[Federal Register Volume 91, Number 164 (Wednesday, August 26, 2026)]
[Proposed Rules]
[Pages 55037-55062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-17365]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-115646-25]
RIN 1545-BR77
Pro Rata Share of Subpart F Income, Tested Income, or Tested Loss
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to the
determination of a United States shareholder's pro rata share of
subpart F income, tested income, or tested loss of a controlled foreign
corporation. The proposed regulations would affect shareholders of
foreign corporations, including United States shareholders of
controlled foreign corporations.
DATES: Written or electronic comments and requests for a public hearing
must be received by October 26, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-115646-
25) by following the online instructions for submitting comments.
Requests for a public hearing must be submitted as prescribed in the
``Comments and Requests for a Public Hearing'' section. Once submitted
to the Federal eRulemaking Portal, comments cannot be edited or
withdrawn. The Department of the Treasury (Treasury Department) and the
IRS will publish for public availability any comment submitted to the
IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-
115646-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Dylan J. Steiner at (202) 317-6934; concerning submissions of comments
and requests for a public hearing, contact the Publications and
Regulations Section of the Office of Associate Chief Counsel (Procedure
and Administration) by email at [email protected] (preferred) or
by telephone at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed additions and amendments to 26 CFR
part 1 (proposed regulations) under sections 951 and 951A and certain
other provisions of the Internal Revenue Code (Code) relating to the
determination of a United States shareholder's pro rata share of
subpart F income, tested income, or tested loss of a controlled foreign
corporation. The proposed regulations also include guidance regarding
the transition rule (transition rule) in section 70354(c)(2) of Public
Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One,
Big, Beautiful Bill Act (OBBBA). The proposed regulations are issued
pursuant to the express delegations of authority in section 951(a)(4)
and section 70354(c)(2) of the OBBBA. The proposed regulations are also
issued pursuant to the express delegation of authority in section
7805(a).
Background
I. Scope
This Background describes the rules for determining a United States
shareholder's pro rata share of subpart F income, tested income, or
tested loss, as relevant, as well as certain other related provisions.
Any term used but not defined in this preamble has the meaning given to
it in the proposed regulations.
[[Page 55038]]
II. Pro Rata Share Rules
A. Rules Before OBBBA
Former section 951(a)(1)(A), as in effect before amendments made by
the OBBBA,\1\ generally required a United States shareholder (U.S.
shareholder) (as defined in section 951(b)) of a foreign corporation to
include in gross income its pro rata share of the corporation's subpart
F income (as defined in section 952) for a taxable year of the
corporation if the corporation was a controlled foreign corporation
(CFC) (as defined in section 957(a)) at any time during the taxable
year and the shareholder owned stock of the corporation on the last day
of the taxable year on which the corporation was a CFC (last relevant
day). For this purpose, ownership of stock was determined under section
958(a) and thus included stock owned directly and stock owned
indirectly through foreign corporations and other foreign entities
(including certain domestic entities to the extent treated as foreign
entities under Sec. 1.958-1(d)(1)).\2\ Under former section
951(a)(1)(B), a U.S. shareholder was generally also required to include
in gross income its amount determined under section 956 for the taxable
year of the foreign corporation.
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\1\ All references to former provisions under section 951 or
951A in this preamble are to the versions of those provisions as in
effect before the amendments made by the OBBBA.
\2\ For purposes of this preamble, a reference to stock
ownership means stock owned within the meaning of section 958(a).
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For purposes of former section 951(a)(1)(A), a U.S. shareholder's
pro rata share of a CFC's subpart F income for a taxable year of the
CFC was calculated by first determining the amount described in former
section 951(a)(2)(A). This amount, which was determined based on the
U.S. shareholder's proportionate share of a hypothetical distribution
by the CFC, represented subpart F income (unreduced by distributions
during the taxable year) allocable to stock of the CFC that the U.S.
shareholder owned on the last relevant day. See Sec. 1.951-1(b) and
(e). This amount was limited under former section 951(a)(2)(A) based on
the portion of the taxable year during which the foreign corporation
was a CFC. The amount determined under former section 951(a)(2)(A) was
then reduced for certain distributions under former section
951(a)(2)(B) to arrive at the U.S. shareholder's pro rata share of the
CFC's subpart F income. Former section 951(a)(2)(B) addressed cases in
which stock of a CFC owned by a U.S. shareholder on the last relevant
day was acquired by the U.S. shareholder during the CFC's taxable year
by generally reducing the U.S. shareholder's pro rata share of the
CFC's subpart F income by the amount of dividends received by any other
person during the taxable year with respect to the acquired stock (but
limited that reduction based on the portion of the CFC's taxable year
during which the U.S. shareholder did not own the stock of the CFC).
Former section 951A(a) required a U.S. shareholder of a CFC to
include in gross income its global intangible low-taxed income (GILTI
inclusion amount). See Sec. 1.951A-1(b). A U.S. shareholder's GILTI
inclusion amount was determined by taking into account the
shareholder's pro rata share of tested items (as defined in Sec.
1.951A-1(f)(5)) of CFCs in which the shareholder owned stock, such as
tested income, tested loss, and qualified business asset investment.
See Sec. 1.951A-1(c). A U.S. shareholder's pro rata share of a CFC's
tested items was determined in the same manner as a U.S. shareholder's
pro rata share of a CFC's subpart F income under former section
951(a)(2), subject to certain modifications. See section 951A(e)(1) and
Sec. 1.951A-1(d).
B. OBBBA Revisions
1. Overview
The OBBBA amended sections 951(a) and 951A for taxable years of
foreign corporations beginning after December 31, 2025. The OBBBA also
provided the transition rule for certain taxable years before the
amendments to sections 951(a) and 951A apply.
2. Revised Section 951(a)
As amended by the OBBBA, section 951(a)(1)(A) requires a U.S.
shareholder of a foreign corporation to include in gross income the
U.S. shareholder's pro rata share of the foreign corporation's subpart
F income if the foreign corporation is a CFC at any time during the
foreign corporation's taxable year (a CFC year) and the U.S.
shareholder owns stock of the foreign corporation on any day during the
CFC year. Thus, unlike pre-OBBBA law, a section 951(a)(1)(A) inclusion
is not limited to U.S. shareholders that own stock in the CFC on the
last relevant day. However, the OBBBA retains the last relevant day
rule in section 951(a)(1)(B), under which a U.S. shareholder is
generally required to include in gross income its amount determined
under section 956.
For purposes of section 951(a)(1)(A), the OBBBA replaced the
hypothetical distribution and reduction rules for determining a U.S.
shareholder's pro rata share of subpart F income under former sections
951(a)(2)(A) and (B) with an approach that is instead based on the
subpart F income attributable to the U.S. shareholder's ownership of
stock of the foreign corporation during the CFC year. Specifically,
section 951(a)(2) provides that a U.S. shareholder's pro rata share of
a CFC's subpart F income is the portion of such income that is
attributable to the stock of the foreign corporation owned by the
shareholder and any period of the CFC year during which (i) the
shareholder owned such stock, (ii) the shareholder was a U.S.
shareholder of the corporation, and (iii) the corporation was a CFC.
The OBBBA also modified the time at which amounts determined under
sections 951(a)(1)(A) and (B) are included in gross income by a U.S.
shareholder. Under section 951(a)(3), any amount required to be
included in gross income by a U.S. shareholder under section
951(a)(1)(A) or (B) with respect to a CFC year is included in gross
income for the U.S. shareholder's taxable year that includes the last
day on which the shareholder owns stock in the CFC during such CFC
year.
Section 951(a)(4) provides that the Secretary shall prescribe such
regulations or other guidance as may be necessary or appropriate to
carry out the purposes of section 951(a), including regulations or
other guidance allowing taxpayers to elect, or requiring taxpayers, to
close the taxable year of a CFC upon a direct or indirect disposition
of stock of the corporation.
3. Revised Section 951A
As amended by the OBBBA, section 951A(a) requires each person that
is a U.S. shareholder of a CFC for any taxable year of the U.S.
shareholder to include in gross income the U.S. shareholder's net CFC
tested income for the taxable year. Section 951A(b)(1) provides that
net CFC tested income means, with respect to any U.S. shareholder for
any taxable year of the U.S. shareholder, the excess (if any) of (i)
the aggregate of the U.S. shareholder's pro rata share of the tested
income of each CFC with respect to which the shareholder is a U.S.
shareholder for the taxable year of the U.S. shareholder, over (ii) the
aggregate of the U.S. shareholder's pro rata share of the tested loss
of each CFC with respect to which the shareholder is a U.S. shareholder
for the taxable year of the U.S. shareholder.
Section 951A(c) provides that the pro rata shares of tested income
and tested loss referred to in section 951A(b)(1) are determined under
the rules of section 951(a)(2) in the same manner as section 951(a)(2)
applies to subpart F income
[[Page 55039]]
and are taken into account in the taxable year of the U.S. shareholder
determined under section 951(a)(3).
4. Transition Rule
For certain taxable years before the amendments to sections 951(a)
and 951A made by the OBBBA apply, a U.S. shareholder determines its pro
rata share of subpart F income and tested items under the transition
rule. The transition rule provides that certain dividends are not
treated as dividends for purposes of applying former section
951(a)(2)(B), except to the extent provided by the Secretary.
A dividend is subject to the transition rule if the dividend is (i)
paid or deemed paid on or before June 28, 2025, and during the taxable
year of a CFC that includes such date, provided the U.S. shareholder
described in section 951(a) did not own (within the meaning of section
958(a)) the stock of the CFC during the portion of the taxable year on
or before June 28, 2025, or (ii) paid or deemed paid after June 28,
2025, and before a foreign corporation's first taxable year beginning
after December 31, 2025. See section 70354(c)(2)(A) of the OBBBA. Any
dividend subject to the transition rule is not treated as a dividend
for purposes of applying former section 951(a)(2)(B) if the dividend
does not increase the taxable income of a United States person subject
to Federal income tax for the taxable year (including by reason of a
dividends received deduction, an exclusion from gross income, or an
exclusion from subpart F income). See section 70354(c)(2)(B) of the
OBBBA.
On December 4, 2025, the Treasury Department and the IRS released
Notice 2025-75, 2025-52 I.R.B. 867 (transition rule notice), describing
rules expected to be included in forthcoming proposed regulations
regarding the application of the transition rule. The transition rule
notice describes rules addressing the meaning of dividends paid or
deemed paid by a CFC and the determination of whether a dividend does
not increase the taxable income of a United States person subject to
Federal income tax.
III. Other Provisions
A. Section 951B
The OBBBA added section 951B, which generally provides that
sections 951 through 965 (other than sections 951A, 951(b), and 957)
apply to any foreign controlled United States shareholder (FCUSS) of a
foreign controlled foreign corporation (FCFC) by substituting ``foreign
controlled United States shareholder'' for ``United States
shareholder'' each place it appears and by substituting ``foreign
controlled foreign corporation'' for ``controlled foreign corporation''
each place it appears. See section 951B(a)(1). Section 951A applies to
an FCUSS by treating each reference to a ``United States shareholder''
in such section as including a reference to an FCUSS, and by treating
each reference to a ``controlled foreign corporation'' in such section
as including a reference to an FCFC. See section 951B(a)(2).
Section 951B(b) provides that an FCUSS is any United States person
that would be a U.S. shareholder with respect to a foreign corporation
if section 951(b) were applied by substituting ``more than 50 percent''
for ``10 percent or more,'' and section 958(b) were applied without
regard to section 958(b)(4). Section 951B(c) provides that an FCFC is a
foreign corporation, other than a CFC, which would be a CFC if section
957(a) were applied by substituting ``foreign controlled United States
shareholders'' for ``United States shareholders,'' and section 958(b)
were applied without regard to section 958(b)(4).
B. Section 960
Section 901(a) generally provides that a taxpayer choosing to
credit foreign income taxes is allowed a credit for certain foreign
income taxes paid or accrued by the taxpayer plus, in the case of a
corporation, the taxes deemed to have been paid by the corporation
under section 960.
Section 960(a) provides that, if a domestic corporation that is a
U.S. shareholder of a CFC includes any item of income under section
951(a)(1), the domestic corporation is deemed to have paid so much of
the CFC's foreign income taxes as are properly attributable to such
item of income. Section 960(d) generally provides that if any amount is
includible in the gross income of a domestic corporation under section
951A, the domestic corporation is deemed to pay a percentage of the
foreign income taxes paid or accrued by its CFCs with respect to their
tested income.
C. Section 245A and Sec. 1.245A-5(e) and (f)
Section 245A(a) allows a domestic corporation that is a U.S.
shareholder a 100-percent deduction for the foreign-source portion of a
dividend received from a specified 10-percent owned foreign corporation
(section 245A deduction). See also sections 964(e)(4) and 1248(j)
(generally permitting the section 245A deduction in connection with the
sale or exchange of stock of a CFC). A specified 10-percent owned
foreign corporation (SFC) is defined as any foreign corporation (other
than a passive foreign investment company as defined in section 1297)
with respect to which a domestic corporation is a U.S. shareholder.
Section 954 generally provides that a dividend received by a CFC is
included in the CFC's foreign personal holding company income (as
defined in section 954(c)) and, thus, in the determination of the CFC's
subpart F income. Under section 954(c)(6), however, a dividend received
by a CFC from a related CFC is not included in the CFC's foreign
personal holding company income if certain requirements are met
(section 954(c)(6) exception).
Under Sec. 1.245A-5(e), a section 245A shareholder (defined as a
domestic corporation that is a U.S. shareholder with respect to an SFC
and that owns directly or indirectly stock of the SFC) is not allowed a
section 245A deduction for any dividend received from an SFC to the
extent of the extraordinary reduction amount. Additionally, Sec.
1.245A-5(f) provides that, if an upper-tier CFC receives a dividend
from a lower-tier CFC in the same taxable year that an extraordinary
reduction occurs with respect to the lower-tier CFC, then the section
954(c)(6) exception applies only to the extent the dividend exceeds the
tiered extraordinary reduction amount.
In general, an extraordinary reduction amount is, with respect to a
dividend received by a controlling section 245A shareholder (as defined
in Sec. 1.245A-5(i)(2)) from a CFC during a taxable year of the CFC in
which an extraordinary reduction occurs with respect to the controlling
section 245A shareholder's ownership of the CFC, the lesser of (i) the
amount of the dividend, and (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 and tested income for the taxable year,
reduced, but not below zero, by the prior extraordinary reduction
amount. A pre-reduction pro rata share generally reflects the amount of
subpart F income and tested income that the shareholder would have
included in income, absent the extraordinary reduction. An
extraordinary reduction generally occurs where a controlling section
245A shareholder transfers more than 10 percent of the CFC's stock
during the CFC's taxable year or where the shareholder's ownership of
the CFC otherwise decreases by more than 10 percent by the end of the
taxable year.
An election may be made to close a CFC's taxable year if an
extraordinary reduction occurs with respect to a
[[Page 55040]]
controlling section 245A shareholder and there would be an
extraordinary reduction amount or tiered extraordinary reduction amount
greater than zero. If the election is made, no amount is considered an
extraordinary reduction amount or tiered extraordinary reduction amount
with respect to the controlling section 245A shareholder. Instead, the
CFC's taxable year closes for all purposes of the Code and for all
shareholders of the CFC.
Explanation of Provisions
I. Scope
The proposed regulations would provide rules under sections 951 and
951A that determine a U.S. shareholder's pro rata share of a CFC's
subpart F income, tested income, or tested loss. The proposed
regulations would also modify information reporting regulations under
section 6038 and the applicability date of certain regulations under
sections 245A and 1502.
II. Section 951 Regulations
A. Overview
The proposed regulations under section 951 would provide rules to
determine a U.S. shareholder's pro rata share of a CFC's subpart F
income that reflect the changes to section 951(a) made by the OBBBA.
The proposed regulations would also provide rules that require or
permit the closing of a foreign corporation's taxable year in certain
circumstances for all purposes of the Code.
B. Income Inclusion Rule
The proposed regulations would require each U.S. shareholder of a
foreign corporation that owns stock in the foreign corporation at any
time during a taxable year of the foreign corporation that is a CFC
year to include in gross income the U.S. shareholder's pro rata share
of the foreign corporation's subpart F income for the CFC year. See
proposed Sec. 1.951-1(b)(1). This amount is included in gross income
in the U.S. shareholder's taxable year that includes the last day on
which the shareholder owns stock in the foreign corporation during the
CFC year. The determination of the amount of a U.S. shareholder's pro
rata share of subpart F income of a CFC for a CFC year is discussed in
part II.E of this Explanation of Provisions.
The proposed regulations would also provide a rule for section 956
inclusions under section 951(a)(1)(B). See proposed Sec. 1.951-
1(b)(2). Because the amendments made by the OBBBA to section 951
generally retain the same approach to determining inclusions under
section 951(a)(1)(B), this rule is consistent with the regulations
under former section 951(a)(1)(B). However, as with inclusions of
subpart F income under section 951(a)(1)(A), the proposed regulations
would provide that amounts required to be included in gross income
under section 951(a)(1)(B) are included in the U.S. shareholder's
taxable year that includes the last day on which the shareholder owns
stock in the foreign corporation during the CFC year, which may
accelerate the taxable year of the inclusion relative to former section
951(a)(1)(B). Further, as discussed in part II.D of this Explanation of
Provisions, the closing of a foreign corporation's taxable year under
the proposed regulations may affect the calculation of amounts under
section 956 and a U.S. shareholder's inclusion under section
951(a)(1)(B).
C. Changes in Ownership of CFC Stock
As revised in the OBBBA, a U.S. shareholder's pro rata share of a
CFC's subpart F income (as well as tested income or tested loss) is the
amount attributable to the stock of the CFC owned by the U.S.
shareholder and the periods of the CFC year during which the U.S.
shareholder owned such stock while the foreign corporation was a CFC.
The Treasury Department and the IRS considered various recommendations
for implementing the OBBBA's revisions to the pro rata share rules. For
example, the Treasury Department and the IRS considered a suggestion to
address changes in ownership of stock of a CFC by permitting taxpayers
to elect a per diem approach with exceptions for extraordinary items or
an interim closing of the books approach, and to provide taxpayers an
election to close the taxable year of CFCs in certain circumstances
comparable to the election permitted under Sec. 1.245A-5(e). The
Treasury Department and the IRS also considered a suggestion to provide
for both elective and mandatory closings with respect to the taxable
year of a CFC, depending on the amount of ownership shift in a given
transaction, and to otherwise address changes in ownership of stock of
a CFC by implementing a ratable approach to determining a U.S.
shareholder's pro rata share.
In general, in cases where there is no change in the ownership of
stock of a CFC during its taxable year, a U.S. shareholder's pro rata
share under the proposed regulations would be the same as determined
under the existing rules in Sec. 1.951-1(e) (see part II.E of this
Explanation of Provisions). However, to address changes in ownership of
stock of a CFC, and largely consistent with a recommendation received,
the proposed regulations would generally apply a daily proration
approach to allocating subpart F income, tested income, or tested loss
to U.S. shareholders and, in certain cases, would require or permit a
closing of the taxable year.
