1838 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9846] 

RIN 1545–BO51 

Regulations Regarding the Transition 

Tax Under Section 965 and Related 

Provisions 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations implementing section 965 of 

the Internal Revenue Code (the ‘‘Code’’). 

Section 965 was amended by the Tax 

Cuts and Jobs Act, which was enacted 

on December 22, 2017. This document 

finalizes the proposed regulations 

published on August 9, 2018. The final 

regulations affect United States persons 

with direct or indirect ownership 

interests in certain foreign corporations. 

DATES: Effective date: These regulations 

are effective on February 5, 2019. 

Applicability dates: For dates of 

applicability, see §§ 1.962–2(d), 1.965– 

9(a), 1.965–9(b), and 1.986(c)–1(d). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the regulations §§ 1.962–2, 

1.965–1 through 1.965–4, 1.965–7 

through 1.965–9, and 1.986(c)–1, Natalie 

Punchak at (202) 317–6934; concerning 

the regulations §§ 1.965–5 and 1.965–6, 

Karen J. Cate at (202) 317–6926 (not tollfree numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

On August 9, 2018, the Department of 

the Treasury (‘‘Treasury Department’’) 

and the IRS published proposed 

regulations (REG–104226–18) under 

sections 962, 965, and 986 in the 

Federal Register (83 FR 39514) (the 

‘‘proposed regulations’’). The proposed 

regulations were issued following 

guidance announcing and describing 

regulations intended to be issued under 

section 965, which was amended by 

section 14103 of the Tax Cuts and Jobs 

Act, Public Law 115–97 (2017) (the 

‘‘Act’’). See Notice 2018–07, 2018–4 

I.R.B. 317; Notice 2018–13, 2018–6 

I.R.B. 341; and Notice 2018–26, 2018–16 

I.R.B. 480. Additional guidance 

describing certain provisions included 

in these regulations (the ‘‘final 

regulations’’) was published on October 

15, 2018. See Notice 2018–78, 2018–42 

I.R.B. 604. Terms used but not defined 

in this preamble have the meaning 

provided in the final regulations. 

A public hearing was held on October 

22, 2018. The Treasury Department and 

the IRS also received written comments 

with respect to the proposed 

regulations. Comments received before 

the final regulations were substantially 

developed, including all comments 

received on or before the deadline for 

comments on October 9, 2018, were 

carefully considered in developing the 

final regulations. Several comments 

were received that do not pertain to the 

rules in the proposed regulations or that 

are otherwise outside the scope of this 

rulemaking. For example, certain 

comments regarding the payment and 

reporting of net tax liability under 

section 965 as addressed in the 

document containing Questions and 

Answers about Reporting Related to 

Section 965 on 2017 Tax Returns 

(available at https://www.irs.gov/ 

newsroom/questions-and-answersabout-reporting-related-to-section-965- 

on-2017-tax-returns) are beyond the 

scope of the final regulations. 

Comments that are outside the scope of 

this rulemaking are generally not 

addressed in this preamble. The 

Treasury Department and the IRS will 

consider these comments in connection 

with any future guidance projects 

addressing the issues discussed in the 

comments. All written comments 

received in response to the proposed 

regulations are available at 

www.regulations.gov or upon request. 

Summary of Comments and 

Explanation of Revisions 

I. Overview 

The final regulations retain the basic 

approach and structure of the proposed 

regulations, with certain revisions. This 

Summary of Comments and Explanation 

of Revisions section discusses those 

revisions as well as comments received 

in response to the solicitation of 

comments in the notice of proposed 

rulemaking accompanying the proposed 

regulations. 

II. Comments and Changes to Proposed 

§ 1.965–1—Overview, General Rules, 

and Definitions 

Proposed § 1.965–1 provides general 

rules and definitions under section 965, 

including general rules concerning 

section 965(a) inclusion amounts, 

general rules concerning section 965(c) 

deduction amounts, and rules 

concerning the treatment of certain 

specified foreign corporations as 

controlled foreign corporations (as 

defined in section 957) (‘‘CFCs’’) and 

certain controlled domestic partnerships 

as foreign partnerships. The comments 

and modifications with respect to these 

rules are discussed in this Part II. 

A. Application of Exchange Rate for 

Determining Section 965(a) Inclusion 

Amount 

The proposed regulations provide that 

a section 965(a) inclusion amount is 

determined by translating a section 

958(a) U.S. shareholder’s pro rata share 

of the section 965(a) earnings amount of 

a deferred foreign income corporation 

(‘‘DFIC’’) into U.S. dollars using the spot 

rate on December 31, 2017. Proposed 

§ 1.965–1(b)(1). A comment suggested 

that the average exchange rate for the 

section 958(a) U.S. shareholder’s 2017 

fiscal year should be used under section 

989(b)(3) and stated that the approach of 

the proposed regulations created 

unnecessary complexity but did not 

elaborate on how complexity was 

created. The Treasury Department and 

the IRS have determined that while 

section 989(b)(3) would generally apply 

the average exchange rate for the 

inclusion year of the DFIC (not the 

section 958(a) U.S. shareholder, as the 

comment suggested) for purposes of 

translating an amount included in 

income under section 951(a)(1)(A), like 

a section 965(a) inclusion amount, it is 

appropriate to use the grant of 

regulatory authority in section 989 to 

instead provide for translation at the 

spot rate on December 31, 2017. As 

explained in Notice 2018–13, a single 

spot rate on December 31, 2017, is more 

administrable for the IRS and less 

burdensome for taxpayers than the 

yearly average approach of section 

989(b)(3) because under the yearly 

average approach, certain amounts 

required for the determination of the 

section 965(a) inclusion amount (for 

example, a DFIC’s allocable share of an 

aggregate foreign E&P deficit) would not 

be determinable until the closing of the 

last year of a specified foreign 

corporation beginning before January 1, 

2018. Accordingly, the final regulations 

do not adopt the comment. 

B. Application of Controlled Domestic 

Partnership Rule 

Proposed § 1.965–1(e) contains a rule 

treating certain controlled domestic 

partnerships as foreign partnerships for 

purposes of determining the section 

958(a) U.S. shareholders of a specified 

foreign corporation owned by the 

controlled domestic partnership and the 

section 958(a) stock owned by such 

shareholders. A comment suggested that 

because controlled domestic partnership 

is defined by reference to a specific 

United States shareholder, the rule 

could be read to apply only with respect 

to such shareholder but not with respect 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1839 

to other partners of the controlled 

domestic partnership, for which it 

would therefore still be treated as 

domestic. The definition of controlled 

domestic partnership is accordingly 

revised to not be defined only with 

respect to a United States shareholder, 

so that a controlled domestic 

partnership is clearly treated as a 

foreign partnership for all partners if the 

rule applies. See § 1.965–1(e)(2). 

The comment also recommended that 

a controlled domestic partnership 

treated as a foreign partnership be 

treated as such for purposes of the 

specified basis adjustment rules 

discussed in Part III.D of this Summary 

of Comments and Explanation of 

Revisions. The final regulations adopt 

this recommendation and provide that a 

controlled domestic partnership treated 

as a foreign partnership is treated as a 

foreign pass-through entity. Section 

1.965–2(i)(2). 

C. Determination of Accumulated Post1986 Deferred Foreign Income 

1. Application of Previously Taxed E&P 

Exception to Non-CFCs 

Proposed § 1.965–1(f)(7)(i)(B) and (C) 

exclude from accumulated post-1986 

deferred foreign income certain earnings 

and profits (‘‘E&P’’) described in section 

959(c)(1) or 959(c)(2) (‘‘previously taxed 

E&P’’) and amounts that would be 

treated as previously taxed E&P in the 

case of shareholders that are not United 

States shareholders on an E&P 

measurement date. These exclusions 

(consistent with section 965(d)(2)(B)) 

apply only to E&P of a CFC. A comment 

requested that the exclusion be 

expanded to previously taxed E&P and 

amounts that would be treated as 

previously taxed E&P of specified 

foreign corporations that are no longer 

CFCs as of the relevant E&P 

measurement date, given that section 

959 can apply to distributions by foreign 

corporations that are no longer CFCs. 

The Treasury Department and the IRS 

have determined that the 

recommendation is inconsistent with 

the clear statutory language of section 

965(d)(2)(B), which applies solely to 

CFCs. Accordingly, the final regulations 

do not reflect this recommendation. See 

Part II.J of this Summary of Comments 

and Explanation of Revisions for a 

discussion of the consequences of an 

actual distribution of previously taxed 

E&P for purposes of section 965. 

2. Expansion of Previously Taxed E&P 

Exception To Address Distributions 

Another comment suggested that the 

final regulations expand on the rationale 

of section 965(d)(2)(B) and proposed 

§ 1.965–1(f)(7)(i)(B) and (C) to provide 

that accumulated post-1986 deferred 

foreign income is reduced by post-1986 

earnings and profits described in section 

959(c)(3) that have been distributed to 

an unrelated foreign corporation 

pursuant to a dividend pro rata to such 

corporation and a specified foreign 

corporation, given that the ‘‘no 

diminution rule’’ discussed in Part 

II.G.1 of this Summary of Comments 

and Explanation of Revisions would 

decrease the post-1986 earnings and 

profits by the amount distributed to the 

specified foreign corporation but not the 

unrelated foreign corporation. As 

discussed in more detail in Part II.G.1 of 

this Summary of Comments and 

Explanation of Revisions, the Treasury 

Department and the IRS have 

determined that the application of the 

statutory ‘‘no diminution rule’’ is clear, 

and the special rules in section 

965(d)(2)(B) for previously taxed E&P 

have no bearing on the fact pattern 

highlighted by the comment. 

Accordingly, the final regulations do not 

adopt this comment, nor a similar 

comment suggesting that step 2 of the 

ordering rule in proposed § 1.965–2(b), 

discussed in Part III.A of this Summary 

of Comments and Explanation of 

Revisions, permit such dividends to 

persons other than specified foreign 

corporations to be taken into account 

before the application of section 965 is 

determined. 

3. Expansion of Previously Taxed E&P 

Exception To Address Section 

951(a)(1)(B) Inclusions 

A comment suggested that a preinclusion year inclusion under sections 

951(a)(1)(B) and 956 with respect to a 

DFIC whose inclusion year ends 

November 30, 2018, may not be 

properly accounted for in determining 

accumulated post-1986 deferred foreign 

income as of the measurement date on 

November 2, 2017. The comment notes 

that a distribution of an amount of E&P 

that would be described in section 

959(c)(1) as a result of an inclusion 

under sections 951(a)(1)(B) and 956 

during a pre-inclusion year taxable year 

would prevent sections 951(a)(1)(B) and 

956 from applying. Accordingly, such 

E&P would not qualify for the exception 

from accumulated post-1986 deferred 

foreign income for previously taxed E&P 

in § 1.965–1(f)(7)(i)(B). The comment 

suggested that the final regulations 

provide an additional exception from 

the definition of accumulated post-1986 

deferred foreign income for E&P that 

would be included in the income of a 

United States shareholder under 

sections 951(a)(1)(B) and 956. 

The Treasury Department and the IRS 

have determined that the statutory 

definition of accumulated post-1986 

deferred foreign income is clear in not 

excluding such E&P. Moreover, 

modifications to reduce a section 965(a) 

inclusion amount to the extent of an 

inclusion under sections 951(a)(1)(B) 

and 956 in such circumstances are not 

warranted for the same reasons that 

modifications to address dividends with 

comparable results are not warranted, as 

discussed in Part II.G.1 of this Summary 

of Comments and Explanation of 

Revisions. A new example illustrates 

the treatment of E&P of a specified 

foreign corporation as of the E&P 

measurement date on November 2, 

2017, which is described in section 

959(c)(1) as a result of an inclusion 

under section 951(a)(1)(B) with respect 

to the specified foreign corporation’s 

taxable year ending on November 30, 

2017. See § 1.965–2(j)(5). 

4. Application of Previously Taxed E&P 

Exception in the Case of Section 962 

Elections 

Under section 962(d), E&P giving rise 

to inclusions under section 951(a)(1) 

with respect to which an election under 

section 962 applies are, notwithstanding 

section 959(a)(1), includible in the gross 

income of a United States shareholder 

when distributed except to the extent of 

tax paid on the inclusions. Therefore, 

those E&P (that is, the non-excludable 

amount) are included in accumulated 

post-1986 deferred foreign income in an 

inclusion year. See section 965(d)(2)(B) 

(excluding from accumulated post-1986 

deferred foreign income earnings that, if 

distributed, would be excluded from 

gross income under section 959). A 

comment suggested that accumulated 

post-1986 deferred foreign income 

should exclude all previously taxed E&P 

attributable to a prior year inclusion 

under section 951(a)(1) by a United 

States shareholder when a section 962 

election applied with respect to the 

prior year inclusion. In the alternative, 

the comment suggested that the final 

regulations allow foreign income taxes 

deemed paid with respect to the original 

inclusion under section 951(a)(1) to be 

treated as deemed paid again with 

respect to a section 965(a) inclusion 

with respect to such previously taxed 

E&P. The Treasury Department and the 

IRS have determined that the statute is 

clear that a reduction to accumulated 

post-1986 deferred income is allowed 

only for E&P that would be excluded 

from income under section 959 upon 

distribution. In addition, there is no 

authority under the Code to allow the 

same foreign income taxes to be credited 

twice. Therefore, because there is no 

1840 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

statutory authority for such 

modifications, the suggested 

modifications to the statutory definition 

of accumulated post-1986 deferred 

foreign income and operation of the 

foreign tax credit rules are not 

warranted and are not adopted in the 

final regulations. 

D. Determination of Aggregate Foreign 

Cash Position and Cash Position 

The proposed regulations define 

‘‘aggregate foreign cash position’’ to 

mean the greater of the aggregate of a 

section 958(a) U.S. shareholder’s pro 

rata share of the cash position of each 

specified foreign corporation 

determined on the final cash 

measurement date or the average of the 

aggregate of a section 958(a) U.S. 

shareholder’s pro rata share of the cash 

position of each specified foreign 

corporation determined as of each 

specified foreign corporation’s first and 

second cash measurement dates. 

Proposed § 1.965–1(f)(8). For purposes 

of this calculation, a specified foreign 

corporation’s cash position consists of 

cash held by the corporation, the net 

accounts receivable of the corporation, 

and the fair market value of the cashequivalent assets held by the 

corporation. Proposed § 1.965– 

1(f)(16)(i). Cash-equivalent assets 

include (i) personal property which is of 

a type that is actively traded and for 

which there is an established financial 

market; (ii) commercial paper, 

certificates of deposit, the securities of 

the Federal government and of any State 

or foreign government; (iii) any foreign 

currency; (iv) any obligation with a term 

of less than one year (‘‘short-term 

obligation’’); and (v) derivative financial 

instruments, other than bona fide 

hedging transactions. Proposed § 1.965– 

1(f)(13). 

1. Exclusions From Cash Position 

Guidance was requested about the 

exclusion of certain assets from the cash 

position of a specified foreign 

corporation. Specifically, comments 

recommended that cash subject to local 

regulatory restrictions, held in a 

fiduciary or trust capacity, derived from 

domestic E&P, earmarked to fund a 

foreign acquisition pursuant to a legal 

contract entered into before November 

2, 2017, obligated to be paid to a third 

party, or corresponding to previously 

taxed E&P not be taken into account in 

determining a specified foreign 

corporation’s cash position. Comments 

also requested that obligations with 

respect to which there was an inclusion 

under sections 951(a)(1)(B) and 956 be 

excluded from a specified foreign 

corporation’s cash position. In addition, 

comments requested guidance 

exempting certain assets that would 

otherwise be considered personal 

property which is of a type that is 

actively traded and for which there is an 

established financial market. For 

example, comments suggested that the 

stock of a publicly traded company be 

excluded from a specified foreign 

corporation’s cash position if the stock 

represents a controlling interest in a 

corporation, meets an annual trading 

volume threshold, is the stock of a 

specified foreign corporation, is held in 

the ordinary course of a section 958(a) 

U.S. shareholder’s trade or business, or 

was not reported as a current asset on 

the audited financial statements of a 

section 958(a) U.S. shareholder or its 

specified foreign corporation. Similarly, 

comments requested that certain 

products or raw materials held as 

inventory that are a type of property that 

may be actively traded on, for example, 

commodities markets, and forward 

contracts with respect to those items be 

excluded from a specified foreign 

corporation’s cash position if the items 

are part of the corporation’s ongoing 

operations or are disposed of in the 

normal course of business. One 

comment requested guidance that 

actively traded personal property be 

presumptively treated as cash, subject to 

the ability of the taxpayer to rebut the 

presumption by submitting a statement 

with its tax return that establishes, 

based on all of the relevant facts and 

circumstances, that the property is 

illiquid. Another comment stated that 

the proposed regulations struck an 

appropriate balance and requested that 

the exceptions from the definition of 

cash position be limited to those in the 

proposed regulations and that no 

additional exceptions be given. 

The Treasury Department and the IRS 

have determined that a narrow 

exemption from the definition of ‘‘cash 

position’’ is appropriate for certain 

assets held by a specified foreign 

corporation in the ordinary course of its 

trade or business as well as for certain 

privately negotiated contracts to buy or 

sell such assets. Therefore, in response 

to comments, the final regulations 

provide that a commodity that is 

described in section 1221(a)(1) or 

1221(a)(8) in the hands of the specified 

foreign corporation is excluded from the 

category of personal property which is 

of a type that is actively traded and for 

which there is an established market, 

except with respect to dealers or traders 

in commodities. Section 1.965– 

1(f)(13)(i)(A) and (ii). Additionally, the 

final regulations exclude forward 

contracts and short positions with 

respect to such commodities from the 

definition of derivative financial 

instrument to the extent that they could 

have been identified as a hedging 

transaction with respect to such 

commodities. See § 1.965–1(f)(18)(iii) 

and (v). This exemption does not raise 

the administrability concerns that are 

inherent in a liquidity-based test of 

widespread applicability. 

However, the Treasury Department 

and the IRS decline to adopt the 

recommendations for additional cash 

position exceptions. Congress 

developed a statutory definition of 

‘‘cash position’’ that includes all cash 

and certain assets held by a specified 

foreign corporation regardless of 

whether the cash or assets are illiquid 

or were transferred from the United 

States. See section 965(c)(3)(B). The 

legislative history is consistent with the 

unambiguous language in the statute. 

See, e.g., H.R. Rep. No. 115–446, at 609– 

10 (2017) (‘‘The cash position of an 

entity consists of all cash, net accounts 

receivable, and the fair market value of 

similarly liquid assets, specifically 

including personal property that is 

actively traded on an established 

financial market, government securities, 

certificates of deposit, commercial 

paper, foreign currency, and short-term 

obligations.’’). Therefore, the final 

regulations continue to provide that, for 

example, the fair market value of 

publicly traded stock held by a specified 

foreign corporation is included in a 

specified foreign corporation’s cash 

position, regardless of the specified 

foreign corporation’s ownership 

percentage in the publicly traded 

corporation, because such stock is ‘‘of a 

type’’ that is actively traded on an 

established securities market. 

Additionally, creating broad 

regulatory exceptions to the statutory 

definition would require 

administratively complex tracing and 

facts-and-circumstances rules. For 

example, an exclusion for cash that 

originated in the United States and was 

earmarked to fund a foreign acquisition 

pursuant to a legal contract entered into 

before November 2, 2017, would 

necessarily require difficult-toadminister rules to identify such cash, 

which may currently be or may have 

previously been comingled with foreignderived cash in a single account. 

Similarly, it would be challenging to 

administer a presumption or a test that 

assesses the liquidity of every asset 

based on the facts and circumstances. 

Accordingly, the final regulations 

generally retain the definitions of 

‘‘aggregate foreign cash position’’ and 

‘‘cash position’’ set forth in the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1841 

proposed regulations. See § 1.965–1(f)(8) 

and (16). 

2. Accounts Receivable and Accounts 

Payable 

The proposed regulations provide that 

for purposes of determining net 

accounts receivable taken into account 

in determining the cash position of a 

specified foreign corporation, the term 

‘‘accounts receivable’’ means 

receivables described in section 

1221(a)(4), and the term ‘‘accounts 

payable’’ means payables arising from 

the purchase of property described in 

section 1221(a)(1) or 1221(a)(8) or the 

receipt of services from vendors or 

suppliers, and only receivables or 

payables with a term upon issuance that 

is less than one year are taken into 

account. Proposed § 1.965–1(f)(5) and 

(6). 

Comments requested that the 

definition of accounts payable for 

purposes of determining a specified 

foreign corporation’s cash position be 

expanded. Specifically, comments 

recommended that accounts payable be 

defined to include payables to 

employees in the ordinary course of 

business, payables arising from the 

purchase of depreciable property, 

payables related to the licensing of 

intellectual property, payables for taxes 

other than income taxes, payables for 

debt with a term of less than one year, 

and payables established under Revenue 

Procedure 99–32, 1999–2 C.B. 296. 

Although the statute does not define the 

term ‘‘accounts payable,’’ generally 

accepted accounting principles define 

the term to mean amounts owed to 

vendors and suppliers for the purchase 

of goods and services on credit, to the 

exclusion of obligations such as accrued 

taxes, interest expense, commission or 

royalty expense, and compensation 

payable, which are treated as accrued 

liabilities. The definition of accounts 

payable set forth in the proposed 

regulations therefore reflects the 

ordinary meaning of the term, and the 

final regulations do not adopt these 

recommendations. 

3. Short-Term Obligations 

The proposed regulations provide that 

for purposes of determining a specified 

foreign corporation’s cash position, the 

term ‘‘short-term obligation’’ means any 

obligation with a term at issuance that 

is less than one year and any loan that 

must be repaid at the demand of the 

lender (or that must be repaid within 

one year of such demand) but does not 

include any accounts receivable. 

Proposed § 1.965–1(f)(43). Comments 

requested that the definition of shortterm obligation be modified to allow 

netting of short-term notes payable 

against short-term notes receivable for 

purposes of computing a specified 

foreign corporation’s cash position. 

The Treasury Department and the IRS 

decline to adopt these comments. The 

statute explicitly allows accounts 

payable to be netted against accounts 

receivable for purposes of determining 

the cash position of a specified foreign 

corporation but does not provide the 

same treatment with respect to shortterm obligations. See section 

965(c)(3)(B)(ii), (c)(3)(B)(iii)(IV), and 

(c)(3)(C). The legislative history is 

consistent with the statute’s plain 

meaning. See H.R. Rep. No. 115–446, at 

615 (2017). Accordingly, the final 

regulations retain the definition of 

‘‘short-term obligation’’ set forth in the 

proposed regulations. See § 1.965– 

1(f)(43). 

4. Cash-Equivalent Asset Hedging 

Transactions 

For purposes of determining the cash 

position of a specified foreign 

corporation, the proposed regulations 

include special rules regarding the 

treatment of cash-equivalent asset 

hedging transactions. The term ‘‘cashequivalent asset hedging transaction’’ is 

defined as a bona fide hedging 

transaction identified on a specified 

foreign corporation’s books and records 

as hedging a cash-equivalent asset. 

Proposed § 1.965–1(f)(14). A bona fide 

hedging transaction is defined to mean 

a hedging transaction that meets (or that 

would meet if the specified foreign 

corporation were a CFC) the 

requirements of a bona fide hedging 

transaction described in § 1.954– 

2(a)(4)(ii) (without regard to the 

identification requirements, in the case 

of a specified foreign corporation that is 

not a CFC). Proposed § 1.965–1(f)(12). 

The proposed regulations do not 

address whether, and the extent to 

which, a bona fide hedging transaction 

that hedges an aggregate risk (an 

‘‘aggregate hedging transaction’’), 

including risks with respect to one or 

more cash-equivalent assets, may be 

treated as a cash-equivalent asset 

hedging transaction. For example, a 

bona fide hedging transaction may 

hedge the risk with respect to multiple 

assets, some of which are cashequivalent assets and some of which are 

not cash-equivalent assets. See generally 

§ 1.954–2(a)(4)(ii)(A) (defining a bona 

fide hedging transaction, in part, by 

reference to the requirements of 

§ 1.1221–2(a) through (d)); § 1.1221– 

2(c)(3) (providing that a hedging 

transaction may manage aggregate risk). 

The Treasury Department and the IRS 

have determined that it is appropriate to 

permit bona fide hedging transactions 

that are aggregate hedging transactions 

to be treated as cash-equivalent asset 

hedging transactions to the extent that 

the risks managed by the aggregate 

hedging transaction relate to cashequivalent hedging transactions. 

Accordingly, the final regulations 

provide that an aggregate hedging 

transaction may be treated as a cashequivalent asset hedging transaction and 

allocate the value of an aggregate 

hedging transaction between cashequivalent hedging transactions and 

other assets, if any, being hedged. See 

§ 1.965–1(f)(14)(ii). 

One comment requested guidance 

clarifying that hedging transactions that 

use cash-equivalent assets that are not 

derivative financial instruments as 

hedging instruments, in addition to 

hedging transactions that use derivative 

financial instruments as hedging 

instruments, are eligible to be treated as 

bona fide hedging transactions. The 

Treasury Department and the IRS have 

determined that it is clear that a hedging 

transaction that uses a cash-equivalent 

asset as a hedging instrument will 

qualify as a bona fide hedging 

transaction if the requirements in 

proposed § 1.965–1(f)(12) are met, and 

no clarification is necessary. 

E. Cash Measurement Dates 

The proposed regulations provide that 

a specified foreign corporation’s final 

cash measurement date is the close of 

the last taxable year of the specified 

foreign corporation that begins before 

January 1, 2018, and ends on or after 

November 2, 2017, if any. Proposed 

§ 1.965–1(f)(24). The second cash 

measurement date of a specified foreign 

corporation is the close of the last 

taxable year of the specified foreign 

corporation that ends after November 1, 

2016, and before November 2, 2017, if 

any. Proposed § 1.965–1(f)(31). The first 

cash measurement date of a foreign 

corporation is the close of the last 

taxable year of the specified foreign 

corporation that ends after November 1, 

2015, and before November 2, 2016, if 

any. Proposed § 1.965–1(f)(25). Under 

the proposed regulations, a section 

958(a) U.S. shareholder takes into 

account its pro rata share of the cash 

position of a specified foreign 

corporation as of the close of any cash 

measurement date of the specified 

foreign corporation on which the 

section 958(a) U.S. shareholder is a 

section 958(a) U.S. shareholder of the 

specified foreign corporation, without 

regard to whether the section 958(a) 

U.S. shareholder is a section 958(a) U.S. 

shareholder as of any other cash 

measurement date, including the final 

1842 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

cash measurement date of the specified 

foreign corporation. See proposed 

§ 1.965–1(f)(30)(iii). 

A comment recommended that the 

proposed regulations be modified such 

that a section 958(a) U.S. shareholder 

would not take into account the pro rata 

share of the cash position of any 

specified foreign corporation liquidated 

before November 2, 2017. The comment 

is premised on the view that the 

references to ‘‘each such specified 

foreign corporation’’ in section 

965(c)(3)(A)(ii) expressly link the 

specified foreign corporations whose 

cash positions are measured on the first 

and second cash measurement dates to 

those whose cash positions are 

measured on the final cash 

measurement date. Accordingly, the 

comment reads the statute to provide 

that if a specified foreign corporation 

did not exist or was not held by a 

section 958(a) U.S. shareholder on the 

final cash measurement date, its cash 

position may not be taken into account 

under section 965(c)(3)(A)(ii). 

The Treasury Department and the IRS 

have determined that the comment’s 

reading of section 965(c)(3)(A)(ii) is an 

inferior reading and have determined 

that the cash measurement date rules in 

the proposed regulations are consistent 

with the text and underlying purposes 

of the relevant statutory provision and 

that the legislative history supports this 

conclusion. The phrase ‘‘each such 

specified foreign corporation’’ in section 

965(c)(3)(A)(ii)(I) and (II) refers only to 

the phrase ‘‘each specified foreign 

corporation of such United States 

shareholder’’ in section 965(c)(3)(A)(i), 

and not the additional language in 

section 965(c)(3)(A)(i) referring to the 

final cash measurement date. 

Additionally, given that the purpose of 

the multiple cash measurement dates 

was to mitigate any incentive for 

taxpayers to manipulate their cash 

position as of the final cash 

measurement date, it is appropriate to 

ensure that the cash position of a 

specified foreign corporation in 

existence on a cash measurement date is 

taken into account by a United States 

shareholder on such date. For example, 

a rule that ignored the cash position of 

specified foreign corporations that did 

not exist or were not held by a section 

958(a) U.S. shareholder on the final cash 

measurement date could allow a section 

958(a) U.S. shareholder with an 

aggregate foreign cash position that was 

determined as of the earlier cash 

measurement dates described in section 

965(c)(3)(A) to retroactively reduce its 

aggregate foreign cash position by 

liquidating or otherwise disposing of 

specified foreign corporations with 

significant cash positions, even when 

cash and cash-equivalent assets of the 

specified foreign corporation continued 

to be held by one or more other 

specified foreign corporations of the 

section 958(a) U.S. shareholder. 

Finally, the Joint Committee on 

Taxation explanation of the Act also 

indicates that, for purposes of section 

965, the cash position of a specified 

foreign corporation that no longer exists 

must still be taken into account by a 

section 958(a) U.S. shareholder in 

determining its aggregate foreign cash 

position. See Staff, Joint Committee on 

Taxation, General Explanation of Public 

Law 115–97, JCS–1–18, at 359–360 

(2018) (‘‘If a specified foreign 

corporation does not exist on any 

particular cash measurement date, its 

cash position would be zero with 

respect to that date.’’). Accordingly, the 

Treasury Department and the IRS do not 

adopt this recommendation. 

Another comment requested 

confirmation that United States 

shareholder status, the United States 

shareholder’s pro rata share, and 

specified foreign corporation status are 

determined based on the facts and 

applicable law at the time of each cash 

measurement date. The Treasury 

Department and the IRS have 

determined that that is clear under 

proposed § 1.965–1(f)(8) and (f)(30)(iii), 

as illustrated by the example in § 1.965– 

1(g)(7). Accordingly, no changes are 

made in the final regulations in this 

regard. 

F. Domestic Pass-Through Entities 

A comment made a number of 

suggestions premised on the assumption 

that aggregate foreign E&P deficits, 

section 965(a) inclusion amounts, and 

section 965(c) deductions are not 

determined at the section 958(a) U.S. 

shareholder level when the section 

958(a) U.S. shareholder is a domestic 

pass-through entity, and instead that 

shares of the components of those 

amounts (such as specified E&P deficits, 

section 965(a) earnings amounts, and 

aggregate foreign cash positions) are 

taken into account separately by the 

domestic pass-through owners. As 

discussed in more detail in this Part II.F 

with respect to the specific suggestions 

made by the comment, the Treasury 

Department and the IRS have 

determined that the statute clearly 

provides otherwise, and the proposed 

regulations and final regulations are 

consistent with the statute. 

The comment requested that the final 

regulations clarify that if a domestic 

pass-through entity is a United States 

shareholder of an E&P deficit foreign 

corporation, a domestic pass-through 

owner of the domestic pass-through 

entity can take into account its shares of 

the domestic pass-through entity’s pro 

rata share of the specified E&P deficit of 

the E&P deficit foreign corporation to 

reduce the domestic pass-through 

owner’s pro rata share of a section 

965(a) earnings amount of a DFIC. In 

support of its recommendation, the 

comment cited the rule provided in 

proposed § 1.965–1(e) treating a 

controlled domestic partnership as a 

foreign partnership, such that its 

partners could be treated as having a pro 

rata share of specified E&P deficits of 

E&P deficit foreign corporations owned 

by the partnership. However, that rule is 

intended to ensure that the accumulated 

post-1986 deferred foreign income of 

DFICs of such a partnership is subject to 

U.S. tax. The Treasury Department and 

the IRS have determined that it should 

not be extended to structures that do not 

present the same tax-avoidance 

concerns, such as the one raised by the 

comment involving a United States 

person that is a partner in a domestic 

partnership. The Treasury Department 

and the IRS have determined that it is 

clear under the statute that a domestic 

pass-through entity’s pro rata share of a 

specified E&P deficit can only be used 

to reduce the domestic pass-through 

entity’s pro rata share of section 965(a) 

earnings amounts, and the proposed and 

final regulations are consistent with the 

statute. 

Similarly, under the statute, a 

domestic pass-through owner’s 

distributive share of a domestic passthrough entity’s section 965(a) inclusion 

amount cannot be reduced by the 

domestic pass-through owner’s pro rata 

share of a specified E&P deficit of an 

E&P deficit foreign corporation of which 

it is a section 958(a) U.S. shareholder. 

The proposed and final regulations are 

consistent with the statute. Accordingly, 

the comment’s suggestion is not 

adopted. 

The comment also suggested 

clarifying that if a domestic passthrough entity’s aggregate foreign cash 

position exceeds its aggregate section 

965(a) inclusion amounts, the domestic 

pass-through owners of the domestic 

pass-through entity need only take into 

account their share of the excess 

aggregate foreign cash position, and not 

their share of the aggregate foreign cash 

position taken into account in 

determining the section 965(c) 

deduction amount of the domestic passthrough entity. The Treasury 

Department and the IRS have 

determined that because only a section 

958(a) U.S. shareholder can have an 

aggregate foreign cash position, and 

there is no mechanism for treating a 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1843 

domestic pass-through owner of a 

domestic pass-through entity that is a 

section 958(a) U.S. shareholder as 

having a share of an aggregate foreign 

cash position, it is clear under the 

statute, the proposed regulations, and 

the final regulations, that domestic passthrough owners do not take into account 

any amount of a domestic pass-through 

entity’s aggregate foreign cash position. 

Accordingly, no clarification is needed, 

and the comment is not adopted. 

G. Post-1986 Earnings and Profits 

1. Treatment of Distributions 

Under the proposed regulations, a 

specified foreign corporation’s post1986 earnings and profits are 

determined without diminution by 

reason of dividends distributed during 

the last taxable year of the foreign 

corporation that begins before January 1, 

2018, other than dividends distributed 

to another specified foreign corporation 

(‘‘no diminution rule’’). Proposed 

§ 1.965–1(f)(29)(i)(B). Comments noted 

that the no diminution rule may result 

in overinclusion of a specified foreign 

corporation’s post-1986 earnings and 

profits and suggested that the final 

regulations limit the rule’s application 

(that is, to allow diminution of a 

specified foreign corporation’s post1986 earnings and profits) in the case of 

dividends to a seller before a sale during 

the inclusion year. The statute explicitly 

provides that dividend distributions, 

other than distributions to another 

specified foreign corporation, must not 

be taken into account for purposes of 

computing a specified foreign 

corporation’s post-1986 earnings and 

profits. Section 965(d)(3)(B). The 

legislative history supports the plain 

language of the statute. See H.R. Rep. 

No. 115–446, at 619 (2017). See Part II.H 

of this Summary of Comments and 

Explanation of Revisions for additional 

discussion of rules affecting the 

treatment of pre-sale distributions by a 

DFIC. Therefore, the comments are not 

adopted. 

Similarly, comments have suggested 

reducing post-1986 earnings and profits 

by dividends to a United States 

shareholder between November 2, 2017, 

and December 1, 2017, by a DFIC with 

an inclusion year ending November 30, 

2018, in order to mitigate double 

counting of E&P in connection with 

such dividends. However, the legislative 

history to section 965(o) makes clear 

that the Treasury Department and the 

IRS were expected to provide 

regulations to address double counting 

resulting from transactions between 

specified foreign corporations but is 

silent with respect to transactions 

between specified foreign corporations 

and United States shareholders. Id. 

Accordingly, the Treasury Department 

and the IRS have determined that the 

grant of regulatory authority in section 

965 was not intended to address such 

fact patterns. Further, and as the 

preamble to the proposed regulations 

notes, payments by a specified foreign 

corporation to a United States 

shareholder can have attendant U.S. tax 

effects that do not occur with respect to 

payments between specified foreign 

corporations. For example, a 

distribution to a United States 

shareholder may permit that 

shareholder to take into account foreign 

tax credits under section 902 and avoid 

the limitation under section 965(g)(1) 

that would apply if the underlying 

foreign taxes had been deemed paid 

with respect to the shareholder’s section 

965(a) inclusion amount. Accordingly, 

the Treasury Department and the IRS 

decline to adopt this recommendation. 

The alternative recommendations in 

some of the comments, to treat the 

dividend as out of previously taxed E&P 

arising in the subsequent taxable year or 

to allow the same foreign income taxes 

to be deemed paid with respect to both 

the dividend and the section 965(a) 

inclusion, are inconsistent with the 

statute and the Code at large, and, 

accordingly, these recommendations are 

not adopted. 

2. Foreign Income Tax Rule 

The proposed regulations provide that 

for purposes of determining a specified 

foreign corporation’s post-1986 earnings 

and profits as of the E&P measurement 

date on November 2, 2017, in the case 

in which foreign income taxes (as 

defined in section 901(m)(5)) of the 

specified foreign corporation accrue 

after November 2, 2017, but on or before 

December 31, 2017, and during the 

specified foreign corporation’s U.S. 

taxable year that includes November 2, 

2017, the specified foreign corporation’s 

post-1986 earnings and profits as of 

November 2, 2017, are reduced by the 

applicable portion of such foreign 

income taxes. Proposed § 1.965– 

1(f)(29)(ii). Comments requested that the 

rule be expanded to permit reduction 

for foreign income taxes accrued after 

December 31, 2017, for purposes of 

determining post-1986 earnings and 

profits on the measurement dates on 

both November 2, 2017, and December 

31, 2017, and regardless of whether the 

foreign corporation’s U.S. taxable year 

includes November 2, 2017. The 

Treasury Department and the IRS have 

determined that it would be 

inappropriate to allow taxes accrued in 

a U.S. tax year after the one that 

includes November 2, 2017, to be taken 

into account in determining post-1986 

earnings and profits on November 2, 

2017, because such taxes could not have 

accrued for the first year under the 

general foreign tax credit rules. 

Moreover, expanding the rule to take 

into account taxes accrued after 

December 31, 2017, would prevent 

section 965-related amounts from being 

determined with certainty as of 

December 31, 2017. As discussed in Part 

II.A of this Summary of Comments and 

Explanation of Revisions, the Treasury 

Department and the IRS have 

determined that it continues to be 

important to have certainty about 

section 965-related amounts as of 

December 31, 2017, and accordingly 

decline to adopt the comments. 

Another comment recommended 

modifying how the applicable portion of 

foreign income taxes taken into account 

on November 2, 2017, is determined. 

For ease of implementation, instead of 

basing the determination on the portion 

of the income for the foreign taxable 

period that includes November 2, 2017, 

as computed under foreign tax law, that 

had accrued as of such date, this 

comment recommended basing the 

determination on the ratio of the E&P for 

the U.S. taxable year, as computed 

under U.S. tax principles, as of 

November 2, 2017, to that as of 

December 31, 2017. The Treasury 

Department and the IRS have 

determined that taxpayers are generally 

required under § 1.904–6 to associate 

foreign income taxes with taxable 

income computed under foreign law, 

such that the rule in § 1.965–1(f)(29)(ii) 

does not create a significant additional 

burden. Moreover, the suggested 

approach could result in significant 

distortions if the foreign corporation’s 

U.S. and foreign taxable years differed. 

Accordingly, the recommendation is not 

adopted. 

3. Other Exclusions From Post-1986 

Earnings and Profits 

A comment also requested that the 

definition of post-1986 earnings and 

profits exclude cashless earnings 

generated by foreign corporations while 

they were not controlled by United 

States shareholders. In the same vein, it 

requested that dividends paid out of 

earnings earned before a foreign 

corporation became a specified foreign 

corporation be excluded from the post1986 earnings and profits of the 

recipient specified foreign corporation. 

Because the term ‘‘post-1986 earnings 

and profits’’ clearly includes E&P 

(which is not tied to cash and is often 

attributable to cashless income) earned 

while a corporation was a specified 

1844 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

foreign corporation, without regard to 

whether it was controlled by United 

States shareholders, and because section 

965(d)(3)(B) clearly evidences 

consideration for the impact of 

dividends between foreign corporations 

on post-1986 earnings and profits, the 

Treasury Department and the IRS 

decline to adopt this comment. 

4. Alternative Measurement Methods 

A comment requested guidance 

permitting taxpayers to determine their 

specified foreign corporations’ post1986 earnings and profits and cash 

positions using an alternative 

measurement method. The comment 

noted that before the enactment of 

section 965, foreign corporations other 

than CFCs or section 902 corporations 

(as defined under former section 

909(d)(5)) had no reason to track E&P 

under U.S. tax principles; therefore, 

requiring a United States shareholder to 

obtain information from a foreign 

corporation that the corporation would 

not have known to maintain is unduly 

burdensome. 

Section 965(d)(3) provides, without 

exception, that for purposes of 

determining post-1986 earnings and 

profits, the E&P of a specified foreign 

corporation must be ‘‘computed in 

accordance with sections 964(a) and 

986.’’ Likewise, section 965(c)(3)(B), 

which contains rules for determining a 

specified foreign corporation’s cash 

position, applies to ‘‘any specified 

foreign corporation.’’ Moreover, there is 

no indication in the legislative history 

that Congress intended to ease the 

requirements for computing the post1986 earnings and profits and the cash 

position for those specified foreign 

corporations that may not have 

previously calculated E&P under U.S. 

tax principles. Accordingly, the 

Treasury Department and the IRS do not 

adopt this comment. 

H. Determination of Pro Rata Share of 

Section 965(a) Earnings Amount 

The proposed regulations provide that 

a section 958(a) U.S. shareholder’s pro 

rata share of the section 965(a) earnings 

amount of a DFIC is the portion of the 

section 965(a) earnings amount that 

would be treated as distributed to the 

section 958(a) U.S. shareholder under 

section 951(a)(2)(A) and § 1.951–1(e), 

determined as of the last day of the 

inclusion year of the DFIC. Proposed 

§ 1.965–1(f)(30)(i). The Treasury 

Department and the IRS have 

determined that this definition is 

inconsistent with the statutory language 

of sections 951 and 965 in the case in 

which a specified foreign corporation, 

whether it is or is not a CFC, ceases to 

be a specified foreign corporation 

during its inclusion year. Under section 

951, a section 958(a) U.S. shareholder of 

such a specified foreign corporation 

would generally have an inclusion 

under section 951 with respect to the 

corporation if it were a DFIC because it 

would own stock of the specified 

foreign corporation on the last day of 

the inclusion year on which the 

corporation was a specified foreign 

corporation. 

Because a specified foreign 

corporation is treated as a CFC for 

purposes of section 951, the Treasury 

Department and the IRS have 

determined that the final regulations 

should be consistent with section 951 in 

requiring a section 965(a) inclusion by 

such a section 958(a) U.S. shareholder. 

Moreover, the Treasury Department and 

the IRS have concluded that it would 

not be appropriate to prorate a section 

965(a) earnings amount based on the 

portion of the inclusion year that the 

DFIC is a specified foreign corporation, 

as the reference in proposed § 1.965– 

1(f)(30)(i) to section 965(a)(2)(A) might 

suggest, given that the limitation of 

post-1986 earnings and profits to E&P 

accumulated in periods in which the 

DFIC was a specified foreign 

corporation would already prevent E&P 

accrued after the DFIC ceased to be a 

specified foreign corporation from being 

taken into account. The definitions of 

‘‘pro rata share’’ and ‘‘section 958(a) 

U.S. shareholder inclusion year’’ are 

revised accordingly in the final 

regulations. See § 1.965–1(f)(30) and 

(f)(34). The definition of pro rata share 

continues to preclude reduction by 

distributions to other owners under 

section 951(a)(2)(B) in order to be 

consistent with section 965(d)(3)(B) and 

prevent double non-taxation in the case 

of certain 2018 dispositions of specified 

foreign corporations. Id.; see § 1.965– 

2(j)(6). 

I. Determination of Pro Rata Share of 

Specified E&P Deficit 

The proposed regulations provide 

that, for purposes of determining a 

section 958(a) U.S. shareholder’s pro 

rata share of a specified E&P deficit of 

an E&P deficit foreign corporation, the 

specified E&P deficit is allocated among 

the shareholders of the corporation’s 

common stock in proportion to the 

value of the common stock held by such 

shareholders. Proposed § 1.965– 

1(f)(30)(ii). The Treasury Department 

and the IRS have determined that a 

specified E&P deficit should be 

allocated to shareholders of an E&P 

deficit corporation’s preferred stock in 

cases involving common stock with no 

liquidation value. The final regulations 

therefore provide that any amount of a 

specified E&P deficit that would 

otherwise be allocated in a hypothetical 

distribution to a class of common stock 

that has no liquidation value is instead 

allocated to the most junior class of 

equity with a positive liquidation value 

to the extent of the liquidation value. 

Section 1.965–1(f)(30)(ii)(A). The final 

regulations also provide that, in cases in 

which a corporation’s common stock 

has a liquidation value of zero and there 

is no class of equity with a liquidation 

preference relative to the common stock, 

the specified E&P deficit is allocated 

among the common stock using any 

reasonable method consistently applied. 

Section 1.965–1(f)(30)(ii)(B). 

J. Determination of Specified E&P 

Deficit 

The proposed regulations provide that 

previously taxed E&P are not excluded 

in determining the existence and 

amount of an E&P deficit foreign 

corporation’s specified E&P deficit. See 

proposed § 1.965–1(f)(22)(ii). Comments 

requested that the final regulations 

provide to the contrary. The Treasury 

Department and the IRS have 

determined that it is clear that 

previously taxed E&P are not excluded 

in determining a specified E&P deficit. 

Section 965(b)(3)(B) and (C) provide that 

a specified E&P deficit is, with respect 

to an E&P deficit foreign corporation, a 

deficit in post-1986 earnings and profits 

as of November 2, 2017. For purposes of 

section 965, the term post-1986 earnings 

and profits is defined in section 

965(d)(3) and is computed in 

accordance with sections 964(a) and 

986. Under section 964(a), E&P are 

determined according to rules 

substantially similar to those applicable 

to domestic corporations. Previously 

taxed E&P are a type of E&P. See section 

959(c). No express exclusion of 

previously taxed E&P is provided in 

section 965(d)(3) for purposes of 

determining post-1986 earnings and 

profits. In contrast, the term 

accumulated post-1986 deferred foreign 

income, as defined in section 965(d)(2), 

starts with post-1986 earnings and 

profits and then explicitly excludes 

previously taxed E&P. See section 

965(d)(2)(B). Accordingly, the 

comments are not adopted. While 

previously taxed E&P is not excluded in 

the statutory definition of post-1986 

earnings and profits, there is no double 

taxation of previously taxed E&P related 

to the E&P deficit foreign corporations 

because section 959 continues to apply 

when the previously taxed E&P are 

distributed. 

A comment also requested that the 

final regulations confirm that E&P or 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1845 

deficits in E&P attributable to income 

that is effectively connected with the 

conduct of a trade or business within 

the United States and subject to tax 

under chapter 1 (‘‘effectively connected 

E&P’’) are taken into account in 

determining the specified E&P deficit of 

an E&P deficit foreign corporation. The 

Treasury Department and the IRS have 

determined that section 965 clearly 

allows deficits in effectively connected 

E&P to be included in an E&P deficit 

foreign corporation’s specified E&P 

deficit. No express exclusion for 

effectively connected E&P is provided in 

section 965(d)(3) for purposes of 

determining post-1986 earnings and 

profits. Moreover, the term accumulated 

post-1986 deferred foreign income, as 

defined in section 965(d)(2), expressly 

excludes effectively connected E&P. 

Accordingly, no clarification is made to 

the proposed regulations with respect to 

effectively connected E&P. 

A comment also requested 

confirmation that a distribution of 

previously taxed E&P in the last taxable 

year of a CFC beginning before January 

1, 2018, can affect an E&P deficit foreign 

corporation’s specified E&P deficit. 

Because previously taxed E&P can only 

be distributed pursuant to a dividend, 

which, pursuant to section 316, requires 

positive E&P, the Treasury Department 

and IRS have determined that a 

distribution of previously taxed E&P 

could not affect a specified E&P deficit. 

Accordingly, the comment is not 

adopted. 

K. Application of Attribution Rules for 

Purposes of Determining Status of 

Foreign Corporation as a Specified 

Foreign Corporation 

To limit the administrative and 

compliance difficulties associated with 

determining whether a foreign 

corporation is a specified foreign 

corporation solely by reason of 

downward attribution of its stock under 

section 318(a)(3)(A) from a partner to a 

partnership when the partner has only 

a de minimis interest in the partnership, 

proposed § 1.965–1(f)(45)(ii) provides a 

special attribution rule for purposes of 

determining whether a foreign 

corporation is a specified foreign 

corporation within the meaning of 

section 965(e)(1)(B) and proposed 

§ 1.965–1(f)(45)(i)(B). Specifically, the 

definition of specified foreign 

corporation provides that, solely for 

purposes of determining whether a 

foreign corporation is a specified foreign 

corporation within the meaning of 

section 965(e)(1)(B), stock owned, 

directly or indirectly, by or for a partner 

(‘‘tested partner’’) will not be considered 

as being owned by a partnership under 

sections 958(b) and 318(a)(3)(A) if the 

tested partner owns less than five 

percent of the interests in the 

partnership’s capital and profits. 

Proposed § 1.965–1(f)(45)(ii). Similar 

rules apply with respect to S 

corporations. See sections 318(a)(5)(E) 

and 1373(a). 

1. Downward Attribution to Trusts 

A comment requested that the final 

regulations adopt a similar rule for 

trusts, noting that downward attribution 

of stock to trusts is also possible when 

a beneficiary has a de minimis interest 

in the trust, unless that interest is a 

remote contingent interest. See section 

318(a)(3)(B). The Treasury Department 

and the IRS agree that downward 

attribution of stock to a trust from de 

minimis beneficiaries of the trust 

presents similar administrative and 

compliance difficulties to those 

addressed in the proposed regulations. 

Accordingly, the final regulations 

extend the special rules concerning 

downward attribution (as modified per 

the discussion in Part II.K.2 of this 

Summary of Comments and Explanation 

of Revisions) to trusts. See § 1.965– 

1(f)(45)(ii)(A)(2). 

2. Other Relief From Attribution 

A comment indicated that, in 

determining specified foreign 

corporation status under section 

965(e)(1)(B), the final regulations should 

take into account domestic corporations 

that are United States shareholders only 

if they own (within the meaning of 

section 958(a)) stock of the specified 

foreign corporation. Another comment 

indicated that the Treasury Department 

and the IRS should generally consider 

additional de minimis constructive 

ownership exceptions in determining 

specified foreign corporation status 

without specifically identifying the 

nature of such relief. A comment also 

recommended that the five percent 

threshold in proposed § 1.965– 

1(f)(45)(ii) be increased to a more 

significant percentage, such as ten 

percent. A similar comment suggested 

that the five percent threshold apply 

only to managing and controlling 

partners, and that a threshold of fifteen 

percent apply to partners who have no 

ability to manage or control the 

partnership. In response to these 

comments, the Treasury Department 

and the IRS have determined that a tenpercent threshold for application of the 

special attribution rules relating to 

partnerships and trusts would strike the 

appropriate balance between mitigating 

administrative and compliance burdens 

and accurately identifying which 

foreign corporations are, in fact, 

specified foreign corporations. 

Accordingly, the final regulations 

increase the threshold for application of 

this special attribution rule for 

partnerships from five percent to ten 

percent, and similarly use a ten-percent 

threshold for the newly-added special 

attribution rule for trusts. 

Another comment suggested that a 

foreign corporation that is a CFC solely 

by reason of downward attribution not 

be treated as a CFC for purposes of 

determining whether it is a specified 

foreign corporation with respect to a 

United States shareholder that is not a 

related person (within the meaning of 

section 954(d)(3)) with respect to the 

domestic corporation to which 

ownership was attributed. Nothing in 

the plain statutory language of section 

965 or 958(b), as amended by the Act, 

prevents the application of section 

318(a)(3) so as to treat a foreign 

corporation as a CFC with respect to a 

United States shareholder as a result of 

downward attribution of stock from a 

foreign person to a United States person 

if the United States person and the 

United States shareholder are not 

related persons as defined by section 

954(d)(3). Furthermore, it may benefit 

taxpayers for a specified foreign 

corporation with respect to which 

section 965 would otherwise apply to be 

respected as a CFC for purposes of 

section 965, as that could permit 

deemed paid credits to be claimed with 

respect to a section 965(a) inclusion 

with respect to the specified foreign 

corporation that would not otherwise be 

permitted. Consistent with the statutory 

text, the final regulations therefore do 

not adopt the exclusion from the 

definition of specified foreign 

corporation recommended by the 

comment. 

3. Application of Section 318(a)(5)(A) 

and (C) 

A comment stated that Example 1 and 

Example 2 in proposed § 1.965–1(g), 

which illustrate the special attribution 

rule, apply section 318(a)(5)(A) and 

(a)(5)(C) inconsistently with informal 

advice issued by the IRS. Because the 

interpretation of those provisions 

reflected in the examples is irrelevant to 

the application of the special attribution 

rule, the final regulations modify the 

examples to avoid the issue raised by 

the comment. See § 1.965–1(g)(1) and 

(2). No inference, however, is intended 

regarding the proper interpretation of 

section 318(a)(5)(A) and (a)(5)(C). 

1846 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

III. Comments and Changes to Proposed 

§ 1.965–2—Adjustments to E&P and 

Basis 

Proposed § 1.965–2 contains rules 

relating to adjustments to E&P and basis 

to determine and account for the 

application of section 965(a) and (b) and 

proposed § 1.965–1(b), and a rule that 

limits the amount of gain recognized in 

connection with the application of 

section 961(b)(2). The comments and 

modifications with respect to these rules 

are discussed in this Part III. 

A. Ordering Rule 

The proposed regulations set forth an 

ordering rule relating to adjustments to 

E&P for purposes of determining a 

section 958(a) U.S. shareholder’s 

inclusions under section 951(a)(1) and 

the treatment of distributions under 

section 959. See proposed § 1.965–2(b). 

1. Application in the Case of E&P 

Measurement Dates in Two Taxable 

Years 

The Treasury Department and the IRS 

have determined that the ordering rule’s 

limited application to E&P for a 

specified foreign corporation’s last 

taxable year beginning before January 1, 

2018, is too narrow, given that it is 

intended to apply for purposes of 

determining post-1986 earnings and 

profits and accumulated post-1986 

deferred foreign income on the E&P 

measurement date on November 2, 

2017; that measurement date may not 

fall within a specified foreign 

corporation’s last taxable year beginning 

before January 1, 2018. The final 

regulations address this issue by 

providing that the ordering rule applies 

for the taxable year of a specified foreign 

corporation in which an E&P 

measurement date occurs, as well as for 

the last taxable year of a specified 

foreign corporation that begins before 

January 1, 2018. 

2. Section 1248 

Comments have also raised questions 

about the proper point in the sequence 

at which to determine and take into 

account inclusions under section 1248. 

Although one comment suggested that 

section 965 should be taken into 

account before section 1248 amounts are 

determined, the Treasury Department 

and the IRS have determined that such 

an approach would not mitigate double 

taxation in the case of a sale in which 

the buyer (as opposed to the seller, as 

in the example provided by the 

comment) was subject to tax under 

section 965. However, such double 

taxation is mitigated by the approach 

suggested by another comment and 

taken by the final regulations, which 

provide that, for purposes of the 

ordering rules, section 1248 amounts are 

determined at the same time as the 

determination of amounts included 

under section 951(a)(1)(A) other than 

amounts included by reason of section 

965. As a result, section 1248 amounts 

are determined before, and may reduce, 

a buyer’s section 965(a) inclusion 

amount with respect to a DFIC. The 

application of the ordering rule in 

connection with a sale to which section 

1248 applies is illustrated in a new 

example in § 1.965–2(j)(6). 

The comment also suggested that the 

final regulations include an example 

addressing the interaction of the section 

367 gain recognition agreement rules 

and the determination of section 965(a) 

inclusions. The Treasury Department 

and the IRS have determined that those 

rules are outside of the scope of these 

regulations and do not adopt the 

comment. 

3. Interaction of Ordering Rule, Foreign 

Tax Credit Rules, and Disregard Rules 

Comments have raised questions 

concerning the interaction of the 

ordering rule with the rule disregarding 

payments in proposed § 1.965–4(f) and 

the determination of the foreign tax 

credit consequences of inclusions with 

respect to, and distributions by, a 

specified foreign corporation. 

The final regulations address these 

issues by providing rules concerning the 

ordering of the determination of foreign 

income taxes deemed paid with respect 

to an inclusion or distribution, after the 

E&P adjustments are determined in 

accordance with § 1.965–2(b). The final 

regulations provide that for purposes of 

determining the consequences under 

sections 902 and 960 of a dividend or 

an inclusion under section 951(a)(1), 

respectively, the ordering rule in 

§ 1.960–1(i)(2) applies except that 

section 902 is applied with respect to 

any distributions from the specified 

foreign corporation described in 

§ 1.965–2(b)(2) that are not disregarded 

under § 1.965–4 before section 960 is 

applied with respect to an inclusion or 

a distribution described in § 1.965– 

2(b)(3), (b)(4), or (b)(5). Section 1.965– 

2(b). As discussed in more detail in 

Parts VI.C.3 and 4 of this Summary of 

Comments and Explanation of 

Revisions, the final regulations confirm 

that the other rules of sections 902 and 

960 apply. See § 1.965–6(b). The final 

regulations also provide that the E&P 

consequences of a distribution between 

specified foreign corporations that is 

disregarded for purposes of section 965 

pursuant to § 1.965–4 are redetermined 

after adjustments for section 965(a) 

inclusions, at the same time that the 

consequences of other distributions are 

determined. See § 1.965–2(b)(1) and (4). 

Modified and new examples illustrate 

the determination of the section 902 

consequences of a distribution between 

specified foreign corporations before 

November 2, 2017, before the 

determination of the section 960 

consequences of a section 965(a) 

inclusion and the foreign tax credit 

consequences of a distribution 

disregarded pursuant to § 1.965–4. See 

§ 1.965–2(j)(1) and (4). 

A comment recommended that the 

ordering rule be further modified to 

allow the foreign tax credit 

consequences of a distribution to a 

United States shareholder to be 

determined before applying section 965. 

The Treasury Department and the IRS 

decline to adopt the recommendation 

because ordering section 965(a) 

inclusions before distributions to United 

States shareholders is required to be 

consistent with section 965(d)(3)(B), 

which precludes diminution of post1986 earnings and profits by 

distributions during the relevant year 

other than by dividends distributed to 

another specified foreign corporation, as 

well as to be consistent with the general 

treatment of inclusions under section 

951 as being taken into account before 

distributions, as discussed in this Part 

III.A.3. 

B. Adjustments to the E&P of DFICs 

Under proposed § 1.965–2(c), the E&P 

of a DFIC that are described in section 

959(c)(3) (or that would be described in 

section 959(c)(3) but for the application 

of section 965(a) and the section 965 

regulations) are reduced (or, in the case 

of a deficit, increased) by an amount 

equal to the DFIC’s section 965(a) 

previously taxed earnings and profits. A 

comment requested that the final 

regulations clarify that earnings 

described in section 959(c)(3) cannot be 

reduced below zero by reason of the rule 

in proposed § 1.965–2(c), in order to 

ensure that the DFIC would be able to 

make a distribution of the section 965(a) 

previously taxed earnings and profits. 

The comment was also concerned that 

a deficit in E&P described in section 

959(c)(3) could prevent foreign income 

taxes accrued on future subpart F 

income from being deemed paid with 

respect to inclusions under section 

951(a)(1)(A) with respect to such 

income and requested that, in the 

alternative, guidance be provided 

allowing foreign income taxes to be 

deemed paid under those 

circumstances. The sum of a foreign 

corporation’s E&P described in each of 

the categories in section 959(c) must 

equal the foreign corporation’s total 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1847 

E&P. See Rev. Rul. 86–131, 1986–2 C.B. 

135 (‘‘[T]he section 959(c) components 

are intended to reflect the composition 

of the CFC’s total earnings and 

profits. . . .’’). In order to ensure that a 

specified foreign corporation’s E&P are 

not distorted by the adjustment to 

section 959(c)(2) E&P required by the 

proposed regulations, the Treasury 

Department and the IRS have 

determined that it is appropriate for the 

reduction provided for in proposed 

§ 1.965–2(c) to create a deficit in E&P 

described in section 959(c)(3) if there 

are insufficient E&P to be reclassified 

and accordingly do not adopt the 

comment. The suggestion concerning 

deemed paid taxes is outside of the 

scope of this rulemaking. 

Under proposed § 1.965–2(d)(1), the 

E&P described in section 959(c)(2) of a 

DFIC are increased by an amount equal 

to the reduction to a section 958(a) U.S. 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

DFIC under section 959(b), ‘‘provided 

the section 958(a) U.S. shareholder 

includes the section 965(a) inclusion 

amount with respect to the deferred 

foreign income corporation in income.’’ 

A comment noted that the rule would 

seem to preclude the creation of section 

965(b) previously taxed earnings and 

profits in a DFIC if its section 965(a) 

earnings amount was completely offset 

by section 958(a) U.S. shareholders’ 

aggregate foreign E&P deficits. Because 

the rule was intended to limit the 

availability of section 965(b) previously 

taxed earnings and profits to situations 

in which a section 965(a) inclusion 

amount was included only if there was 

a section 965(a) inclusion amount, the 

rule is revised to so clarify. See § 1.965– 

2(d)(1). 

Comments also requested that the 

final regulations clarify that section 

965(b) previously taxed earnings and 

profits are treated as E&P attributable to 

an amount previously included in the 

income of a person under section 951 

for purposes of section 1248(d)(1). The 

Treasury Department and the IRS have 

determined that this treatment is 

appropriate, notwithstanding the fact 

that, as discussed in Part III.D.2 of this 

Summary of Comments and Explanation 

of Revisions, these amounts have not 

been included in income under section 

951, because it is necessary to ensure 

the ability to take into account section 

965(b) previously taxed earnings and 

profits upon a disposition of specified 

foreign corporation stock. Accordingly, 

the final regulations reflect this 

clarification. See § 1.965–2(d)(1). 

