earnings and profits give rise to the amount 
described in section 964(e)(1). Therefore, for example, if an upper-
tier CFC sells or exchanges stock of a lower-tier CFC, and, as a result 
of the sale or exchange, a section 245A shareholder with respect to the 
upper-tier CFC includes an amount in gross income under section 
951(a)(1)(A) by reason of section

[[Page 53091]]

964(e)(4), then the inclusion is treated as a dividend received 
directly by the section 245A shareholder from the lower-tier CFC whose 
earnings and profits give rise to the dividend, and the section 245A 
shareholder is not allowed a section 245A deduction for the dividend to 
the extent of the ineligible amount of such dividend.
    (3) Rules regarding stock ownership and stock transfers--(i) 
Determining indirect ownership of stock of an SFC or a CFC. For 
purposes of this section, if a person owns an interest in, or stock of, 
a specified entity, including through a chain of ownership of one or 
more other specified entities, then the person is considered to own 
indirectly a pro rata share of stock of an SFC or a CFC owned by the 
specified entity. To determine a person's pro rata share of stock owned 
by a specified entity, the principles of section 958(a) apply without 
regard to whether the specified entity is foreign or domestic.
    (ii) Determining indirect transfers for stock owned indirectly. If, 
under paragraph (g)(3)(i) of this section, a person is considered to 
own indirectly stock of an SFC or CFC that is owned by a specified 
entity, then the following rules apply in determining if the person 
transfers stock of the SFC or CFC--
    (A) To the extent the specified entity transfers stock that is 
considered owned indirectly by the person immediately before the 
transfer, the person is considered to transfer indirectly such stock;
    (B) If the person transfers an interest in, or stock of, the 
specified entity, then the person is considered to transfer indirectly 
the stock of the SFC or CFC attributable to the interest in, or the 
stock of, the specified entity that is transferred; and
    (C) In the case in which the person owns the specified entity 
through a chain of ownership of one or more other specified entities, 
if there is a transfer of an interest in, or stock of, another 
specified entity in the chain of ownership, then the person is 
considered to transfer indirectly the stock of the SFC or CFC 
attributable to the interest in, or the stock of, the other specified 
entity transferred.
    (iii) Definition of specified entity. The term specified entity 
means any partnership, trust (other than a trust treated as a 
corporation for U.S. income tax purposes), or estate (in each case, 
domestic or foreign), or any foreign corporation.
    (4) Coordination rules--(i) General rule. A dividend is first 
subject to section 245A(e). To the extent the dividend is not a hybrid 
dividend or tiered hybrid dividend under section 245A(e), the dividend 
is subject to paragraph (e) or (f) of this section, as applicable, and 
then, to the extent the dividend is not subject to paragraph (e) or (f) 
of this section, it is subject to paragraph (c) or (d) of this section, 
as applicable.
    (ii) Coordination rule for paragraphs (c) and (d) and (e) and (f) 
of this section, respectively. If an SFC or CFC pays a dividend (or 
simultaneous dividends), a portion of which may be subject to paragraph 
(c) or (e) of this section and a portion of which may be subject to 
paragraph (d) or (f) of this section, the rules of this section apply 
by treating the portion of the dividend or dividends that may be 
subject to paragraph (c) or (e) of this section as if it occurred 
immediately before the portion of the dividend or dividends that may be 
subject to paragraph (d) or (f) of this section. For example, if a 
dividend arising under section 964(e)(4) occurs at the same time as a 
dividend that would be eligible for the exception to foreign personal 
holding company income under section 954(c)(6) but for the potential 
application of paragraph (d) this section, then the tiered 
extraordinary disposition amount with respect to the other dividend is 
determined as if the dividend arising under section 964(e)(4) occurs 
immediately before the other dividend.
    (5) Ordering rule for multiple dividends made by an SFC or a CFC 
during a taxable year. If an SFC or a CFC pays dividends on more than 
one date during its taxable year or at different times on the same 
date, this section applies based on the order in which the dividends 
are paid.
    (6) Partner's distributive share of a domestic partnership's pro 
rata share of subpart F income or tested income. If a section 245A 
shareholder or a U.S. tax resident is a direct or indirect partner in a 
domestic partnership that is a United States shareholder with respect 
to a CFC and includes in gross income its distributive share of the 
domestic partnership's inclusion under section 951(a) or 951A(a) with 
respect to the CFC then, solely for purposes of this section, a 
reference to the section 245A shareholder's or U.S. tax resident's pro 
rata share of the CFC's subpart F income or tested income included in 
gross income under section 951(a) or 951A(a), respectively, includes 
such person's distributive share of the domestic partnership's pro rata 
share of the CFC's subpart F income or tested income. A person is an 
indirect partner with respect to a domestic partnership if the person 
indirectly owns the domestic partnership through one or more specified 
entities (other than a foreign corporation).
    (7) Related domestic corporations treated as a single domestic 
corporation for certain purposes. For purposes of determining the 
extent that a dividend is an extraordinary disposition amount or a 
tiered extraordinary disposition amount, as well as for purposes of 
determining the extent to which an extraordinary disposition account is 
reduced by a prior extraordinary disposition amount, domestic 
corporations that are related parties are treated as a single domestic 
corporation. Thus, for example, if two domestic corporations are 
related parties and either or both of them are section 245A 
shareholders with respect to an SFC, then the extent to which a 
dividend received by either domestic corporation from the SFC is an 
extraordinary disposition amount is based on the sum of each domestic 
corporation's extraordinary disposition account with respect to the 
SFC. When, by reason of this paragraph (g)(7), the extent to which a 
dividend is an extraordinary disposition amount or tiered extraordinary 
disposition amount is determined based on the sum of two or more 
extraordinary disposition accounts, a pro rata amount in each 
extraordinary disposition account is considered to give rise to the 
extraordinary disposition amount or tiered extraordinary disposition 
amount, if any.
    (h) Anti-abuse rule. Appropriate adjustments are made pursuant to 
this section, including adjustments that would disregard a transaction 
or arrangement in whole or in part, to any amounts determined under (or 
subject to the application of) this section if a transaction or 
arrangement is engaged in with a principal purpose of avoiding the 
purposes of this section. For examples illustrating the application of 
this paragraph (h), see paragraphs (j)(8) through (10) of this section.
    (i) Definitions. The following definitions apply for purposes of 
this section.
    (1) Controlled foreign corporation. The term controlled foreign 
corporation (or CFC) has the meaning provided in section 957.
    (2) Controlling section 245A shareholder. The term controlling 
section 245A shareholder means, with respect to a CFC, any section 245A 
shareholder that owns directly or indirectly more than 50 percent (by 
vote or value) of the stock of the CFC. For purposes of determining 
whether a section 245A shareholder is a controlling section 245A 
shareholder with respect to a CFC, all stock of the