The Treasury Department and the IRS are of the view that other
suggested approaches to address changes in ownership of stock of a CFC,
such as an interim closing of the foreign corporation's books or a
special allocation of extraordinary items, may, in certain cases, be
complex, administratively burdensome, or lead to inappropriate results
(for example, when the earnings and profits (E&P) limitation under
section 952(c) applies). Rules in other contexts that adopt such
approaches in allocating various items of income, gain, deduction,
loss, and credit attributable to a taxpayer's ownership period differ
from the pro rata share rules in that sections 951 and 951A require the
allocation of subpart F income, tested income, or tested loss, each of
which is a single, net amount determined at the foreign corporation
level with respect to its taxable year. Cf. Sec. 1.706-4 (providing
various rules, including a proration approach, interim closing method,
and extraordinary item exception, where a partner's interest in a
partnership varies during its taxable year) and Sec. 1.1502-76(b)
(permitting the ratable allocation of a year's items (other than
extraordinary items) between the periods ending and beginning with a
corporation becoming or ceasing to be a member of a consolidated
group). The statutory language in section 951(a)(1)(A) requires this
result by referring to the pro rata share of ``the corporation's
subpart F income for the CFC year,'' which, in using the term defined
in section 952, means the pro rata share of the sum of the amounts
described in section 952(a) and not the pro rata share of specific
items that comprise subpart F income. See also section 951A(c)(1)
(providing that a U.S. shareholder's pro rata share of a CFC's tested
income or tested loss, each defined in section 951A(b)(2) as a net
amount for the CFC's taxable year, is determined under the rules of
section 951(a)(2) in the same manner as such section applies to subpart
F income).
The proposed regulations would require a closing of a foreign
corporation's taxable year only in circumstances where the change in
ownership of stock of a foreign corporation results in the foreign
corporation becoming or ceasing to be a CFC (subject to certain
modifications for
[[Page 55041]]
determining CFC status that generally are intended to prevent avoidance
of the rule). See part II.D.2 of this Explanation of Provisions. In
those cases, the provision's requirement to determine the subpart F
income, tested income, or tested loss attributable to the ownership
period of a U.S. shareholder is appropriately carried out by confining
the analysis to the period in which the relevant earnings of the
foreign corporation are subject to U.S. taxation under sections 951
through 965. The closing of the foreign corporation's taxable year in
such cases prevents items of income, gain, deduction, or loss incurred
while the foreign corporation's earnings are not subject to the subpart
F provisions of the Code from affecting the determination of a U.S.
shareholder's pro rata share under section 951 or 951A. Additionally,
the required closing of the foreign corporation's taxable year may
mitigate potential compliance burdens associated with obtaining
information relating to the foreign corporation while it is owned and
controlled by foreign persons.
In other cases involving changes in the ownership of stock of a
foreign corporation during a CFC year, the proposed regulations would
generally apply a daily proration approach. See part II.E of this
Explanation of Provisions. The Treasury Department and the IRS are of
the view that this approach, which allocates subpart F income (as well
as tested income or tested loss) proportionately based on the number of
days in the CFC year, is consistent with the statute's requirement to
attribute an overall income amount to periods of ownership. See also
Sec. Sec. 1.1248-2 and 1.1248-3 (applying a similar daily proration
approach for purposes of determining E&P attributable to foreign
corporation stock owned by a United States person during certain
periods). However, for certain changes in the ownership of stock of a
CFC involving unrelated persons that generally result in shifts of
ownership of more than 50 percentage points, the proposed regulations
would provide an election to close the CFC's taxable year. This
election permits taxpayers to achieve the accuracy, certainty, and
reduced compliance burdens afforded by closing the taxable year in lieu
of applying the daily proration approach to the entire taxable year.
See part II.D.3 of this Explanation of Provisions. Contrary to certain
recommendations that an elective closing be available upon less
substantial transfers of ownership, the proposed regulations would
limit elective closings to these circumstances, as a greater than 50
percentage point shift in ownership generally indicates that a seller
or selling group has relinquished control of the CFC and therefore has
a heightened interest in closing the CFC's taxable year so as to avoid
the effect of the new controlling shareholder or shareholders' actions
on the determination of their pro rata share. In these cases, the
seller typically does not remain involved in the CFC's activities after
relinquishing control, and an inability to close the taxable year could
require the buyer and seller to coordinate in terms of tax compliance
and controversy defense with respect to that year, potentially
necessitating complex contractual provisions. Further, the potential
benefit afforded by a closing of the CFC's taxable year in cases of
less significant changes in ownership would likely be outweighed by the
resulting compliance and administrative burden, and the additional
flexibility to close the taxable year of a CFC could lead to improper
manipulation or abuse if it was available for minor changes in
ownership or transfers involving related persons.
D. Determination of CFC Year
1. In General
A U.S. shareholder's pro rata share of a foreign corporation's
subpart F income is determined by reference to a CFC year of the
foreign corporation. The determination of a CFC year of a foreign
corporation is made after the application of rules in the proposed
regulations that would require or permit the closing of the taxable
year of a foreign corporation in certain cases where there is a change
in the ownership of stock of the foreign corporation.
2. Mandatory Closing of Taxable Year of Foreign Corporation
The proposed regulations would provide that a foreign corporation
closes its taxable year if there is a status change event, which occurs
if a foreign corporation becomes or ceases to be a CFC. See proposed
Sec. 1.951-1(d)(1). If there is a status change event, the taxable
year of the foreign corporation closes for all purposes of the Code
and, thus, the closing applies to all shareholders of the foreign
corporation regardless of whether a particular shareholder's ownership
of stock in the foreign corporation changes.
The taxable year of the foreign corporation closes as of the end of
the day on which the status change event occurs, which is the last day
that the foreign corporation is or is not a CFC (unless the taxable
year otherwise closes as of such date under another provision of the
Code, for example, as a result of a section 338(g) election). See
proposed Sec. 1.951-1(d)(1)(ii). Thus, for example, if a domestic
corporation owns all the stock of a foreign corporation (which uses a
calendar taxable year) and sells all the stock of the foreign
corporation to a nonresident alien individual on June 30, the status
change event would occur on June 30, the date the foreign corporation
ceases to be a CFC, and the taxable yefar of the foreign corporation
would close as of the end of the day on June 30. See also proposed
Sec. 1.951-1(f) (regarding the ownership period of foreign corporation
stock) discussed in part II.F of this Explanation of Provisions.
The proposed regulations would provide additional rules for
domestic partnerships (including certain S corporations treated as
partnerships by operation of section 1373(a)) and options to acquire
stock in determining whether there is a status change event that
requires the closing of a foreign corporation's taxable year. See
proposed Sec. 1.951-1(d)(1)(iii). Specifically, solely for this
purpose, in determining whether a foreign corporation is a CFC when
stock of a foreign corporation is owned through a domestic partnership,
the rule in Sec. 1.958-1(d)(1) would apply without regard to the
exceptions in Sec. 1.958-1(d)(2)(i) and (ii) (and, thus, a domestic
partnership would not be treated as owning stock of a foreign
corporation within the meaning of section 958(a)). A similar rule would
disregard the constructive ownership of stock of a foreign corporation
by reason of an option to acquire such stock under section 318(a)(4)
and Sec. 1.958-2(e). These rules are generally intended to ensure
that, while the requirement to close the taxable year of a foreign
corporation is based on the CFC status of the foreign corporation, the
CFC status of the foreign corporation for this purpose is determined by
reference to the U.S. shareholders of the foreign corporation that are
subject to income inclusions under sections 951 and 951A. Thus, for
example, if a domestic corporation sells all the stock of a foreign
corporation that is a CFC to a domestic partnership, and not more than
50 percent of the stock of the foreign corporation is owned after the
sale, in the aggregate, by partners of the domestic partnership that
are U.S. shareholders in the foreign corporation, the sale results in a
status change event of the foreign corporation because, for this
purpose, the foreign corporation ceases to be a CFC. Similarly, if a
domestic partnership sells all the stock
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of a foreign corporation to a domestic corporation, and not more than
50 percent of the stock of the foreign corporation was owned before the
sale, in the aggregate, by partners of the domestic partnership that
were U.S. shareholders in the foreign corporation, the sale also
results in a status change event because, for this purpose, the foreign
corporation becomes a CFC.
3. Election To Close Taxable Year of Foreign Corporation
Under the proposed regulations, the controlling section 958(a) U.S.
shareholders of a CFC may elect to close the CFC's taxable year if a
significant ownership variance occurs with respect to the CFC and the
taxable year does not otherwise close on that date. See proposed Sec.
1.951-1(d)(2). As with the mandatory closing of a foreign corporation's
taxable year described in part II.D.2 of this Explanation of
Provisions, if the election is made, the taxable year of the CFC closes
for all shareholders of the foreign corporation and for all purposes of
the Code as of the end of the day on which the significant ownership
variance occurs.
The determination of whether there is a significant ownership
variance is based on the total change in ownership of CFC stock by
section 958(a) U.S. shareholders resulting from all specified transfers
that occur pursuant to the same plan during what would be the taxable
year of a CFC absent an elective closing (default taxable year). A
significant ownership variance generally occurs if the specified
transfers result in a decrease by more than 50 percentage points in
section 958(a) shareholder ownership. See proposed Sec. 1.951-
1(d)(2)(ii)(A). For this purpose, a specified transfer generally
includes a change in the ownership of the stock of a CFC resulting from
a sale, exchange, or other disposition of stock of a foreign
corporation or a partnership interest, as well as an issuance of stock
or a partnership interest.
Because a significant ownership variance looks to all specified
transfers that occur pursuant to the same plan during the same default
taxable year of a CFC, the proposed regulations are intended to make
the election available for transactions undertaken by multiple section
958(a) U.S. shareholders or that involve multiple specified transfers
over the course of the CFC's default taxable year. For example, the
proposed regulations would permit an elective closing of a CFC's
taxable year if multiple section 958(a) U.S. shareholders that
separately do not own more than 50 percent of the stock of a CFC
together sell more than 50 percent of the stock of the CFC pursuant to
the same plan on different days during the CFC's default taxable year.
If there are multiple specified transfers that occur pursuant to
the same plan on different days in a default taxable year of a CFC, the
significant ownership variance occurs on the day that the last such
specified transfer occurs. See proposed Sec. 1.951-1(d)(2)(ii)(A).
This is the case regardless of the day on which there has been a more
than 50-percent decrease in the ownership percentage of one or more
section 958(a) U.S. shareholders of the CFC. For example, assume US1
and US2, both domestic corporations, own 60 percent and 40 percent of
the stock of CFC, respectively. CFC uses a calendar taxable year. On
June 30, US1 sells all its stock of CFC (60 percent) to US3, also a
domestic corporation that is not related to US1 or US2, and pursuant to
the same plan, US2 sells all its stock in CFC (40 percent) to US3 on
September 1. In that case, the significant ownership variance occurs on
September 1, the date of US2's sale, and, if an election is made, the
taxable year of CFC closes on that date.
The Treasury Department and the IRS are of the view that the
elective closing of the taxable year of a CFC should be restricted with
respect to specified transfers among related parties because, in those
cases, the change in economic ownership of CFC stock is less meaningful
or possibly absent. Likewise, there is less reason, from an accuracy
and burden-reduction standpoint, to provide an elective closing in the
case of a transfer between related persons, and the availability of the
election may lead to inappropriate manipulation (for example,
transactions may be undertaken solely for purposes of closing a CFC's
taxable year). Accordingly, the proposed regulations would generally
provide that, in determining whether there is a significant ownership
variance with respect to a CFC, the percentage of ownership of stock of
the CFC owned by section 958(a) U.S. shareholders is not treated as
decreasing to the extent there is an increase in the percentage of
ownership of stock of the CFC by a related United States person. See
proposed Sec. 1.951-1(d)(2)(ii)(C)(1). For similar reasons, the
proposed regulations would not take into account certain transfers in
connection with reorganizations described in section 368(a)(1)(F) for
this purpose. See proposed Sec. 1.951-1(d)(2)(ii)(C)(2).
The section 958(a) U.S. shareholders of a CFC are the U.S.
shareholders that own stock of the CFC. For purposes of making the
election to close a CFC's taxable year, the controlling section 958(a)
U.S. shareholders are all the section 958(a) U.S. shareholders of a CFC
whose ownership of stock of the CFC decreases in a significant
ownership variance. In certain cases, there may be only one controlling
section 958(a) U.S. shareholder that makes the election (for example,
if a U.S. shareholder owns all the stock of a CFC). A domestic
partnership is not treated as owning stock of a CFC for this purpose
and therefore cannot be a section 958(a) U.S. shareholder or a
controlling section 958(a) U.S. shareholder. See Sec. 1.958-1(d).
To make the election, the controlling section 958(a) U.S.
shareholders and each U.S. shareholder (if any) of the CFC that owns
stock of the CFC on any date during the CFC's taxable year on or before
the date of the significant ownership variance must enter into a
written, binding agreement that all parties agree to the election. Each
party to this binding agreement must be able to present the agreement
to the IRS for inspection upon request. No binding agreement is
required, however, if there is only one controlling section 958(a) U.S.
shareholder and no other relevant U.S. shareholders of the CFC.
Additionally, for this purpose, a U.S. shareholder that acquires stock
of the CFC on the date of the significant ownership variance is not
considered as owning that stock on that date and therefore is not
required to enter the binding agreement unless the shareholder
otherwise was a U.S. shareholder on or before that date. See proposed
Sec. 1.951-1(f). The proposed regulations would prescribe additional
procedural requirements for making the election, including the
requirement to provide certain information in a statement that must be
submitted to the IRS. See proposed Sec. 1.951-1(d)(2)(iv). The
proposed regulations would also provide a consistency requirement,
under which, if a significant ownership variance occurs with respect to
multiple CFCs pursuant to a plan or series of related transactions, an
election to close a CFC's taxable year may be made only if the election
is made with respect to all the CFCs. See proposed Sec. 1.951-
1(d)(2)(vi).
4. Allocation of Foreign Income Taxes
The proposed regulations would provide a rule for allocating
certain foreign income taxes that accrue during the period that would
have been the foreign corporation's taxable year if not for the
mandatory or elective closing. A mandatory or elective closing of a
foreign corporation's taxable year can result in the foreign
corporation's
[[Page 55043]]
foreign taxable year spanning multiple short U.S. taxable years.
However, the foreign income tax with respect to that foreign taxable
year would accrue only in the U.S. taxable year in which the foreign
taxable year ends. See Sec. 1.905-1(d)(1)(i). The proposed regulations
would address this issue by requiring an allocation of a portion of the
foreign income tax that accrues in the CFC's U.S. taxable year
following the closing date to the U.S. taxable year ending with the
closing. See proposed Sec. 1.951-1(d)(3)(i). The portion of the
foreign income tax allocated to the U.S. taxable year ending with the
closing is determined based on the portion of the foreign taxable
income attributable to the period of the foreign taxable year ending
with the closing using the closing of the books method described in
Sec. 1.1502-76(b). For example, if a foreign corporation that uses a
calendar taxable year for both U.S. and foreign income tax purposes has
its U.S. taxable year close on June 30 as a result of a mandatory or
elective closing and the foreign corporation earned 50 percent of its
foreign taxable income from January to June 30, 50 percent of the
foreign income tax that accrues on December 31 (at the end of the
foreign corporation's foreign taxable year and during its U.S. taxable
year following the June 30 closing) would be allocated to its U.S.
taxable year ending with the closing (January 1 to June 30).
5. Taxable Years of Partnerships Owned by Foreign Corporations
In the case of a foreign corporation that owns an interest in a
partnership, generally, the partnership's taxable year would not close
for any purpose of the Code solely as a result of the foreign
corporation's taxable year closing. Therefore, if the partnership's
taxable year begins before a status change event or significant
ownership variance (for which an election is made) and ends after the
early closing of the foreign corporation's taxable year, the foreign
corporation would include its distributive share of the partnership's
items arising in that partnership taxable year entirely in the foreign
corporation's short taxable year following the status change event or
significant ownership variance. By contrast, a concurrent closing of
the partnership's taxable year would require the partnership's items to
be allocated between the foreign corporation's short taxable year
ending on the day of the status change event or significant ownership
variance and the following short taxable year. Because this requirement
to allocate partnership items between periods that are pre- and post-
sale of stock of the foreign corporation would require a seller to
obtain information from a buyer to determine the foreign corporation's
distributive share of partnership items includible in the foreign
corporation's first short taxable year, the proposed regulations would
not provide for a closing of the partnership's taxable year with
respect to the foreign corporation.
The Treasury Department and the IRS welcome comments as to whether
a closing of a foreign corporation's taxable year as a result of a
status change event or significant ownership variance should be treated
as a deemed disposition of the foreign corporation's entire interest in
a partnership for purposes of section 706, and therefore result in a
closing of the partnership's taxable year with respect to the foreign
corporation partner. Cf. Sec. Sec. 1.706-1(c)(2)(i) and (iii), 1.1362-
3(c)(1), 1.1377-1(b)(3)(iv), and 1.1502-76(b)(2)(vi) (in certain cases,
treating an early closing of a corporate partner's taxable year as a
deemed disposition of the partner's entire interest in the partnership
and therefore resulting in treating the partnership taxable year as
closing with respect to that partner).
E. Determination of Pro Rata Share of Subpart F Income
1. In General
The proposed regulations would provide rules for determining a U.S.
shareholder's pro rata share of a CFC's subpart F income for a CFC
year. This determination is made after the determination of the subpart
F income of the CFC for the CFC year in accordance with section 952 and
other applicable provisions, such as the E&P limitation, the chain
deficit rules, and the recapture rules.
In general, the proposed regulations would apply a daily proration
approach for purposes of determining the amount of a CFC's subpart F
income that is attributed to the period during which a U.S. shareholder
owns stock of a foreign corporation while it is a CFC during the CFC
year. See part II.E.2 of this Explanation of Provisions. The proposed
regulations would provide additional rules for applying this daily
proration approach in circumstances involving multiple classes of stock
of a foreign corporation and changes in the number of shares of
outstanding stock of a foreign corporation during the CFC year. See
parts II.E.3 and 4 of this Explanation of Provisions.
2. Single Class of Foreign Corporation Stock
Under the proposed regulations, if at all times during the CFC year
the CFC has only a single class of stock outstanding and there is no
change in the number of outstanding shares of stock of the CFC, a U.S.
shareholder's pro rata share of subpart F income of a CFC would be
determined based on the percentage of stock of the CFC the U.S.
shareholder owned (that is, the number of shares the U.S. shareholder
owned over the number of outstanding shares of the CFC) and the
percentage of the CFC year during which the shareholder owned the stock
of the foreign corporation while it was a U.S. shareholder and the
foreign corporation was a CFC. See proposed Sec. 1.951-1(e)(2)(i).
Thus, for example, if two U.S. shareholders (US1 and US2) each
owned 50 percent of the single class of stock of a CFC for an entire
CFC year, each of US1's and US2's pro rata shares of the CFC's subpart
F income for the CFC year is equal to the proportionate amount of
subpart F income attributable to the stock of the CFC the U.S.
shareholder owned (that is, 50 percent of CFC's subpart F income). As
an additional example, if US1 instead transfers all of its stock of a
CFC to another U.S. shareholder (US3) during the CFC year, each of US1
and US3's pro rata share of the CFC's subpart F income for the CFC year
is equal to the proportionate amount of subpart F income attributable
to the stock multiplied by the percentage of days during the CFC year
on which the U.S. shareholder owned the stock of the CFC. See proposed
Sec. 1.951-1(e)(4)(iii) (Example 2).