C. Adjustments to the E&P Described in 

Section 959(c)(3) of E&P Deficit Foreign 

Corporations 

Under the proposed regulations, the 

E&P described in section 959(c)(3) of an 

E&P deficit foreign corporation are 

increased by an amount equal to the 

portion of a section 958(a) U.S. 

shareholder’s pro rata share of the 

specified E&P deficit of the E&P deficit 

foreign corporation taken into account 

under section 965(b), translated (if 

necessary) into the functional currency 

of the E&P deficit foreign corporation 

using the spot rate on December 31, 

2017. Proposed § 1.965–2(d)(2)(i)(A). A 

comment recommended that the 

proposed regulations be modified such 

that any increase to the earnings and 

profits described in section 959(c)(3) of 

an E&P deficit foreign corporation is 

allocated only to a section 958(a) U.S. 

shareholder that takes into account its 

E&P deficit foreign corporation’s 

specified E&P deficit under section 

965(b) and not to any other shareholders 

of the E&P deficit foreign corporation. 

E&P described in section 959(c)(3) are 

not generally allocated to specific 

shareholders, and creating a rule that 

tracks section 959(c)(3) E&P resulting 

from a section 958(a) U.S. shareholder’s 

use of each E&P deficit foreign 

corporation’s specified E&P deficit in a 

shareholder-level account would entail 

considerable complexity. Accordingly, 

the final regulations do not adopt the 

recommended change. See § 1.965– 

2(d)(2)(i)(A). 

D. Basis Election 

1. Requirements for Making and 

Revoking Basis Election 

The proposed regulations clarify that, 

in general, no adjustments to basis of 

stock or property are made under 

section 961 (or any other provision of 

the Code) to account for the reduction 

to a section 958(a) U.S. shareholder’s 

pro rata share of the section 965(a) 

earnings amount of a DFIC by a portion 

of its aggregate foreign E&P deficit. See 

proposed § 1.965–2(f)(1). However, 

consistent with the legislative history, 

the proposed regulations allow a section 

958(a) U.S. shareholder to elect to make 

certain basis adjustments (‘‘specified 

basis adjustments’’) with respect to each 

DFIC and each E&P deficit foreign 

corporation. Proposed § 1.965–2(f)(2). 

Specifically, an election under the 

proposed regulations allows a section 

958(a) U.S. shareholder’s basis in the 

section 958(a) stock of a DFIC or 

applicable property with respect to the 

DFIC to be increased by an amount 

equal to the section 965(b) previously 

taxed earnings and profits of the DFIC 

with respect to the section 958(a) U.S. 

shareholder. See proposed § 1.965– 

2(f)(2)(ii)(A). The basis election also 

requires that the section 958(a) U.S. 

shareholder’s basis in the section 958(a) 

stock of an E&P deficit foreign 

corporation or applicable property with 

respect to an E&P deficit foreign 

corporation be reduced by an amount 

equal to the portion of the section 958(a) 

U.S. shareholder’s pro rata share of the 

specified E&P deficit of the E&P deficit 

foreign corporation taken into account 

under the reduction rules. See proposed 

§ 1.965–2(f)(2)(ii)(B). 

The proposed regulations provide the 

general rule that the basis election must 

be made no later than the due date 

(taking into account extensions, if any) 

for the section 958(a) U.S. shareholder’s 

return for the first taxable year that 

includes the last day of the last taxable 

year of a DFIC or E&P deficit foreign 

corporation of the section 958(a) U.S. 

shareholder that begins before January 

1, 2018. Proposed § 1.965– 

2(f)(2)(iii)(B)(1)(i). If the relevant return 

was due before September 10, 2018, the 

proposed regulations provide that the 

basis election must be made by October 

9, 2018 (the ‘‘transition rule’’). Proposed 

§ 1.965–2(f)(2)(iii)(B)(1)(ii). The 

proposed regulations further require 

that, in order for the basis election to be 

effective, a section 958(a) U.S. 

shareholder and each section 958(a) 

U.S. shareholder that is related to the 

section 958(a) U.S. shareholder under 

section 267(b) or 707(b) (‘‘related 

section 958(a) U.S. shareholder’’) must 

make the election. Proposed § 1.965– 

2(f)(2)(iii)(A). 

Section 2 of Notice 2018–78 

announced that the Treasury 

Department and the IRS had determined 

that requiring taxpayers to make a 

binding basis election before the 

finalization of the proposed regulations 

would be too onerous for taxpayers. 

Consistent with that announcement, the 

final regulations provide that the 

transition rule will apply with respect to 

returns due (determined with regard to 

any extension) before May 6, 2019, and 

that in such cases the basis election 

must be made no later than May 6, 2019. 

Section 1.965–2(f)(2)(iii)(B)(1)(ii). 

Additionally, as explained in section 2 

of Notice 2018–78, the final regulations 

provide that if a basis election was made 

on or before February 5, 2019, the basis 

election may be revoked by attaching a 

statement to an amended return filed no 

later than May 6, 2019. Id. 

Clarification was requested regarding 

whether a basis election must be made 

by a related section 958(a) U.S. 

shareholder if that shareholder owns a 

DFIC but does not own an E&P deficit 

1848 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

foreign corporation and does not reduce 

its pro rata share of any section 965(a) 

earnings amount under section 965(b), 

proposed § 1.965–1(b)(2), or proposed 

§ 1.965–8(b). The Treasury Department 

and the IRS have concluded that the 

requirement to make a basis election 

should not apply to such persons. 

Accordingly, the final regulations 

provide that the basis election must be 

made by a section 958(a) U.S. 

shareholder and any related section 

958(a) U.S. shareholder of an E&P 

deficit foreign corporation or of a DFIC 

with respect to which the section 958(a) 

U.S. shareholder’s pro rata share of the 

section 965(a) earnings amount is 

reduced under section 965(b), § 1.965– 

1(b)(2), or § 1.965–8(b). Section 1.965– 

2(f)(2)(iii)(A). However, the final 

regulations do not adopt a comment’s 

suggestion that the consistency 

requirement be eliminated in its entirety 

because the Treasury Department and 

the IRS have determined that the 

requirement is necessary to prevent 

related taxpayers from applying the 

rules only where they are advantageous. 

Another comment requested that the 

basis election be considered made by 

default unless a taxpayer affirmatively 

elects not to make specified basis 

adjustments. Given the potentially 

significant ramifications of the specified 

basis adjustments, the Treasury 

Department and the IRS have 

determined that providing for automatic 

basis adjustments and putting the onus 

on taxpayers to affirmatively elect out is 

not appropriate. Accordingly, the 

comment is not adopted. 

2. Level and Consequences of Basis 

Adjustments 

Comments requested that the final 

regulations provide that positive basis 

adjustments with respect to section 

965(b) previously taxed earnings and 

profits apply down a chain of foreign 

corporations under section 961(c) and 

thus that they apply by default, such 

that the basis election and its 

concomitant downward basis 

adjustments with respect to E&P deficit 

foreign corporations need not be made. 

Comments also suggested that even if 

downward basis adjustments were 

required, the final regulations should 

not require them to be made for the 

entire amount of a specified E&P deficit 

taken into account, but instead allow 

taxpayers to elect an amount of basis 

that ‘‘shifted.’’ The comments were 

particularly concerned that downward 

adjustments not offset upward 

adjustments. Comments also 

recommended that the final regulations 

not require gain recognition to the 

extent that downward basis adjustments 

would exceed basis, and that, if such 

gain recognition is required, a special 

reduced rate of tax be provided for such 

gain. 

The Treasury Department and the IRS 

have determined that it is clear under 

proposed § 1.965–2(f)(1) that no 

adjustments are made under section 961 

with respect to section 965(b) 

previously taxed earnings and profits, 

given that section 965(b) previously 

taxed earnings and profits do not 

represent amounts included in income 

by a section 958(a) U.S. shareholder, as 

required by section 961, and that 

adjustments apply only with respect to 

section 958(a) stock or applicable 

property owned directly by a section 

958(a) U.S. shareholder (or in certain 

cases, through foreign pass-through 

entities). Id. Accordingly, the final 

regulations do not modify the proposed 

regulations in this regard. 

The Treasury Department and the IRS 

have also determined that it would 

create economic distortions to provide 

for upward basis adjustments with 

respect to section 965(b) previously 

taxed earnings and profits without 

providing for corresponding downward 

basis adjustments with respect to 

portions of specified E&P deficits taken 

into account to reduce section 965(a) 

inclusion amounts and requiring gain 

recognition to the extent such 

adjustments exceed basis. Accordingly, 

it would not be appropriate to provide 

that section 965(b) previously taxed 

earnings and profits are treated as 

included in income under section 951 

for purposes of section 961, even though 

the final regulations provide as much 

for purposes of section 1248(d), as 

discussed in Part III.B of this Summary 

of Comments and Explanation of 

Revisions. Moreover, the Treasury 

Department and the IRS have concluded 

that rules coordinating upward and 

downward tiered-basis adjustments are 

not warranted. Additionally, given the 

electivity of the specified basis 

adjustments and the ability of taxpayers 

to take into account factors like the tax 

rate at which gain is recognized as a 

result of the basis election, the Treasury 

Department and the IRS decline to 

provide rules resulting in the 

application of a special tax rate to such 

gain. 

However, the Treasury Department 

and the IRS have determined that it is 

appropriate to not require downward 

basis adjustments in excess of basis (in 

order to avoid gain recognition under 

§ 1.965–2(h)(3) to the extent of such 

excess) if the corresponding upward 

basis adjustments are correspondingly 

limited. Accordingly, § 1.965– 

2(f)(2)(ii)(B)(2) provides that downward 

basis adjustments to the stock of, or 

applicable property with respect to, an 

E&P deficit foreign corporation may be 

limited to the available basis with the 

result that gain is not recognized (the 

‘‘to-the-extent rule’’). If the to-the-extent 

rule limits downward basis adjustments, 

the corresponding upward basis 

adjustments are correspondingly 

limited. See § 1.965–2(f)(2)(ii)(A)(2)(ii). 

However, the section 958(a) U.S. 

shareholder can (subject to certain 

limitations) designate the stock of, or 

applicable property with respect to, a 

DFIC with respect to which the upward 

adjustments are made. Id. A taxpayer 

may also choose to make the full 

amounts of the adjustments that would 

have been required under the proposed 

regulations and recognize gain under 

§ 1.965–2(h)(3) as necessary. See 

§ 1.965–2(f)(2)(ii)(A)(1) and 

(f)(2)(ii)(B)(1). 

3. Timing of Basis Adjustments 

The proposed regulations provide that 

the specified basis adjustments are 

made as of the close of the last day of 

the last taxable year of the specified 

foreign corporation that begins before 

January 1, 2018. Proposed § 1.965– 

2(h)(1). Questions have been raised 

about the application of the proposed 

rules in the case of a specified foreign 

corporation that ceases to be a CFC 

during its last taxable year of the 

specified foreign corporation that begins 

before January 1, 2018, due to a 

disposition of its stock. As discussed in 

Part II.H of this Summary of Comments 

and Explanation of Revisions, under 

section 951, a section 958(a) U.S. 

shareholder of such a specified foreign 

corporation would generally have an 

inclusion under section 951 with 

respect to the corporation if it were a 

DFIC because it would own stock of the 

specified foreign corporation on the last 

day on which the corporation was a 

controlled foreign corporation. 

Accordingly, under § 1.961–1(a), a basis 

adjustment would generally be allowed 

as of the last day in the taxable year of 

such corporation on which it is a 

controlled foreign corporation. 

As discussed in Part II.H of this 

Summary of Comments and Explanation 

of Revisions, because a specified foreign 

corporation is treated as a CFC for 

purposes of § 1.965–1(b) and sections 

951 and 961, the Treasury Department 

and the IRS have determined that 

income inclusion provisions in the final 

regulations should be consistent with 

these rules, and thus the basis 

adjustment provisions should as well, 

and the relevant rules in the final 

regulations are revised accordingly. See 

§§ 1.965–1(f)(30)(i) and (f)(34) and 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1849 

1.965–2(h)(1) (providing that a specified 

basis adjustment is made as of the last 

day of the last taxable year of the 

specified foreign corporation that begins 

before January 1, 2018, on which it is a 

specified foreign corporation). 

4. Share-by-Share Requirement for Basis 

Adjustments 

Proposed § 1.965–2(h)(3) requires that 

the specified basis adjustments be made 

on a share-by-share basis. A comment 

suggested that the specified basis 

adjustments be made in the aggregate to 

mitigate taxpayer burden in tracking 

and prevent what it described as 

inappropriate gain recognition. 

However, adjustments to basis under 

section 961 for inclusions under section 

951 and distributions of previously 

taxed E&P are generally required to be 

made on a share-by-share basis, and it 

will be necessary to have information 

concerning basis share-by-share going 

forward. Furthermore, the to-the-extent 

rule included in the final regulations 

will provide relief to taxpayers that have 

low-basis and high-basis shares. 

Accordingly, the comment is not 

adopted. 

5. Basis Adjustments With Respect to 

Foreign Pass-Through Entity 

A comment suggested that the final 

regulations provide that for purposes of 

the specified basis adjustments with 

respect to foreign pass-through entities, 

the principles of section 743(b) apply 

for associating a specified basis 

adjustment with a section 958(a) U.S. 

shareholder with respect to whom it is 

made. The comment also recommended 

clarification of the basis consequences 

of a distribution in a structure with a 

foreign pass-through entity. The 

Treasury Department and the IRS will 

consider these recommendations in 

connection with future guidance 

concerning the application of sections 

959 and 961 generally. 

See Part II.B of this Summary of 

Comments and Explanation of Revisions 

for a discussion of the treatment of a 

controlled domestic partnership treated 

as a foreign partnership under § 1.965– 

1(e) for purposes of the specified basis 

adjustment rules relating to foreign 

pass-through entities. 

6. Section 962 Elections 

The proposed regulations reserve on 

the issue of basis adjustments with 

respect to a section 958(a) U.S. 

shareholder that made a section 962 

election. A comment noted that section 

961(a)’s limitation on a basis increase to 

the amount of tax paid under chapter 1 

of the Code with respect to amounts 

required to be included in income under 

section 951(a) (in the case of a United 

States shareholder who has made a 

section 962 election for the taxable year) 

means that a section 958(a) U.S. 

shareholder that makes a section 965(h) 

election may only increase its basis as 

it pays its section 965(h) net tax liability 

over time. As suggested by the 

comment, the final regulations include 

this rule. See § 1.965–2(e)(2) and (h)(1). 

Consistent with this rule, no 

adjustments apply for section 965(b) 

previously taxed earnings and profits 

and the use of specified E&P deficits. 

See § 1.965–2(f)(2)(ii)(C). 

A comment requested that the final 

regulations provide guidance 

concerning the consequences if an 

individual section 958(a) U.S. 

shareholder that made both a section 

962 election and a section 965(h) 

election that applied to a section 965(a) 

inclusion with respect to a DFIC 

disposed of the DFIC stock before all of 

its section 965(h) net tax liability had 

been paid, and thus before all 

corresponding basis adjustments had 

been made. The comment recommended 

that the basis adjustments be treated as 

made immediately before the 

disposition. The Treasury Department 

and the IRS have determined that this 

treatment would not be appropriate, 

because it would allow the shareholder 

to obtain the benefits of the basis 

increase without having paid the 

corresponding tax, and do not adopt the 

comment. 

The comment also requested that the 

final regulations clarify the basis 

adjustments to be made in the case of 

a domestic pass-through owner that has 

made a section 962 election applicable 

to its distributive share of a domestic 

pass-through entity’s section 965(a) 

inclusion amount. The issue raised by 

the comment is a longstanding issue of 

general applicability within subpart F 

that is outside of the scope of 

regulations concerning section 965. 

Accordingly, the Treasury Department 

and the IRS decline to adopt the 

comment, and the final regulations, like 

the proposed regulations, address only 

basis adjustments applicable to section 

958(a) U.S. shareholders of DFICs. 

E. Gain Reduction Rule and Translation 

Rates 

The proposed regulations provide 

that, for purposes of section 986(c), 

foreign currency gain or loss with 

respect to distributions of section 965(a) 

previously taxed earnings and profits is 

determined based on movements in the 

exchange rate between December 31, 

2017, and the date on which such E&P 

are actually distributed. See proposed 

§ 1.986(c)–1(a). The proposed 

regulations also provide that any gain or 

loss recognized under section 986(c) 

with respect to distributions of section 

965(a) previously taxed earnings and 

profits is reduced in the same 

proportion as the reduction by a section 

965(c) deduction amount of the section 

965(a) inclusion amount that gave rise 

to such section 965(a) previously taxed 

earnings and profits. See proposed 

§ 1.986(c)–1(b). Moreover, proposed 

§ 1.986(c)–1(c) provides that section 

986(c) does not apply with respect to 

distributions of section 965(b) 

previously taxed earnings and profits. 

The proposed regulations also provide 

that if a section 958(a) U.S. shareholder 

receives a distribution from a DFIC 

(including through a chain of ownership 

described under section 958(a)) during 

the inclusion year of the DFIC that is 

attributable to section 965 previously 

taxed earnings and profits of the DFIC, 

then the amount of gain that otherwise 

would be recognized under section 

961(b)(2) by the section 958(a) U.S. 

shareholder with respect to the section 

958(a) U.S. shareholder’s section 958(a) 

stock of the DFIC or interest in 

applicable property with respect to the 

DFIC by reason of the distribution is 

reduced (but not below zero) by an 

amount equal to the section 965 

previously taxed earnings and profits of 

the DFIC with respect to the section 

958(a) U.S. shareholder. Proposed 

§ 1.965–2(g)(1)(i). 

The proposed regulations do not 

specify the translation rate to be used 

for purposes of reducing the amount of 

gain that otherwise would be recognized 

under section 961(b)(2) when a DFIC 

that has a functional currency other 

than the U.S. dollar distributes section 

965(b) previously taxed earnings and 

profits. In the absence of a rule 

providing that section 965(b) previously 

taxed earnings and profits should be 

translated into U.S. dollars at the spot 

rate on December 31, 2017, fluctuations 

in exchange rates would cause 

distortions in the application of the gain 

reduction rule to distributions of section 

965(b) previously taxed earnings and 

profits. For example, distributions of 

section 965(b) previously taxed earnings 

and profits denominated in a currency 

other than the U.S. dollar during an 

inclusion year could result in gain 

recognition attributable to fluctuations 

in exchange rates, notwithstanding the 

fact that proposed § 1.986(c)–1 

specifically provides that a taxpayer is 

not required to recognize foreign 

currency gain or loss on such 

distributions. To prevent recognition of 

gain under these circumstances, the 

final regulations provide that the 

translation rate to be used with respect 

1850 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

to section 965(b) previously taxed 

earnings and profits for purposes of the 

gain reduction rule is the spot rate on 

December 31, 2017. 

The Treasury Department and the IRS 

are considering proposing regulations 

under section 961 to similarly ensure 

that a taxpayer is not required to 

recognize gain by reason of fluctuations 

in exchange rates on distributions of 

section 965(b) previously taxed earnings 

and profits in taxable years after the 

inclusion year. In addition, the Treasury 

Department and the IRS intend to study 

the proper amount of gain or loss, 

including foreign currency gain or loss, 

to be recognized on distributions of 

previously taxed E&P, including 

previously taxed E&P other than section 

965(a) previously taxed earnings and 

profits and section 965(b) previously 

taxed earnings and profits. 

IV. Comments and Changes to Proposed 

§ 1.965–3—Section 965(c) Deductions 

Proposed § 1.965–3 provides rules 

regarding the determination of section 

965(c) deductions and section 965(c) 

deduction amounts. The comments and 

modifications with respect to these rules 

are discussed in this Part IV. 

A. Disregard of Certain Assets To 

Prevent Double Counting 

The proposed regulations contain 

rules for disregarding certain assets for 

purposes of determining the aggregate 

foreign cash position of a section 958(a) 

U.S. shareholder. See proposed § 1.965– 

3(b). 

1. Disregard of Certain Obligations 

Between Related Specified Foreign 

Corporations 

One such rule in the proposed 

regulations provides that, for purposes 

of determining the aggregate foreign 

cash position of a section 958(a) U.S. 

shareholder, accounts receivable, 

accounts payable, short-term 

obligations, and derivative financial 

instruments between related specified 

foreign corporations are disregarded, if 

applicable, on a cash measurement date 

of the specified foreign corporations to 

the extent of the smallest of the section 

958(a) U.S. shareholder’s ownership 

percentages of section 958(a) stock of 

the specified foreign corporations 

owned by the section 958(a) U.S. 

shareholder on the cash measurement 

date. Proposed § 1.965–3(b)(1). 

A comment suggested that the rule in 

proposed § 1.965–3(b)(1) be extended to 

permit the same treatment for thirdparty accounts payable and third-party 

accounts receivable held by related 

specified foreign corporations of a 

section 958(a) U.S. shareholder. The 

comment also suggested that all 

members of a consolidated group that 

are section 958(a) U.S. shareholders be 

treated as a single section 958(a) U.S. 

shareholder for purposes of such a rule. 

The Treasury Department and the IRS 

do not adopt this comment for several 

reasons. First, although the statute 

explicitly allows third-party accounts 

payable held by a specified foreign 

corporation to be netted against the 

same specified foreign corporation’s 

third-party accounts receivable for 

purposes of determining its cash 

position, it does not provide for netting 

of third-party payables and third-party 

receivables among a section 958(a) U.S. 

shareholder’s specified foreign 

corporations for purposes of 

determining that section 958(a) U.S. 

shareholder’s aggregate foreign cash 

position. See section 965(c)(3)(B)(ii) and 

(c)(3)(C). Second, the statutory language 

and the legislative history direct the 

Secretary to address the double 

counting of accounts receivable and 

accounts payable between related 

specified foreign corporations of a 

section 958(a) U.S. shareholder but do 

not grant authority to issue rules 

allowing one specified foreign 

corporation’s third-party accounts 

payable to offset another specified 

foreign corporation’s third-party 

accounts receivable. See section 

965(c)(3)(D); H.R. Rep. No. 115–446, at 

615 (2017). Furthermore, allowing thirdparty payables and third-party 

receivables of all related specified 

foreign corporations of a section 958(a) 

U.S. shareholder to be netted would 

require administratively onerous 

allocation rules. The final regulations 

therefore do not extend the rule in 

proposed § 1.965–3(b)(1) to cover thirdparty accounts payable and third-party 

accounts receivable held by related 

specified foreign corporations with a 

common section 958(a) U.S. 

shareholder. 

2. Disregard of Other Assets Upon 

Demonstration of Double-Counting 

Another rule in the proposed 

regulations intended to prevent double 

counting provides that, in determining 

the aggregate foreign cash position of a 

section 958(a) U.S. shareholder, 

amounts of net accounts receivable, 

actively traded property, and short-term 

obligations of a specified foreign 

corporation are disregarded to the extent 

such amounts are attributable to 

amounts taken into account in 

determining the section 958(a) U.S. 

shareholder’s pro rata share of the cash 

position of another specified foreign 

corporation on the same cash 

measurement date. Proposed § 1.965– 

3(b)(2). In order for the rule in proposed 

§ 1.965–3(b)(2) to apply, a section 958(a) 

U.S. shareholder must explain, in a 

statement attached to its timely filed 

return for its inclusion year, why there 

would otherwise be double-counting. Id. 

a. Expansion 

Comments recommended that the rule 

in proposed § 1.965–3(b)(2) be expanded 

to cover all assets constituting a 

specified foreign corporation’s cash 

position, which are enumerated in 

section 965(c)(3)(B). Under this 

formulation, a section 958(a) U.S. 

shareholder would be able to disregard 

cash held by its specified foreign 

corporation (or any other asset 

described in section 965(c)(3)(B)) on a 

cash measurement date to the extent 

attributable to amounts already taken 

into account in determining the section 

958(a) U.S. shareholder’s pro rata share 

of the cash position of another specified 

foreign corporation on such cash 

measurement date. 

The Treasury Department and the IRS 

do not adopt this recommendation for a 

number of reasons. First, extending the 

rule in proposed § 1.965–3(b)(2) to 

apply to assets other than net accounts 

receivable, actively traded property, and 

short-term obligations would be 

inconsistent with section 965(c)(3)(D), 

which expressly identifies net accounts 

receivable, actively traded property, and 

short-term obligations as assets not to be 

taken into account by a section 958(a) 

U.S. shareholder for purposes of 

determining its aggregate foreign cash 

position to the extent the shareholder 

demonstrates to the Secretary’s 

satisfaction that such amount is so taken 

into account by the shareholder with 

respect to another specified foreign 

corporation. The other assets described 

in section 965(c)(3)(C), including cash, 

are not mentioned in section 

965(c)(3)(D). Second, the Treasury 

Department and the IRS have 

determined that expanding the rule in 

proposed § 1.965–3(b)(2) to cover all 

assets taken into account in determining 

a specified foreign corporation’s cash 

position would require complex tracing 

rules to ensure that each asset was 

already taken into account by a section 

958(a) U.S. shareholder with respect to 

another specified foreign corporation 

and have determined that such rules 

would entail significant administrative 

and compliance challenges. 

Accordingly, the final regulations do not 

expand the rule in proposed § 1.965– 

3(b)(2) to allow a section 958(a) U.S. 

shareholder to disregard assets other 

than those specifically enumerated in 

section 965(c)(3)(D). 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1851 

b. Clarification of Cash Measurement 

Dates 

Comments also recommended that the 

rule in proposed § 1.965–3(b)(2) be 

clarified so that relief from doublecounting is available with respect to a 

specified foreign corporation when an 

amount is taken into account in 

determining the section 958(a) U.S. 

shareholder’s pro rata share of the cash 

position of another specified foreign 

corporation on such other specified 

foreign corporation’s corresponding 

cash measurement date even if the cash 

measurement date is not the same 

calendar date for both specified foreign 

corporations. 

The Treasury Department and the IRS 

have concluded that section 965(c)(3)(D) 

allows relief from double counting 

whenever a section 958(a) U.S. 

shareholder can establish that net 

accounts receivable, actively traded 

property, or short-term obligations are 

‘‘taken into account . . . with respect to 

another specified foreign corporation.’’ 

The statute does not require that an 

amount must have been taken into 

account with respect to another 

specified foreign corporation on the 

same day. Therefore, in response to the 

comments, the final regulations amend 

the rule in proposed § 1.965–3(b)(2) to 

clarify that double-counting relief with 

respect to a specified foreign 

corporation is available when an 

amount is taken into account in 

determining the section 958(a) U.S. 

shareholder’s pro rata share of the cash 

position of another specified foreign 

corporation on the other specified 

foreign corporation’s corresponding 

cash measurement date. Section 1.965– 

3(b)(2). Corresponding clarifications are 

made for consistency in § 1.965–3(b)(1). 

3. Notional Cash Pooling Arrangements 

Comments requested guidance 

providing that for purposes of 

computing a section 958(a) U.S. 

shareholder’s aggregate foreign cash 

position, notional cash pooling 

arrangements are treated as creating 

intercompany receivables. The facts and 

circumstances of each notional cash 

pool, including the underlying 

contractual rights and obligations of the 

parties to the arrangement and the role 

of the unrelated cash pool provider in 

the arrangement, are varied. Whether a 

notional cash pooling arrangement is 

treated as in substance creating a loan 

between and among participants, rather 

than between the participant and the 

unrelated cash pool provider, depends 

on the application of federal income tax 

principles to the particular facts and 

circumstances of the arrangement. 

Accordingly, the Treasury Department 

and the IRS do not adopt these 

comments. 

B. Disregard of Portion of Cash Position 

of Noncorporate Entities Treated as 

Specified Foreign Corporations 

Section 965(c)(3)(E) provides that an 

entity (other than a corporation) is 

treated as a specified foreign 

corporation of a United States 

shareholder for purposes of determining 

the United States shareholder’s 

aggregate foreign cash position if any 

interest in the entity is held by a 

specified foreign corporation of the 

United States shareholder (determined 

after application of the rule in this 

sentence) and the entity, if it were a 

foreign corporation, would be a 

specified foreign corporation of the 

United States shareholder. A comment 

requested confirmation that application 

of section 965(c)(3)(E) to treat a 

noncorporate entity as a specified 

foreign corporation could depend on 

ownership by other owners of the 

noncorporate entity and on the 

definition of United States shareholder 

applicable for the year in which the 

status of a foreign corporation as a 

specified foreign corporation is being 

determined. The Treasury Department 

and the IRS have determined that this 

point is clear from the definition of 

specified foreign corporation. The 

comment also suggested that the 

Treasury Department and the IRS 

consider limitations on attribution for 

purposes of determining whether a 

noncorporate entity would be a 

specified foreign corporation if it were 

a foreign corporation. The Treasury 

Department and the IRS have 

determined that the special attribution 

rule described in Part II.K of this 

Summary of Comments and Explanation 

of Revisions, as modified to a tenpercent threshold in the final 

regulations, would apply for purposes of 

the noncorporate entity rule and that no 

additional limitations are warranted. 

The Treasury Department and the IRS 

have also determined that it is clear 

under the statute that section 951(b) as 

in effect for years of foreign corporations 

beginning before January 1, 2018, 

applies for purposes of determining 

whether a noncorporate entity would be 

a specified foreign corporation if it were 

a foreign corporation for purposes of 

section 965(c)(3)(E), given that the 

relevant year for application of the rule 

is the last taxable year of a foreign 

corporation beginning before January 1, 

2018. 

A comment also requested guidance 

clarifying the application of section 

965(c)(3)(E) to noncorporate entities 

only partially owned by a specified 

foreign corporation. The legislative 

history to section 965(c)(3)(E) indicates 

that it was intended that ‘‘the cash 

position of a U.S. shareholder . . . not 

generally include the cash attributable 

to a direct ownership interest in a 

partnership,’’ and that the Treasury 

Department and the IRS ‘‘provide 

guidance for taking into account only 

the specified foreign corporation’s share 

of the partnership’s cash position, and 

not [an] interest directly owned by the 

U.S. shareholder.’’ H.R. Rep. No. 115– 

446, at 621 (2017). Accordingly, the 

final regulations include a rule in 

§ 1.965–3(b)(3) providing that if section 

965(c)(3)(E) applies to an entity, the 

section 958(a) U.S. shareholder’s pro 

rata share of the cash position of the 

entity is reduced by the amount 

attributable to deemed stock of the 

entity not owned (within the meaning of 

section 958(a)) by a specified foreign 

corporation of the section 958(a) U.S. 

shareholder. This rule is illustrated in 

the example in § 1.965–3(b)(4)(v). 

C. Increase of Income by Section 965(c) 

Deduction of Expatriated Entity 

Under proposed § 1.965–3(d)(1), if a 

person is allowed a section 965(c) 

deduction and becomes an expatriated 

entity, in certain circumstances, the 

person must pay tax equal to 35 percent 

of the person’s section 965(c) 

deductions. See also section 965(l)(1). A 

comment recommended clarifying and 

limiting the definition of expatriated 

entity to exclude United States 

individuals on the theory that the 

reference to ‘‘entity’’ in section 965(l)(2) 

was intended to so provide. Section 

965(l)(2) defines expatriated entity by 

cross-reference to the definition 

provided in section 7874(a)(2), which 

includes not only entities but certain 

persons (which could be individuals) 

related to the entity at issue; therefore, 

the Treasury Department and the IRS 

have determined that section 965(l)(2) 

does not apply only to an entity but 

potentially to any person that is an 

expatriated entity, and the final 

regulations are clarified accordingly. 

See § 1.965–3(d)(2). 

D. Treatment of Section 965(c) 

Deductions 

Under the proposed regulations, a 

United States person that must pay tax 

under section 4940 or 1411 on a section 

965(a) inclusion cannot take into 

account a section 965(c) deduction for 

purposes of determining the amount of 

such tax. See proposed § 1.965–3(f)(3) 

and (4). A comment recommended that 

the section 965(c) deduction be allowed 

for purposes of computing the amount 

1852 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

of tax due under section 1411. It 

suggested that the rule in proposed 

§ 1.965–3(f)(3) was inconsistent with the 

rule in § 1.1411–4(f)(3)(ii), which takes 

into account in determining net 

investment income itemized deductions 

that are investment expenses (as defined 

in section 163(d)(4)(C)). However, 

§ 1.1411–4(f)(3)(ii) is inapplicable 

because § 1.965–3(f)(1) provides that a 

section 965(c) deduction is not an 

itemized deduction. The Treasury 

Department and the IRS have 

determined that the section 965(c) 

deduction was only intended to reduce 

the rate of tax attributable to income 

taxes contained in chapter 1 of the 

Code. See H.R. Rep. No. 115–466, at 620 

(2017). Accordingly, the final 

regulations continue to provide that for 

purposes of section 1411 and § 1.1411– 

4(f)(6), a section 965(c) deduction is not 

treated as a deduction properly 

allocable to a corresponding section 

965(a) inclusion. Section 1.965–3(f)(3). 

Another comment suggested that the 

final regulations clarify whether a 

section 965(c) deduction is taken into 

account for purposes of the tax imposed 

under section 4968. Because section 

4968(c) provides that net investment 

income subject to the tax is determined 

under rules similar to the rules of 

section 4940(c), and § 1.965–3(f)(4) 

provides that for purposes of section 

4940(c)(3)(A), a section 965(c) 

deduction is not treated as an ordinary 

and necessary expense paid or incurred 

for the production or collection of gross 

investment income, the Treasury 

Department and the IRS have 

determined that it is clear that a section 

965(c) deduction is not taken into 

account for purposes of section 4968, 

and no clarification is necessary. The 

comment also requested rules 

addressing the basis of the stock of a 

DFIC for purposes of section 4968; 

however, such rules would be outside of 

the scope of this rulemaking, and the 

request for such guidance is declined. 

The comment also recommended that 

the final regulations clarify that a 

section 965(c) deduction is a deduction 

taken into account under section 62(a) 

in determining an individual’s adjusted 

gross income. The Treasury Department 

and the IRS have determined that such 

treatment is appropriate and the final 

regulations are modified to so provide. 

See § 1.965–3(f)(1). 

V. Comments and Changes to Proposed 

§ 1.965–4—Disregard of Certain 

Transactions 

Proposed § 1.965–4 sets forth rules 

that disregard certain transactions for 

purposes of applying section 965. 

Specifically, proposed § 1.965–4 

provides rules that disregard (i) 

transactions undertaken with a 

principal purpose of changing a section 

965 element of a United States 

shareholder, (ii) certain changes in 

method of accounting and entity 

classification elections, and (iii) certain 

transactions occurring between E&P 

measurement dates. The comments and 

modifications with respect to these rules 

are discussed in this Part V. 

A. Scope and Consequences of AntiAbuse Rules Generally 

The rules under proposed § 1.965– 

4(b) through (e) (‘‘anti-abuse rules’’) 

relate to transactions undertaken with a 

principal purpose of changing a section 

965 element of a United States 

shareholder and certain changes in 

method of accounting and entity 

classification elections. They provide 

that transactions subject to those rules 

are ‘‘disregarded for purposes of 

determining the amounts of all section 

965 elements’’ of a United States 

shareholder. Comments questioned the 

consequences of disregarding a 

transaction under these rules, including 

with respect to certain E&P and foreign 

tax credit calculations. The final 

regulations retain the approach in the 

proposed regulations, which do not 

describe the consequences of 

disregarding a transaction other than the 

consequences with respect to the 

section 965 elements of a United States 

shareholder. A discussion of, or rules 

regarding, the consequences of these 

transactions for other purposes is 

outside the scope of the final 

regulations. However, the Treasury 

Department and the IRS have 

determined that it is appropriate to 

mitigate double taxation that could 

result from the application of the antiabuse rules to a liquidation. 

Accordingly, § 1.965–4(e)(4) provides 

that in the case of a liquidation of a 

specified foreign corporation that is 

disregarded for purposes of determining 

the section 965 elements of a United 

States shareholder pursuant to § 1.965– 

4(b) or (c)(2), for purposes of 

determining the amounts of the section 

965 elements of the United States 

shareholder, the date of the liquidation 

generally is treated as the last day of the 

taxable year of the specified foreign 

corporation. Special rules apply with 

respect to liquidations resulting from 

entity classification elections, including 

a rule that may defer the date of 

liquidation for this purpose to the date 

on which the entity classification 

election is filed. For example, if a 

domestic corporation (USP) wholly 

owns a foreign subsidiary (FS) that has 

a taxable year ending on November 30, 

and an entity classification election is 

filed on November 15, 2017, to treat FS 

as an entity that is disregarded as an 

entity separate from its owner for U.S. 

federal income tax purposes 

(‘‘disregarded entity’’) effective on 

October 1, 2017, then any transactions 

undertaken by FS through and 

including November 30, 2017, would be 

taken into account for purposes of 

determining the post-1986 earnings and 

profits and accumulated post-1986 

deferred foreign income of FS, and any 

transactions involving FS after 

November 30, 2017, would not be taken 

into account for such purposes. 

Furthermore, any section 965(a) 

previously taxed earnings and profits 

and section 965(b) previously taxed 

earnings and profits of FS would be 

taken into account in determining the 

all earnings and profits amount under 

§ 1.367(b)–3(b) with respect to FS. 

Comments also requested various 

exceptions from the anti-abuse rules for 

transactions that do not reduce the 

overall U.S. federal income tax liability 

of United States persons resulting from 

the application of section 965. In 

response to these comments, the final 

regulations provide an exception from 

the anti-abuse rules for certain 

incorporation transactions. Under the 

exception, the anti-abuse rules do not 

apply to disregard a transfer of stock of 

a specified foreign corporation by a 

United States shareholder to a domestic 

corporation (for this purpose, including 

an S corporation), provided that the 

section 965(a) inclusion amount with 

respect to the transferred stock of the 

specified foreign corporation is not 

reduced and that the aggregate foreign 

cash position of both the transferor and 

the transferee is determined as if each 

had held the transferred stock of the 

specified foreign corporation owned by 

the other on each of the cash 

measurement dates. See § 1.965–4(e)(3). 

B. Transactions With a Principal 

Purpose of Changing a Section 965 

Element 

1. General Rules 

Comments suggested that the antiabuse rules be eliminated and that, if 

retained, the anti-abuse rules in 

proposed § 1.965–4(b) not contain 

rebuttable presumptions or per se rules. 

The Treasury Department and the IRS 

have determined that the rebuttable 

presumptions and per se rules are 

appropriate for tax administration 

reasons. They identify situations in 

which tax avoidance is highly likely or 

unlikely in order to minimize the 

number of circumstances in which more 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1853 

detailed facts and circumstances 

analyses are required. 

A comment also suggested that 

ordinary course exceptions be provided 

for all of the anti-abuse rules, so that the 

rules can never apply to ordinary course 

transactions. The Treasury Department 

and the IRS have determined that 

excluding ordinary course transactions 

from the presumptions in the anti-abuse 

rules, rather than the overall application 

of the rules, while still applying those 

rules to transactions that were actually 

undertaken with a principal purpose of 

changing a section 965 element, strikes 

the appropriate balance between 

administrability and taxpayer certainty, 

and therefore do not adopt the 

comment. 

A comment also suggested that the 

final regulations omit the requirement 

in proposed § 1.965–4(b)(2) that a 

taxpayer file a statement indicating that 

it takes the position that a presumption 

in proposed § 1.965–4(b) is rebutted. 

The Treasury Department and the IRS 

have determined that it is important for 

fair and effective tax administration that 

the IRS be aware of transactions for 

which there is a presumption of a 

principal purpose of changing a section 

965 element and do not adopt the 

suggestion. 

2. Cash Reduction Transactions and 

Specified Distributions 

The proposed regulations provide that 

a cash reduction transaction is 

presumed to be undertaken with a 

principal purpose of changing a section 

965 element of a United States 

shareholder unless the cash reduction 

transaction occurs in the ordinary 

course of business. Proposed § 1.965– 

4(b)(2)(iii)(A). A cash reduction 

transaction includes a transfer of cash, 

accounts receivable, or cash-equivalent 

assets by a specified foreign corporation 

to a United States shareholder of the 

specified foreign corporation or a person 

related to a United States shareholder of 

the specified foreign corporation if the 

transfer or assumption reduces the 

aggregate foreign cash position of the 

United States shareholder. Id. The 

presumption may be rebutted only if the 

facts and circumstances clearly establish 

that the transaction was not undertaken 

with a principal purpose of changing 

the amount of a section 965 element of 

a United States shareholder, and a 

taxpayer taking the position that the 

presumption is rebutted must attach a 

statement to its tax return disclosing 

that it has rebutted the presumption. 

Section 1.965–4(b)(2)(i). 

The proposed regulations also set 

forth a ‘‘per se’’ rule providing that a 

cash reduction transaction will be 

treated per se as being undertaken with 

a principal purpose of changing the 

amount of a section 965 element of a 

United States shareholder if it is a 

specified distribution. Proposed 

§ 1.965–4(b)(2)(iii)(B). The proposed 

regulations provide, in part, that a cash 

reduction transaction that is a 

distribution by a specified foreign 

corporation of a United States 

shareholder will be considered a 

specified distribution if and to the 

extent that, at the time of the 

distribution, there was a plan or 

intention for the distributee to transfer 

cash, accounts receivable, or cashequivalent assets to any specified 

foreign corporation of the United States 

shareholder. Id. Under the proposed 

regulations, a cash reduction transaction 

that is a distribution by a specified 

foreign corporation to a United States 

shareholder of the specified foreign 

corporation, other than a specified 

distribution, is treated per se as not 

being undertaken with a principal 

purpose of changing the amount of a 

section 965 element of a United States 

shareholder. Id. 

The Treasury Department and the IRS 

received requests that the final 

regulations exempt certain transactions 

from the definition of cash reduction 

transaction and specified distribution. A 

comment requested that a cash 

reduction transaction not be treated as 

a specified distribution if, and to the 

extent that, the distributee does not, 

within 24 months following the 

distribution, transfer cash, accounts 

receivable, or cash equivalents to a 

specified foreign corporation of the 

United States shareholder. Although the 

Treasury Department and the IRS have 

determined that the amount of time 

between a distribution and a transfer of 

cash may be relevant in determining 

whether there was a plan or intent for 

the distributee to transfer the cash, the 

Treasury Department and the IRS have 

determined that a per se rule 

disregarding transfers outside of a 

certain window is not warranted, as 

long-term plans for a transfer could 

exist, and providing such a rule would 

facilitate tax avoidance. A comment also 

suggested that it be clarified that any 

transferred amount disregarded be 

limited to the amount of the subsequent 

transfer. Because a specified 

distribution is defined as a cash 

reduction transaction ‘‘to the extent 

that’’ there is a plan or intent to retransfer cash, the Treasury Department 

and the IRS have determined that it is 

already clear that the amount of a 

specified distribution is limited to the 

amount re-transferred, and accordingly 

no additional clarification is required. 

Another comment requested that the 

per se rule not apply to cash reduction 

transactions planned before November 

2, 2017. The final regulations do not 

adopt this requested change, as the 

Treasury Department and the IRS have 

determined that a rule exempting cash 

reduction transactions in planning 

stages before November 2, 2017, from 

the application of the per se rule would 

necessarily have to account for the 

possibility of subsequent plan 

modification or amendment and would 

require an inquiry regarding a taxpayer’s 

subjective intent, resulting in a standard 

that is difficult to administer. 

Comments also suggested that a cash 

reduction transaction should not be 

considered a specified distribution to a 

United States shareholder by reason of 

a transfer of cash to a specified foreign 

corporation of the United States 

shareholder in the ordinary course of 

business. The Treasury Department and 

the IRS agree that payments pursuant to 

a legal obligation entered into before the 

Act’s introduction in Congress should 

not be considered to give rise to a plan 

or intention for the distributee in a cash 

reduction transaction to transfer cash, 

accounts receivable, or cash-equivalent 

assets to a specified foreign corporation 

of the distributee. Accordingly, the final 

regulations provide that in the case of a 

cash reduction transaction that is a 

distribution by a specified foreign 

corporation of a United States 

shareholder, there is not considered to 

be a plan or intention for the distributee 

to transfer cash, accounts receivable, or 

cash-equivalent assets to any specified 

foreign corporation of the United States 

shareholder if the transfer is made by 

the distributee pursuant to a legal 

obligation entered into before November 

2, 2017. Section 1.965–4(b)(2)(iii)(B). If 

the taxpayer relies on this rule in 

determining that a cash reduction 

transaction is not a specified 

distribution, it must attach a statement 

to its return indicating that position. Id. 

3. Pro Rata Share Transactions 

The proposed regulations provide that 

a pro rata share transaction is presumed 

to be undertaken with a principal 

purpose of changing the amount of a 

section 965 element of a United States 

shareholder and treat certain internal 

group transactions as per se being 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder. 

Proposed § 1.965–4(b)(2)(v). A comment 

requested that internal group 

transactions not be treated as per se 

having a principal purpose of changing 

1854 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

a section 965 element. The Treasury 

Department and the IRS have 

determined that the definition of 

internal group transactions is 

sufficiently narrowly tailored to apply 

the per se rule to tax-motivated 

transactions of the type that Congress 

intended the Treasury Department and 

the IRS to address and do not adopt the 

comment. 

4. E&P Reduction Transactions 

A comment noted that dividends paid 

by one specified foreign corporation to 

another between E&P measurement 

dates could potentially be subject to the 

rules in both proposed § 1.965–4(f) 

(disregarding specified payments in 

order to mitigate double-counting) and 

proposed § 1.965–4(b)(2)(iv) (which can 

result in disregarding certain 

transactions that reduce accumulated 

post-1986 deferred foreign income or 

post-1986 earnings and profits) and 

argued that the overlapping rules create 

a burden on taxpayers that should be 

ameliorated by exempting dividends 

between E&P measurement dates from 

the rules in § 1.965–4(b)(2)(iv). The 

Treasury Department and the IRS have 

determined that if such a dividend is 

disregarded pursuant to § 1.965–4(f), 

then it is clear that it is irrelevant 

whether it would also be disregarded 

under § 1.965–4(b), applying the 

presumption in § 1.965–4(b)(2)(iv), such 

that there would be no need for a 

taxpayer to bear the burden of rebutting 

the presumption. If, however, the 

dividend is not disregarded pursuant to 

§ 1.965–4(f), and the taxpayer takes the 

position that it is also not disregarded 

under § 1.965–4(b), because it can rebut 

a presumption that applies under 

§ 1.965–4(b)(2)(iv), then it is appropriate 

that the taxpayer be required to 

document that rebuttal for the reasons 

discussed in Part V.B.1 of this Summary 

of Comments and Explanation of 

Revisions. Accordingly, the comment is 

not adopted. 

C. Changes of Accounting Method and 

Entity Classification Elections 

A comment noted that a positive 

section 481 adjustment resulting from a 

change of accounting method could 

increase the section 965(a) inclusion 

amount and the amount of foreign 

income taxes deemed paid by a United 

States shareholder and thus be 

disregarded for purposes of determining 

the United States shareholder’s section 

965(a) inclusion amount, allowing some 

or all of the adjustment to escape 

taxation under section 965, even though 

the increase in foreign income taxes 

deemed paid was minimal. The 

Treasury Department and the IRS have 

determined that this would be 

inappropriate and modify the rule in 

proposed § 1.965–4(c)(1) to apply only if 

there is a reduction in a section 965(a) 

inclusion amount or an aggregate 

foreign cash position, or an increase in 

section 960 deemed paid taxes other 

than by reason of an increase in a 

section 965(a) inclusion amount. See 

§ 1.965–4(c)(1)(i). 

Comments suggested that the rule in 

proposed § 1.965–4(c)(1), which applies 

to changes in methods of accounting, 

not apply to changes from 

impermissible methods of accounting to 

permissible methods of accounting, and 

that the rule be conditioned on a 

principal purpose of changing a section 

965 element. However, a principal 

purpose-based rule would be difficult to 

administer and unwarranted, given that 

changes after November 2, 2017, relating 

to specified foreign corporations likely 

would be tax-motivated. Moreover, the 

Treasury Department and the IRS have 

determined that allowing changes from 

impermissible methods of accounting to 

permissible methods of accounting to be 

taken into account will allow similarly 

situated taxpayers to take different 

positions in a way that is detrimental to 

the government, as taxpayers will 

choose to make currently those changes 

that result in reductions of tax due 

under section 965 while deferring such 

changes that would result in increases 

of tax due under section 965 until later 

years. Accordingly, the comments are 

not adopted. 

Another comment requested that the 

final regulations permit the taxable year 

of a specified foreign corporation to be 

changed to a calendar year taxable year. 

Because neither the proposed 

regulations nor the final regulations 

affect the possibility of changing the 

accounting period of a specified foreign 

corporation, the final regulations do not 

adopt this comment. But see Rev. Proc. 

2018–17, 2018–9 I.R.B. 384 (limiting 

certain changes in accounting periods of 

a specified foreign corporation). 

In addition, comments raised 

questions regarding the scope of the rule 

in proposed § 1.965–4(c)(2), which 

applies to any entity classification 

election under § 301.7701–3 that is filed 

on or after November 2, 2017, and 

whether it is appropriate for that rule to 

be a per se rule that applies to all entity 

classification elections filed on or after 

that date. A comment suggested that the 

rule would inappropriately apply to a 

transaction that would have no impact 

on section 965 elements. Another 

comment suggested that certain 

transactions effectuated by entity 

classification elections, such as 

conversion of a United States 

shareholder from a domestic passthrough entity to a C corporation, or 

vice versa, should be excepted from the 

application of the rule. However, 

because an entity classification election 

is an election made specifically for tax 

purposes that could be made 

retroactively in order to be effective 

before November 2, 2017, and because 

the rule would only disregard such an 

election if it had the effect of changing 

a section 965 element, the final 

regulations do not change the rule from 

the proposed regulations. But see 

§ 1.965–4(e)(3) (discussed in Part V.A of 

this Summary of Comments and 

Explanation of Revisions). 

D. Application of Specified Payment 

Rule 

The proposed regulations provide that 

certain amounts paid or incurred 

between related specified foreign 

corporations of a section 958(a) U.S. 

shareholder between E&P measurement 

dates that would otherwise reduce the 

post-1986 earnings and profits as of 

December 31, 2017, of the specified 

foreign corporation that paid or incurred 

such amounts are disregarded for 

purposes of determining the post-1986 

earnings and profits of both of the 

specified foreign corporations as of the 

E&P measurement date on December 31, 

2017. See proposed § 1.965–4(f)(1). 

Comments indicated that the 

requirement that the two specified 

foreign corporations have different 

tentative measurement dates in order for 

specified payments to be disregarded 

resulted in complexity and 

inappropriate results when there were 

multiple payments among specified 

foreign corporations during the period, 

such as in a series of dividends up a 

multi-level chain of specified foreign 

corporations. They also indicated that it 

was unclear how the tentative 

measurement date was to be determined 

in the case of a specified foreign 

corporation that was neither an E&P 

deficit foreign corporation nor a DFIC. 

Moreover, comments indicated that 

disregarding specified payments that 

were deductible payments only for 

purposes of section 965, but not other 

purposes, could create unintended 

foreign tax credit results, which results 

would not be remedied by the changes 

to the ordering rule in § 1.965–2(b) 

discussed in Part III.A of this Summary 

of Comments and Explanation of 

Revisions. One comment suggested that 

the specified payment rule should be 

refined to have an anti-abuse function. 

The Treasury Department and the IRS 

have determined that detailed rules to 

address the fact patterns raised in the 

comments, such as rules to determine 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1855 

the extent of double-counting, to except 

ordinary course payments, or to add 

ordering rules to determine whether a 

payment is a specified payment, would 

introduce more complexity than 

warranted and would be difficult to 

administer. However, in response to the 

comments, the final regulations 

eliminate the requirement that the 

specified foreign corporations between 

which a payment is made have different 

tentative measurement dates in order for 

the payment to be a specified payment 

disregarded under the rule and provide 

that a section 958(a) U.S. shareholder 

may choose not to apply the rule in 

§ 1.965–4(f)(1), provided that it and all 

related section 958(a) U.S. shareholders 

do so with respect to all of their 

specified foreign corporations. Section 

1.965–4(f)(1), (2), and (3). 

VI. Comments and Changes to Proposed 

§ 1.965–5 and § 1.965–6—Foreign Tax 

Credits 

Proposed § 1.965–5 and § 1.965–6 

provide rules with respect to foreign tax 

credits. The proposed regulations 

include, in addition to the foreign tax 

credit-specific rules of section 965, rules 

coordinating the provisions of section 

965 with the foreign tax credit 

provisions as in effect before their 

repeal or amendment by the Act. The 

comments and modifications with 

respect to these rules are discussed in 

this Part VI. 

A. Application and Determination of the 

Disallowance of the Applicable 

Percentage of Foreign Income Taxes 

1. Disallowance of the Applicable 

Percentage of Foreign Income Taxes 

Attributable to Distributions of 

Previously Taxed Earnings and Profits 

Under the proposed regulations, no 

deduction (including under section 164) 

or credit under section 901 is allowed 

for the applicable percentage (as defined 

in proposed § 1.965–5(d)) of any foreign 

income taxes ‘‘paid or accrued’’ with 

respect to any amount for which a 

section 965(c) deduction is allowed for 

a section 958(a) U.S. shareholder 

inclusion year. Proposed § 1.965–5(b). 

This includes foreign income taxes 

directly paid or accrued by a taxpayer 

attributable to a distribution of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits. A similar 

rule applies to deny the applicable 

percentage of any foreign income taxes 

‘‘treated as paid or accrued’’ with 

respect to any amount for which a 

section 965(c) deduction is allowed for 

a section 958(a) U.S. shareholder 

inclusion year. Proposed § 1.965–5(c). 

For these purposes, foreign income 

taxes ‘‘treated as paid or accrued’’ 

include foreign income taxes deemed 

paid by the taxpayer under section 960 

with respect to distributions of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits. 

Comments recommended that the 

proposed regulations be modified to 

allow a credit for the applicable 

percentage of foreign income taxes 

directly paid or accrued under section 

901 or treated as paid or accrued under 

section 960 on a distribution of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits. In general, 

these comments asserted that the 

disallowance of taxes attributable to a 

distribution of previously taxed E&P 

discourages the distribution of the 

previously taxed E&P, which the 

comments assert is inconsistent with the 

purpose of section 965. Comments also 

argued that the rule created 

administrative complexity and asked for 

guidance on how to track previously 

taxed E&P for purposes of applying this 

rule. Other comments acknowledged 

that providing a reduction for the 

foreign tax credits attributable to a 

distribution of previously taxed E&P 

based on the applicable percentage was 

appropriate. 

The final regulations do not adopt the 

recommended changes. As an initial 

matter, guidance on tracking previously 

taxed E&P is outside the scope of this 

rulemaking. In addition, the Treasury 

Department and the IRS have 

determined that the rules under § 1.965– 

5(b) are consistent with the statutory 

purpose of sections 960 and 965 and do 

not discourage the repatriation of 

previously taxed E&P. In any event, the 

purpose of the foreign tax credit is not 

to encourage repatriation of E&P to the 

United States but to relieve double 

taxation. To the extent the income is 

subject to a lower effective rate of U.S. 

tax, it is consistent with the purpose of 

section 965(g) to reduce the credits 

allowed as part of relieving double 

taxation on such income. 

Moreover, the statutory language of 

section 965(g) contemplates that the 

disallowance for the applicable 

percentage will apply to distributions of 

previously taxed E&P. Section 965(g)(1) 

provides, ‘‘[n]o credit shall be allowed 

under section 901 for the applicable 

percentage of any foreign income taxes 

paid or accrued (or treated as paid or 

accrued). . . .’’ In addition, section 

965(g)(3) provides that no deduction is 

allowed for any tax for which credit is 

not allowable under section 901 by 

reason of section 965(g)(1). A deduction 

is allowed only for taxes directly paid 

or accrued by the taxpayer, not taxes 

deemed paid by the taxpayer. Because a 

U.S. taxpayer would ordinarily be 

subject to foreign tax only on a 

distribution from a foreign corporation, 

not on an income inclusion under U.S. 

tax law, ‘‘taxes paid or accrued’’ can 

only be understood to refer to foreign 

income taxes directly paid or accrued 

under section 901 with respect to a 

distribution to the taxpayer of 

previously taxed E&P. Allowing a full 

credit for all such foreign income taxes 

would render section 965(g)(3) 

meaningless. Accordingly, in order to 

give effect to the language of section 

965(g)(3), foreign taxes paid or accrued 

on distributions of section 965(a) 

previously taxed earnings and profits 

and section 965(b) previously taxed 

earnings and profits are subject to the 

credit disallowance rules of section 

965(g)(1). 

Furthermore, there is no policy reason 

to differentiate between foreign income 

taxes attributable to a distribution of 

previously taxed E&P that are paid or 

accrued directly by the United States 

shareholder and are creditable under 

section 901 and those foreign income 

taxes that are paid or accrued by other 

CFCs as part of the distribution of the 

earnings to the United States 

shareholder and are creditable under 

section 960(a)(3). Thus, because section 

965(g)(3) contemplates the disallowance 

of foreign tax credits attributable to 

distributions of previously taxed E&P 

when the foreign income taxes are 

directly paid or accrued by the United 

States shareholder, the final regulations 

continue to provide that the foreign tax 

credit is disallowed with respect to the 

applicable percentage of foreign income 

taxes deemed paid under section 

960(a)(3) with respect to a distribution 

of previously taxed E&P in the same 

manner as credits are disallowed for 

foreign taxes deemed paid under section 

960(a)(1) with respect to a section 965(a) 

inclusion. 

Additionally, some comments raised 

specific objections about the application 

of these rules to foreign income taxes 

paid and deemed paid with respect to 

distributions of section 965(b) 

previously taxed earnings and profits, 

asserting that the disallowance is 

inappropriate because these earnings do 

not represent an amount for which a 

section 965(c) deduction is allowed. 

One comment also asserted that it was 

inappropriate to disallow the applicable 

percentage of foreign income taxes paid 

and deemed paid with respect to 

distributions of section 965(b) 

previously taxed earnings and profits 

because a distribution of section 965(b) 

1856 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

previously taxed earnings and profits 

results in a dollar-for-dollar reduction to 

basis (to the extent thereof), followed by 

gain recognition, because there is no 

automatic basis increase in the amount 

of such earnings under section 961. 

Additionally, the comment pointed out 

that the proposed regulations could 

create inequities between taxpayers 

because the proposed regulations could 

be read to imply that a taxpayer that had 

no section 965(a) inclusion amount 

because of the operation of section 

965(b) had no applicable percentage, 

and thus no reduction in creditable 

foreign income taxes paid or deemed 

paid on distributions of the section 

965(b) previously taxed earnings and 

profits. 

As discussed in Part VI.B.1 of this 

Summary of Comments and Explanation 

of Revisions, the Treasury Department 

and the IRS have determined that 

section 965(b) previously taxed earnings 

and profits are treated as included in 

income under section 951(a) for 

purposes of section 960, and thus are 

treated similarly to section 965(a) 

previously taxed earnings and profits for 

purposes of applying section 965(g). 

Additionally, with respect to the 

reduction in basis associated with a 

distribution of section 965(b) previously 

taxed earnings and profits, the final 

regulations provide that a section 958(a) 

U.S. shareholder may elect to make 

certain basis adjustments to increase the 

basis of DFICs with section 965(b) 

previously taxed earnings and profits. 

See § 1.965–2(f)(2). Finally, comments 

concerning the applicable percentage for 

distributions of section 965(b) 

previously taxed earnings and profits 

are addressed in Part VI.A.4 of this 

Summary of Comments and Explanation 

of Revisions. 

2. Compatibility of Applicable 

Percentage Credit Disallowance With 

U.S. Bilateral Income Tax Treaties 

A comment stated that proposed 

§ 1.965–5 is incompatible with the 

provisions of U.S. bilateral income tax 

treaties that provide for relief from 

double taxation. However, the credit 

against U.S. income tax provided for in 

these treaties is generally allowed ‘‘[i]n 

accordance with the provisions and 

subject to the limitations of the law of 

the United States (as it may be amended 

from time to time without changing the 

general principle hereof).’’ See, for 

example, paragraph 1 of Article 24 

(Elimination of Double Taxation) of the 

income tax convention between the 

United States and Canada, as amended 

by the protocol signed June 14, 1983. 

This language provides that foreign tax 

credits allowed under the treaty are 

subject to the terms of the U.S. statutory 

credit, including ‘‘provisions such as 

Code sections 901(c), 904, 905, 907, 908, 

and 911,’’ but the applicable limitations 

of U.S. law are not limited to the 

illustrative listed provisions. See, for 

example, the U.S. Treasury Department 

Technical Explanation to the income tax 

convention between the United States 

and Canada, concerning Article 24, as 

amended by the protocol signed June 

14, 1983. 

The disallowance of the applicable 

percentage of foreign income taxes 

under section 965(g)(1) and § 1.965–5 is 

similar to the application of section 904 

and other provisions in the Code that 

limit the allowable foreign tax credit. 

The disallowance takes into account the 

section 965(c) deduction and reflects the 

fact that, because of the section 965(c) 

deduction, the income included under 

section 965 is subject to an effective rate 

of U.S. tax that is significantly lower 

than the U.S. tax rates ordinarily 

imposed on corporations or individuals. 

Absent this disallowance, foreign 

income tax incurred with respect to the 

income included under section 965 

could inappropriately be used to offset 

U.S. tax on unrelated foreign source 

income, rather than to mitigate double 

taxation incurred with respect to the 

taxable amount of the section 965(a) 

inclusion. Accordingly, the application 

of section 965(g)(1) and § 1.965–5 is 

consistent with the provisions of U.S. 

bilateral income tax treaties that provide 

for relief from double taxation. 