[[Page 53092]]

CFC owned by a related party with respect to the section 245A 
shareholder or by other persons acting in concert with the section 245A 
shareholder to undertake an extraordinary reduction is considered owned 
by the section 245A shareholder. If section 964(e)(4) applies to a sale 
or exchange of a lower-tier CFC with respect to a controlling section 
245A shareholder, all United States shareholders of the CFC are 
considered to act in concert with regard to the sale or exchange. In 
addition, if all persons selling stock in a CFC, held directly, sell 
such stock to the same buyer or buyers (or a related party with respect 
to the buyer or buyers) as part of the same plan, all sellers will be 
considered to act in concert with regard to the sale or exchange.
    (3) Disqualified amount. The term disqualified amount has the 
meaning set forth in paragraph (d)(1) of this section.
    (4) Disqualified period. The term disqualified period has the 
meaning set forth in paragraph (c)(3)(iii) of this section.
    (5) Extraordinary disposition. The term extraordinary disposition 
has the meaning set forth in paragraph (c)(3)(ii) of this section.
    (6) Extraordinary disposition account. The term extraordinary 
disposition amount has the meaning set forth in paragraph (c)(3)(i) of 
this section.
    (7) Extraordinary disposition amount. The term extraordinary 
disposition amount has the meaning set forth in paragraph (c)(1) of 
this section.
    (8) Extraordinary disposition E&P. The term extraordinary E&P has 
the meaning set forth in paragraph (c)(3)(i)(C) of this section.
    (9) Extraordinary disposition ownership percentage. The term 
extraordinary disposition ownership percentage has the meaning set 
forth in paragraph (c)(3)(i)(B) of this section.
    (10) Extraordinary reduction. The term extraordinary reduction has 
the meaning set forth in paragraph (e)(2)(i)(A) of this section.
    (11) Extraordinary reduction amount. The term extraordinary 
reduction amount has the meaning set forth in paragraph (e)(1) of this 
section.
    (12) Ineligible amount. The term ineligible amount has the meaning 
set forth in paragraph (b)(2) of this section.
    (13) Lower-tier CFC. The term lower-tier CFC means a CFC whose 
stock is owned (within the meaning of section 958(a)(2)), in whole or 
in part, by another CFC.
    (14) Non-extraordinary disposition E&P. The term non-extraordinary 
disposition E&P has the meaning set forth in paragraph (c)(2)(ii) of 
this section.
    (15) Pre-reduction pro rata share. The term pre-reduction pro rata 
share has the meaning set forth in paragraph (e)(2)(ii) of this 
section.
    (16) Prior extraordinary disposition amount. The term prior 
extraordinary disposition amount has the meaning set forth in paragraph 
(c)(3)(i)(D) of this section.
    (17) Prior extraordinary reduction amount. The term prior 
extraordinary reduction amount has the meaning set forth in paragraph 
(e)(2)(ii)(C) of this section.
    (18) Qualified portion. The term qualified portion has the meaning 
set forth in paragraph (c)(3)(i)(D)(2)(i) of this section.
    (19) Related party. The term related party means, with respect to a 
person, another person bearing a relationship described in section 
267(b) or 707(b) to the person, in which case such persons are related.
    (20) Section 245A deduction. The term section 245A deduction means, 
with respect to a dividend received by a section 245A shareholder from 
an SFC, the amount of the deduction allowed to the section 245A 
shareholder by reason of the dividend.
    (21) Section 245A shareholder. The term section 245A shareholder 
means a domestic corporation that is a United States shareholder with 
respect to an SFC and that owns directly or indirectly stock of the 
SFC.
    (22) Specified 10-percent owned foreign corporation (SFC). The term 
specified 10-percent owned foreign corporation (or SFC) has the meaning 
provided in section 245A(b)(1).
    (23) Specified entity. The term specified entity has the meaning 
set forth in paragraph (g)(3)(iii) of this section.
    (24) Specified property. The term specified property has the 
meaning set forth in paragraph (c)(3)(iv) of this section.
    (25) Tiered extraordinary disposition amount. The term tiered 
extraordinary disposition amount has the meaning set forth in paragraph 
(d)(2)(i) of this section.
    (26) Tiered extraordinary reduction amount. The term tiered 
extraordinary reduction amount has the meaning set forth in paragraph 
(f)(2) of this section.
    (27) United States shareholder. The term United States shareholder 
has the meaning provided in section 951(b).
    (28) Upper-tier CFC. The term upper-tier CFC means a CFC that owns 
(within the meaning of section 958(a)(2)) stock in another CFC.
    (29) U.S. tax resident. The term U.S. tax resident means a United 
States person described in section 7701(a)(30)(A) or (C).
    (j) Examples. The application of this section is illustrated by the 
examples in this paragraph (j).
    (1) Facts. Except as otherwise stated, the facts described in this 
paragraph (j)(1) are assumed for purposes of the examples.
    (i) US1 and US2 are domestic corporations, each with a calendar 
taxable year, and are not related parties with respect to each other.
    (ii) CFC1, CFC2, and CFC3 are foreign corporations that are SFCs 
and CFCs.
    (iii) Each entity uses the U.S. dollar as its functional currency.
    (iv) Year 2 begins on or after January 1, 2018 and has 365 days.
    (v) Absent application of this section, dividends received by US1 
and US2 from a CFC meet the requirements to qualify for the section 
245A deduction, and dividends received by one CFC from another CFC 
qualify for the exception to foreign personal holding company income 
under section 954(c)(6).
    (vi) The de minimis rules in paragraphs (c)(3)(ii)(E) and 
(e)(3)(ii) of this section do not apply.
    (vii) Section 1059 is not relevant to the tax results described in 
the examples in this paragraph (j).

    (2) Example 1. Extraordinary disposition--(i) Facts. US1 and US2 
own 60% and 40%, respectively, of the single class of stock of CFC1. 
CFC1 owns all of the single class of stock of CFC2. CFC1 and CFC2 
use the taxable year ending November 30 as their taxable year. On 
November 1, 2018, CFC1 sells specified property to CFC2 in exchange 
for $200x of cash (the ``Property Transfer''). The Property Transfer 
is outside of CFC1's ordinary course of activities. The transferred 
property has a basis of $100x in the hands of CFC1. CFC1 recognizes 
$100x of gain as a result of the Property Transfer ($200x - $100x). 
On December 1, 2018, CFC1 distributes $80x pro rata to US1 ($48x) 
and US2 ($32x), all of which is a dividend within the meaning of 
section 316 and treated as a distribution out of earnings described 
in section 959(c)(3). No other distributions are made by CFC1 to 
either US1 or US2 in CFC1's taxable year ending November 30, 2019. 
For its taxable year ending on November 30, 2019, CFC1 has $110x of 
earnings and profits described in section 959(c)(3), without regard 
to any distributions during the taxable year.
    (ii) Analysis--(A) Identification of extraordinary disposition. 
Because CFC1 is a CFC and uses the taxable year ending on November 
30, under paragraph (c)(3)(iii) of this section, it has a 
disqualified period beginning on January 1, 2018, and ending on 
November 30, 2018. In addition, under paragraph (c)(3)(ii) of this 
section, the Property Transfer is an extraordinary disposition 
because it: Is a disposition of specified property by CFC1 on a date 
on