The computation prescribed in the proposed regulations is made
separately with respect to CFC year blocks, which are those shares of a
class of stock of the CFC that a U.S. shareholder owned for the same
period within the CFC year (for example, if the U.S. shareholder
acquired or disposed of a portion of its shares of the class of stock
of the CFC during the CFC year). See proposed Sec. 1.951-
1(e)(2)(i)(B). A U.S. shareholder's pro rata share of subpart F income
of the CFC for the CFC year is equal to the total of the amounts
determined for each of its CFC year blocks. See proposed Sec. 1.951-
1(e)(4)(iii) (Example 2).
3. Multiple Classes of Foreign Corporation Stock
The proposed regulations would provide additional rules to address
cases in which a foreign corporation has multiple classes of stock
outstanding during a CFC year. In general, the proposed regulations
would adopt the hypothetical distribution analysis under existing Sec.
1.951-1(e) for purposes of
[[Page 55044]]
determining the subpart F income that is allocated among the classes of
stock of a foreign corporation. Thus, to determine a U.S. shareholder's
pro rata share of a CFC's subpart F income for a CFC year, the subpart
F income is first allocated to the classes of stock of the CFC in the
same proportion as the amount of allocable earnings and profits that
would be distributed to each class of stock in a hypothetical
distribution of the CFC's allocable earnings and profits on the last
day of the CFC year (hypothetical distribution). See proposed Sec.
1.951-1(e)(2)(ii). After the subpart F income is allocated to a class
of stock, a U.S. shareholder determines its pro rata share of subpart F
income with respect to each class of stock using the daily proration
approach described in part II.E.2 of this Explanation of Provisions.
See proposed Sec. 1.951-1(e)(4)(iv) (Example 3).
For example, if, for the entirety of a CFC year, one U.S.
shareholder (US1) owned all the common stock of a CFC and another U.S.
shareholder (US2) owned all the preferred stock of the CFC, the
hypothetical distribution applies to allocate the subpart F income of
the CFC to the preferred and common stock. Each of US1 and US2's pro
rata share of the CFC's subpart F income for the CFC year is then equal
to the proportionate amount of subpart F income allocated to each class
of stock of the foreign corporation that is attributable to the stock
of the CFC the U.S. shareholder owned (thus, US1's pro rata share is
equal to all of the subpart F income allocated to the common stock and
US2's pro rata share is equal to all of the subpart F income allocated
to the preferred stock). As an additional example, if US2 instead
transfers all of its stock of the CFC (that is, the preferred stock) to
another U.S. shareholder (US3) during the CFC year, each of US2 and
US3's pro rata share of the CFC's subpart F income for the CFC year is
equal to the subpart F income allocated to the preferred stock of the
CFC as determined under the hypothetical distribution, multiplied by
the percentage of days during the CFC year on which the U.S.
shareholder owned the preferred stock of the CFC. See proposed Sec.
1.951-1(e)(4)(iv) (Example 3).
4. Changes in Number of Outstanding Shares of Foreign Corporation
The proposed regulations would provide additional rules to address
cases in which there are changes in the number of shares of stock of a
foreign corporation outstanding during the year, for example, as a
result of a redemption or issuance of stock of the foreign corporation
during a CFC year. In general, the proposed regulations would adopt an
approach based on the average number of shares outstanding of the
foreign corporation during the CFC year. See also Sec. 1.1248-3(c)(2)
(applying a similar share averaging approach for purposes of
determining E&P attributable to stock of a foreign corporation).
If the number of shares outstanding within a class of stock of a
CFC varies during the CFC year, the proposed regulations would provide
that the daily proration approach described in part II.E.2 of this
Explanation of Provisions is applied with respect to a class of stock
by substituting a weighted average share count for the number of the
CFC's shares outstanding during the CFC year when determining the U.S.
shareholder's percentage of ownership of the stock of the foreign
corporation. See proposed Sec. 1.951-1(e)(2)(iii)(A). The weighted
average share count is equal to the sum of the number of shares
outstanding on each day of the CFC year divided by the number of days
in the CFC year. See proposed Sec. 1.951-1(e)(4)(v) (Example 4).
If there is more than one class of stock of a CFC outstanding
during the CFC year and the number of shares within a class of stock
varies during the CFC year, then the hypothetical distribution
described in part II.E.3 of this Explanation of Provisions is based on
the allocable earnings and profits that would be distributed to a class
of shares if a weighted average share count was outstanding on the last
day of the CFC year. See proposed Sec. 1.951-1(e)(2)(iii)(B) and
(4)(v) (Example 4).
F. Ownership Period of Foreign Corporation Stock
Section 1.951-1(f) provides that, for purposes of sections 951
through 964, the holding period of an asset (including stock of a CFC)
is determined by excluding the day on which such asset is acquired and
including the day on which such asset is disposed of. The proposed
regulations would clarify that this rule applies in determining the
period when stock of a foreign corporation is owned. Thus, for example,
if a U.S. shareholder sells all the stock of a CFC to another U.S.
shareholder, the selling U.S. shareholder is treated as owning the
stock of the CFC through the end of the day of the sale, and the
acquiring U.S. shareholder is treated as owning the stock of the CFC as
of the beginning of the day immediately after the sale.
III. Section 951A Regulations
A. Pro Rata Share of Tested Income or Tested Loss
The proposed regulations would revise Sec. 1.951A-1 to coordinate
the determination of a U.S. shareholder's pro rata share of a CFC's
tested income or tested loss with the rules provided in proposed Sec.
1.951-1, including the determination of a foreign corporation's CFC
year under the rules for mandatory and elective closings of a foreign
corporation's taxable year. See proposed Sec. 1.951A-1(d). The
proposed regulations would generally retain the rules relating to the
allocation of tested loss to preferred stock but modify those
provisions to apply for purposes of the hypothetical distribution
described in proposed Sec. 1.951-1(e)(2)(ii). See proposed Sec.
1.951A-1(d)(2)(ii) and (3). The examples under Sec. 1.951A-1 would
also be modified to illustrate the pro rata share rules in the proposed
regulations. See proposed Sec. 1.951A-1(d)(2)(iii) and (3)(iv).
B. Section 951A Inclusion Rules
The proposed regulations would revise Sec. 1.951A-1 to incorporate
other amendments to section 951A in the OBBBA. In particular, the
proposed regulations would provide that, under section 951A as revised
by the OBBBA, a U.S. shareholder is required to include in gross income
its net CFC tested income inclusion amount, and the proposed
regulations would prescribe the rule for determining this amount. See
proposed Sec. 1.951A-1(b) and (c). The proposed regulations would also
remove the rules for determining a U.S. shareholder's pro rata share of
qualified business asset investment, tested interest expense, and
tested interest income. The Treasury Department and the IRS anticipate
proposing additional changes to the regulations under section 951A to
conform with the amendments made in the OBBBA in a separate guidance
project.
IV. Information Reporting Under Section 1.6038-2
Section 6038(a)(1) provides that every United States person that
controls (within the meaning of section 6038(e)(2)) any foreign
business entity must furnish with respect to that entity such
information as the Secretary may prescribe related to the items listed
in section 6038(a)(1)(A) through (E) and any other information that is
similar or related in nature to such listed information or which the
Secretary determines to be appropriate to carry out the provisions of
the Code. Section 1.6038-2(f) sets forth information that
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may be required to be provided on Form 5471.
The proposed regulations would modify the information described in
Sec. 1.6038-2(f)(8) regarding the outstanding stock of a foreign
corporation to reflect the amendments made by the OBBBA to sections 951
and 951A. See proposed Sec. 1.6038-2(f)(8). Additionally, as revised,
proposed Sec. 1.6038-2(f) would provide that returns on Form 5471,
Information Return of U.S. Persons With Respect To Certain Foreign
Corporations, must contain information prescribed by Form 5471 (or
successor form) and that such information may include, but is not
limited to, the information set forth in Sec. 1.6038-2(f). This
revision clarifies that additional information may be required on Form
5471 that is not described by regulation, consistent with section
6038(a)(1).
V. Related Provisions
A. Section 951B
As described in part III.A of the Background, pursuant to section
951B(a)(1), section 951 applies to FCUSSs and FCFCs by replacing
references to ``United States shareholder'' with ``foreign controlled
United States shareholder'' and references to ``controlled foreign
corporation'' with ``foreign controlled foreign corporation.''
Additionally, under section 951B(a)(2), section 951A applies to an
FCUSS by treating references to a ``United States shareholder'' as
including a reference to an FCUSS and by treating each reference to a
``controlled foreign corporation'' as including a reference to an FCFC.
Pursuant to the application of section 951B, the proposed
regulations under sections 951 and 951A would apply to FCUSSs and FCFCs
in the same manner. Thus, the proposed regulations under section 951
would apply by substituting references to ``United States shareholder''
for ``foreign controlled United States shareholder'' and references to
``controlled foreign corporation'' for ``foreign controlled foreign
corporation.'' The proposed regulations under section 951A would apply
by treating each reference to a ``United States shareholder'' as
including a reference to an FCUSS and by treating each reference to a
``controlled foreign corporation'' as including a reference to an FCFC.
Because the proposed regulations would apply the same rules under
sections 951 and 951A to FCUSSs and FCFCs pursuant to section 951B, the
election to close the taxable year of a foreign corporation under
proposed Sec. 1.951-1(d)(2) would not be available to FCUSSs with
respect to an FCFC because such shareholders cannot own the requisite
percentage of stock of an FCFC (more than 50 percent of the vote or
value) for a significant ownership variance to occur. The mandatory
closing of a foreign corporation's taxable year under proposed Sec.
1.951-1(d)(2), however, is required if a foreign corporation becomes or
ceases to be an FCFC for the same reasons described in part II.C of
this Explanation of Provisions. The mandatory closing of a foreign
corporation's taxable year would include cases in which a CFC becomes
an FCFC or an FCFC becomes a CFC to ensure the proper operation of
section 951B.
B. Section 960
These proposed regulations would not make any changes to the
regulations under section 960. While the determination of a corporate
U.S. shareholder's pro rata share of a CFC's subpart F income, tested
income, or tested loss has changed, the regulations under section 960
should continue to operate appropriately to determine the foreign
income taxes deemed paid by a domestic corporation as a result of its
inclusions under sections 951(a)(1) and 951A.
VI. Effect on Other Regulations
A. Section 1.1502-80(j)
Section 1.1502-80(j) provides that, in determining the amount
described in former section 951(a)(2)(B) that is attributable to
distributions of previously taxed earnings and profits to which section
959(b) applies, members of a consolidated group (as defined in Sec.
1.1502-1(h)) are treated as a single U.S. shareholder for purposes of
determining the part of the year during which such shareholder did not
own the stock described in former section 951(a)(2)(A). Following the
revisions to section 951 in the OBBBA, for taxable years of foreign
corporations that begin after December 31, 2025, former section
951(a)(2)(B) does not apply in determining a U.S. shareholder's pro
rata share of subpart F income or tested income. As a result, to the
extent former section 951(a)(2)(B) is no longer relevant, Sec. 1.1502-
80(j) is no longer necessary to address the application of former
section 951(a)(2)(B) within a consolidated group with respect to
distributions to which section 959(b) applies. Accordingly, the
proposed regulations would amend the applicability date in Sec.
1.1502-80(j)(3) to clarify that Sec. 1.1502-80(j) applies only to the
extent former section 951(a)(2)(B) is applicable.
B. Section 1.245A-5(e) and (f)
The Treasury Department and the IRS are of the view that, because
of the revisions to sections 951 and 951A in the OBBBA, the
extraordinary reduction rules in Sec. 1.245A-5(e) and (f) are no
longer necessary. Accordingly, under the proposed regulations, the
extraordinary reduction rules would not apply for taxable years of
foreign corporations beginning after December 31, 2025. See proposed
Sec. 1.245A-5(k)(3). The proposed regulations would also modify Sec.
1.245A-5(d) (limitation on the section 954(c)(6) exception with respect
to extraordinary disposition accounts for lower-tier CFCs) to reflect
the revisions to section 951 in the OBBBA. See proposed Sec. 1.245A-
5(d)(1)(ii).
C. Section 1248 Regulations
In general, under section 1248(a), if a United States person that
satisfies certain ownership requirements recognizes gain on a sale or
exchange of stock in a foreign corporation, then the gain is included
in the gross income of such person as a dividend to the extent of the
E&P of the foreign corporation attributable to the stock that
accumulated while the United States person held the stock and the
corporation was a CFC, taking into account E&P of certain lower-tier
foreign corporations but excluding previously taxed earnings and
profits. For this purpose, regulations under section 1248 provide rules
for determining E&P attributable to stock in a foreign corporation in
simple and complex cases. See Sec. Sec. 1.1248-2 and 1.1248-3. The
rules addressing complex cases incorporate the principles of Sec.
1.951-1(e)(2) and (3) for purposes of allocating E&P to multiple
classes of stock of a foreign corporation. See Sec. 1.1248-3(c)(4) and
(d)(6).
The determination of a U.S. shareholder's pro rata share of a CFC's
subpart F income, tested income, or tested loss under the proposed
regulations is intended to be consistent with the manner in which E&P
is attributed to stock of a foreign corporation under the rules
prescribed in regulations under section 1248. The Treasury Department
and the IRS, however, are studying the regulations under section 1248
and revisions to those regulations may be proposed in a separate
guidance project. Comments are requested on the extent to which
revisions to the regulations under section 1248 are necessary to
coordinate
[[Page 55046]]
with the proposed regulations under sections 951 and 951A.
D. Proposed Regulations on Previously Taxed Earnings and Profits
On December 2, 2024, the Treasury Department and the IRS published
proposed regulations under sections 959 and 961 and certain other
provisions of the Code regarding previously taxed earnings and profits
(89 FR 95362) (2024 proposed PTEP regulations). The 2024 proposed PTEP
regulations contain certain rules premised on former section 951 and
also proposed revisions to the regulations under section 951. The
Treasury Department and the IRS intend to modify the 2024 proposed PTEP
regulations to reflect the amendments to sections 951 and 951A in the
OBBBA and the rules in these proposed regulations in a separate
guidance project.
VII. Transition Rule
A. Application
The proposed regulations would provide rules for the application of
the transition rule that are consistent with the rules described in the
transition rule notice. See proposed Sec. 1.951-4.
For example, the proposed regulations would provide as a general
rule that certain dividends are not treated as dividends for purposes
of applying former section 951(a)(2)(B) to the extent the dividend does
not increase the taxable income of a United States person subject to
Federal income tax. See proposed Sec. 1.951-4(b). As described in
section 3.04 of the transition rule notice, this general rule would
apply by reference to the specific shares of stock of the CFC with
respect to which a dividend was paid or deemed paid, and for which a
U.S. shareholder would otherwise reduce its pro rata share under former
section 951(a)(2)(B) absent the application of the transition rule.
Accordingly, if a U.S. shareholder acquires shares of stock in a CFC
after June 28, 2025, dividends paid with respect to those shares on or
before June 28, 2025, and during the taxable year of the CFC that
includes such date, are subject to the transition rule even if the U.S.
shareholder owned other shares in the CFC on or before June 28, 2025.
The proposed regulations would also define dividends paid or deemed
paid, United States person subject to Federal income tax, and taxable
income for purposes of the transition rule. See proposed Sec. 1.951-
4(c) through (e).
In addition, the proposed regulations would provide rules for
determining whether a dividend increases taxable income. See proposed
Sec. 1.951-4(f). The proposed regulations would provide that all
applicable provisions of the Code, and the regulations thereunder, are
applied before applying, and without regard to, the transition rule.
Therefore, for example, to the extent a dividend paid to a controlling
domestic shareholder before an extraordinary reduction would be
ineligible for the dividends received deduction under section 245A(a)
after applying section 245A and Sec. 1.245A-5 without regard to the
transition rule, the dividend would be treated as increasing the
taxable income of a United States person subject to Federal income tax.
The proposed regulations would provide an example demonstrating this
result and the consequences that would follow under section 245A.
Finally, the proposed regulations would include the rules on
partnerships and S corporations generally described in the transition
rule notice, including a safe harbor in the context of certain publicly
held partnerships. See proposed Sec. 1.951-4(g).
B. Substantiation Requirement
Under section 3.03(4) of the transition rule notice, a U.S.
shareholder that reduces its pro rata share of subpart F income or
tested income under former section 951(a)(2)(B) as a result of a
dividend subject to the transition rule must determine and document
that the dividend increased the taxable income of a United States
person subject to Federal income tax. The U.S. shareholder is required
to provide a statement to the IRS that describes why the U.S.
shareholder is entitled to treat such amount as a dividend for purposes
of former section 951(a)(2)(B) and how the U.S. shareholder determined
such amount increased the taxable income of a United States person
subject to Federal income tax.
A commenter on the transition rule notice asserted that the
requirement that a U.S. shareholder must determine and document that
the dividend increased the taxable income of a United States person
subject to Federal income tax is ambiguous and potentially onerous. The
commenter noted that the transition rule notice does not explain what
level of analysis, substantiation, or third-party information is
required to demonstrate that a dividend resulted in an increase to
taxable income and indicated that this information would be difficult
to obtain for transactions that have already closed. The commenter
recommended that the Treasury Department and the IRS eliminate or
significantly pare back the requirement where the dividend is required
by law to be included in the gross income of a United States person and
where no exclusion or deduction could reasonably apply. Alternatively,
the commenter suggested adopting a per se rule or safe harbor under
which the requirement does not apply to dividends received by certain
United States persons for whom inclusion in taxable income is mandatory
under the Code and, for all other situations, provide that Federal
income tax principles must be analyzed and indicate the type of
documentation that is sufficient to demonstrate that the dividend
increased taxable income.
The Treasury Department and the IRS are of the view that the
substantiation requirement described in the transition rule notice
properly requires taxpayers to establish that they are correctly
calculating their pro rata share of subpart F income or tested income
when applying the transition rule, while adequately prescribing the
degree of detail taxpayers must provide. The Treasury Department and
the IRS are also of the view that a per se rule or safe harbor rule is
not appropriate. For example, in the case of a dividend paid or deemed
paid to a United States person for whom inclusion in taxable income is
mandatory under the Code (for example, an individual who is a United
States citizen), information supporting the determination that the
dividend recipient is such a person would satisfy the substantiation
requirement. Additionally, a specific description of the types of
documentation that taxpayers must provide for substantiation purposes
would be overly restrictive. Accordingly, the proposed regulations do
not adopt the commenter's recommendations and would include the
substantiation requirement described in the transition rule notice. See
proposed Sec. 1.951-4(h).
VIII. Applicability Dates
The Treasury Department and the IRS expect to finalize the proposed
regulations by January 4, 2027. Under section 7805(b)(2), the proposed
regulations under sections 951, 951A, and 6038 are generally proposed
to apply to taxable years of foreign corporations beginning after
December 31, 2025, and to taxable years of U.S. shareholders for which
such taxable years of those foreign corporations are relevant. See
proposed Sec. Sec. 1.951-1(i)(1), 1.951A-7(a), and 1.6038-2(m).