3. Applicable Percentage With Respect 

to Foreign Income Taxes That Are Not 

Net Basis Taxes 

The proposed regulations provide that 

no deduction or credit is allowed for the 

applicable percentage of net basis taxes 

imposed on a United States citizen by 

the citizen’s jurisdiction of residence 

upon receipt of a distribution of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits. Proposed 

§ 1.965–5(b). A comment recommended 

that the final regulations define ‘‘net 

basis taxes’’ and clarify that proposed 

§ 1.965–5(b) does not apply to creditable 

gross basis income taxes. 

Section 965(g) and proposed § 1.965– 

5(b) apply to all creditable foreign 

income taxes. The reference to ‘‘net 

basis taxes’’ was included in the 

proposed regulations for illustrative 

purposes only, and the taxes listed in 

proposed § 1.965–5(b) are not an 

exhaustive list of the taxes subject to 

proposed § 1.965–5(b). The final 

regulations clarify this accordingly. See 

§ 1.965–5(b). 

4. Applicable Percentage With Respect 

to Distributions of Section 965(b) 

Previously Taxed Earnings and Profits 

The definition of applicable 

percentage in section 965(g) and 

proposed § 1.965–5(d) is computed 

based on a taxpayer’s section 965(a) 

inclusion for a section 958(a) U.S. 

shareholder inclusion year. Comments 

noted that it was not clear under the 

proposed regulations how the 

applicable percentage with respect to 

section 965(b) previously taxed earnings 

and profits should be determined when 

a DFIC has section 965(b) previously 

taxed earnings and profits but the 

section 958(a) U.S. shareholder does not 

have an aggregate section 965(a) 

inclusion amount, because its pro rata 

shares of accumulated post-1986 

deferred foreign income are entirely 

offset by its pro rata shares of specified 

E&P deficits. The final regulations 

provide that if there is no aggregate 

section 965(a) inclusion amount, the 

applicable percentage is 55.7 percent 

(that is, the applicable percentage that 

would apply if the section 965(b) 

previously taxed earnings and profits 

had been included in income and were 

an amount to which section 965(c)(1)(B) 

applied). See § 1.965–5(d)(2). 

The final regulations also clarify how 

the applicable percentage applies with 

respect to domestic pass-through 

owners and with respect to distributions 

of previously taxed E&P. With respect to 

domestic pass-through owners, the final 

regulations provide that the applicable 

percentage determined under § 1.965– 

5(d)(1) or (2) with respect to a domestic 

pass-through entity applies with respect 

to taxes deemed paid by a domestic 

pass-through owner even if the domestic 

pass-through entity does not have a 

section 965(a) inclusion amount. 

Section 1.965–5(d)(3). With respect to 

foreign income taxes imposed on 

distributions of previously taxed E&P, 

the final regulations provide that the 

applicable percentage that is applied is 

the applicable percentage with respect 

to the section 958(a) U.S. shareholder 

and the section 958(a) U.S. inclusion 

year in which the section 958(a) U.S. 

shareholder had the section 965(a) 

inclusion as a result of which the 

section 965(a) previously taxed earnings 

and profits or the section 965(b) 

previously taxed earnings and profits 

first arose. Section 1.965–5(d)(4). 

5. Applicable Percentage With Respect 

to Tax on Gain From Sale of Stock 

The proposed regulations provide that 

the disallowance of foreign tax credits 

under section 965(g)(1) applies with 

respect to the applicable percentage of 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1857 

foreign income taxes attributable to 

distributions of section 965(a) 

previously taxed earnings and profits 

and section 965(b) previously taxed 

earnings and profits. Proposed § 1.965– 

5(b). A comment requested guidance on 

whether the applicable percentage also 

applies to foreign income taxes imposed 

on an amount of a shareholder’s gain 

from the sale of the specified foreign 

corporation’s stock taken into account 

for foreign, but not U.S., income tax 

purposes, equal to its tax basis increase 

under section 961(a) or § 1.965–2(f)(2) 

by reason of section 965. The Treasury 

Department and the IRS have 

determined that under § 1.904–6, 

foreign tax imposed on a disposition of 

stock is associated with the gain (or 

other income) that is (or would be) 

recognized for U.S. tax purposes upon a 

taxable disposition, without regard to 

whether the taxpayer’s basis in the stock 

(and, accordingly, the amount of gain 

recognized) is a different amount for 

U.S. and foreign tax purposes. Because 

no portion of a foreign tax imposed on 

the sale of a specified foreign 

corporation’s stock is considered 

imposed with respect to its previously 

taxed E&P, the final regulations do not 

expand the scope of the rule in the 

proposed regulations. 

B. Operation of Section 960(a)(3) 

1. Disallowance of Credits for Foreign 

Taxes Treated as Deemed Paid Under 

Section 960(a)(1) With Respect to 

Section 965(b) Previously Taxed 

Earnings and Profits 

The proposed regulations provide that 

no credit is allowed under section 

960(a)(3) or any other section for foreign 

income taxes that would have been 

deemed paid under section 960(a)(1) 

with respect to the section 965(a) 

earnings amount that is reduced under 

proposed § 1.965–1(b)(2) or proposed 

§ 1.965–8(b). Proposed § 1.965– 

5(c)(1)(ii). The Treasury Department and 

the IRS have received comments 

asserting that this rule should not be 

included in the final regulations. The 

final regulations maintain the rule from 

the proposed regulations. 

Comments stated that allowing a 

deemed paid credit under section 

960(a)(3) is necessary to avoid double 

taxation; however, there is no double 

taxation associated with section 965(b) 

previously taxed earnings and profits. 

The section 965(a) earnings amount 

offset by an aggregate foreign E&P deficit 

is excluded from U.S. taxable income 

and thereby effectively exempted from 

U.S. tax under section 965(b)(4)(A) and 

proposed § 1.965–1(b)(2) or proposed 

§ 1.965–8(b). As a policy matter, this 

exclusion eliminates the need for a 

foreign tax credit. The purpose of the 

foreign tax credit is to mitigate double 

taxation by allowing foreign income 

taxes to reduce the U.S. tax that would 

otherwise be imposed on foreign source 

income. Allowing foreign income taxes 

imposed on income that is not subject 

to U.S. tax by reason of section 965(b) 

to be credited against U.S. tax on 

unrelated income would confer a 

windfall double benefit for taxpayers 

with section 965(b) previously taxed 

earnings and profits. 

As a technical matter, section 

965(b)(4)(A) treats section 965(a) 

earnings amounts offset by an aggregate 

foreign E&P deficit as previously 

included in income under section 951(a) 

‘‘for purposes of applying section 959.’’ 

Accordingly, section 965(b) previously 

taxed earnings and profits are treated as 

previously taxed E&P resulting from a 

section 951(a) inclusion, despite never 

actually having been included in U.S. 

taxable income. Under section 960(a)(1), 

a domestic corporate shareholder that 

includes an amount in income under 

section 951(a) is deemed to have paid a 

ratable portion of the foreign 

corporation’s foreign income taxes at the 

time of the income inclusion. Amounts 

treated as previously taxed E&P 

resulting from an income inclusion 

under section 951(a) should similarly be 

treated as having resulted in foreign 

taxes deemed paid under section 

960(a)(1). 

Section 960(a)(3) allows a credit for 

foreign income taxes paid by CFCs upon 

a subsequent distribution of the section 

965(b) previously taxed earnings and 

profits through a chain of CFCs to the 

domestic corporate shareholder, but 

does not allow a credit for foreign 

income taxes that were previously 

deemed paid (or treated as deemed 

paid) under section 960(a)(1) when the 

amounts were included (or treated as 

included) in income under section 

951(a). Because foreign income taxes 

attributable to a section 965(a) earnings 

amount that were offset by an aggregate 

foreign E&P deficit were treated as 

deemed paid under section 960(a)(1) 

when those earnings were treated as 

included in income under section 

951(a), those taxes are not available to 

be deemed paid again under section 

960(a)(3) upon a subsequent distribution 

of the section 965(b) previously taxed 

earnings and profits. Consistent with 

that treatment and with section 

960(a)(2), the regulations under section 

902 remove from the foreign 

corporation’s pool of post-1986 foreign 

income taxes the foreign income taxes 

that are attributable to earnings 

included in income under section 951(a) 

or otherwise removed from its post-1986 

undistributed earnings. See § 1.902– 

1(a)(8)(i). 

Comments argue that the plain 

language of section 965(b)(4)(A) means 

that section 965(a) earnings amounts 

offset by an aggregate foreign E&P deficit 

are treated as income previously 

included under section 951(a) solely for 

purposes of applying section 959, and 

not for purposes of applying section 

960(a). However, the application of 

section 959 is a precondition to the 

application of section 960(a)(3). The 

Treasury Department and the IRS have 

determined that section 960(a)(3) cannot 

be applied independently of section 959 

and that the Act did not change the 

relationship between these sections. 

Indeed, the comments recognize the 

interaction between sections 959 and 

960(a)(3) by recommending that a credit 

be allowed under section 960(a)(3) upon 

a distribution of section 965(b) 

previously taxed earnings and profits, 

which requires treating such amounts as 

previously taxed E&P for purposes of 

section 960(a)(3) as well as for purposes 

of section 959. If the section 965(b) 

previously taxed earnings and profits 

are treated as previously taxed E&P 

excluded from gross income on 

distribution under section 959(a) in 

applying section 960(a)(3), it necessarily 

follows that in applying that same 

section those amounts are treated as 

having been included in income under 

section 951(a) and resulted in foreign 

taxes deemed paid under section 

960(a)(1) as well. 

Some comments raised the concern 

that U.S. companies would face a higher 

U.S. tax burden by not being able to 

claim foreign tax credits under section 

960(a)(3) for foreign income tax imposed 

on E&P that is not subject to tax in the 

United States by reason of section 

965(b). The comments argued that this 

would reduce the competitive advantage 

Congress sought to confer through the 

enactment of the foreign tax credit 

regime and discourage repatriation of 

previously taxed E&P. However, the 

purpose of the foreign tax credit regime 

is to relieve double taxation of foreign 

source income by reducing U.S. tax on 

that income, not to guarantee that U.S. 

taxpayers will be able to use all foreign 

income taxes paid to reduce their U.S. 

tax burden. See section 904. The foreign 

tax credit regime was never intended to 

subsidize foreign income taxes that are 

paid in excess of the U.S. tax burden on 

the foreign source income. Because 

these earnings are not subject to U.S. 

tax, any foreign tax credits related to 

these earnings would only be used to 

offset other unrelated foreign source 

income. 

1858 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

One comment explained that allowing 

a deemed paid credit under section 

960(a)(3) with respect to section 965(b) 

previously taxed earnings and profits is 

equivalent to allowing a deemed paid 

credit for foreign income tax paid in a 

year in which losses recognized for U.S. 

(but not foreign) tax purposes reduced 

post-1986 undistributed earnings. PreAct law, however, associated foreign 

income taxes paid by a foreign 

corporation in post-1986 years with its 

post-1986 undistributed earnings, but 

did not treat earnings offset by losses as 

giving rise to previously taxed E&P. 

Therefore, the statutory scheme allowed 

a credit for those taxes in connection 

with dividends or inclusions of those 

earnings, and not in connection with 

distributions of previously taxed E&P. 

Relatedly, comments also suggested 

that the premise of section 965(b) is to 

treat an E&P deficit foreign corporation 

and a DFIC as a single corporation to the 

extent that a DFIC’s accumulated post1986 deferred foreign income is offset 

by an aggregate foreign E&P deficit. 

However, Congress did not adopt the 

single corporation approach, as 

evidenced by the allocation of the 

aggregate foreign E&P deficit to the 

DFICs under section 965(b). Section 965 

as enacted requires a foreign 

corporation-by-foreign corporation 

determination, which method extends 

to the computation of the foreign tax 

credit. Congress did not change the 

computation of the deemed-paid credit 

to apply other than on a foreign 

corporation-by-foreign corporation 

basis. 

After consideration of the comments, 

the Treasury Department and the IRS 

maintain the rule in the final regulations 

based upon both the technical analysis 

of the relevant sections of the Code and 

the underlying policy. As a result, no 

credit is allowed under section 960(a)(3) 

or any other provision of the Code for 

taxes attributable to section 965(a) 

earnings amounts offset by an aggregate 

foreign E&P deficit that would have 

been deemed paid under section 

960(a)(1) had the amounts actually been 

included in income under section 

951(a). 

2. Definition of Upper-Tier Foreign 

Corporation 

The proposed regulations provide that 

the credit allowed under section 

960(a)(3) is only with respect to foreign 

income taxes imposed on an upper-tier 

foreign corporation on distributions of 

section 965(a) previously taxed earnings 

and profits or section 965(b) previously 

taxed earnings and profits from a lowertier foreign corporation. Proposed 

§ 1.965–5(c)(1)(ii). A comment requested 

that the final regulations clarify that 

references to ‘‘upper-tier foreign 

corporation’’ includes a disregarded 

entity or partnership that is legally an 

owner of the specified foreign 

corporation in question, and that 

references to distributions similarly 

refer to legal distributions not to U.S. 

tax characterizations. 

The final regulations do not broaden 

the definition of ‘‘upper-tier foreign 

corporation’’ as requested by the 

comment. To the extent that there is a 

distribution of previously taxed E&P 

from a foreign corporation to a 

disregarded entity or partnership that is 

owned by a foreign corporation, the 

foreign corporate owner would be 

considered an ‘‘upper-tier foreign 

corporation.’’ See, e.g., section 702(a). 

Therefore, a credit would be allowed 

under section 960(a)(3), upon ultimate 

distribution of the previously taxed E&P 

to an eligible United States shareholder, 

for creditable foreign income taxes 

imposed on the disregarded entity or 

partnership that are considered paid by 

the foreign corporate owner for U.S. tax 

purposes with respect to the 

distribution of previously taxed E&P 

from the lower-tier foreign corporation. 

To the extent that there is a distribution 

of previously taxed E&P from a foreign 

corporation to a disregarded entity or 

partnership that is owned by a domestic 

corporation, the domestic corporate 

owner should be entitled to a credit 

under section 901 for the creditable 

foreign income taxes imposed on the 

disregarded entity or partnership that 

are considered paid by the domestic 

corporation for U.S. tax purposes. 

Therefore, there is no need to broaden 

the definition of ‘‘upper-tier foreign 

corporation’’ to include disregarded 

entities and partnerships. 

Similar comments requested that the 

final regulations clarify that a tax 

imposed on a disregarded payment from 

a disregarded entity to an upper-tier 

foreign corporation that owns the 

disregarded entity is related to a 

distribution of previously taxed E&P. 

Another comment stated that the 

limitation of the credit allowed under 

section 960(a)(3) to foreign income taxes 

imposed on an upper-tier foreign 

corporation impedes the avoidance of 

double taxation with respect to foreign 

income taxes imposed on a lower-tier 

CFC upon distribution of its previously 

taxed E&P to an upper-tier CFC or 

foreign income taxes imposed on a firsttier CFC upon distribution of its 

previously taxed E&P to its United 

States shareholder. The Treasury 

Department and the IRS do not address 

these comments in the final regulations 

because the characterization of taxes 

incurred with respect to disregarded 

payments for purposes of section 

960(a)(3) is outside of the scope of this 

rulemaking. 

Finally, clarification was requested on 

whether the requirement that the 

previously taxed E&P be distributed by 

a lower-tier foreign corporation in order 

for taxes to be deemed paid with respect 

to the previously taxed E&P under 

section 960(a)(3) applies to both section 

965(a) previously taxed earnings and 

profits and section 965(b) previously 

taxed earnings and profits, or just to the 

latter. The Treasury Department and the 

IRS have determined that regulations 

are clear that the requirement applies to 

both section 965(a) previously taxed 

earnings and profits and section 965(b) 

previously taxed earnings and profits. 

See § 1.965–5(c)(1)(ii). 

C. Deemed Paid Credit Computation 

1. Treatment of Adjustment Under 

Section 965(b)(4)(B) 

The proposed regulations provide 

that, for purposes of section 902(c)(1), 

the post-1986 undistributed earnings of 

an E&P deficit foreign corporation are 

increased under section 965(b)(4)(B) and 

§ 1.965–2(d)(2)(i)(A) as of the first day of 

the foreign corporation’s first taxable 

year following the E&P deficit foreign 

corporation’s last taxable year that 

begins before January 1, 2018. Proposed 

§ 1.965–6(c)(3). Comments 

recommended that the final regulations 

conform to the language of section 

965(b)(4)(B) to provide that these 

adjustments happen in the last taxable 

year that begins before January 1, 2018. 

Section 965(b)(4)(B) provides that, for 

purposes of the Code, a United States 

shareholder’s pro rata share of the E&P 

of any E&P deficit foreign corporation is 

increased by the amount of the specified 

E&P deficit of such corporation taken 

into account by the shareholder by 

reason of allocation of the deficit to a 

DFIC. Under section 902(c)(1), post1986 undistributed earnings are based 

on the E&P of the foreign corporation, 

computed in accordance with sections 

964(a) and 986, without diminution for 

dividends distributed during the taxable 

year. Pursuant to section 902(c)(8), 

Treasury regulations modify the 

computation of E&P included in post1986 undistributed earnings as 

necessary to carry out the provisions of 

section 902. For example, under 

§ 1.902–1(a)(9)(i), previously taxed 

earnings and profits arising in prior 

post-1986 taxable years are not included 

in post-1986 undistributed earnings. 

Section 965(o) also provides that the 

Treasury Department and IRS may issue 

regulations necessary to prevent the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1859 

avoidance of the purposes of section 

965. 

Given this background, the Treasury 

Department and the IRS have 

determined that post-1986 undistributed 

earnings should not be increased during 

the last taxable year of an E&P deficit 

foreign corporation beginning before 

January 1, 2018, as a result of section 

965(b)(4)(B). An immediate increase 

could allow shareholders to claim 

deemed paid credits with respect to 

amounts earned after November 2, 2017, 

by E&P deficit foreign corporations even 

though such earnings were not in excess 

of accumulated deficits. That would 

result in a windfall to section 958(a) 

U.S. shareholders of DFICs and E&P 

deficit foreign corporations because 

such shareholders are not taxable on 

accumulated post-1986 deferred foreign 

income of a DFIC to the extent of the 

DFIC’s allocable share of an aggregate 

foreign E&P deficit and, with respect to 

the E&P deficit corporation, they would 

be entitled to deemed paid taxes that 

they would not otherwise be eligible to 

claim because of the accumulated 

deficit, a result inconsistent with 

general operation of section 902. See, 

e.g., § 1.902–1(b)(4). Additionally, the 

deemed paid taxes would not be subject 

to the disallowance for the applicable 

percentage provided for in section 

965(g), even though the foreign income 

taxes were able to be deemed paid only 

as a result of the operation of section 

965. Accordingly, the Treasury 

Department and the IRS do not amend 

this rule in the final regulations. See 

§ 1.965–6(b)(3). 

2. Deemed Paid Credits for E&P Deficit 

Foreign Corporations 

The proposed regulations clarify that 

when the denominator of the section 

902 fraction is zero or less than zero, the 

section 902 fraction is zero, and no 

foreign taxes are deemed paid. Proposed 

§ 1.965–6(c)(2). A comment requested 

that the foreign taxes of an E&P deficit 

foreign corporation could be deemed 

paid with respect to a section 965(a) 

inclusion, for example, by allocation of 

such taxes pro rata to DFICs. 

The Treasury Department and the IRS 

do not adopt the suggestion to treat the 

post-1986 foreign income taxes of an 

E&P deficit foreign corporation as taxes 

paid or accrued by a DFIC because there 

is no basis in the statute for modifying 

the computation of deemed paid credits 

in this manner. In addition, neither 

section 902 nor 960 nor the regulations 

issued under those sections provide for 

the allocation of taxes from one foreign 

corporation to another as suggested by 

the comment. 

3. Application of Section 902 as if 

Section 965(a) Inclusion Were a 

Dividend 

The proposed regulations provide, in 

relevant part, that for purposes of 

determining foreign taxes deemed paid 

under section 960(a)(1) with respect to 

a section 965(a) inclusion with respect 

to a DFIC, section 902 applies as if the 

section 965(a) inclusion were a 

dividend paid by the DFIC. Proposed 

§ 1.965–6(b). Questions have arisen as to 

the effect of treating a section 965(a) 

inclusion as a dividend for this purpose. 

This language merely incorporates the 

language of section 960(a)(1) into the 

regulations, as section 960(a)(1) also 

provides in relevant part that ‘‘section 

902 shall be applied as if the amount so 

included were a dividend paid by such 

foreign corporation.’’ The language in 

proposed § 1.965–6(b) does not mean 

that any of the requirements of sections 

902 and 960 should be considered 

inapplicable for purposes of 

determining deemed paid taxes with 

respect to section 965(a) inclusions. 

Further, the language in proposed 

§ 1.965–6(b) does not mean that section 

965(a) inclusions should be treated as 

dividends for purposes of the ordering 

rule under § 1.960–1(i)(2). The final 

regulations clarify that the ordering 

rules of § 1.960–1(i)(2) continue to 

apply, subject to the modification 

described in Part III.A of this Summary 

of Comments and Explanation of 

Revisions. See § 1.965–2(b). 

4. Section 902 Fraction 

The proposed regulations provide that 

the term ‘‘section 902 fraction’’ means, 

with respect to either a DFIC or an E&P 

deficit foreign corporation, the fraction 

that is (i) the dividend paid by, or the 

inclusion under section 951(a)(1) 

(including a section 965(a) inclusion) 

with respect to, the foreign corporation, 

as applicable, divided by (ii) the foreign 

corporation’s post-1986 undistributed 

earnings. Proposed § 1.965–6(c). A 

question was raised as to whether 

dividends and inclusions under section 

951(a)(1) are combined for purposes of 

the section 902 fraction. Another 

comment concerned whether the 

definition of ‘‘section 902 fraction’’ 

implied that the ordering rule in 

§ 1.960–1(i)(2) was no longer effective. 

The final regulations continue to 

include a defined term, ‘‘section 902 

fraction,’’ that is consistent with section 

902(a), while tying it to the computation 

of deemed paid taxes in section 902(a). 

See § 1.965–6(b)(2) and (4). As noted in 

Part VI.C.3 of this Summary of 

Comments and Explanation of 

Revisions, the final regulations also 

confirm that the ordering rule in 

§ 1.960–1(i)(2), as modified by § 1.965– 

2(b), applies in years in which a 

taxpayer may have a section 965(a) 

inclusion; accordingly, the section 902 

fraction must be computed separately 

with respect to dividends and 

inclusions under section 951(a)(1). As 

noted in Part III.A.3 of this Summary of 

Comments and Explanation of 

Revisions, the examples in § 1.965– 

2(j)(1) and (4) illustrate the 

determination of deemed paid taxes 

(including the computation of section 

902 fractions) under sections 902 and 

960 in fact patterns involving section 

965(a) inclusions. 

5. Ownership Requirements for Deemed 

Paid Taxes 

The proposed regulations provide that 

the rule treating members of a 

consolidated group as a single 

corporation does not apply for purposes 

of computing the foreign taxes deemed 

paid with respect to a section 965(a) 

inclusion, and that the foreign taxes 

deemed paid must be computed on a 

separate member basis. See proposed 

§ 1.965–8(e)(2). A comment requested 

that the final regulations treat all the 

members of a consolidated group as a 

single taxpayer for all purposes of 

section 965, such that members owning 

less than ten percent of a DFIC would 

be able to claim deemed paid credits 

with respect to the DFIC. 

Another comment requested relief in 

the case in which a domestic 

corporation satisfied the ownership 

requirements under section 902 with 

respect to a DFIC when it received a 

distribution from the DFIC, but did not 

satisfy the ownership requirements 

under section 960 on the date of the 

section 965(a) inclusion. 

The final regulations continue to 

follow the statute under section 960 

regarding the ownership requirements 

for eligibility for a foreign tax credit 

and, therefore, do not adopt either of 

these comments. See § 1.965–8(e)(2). 

6. Hovering Deficits 

In response to comments, the 

preamble to the proposed regulations 

stated that the regulations would not 

provide a rule that, to the extent that a 

hovering deficit is treated as reducing 

the post-1986 earnings and profits of a 

DFIC, related taxes would be added to 

the DFIC’s post-1986 foreign income 

taxes in the inclusion year with respect 

to the DFIC. After the issuance of the 

proposed regulations, the Treasury 

Department and the IRS received 

additional comments requesting 

reconsideration of this issue. Comments 

1860 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

highlighted the following language in 

the legislative history to section 965: 

[T]he conferees expect the Secretary may 

issue guidance to provide that, solely for 

purposes of calculating the amount of foreign 

income taxes deemed paid by the U.S. 

shareholder with respect to an inclusion 

under section 965, a hovering deficit may be 

absorbed by current year earnings and profits 

and the foreign income taxes related to the 

hovering deficit may be added to the 

specified foreign corporation’s post-1986 

foreign income taxes in that separate category 

on a pro rata basis in the year of inclusion. 

H.R. Rep. No. 115–466, at 619 (2017). 

To effectuate the legislative history, 

the final regulations provide that to the 

extent the hovering deficit would have 

been absorbed by E&P accrued during 

the taxable year but for a section 965(a) 

inclusion, taxes that relate to the 

hovering deficit are taken into account 

for purposes of determining post-1986 

foreign income taxes. Therefore, 

§ 1.965–6(d) provides that in the last 

taxable year that begins before January 

1, 2018, of a DFIC that is also a foreign 

surviving corporation, for purposes of 

determining the related taxes that are 

included in post-1986 foreign income 

taxes, the post-transaction earnings that 

can be offset by a hovering deficit 

include any current year earnings which 

were included under section 965 by a 

section 958(a) U.S. shareholder; and the 

hovering deficit offset is treated as 

occurring as of the last day of the DFIC’s 

inclusion year. 

VII. Comments and Changes to 

Proposed § 1.965–7—Elections and 

Payment Rules 

Proposed § 1.965–7 provides rules 

regarding the timing and manner of 

certain elections that may be available 

to taxpayers under section 965, and 

payments to be made pursuant to those 

elections. The comments and 

modifications with respect to these rules 

are discussed in this Part VII. 

A. Election Statements 

The proposed regulations provide 

that, in order to make elections with 

respect to section 965, the person 

making the election must attach an 

election statement, signed under 

penalties of perjury, to its return for the 

relevant taxable year. Proposed 

§§ 1.965–2(f)(2)(iii)(B)(2), 1.965– 

7(b)(2)(iii), 1.965–7(c)(2)(iii), 1.965– 

7(d)(3)(iii), 1.965–7(e)(2)(iii), and 1.965– 

7(f)(5)(iii). The proposed regulations do 

not address whether the election 

statement attached to or included with 

the return must be signed or whether 

the person making the election can 

attach an unsigned statement and retain 

the signed copy in its records. The final 

regulations provide that the signature 

requirement is satisfied if the unsigned 

copy is attached to a timely-filed return 

of the person making the election, 

provided that the person retains the 

signed original in the manner specified 

in § 1.6001–1(e). See §§ 1.965– 

2(f)(2)(iii)(B)(2), 1.965–7(b)(2)(iii), 

1.965–7(c)(2)(iii), 1.965–7(d)(3)(iii), 

1.965–7(e)(2)(iii), and 1.965–7(f)(5)(iii). 

In addition, comments requested 

clarification regarding whether the 

election statement could be signed by a 

return preparer and who must sign the 

statement in the case of a married filing 

jointly income tax return. The final 

regulations do not specifically address 

who must sign a statement but indicate 

that general rules concerning who is 

authorized to sign tax returns apply. Id. 

B. Acceleration Events and Triggering 

Events 

Section 965(h)(3) provides that an 

acceleration event occurs when there is 

an addition to tax for failure to timely 

pay an installment required under 

section 965(h), a liquidation or sale of 

substantially all of the assets of the 

person who made the section 965(h) 

election (including in a title 11 or 

similar case), a cessation of business by 

the person who made the section 965(h) 

election, or any similar circumstance. 

Proposed § 1.965–7(b)(3)(ii) clarifies 

what events are acceleration events and 

what is considered a similar 

circumstance. Proposed § 1.965– 

7(b)(3)(ii)(B) provides that a liquidation, 

sale, exchange, or other disposition of 

substantially all of the assets of the 

person making the election (including 

in a title 11 or similar case or, in the 

case of an individual, death) is an 

acceleration event. 

Similarly, section 965(i)(2) lists 

triggering events that end the payment 

deferral for purposes of the section 

965(i) election, including a liquidation 

or sale of substantially all of the assets 

of the S corporation (including in a title 

11 or similar case), a cessation of 

business by the S corporation, the S 

corporation ceasing to exist, or any 

similar circumstance. Proposed § 1.965– 

7(c)(3)(ii) clarifies the similar 

circumstances treated as triggering 

events. Specifically, proposed § 1.965– 

7(c)(3)(ii)(B) provides that a liquidation, 

sale, exchange, or other disposition of 

substantially all of the assets of the S 

corporation (including in a title 11 or 

similar case) is a triggering event. 

In addition, section 965(m)(2)(B)(ii) 

provides that, with respect to a real 

estate investment trust (‘‘REIT’’) that 

made a section 965(m) election, a 

liquidation or sale of substantially all of 

the assets of the REIT (including in a 

title 11 or similar case), a cessation of 

business by the REIT, or any similar 

circumstance will cause any amount not 

yet included in gross income (due to the 

section 965(m) election) to be included 

in gross income as of the day before the 

date of the event. Proposed § 1.965– 

7(d)(5) clarifies what a similar 

circumstance is by providing that a 

liquidation, sale, exchange, or other 

disposition of substantially all of the 

assets of the REIT will cause the 

acceleration of the remaining inclusion. 

1. Disposition or Exchange of 

Substantially All of the Assets 

Comments questioned whether a 

disposition of substantially all of the 

assets resulting from a downstream taxfree reorganization or an exchange 

described in section 351 or 721 should 

constitute an acceleration event or 

triggering event, particularly when the 

assets remain under the control of the 

taxpayer, and whether a reorganization 

described in section 368(a)(1)(F) should 

be treated as an acceleration event or 

triggering event. One comment, relating 

only to triggering events under section 

965(i), proposed multiple alternatives, 

including removing the ‘‘exchange or 

other disposition’’ language from 

proposed § 1.965–7(c)(3)(ii)(B) and 

providing that any nonrecognition 

transaction is not an exchange. 

The Treasury Department and the IRS 

have determined that any disposition of 

substantially all of the assets of the 

person making the section 965(h) 

election, the S corporation, or the REIT, 

including in a tax-free reorganization or 

an exchange described in section 351 or 

721, poses a risk to the IRS’s ability to 

collect the full amount of the section 

965(h) net tax liability, section 965(i) 

net tax liability, or total net tax liability 

under section 965, as the case may be. 

The Treasury Department and the IRS 

have determined that it is essential for 

tax administration purposes for the IRS 

to be apprised of these dispositions. 

Providing an exclusion to the general 

rule that an exchange or other 

disposition of substantially all of the 

assets of the person making the section 

965(h) election, the S corporation with 

respect to which a section 965(i) 

election is in effect, or the REIT with a 

section 965(m) election in effect for 

nonrecognition transactions could 

hamper the IRS’s ability to collect the 

outstanding tax liabilities and could 

enable certain taxpayers to 

inappropriately dilute their interests in 

their assets or change their businesses in 

a way that is inconsistent with the 

purposes behind the elections and 

related triggering and acceleration 

events. The final regulations also do not 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1861 

include a special exception for 

reorganizations under section 

368(a)(1)(F) because requiring a transfer 

agreement, if applicable, in those 

situations is necessary for tax 

administration purposes. 

A comment also requested 

clarification of the meaning of 

‘‘substantially all’’ for purposes of the 

acceleration event and triggering event 

rules. The phrase ‘‘substantially all’’ is 

used in various Code provisions and in 

regulations, and often is determined 

based on all of the facts and 

circumstances. Consistent with this 

general approach, the Treasury 

Department and the IRS decline to 

provide a bright-line definition of 

‘‘substantially all’’ in the final 

regulations. 

2. Death of Transferor 

Proposed § 1.965–7(b)(3)(ii)(B) 

provides that for a person who made a 

section 965(h) election, the liquidation, 

sale, exchange, or other disposition of 

substantially all of the assets of the 

person, including, for an individual, by 

reason of death, is an acceleration event. 

Proposed § 1.965–7(b)(3)(iii)(A)(1)(ii) 

specifically excludes death of an 

individual from the covered 

acceleration events that allow for a 

transfer agreement. A comment 

requested that, because death is 

specifically mentioned as a triggering 

event in section 965(i)(2)(A)(iii) but not 

section 965(h)(3), death not be treated as 

an acceleration event for purposes of the 

section 965(h) election. In addition, the 

comment requested that, if death is 

treated as an acceleration event for 

purposes of the section 965(h) election, 

it be treated as a covered acceleration 

event (as described in proposed § 1.965– 

7(b)(3)(iii)(A)(1)) and thus be eligible for 

a transfer agreement. Under section 

965(h)(3), an acceleration event includes 

a liquidation or sale of substantially all 

of the assets of the taxpayer or any 

similar circumstance, and proposed 

§ 1.965–7(b)(3)(ii)(B) provides that an 

exchange or other disposition of 

substantially all of the assets of the 

taxpayer (outside of the context of the 

death of an individual) is an 

acceleration event. The death of an 

individual taxpayer is similar to any 

transfer or other disposition of 

substantially all of the assets of a 

taxpayer, and, accordingly, is a similar 

circumstance that should be an 

acceleration event. The Treasury 

Department and the IRS have 

determined that there are administrative 

difficulties with transferring liabilities 

and executing transfer agreements in the 

event of death. Moreover, in many 

cases, there would be multiple 

beneficiaries in the case of death, and 

multiple transferees are not permitted 

for purposes of section 965(h). For those 

reasons, and because the section 965(i) 

rules more clearly contemplate allowing 

transfers on death (and allowing 

transfers to multiple transferees or 

beneficiaries), the Treasury Department 

and the IRS have determined that it is 

appropriate not to treat the death of an 

individual shareholder as a covered 

acceleration event for purposes of 

section 965(h), and the comment is not 

adopted. 

C. Transfer Agreements 

1. Inclusion of Form 965–A or 965–B 

The proposed regulations provide that 

transfer agreements for purposes of 

section 965(h) and section 965(i) are 

required to include the eligible section 

965(h) transferor’s or eligible section 

965(i) transferor’s most recent Form 

965–A or 965–B, as applicable, among 

other information. Proposed § 1.965– 

7(b)(3)(iii)(B)(4)(v) and (c)(3)(iv)(B)(4)(v). 

In some cases, no Form 965–A or 965– 

B will have been required to be filed 

before the transfer agreement. 

Accordingly, the final regulations clarify 

that the Form 965–A or 965–B is only 

required to be filed with a transfer 

agreement if the eligible section 965(h) 

transferor or eligible section 965(i) 

transferor was required to file the form. 

Section 1.965–7(b)(3)(iii)(B)(4)(v) and 

(c)(3)(iv)(B)(4)(v). 

2. Due Date for Transfer Agreements 

Proposed § 1.965–7(b)(3)(iii)(B)(2)(ii) 

and § 1.965–7(c)(3)(iv)(B)(2)(ii) provide 

that, if an acceleration event or a 

triggering event occurs before 

September 10, 2018, a transfer 

agreement must be filed by October 9, 

2018, in order to be considered timely 

filed. In addition, proposed § 1.965– 

7(b)(3)(iii)(B)(2)(i) and § 1.965– 

7(c)(3)(iv)(B)(2)(i) provide that, if an 

acceleration event or a triggering event 

occurs on or after September 10, 2018, 

a transfer agreement must be filed 

within thirty days of the acceleration or 

triggering event in order to be 

considered timely filed. Proposed 

§ 1.965–7(b)(3)(iii)(B)(2)(i) and § 1.965– 

7(c)(3)(iv)(B)(2)(i) provide that transfer 

agreements must be filed in accordance 

with the rules provided in publications, 

forms, instructions, or other guidance. 

Because additional guidance, including 

where to file the agreements, was not 

issued before certain transfer 

agreements would have been due, the 

transition rules in § 1.965– 

7(b)(3)(iii)(B)(2)(ii) and § 1.965– 

7(c)(3)(iv)(B)(2)(ii) have been updated to 

provide that if a triggering event or 

acceleration event occurs on or before 

February 5, 2019, the transfer agreement 

must be filed by March 7, 2019, in order 

to be considered timely filed. See also 

§ 1.965–7(c)(3)(v)(D)(2)(ii) (similarly 

extending the deadline for filing 

agreements to make a section 965(h) 

election after a triggering event). 

3. Multiple Transferees 

With respect to a section 965(h) 

acceleration event, proposed § 1.965– 

7(b)(3)(iii)(B)(1) defines an eligible 

section 965(h) transferee as a ‘‘single 

United States person that is not a 

domestic pass-through entity’’ that 

meets additional requirements. With 

respect to a section 965(i) triggering 

event, proposed § 1.965–7(c)(3)(iv)(B)(1) 

defines an eligible section 965(i) 

transferee as a ‘‘single United States 

person that is not a domestic passthrough entity.’’ A comment requested 

that multiple transferees be allowed to 

be eligible transferees for purposes of 

both section 965(h) and section 965(i). 

Section 965(h) and proposed § 1.965– 

7(b) do not allow for a partial transfer 

of the section 965(h) net tax liability. 

Allowing multiple transferees would be 

similar to allowing for partial transfers. 

Furthermore, the existence of multiple 

transferees poses significant 

administrative challenges for the IRS. 

Accordingly, the Treasury Department 

and the IRS do not adopt the 

recommendation. However, section 

965(i)(2)(B) specifically contemplates 

partial transfers of the section 965(i) net 

tax liability. As a result, the final 

regulations clarify in § 1.965– 

7(c)(3)(iv)(B)(1) that if a transfer 

(including as a result of the death of an 

eligible section 965(i) transferor) 

consists of multiple partial transfers (as 

described in § 1.965–7(c)(3)(iii)), then 

the eligible section 965(i) transferor can 

enter into multiple transfer agreements, 

one for each partial transfer, with 

different eligible section 965(i) 

transferees. 

4. Consolidated Groups 

Proposed § 1.965–7(b)(3)(ii)(F) 

provides that an acceleration event 

includes, in the case of a consolidated 

group, the consolidated group ceasing to 

exist. Proposed § 1.965– 

7(b)(3)(iii)(A)(1)(iv) provides that, for 

purposes of the eligible section 965(h) 

transferee exception (as defined in 

proposed § 1.965–7(b)(3)(iii)), a covered 

acceleration event includes, with 

respect to an acceleration event under 

proposed § 1.965–7(b)(3)(ii)(F), an event 

resulting from the acquisition of a 

consolidated group within the meaning 

of § 1.1502–13(j)(6) if the acquired 

consolidated group members join a 

1862 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

different consolidated group as of the 

day following the acquisition. The 

proposed regulations do not provide for 

covered acceleration events related to 

other fact patterns in which a 

consolidated group ceases to exist. 

Comments requested that there be an 

additional covered acceleration event to 

account for a situation in which the 

consolidated group ceases to exist by 

reason of one or more members of the 

consolidated group transferring all of 

their assets to other members, with only 

one member remaining (for example, a 

consolidated group consisting only of a 

parent and a subsidiary ceasing to exist 

by reason of the subsidiary liquidating 

into the parent). The Treasury 

Department and the IRS have 

determined that it is appropriate to 

permit the remaining member to enter 

into a transfer agreement in these 

circumstances. Accordingly, § 1.965– 

7(b)(3)(iii)(A)(1)(v) includes this 

scenario as a covered acceleration event. 

In addition, § 1.965–7(b)(3)(iii)(B)(1)(v) 

provides that, with respect to the 

acceleration event in § 1.965– 

7(b)(3)(iii)(A)(1)(v), the remaining 

member of the consolidated group to 

which all of the other members’ assets 

are transferred is an eligible section 

965(h) transferee (provided that it meets 

the remaining requirements of § 1.965– 

7(b)(3)(iii)(B)(1)). 

Another comment requested that 

there be an additional covered 

acceleration event to account for a 

situation in which a consolidated group 

is wholly owned by a corporation that 

is not an includible corporation (within 

the meaning of section 1504(b)) when a 

section 965(h) election was made but 

subsequently becomes an includible 

corporation even though the situation 

does not involve the acquisition of stock 

of the common parent. For example, this 

situation could arise when the 

corporation that owns the consolidated 

group is an S corporation and 

subsequently revokes its S corporation 

election. The Treasury Department and 

the IRS have determined that it is 

appropriate to permit transfer 

agreements in these circumstances. 

Accordingly, § 1.965– 

7(b)(3)(iii)(A)(1)(vi) provides that a 

covered acceleration event occurs when 

the group ceases to exist as a result of 

the termination of the subchapter S 

election pursuant to section 1362(d) of 

a shareholder of the common parent of 

the consolidated group and, for the 

shareholder’s taxable year immediately 

following the termination, the 

shareholder joins in the filing a 

consolidated return as of a consolidated 

group that includes all of the former 

members of the former consolidated 

group. In addition, § 1.965– 

7(b)(3)(iii)(B)(1)(vi) provides that, with 

respect to the acceleration event in 

§ 1.965–7(b)(3)(iii)(A)(1)(vi), the agent 

(within the meaning of § 1.1502–77) of 

the new consolidated group that 

includes the shareholder whose 

subchapter S election was terminated 

and all of the former members of the 

former consolidated group is an eligible 

section 965(h) transferee (provided that 

it meets the remaining requirements of 

§ 1.965–7(b)(3)(iii)(B)(1)). 

5. Joint and Several Liability 

Proposed § 1.965–7(b)(3)(iii)(D)(2) 

provides that an eligible section 965(h) 

transferor remains jointly and severally 

liable for any unpaid installments 

assumed by the eligible section 965(h) 

transferee, as well as any penalties, 

additions to tax, or other additional 

amounts attributable to the section 

965(h) net tax liability that was 

transferred. A representation to this 

effect is required in the transfer 

agreement if the section 965(h) 

transferor remains in existence after the 

transfer. Proposed § 1.965– 

7(b)(3)(iii)(B)(4)(viii). A comment 

questioned whether the joint and 

several liability requirement was 

necessary, given that the eligible section 

965(h) transferee has agreed to assume 

the liability and has the assets from 

which the liability would be satisfied, 

and whether there should be differing 

treatment between eligible section 

965(h) transferors that liquidate 

immediately after the transfer and those 

that do not. The comment also noted 

that in many cases, the section 965(h) 

net tax liability would be taken into 

account in the purchase price of a sale 

of substantially all of the assets of the 

eligible section 965(h) transferor. The 

final regulations do not adopt this 

comment. Requiring the eligible section 

965(h) transferor to be jointly and 

severally liability for the unpaid section 

965(h) net tax liability, as well as any 

penalties, additions to tax, or other 

additional amounts attributable to the 

section 965(h) net tax liability, protects 

the IRS’s ability to collect the full 

amount of the section 965(h) net tax 

liability and helps guard against abusive 

transactions. In addition, as the 

comment noted, taxpayers are able to 

account for the joint and several liability 

in their transactions. 

6. Death of an S Corporation 

Shareholder 

Under section 965(i)(2)(A)(iii) and 

(i)(2)(C) and proposed § 1.965– 

7(c)(3)(ii)(C) and (c)(3)(iv)(A)(1), the 

death of an S corporation shareholder 

who made a section 965(i) election is a 

triggering event, and the deferred 

liability can be transferred if a transfer 

agreement is entered into with an 

eligible section 965(i) transferee (as 

defined in proposed § 1.965– 

7(c)(3)(iv)(B)(1)). Proposed § 1.965– 

7(c)(3)(iv)(B)(2)(i) requires that any 

transfer agreement with respect to a 

section 965(i) election be filed within 30 

days of the date that the transfer 

occurred. The Treasury Department and 

the IRS have determined that when the 

triggering event is the death of the 

eligible section 965(i) transferor, filing a 

transfer agreement within 30 days may 

be impractical. Accordingly, the final 

regulations provide, in § 1.965– 

7(c)(3)(iv)(B)(2)(iii), that in the case of 

the death of an eligible section 965(i) 

transferor, the transfer agreement is 

required to be filed by the later of the 

unextended due date for the eligible 

section 965(i) transferor’s final income 

tax return and March 7, 2019. 

In addition, the final regulations 

clarify in § 1.965–7(c)(3)(iv)(B)(5) what 

transfer agreements are required 

following the death of an eligible 

section 965(i) transferor. In order to 

make the transfer agreements more 

administrable for both taxpayers and the 

IRS, the final regulations provide that, 

except in the case of transfers to trusts, 

in the event of the death of an eligible 

section 965(i) transferor, if the 

beneficiary or beneficiaries are known 

and determined as of the due date for 

the transfer agreement (that is, 

generally, the unextended due date for 

the eligible section 965(i) transferor’s 

final income tax return), then the 

transfer will be treated as a transfer 

directly between the eligible section 

965(i) transferor and the eligible section 

965(i) transferee beneficiary or 

beneficiaries, and only one transfer 

agreement for each eligible section 

965(i) transferee is required. If, however, 

the beneficiary or beneficiaries are not 

known and determined by the due date 

for the transfer agreement, then the 

transfer will be treated as two transfers: 

First, the transfer on death between the 

eligible section 965(i) transferor and his 

or her estate, and, second, a transfer (not 

on death) between the estate and the 

eligible section 965(i) transferee 

beneficiary or beneficiaries, and 

separate transfer agreements are 

required for each transfer. The general 

rule concerning transfers to trusts will 

continue to apply as discussed in Part 

VII.E.1 of this Summary of Comments 

and Explanation of Revisions. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1863 

7. Terms of Transfer Agreements 

a. Transfer Agreements After 

Acceleration Events 

The proposed regulations provide 

specific information and representations 

that a transfer agreement must contain, 

including a statement that the transferee 

agrees to assume the transferor’s 

liability for any unpaid installment 

payments. The final regulations include 

modifications to certain requirements 

for the terms of a transfer agreement. 

First, the final regulations clarify that an 

eligible section 965(h) transferee must 

consent to an assessment with respect to 

the liability that it assumes. 

Specifically, when an eligible section 

965(h) transferor and an eligible section 

965(h) transferee enter into a transfer 

agreement, the amount of the section 

965(h) net tax liability will already be 

assessed against the transferor. For the 

transfer agreements to be administrable, 

the final regulations add the 

requirement that an eligible section 

965(h) transferee waive the right to a 

notice of liability and consent to the 

immediate assessment of the portion of 

the eligible section 965(h) transferor’s 

section 965(h) net tax liability 

remaining unpaid as a term of the 

transfer agreement. Section 1.965– 

7(b)(3)(iii)(B)(4)(ix). 

Second, the final regulations retain 

the proposed regulations’ requirement 

that an eligible section 965(h) transferee 

represent that it is able to make the 

remaining payments with respect to the 

section 965(h) net tax liability being 

assumed. Because the transfer of 

substantially all of the assets of the 

eligible section 965(h) transferor 

presents a risk to the IRS’s ability to 

collect the outstanding section 965(h) 

net tax liability, the final regulations 

require a transfer agreement to include 

a statement as to whether the leverage 

ratio of the eligible section 965(h) 

transferee exceeds three to one, subject 

to modification by future guidance. See 

§ 1.965–7(b)(3)(iii)(B)(4)(ix) and 

(b)(3)(iii)(B)(6). 

A taxpayer with a leverage ratio in 

excess of three to one may be an eligible 

section 965(h) transferee and may file a 

valid transfer agreement, provided the 

requirements of § 1.965–7(b)(3)(iii)(B) 

are met. The IRS may, however, use the 

information provided regarding an 

eligible section 965(h) transferee’s 

leverage ratio in connection with a 

subsequent evaluation of the accuracy of 

an eligible section 965(h) transferee’s 

representation that it has the ability to 

pay the outstanding section 965(h) net 

tax liability. The ability of an eligible 

section 965(h) transferee to pay the 

outstanding section 965(h) net tax 

liability depends on all of the relevant 

facts and circumstances, including its 

leverage ratio and also including the 

eligible section 965(h) transferee’s 

revenue, the value of its assets, its 

access to capital, the volatility of its 

business, the size of the section 965(h) 

net tax liability assumed, and other 

factors. The IRS may request further 

information when evaluating a transfer 

agreement in order to assess these 

aspects of the transferee. Section 1.965– 

7(b)(3)(iii)(C)(1) and (c)(3)(iv)(C)(1). 

If the Commissioner determines that 

this representation (or any of the other 

information contained in the transfer 

agreement) is incorrect, then the transfer 

agreement may be rejected as of the date 

of the acceleration event or the 

Commissioner may determine that an 

acceleration event has occurred with 

respect to the eligible section 965(h) 

transferee as of the date of the 

determination. See § 1.965– 

7(b)(3)(iii)(C)(2). 

Third, § 1.965–7(b)(3)(iii)(B)(4)(xi) 

clarifies, consistent with the 

requirement in proposed § 1.965– 

7(b)(3)(iii)(B)(2)(i) that a transfer 

agreement be filed consistent with other 

guidance, that additional terms for 

transfer agreements may be prescribed 

pursuant to publications, forms, 

instructions, or other guidance. 

b. Transfer Agreements and Consent 

Agreements After Triggering Eevents 

The final regulations also include 

changes to the terms of the transfer 

agreements to be entered into by eligible 

section 965(i) transferees and the 

consent agreements to be entered into 

by certain shareholders after certain 

triggering events consistent with the 

changes to the terms of the transfer 

agreements to be entered into in 

connection with acceleration events 

discussed in Part VI.C.7.a of this 

Summary of Comments and Explanation 

of Revisions. The final regulations 

require a transfer agreement or consent 

agreement to include a statement as to 

whether the leverage ratio of the eligible 

section 965(i) transferee or the taxpayer 

making the section 965(h) election after 

a triggering events exceeds three to one. 

See § 1.965–7(c)(3)(iv)(B)(4)(ix), 

(c)(3)(iv)(B)(6), (c)(3)(v)(D)(4)(v), and 

(c)(3)(v)(D)(6). The final regulations also 

clarify that additional terms for transfer 

agreements and consent agreements in 

connection with triggering events may 

be prescribed pursuant to publications, 

forms, instructions, or other guidance. 

Section 1.965–7(c)(3)(iv)(B)(4)(x) and 

(c)(3)(v)(D)(4)(vi). 

D. Section 965(h) Elections 

1. Deficiencies or Additional Liabilities 

Section 965(h)(4) provides that if a 

deficiency is assessed with respect to a 

person’s section 965(h) net tax liability, 

other than in cases of negligence, 

intentional disregard of rules and 

regulations, or fraud with intent to 

evade tax, the amount of the deficiency 

will be prorated among the installments, 

and for any installment the due date of 

which has already passed, the part of 

the deficiency prorated to that 

installment will be due on notice and 

demand. Proposed § 1.965–7(b)(1)(ii) 

extends this rule to apply in the case of 

a person that increases the amount of its 

section 965(h) net tax liability when it 

files a return after payment of the first 

installment or files an amended return. 

Requiring notice and demand before 

payment of the additional amount when 

it is not due to a deficiency that has 

been assessed is administratively 

difficult and inconsistent with the rule 

provided in proposed § 1.965– 

7(b)(1)(ii)(C), applicable in the case of 

negligence, intentional disregard of 

rules and regulations, or fraud with 

intent to evade tax. Therefore, the final 

regulations have been modified to 

provide that in the case of an additional 

liability reported on a return or 

amended return, any amount that is 

prorated to an installment, the due date 

of which has already passed, will be due 

with the return reporting the additional 

amount. Section 1.965–7(b)(1)(ii)(B). 

The rule with respect to deficiencies 

remains the same, and payment for a 

deficiency prorated to an installment, 

the due date of which has already 

passed, is due on notice and demand. 

Id. 

2. Elections in Multiple Years 

A comment requested clarification 

regarding whether a person who has 

section 965(h) net tax liabilities in 

multiple taxable years due to ownership 

of DFICs with different inclusion years 

can make the section 965(h) election for 

each year individually. Because the 

section 965(h) election is made with 

respect to the section 965(h) net tax 

liability for a taxable year and is made 

with the person’s tax return, it must be 

made separately for each year that the 

person has a section 965(h) net tax 

liability. The Treasury Department and 

the IRS have determined that no 

additional clarification is necessary. 

Section 1.965–7(b)(2) and (g)(4). 

1864 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

E. Section 965(i) Elections 

1. Trusts and Estates 

Comments requested clarification of 

the application of the rules regarding 

elections in the case of trusts and 

estates. These comments can largely be 

divided into two categories: (a) Requests 

for guidance concerning which persons 

are treated as S corporation 

shareholders for purposes of the section 

965(i) election and entering into transfer 

agreements after a triggering event, and 

(b) requests for guidance concerning 

what events constitute triggering events. 

a. Persons Eligible To Make Section 

965(i) Elections and Eligible Section 

965(i) Transferees 

The comments requested that the final 

regulations clarify the definition of 

‘‘pass-through entity’’ in proposed 

§ 1.965–1(f)(28) to provide more 

certainty on the status of grantor trusts 

and qualified subchapter S trusts 

(‘‘QSSTs’’). Comments further noted 

that it may be unclear whether grantor 

trust owners and beneficiaries of QSSTs 

are eligible to make a section 965(i) 

election and enter into transfer 

agreements as eligible section 965(i) 

transferees because it is not clear 

whether such persons are treated as 

shareholders of an S corporation for 

purposes of section 965. They also 

requested that the final regulations 

provide that a person with a section 

965(i) net tax liability be permitted to 

make a section 965(i) election and that 

a person that would be subject to tax on 

a section 965(i) net tax liability be 

permitted to enter into a transfer 

agreement after a triggering event. 

Similarly, they requested that when an 

S corporation is owned by a domestic 

pass-through entity, the domestic passthrough owners be able to make the 

section 965(i) election. The comments 

also requested guidance on who is an 

eligible section 965(i) transferee when 

there is a death and a grantor trust 

becomes a non-grantor trust, given that 

an eligible section 965(i) transferee does 

not include a pass-through entity, as 

defined in proposed § 1.965–1(f)(28). 

The Treasury Department and the IRS 

have determined that the proposed 

regulations are clear that both grantor 

trusts and QSSTs constitute passthrough entities for purposes of 

proposed § 1.965–1(f)(28). The entire 

portion of the income attributable to the 

S corporation stock is taxed to the 

beneficiary of a QSST. See § 1.1361– 

1(j)(1)(i). The same is true for grantor 

trusts. See section 671 and § 1.1361– 

1(h)(1)(i). The Treasury Department and 

the IRS have determined that, because 

the beneficiary of a QSST or the grantor 

(or beneficiary) of a grantor trust is 

treated as an S corporation shareholder 

for subchapter S purposes, it is 

appropriate that the beneficiary or 

grantor makes the section 965(i) election 

and signs a transfer agreement as the 

eligible section 965(i) transferee. While 

the beneficiaries of an electing small 

business trust (‘‘ESBT’’) are treated as S 

corporation shareholders for section 

1361 purposes, they are not treated as 

such for purposes of consenting to an S 

corporation election or taking into 

account shares of an S corporation’s 

items of income, loss, or deduction. See 

§§ 1.1361–1(h)(3) and 1.1362–6(b)(2). 

Thus, the trustee of the S corporation 

portion of an ESBT should make a 

section 965(i) election and be the 

eligible section 965(i) transferee. 

In the case of death, in which a 

grantor trust becomes a non-grantor 

trust, who can enter the transfer 

agreement should depend on whether, 

for example, an election is made to treat 

the trust as a QSST or an ESBT, whether 

the trust is treated as a testamentary 

trust, or whether a section 645 election 

is made to treat the trust as part of the 

estate. Generally, the QSST beneficiary, 

the trustee of an ESBT, or the executor 

of an estate should be permitted to enter 

into the transfer agreement. 

Accordingly, in response to these 

comments, the rules in § 1.965–7(c)(1) 

and (c)(3)(iv)(B)(1) are revised to clarify 

that persons required to consent with 

respect to a trust or estate for purposes 

of section 1362 are eligible to make a 

section 965(i) election and be an eligible 

section 965(i) transferee. 

The comments also requested 

clarification concerning whether an 

ESBT or QSST that is treated as 

bifurcated under trust rules is also 

treated as bifurcated for purposes of 

section 965, including elections, 

acceleration events, and triggering 

events. The comments noted that certain 

trusts, in particular ESBTs, are divided 

into different portions when they hold 

stock of an S corporation. See 

§ 1.641(c)–1(a). Accordingly, separate 

section 965(h) elections and section 

965(i) elections must be made. The final 

regulations do not, however, address the 

application of the trust bifurcation rules, 

which are outside of the scope of this 

rulemaking. 

b. Triggering Events 

Comments requested that certain 

transactions that occur frequently with 

respect to S corporation trusts not be 

treated as triggering events and that 

guidance be provided concerning how 

to enter into a transfer agreement if such 

a transaction is a triggering event. For 

example, family settlement agreements, 

disclaimers, and certain decanting 

transactions result in a legal transfer but 

are not considered a transfer for either 

U.S. federal transfer tax or income tax 

purposes. The comments also noted that 

certain trust transactions may result in 

a change in taxpayer for U.S. federal 

income tax reporting purposes although 

no legal transfer occurred. These 

transactions may include a conversion 

of a grantor trust to a non-grantor trust, 

a trust making a QSST or ESBT election, 

a merger of two or more trusts, or a 

severance of trusts into separate shares. 

A comment also recommended that a 

material modification of a trust, such as 

through an amendment, decanting, or 

judicial reformation, or a material 

modification in a trust’s beneficiaries, 

not constitute a triggering event where 

there is no change in ownership for U.S. 

federal income tax purposes. 

In response to the comments, the final 

regulations clarify that a transfer of S 

corporation stock can only be a 

triggering event if it is a transfer that 

results in a change in ownership for 

U.S. federal income tax purposes. Thus, 

for example, a transfer of S corporation 

stock between a person and a grantor 

trust of which the person is an owner, 

which is disregarded for U.S. federal 

income tax purposes, is not a transfer 

that can constitute a triggering event 

because it does not result in an 

ownership change for U.S. federal 

income tax purposes. Cf. Rev. Rul. 85– 

13, 1985–1 C.B. 184 (providing that no 

sale occurred upon the transfer of trust 

assets from a grantor trust to the 

grantor). Specific guidance concerning 

what transactions are treated as transfers 

that result in a change in ownership for 

U.S. federal income tax purposes is 

outside the scope of these regulations. 

Comments also requested guidance on 

whether a trust’s conversion from 

grantor status to non-grantor status due 

to the death of a grantor, regardless of 

whether the trust is treated as part of the 

decedent’s estate under section 645, is 

a triggering event. Section 965(i)(2)(iii) 

and § 1.965–7(c)(3)(ii)(C) are clear that a 

transfer includes a transfer by reason of 

death, so a trust’s conversion to nongrantor status due to a death is a 

triggering event. Accordingly, no further 

guidance is warranted. 

2. Section 962 Elections 

A comment requested guidance 

concerning the interaction of a section 

962 election and a section 965(i) 

election. The Treasury Department and 

the IRS have determined that it is clear 

that an eligible taxpayer may make a 

section 962 election that applies with 

respect to a section 965(a) inclusion that 

results in a section 965(i) net tax 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1865 

liability that the taxpayer defers 

payment of pursuant to a section 965(i) 

election, because there are no 

limitations in the section 962 

regulations or the section 965 

regulations that would preclude the 

elections. Accordingly, no change is 

made to the final regulations in this 

regard. 

The comment also requested guidance 

concerning whether making both the 

section 962 election and the section 

965(i) election would result in the 

treatment of distributions from a DFIC 

owned by the S corporation to which 

the section 965(i) election relates 

occurring before a triggering event as 

dividends not excluded from gross 

income. The Treasury Department and 

the IRS have determined that it is clear 

that amounts attributable to a section 

965(a) inclusion with respect to which 

a section 962 election applies that 

would otherwise be excluded from gross 

income under section 959 are prevented 

from being excluded before a triggering 

event due to the application of section 

962(d), because no tax will have been 

paid with respect to the section 965(a) 

inclusion. See Part III.D.6 of this 

Summary of Comments and Explanation 

of Revisions for a discussion of the 

application of section 962(d) to section 

965(h) elections, the concepts of which 

apply equally for section 965(i) 

elections. However, as discussed in Part 

III.D.6 of this Summary of Comments 

and Explanation of Revisions with 

regard to the basis adjustments to be 

made in the similar case of a domestic 

pass-through owner that has made a 

section 962 election applicable to its 

distributive share of a domestic passthrough entity’s section 965(a) inclusion 

amount, the issue raised by the 

comment is a longstanding issue of 

general applicability within subpart F 

that is outside of the scope of 

regulations concerning section 965. 

Accordingly, the Treasury Department 

and the IRS decline to adopt the 

comment. 

F. Section 965(m) Elections 

Section 965(m) allows a real estate 

investment trust (REIT) to make an 

election to include its section 965(a) 

inclusions (and correspondingly deduct 

its section 965(c) deductions) over an 

eight-year period, rather than all in one 

taxable year. The schedule for 

inclusions over the eight-year period is 

similar to the schedule for payments for 

the section 965(h) election. See sections 

965(h)(1) and 965(m)(1)(B). A comment 

requested that REITs making section 

965(m) elections be treated the same as 

taxpayers making section 965(h) 

elections and be allowed to make 

adjustments to previously taxed E&P 

and basis under sections 959 and 961 as 

if the REIT had included the full section 

965(a) inclusion (and deducted the full 

section 965(c) deduction) in the taxable 

year or years in which its DFICs had 

subpart F income as a result of section 

965(a). Notwithstanding the similarities 

in the eight-year schedules for section 

965(h) elections and section 965(m) 

elections, the statute is clear that the 

section 965(h) election defers payments 

while the section 965(m) election defers 

inclusions (and deductions). Thus, 

allowing REITs making section 965(m) 

elections to make adjustments under 

sections 959 and 961 as if they had not 

made the section 965(m) election would 

be inconsistent with the statute; 

therefore, the final regulations do not 

adopt the comment. 