[[Page 53093]]

which it was a CFC and during CFC1's disqualified period; is to 
CFC2, a related party with respect to CFC1; occurs outside of the 
ordinary course of CFC1's activities; and, is not subject to the de 
minimis rule in paragraph (c)(3)(ii)(E) of this section.
    (B) Determination of section 245A shareholders and their 
extraordinary disposition accounts. Because CFC1 undertook an 
extraordinary disposition, under paragraph (c)(3)(i) of this 
section, a portion of CFC1's earnings and profits are extraordinary 
disposition E&P and, therefore, give rise to an extraordinary 
disposition account with respect to each of CFC1's section 245A 
shareholders. Under paragraph (i)(21) of this section, US1 and US2 
are both section 245A shareholders with respect to CFC1. The amount 
of the extraordinary disposition account with respect to US1 is 
$60x, which is equal to the product of the extraordinary disposition 
E&P (the amount of the net gain recognized by CFC1 as a result of 
the Property Transfer ($100x)) and the extraordinary disposition 
ownership percentage (the percentage of the stock of CFC1 owned 
directly or indirectly by US1 on January 1, 2018 (60%)), reduced by 
the prior extraordinary disposition amount ($0). See paragraph 
(c)(3)(i) of this section. Similarly, the amount of the 
extraordinary disposition account with respect to US2 is $40x, which 
is equal to the product of the extraordinary disposition E&P (the 
net gain recognized by CFC1 as a result of the Property Transfer 
($100x)) and extraordinary disposition ownership percentage (the 
percentage of the stock of CFC1 owned directly or indirectly by US2 
on January 1, 2018 (40%)), reduced by the prior extraordinary 
disposition amount ($0).
    (C) Determination of extraordinary disposition amount with 
respect to US1. The dividend of $48x paid to US1 on December 1, 
2018, is an extraordinary disposition amount to the extent the 
dividend is paid out of the extraordinary disposition account with 
respect to US1. See paragraph (c)(1) of this section. Under 
paragraph (c)(2)(i) of this section, the dividend is first 
considered paid out of non-extraordinary disposition E&P with 
respect to US1, to the extent thereof. With respect to US1, $6x of 
CFC1's earnings and profits is non-extraordinary disposition E&P, 
calculated as the excess of $66x (the product of $110x of earnings 
and profits described in section 959(c)(3), without regard to the 
$80x distribution, and 60%) over $60x (the balance of US1's 
extraordinary disposition account with respect to CFC1, immediately 
before the distribution). See paragraph (c)(2)(ii) of this section. 
Thus, $6x of the dividend is considered paid out of non-
extraordinary disposition E&P with respect to US1. Under paragraph 
(c)(2)(i)(B) of this section, the remaining $42x of the dividend is 
next considered paid out of US1's extraordinary disposition account 
with respect to CFC1, to the extent thereof. Accordingly, $42x of 
the dividend is considered paid out of the extraordinary disposition 
account with respect to CFC1 and gives rise to $42x of an 
extraordinary disposition amount. As a result, US1's prior 
extraordinary disposition amount is increased by $42x under 
paragraph (c)(3)(i)(D) of this section, and US1's extraordinary 
disposition account is reduced to $18x ($60x - $42x) under paragraph 
(c)(3)(i)(A) of this section.
    (D) Determination of extraordinary disposition amount with 
respect to US2. The dividend of $32x paid to US2, on December 1, 
2018, is an extraordinary disposition amount to the extent the 
dividend is paid out of extraordinary disposition E&P with respect 
to US2. See paragraph (c)(1) of this section. Under paragraph 
(c)(2)(i) of this section, the dividend is first considered paid out 
of non-extraordinary disposition E&P with respect to US2, to the 
extent thereof. With respect to US2, $4x of CFC1's earnings and 
profits is non-extraordinary disposition E&P, calculated as the 
excess of $44x (the product of $110x of earnings and profits 
described in section 959(c)(3), without regard to the $80x 
distribution, and 40%) over $40x (the balance of US2's extraordinary 
disposition account with respect to CFC1, immediately before the 
distribution). See paragraph (c)(2)(ii) of this section. Thus, $4x 
of the dividend is considered paid out of non-extraordinary 
disposition E&P with respect to US2. Under paragraph (c)(2)(i)(B) of 
this section, the remaining $28x of the dividend is next considered 
paid out of US2's extraordinary disposition account with respect to 
CFC1, to the extent thereof. Accordingly, $28x of the dividend is 
considered paid out of the extraordinary disposition account with 
respect to US2 and gives rise to $28x of an extraordinary 
disposition amount. As a result, US2's prior extraordinary 
disposition amount is increased by $28x under paragraph (c)(3)(i)(D) 
of this section, and US2's extraordinary disposition account is 
reduced to $12x ($40x - $28x) under paragraph (c)(3)(i)(A) of this 
section.
    (E) Determination of ineligible amount with respect to US1 and 
US2. Under paragraph (b)(2) of this section, with respect to US1 and 
the dividend of $48x, the ineligible amount is $21x, the sum of 50 
percent of the extraordinary disposition amount ($42x) and 
extraordinary reduction amount ($0). Therefore, with respect to the 
dividend received by US1 of $48x, $27x is eligible for a section 
245A deduction. With respect to US2 and the dividend of $32x, the 
ineligible amount is $14x, the sum of 50% of the extraordinary 
disposition amount ($28x) and extraordinary reduction amount ($0). 
Therefore, with respect to the dividend received by US2 of $32x, 
$18x is eligible for a section 245A deduction.
    (3) Example 2. Application of section 954(c)(6) exception with 
extraordinary disposition account--(i) Facts. The facts are the same 
as in paragraph (j)(2)(i) of this section (the facts in Example 1) 
except that the Property Transfer is a sale by CFC2 to CFC1 instead 
of a sale by CFC1 to CFC2, the $80x distribution is by CFC2 to CFC1 
in a separate transaction that is unrelated to the Property 
Transfer, and the description of the earnings and profits of CFC1 is 
applied to CFC2. Additionally, absent the application of this 
section, section 954(c)(6) would apply to the distribution by CFC2 
to CFC1. Under section 951(a)(2) and Sec.  1.951-1(b) and (e), US1's 
pro rata share of any subpart F income of CFC1 is 60% and US2's pro 
rata share of any subpart F income of CFC2 is 40%.
    (ii) Analysis--(A) Identification of extraordinary disposition. 
The Property Transfer is an extraordinary disposition under the same 
analysis as provided in paragraph (j)(2)(ii)(A) of this section (the 
analysis in Example 1).
    (B) Determination of section 245A shareholders and their 
extraordinary disposition accounts. Both US1 and US2 are section 
245A shareholders with respect to CFC2, US1 has an extraordinary 
disposition account of $60x with respect to CFC2, and US2 has an 
extraordinary disposition account of $40x with respect to CFC2 under 
the same analysis as provided in paragraph (j)(2)(ii)(B) of this 
section (the analysis in Example 1).
    (C) Determination of tiered extraordinary disposition amount--
(1) In general. US1 and US2 each have a tiered extraordinary 
disposition amount with respect to the $80x dividend paid by CFC2 to 
CFC1 to the extent that US1 and US2 would have an extraordinary 
disposition amount if each had received as a dividend its pro rata 
share of the dividend from CFC2. See paragraph (d)(2)(i) of this 
section. Under paragraph (d)(2)(ii) of this section, US1's pro rata 
share of the dividend is $48x (60% x $80x), that is, the increase to 
US1's pro rata share of the subpart F income if the dividend were 
included in CFC1's foreign personal holding company income, without 
regard to section 952(c) and the allocation of expenses. Similarly, 
US2's pro rata share of the dividend is $32x (40% x $80x).
    (2) Determination of tiered extraordinary disposition amount 
with respect to US1. The extraordinary disposition amount with 
respect to US1 is $42x, under the same analysis provided in 
paragraph (j)(2)(ii)(C) of this section (the analysis in Example 1). 
Accordingly, the tiered extraordinary disposition amount with 
respect to US1 is $42x.
    (3) Determination of extraordinary disposition amount with 
respect to US2. The extraordinary disposition amount with respect to 
US2 is $28x, under the same analysis provided in paragraph 
(j)(2)(ii)(D) of this section (the analysis in Example 1). 
Accordingly, the tiered extraordinary disposition amount with 
respect to US2 is $28x.
    (D) Limitation of section 954(c)(6) exception. The sum of US1 
and US2's tiered extraordinary disposition amounts is $70x ($42x + 
$28x). The portion of the stock of CFC1 (by value) owned (within the 
meaning of section 958(a)) by U.S. tax residents on the last day of 
CFC1's taxable year is 100%. Under paragraph (d)(1) of this section, 
the disqualified amount with respect to the dividend is $70x ($70x/
100%). Accordingly, the portion of the $80x dividend from CFC2 to 
CFC1 that is eligible for the exception to foreign personal holding 
company income under section 954(c)(6) is $45x, equal to the sum of 
$10x (the portion of the $80x dividend that exceeds the $70x 
disqualified amount) and $35x (50 percent of $70x, the portion of 
the dividend that does not exceed the disqualified amount). Under 
section 951(a)(2) and Sec.  1.951-1(b) and (e), US1 includes $21x 
(60% x $35x) and US2