Under section 70354(c) of the OBBBA, the amendments to the pro rata
share rules of section 951(a) made by section 70354(a) of the OBBBA are
made effective ``for taxable years of foreign corporations beginning
after December 31, 2025.'' However, under section
[[Page 55047]]
70323(c) of the OBBBA, the amendments to section 951A made by section
70323(a) of the OBBBA, requiring a U.S. shareholder to include in gross
income its net CFC tested income instead of its GILTI inclusion amount,
are made effective ``for taxable years beginning after December 31,
2025,'' which the Treasury Department and the IRS believe is best
interpreted as referring to the taxable years of a U.S. shareholder.
Therefore, in the case of a foreign corporation whose taxable year
begins after December 31, 2025, but ends with or within a taxable year
of a U.S. shareholder that begins on or before December 31, 2025,
former section 951A applies with respect to the U.S. shareholder, with
the U.S. shareholder's pro rata shares of the CFC's tested items
determined under section 951(a)(2) as amended by the OBBBA. Proposed
Sec. 1.951A-7(c) would therefore provide that, in this fact pattern,
the U.S. shareholder applies the former version of Sec. 1.951A-1
(which provides for the calculation and inclusion of the U.S.
shareholder's GILTI inclusion amount rather than net CFC tested income)
with respect to the CFC, but must take into account the amendments to
section 951(a)(2) made by the OBBBA in determining the U.S.
shareholder's pro rata share of any tested item.
As revised in the proposed regulations, Sec. Sec. 1.245A-5(e) and
(f) and 1.1502-80(j) would not apply with respect to taxable years of
foreign corporations beginning after December 31, 2025. See proposed
Sec. Sec. 1.245A-5(k)(3) and 1.1502-80(j)(3).
Under section 7805(b)(2), the proposed regulations regarding the
transition rule would apply to taxable years of a foreign corporation
that either include June 28, 2025, or begin after June 28, 2025, but
before the foreign corporation's first taxable year beginning after
December 31, 2025. See proposed Sec. 1.951-4(i).
Taxpayers may rely on all aspects of the proposed regulations
before the date the proposed regulations are finalized, provided a
taxpayer and its related parties (within the meaning of sections 267(b)
and 707(b)(1)) follow the rules in their entirety and in a consistent
manner.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
The Office of Management and Budget's (OMB) Office of Information
and Regulatory Analysis has determined that this proposed regulation is
not significant and is not subject to review under section 6(b) of
Executive Order 12866. Therefore, a regulatory impact assessment is not
required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the OMB
before collecting information from the public, whether such collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the OMB.
The collections of information in these proposed regulations
contain reporting and recordkeeping requirements that enable the IRS to
verify that a taxpayer is reporting the correct amount of taxable
income. The collections of information will be used by the IRS for tax
compliance purposes. The likely respondents are individuals,
businesses, and other for-profit institutions.
The collections of information in the proposed regulations are in
proposed Sec. Sec. 1.951-1(d)(2)(i) and (iv), 1.951-4(h), and 1.6038-
2(f)(8).
The collections of information in proposed Sec. 1.951-1(d)(2)(i)
and (iv) are elective for controlling section 958(a) U.S. shareholders
electing to close a CFC's taxable year if a significant ownership
variance occurs. The collection of information in proposed Sec. 1.951-
1(d)(2)(i) is satisfied by the controlling section 958(a) U.S.
shareholders providing notice regarding the election to United States
persons that own stock of a CFC during the taxable year that ends on
the day on which the CFC's taxable year is treated as closing under
proposed Sec. 1.951-1(d)(2), other than those persons required to
enter into the binding agreement. The collection of information in
proposed Sec. 1.951-1(d)(2)(iv) is satisfied by all controlling
section 958(a) U.S. shareholders filing the ``Elective Section 951
Year-Closing Statement'' with a timely filed original Federal income
tax return (including extensions) for the taxable year that includes
the day the CFC's taxable year is treated as closing under proposed
Sec. 1.951-1(d)(2).
The collection of information in proposed Sec. 1.951-4(h)(2) is
mandatory for certain United States persons that are entitled to treat
certain dividend amounts as a dividend for purposes of former section
951(a)(2)(B) as described in proposed Sec. 1.951-4(h)(2). The
collection of information is satisfied by a United States person
attaching a statement to Form 5471 that describes how the United States
person determined that the dividend increased the taxable income of a
United States person that is subject to Federal income tax for the
taxable year, applying the rules in proposed Sec. 1.951-4.
The collection of information in proposed Sec. 1.6038-2(f)(8) is
mandatory for U.S. shareholders. The collection of information is
satisfied by completing Schedules A and B relating to the outstanding
stock of a CFC and changes in direct and indirect ownership of the CFC
as described in or as prescribed by Form 5471 and its instructions.
These reporting requirements will be included within OMB Control
Numbers 1545-0123 for business filers, 1545-0074 for individual filers,
1545-0092 for trust and estate filers and 1545-0047 for tax exempt
filers in accordance with the PRA procedures under 5 CFR 1320.10.
The recordkeeping requirements include that taxpayers keep books of
account and records that are adequate to permit verification that the
reduction in the taxpayer's pro rata share under former section
951(a)(2)(B) was appropriate and that the taxpayer is reporting the
correct amount of taxable income. The recordkeeping requirements also
include that certain taxpayers enter into a binding agreement with
other shareholders as described in part II.D.3 of the Explanation of
Provisions.
All recordkeeping requirements will be included within OMB Control
Numbers 1545-0123 for business filers, 1545-0074 for individual filers,
1545-0092 for trust and estate filers, and 1545-0047 for tax exempt
filers in accordance with the PRA procedures under 5 CFR 1320.10.
III. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency to
prepare and make available for public comment an initial regulatory
flexibility analysis that will describe the impact of the proposed rule
on small entities. See 5 U.S.C. 603(a). Section 605 of the RFA provides
an exception to this requirement if the agency certifies that the
proposed rulemaking will not have a substantial economic impact on a
substantial number of small entities. A small entity is defined as a
small business, small nonprofit organization, or small governmental
jurisdiction. See U.S.C. 601(3) through (6).
It is hereby certified that the proposed regulations will not have
a significant economic impact on a substantial number of small
entities. The Treasury
[[Page 55048]]
Department and the IRS have determined that the regulations may affect
a substantial number of small entities but do not expect that the
proposed regulations will have a significant economic impact on
affected small entities within the meaning of sections 601(3) through
(6) of the RFA. The proposed regulations provide guidance on issues
regarding sections 951 and 951A and related provisions but do not
change the economic impact of the existing regulations or impose any
new costs on small entities. The proposed regulations would modify some
existing reporting requirements as discussed in part II of this Special
Analyses, but the modifications are not expected to impose significant
costs on any entities. Notwithstanding this certification, the Treasury
Department and the IRS welcome comments from the public about the
impact of these regulations on small entities.
IV. Submission to the Small Business Administration
Pursuant to section 7805(f) of the Code, the proposed regulations
have been submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small
businesses.
V. 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. In 2026, that threshold is approximately $214 million. The
proposed 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.
VI. Executive Order 13132: Federalism
Executive Order 13132 (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 proposed regulations do not have
federalism implications, do not impose substantial direct compliance
costs on State and local governments, and do not preempt State law
within the meaning of the Executive order.
Comments and Requests for a Public Hearing
Consideration will be given to comments that are submitted timely
to the IRS as prescribed in the preamble under the ADDRESSES section.
In addition to the comments specifically requested in the Explanation
of Provisions, the Treasury Department and the IRS request comments on
all aspects of the proposed regulations. Any comments submitted will be
made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits written comments. Requests for a public
hearing are encouraged to be made electronically. If a public hearing
is scheduled, notice of the date and time for the public hearing will
be published in the Federal Register. Public hearings will be conducted
in person with a telephonic option for individuals who wish to attend
or testify at the hearing by telephone. Hearings will be made
accessible to people with disabilities.
Statement of Availability of IRS Documents
Any IRS Revenue Procedures, Revenue Rulings, Notices, or other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at www.irs.gov.
Drafting Information
The principal author of these regulations is James R. Kostura,
Office of Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by revising
the entry for Sec. 1.951-1 and adding entries in numerical order for
Sec. 1.951-4 and Sec. 1.951A-1 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.951-1 also issued under 26 U.S.C. 951, 951(a)(4), and
7701(a).
Section 1.951-4 also issued under section 70354(c)(2), Pub. L.
119-21, 139 Stat. 72.
Section 1.951A-1 also issued under 26 U.S.C. 951(a)(4) and 951A.
* * * * *
0
Par. 2. Section 1.245A-5 is amended by:
0
1. Revising the last sentence of paragraph (a);
0
2. Revising paragraph (d)(1)(ii);
0
3. Revising the second sentence of paragraph (j)(3)(ii)(D);
0
4. Revising paragraph (k)(1); and
0
5. Adding paragraphs (k)(3) and (4).
The revisions and additions read as follows:
Sec. 1.245A-5 Limitation of section 245A deduction and section
954(c)(6) exception.
(a) * * * Paragraph (k) of this section provides the applicability
date of this section, including a rule that provides that the
extraordinary reduction rules described in paragraphs (e) and (f) of
this section do not apply to taxable periods of foreign corporations
beginning after December 31, 2025.
* * * * *
(d) * * *
(1) * * *
(ii) The percentage of the upper-tier CFC's subpart F income that
would be included in a United States shareholder's income under section
951(a) with respect to the upper-tier CFC's taxable year, determined
without regard to the application of section 954(c)(6).
* * * * *
(j) * * *
(3) * * *
(ii) * * *
(D) * * * The percentage of CFC1's subpart F income for its taxable
year that would be included in a United States shareholder's income is
100%. * * *
* * * * *
(k) Applicability date--(1) In general. Except as provided in
paragraphs (k)(3) and (4) of this section, 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.
* * * * *
(3) Phaseout of extraordinary reduction rules. Paragraphs
(b)(2)(ii), (e), and (f) of this section do not apply to taxable
periods of foreign corporations beginning after December 31, 2025.
(4) Modification of extraordinary disposition rules. Paragraphs
(d)(1)(ii)
[[Page 55049]]
and (j)(3)(ii)(D) of this section apply to taxable periods of foreign
corporations beginning after December 31, 2025, and to taxable periods
of section 245A shareholders in which or with which such taxable
periods end. For rules that apply to taxable periods of foreign
corporations beginning on or before December 31, 2025, see Sec.
1.245A-5 as contained in 26 CFR part 1 edition revised as of April 1,
2026.
0
Par. 3. Section 1.901-2 is amended by revising paragraph (f)(6) to read
as follows:
Sec. 1.901-2 Income, war profits, or excess profits tax paid or
accrued.
* * * * *
(f) * * *
(6) Allocation of foreign income taxes in connection with certain
elections and status change events. For rules relating to the
allocation of foreign income taxes in connection with elections made
pursuant to section 336(e), see Sec. 1.336-2(g)(3)(ii). For rules
relating to the allocation of foreign income taxes in connection with
elections made pursuant to section 338, see Sec. 1.338-9(d). For rules
relating to the allocation of foreign income taxes in connection with
elections made pursuant to Sec. 1.245A-5(e)(3)(i), see Sec. 1.245A-
5(e)(3)(i)(B) (applicable to taxable periods of foreign corporations
beginning before December 31, 2025). For rules relating to the
allocation of foreign income taxes in connection with an election
pursuant to Sec. 1.951-1(d)(2) or a status change event under Sec.
1.951-1(d)(1), see Sec. 1.951-1(d)(3).
* * * * *
0
Par. 4. Section 1.951-1 is amended by:
0
1. Revising paragraphs (a), (b), (d) through (f), and (h); and
0
2. Adding paragraph (i).
The revisions and addition read as follows:
Sec. 1.951-1 Amounts included in gross income of United States
shareholders.
(a) Scope. This section sets forth the rules for determining
amounts included in the gross income of a United States shareholder
under section 951(a). Paragraph (b) of this section provides the
general rule for amounts required to be included in gross income under
section 951(a)(1)(A) and (B). Paragraph (c) of this section is
reserved. Paragraph (d) of this section provides rules that require or
permit the closing of the taxable year of a foreign corporation, which,
if applicable, are necessary to determine the CFC year with respect to
which a United States shareholder determines its pro rata share of
subpart F income. Paragraph (e) of this section prescribes the rules
for determining a United States shareholder's pro rata share of subpart
F income for a CFC year. Paragraph (f) of this section provides a rule
for determining the holding period of an asset (including stock of a
controlled foreign corporation). Paragraph (g) of this section defines
United States shareholder. Paragraph (h) of this section provides
additional definitions. Paragraph (i) of this section provides
applicability dates. For rules applying this section to foreign
controlled United States shareholders and foreign controlled foreign
corporations, see section 951B (generally replacing references in this
section to the term ``United States shareholder'' with the term
``foreign controlled United States shareholder'' and the term
``controlled foreign corporation'' with the term ``foreign controlled
foreign corporation'').
(b) In general--(1) Section 951(a)(1)(A) inclusions. Each United
States shareholder of a foreign corporation that owns stock in the
foreign corporation on any day during a CFC year of the foreign
corporation must, for the United States shareholder's taxable year that
includes the last day on which the shareholder owns stock in the
foreign corporation during the CFC year, include in gross income the
United States shareholder's pro rata share (determined under paragraph
(e) of this section) of the foreign corporation's subpart F income for
the CFC year.
(2) Section 951(a)(1)(B) inclusions. Each United States shareholder
of a foreign corporation that owns stock in the foreign corporation on
the last day of a CFC year on which the foreign corporation is a
controlled foreign corporation must, for the United States
shareholder's taxable year that includes the last day on which the
shareholder owns stock in the foreign corporation during the CFC year,
include in gross income the amount determined under section 956 with
respect to the United States shareholder for the CFC year, but only to
the extent not excluded from gross income under section 959(a)(2).
(3) Personal holding company determination. For purposes of
determining whether a United States shareholder that is a domestic
corporation is a personal holding company under section 542 and Sec.
1.542-1, the character of the amount includible in gross income of such
domestic corporation under this paragraph (b) is determined as if such
amount were realized directly by such domestic corporation from the
source from which it is realized by the controlled foreign corporation.
(4) Cross references. See Sec. 1.957-2(a) for a special limitation
on the amount of subpart F income in the case of a controlled foreign
corporation described in section 957(b) (involving insurance income).
See section 970(a) and Sec. 1.970-1 for rules that reduce subpart F
income of controlled foreign corporations that are export trade
corporations.
* * * * *
(d) Certain taxable year determinations--(1) Required closing of
foreign corporation's taxable year--(i) In general. If a status change
event occurs with respect to a foreign corporation, the taxable year of
the foreign corporation closes for all purposes of the Internal Revenue
Code (and, therefore, as to all shareholders of the foreign
corporation) under this paragraph (d)(1) as of the end of the day on
which the status change event occurs, unless the taxable year otherwise
closes as of such day under another provision of the Internal Revenue
Code.
(ii) Status change event. A status change event occurs if a foreign
corporation becomes or ceases to be a controlled foreign corporation.
For purposes of paragraph (d)(1)(i) of this section, in the case of a
foreign corporation becoming a controlled foreign corporation, the
status change event occurs on the last day that the foreign corporation
is not a controlled foreign corporation, and in the case of a foreign
corporation ceasing to be a controlled foreign corporation, the status
change event occurs on the last day that the foreign corporation is a
controlled foreign corporation.
(iii) Special rules for domestic partnerships and options. Solely
for purposes of determining whether a status change event occurs with
respect to a foreign corporation--
(A) Sec. 1.958-1(d)(1) is applied without regard to the exceptions
in Sec. 1.958-1(d)(2)(i) and (ii), and
(B) Section 318(a)(4) and Sec. 1.958-2(e) do not apply.
(2) Elective closing of controlled foreign corporation's taxable
year--(i) In general. If a significant ownership variance occurs with
respect to a controlled foreign corporation, all the controlling
section 958(a) U.S. shareholders of the controlled foreign corporation
may elect to close the controlled foreign corporation's taxable year
for all purposes of the Internal Revenue Code (and, therefore, as to
all shareholders of the controlled foreign corporation) under this
paragraph (d)(2) as of the end of the day on which the
[[Page 55050]]
significant ownership variance occurs, unless the taxable year
otherwise closes as of such day under another provision of the Internal
Revenue Code. If the election is made, all persons that own stock of
the controlled foreign corporation (regardless of whether they are
controlling section 958(a) U.S. shareholders) must file their
respective Federal income tax returns and information returns
consistently with the election. The closing of the controlled foreign
corporation's taxable year is treated as a change in taxable year for
purposes of the notice requirement in Sec. 1.964-1(c)(3)(iii),
treating the controlling section 958(a) U.S. shareholders as the
controlling domestic shareholders of the foreign corporation for this
purpose. The notice described in Sec. 1.964-1(c)(3)(iii) must be
provided to all United States persons that own stock of the controlled
foreign corporation during the taxable year that ends on the day on
which the controlled foreign corporation's taxable year closes under
this paragraph (d)(2), other than those persons required to enter into
the binding agreement described in paragraph (d)(2)(iv)(B) of this
section.
(ii) Significant ownership variance--(A) In general. A significant
ownership variance occurs if, taking into account all specified
transfers that occur pursuant to the same plan during the same taxable
year of a controlled foreign corporation (such taxable year determined
without regard to this paragraph (d)(2)), the percentage of the
outstanding stock of the controlled foreign corporation owned by one or
more section 958(a) U.S. shareholders of the controlled foreign
corporation decreases, in the aggregate, by more than 50 percentage
points (by vote or value), as compared to the percentage of stock of
the controlled foreign corporation owned by those section 958(a) U.S.
shareholders immediately before the first such specified transfer. For
purposes of paragraph (d)(2)(i) of this section, the significant
ownership variance occurs on the day that the last specified transfer
taken into account in the significant ownership variance occurs.
(B) Specified transfer. A specified transfer is--
(1) A sale, exchange, or any other disposition of one or more
shares of stock of a foreign corporation or of a partnership interest
by the same person on the same date, including a redemption of stock
within the meaning of section 317(b) or a change in a partner's
interest in a partnership as a result of a distribution or redemption,
or
(2) An issuance of one or more shares of stock of a foreign
corporation, an issuance of a partnership interest, or a change in a
partner's interest in a partnership as a result of a contribution of
property or services to the partnership, in each case occurring on the
same date.
(C) Special rules for related persons and certain reorganizations.
Solely for purposes of applying paragraph (d)(2)(ii)(A) of this
section--
(1) The total percentage of the outstanding stock of the controlled
foreign corporation owned by one or more section 958(a) U.S.
shareholders is not treated as decreasing to the extent that, taking
into account all the specified transfers referred to in paragraph
(d)(2)(ii)(A) of this section, a United States person that is a related
person, immediately following the last such specified transfer, with
respect to any section 958(a) U.S. shareholder whose percentage of
ownership of stock of the controlled foreign corporation decreased
(determined without regard to this paragraph (d)(2)(ii)(C)(1)), has an
increase in its percentage of ownership of stock of the controlled
foreign corporation; and
(2) The transferor corporation and the resulting corporation (as
defined in Sec. 1.368-2(m)(1)) in a reorganization described under
section 368(a)(1)(F) are treated as the same corporation.