Another comment requested that if 

adjustments under sections 959 and 961 

were not permitted until the 

corresponding amounts were included 

in income, the final regulations provide 

guidance concerning the consequences 

if the REIT disposed of DFIC stock 

before all section 965(a) inclusions with 

respect to the stock had been included 

in income, and thus before all 

corresponding adjustments under 

sections 959 and 961 had been made. 

The comment recommended that the 

section 959 and 961 adjustments be 

treated as made immediately before the 

disposition. For the reasons discussed 

in the preceding paragraph, the 

Treasury Department and the IRS have 

determined that such treatment would 

not be appropriate and do not adopt the 

comment. 

G. Section 965(n) Elections 

Proposed § 1.965–7(e) provides that if 

a taxpayer makes a section 965(n) 

election for a taxable year, certain 

section 965-related amounts are not 

taken into account in determining the 

taxpayer’s net operating loss under 

section 172 for the year or in 

determining the taxpayer’s taxable 

income for such taxable year (computed 

without regard to the deduction 

allowable under section 172) that may 

be reduced by net operating loss 

carryovers or carrybacks to such taxable 

year under section 172. A comment 

requested clarification that the section 

965(n) election applies for purposes of 

the alternative minimum tax (‘‘AMT’’) 

and section 1411. The Treasury 

Department and the IRS have 

determined that because the section 

965(n) election affects the net operating 

loss deduction and taxable income, 

which are starting points for 

determining alternative minimum tax 

net operating loss deduction and 

alternative minimum taxable income 

under sections 56(d) and 55(b)(2), 

respectively, it is clear that the section 

965(n) election applies for purposes of 

the AMT. Similarly, it is clear that the 

section 965(n) election affects the 

computations under § 1.1411–4(h) if an 

election under § 1.1411–10(g) has been 

made, and no clarification is needed. 

A comment also requested 

clarification that a section 965(n) 

election can be made for every year in 

which a REIT has a section 965(a) 

inclusion by reason of a section 965(m) 

election. Given that § 1.965–7(e), like 

proposed § 1.965–7(e), provides that a 

section 965(n) election can be made for 

a taxable year in which a person has a 

section 965(a) inclusion, the Treasury 

Department and the IRS have 

determined that no additional 

clarification is necessary. 

H. Election To Use Alternative Method 

of Calculating Post-1986 Earnings and 

Profits 

Proposed § 1.965–7(f)(5)(i) provides 

for an election to use an alternative 

method for calculating post-1986 

earnings and profits and provides that 

the election is made for each specified 

foreign corporation by its controlling 

domestic shareholder (as defined in 

§ 1.964–1(c)(5)) pursuant to the rules of 

§ 1.964–1(c)(3). A comment requested 

modifications regarding multiple 

aspects of this election. 

First, the comment requested that 

references to the rules in § 1.964–1(c)(3) 

be deleted because the requirements, 

particularly with respect to the 

statement required by § 1.964–1(c)(3)(ii) 

and the notice to minority shareholders 

required by § 1.964–1(c)(3)(iii), are too 

onerous for this purpose. Second, the 

comment requested that United States 

shareholders be allowed to make a 

blanket election for all of their specified 

foreign corporations or be allowed to 

make a single election and specifically 

provide a schedule of those specified 

foreign corporations for which they do 

not want to make the election. Third, 

the comment requested that the 

penalties of perjury statement 

requirement be eliminated. 

The Treasury Department and the IRS 

have determined that requiring a 

controlling domestic shareholder to file 

the statement required by § 1.964– 

1(c)(ii) in order to make the election 

described in proposed § 1.965–7(f) is 

duplicative in light of the requirement 

to provide an election statement 

described in proposed § 1.965– 

7(f)(5)(iii). However, the requirement to 

give notice to minority shareholders is 

not a duplicative requirement, and it 

helps ensure that all taxpayers are using 

1866 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

the same amounts for post-1986 

earnings and profits to calculate their 

section 965(a) inclusions. Accordingly, 

§ 1.965–7(f)(5)(i) retains the reference to 

§ 1.964–1(c)(3) but provides that the 

statement described in § 1.964– 

1(c)(3)(ii) is not required. In addition, 

proposed § 1.965–7(f) provides that the 

election is made on a specified foreign 

corporation by specified foreign 

corporation basis, in part because the 

ability to use the November 2, 2017, 

measurement date might differ among 

specified foreign corporations. While it 

is important for the IRS to know what 

method is being used for each specified 

foreign corporation in order to properly 

determine the amount of post-1986 

earnings and profits, it is not necessary 

for a separate statement to be filed with 

respect to each specified foreign 

corporation. Therefore, the final 

regulations permit a single election 

statement to be filed that provides the 

necessary information with respect to 

each specified foreign corporation. 

Finally, the election statement required 

by proposed § 1.965–7(f)(5)(iii) contains 

additional information beyond the 

making of the election, including the 

name and taxpayer identification 

number (if any) of both the person 

making the election and the specified 

foreign corporation, so the request that 

the penalties of perjury statement be 

eliminated is not adopted. See Part 

VII.A of this Summary of Comments and 

Explanation of Revisions for more 

discussion of the election statements. 

I. Total Net Tax Liability Under Section 

965 

Section 965(h) elections and section 

965(i) elections allow the deferral of 

payment of amounts based on a 

taxpayer’s total net tax liability under 

section 965. See § 1.965–7(b)(1), (c)(1), 

(g)(4), and (g)(6). Total net tax liability 

is calculated on the basis of a taxpayer’s 

net income tax ‘‘with’’ and ‘‘without’’ 

the application of section 965, which is 

intended to isolate the portion of a 

taxpayer’s net income tax attributable to 

section 965. 

1. ‘‘Without’’ Prong 

The second prong of the definition of 

total net tax liability under section 965 

(the ‘‘without’’ prong) in the proposed 

regulations calculates the taxpayer’s net 

income tax without regard to section 

965 but also disregards dividends 

received directly or through a chain of 

ownership described in section 958(a). 

Proposed § 1.965–7(g)(10)(i)(B)(2). 

Dividends are disregarded because, 

absent section 965, they would 

generally be taxed in the hands of the 

taxpayer, but such dividends may 

instead be distributions of previously 

taxed E&P if section 965 applies, and 

thus not subject to additional tax if 

section 965 applies. Therefore, absent 

this rule, the tax imposed on dividends 

would be included in the ‘‘without’’ 

prong but not in the ‘‘with’’ prong, 

distorting the ‘‘with’’ and ‘‘without’’ 

calculation so that it no longer isolates 

the net income tax attributable to 

section 965. However, this rule does not 

disregard investments in United States 

property that would give rise to 

inclusions under sections 951(a)(1)(B) 

and 956, even though these inclusions, 

like dividends, could result in income 

inclusions that would be taxable in the 

‘‘without’’ prong absent section 965, but 

may instead be sheltered by previously 

taxed E&P if section 965 does apply. 

Comments recommended that the final 

regulations disregard inclusions under 

sections 951(a)(1)(B) and 956 for 

purposes of the ‘‘without’’ computation 

in order to ensure that the total net tax 

liability under section 965 reflects an 

accurate measure of a taxpayer’s tax due 

to section 965. The final regulations 

adopt this recommendation. See 

§ 1.965–7(g)(10)(i)(B)(2). 

A comment also suggested that the 

final regulations clarify whether the 

‘‘without’’ prong disregards dividends 

received by a United States shareholder 

from a DFIC before the DFIC’s inclusion 

year. The Treasury Department and the 

IRS have determined that disregarding 

such dividends would distort the 

measurement of the taxpayer’s tax due 

to section 965, as those dividends 

would not become distributions of 

previously taxed E&P solely as a result 

of disregarding section 965 in a year for 

which there was no section 965(a) 

inclusion with respect to a DFIC. 

Accordingly, consistent with the change 

discussed in the preceding paragraph 

and in response to the comment, the 

final regulations clarify that the 

dividends disregarded are limited to 

those paid by a DFIC during the DFIC’s 

inclusion year. See id. 

A comment also noted that the 

‘‘without’’ prong of the definition of 

total net tax liability under section 965 

under the proposed regulations 

disregards credits, as well as income or 

deductions properly attributable to 

dividends from a DFIC, even though 

section 965(h)(6)(A)(ii)(II) only 

specifically disregards income or 

deductions. The comment suggested 

that because credits were specifically 

included in the House version of the 

rule, but not the Senate version, 

Congress specifically intended to take 

into account credits in the ‘‘without’’ 

prong. However, there is no legislative 

history explaining the change. A similar 

comment recommended that the 

‘‘without’’ prong of the definition of 

total net tax liability under section 965 

take into account foreign income taxes 

that the taxpayer would have been able 

to use as credits in subsequent years had 

section 965 not been enacted. 

The term ‘‘net income tax’’ is defined 

to mean the regular tax liability reduced 

by the credits allowed under subparts A, 

B, and D of part IV of subchapter A of 

the Code and is not defined as such 

solely with respect to the ‘‘with’’ prong 

in section 965(h)(6)(A)(i), but also the 

‘‘without’’ prong in section 

965(h)(6)(A)(ii). See section 

965(h)(6)(B). Subpart B includes section 

27, which allows for a foreign tax credit. 

The disregard of credits clearly follows 

from the statutory definition of the 

‘‘without’’ prong, as there could be no 

credits attributable to a dividend if 

income attributable to the dividend 

were disregarded. Accordingly, the 

Treasury Department and the IRS have 

determined that the approach of the 

proposed regulations is appropriate, and 

do not adopt the recommendations. 

2. Effect on Total Tax Liability 

A comment suggested that the rules 

for determining a total net tax liability 

under section 965 can result in the total 

tax liability of a United States person 

who makes a section 965(i) election 

being higher than it would have been 

had a section 965(i) election not been 

made. However, the Treasury 

Department and the IRS have 

determined that because such rules 

apply only for purposes of the definition 

of total net tax liability under section 

965, and thus for purposes of 

determining how much can be deferred 

pursuant to a section 965(h) election or 

a section 965(i) election, they have no 

impact on a person’s actual total tax 

liability. Accordingly, no changes are 

made in response to the comment. 

VIII. Comments and Changes to 

Proposed § 1.965–8—Affiliated Groups 

(Including Consolidated Groups) 

Proposed § 1.965–8 sets forth rules 

governing the application of section 965 

and the section 965 regulations to 

members of an affiliated group (as 

defined in section 1504(a)), including 

members of a consolidated group (as 

defined in § 1.1502–1(h)). The 

comments and modifications with 

respect to these rules are discussed in 

this Part VIII. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1867 

A. Treatment of Consolidated Groups 

1. Treatment for Purposes of 

Determining Aggregate Foreign Cash 

Position 

The proposed regulations provide 

rules allowing a section 958(a) U.S. 

shareholder to disregard certain assets 

for purposes of determining its aggregate 

foreign cash position. See proposed 

§ 1.965–3(b). The proposed regulations 

further provide that all members of a 

consolidated group that are section 

958(a) U.S. shareholders of a specified 

foreign corporation are treated as a 

single section 958(a) U.S. shareholder 

for certain enumerated purposes that do 

not include proposed § 1.965–3(b). 

Proposed § 1.965–8(e). Section 3 of 

Notice 2018–78 explained that, to 

prevent the overstatement of the 

aggregate foreign cash position, the final 

regulations would provide that all 

members of a consolidated group that 

are section 958(a) U.S. shareholders of 

a specified foreign corporation would 

also be treated as a single section 958(a) 

U.S. shareholder for purposes of 

§ 1.965–3(b). 

However, comments have noted that 

treating all members of a consolidated 

group that are section 958(a) U.S. 

shareholders of a specified foreign 

corporation as a single section 958(a) 

U.S. shareholder for purposes of 

§ 1.965–3(b) but not for all purposes of 

determining the aggregate foreign cash 

position could still result in 

overstatement of the aggregate foreign 

cash position, if, for example, stock of 

a specified foreign corporation was 

transferred between such shareholders 

between cash measurement dates. 

Accordingly, the final regulations 

provide that the consolidated group 

aggregate foreign cash position is 

determined as if all members of a 

consolidated group that are section 

958(a) U.S. shareholders of a specified 

foreign corporation were a single section 

958(a) U.S. shareholder. See § 1.965– 

8(e)(1), (e)(3), and (f)(4). 

2. Treatment for Other Purposes 

Comments also requested that the 

final regulations treat all members of a 

consolidated group as a single United 

States shareholder for all purposes of 

section 965. One comment highlighted a 

fact pattern in which it argues that the 

anti-abuse rule in § 1.965–4(b) applies 

and causes double taxation if the 

members are treated as separate but 

would not apply if the members were 

treated as a single United States 

shareholder. However, the Treasury 

Department and the IRS have 

determined that treatment of members 

of a consolidated group as a single 

United States shareholder would not 

alter the application of the anti-abuse 

rule in the fact pattern raised. Even if it 

did, however, broadly changing the 

consequences of well-established 

principles concerning the determination 

of inclusions under section 951 in a 

consolidated group would not be 

justified by the application of an antiabuse rule to a transaction that falls 

within its parameters. See Part VI.C.5 of 

this Summary of Comments and 

Explanation of Revisions for a 

discussion of why the final regulations 

do not adopt recommendations to treat 

all members of a consolidated group 

that are section 958(a) U.S. shareholders 

of a specified foreign corporation as a 

single section 958(a) U.S. shareholder 

for purposes of determining foreign 

income taxes deemed paid with respect 

to section 965(a) inclusions. 

B. Treatment of Affiliated Groups Other 

Than Consolidated Groups 

A comment also suggested that 

section 958(a) U.S. shareholders that are 

members of an affiliated group that do 

not file a consolidated U.S. federal 

income tax return also be treated as a 

single United States shareholder for 

purposes of determining the aggregate 

foreign cash position of each member. It 

suggested that the statute evidences 

Congressional intent for such treatment. 

The Treasury Department and the IRS 

have determined that the rules in 

section 965(b)(5) concerning the 

allocation of an affiliated group 

member’s aggregate unused E&P deficit 

to certain members of its affiliated group 

do not evidence an intent to treat all 

members of an affiliated, but not 

consolidated, group as a single United 

States shareholder and decline to adopt 

the recommendation. 

IX. Other Comments 

A. Application to Individuals 

Numerous comments recommended 

that guidance exempt individuals from 

the application of section 965. A 

comment also recommended that 

section 965(c)(3)(E), which provides that 

the cash position of certain 

noncorporate entities must be taken into 

account in determining a United States 

shareholder’s aggregate foreign cash 

position, not apply with respect to 

individuals but did not supply any 

reasoning for the recommendation. The 

statute applies to increase the subpart F 

income of all DFICs, with no exception 

to the extent that a DFIC has one or 

more United States shareholders that are 

individuals. See section 965(a). Further, 

the legislative history expressly 

provides that all United States 

shareholders, including individuals, are 

subject to section 965. See H.R. Rep. No. 

115–446, at 606 (2017) (‘‘In contrast to 

the participation exemption deduction 

[in section 245A] available only to 

domestic corporations that are U.S. 

shareholders under subpart F, the 

transition rule applies to all U.S. 

shareholders.’’). Accordingly, the final 

regulations do not adopt these 

recommendations. The final regulations 

also do not adopt a related 

recommendation to permit retroactive 

entity classification elections to treat 

DFICs as disregarded for U.S. federal 

income tax purposes, which would be 

out of scope and contrary to the 

legislative history indicating that the 

Treasury Department and the IRS were 

expected to prevent the avoidance of 

section 965. See H.R. Rep. No. 115–466, 

at 619 (2017). 

Another comment disputed the 

description of the clear application of 

section 965(c) and the proposed 

regulations thereunder in Part XI.C.2 of 

the Explanation of Provisions in the 

proposed regulations but did not suggest 

any changes to the rules in the proposed 

regulations. The Treasury Department 

and the IRS have determined that the 

proposed regulations are consistent with 

the statute and that Part XI.C.2 of the 

Explanation of Provisions in the 

proposed regulations accurately 

describes the rules, and thus that no 

changes are needed in response to the 

comment. 

B. Section 962 Elections 

A comment requested that the 

Treasury Department and the IRS 

consider providing relief for individuals 

who make a section 962 election and 

subsequently receive a distribution of 

section 965(a) previously taxed earnings 

and profits or section 965(b) previously 

taxed earnings and profits from a DFIC 

to provide parity with corporations. 

However, as the comment 

acknowledges, section 962(d) limits the 

application of section 959 in the case of 

an individual that has made a section 

962 election, and, as discussed in Part 

III.D.6 of this Summary of Comments 

and Explanation of Revisions, section 

961 similarly limits the availability of 

basis for a distribution of previously 

taxed E&P in the case of a section 962 

election. Accordingly, the Treasury 

Department and the IRS have 

determined that no relief is appropriate. 

Another comment requested guidance 

concerning the interaction of a section 

962 election and a § 1.1411–10(g) 

election; specifically, whether tax is 

imposed under section 1411 on a 

distribution of previously taxed E&P 

that are not excluded from an 

1868 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

individual’s income as a result of the 

application of section 959(d) and what 

the effects are on the section 1411 tax 

basis in DFIC stock. Because this is an 

issue of general applicability with 

respect to previously taxed E&P and not 

specific to the application of section 

965, the final regulations do not address 

this issue. 

C. RICs 

A comment requested that guidance 

affirm that section 965(a) inclusions do 

not affect regulated investment 

company (‘‘RIC’’) qualification. The 

application of the RIC qualification 

rules is outside of the scope of the final 

regulations. 

D. Extension of Limitation on 

Assessment 

A comment suggested that the final 

regulations clarify whether the 

extension of the limitation on the time 

period for assessment under section 

965(k) applies to domestic pass-through 

owners. The comment also suggested 

that the final regulations clarify that the 

extension does not apply for purposes of 

the alternative minimum tax, the tax 

under section 1411, the tax under 

section 4968, or the tax under section 

4940. In addition, the comment 

recommended clarifying the interaction 

of the extension of the limitation on the 

time period for collection in section 

965(i)(6) with the extension in section 

965(k) and the interaction of section 

965(k) with partnership audit rules 

enacted by the Bipartisan Budget Act of 

2015, Public Law 114–74, 129 Stat. 587 

(‘‘BBA’’). The Treasury Department and 

the IRS have determined that, because 

section 965(k) applies to the net tax 

liability under section 965 (as defined in 

section 965(h)(6)), and § 1.965–7(g)(10) 

defines total net tax liability under 

section 965 consistently with the 

definition under section 965(h)(6), it is 

clear that section 965(k) applies to any 

total net tax liability under section 965, 

including that of a domestic passthrough owner. Moreover, the 

definitions of net tax liability under 

section 965 in section 965(h)(6) and 

total net tax liability under section 965 

in § 1.965–7(g)(10) are clear that they do 

not include the taxes mentioned by the 

comment. The Treasury Department and 

the IRS have also determined that it is 

clear that section 965(k) does not limit 

section 965(i)(6). Accordingly, the 

comment is not adopted. The final 

regulations do not address the 

interaction of section 965(k) with the 

BBA rules, as those are outside of the 

scope of this rulemaking. 

E. Late Election Relief 

Section 965 includes statutory due 

dates for making section 965(h) 

elections, section 965(i) elections, 

section 965(m) elections, and section 

965(n) elections. In addition to 

furnishing guidance with respect to 

statutory elections, the proposed 

regulations provide taxpayers with two 

additional elections in proposed 

§§ 1.965–2(f)(2) and 1.965–7(f) and 

prescribe due dates for making these 

regulatory elections. The proposed 

regulations indicate that relief under 

§ 301.9100–2 or § 301.9100–3 is not 

available with respect to any election 

under section 965. A comment 

recommended that the Treasury 

Department and the IRS reverse its 

position in the proposed regulations and 

grant section 9100 relief for the statutory 

and regulatory elections with respect to 

section 965. The IRS does not have the 

discretion to provide section 9100 relief 

with respect to an election whose due 

date is prescribed by statute. 

Furthermore, in addition to providing 

additional time for the basis election, as 

discussed in Part III.D.1 of this 

Summary of Comments and Explanation 

of Revisions, Notice 2018–78 provided a 

postponement for taxpayers affected by 

Hurricane Florence to make and revoke 

all elections with respect to section 965. 

The Treasury Department and the IRS 

have determined that providing 

additional election relief would create 

administrative difficulties and is 

therefore inappropriate. Accordingly, 

the recommendation is not adopted. 

X. Applicability Dates 

No comments were received with 

respect to the applicability dates of the 

proposed regulations. The final 

regulations retain the applicability dates 

that were in the proposed regulations 

and, consistent with the applicability 

date of section 965, generally apply 

beginning the last taxable year of a 

foreign corporation that begins before 

January 1, 2018, and with respect to a 

United States person, beginning the 

taxable year in which or with which 

such taxable year of the foreign 

corporation ends. See section 

7805(b)(2). 

Effect on Other Documents 

Notice 2018–07 (2018–4 I.R.B. 317) is 

obsolete as of February 5, 2019. 

Sections 1 through 4 and 6 of Notice 

2018–13 (2018–6 I.R.B. 341) are obsolete 

as of February 5, 2019. 

Sections 1 through 5 and 7 of Notice 

2018–26 (2018–16 I.R.B. 480) are 

obsolete as of February 5, 2019. 

Sections 1 through 3 and 5 of Notice 

2018–78 (2018–42 I.R.B. 604) are 

obsolete as of February 5, 2019. 

Statement of Availability of IRS 

Documents 

IRS Revenue Procedures, Revenue 

Rulings, notices, and other guidance 

cited in this document are published in 

the Internal Revenue Bulletin or 

Cumulative Bulletin and are available 

from the Superintendent of Documents, 

U.S. Government Printing Office, 

Washington, DC 20402, or by visiting 

the IRS website at http://www.irs.gov. 

Special Analyses 

I. Regulatory Planning and Review 

Executive Orders 13563 and 12866 

direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, 

reducing costs, harmonizing rules, and 

promoting flexibility. OIRA has 

designated this rule as an economically 

significant regulatory action under 

section 3(f) of Executive Order 12866 

and the Memorandum of Agreement 

(MOA), Review of Tax Regulations 

under Executive Order 12866 (April 11, 

2018). Accordingly, the rule has been 

reviewed by the Office of Management 

and Budget. 

A. Need for the Final Regulations 

These final regulations implement 

section 965 of the Code as amended by 

the Act. The final regulations provide 

rules for determining the section 965(a) 

inclusion amount of a United States 

shareholder of a foreign corporation 

with accumulated post-1986 deferred 

foreign income. The final regulations 

directly implement the statutory 

requirements. The Senate Committee on 

Finance stated with respect to section 

965: 

To ensure that all distributions from 

foreign subsidiaries are treated in the same 

manner under the participation exemption 

system, the Committee believes that it is 

appropriate to tax such earnings as if they 

had been repatriated under present law, but 

at a reduced rate. The Committee believes the 

tax on accumulated foreign earnings should 

apply without requiring an actual 

distribution of earnings, and further believes 

that the tax rate should take into account the 

liquidity of the accumulated earnings. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1869 

Senate Committee on Finance, 

Explanation of the Bill, at 358 

(November 22, 2017). 

B. Background 

The international tax system prior to 

the Act created strong incentives for 

U.S. companies to keep their earnings 

and profits overseas, an action known as 

deferral, in order to avoid paying a 

sizeable residual U.S. tax. The Act 

ended deferral and the resulting 

‘‘lockout effect.’’ It introduced a onetime tax on the stock of any deferred 

E&P not previously taxed by the United 

States, regardless of whether those 

earnings are repatriated. Cash or cashequivalent assets held by a foreign 

corporation result in a higher rate of 

repatriation tax than non-cash assets, 

such as plant, property, and equipment. 

The tax applies to the accumulated 

stock of deferred E&P as of the last 

taxable year of a foreign corporation 

beginning before January 1, 2018, and 

with respect to United States 

shareholders, for taxable years in which 

or with which the taxable year of the 

foreign corporation ends; these details 

are important for understanding the 

economic impacts of the final 

regulations. 

The final regulations address open 

questions regarding the application of 

section 965 and comments received on 

the proposed regulations. They provide 

rules related to section 965 described in 

the four notices issued since December 

22, 2017, with certain modifications, as 

well as additional guidance related to 

section 965. Specifically, the guidance 

provides general rules and definitions, 

as well as rules related to the 

determination and treatment of section 

965(c) deductions, rules that disregard 

certain transactions in connection with 

section 965, rules related to foreign tax 

credits, rules regarding elections and 

payments, rules regarding the 

application of the section 965 

regulations to affiliated groups, 

including consolidated groups, rules on 

dates of applicability, rules relating to 

section 962 elections, and rules 

regarding the application of section 

986(c) in connection with section 965. 

These final regulations are designed to 

provide clarity and reduce unnecessary 

burdens on taxpayers, including by 

providing guidance on how to apply 

particular mechanical rules. 

C. Baseline 

The baseline constitutes a world in 

which no regulations pertaining to 

section 965 had been promulgated. The 

following qualitative analysis describes 

the anticipated impacts of the 

regulations relative to the baseline. 

D. Consideration of Alternatives 

For a discussion of the alternatives 

considered in the promulgation of the 

proposed regulations, see Parts II 

through IX of the Summary of 

Comments and Explanation of 

Revisions. For example, see Part II of the 

Summary of Comments and Explanation 

of Revisions for a discussion of the 

alternatives considered with respect to 

the determination of, among other 

things, post-1986 earnings and profits, 

cash measurement dates, and short-term 

obligations, and Part III.D of the 

Summary of Comments and Explanation 

of Revisions for a discussion of the 

alternatives considered to the rule 

permitting elective basis adjustments to 

the stock of certain DFICs and E&P 

deficit foreign corporations. For a 

discussion of additional alternatives 

considered in the promulgation of the 

final regulations, see Part G of this 

Special Analyses. 

E. Economic Analysis of Provisions 

Substantially Unchanged From the 

Proposed Regulations 

The final regulations enhance the 

performance of the U.S. economy by 

reducing uncertainty and ambiguity 

over interpretation of the section 965 

requirements. Absent these final 

regulations, different parties would 

likely interpret the statute in different 

ways. Such disparate interpretations 

could lead similarly situated taxpayers 

to calculate their tax liability differently 

and therefore possibly to make 

organizational or investment decisions 

under different signals of economic 

value, an economically inefficient 

outcome. The final regulations, 

following the proposed regulations with 

primarily only technical modifications, 

reduce uncertainty and ambiguity by: 

(1) Providing that all members of a 

consolidated group that are United 

States shareholders of a specified 

foreign corporation are treated as a 

single United States shareholder for 

certain purposes; (2) introducing 

definitions of terminology used; (3) 

coordinating foreign tax credit rules; (4) 

providing explicit mechanical rules for 

applying section 965 in a variety of 

complex scenarios; (5) making explicit 

the process for making elections and 

paying the tax; and (6) providing dates 

of applicability. 

In consultation with taxpayers, the 

Treasury Department and the IRS also 

determined that there are multiple 

instances throughout the statute where 

the transition tax may be artificially 

inflated because of double counting of 

cash and E&P due to multiple testing 

dates and chains of ownership. Double 

counting, as well as non-counting, is 

inequitable because similarly situated 

taxpayers may differ in terms of the 

amounts of income that fall into the 

specific categories that may be subject to 

double counting or non-counting. As a 

result of this analysis, the final 

regulations, following the proposed 

regulations with only technical 

modifications, reduce double counting 

and non-counting and produce more 

equitable tax outcomes across otherwise 

similarly situated taxpayers by: (1) 

Preventing double counting in 

computing the aggregate foreign cash 

position, for example, by disregarding 

receivables and payables between 

related specified foreign corporations 

with a common U.S. shareholder; and 

(2) preventing double-counting and noncounting in the computation of deferred 

earnings arising from amounts paid or 

incurred between related parties 

between measurement dates. 

F. Responses to Comments 

The Treasury Department and the IRS 

received comments from the public in 

response to the proposed regulations. 

This section discusses significant issues 

brought up in the comments for which 

economic reasoning is insightful. For a 

full discussion of comments received, 

see the Summary of Comments and 

Explanation of Revisions section of this 

preamble. 

1. Basis Election Rules 

To understand the basis election, it is 

useful to understand that when a United 

States shareholder includes an amount 

in income related to the subpart F 

income of its CFC, the CFC’s earnings 

that are associated with the income 

inclusion are considered as previously 

taxed. Thus, when those previously 

taxed E&P are distributed to the United 

States shareholder, the United States 

shareholder generally does not include 

them in income. Additionally, in 

general, the subpart F inclusion also 

causes an upward basis adjustment in 

the stock of the CFC equal to the amount 

of the income inclusion. This also 

prevents double taxation through capital 

gain recognized in the event that the 

CFC is sold. Because this increase in 

basis is only needed to avoid double 

taxation until the previously taxed E&P 

are distributed, once the earnings are 

distributed, there is a corresponding 

downward adjustment in basis of the 

CFC. If there is insufficient basis in the 

stock to account for the decrease, then 

the United States shareholder must 

recognize gain equal to the difference 

between the amount of the basis and the 

reduction. 

1870 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

When applying the framework laid 

out above in the context of section 965, 

there are several places where 

additional rules were needed. Under 

section 965(b)(4)(A), earnings of DFICs 

are treated as previously taxed E&P 

(‘‘section 965(b) previously taxed 

earnings and profits’’) if a deficit is used 

to offset those earnings for purposes of 

determining the United States 

shareholder’s inclusion under section 

965(a). However, the statute does not 

provide for a basis increase to the stock 

of the DFIC, even though other 

provisions of the Code still require a 

basis decrease when the section 965(b) 

previously taxed earnings and profits 

are distributed. Thus, under the statute, 

there could be a disincentive to 

distribute section 965(b) previously 

taxed earnings and profits because the 

United States shareholder has to reduce 

its basis in its CFC, and in some 

instances, recognize gain, because the 

initial offsetting basis increase did not 

occur. 

Under section 965(b)(4)(B), the deficit 

in E&P in an E&P deficit foreign 

corporation is generally eliminated to 

the extent that it is used to offset 

earnings of a DFIC. The increase in E&P 

without a corresponding decrease in the 

basis of the E&P deficit foreign 

corporation introduces a distortion into 

the system because it preserves a loss in 

the stock of the entity even though the 

loss in earnings and profits has been 

utilized and eliminated. 

Consistent with the legislative history, 

under the proposed regulations, a 

taxpayer could elect to make certain 

basis adjustments related to the 

taxpayer’s section 965(b) previously 

taxed earnings and profits. This election 

was allowed in order to eliminate the 

distortions in the basis of the stock of 

the DFIC and E&P deficit foreign 

corporations. The proposed regulations 

allowed the taxpayer to elect to increase 

the basis of certain stock of its DFICs 

pro rata by the amount of its section 

965(b) previously taxed earnings and 

profits. However, for consistency, the 

taxpayer was then also required to 

reduce the basis of certain stock of its 

E&P deficit foreign corporations by an 

equivalent amount, and recognize gain 

to the extent the reduction exceeded the 

amount of basis the taxpayer had in the 

stock. The proposed regulations 

therefore reduced the disincentive to 

repatriate section 965(b) previously 

taxed earnings and profits. However, the 

forced gain recognition could have 

discouraged some taxpayers from 

making the election, which would 

continue the disincentive to repatriate 

section 965(b) previously taxed earnings 

and profits, retaining the distortion in 

the basis of their E&P deficit foreign 

corporations and thereby distorting 

taxpayers’ investment and planning 

decisions. 

The final regulations therefore revise 

this rule slightly to provide an even 

more flexible election. The final 

regulations permit a taxpayer to increase 

its basis in the stock of its DFICs by the 

lesser of its section 965(b) previously 

taxed earnings and profits or the amount 

it can reduce the stock basis of its E&P 

deficit foreign corporations without 

recognizing gain. Additionally, subject 

to certain limitations, the taxpayer is 

allowed to designate which stock of a 

DFIC is increased and by how much. 

This new election further incentivizes 

taxpayers to make an election to reduce 

some of the distortions created by the 

statute, by providing some basis in the 

DFICs with section 965(b) previously 

taxed earnings and profits that can be 

used to repatriate those earnings, and by 

reducing some of the basis in the E&P 

deficit foreign corporations to account 

for the utilization and elimination of the 

deficit. Additionally, allowing taxpayers 

the flexibility to assign basis increases 

to stock in a way which benefits them 

the most, rather than merely allocating 

the increases pro rata among the 

taxpayers’ DFICs, further neutralizes 

any negative impact of the statute on the 

incentive to repatriate section 965(b) 

previously taxed earnings and profits. 

In developing the final regulations, 

the Treasury Department and the IRS 

considered a number of options related 

to the basis election, including retaining 

the rule in the proposed regulations, 

requiring that the taxpayer increase the 

basis in the stock of its DFICs on a pro 

rata basis rather than by designation, 

and a more complex rule that would 

have permitted additional basis 

adjustments where an E&P deficit 

foreign corporation had basis in excess 

of its deficit. The rules in the final 

regulation balance administrative and 

compliance concerns, while still 

allowing the maximum amount of 

flexibility for taxpayers in their 

investment and repatriation planning. 

This increased flexibility and clarity 

provided by the final regulations helps 

to ensure that taxpayers face more 

uniform incentives regarding section 

965(b) previously taxed earnings and 

profits, and minimizes distortions to 

taxpayer behavior resulting from the 

adjustments provided for by the statute. 

See Part III.D of the Summary of 

Comments and Explanation of Revisions 

for additional discussion of the 

considerations taken into account with 

respect to this issue. 

2. Cash Position Calculation 

In the case of a domestic corporate 

United States shareholder, section 965 

generally taxes foreign earnings at a 

15.5% rate if held in cash, but only at 

8% otherwise. The cash definition in 

the statute and the proposed regulations 

includes both cash and cash 

equivalents. A number of comments 

were received requesting that certain 

assets be excluded from the list of assets 

counted as cash equivalents, including 

commodities held as inventories or 

supplies and stock of publicly traded 

companies. The final regulations 

provide a narrow exception from the 

definition of ‘‘cash position’’ for certain 

commodities held by a specified foreign 

corporation in the ordinary course of its 

trade or business as well as for certain 

privately negotiated contracts to buy or 

sell such assets. 

The Treasury Department and the IRS 

have determined that assets that would 

otherwise constitute cash equivalents 

should not be treated as such for 

purposes of section 965 if they 

constitute inventory or supplies under 

longstanding tax principles. These types 

of assets have been defined by statute 

and decades of case law as property 

used in the ordinary course of a 

taxpayer’s business, typically for sale to 

customers or further use via processes 

such as manufacturing and refinement. 

In general, these types of assets are not 

held for investment with the goal of 

recognizing appreciation over a 

substantial period of time, but are rather 

turned over (or used to make property 

that is turned over) routinely in the 

ordinary conduct of business. 

These well-settled delineations of 

what constitute inventory or supplies 

are consistent with the statutory 

definition of and legislative history 

explaining cash-equivalent assets in 

section 965(c)(3)(B)(iii). Moreover, the 

contours of this category have been 

carefully defined through common law 

and are generally well-understood by 

taxpayers. As a result, an exception 

from cash-equivalent assets for this type 

of property is well-defined and 

understood, consistent with statutory 

intent, and appropriately narrow. By 

contrast, other potential exceptions 

would have required the creation of new 

terms and concepts, led to potential 

over- or under-inclusiveness, and 

created uncertainty. For these reasons, 

the Treasury Department and the IRS 

determined that the general approach in 

the proposed regulations was most 

consistent with the statute and 

legislative history, subject to the narrow 

exception added to the final regulations 

for the reasons discussed above. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1871 

Further, providing broad exceptions 

could create complexity and increased 

administrative and compliance burdens. 

See Part II.D of the Summary of 

Comments and Explanation of Revisions 

for a more complete discussion of the 

considerations taken into account with 

respect to this issue. 

3. Total Net Tax Liability Under Section 

965 

Section 965(h) elections and section 

965(i) elections allow a taxpayer to defer 

payment of its total net tax liability 

under section 965. (For section 965(h), 

the election provides deferral over 8 

years, whereas for section 965(i) the 

election provides indefinite deferral 

until the occurrence of certain triggering 

events.) Total net tax liability under 

section 965, which defines the portion 

of a taxpayer’s income tax eligible for 

deferral, is equal to the difference 

between a taxpayer’s net income tax 

‘‘with’’ and ‘‘without’’ the application of 

section 965; this is intended to isolate 

the portion of a taxpayer’s net income 

tax attributable solely to section 965. 

Under the statute, the ‘‘without’’ prong 

calculates a taxpayer’s net income tax 

without regard to section 965, but also 

disregards dividends received from a 

foreign subsidiary. Dividends are 

disregarded because, absent section 965, 

the dividends generally would be taxed 

in the hands of the taxpayer, but such 

dividends would be distributions of 

previously taxed E&P if section 965 

applies, and thus not subject to 

additional tax. 

Absent the provision in the statute 

that disregards dividends received from 

a foreign subsidiary in the ‘‘without’’ 

prong, the tax imposed on dividends 

would be included in the ‘‘without’’ 

prong but not in the ‘‘with’’ prong, 

distorting the ‘‘with’’ and ‘‘without’’ 

calculation so that it no longer isolates 

the net income tax attributable to 

section 965, and under-counting income 

eligible for deferral. 

In response to comments, the final 

regulations also disregard effective 

repatriations taxed in a manner similar 

to dividends under section 951(a)(1)(B) 

resulting from a foreign subsidiary’s 

investments in United States property 

under section 956 for purposes of 

calculating the ‘‘without’’ prong. In the 

year that section 965 applied, taxpayers 

may have chosen to borrow funds from 

their CFCs instead of receiving a regular 

dividend distribution, because such 

loans would not be subject to tax as 

effective repatriations of previously 

taxed E&P and their annual cash 

distribution policies could not be easily 

adjusted following passage of the Act. 

Without the final regulations, taxpayers 

that received these loans from their 

CFCs would be required to include the 

loan amount in the ‘‘without’’ 

calculation, leading to a distortion in 

the ‘‘with’’ and ‘‘without’’ calculation so 

that it no longer isolates the net income 

tax attributable to section 965, resulting 

in a reduced net income tax attributable 

to section 965, and a loss of some of the 

deferral benefit of section 965(h) and (i). 

While the Treasury Department and 

the IRS considered retaining the 

proposed rule, the final regulations do 

not do so because the amounts of 

inbound loans, like dividends, will 

generally be non-taxable investments of 

previously taxed E&P ‘‘with’’ section 

965, but taxable as effective 

repatriations ‘‘without’’ section 965, and 

thus, as stated previously, including 

these amounts in the ‘‘without’’ 

calculation would inappropriately 

decrease the amount of the taxpayer’s 

net tax liability eligible for the deferral 

elections and fail to isolate the portion 

of the taxpayer’s net tax liability 

attributable solely to section 965. See 

Part VII.I.1 of the Summary of 

Comments and Explanation of Revisions 

for a more complete discussion of the 

considerations taken into account with 

respect to this issue. 

II. Paperwork Reduction Act 

A. Collection of Information Imposed by 

the Regulations 

The collection of information 

imposed directly by these regulations is 

contained in §§ 1.965–2(d)(2)(ii)(B), 

1.965–2(f)(2)(iii)(B), 1.965–3(b)(2), 

1.965–3(c)(3), 1.965–4(b)(2)(i), 1.965– 

4(b)(2)(iii)(B), 1.965–7(b)(2), 1.965– 

7(b)(3)(iii)(B), 1.965–7(c)(2), 1.965– 

7(c)(3)(iv)(B), 1.965–7(c)(3)(v)(D), 1.965– 

7(c)(6)(i), 1.965–7(d)(3), 1.965–7(e)(2), 

1.965–7(f)(5), and 1.965–8(c). The 

collection of information provided by 

these regulations has been reviewed and 

approved by the Office of Management 

and Budget under control number 1545– 

2280. The information is required in 

order for the IRS to be aware if a 

taxpayer makes an election, transfers a 

section 965(h) net tax liability or section 

965(i) net tax liability pursuant to a 

transfer agreement, or takes a position 

that the anti-abuse rules (described in 

Part V of the Summary of Comments 

and Explanation of Revisions section of 

this preamble) do not apply. 

The estimates for the collection of 

information provided by these final 

regulations are that 100,000 respondents 

will require 5 hours per response for a 

total reporting burden of 500,000 hours. 

A valuation of the burden hours at $95/ 

hour ($2017) leads to a PRA-based 

estimate of the reporting costs to 

taxpayers of $47,500,000. This is a onetime paperwork burden. The Treasury 

Department and the IRS anticipate 

substantially all paperwork burdens 

related to the final regulations to be 

incurred only with respect to the 

inclusion year. Any subsequent 

reporting (such as in connection with a 

transfer of a section 965(h) net tax 

liability or section 965(i) net tax 

liability) would be negligible burdens 

that implement elections made and 

payments calculated in the inclusion 

year. These burden estimates capture 

only those burdens imposed by the final 

regulations and do not include burden 

estimates for forms associated with the 

statute. 

Comments suggested that the burden 

reported in connection with the 

collection of information requirements 

under the proposed regulations did not 

appropriately take into account the time 

necessary for determining net tax 

liability under section 965 and 

performing other computations related 

to the determination of such net tax 

liability. However, the collections of 

information under the proposed 

regulations do not relate to such 

computations; they relate solely to the 

making of elections, filing of transfer 

agreements, and reporting of positions 

concerning the application of anti-abuse 

rules. Limited information is required to 

make such elections, file such transfer 

agreements, or do such reporting, and 

accordingly, five hours is an appropriate 

estimate of the burden imposed by the 

collections of information in the final 

regulations. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection of information 

displays a valid OMB control number. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. The IRS has 

posted information for taxpayers on 

their recordkeeping requirements at 

https://www.irs.gov/taxtopics/tc305. 

Generally, tax returns and tax return 

information are confidential, as required 

by 26 U.S.C. 6103. 

B. Forms Created or Modified To Collect 

Information 

In addition to the collection of 

information requirements in the final 

regulations, the enactment of section 

965 necessitated the creation and 

modification of certain forms, which are 

needed to capture changes solely made 

by the Act and do not reflect a burden 

imposed by the final regulations. The 

Treasury Department and the IRS intend 

1872 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

that the collections of information 

relating to the reporting and payment of 

tax under section 965 will be conducted 

by way of the forms and instructions 

identified thus far in the following table. 

As a result, for purposes of the 

Paperwork Reduction Act (44 U.S.C. 

3507(d)), the reporting burden 

associated with the collection of 

information in those forms will be 

reflected in the Form 14029, Paperwork 

Reduction Act Submission, associated 

with those forms. 

RELATED NEW OR REVISED TAX FORMS

New forms Revision of 

existing form 

Number of respondents 

(estimated) 

Form 965 ..................................................................................................................... X ........................ 50,000—100,000 

Form 965–A ................................................................................................................. X ........................ 35,000–70,000 

Form 965–B ................................................................................................................. X ........................ 15,000–30,000 

Form 990–PF ............................................................................................................... ........................ X <1,000 

Form 990–T ................................................................................................................. ........................ X <1,000 

Form 1040 ................................................................................................................... ........................ X 27,000–57,000 

Form 1041 ................................................................................................................... ........................ X <1,000 

Form 1065 ................................................................................................................... ........................ X 8,000–10,000 

Form 1120 ................................................................................................................... ........................ X 12,000–20,000 

Form 1120–C ............................................................................................................... ........................ X <1,000 

Form 1120–L ............................................................................................................... ........................ X <1,000 

Form 1120–PC ............................................................................................................ ........................ X <1,000 

Form 1120–REIT ......................................................................................................... ........................ X <1,000 

Form 1120–RIC ........................................................................................................... ........................ X <1,000 

Form 1120–S ............................................................................................................... ........................ X 3,000–5,000 

The current status of the Paperwork 

Reduction Act submissions related to 

the tax forms that will be created or 

revised as a result of section 965 is 

provided in the following table. The 

burdens associated with the information 

collections in the forms are included in 

aggregated burden estimates for the 

OMB control numbers listed in the 

following table which, in the case of 

1545–0123, represents a total estimated 

burden time, including all other related 

forms and schedules for corporations, of 

3.157 billion hours and total estimated 

monetized costs of $58.148 billion 

($2017) and, in the case of 1545–0074, 

a total estimated burden time, including 

all other related forms and schedules for 

individuals, of 1.784 billion hours and 

total estimated monetized costs of 

$31.764 billion ($2017). The burden 

estimates provided in the OMB control 

numbers in the following table are 

aggregate amounts that relate to the 

entire package of forms associated with 

the OMB control number, and will in 

the future include but not isolate the 

estimated burden of only those 

information collections associated with 

section 965. These numbers are 

therefore unrelated to the future 

calculations needed to assess the burden 

imposed by these regulations. To guard 

against over-counting the burden that 

international tax provisions imposed 

prior to the Act, the Treasury 

Department and the IRS urge readers to 

recognize that these burden estimates 

have also been cited by regulations 

(such as the foreign tax credit 

regulations, 83 FR 63200) that rely on 

the applicable OMB control numbers in 

order to collect information from the 

applicable types of filers. With respect 

to the final regulations, the only 

relevant burden estimates are those 

associated with OMB control number 

1545–2280. Future estimates would 

capture both changes made by the Act 

and those that arise out of discretionary 

authority exercised in the regulations. In 

addition, when available, drafts of IRS 

forms are posted for comment at https:// 

apps.irs.gov/app/picklist/list/ 

draftTaxForms.htm. 

Form Type of filer OMB No.(s) Status 

Form 965 (including Schedules A– 

H).

Business (NEW 

Model).

1545–0123 Published in the FRN on 10/11/18. Public Comment period closed on 

12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

Form 965–B ................................... Business (NEW 

Model).

1545–0123 Published in the FRN on 10/11/18. Public Comment period closed on 

12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

Form 965–A ................................... Individual (NEW 

Model).

1545–0074 Limited Scope submission (1040 only) approved on 12/7/18. Full ICR 

submission for all forms in 3/2019. 60 Day FRN not published yet 

for full collection. 

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1873 

1 In-house estimates of section 965 tax liability 

and total receipts of small businesses are used to 

scale the published aggregate figures. In this case, 

a small business is defined as a multinational 

corporation with less than $25 million in gross 

receipts. Data on total sales of all U.S. parented 

companies are drawn from the Bureau of Economic 

Analysis Interactive Data accessed at this web 

address in December, 2018: https://apps.bea.gov/ 

iTable/iTable.cfm?ReqID=2&step=1. 

Form Type of filer OMB No.(s) Status 

Forms 990–PF, 990–T ................... Tax exempt entities (NEW 

Model).

1545–0047 Published 60-day FRN on 8/22/18. 

Link: https://www.federalregister.gov/documents/2018/08/22/2018-18135/proposed-collection-commentrequest-for-forms-990-990-ez-sch-b-br-br-990-ez-sch-l-lp-990-ez-990-pf. 

Form 1040 ...................................... Individual (NEW 

Model).

1545–0074 Limited Scope submission (1040 only) approved on 12/7/18. Full ICR 

submission for all forms in 3/2019. 60 Day FRN not published yet 

for full collection. 

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031. 

Form 1041 ...................................... Trusts and estates.1545–0092 Submitted to OIRA for review on 9/27/18. 

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014. 

Form 1065 ...................................... Business (NEW 

Model).

1545–0123 Published in the FRN on 10/11/18. Public Comment period closed on 

12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

Forms 1120, 1120–C, 1120–L, 

1120–PC, 1120–REIT, 1120– 

RIC, 1120–S.

Business (NEW 

Model).

1545–0123 Published in the FRN on 10/11/18. Public Comment period closed on 

12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

III. Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act (5 U.S.C. chapter 6), it is hereby 

certified that the final regulations will 

not have a significant economic impact 

on a substantial number of small entities 

within the meaning of section 601(6) of 

the Regulatory Flexibility Act (‘‘small 

entities’’). 

Section 965 and the final regulations 

generally affect U.S. taxpayers who are 

at least 10-percent shareholders of a 

foreign corporation. As an initial matter, 

foreign corporations are not considered 

small entities. Nor are U.S. taxpayers 

considered small entities to the extent 

the taxpayers are natural persons or 

entities other than small entities. 

Although the Treasury Department and 

the IRS received a number of comments 

asserting that a substantial number of 

small entities would be affected by the 

proposed regulations, those comments 

were principally concerned with U.S. 

citizens living abroad that owned 

foreign corporations directly or 

indirectly through other foreign entities. 

No small entity is affected in this 

scenario. Thus, the final regulations 

generally only affect small entities if a 

U.S. taxpayer that is a 10-percent 

shareholder of a foreign corporation is a 

small entity. 

While comprehensive counts of all 

types of small businesses affected by 

section 965 and these regulations are 

not readily available, in-house estimates 

of section 965 suggest that very roughly 

20,000 multinational domestic 

corporations are potentially subject to 

section 965, and that about half of these 

corporations have less than $25 million 

in gross receipts. Therefore, very 

roughly 10,000 small multinational 

corporations (defined as corporations 

with less than $25 million in gross 

receipts) are potentially subject to 

section 965. The in-house estimates 

further suggest that about 25% of these 

small multinational corporations would 

not owe any tax under section 965, 

because they do not have any 

accumulated E&P to which the tax 

would be applied. 

Regardless of the number of small 

entities potentially affected by section 

965 or the final regulations, the 

Treasury Department and the IRS have 

concluded that there is no significant 

economic impact on such entities as a 

result of the final regulations. Based on 

published information from the 

Conference Report accompanying the 

Act, H.R. Rep. No. 115–446, at 688 

(2017), and Bureau of Economic 

Analysis aggregate data, which were 

adjusted to reflect the tax burden and 

total sales of small businesses, the 

projected net tax proceeds from section 

965 are estimated to be only a small 

fraction of the total sales of small U.S. 

parented multinational enterprises 

projected to 2027.1 See the table in this 

Part III. The tax amounts to less than 3 

to 5 percent of receipts (as defined in 13 

CFR 121.04), an economic impact that is 

not regarded as significant under the 

Regulatory Flexibility Act. Moreover, 

while most affected small entities are 

likely to pay the tax in (unequal) 

installments over 8 years, the percentage 

in any particular year does not exceed 

2.2 percent. 

1874 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

NET SECTION 965 TAX REVENUE AS A FRACTION OF TOTAL SALES FOR SMALL MULTINATIONAL BUSINESSES 1

Fiscal years 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 

Net Tax Collected ($ billions) .................... 1.2 0.8 0.2 0.2 0.2 0.4 0.7 1.0 0.5 ¥0.1 

Total Sales ($ billions) .............................. 54.0 56.7 59.6 62.6 65.7 69.0 72.4 76.0 79.8 83.8 

Percent ...................................................... 2.20 1.32 0.42 0.38 0.36 0.60 0.99 1.28 0.63 ¥0.17 

1Small Multinational Businesses are not necessarily small entities as defined by the Regulatory Flexibility Act. 

Thus, even if the economic impact of 

the final regulations is interpreted 

broadly to include the tax liability due 

under section 965, which small entities 

would be required to pay even if the 

final regulations were not issued, the 

economic impact should not be 

regarded as significant under the 

Regulatory Flexibility Act. 

Additionally, the economic impact of 

the final regulations when considered 

alone should be minimal. Any economic 

impact of the final regulations stems 

from the collection of information 

requirements imposed by §§ 1.965– 

2(d)(2)(ii)(B), 1.965–2(f)(2)(iii)(B), 

1.965–3(b)(2), 1.965–3(c)(3), 1.965– 

4(b)(2)(i), 1.965–4(b)(2)(iii)(B), 1.965– 

7(b)(2), 1.965–7(b)(3)(iii)(B), 1.965– 

7(c)(2), 1.965–7(c)(3)(iv)(B), 1.965– 

7(c)(3)(v)(D), 1.965–7(c)(6)(i), 1.965– 

7(d)(3), 1.965–7(e)(2), 1.965–7(f)(5), and 

1.965–8(c). The Treasury Department 

and the IRS have determined that the 

average burden associated with these 

collection of information requirements 

is 5 hours, which is minimal, 

particularly in comparison with other 

regulatory requirements related to 

owning stock in a specified foreign 

corporation. Furthermore, these 

requirements apply only if a taxpayer 

chooses to make an election or rely on 

a favorable rule. The comments received 

regarding the economic impact of the 

proposed regulations principally focus 

on burdens imposed by the statute (i.e., 

the tax due as a result of section 965) 

rather than any additional burdens 

resulting from the proposed regulations. 

For the reasons explained above, the 

Treasury Department and the IRS have 

determined that the final regulations 

will not have a significant economic 

impact on a substantial number of small 

entities. Accordingly, a regulatory 

flexibility analysis under the Regulatory 

Flexibility Act is not required. Pursuant 

to section 7805(f), the notice of 

proposed rulemaking preceding these 

final regulations was submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. No 

comments were received. 

IV. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a state, local, or tribal government, in 

the aggregate, or by the private sector, of 

$100 million in 1995 dollars, updated 

annually for inflation. In 2018, that 

threshold is approximately $150 

million. This rule does not include any 

Federal mandate that may result in 

expenditures by state, local, or tribal 

governments, or by the private sector in 

excess of that threshold. 

V. Executive Order 13132: Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial, direct compliance costs on 

state and local governments, and is not 

required by statute, or preempts state 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive Order. This 

final rule does not have federalism 

implications and does not impose 

substantial direct compliance costs on 

state and local governments or preempt 

state law within the meaning of the 

Executive Order. 

Drafting Information 

The principal authors of the final 

regulations are Leni C. Perkins, Natalie 

Punchak, and Karen J. Cate of the Office 

of Associate Chief Counsel 

(International). However, other 

personnel from the Treasury 

Department and the IRS participated in 

the development of the final regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding new 

entries in numerical order to read as 

follows: 

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

* * * * * 

Section 1.962–1 also issued under 26 

U.S.C. 965(o). 

* * * * * 

Section 1.965–1 also issued under 26 

U.S.C. 965(c)(3)(B)(iii)(V), 965(d)(2), 965(o), 

989(c), and 7701(a). 

Section 1.965–2 also issued under 26 

U.S.C. 965(b)(3)(A)(ii), 965(o), and 961(a) and 

(b). 

Section 1.965–3 also issued under 26 

U.S.C. 965(c)(3)(D) and 965(o). 

Section 1.965–4 also issued under 26 

U.S.C. 965(c)(3)(F) and 965(o). 

Sections 1.965–5 through 1.965–6 also 

issued under 26 U.S.C. 965(o) and 26 U.S.C. 

902(c)(8) (as in effect on December 21, 2017). 

Section 1.965–7 also issued under 26 

U.S.C. 965(h)(3), 965(h)(5), 965(i)(2), 

965(i)(8)(B), 965(m)(2)(A), 965(n)(3), and 

965(o). 

Section 1.965–8 also issued under 26 

U.S.C. 965(o). 

Section 1.965–9 also issued under 26 

U.S.C. 965(o). 

* * * * * 

Section 1.986(c)–1 also issued under 26 

U.S.C. 965(o) and 26 U.S.C. 989(c). 

* * * * * 

■ Par. 2. Section 1.962–1 is amended 

by: 

■ 1. Revising paragraph (b)(1)(i). 

■ 2. Redesignating paragraphs 

(b)(2)(iv)(a) and (b) as paragraph 

(b)(2)(iv)(A) and (B), respectively. 

■ 3. Adding paragraph (d). 

The revision and addition read as 

follows: 

§ 1.962–1 Limitation of tax for individuals 

on amounts included in gross income 

under section 951(a). 

* * * * * 

(b) * * * 

(1) * * * 

(i) Determination of taxable income. 

The term taxable income means the 

excess of— 

(A) The sum of— 

(1) All amounts required to be 

included in his gross income under 

section 951(a) for the taxable year with 

respect to a foreign corporation of which 

he is a United States shareholder, 

including— 

(i) His section 965(a) inclusion 

amounts (as defined in § 1.965–1(f)(38)); 

and 

(ii) His domestic pass-through owner 

shares (as defined in § 1.965–1(f)(21)) of 

section 965(a) inclusion amounts with 

respect to deferred foreign income 

corporations (as defined in § 1.965– 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1875 

1(f)(17)) of which he is a United States 

shareholder; plus 

(2) [Reserved] 

(3) All amounts which would be 

required to be included in his gross 

income under section 78 for the taxable 

year with respect to the amounts 

referred to in paragraph (b)(1)(i)(A)(1) 

and (2) of this section if the shareholder 

were a domestic corporation; over 

(B) The sum of the following 

deductions, but no other deductions or 

amounts— 

(1) His section 965(c) deduction 

amount (as defined in § 1.965–1(f)(42)) 

for the taxable year; 

(2) His domestic pass-through owner 

shares of section 965(c) deduction 

amounts corresponding to the amounts 

referred to in paragraph (b)(1)(i)(A)(1)(ii) 

of this section; and 

(3) [Reserved] 

* * * * * 

(d) Applicability dates. Paragraph 

(b)(1)(i) of this section applies beginning 

the last taxable year of a foreign 

corporation that begins before January 1, 

2018, and with respect to a United 

States person, for the taxable year in 

which or with which such taxable year 

of the foreign corporation ends. 

■ Par. 3. Section 1.962–2 is amended by 

revising paragraph (a) and adding 

paragraph (d) to read as follows: 

§ 1.962–2 Election of limitation of tax for 

individuals. 

(a) Who may elect. The election under 

section 962 may be made only by an 

individual (including a trust or estate) 

who is a United States shareholder 

(including an individual who is a 

United States shareholder because, by 

reason of section 958(b), he is 

considered to own stock of a foreign 

corporation owned (within the meaning 

of section 958(a)) by a domestic passthrough entity (as defined in § 1.965– 

1(f)(19))). 

* * * * * 

(d) Applicability dates. Paragraph (a) 

of this section applies beginning the last 

taxable year of a foreign corporation that 

begins before January 1, 2018, and with 

respect to a United States person, for the 

taxable year in which or with which 

such taxable year of the foreign 

corporation ends. 

■ Par. 4. Sections 1.965–0 through 

1.965–9 are added to read as follows: 

* * * * * 

1.965–0 Outline of section 965 regulations. 

1.965–1 Overview, general rules, and 

definitions. 

1.965–2 Adjustments to earnings and 

profits and basis. 

1.965–3 Section 965(c) deductions. 

1.965–4 Disregard of certain transactions. 

1.965–5 Allowance of credit or deduction 

for foreign income taxes. 

1.965–6 Computation of foreign income 

taxes deemed paid and allocation and 

apportionment of deductions. 

1.965–7 Elections, payment, and other 

special rules. 

1.965–8 Affiliated groups (including 

consolidated groups). 

1.965–9 Applicability dates. 

* * * * * 

§ 1.965–0 Outline of section 965 

regulations. 

This section lists the headings for 

§§ 1.965–1 through 1.965–9. 

§ 1.965–1 Overview, general rules, and 

definitions. 

(a) Overview. 

(1) In general. 

(2) Scope. 

(b) Section 965(a) inclusion amounts. 

(1) Inclusion of the pro rata share of the 

section 965(a) earnings amount. 

(2) Reduction by the allocable share of the 

aggregate foreign E&P deficit. 

(c) Section 965(c) deduction amounts. 

(d) Treatment of specified foreign 

corporation as a controlled foreign 

corporation. 

(e) Special rule for certain controlled 

domestic partnerships. 

(1) In general. 

(2) Definition of a controlled domestic 

partnership. 

(f) Definitions. 

(1) 8 percent rate amount. 

(2) 8 percent rate equivalent percentage. 

(3) 15.5 percent rate amount. 

(4) 15.5 percent rate equivalent percentage. 

(5) Accounts payable. 

(6) Accounts receivable. 

(7) Accumulated post-1986 deferred 

foreign income. 

(8) Aggregate foreign cash position. 

(9) Aggregate foreign E&P deficit. 

(10) Aggregate section 965(a) inclusion 

amount. 

(11) Allocable share. 

(12) Bona fide hedging transaction. 

(13) Cash-equivalent asset. 

(i) In general. 

(ii) Specified commodity. 

(14) Cash-equivalent asset hedging 

transaction. 

(i) In general. 

(ii) Aggregate hedging transactions. 

(15) Cash measurement dates. 

(16) Cash position. 

(i) General rule. 

(ii) Fair market value of cash-equivalent 

assets. 

(iii) Measurement of derivative financial 

instruments. 

(iv) Translation of cash position amounts. 

(17) Deferred foreign income corporation. 

(i) In general. 

(ii) Priority rule. 

(18) Derivative financial instrument. 

(19) Domestic pass-through entity. 

(20) Domestic pass-through owner. 

(21) Domestic pass-through owner share. 

(22) E&P deficit foreign corporation. 

(i) In general. 

(ii) Determination of deficit in post-1986 

earnings and profits. 

(23) E&P measurement dates. 

(24) Final cash measurement date. 

(25) First cash measurement date. 

(26) Inclusion year. 

(27) Net accounts receivable. 

(28) Pass-through entity. 

(29) Post-1986 earnings and profits. 

(i) General rule. 

(ii) Foreign income taxes. 

(iii) Deficits in earnings and profits. 

(30) Pro rata share. 

(31) Second cash measurement date. 

(32) Section 958(a) stock. 

(33) Section 958(a) U.S. shareholder. 

(34) Section 958(a) U.S. shareholder 

inclusion year. 

(35) Section 965 regulations. 

(36) Section 965(a) earnings amount. 

(37) Section 965(a) inclusion. 

(38) Section 965(a) inclusion amount. 

(39) Section 965(a) previously taxed 

earnings and profits. 

(40) Section 965(b) previously taxed 

earnings and profits. 

(41) Section 965(c) deduction. 

(42) Section 965(c) deduction amount. 

(43) Short-term obligation. 

(44) Specified E&P deficit. 

(45) Specified foreign corporation. 

(i) General rule. 

(ii) Special attribution rule. 

(A) In general. 

(B) Attribution for purposes of the ten 

percent standard. 

(iii) Passive foreign investment companies. 

(46) Spot rate. 

(47) United States shareholder. 

(g) Examples. 

(1) Example 1. 

(i) Facts. 

(ii) Analysis. 