[[Page 53094]]

includes $14x (40% x $35x) in income under section 951(a).
    (E) Changes in extraordinary disposition account of US1. Under 
paragraph (c)(3)(i)(D)(1) of this section, US1's prior extraordinary 
disposition amount with respect to CFC2 is increased by $42x, or 
200% of $21x, the amount US1 included in income under section 951(a) 
with respect to CFC1. Under paragraph (c)(3)(i)(D)(1)(iii) of this 
section, US1 has no qualified portion because all of the owners of 
CFC2 are section 245A shareholders with a tiered extraordinary 
disposition amount with respect to CFC2. As a result, US1's 
extraordinary disposition account is reduced to $18x ($60x-$42x) 
under paragraph (c)(3)(i)(A) of this section.
    (F) Changes in extraordinary disposition account of US2. Under 
paragraph (c)(3)(i)(D)(1) of this section, US2's prior extraordinary 
disposition amount with respect to CFC2 is increased by $28x, or 
200% of $14x, the amount US2 included in income under section 951(a) 
with respect to CFC1. Under paragraph (c)(3)(i)(D)(1)(iii) of this 
section, US2 has no qualified portion because all of the owners of 
CFC2 are section 245A shareholders with a tiered extraordinary 
disposition amount with respect to CFC2. As a result, US2's 
extraordinary disposition account is reduced to $12x ($40x-$28x) 
under paragraph (c)(3)(i)(A) of this section.
    (4) Example 3. Extraordinary reduction--(i) Facts. At the 
beginning of CFC1's taxable year ending on December 31, Year 2, US1 
owns all of the single class of stock of CFC1, and no person 
transferred any CFC1 stock directly or indirectly in Year 1 pursuant 
to a plan to reduce the percentage of stock (by value) of CFC1 owned 
by US1. Also as of the beginning of Year 2, CFC1 has no earnings and 
profits described in section 959(c)(1) or (2), and US1 does not have 
an extraordinary disposition account with respect to CFC1. As of the 
end of Year 2, CFC1 has $160x of tested income and no other income. 
CFC1 has $160x of earnings and profits for Year 2. On October 19, 
Year 2, US1 sells all of its CFC1 stock to US2 for $100x in a 
transaction (the ``Stock Sale'') in which US1 recognizes $90x of 
gain. Under section 1248(a), the entire $90x of gain is included in 
US1's gross income as a dividend and, pursuant to section 1248(j), 
the $90x is treated as a dividend for purposes of applying section 
245A. At the end of Year 2, under section 951A, US2 takes into 
account $70x of tested income, calculated as $160x (100% of the 
$160x of tested income) less $90x, the amount described in section 
951(a)(2)(B). The amount described in section 951(a)(2)(B) is the 
lesser of $90x, the amount of dividends received by US1 with respect 
to the transferred stock, and $128x, the amount of tested income 
attributable to the transferred stock ($160x) multiplied by 292/365 
(the ratio of the number of days in Year 2 that US2 did not own the 
transferred stock to the total number of days in Year 2). US1 does 
not make an election pursuant to paragraph (e)(3)(i) of this 
section.
    (ii) Analysis--(A) Determination of controlling section 245A 
shareholder and extraordinary reduction of ownership. Under 
paragraph (i)(2) of this section, US1 is a controlling section 245A 
shareholder with respect to CFC1. In addition, the Stock Sale 
results in an extraordinary reduction with respect to US1's 
ownership of CFC1. See paragraph (e)(2)(i) of this section. The 
extraordinary reduction occurs because during Year 2, US1 
transferred 100% of the CFC1 stock it owned at the beginning of the 
year and such amount is more than 5% of the total value of the stock 
of CFC1 at the beginning of Year 2; it also occurs because on the 
last day of the year the percentage of stock (by value) of CFC1 that 
US1 owns directly or indirectly (0%) (the end of year percentage) is 
less than 90% of the stock (by value) of CFC1 that US1 owns directly 
or indirectly on the day of the taxable year when it owned the 
highest percentage of CFC1 stock by value (100%) (the initial 
percentage), no transactions occurred in the preceding year pursuant 
to a plan to reduce the percentage of CFC1 stock owned by US1, and 
the difference between the initial percentage and the end of year 
percentage (100 percentage points) is at least 5 percentage points.
    (B) Determination of extraordinary reduction amount. Under 
paragraph (e)(1) of this section, the entire $90x dividend to US1 is 
an extraordinary reduction amount with respect to US1 because the 
dividend is at least equal to US1's pre-reduction pro rata share of 
CFC1's Year 2 tested income described in paragraph (e)(2)(ii)(A) of 
this section ($160x), reduced by the amount of tested income taken 
into account by US2, a U.S. tax resident, under paragraph 
(e)(2)(ii)(B) of this section ($70x).
    (C) Determination of ineligible amount. Under paragraph (b)(2) 