(iii) Certain United States shareholders--(A) Section 958(a) U.S.
shareholders. The section 958(a) U.S. shareholders of a controlled
foreign corporation are the United States shareholders that own stock
of the controlled foreign corporation.
(B) Controlling section 958(a) U.S. shareholders. The controlling
section 958(a) U.S. shareholders of a controlled foreign corporation
are the section 958(a) U.S. shareholders (or, if applicable, single
section 958(a) U.S. shareholder) whose percentage of ownership of stock
of the controlled foreign corporation decreases as part of a
significant ownership variance.
(iv) Time and manner of making election--(A) Election by
controlling section 958(a) U.S. shareholders. An election pursuant to
this paragraph (d)(2) is made and effective if each controlling section
958(a) U.S. shareholder files the statement described in paragraph
(d)(2)(v) of this section with its timely filed original Federal income
tax return (including extensions) for the taxable year that includes
the day the controlled foreign corporation's taxable year closes under
this paragraph (d)(2). If a controlling section 958(a) U.S. shareholder
is a member of a consolidated group (within the meaning of Sec.
1.1502-1(h)), the agent for the group (within the meaning of Sec.
1.1502-77(c)(1)) makes the election by filing the statement described
in paragraph (d)(2)(v) of this section on behalf of such member.
(B) Binding agreement. Before the filing of the statement described
in paragraph (d)(2)(v) of this section, all the controlling section
958(a) U.S. shareholders and all other section 958(a) U.S. shareholders
of the controlled foreign corporation (if any) that own stock of the
controlled foreign corporation on any day of the controlled foreign
corporation's taxable year up to and including the day that the
significant ownership variance occurs must enter into a written,
binding agreement requiring the controlling section 958(a) U.S.
shareholders to make the election described in this paragraph (d)(2).
Each party to this binding agreement must be able to present the
agreement to the Internal Revenue Service for inspection upon request.
No binding agreement is required under this paragraph (d)(2)(iv)(B) if
there is a single controlling section 958(a) U.S. shareholder and there
is no other section 958(a) U.S. shareholder of the controlled foreign
corporation that owns stock of the controlled foreign corporation on
any day of the controlled foreign corporation's taxable year up to and
including the day that the significant ownership variance occurs. In
the case of a section 958(a) U.S. shareholder that owns stock of the
controlled foreign corporation indirectly through one or more
partnerships, the partnership that directly holds the stock of the
controlled foreign corporation may enter into the binding agreement on
behalf of the United States shareholder 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)).
(v) Form and content of statement. The statement required by
paragraph (d)(2)(iv) of this section must be titled ``Elective Section
951 Year-Closing Statement.'' The statement must--
(A) Identify (by name and tax identification number, if any) the
controlled foreign corporation, the controlling section 958(a) U.S.
shareholders, and each other section 958(a) U.S. shareholder of the
controlled foreign corporation that is party to the binding agreement
referred to in paragraph (d)(2)(iv)(B) of this section;
(B) Describe the significant ownership variance to which the
election applies and provide the date on which the
[[Page 55051]]
controlled foreign corporation's taxable year closes;
(C) State that each controlling section 958(a) U.S. shareholder and
all other section 958(a) U.S. shareholders of the controlled foreign
corporation described in paragraph (d)(2)(iv)(B) of this section have
entered into a written, binding agreement to elect to close the
controlled foreign corporation's taxable year in accordance with
paragraph (d)(2)(iv)(B) of this section; and
(D) Be filed in the manner, if any, prescribed by forms,
publications, or other guidance published in the Internal Revenue
Bulletin.
(vi) Consistency requirement. If significant ownership variances
occur with respect to multiple controlled foreign corporations pursuant
to a plan or series of related transactions, the election described in
this paragraph (d)(2) may be made only if it is made with respect to
each of the controlled foreign corporations.
(3) Foreign income taxes--(i) Allocation to taxable years. If a
foreign corporation's taxable year closes under paragraph (d)(1) or
(d)(2) of this section and the foreign corporation's taxable year under
foreign law does not close at the end of the date on which the foreign
corporation's taxable year closes (the closing date), a portion of the
foreign income tax with respect to such foreign taxable year that
accrues in the taxable year following the closing date is allocated to
the taxable year ending with the closing date. The allocation is made
based on the portion of the taxable income of the foreign corporation
(as determined under foreign law) for the foreign taxable year that is
attributable under the principles of Sec. 1.1502-76(b) (without regard
to Sec. 1.1502-76(b)(2)(ii)) to the period of the foreign taxable year
ending with the closing date. This paragraph (d)(3) applies to all
foreign income taxes for which the foreign corporation is the taxpayer
under Sec. 1.901-2(f) (other than withholding taxes as defined in
section 901(k)(1)(B)). Foreign income taxes allocated to a taxable year
under this paragraph (d)(3) are treated as accrued by the foreign
corporation as of the close of that taxable year for all purposes of
the Internal Revenue Code except for section 986(a).
(ii) Allocation and apportionment to statutory and residual
groupings. The portion of the foreign income tax allocated under
paragraph (d)(3)(i) of this section to the taxable year ending with the
closing date is allocated and apportioned to statutory and residual
groupings under Sec. 1.861-20 by treating the foreign taxable income
attributed under paragraph (d)(3)(i) of this section to the period of
the foreign taxable year ending with the closing date as the foreign
income included in the base on which the tax is imposed. The portion of
the foreign income tax that remains in the taxable year following the
closing date is allocated and apportioned to statutory and residual
groupings under Sec. 1.861-20 by treating the remaining foreign
taxable income as the foreign income included in the base on which the
tax is imposed.
(4) Examples. The following examples illustrate the application of
this paragraph (d).
(i) Example 1: Status change event--(A) Facts. FC is a foreign
corporation with a calendar taxable year. As of January 1 of Year 1,
100 percent of the stock of FC is owned by USP, a domestic corporation.
On June 30 of Year 1, USP sells all its stock in FC to Individual A, a
nonresident alien individual.
(B) Analysis. Under paragraph (f)(1) of this section, USP owns the
stock of FC through June 30 of Year 1. Individual A owns the stock of
FC on July 1 of Year 1. FC is therefore a controlled foreign
corporation through June 30 of Year 1 and is not a controlled foreign
corporation on July 1 of Year 1. Under paragraph (d)(1)(ii) of this
section, a status change event occurs with respect to FC on June 30 of
Year 1, which is the last day that FC is a controlled foreign
corporation. Therefore, under paragraph (d)(1)(i) of this section, the
taxable year of FC closes for all purposes of the Internal Revenue Code
as of the end of the day on June 30 of Year 1.
(ii) Example 2: Significant ownership variance--(A) Facts. The
facts are the same as in paragraph (d)(4)(i)(A) of this section
(Example 1), except that Individual A is a United States citizen. USP
and Individual A are not related persons.
(B) Analysis. Paragraph (d)(1) of this section does not apply to
the sale of stock of FC by USP to Individual A because the sale does
not result in FC ceasing to be a controlled foreign corporation. Under
paragraph (d)(2)(ii)(B) of this section, the sale of stock of FC by USP
to Individual A is a specified transfer. Under paragraph (d)(2)(ii)(B)
of this section, USP is a section 958(a) U.S. shareholder of FC prior
to the sale. Under paragraph (f)(1) of this section, USP owns the stock
of FC through June 30 of Year 1, and Individual A owns the stock of FC
on July 1 of Year 1. Under paragraph (d)(2)(ii)(A) of this section,
USP's sale of all the stock of FC to Individual A results in a
significant ownership variance that occurs on June 30 of Year 1. A
significant ownership variance occurs because, taking into account the
sale, the percentage of the outstanding stock of FC owned by USP
decreases, in the aggregate, by more than 50 percentage points (by vote
or value), as compared to the percentage of stock of FC owned by USP
immediately before the sale (from 100 percent to 0 percent). Under
paragraph (d)(2)(iii)(B) of this section, USP is the single controlling
section 958(a) U.S. shareholder of FC. Therefore, pursuant to paragraph
(d)(2)(i) of this section, USP may elect to close the taxable year of
FC for all purposes of the Internal Revenue Code as of the end of the
day on June 30 of Year 1.
(iii) Example 3: Transfer between related persons--(A) Facts. The
facts are the same as in paragraph (d)(4)(ii)(A) of this section
(Example 2), except that USP and Individual A are related persons.
(B) Analysis. Paragraph (d)(1) of this section does not apply to
the sale of stock of FC by USP to Individual A because the sale does
not result in FC ceasing to be a controlled foreign corporation. Under
paragraph (d)(2)(ii)(B) of this section, the sale of stock of FC by USP
to Individual A is a specified transfer. Under paragraph (d)(2)(iii)(A)
of this section, USP is a section 958(a) U.S. shareholder of FC prior
to the sale. Under paragraph (f)(1) of this section, USP owns the stock
of FC through June 30 of Year 1, and Individual A owns the stock of FC
on July 1 of Year 1. Under paragraph (d)(2)(ii)(C) of this section,
solely for purposes of applying paragraph (d)(2)(ii)(A) of this
section, the total percentage of the outstanding stock of FC owned by
one or more section 958(a) U.S. shareholders is not treated as
decreasing as a result of the sale because Individual A is a United
States person that is a related person, immediately following the sale,
with respect to USP, and the sale results in an increase in Individual
A's percentage of ownership of stock of FC by 100 percent (entirely
offsetting the 100 percent decrease in USP's percentage of ownership of
stock of FC). Therefore, the sale does not give rise to a significant
ownership variance and USP may not elect to close the taxable year of
FC.
(e) Pro rata share of subpart F income defined--(1) Overview. This
paragraph (e) determines a United States shareholder's pro rata share
of a controlled foreign corporation's subpart F income for a CFC year.
Paragraph (e)(2) of this section contains the rules for determining a
United States shareholder's pro rata share of subpart F income.
Paragraph (e)(3) of this section sets forth an anti-abuse rule, and
[[Page 55052]]
paragraph (e)(4) of this section contains examples.
(2) In general. A United States shareholder's pro rata share of a
controlled foreign corporation's subpart F income for a CFC year is the
portion of the subpart F income attributable to the stock of the
foreign corporation that the United States shareholder owns during the
period of the CFC year in which the United States shareholder owns the
stock, the shareholder is a United States shareholder of the foreign
corporation, and the foreign corporation is a controlled foreign
corporation, as determined under the rules of this paragraph (e)(2).
(i) One class of stock with constant number of shares outstanding--
(A) Daily proration. Subject to paragraph (e)(2)(i)(B) of this section,
if the controlled foreign corporation has only one class of stock
outstanding at all times during the CFC year and there is no change in
the number of outstanding shares of the controlled foreign corporation
during the CFC year, a United States shareholder's pro rata share of
the controlled foreign corporation's subpart F income is equal to the
subpart F income of the controlled foreign corporation for the CFC year
multiplied by the product of--
(1) A fraction, the numerator of which is the number of shares of
the controlled foreign corporation the United States shareholder owned
during the CFC year, and the denominator of which is the number of
shares of the controlled foreign corporation outstanding for the CFC
year, and
(2) A fraction, the numerator of which is the number of days the
United States shareholder owned the shares of the controlled foreign
corporation while a United States shareholder of the foreign
corporation and while the foreign corporation was a controlled foreign
corporation during the CFC year, and the denominator of which is the
number of days in the CFC year.
(B) Stock with different ownership periods during CFC year--(1) In
general. If a United States shareholder owns shares in more than one
CFC year block during a CFC year (for example, because the United
States shareholder acquires or disposes of a portion of its shares
during the CFC year), paragraph (e)(2)(i)(A) of this section is applied
separately to each CFC year block, and the United States shareholder's
pro rata share of the controlled foreign corporation's subpart F income
for the CFC year is equal to the total amount determined with respect
to all of its CFC year blocks. See paragraph (e)(4)(iii) of this
section (Example 2).
(2) Definition of CFC year block. The term CFC year block means a
group of shares within a class of stock of a controlled foreign
corporation that a United States shareholder owns for the same period
during a CFC year.
(ii) More than one class of stock with constant number of shares
outstanding in each class. If a controlled foreign corporation has more
than one class of stock outstanding during a CFC year and there is no
change in the number of outstanding shares in any class of the
controlled foreign corporation's stock during the CFC year, paragraph
(e)(2)(i) of this section is applied separately to each class of stock
after first allocating the controlled foreign corporation's subpart F
income for the CFC year among the classes of stock. For this purpose,
the amount of subpart F income for the CFC year allocated to a class of
stock of a controlled foreign corporation is the amount that bears the
same ratio to the corporation's subpart F income for the CFC year as
the amount of the corporation's allocable earnings and profits that
would be distributed with respect to the class of stock bears to the
total amount of the corporation's allocable earnings and profits that
would be distributed with respect to all the stock of the corporation
if all the allocable earnings and profits of the corporation for the
CFC year (not reduced by actual distributions during the year) were
distributed (hypothetical distribution) on the last day of the CFC
year.
(A) Definition of allocable earnings and profits. The term
allocable earnings and profits means, with respect to a controlled
foreign corporation for a CFC year, the amount that is the greater of--
(1) The earnings and profits of the corporation for the CFC year
determined under section 964, and
(2) The sum of the subpart F income (as determined under section
952 after the application of section 951A(b)(2)(B)(ii) and Sec.
1.951A-6(b)) of the corporation for the CFC year and the tested income
of the corporation for the CFC year.
(B) Hypothetical distribution analysis. The amount of the
controlled foreign corporation's allocable earnings and profits
distributed in the hypothetical distribution with respect to each class
of stock is determined based on the distribution rights of the stock
during the CFC year. Subject to paragraphs (e)(2)(ii)(C) and (D), and
(e)(3), of this section, the distribution rights of a class of stock
are determined taking into account all facts and circumstances related
to the economic rights and interest in the allocable earnings and
profits of the corporation of each class, including the terms of the
class of stock, any agreement among the shareholders and, if and to the
extent appropriate, the relative fair market value of shares of stock.
For purposes of this paragraph (e)(2)(ii)(B), facts and circumstances
do not include actual distributions (including distributions by
redemption) or any amount treated as a dividend under any other
provision of subtitle A of the Internal Revenue Code (for example,
under section 78, 356(a)(2), 367(b), or 1248) made during the CFC year.
(C) Special rules--(1) Redemptions, liquidations, and returns of
capital. No amount of allocable earnings and profits is distributed in
the hypothetical distribution with respect to a particular class of
stock based on the terms of the class of stock of the controlled
foreign corporation or any agreement or arrangement with respect
thereto that would result in a redemption (even if such redemption
would be treated as a distribution of property to which section 301
applies pursuant to section 302(d)), a distribution in liquidation, or
a return of capital.
(2) Certain cumulative preferred stock. If a controlled foreign
corporation has outstanding a class of redeemable preferred stock with
cumulative dividend rights and dividend arrearages on such stock do not
compound at least annually at a rate that equals or exceeds the
applicable Federal rate (as defined in section 1274(d)(1)) that applies
on the date the stock is issued for the term from such issue date to
the mandatory redemption date based on a comparable compounding
assumption (the relevant AFR), the amount of the corporation's
allocable earnings and profits distributed in the hypothetical
distribution with respect to the class of stock may not exceed the
amount of dividends actually paid during the CFC year with respect to
the class of stock plus the present value at the end of the CFC year of
the unpaid current dividends with respect to the class determined using
the relevant AFR and assuming the dividends will be paid at the
mandatory redemption date. For purposes of this paragraph
(e)(2)(ii)(C)(2), if the class of preferred stock does not have a
mandatory redemption date, the mandatory redemption date is the date
that the class of preferred stock is expected to be redeemed based on
all facts and circumstances.
(3) Dividend arrearages. If there is an arrearage in dividends for
prior taxable years with respect to a class of preferred stock of a
controlled foreign corporation, an amount of the corporation's
allocable earnings and
[[Page 55053]]
profits is distributed in the hypothetical distribution to the class of
preferred stock by reason of the arrearage only to the extent the
arrearage exceeds the accumulated earnings and profits of the
controlled foreign corporation remaining from prior CFC years beginning
after December 31, 1962, as of the beginning of the CFC year, or the
date on which such stock was issued, whichever is later (the applicable
date). If there is an arrearage in dividends for prior CFC years with
respect to more than one class of preferred stock, the previous
sentence is applied to each class in order of priority, except that the
accumulated earnings and profits remaining after the applicable date
are reduced by the allocable earnings and profits necessary to satisfy
arrearages with respect to classes of stock with a higher priority. For
purposes of this paragraph (e)(2)(ii)(C)(3), the amount of any
arrearage with respect to stock described in this paragraph
(e)(2)(ii)(C)(3) is determined in the same manner as the present value
of unpaid current dividends on such stock under paragraph
(e)(2)(ii)(C)(2) of this section.
(D) Restrictions or other limitations on distributions--(1) In
general. A restriction or other limitation on distributions of an
amount of earnings and profits by a controlled foreign corporation is
not taken into account in determining the amount of the corporation's
allocable earnings and profits distributed in the hypothetical
distribution to a class of stock of the controlled foreign corporation.
(2) Definition of restriction or other limitation. For purposes of
paragraph (e)(2)(ii)(D)(1) of this section, a restriction or other
limitation on distributions includes any limitation that has the effect
of limiting the distribution of an amount of earnings and profits by a
controlled foreign corporation with respect to a class of stock of the
corporation, other than currency or other restrictions or limitations
imposed under the laws of any foreign country as provided in section
964(b).
(3) Exception for certain preferred distributions. For purposes of
paragraph (e)(2)(ii)(D)(1) of this section, the right to receive
periodically a fixed amount (whether determined by a percentage of par
value, a reference to a floating coupon rate, a stated return expressed
in terms of a certain amount of U.S. dollars or foreign currency, or
otherwise) with respect to a class of stock the distribution of which
is a condition precedent to a further distribution of earnings and
profits that year with respect to any class of stock (not including a
distribution in partial or complete liquidation) is not a restriction
or other limitation on the distribution of earnings and profits by a
controlled foreign corporation.
(4) Illustrative list of restrictions and limitations. Except as
provided in paragraph (e)(2)(ii)(D)(3) of this section, restrictions or
other limitations on distributions include, but are not limited to--
(i) An arrangement that restricts the ability of a controlled
foreign corporation to pay dividends on a class of stock of the
corporation until a condition or conditions are satisfied (for example,
until another class of stock is redeemed);
(ii) A loan agreement entered into by a controlled foreign
corporation that restricts or otherwise affects the ability to make
distributions on its stock until certain requirements are satisfied; or
(iii) An arrangement that conditions the ability of a controlled
foreign corporation to pay dividends to its shareholders on the
financial condition of the corporation.
(iii) Changes in number of shares outstanding. If the number of
shares within any class of stock of a controlled foreign corporation
outstanding on each day of a CFC year changes (for example, because of
an issuance of new shares or a redemption of outstanding shares), a
United States shareholder's pro rata share of subpart F income is
determined under the rules provided in paragraphs (e)(2)(i) and (ii) of
this section as modified by this paragraph (e)(2)(iii).
(A) Weighted average share count. For purposes of applying
paragraph (e)(2)(i) of this section, a United States shareholder's pro
rata share of subpart F income is determined by substituting a weighted
average share count for the number of the controlled foreign
corporation's shares outstanding during the CFC year, which is equal to
the sum of the number of shares outstanding on each day of the CFC year
divided by the number of days in the CFC year.