(2) Example 2. 

(i) Facts. 

(ii) Analysis. 

(3) Example 3. 

(i) Facts. 

(ii) Analysis. 

(4) Example 4. 

(i) Facts. 

(ii) Analysis. 

(5) Example 5. 

(i) Facts. 

(ii) Analysis. 

(A) Determination of status as a deferred 

foreign income corporation. 

(B) Determination of status as an E&P 

deficit foreign corporation. 

(6) Example 6. 

(i) Facts. 

(ii) Analysis. 

(7) Example 7. 

(i) Facts. 

(ii) Analysis. 

(8) Example 8. 

(i) Facts. 

(ii) Analysis. 

§ 1.965–2 Adjustments to earnings and 

profits and basis. 

(a) Scope. 

(b) Determination of and adjustments to 

earnings and profits of a specified foreign 

corporation for purposes of applying sections 

902, 959, 960, and 965. 

(c) Adjustments to earnings and profits by 

reason of section 965(a). 

(d) Adjustments to earnings and profits by 

reason of section 965(b). 

1876 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

(1) Adjustments to earnings and profits 

described in section 959(c)(2) and (c)(3) of 

deferred foreign income corporations. 

(2) Adjustments to earnings and profits 

described in section 959(c)(3) of E&P deficit 

foreign corporations. 

(i) Increase in earnings and profits by an 

amount equal to the portion of the section 

958(a) U.S. shareholder’s pro rata share of the 

specified E&P deficit. 

(A) In general. 

(B) Reduction of a qualified deficit. 

(ii) Determination of portion of a section 

958(a) U.S. shareholder’s pro rata share of a 

specified E&P deficit taken into account. 

(A) In general. 

(B) Designation of portion of a section 

958(a) U.S. shareholder’s pro rata share of a 

specified E&P deficit taken into account. 

(e) Adjustments to basis by reason of 

section 965(a). 

(1) General rule. 

(2) Section 962 election. 

(f) Adjustments to basis by reason of 

section 965(b). 

(1) In general. 

(2) Election to make adjustments to basis 

to account for the application of section 

965(b). 

(i) In general. 

(ii) Basis adjustments. 

(A) Increase in basis with respect to a 

deferred foreign income corporation. 

(1) In general. 

(2) Limited basis adjustment. 

(B) Reduction in basis with respect to an 

E&P deficit foreign corporation. 

(1) In general. 

(2) Limited basis adjustment. 

(C) Section 962 election. 

(iii) Rules regarding the election. 

(A) Consistency requirement. 

(B) Manner of making election. 

(1) Timing. 

(i) In general. 

(ii) Transition rule. 

(2) Election statement. 

(g) Gain reduction rule. 

(1) Reduction in gain recognized under 

section 961(b)(2) by reason of distributions 

attributable to section 965 previously taxed 

earnings and profits in the inclusion year. 

(i) In general. 

(ii) Definition of section 965 previously 

taxed earnings and profits. 

(2) Reduction in basis by an amount equal 

to the gain reduction amount. 

(h) Rules of application for specified basis 

adjustments. 

(1) Timing of basis adjustments. 

(2) Netting of basis adjustments. 

(3) Gain recognition for reduction in excess 

of basis. 

(4) Adjustments with respect to each share. 

(i) Section 958(a) stock. 

(ii) Applicable property. 

(5) Stock or property for which 

adjustments are made. 

(i) In general. 

(ii) Special rule for an interest in a foreign 

pass-through entity. 

(i) Definitions. 

(1) Applicable property. 

(2) Foreign pass-through entity. 

(3) Property. 

(j) Examples. 

(1) Example 1. 

(i) Facts. 

(ii) Analysis. 

(A) Adjustments to section 959(c) 

classification of earnings and profits for 

inclusion under section 951(a)(1)(A) without 

regard to section 965. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. 

(C) Section 965(a) inclusion amount. 

(1) CFC1 section 965(a) earnings amount. 

(2) CFC2 section 965(a) earnings amount. 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). 

(D) Distribution to United States 

shareholder. 

(E) Section 902 and section 960 

consequences. 

(1) Distribution by and inclusions with 

respect to CFC2. 

(2) Inclusions with respect to CFC1. 

(2) Example 2. 

(i) Facts. 

(ii) Analysis. 

(A) Adjustments to section 959(c) 

classification of earnings and profits for 

inclusion under section 951(a)(1)(A) without 

regard to section 965. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. 

(C) Section 965(a) inclusion amount. 

(1) CFC1 section 965(a) earnings amount. 

(2) CFC2 section 965(a) earnings amount. 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). 

(D) Distribution to United States 

shareholder. 

(3) Example 3. 

(i) Facts. 

(ii) Analysis. 

(A) Adjustments to section 959(c) 

classification of earnings and profits for 

inclusion under section 951(a)(1)(A) without 

regard to section 965. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. 

(C) Section 965(a) inclusion amount. 

(1) CFC1 section 965(a) earnings amount. 

(2) CFC2 section 965(a) earnings amount. 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). 

(D) Distribution to United States 

shareholder. 

(4) Example 4. 

(i) Facts. 

(ii) Analysis. 

(A) Adjustments to section 959(c) 

classification of earnings and profits for 

inclusion under section 951(a)(1)(A) without 

regard to section 965. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. 

(C) Section 965(a) inclusion amount. 

(1) CFC1 section 965(a) earnings amount. 

(2) CFC2 section 965(a) earnings amount. 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). 

(D) Distribution to United States 

shareholder. 

(1) Distribution that is a specified payment. 

(2) Distribution to United States 

shareholder. 

(E) Section 902 and section 960 

consequences. 

(5) Example 5. 

(A) Section 965(a) inclusion amount. 

(1) CFC section 965(a) earnings amount. 

(2) Effect on earnings and profits described 

in section 959(c)(2) and (3). 

(6) Example 6. 

(i) Facts. 

(ii) Analysis. 

(A) Adjustments to section 959(c) 

classification of earnings and profits for 

section 1248 inclusion. 

(B) Section 965(a) inclusion amount. 

(C) Distributions to United States 

shareholders. 

(7) Example 7. 

(i) Facts. 

(ii) Analysis. 

(8) Example 8. 

(i) Facts. 

(ii) Analysis. 

(A) Application of the gain reduction rule. 

(B) Adjustments to the basis of CFC1. 

(9) Example 9. 

(i) Facts. 

(ii) Analysis. 

(A) Application of the gain reduction rule. 

(B) Adjustments to the basis of CFC1 and 

CFC2. 

§ 1.965–3 Section 965(c) deductions. 

(a) Scope. 

(b) Rules for disregarding certain assets for 

determining aggregate foreign cash position. 

(1) Disregard of certain obligations between 

related specified foreign corporations. 

(2) Disregard of other assets upon 

demonstration of double-counting. 

(3) Disregard of portion of cash position of 

noncorporate entities treated as specified 

foreign corporations. 

(4) Examples. 

(i) Example 1. 

(A) Facts. 

(B) Analysis. 

(1) Loan from CFC1 to CFC2. 

(2) Account receivable of CFC1 held by 

CFC2. 

(3) Loan from CFC1 to CFC3. 

(ii) Example 2. 

(A) Facts. 

(B) Analysis. 

(iii) Example 3. 

(A) Facts. 

(B) Analysis. 

(iv) Example 4. 

(A) Facts. 

(B) Analysis. 

(v) Example 5. 

(A) Facts. 

(B) Analysis. 

(1) Treatment of PS1. 

(2) Treatment of PS2. 

(c) Determination of aggregate foreign cash 

position for a section 958(a) U.S. shareholder 

inclusion year. 

(1) Single section 958(a) U.S. shareholder 

inclusion year. 

(2) Multiple section 958(a) U.S. 

shareholder inclusion years. 

(i) Allocation to first section 958(a) U.S. 

shareholder inclusion year. 

(ii) Allocation to succeeding section 958(a) 

U.S. shareholder inclusion years. 

(3) Estimation of aggregate foreign cash 

position. 

(4) Examples. 

(i) Example 1. 

(A) Facts. 

(B) Analysis. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1877 

(ii) Example 2. 

(A) Facts. 

(B) Analysis. 

(d) Increase of income by section 965(c) 

deduction of an expatriated entity. 

(1) In general. 

(2) Definition of expatriated entity. 

(3) Definition of surrogate foreign 

corporation. 

(e) Section 962 election. 

(1) In general. 

(2) Example. 

(i) Facts. 

(ii) Analysis. 

(f) Treatment of section 965(c) deduction 

under certain provisions of the Internal 

Revenue Code. 

(1) Section 63(d). 

(2) Sections 705, 1367, and 1368. 

(i) Adjustments to basis. 

(ii) S corporation accumulated adjustments 

account. 

(iii) Example. 

(A) Facts. 

(B) Analysis. 

(3) Section 1411. 

(4) Section 4940. 

(g) Domestic pass-through entities. 

§ 1.965–4 Disregard of certain transactions. 

(a) Scope. 

(b) Transactions undertaken with a 

principal purpose of changing the amount of 

a section 965 element. 

(1) General rule. 

(2) Presumptions and exceptions for the 

application of the general rule. 

(ii) Definitions. 

(A) Relatedness. 

(B) Transfer. 

(1) In general. 

(2) Indirect transfer. 

(iii) Cash reduction transactions. 

(A) General rule. 

(B) Per se rules for certain distributions. 

(iv) E&P reduction transactions. 

(A) General rule. 

(1) Definition of pro rata share reduction 

transaction. 

(2) Definition of E&P deficit transaction. 

(B) Per se rule for internal group 

transactions. 

(C) Example. 

(1) Facts. 

(2) Analysis. 

(c) Disregard of certain changes in method 

of accounting and entity classification 

elections. 

(1) Changes in method of accounting. 

(2) Entity classification elections. 

(d) Definition of a section 965 element. 

(e) Rules for applying paragraphs (b) and 

(c) of this section. 

(1) Determination of whether there is a 

change in the amount of a section 965 

element. 

(2) Treatment of domestic pass-through 

owners as United States shareholders. 

(3) Exception for certain incorporation 

transactions. 

(i) In general. 

(ii) Aggregate foreign cash position. 

(4) Consequences of liquidation. 

(i) In general. 

(ii) Specified liquidation date. 

(f) Disregard of certain transactions 

occurring between E&P measurement dates. 

(1) Disregard of specified payments. 

(2) Definition of specified payment. 

(3) Non-application of disregard rule. 

(4) Examples. 

(i) Example 1. 

(A) Facts. 

(B) Analysis. 

(ii) Example 2. 

(A) Facts. 

(B) Analysis. 

(iii) Example 3. 

(A) Facts. 

(B) Analysis. 

(iv) Example 4. 

(A) Facts. 

(B) Analysis. 

(v) Example 5. 

(A) Facts. 

(B) Analysis. 

(vi) Example 6. 

(A) Facts. 

(B) Analysis. 

§ 1.965–5 Allowance of credit or deduction 

for foreign income taxes. 

(a) Scope. 

(b) Rules for foreign income taxes paid or 

accrued. 

(c) Rules for foreign income taxes treated 

as paid or accrued. 

(1) Disallowed credit. 

(i) In general. 

(ii) Foreign income taxes deemed paid 

under section 960(a)(3) (as in effect on 

December 21, 2017). 

(iii) [Reserved] 

(2) Disallowed deduction. 

(3) Coordination with section 78. 

(i) In general. 

(ii) Domestic corporation that is a domestic 

pass-through owner. 

(d) Applicable percentage. 

(1) In general. 

(2) No section 965(a) inclusion amount. 

(3) Applicable percentage for domestic 

pass-through owners. 

(4) Applicable percentage with respect to 

certain distributions of previously taxed 

earnings and profits. 

§ 1.965–6 Computation of foreign income 

taxes deemed paid and allocation and 

apportionment of deductions. 

(a) Scope. 

(b) Computation of foreign income taxes 

deemed paid. 

(1) In general. 

(2) Dividend or inclusion in excess of post1986 undistributed earnings. 

(3) Treatment of adjustment under section 

965(b)(4)(B). 

(4) Section 902 fraction. 

(c) Allocation and apportionment of 

deductions. 

(d) Hovering deficits. 

§ 1.965–7 Elections, payment, and other 

special rules. 

(a) Scope. 

(b) Section 965(h) election. 

(1) In general. 

(i) Amount of installments. 

(ii) Increased installments due to a 

deficiency or a timely filed or amended 

return. 

(A) In general. 

(B) Timing. 

(C) Exception for negligence, intentional 

disregard, or fraud. 

(iii) Due date of installments. 

(A) In general. 

(B) Extension for specified individuals. 

(2) Manner of making election. 

(i) Eligibility. 

(ii) Timing. 

(iii) Election statement. 

(3) Acceleration of payment. 

(i) Acceleration. 

(ii) Acceleration events. 

(iii) Eligible section 965(h) transferee 

exception. 

(A) In general. 

(1) Requirement to have a covered 

acceleration event. 

(2) Requirement to enter into a transfer 

agreement. 

(B) Transfer agreement. 

(1) Eligibility. 

(2) Filing requirements. 

(i) In general. 

(ii) Transition rule. 

(3) Signature requirement. 

(4) Terms of agreement. 

(5) Consolidated groups. 

(6) Leverage ratio. 

(C) Consent of Commissioner. 

(1) In general. 

(2) Material misrepresentations and 

omissions. 

(D) Effect of assumption. 

(1) In general. 

(2) Eligible section 965(h) transferor 

liability. 

(E) Qualifying consolidated group member 

transaction. 

(1) Definition of qualifying consolidated 

group member transaction. 

(2) Definition of qualified successor. 

(3) Departure of multiple members of a 

consolidated group. 

(c) Section 965(i) election. 

(1) In general. 

(2) Manner of making election. 

(i) Eligibility. 

(ii) Timing. 

(iii) Election statement. 

(3) Triggering events. 

(i) In general. 

(ii) Triggering events. 

(iii) Partial transfers. 

(iv) Eligible section 965(i) transferee 

exception. 

(A) In general. 

(1) Requirement to have a covered 

triggering event. 

(2) Requirement to enter into a transfer 

agreement. 

(B) Transfer agreement. 

(1) Eligibility. 

(2) Filing requirements. 

(i) In general. 

(ii) Transition rule. 

(iii) Death of eligible section 965(i) 

transferor. 

(3) Signature requirement. 

(4) Terms of agreement. 

(5) Special rule in the case of death of 

eligible section 965(i) transferor. 

(6) Leverage ratio. 

(C) Consent of Commissioner. 

(1) In general. 

(2) Material misrepresentations and 

omissions. 

(D) Effect of assumption. 

(1) In general. 

1878 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

(2) Eligible section 965(i) transferor 

liability. 

(v) Coordination with section 965(h) 

election. 

(A) In general. 

(B) Timing for election. 

(C) Due date for installment. 

(D) Limitation. 

(1) In general. 

(2) Manner of obtaining consent. 

(i) In general. 

(ii) Transition rule. 

(3) Signature requirement. 

(4) Terms of agreement. 

(5) Consent of Commissioner. 

(i) In general. 

(ii) Material misrepresentations and 

omissions. 

(6) Leverage ratio. 

(4) Joint and several liability. 

(5) Extension of limitation on collection. 

(6) Annual reporting requirement. 

(i) In general. 

(ii) Failure to report. 

(d) Section 965(m) election and special 

rule for real estate investment trusts. 

(1) In general. 

(2) Inclusion schedule for section 965(m) 

election. 

(3) Manner of making election. 

(i) Eligibility. 

(ii) Timing. 

(iii) Election statement. 

(4) Coordination with section 965(h). 

(5) Acceleration of inclusion. 

(6) Treatment of section 965(a) inclusions 

of a real estate investment trust. 

(e) Section 965(n) election. 

(1) In general. 

(i) General rule. 

(ii) Applicable amount for section 965(n) 

election. 

(iii) Scope of section 965(n) election. 

(iv) [Reserved] 

(2) Manner of making election. 

(i) Eligibility. 

(ii) Timing. 

(iii) Election statement. 

(f) Election to use alternative method for 

calculating post-1986 earnings and profits. 

(1) Effect of election for specified foreign 

corporations that do not have a 52–53-week 

taxable year. 

(2) Effect of election for specified foreign 

corporations that have a 52–53-week taxable 

year. 

(3) Computation of post-1986 earnings and 

profits using alternative method. 

(4) Definitions. 

(i) 52–53-week taxable year. 

(ii) Annualized earnings and profits 

amount. 

(iii) Daily earnings amount. 

(iv) Notional measurement date. 

(5) Manner of making election. 

(i) Eligibility. 

(ii) Timing. 

(iii) Election statement. 

(6) Examples. 

(i) Example 1. 

(A) Facts. 

(B) Analysis. 

(ii) Example 2. 

(A) Facts. 

(B) Analysis. 

(g) Definitions. 

(1) Deferred net tax liability. 

(2) REIT section 965 amounts. 

(3) Section 965(h) election. 

(4) Section 965(h) net tax liability. 

(5) Section 965(i) election. 

(6) Section 965(i) net tax liability. 

(7) Section 965(m) election. 

(8) Section 965(n) election. 

(9) Specified individual. 

(10) Total net tax liability under section 

965. 

(i) General rule. 

(ii) Net income tax. 

(iii) Foreign tax credits. 

§ 1.965–8 Affiliated groups (including 

consolidated groups). 

(a) Scope. 

(b) Reduction of E&P net surplus 

shareholder’s pro rata share of the section 

965(a) earnings amount of a deferred foreign 

income corporation by the allocable share of 

the applicable share of the aggregate unused 

E&P deficit. 

(1) In general. 

(2) Consolidated group as part of an 

affiliated group. 

(c) Designation of portion of excess 

aggregate foreign E&P deficit taken into 

account. 

(1) In general. 

(2) Consolidated group as part of an 

affiliated group. 

(d) [Reserved] 

(1) [Reserved] 

(2) Consolidated groups. 

(e) Treatment of a consolidated group as a 

single section 958(a) U.S. shareholder or a 

single person. 

(1) In general. 

(2) Limitation. 

(3) Determination of section 965(c) 

deduction amount. 

(f) Definitions. 

(1) Aggregate unused E&P deficit. 

(i) In general. 

(ii) Reduction with respect to E&P net 

deficit shareholders that are not wholly 

owned by the affiliated group. 

(2) Allocable share. 

(3) Applicable share. 

(4) Consolidated group aggregate foreign 

cash position. 

(5) E&P net deficit shareholder. 

(6) E&P net surplus shareholder. 

(7) Excess aggregate foreign E&P deficit. 

(8) Group cash ratio. 

(9) Group ownership percentage. 

(g) Examples. 

(1) Example 1. 

(i) Facts. 

(A) In general. 

(B) Facts relating to section 965. 

(ii) Analysis. 

(A) Section 965(a) inclusion amounts 

before application of section 965(b)(5). 

(B) Application of section 965(b)(5). 

(1) Determination of E&P net surplus 

shareholders and E&P net deficit 

shareholders. 

(2) Determining section 965(a) inclusion 

amounts under section 965(b)(5). 

(C) Aggregate foreign cash position. 

(D) Section 965(c) deduction amount. 

(2) Example 2. 

(i) Facts. 

(ii) Analysis. 

(A) Section 965(a) inclusion amount. 

(1) Single section 958(a) U.S. shareholder 

treatment. 

(2) Determination of inclusion amount. 

(B) Consolidated group aggregate foreign 

cash position. 

(C) Section 965(a) deduction amount. 

§ 1.965–9 Applicability dates. 

(a) In general. 

(b) Applicability dates for rules 

disregarding certain transactions. 

§ 1.965–1 Overview, general rules, and 

definitions. 

(a) Overview—(1) In general. This 

section provides general rules and 

definitions under section 965. Section 

1.965–2 provides rules relating to 

adjustments to earnings and profits and 

basis to determine and account for the 

application of section 965 and a rule 

that limits the amount of gain 

recognized under section 961(b)(2) by 

reason of distributions attributable to 

section 965 previously taxed earnings 

and profits (as defined in § 1.965– 

2(g)(1)(ii)) in the inclusion year. Section 

1.965–3 provides rules regarding the 

determination of section 965(c) 

deductions. Section 1.965–4 sets forth 

rules that disregard certain transactions 

for purposes of section 965. Sections 

1.965–5 and 1.965–6 provide rules with 

respect to foreign tax credits. Section 

1.965–7 provides rules regarding 

elections and payments. Section 1.965– 

8 provides rules regarding affiliated 

groups, including consolidated groups. 

Section 1.965–9 provides dates of 

applicability. See also §§ 1.962–1 and 

1.962–2 (providing rules regarding the 

application of section 962) and 

1.986(c)–1 (providing rules regarding 

the application of section 986(c)). 

(2) Scope. Paragraph (b) of this section 

provides the general rules concerning 

section 965(a) inclusion amounts. 

Paragraph (c) of this section provides 

the general rule concerning section 

965(c) deduction amounts. Paragraph 

(d) of this section provides a rule for 

specified foreign corporations that are 

not controlled foreign corporations. 

Paragraph (e) of this section treats 

certain controlled domestic partnerships 

as foreign partnerships for purposes of 

section 965. Paragraph (f) of this section 

provides definitions applicable for the 

section 965 regulations and §§ 1.962–1, 

1.962–2, and 1.986(c)–1. Paragraph (g) 

of this section contains examples 

illustrating the general rules and 

definitions set forth in this section. 

(b) Section 965(a) inclusion 

amounts—(1) Inclusion of the pro rata 

share of the section 965(a) earnings 

amount. For an inclusion year of a 

deferred foreign income corporation, the 

subpart F income of the deferred foreign 

income corporation (as otherwise 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1879 

determined for the inclusion year under 

section 952 and § 1.952–1) is increased 

by the section 965(a) earnings amount of 

the deferred foreign income corporation. 

See section 965(a). Accordingly, a 

section 958(a) U.S. shareholder with 

respect to a deferred foreign income 

corporation generally includes in gross 

income under section 951(a)(1) for the 

section 958(a) U.S. shareholder 

inclusion year its pro rata share of the 

section 965(a) earnings amount of the 

deferred foreign income corporation, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017, and subject to reduction under 

section 965(b), paragraph (b)(2) of this 

section, and § 1.965–8(b). The amount of 

the section 958(a) U.S. shareholder’s 

inclusion with respect to a deferred 

foreign income corporation as a result of 

section 965(a) and this paragraph (b)(1), 

as reduced under section 965(b), 

paragraph (b)(2) of this section, and 

§ 1.965–8(b), as applicable, is referred to 

as the section 965(a) inclusion amount. 

Neither the section 965(a) earnings 

amount nor the section 965(a) inclusion 

amount is subject to the rules or 

limitations in section 952 or limited by 

the accumulated earnings and profits of 

the deferred foreign income corporation 

on the date of the inclusion. 

(2) Reduction by the allocable share of 

the aggregate foreign E&P deficit. For 

purposes of determining a section 958(a) 

U.S. shareholder’s section 965(a) 

inclusion amount with respect to a 

deferred foreign income corporation, the 

U.S. dollar amount of the section 958(a) 

U.S. shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

deferred foreign income corporation, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017, is reduced by the deferred foreign 

income corporation’s allocable share of 

the section 958(a) U.S. shareholder’s 

aggregate foreign E&P deficit. See 

section 965(b). If the section 958(a) U.S. 

shareholder is a member of a 

consolidated group, under § 1.965–8(e), 

all section 958(a) U.S. shareholders that 

are members of the consolidated group 

are treated as a single section 958(a) 

U.S. shareholder for purposes of this 

paragraph (b)(2). 

(c) Section 965(c) deduction amounts. 

For a section 958(a) U.S. shareholder 

inclusion year, a section 958(a) U.S. 

shareholder is generally allowed a 

deduction in an amount equal to the 

section 965(c) deduction amount. 

(d) Treatment of specified foreign 

corporation as a controlled foreign 

corporation. A specified foreign 

corporation described in section 

965(e)(1)(B) and paragraph (f)(45)(i)(B) 

of this section that is not otherwise a 

controlled foreign corporation is treated 

as a controlled foreign corporation 

solely for purposes of paragraph (b) of 

this section and sections 951, 961, and 

§ 1.1411–10. See 965(e)(2). 

(e) Special rule for certain controlled 

domestic partnerships—(1) In general. 

For purposes of the section 965 

regulations, a controlled domestic 

partnership is treated as a foreign 

partnership for purposes of determining 

the section 958(a) U.S. shareholder of a 

specified foreign corporation and the 

section 958(a) stock of the specified 

foreign corporation owned by the 

section 958(a) U.S. shareholder if the 

following conditions are satisfied— 

(i) Without regard to this paragraph 

(e), the controlled domestic partnership 

is a section 958(a) U.S. shareholder of 

the specified foreign corporation and 

thus owns section 958(a) stock of the 

specified foreign corporation (tested 

section 958(a) stock); 

(ii) If the controlled domestic 

partnership (and all other controlled 

domestic partnerships in the chain of 

ownership of the specified foreign 

corporation) were treated as foreign— 

(A) The specified foreign corporation 

would continue to be a specified foreign 

corporation; and 

(B) At least one United States 

shareholder of the specified foreign 

corporation— 

(1) Would be treated as a section 

958(a) U.S. shareholder of the specified 

foreign corporation; and 

(2) Would be treated as owning 

(within the meaning of section 958(a)) 

tested section 958(a) stock of the 

specified foreign corporation through 

another foreign corporation that is a 

direct or indirect partner in the 

controlled domestic partnership. 

(2) Definition of a controlled domestic 

partnership. For purposes of paragraph 

(e)(1) of this section, the term controlled 

domestic partnership means a domestic 

partnership that is controlled by a 

United States shareholder described in 

paragraph (e)(1)(ii)(B) of this section and 

persons related to the United States 

shareholder. For purposes of this 

paragraph (e)(2), control is determined 

based on all the facts and 

circumstances, except that a partnership 

will be deemed to be controlled by a 

United States shareholder and related 

persons if those persons, in the 

aggregate, own (directly or indirectly 

through one or more partnerships) more 

than 50 percent of the interests in the 

partnership capital or profits. For 

purposes of this paragraph (e)(2), a 

related person is, with respect to a 

United States shareholder, a person that 

is related (within the meaning of section 

267(b) or 707(b)(1)) to the United States 

shareholder. 

(f) Definitions. This paragraph (f) 

provides definitions that apply for 

purposes of the section 965 regulations 

and §§ 1.962–1, 1.962–2, and 1.986(c)– 

1. Unless otherwise indicated, all 

amounts are expressed as positive 

numbers. 

(1) 8 percent rate amount. The term 

8 percent rate amount means, with 

respect to a section 958(a) U.S. 

shareholder and a section 958(a) U.S. 

shareholder inclusion year, the excess, 

if any, of the section 958(a) U.S. 

shareholder’s aggregate section 965(a) 

inclusion amount for the section 958(a) 

U.S. shareholder inclusion year over the 

amount of the section 958(a) U.S. 

shareholder’s aggregate foreign cash 

position for the section 958(a) U.S. 

shareholder inclusion year as 

determined under § 1.965–3(c). 

(2) 8 percent rate equivalent 

percentage. The term 8 percent rate 

equivalent percentage means, with 

respect to a section 958(a) U.S. 

shareholder and a section 958(a) U.S. 

shareholder inclusion year, the 

percentage that would result in the 8 

percent rate amount being subject to an 

8 percent rate of tax determined by only 

taking into account a deduction equal to 

such percentage of such amount and the 

highest rate of tax specified in section 

11 for the section 958(a) U.S. 

shareholder inclusion year. In the case 

of a section 958(a) U.S. shareholder 

inclusion year of a section 958(a) U.S. 

shareholder to which section 15 applies, 

the highest rate of tax under section 11 

before the effective date of the change in 

rates and the highest rate of tax under 

section 11 after the effective date of 

such change will each be taken into 

account under the preceding sentence in 

the same proportions as the portion of 

the section 958(a) U.S. shareholder 

inclusion year that is before and after 

such effective date, respectively. 

(3) 15.5 percent rate amount. The 

term 15.5 percent rate amount means, 

with respect to a section 958(a) U.S. 

shareholder and a section 958(a) U.S. 

shareholder inclusion year, the amount 

of the section 958(a) U.S. shareholder’s 

aggregate foreign cash position for the 

section 958(a) U.S. shareholder 

inclusion year as determined under 

§ 1.965–3(c) to the extent it does not 

exceed the section 958(a) U.S. 

shareholder’s aggregate section 965(a) 

inclusion amount for the section 958(a) 

U.S. shareholder inclusion year. 

(4) 15.5 percent rate equivalent 

percentage. The term 15.5 percent rate 

equivalent percentage, with respect to a 

section 958(a) U.S. shareholder and a 

section 958(a) U.S. shareholder 

1880 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

inclusion year, has the meaning 

provided for the term ‘‘8 percent rate 

equivalent percentage’’ applied by 

substituting ‘‘15.5 percent rate amount’’ 

for ‘‘8 percent rate amount’’ and ‘‘15.5 

percent rate of tax’’ for ‘‘8 percent rate 

of tax.’’ 

(5) Accounts payable. The term 

accounts payable means payables 

arising from the purchase of property 

described in section 1221(a)(1) or 

section 1221(a)(8) or the receipt of 

services from vendors or suppliers, 

provided the payables have a term upon 

issuance of less than one year. 

(6) Accounts receivable. The term 

accounts receivable means receivables 

described in section 1221(a)(4) that have 

a term upon issuance of less than one 

year. 

(7) Accumulated post-1986 deferred 

foreign income—(i) In general. The term 

accumulated post-1986 deferred foreign 

income means, with respect to a 

specified foreign corporation, the post1986 earnings and profits of the 

specified foreign corporation except to 

the extent such earnings and profits— 

(A) Are attributable to income of the 

specified foreign corporation that is 

effectively connected with the conduct 

of a trade or business within the United 

States and subject to tax under chapter 

1; 

(B) If distributed, would, in the case 

of a controlled foreign corporation, be 

excluded from the gross income of a 

United States shareholder under section 

959; or 

(C) If distributed, would, in the case 

of a controlled foreign corporation that 

has shareholders that are not United 

States shareholders on an E&P 

measurement date, be excluded from the 

gross income of such shareholders 

under section 959 if such shareholders 

were United States shareholders, 

determined by applying the principles 

of Revenue Ruling 82–16, 1982–1 C.B. 

106. 

(ii) Earnings and profits attributable 

to subpart F income in the same taxable 

year as an E&P measurement date. For 

purposes of determining the 

accumulated post-1986 deferred foreign 

income of a specified foreign 

corporation as of an E&P measurement 

date, earnings and profits of the 

specified foreign corporation that are or 

would be, applying the principles of 

Revenue Ruling 82–16, 1982–1 C.B. 106, 

described in section 959(c)(2) by reason 

of subpart F income (as defined in 

section 952 without regard to section 

965(a)) are described in section 

965(d)(2)(B) and paragraph (f)(7)(i)(B) or 

(f)(7)(i)(C) of this section only to the 

extent that such income has been 

accrued by the specified foreign 

corporation as of the E&P measurement 

date. For rules regarding the interaction 

of sections 951, 956, 959, and 965 

generally, see § 1.965–2(b). 

(8) Aggregate foreign cash position— 

(i) In general. The term aggregate foreign 

cash position means, with respect to a 

section 958(a) U.S. shareholder that is 

not a member of a consolidated group, 

the greater of— 

(A) The aggregate of the section 958(a) 

U.S. shareholder’s pro rata share of the 

cash position of each specified foreign 

corporation determined as of the final 

cash measurement date of the specified 

foreign corporation; or 

(B) One half of the sum of— 

(1) The aggregate described in 

paragraph (f)(8)(i)(A) of this section 

determined as of the second cash 

measurement date of each specified 

foreign corporation, plus 

(2) The aggregate described in 

paragraph (f)(8)(i)(A) of this section 

determined as of the first cash 

measurement date of each specified 

foreign corporation. 

(ii) Other rules. For rules for 

determining the aggregate foreign cash 

position for a section 958(a) U.S. 

shareholder inclusion year of the 

section 958(a) U.S. shareholder, see 

§ 1.965–3(c). For the rule for 

determining the aggregate foreign cash 

position of a section 958(a) U.S. 

shareholder that is a member of a 

consolidated group, see § 1.965–8(e)(3). 

For rules disregarding certain assets for 

purposes of determining the aggregate 

foreign cash position of a section 958(a) 

U.S. shareholder, see § 1.965–3(b). 

(9) Aggregate foreign E&P deficit. The 

term aggregate foreign E&P deficit 

means, with respect to a section 958(a) 

U.S. shareholder, the lesser of— 

(i) The aggregate of the section 958(a) 

U.S. shareholder’s pro rata share of the 

specified E&P deficit of each E&P deficit 

foreign corporation, translated (if 

necessary) into U.S. dollars using the 

spot rate on December 31, 2017, or 

(ii) The aggregate of the section 958(a) 

U.S. shareholder’s pro rata share of the 

section 965(a) earnings amount of each 

deferred foreign income corporation, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017. 

(10) Aggregate section 965(a) 

inclusion amount. The term aggregate 

section 965(a) inclusion amount means, 

with respect to a section 958(a) U.S. 

shareholder, the sum of all of the 

section 958(a) U.S. shareholder’s section 

965(a) inclusion amounts. 

(11) Allocable share. The term 

allocable share means, with respect to a 

deferred foreign income corporation and 

an aggregate foreign E&P deficit of a 

section 958(a) U.S. shareholder, the 

product of the aggregate foreign E&P 

deficit and the ratio determined by 

dividing— 

(i) The section 958(a) U.S. 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

deferred foreign income corporation, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017, by 

(ii) The amount described in 

paragraph (f)(9)(ii) of this section with 

respect to the section 958(a) U.S. 

shareholder. 

(12) Bona fide hedging transaction. 

The term bona fide hedging transaction 

means a hedging transaction that meets 

(or that would meet if the specified 

foreign corporation were a controlled 

foreign corporation) the requirements of 

a bona fide hedging transaction 

described in § 1.954–2(a)(4)(ii), except 

that in the case of a specified foreign 

corporation that is not a controlled 

foreign corporation, the identification 

requirements of § 1.954–2(a)(4)(ii)(B) do 

not apply. 

(13) Cash-equivalent asset—(i) In 

general. The term cash-equivalent asset 

means any of the following assets— 

(A) Personal property which is of a 

type that is actively traded and for 

which there is an established financial 

market, other than a specified 

commodity; 

(B) Commercial paper, certificates of 

deposit, the securities of the Federal 

government and of any State or foreign 

government; 

(C) Any foreign currency; 

(D) A short-term obligation; or 

(E) Derivative financial instruments, 

other than bona fide hedging 

transactions. 

(ii) Specified commodity. The term 

specified commodity means a 

commodity held by a specified foreign 

corporation that, in the hands of the 

specified foreign corporation, is 

property described in section 1221(a)(1) 

or 1221(a)(8). This paragraph (f)(13)(ii) 

does not apply with respect to a 

specified foreign corporation that is a 

dealer or trader in commodities. 

(14) Cash-equivalent asset hedging 

transaction—(i) In general. The term 

cash-equivalent asset hedging 

transaction means a bona fide hedging 

transaction identified on a specified 

foreign corporation’s books and records 

as hedging a cash-equivalent asset. 

(ii) Aggregate hedging transactions. 

For purposes of paragraph (f)(14)(i) of 

this section, the amount of a bona fide 

hedging transaction described in 

§ 1.1221–2(c)(3) (an aggregate hedging 

transaction) that is treated as a cashequivalent asset hedging transaction is 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1881 

the amount that bears the same 

proportion to the fair market value of 

the aggregate hedging transaction as the 

value of the cash-equivalent assets being 

hedged by the aggregate hedging 

transaction bears to the value of all 

assets being hedged by the aggregate 

hedging transaction. 

(15) Cash measurement dates. The 

term cash measurement dates means, 

with respect to a specified foreign 

corporation, the first cash measurement 

date, the second cash measurement 

date, and the final cash measurement 

date, collectively, and each a cash 

measurement date. 

(16) Cash position—(i) General rule. 

The term cash position means, with 

respect to a specified foreign 

corporation, the sum of— 

(A) Cash held by the corporation; 

(B) The net accounts receivable of the 

corporation; and 

(C) The fair market value of the cashequivalent assets held by the 

corporation. 

(ii) Fair market value of cashequivalent assets. For purposes of 

determining the fair market value of a 

cash-equivalent asset of a specified 

foreign corporation, the value of the 

cash-equivalent asset must be adjusted 

by the fair market value of any cashequivalent asset hedging transaction 

with respect to the cash-equivalent 

asset, but only to the extent that the 

cash-equivalent asset hedging 

transaction does not reduce the fair 

market value of the cash-equivalent 

asset below zero. 

(iii) Measurement of derivative 

financial instruments. The amount of 

derivative financial instruments taken 

into account in determining the cash 

position of a specified foreign 

corporation is the aggregate fair market 

value of its derivative financial 

instruments that constitute cashequivalent assets, provided such 

amount is not less than zero. 

(iv) Translation of cash position 

amounts. The cash position of a 

specified foreign corporation with 

respect to a cash measurement date 

must be expressed in U.S. dollars. For 

this purpose, the amounts described in 

paragraph (f)(16)(i) of this section must 

be translated (if necessary) into U.S. 

dollars using the spot rate on the 

relevant cash measurement date. 

(17) Deferred foreign income 

corporation—(i) In general. The term 

deferred foreign income corporation 

means a specified foreign corporation 

that has accumulated post-1986 deferred 

foreign income greater than zero as of an 

E&P measurement date. 

(ii) Priority rule. If a specified foreign 

corporation satisfies the definition of a 

deferred foreign income corporation 

under section 965(d)(1) and paragraph 

(f)(17)(i) of this section, it is classified 

solely as a deferred foreign income 

corporation and not also as an E&P 

deficit foreign corporation even if it 

otherwise satisfies the requirements of 

section 965(b)(3)(B) and paragraph 

(f)(22) of this section. 

(18) Derivative financial instrument. 

The term derivative financial 

instrument includes a financial 

instrument that is one of the following— 

(i) A notional principal contract, 

(ii) An option contract, 

(iii) A forward contract, other than a 

forward contract with respect to a 

specified commodity (as defined in 

paragraph (f)(13)(ii) of this section), but 

solely to the extent that the specified 

foreign corporation identified, or could 

have identified, the forward contract as 

a hedging transaction (within the 

meaning of § 1.1221–2(b)) with respect 

to one or more specified commodities 

held by the specified foreign 

corporation, 

(iv) A futures contract, 

(v) A short position in securities or 

commodities, other than a forward 

contract with respect to a specified 

commodity, but solely to the extent that 

the specified foreign corporation 

identified, or could have identified, the 

forward contract as a hedging 

transaction (within the meaning of 

§ 1.1221–2(b)) with respect to one or 

more specified commodities held by the 

specified foreign corporation, or 

(vi) Any financial instrument similar 

to one described in paragraphs (f)(18)(i) 

through (v) of this section. 

(19) Domestic pass-through entity. 

The term domestic pass-through entity 

means a pass-through entity that is a 

United States person (as defined in 

section 7701(a)(30)). 

(20) Domestic pass-through owner. 

The term domestic pass-through owner 

means, with respect to a domestic passthrough entity, a United States person 

(as defined in section 7701(a)(30)) that 

is a partner, shareholder, beneficiary, 

grantor, or owner, as the case may be, 

in the domestic pass-through entity. 

Notwithstanding the preceding 

sentence, the term does not include a 

partner, shareholder, beneficiary, 

grantor, or owner of the domestic passthrough entity that is itself a domestic 

pass-through entity but does include 

any other United States person that is an 

indirect partner, shareholder, 

beneficiary, grantor, or owner of the 

domestic pass-through entity through 

one or more other pass-through entities. 

(21) Domestic pass-through owner 

share. The term domestic pass-through 

owner share means, with respect to a 

domestic pass-through owner and a 

domestic pass-through entity, the 

domestic pass-through owner’s share of 

the aggregate section 965(a) inclusion 

amount and the section 965(c) 

deduction amount, as applicable, of the 

domestic pass-through entity, including 

the domestic pass-through owner’s 

share of the aggregate section 965(a) 

inclusion amount and section 965(c) 

deduction amount, as applicable, of a 

domestic pass-through entity owned 

indirectly by the domestic pass-through 

owner through one or more other passthrough entities. 

(22) E&P deficit foreign corporation— 

(i) In general. The term E&P deficit 

foreign corporation means, with respect 

to a section 958(a) U.S. shareholder, a 

specified foreign corporation, other than 

a deferred foreign income corporation, 

if, as of November 2, 2017— 

(A) The specified foreign corporation 

had a deficit in post-1986 earnings and 

profits, 

(B) The corporation was a specified 

foreign corporation, and 

(C) The shareholder was a United 

States shareholder of the corporation. 

(ii) Determination of deficit in post1986 earnings and profits. In the case of 

a specified foreign corporation that has 

post-1986 earnings and profits that 

include earnings and profits described 

in section 959(c)(1) or 959(c)(2) (or both) 

and a deficit in earnings and profits 

(including hovering deficits, as defined 

in § 1.367(b)–7(d)(2)(i)), the specified 

foreign corporation has a deficit in post1986 earnings and profits described in 

paragraph (f)(22)(i)(A) of this section 

only to the extent the deficit in post1986 earnings and profits exceeds the 

aggregate of its post-1986 earnings and 

profits described in section 959(c)(1) 

and 959(c)(2). 

(23) E&P measurement dates. The 

term E&P measurement dates means 

November 2, 2017, and December 31, 

2017, collectively, and each an E&P 

measurement date. 

(24) Final cash measurement date. 

The term final cash measurement date 

means, with respect to a specified 

foreign corporation, the close of the last 

taxable year of the specified foreign 

corporation that begins before January 1, 

2018, and ends on or after November 2, 

2017, if any. 

(25) First cash measurement date. The 

term first cash measurement date 

means, with respect to a specified 

foreign corporation, the close of the last 

taxable year of the specified foreign 

corporation that ends after November 1, 

2015, and before November 2, 2016, if 

any. 

(26) Inclusion year. The term 

inclusion year means, with respect to a 

1882 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

deferred foreign income corporation, the 

last taxable year of the deferred foreign 

income corporation that begins before 

January 1, 2018. 

(27) Net accounts receivable. The 

term net accounts receivable means, 

with respect to a specified foreign 

corporation, the excess (if any) of— 

(i) The corporation’s accounts 

receivable, over 

(ii) The corporation’s accounts 

payable (determined consistent with the 

rules of section 461). 

(28) Pass-through entity. The term 

pass-through entity means a 

partnership, S corporation, or any other 

person (whether domestic or foreign) 

other than a corporation to the extent 

that the income or deductions of the 

person are included in the income of 

one or more direct or indirect owners or 

beneficiaries of the person. For example, 

if a domestic trust is subject to federal 

income tax on a portion of its section 

965(a) inclusion amount and its 

domestic pass-through owners are 

subject to tax on the remaining portion, 

the domestic trust is treated as a 

domestic pass-through entity with 

respect to such remaining portion. 

(29) Post-1986 earnings and profits— 

(i) General rule. The term post-1986 

earnings and profits means, with respect 

to a specified foreign corporation and an 

E&P measurement date, the earnings 

and profits (including earnings and 

profits described in section 959(c)(1) 

and 959(c)(2)) of the specified foreign 

corporation (computed in accordance 

with sections 964(a) and 986, subject to 

§ 1.965–4(f), and by taking into account 

only periods when the foreign 

corporation was a specified foreign 

corporation) accumulated in taxable 

years beginning after December 31, 

1986, and determined— 

(A) As of the E&P measurement date, 

except as provided in paragraph 

(f)(29)(ii) of this section, and 

(B) Without diminution by reason of 

dividends distributed during the last 

taxable year of the foreign corporation 

that begins before January 1, 2018, other 

than dividends distributed to another 

specified foreign corporation to the 

extent the dividends increase the post1986 earnings and profits of the 

distributee specified foreign 

corporation. 

(ii) Foreign income taxes. For 

purposes of determining a specified 

foreign corporation’s post-1986 earnings 

and profits as of the E&P measurement 

date on November 2, 2017, in the case 

in which foreign income taxes (as 

defined in section 901(m)(5)) of the 

specified foreign corporation accrue 

after November 2, 2017, but on or before 

December 31, 2017, and during the 

specified foreign corporation’s U.S. 

taxable year that includes November 2, 

2017, the specified foreign corporation’s 

post-1986 earnings and profits as of 

November 2, 2017, are reduced by the 

applicable portion of such foreign 

income taxes. For purposes of the 

preceding sentence, the applicable 

portion of the foreign income taxes is 

the amount of the taxes that are 

attributable to the portion of the taxable 

income (as determined under foreign 

law) that accrues on or before November 

2, 2017. 

(iii) Deficits in earnings and profits. 

Any deficit related to post-1986 

earnings and profits, including a 

hovering deficit (as defined in 

§ 1.367(b)–7(d)(2)(i)), of a specified 

foreign corporation is taken into account 

for purposes of determining the post1986 earnings and profits (including a 

deficit) of the specified foreign 

corporation. 

(30) Pro rata share. The term pro rata 

share means, with respect to a section 

958(a) U.S. shareholder of a specified 

foreign corporation, a deferred foreign 

income corporation, or an E&P deficit 

foreign corporation, as applicable— 

(i) With respect to the section 965(a) 

earnings amount of a deferred foreign 

income corporation, the portion of the 

section 965(a) earnings amount that 

would be treated as distributed to the 

section 958(a) U.S. shareholder under 

§ 1.951–1(e), determined as of the last 

day of the inclusion year of the deferred 

foreign income corporation on which it 

is a specified foreign corporation; 

(ii) With respect to the specified E&P 

deficit of an E&P deficit foreign 

corporation, the portion of the specified 

E&P deficit allocated to the section 

958(a) U.S. shareholder, determined by 

allocating the specified E&P deficit 

among the shareholders of the 

corporation’s common stock in 

proportion to the liquidation value of 

the common stock held by the 

shareholders, determined as of the last 

day of the last taxable year of the E&P 

deficit foreign corporation that begins 

before January 1, 2018, provided that— 

(A) If the corporation’s common stock 

has a liquidation value of zero and there 

is at least one other class of equity with 

a liquidation preference relative to the 

common stock, then the specified E&P 

deficit is allocated as if it were 

distributed in a hypothetical 

distribution described in § 1.951– 

1(e)(1)(i) with respect to the most junior 

class of equity with a positive 

liquidation value to the extent of such 

liquidation value, and then to the next 

most junior class of equity to the extent 

of its liquidation value, and so on, 

applying § 1.951–1(e) by substituting 

‘‘specified E&P deficit’’ for ‘‘subpart F 

income’’ each place it appears and 

treating the amount of current earnings 

and profits of the corporation for the 

year as being equal to the specified E&P 

deficit of the corporation for the year; 

and 

(B) If the corporation’s common stock 

has a liquidation value of zero and there 

is no other class of equity with a 

liquidation preference relative to the 

common stock, the specified E&P deficit 

is allocated among the common stock 

using any reasonable method 

consistently applied; and 

(iii) With respect to the cash position 

of a specified foreign corporation on a 

cash measurement date, the portion of 

the cash position that would be treated 

as distributed to the section 958(a) U.S. 

shareholder under § 1.951–1(e) if the 

cash position were subpart F income, 

determined as of the close of the cash 

measurement date and without regard to 

whether the section 958(a) U.S. 

shareholder is a section 958(a) U.S. 

shareholder of the specified foreign 

corporation as of any other cash 

measurement date of the specified 

foreign corporation, including the final 

cash measurement date of the specified 

foreign corporation. 

(31) Second cash measurement date. 

The term second cash measurement 

date means, with respect to a specified 

foreign corporation, the close of the last 

taxable year of the specified foreign 

corporation that ends after November 1, 

2016, and before November 2, 2017, if 

any. 

(32) Section 958(a) stock. The term 

section 958(a) stock means, with respect 

to a specified foreign corporation, a 

deferred foreign income corporation, or 

an E&P deficit foreign corporation, as 

applicable, stock of the corporation 

owned (directly or indirectly) by a 

United States shareholder within the 

meaning of section 958(a). 

(33) Section 958(a) U.S. shareholder. 

The term section 958(a) U.S. 

shareholder means, with respect to a 

specified foreign corporation, a deferred 

foreign income corporation, or an E&P 

deficit foreign corporation, as 

applicable, a United States shareholder 

of such corporation that owns section 

958(a) stock of the corporation. 

(34) Section 958(a) U.S. shareholder 

inclusion year. The term section 958(a) 

U.S. shareholder inclusion year means 

the taxable year of a section 958(a) U.S. 

shareholder in which or with which the 

last day of the inclusion year of a 

deferred foreign income corporation on 

which it is a specified foreign 

corporation occurs. 

(35) Section 965 regulations. The term 

section 965 regulations means the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1883 

regulations under §§ 1.965–1 through 

1.965–9, collectively. 

(36) Section 965(a) earnings amount. 

The term section 965(a) earnings 

amount means, with respect to a 

deferred foreign income corporation, the 

greater of the accumulated post-1986 

deferred foreign income of the deferred 

foreign income corporation as of the 

E&P measurement date on November 2, 

2017, or the accumulated post-1986 

deferred foreign income of the deferred 

foreign income corporation as of the 

E&P measurement date on December 31, 

2017, determined in each case in the 

functional currency of the specified 

foreign corporation. If the functional 

currency of a specified foreign 

corporation changes between the two 

E&P measurement dates, the comparison 

must be made in the functional currency 

of the specified foreign corporation as of 

December 31, 2017, by translating the 

specified foreign corporation’s 

accumulated post-1986 deferred foreign 

income as of November 2, 2017, into the 

new functional currency using the spot 

rate on November 2, 2017. 

(37) Section 965(a) inclusion. The 

term section 965(a) inclusion means, 

with respect to a person and a deferred 

foreign income corporation, an amount 

included in income by the person by 

reason of section 965 with respect to the 

deferred foreign income corporation, 

whether because the person is a section 

958(a) U.S. shareholder of the deferred 

foreign income corporation with a 

section 965(a) inclusion amount with 

respect to the deferred foreign income 

corporation or because the person is a 

domestic pass-through owner with 

respect to a domestic pass-through 

entity that is a section 958(a) U.S. 

shareholder of the deferred foreign 

income corporation and the person 

includes in income its domestic passthrough owner share of the section 

965(a) inclusion amount of the domestic 

pass-through entity with respect to the 

deferred foreign income corporation. 

(38) Section 965(a) inclusion amount. 

The term section 965(a) inclusion 

amount has the meaning provided in 

paragraph (b)(1) of this section. 

(39) Section 965(a) previously taxed 

earnings and profits. The term section 

965(a) previously taxed earnings and 

profits has the meaning provided in 

§ 1.965–2(c). 

(40) Section 965(b) previously taxed 

earnings and profits. The term section 

965(b) previously taxed earnings and 

profits has the meaning provided in 

§ 1.965–2(d). 

(41) Section 965(c) deduction. The 

term section 965(c) deduction means, 

with respect to a person, an amount 

allowed as a deduction to the person by 

reason of section 965(c), whether 

because the person is a section 958(a) 

U.S. shareholder with a section 965(c) 

deduction amount or because the person 

is a domestic pass-through owner with 

respect to a domestic pass-through 

entity that is a section 958(a) U.S. 

shareholder and the person takes into 

account its domestic pass-through 

owner share of the section 965(c) 

deduction amount of the domestic passthrough entity. 

(42) Section 965(c) deduction amount. 

The term section 965(c) deduction 

amount means an amount equal to the 

sum of— 

(i) A section 958(a) U.S. shareholder’s 

8 percent rate equivalent percentage of 

the section 958(a) U.S. shareholder’s 8 

percent rate amount for the section 

958(a) U.S. shareholder inclusion year, 

plus 

(ii) The section 958(a) U.S. 

shareholder’s 15.5 percent rate 

equivalent percentage of the section 

958(a) U.S. shareholder’s 15.5 percent 

rate amount for the section 958(a) U.S. 

shareholder inclusion year. 

(43) Short-term obligation. The term 

short-term obligation means any 

obligation with a term upon issuance 

that is less than one year and any loan 

that must be repaid at the demand of the 

lender (or that must be repaid within 

one year of such demand), but does not 

include any accounts receivable. 

(44) Specified E&P deficit. The term 

specified E&P deficit means, with 

respect to an E&P deficit foreign 

corporation, the amount of the deficit 

described in paragraph (f)(22)(i)(A) of 

this section. 

(45) Specified foreign corporation—(i) 

General rule. Except as provided in 

paragraph (f)(45)(iii) of this section, the 

term specified foreign corporation 

means— 

(A) A controlled foreign corporation, 

or 

(B) A foreign corporation of which 

one or more domestic corporations is a 

United States shareholder. 

(ii) Special attribution rule—(A) In 

general. Solely for purposes of 

determining whether a foreign 

corporation is a specified foreign 

corporation within the meaning of 

section 965(e)(1)(B) and paragraph 

(f)(45)(i)(B) of this section, stock owned, 

directly or indirectly, by or for— 

(1) A partner (tested partner) will not 

be considered as being owned by a 

partnership under sections 958(b) and 

318(a)(3)(A) and § 1.958–2(d)(1)(i) if the 

tested partner owns less than ten 

percent of the interests in the 

partnership’s capital and profits; and 

(2) A beneficiary (tested beneficiary) 

will not be considered as being owned 

by a trust under sections 958(b) and 

318(a)(3)(B) and § 1.958–2(d)(1)(ii) if the 

value of the interest of the tested 

beneficiary, computed actuarially, 

whether vested or contingent, current or 

remainder, is less than ten percent of 

the value of the trust property, assuming 

the maximum exercise of discretion in 

favor of the beneficiary. 

(B) Attribution for purposes of the ten 

percent standard. For purposes of 

paragraph (f)(45)(ii)(A) of this section, 

an interest in a partnership or trust 

owned by a partner or beneficiary other 

than the tested partner or tested 

beneficiary will be considered as being 

owned by the tested partner or tested 

beneficiary under the principles of 

sections 958(b) and 318, as modified by 

this paragraph (f)(45)(ii), as if interests 

in a partnership or trust were stock. 

(iii) Passive foreign investment 

companies. A foreign corporation that is 

a passive foreign investment company 

(as defined in section 1297) with respect 

to a United States shareholder and that 

is not a controlled foreign corporation is 

not a specified foreign corporation of 

the United States shareholder. 

(46) Spot rate. The term spot rate has 

the meaning provided in § 1.988–1(d). 

(47) United States shareholder. The 

term United States shareholder has the 

meaning provided in section 951(b). 

(g) Examples. The following examples 

illustrate the definitions and general 

rules set forth in this section. 

(1) Example 1. Definition of specified 

foreign corporation. (i) Facts. A, an 

individual, owns 1% of the interests in a 

partnership, PS, and 10% by vote and value 

of the stock of a foreign corporation, FC. PS 

owns 100% of the stock of a domestic 

corporation, DC. A United States citizen, USI, 

owns an additional 10% by vote and value 

of the stock of FC. The remaining 80% by 

vote and value of the stock of FC is owned 

by non-United States persons that are 

unrelated to A, USI, DC, and PS. 

(ii) Analysis. (A) Absent the application of 

sections 958(b), 318(a)(3)(A), and 

318(a)(3)(C), and § 1.958–2(d)(1)(i) and (iii), 

FC would not be a specified foreign 

corporation because FC is not a controlled 

foreign corporation and there would be no 

domestic corporation that is a United States 

shareholder of FC. However, under sections 

958(b) and 318(a)(3)(A) and § 1.958– 

2(d)(1)(i), absent the special attribution rule 

in paragraph (f)(45)(ii) of this section, PS 

would be treated as owning 10% of the stock 

of FC. As a result, under sections 958(b), 

318(a)(5)(A), and 318(a)(3)(C), and § 1.958– 

2(f)(1)(i) and (d)(1)(iii), DC would be treated 

as owning the stock of FC treated as owned 

by PS, and thus DC would be a United States 

shareholder with respect to FC, causing FC 

to be a specified foreign corporation within 

the meaning of section 965(e)(1)(B) and 

paragraph (f)(45)(i)(B) of this section. The 

results would be the same whether A or PS 

or both are domestic or foreign persons. 

1884 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

(B) Under the special attribution rule in 

paragraph (f)(45)(ii) of this section, solely for 

purposes of determining whether a foreign 

corporation is a specified foreign corporation 

within the meaning of section 965(e)(1)(B) 

and paragraph (f)(45)(i)(B) of this section, the 

stock of FC owned by A is not considered as 

being owned by PS under sections 958(b) and 

318(a)(3)(A) and § 1.958–2(d)(1)(i) because A 

owns less than 10% of the interests in PS’s 

capital and profits. Accordingly, FC is not a 

specified foreign corporation within the 

meaning of section 965(e)(1)(B) and 

paragraph (f)(45)(i)(B) of this section. 

(2) Example 2. Definition of specified 

foreign corporation. (i) Facts. The facts are 

the same as in paragraph(g)(1)(i) of this 

section (the facts in Example 1), except that 

A is a foreign corporation wholly owned by 

B, a foreign corporation, and B directly owns 

9% of the interests in PS. 

(ii) Analysis. Applying the principles of 

sections 958(b) and 318, as modified by 

paragraph (f)(45)(ii) of this section, as if the 

interest in PS were stock, A is treated as 

owning the interests in PS owned by B (in 

addition to the 1% interest in PS that A owns 

directly), and thus A is not treated as owning 

less than 10% of the interests in PS’s capital 

and profits. Accordingly, the special 

attribution rule in paragraph (f)(45)(ii) of this 

section does not apply, and PS is treated as 

owning A’s stock of FC for purposes of 

determining whether FC is a specified foreign 

corporation within the meaning of section 

965(e)(1)(B) and paragraph (f)(45)(i)(B) of this 

section. Accordingly, under the analysis 

described in paragraph (ii)(A) of Example 1 

of paragraph (g)(1) of this section, FC is a 

specified foreign corporation within the 

meaning of section 965(e)(1)(B) and 

paragraph (f)(45)(i)(B) of this section. 

(3) Example 3. Determination of 

accumulated post-1986 deferred foreign 

income. (i) Facts. USP, a domestic 

corporation, and FP, a foreign corporation 

unrelated to USP, have owned 70% and 30% 

respectively, by vote and value, of the only 

class of stock of FS, a foreign corporation, 

from January 1, 2016, until December 31, 

2017. USP and FS both have a calendar year 

taxable year. FS had no income until its 

taxable year ending December 31, 2016, in 

which it had 100u of income, all of which 

constituted subpart F income, and USP 

included 70u in income with respect to FS 

under section 951(a)(1) for such year. FS 

earned no income in 2017. Therefore, FS’s 

post-1986 earnings and profits are 100u as of 

both E&P measurement dates. 

(ii) Analysis. Because USP included 70u in 

income with respect to FS under section 

951(a)(1), 70u of such post-1986 earnings and 

profits would, if distributed, be excluded 

from the gross income of USP under section 

959. Thus, FS’s accumulated post-1986 

deferred foreign income would be reduced by 

70u pursuant to section 965(d)(2)(B) and 

paragraph (f)(7)(i)(B) of this section. 

Furthermore, under paragraph (f)(7)(i)(C) of 

this section, the accumulated post-1986 

deferred foreign income of FS is reduced by 

amounts that would be excluded from the 

gross income of FP if FP were a United States 

shareholder, consistent with the principles of 

Revenue Ruling 82–16. Accordingly, FS’s 

accumulated post-1986 deferred foreign 

income is reduced by the remaining 30u of 

the 100u of post-1986 earnings and profits to 

which USP’s 70u of section 951(a)(1) income 

inclusions were attributable. As a result, FS’s 

accumulated post-1986 deferred foreign 

income is 0u (100u minus 70u minus 30u). 

(4) Example 4. Determination of status as 

a deferred foreign income corporation or an 

E&P deficit foreign corporation; specified 

foreign corporation is solely a deferred 

foreign income corporation. (i) Facts. USP, a 

domestic corporation, owns all of the stock 

of FS, a foreign corporation. As of November 

2, 2017, FS has a deficit in post-1986 

earnings and profits of 150u. As of December 

31, 2017, FS has 200u of post-1986 earnings 

and profits. FS does not have earnings and 

profits that are attributable to income of the 

specified foreign corporation that is 

effectively connected with the conduct of a 

trade or business within the United States 

and subject to tax under chapter 1, or that, 

if distributed, would be excluded from the 

gross income of a United States shareholder 

under section 959 or from the gross income 

of another shareholder if such shareholder 

were a United States shareholder. 

(ii) Analysis. FS’s accumulated post-1986 

deferred foreign income is equal to its post1986 earnings and profits because no 

adjustment to post-1986 earnings and profits 

is made under section 965(d)(2) or § 1.965– 

1(f)(7). Under paragraph (f)(17)(i) of this 

section, FS is a deferred foreign income 

corporation because FS has accumulated 

post-1986 deferred foreign income greater 

than zero as of the E&P measurement date on 

December 31, 2017. In addition, under 

paragraph (f)(17)(ii) of this section, because 

FS is a deferred foreign income corporation, 

FS is not also an E&P deficit foreign 

corporation, notwithstanding that FS has a 

deficit in post-1986 earnings and profits as of 

the E&P measurement date on November 2, 

2017. 

(5) Example 5. Determination of status as 

a deferred foreign income corporation or an 

E&P deficit foreign corporation; specified 

foreign corporation is neither a deferred 

foreign income corporation nor an E&P 

deficit foreign corporation. (i) Facts. USP, a 

domestic corporation, owns all of the stock 

of FS, a foreign corporation. As of both 

November 2, 2017, and December 31, 2017, 

FS has 100u of earnings and profits described 

in section 959(c)(2) and a deficit of 90u in 

earnings and profits described in section 

959(c)(3), all of which were accumulated in 

taxable years beginning after December 31, 

1986, while FS was a specified foreign 

corporation. Accordingly, as of both 

November 2, 2017, and December 31, 2017, 

FS has 10u of post-1986 earnings and profits. 