of this section, with respect to US1 and the dividend of $90x, the 
ineligible amount is $90x, the sum of 50% of the extraordinary 
disposition amount ($0) and extraordinary reduction amount ($90x). 
Therefore, with respect to the dividend received of $90x, no portion 
is eligible for the dividends received deduction allowed under 
section 245A(a).
    (iii) Alternative facts--election to close CFC's taxable year. 
The facts are the same as in paragraph (j)(4)(i) of this section 
(the facts of this Example 3), except that, pursuant to paragraph 
(e)(3)(i) of this section, US1 elects to close CFC1's Year 2 taxable 
year for all purposes of the Code as of the end of October 19, Year 
2, the date on which the Stock Sale occurs; in addition, US1 and US2 
enter into a written, binding agreement that US1 will elect to close 
CFC1's Year 2 taxable year. Accordingly, under section 951A(a), US1 
takes into account 100% of CFC1's tested income for the taxable year 
beginning January 1, Year 2, and ending October 19, Year 2, and US2 
takes into account 100% of CFC1's tested income for the taxable year 
beginning October 20, Year 2, and ending December 31, Year 2. Under 
paragraph (e)(3)(i)(A) of this section, no amount is considered an 
extraordinary reduction amount with respect to US1.
    (5) Example 4. Extraordinary reduction; decrease in section 245A 
shareholder's pre-reduction pro rata share for amounts taken into 
account by U.S. tax residents--(i) Facts. At the beginning of CFC1's 
taxable year ending December 31, Year 2, US1 owns all of the single 
class of stock of CFC1, and no person transferred any CFC1 stock 
directly or indirectly in Year 1 pursuant to a plan to reduce the 
percentage of stock (by value) of CFC1 owned by US1. CFC1 generates 
$120x of subpart F income during its taxable year ending on December 
31, Year 2. On October 1, Year 2, CFC1 distributes a $120x dividend 
to US1. On October 19, Year 2, US1 sells 100% of its stock of CFC1 
to PRS, a domestic partnership, in a transaction in which no gain or 
loss is realized (the ``Stock Sale''). A, an individual who is a 
citizen of the United States, and B, a foreign individual who is not 
a U.S. tax resident, each own 50% of the capital and profits 
interests of PRS. On December 1, Year 2, US2 and FP, a foreign 
corporation, contribute property to CFC1; in exchange, each of US2 
and FP receives 25% of the stock of CFC1. PRS owns the remaining 50% 
of the stock of CFC1. US1 does not make an election pursuant to 
paragraph (e)(3)(i) of this section.
    (ii) Analysis--(A) Determination of controlling section 245A 
shareholder and extraordinary reduction. Under paragraph (i)(2) of 
this section, US1 is a controlling section 245A shareholder with 
respect to CFC1. In addition, the Stock Sale results in an 
extraordinary reduction with respect to US1's ownership of CFC1. See 
paragraph (e)(2)(i) of this section. The extraordinary reduction 
occurs because during Year 2, US1 transferred 100% of the CFC1 stock 
it owns on the first day of Year 2, and that amount is more than 5% 
of the total value of the stock of CFC1 at the beginning of Year 2; 
it also occurs because on the last day of Year 2 the percentage of 
stock (by value) of CFC1 that US1 owns directly or indirectly (0%) 
(the end of year percentage) is less than 90% of the highest 
percentage of stock (by value) of CFC1 that US1 owns directly or 
indirectly on the day of the taxable year when it owned the highest 
percentage of CFC1 stock by value (100%) (the initial percentage), 
no transactions occurred in the preceding year pursuant to a plan to 
reduce the percentage of CFC1 stock owned by US1, and the difference 
between the initial percentage and the end of year percentage (100 
percentage points) is at least 5 percentage points.
    (B) Determination of pre-reduction pro rata share. Before the 
extraordinary reduction, US1 owned 100% of the stock of CFC1. Thus, 
under paragraph (e)(2)(ii)(A) of this section, the tentative amount 
of US1's pre-reduction pro rata share of CFC1's subpart F income is 
$120x. A and US2 are U.S. tax residents pursuant to paragraph 
(i)(29) of this section because they are United States persons 
described in section 7701(a)(30)(A) or (C). Thus, US1's pre-
reduction pro rata share amount is subject to the reduction 
described in paragraph (e)(2)(ii)(B) of this section because U.S. 
tax residents directly or indirectly acquire stock of CFC1 from US1 
or CFC1 during the taxable year in which the extraordinary reduction 
occurs. With respect to US1's pre-reduction pro rata share of CFC1's 
subpart F income, the reduction equals the amount of subpart F 
income of CFC1 taken into account under section 951(a) by these U.S. 
tax residents.
    (C) Determination of decrease in pre-reduction pro rata share 
for amounts taken