(B) Multiple classes of stock. For purposes of applying paragraph
(e)(2)(ii) of this section, a controlled foreign corporation's subpart
F income for the CFC year is allocated among classes of stock based on
the allocable earnings and profits that would be distributed to a class
of stock in the hypothetical distribution if a weighted average share
count of the class was outstanding on each day of the CFC year and,
thus, on the last day of the CFC year when the hypothetical
distribution occurs.
(3) Transactions and arrangements with a principal purpose of
changing pro rata shares. Appropriate adjustments must be made to the
allocation of allocable earnings and profits that would be distributed
(without regard to this paragraph (e)(3)) in a hypothetical
distribution with respect to any share of stock to disregard the effect
on the hypothetical distribution of any transaction or arrangement that
is undertaken as part of a plan a principal purpose of which is the
avoidance of Federal income taxation by changing the amount of
allocable earnings and profits that would be distributed in any
hypothetical distribution with respect to such share. This paragraph
(e)(3) also applies for purposes of the pro rata share rules described
in Sec. 1.951A-1(d) that reference this paragraph (e).
(4) Examples. The following examples illustrate the application of
this paragraph (e).
(i) Facts. Except as otherwise stated, the following facts are
assumed for purposes of the examples:
(A) FC1 is a controlled foreign corporation.
(B) USP1 and USP2 are domestic corporations that are United States
shareholders of FC1.
(C) Individual A is a nonresident alien individual, and FC2 is a
foreign corporation that is not a controlled foreign corporation.
(D) All persons use the calendar year as their taxable year.
(E) Year 1 has 365 days.
(F) Any ownership of stock of FC1 by any shareholder is for all of
Year 1.
(G) The common shareholders of FC1 are entitled to dividends when
declared by FC1's board of directors.
(H) There are no accrued but unpaid dividends with respect to
preferred shares, the preferred stock is not described in paragraph
(e)(2)(ii)(C)(2) of this section, and common shares have positive
liquidation value.
(I) There are no other facts and circumstances related to the
economic rights and interest of any class of stock in the allocable
earnings and profits of a foreign corporation, and no transaction or
arrangement was entered into as part of a plan a principal purpose of
which is the avoidance of Federal income taxation.
(J) FC1 has neither tested income nor tested loss.
(K) None of the transactions described constitute a status change
event or a significant ownership variance.
(ii) Example 1: One class of stock with constant number of shares
outstanding--(A) Facts. FC1 has outstanding 100 shares of one class of
stock. USP1 owns 60 shares of FC1. USP2 owns 40 shares of FC1. For Year
1, FC1 earns $100x of subpart F income.
(B) Analysis. FC1 has one class of stock and the number of shares
[[Page 55054]]
outstanding does not change during Year 1, which is a CFC year.
Therefore, USP1's and USP2's pro rata shares of FC1's subpart F income
for the CFC year are determined under paragraph (e)(2)(i) of this
section. For Year 1, USP1's pro rata share of FC1's subpart F income is
$60x, which is equal to $100x of subpart F income multiplied by the
product of two fractions. For the first fraction, the numerator is the
number of shares that USP1 owned (60) and the denominator is the number
of shares of FC1 outstanding (100) (60 percent). For the second
fraction, the numerator is the number of days in the CFC year that USP1
owned the shares while USP1 was a United States shareholder of FC1 and
FC1 was a controlled foreign corporation (365) and the denominator is
the number of days in the CFC year of FC1 (365) (100 percent). For Year
1, USP2's pro rata share of FC1's subpart F income is $40x, which is
equal to $100x of subpart F income multiplied by the product of two
fractions. For the first fraction, the numerator is the number of
shares that USP2 owned (40) and the denominator is the number of shares
of FC1 outstanding (100) (40 percent). For the second fraction, the
numerator is the number of days in the CFC year that USP2 owned the
shares while USP2 was a United States shareholder of FC1 and FC1 was a
controlled foreign corporation (365) and the denominator is the number
of days in the CFC year of FC1 (365) (100 percent).
(iii) Example 2: Single class of stock with constant number of
shares outstanding during the CFC year, and a share transfer during the
CFC Year--(A) Facts. The facts are the same as in paragraph
(e)(4)(ii)(A) of this section (Example 1), except that on June 30 of
Year 1 USP2 sells 20 shares of FC1 to Individual A.
(B) Analysis. The determination of USP1's pro rata share of the
subpart F income of FC1 is the same as in paragraph (e)(4)(ii)(B) of
this section (the analysis in Example 1). Under paragraph (e)(2)(i)(B)
of this section, USP2's pro rata share of FC1's subpart F income is
determined by reference to the two separate CFC year blocks that USP2
owns during the CFC year. USP2 owns 40 shares of FC1 from January 1
through June 30 of the CFC year (the first CFC year block), and 20
shares of FC1 from July 1 through December 31 of the CFC year (the
second CFC year block). USP2's pro rata share of subpart F income with
respect to the first CFC year block is $19.84x, which is equal to $100x
of subpart F income multiplied by the product of two fractions. For the
first fraction, the numerator is the number of shares USP2 owned in the
first CFC year block (40) and the denominator is the number of shares
of FC1 outstanding (100) (40 percent). For the second fraction, the
numerator is the number of days in the CFC year that USP2 owned the
shares in the first CFC year block while USP2 was a United States
shareholder of FC1 and FC1 was a controlled foreign corporation (181)
and the denominator is the number of days in the CFC year (365) (49.6
percent). USP2's pro rata share of subpart F income with respect to the
second CFC year block is $10.08x, which is equal to $100x of subpart F
income multiplied by the product of two fractions. For the first
fraction, the numerator is the number of shares USP2 owned in the
second CFC year block (20) and the denominator is the number of shares
of FC1 outstanding (100) (20 percent). For the second fraction, the
numerator is the number of days in the CFC year that USP2 owned the
shares in the second CFC year block while USP2 was a United States
shareholder of FC1 and FC1 was a controlled foreign corporation (184)
and the denominator is the number of days in the CFC year (365) (50.4
percent). Accordingly, for Year 1, USP2's pro rata share of the subpart
F income of FC1 is $29.92x ($19.84x + $10.08x).
(iv) Example 3: Common and preferred stock--(A) Facts. FC1 has
outstanding 70 shares of common stock and 30 shares of 4%
nonparticipating, voting preferred stock with a par value of $10x per
share. USP1 owns all the common shares. Individual A owns all the
preferred shares. For Year 1, FC1 has $100x of earnings and profits and
$50x of subpart F income.
(B) Analysis. FC1 has more than one class of stock and the number
of shares outstanding in each class does not change during Year 1,
which is a CFC year. Therefore, USP1's pro rata share of FC1's subpart
F income for the CFC year is determined under paragraph (e)(2)(i) of
this section after applying the hypothetical distribution in paragraph
(e)(2)(ii) of this section to determine the amount of subpart F income
allocated to the common and preferred stock of FC1. The distribution
rights of the preferred shares are not a restriction or other
limitation within the meaning of paragraph (e)(2)(ii)(D) of this
section. Under paragraph (e)(2)(ii) of this section, the amount of
FC1's allocable earnings and profits distributed in the hypothetical
distribution with respect to Individual A's preferred shares is $12x
(0.04 x $10x x 30) and with respect to USP1's common shares is $88x
($100x-$12x). Accordingly, under paragraph (e)(2)(ii) of this section,
$6x of FC1's subpart F income is allocated to the preferred shares
($50x x ($12x/$100x)), and $44x of FC1's subpart F income is allocated
to the common shares ($50x x ($88x/$100x)) for Year 1. As a result,
under paragraph (e)(2)(i) of this section, because USP1 owned all the
common shares, USP1's pro rata share of FC1's subpart F income is $44x
for Year 1.
(v) Example 4: Mid-year redemption of preferred stock--(A) Facts.
The facts are the same as in paragraph (e)(4)(iv)(A) of this section
(Example 3), except on June 30 of Year 1, FC1 redeems 15 shares of the
preferred stock owned by Individual A.
(B) Analysis. The redemption of the 15 shares of preferred stock of
FC1 owned by Individual A is not taken into account in determining the
distribution rights of the preferred stock under paragraph
(e)(2)(ii)(B) of this section, and the distribution rights of the
preferred shares are not a restriction or other limitation within the
meaning of paragraph (e)(2)(ii)(D) of this section. Under paragraph
(e)(2)(ii) of this section, the amount of FC1's allocable earnings and
profits distributed in the hypothetical distribution is determined
based on the allocable earnings and profits that would be distributed
with respect to the preferred shares if a weighted average share count
of preferred shares was outstanding on each day of the CFC year and,
thus, on the last day of the CFC year. The weighted average share count
of the preferred shares is 22.44 ((15 x 365 + 15 x 181)/365). The
allocable earnings and profits that would be distributed to Individual
A's preferred shares based on the weighted average share count is
$8.98x (0.04 x $10x x 22.44). The allocable earnings and profits that
would be distributed with respect to USP1's common shares is $91.02x
($100x-$8.98x). Accordingly, under paragraph (e)(2)(ii) of this
section, $45.51x of FC1's subpart F income is allocated to USP1's
common shares ($50x x ($91.02x/$100x)), and USP1's pro rata share of
FC1's subpart F income under paragraph (e)(2)(i) of this section is
$45.51 for Year 1.
(vi) Example 5: Restriction based on cumulative income--(A) Facts.
FC1 has outstanding 10 shares of common stock and 400 shares of 2%
nonparticipating, voting preferred stock with a par value of $1x per
share. USP1 owns all the common shares. FC2 owns all the preferred
shares. USP1 and FC2 cause the governing documents of FC1 to provide
that no dividends may be paid to the common shareholders until FC1
cumulatively earns $100,000x of income. For Year 1, FC1 has $50x of
[[Page 55055]]
earnings and profits and $50x of subpart F income.
(B) Analysis. The agreement restricting FC1's ability to pay
dividends to common shareholders until FC1 cumulatively earns $100,000x
of income is a restriction or other limitation within the meaning of
paragraph (e)(2)(ii)(D) of this section. Therefore, the restriction is
disregarded for purposes of determining the amount of FC1's allocable
earnings and profits distributed in the hypothetical distribution to a
class of stock. The distribution rights of the preferred shares are not
a restriction or other limitation within the meaning of paragraph
(e)(2)(ii)(D) of this section. Under paragraph (e)(2)(ii) of this
section, the amount of FC1's allocable earnings and profits distributed
in the hypothetical distribution with respect to FC2's preferred shares
is $8x (0.02 x $1x x 400) and with respect to USP1's common shares is
$42x ($50x-$8x). Accordingly, under paragraphs (e)(2)(i) and (ii) of
this section, USP1's pro rata share of FC1's subpart F income is $42x
for Year 1 ($50x x ($42x/$50x)).
(vii) Example 6: Redemption rights--(A) Facts. FC1 has outstanding
40 shares of common stock and 10 shares of 4% nonparticipating,
preferred stock with a par value of $50x per share. Pursuant to the
terms of the preferred stock, FC1 has the right to redeem the preferred
stock at any time, in whole or in part. FC2 owns all the preferred
shares. USP1, wholly owned by FC2, owns all the common shares. Pursuant
to the governing documents of FC1, no dividends may be paid to the
common shareholders while the preferred stock is outstanding. For Year
1, FC1 has $100x of earnings and profits and $100x of subpart F income.
(B) Analysis. The agreement restricting FC1's ability to pay
dividends to common shareholders while the preferred stock is
outstanding is a restriction or other limitation within the meaning of
paragraph (e)(2)(ii)(D) of this section. Therefore, the restriction is
disregarded for purposes of determining the amount of FC1's allocable
earnings and profits distributed in the hypothetical distribution to a
class of stock. Under paragraph (e)(2)(ii)(C)(1) of this section, no
amount of allocable earnings and profits is distributed in the
hypothetical distribution to the preferred shareholders in respect of
FC1's right to redeem the preferred shares. This is the case regardless
of the restriction on paying dividends to the common shareholders while
the preferred stock is outstanding, and regardless of the fact that a
redemption of FC2's preferred shares would be treated as a distribution
to which section 301 applies under section 302(d) (due to FC2's
constructive ownership of the common shares). Thus, neither the
restriction on paying dividends to the common shareholders while the
preferred stock is outstanding nor FC1's redemption rights with respect
to the preferred shares affects the distribution of allocable earnings
and profits in the hypothetical distribution to FC1's shareholders.
However, the distribution rights of the preferred shares are not a
restriction or other limitation within the meaning of paragraph
(e)(2)(ii)(D) of this section. As a result, the amount of FC1's
allocable earnings and profits distributed in the hypothetical
distribution with respect to FC2's preferred shares is $20x (0.04 x
$50x x 10) and with respect to USP1's common shares is $80x ($100x-
$20x). Accordingly, under paragraphs (e)(2)(i) and (ii) of this
section, USP1's pro rata share of FC1's subpart F income is $80x for
Year 1 ($100x x ($80x/$100x)).
(viii) Example 7: Shareholder owns common and preferred stock--(A)
Facts. FC1 has outstanding 40 shares of common stock and 60 shares of
6% nonparticipating, nonvoting preferred stock with a par value of
$100x per share. USP1 owns 30 shares of the common stock and 15 shares
of the preferred stock during Year 1. The remaining 10 shares of common
stock and 45 shares of preferred stock of FC1 are owned by Individual
A. For Year 1, FC1 has $1,000x of earnings and profits and $500x of
subpart F income.
(B) Analysis. The right of the holder of the preferred stock to
receive 6% of par value is not a restriction or other limitation within
the meaning of paragraph (e)(2)(ii)(D) of this section. The amount of
FC1's allocable earnings and profits distributed in the hypothetical
distribution with respect to FC1's preferred shares is $360x (0.06 x
$100x x 60) and with respect to its common shares is $640x ($1,000x-
$360x). As a result, under paragraph (e)(2)(ii) of this section, $180x
of FC1's subpart F income is allocated to the preferred shares ($500x x
($360x/$1,000x)) and $320x of FC1's subpart F income is allocated to
the common shares ($500x x ($640x/$1,000x)). Under paragraph (e)(2)(i)
of this section, USP1's pro rata share of the subpart F income of FC1
is $285x, of which $45x is attributable to USP1's preferred shares
($180x x 15/60 x 365/365) and $240x is attributable to USP1's common
shares ($320x x 30/40 x 365/365).
(ix) Example 8: Subpart F income and tested income--(A) Facts. FC1
has outstanding 700 shares of common stock and 300 shares of 4%
nonparticipating, voting preferred stock with a par value of $100x per
share. USP1 owns all the common shares. USP2 owns all the preferred
shares. For Year 1, FC1 has $10,000x of earnings and profits, $2,000x
of subpart F income, and $9,000x of tested income.
(B) Analysis--(1) Hypothetical distribution. The allocable earnings
and profits of FC1 determined under paragraph (e)(2)(ii)(A) of this
section are $11,000x, the greater of FC1's earnings and profits as
determined under section 964 ($10,000x) or the sum of FC1's subpart F
income and tested income ($2,000x + $9,000x). The amount of FC1's
allocable earnings and profits distributed in the hypothetical
distribution with respect to USP2's preferred shares is $1,200x (0.04 x
$100x x 300) and with respect to USP1's common shares is $9,800x
($11,000x-$1,200x).
(2) Pro rata share of subpart F income. Under paragraph (e)(2)(ii)
of this section, $1,782x of FC1's subpart F income is allocated to the
common shares ($2,000x x ($9,800x/$11,000x)) and $218x of FC1's subpart
F income is allocated to the preferred shares ($2,000x x ($1,200x/
$11,000x)). Accordingly, under paragraph (e)(2)(i) of this section, for
Year 1, USP1's pro rata share of FC1's subpart F income is $1,782x
($1,782x x 700/700 x 365/365), and USP2's pro rata share of FC1's
subpart F income is $218x ($218x 300/300 x 365/365).
(3) Pro rata share of tested income. Under Sec. 1.951A-1(d)(2)(i)
and paragraph (e)(2)(ii) of this section, $8,018x of FC1's tested
income is allocated to the common shares ($9,000x x ($9,800x/$11,000x))
and $982x of FC1's tested income is allocated to the preferred shares
($9,000x x ($1,200x/$11,000x)). Accordingly, under Sec. 1.951A-
1(d)(2)(i) and paragraph (e)(2)(i) of this section, for Year 1, USP1's
pro rata share of FC1's tested income is $8,018x ($8,018x x 700/700 x
365/365), and USP2's pro rata share of FC1's tested income is $982x
($982x x 300/300 x 365/365).
(x) Example 9: Subpart F income and tested loss--(A) Facts. The
facts are the same as in paragraph (e)(4)(ix)(A) of this section
(Example 8), except that for Year 1, FC1 has $8,000x of earnings and
profits, $10,000x of subpart F income (without regard to the limitation
in section 952(c)(1)(A)), and $2,000x of tested loss. Under section
951A(b)(2)(B)(ii) and Sec. 1.951A-6(b), the earnings and profits of
FC1 are increased for purposes of section 952(c)(1)(A) by the amount of
FC1's tested loss. Accordingly, after the application of section
951A(b)(2)(B)(ii)
[[Page 55056]]
and Sec. 1.951A-6(b), the subpart F income of FC1 is $10,000x.
(B) Analysis--(1) Pro rata share of subpart F income. The allocable
earnings and profits determined under paragraph (e)(2)(ii) of this
section are $10,000x, the greater of the earnings and profits of FC1
determined under section 964 ($8,000x) or the sum of FC1's subpart F
income and tested income ($10,000x + $0). The amount of FC1's allocable
earnings and profits distributed in the hypothetical distribution with
respect to USP2's preferred shares is $1,200x (0.04 x $100x x 300) and
with respect to USP1's common shares is $8,800x ($10,000x-$1,200x).
Under paragraph (e)(2)(ii) of this section, $1,200x of FC1's subpart F
income is allocated to the preferred shares ($10,000x x ($1,200x/
$10,000x)) and $8,800x of FC1's subpart F income is allocated to the
common shares ($10,000x x ($8,800x/$10,000x)). Accordingly, under
paragraph (e)(2)(i) of this section, for Year 1, USP1's pro rata share
of FC1's subpart F income is $8,800x ($8,800x x 700/700 x 365/365) and
USP2's pro rata share of FC1's subpart F income is $1,200x ($1,200x x
300/300 x 365/365).
(2) Pro rata share of tested loss. For purposes of paragraph
(e)(2)(ii) of this section, the allocable earnings and profits
determined under Sec. 1.951A-1(d)(3)(i)(B) are $2,000x, the amount of
FC1's tested loss. Under Sec. 1.951A-1(d)(3)(i)(C), the entire $2,000x
of tested loss is allocated in the hypothetical distribution to USP1's
common shares. Accordingly, under Sec. 1.951A-1(d)(3)(i)(A) and
paragraph (e)(2)(i) of this section, USP1's pro rata share of the
tested loss is $2,000x.