(ii) Analysis. (A) Determination of status as 

a deferred foreign income corporation. Under 

paragraph (f)(17) of this section, for purposes 

of determining whether FS is a deferred 

foreign income corporation, a determination 

must be made whether FS has accumulated 

post-1986 deferred foreign income greater 

than zero as of either the E&P measurement 

date on November 2, 2017, or the E&P 

measurement date on December 31, 2017. 

Under section 965(d)(2) and paragraph (f)(7) 

of this section, FS’s accumulated post-1986 

deferred foreign income is its post-1986 

earnings and profits, except to the extent 

such earnings and profits are attributable to 

income of the specified foreign corporation 

that is effectively connected with the conduct 

of a trade or business within the United 

States and subject to tax under chapter 1, or 

that, if distributed, would be excluded from 

the gross income of a United States 

shareholder under section 959 or from the 

gross income of another shareholder if such 

shareholder were a United States 

shareholder. Disregarding FS’s 100u of post1986 earnings and profits described in 

paragraph (f)(7)(i)(B) of this section, FS has 

a 90u deficit in accumulated post-1986 

deferred foreign income as of both E&P 

measurement dates. Accordingly, FS does not 

have accumulated post-1986 deferred foreign 

income greater than zero as of either E&P 

measurement date, and, therefore, FS is not 

a deferred foreign income corporation. 

(B) Determination of status as an E&P 

deficit foreign corporation. Under paragraph 

(f)(22)(i) of this section, for purposes of 

determining whether FS is an E&P deficit 

foreign corporation, a determination must be 

made whether FS has a deficit in post-1986 

earnings and profits as of the E&P 

measurement date on November 2, 2017. 

Under paragraph (f)(22)(ii) of this section, 

because the deficit in the earnings and profits 

of FS described in section 959(c)(3) of 90u 

does not exceed the earnings and profits of 

FS described in section 959(c)(2) of 100u, FS 

does not have a deficit in post-1986 earnings 

and profits as of the E&P measurement date 

on November 2, 2017, and, therefore, FS is 

not an E&P deficit foreign corporation. 

Accordingly, FS is neither a deferred foreign 

income corporation nor an E&P deficit 

foreign corporation. 

(6) Example 6. Application of currency 

translation rules. (i) Facts. As of November 

2, 2017, and December 31, 2017, USP, a 

domestic corporation, owns all of the stock 

of CFC1, an E&P deficit foreign corporation 

with the ‘‘u’’ as its functional currency; 

CFC2, an E&P deficit foreign corporation 

with the ‘‘v’’ as its functional currency; 

CFC3, a deferred foreign income corporation 

with the ‘‘y’’ as its functional currency; and 

CFC4, a deferred foreign income corporation 

with the ‘‘z’’ as its functional currency. USP, 

CFC1, CFC2, CFC3, and CFC4 each have a 

calendar year taxable year. As of December 

31, 2017, 1u=$1, .75v=$1, .50y=$1, and 

.25z=$1. CFC1 has a specified E&P deficit of 

100u, CFC2 has a specified E&P deficit of 

120v, CFC3 has a section 965(a) earnings 

amount of 50y, and CFC4 has a section 965(a) 

earnings amount of 75z. 

(ii) Analysis. (A) Under paragraph (f)(38) of 

this section, for purposes of determining 

USP’s section 965(a) inclusion amounts with 

respect to CFC3 and CFC4, the section 965(a) 

earnings amount of each of CFC3 and CFC4 

is translated into U.S. dollars at the spot rate 

on December 31, 2017, which equals $100 

(50y at .50y=$1) and $300 (75z at .25z=$1), 

respectively. Furthermore, USP’s pro rata 

share of the section 965(a) earnings amounts, 

as translated, is $100 and $300, respectively, 

or 100% of each section 965(a) earnings 

amount. 

(B) Under paragraph (f)(9) of this section, 

for purposes of determining USP’s aggregate 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1885 

foreign E&P deficit, the specified E&P deficit 

of each of CFC1 and CFC2 is translated into 

U.S. dollars at the spot rate on December 31, 

2017, which equals $100 (100u at 1u=$1) and 

$160 (120v at .75v=$1), respectively. 

Furthermore USP’s pro rata share of each 

specified E&P deficit, as translated, is $100 

and $160, respectively, or 100% of each 

specified E&P deficit. Therefore, USP’s 

aggregate foreign E&P deficit is $260. 

(C) Under section 965(b)(1) and paragraph 

(b)(2) of this section, for purposes of 

determining USP’s section 965(a) inclusion 

amount with respect to each of CFC3 and 

CFC4, the U.S. dollar amount of USP’s pro 

rata share of the section 965(a) earnings 

amount of each of CFC3 and CFC4 is reduced 

by each of CFC3 and CFC4’s allocable share 

of USP’s aggregate foreign E&P deficit. Under 

section 965(b)(2) and paragraph (f)(11) of this 

section, CFC3’s allocable share of USP’s 

aggregate foreign E&P deficit of $260 is $65 

($260 × ($100/$400)) and CFC4’s allocable 

share of USP’s aggregate foreign E&P deficit 

is $195 ($260 × ($300/400)). After reduction 

under section 965(b)(1) and paragraph (b)(2) 

of this section, the section 965(a) inclusion 

amount of USP with respect to CFC3 is $35 

($100¥$65) and the section 965(a) inclusion 

amount of USP with respect to CFC4 is $105 

($300¥$195). Under § 1.965–2(c), the section 

965(a) previously taxed earnings and profits 

of each of CFC3 and CFC4, translated into the 

respective functional currencies of CFC3 and 

CFC4 at the spot rate on December 31, 2017, 

are 17.5y ($35 at .50y=$1) and 26.25z ($105 

at .25z=$1), respectively. Under § 1.965– 

6(b)(1), for purposes of applying section 

960(a)(1), the amounts treated as a dividend 

paid by each of CFC3 and CFC4, translated 

into the respective functional currencies of 

CFC3 and CFC4 at the spot rate on December 

31, 2017, are 17.5y ($35 at .50y=$1) and 

26.25z ($105 at .25z=$1). 

(D) For purposes of determining the section 

965(b) previously taxed earnings and profits 

of each of CFC3 and CFC4 under section 

965(b)(4)(A) and § 1.965–2(d)(1) as a result of 

the reduction to USP’s section 965(a) 

inclusion amounts with respect to CFC3 and 

CFC4, the amount of the aggregate foreign 

E&P deficit of USP allocated to each of CFC3 

and CFC4 under section 965(b)(2) and 

paragraph (f)(11) of this section, translated 

into the respective functional currencies of 

CFC3 and CFC4 at the spot rate on December 

31, 2017, is 32.5y ($65 at .50y=$1) and 48.75z 

($195 at .25z=$1), respectively. 

(7) Example 7. Determination of cash 

measurement dates and pro rata shares of 

cash positions. (i) Facts. Except as otherwise 

provided, for all relevant periods, USP, a 

domestic corporation, has owned directly at 

least 10% of the stock of CFC1, CFC2, CFC3, 

and CFC4, each a foreign corporation. CFC1 

and CFC2 have calendar year taxable years. 

CFC3 and CFC4 have taxable years that end 

on November 30. No entity has a short 

taxable year, except as a result of the 

transactions described below. 

(A) USP transferred all of its stock of CFC2 

to an unrelated person on June 30, 2016, at 

which point USP ceased to be a United States 

shareholder with respect to CFC2. 

(B) CFC4 dissolved on December 30, 2010, 

and, as a result, its final taxable year ended 

on December 30, 2010. 

(ii) Analysis. Each of CFC1, CFC2, CFC3, 

and CFC4 is a specified foreign corporation 

of USP, subject to the sale of CFC2 on June 

30, 2016, and the dissolution of CFC4 on 

December 30, 2010. Under the definition of 

aggregate foreign cash position in paragraph 

(f)(8)(i) of this section, the definition of pro 

rata share of a cash position in paragraph 

(f)(30)(iii) of this section, and the definitions 

of the final cash measurement date, second 

cash measurement date, and first cash 

measurement date in paragraphs (f)(24), (25), 

and (31) of this section, the cash 

measurement dates of the specified foreign 

corporations to be taken into account by USP 

in determining its aggregate foreign cash 

position are summarized in the following 

table: 

CASH MEASUREMENT DATES

Final Second First 

CFC1 .............................................. December 31, 2017 ...................... December 31, 2016 ...................... December 31, 2015. 

CFC2 .............................................. N/A ................................................ N/A ................................................ December 31, 2015. 

CFC3 .............................................. November 30, 2018 ...................... November 30, 2016 ...................... November 30, 2015. 

CFC4 .............................................. N/A ................................................ N/A ................................................ N/A. 

(8) Example 8. Determination of section 

958(a) U.S. shareholder in case of a 

controlled domestic partnership. (i) Facts. 

USP, a domestic corporation, owns all of the 

stock of CFC1 and CFC2. CFC1 and CFC2 

own 60% and 40%, respectively, of the 

interests in the capital and profits of DPS, a 

domestic partnership. DPS owns all of the 

stock of CFC3 and CFC4. This ownership 

structure has existed since the date of 

formation of CFC1, CFC2, CFC3, and CFC4. 

CFC1, CFC2, CFC3, and CFC4 are each a 

foreign corporation. USP, DPS, CFC1, CFC2, 

CFC3, and CFC4 have calendar year taxable 

years. On both E&P measurement dates, CFC3 

has 50u of accumulated post-1986 deferred 

foreign income. On both E&P measurement 

dates, CFC4 has a deficit in post-1986 

earnings and profits of 30u. On all cash 

measurement dates, CFC1, CFC2, and CFC3 

each have a cash position of 0u, and CFC4 

has a cash position of 200u. 

(ii) Analysis. DPS is a controlled domestic 

partnership with respect to USP within the 

meaning of paragraph (e)(2) of this section 

because more than 50% of the interests in its 

capital and profits are owned by persons 

related to USP within the meaning of section 

267(b), CFC1 and CFC2, and thus DPS is 

controlled by USP and related persons. 

Without regard to paragraph (e) of this 

section, DPS is a section 958(a) U.S. 

shareholder of CFC3 and CFC4, each of 

which is a controlled foreign corporation. If 

DPS were treated as foreign, CFC3 and CFC4 

would each continue to be a controlled 

foreign corporation, and USP would be 

treated as a section 958(a) U.S. shareholder 

of each of CFC3 and CFC4, and would be 

treated as owning (within the meaning of 

section 958(a)) tested section 958(a) stock of 

each of CFC3 and CFC4 through CFC1 and 

CFC2, which are both partners in DPS. Thus, 

under paragraph (e)(1) of this section, DPS is 

treated as a foreign partnership for purposes 

of determining the section 958(a) U.S. 

shareholder of both CFC3 and CFC4 and the 

section 958(a) stock of both CFC3 and CFC4 

owned by the section 958(a) U.S. 

shareholder. Thus, USP’s pro rata share of 

CFC3’s section 965(a) earnings amount is 

50u, and its pro rata share of CFC4’s 

specified E&P deficit is 30u. USP’s aggregate 

foreign cash position is 200u. DPS is not a 

section 958(a) U.S. shareholder with respect 

to either CFC3 or CFC4. 

§ 1.965–2 Adjustments to earnings and 

profits and basis. 

(a) Scope. This section provides rules 

relating to adjustments to earnings and 

profits and basis to determine and 

account for the application of section 

965(a) and (b) and § 1.965–1(b) and a 

rule that limits the amount of gain 

recognized under section 961(b)(2) by 

reason of distributions attributable to 

section 965 previously taxed earnings 

and profits (as defined in paragraph 

(g)(1)(ii) of this section) in the inclusion 

year. Paragraph (b) of this section 

provides rules relating to adjustments to 

earnings and profits of a specified 

foreign corporation for purposes of 

applying sections 902, 959, 960, and 

965. Paragraph (c) of this section 

provides rules regarding adjustments to 

earnings and profits by reason of section 

965(a). Paragraph (d) of this section 

provides rules regarding adjustments to 

earnings and profits by reason of section 

965(b). Paragraph (e) provides rules 

regarding adjustments to basis by reason 

of section 965(a). Paragraph (f) of this 

section provides an election to make 

certain adjustments to basis 

corresponding to adjustments to 

earnings and profits by reason of section 

965(b). Paragraph (g) of this section 

provides rules that limit the amount of 

gain recognized in connection with the 

application of section 961(b)(2) and that 

require related reductions in basis. 

Paragraph (h) of this section provides 

1886 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

rules regarding basis adjustments. 

Paragraph (i) of this section provides 

definitions that apply for purposes of 

this section. Paragraph (j) of this section 

provides examples illustrating the 

application of this section. 

(b) Determination of and adjustments 

to earnings and profits of a specified 

foreign corporation for purposes of 

applying sections 902, 959, 960, and 

965. For the taxable year of a specified 

foreign corporation in which an E&P 

measurement date occurs, and the last 

taxable year of a specified foreign 

corporation that begins before January 1, 

2018, and the taxable year of a section 

958(a) U.S. shareholder in which or 

with which any such year ends, the 

adjustments to earnings and profits 

described in paragraphs (b)(1) through 

(b)(5) of this section apply in sequence. 

For purposes of determining the 

consequences under sections 902 and 

960 of a distribution or an inclusion 

under section 951(a)(1), after the 

application of those paragraphs, the 

ordering rule in § 1.960–1(i)(2) applies 

except that section 902 is applied with 

respect to any distributions from the 

specified foreign corporation described 

in paragraph (b)(2) of this section that 

are not disregarded under § 1.965–4 

before section 960 is applied with 

respect to an inclusion or distribution 

described in paragraph (b)(3), (b)(4), or 

(b)(5) of this section. 

(1) Each of the subpart F income of 

the specified foreign corporation and 

the amount required to be included in 

income under section 1248, if any, are 

determined without regard to section 

965(a), but taking into account any 

relevant distributions, and earnings and 

profits of the specified foreign 

corporation that are described in section 

959(c)(2) with respect to the section 

958(a) U.S. shareholder are increased to 

the extent of the section 958(a) U.S. 

shareholder’s inclusion under section 

951(a)(1)(A) without regard to section 

965(a) (including to the extent provided 

in section 959(e)). 

(2) The treatment of a distribution by 

the specified foreign corporation to 

another specified foreign corporation 

that is made before January 1, 2018, is 

determined under section 959. 

(3) Each of the post-1986 earnings and 

profits (including a deficit) of the 

specified foreign corporation, the 

accumulated post-1986 deferred foreign 

income of the specified foreign 

corporation, the section 965(a) earnings 

amount of the specified foreign 

corporation, and the section 965(a) 

inclusion amount with respect to the 

specified foreign corporation, if any, is 

determined, taking into account the 

rules of § 1.965–4, and the earnings and 

profits (including a deficit) of the 

specified foreign corporation are 

adjusted as provided in paragraphs (c) 

and (d) of this section. For a rule 

disregarding subpart F income earned 

after an E&P measurement date for 

purposes of calculating accumulated 

post-1986 deferred foreign income as of 

the E&P measurement date, see § 1.965– 

1(f)(7)(ii). 

(4) The treatment of distributions 

described in paragraph (b)(2) of this 

section that are disregarded under 

§ 1.965–4 is redetermined and the 

treatment of all distributions from the 

specified foreign corporation other than 

those described in paragraph (b)(2) of 

this section is determined under section 

959. 

(5) An amount is determined under 

section 956 with respect to the specified 

foreign corporation and the section 

958(a) U.S. shareholder; earnings and 

profits of the specified foreign 

corporation described in section 

959(c)(2) with respect to the section 

958(a) U.S. shareholder are reclassified 

as earnings and profits described in 

section 959(c)(1) with respect to the 

section 958(a) U.S. shareholder to the 

extent the amount determined under 

section 956 would, but for section 

959(a)(2), be included by the section 

958(a) U.S. shareholder under section 

951(a)(1)(B); and earnings and profits 

described in section 959(c)(1) with 

respect to the section 958(a) U.S. 

shareholder are further increased to the 

extent of the section 958(a) U.S. 

shareholder’s inclusion under section 

951(a)(1)(B). 

(c) Adjustments to earnings and 

profits by reason of section 965(a). The 

earnings and profits of a deferred 

foreign income corporation described in 

section 959(c)(2) with respect to a 

section 958(a) U.S. shareholder are 

increased by an amount equal to the 

section 965(a) inclusion amount of the 

section 958(a) U.S. shareholder with 

respect to the deferred foreign income 

corporation, if any, translated (if 

necessary) into the functional currency 

of the deferred foreign income 

corporation using the spot rate on 

December 31, 2017, provided the 

section 965(a) inclusion amount is 

included in income by the section 

958(a) U.S. shareholder. For purposes of 

the section 965 regulations, the earnings 

and profits described in section 

959(c)(2) by reason of this paragraph (c) 

and the earnings and profits initially 

described in section 959(c)(2) by reason 

of this paragraph (c) but subsequently 

reclassified as earnings and profits 

described in section 959(c)(1), if any, are 

referred to as section 965(a) previously 

taxed earnings and profits. Furthermore, 

the earnings and profits (including a 

deficit) of the deferred foreign income 

corporation that are described in section 

959(c)(3) (or that would be described in 

section 959(c)(3) but for the application 

of section 965(a) and the section 965 

regulations) are reduced (or, in the case 

of a deficit, increased) by an amount 

equal to the section 965(a) previously 

taxed earnings and profits. 

(d) Adjustments to earnings and 

profits by reason of section 965(b)—(1) 

Adjustments to earnings and profits 

described in section 959(c)(2) and (c)(3) 

of deferred foreign income corporations. 

The earnings and profits of a deferred 

foreign income corporation described in 

section 959(c)(2) with respect to a 

section 958(a) U.S. shareholder are 

increased by an amount equal to the 

reduction to the section 958(a) U.S. 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

deferred foreign income corporation 

under section 965(b), § 1.965–1(b)(2), 

and § 1.965–8(b), as applicable, 

translated (if necessary) into the 

functional currency of the deferred 

foreign income corporation using the 

spot rate on December 31, 2017, 

provided the section 958(a) U.S. 

shareholder includes the section 965(a) 

inclusion amount (if any) with respect 

to the deferred foreign income 

corporation in income. For purposes of 

the section 965 regulations, the earnings 

and profits described in section 

959(c)(2) by reason of this paragraph (d) 

and the earnings and profits initially 

described in section 959(c)(2) by reason 

of this paragraph (d) but subsequently 

reclassified as earnings and profits 

described in section 959(c)(1) are 

referred to as section 965(b) previously 

taxed earnings and profits, and are 

treated as having been previously 

included in the gross income of the 

section 958(a) U.S. shareholder under 

section 951 for purposes of section 

1248(d)(1). Furthermore, the earnings 

and profits (including a deficit) 

described in section 959(c)(3) of the 

deferred foreign income corporation (or 

that would be described in section 

959(c)(3) but for the application of 

section 965(b) and the section 965 

regulations) are reduced (or, in the case 

of a deficit, increased) by an amount 

equal to the section 965(b) previously 

taxed earnings and profits. 

(2) Adjustments to earnings and 

profits described in section 959(c)(3) of 

E&P deficit foreign corporations—(i) 

Increase in earnings and profits by an 

amount equal to the portion of the 

section 958(a) U.S. shareholder’s pro 

rata share of the specified E&P deficit 

taken into account—(A) In general. For 

an E&P deficit foreign corporation’s last 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1887 

taxable year that begins before January 

1, 2018, the earnings and profits of the 

E&P deficit foreign corporation 

described in section 959(c)(3) are 

increased by an amount equal to the 

portion of a section 958(a) U.S. 

shareholder’s pro rata share of the 

specified E&P deficit of the E&P deficit 

foreign corporation taken into account 

under section 965(b), § 1.965–1(b)(2), 

and § 1.965–8(b), as determined under 

paragraph (d)(2)(ii) of this section, 

translated (if necessary) into the 

functional currency of the E&P deficit 

foreign corporation using the spot rate 

on December 31, 2017. For purposes of 

section 316, the earnings and profits of 

the E&P deficit foreign corporation 

attributable to the increase described in 

the preceding sentence are not treated as 

earnings and profits of the taxable year 

described in section 316(a)(2). See also 

§ 1.965–6(b)(3) for the timing of this 

adjustment for purposes of determining 

foreign taxes deemed paid under 

sections 902 and 960. 

(B) Reduction of a qualified deficit. 

For purposes of section 952, a section 

958(a) U.S. shareholder’s pro rata share 

of the earnings and profits of an E&P 

deficit foreign corporation is increased 

by an amount equal to the portion of the 

section 958(a) U.S. shareholder’s pro 

rata share of the specified E&P deficit of 

the E&P deficit foreign corporation 

taken into account under section 965(b), 

§ 1.965–1(b)(2), or § 1.965–8(b), as 

applicable, as determined under 

paragraph (d)(2)(ii) of this section, 

translated (if necessary) into the 

functional currency of the E&P deficit 

foreign corporation using the spot rate 

on December 31, 2017, and such 

increase is attributable to the same 

activity to which the deficit so taken 

into account was attributable. 

(ii) Determination of portion of a 

section 958(a) U.S. shareholder’s pro 

rata share of a specified E&P deficit 

taken into account—(A) In general. The 

portion of a section 958(a) U.S. 

shareholder’s pro rata share of a 

specified E&P deficit of an E&P deficit 

foreign corporation taken into account 

under section 965(b), § 1.965–1(b)(2), or 

§ 1.965–8(b), as applicable, is 100 

percent of the section 958(a) U.S. 

shareholder’s pro rata share of the 

specified E&P deficit if either of the 

following conditions is satisfied: 

(1) The section 958(a) U.S. 

shareholder (including a consolidated 

group of which the section 958(a) U.S. 

shareholder is a member) does not have 

an excess aggregate foreign E&P deficit 

(as defined in § 1.965–8(f)(7)(i)), or 

(2) If the section 958(a) U.S. 

shareholder is a member of an affiliated 

group in which not all members are 

members of the same consolidated 

group, the amount described in § 1.965– 

8(f)(1)(i)(B) with respect to the affiliated 

group is equal to or greater than the 

amount described § 1.965–8(f)(1)(i)(A). 

(B) Designation of portion of a section 

958(a) U.S. shareholder’s pro rata share 

of a specified E&P deficit taken into 

account. If neither the condition in 

paragraph (d)(2)(ii)(A)(1) nor the 

condition in paragraph (d)(2)(ii)(A)(2) is 

satisfied with respect to a section 958(a) 

U.S. shareholder, then the section 958(a) 

U.S. shareholder must designate the 

portion taken into account by reporting 

to each E&P deficit foreign corporation 

of the section 958(a) U.S. shareholder, 

and maintaining, in its books and 

records, a statement setting forth the 

following information— 

(1) The portion of the section 958(a) 

U.S. shareholder’s pro rata share of the 

specified E&P deficit of the E&P deficit 

foreign corporation taken into account 

under section 965(b), § 1.965–1(b)(2), or 

§ 1.965–8(b), as designated under 

§ 1.965–8(c), as applicable, and 

(2) In the case of an E&P deficit 

foreign corporation that has a qualified 

deficit (as determined under section 952 

and § 1.952–1), the portion (if any) of 

the section 958(a) shareholder’s pro rata 

share of the specified E&P deficit of the 

E&P deficit foreign corporation taken 

into account under paragraph 

(d)(2)(ii)(B)(1) of this section that is 

attributable to a qualified deficit, 

including the qualified activities to 

which such portion is attributable. 

(e) Adjustments to basis by reason of 

section 965(a)—(1) General rule. Except 

as provided in paragraph (e)(2) of this 

section, a section 958(a) U.S. 

shareholder’s basis in section 958(a) 

stock of a deferred foreign income 

corporation, or a section 958(a) U.S. 

shareholder’s basis in applicable 

property with respect to a deferred 

foreign income corporation, is increased 

by the section 958(a) U.S. shareholder’s 

section 965(a) inclusion amount with 

respect to the deferred foreign income 

corporation included in income by the 

section 958(a) U.S. shareholder. See 

section 961(a). 

(2) Section 962 election. In the case of 

a section 958(a) U.S. shareholder who 

has made an election under section 962 

for a section 958(a) U.S. shareholder’s 

inclusion year, the increase in basis in 

the section 958(a) U.S. shareholder’s 

section 958(a) stock of, or applicable 

property with respect to, a deferred 

foreign income corporation cannot 

exceed an amount equal to the amount 

of tax paid under chapter 1 of the Code 

with respect to the section 958(a) U.S. 

shareholder’s section 965(a) inclusion 

amount with respect to the deferred 

foreign income corporation, taking into 

account any section 965(h) election 

made by the section 958(a) U.S. 

shareholder. 

(f) Adjustments to basis by reason of 

section 965(b)—(1) In general. Except as 

provided in paragraph (f)(2) of this 

section, no adjustments to basis of stock 

or property are made under section 961 

(or any other provision of the Code) to 

take into account the reduction to a 

section 958(a) U.S. shareholder’s pro 

rata share of the section 965(a) earnings 

amount of a deferred foreign income 

corporation under section 965(b), 

§ 1.965–1(b)(2), or § 1.965–8(b), as 

applicable. 

(2) Election to make adjustments to 

basis to account for the application of 

section 965(b)—(i) In general. If a 

section 958(a) U.S. shareholder makes 

the election as provided in this 

paragraph (f)(2), the adjustments to basis 

described in paragraph (f)(2)(ii) of this 

section are made with respect to each 

deferred foreign income corporation and 

each E&P deficit foreign corporation in 

which the section 958(a) U.S. 

shareholder owns section 958(a) stock. 

(ii) Basis adjustments—(A) Increase in 

basis with respect to a deferred foreign 

income corporation—(1) In general. 

Except as provided in paragraphs 

(f)(2)(ii)(A)(2) and (C) of this section, a 

section 958(a) U.S. shareholder’s basis 

in section 958(a) stock of a deferred 

foreign income corporation, or a section 

958(a) U.S. shareholder’s basis in 

applicable property with respect to a 

deferred foreign income corporation, is 

increased by an amount equal to the 

section 965(b) previously taxed earnings 

and profits of the deferred foreign 

income corporation with respect to the 

section 958(a) U.S. shareholder, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017. 

(2) Limited basis adjustment. A 

section 958(a) U.S. shareholder may, in 

lieu of applying paragraph (f)(2)(ii)(A)(1) 

of this section, designate the amount by 

which it increases its basis in section 

958(a) stock of, or applicable property 

with respect to, a deferred foreign 

income corporation, provided that— 

(i) The increase does not exceed the 

section 965(b) previously taxed earnings 

and profits of the deferred foreign 

income corporation with respect to the 

section 958(a) U.S. shareholder, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017; and 

(ii) The aggregate amount of a section 

958(a) U.S. shareholder’s increases in 

basis with respect to stock or applicable 

property pursuant to paragraph 

(f)(2)(ii)(A)(2) of this section does not 

1888 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

exceed the aggregate amount of the 

section 958(a) U.S. shareholder’s 

reductions in basis pursuant to 

paragraph (f)(2)(ii)(B) of this section 

subject to the limitation under 

paragraph (f)(2)(ii)(B)(2) of this section. 

(B) Reduction in basis with respect to 

an E&P deficit foreign corporation—(1) 

In general. Except as provided in 

paragraphs (f)(2)(ii)(B)(2) and (f)(2)(ii)(C) 

of this section, a section 958(a) U.S. 

shareholder’s basis in section 958(a) 

stock of an E&P deficit foreign 

corporation, or a section 958(a) U.S. 

shareholder’s basis in applicable 

property with respect to an E&P deficit 

foreign corporation, is reduced by an 

amount equal to the portion of the 

section 958(a) U.S. shareholder’s pro 

rata share of the specified E&P deficit of 

the E&P deficit foreign corporation 

taken into account under section 965(b), 

§ 1.965–1(b)(2), and § 1.965–8(b), as 

applicable, as determined under 

paragraph (d)(2)(ii) of this section, 

translated (if necessary) into U.S. dollars 

using the spot rate on December 31, 

2017. For rules requiring gain 

recognition, see paragraph (h)(3) of this 

section. 

(2) Limited basis adjustment. If a 

section 958(a) U.S. shareholder adjusts 

its basis in section 958(a) stock of, or 

applicable property with respect to, one 

or more deferred foreign income 

corporations under paragraph 

(f)(2)(ii)(A)(2) of this section, the section 

958(a) U.S. shareholder’s aggregate 

reductions in basis in section 958(a) 

stock of, or applicable property with 

respect to, an E&P deficit foreign 

corporation pursuant to paragraph 

(f)(2)(ii)(B)(1) of this section on a day 

may not exceed the amount of the 

section 958(a) U.S. shareholder’s basis 

in the section 958(a) stock of, or 

applicable property with respect to, 

such E&P deficit foreign corporation, 

determined without taking into account 

specified basis adjustments to the 

section 958(a) stock of, or applicable 

property with respect to, such E&P 

deficit foreign corporation. 

(C) Section 962 election. In the case of 

a section 958(a) U.S. shareholder who 

has made an election under section 962 

for a section 958(a) U.S. shareholder’s 

inclusion year, the adjustments 

provided in paragraphs (f)(2)(ii)(A) and 

(B) of this section do not apply. 

(iii) Rules regarding the election—(A) 

Consistency requirement. In order for 

the election described in this paragraph 

(f)(2) to be effective, a section 958(a) 

U.S. shareholder and each section 

958(a) U.S. shareholder of an E&P 

deficit foreign corporation or of a 

deferred foreign income corporation 

with respect to which the second 

section 958(a) U.S. shareholder’s pro 

rata share of the section 965(a) earnings 

amount is reduced under section 965(b), 

§ 1.965–1(b)(2), or § 1.965–8(b) that is 

related to the first section 958(a) U.S. 

shareholder must make the election 

described in this paragraph (f)(2). For 

purposes of this paragraph (f)(2)(iii)(A), 

a person is treated as related to a section 

958(a) U.S. shareholder if the person 

bears a relationship to the section 958(a) 

U.S. shareholder described in section 

267(b) or 707(b). 

(B) Manner of making election—(1) 

Timing—(i) In general. Except as 

provided in paragraph (f)(2)(iii)(B)(1)(ii) 

of this section, the election provided in 

this paragraph (f)(2) must be made no 

later than the due date (taking into 

account extensions, if any) for the 

section 958(a) U.S. shareholder’s return 

for the first taxable year that includes 

the last day of the last taxable year of 

a deferred foreign income corporation or 

E&P deficit foreign corporation of the 

shareholder that begins before January 

1, 2018. Relief is not available under 

§ 301.9100–2 or 301.9100–3 to file a late 

election. Except as provided in 

paragraph (f)(2)(iii)(B)(1)(ii) of this 

section, the election provided in this 

paragraph (f)(2) is irrevocable. 

(ii) Transition rule. If the due date 

referred to in paragraph (f)(2)(iii)(B)(1)(i) 

of this section occurs before May 6, 

2019, the election must be made by May 

6, 2019. In the case of an election made 

before February 5, 2019, the election 

may be revoked by attaching a 

statement, signed under penalties of 

perjury, to an amended return filed by 

May 6, 2019. The statement must 

contain the section 958(a) U.S. 

shareholder’s name and taxpayer 

identification number and a statement 

that the section 958(a) U.S. shareholder 

and all related persons, as defined in 

paragraph (f)(2)(iii)(A) of this section, 

that are section 958(a) U.S. shareholders 

of E&P deficit foreign corporations or of 

deferred foreign income corporations 

with respect to which the section 958(a) 

U.S. shareholder’s pro rata share of the 

section 965(a) earnings amount is 

reduced under section 965(b), § 1.965– 

1(b)(2), or § 1.965–8(b) revoke the 

election provided in this paragraph 

(f)(2). 

(2) Election statement. Except as 

otherwise provided in publications, 

forms, instructions, or other guidance, 

to make the election provided in this 

paragraph (f)(2), a section 958(a) U.S. 

shareholder must attach a statement, 

signed under penalties of perjury 

consistent with the rules for signatures 

applicable to the section 958(a) U.S. 

shareholders return, to its return for the 

first taxable year that includes the last 

day of the last taxable year of a deferred 

foreign income corporation or E&P 

deficit foreign corporation of the 

shareholder that begins before January 

1, 2018. The statement must include the 

section 958(a) U.S. shareholder’s name, 

taxpayer identification number, and a 

statement that the section 958(a) U.S. 

shareholder and all related persons, as 

defined in paragraph (f)(2)(iii)(A) of this 

section, that are section 958(a) U.S. 

shareholders of E&P deficit foreign 

corporations or of deferred foreign 

income corporations with respect to 

which the section 958(a) U.S. 

shareholder’s pro rata share of the 

section 965(a) earnings amount is 

reduced under section 965(b), § 1.965– 

1(b)(2), or § 1.965–8(b) make the 

election provided in this paragraph 

(f)(2). If the section 958(a) U.S. 

shareholder increases its basis in stock 

or applicable property under paragraph 

(f)(2)(ii)(A)(2) of this section and 

decreases its basis in stock or applicable 

property pursuant to paragraph 

(f)(2)(ii)(B) of this section subject to the 

limitation under paragraph 

(f)(2)(ii)(B)(2) of this section, the 

election statement must so indicate. The 

attachment of an unsigned copy of the 

election statement to the timely-filed 

return for the relevant taxable year 

satisfies the signature requirement of 

this paragraph (f)(2)(iii)(B)(2) if the 

section 958(a) U.S. shareholder retains 

the original signed election statement in 

the manner specified by § 1.6001–1(e). 

(g) Gain reduction rule—(1) Reduction 

in gain recognized under section 

961(b)(2) by reason of distributions 

attributable to section 965 previously 

taxed earnings and profits in the 

inclusion year—(i) In general. If a 

section 958(a) U.S. shareholder receives 

a distribution from a deferred foreign 

income corporation (including through 

a chain of ownership described under 

section 958(a)) during the inclusion year 

of the deferred foreign income 

corporation that is attributable to 

section 965 previously taxed earnings 

and profits of the deferred foreign 

income corporation, then the amount of 

gain that otherwise would be recognized 

under section 961(b)(2) by the section 

958(a) U.S. shareholder with respect to 

the section 958(a) U.S. shareholder’s 

section 958(a) stock of the deferred 

foreign income corporation or interest in 

applicable property with respect to the 

deferred foreign income corporation is 

reduced (but not below zero) by an 

amount equal to the section 965 

previously taxed earnings and profits of 

the deferred foreign income corporation 

with respect to the section 958(a) U.S. 

shareholder, translated (if necessary) 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1889 

into U.S. dollars at the spot rate on 

December 31, 2017. 

(ii) Definition of section 965 

previously taxed earnings and profits. 

For purposes of paragraph (g)(1)(i) of 

this section, the term section 965 

previously taxed earnings and profits 

means, with respect to a deferred 

foreign income corporation and a 

section 958(a) U.S. shareholder, the sum 

of the section 965(a) previously taxed 

earnings and profits of the deferred 

foreign income corporation with respect 

to the section 958(a) U.S. shareholder, 

and, if the section 958(a) U.S. 

shareholder has made the election 

described in paragraph (f)(2) of this 

section, the section 965(b) previously 

taxed earnings and profits of the 

deferred foreign income corporation 

with respect to the section 958(a) U.S. 

shareholder. 

(2) Reduction in basis by an amount 

equal to the gain reduction amount. If 

a section 958(a) U.S. shareholder does 

not recognize gain under section 

961(b)(2) by reason of paragraph (g)(1) of 

this section with respect to a 

distribution from a deferred foreign 

income corporation (including through 

a chain of ownership described under 

section 958(a)), the section 958(a) U.S. 

shareholder’s basis in the section 958(a) 

stock of the deferred foreign income 

corporation, or the section 958(a) U.S. 

shareholder’s basis in the applicable 

property with respect to the deferred 

foreign income corporation, is reduced 

by the amount of gain that would 

otherwise be recognized by the section 

958(a) U.S. shareholder without regard 

to paragraph (g)(1) of this section. 

(h) Rules of application for specified 

basis adjustments. This paragraph (h) 

applies for purposes of making any 

adjustment to the basis of section 958(a) 

stock or applicable property with 

respect to a specified foreign 

corporation described in paragraph (e), 

(f)(2), or (g)(2) of this section 

(collectively, specified basis 

adjustments, and each a specified basis 

adjustment). 

(1) Timing of basis adjustments. 

Except as provided in paragraph (e)(2) 

of this section, a specified basis 

adjustment to section 958(a) stock or 

applicable property with respect to a 

specified foreign corporation is made as 

of the last day of the last taxable year 

of the specified foreign corporation that 

begins before January 1, 2018, on which 

it is a specified foreign corporation. 

(2) Netting of basis adjustments. If one 

or more specified basis adjustments 

occur on the same day with respect to 

the same section 958(a) stock or 

applicable property, a single basis 

adjustment is made as of the close of 

such day with respect to such stock or 

applicable property in an amount equal 

to the net amount, if any, of the increase 

or reduction, as applicable. 

(3) Gain recognition for reduction in 

excess of basis. The excess (if any) of a 

net reduction in basis with respect to 

section 958(a) stock or applicable 

property of a section 958(a) U.S. 

shareholder by reason of one or more 

specified basis adjustments over the 

section 958(a) U.S. shareholder’s basis 

in such stock or applicable property 

without regard to the specified basis 

adjustments is treated as gain from the 

sale or exchange of property. 

(4) Adjustments with respect to each 

share—(i) Section 958(a) stock. If a 

specified basis adjustment is made with 

respect to section 958(a) stock, the 

specified basis adjustment is made with 

respect to each share of the section 

958(a) stock in a manner consistent with 

the section 958(a) U.S. shareholder’s pro 

rata share of the section 965(a) earnings 

amount or specified E&P deficit, as 

applicable, by reason of such share. 

(ii) Applicable property. If a specified 

basis adjustment is made with respect to 

applicable property, the adjustment is 

made with respect to the applicable 

property in a manner consistent with 

the application of paragraph (h)(4)(i) of 

this section. 

(5) Stock or property for which 

adjustments are made—(i) In general. 

Except as provided in paragraph 

(h)(5)(ii) of this section, a specified basis 

adjustment is made solely with respect 

to section 958(a) stock owned by the 

section 958(a) U.S. shareholder within 

the meaning of section 958(a)(1)(A) or 

applicable property owned directly by 

the section 958(a) U.S. shareholder. 

(ii) Special rule for an interest in a 

foreign pass-through entity. If the 

applicable property of the section 958(a) 

U.S. shareholder described in paragraph 

(h)(5)(i) of this section is an interest in 

a foreign pass-through entity, then, for 

purposes of determining the foreign 

pass-through entity’s basis in section 

958(a) stock or applicable property, as 

applicable, with respect to the section 

958(a) U.S. shareholder, a specified 

basis adjustment is made with respect to 

section 958(a) stock or applicable 

property of the section 958(a) U.S. 

shareholder owned through the foreign 

pass-through entity in the same manner 

as if the section 958(a) stock or 

applicable property were owned 

directly by the section 958(a) U.S. 

shareholder. In the case of tiered foreign 

pass-through entities, this paragraph 

(h)(5)(ii) applies with respect to each 

foreign pass-through entity. 

(i) Definitions. This paragraph (i) 

provides definitions that apply for 

purposes of this section. 

(1) Applicable property. The term 

applicable property means, with respect 

to a section 958(a) U.S. shareholder and 

a specified foreign corporation, property 

owned by the section 958(a) U.S. 

shareholder (including through one or 

more foreign pass-through entities) by 

reason of which the section 958(a) U.S. 

shareholder is considered under section 

958(a)(2) as owning section 958(a) stock 

of the specified foreign corporation. 

(2) Foreign pass-through entity. The 

term foreign pass-through entity means 

a foreign partnership or a foreign estate 

or trust (as defined in section 

7701(a)(31)) (including a controlled 

domestic partnership treated as a 

foreign partnership pursuant to § 1.965– 

1(e)). 

(3) Property. The term property has 

the meaning provided in § 1.961–1(b)(1). 

(j) Examples. The following examples 

illustrate the application of this section. 

(1) Example 1. Determination of 

accumulated post-1986 deferred foreign 

income with subpart F income earned before 

E&P measurement date on November 2, 2017. 

(i) Facts. USP, a domestic corporation, owns 

all of the stock of CFC1, a foreign 

corporation, which owns all of the stock of 

CFC2, also a foreign corporation. USP, CFC1, 

and CFC2 all have taxable years ending 

December 31, 2017. As of January 1, 2017, 

CFC1 has no earnings and profits, and CFC2 

has 100u of earnings and profits described in 

section 959(c)(3) that were accumulated in 

taxable years beginning after December 31, 

1986, while CFC2 was a specified foreign 

corporation, and $21x of post-1986 foreign 

income taxes. None of CFC2’s earnings and 

profits are attributable to income treated as 

effectively connected with the conduct of a 

trade or business within the United States. 

On March 1, 2017, CFC1 earns 30u of subpart 

F income (as defined in section 952), and 

CFC2 earns 20u of subpart F income. No 

foreign income tax is imposed on CFC1’s or 

CFC2’s subpart F income. For purposes of 

section 904, the post-1986 undistributed 

earnings, subpart F income, and post-1986 

foreign income taxes are in the general 

category. On July 1, 2017, CFC2 distributes 

40u to CFC1. On November 1, 2017, CFC1 

distributes 60u to USP. USP does not have 

an aggregate foreign E&P deficit. USP 

includes in gross income all amounts that it 

is required to include under section 951. No 

foreign income tax is imposed or withheld on 

the distribution by CFC2 to CFC1 or the 

distribution by CFC1 to USP. 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

for inclusion under section 951(a)(1)(A) 

without regard to section 965. The 

distribution from CFC2 to CFC1 does not give 

rise to subpart F income to CFC1 due to the 

application of section 954(c)(6). Accordingly, 

USP’s inclusion under section 951(a)(1)(A) 

without regard to section 965(a) is 30u with 

respect to CFC1 and 20u with respect to 

1890 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

CFC2 for their taxable years ending December 

31, 2017. As a result of the inclusions under 

section 951(a)(1)(A), CFC1 and CFC2 increase 

their earnings and profits described in 

section 959(c)(2) by 30u and 20u, 

respectively. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. The 

distribution of 40u from CFC2 to CFC1 is 

treated as a distribution of 20u out of 

earnings and profits described in section 

959(c)(2) (attributable to inclusions under 

section 951(a)(1)(A) without regard to section 

965(a)) and 20u out of earnings and profits 

described in section 959(c)(3). 

(C) Section 965(a) inclusion amount. USP 

determines whether CFC1 and CFC2 are 

deferred foreign income corporations and, if 

so, determines its section 965(a) inclusion 

amounts with respect to CFC1 and CFC2. 

CFC1 and CFC2 are specified foreign 

corporations, and CFC1 and CFC2 each have 

accumulated post-1986 deferred foreign 

income greater than zero as of an E&P 

measurement date. Accordingly, CFC1 and 

CFC2 are deferred foreign income 

corporations. USP’s section 965(a) inclusion 

amount with respect to each of CFC1 and 

CFC2, respectively, equals the section 965(a) 

earnings amount of CFC1 and CFC2, 

respectively. 

(1) CFC1 section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC1 is 20u, the amount of its 

accumulated post-1986 deferred foreign 

income as of both November 2, 2017, and 

December 31, 2017, which is equal to 70u of 

post-1986 earnings and profits (30u earned 

and 40u attributable to the CFC2 distribution) 

reduced by 50u of such post-1986 earnings 

and profits described in section 959(c)(2) 

(30u earned and 20u attributable to the CFC2 

distribution) under section 965(d)(2)(B) and 

§ 1.965–1(f)(7)(i)(B). Under section 

965(d)(3)(B) and § 1.965–1(f)(29)(i)(B), the 

post-1986 earnings and profits of CFC1 are 

not reduced by the 60u distribution to USP. 

(2) CFC2 section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC2 is 80u, the amount of its 

accumulated post-1986 deferred foreign 

income as of both November 2, 2017, and 

December 31, 2017, which is equal to the 

amount of CFC2’s post-1986 earnings and 

profits of 80u. CFC2’s accumulated post-1986 

deferred foreign income is equal to its post1986 earnings and profits because CFC2 does 

not have earnings and profits that are 

attributable to income of the specified foreign 

corporation that is effectively connected with 

the conduct of a trade or business within the 

United States and subject to tax under 

chapter 1, or that, if distributed, would be 

excluded from the gross income of a United 

States shareholder under section 959 or from 

the gross income of another shareholder if 

such shareholder were a United States 

shareholder, and, therefore, no adjustment is 

made under section 965(d)(2) or § 1.965– 

1(f)(7). CFC2’s 80u of post-1986 earnings and 

profits consists of 120u of earnings and 

profits that it earned, reduced by the 40u 

distribution to CFC1 under section 

965(d)(3)(B) and § 1.965–1(f)(29)(i)(B). The 

amount of the reduction to the post-1986 

earnings and profits of CFC2 for the 40u 

distribution is not limited by § 1.965– 

1(f)(29)(i)(B) because CFC1’s post-1986 

earnings and profits are increased by 40u as 

a result of the distribution. Furthermore, 

because the 40u distribution was made on 

July 1, 2017, which is before the E&P 

measurement date on November 2, 2017, 

§ 1.965–4(f) is not relevant. 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). CFC1 and CFC2 

increase their earnings and profits described 

in section 959(c)(2) by USP’s section 965(a) 

inclusion amounts with respect to CFC1 and 

CFC2, 20u and 80u, respectively, and reduce 

their earnings and profits described in 

section 959(c)(3) by an equivalent amount. 

(D) Distribution to United States 

shareholder. The distribution from CFC1 to 

USP is treated as a distribution of 60u out of 

the earnings and profits of CFC1 described in 

section 959(c)(2), which include earnings and 

profits attributable to the section 965(a) 

inclusion amount taken into account by USP. 

(E) Section 902 and section 960 

consequences. (1) Distribution by and 

inclusions with respect to CFC2. Under 

section 960, USP is deemed to pay $3.50x 

($21x × (20u/120u)) of CFC2’s post-1986 

foreign income taxes as a result of its 

inclusion under section 951(a)(1)(A) without 

regard to section 965(a) with respect to CFC2. 

As a result of the distribution from CFC2 to 

CFC1, CFC2’s post-1986 foreign income taxes 

are reduced, and CFC1’s post-1986 foreign 

income taxes are increased, by the foreign 

income taxes deemed paid by CFC1 under 

section 902 of $3.50x (($21x¥$3.50x) × (20u/ 

120u¥20u)). Under section 960, USP is 

deemed to pay $14x (($21x¥$3.50x¥$3.50x) 

× 80u/(120u¥40u)) of CFC2’s post-1986 

foreign income taxes as a result of its section 

965(a) inclusion with respect to CFC2. The 

taxes deemed paid by USP as a result of its 

section 965(a) inclusion with respect to CFC2 

are subject to the applicable percentage 

disallowance under section 965(g). 

(2) Inclusions with respect to CFC1. As 

determined in paragraph (j)(1)(ii)(E)(1) of this 

section (paragraph (E)(1) in the analysis in 

this Example 1), as a result of the distribution 

from CFC2 to CFC1, CFC1 is deemed under 

section 902 to pay $3.50x of CFC2’s post1986 foreign income taxes. Under section 

960, USP is deemed to pay $2.10x ($3.50x × 

(30u/(30u + 20u))) of CFC1’s post-1986 

foreign income taxes as a result of its 

inclusion under section 951(a)(1)(A) without 

regard to section 965(a) with respect to CFC1. 

Under section 960, USP is deemed to pay 

$1.40x (($3.50x¥$2.10x) × 20u/(30u + 

20u¥30u)) of CFC1’s post-1986 foreign 

income taxes as a result of its section 965(a) 

inclusion with respect to CFC1. The taxes 

deemed paid by USP as a result of its section 

965(a) inclusion with respect to CFC1 are 

subject to the applicable percentage 

disallowance under section 965(g). 

(2) Example 2. Determination of 

accumulated post-1986 deferred foreign 

income with subpart F income earned after 

E&P measurement date on November 2, 2017. 

(i) Facts. The facts are the same as in 

paragraph (j)(1)(i) of this section (the facts in 

Example 1), except that on December 1, 2017, 

CFC1 earns an additional 50u of subpart F 

income (as defined in section 952), and 

neither CFC1 nor CFC2 has any post-1986 

foreign income taxes. 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

for inclusion under section 951(a)(1)(A) 

without regard to section 965. USP 

determines its inclusion under section 

951(a)(1)(A) without regard to section 965(a), 

which is 80u with respect to CFC1 and 20u 

with respect to CFC2 for their taxable years 

ending December 31, 2017. As a result of the 

inclusions under section 951(a)(1)(A), CFC1 

and CFC2 increase their earnings and profits 

described in section 959(c)(2) by 80u and 

20u, respectively. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. The 

analysis is the same as in paragraph 

(j)(1)(ii)(B) of this section (paragraph (B) in 

the analysis in Example 1). 

(C) Section 965(a) inclusion amount. USP 

determines whether CFC1 and CFC2 are 

deferred foreign income corporations and, if 

so, determines its section 965(a) inclusion 

amounts with respect to CFC1 and CFC2. 

CFC1 and CFC2 are specified foreign 

corporations, and CFC1 and CFC2 each have 

accumulated post-1986 deferred foreign 

income greater than zero as of an E&P 

measurement date. Accordingly, CFC1 and 

CFC2 are deferred foreign income 

corporations. USP’s section 965(a) inclusion 

amount with respect to each of CFC1 and 

CFC2, respectively, equals the section 965(a) 

earnings amount of CFC1 and CFC2, 

respectively. 

(1) CFC1 section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC1 is 20u, the greater of— 

(i) The amount of its accumulated post1986 deferred foreign income as of November 

2, 2017, 20u, which is equal to 70u of post1986 earnings and profits (30u earned and 

40u attributable to the CFC2 distribution) 

reduced by 50u of such post-1986 earnings 

and profits described in section 959(c)(2) 

without regard to the subpart F income 

earned after November 2, 2017 (30u earned 

and 20u attributable to the CFC2 distribution) 

under section 965(d)(2)(B) and § 1.965– 

1(f)(7)(i)(B) and (ii), and 

(ii) The amount of its accumulated post1986 deferred foreign income as of December 

31, 2017, 20u, which is equal to 120u of post1986 earnings and profits (80u earned and 

40u attributable to the CFC2 distribution) 

reduced by 100u of such post-1986 earnings 

and profits described in section 959(c)(2) 

with regard to the subpart F income earned 

on or before December 31, 2017 (80u earned 

and 20u attributable to the CFC2 distribution) 

under section 965(d)(2)(B) and § 1.965– 

1(f)(7)(i)(B) and (ii). 

(2) CFC2 section 965(a) earnings amount. 

The analysis is the same as in paragraph 

(j)(1)(ii)(C)(2) of this section (paragraph (C)(2) 

in the analysis in Example 1)). 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). The analysis is 

the same as in paragraph (j)(1)(ii)(C)(3) of this 

section (paragraph (C)(3) in the analysis in 

Example 1). 

(D) Distribution to United States 

shareholder. The analysis is the same as in 

paragraph (j)(1)(ii)(D) of this section 

(paragraph (D) in the analysis in Example 1). 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1891 

(3) Example 3. Determination of 

accumulated post-1986 deferred foreign 

income with subpart F income earned after 

E&P measurement date on November 2, 2017, 

but previously taxed earnings and profits 

attributable to the subpart F income 

distributed before E&P measurement date on 

November 2, 2017. (i) Facts. The facts are the 

same as in paragraph (j)(1)(i) of this section 

(the facts in Example 1), except that on 

December 1, 2017, CFC2 earns an additional 

50u of subpart F income (as defined in 

section 952), and neither CFC1 nor CFC2 has 

any post-1986 foreign income taxes. 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

for inclusion under section 951(a)(1)(A) 

without regard to section 965. USP 

determines its inclusion under section 

951(a)(1)(A) without regard to section 965(a), 

which is 30u with respect to CFC1 and 70u 

with respect to CFC2 for their taxable years 

ending December 31, 2017. As a result of the 

inclusions under section 951(a)(1)(A), CFC1 

and CFC2 increase their earnings and profits 

described in section 959(c)(2) by 30u and 

70u, respectively. 

(B) Distributions between specified foreign 

corporations before January 1, 2018. The 

distribution of 40u from CFC2 to CFC1 is 

treated as a distribution of 40u out of 

earnings and profits described in section 

959(c)(2) (attributable to inclusions under 

section 951(a)(1)(A) without regard to section 

965(a)). 

(C) Section 965(a) inclusion amount. USP 

determines whether CFC1 and CFC2 are 

deferred foreign income corporations, and, if 

so, determines its section 965(a) inclusion 

amounts with respect to CFC1 and CFC2. 

Because USP wholly owns CFC1 and CFC2 

under section 958(a) and USP does not have 

an aggregate foreign E&P deficit, USP’s 

section 965(a) inclusion amount with respect 

to each of CFC1 and CFC2, respectively, 

equals the section 965(a) earnings amount, if 

any, of CFC1 and CFC2, respectively. 

(1) CFC1 section 965(a) earnings amount. 

CFC1 is not a deferred foreign income 

corporation and does not have a section 

965(a) earnings amount because the amount 

of its accumulated post-1986 deferred foreign 

income as of both November 2, 2017, and 

December 31, 2017, is 0u, which is equal to 

70u of post-1986 earnings and profits (30u 

earned and 40u attributable to the CFC2 

distribution) reduced by 70u of such post1986 earnings and profits described in 

section 959(c)(2) (30u earned and 40u 

attributable to the CFC2 distribution) under 

section 965(d)(2)(B) and § 1.965–1(f)(7)(i)(B). 

(2) CFC2 section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC2 is 100u, the greater of the 

amounts in paragraph (j)(3)(ii)(C)(2)(i) and (ii) 

of this section (paragraph (C)(2)(i) and (ii) in 

the analysis in this Example 3)— 

(i) The amount of its accumulated post1986 deferred foreign income as of November 

2, 2017, 80u. CFC2’s 80u of accumulated 

post-1986 deferred foreign income as of 

November 2, 2017, is equal to its 80u of post1986 earnings and profits because no 

adjustment is made under section 965(d)(2) 

or § 1.965–1(f)(7), as CFC2 does not have 

earnings and profits that are attributable to 

income of the specified foreign corporation 

that is effectively connected with the conduct 

of a trade or business within the United 

States and subject to tax under chapter 1, or 

that, if distributed, would be excluded from 

the gross income of a United States 

shareholder under section 959 or from the 

gross income of another shareholder if such 

shareholder were a United States 

shareholder, without regard to the subpart F 

income earned after November 2, 2017. 

CFC2’s 80u of post-1986 earnings and profits 

consists of 120u of earnings and profits that 

it earned, reduced by the 40u distribution to 

CFC1 under section 965(d)(3)(B) and § 1.965– 

1(f)(29)(i)(B). The amount of the reduction to 

the post-1986 earnings and profits of CFC2 

for the 40u distribution is not limited by 

§ 1.965–1(f)(29)(i)(B) because CFC1’s post1986 earnings and profits are increased by 

40u as a result of the distribution. 

Furthermore, because the 40u distribution 

was made on July 1, 2017, which is before 

any E&P measurement date, § 1.965–4(f) is 

not relevant. 

(ii) The amount of its accumulated post1986 deferred foreign income as of December 

31, 2017, 100u, which is equal to 130u of 

post-1986 earnings and profits reduced by 

30u of such post-1986 earnings and profits 

described in section 959(c)(2) with regard to 

the subpart F income earned before 

December 31, 2017, under section 

965(d)(2)(B) and § 1.965–1(f)(7)(i)(B) and (ii). 

CFC2’s 130u of post-1986 earnings and 

profits consists of 170u of earnings and 

profits that it earned, reduced by the 40u 

distribution to CFC1 under section 

965(d)(3)(B) and § 1.965–1(f)(29)(i)(B). 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). CFC2 increases 

its earnings and profits described in section 

959(c)(2) by USP’s section 965(a) inclusion 

amount with respect to CFC2, 100u, and 

reduces its earnings and profits described in 

section 959(c)(3) by an equivalent amount. 

(D) Distribution to United States 

shareholder. The analysis is the same as in 

paragraph (j)(1)(ii)(D) of this section 

(paragraph (D) in the analysis in Example 1). 

(4) Example 4. Determination of 

accumulated post-1986 deferred foreign 

income with distribution made after E&P 

measurement date on November 2, 2017. (i) 

Facts. USP, a domestic corporation, owns all 

of the stock of CFC1, a foreign corporation, 

which owns all of the stock of CFC2, also a 

foreign corporation. USP, CFC1, and CFC2 all 

have taxable years ending December 31, 

2017. As of January 1, 2017, CFC1 has 10u 

of earnings and profits described in section 

959(c)(3) that were accumulated in taxable 

years beginning after December 31, 1986, 

while CFC1 was a specified foreign 

corporation, and $2x of post-1986 foreign 

income taxes; and CFC2 has 100u of earnings 

and profits described in section 959(c)(3) that 

were accumulated in taxable years beginning 

after December 31, 1986, while CFC2 was a 

specified foreign corporation and $10x of 

post-1986 foreign income taxes. For purposes 

of section 904, the post-1986 undistributed 

earnings and post-1986 foreign income taxes 

are in the general category. None of CFC1’s 

or CFC2’s earnings and profits are 

attributable to income treated as effectively 

connected with the conduct of a trade or 

business within the United States. On 

December 1, 2017, CFC2 distributes 100u to 

CFC1, and CFC1 distributes 10u to USP. USP 

does not have an aggregate foreign E&P 

deficit. USP includes in gross income all 

amounts that it is required to include under 

section 951. No foreign income tax is 

imposed or withheld on the distribution by 

CFC2 to CFC1 or the distribution by CFC1 to 

USP. USP does not apply § 1.965–4(f)(3) to 

determine the post-1986 earnings and profits 

of CFC1 and CFC2. 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

for inclusion under section 951(a)(1)(A) 

without regard to section 965. The 

distribution from CFC2 to CFC1 does not give 

rise to subpart F income to CFC1 due to the 

application of section 954(c)(6). Accordingly, 

USP does not have an inclusion under 

section 951(a)(1)(A) without regard to section 

965(a) with respect to CFC1 or CFC2 for their 

taxable years ending December 31, 2017. As 

a result, neither CFC1 nor CFC2 has earnings 

and profits described in section 959(c)(2). 

(B) Distributions between specified foreign 

corporations before January 1, 2018. The 

distribution of 100u from CFC2 to CFC1 is 

initially treated as a distribution out of 

earnings and profits described in section 

959(c)(3). 

(C) Section 965(a) inclusion amount. USP 

determines whether CFC1 and CFC2 are 

deferred foreign income corporations, and, if 

so, determines its section 965(a) inclusion 

amounts with respect to CFC1 and CFC2. 

CFC1 and CFC2 are specified foreign 

corporations, and CFC1 and CFC2 each have 

accumulated post-1986 deferred foreign 

income greater than zero as of an E&P 

measurement date. Accordingly, CFC1 and 

CFC2 are deferred foreign income 

corporations. USP’s section 965(a) inclusion 

amount with respect to each of CFC1 and 

CFC2, respectively, equals the section 965(a) 

earnings amount of CFC1 and CFC2, 

respectively. 

(1) CFC1 section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC1 is 10u, the amount of its 

accumulated post-1986 deferred foreign 

income as of both November 2, 2017, and 

December 31, 2017, which is equal to the 

amount of CFC1’s post-1986 earnings and 

profits of 10u. CFC1’s accumulated post-1986 

deferred foreign income is equal to its post1986 earnings and profits because CFC1 does 

not have earnings and profits that are 

attributable to income of the specified foreign 

corporation that is effectively connected with 

the conduct of a trade or business within the 

United States and subject to tax under 

chapter 1, or that, if distributed, would be 

excluded from the gross income of a United 

States shareholder under section 959 or from 

the gross income of another shareholder if 

such shareholder were a United States 

shareholder, and therefore no adjustment is 

made under section 965(d)(2) or § 1.965– 

1(f)(7). But for § 1.965–4(f), CFC1’s post-1986 

earnings and profits as of December 31, 2017, 

would be 110u, but because the distribution 

from CFC2 is a specified payment, it is 

disregarded in determining CFC1’s post-1986 

earnings and profits as of December 31, 2017, 

1892 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

under § 1.965–4(f). Under section 

965(d)(3)(B) and § 1.965–1(f)(29)(i)(B), the 

post-1986 earnings and profits of CFC1 are 

not reduced by the 10u distribution to USP. 

(2) CFC2 section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC2 is 100u, the amount of its 

accumulated post-1986 deferred foreign 

income as of both November 2, 2017, and 

December 31, 2017, which is equal to the 

amount of CFC2’s post-1986 earnings and 

profits of 100u. CFC2’s accumulated post1986 deferred foreign income is equal to its 

post-1986 earnings and profits because CFC2 

does not have earnings and profits that are 

attributable to income of the specified foreign 

corporation that is effectively connected with 

the conduct of a trade or business within the 

United States and subject to tax under 

chapter 1, or that, if distributed, would be 

excluded from the gross income of a United 

States shareholder under section 959 or from 

the gross income of another shareholder if 

such shareholder were a United States 

shareholder, and therefore no adjustment is 

made under section 965(d)(2) or § 1.965– 

1(f)(7). But for § 1.965–4(f), CFC2’s post-1986 

earnings and profits as of December 31, 2017, 

would be 0u, but because the distribution to 

CFC1 is a specified payment, it is disregarded 

in determining CFC2’s post-1986 earnings 

and profits as of December 31, 2017, under 

§ 1.965–4(f). 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). CFC1 and CFC2 

increase their earnings and profits described 

in section 959(c)(2) by USP’s section 965(a) 

inclusion amounts with respect to CFC1 and 

CFC2, 10u and 100u, respectively, and 

reduce their earnings and profits described in 

section 959(c)(3) by an equivalent amount. 