[[Page 53095]]

into account by U.S. tax resident. On December 31, Year 2, both PRS 
and US2 will be United States shareholders with respect to CFC1 and 
will include in gross income their pro rata share of CFC1's subpart 
F income under section 951(a). With respect to US2, this amount will 
be $30x, which is equal to 25% of CFC1's subpart F income for the 
taxable year. With respect to PRS, its pro rata share of $60x under 
section 951(a)(2)(A) (50% of $120x) will be reduced under section 
951(a)(2)(B) by $48x. The section 951(a)(2)(B) reduction is equal to 
the lesser of the $120x dividend paid with respect to those shares 
to US1 or $48x (50% x $120x x 292/365, the period during the taxable 
year that PRS did not own CFC1 stock). Thus, PRS includes $12x in 
gross income pursuant to section 951(a). Of this amount, $6x is 
allocated to A (as a 50% partner of PRS) and, therefore, treated as 
taken into account by A under paragraphs (e)(2)(ii)(B) and (g)(6) of 
this section. Thus, A and US2 take into account a total of $36x of 
CFC1's subpart F income under section 951(a). This amount reduces 
US1's pre-reduction pro rata share of CFC1's subpart F income to 
$84x ($120x-$36x) under paragraph (e)(2)(ii)(B) of this section. 
CFC1 did not generate tested income during the taxable year and, 
therefore, no amount is taken into account under section 951A with 
respect to CFC1, and US1 has no pre-reduction pro rata share with 
respect to tested income of CFC1.
    (D) Determination of extraordinary reduction amount. Under 
paragraph (e)(1) of this section, the extraordinary reduction amount 
equals $84x, which is the lesser of the amount of the dividend 
received by US1 from CFC1 during Year 2 ($120x) and the sum of US1's 
pre-reduction pro rata share of CFC1's subpart F income ($84x) and 
tested income ($0).
    (E) Determination of ineligible amount. Under paragraph (b)(2) 
of this section, with respect to US1 and the dividend of $120x, the 
ineligible amount is $84x, the sum of 50% of the extraordinary 
disposition amount ($0) and extraordinary reduction amount ($84x). 
Therefore, with respect to the dividend received by US1 from CFC1, 
$36x ($120x-$84x) is eligible for a section 245A deduction.
    (6) Example 5. Controlling section 245A shareholder--(i) Facts. 
US1 and US2 own 30% and 25% of the stock of CFC1, respectively. FP, 
a foreign corporation that is not a CFC, owns all of the stock of 
US1 and US2. FP owns the remaining 45% of the stock of CFC1. On 
September 30, Year 2, US1 sells all of its stock of CFC1 to US3, a 
domestic corporation that is not a related party with respect to FP, 
US1, or US2. No person transferred any stock of CFC1 directly or 
indirectly in Year 1 pursuant to a plan to reduce the percentage of 
stock (by value) of CFC1 owned by US1.
    (ii) Analysis. Under paragraph (i)(21) of this section, US1 is a 
section 245A shareholder with respect to CFC1, an SFC. Because US1 
owns, together with US2 and FP (related persons with respect to 
US1), more than 50% of the stock of CFC1, US1 is a controlling 
section 245A shareholder of CFC1. The sale of US1's CFC1 stock 
results in an extraordinary reduction occurring with respect to 
US1's ownership of CFC1. The extraordinary reduction occurs because 
during Year 2, US1 transferred 100% of the stock of CFC1 that it 
owned at the beginning of the year and that amount is more than 5% 
of the total value of the stock of CFC1 at the beginning of Year 2. 
The extraordinary disposition also occurs because on the last day of 
the year the percentage of stock (by value) of CFC1 that US1 
directly or indirectly owns (0%) (the end of year percentage) is 
less than 90% of the stock (by value) of CFC1 that US1 directly or 
indirectly owned on the day of the taxable year when it owned the 
highest percentage of CFC1 stock by value (30%) (the initial 
percentage), no transactions occurred in the preceding year pursuant 
to a plan to reduce the percentage of CFC1 stock owned by US1, and 
the difference between the initial percentage and end of year 
percentage (30 percentage points) is at least 5 percentage points.
    (7) Example 6. Limitation of section 954(c)(6) exception with 
respect to an extraordinary reduction--(i) Facts. At the beginning 
of CFC1 and CFC2's taxable year ending on December 31, Year 2, US1 
and A, an individual who is a citizen of the United States, own 80% 
and 20% of the single class of stock of CFC1, respectively. CFC1 
owns 100% of the stock of CFC2. Both US1 and A are United States 
shareholders with respect to CFC1 and CFC2, and US1 and A are not 
related parties with respect to each other. No person transferred 
CFC2 stock directly or indirectly in Year 2 pursuant to a plan to 
reduce the percentage of stock (by value) of CFC2 owned by US1, and 
US1 does not have an extraordinary disposition account with respect 
to CFC2. At the end of Year 2, and without regard to any 
distributions during Year 2, CFC2 had $150x of tested income and no 
other income, and CFC1 had no income or expenses. On June 30, Year 
2, CFC2 distributed $150x as a dividend to CFC1, which would qualify 
for the exception from foreign personal holding company income under 
section 954(c)(6) but for the application of this section. On August 
7, Year 2, CFC1 sells all of its CFC2 stock to US2 for $100x in a 
transaction (the ``Stock Sale'') in which CFC1 realizes no gain or 
loss. At the end of Year 2, under section 951A, US2 takes into 
account $60x of tested income, calculated as $150x (100% of the 
$150x of tested income) less $90x, the amount described in section 
951(a)(2)(B). The amount described in section 951(a)(2)(B) is the 
lesser of $150x, the amount of dividends received by CFC1 during 
Year 2 with respect to the transferred stock, and $90x, the amount 
of tested income attributable to the transferred stock ($150x) 
multiplied by 219/365 (the ratio of the number of days in Year 2 
that US2 did not own the transferred stock to the total number of 
days in Year 2). US1 does not make an election pursuant to paragraph 
(e)(3)(i) of this section.
    (ii) Analysis--(A) Determination of controlling section 245A 
shareholder and extraordinary reduction of ownership. Under 
paragraph (i)(2) of this section, US1 is a controlling section 245A 
shareholder with respect to CFC2, but A is not. In addition, the 
Stock Sale results in an extraordinary reduction with respect to 
US1's ownership of CFC2. See paragraph (e)(2)(i) of this section. 
The extraordinary reduction occurs because during Year 2, US1 
transferred indirectly 100% of the CFC2 stock it owned at the 
beginning of the year and such amount is more than 5% of the total 
value of the stock of CFC2 at the beginning of Year 2. The 
extraordinary disposition also occurs because on the last day of the 
year the percentage of stock (by value) of CFC2 that US1 owns 
directly or indirectly (0%) (the end of year percentage) is less 
than 90% of the stock (by value) of CFC2 that US1 owns directly or 
indirectly on the day of the taxable year when it owned the highest 
percentage of CFC2 stock by value (80%) (the initial percentage), no 
transactions occurred in the preceding year pursuant to a plan to 
reduce the percentage of CFC2 stock owned by US1, and the difference 
between the initial percentage and the end of year percentage (80 
percentage points) is at least 5 percentage points. Because there is 
an extraordinary reduction with respect to CFC2 in Year 2 and CFC1 
received a dividend from CFC2 in Year 2, under paragraph (f)(1) of 
this section, it is necessary to determine the limitation on the 
amount of the dividend eligible for the exception under section 
954(c)(6).
    (B) Determination of tiered extraordinary reduction amount. The 
limitation on the amount of the dividend eligible for the exception 
under section 954(c)(6) is based on the tiered extraordinary 
reduction amount. The sum of the amount of subpart F income and 
tested income of CFC2 for Year 2 is $150x, and immediately before 
the extraordinary reduction, CFC1 held 100% of the stock of CFC2. 
Additionally, US2 is a U.S. tax resident as defined in paragraph 
(i)(29) of this section because it is a United States person 
described in section 7701(a)(30)(A) or (C), and US2 has a pro rata 
share of $60x of tested income under section 951A with respect to 
CFC2. Accordingly, under paragraph (f)(2) of this section, the 
tiered extraordinary reduction amount is $90x (($150x x 100%) - 
$60x).
    (C) Limitation of section 954(c)(6) exception. Under paragraph 
(f)(1) of this section, the portion of the $150x dividend from CFC2 
to CFC1 that is eligible for the exception to foreign personal 
holding company income under section 954(c)(6) is $60x ($150x - 
$90x). To the extent that the $90x that does not qualify for the 
exception gives rise to additional subpart F income to CFC1, both 
US1 and A will take into account their pro rata share of that 
subpart F income under section 951(a)(2) and Sec.  1.951-1(b) and 
(e).
    (8) Example 7. Application of anti-abuse rule to a prepayment of 
a royalty--(i) Facts. US1 owns 100% of the single class of stock of 
CFC1 and CFC2. CFC1 has a November 30 taxable year, and CFC2 has a 
calendar year taxable year. There is a license agreement between 
CFC1 and CFC2 pursuant to which CFC2 is obligated to pay annual 
royalties to CFC1 for the use of intangible property. As of November 
1, 2018, the remaining term of the agreement is 10 years. On 
November 1, 2018, CFC1 receives from CFC2, and accrues into income, 
$100x of pre-paid royalties that are for the use of the intangible 
property for the subsequent 10 years. The form of the