(f) Determination of holding period--(1) In general. For purposes
of sections 951 through 964, the holding period of an asset (including
stock of a controlled foreign corporation) is determined by excluding
the day on which the asset is acquired and including the day on which
the asset is disposed of. Thus, for example, in determining the period
that stock of a controlled foreign corporation is owned, the day on
which the stock is directly or indirectly acquired is excluded and the
day on which the stock is directly or indirectly disposed of is
included.
(2) Example: Period of stock ownership--(i) Facts. On June 30 of
Year 1, USP, a domestic corporation, acquires 70 of the 100 shares of
the only class of stock of FC, a foreign corporation, from Individual
B, a nonresident alien individual who until such time owns all 100
shares of FC. USP sells 10 shares and 60 shares of stock of FC on
November 30 and December 31 of Year 1, respectively, to Individual B, a
nonresident alien individual.
(ii) Analysis. Under paragraph (f)(1) of this section, FC is a
controlled foreign corporation for the period beginning July 1 of Year
1 and extending through December 31 of Year 1. As to the 10 shares of
stock sold on November 30 of Year 1, USP owns the shares from July 1 of
Year 1 through November 30 of Year 1. As to the remaining 60 shares of
stock, USP owns the shares beginning July 1 of Year 1 through December
31 of Year 1.
* * * * *
(h) Definitions. The following definitions apply for purposes of
this section.
Allocable earnings and profits. The term allocable earnings and
profits has the meaning provided in paragraph (e)(2)(ii)(A) of this
section.
CFC year. The term CFC year means a taxable year of a foreign
corporation in which the foreign corporation is a controlled foreign
corporation at any time during the taxable year.
CFC year block. The term CFC year block has the meaning provided in
paragraph (e)(2)(i)(B)(2) of this section.
Controlled foreign corporation. The term controlled foreign
corporation has the meaning provided in section 957(a) (or, if
applicable, section 957(b)).
Controlling section 958(a) U.S. shareholders. The term controlling
section 958(a) U.S. shareholders has the meaning provided in paragraph
(d)(2)(iii)(B) of this section.
Hypothetical distribution. The term hypothetical distribution has
the meaning provided in paragraph (e)(2)(ii) of this section.
Own. The term own (or ownership or owned), when used with respect
to stock of a foreign corporation, means to own the stock directly or
indirectly within the meaning of section 958(a) and Sec. 1.958-1(a).
See also Sec. 1.958-1(d) (except as provided in Sec. 1.958-1(d)(2), a
domestic partnership is not treated as owning stock of a foreign
corporation within the meaning of section 958(a) for purposes of
section 951 and for purposes of any provision that specifically applies
by reference to section 951 or the regulations in this part under
section 951, and the domestic partnership is treated as a foreign
partnership under section 958(a)(2) in determining the persons that own
stock of the foreign corporation within the meaning of section 958(a)).
Related persons. The term related persons means persons that are
related within the meaning of section 267(b), as applied without regard
to section 267(c)(3).
Section 958(a) U.S. shareholders. The term section 958(a) U.S.
shareholders has the meaning provided in paragraph (d)(2)(iii)(A) of
this section.
Significant ownership variance. The term significant ownership
variance has the meaning provided in paragraph (d)(2)(ii) of this
section.
Specified transfer. The term specified transfer has the meaning
provided in paragraph (d)(2)(ii)(B) of this section.
Status change event. The term status change event has the meaning
provided in paragraph (d)(1)(ii) of this section.
Subpart F income. The term subpart F income has the meaning
provided in section 952.
Tested income. The term tested income has the meaning provided in
section 951A(b)(2)(A).
Tested loss. The term tested loss has the meaning provided in
section 951A(b)(2)(B)(i).
United States shareholder. The term United States shareholder has
the meaning provided in paragraph (g) of this section.
(i) Applicability date. This section applies to taxable years of
foreign corporations beginning after December 31, 2025, and to taxable
years of United States shareholders for which such taxable years of
those foreign corporations are relevant. For rules applicable to
taxable years of foreign corporations beginning on or before December
31, 2025, and to taxable years of United States shareholders in which
or with which such taxable years end, see 26 CFR 1.951-1 as contained
in 26 CFR part 1 edition revised as of April 1, 2026.
0
Par. 5. Section 1.951-4 is added to read as follows:
Sec. 1.951-4 Transition rule for dividends.
(a) Scope. This section sets forth the rules for applying the
transition rule for dividends in section 70354(c)(2) of Public Law 119-
21, 139 Stat. 72 (July 4, 2025) (OBBBA). Paragraph (b) of this section
provides the general rule for dividends subject to the transition rule.
Paragraph (c) of this section provides the meaning of dividend paid or
deemed paid. Paragraph (d) of this section provides the meaning of
United States person subject to Federal income tax. Paragraph (e) of
this section provides the meaning of taxable income. Paragraph (f) of
this section provides rules for determining whether a dividend
increases taxable income. Paragraph (g) of this section provides rules
for the application of this section to dividends paid or deemed paid to
partnerships. Paragraph (h) of this
[[Page 55057]]
section provides certain substantiation requirements for establishing
that a dividend increases the taxable income of a United States person
subject to Federal income tax. Paragraph (i) of this section provides
the applicability date for this section.
(b) Transition rule. For purposes of this section, the term
transition rule means the rule provided in section 70354(c)(2) of the
OBBBA and this paragraph (b). Under the transition rule, for purposes
of applying section 951(a)(2)(B), as in effect before amendment by the
OBBBA, a dividend paid or deemed paid by a controlled foreign
corporation with respect to stock of the controlled foreign corporation
is not treated as a dividend to the extent that--
(1) Either--
(i) The dividend was paid or deemed paid on or before June 28,
2025, during the controlled foreign corporation's taxable year that
includes June 28, 2025, and the United States shareholder that owned
(within the meaning of section 958(a)) that stock on the last day of
that taxable year did not own (within the meaning of section 958(a))
that stock during the portion of the taxable year ending on June 28,
2025; or
(ii) The dividend was paid or deemed paid after June 28, 2025, and
before the controlled foreign corporation's first taxable year
beginning after December 31, 2025; and
(2) The dividend does not increase the taxable income of a United
States person subject to Federal income tax.
(c) Dividend paid or deemed paid. For purposes of this section, any
amount that would be treated, without regard to this section, as a
distribution received by a person as a dividend under section
951(a)(2)(B), as in effect before the amendments to section 951(a) made
by the OBBBA, is treated as a dividend paid or deemed paid.
(d) United States person subject to Federal income tax. For
purposes of this section, a United States person subject to Federal
income tax means--
(1) Any United States person (as defined in section 7701(a)(30)),
except for a domestic partnership, an S corporation (as defined in
section 1361), a trust that is a United States person described in
section 7701(a)(30)(E) and treated as owned by a person under sections
671 through 678, or a bona fide resident (as defined in section 937(a))
of Guam, the Commonwealth of the Northern Mariana Islands, or the U.S.
Virgin Islands; and
(2) Any nonresident alien individual who elects to be treated as a
resident of the United States under section 6013(g) or (h).
(e) Meaning of taxable income--(1) In general. Except as provided
in paragraph (e)(2) of this section, for purposes of this section,
taxable income means taxable income as defined in section 63.
(2) Exceptions--(i) Regulated investment companies. In the case of
a regulated investment company (RIC) (as defined in section 851) that
satisfies the requirements of section 852(a) for a taxable year in
which the RIC receives, or is deemed to receive, a dividend described
in paragraph (b)(1) of this section, taxable income means investment
company taxable income (as defined in section 852(b)).
(ii) Real estate investment trusts. In the case of a real estate
investment trust (REIT) (as defined in section 856) that satisfies the
requirements of section 857(a) for a taxable year in which the REIT
receives, or is deemed to receive, a dividend described in paragraph
(b)(1) of this section, taxable income means real estate investment
trust taxable income (as defined in section 857(b)(2)).
(iii) Exempt organizations. In the case of an organization exempt
from taxation under section 501(a), taxable income means unrelated
business taxable income (as defined in section 512).
(f) Determining whether a dividend increases taxable income--(1) In
general. For purposes of determining whether a dividend paid or deemed
paid increases the taxable income of a United States person subject to
Federal income tax, all applicable provisions of the Internal Revenue
Code, and the regulations thereunder, are applied before applying, and
without regard to, the transition rule. Therefore, the determination of
whether a dividend paid or deemed paid increases the taxable income of
a United States person subject to Federal income tax is made after the
application of any exclusion that results in the dividend not being
included in the person's gross income or taxable income and any
dividends received deduction that reduces the amount of the dividend
included in the person's taxable income.
(2) Section 245A coordination example. The following example
illustrates the application of the rule in paragraph (f)(1) of this
section.
(i) Facts. US1, a domestic corporation that is not a RIC, REIT, S
corporation, or organization exempt from taxation under section 501(a),
owns all the stock of CFC, a foreign corporation. On March 1, 2025, CFC
pays a dividend of $100x to US1, which, absent the application of Sec.
1.245A-5(b), qualifies for the deduction under section 245A(a). On July
1, 2025, USP1 sells all its stock of CFC to US2, a domestic
corporation, which results in an extraordinary reduction with respect
to US1's ownership of CFC, within the meaning of Sec. 1.245A-5(e)(1).
If Sec. 1.245A-5 were applied before and without regard to the
transition rule, US1's pre-reduction pro rata share under Sec. 1.245A-
5(e)(2)(ii) would be $100x and the entire dividend of $100x to US1
would be an extraordinary reduction amount with respect to US1, within
the meaning of Sec. 1.245A-5(e)(1). Additionally, the ineligible
amount with respect to US1 within the meaning of Sec. 1.245A-5(b)(2),
would be $100x. US1, US2, and CFC all use a calendar taxable year.
US1's reporting for Federal income tax purposes is consistent with
Sec. 1.245A-5(e).
(ii) Analysis. Under paragraph (f)(1) of this section, the
determination of whether the dividend of $100x increases the taxable
income of US1, a United States person subject to Federal income tax, is
made after the application of any exclusion that results in the
dividend not being included in the person's gross income or taxable
income and any dividends received deduction that reduces the amount of
the dividend included in the person's taxable income. Additionally, in
determining US1's pre-reduction pro rata share under Sec. 1.245A-
5(e)(2)(ii), any decrease for amounts taken into account by a U.S. tax
resident under Sec. 1.245A-5(e)(2)(ii)(B) is determined by applying
section 951(a)(2)(B), as in effect before amendment by the OBBBA,
without regard to the transition rule. Therefore, because the
ineligible amount with respect to US1 and the dividend paid to US1
would be $100x before applying, and without regard to, the transition
rule, the ineligible amount is $100x and none of the dividend paid to
US1 is eligible for a section 245A deduction after applying Sec.
1.245A-5(b). Accordingly, the entire dividend of $100x is treated as
increasing the taxable income of a United States person subject to
Federal income tax for purposes of this section. Additionally, the
election to close CFC's taxable year pursuant to Sec. 1.245A-
5(e)(3)(i)(A) is available to US1, provided the other conditions
described in Sec. 1.245A-5(e)(3)(i)(A) are met.
(3) Generally applicable deductions. The determination of the
amount by which a dividend paid or deemed paid increases the taxable
income of a United States person subject to Federal income tax is made
without regard to decreases to taxable income resulting from generally
applicable deductions of the United States person that are not
particular to the receipt of a dividend, including deductions for--
[[Page 55058]]
(i) Depreciation under section 167;
(ii) Net operating losses under section 172;
(iii) Distributions under sections 651 and 661; and
(iv) Dividends paid under sections 852(b)(2)(D) and 857(b)(2)(B).
(4) Dividends paid to controlled foreign corporations--(i) In
general. In the case of a dividend paid or deemed paid by a controlled
foreign corporation to another controlled foreign corporation, for
purposes of this section, the dividend is treated as increasing the
taxable income of a United States person subject to Federal income tax
to the extent the dividend is taken into account in determining a
United States shareholder's inclusion under section 951(a)(1)(A) or
951A(a).
(ii) Inclusions under section 951(a)(1)(A). For purposes of this
paragraph (f)(4), a dividend is taken into account in determining a
United States shareholder's inclusion under section 951(a)(1)(A) if the
dividend would give rise to an amount includible in gross income by the
United States shareholder under section 951(a)(1)(A), determined
without regard to properly allocable deductions of the controlled
foreign corporation that received or is deemed to receive the dividend
(except as provided in paragraph (f)(4)(iv) of this section), the
current earnings and profits limitation under section 952(c)(1)(A),
qualified deficits under section 952(c)(1)(B), or chain deficits under
section 952(c)(1)(A).
(iii) Inclusions under section 951A(a). For purposes of this
paragraph (f)(4), a dividend is taken into account in determining a
United States shareholder's inclusion under section 951A(a) if the
dividend would give rise to an amount includible in gross income by the
United States shareholder under section 951A, determined without regard
to properly allocable deductions of the controlled foreign corporation
that received or is deemed to receive the dividend (except as provided
in paragraph (f)(4)(iv) of this section), tested losses (as defined in
section 951A(c)(2)(B) before amendment by the OBBBA) of any other
controlled foreign corporation, or the net deemed tangible income
return of the United States shareholder (as defined in section
951A(b)(2) before amendment by the OBBBA).
(iv) High-taxed amounts. For purposes of this paragraph (f)(4), any
dividend paid or deemed paid to a controlled foreign corporation that
is excluded from the controlled foreign corporation's subpart F income
or tested income under the high-tax exception or the high-tax exclusion
(see section 954(b)(4) and Sec. 1.951A-2(c)(1)(iii)), is treated as
not taken into account in determining a United States shareholder's
inclusion under section 951(a)(1)(A) or 951A(a).
(g) Application to partnerships--(1) In general. In the case of a
dividend paid or deemed paid to a partnership, the determination of
whether the dividend increases the taxable income of a United States
person subject to Federal income tax is made by reference to the
partners of the partnership. Further, to the extent the dividend is
included in the distributive share of a partner that is itself a
partnership, the determination of whether the dividend increases the
taxable income of a United States person subject to Federal income tax
is made by reference to the partners of that partnership.
(2) Safe harbor for publicly held partnership interests--(i) In
general. To the extent a dividend paid or deemed paid by a controlled
foreign corporation is allocated to a de minimis owner by reason of
owning an interest in a class of publicly held interests in a domestic
partnership, the dividend is treated as increasing the taxable income
of a United States person subject to Federal income tax.
(ii) Exception. Paragraph (g)(2)(i) of this section does not apply
if the domestic partnership has actual knowledge of facts that allow
the partnership to determine that the de minimis owner is not a United
States person subject to Federal income tax within the meaning of
paragraph (d) of this section or that the dividend paid by the
controlled foreign corporation does not increase the de minimis owner's
taxable income within the meaning of paragraphs (e) and (f) of this
section.
(iii) Meaning of de minimis owner. For purposes of this paragraph
(g)(2), the term de minimis owner means any person that owns no more
than 5 percent of a class of publicly held interests in a domestic
partnership on each day of the taxable year of the domestic
partnership. In determining whether a person is a de minimis owner, a
person is treated as owning an interest in a class of publicly held
interests if the person owns the interest directly or by applying the
rules of section 318(a), except that section 318(a)(2)(C) and (a)(3)(C)
are applied for this purpose by substituting ``5 percent'' for ``50
percent.''
(iv) Meaning of publicly held interest. For purposes of this
paragraph (g)(2), publicly held interest means any class of interests
in a domestic partnership that is regularly traded on an established
securities market as defined in Sec. 1.7704-1(b), but without regard
to Sec. 1.7704-1(b)(3).
(h) Establishing extent to which a dividend increases taxable
income of a United States person subject to Federal income tax. A
United States shareholder that claims a reduction of its pro rata share
of subpart F income or tested income under section 951(a)(2)(B), as a
result of a dividend that is described in paragraph (b)(1) of this
section, must substantiate such claim by attaching to Form 5471,
Information Return of U.S. Persons With Respect To Certain Foreign
Corporations (or successors), a statement titled ``Pro Rata Share
Transition Rule Statement'' that--
(1) Provides the amount of each dividend paid by the controlled
foreign corporation (with respect to the stock owned by the United
States shareholder filing the return) that is described in paragraph
(b)(1) of this section but treated as a dividend for purposes of
applying section 951(a)(2)(B),
(2) Describes why the United States shareholder filing the return
is entitled to treat each such amount as a dividend for purposes of
section 951(a)(2)(B), and
(3) Describes how the United States shareholder determined such
amount increased the taxable income of a United States person subject
to Federal income tax under the rules of this section.
(i) Applicability date. This section applies to taxable years of a
foreign corporation that either include June 28, 2025, or begin after
June 28, 2025, and before the foreign corporation's first taxable year
beginning after December 31, 2025.
0
Par. 6. Section 1.951A-1 is amended by:
0
1. Revising paragraphs (a)(2) through (e); and
0
2. Removing paragraph (f).
The revisions read as follows:
Sec. 1.951A-1 General provisions.
(a) * * *
(2) Scope. Paragraph (b) of this section provides the general rule
requiring a United States shareholder to include in gross income its
net CFC tested income for a U.S. shareholder inclusion year. Paragraph
(c) of this section provides rules for determining the amount of a
United States shareholder's net CFC tested income for the U.S.
shareholder inclusion year, including a rule for the application of
section 951A and the section 951A regulations to consolidated groups.
Paragraph (d) of this section provides rules for determining a United
States shareholder's pro rata share of tested income and tested loss
for purposes of determining the United States
[[Page 55059]]
shareholder's net CFC tested income. Paragraph (e) of this section
provides additional definitions for purposes of this section and the
section 951A regulations. For rules applying this section to foreign
controlled United States shareholders and foreign controlled foreign
corporations, see section 951B (generally treating references in this
section to the term ``United States shareholder'' as including the term
``foreign controlled United States shareholder'' and the term
``controlled foreign corporation'' as including the term ``foreign
controlled foreign corporation'').
(b) Inclusion of net CFC tested income. Each person who is a United
States shareholder of any controlled foreign corporation and owns stock
of any such controlled foreign corporation includes in gross income in
the U.S. shareholder inclusion year the shareholder's net CFC tested
income inclusion amount, if any, for the U.S. shareholder inclusion
year.
(c) Determination of net CFC tested income inclusion amount--(1) In
general. Except as provided in paragraph (c)(2) of this section, the
term net CFC tested income inclusion amount means, with respect to a
United States shareholder and a U.S. shareholder inclusion year, the
excess (if any) of--
(i) The aggregate of the shareholder's pro rata share of the tested
income of each tested income CFC (as defined in Sec. 1.951A-2(b)(1))
for a CFC inclusion year, over
(ii) The aggregate of the shareholder's pro rata share of the
tested loss of each tested loss CFC (as defined in Sec. 1.951A-
2(b)(2)) for a CFC inclusion year.
(2) [Reserved]
(d) Determination of pro rata share--(1) In general. For purposes
of paragraph (c)(1) of this section, each United States shareholder
that owns stock of a controlled foreign corporation on any day during a
CFC inclusion year determines its pro rata share (if any) of tested
income or tested loss of the controlled foreign corporation for the
U.S. shareholder inclusion year that includes the last day on which the
United States shareholder owns stock in the controlled foreign
corporation during the CFC inclusion year. In no case may the sum of
the pro rata share of tested income or tested loss of a controlled
foreign corporation for a CFC inclusion year allocated to stock under
this paragraph (d) exceed the amount of the tested income or tested
loss of the controlled foreign corporation for the CFC inclusion year.