(D) Distributions—(1) Distribution that is a 

specified payment. The distribution from 

CFC2 to CFC1 is recharacterized as a 

distribution of 100u out of the earnings and 

profits of CFC2 described in section 

959(c)(2), which include earnings and profits 

attributable to the section 965(a) inclusion 

amount taken into account by USP. 

(2) Distribution to United States 

shareholder. The distribution from CFC1 to 

USP is treated as a distribution of 10u out of 

the earnings and profits of CFC1 described in 

section 959(c)(2), which include earnings and 

profits attributable to the section 965(a) 

inclusion amount taken into account by USP. 

(E) Section 902 and section 960 

consequences. Under section 960, USP is 

deemed to pay $10x ($10x × (100u/100u)) of 

CFC2’s post-1986 foreign income taxes as a 

result of its section 965(a) inclusion with 

respect to CFC2 and $2x ($2x × (10u/10u) of 

CFC1’s post-1986 foreign income taxes as a 

result of its section 965(a) inclusion with 

respect to CFC1. Such taxes are subject to the 

applicable percentage disallowance under 

section 965(g). 

(5) Example 5. Determination of 

accumulated post-1986 deferred foreign 

income with section 951(a)(1)(B) inclusion 

after E&P measurement date on November 2, 

2017. (i) Facts. USP, a domestic corporation, 

owns all of the stock of CFC, a foreign 

corporation. USP has a taxable year ending 

December 31, 2017, and CFC has a taxable 

year ending November 30, 2017. As of 

December 1, 2016, CFC has 110u of earnings 

and profits described in section 959(c)(3) that 

were accumulated in taxable years beginning 

after December 31, 1986, while CFC was a 

specified foreign corporation. CFC holds 

150u of United States property throughout its 

taxable year ending November 30, 2017, but 

disposes of it on December 1, 2017, 

recognizing no gain or loss on the property. 

Between December 1, 2017, and December 

31, 2017, CFC earns an additional 10u of 

income that does not constitute subpart F 

income or income treated as effectively 

connected with the conduct of a trade or 

business within the United States that gives 

rise to 10u of earnings and profits. USP 

includes in income all amounts that it is 

required to include under section 951. 

(ii) Analysis. (A) Section 965(a) inclusion 

amount. USP determines whether CFC is a 

deferred foreign income corporation, and, if 

so, determines its section 965(a) inclusion 

amount with respect to CFC. CFC is a 

specified foreign corporation, and CFC has 

accumulated post-1986 deferred foreign 

income greater than zero as of an E&P 

measurement date. Accordingly, CFC is a 

deferred foreign income corporation. USP’s 

section 965(a) inclusion amount with respect 

to CFC equals the section 965(a) earnings 

amount of CFC. 

(1) CFC section 965(a) earnings amount. 

The section 965(a) earnings amount with 

respect to CFC is 110u, the greater of the 

amount of its accumulated post-1986 

deferred foreign income as of November 2, 

2017, which is 110u, and the amount of its 

accumulated post-1986 deferred foreign 

income as of December 31, 2017, which is 

10u. CFC’s accumulated post-1986 deferred 

foreign income as of November 2, 2017, is 

equal to its 110u of post-1986 earnings and 

profits, which are not reduced by the 110u 

of earnings and profits described in section 

959(c)(1) as a result of USP’s section 

951(a)(1)(B) inclusion with respect to CFC as 

of December 31, 2017, because such amounts 

would not be excluded from the gross income 

of a United States shareholder under section 

959 under section 965(d)(2) or § 1.965–1(f)(7) 

if distributed on November 2, 2017. CFC’s 

accumulated post-1986 deferred foreign 

income as of December 31, 2017, is equal to 

its 120u of post-1986 earnings and profits 

reduced by the 110u of earnings and profits 

described in section 959(c)(1) as a result of 

USP’s section 951(a)(1)(B) inclusion with 

respect to CFC as of December 31, 2017, 

which would be excluded from the gross 

income of a United States shareholder under 

section 959 under section 965(d)(2) or 

§ 1.965–1(f)(7) if distributed on December 31, 

2017. 

(2) Effect on earnings and profits described 

in section 959(c)(2) and (3). In USP’s taxable 

year ending December 31, 2018, CFC 

increases its earnings and profits described in 

section 959(c)(2) by USP’s section 965(a) 

inclusion amount with respect to CFC, 110u, 

and reduces its earnings and profits 

described in section 959(c)(3) by an 

equivalent amount. 

(B) Section 956 inclusion. In USP’s taxable 

year ending December 31, 2017, USP 

increases its earnings and profits described in 

section 959(c)(1) by USP’s amount included 

under sections 951(a)(1)(B) and 956 with 

respect to CFC, 110u, and reduces its 

earnings and profits described in section 

959(c)(3) by an equivalent amount. 

(6) Example 6. Section 1248 inclusion. (i) 

Facts. USP1, a domestic corporation, owns 

all of the stock of CFC, a foreign corporation, 

until it sells all of such stock to USP2, a 

domestic corporation, on December 1, 2017, 

in a sale on which USP1 recognizes $100x of 

gain. Throughout 2017, 1u=$1x. USP1, USP2, 

and CFC all have taxable years ending 

December 31, 2017. As of January 1, 2017, 

CFC has 100u of earnings and profits 

described in section 959(c)(3) that were 

accumulated in taxable years beginning after 

December 31, 1986, while CFC was wholly 

owned by USP1. On March 1, 2017, CFC 

distributes 20u to USP1. None of CFC’s 

earnings and profits are attributable to 

income treated as effectively connected with 

the conduct of a trade or business within the 

United States. USP2 does not have an 

aggregate foreign E&P deficit. USP1 and 

USP2 include in income all amounts that 

they are required to include under sections 

951 and 1248. 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

for section 1248 inclusion. USP1’s inclusion 

under section 1248 with respect to CFC is 

$80x ($100x¥$20x). As a result of the 

inclusion under section 1248, under section 

959(e), CFC increases its earnings and profits 

described in section 959(c)(2) by 80u. 

(B) Section 965(a) inclusion amount. USP2 

determines whether CFC is a deferred foreign 

income corporation and, if so, determines its 

section 965(a) inclusion amount with respect 

to CFC. CFC is a specified foreign 

corporation, and CFC has accumulated post1986 deferred foreign income greater than 

zero as of an E&P measurement date. 

Accordingly, CFC is a deferred foreign 

income corporation. USP2’s section 965(a) 

inclusion amount with respect to CFC equals 

the section 965(a) earnings amount of CFC. 

The section 965(a) earnings amount with 

respect to CFC is 20u, the amount of its 

accumulated post-1986 deferred foreign 

income as of both November 2, 2017, and 

December 31, 2017, which is equal to 100u 

of post-1986 earnings and profits reduced by 

80u of such post-1986 earnings and profits 

described in section 959(c)(2) under section 

965(d)(2)(B) and § 1.965–1(f)(7)(i)(B). CFC 

increases its earnings and profits described in 

section 959(c)(2) by USP2’s section 965(a) 

inclusion amount with respect to CFC, 20u, 

and reduces its earnings and profits that 

would be described in section 959(c)(3) but 

for the application of section 965(a) by an 

equivalent amount. 

(C) Distributions to United States 

shareholders. The distributions from CFC to 

USP1 (including the deemed dividend under 

section 1248) are treated as distributions out 

of the earnings and profits of CFC described 

in section 959(c)(3). 

(7) Example 7. Distribution attributable to 

section 965(a) previously taxed earnings and 

profits. (i) Facts. USP, a domestic 

corporation, owns all of the stock of CFC1, 

a specified foreign corporation that has no 

post-1986 earnings and profits (or deficit in 

post-1986 earnings and profits), and CFC1 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1893 

owns all the stock of CFC2, a deferred foreign 

income corporation. USP is a calendar year 

taxpayer. CFC1’s last taxable year beginning 

before January 1, 2018, ends on November 

30, 2018; CFC2 has an inclusion year that 

ends on November 30, 2018. The functional 

currency of CFC1 and CFC2 is the U.S. 

dollar. USP’s adjusted basis in the stock of 

CFC1 is zero. On January 1, 2018, CFC2 

distributes $100x to CFC1, and CFC1 

distributes $100x to USP. USP has a section 

965(a) inclusion amount of $100x with 

respect to CFC2 that is taken into account for 

USP’s taxable year ending December 31, 

2018. CFC2 has no earnings and profits 

described in section 959(c)(1) or (2) other 

than section 965(a) previously taxed earnings 

and profits. 

(ii) Analysis. Under paragraph (c) of this 

section, CFC2 has $100x of section 965(a) 

previously taxed earnings and profits with 

respect to USP. USP receives a distribution 

from CFC2 through a chain of ownership 

described in section 958(a) during the 

inclusion year of CFC2 that is attributable to 

the $100x of section 965(a) previously taxed 

earnings and profits of CFC2. Under 

paragraph (g)(1) of this section, the amount 

of gain that USP otherwise would recognize 

with respect to the stock of CFC1 under 

section 961(b)(2) is reduced (but not below 

zero) by $100x, the amount of CFC2’s section 

965(a) previously taxed earnings and profits 

with respect to USP. As of the close of 

November 30, 2018, USP’s basis in CFC1 is 

increased under paragraph (e) of this section 

by USP’s section 965(a) inclusion amount 

with respect to CFC2 ($100x), and is reduced 

under paragraph (g)(2) of this section by the 

amount of gain that would have been 

recognized by USP under section 961(b)(2) 

but for the application of paragraph (g)(1) of 

this section ($100x). 

(8) Example 8. Distribution attributable to 

section 965(b) previously taxed earnings and 

profits; parent-subsidiary. (i) Facts. The facts 

are the same as in paragraph (j)(7)(i) of this 

section (the facts in Example 7), except that 

CFC1 has a specified E&P deficit of $100x. 

Because of the specified E&P deficit of CFC1, 

USP’s section 965(a) inclusion amount with 

respect to CFC2 is reduced to zero pursuant 

to section 965(b)(1) and § 1.965–1(b)(2). USP 

makes the election described in paragraph 

(f)(2) of this section. 

(ii) Analysis. (A) Application of the gain 

reduction rule. Under paragraph (d)(1) of this 

section, CFC2 has $100x of section 965(b) 

previously taxed earnings and profits with 

respect to USP, and, under paragraph (d)(2) 

of this section, CFC1’s earnings and profits 

described in section 959(c)(3) are increased 

by $100x to $0. USP receives a distribution 

from CFC2 through a chain of ownership 

described in section 958(a) during the 

inclusion year of CFC2 that is attributable to 

the $100x of section 965(b) previously taxed 

earnings and profits of CFC2. Under 

paragraph (g)(1) of this section, the amount 

of gain that USP otherwise would recognize 

with respect to the stock of CFC1 under 

section 961(b)(2) is reduced (but not below 

zero) by $100x, the amount of CFC2’s section 

965(b) previously taxed earnings and profits 

with respect to USP under paragraph (d)(1) 

of this section. 

(B) Adjustments to the basis of CFC1. 

Because USP makes the election described in 

paragraph (f)(2) of this section, as of the close 

of November 30, 2018, USP’s basis in CFC1 

is increased under paragraph (f)(2)(ii)(A) of 

this section by an amount equal to CFC2’s 

section 965(b) previously taxed earnings and 

profits with respect to USP under paragraph 

(d)(1) of this section ($100x), reduced under 

paragraph (f)(2)(ii)(B) of this section by an 

amount equal to the portion of the specified 

E&P deficit of CFC1 taken into account in 

determining USP’s section 965(a) inclusion 

amount with respect to CFC2 ($100x), and 

reduced under paragraph (g)(2) of this section 

by the amount of gain that would have been 

recognized by USP with respect to the stock 

of CFC1 under section 961(b)(2) but for the 

application of paragraph (g)(1) of this section 

($100x). Under paragraph (h)(2) and (3) of 

this section, the excess of the net reduction 

from the adjustments under paragraphs (f) 

and (g) of this section over USP’s basis in the 

stock of CFC1 (in this case, $100x) is treated 

as gain recognized by USP from the sale or 

exchange of property. 

(9) Example 9. Distribution attributable to 

section 965(b) previously taxed earnings and 

profits; brother-sister. (i) Facts. The facts are 

the same as in paragraph (j)(8)(i) of this 

section (the facts in Example 8), except that 

USP owns all the stock of CFC2, USP’s 

adjusted basis in the stock of CFC2 is zero, 

CFC1 made no distributions, and on January 

1, 2018, CFC2 distributes $100x to USP. 

(ii) Analysis. (A) Application of the gain 

reduction rule. Under paragraph (d)(1) of this 

section, CFC2 has $100x of section 965(b) 

previously taxed earnings and profits with 

respect to USP, and, under paragraph (d)(2) 

of this section, CFC1’s earnings and profits 

described in section 959(c)(3) (deficit of 

$100x) are increased by $100x to $0. USP 

receives a distribution from CFC2 during the 

inclusion year of CFC2 that is attributable to 

the $100x of section 965(b) previously taxed 

earnings and profits of CFC2. Under 

paragraph (g)(1) of this section, the amount 

of gain that USP otherwise would recognize 

with respect to the stock of CFC2 under 

section 961(b)(2) is reduced (but not below 

zero) by $100x, the amount of CFC2’s section 

965(b) previously taxed earnings and profits 

with respect to USP under paragraph (d)(1) 

of this section. 

(B) Adjustments to the basis of CFC1 and 

CFC2. Because USP makes the election 

described in paragraph (f)(2) of this section, 

as of the close of November 30, 2018, USP’s 

basis in the stock of CFC2 is increased under 

paragraph (f)(2)(ii)(A) of this section by the 

amount of CFC2’s section 965(b) previously 

taxed earnings and profits with respect to 

USP under paragraph (d)(1) of this section 

($100x) and reduced under paragraph (g)(2) 

of this section by the amount of gain that 

would have been recognized by USP with 

respect to the stock of CFC2 under section 

961(b)(2) but for the application of paragraph 

(g)(1) of this section ($100x). As of the close 

of November 30, 2018, USP’s basis in CFC1 

is reduced under paragraph (f)(2)(ii)(B) of this 

section by an amount equal to the portion of 

USP’s pro rata share of the specified E&P 

deficit of CFC1 taken into account in 

determining USP’s section 965(a) inclusion 

amount with respect to CFC2 ($100x). Under 

paragraph (h)(3) of this section, the excess of 

the reduction under paragraph (f) of this 

section over USP’s basis in the stock of CFC1 

(in this case, $100x) is treated as gain 

recognized by USP from the sale or exchange 

of property. 

§ 1.965–3 Section 965(c) deductions. 

(a) Scope. This section provides rules 

regarding section 965(c) deductions and 

section 965(c) deduction amounts. 

Paragraph (b) of this section provides 

rules for disregarding certain assets for 

purposes of determining the aggregate 

foreign cash position of a section 958(a) 

U.S. shareholder. Paragraph (c) of this 

section provides rules for determining 

the aggregate foreign cash position for a 

section 958(a) U.S. shareholder 

inclusion year. Paragraph (d) of this 

section provides a rule regarding certain 

expatriated entities. Paragraph (e) of this 

section provides a rule for the treatment 

of section 965(c) deductions in 

connection with an election under 

section 962. Paragraph (f) of this section 

provides rules regarding the treatment 

of a section 965(c) deduction under 

certain provisions of the Internal 

Revenue Code. Paragraph (g) of this 

section provides a rule for domestic 

pass-through entities. 

(b) Rules for disregarding certain 

assets for determining aggregate foreign 

cash position—(1) Disregard of certain 

obligations between related specified 

foreign corporations. In determining the 

aggregate foreign cash position of a 

section 958(a) U.S. shareholder, any 

account receivable, account payable, 

short-term obligation, or derivative 

financial instrument between a 

specified foreign corporation with 

respect to which the section 958(a) U.S. 

shareholder owns section 958(a) stock 

and a related specified foreign 

corporation on corresponding cash 

measurement dates is disregarded to the 

extent of the smallest of the product of 

the amount of the item on such 

corresponding cash measurement dates 

of each specified foreign corporation 

and the section 958(a) U.S. 

shareholder’s ownership percentage of 

section 958(a) stock of the specified 

foreign corporation owned by the 

section 958(a) U.S. shareholder on such 

dates. For purposes of this paragraph 

(b)(1)(i), a specified foreign corporation 

is treated as a related specified foreign 

corporation with respect to another 

specified foreign corporation if, as of the 

cash measurement date referred to in 

the preceding sentence of each specified 

foreign corporation, the specified 

foreign corporations are related persons 

within the meaning of section 954(d)(3), 

substituting the term ‘‘specified foreign 

1894 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

corporation’’ for ‘‘controlled foreign 

corporation’’ in each place that it 

appears. 

(2) Disregard of other assets upon 

demonstration of double-counting. For 

purposes of determining the aggregate 

foreign cash position of a section 958(a) 

U.S. shareholder, the section 958(a) U.S. 

shareholder’s pro rata share of the cash 

position of a specified foreign 

corporation on a cash measurement date 

is reduced by amounts of net accounts 

receivable, actively traded property, and 

short-term obligations to the extent such 

amounts are attributable to amounts 

taken into account in determining the 

section 958(a) U.S. shareholder’s pro 

rata share of the cash position of another 

specified foreign corporation on the 

corresponding cash measurement date 

of such other specified corporation and 

to the extent not disregarded pursuant 

to paragraph (b)(1) of this section. 

However, the preceding sentence 

applies only if the section 958(a) U.S. 

shareholder attaches a statement 

containing the information outlined in 

paragraphs (b)(2)(i) through (v) of this 

section to its timely filed return (taking 

into account extensions, if any) for the 

section 958(a) U.S. shareholder 

inclusion year, or, if the section 958(a) 

U.S. shareholder has multiple section 

958(a) U.S. shareholder inclusion years, 

the later of such years. Relief is not 

available under § 301.9100–2 or 

301.9100–3 to allow late filing of the 

statement. The statement must contain 

the following information with respect 

to each specified foreign corporation for 

which the cash position is reduced 

under this paragraph (b)(2)— 

(i) A description of the asset that 

would be taken into account with 

respect to both specified foreign 

corporations, 

(ii) A statement of the amount by 

which its pro rata share of the cash 

position of one specified foreign 

corporation is reduced, 

(iii) A detailed explanation of why 

there would otherwise be doublecounting, including the computation of 

the amount taken into account with 

respect to the other specified foreign 

corporation, and 

(iv) An explanation of why paragraph 

(b)(1) of this section does not apply to 

disregard such amount. 

(3) Disregard of portion of cash 

position of noncorporate entities treated 

as specified foreign corporations. If an 

entity is treated as a specified foreign 

corporation of a section 958(a) U.S. 

shareholder pursuant to section 

965(c)(3)(E), for purposes of determining 

the aggregate foreign cash position of 

the section 958(a) U.S. shareholder, the 

section 958(a) U.S. shareholder’s pro 

rata share of the cash position of the 

entity (determined taking into account 

paragraphs (b)(1) and (b)(2) of this 

section) is reduced by the amount of the 

pro rata share attributable to deemed 

stock of the entity not owned (within 

the meaning of section 958(a), applied 

by treating domestic pass-through 

entities as foreign) by a specified foreign 

corporation of the section 958(a) U.S. 

shareholder (determined without taking 

into account section 965(c)(3)(E)). 

(4) Examples. The following examples 

illustrate the application of this 

paragraph (b). 

(i) Example 1. (A) Facts. USP, a domestic 

corporation, owns all of the stock of CFC1, 

a foreign corporation. CFC1 owns 95% of the 

only class of stock of CFC2, also a foreign 

corporation, and 40% of the only class of 

stock of CFC3, also a foreign corporation. The 

remaining 5% of the only class of stock of 

CFC2 is owned by a person unrelated to USP, 

CFC1, and CFC2; and the remaining 60% of 

the only class of stock of CFC3 is owned by 

a person unrelated to USP and CFC1. USP, 

CFC1, and CFC3 have calendar year taxable 

years. CFC2 has a taxable year ending on 

November 30. On November 15, 2015, CFC1 

makes a loan of $100x to CFC2, which is 

required to be and is, in fact, repaid on 

January 1, 2016. On November 15, 2016, 

CFC2 sells inventory to CFC1 in exchange for 

an account receivable of $200x, which is 

required to be and is, in fact, repaid on 

December 15, 2016. On August 1, 2017, CFC1 

makes a loan of $300x to CFC3, which is 

required to be and is, in fact, repaid on 

January 31, 2018. 

(B) Analysis—(1) Loan from CFC1 to CFC2. 

For purposes of determining the aggregate 

foreign cash position of USP, a section 958(a) 

U.S. shareholder of CFC1, under paragraph 

(b)(1) of this section, because CFC1 and CFC2 

are related within the meaning of paragraph 

(b)(1) of this section, the short-term 

obligation of CFC2 held by CFC1 outstanding 

on the first cash measurement date of each 

specified foreign corporation, November 30, 

2015, and December 31, 2015, respectively, is 

disregarded to the extent of 95%, the smallest 

ownership percentage of section 958(a) stock 

of CFC1 and CFC2 owned by USP on such 

first cash measurement dates. Accordingly, 

USP only takes into account $5 ($100¥95% 

of $100) of the short-term obligation in 

determining CFC1’s cash position for 

purposes of determining its aggregate foreign 

cash position. 

(2) Account receivable of CFC1 held by 

CFC2. Because the account receivable of 

CFC1 held by CFC2 on its second cash 

measurement date, November 30, 2016, is not 

outstanding on CFC1’s second cash 

measurement date, December 31, 2016, 

paragraph (b)(1) of this section does not 

apply to disregard any portion of such 

account receivable. 

(3) Loan from CFC1 to CFC3. Because CFC3 

is not related to CFC1 within the meaning of 

paragraph (b)(1) of this section, paragraph 

(b)(1) of this section does not apply to 

disregard any portion of such short-term 

obligation. 

(ii) Example 2. (A) Facts. The facts are the 

same as in paragraph (b)(4)(i)(A) of this 

section (the facts in Example 1), except that 

on December 1, 2015, CFC1 sells 5% of the 

stock of CFC2 to an unrelated person. 

(B) Analysis. The analysis is the same as 

in paragraph (b)(4)(i)(B) of this section (the 

analysis in Example 1), except that the shortterm obligation of CFC2 held by CFC1 

outstanding on both of their first cash 

measurement dates, November 30, 2015, and 

December 31, 2015, respectively, is 

disregarded under paragraph (b)(1) of this 

section to the extent of 90%, the smallest 

ownership percentage of section 958(a) stock 

of CFC1 and CFC2 by USP on such first cash 

measurement dates. Accordingly, USP takes 

into account $10 ($100¥90% of $100) of the 

short-term obligation in determining CFC1’s 

cash position for purposes of determining its 

aggregate foreign cash position. 

(iii) Example 3. (A) Facts. USP, a domestic 

corporation, owns all of the stock of CFC1, 

a foreign corporation, which owns 45% of 

the only class of stock of CFC2, also a foreign 

corporation. The remainder of the CFC2 stock 

is actively traded on an established financial 

market but is not owned by any person 

related to USP or CFC1. USP, CFC1, and 

CFC2 have calendar year taxable years. The 

value of the CFC2 stock owned by CFC1 is 

$500x on each of the cash measurement 

dates. Also on each of the cash measurement 

dates, CFC2 has $300x of assets described in 

section 965(c)(3)(B) and § 1.965–1(f)(16) that 

are taken into account in determining its cash 

position. 

(B) Analysis. For purposes of determining 

USP’s aggregate foreign cash position, USP’s 

pro rata share of the cash position of CFC1 

on each cash measurement date may be 

reduced by the amount of the stock of CFC2 

to the extent attributable to amounts taken 

into account in determining USP’s pro rata 

share of the cash position of CFC2 on such 

cash measurement date (that is, to the extent 

of the $135x taken into account with respect 

to CFC2), provided USP attaches a statement 

to its timely filed return (taking into account 

extensions, if any) containing the following: 

A description of the CFC2 stock and the 

assets of CFC2 taken into account in 

determining its cash position; a statement 

that USP’s pro rata share of the cash position 

of CFC1 is being reduced by $135x; the 

computation of the $135x taken into account 

with respect to CFC2; and an explanation of 

why paragraph (b)(1) of this section does not 

apply to disregard such amount. 

(iv) Example 4. (A) Facts. USP, a domestic 

corporation, owns all of the stock of CFC1 

and CFC2, each a foreign corporation. USP, 

CFC1, and CFC2 have calendar year taxable 

years. CFC1 buys goods on credit from a third 

party for $100x and thus has an account 

payable of $100x. CFC1 modifies the goods 

and sells to CFC2 for $105x in exchange for 

an account receivable of $105x. CFC2 

modifies the goods and sells to another third 

party for $110x in exchange for an account 

receivable of $110x. All of the accounts 

payable and accounts receivable are 

outstanding on the final cash measurement 

date. 

(B) Analysis. For purposes of determining 

USP’s aggregate foreign cash position, on the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1895 

final cash measurement date, CFC1 has net 

accounts receivable of $0 because, pursuant 

to paragraph (b)(1) of this section, CFC1’s 

account receivable from CFC2 is disregarded, 

and CFC2 has net accounts receivable of 

$110x because, pursuant to paragraph (b)(1) 

of this section, CFC2’s account payable to 

CFC1 is disregarded. USP cannot rely on the 

rule in paragraph (b)(2) of this section 

because no amounts attributable to CFC2’s 

net accounts receivable are taken into 

account with respect to another specified 

foreign corporation. 

(v) Example 5. (A) Facts. USP, a domestic 

corporation, owns all of the stock of CFC1 

and CFC2, each a foreign corporation. USP 

and CFC1 own 60% and 40%, respectively, 

of the interests in the capital and profits of 

PS1, a partnership. PS1 and CFC2 own 70% 

and 30%, respectively, of the interests in the 

capital and profits of PS2, a partnership. On 

each cash measurement date, PS1’s cash 

position of $100x consists entirely of cash, 

and PS2’s cash position of $200x includes a 

$50x short-term obligation of CFC2. 

(B) Analysis. (1) Treatment of PS1. Because 

an interest in PS1 is held by CFC1, a 

specified foreign corporation of USP, and 

PS1 would be a specified foreign corporation 

of USP if it were a foreign corporation, PS1 

is treated as a specified foreign corporation 

of USP for purposes of determining USP’s 

aggregate foreign cash position. Without 

regard to paragraph (b)(3) of this section, USP 

must take into account $100x, its pro rata 

share of PS1’s cash position, for purposes of 

determining its aggregate foreign cash 

position. However, 60% of that amount is 

attributable to deemed stock of PS1 that is 

not owned (within the meaning of section 

958(a)) by a specified foreign corporation of 

USP. Accordingly, pursuant to paragraph 

(b)(3) of this section, the amount of PS1’s 

cash position that USP must take into 

account for purposes of determining its 

aggregate foreign cash position is reduced by 

$60x (60% of $100x) to $40x ($100x¥$60x). 

(2) Treatment of PS2. Because an interest 

in PS2 is held by CFC2, a specified foreign 

corporation of USP, and PS2 would be a 

specified foreign corporation of USP if it 

were a foreign corporation, PS2 is treated as 

a specified foreign corporation of USP for 

purposes of determining USP’s aggregate 

foreign cash position. USP, CFC1, CFC2, PS1, 

and PS2 all have calendar year taxable years. 

For purposes of determining the aggregate 

foreign cash position of USP, a section 958(a) 

U.S. shareholder of PS2, under paragraph 

(b)(1) of this section, the short-term 

obligation of CFC2 held by PS2 outstanding 

on each cash measurement date of each 

specified foreign corporation is disregarded 

on such cash measurement dates. 

Accordingly, without regard to paragraph 

(b)(3) of this section, USP must take into 

account $150x ($200x¥$50x) of PS2’s cash 

position for purposes of determining its 

aggregate foreign cash position. However, 

42% (60% × 70%) of that amount is 

attributable to deemed stock of PS2 that is 

not owned (within the meaning of section 

958(a), applied by treating PS1 as foreign if 

it is a domestic pass-through entity) by a 

specified foreign corporation of USP 

(determined without taking into account 

section 965(c)(3)(E)). Accordingly, pursuant 

to paragraph (b)(3) of this section, the amount 

of PS2’s cash position that USP must take 

into account for purposes of determining its 

aggregate foreign cash position is reduced by 

$63x (42% of $150x) to $87x ($150x¥$63x). 

(c) Determination of aggregate foreign 

cash position for a section 958(a) U.S. 

shareholder inclusion year—(1) Single 

section 958(a) U.S. shareholder 

inclusion year. If a section 958(a) U.S. 

shareholder has a single section 958(a) 

U.S. shareholder inclusion year, then 

the section 958(a) U.S. shareholder’s 

aggregate foreign cash position for the 

section 958(a) U.S. shareholder 

inclusion year is equal to the aggregate 

foreign cash position of the section 

958(a) U.S. shareholder. 

(2) Multiple section 958(a) U.S. 

shareholder inclusion years. If a section 

958(a) U.S. shareholder has multiple 

section 958(a) U.S. shareholder 

inclusion years, then the section 958(a) 

U.S. shareholder’s aggregate foreign 

cash position for each section 958(a) 

U.S. shareholder inclusion year is 

determined by allocating the aggregate 

foreign cash position to a section 958(a) 

U.S. shareholder inclusion year under 

paragraphs (c)(2)(i) and (c)(2)(ii) of this 

section. 

(i) Allocation to first section 958(a) 

U.S. shareholder inclusion year. A 

portion of the aggregate foreign cash 

position of the section 958(a) U.S. 

shareholder is allocated to the first 

section 958(a) U.S. shareholder 

inclusion year in an amount equal to the 

lesser of the section 958(a) U.S. 

shareholder’s aggregate foreign cash 

position or the section 958(a) U.S. 

shareholder’s aggregate section 965(a) 

inclusion amount for the section 958(a) 

U.S. shareholder inclusion year. 

(ii) Allocation to succeeding section 

958(a) U.S. shareholder inclusion years. 

The amount of the section 958(a) U.S. 

shareholder’s aggregate foreign cash 

position allocated to any succeeding 

section 958(a) U.S. shareholder 

inclusion year equals the lesser of the 

excess, if any, of the section 958(a) U.S. 

shareholder’s aggregate foreign cash 

position over the aggregate amount of its 

aggregate foreign cash position allocated 

to preceding section 958(a) U.S. 

shareholder inclusion years under 

paragraph (c)(2)(i) of this section and 

this paragraph (c)(2)(ii) or the section 

958(a) U.S. shareholder’s aggregate 

section 965(a) inclusion amount for 

such succeeding section 958(a) U.S. 

shareholder inclusion year. 

(3) Estimation of aggregate foreign 

cash position. For purposes of 

determining the aggregate foreign cash 

position of a section 958(a) U.S. 

shareholder, the section 958(a) U.S. 

shareholder may assume that its pro rata 

share of the cash position of any 

specified foreign corporation whose last 

taxable year beginning before January 1, 

2018, ends after the date the return for 

such section 958(a) U.S. shareholder 

inclusion year (the estimated section 

958(a) U.S. shareholder inclusion year) 

is timely filed (taking into account 

extensions, if any) is zero as of the cash 

measurement date with which the 

taxable year of such specified foreign 

corporation ends. If a section 958(a) U.S. 

shareholder’s pro rata share of the cash 

position of a specified foreign 

corporation is treated as zero pursuant 

to the preceding sentence, the amount 

described in § 1.965–1(f)(8)(i)(A) with 

respect to such section 958(a) U.S. 

shareholder in fact exceeds the amount 

described in § 1.965–1(f)(8)(i)(B) with 

respect to such section 958(a) U.S. 

shareholder, and the aggregate section 

965(a) inclusion amount for the 

estimated section 958(a) U.S. 

shareholder inclusion year exceeds the 

amount described in § 1.965–1(f)(8)(i)(B) 

with respect to such section 958(a) U.S. 

shareholder, interest and penalties will 

not be imposed if such section 958(a) 

U.S. shareholder amends the return for 

the estimated section 958(a) U.S. 

shareholder inclusion year to account 

for the correct aggregate foreign cash 

position for the year. The amended 

return must be filed by the due date 

(taking into account extensions, if any) 

for the return for the year after the 

estimated section 958(a) U.S. 

shareholder inclusion year. 

(4) Examples. The following examples 

illustrate the application of this 

paragraph (c). 

(i) Example 1. Estimation of aggregate 

foreign cash position for a section 958(a) U.S. 

shareholder inclusion year—(A) Facts. USP, 

a domestic corporation, owns all of the stock 

of CFC1, a foreign corporation, which owns 

all of the stock of CFC2, also a foreign 

corporation. USP is a calendar year taxpayer. 

CFC1 has a taxable year ending on December 

31, and CFC2 has a taxable year ending on 

November 30. The cash position of CFC1 on 

each of December 31, 2015, December 31, 

2016, and December 31, 2017, is $100x. The 

cash position of CFC2 on each of November 

30, 2015, and November 30, 2016, is $200x. 

USP has a section 965(a) inclusion amount of 

$300x with respect to CFC1. 

(B) Analysis. In determining its aggregate 

foreign cash position for its 2017 taxable 

year, USP may assume that its pro rata share 

of the cash position of CFC2 will be zero as 

of November 30, 2018, for purposes of filing 

its return due on April 18, 2018 (or due on 

October 15, 2018, with extension). Therefore, 

USP’s aggregate foreign cash position is 

treated as $300x, which is the greater of (a) 

$300x, 50% of the sum of USP’s pro rata 

shares of the cash position of CFC1 as of 

December 31, 2015, and December 31, 2016, 

1896 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

and of the cash position of CFC2 as of 

November 30, 2015, and November 30, 2016, 

and (b) $100x, USP’s pro rata share of the 

cash position of CFC1 as of December 31, 

2017. If USP’s pro rata share of the cash 

position of CFC2 as of November 30, 2018, 

in fact exceeds $200x, USP must amend its 

return for its 2017 taxable year to reflect the 

correct aggregate foreign cash position by the 

due date for its return for its 2018 taxable 

year, April 15, 2019 (or October 15, 2019, 

with extension). 

(ii) Example 2. Allocation of aggregate 

foreign cash position among section 958(a) 

U.S. shareholder inclusion years—(A) Facts. 

The facts are the same as in paragraph 

(c)(4)(i)(A) of this section (the facts in 

Example 1), except that the cash position of 

each of CFC1 and CFC2 on all relevant cash 

measurement dates is $200x, with the result 

that USP has an aggregate foreign cash 

position determined under § 1.965–1(f)(8)(i) 

of $400x. For its 2017 taxable year, USP has 

a section 965(a) inclusion amount with 

respect to CFC1 of $300x, and for its 2018 

taxable year, USP has a section 965(a) 

inclusion amount with respect to CFC2 of 

$300x. 

(B) Analysis. Under paragraph (c)(2)(i) of 

this section, USP’s aggregate foreign cash 

position for 2017 is $300x, which is the 

lesser of USP’s aggregate foreign cash 

position determined under § 1.965–1(f)(8)(i) 

($400x) or the section 965(a) inclusion 

amount ($300x) that USP takes into account 

in 2017. Under paragraph (c)(2)(ii) of this 

section, the amount of USP’s aggregate 

foreign cash position for 2018 is $100x, 

USP’s aggregate foreign cash position 

determined under § 1.965–1(f)(8)(i) ($400x) 

reduced by the amount of its aggregate 

foreign cash position for 2017 ($300x) under 

paragraph (c)(2)(i) of this section. 

(d) Increase of income by section 

965(c) deduction of an expatriated 

entity—(1) In general. If a person is 

allowed a section 965(c) deduction and 

the person (or a successor) first becomes 

an expatriated entity, with respect to a 

surrogate foreign corporation, at any 

time during the 10-year period 

beginning on December 22, 2017, then 

the tax imposed by chapter 1 of the 

Internal Revenue Code is increased for 

the first taxable year in which such 

person becomes an expatriated entity by 

an amount equal to 35 percent of the 

person’s section 965(c) deductions, and 

no credits are allowed against such 

increase in tax. The preceding sentence 

applies only if the surrogate foreign 

corporation first becomes a surrogate 

foreign corporation on or after December 

22, 2017. 

(2) Definition of expatriated entity. 

For purposes of paragraph (d)(1) of this 

section, the term expatriated entity has 

the same meaning given such term 

under section 7874(a)(2), except that 

such term does not include an 

expatriated entity if the surrogate 

foreign corporation with respect to the 

expatriated entity is treated as a 

domestic corporation under section 

7874(b). 

(3) Definition of surrogate foreign 

corporation. For purposes of paragraph 

(d)(1) of this section, the term surrogate 

foreign corporation has the meaning 

given such term in section 7874(a)(2)(B). 

(e) Section 962 election—(1) In 

general. In the case of an individual 

(including a trust or estate) that makes 

an election under section 962, any 

section 965(c) deduction taken into 

account under § 1.962–1(b)(1)(i)(B) in 

determining taxable income as used in 

section 11 is not taken into account for 

purposes of determining the 

individual’s taxable income under 

section 1. 

(2) Example.The following example 

illustrates the application of the rule in this 

paragraph (e). 

(i) Facts. USI, a United States citizen, owns 

10% of the capital and profits of USPRS, a 

domestic partnership that has a calendar year 

taxable year, the remainder of which is 

owned by foreign persons unrelated to USI or 

USPRS. USPRS owns all of the stock of FS, 

a foreign corporation that is a controlled 

foreign corporation with a calendar year 

taxable year. USPRS has a section 965(a) 

inclusion amount with respect to FS of 

$1,000x and has a section 965(c) deduction 

amount of $700x. FS has no post-1986 

foreign income taxes. USI makes a valid 

election under section 962 for 2017. 

(ii) Analysis. USI’s ‘‘taxable income’’ 

described in § 1.962–1(b)(1)(i) equals $100x 

(USI’s domestic pass-through owner share of 

USPRS’s section 965(a) inclusion amount) 

minus $70x (USI’s domestic pass-through 

owner share of USPRS’s section 965(c) 

deduction amount), or $30x. No other 

deductions are allowed in determining this 

amount. USI’s tax on the $30x section 965(a) 

inclusion will be equal to the tax that would 

be imposed on such amount under section 11 

if USI were a domestic corporation. Under 

paragraph (e)(1) of this section, USI cannot 

deduct $70x for purposes of determining 

USI’s taxable income that is subject to tax 

under section 1. 

(f) Treatment of section 965(c) 

deduction under certain provisions of 

the Internal Revenue Code—(1) Sections 

62(a) and 63(d). A section 965(c) 

deduction is treated as a deduction 

described in section 62(a) and is not 

treated as an itemized deduction for any 

purpose of the Internal Revenue Code. 

(2) Sections 705, 1367, and 1368—(i) 

Adjustments to basis. In the case of a 

domestic partnership or S corporation— 

(A) The aggregate amount of its 

section 965(a) inclusions net of the 

aggregate amount of its section 965(c) 

deductions is treated as a separately 

stated item of net income solely for 

purposes of calculating basis under 

section 705(a) and § 1.705–1(a) and 

section 1367(a)(1) and § 1.1367–1(f), and 

(B) The aggregate amount of its 

section 965(a) inclusions equal to the 

aggregate amount of its section 965(c) 

deductions is treated as income exempt 

from tax solely for purposes of 

calculating basis under sections 

705(a)(1)(B), 1367(a)(1)(A), and 

§ 1.1367–1(f). 

(ii) S corporation accumulated 

adjustments account. In the case of an 

S corporation, the aggregate amount of 

its section 965(a) inclusions equal to the 

aggregate amount of its section 965(c) 

deductions is treated as income not 

exempt from tax solely for purposes of 

determining whether an adjustment is 

made to an accumulated adjustments 

account under section 1368(e)(1)(A) and 

§ 1.1368–2(a)(2). 

(iii) Example. The following example 

illustrates the application of this paragraph 

(f)(2). 

(A) Facts. USI, a United States citizen, 

owns all of the stock of S Corp, an S 

corporation, which owns all of the stock of 

FS, a foreign corporation. S Corp has a 

section 965(a) inclusion of $1,000x with 

respect to FS and has a $700x section 965(c) 

deduction. 

(B) Analysis. As a result of the application 

of paragraph (f)(2)(i)(A) of this section, solely 

for purposes of calculating basis under 

section 1367(a)(1) and § 1.1367–1(f), USI 

treats as a separately stated item of net 

income $300x (its pro rata share of the net 

of S Corp’s $1,000x aggregate section 965(a) 

inclusion and S Corp’s $700x aggregate 

section 965(c) deduction). Accordingly, USI’s 

basis in S Corp is increased under section 

1367(a)(1) by $300x. As a result of the 

application of paragraph (f)(2)(i)(B) of this 

section, an amount of S Corp’s aggregate 

section 965(a) inclusion equal to its aggregate 

section 965(c) deduction, $700x, is treated as 

tax exempt income solely for purposes of 

calculating basis under section 1367(a)(1)(A) 

and § 1.1367–1(f), and accordingly, USI’s 

basis in S Corp is further increased by its pro 

rata share of such amount, $700x. S Corp’s 

accumulated adjustments account (‘‘AAA’’) 

is increased under section 1368(e)(1)(A) by 

the $1,000x section 965(a) inclusion taken 

into account and reduced by the $700x 

section 965(c) deduction taken into account. 

In addition, as a result of the application of 

paragraph (f)(2)(ii) of this section, S Corp’s 

AAA is further increased by an amount of S 

Corp’s aggregate section 965(a) inclusion 

equal to its aggregate section 965(c) 

deduction, $700x, which is not treated as taxexempt income for purposes of § 1.1368– 

2(a)(2). 

(3) Section 1411. For purposes of 

section 1411 and § 1.1411–4(f)(6), a 

section 965(c) deduction is not treated 

as being properly allocable to any 

section 965(a) inclusion. 

(4) Section 4940. For purposes of 

section 4940(c)(3)(A), a section 965(c) 

deduction is not treated as an ordinary 

and necessary expense paid or incurred 

for the production or collection of gross 

investment income. 

(g) Domestic pass-through entities. 

For purposes of determining a domestic 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1897 

pass-through owner share, a section 

965(c) deduction amount of a domestic 

pass-through entity must be allocated to 

a domestic pass-through owner in the 

same proportion as an aggregate section 

965(a) inclusion amount of the domestic 

pass-through entity for a section 958(a) 

U.S. shareholder inclusion year is 

allocated to the domestic pass-through 

owner. 

§ 1.965–4 Disregard of certain 

transactions. 

(a) Scope. This section provides rules 

that disregard certain transactions for 

purposes of applying section 965 to a 

United States shareholder. Paragraph (b) 

of this section provides rules that 

disregard transactions undertaken with 

a principal purpose of changing the 

amount of a section 965 element of a 

United States shareholder. Paragraph (c) 

of this section provides rules that 

disregard certain changes in method of 

accounting and entity classification 

elections that would otherwise change 

the amount of a section 965 element. 

Paragraph (d) of this section defines the 

term section 965 element. Paragraph (e) 

of this section provides rules of 

application concerning paragraphs (b) 

and (c) of this section. Paragraph (f) of 

this section provides rules that 

disregard certain transactions occurring 

between E&P measurement dates. 

Paragraph (g) of this section provides 

examples illustrating the application of 

this section. 

(b) Transactions undertaken with a 

principal purpose of changing the 

amount of a section 965 element—(1) 

General rule. Except as otherwise 

provided in paragraph (e)(3) of this 

section, a transaction is disregarded for 

purposes of determining the amounts of 

all section 965 elements of a United 

States shareholder if each of the 

following conditions is satisfied with 

respect to any section 965 element of 

the United States shareholder— 

(i) The transaction occurs, in whole or 

in part, on or after November 2, 2017 

(the specified date); 

(ii) The transaction is undertaken 

with a principal purpose of changing 

the amount of a section 965 element of 

the United States shareholder; and 

(iii) The transaction would, without 

regard to this paragraph (b)(1), change 

the amount of the section 965 element 

of the United States shareholder. 

(2) Presumptions and exceptions for 

the application of the general rule—(i) 

Overview. Under paragraphs (b)(2)(iii) 

through (v) of this section, certain 

transactions are presumed to be 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder 

for purposes of paragraph (b)(1) of this 

section. The presumptions described in 

paragraphs (b)(2)(iii) through (v) of this 

section may be rebutted only if facts and 

circumstances clearly establish that the 

transaction was not undertaken with a 

principal purpose of changing the 

amount of a section 965 element of a 

United States shareholder. A taxpayer 

that takes the position that the 

presumption is rebutted must attach a 

statement to its return for its taxable 

year in which or with which the 

relevant taxable year of the relevant 

specified foreign corporation ends 

disclosing that it has rebutted the 

presumption. In the case of a transaction 

described in paragraph (b)(2)(iii) or (iv) 

of this section, if the presumption does 

not apply because the transaction occurs 

in the ordinary course of business, 

whether the transaction was undertaken 

with a principal purpose of changing 

the amount of a section 965 element of 

a United States shareholder must be 

determined under all the facts and 

circumstances. Under paragraphs 

(b)(2)(iii) through (v) of this section, 

certain transactions are treated per se as 

being undertaken with a principal 

purpose of changing the amount of a 

section 965 element of a United States 

shareholder, and, therefore, such 

transactions are disregarded under 

paragraph (b)(1) of this section if the 

conditions of paragraphs (b)(1)(i) and 

(iii) of this section are satisfied. Further, 

under paragraph (b)(2)(iii) of this 

section, certain distributions are treated 

per se as not being undertaken with a 

principal purpose of changing the 

amount of a section 965 element of a 

United States shareholder and therefore 

are not disregarded under paragraph 

(b)(1) of this section. 

(ii) Definitions—(A) Relatedness. For 

purposes of paragraphs (b)(2)(iii) 

through (v) of this section, a person is 

treated as related to a United States 

shareholder if, either immediately 

before or immediately after the 

transaction (or series of related 

transactions), the person bears a 

relationship to the United States 

shareholder described in section 267(b) 

or section 707(b). 

(B) Transfer—(1) In general. For 

purposes of paragraphs (b)(2)(iii) and (v) 

of this section, the term transfer 

includes any disposition of stock or 

property, including a sale or exchange, 

contribution, distribution, issuance, 

redemption, recapitalization, or loan of 

stock or property, and includes an 

indirect transfer of stock or property. 

(2) Indirect transfer. For purposes of 

paragraph (b)(2)(ii)(B)(1) of this section, 

the term indirect transfer includes a 

transfer of property or stock owned by 

an entity through a transfer of an 

interest in such entity (or an interest in 

an entity that has a direct or indirect 

interest in such entity), and a transfer of 

property or stock to a person through a 

transfer of property or stock to a passthrough entity of which such person is 

a direct or indirect owner. 

(iii) Cash reduction transactions—(A) 

General rule. For purposes of paragraph 

(b)(1) of this section, a cash reduction 

transaction is presumed to be 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder. 

For this purpose, the term cash 

reduction transaction means a transfer 

of cash, accounts receivable, or cashequivalent assets by a specified foreign 

corporation to a United States 

shareholder of the specified foreign 

corporation or a person related to a 

United States shareholder of the 

specified foreign corporation, or an 

assumption by a specified foreign 

corporation of an account payable of a 

United States shareholder of the 

specified foreign corporation or a person 

related to a United States shareholder of 

the specified foreign corporation, if such 

transfer or assumption would, without 

regard to paragraph (b)(1) of this section, 

reduce the aggregate foreign cash 

position of the United States 

shareholder. The presumption described 

in this paragraph (b)(2)(iii) does not 

apply to a cash reduction transaction 

that occurs in the ordinary course of 

business. 

(B) Per se rules for certain 

distributions. Notwithstanding the 

presumption described in paragraph 

(b)(2)(iii)(A) of this section, except in 

the case of a specified distribution, a 

cash reduction transaction that is a 

distribution by a specified foreign 

corporation to a United States 

shareholder of the specified foreign 

corporation is treated per se as not being 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of the United States 

shareholder for purposes of paragraph 

(b)(1) of this section. A specified 

distribution is treated per se as being 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder 

for purposes of paragraph (b)(1) of this 

section. For purposes of this paragraph 

(b)(2)(iii)(B), the term specified 

distribution means a cash reduction 

transaction that is a distribution by a 

specified foreign corporation of a United 

States shareholder if and to the extent 

that, at the time of the distribution, 

there was a plan or intention for the 

distributee to transfer cash, accounts 

receivable, or cash-equivalent assets to 

1898 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

any specified foreign corporation of the 

United States shareholder or a 

distribution that is a non pro rata 

distribution to a foreign person that is 

related to the United States shareholder. 

For purposes of the preceding sentence, 

there is no plan or intention for the 

distributee to transfer cash, accounts 

receivable, or cash-equivalent assets to 

any specified foreign corporation of the 

United States shareholder if the transfer 

is pursuant to a legal obligation entered 

into before November 2, 2017. A 

taxpayer that takes the position that a 

cash reduction transaction is not a 

specified distribution because a transfer 

of cash, accounts receivable, or cashequivalent asset is pursuant to a legal 

obligation entered into before November 

2, 2017, must attach a statement to its 

return for its taxable year in which or 

with which the relevant taxable year of 

the relevant specified foreign 

corporation ends disclosing the 

position. 

(iv) E&P reduction transactions—(A) 

General rule. For purposes of paragraph 

(b)(1) of this section, an E&P reduction 

transaction is presumed to be 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder. 

For purposes of this paragraph (b)(2)(iv), 

the term E&P reduction transaction 

means a transaction between a specified 

foreign corporation and any of a United 

States shareholder of the specified 

foreign corporation, another specified 

foreign corporation of a United States 

shareholder of the specified foreign 

corporation, or any person related to a 

United States shareholder of the 

specified foreign corporation, if the 

transaction would, without regard to 

paragraph (b)(1) of this section, reduce 

either the accumulated post-1986 

deferred foreign income or the post1986 undistributed earnings (as defined 

in section 902(c)(1)) of the specified 

foreign corporation or another specified 

foreign corporation of any United States 

shareholder of such specified foreign 

corporation. The presumption described 

in this paragraph (b)(2)(iv)(A) does not 

apply to an E&P reduction transaction 

that occurs in the ordinary course of 

business. 

(B) Per se rule for specified 

transactions. A specified transaction is 

treated per se as being undertaken with 

a principal purpose of changing the 

amount of a section 965 element of a 

United States shareholder for purposes 

of paragraph (b)(1) of this section. For 

purposes of the preceding sentence, the 

term specified transaction means an 

E&P reduction transaction that involves 

one or more of the following: A 

complete liquidation of a specified 

foreign corporation to which section 331 

applies; a sale or other disposition of 

stock by a specified foreign corporation; 

or a distribution by a specified foreign 

corporation that reduces the earnings 

and profits of the specified foreign 

corporation pursuant to section 

312(a)(3). 

(v) Pro rata share transactions—(A) 

General rule. For purposes of paragraph 

(b)(1) of this section, a pro rata share 

transaction is presumed to be 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder. 

For this purpose, the term pro rata share 

transaction means either a pro rata share 

reduction transaction or an E&P deficit 

transaction. 

(1) Definition of pro rata share 

reduction transaction. For purposes of 

this paragraph (b)(2)(v)(A), the term pro 

rata share reduction transaction means 

a transfer of the stock of a specified 

foreign corporation by either a United 

States shareholder of the specified 

foreign corporation or a person related 

to a United States shareholder of the 

specified foreign corporation (including 

by the specified foreign corporation 

itself) to a person related to the United 

States shareholder if the transfer would, 

without regard to paragraph (b)(1) of 

this section, reduce the United States 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

specified foreign corporation, reduce the 

United States shareholder’s pro rata 

share of the cash position of the 

specified foreign corporation, or both. 

(2) Definition of E&P deficit 

transaction. For purposes of this 

paragraph (b)(2)(v)(A), the term E&P 

deficit transaction means a transfer to 

either a United States shareholder or a 

person related to the United States 

shareholder of the stock of an E&P 

deficit foreign corporation by a person 

related to the United States shareholder 

(including by the E&P deficit foreign 

corporation itself) if the transfer would, 

without regard to paragraph (b)(1) of 

this section, increase the United States 

shareholder’s pro rata share of the 

specified E&P deficit of the E&P deficit 

foreign corporation. 

(B) Per se rule for internal group 

transactions. An internal group 

transaction is treated per se as being 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of a United States shareholder 

for purposes of paragraph (b)(1) of this 

section. For purposes of the preceding 

sentence, the term internal group 

transaction means a pro rata share 

transaction if, immediately before or 

after the transfer, the transferor of the 

stock of the specified foreign 

corporation and the transferee of such 

stock are members of an affiliated group 

in which the United States shareholder 

is a member. For this purpose, the term 

affiliated group has the meaning set 

forth in section 1504(a), determined 

without regard to paragraphs (1) through 

(8) of section 1504(b), and the term 

members of an affiliated group means 

entities included in the same affiliated 

group. For purposes of identifying an 

affiliated group and the members of 

such group, each partner in a 

partnership, as determined without 

regard to this sentence, is treated as 

holding its proportionate share of the 

stock held by the partnership, as 

determined under the rules and 

principles of sections 701 through 777, 

and if one or more members of an 

affiliated group own, in the aggregate, at 

least 80 percent of the interests in a 

partnership’s capital or profits, the 

partnership will be treated as a 

corporation that is a member of the 

affiliated group. 

(C) Example. The following example 

illustrates the application of the rules in this 

paragraph (b)(2)(v). 

(1) Facts. FP, a foreign corporation, owns 

all of the stock of USP, a domestic 

corporation. USP owns all of the stock of FS, 

a foreign corporation. USP has a calendar 

year taxable year; FS’s taxable year ends 

November 30. On January 2, 2018, USP 

transfers all of the stock of FS to FP in 

exchange for cash. On January 3, 2018, FS 

makes a distribution with respect to the stock 

transferred to FP. USP treats the transaction 

as a taxable sale of the FS stock and claims 

a dividends received deduction under 

section 245A with respect to its deemed 

dividend under section 1248(j) as a result of 

the sale. FS has post-1986 earnings and 

profits as of December 31, 2017, and no post1986 earnings and profits that are attributable 

to income effectively connected with the 

conduct of a trade or business within the 

United States and subject to tax under 

chapter 1 or that, if distributed, would be 

excluded from the gross income of a United 

States shareholder under section 959. 

(2) Analysis. The transfer of the stock of FS 

is a pro rata share reduction transaction and 

thus a pro rata share transaction because 

such transfer is by USP, a United States 

shareholder, to FP, a person related to USP, 

and the transfer would, without regard to the 

rule in paragraph (b)(1) of this section, 

reduce USP’s pro rata share of the section 

965(a) earnings amount of FS. Because USP 

and FP are also members of an affiliated 

group within the meaning of paragraph 

(b)(2)(v)(B) of this section, the transfer of the 

stock of FS is also an internal group 

transaction and is treated per se as being 

undertaken with a principal purpose of 

changing the amount of a section 965 

element of USP. Accordingly, because the 

transfer occurs after the specified date and 

reduces USP’s section 965(a) inclusion 

amount with respect to FS, the transfer is 

disregarded for purposes of determining any 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1899 

section 965 element of USP with the result 

that, among other things, USP’s pro rata share 

of FS’s section 965(a) earnings amount is 

determined as if USP owned (within the 

meaning of section 958(a)) 100% of the stock 

of FS on the last day of FS’s inclusion year 

and no other person received a distribution 

with respect to such stock during such year. 

See section 951(a)(2)(A) and (B). 

(c) Disregard of certain changes in 

method of accounting and entity 

classification elections—(1) Changes in 

method of accounting. Any change in 

method of accounting made for a taxable 

year of a specified foreign corporation 

that ends in 2017 or 2018 is disregarded 

for purposes of determining the 

amounts of all section 965 elements 

with respect to a United States 

shareholder if the change in method of 

accounting would, without regard to 

this paragraph (c)(1), change the amount 

of any section 965 element described in 

paragraph (d)(1) or (2) of this section 

with respect to the United States 

shareholder, or change the amount of 

the section 965 element described in 

paragraph (d)(3) of this section other 

than by reason of an increase in a 

section 965(a) inclusion amount with 

respect to the specified foreign 

corporation, regardless of whether the 

change in method of accounting is made 

with a principal purpose of changing 

the amount of a section 965 element 

with respect to the United States 

shareholder. The rule described in the 

preceding sentence applies regardless of 

whether the change in method of 

accounting was made in accordance 

with the procedures described in Rev. 

Proc. 2015–13, 2015–5 I.R.B. 419 (or 

successor), and regardless of whether 

the change in method of accounting was 

properly made, but it does not apply to 

a change in method of accounting for 

which the original and/or duplicate 

copy of any Form 3115, ‘‘Application 

for Change in Accounting Method,’’ 

requesting the change was filed before 

the specified date (as defined in 

paragraph (b)(1) of this section). 

(2) Entity classification elections. 

Except as otherwise provided in 

paragraph (e)(3) of this section, an 

election under § 301.7701–3 to change 

the classification of an entity that is 

filed on or after the specified date (as 

defined in paragraph (b)(1) of this 

section) is disregarded for purposes of 

determining the amounts of all section 

965 elements of a United States 

shareholder if the election would, 

without regard to this paragraph (c)(2), 

change the amount of any section 965 

element of the United States 

shareholder, regardless of whether the 

election is made with a principal 

purpose of changing the amount of a 

section 965 element of the United States 

shareholder. An election filed on or 

after the specified date is subject to the 

preceding sentence even if the election 

was filed with an effective date that is 

before the specified date. 

(d) Definition of a section 965 

element. For purposes of paragraphs (b) 

and (c) of this section, the term section 

965 element means, with respect to a 

United States shareholder, any of the 

following amounts (collectively, section 

965 elements)— 

(1) The United States shareholder’s 

section 965(a) inclusion amount with 

respect to a specified foreign 

corporation; 

(2) The aggregate foreign cash position 

of the United States shareholder; or 

(3) The amount of foreign income 

taxes of a specified foreign corporation 

deemed paid by the United States 

shareholder under section 960 as a 

result of a section 965(a) inclusion. 

(e) Rules for applying paragraphs (b) 

and (c) of this section—(1) 

Determination of whether there is a 

change in the amount of a section 965 

element. For purposes of paragraphs (b) 

and (c) of this section, there is a change 

in the amount of a section 965 element 

of a United States shareholder as a 

result of a transaction, change in 

accounting method, or election to 

change an entity’s classification, if, 

without regard to paragraph (b)(1), 

(c)(1), or (c)(2) of this section, the 

transaction, change in accounting 

method, or change in entity 

classification would— 

(i) Reduce the amount described in 

paragraph (d)(1) of this section, 

(ii) Reduce the amount described in 

paragraph (d)(2) of this section, but only 

if such amount is less than the United 

States shareholder’s aggregate section 

965(a) inclusion amount, or 

(iii) Increase the amount described in 

paragraph (d)(3) of this section. 

(2) Treatment of domestic passthrough owners as United States 

shareholders. For purposes of 

paragraphs (b) and (c) of this section, if 

a domestic pass-through entity is a 

United States shareholder, then a 

domestic pass-through owner with 

respect to the domestic pass-through 

entity that is not otherwise a United 

States shareholder is treated as a United 

States shareholder. 

(3) Exception for certain 

incorporation transactions—(i) In 

general. Paragraphs (b) and (c)(2) of this 

section do not apply to disregard a 

transfer of stock of a specified foreign 

corporation by a United States 

shareholder to a domestic corporation 

(for this purpose, including an S 

corporation), provided that— 

(A) The transferee’s section 965(a) 

inclusion amount with respect to the 

transferred stock of the specified foreign 

corporation is no lower than the 

transferor’s section 965(a) inclusion 

amount with respect to the transferred 

stock of the specified foreign 

corporation, determined without regard 

to the transfer; and 

(B) The transferee and the transferor 

determine their aggregate foreign cash 

position under paragraph (e)(3)(ii) of 

this section. 

(ii) Aggregate foreign cash position. In 

the case of a transfer described in 

paragraph (e)(3)(i) of this section, in 

order to rely on the exception in 

paragraph (e)(3)(i) of this section— 

(A) The transferee must treat its pro 

rata share of the cash position of a 

specified foreign corporation as of a 

cash measurement date as of which it 

did not own the transferred stock of the 

specified foreign corporation as 

including the transferor’s pro rata share 

of the cash position of the specified 

foreign corporation with respect to the 

transferred stock of the specified foreign 

corporation as of such cash 

measurement date for purposes of 

determining its aggregate foreign cash 

position; and 

(B) The transferor must treat its pro 

rata share of the cash position of a 

specified foreign corporation as of a 

cash measurement date as of which it 

did not own the transferred stock of the 

specified foreign corporation as 

including the transferee’s pro rata share 

of the cash position of the specified 

foreign corporation with respect to the 

transferred stock of the specified foreign 

corporation as of such cash 

measurement date for purposes of 

determining its aggregate foreign cash 

position. 

(4) Consequences of liquidation—(i) 

In general. In the case of a liquidation 

of a specified foreign corporation that is 

disregarded for purposes of determining 

the section 965 elements of a United 

States shareholder pursuant to 

paragraph (b) or (c)(2) of this section, for 

purposes of determining the amounts of 

the section 965 elements of the United 

States shareholder, the date that is 

treated as the last day of the taxable year 

of the specified foreign corporation is 

the later of— 

(A) The date of the liquidation; and 

(B) The specified liquidation date, if 

any. 

(ii) Specified liquidation date. The 

term specified liquidation date means, 

in the case of a liquidation of a specified 

foreign corporation pursuant to an 

entity classification election that is 

disregarded for purposes of determining 

1900 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

the section 965 elements of a United 

States shareholder— 

(A) November 30, 2017, with respect 

to a United States shareholder that must 

include in income under § 1.367(b)–3 as 

a deemed dividend the all earnings and 

profits amount with respect to the 

United States shareholder’s stock of the 

liquidating specified foreign 

corporation; or 

(B) The date of filing of the entity 

classification election, with respect to 

all other United States shareholders. 