[[Page 53096]]

arrangement as a license, including the prepayment of the royalty, 
is respected for U.S. tax purposes; therefore CFC1's receipt of the 
$100x royalty prepayment does not constitute a disposition of the 
intangible property and is excluded from CFC1's subpart F income 
pursuant to section 954(c)(6). A principal purpose of CFC2 prepaying 
the royalty is for CFC1 to generate earnings and profits during the 
disqualified period that would not be subject to current U.S. tax 
yet may be eligible for the section 245A deduction and could, for 
example, be used to reduce the amount of gain recognized on a 
disposition of the stock of CFC1 that would be subject to U.S. tax 
by increasing the portion of such gain treated as a dividend.
    (ii) Analysis. Because the royalty prepayment was carried out 
with a principal purpose of avoiding the purposes of this section, 
appropriate adjustments are required to be made under the anti-abuse 
rule in paragraph (h) of this section. CFC1 is a CFC that has a 
November 30 taxable year, so under paragraph (c)(3)(iii) of this 
section, CFC1 has a disqualified period beginning on January 1, 
2018, and ending on November 30, 2018. In addition, even though the 
intangible property licensed by CFC1 to CFC2 is specified property, 
CFC2's prepayment of the royalty would not be treated as a 
disposition of the specified property by CFC1 and, therefore, would 
not constitute an extraordinary disposition (and thus would not give 
rise to extraordinary disposition E&P), absent the application of 
the anti-abuse rule of paragraph (h) of this section. Pursuant to 
paragraph (h) of this section, the earnings and profits of CFC1 
generated as a result of the $100x of prepaid royalty are treated as 
extraordinary disposition E&P for purposes of this section.
    (9) Example 8. Application of anti-abuse rule to restructuring 
transaction--(i) Facts. FP, a foreign corporation with no United 
States shareholders, owns 100% of the single class of stock of US1. 
US1 owns 100% of the single class of stock of CFC1 that, in turn, 
owns 100% of the single class of stock of CFC2. CFC2 has $100x of 
extraordinary disposition E&P, and US1 has a $100x extraordinary 
disposition account with respect to CFC2. In Year 1, FP transfers 
property to CFC1 in exchange for newly issued stock of CFC1. After 
the transfer, FP and US1 own, respectively, 90% and 10% of the 
single class of stock of CFC1. In Year 3, CFC2 pays a $100x dividend 
to CFC1, and the dividend gives rise to a tiered extraordinary 
disposition amount with respect to US1 of $10x. US1 includes $10x in 
gross income under section 951(a) with respect to the tiered 
extraordinary disposition amount. The $10x tiered extraordinary 
disposition amount reduces US1's extraordinary disposition account 
from $100x to $90x. In Year 5, CFC1 redeems all of the stock of CFC1 
held by US1 in exchange for $100x of cash. Under sections 302(d) and 
301(c)(1), the redemption results in a $100x dividend to US1. Under 
section 959(a), $10x of the $100x dividend is not included in US1's 
gross income and, but for the application of paragraph (h) of this 
section, US1 would claim a section 245A deduction of $90x with 
respect to $90x of the dividend. The transfer of property from FP to 
CFC1 in exchange for stock of CFC1, the $100x dividend from CFC2 to 
CFC1, and CFC1's redemption of all of its stock held by US1 
(together, the ``Transaction'') were undertaken with the principal 
purpose of avoiding the application of this section to distributions 
from CFC2. As a result of the redemption, CFC2 is wholly owned by FP 
through CFC1, and CFC2's earnings and profits can be distributed 
without incurring U.S. tax irrespective of the availability of the 
section 245A deduction or the exception under section 954(c)(6).
    (ii) Analysis. Because the Transaction was carried out with a 
principal purpose of avoiding the purposes of this section, 
appropriate adjustments are required to be made under the anti-abuse 
rule in paragraph (h) of this section. Pursuant to paragraph (h) of 
this section, all $90x of the dividend included in US1's income in 
Year 5 is treated as an extraordinary disposition amount. Therefore, 
$45x of the dividend is treated as an ineligible amount for which 
US1 cannot claim a section 245A deduction pursuant to paragraph 
(b)(2)(i) of this section (that is, 50% of the extraordinary 
disposition amount) and, accordingly, US1 is only allowed a section 
245A deduction of $45x ($90x dividend received, less the $45x 
ineligible amount) with respect to the $90x dividend from CFC1 that 
it included in income. In addition, US1's extraordinary disposition 
account with respect to CFC2 is reduced from $90x to zero pursuant 
to paragraph (c)(3)(i)(A) and (D) of this section.
    (10) Example 9. Application of anti-abuse rule to a related-
party loan--(i) Facts. US1 owns 100% of the single class of stock of 
CFC1 and CFC2. US1 does not own stock of any other foreign 
corporation. US1 intends to repatriate $100x cash from CFC1 at the 
end of taxable year Y1. At the end of taxable year Y1, CFC1 has 
$100x of earnings and profits described in section 959(c)(3) (all of 
which is extraordinary disposition E&P) and $100x of cash, and US1 
has an extraordinary disposition account balance with respect to 
CFC1 equal to $100x. In addition, at the end of taxable year Y1, 
CFC2 has $100x of earnings and profits described in section 
959(c)(3). US1 does not have an extraordinary disposition account 
with respect to CFC2. Anticipating the application of this section 
to a distribution from CFC1, US1 instead causes CFC1 to loan $100x 
of cash to CFC2 during taxable year Y1 in exchange for a $100x note. 
The form of the transaction is respected as a loan for U.S. tax 
purposes. At the end of taxable Y1, CFC2 distributes $100x of cash 
to US1. The loan and distribution are part of a plan a principal 
purpose of which is to repatriate CFC1's $100x cash without 
triggering the application of this section.
    (ii) Analysis. Because the loan from CFC1 to CFC and the 
subsequent distribution of cash were carried out with a principal 
purpose of avoiding the purposes of this section, appropriate 
adjustments are required to be made under the anti-abuse rule in 
paragraph (h) of this section. Pursuant to that rule, the 
distribution of $100x of cash is treated as a distribution out of 
US1's extraordinary disposition account with respect to CFC1. 
Accordingly, the $100x distribution is taxed as a dividend, and only 
$50x of the dividend received by US1 is eligible for the section 
245A deduction pursuant to paragraph (b)(1) of this section. As a 
result of the distribution, the balance of US1's extraordinary 
disposition account with respect to CFC1 is reduced by $100x to zero 
pursuant to paragraph (c)(3)(i)(A) of this section.