Except as modified in this paragraph (d), a United States shareholder's
pro rata share of tested income or tested loss is determined under the
rules of section 951(a)(2) and Sec. 1.951-1(b) and (e) in the same
manner as those provisions apply to subpart F income. See also Sec.
1.951-1(d), which requires or permits the closing of the taxable year
of a foreign corporation in specified circumstances. Under section
951(a)(2) and Sec. 1.951-1(b) and (e), as modified by this paragraph
(d), a United States shareholder's pro rata share of tested income or
tested loss for a U.S. shareholder inclusion year is determined with
respect to the stock of the controlled foreign corporation owned by the
U.S. shareholder during a CFC inclusion year. A United States
shareholder's pro rata share of tested income or tested loss is
translated into United States dollars using the average exchange rate
for the CFC inclusion year of the controlled foreign corporation.
Paragraphs (d)(2) and (3) of this section provide rules for determining
a United States shareholder's pro rata share of tested income or tested
loss of a controlled foreign corporation.
(2) Tested income--(i) In general. Except as provided in paragraph
(d)(2)(ii) of this section, a United States shareholder's pro rata
share of the tested income of each tested income CFC for a U.S.
shareholder inclusion year is determined under section 951(a)(2) and
Sec. 1.951-1(b) and (e), substituting ``tested income'' for ``subpart
F income'' each place it appears, other than in Sec. 1.951-
1(e)(2)(ii)(A).
(ii) Special rule for prior allocation of tested loss. In any case
in which tested loss has been allocated to any class of stock in a
prior CFC inclusion year under paragraph (d)(3)(iii) of this section
(or under Sec. 1.951A-1(d)(4)(iii), as contained in 26 CFR part 1
edition revised as of April 1, 2026), tested income is first allocated
to each such class of stock in the order of its liquidation priority to
the extent of the excess (if any) of the sum of the tested loss
allocated to each such class of stock for each prior CFC inclusion year
under paragraph (d)(3)(iii) of this section (or under Sec. 1.951A-
1(d)(4)(iii), as contained in 26 CFR part 1 edition revised as of April
1, 2026), over the sum of the tested income allocated to each such
class of stock for each prior CFC inclusion year under this paragraph
(d)(2)(ii). Paragraph (d)(2)(i) of this section applies for purposes of
determining a United States shareholder's pro rata share of the
remainder of the tested income, except that, for purposes of the
hypothetical distribution in Sec. 1.951-1(e)(2)(ii), the amount of
allocable earnings and profits of the tested income CFC is reduced by
the amount of tested income allocated under the first sentence of this
paragraph (d)(2)(ii). For an example of the application of this
paragraph (d)(2), see paragraph (d)(3)(iv)(B) of this section (Example
2).
(iii) Examples. The following examples illustrate the application
of paragraph (d)(2) of this section. See also Sec. 1.951-1(e)(4)(ix)
(Example 8) (illustrating a United States shareholder's pro rata share
of tested income).
(A) Example 1--(1) Facts. FS, a controlled foreign corporation, has
outstanding 70 shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock with a par value of $10x
per share. P Corp, a domestic corporation and a United States
shareholder of FS, owns all of the common shares. Individual A, a
United States citizen and a United States shareholder of FS, owns all
of the preferred shares. Individual A, FS, and P Corp use the calendar
year as their taxable year. Individual A and P Corp are shareholders of
FS for all of Year 1. At the beginning of Year 1, FS had no dividend
arrearages with respect to its preferred stock. For Year 1, FS has
$100x of earnings and profits, $120x of tested income, and no subpart F
income within the meaning of section 952.
(2) Analysis--Determination of pro rata share of tested income. For
purposes of determining P Corp's pro rata share of FS's tested income
under this paragraph (d)(2) the amount of FS's allocable earnings and
profits for purposes of the hypothetical distribution described in
Sec. 1.951-1(e)(2)(ii) is $120x, the greater of its earnings and
profits as determined under section 964 ($100x) and the sum of its
subpart F income and tested income ($0 + $120x). Under this paragraph
(d)(2) and Sec. 1.951-1(e)(2)(ii), the amount of FS's allocable
earnings and profits distributed in the hypothetical distribution with
respect to the preferred shares of FS is $12x (0.04 x $10x x 30) and
the amount distributed with respect to the common shares of FS is $108x
($120x-$12x), which results in $12x of tested income being allocated to
the preferred shares and $108x being allocated to the common shares.
Accordingly, under this paragraph (d)(2) and Sec. 1.951-1(e)(2),
Individual A's pro rata share of FS's tested income is $12x, and P
Corp's pro rata share of FS's tested income is $108x for Year 1.
(B) Example 2--(1) Facts. P Corp, a domestic corporation and a
United States shareholder, owns all 100 shares of the only class of
stock of FS, a controlled foreign corporation, from January 1 of Year
1, until May 26 of Year 1. On May 26 of Year 1, P Corp
[[Page 55060]]
sells all its FS stock to R Corp, a domestic corporation that is not
related to P Corp, and recognizes no gain or loss on the sale. P Corp
does not make an election to close the taxable year of FS under Sec.
1.951-1(d)(2). R Corp, a United States shareholder of FS, owns the
stock of FS from May 27 through December 31 of Year 1. For Year 1, FS
has $50x of earnings and profits, $50x of tested income, and no subpart
F income within the meaning of section 952. P Corp, R Corp, and FS all
use the calendar year as their taxable year, and Year 1 has 365 days.
(2) Analysis--Determination of pro rata share of tested income.
Under this paragraph (d)(2) and Sec. 1.951-1(e)(2)(i), P Corp's pro
rata share of the tested income of FS is $20x, which is equal to $50x
of tested income multiplied by the product of two fractions. For the
first fraction, the numerator is the number of shares P Corp owned
(100) and the denominator is the number of shares of FS outstanding
(100) (100 percent). For the second fraction, the numerator is the
number of days in Year 1 that P Corp owned the shares while P Corp was
a United States shareholder of FS and FS was a CFC (146) and the
denominator is the number of days in the CFC inclusion year of FS (365)
(40 percent). R Corp's pro rata share of the tested income of FS is
$30x, which is equal to $50x of tested income multiplied by the product
of two fractions. For the first fraction, the numerator is the number
of shares R Corp owned (100) and the denominator is the number of
shares of FS outstanding (100) (100 percent). For the second fraction,
the numerator is the number of days in Year 1 that R Corp owned the
shares while R Corp was a United States shareholder of FS and FS was a
CFC (219) and the denominator is the number of days in the CFC
inclusion year of FS (365) (60 percent).
(3) Tested loss--(i) In general. A United States shareholder's pro
rata share of the tested loss of each tested loss CFC for a U.S.
shareholder inclusion year is determined under section 951(a)(2) and
Sec. 1.951-1(b) and (e) with the following modifications--
(A) ``Tested loss'' is substituted for ``subpart F income'' each
place it appears;
(B) For purposes of the hypothetical distribution described in
Sec. 1.951-1(e)(2)(ii), the amount of allocable earnings and profits
of a controlled foreign corporation for a CFC inclusion year is treated
as being equal to the tested loss of the tested loss CFC for the CFC
inclusion year; and
(C) Except as provided in paragraphs (d)(3)(ii) and (iii) of this
section, the hypothetical distribution described in Sec. 1.951-
1(e)(2)(ii) is treated as made solely with respect to the common stock
of the tested loss CFC.
(ii) Special rule in case of accrued but unpaid dividends. If a
tested loss CFC's earnings and profits that have accumulated since the
issuance of preferred shares are reduced below the amount necessary to
satisfy any accrued but unpaid dividends with respect to such preferred
shares, then the amount by which the tested loss reduces the earnings
and profits below the amount necessary to satisfy the accrued but
unpaid dividends is allocated in the hypothetical distribution
described in Sec. 1.951-1(e)(2)(ii) to the preferred stock of the
tested loss CFC and the remainder of the tested loss is allocated in
the hypothetical distribution to the common stock of the tested loss
CFC.
(iii) Special rule for stock with no liquidation value. If a tested
loss CFC's common stock has a liquidation value of zero and there is at
least one other class of equity with a liquidation preference relative
to the common stock, then the tested loss is allocated in the
hypothetical distribution described in Sec. 1.951-1(e)(2)(ii) to the
most junior class of equity with a positive liquidation value to the
extent of such liquidation value. Thereafter, tested loss is allocated
to the next most junior class of equity to the extent of its
liquidation value and so on. All determinations of liquidation value
are to be made as of the beginning of the CFC inclusion year of the
tested loss CFC.
(iv) Examples. The following examples illustrate the application of
this paragraph (d)(3). See also Sec. 1.951-1(e)(4)(x) (Example 9)
(illustrating a United States shareholder's pro rata share of subpart F
income and tested loss).
(A) Example 1--(1) Facts. FS, a controlled foreign corporation, has
outstanding 70 shares of common stock and 30 shares of 4%
nonparticipating, cumulative preferred stock with a par value of $10x
per share. P Corp, a domestic corporation and a United States
shareholder of FS, owns all the common shares. Individual A, a United
States citizen and a United States shareholder, owns all the preferred
shares. FS, Individual A, and P Corp all use the calendar year as their
taxable year. Individual A and P Corp are shareholders of FS for all of
Year 5. At the beginning of Year 5, FS had earnings and profits of
$120x, which accumulated after the issuance of the preferred stock. At
the end of Year 5, the accrued but unpaid dividends with respect to the
preferred stock are $36x. For Year 5, FS has a $100x tested loss, and
no other items of income, gain, deduction or loss. At the end of Year
5, FS has earnings and profits of $20x.
(2) Analysis. FS is a tested loss CFC for Year 5. Before taking
into account the tested loss in Year 5, FS had sufficient earnings and
profits to satisfy the accrued but unpaid dividends of $36x. The amount
of the reduction in earnings below the amount necessary to satisfy the
accrued but unpaid dividends attributable to the tested loss is $16x
($36x-($120x-$100x)). Accordingly, under paragraph (d)(3)(ii) of this
section, $16x of the tested loss is allocated to the preferred stock of
FS in the hypothetical distribution described in Sec. 1.951-
1(e)(2)(ii), and $84x ($100x-$16x) of the tested loss is allocated to
the common shares of FS in the hypothetical distribution.
(B) Example 2--(1) Facts. FS, a controlled foreign corporation, has
outstanding 100 shares of common stock and 50 shares of 4%
nonparticipating, cumulative preferred stock with a par value of $100x
per share. P Corp, a domestic corporation and a United States
shareholder of FS, owns all the common shares. Individual A, a United
States citizen and a United States shareholder, owns all the preferred
shares. FS, Individual A, and P Corp all use the calendar year as their
taxable year. Individual A and P Corp are shareholders of FS for all of
Year 1 and Year 2. At the beginning of Year 1, the common stock has no
liquidation value and the preferred stock has a liquidation value of
$5,000x and no accrued but unpaid dividends. In Year 1, FS has a tested
loss of $1,000x and no other items of income, gain, deduction, or loss.
In Year 2, FS has tested income of $3,000x and no other items of
income, gain, deduction, or loss. FS has earnings and profits of
$3,000x for Year 2. At the end of Year 2, FS has accrued but unpaid
dividends of $400x with respect to the preferred stock, the sum of
$200x for Year 1 (0.04 x $100x x 50) and $200x for Year 2 (0.04 x $100x
x 50).
(2) Analysis--(i) Year 1. FS is a tested loss CFC in Year 1. The
common stock of FS has a liquidation value of zero, and the preferred
stock has a liquidation preference relative to the common stock. The
tested loss ($1,000x) does not exceed the liquidation value of the
preferred stock ($5,000x). Accordingly, under paragraph (d)(3)(iii) of
this section, the tested loss is allocated to the preferred stock in
the hypothetical distribution described in Sec. 1.951-1(e)(2)(ii).
Individual A's pro rata share of the tested loss is $1,000x, and P
Corp's pro rata share of the tested loss is $0.
(ii) Year 2. FS is a tested income CFC in Year 2. Because $1,000x
of tested loss
[[Page 55061]]
was allocated to the preferred stock in Year 1 under paragraph
(d)(3)(iii) of this section, the first $1,000x of tested income in Year
2 is allocated to the preferred stock under paragraph (d)(2)(ii) of
this section. P Corp's and Individual A's pro rata shares of the
remaining $2,000x of tested income are determined under the general
rule of paragraph (d)(2)(i) of this section, except that for purposes
of the hypothetical distribution the amount of FS's allocable earnings
and profits is reduced by the tested income allocated under paragraph
(d)(2)(ii) of this section to $2,000x ($3,000x-$1,000x). Accordingly,
under paragraph (d)(2)(i) of this section and Sec. 1.951-1(e)(2)(ii),
the amount of FS's allocable earnings and profits distributed in the
hypothetical distribution with respect to the preferred stock of FS is
$400x ($400x of accrued but unpaid dividends) and with respect to the
common stock of FS is $1,600x ($2,000x-$400x), which results in $400x
of tested income being allocated to the preferred stock and $1,600x of
tested income being allocated to the common stock. Under paragraph
(d)(2)(i) of this section and Sec. 1.951-1(e)(2)(i), Individual A's
pro rata share of the tested income is $1,400x ($1,000x + $400x), and P
Corp's pro rata share of the tested income is $1,600x.
(e) Definitions. This paragraph (e) provides additional definitions
that apply for purposes of this section and the section 951A
regulations. Other definitions relevant to the section 951A regulations
are included in Sec. Sec. 1.951A-2 through 1.951A-4.
(1) CFC inclusion year. The term CFC inclusion year means a taxable
year of a foreign corporation in which the foreign corporation is a
controlled foreign corporation at any time during the taxable year.
(2) Controlled foreign corporation. The term controlled foreign
corporation has the meaning provided in section 957(a).
(3) Own. The term own (or ownership or owned), when used with
respect to stock of a foreign corporation, means to own the stock
directly or indirectly within the meaning of section 958(a) and Sec.
1.958-1(a). See also Sec. 1.958-1(d) (except as provided in Sec.
1.958-1(d)(2), a domestic partnership is not treated as owning stock of
a foreign corporation within the meaning of section 958(a) for purposes
of section 951A and for purposes of any provision that specifically
applies by reference to section 951A or the section 951A regulations,
and the domestic partnership is treated as a foreign partnership under
section 958(a)(2) in determining the persons that own stock of the
foreign corporation within the meaning of section 958(a)).
(4) United States shareholder. The term United States shareholder
has the meaning set forth in section 951(b).
(5) U.S. shareholder inclusion year. The term U.S. shareholder
inclusion year means a United States shareholder's taxable year that
includes the last day on which the United States shareholder owns stock
in a controlled foreign corporation during a CFC inclusion year of the
controlled foreign corporation.
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Par. 7. Section 1.951A-7 is amended by:
0
1. Revising paragraph (a); and
0
2. Adding paragraph (c).
The revision and addition read as follows:
Sec. 1.951A-7 Applicability dates.
(a) In general. Except as otherwise provided in this section, Sec.
1.951A-1 applies to taxable years of foreign corporations beginning
after December 31, 2025, and to taxable years of United States
shareholders for which such taxable years of those foreign corporations
are relevant. For rules applicable to taxable years of foreign
corporations beginning on or before such date, and to taxable years of
United States shareholders in which or with which such taxable years
end, see 26 CFR 1.951A-1 as contained in 26 CFR part 1 edition revised
as of April 1, 2026. Except as otherwise provided in this section,
Sec. Sec. 1.951A-2 through 1.951A-6 apply to taxable years of foreign
corporations beginning after December 31, 2017, and to taxable years of
United States shareholders in which or with which such taxable years of
foreign corporations end.
* * * * *
(c) Transition rule for global intangible low-taxed income. In the
case of a taxable year of a foreign corporation beginning after
December 31, 2025, that ends with or within a taxable year of a United
States shareholder beginning on or before December 31, 2025, 26 CFR
1.951A-1 as contained in 26 CFR part 1 edition revised as of April 1,
2026 applies with respect to such United States shareholder, taking
into account the amendments to section 951(a)(2) made by section
70354(a) of Public Law 119-21, 139 Stat. 72 (July 4, 2025) when
determining the United States shareholder's pro rata share of any
tested item.
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Par. 8. Section 1.1502-80 is amended by revising paragraph (j)(3) to
read as follows:
Sec. 1.1502-80 Applicability of other provisions of law.
* * * * *
(j) * * *
(3) Applicability date. This paragraph (j) applies to consolidated
return years--
(i) For which the original consolidated return is due (without
extensions) after February 23, 2023; and
(ii) That include the last day of a taxable year beginning before
January 1, 2026, of a controlled foreign corporation owned by a member
of the consolidated group.
0
Par. 9. Section 1.6038-2 is amended by revising paragraphs (f) and (m)
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) Contents of return. Returns on Form 5471 (or successor form)
must contain information prescribed by Form 5471 (or successor form).
Such information may include (but is not limited to) the following:
* * * * *
(8) With respect to the outstanding stock of the foreign
corporation--
(i) A description of each class of stock,
(ii) The first day of the foreign corporation's annual accounting
period and the number of shares of each class of stock outstanding on
the first day of the annual accounting period,
(iii) The date and a description of any issuance, redemption, or
any other change to the number of shares of any class of stock during
the annual accounting period, including the number of shares issued,
redeemed, or otherwise changed,
(iv) The balance of each class of stock outstanding during the
annual accounting period immediately following any such issuance,
redemption, or other change, and
(v) For each person that directly owns (within the meaning of
section 958(a)) stock in the foreign corporation and each United States
shareholder (as defined in section 951(b), taking into account section
953(c)) that indirectly owns (as described in section 958(a)(2) and
determined by treating a domestic partnership in the same manner as a
foreign partnership pursuant to Sec. 1.958-1(d)) stock in the foreign
corporation, at any time during the annual accounting period:
(A) A description of each class of stock held by each such person
(in the case of direct owners) or indirectly owned by each such person
(in the case of United States shareholders) at any
[[Page 55062]]
time during the annual accounting period,
(B) The number of shares of each class of stock held on the first
day of the annual accounting period by each such person (in the case of
direct owners) or indirectly owned on the first day of the annual
accounting period by each such person (in the case of United States
shareholders),
(C) The date and a description of any acquisition, receipt,
redemption, disposition, or any other change to the number of any
shares of stock held by each such person (in the case of direct owners)
or indirectly owned by each such person (in the case of United States
shareholders) at any time during the annual accounting period,
including the number of shares acquired, received, redeemed, disposed,
or otherwise changed, and
(D) The balance of each class of stock held by each such person (in
the case of direct owners) or indirectly owned by each such person (in
the case of United States shareholders) during the annual accounting
period immediately following any such acquisition, receipt, redemption,
disposition, or other change.
* * * * *
(m) Applicability dates. This section applies to taxable years of
foreign corporations beginning after December 31, 2025. For rules
applicable to taxable years of foreign corporations beginning on or
before such date, see 26 CFR 1.6038-2 as contained in 26 CFR part 1
edition revised as of April 1, 2026.
Frank J. Bisignano,
Chief Executive Officer.
[FR Doc. 2026-17365 Filed 8-25-26; 8:45 am]
BILLING CODE 4831-GV-P