    (k) Applicability date--(1) In general. This section applies to 
taxable periods of a foreign corporation ending on or after June 14, 
2019, and to taxable periods of section 245A shareholders in which or 
with which such taxable periods end. For taxable periods described in 
the previous sentence, this section (and not Sec.  1.245A-5T) applies 
regardless of whether, but for this paragraph (k)(1), Sec.  1.245A-5T 
would apply. See Sec.  1.245A-5T as contained in 26 CFR part 1 edition 
revised as of April 1, 2020 for distributions occurring after December 
31, 2017, as to which this section does not apply.
    (2) Early application of this section. Notwithstanding paragraph 
(k)(1) of this section, a taxpayer may choose to apply this section to 
taxable periods of a foreign corporation ending before June 14, 2019, 
and to taxable periods of section 245A shareholders in which or with 
which such taxable periods end, provided that the taxpayer and all 
persons bearing a relationship to the taxpayer described in section 
267(b) or 707(b) apply this section in its entirety for all such 
taxable periods.


Sec.  Sec.  1.245A-1T through 1.245-4T and 1.245A-5T   [Removed]

0
Par. 3. Sections 1.245A-1T through 1.245-4T and 1.245A-5T are removed.
0
Par. 4. Section 1.245A(e)-1 is amended by, for each paragraph listed in 
the following table, removing the language in the ``Remove'' column and 
adding in its place the language in the ``Add'' column.

----------------------------------------------------------------------------------------------------------------
                           Paragraph                                     Remove                    Add
----------------------------------------------------------------------------------------------------------------
(b)(2)........................................................                1.245A-5T                 1.245A-5
(b)(3) introductory text......................................      1.245A-5T(g)(3)(ii)       1.245A-5(g)(3)(ii)
(c)(3)........................................................      1.245A-5T(g)(3)(ii)       1.245A-5(g)(3)(ii)

[[Page 53097]]

 
(d)(5) introductory text......................................      1.245A-5T(g)(3)(ii)       1.245A-5(g)(3)(ii)
(g)(1)(i).....................................................                1.245A-5T                 1.245A-5
(g)(1)(iii)...................................................                1.245A-5T                 1.245A-5
(g)(2)(i).....................................................                1.245A-5T                 1.245A-5
----------------------------------------------------------------------------------------------------------------


0
Par. 5. Section 1.954(c)(6)-1 is added to read as follows:


Sec.  1.954(c)(6)-1  Certain cases in which section 954(c)(6) exception 
not available.

    (a) Cross-references to other rules. For a non-exclusive list of 
rules that in certain cases limit the applicability of the exception to 
foreign personal holding company income under section 954(c)(6), see--
    (1) Section 1.245A-5(d) (rules regarding the application of section 
954(c)(6) to extraordinary disposition amounts);
    (2) Section 1.245A-5(f) (rules regarding the application of section 
954(c)(6) to tiered extraordinary reduction amounts);
    (3) Section 1.245A(e)-1(c) (rules regarding tiered hybrid 
dividends);
    (4) Section 1.367(b)-4(e)(4) (rules regarding income inclusion and 
gain recognition in certain exchanges following an inversion 
transaction);
    (5) Section 964(e)(4)(A) (rules regarding certain gain from the 
sale or exchange of stock that is recharacterized as a dividend); and
    (6) Section 1.7701(l)-4(e) (rules regarding recharacterization of 
certain transactions following an inversion transaction).
    (b) Applicability date. This section applies as of August 27, 2020.


Sec.  1.954(c)(6)-1T  [Removed]

0
Par. 6. Section 1.954(c)(6)-1T is removed.

0
Par. 7. Section 1.6038-2 is amended by adding paragraphs (f)(16) and 
(m)(2) to read as follows:


Sec.  1.6038-2  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations.

* * * * *
    (f) * * *
    (16) Amounts related to extraordinary dispositions and 
extraordinary reductions. The corporation must report the information 
in the form and manner and to the extent prescribed by the form, 
instructions to the form, publication, or other guidance published in 
the Internal Revenue Bulletin if any of the following conditions are 
met during the corporation's annual accounting period--
    (i) The corporation distributes or receives a dividend that gives 
rise to an ineligible amount (as defined in Sec.  1.245A-5(i)(12)), a 
tiered extraordinary disposition amount (as defined in Sec.  1.245A-
5(i)(25)), or a tiered extraordinary reduction amount (as defined in 
Sec.  1.245A-5(i)(26));
    (ii) A section 245A shareholder with respect to the corporation has 
an extraordinary disposition account (as defined in Sec.  1.245A-
5(i)(6)); or
    (iii) The corporation would have been deemed to have undertaken an 
extraordinary disposition (as defined in Sec.  1.245A-5(i)(5)) but for 
the application of Sec.  1.245A-5(c)(3)(ii)(C)(2).
* * * * *
    (m) * * *
    (2) Special rule for paragraph (f)(16) of this section. Paragraph 
(f)(16) of this section applies with respect to information for annual 
accounting periods to which Sec.  1.245A-5 applies.
* * * * *


Sec.  1.6038-2T  [Removed]

0
Par. 8. Section 1.6038-2T is removed.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.

    Approved: August 10, 2020.
David Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-18543 Filed 8-21-20; 4:15 pm]
BILLING CODE 4830-01-P