(f) Disregard of certain transactions 

occurring between E&P measurement 

dates—(1) Disregard of specified 

payments. Except as provided in 

paragraph (f)(3) of this section, a 

specified payment made by a specified 

foreign corporation (payor specified 

foreign corporation) to another specified 

foreign corporation (payee specified 

foreign corporation) is disregarded for 

purposes of determining the post-1986 

earnings and profits of each of the payor 

specified foreign corporation and the 

payee specified foreign corporation as of 

the E&P measurement date on December 

31, 2017. 

(2) Definition of specified payment. 

For purposes of paragraph (f)(1) of this 

section, the term specified payment 

means any amount paid or accrued by 

the payor specified foreign corporation, 

including a distribution by the payor 

specified foreign corporation with 

respect to its stock, if each of the 

following conditions are satisfied: 

(i) Immediately before or immediately 

after the payment or accrual of the 

amount, the payor specified foreign 

corporation and the payee specified 

foreign corporation are related within 

the meaning of section 954(d)(3), 

substituting the term ‘‘specified foreign 

corporation’’ for ‘‘controlled foreign 

corporation’’ in each place that it 

appears; 

(ii) The payment or accrual of the 

amount occurs after November 2, 2017, 

and on or before December 31, 2017; 

and 

(iii) The payment or accrual of the 

amount would, without regard to the 

application of paragraph (f)(1) of this 

section, reduce the post-1986 earnings 

and profits of the payor specified 

foreign corporation as of the E&P 

measurement date on December 31, 

2017. 

(3) Non-application of disregard rule. 

A section 958(a) U.S. shareholder may 

determine the post-1986 earnings and 

profits of a specified foreign corporation 

without regard to paragraph (f)(1) of this 

section, provided that it and every 

section 958(a) U.S. shareholder related 

to the first section 958(a) U.S. 

shareholder determines the post-1986 

earnings and profits of each of its 

specified foreign corporations without 

regard to paragraph (f)(1) of this section. 

For purposes of this paragraph (f)(3), a 

person is treated as related to a section 

958(a) U.S. shareholder if the person 

bears a relationship to the section 958(a) 

U.S. shareholder described in section 

267(b) or 707(b). 

(4) Examples. The following examples 

illustrate the application of the rules in 

this paragraph (f). 

(i) Example 1. Deductible payment between 

wholly owned specified foreign corporations 

is a specified payment. (A) Facts. USP, a 

domestic corporation, owns all of the stock 

of CFC1, a foreign corporation, which owns 

all of the stock of CFC2, also a foreign 

corporation. USP, CFC1, and CFC2 have 

calendar year taxable years. On November 2, 

2017, each of CFC1 and CFC2 has post-1986 

earnings and profits of 100u. Neither CFC1 

nor CFC2 has post-1986 earnings and profits 

that are attributable to income of the 

specified foreign corporation that is 

effectively connected with the conduct of a 

trade or business within the United States 

and subject to tax under chapter 1 or that, if 

distributed, would be excluded from the 

gross income of a United States shareholder 

under section 959 or from the gross income 

of another shareholder if such shareholder 

were a United States shareholder; therefore, 

no adjustment is made under section 

965(d)(2) or § 1.965–1(f)(7), and each of 

CFC1’s and CFC2’s accumulated post-1986 

deferred foreign income is equal to such 

corporation’s post-1986 earnings and profits. 

On November 3, 2017, CFC2 makes a 

deductible payment of 10u to CFC1. The 

payment does not constitute subpart F 

income. CFC1 and CFC2 have no other items 

of income or deduction. 

(B) Analysis. The payment from CFC2 to 

CFC1 is a specified payment because (1) 

CFC1 and CFC2 are related specified foreign 

corporations; (2) the payment occurs after 

November 2, 2017, and on or before 

December 31, 2017; and (3) the payment 

would, without regard to the application of 

the rule in paragraph (f)(1) of this section, 

reduce the post-1986 earnings and profits of 

CFC2 as of the E&P measurement date on 

December 31, 2017. Under paragraph (f)(1) of 

this section, the payment is disregarded, and 

CFC1 and CFC2 each have post-1986 

earnings and profits of 100u as of December 

31, 2017. Accordingly, the section 965(a) 

earnings amount of each of CFC1 and CFC2 

is 100u. 

(ii) Example 2. Distribution is a specified 

payment. (A) Facts. The facts are the same as 

in paragraph (f)(4)(i)(A) of this section (the 

facts in Example 1), except instead of a 

deductible payment to CFC1, CFC2 makes a 

10u distribution on November 3, 2017, that, 

without regard to paragraph (f)(1) of this 

section would reduce the post-1986 earnings 

and profits of CFC2 as of the E&P 

measurement date on December 31, 2017, 

and increase the post-1986 earnings and 

profits of CFC1 as of the E&P measurement 

date on December 31, 2017, by 10u. 

(B) Analysis. The distribution is a specified 

payment because (1) CFC1 and CFC2 are 

related specified foreign corporations; (2) the 

distribution occurs after November 2, 2017, 

and on or before December 31, 2017; and (3) 

the distribution would, without regard to the 

application of the rule in paragraph (f)(1) of 

this section, reduce the post-1986 earnings 

and profits of CFC2 as of the E&P 

measurement date on December 31, 2017. 

Under paragraph (f)(1) of this section, the 

distribution is disregarded with the result 

that CFC1 and CFC2 each have post-1986 

earnings and profits of 100u as of the E&P 

measurement date on December 31, 2017, 

and a section 965(a) earnings amount of 

100u. 

(iii) Example 3. Deductible payment 

between related (but not wholly owned) 

specified foreign corporations is a specified 

payment. (A) Facts. The facts are the same as 

in paragraph (f)(4)(i)(A) of this section (the 

facts in Example 1), except that CFC1 owns 

only 51% of the only class of stock of CFC2, 

the remainder of which is owned by USI, a 

United States citizen unrelated to USP, CFC1, 

and CFC2. 

(B) Analysis. The analysis is the same as 

in paragraph (f)(4)(i)(B) of this section (the 

analysis in Example 1); thus, the payment is 

disregarded with the result that CFC1 and 

CFC2 each have post-1986 earnings and 

profits of 100u as of the E&P measurement 

date on December 31, 2017, and a section 

965(a) earnings amount of 100u. 

(iv) Example 4. Deductible payment 

between unrelated specified foreign 

corporations is not a specified payment. (A) 

Facts. The facts are the same as in paragraph 

(f)(4)(i)(A) of this section (the facts in 

Example 1), except that CFC1 owns only 

50% of the only class of stock of CFC2, the 

remainder of which is owned by USI, a 

United States citizen unrelated to USP, CFC1, 

and CFC2. 

(B) Analysis. Paragraph (f)(1) of this section 

does not apply because CFC1 and CFC2 are 

not related. Thus, the payment is taken into 

account with the result that CFC1 has post1986 earnings and profits of 110u as of the 

E&P measurement date on December 31, 

2017, and a section 965(a) earnings amount 

of 110u. 

(v) Example 5. Deductible payment and 

income accrued from unrelated persons are 

not specified payments. (A) Facts. The facts 

are the same as in paragraph (f)(4)(i)(A) of 

this section (the facts in Example 1), except 

that CFC2 does not make a deductible 

payment to CFC1, and, between E&P 

measurement dates, CFC2 accrues gross 

income of 20u from a person that is not 

related to CFC2, and CFC1 incurs a 

deductible expense of 20u to a person that is 

not related to CFC1. 

(B) Analysis. Paragraph (f)(1) of this section 

does not apply because neither the 

deductible expense of CFC1 nor the income 

accrual by CFC2 are attributable to a 

specified payment. 

(vi) Example 6. Deductible payment and 

income accrued with respect to unrelated 

persons are not specified payments; 

deductible payment between wholly specified 

foreign corporations is a specified payment. 

(A) Facts. The facts are the same as in 

paragraph (f)(4)(v)(A) of this section (the facts 

in Example 5), except that CFC2 also makes 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1901 

a deductible payment of 10u to CFC1 on 

November 3, 2017. 

(B) Analysis. The deductible payment is a 

specified payment because (1) CFC1 and 

CFC2 are related specified foreign 

corporations; (2) the payment occurs after 

November 2, 2017, and on or before 

December 31, 2017; and (3) the deductible 

payment would, without regard to the 

application of the rule in paragraph (f)(1) of 

this section, reduce the post-1986 earnings 

and profits of CFC2 as of the E&P 

measurement date on December 31, 2017. 

Accordingly, under paragraph (f)(1) of this 

section, the deductible payment is 

disregarded with the result that CFC1 and 

CFC2 have 80u and 120u of post-1986 

earnings and profits as of the E&P 

measurement date on December 31, 2017, 

respectively. Accordingly, CFC1 and CFC2 

have section 965(a) earnings amounts of 100u 

and 120u, respectively. 

§ 1.965–5 Allowance of a credit or 

deduction for foreign income taxes. 

(a) Scope. This section provides rules 

for the allowance of a credit or 

deduction for foreign income taxes in 

connection with the application of 

section 965. Paragraph (b) of this section 

provides rules under section 965(g) for 

the allowance of a credit or deduction 

for foreign income taxes paid or 

accrued. Paragraph (c) of this section 

provides rules for the allowance of a 

credit or deduction for foreign income 

taxes treated as paid or accrued in 

connection with the application of 

section 965. Paragraph (d) of this section 

defines the term applicable percentage. 

(b) Rules for foreign income taxes 

paid or accrued. Neither a deduction 

(including under section 164) nor a 

credit under section 901 is allowed for 

the applicable percentage of any foreign 

income taxes paid or accrued with 

respect to any amount for which a 

section 965(c) deduction is allowed for 

a section 958(a) U.S. shareholder 

inclusion year. Neither a deduction 

(including under section 164) nor a 

credit under section 901 is allowed for 

the applicable percentage of any foreign 

income taxes attributable to a 

distribution of section 965(a) previously 

taxed earnings and profits or section 

965(b) previously taxed earnings and 

profits. Accordingly, for example, no 

deduction or credit is allowed for the 

applicable percentage of any 

withholding taxes imposed on a United 

States shareholder by the jurisdiction of 

residence of the distributing foreign 

corporation with respect to a 

distribution of section 965(a) previously 

taxed earnings and profits or section 

965(b) previously taxed earnings and 

profits. Similarly, for example, no 

deduction or credit is allowed for the 

applicable percentage of foreign income 

taxes imposed on a United States citizen 

by the citizen’s jurisdiction of residence 

upon receipt of a distribution of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits. 

(c) Rules for foreign income taxes 

treated as paid or accrued—(1) 

Disallowed credit—(i) In general. A 

credit under section 901 is not allowed 

for the applicable percentage of any 

foreign income taxes treated as paid or 

accrued with respect to any amount for 

which a section 965(c) deduction is 

allowed for a section 958(a) U.S. 

shareholder inclusion year. For 

purposes of the preceding sentence, 

taxes treated as paid or accrued include 

foreign income taxes deemed paid 

under section 960(a)(1) with respect to 

a section 965(a) inclusion, foreign 

income taxes deemed paid under 

section 960(a)(3) (as in effect on 

December 21, 2017) or section 960(b) (as 

applicable to taxable years of controlled 

foreign corporations beginning after 

December 31, 2017) with respect to 

distributions of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits, foreign income taxes 

allocated to an entity under § 1.901– 

2(f)(4), and a distributive share of 

foreign income taxes paid or accrued by 

a partnership. 

(ii) Foreign income taxes deemed paid 

under section 960(a)(3) (as in effect on 

December 21, 2017). Foreign income 

taxes deemed paid by a domestic 

corporation under section 960(a)(3) with 

respect to a distribution of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits include only 

the foreign income taxes paid or accrued 

by an upper-tier foreign corporation 

with respect to a distribution of section 

965(a) previously taxed earnings and 

profits or section 965(b) previously 

taxed earnings and profits from a lowertier foreign corporation. No credit is 

allowed under section 960(a)(3) or any 

other section for foreign income taxes 

that would have been deemed paid 

under section 960(a)(1) with respect to 

the portion of a section 965(a) earnings 

amount that is reduced under § 1.965– 

1(b)(2) or § 1.965–8(b). 

(iii) [Reserved] 

(2) Disallowed deduction. No 

deduction (including under section 164) 

is allowed for the applicable percentage 

of any foreign income taxes treated as 

paid or accrued with respect to any 

amount for which a section 965(c) 

deduction is allowed. Such taxes 

include foreign income taxes allocated 

to an entity under § 1.901–2(f)(4) and a 

distributive share of foreign income 

taxes paid or accrued by a partnership. 

(3) Coordination with section 78—(i) 

In general. With respect to foreign 

income taxes deemed paid by a 

domestic corporation with respect to its 

section 965(a) inclusion amount for a 

section 958(a) U.S. shareholder 

inclusion year, section 78 applies only 

to so much of such taxes as bears the 

same proportion to the amount of such 

taxes as— 

(A) The excess of— 

(1) The section 965(a) inclusion 

amount for a section 958(a) U.S. 

shareholder inclusion year, over 

(2) The section 965(c) deduction 

amount allowable with respect to such 

section 965(a) inclusion amount, bears 

to 

(B) Such section 965(a) inclusion 

amount. 

(ii) Domestic corporation that is a 

domestic pass-through owner. With 

respect to foreign income taxes deemed 

paid by a domestic corporation 

attributable to such corporation’s 

domestic pass-through owner share of a 

section 965(a) inclusion amount of a 

domestic pass-through entity, section 78 

applies only to so much of such taxes 

as bears the same proportion to the 

amount of such taxes as the proportion 

determined under paragraph (c)(3)(i) of 

this section as applied to the domestic 

pass-through entity’s section 965(a) 

inclusion amount for a section 958(a) 

U.S. shareholder inclusion year. 

(d) Applicable percentage—(1) In 

general. For purposes of this section, 

except as provided in paragraph (d)(2) 

and (d)(3) of this section, the term 

applicable percentage means, with 

respect to a section 958(a) U.S. 

shareholder and a section 958(a) U.S. 

shareholder inclusion year, the amount 

(expressed as a percentage) equal to the 

sum of— 

(i) 0.771 multiplied by the ratio of— 

(A) The section 958(a) U.S. 

shareholder’s 8 percent rate amount for 

the section 958(a) U.S. shareholder 

inclusion year, divided by 

(B) The sum of the section 958(a) U.S. 

shareholder’s 8 percent rate amount for 

the section 958(a) U.S. shareholder 

inclusion year plus the section 958(a) 

U.S. shareholder’s 15.5 percent rate 

amount for the section 958(a) U.S. 

shareholder inclusion year; plus 

(ii) 0.557 multiplied by the ratio of— 

(A) The section 958(a) U.S. 

shareholder’s 15.5 percent rate amount 

for the section 958(a) U.S. shareholder 

inclusion year, divided by 

1902 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

(B) The amount described in 

paragraph (d)(1)(i)(B) of this section. 

(2) No section 965(a) inclusion 

amount. If a section 958(a) U.S. 

shareholder does not have an aggregate 

section 965(a) inclusion amount, the 

section 958(a) U.S. shareholder’s 

applicable percentage is 55.7 percent. 

(3) Applicable percentage for 

domestic pass-through owners. In the 

case of a domestic pass-through owner 

with respect to a domestic pass-through 

entity, the domestic pass-through 

owner’s applicable percentage that is 

applied to foreign income taxes 

attributable to the domestic passthrough owner share of the section 

965(a) inclusion amount or of 

distributions of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits is equal to the applicable 

percentage determined under paragraph 

(d)(1) or (2) of this section, as 

applicable, with respect to the domestic 

pass-through entity. 

(4) Applicable percentage with respect 

to certain distributions of previously 

taxed earnings and profits. In the case 

of a distribution of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits (other than with respect to 

a section 958(a) U.S. shareholder 

described in paragraph (d)(2) of this 

section), the applicable percentage that 

is applied to foreign income taxes 

attributable to the distribution is the 

applicable percentage that applied with 

respect to the section 958(a) U.S. 

shareholder and the section 958(a) U.S. 

inclusion year in which, or with which, 

the inclusion year of the relevant 

deferred foreign income corporation 

ends. For this purpose, the relevant 

deferred foreign income corporation is 

the deferred foreign income corporation 

with respect to which the section 958(a) 

U.S. shareholder had the section 965(a) 

inclusion as a result of which the 

section 965(a) previously taxed earnings 

and profits first arose (as described in 

§ 1.965–2(c)) or the section 965(b) 

previously taxed earnings and profits 

first arose (as described in § 1.965–2(d)). 

§ 1.965–6 Computation of foreign income 

taxes deemed paid and allocation and 

apportionment of deductions. 

(a) Scope. This section provides rules 

for the computation of foreign income 

taxes deemed paid and the allocation 

and apportionment of deductions. 

Paragraph (b) of this section provides 

the general rules for the computation of 

foreign income taxes deemed paid 

under sections 902 and 960. Paragraph 

(c) of this section provides rules for 

allocation and apportionment of 

expenses. Paragraph (d) of this section 

provides rules for foreign income taxes 

associated with hovering deficits. 

(b) Computation of foreign incomes 

taxes deemed paid—(1) In general. For 

purposes of determining foreign income 

taxes deemed paid under section 

960(a)(1) with respect to a section 965(a) 

inclusion attributable to a deferred 

foreign income corporation that is a 

member of a qualified group (as defined 

in section 902(b)(2)), section 902 applies 

as if the section 965(a) inclusion, 

translated (if necessary) into the 

functional currency of the deferred 

foreign income corporation using the 

spot rate on December 31, 2017, were a 

dividend paid by the deferred foreign 

income corporation. For purposes of 

computing the amount of foreign 

income taxes deemed paid under 

section 960(a)(1), §§ 1.965–2(b), 1.965– 

5, sections 902 and 960, the regulations 

under those sections, and this section 

apply. 

(2) Dividend or inclusion in excess of 

post-1986 undistributed earnings. When 

the denominator of the section 902 

fraction is positive but less than the 

numerator of such fraction, the section 

902 fraction is one. When the 

denominator of the section 902 fraction 

is zero or less than zero, the section 902 

fraction is zero, and no foreign taxes are 

deemed paid. 

(3) Treatment of adjustment under 

section 965(b)(4)(B). For purposes of 

section 902(c)(1), the post-1986 

undistributed earnings of an E&P deficit 

foreign corporation are increased under 

section 965(b)(4)(B) and § 1.965– 

2(d)(2)(i)(A) as of the first day of the 

foreign corporation’s first taxable year 

following the E&P deficit foreign 

corporation’s last taxable year that 

begins before January 1, 2018. 

(4) Section 902 fraction. The term 

section 902 fraction means, with respect 

to either a deferred foreign income 

corporation or an E&P deficit foreign 

corporation, the fraction that is— 

(i) The dividends paid by, or the 

inclusion under section 951(a)(1) 

(including a section 965(a) inclusion) 

with respect to, the foreign corporation, 

as applicable (the numerator), divided 

by 

(ii) The foreign corporation’s post1986 undistributed earnings or pre-1987 

accumulated profits, as applicable (the 

denominator). 

(c) Allocation and apportionment of 

deductions. For purposes of allocating 

and apportioning expenses, a section 

965(c) deduction does not result in any 

gross income, including a section 965(a) 

inclusion, being treated as exempt, 

excluded, or eliminated income within 

the meaning of section 864(e)(3) or 

§ 1.861–8T(d). Similarly, a section 

965(c) deduction does not result in the 

treatment of stock as an exempt asset 

within the meaning of section 864(e)(3) 

or § 1.861–8T(d). In addition, consistent 

with the general inapplicability of 

§ 1.861–8T(d)(2) to earnings and profits 

described in section 959(c)(1) or 

959(c)(2), neither section 965(a) 

previously taxed earnings and profits 

nor section 965(b) previously taxed 

earnings and profits are treated as giving 

rise to gross income that is exempt, 

excluded, or eliminated income. 

Similarly, the asset that gives rise to a 

section 965(a) inclusion, section 965(a) 

previously taxed earnings and profits, or 

section 965(b) previously taxed earnings 

and profits is not treated as a tax-exempt 

asset. 

(d) Hovering deficits. In the last 

taxable year that begins before January 

1, 2018, of a deferred foreign income 

corporation that is also a foreign 

surviving corporation, as defined in 

§ 1.367(b)–7(a), solely for purposes of 

determining the amount of related taxes 

that are included in post-1986 foreign 

income taxes under § 1.367(b)– 

7(d)(2)(iii)— 

(1) The post-transaction earnings 

described in § 1.367(b)–7(d)(2)(ii) that 

can be offset by a hovering deficit 

include any post-transaction earnings 

earned in that year that were not 

considered accumulated because they 

were included in income under section 

965 and § 1.965–1(b)(1) by a section 

958(a) U.S. shareholder; and 

(2) Any offset for purposes of 

§ 1.367(b)–7(d)(2)(ii) is treated as 

occurring on the last day of the foreign 

surviving corporation’s inclusion year. 

§ 1.965–7 Elections, payment, and other 

special rules. 

(a) Scope. This section provides rules 

regarding certain elections and 

payments. Paragraph (b) of this section 

provides rules regarding the section 

965(h) election. Paragraph (c) of this 

section provides rules regarding the 

section 965(i) election. Paragraph (d) of 

this section provides rules regarding the 

section 965(m) election and a special 

rule for real estate investment trusts. 

Paragraph (e) of this section provides 

rules regarding the section 965(n) 

election. Paragraph (f) of this section 

provides rules regarding the election to 

use the alternative method for 

calculating post-1986 earnings and 

profits. Paragraph (g) of this section 

provides definitions that apply for 

purposes of this section. 

(b) Section 965(h) election—(1) In 

general. Any person with a section 

965(h) net tax liability (that is, a section 

958(a) U.S. shareholder or a domestic 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1903 

pass-through owner with respect to a 

domestic pass-through entity that is a 

section 958(a) U.S. shareholder, but not 

a domestic pass-through entity itself) 

may elect under section 965(h) and this 

paragraph (b) to pay its section 965(h) 

net tax liability in eight installments. 

This election may be revoked only by 

paying the full amount of the remaining 

unpaid section 965(h) net tax liability. 

(i) Amount of installments. Except as 

provided in paragraph (b)(3) of this 

section, if a person makes a section 

965(h) election, the amounts of the 

installments are— 

(A) Eight percent of the section 965(h) 

net tax liability in the case of each of the 

first five installments; 

(B) Fifteen percent of the section 

965(h) net tax liability in the case of the 

sixth installment; 

(C) Twenty percent of the section 

965(h) net tax liability in the case of the 

seventh installment; and 

(D) Twenty-five percent of the section 

965(h) net tax liability in the case of the 

eighth installment. 

(ii) Increased installments due to a 

deficiency or a timely filed or amended 

return—(A) In general. If a person makes 

a section 965(h) election, except as 

provided in paragraph (b)(1)(ii)(C) of 

this section, any deficiency or 

additional liability will be prorated to 

the installments described under 

paragraph (b)(1)(i) of this section if any 

of the following occur: 

(1) A deficiency is assessed with 

respect to the person’s section 965(h) 

net tax liability; 

(2) The person files a return by the 

due date of the return (taking into 

account extensions, if any) increasing 

the amount of its section 965(h) net tax 

liability beyond that taken into account 

in paying the first installment described 

under paragraph (b)(1)(i) of this section; 

or 

(3) The person files an amended 

return that reflects an increase in the 

amount of its section 965(h) net tax 

liability. 

(B) Timing. If the due date for the 

payment of an installment to which the 

deficiency is prorated has passed, the 

amount prorated to such installment 

must be paid on notice and demand by 

the Secretary, or, in the case of an 

additional liability reported on a return 

increasing the amount of the section 

965(h) net tax liability after payment of 

the first installment or on an amended 

return, with the filing of the return. If 

the due date for the payment of an 

installment to which the deficiency or 

additional liability is prorated has not 

passed, then such amount will be due 

at the same time as, and as part of, the 

relevant installment. 

(C) Exception for negligence, 

intentional disregard, or fraud. If a 

deficiency or additional liability is due 

to negligence, intentional disregard of 

rules and regulations, or fraud with 

intent to evade tax, the proration rule of 

this paragraph (b)(1)(ii) will not apply, 

and the deficiency or additional liability 

(as well as any applicable interest and 

penalties) must be paid on notice and 

demand by the Secretary or, in the case 

of an additional liability reported on a 

return increasing the amount of the 

section 965(h) net tax liability after 

payment of the first installment or on an 

amended return, with the filing of the 

return. 

(iii) Due date of installments—(A) In 

general. If a person makes a section 

965(h) election, the first installment 

payment is due on the due date (without 

regard to extensions) for the return for 

the relevant taxable year. For purposes 

of this paragraph (b), the term relevant 

taxable year means, in the case in which 

the person is a section 958(a) U.S. 

shareholder, the section 958(a) U.S. 

shareholder inclusion year, or, in the 

case in which the person is a domestic 

pass-through owner, the taxable year in 

which the person has the section 965(a) 

inclusion to which the section 965(h) 

net tax liability is attributable. Each 

succeeding installment payment is due 

on the due date (without regard to 

extensions) for the return for the taxable 

year following the taxable year with 

respect to which the previous 

installment payment was made. 

(B) Extension for specified 

individuals. If a person is a specified 

individual with respect to a taxable year 

within which an installment payment is 

due pursuant to paragraph (b)(1)(iii)(A) 

of this section, then, for purposes of 

determining the due date of an 

installment payment under paragraph 

(b)(1)(iii)(A) of this section, the due date 

of the return (without regard to 

extensions) due within the taxable year 

will be treated as the fifteenth day of the 

sixth month following the close of the 

prior taxable year. This paragraph 

(b)(1)(iii)(B) is applicable regardless of 

whether the person is a specified 

individual with respect to the relevant 

taxable year. 

(2) Manner of making election—(i) 

Eligibility. Any person with a section 

965(h) net tax liability may make the 

section 965(h) election, provided that, 

with respect to the person, none of the 

acceleration events described in 

paragraph (b)(3)(ii) of this section has 

occurred before the election is made. 

Notwithstanding the preceding 

sentence, a person that would be 

eligible to make the section 965(h) 

election but for the occurrence of an 

event described in paragraph (b)(3)(ii) of 

this section may make the section 

965(h) election if the exception 

described in paragraph (b)(3)(iii)(A) of 

this section applies. 

(ii) Timing. A section 965(h) election 

must be made no later than the due date 

(taking into account extensions, if any, 

or any additional time that would have 

been granted if the person had made an 

extension request) for the return for the 

relevant taxable year. Relief is not 

available under § 301.9100–2 or 

§ 301.9100–3 to file a late election. 

(iii) Election statement. Except as 

otherwise provided in publications, 

forms, instructions, or other guidance, 

to make a section 965(h) election, a 

person must attach a statement, signed 

under penalties of perjury consistent 

with the rules for signatures applicable 

to the person’s return, to its return for 

the relevant taxable year. The statement 

must include the person’s name, 

taxpayer identification number, total net 

tax liability under section 965, section 

965(h) net tax liability, section 965(i) 

net tax liability with respect to which a 

section 965(i) election is effective (if 

applicable), and the anticipated 

amounts of each installment described 

under paragraph (b)(1)(i) of this section. 

The statement must be filed in the 

manner prescribed in publications, 

forms, instructions, or other guidance. 

The attachment of an unsigned copy of 

the election statement to the timely-filed 

return for the relevant taxable year 

satisfies the signature requirement of 

this paragraph (b)(2)(iii) if the person 

making the election retains the original 

signed election statement in the manner 

specified by § 1.6001–1(e). 

(3) Acceleration of payment—(i) 

Acceleration. Notwithstanding 

paragraph (b)(1)(i) of this section, if a 

person makes a section 965(h) election 

and an acceleration event described in 

paragraph (b)(3)(ii) of this section 

subsequently occurs, then, except as 

provided in paragraph (b)(3)(iii) of this 

section, the unpaid portion of the 

remaining installments will be due on 

the date of the acceleration event (or in 

the case of a title 11 or similar case, the 

day before the petition is filed). 

(ii) Acceleration events. The following 

events are acceleration events for 

purposes of paragraph (b)(3)(i) of this 

section with respect to a person that has 

made a section 965(h) election— 

(A) An addition to tax is assessed for 

the failure to timely pay an installment 

described in paragraph (b)(1)(i) of this 

section; 

(B) A liquidation, sale, exchange, or 

other disposition of substantially all of 

the assets of the person (including in a 

1904 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

title 11 or similar case, or, in the case 

of an individual, by reason of death); 

(C) In the case of a person that is not 

an individual, a cessation of business by 

the person; 

(D) Any event that results in the 

person no longer being a United States 

person, including a resident alien (as 

defined in section 7701(b)(1)(A)) 

becoming a nonresident alien (as 

defined in section 7701(b)(1)(B)); 

(E) In the case of a person that was not 

a member of any consolidated group, 

the person becoming a member of a 

consolidated group; 

(F) In the case of a consolidated 

group, the group ceasing to exist 

(including by reason of the acquisition 

of a consolidated group within the 

meaning of § 1.1502–13(j)(5)) or the 

group otherwise discontinuing in the 

filing of a consolidated return; or 

(G) A determination by the 

Commissioner described in the second 

sentence of paragraph (b)(3)(iii)(C)(2) of 

this section. 

(iii) Eligible section 965(h) transferee 

exception—(A) In general. Paragraph 

(b)(3)(i) of this section does not apply 

(such that the unpaid portion of all 

remaining installments will not be due 

as of the date of the acceleration event) 

to a person with respect to which an 

acceleration event occurs if the 

requirements described in paragraphs 

(b)(3)(iii)(A)(1) and (2) of this section are 

satisfied. A person with respect to 

which an acceleration event described 

in this paragraph (b)(3)(iii)(A) occurs is 

referred to as an eligible section 965(h) 

transferor. 

(1) Requirement to have a covered 

acceleration event. The acceleration 

event satisfies the requirements of this 

paragraph (b)(3)(iii)(A)(1) if it is 

described in— 

(i) Paragraph (b)(3)(ii)(B) of this 

section, and the acceleration event is a 

qualifying consolidated group member 

transaction within the meaning of 

paragraph (b)(3)(iii)(E) of this section; 

(ii) Paragraph (b)(3)(ii)(B) of this 

section (other than, in the case of an 

individual, an acceleration event caused 

by reason of death) in a transaction that 

is not a qualifying consolidated group 

member transaction; 

(iii) Paragraph (b)(3)(ii)(E) of this 

section; 

(iv) Paragraph (b)(3)(ii)(F) of this 

section, and the acceleration event 

results from the acquisition of a 

consolidated group within the meaning 

of § 1.1502–13(j)(5), and the acquired 

consolidated group members join a 

different consolidated group as of the 

day following the acquisition; 

(v) Paragraph (b)(3)(ii)(F) of this 

section, and the group ceases to exist as 

a result of the transfer of all of the assets 

of one or more members of the 

consolidated group to other members 

with only one entity remaining (the 

successor entity); or 

(vi) Paragraph (b)(3)(ii)(F) of this 

section, and the group ceases to exist as 

a result of the termination of the 

subchapter S election pursuant to 

section 1362(d) of a shareholder of the 

common parent of the consolidated 

group and, for the shareholder’s taxable 

year immediately following the 

termination, the shareholder joins in the 

filing of a consolidated return as a 

consolidated group that includes all of 

the former members of the former 

consolidated group. 

(2) Requirement to enter into a 

transfer agreement. An eligible section 

965(h) transferor and an eligible section 

965(h) transferee (as defined in 

paragraph (b)(3)(iii)(B)(1) of this section) 

must enter into an agreement with the 

Commissioner that satisfies the 

requirements of paragraph (b)(3)(iii)(B) 

of this section. 

(B) Transfer agreement—(1) 

Eligibility. A transfer agreement that 

satisfies the requirements of this 

paragraph (b)(3)(iii)(B) must be entered 

into by an eligible section 965(h) 

transferor and an eligible section 965(h) 

transferee. For this purpose, the term 

eligible section 965(h) transferee refers 

to a single United States person that is 

not a domestic pass-through entity and 

that— 

(i) With respect to an acceleration 

event described in paragraph 

(b)(3)(iii)(A)(1)(i) of this section, is a 

departing member (as defined in 

paragraph (b)(3)(iii)(E)(1)(i) of this 

section) or its qualified successor (as 

defined in paragraph (b)(3)(iii)(E)(2) of 

this section); 

(ii) With respect to an acceleration 

event described in paragraph 

(b)(3)(iii)(A)(1)(ii) of this section, 

acquires substantially all of the assets of 

an eligible section 965(h) transferor; 

(iii) With respect to an acceleration 

event described in paragraph 

(b)(3)(iii)(A)(1)(iii) of this section, is the 

agent (within the meaning of § 1.1502– 

77) of the consolidated group that the 

eligible section 965(h) transferor joins; 

(iv) With respect to an acceleration 

event described in paragraph 

(b)(3)(iii)(A)(1)(iv) of this section, is the 

agent (within the meaning of § 1.1502– 

77) of the surviving consolidated group; 

(v) With respect to an acceleration 

event described in paragraph 

(b)(3)(iii)(A)(1)(v) of this section, is the 

successor entity (within the meaning of 

paragraph (b)(3)(iii)(A)(1)(v) of this 

section); or 

(vi) With respect an acceleration event 

described in paragraph 

(b)(3)(iii)(A)(1)(vi) of this section, is the 

agent (within the meaning of § 1.1502– 

77) of the consolidated group that 

includes the shareholder whose 

subchapter S election was terminated 

and all of the former members of the 

former consolidated group. 

(2) Filing requirements—(i) In general. 

A transfer agreement must be timely 

filed. Except as provided in paragraph 

(b)(3)(iii)(B)(2)(ii) of this section, a 

transfer agreement is considered timely 

filed only if the transfer agreement is 

filed within 30 days of the date that the 

acceleration event occurs. The transfer 

agreement must be filed in accordance 

with the rules provided in publications 

forms, instructions, or other guidance. 

In addition, a duplicate copy of the 

transfer agreement must be attached to 

the returns of both the eligible section 

965(h) transferee and the eligible section 

965(h) transferor for the taxable year 

during which the acceleration event 

occurs filed by the due date for such 

returns (taking into account extensions, 

if any). Relief is not available under 

§ 301.9100–2 or 301.9100–3 to file a 

transfer agreement late. 

(ii) Transition rule. If an acceleration 

event occurs on or before February 5, 

2019, the transfer agreement must be 

filed by March 7, 2019, to be considered 

timely filed. 

(3) Signature requirement. The 

transfer agreement that is filed within 

30 days of the acceleration event or by 

the due date specified in paragraph 

(b)(3)(iii)(B)(2)(ii) of this section must be 

signed under penalties of perjury by a 

person who is authorized to sign a 

return on behalf of the eligible section 

965(h) transferor and a person who is 

authorized to sign a return on behalf of 

the eligible section 965(h) transferee. 

(4) Terms of agreement. A transfer 

agreement under this paragraph 

(b)(3)(iii)(B) must be entitled ‘‘Transfer 

Agreement Under Section 965(h)(3)’’ 

and must contain the following 

information and representations— 

(i) A statement that the document 

constitutes an agreement by the eligible 

section 965(h) transferee to assume the 

liability of the eligible section 965(h) 

transferor for any unpaid installment 

payments of the eligible section 965(h) 

transferor under section 965(h); 

(ii) A statement that the eligible 

section 965(h) transferee (and, if the 

eligible section 965(h) transferor 

continues in existence immediately after 

the acceleration event, the eligible 

section 965(h) transferor) agrees to 

comply with all of the conditions and 

requirements of section 965(h) and 

paragraph (b) of this section, as well as 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1905 

any other applicable requirements in the 

section 965 regulations; 

(iii) The name, address, and taxpayer 

identification number of the eligible 

section 965(h) transferor and the eligible 

section 965(h) transferee; 

(iv) The amount of the eligible section 

965(h) transferor’s section 965(h) net tax 

liability remaining unpaid, as 

determined by the eligible section 

965(h) transferor, which amount is 

subject to adjustment by the 

Commissioner; 

(v) A copy of the eligible section 

965(h) transferor’s most recent Form 

965–A or Form 965–B, as applicable, if 

the eligible section 965(h) transferor has 

been required to file a Form 965–A or 

Form 965–B; 

(vi) A detailed description of the 

acceleration event that led to the 

transfer agreement; 

(vii) A representation that the eligible 

section 965(h) transferee is able to make 

the remaining payments required under 

section 965(h) and paragraph (b) of this 

section with respect to the section 

965(h) net tax liability being assumed; 

(viii) If the eligible section 965(h) 

transferor continues to exist 

immediately after the acceleration 

event, an acknowledgement that the 

eligible section 965(h) transferor and 

any successor to the eligible section 

965(h) transferor will remain jointly and 

severally liable for any unpaid 

installment payments of the eligible 

section 965(h) transferor under section 

965(h), including, if applicable, under 

§ 1.1502–6; 

(ix) A statement as to whether the 

leverage ratio of the eligible section 

965(h) transferee and all subsidiary 

members of its affiliated group 

immediately after the acceleration event 

exceeds three to one, which ratio may 

be modified as provided in publications, 

forms, instructions, or other guidance; 

(x) A certification by the eligible 

section 965(h) transferee stating that the 

eligible section 965(h) transferee waives 

the right to a notice of liability and 

consents to the immediate assessment of 

the portion of the section 965(h) net tax 

liability remaining unpaid; and 

(xi) Any additional information, 

representation, or certification required 

by the Commissioner in publications, 

forms, instructions, or other guidance. 

(5) Consolidated groups. For purposes 

of this paragraph (b)(3)(iii)(B), in the 

case of a consolidated group, the terms 

‘‘eligible section 965(h) transferor’’ and 

‘‘eligible section 965(h) transferee’’ each 

refer to a consolidated group that is a 

party to a covered acceleration event 

described in paragraph (b)(3)(iii)(A)(1) 

of this section. In such a case, any 

transfer agreement under this paragraph 

(b)(3)(iii)(B) must be entered into by the 

agent (as defined in § 1.1502–77) of the 

relevant consolidated group. 

(6) Leverage ratio. For purposes of 

paragraph (b)(3)(iii)(B)(4)(ix) of this 

section, and except as otherwise 

provided in publications, forms, 

instructions, or other guidance, the term 

leverage ratio means the ratio that the 

total indebtedness of the eligible section 

965(h) transferee bears to the sum of its 

money and all other assets reduced (but 

not below zero) by such total 

indebtedness. For this purpose, the 

amount taken into account with respect 

to any asset is the adjusted basis thereof 

for purposes of determining gain, and 

the amount taken into account with 

respect to any indebtedness with 

original issue discount is its issue price 

plus the portion of the original issue 

discount previously accrued as 

determined under the rules of section 

1272 (determined without regard to 

subsection (a)(7) or (b)(4) thereof). 

(C) Consent of Commissioner—(1) In 

general. Except as otherwise provided 

in publications, forms, instructions, or 

other guidance, if an eligible section 

965(h) transferor and an eligible section 

965(h) transferee file a transfer 

agreement in accordance with the 

provisions of paragraph (b)(3)(iii)(B) of 

this section, the eligible section 965(h) 

transferor and the eligible section 965(h) 

transferee will be considered to have 

entered into an agreement described in 

paragraph (b)(3)(iii)(A)(2) of this section 

with the Commissioner for purposes of 

section 965(h)(3) and paragraph 

(b)(3)(iii) of this section. If the 

Commissioner determines that 

additional information is necessary (for 

example, additional information 

regarding the ability of the eligible 

section 965(h) transferee to fully pay the 

remaining section 965(h) net tax 

liability), the eligible section 965(h) 

transferee must provide such 

information upon request. 

(2) Material misrepresentations and 

omissions. If the Commissioner 

determines that an agreement filed by 

an eligible section 965(h) transferor and 

an eligible section 965(h) transferee 

contains a material misrepresentation or 

material omission, or if the eligible 

section 965(h) transferee does not 

provide the additional information 

requested under paragraph 

(b)(3)(iii)(C)(1) of this section within a 

reasonable timeframe communicated by 

the Commissioner to the eligible section 

965(h) transferee, then the 

Commissioner may reject the transfer 

agreement (effective as of the date of the 

related acceleration event). In the 

alternative, on the date that the 

Commissioner determines that the 

transfer agreement includes a material 

misrepresentation or material omission, 

the Commissioner may determine that 

an acceleration event has occurred with 

respect to the eligible section 965(h) 

transferee as of the date of the 

determination, such that any unpaid 

installment payments of the eligible 

section 965(h) transferor that were 

assumed by the eligible section 965(h) 

transferee become due on the date of the 

determination. 

(D) Effect of assumption—(1) In 

general. If the exception in this 

paragraph (b)(3)(iii) applies with respect 

to an eligible section 965(h) transferor 

and an eligible section 965(h) transferee, 

the eligible section 965(h) transferee 

assumes all of the outstanding 

obligations and responsibilities of the 

eligible section 965(h) transferor with 

respect to the section 965(h) net tax 

liability as though the eligible section 

965(h) transferee had included the 

section 965(a) inclusion in income. 

Accordingly, the eligible section 965(h) 

transferee is responsible for making 

payments and reporting with respect to 

any unpaid installment payments. In 

addition, for example, if an acceleration 

event described in paragraph (b)(3)(ii) of 

this section occurs with respect to an 

eligible section 965(h) transferee, any 

unpaid installment payments of the 

eligible section 965(h) transferor that 

were assumed by the eligible section 

965(h) transferee will become due on 

the date of such event, subject to any 

applicable exception in paragraph 

(b)(3)(iii) of this section. 

(2) Eligible section 965(h) transferor 

liability. An eligible section 965(h) 

transferor (or a successor) remains 

jointly and severally liable for any 

unpaid installment payments of the 

eligible section 965(h) transferor that 

were assumed by the eligible section 

965(h) transferee, as well as any 

penalties, additions to tax, or other 

additional amounts attributable to such 

net tax liability. 

(E) Qualifying consolidated group 

member transaction—(1) Definition of 

qualifying consolidated group member 

transaction. For purposes of this 

paragraph (b)(3), the term qualifying 

consolidated group member transaction 

means a transaction in which— 

(i) A member of a consolidated group 

(the departing member) ceases to be a 

member of the consolidated group 

(including by reason of the distribution, 

sale, or exchange of the departing 

member’s stock); 

(ii) The transaction results in the 

consolidated group (which is treated as 

a single person for this purpose under 

§ 1.965–8(e)(1)) being treated as 

transferring substantially all of its assets 

1906 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

for purposes of paragraph (b)(3)(ii)(B) of 

this section; and 

(iii) The departing member either 

continues to exist immediately after the 

transaction or has a qualified successor. 

(2) Definition of qualified successor. 

For purposes of this paragraph (b)(3), 

the term qualified successor means, 

with respect to a departing member 

described in this paragraph (b)(3)(iii)(E), 

another domestic corporation (or 

consolidated group) that acquires 

substantially all of the assets of the 

departing member (including in a 

transaction described in section 

381(a)(2)). 

(3) Departure of multiple members of 

a consolidated group. Multiple members 

that deconsolidate from the same 

consolidated group as a result of a single 

transaction are treated as a single 

departing member to the extent that, 

immediately after the transaction, they 

become members of the same (second) 

consolidated group, which would be 

treated as a single person under § 1.965– 

8(e)(1). 

(c) Section 965(i) election—(1) In 

general. Each shareholder of an S 

corporation (including a person listed in 

§ 1.1362–6(b)(2) with respect to a trust 

or estate, but not a domestic passthrough entity itself) that is a United 

States shareholder of a deferred foreign 

income corporation may elect under 

section 965(i) and this paragraph (c) to 

defer the payment of the shareholder’s 

section 965(i) net tax liability with 

respect to the S corporation until the 

shareholder’s taxable year that includes 

a triggering event described in 

paragraph (c)(3) of this section. This 

election may be revoked only by paying 

the full amount of the unpaid section 

965(i) net tax liability. 

(2) Manner of making election—(i) 

Eligibility. Each shareholder with a 

section 965(i) net tax liability with 

respect to an S corporation may make 

the section 965(i) election with respect 

to such S corporation, provided that, 

with respect to the shareholder, none of 

the triggering events described in 

paragraph (c)(3)(ii) of this section have 

occurred before the election is made. 

Notwithstanding the preceding 

sentence, a shareholder that would be 

eligible to make the section 965(i) 

election but for the occurrence of an 

event described in paragraph (c)(3)(ii) of 

this section may make the section 965(i) 

election if an exception described in 

paragraph (c)(3)(iv) of this section 

applies. 

(ii) Timing. A section 965(i) election 

must be made no later than the due date 

(taking into account extensions, if any) 

for the shareholder’s return for each 

taxable year that includes the last day of 

the taxable year of the S corporation in 

which the S corporation has a section 

965(a) inclusion to which the 

shareholder’s section 965(i) net tax 

liability is attributable. Relief is not 

available under § 301.9100–2 or 

301.9100–3 to make a late election. 

(iii) Election statement. Except as 

otherwise provided in publications, 

forms, instructions, or other guidance, 

to make a section 965(i) election, a 

shareholder must attach a statement, 

signed under penalties of perjury 

consistent with the rules for signatures 

applicable to the person’s return, to its 

return for the taxable year that includes 

the last day of a taxable year of the S 

corporation in which the S corporation 

has a section 965(a) inclusion to which 

the shareholder’s section 965(i) net tax 

liability is attributable. The statement 

must include the shareholder’s name, 

taxpayer identification number, the 

name and taxpayer identification 

number of the S corporation with 

respect to which the election is made, 

the amount described in paragraph 

(g)(10)(i)(A) of this section as modified 

by paragraph (g)(6) of this section for 

purposes of determining the section 

965(i) net tax liability with respect to 

the S corporation, the amount described 

in paragraph (g)(10)(i)(B) of this section, 

and the section 965(i) net tax liability 

with respect to the S corporation. The 

statement must be filed in the manner 

prescribed in publications, forms, 

instructions, or other guidance. The 

attachment of an unsigned copy of the 

election statement to the timely-filed 

return for the relevant taxable year 

satisfies the signature requirement of 

this paragraph (c)(2)(iii) if the 

shareholder retains the original signed 

election statement in the manner 

specified by § 1.6001–1(e). 

(3) Triggering events—(i) In general. If 

a shareholder makes a section 965(i) 

election with respect to an S 

corporation, the shareholder defers 

payment of its section 965(i) net tax 

liability with respect to the S 

corporation until the shareholder’s 

taxable year that includes the 

occurrence of a triggering event 

described in paragraph (c)(3)(ii) of this 

section with respect to the section 965(i) 

net tax liability with respect to the S 

corporation. If a triggering event 

described in paragraph (c)(3)(ii) of this 

section with respect to an S corporation 

occurs, except as provided in paragraph 

(c)(3)(iv) of this section, the 

shareholder’s section 965(i) net tax 

liability with respect to the S 

corporation will be assessed as an 

addition to tax for the shareholder’s 

taxable year that includes the triggering 

event. 

(ii) Triggering events. The following 

events are considered triggering events 

for purposes of paragraph (c)(3)(i) of this 

section with respect to a shareholder’s 

section 965(i) net tax liability with 

respect to an S corporation— 

(A) The corporation ceases to be an S 

corporation (determined as of the first 

day of the first taxable year that the 

corporation is not an S corporation); 

(B) A liquidation, sale, exchange, or 

other disposition of substantially all of 

the assets of the S corporation 

(including in a title 11 or similar case), 

a cessation of business by the S 

corporation, or the S corporation 

ceasing to exist; 

(C) The transfer of any share of stock 

of the S corporation by the shareholder 

(including by reason of death or 

otherwise) that results in a change of 

ownership for federal income tax 

purposes; or 

(D) A determination by the 

Commissioner described in the second 

sentence of paragraph (c)(3)(iv)(C)(2) of 

this section. 

(iii) Partial transfers. If an S 

corporation shareholder transfers less 

than all of its shares of stock of the S 

corporation, the transfer will be a 

triggering event only with respect to the 

portion of a shareholder’s section 965(i) 

net tax liability that is properly 

allocable to the transferred shares. 

(iv) Eligible section 965(i) transferee 

exception—(A) In general. Paragraph 

(c)(3)(i) of this section will not apply 

(such that a shareholder’s section 965(i) 

net tax liability with respect to an S 

corporation will not be assessed as an 

addition to tax for the shareholder’s 

taxable year that includes the triggering 

event) if the requirements described in 

paragraphs (c)(3)(iv)(A)(1) and (2) of this 

section are satisfied. A shareholder with 

respect to which a triggering event 

described in this paragraph (c)(3)(iv)(A) 

occurs is referred to as an eligible 

section 965(i) transferor. 

(1) Requirement to have a covered 

triggering event. The triggering event 

satisfies the requirements of this 

paragraph (c)(3)(iv)(A)(1) if it is 

described in paragraph (c)(3)(ii)(C) of 

this section. 

(2) Requirement to enter into a 

transfer agreement. The shareholder 

with respect to which a triggering event 

occurs and an eligible section 965(i) 

transferee (as defined in paragraph 

(c)(3)(v)(B)(1) of this section) must enter 

into an agreement with the 

Commissioner that satisfies the 

requirements of paragraph (c)(3)(iv)(B) 

of this section. 

(B) Transfer agreement—(1) 

Eligibility. A transfer agreement that 

satisfies the requirements of this 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1907 

paragraph (c)(3)(iv)(B) may be entered 

into by an eligible section 965(i) 

transferor and an eligible section 965(i) 

transferee. For this purpose, the term 

eligible section 965(i) transferee refers to 

a single United States person that 

becomes a shareholder of the S 

corporation (including a person listed in 

§ 1.1362–6(b)(2) with respect to a trust 

or estate, but not a domestic passthrough entity itself). In the case of a 

transfer that consists of multiple partial 

transfers (as described in paragraph 

(c)(3)(iii) of this section), a transfer 

agreement that satisfies the 

requirements of this paragraph 

(c)(3)(iv)(B) may be entered into by an 

eligible section 965(i) transferor and an 

eligible section 965(i) transferee for each 

partial transfer. 

(2) Filing requirements—(i) In general. 

A transfer agreement must be timely 

filed. Except as provided in paragraphs 

(c)(3)(iv)(B)(2)(ii) and (iii) of this section, 

a transfer agreement is considered 

timely filed only if the transfer 

agreement is filed within 30 days of the 

date that the triggering event occurs. 

The transfer agreement must be filed in 

accordance with the rules provided in 

publications, forms, instructions, or 

other guidance. In addition, a duplicate 

copy of the transfer agreement must be 

attached to the returns of both the 

eligible section 965(i) transferee and the 

eligible section 965(i) transferor for the 

taxable year during which the triggering 

event occurs filed by the due date 

(taking into account extensions, if any) 

for such returns. Relief is not available 

under § 301.9100–2 or 301.9100–3 to 

file a transfer agreement late. 

(ii) Transition rule. If a triggering 

event occurs on or before February 5, 

2019, the transfer agreement must be 

filed by March 7, 2019, to be considered 

timely filed. 

(iii) Death of eligible section 965(i) 

transferor. If the triggering event is the 

death of the eligible section 965(i) 

transferor, the transfer agreement must 

be filed by the later of the unextended 

due date for the eligible section 965(i) 

transferor’s final income tax return or 

March 7, 2019. 

(3) Signature requirement. The 

transfer agreement that is filed within 

30 days of the triggering event or by the 

due date specified in paragraph 

(c)(3)(iv)(B)(2)(ii) or (iii) of this section 

must be signed under penalties of 

perjury by a person who is authorized 

to sign a return on behalf of the eligible 

section 965(i) transferor and a person 

who is authorized to sign a return on 

behalf of the eligible section 965(i) 

transferee. 

(4) Terms of agreement. A transfer 

agreement under this paragraph 

(c)(3)(iv)(B) must be entitled ‘‘Transfer 

Agreement Under Section 965(i)(2)’’ and 

must contain the following information 

and representations: 

(i) A statement that the document 

constitutes an agreement by the eligible 

section 965(i) transferee to assume the 

liability of the eligible section 965(i) 

transferor for the unpaid portion of the 

section 965(i) net tax liability, or, in the 

case of a partial transfer, for the unpaid 

portion of the section 965(i) net tax 

liability attributable to the transferred 

stock; 

(ii) A statement that the eligible 

section 965(i) transferee agrees to 

comply with all of the conditions and 

requirements of section 965(i) and 

paragraph (c) of this section, including 

the annual reporting requirement, as 

well as any other applicable 

requirements in the section 965 

regulations; 

(iii) The name, address, and taxpayer 

identification number of the eligible 

section 965(i) transferor and the eligible 

section 965(i) transferee; 

(iv) The amount of the eligible section 

965(i) transferor’s unpaid section 965(i) 

net tax liability or, in the case of a 

partial transfer, the unpaid portion of 

the section 965(i) net tax liability 

attributable to the transferred stock, 

each as determined by the eligible 

section 965(i) transferor, which amount 

is subject to adjustment by the 

Commissioner; 

(v) A copy of the eligible section 

965(i) transferor’s most recent Form 

965–A, if the eligible section 965(i) 

transferor has been required to file a 

Form 965–A; 

(vi) A detailed description of the 

triggering event that led to the transfer 

agreement, including the name and 

taxpayer identification number of the S 

corporation with respect to which the 

section 965(i) election was effective; 

(vii) A representation that the eligible 

section 965(i) transferee is able to pay 

the section 965(i) net tax liability being 

assumed; 

(viii) An acknowledgement that the 

eligible section 965(i) transferor and any 

successor to the eligible section 965(i) 

transferor will remain jointly and 

severally liable for the section 965(i) net 

tax liability being assumed by the 

eligible section 965(i) transferee. 

(ix) A statement as to whether the 

leverage ratio of the eligible section 

965(i) transferee immediately after the 

triggering event exceeds three to one, 

which ratio may be modified as 

provided in publications, forms, 

instructions, or other guidance; 

(x) Any additional information, 

representation, or certification required 

by the Commissioner in publications, 

forms, instructions, or other guidance. 

(5) Special rule in the case of death 

of eligible section 965(i) transferor. 

Except in the case of transfers to trusts, 

if the triggering event is the death of the 

eligible section 965(i) transferor, and the 

identity of the beneficiary or 

beneficiaries (in the case of multiple 

partial transfers) is determined as of the 

due date for the transfer agreement 

described in paragraph 

(c)(3)(iv)(B)(2)(iii) of this section, then 

the transfer may be treated as a transfer 

directly between the eligible 965(i) 

transferor and the beneficiary or 

beneficiaries. If, however, the identity of 

the beneficiary or beneficiaries is not 

determined as of the due date for the 

transfer agreement described in 

paragraph (c)(3)(iv)(B)(2)(iii) of this 

section, then the transfer must be 

treated first as a transfer between the 

eligible section 965(i) transferor and his 

or her estate at the time of death and 

second as a transfer between the estate 

and the beneficiary or beneficiaries 

when the shares are actually transferred 

to the beneficiary or beneficiaries. 

Separate transfer agreements must be 

filed for each transfer. The transfer from 

the eligible section 965(i) transferor to 

his or her estate is a transfer resulting 

from a triggering event that is the death 

of the eligible section 965(i) transferor, 

and the transfer agreement is subject to 

the timing rules in paragraph 

(c)(3)(iv)(B)(2)(iii) of this section. The 

transfer from the estate to the 

beneficiary or beneficiaries is not a 

transfer resulting from a triggering event 

that is the death of the eligible section 

965(i) transferor, and the transfer 

agreement is subject to the timing rules 

in paragraph (c)(3)(iv)(B)(2)(i) and (ii) of 

this section. 

(6) Leverage ratio. For purposes of 

paragraph (c)(3)(iv)(B)(4)(ix) of this 

section, and except as otherwise 

provided in publications, forms, 

instructions, or other guidance, the term 

leverage ratio means the ratio that the 

total indebtedness of the eligible section 

965(i) transferee bears to the sum of its 

money and all other assets reduced (but 

not below zero) by such total 

indebtedness. For this purpose, the 

amount taken into account with respect 

to any asset is the adjusted basis thereof 

for purposes of determining gain, and 

the amount taken into account with 

respect to any indebtedness with 

original issue discount is its issue price 

plus the portion of the original issue 

discount previously accrued as 

determined under the rules of section 

1272 (determined without regard to 

subsection (a)(7) or (b)(4) thereof). 

1908 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

(C) Consent of Commissioner—(1) In 

general. Except as otherwise provided 

in publications, forms, instructions, or 

other guidance, if an eligible section 

965(i) transferor and an eligible section 

965(i) transferee file a transfer 

agreement in accordance with the 

provisions of paragraph (c)(3)(iv)(B) of 

this section, the eligible section 965(i) 

transferor and the eligible section 965(i) 

transferee will be considered to have 

entered into an agreement with the 

Commissioner for purposes of section 

965(i)(2) and paragraph (c)(3)(iv) of this 

section. If the Commissioner determines 

that additional information is necessary 

(for example, additional information 

regarding the ability of the eligible 

section 965(i) transferee to pay the 

eligible section 965(i) transferor’s 

unpaid section 965(i) net tax liability), 

the eligible section 965(i) transferee 

must provide such information upon 

request. 

(2) Material misrepresentations and 

omissions. If the Commissioner 

determines that an agreement filed by 

an eligible section 965(i) transferor and 

an eligible section 965(i) transferee 

contains a material misrepresentation or 

material omission, or if the eligible 

section 965(i) transferee does not 

provide the additional information 

requested under paragraph 

(c)(3)(iv)(C)(1) of this section within a 

reasonable timeframe communicated by 

the Commissioner to the eligible section 

965(i) transferee, then the Commissioner 

may reject the transfer agreement 

(effective as of the date of the related 

triggering event). In the alternative, on 

the date that the Commissioner 

determines that the transfer agreement 

includes a material misrepresentation or 

material omission, the Commissioner 

may determine that a triggering event 

has occurred with respect to the eligible 

section 965(i) transferee as of the date of 

the determination, such that the unpaid 

section 965(i) net tax liability of the 

eligible section 965(i) transferor that 

was assumed by the eligible section 

965(i) transferee becomes due on the 

date of the determination. 

(D) Effect of assumption—(1) In 

general. When the exception in this 

paragraph (c)(3)(iv) applies with respect 

to an eligible section 965(i) transferor 

and an eligible section 965(i) transferee, 

the eligible section 965(i) transferee 

assumes all of the outstanding 

obligations and responsibilities of the 

eligible section 965(i) transferor with 

respect to the section 965(i) net tax 

liability with respect to the S 

corporation as though the eligible 

section 965(i) transferee had included 

the section 965(a) inclusion in income. 

Accordingly, the eligible section 965(i) 

transferee is responsible for making 

payments and reporting with respect to 

any unpaid section 965(i) net tax 

liability with respect to the S 

corporation. In addition, for example, if 

a triggering event described in 

paragraph (c)(3)(ii) of this section occurs 

with respect to an eligible section 965(i) 

transferee, any unpaid portion of the 

section 965(i) net tax liability of the 

eligible section 965(i) transferor that 

was assumed by the eligible section 

965(i) transferee becomes due on the 

date of such event, subject to any 

applicable exception in paragraph 

(c)(3)(iv) or (v) of this section. 

(2) Eligible section 965(i) transferor 

liability. An eligible section 965(i) 

transferor remains jointly and severally 

liable for any unpaid installment 

payments of the eligible section 965(i) 

transferor that were assumed by the 

eligible section 965(i) transferee, as well 

as any penalties, additions to tax, or 

other additional amounts attributable to 

such net tax liability. 

(v) Coordination with section 965(h) 

election—(A) In general. Subject to the 

limitation described in paragraph 

(c)(3)(v)(D) of this section, a shareholder 

that has made a section 965(i) election 

with respect to an S corporation, upon 

the occurrence of a triggering event with 

respect to such S corporation, may make 

a section 965(h) election with respect to 

the portion of the shareholder’s section 

965(i) net tax liability with respect to 

such S corporation that is assessed as an 

addition to tax for the shareholder’s 

taxable year that includes the triggering 

event pursuant to paragraph (c)(3)(i) of 

this section as if such portion were a 

section 965(h) net tax liability. 

(B) Timing for election. A section 

965(h) election made pursuant to 

section 965(i)(4) and paragraph 

(c)(3)(v)(A) of this section must be made 

no later than the due date (taking into 

account extensions, if any) for the 

shareholder’s return for the taxable year 

in which the triggering event with 

respect to the S corporation occurs. 

Relief is not available under § 301.9100– 

2 or § 301.9100–3 to make a late 

election. 

(C) Due date for installment. If a 

shareholder makes a section 965(h) 

election pursuant to section 965(i)(4) 

and paragraph (c)(3)(v)(A) of this 

section, the payment of the first 

installment (as described in paragraph 

(b)(1)(i) of this section) must be made no 

later than the due date (without regard 

to extensions) for the shareholder’s 

return of tax for the taxable year in 

which the triggering event with respect 

to the S corporation occurs. 

(D) Limitation—(1) In general. 

Notwithstanding paragraph (c)(3)(v)(A) 

of this section, if the triggering event 

with respect to an S corporation is a 

triggering event described in paragraph 

(c)(3)(ii)(B) of this section, then the 

section 965(h) election may only be 

made with the consent of the 

Commissioner. 

(2) Manner of obtaining consent—(i) 

In general. In order to obtain the consent 

of the Commissioner as required by 

paragraph (c)(3)(v)(D)(1) of this section, 

the shareholder intending to make the 

section 965(h) election must file the 

agreement described in paragraph 

(c)(3)(v)(D)(4) of this section within 30 

days of the occurrence of the triggering 

event, except as described in paragraph 

(c)(3)(v)(D)(2)(ii) of this section. The 

agreement must be filed in accordance 

with the rules provided in publications, 

forms, instructions, or other guidance. 

In addition, a duplicate copy of the 

agreement must be filed, with the 

shareholder’s timely-filed return for the 

taxable year during which the triggering 

event occurs (taking into account 

extensions, if any), along with the 

election statement described in 

paragraph (b)(2)(iii) of this section. 

Relief is not available under § 301.9100– 

2 or § 301.9100–3 to file an agreement 

late. 

(ii) Transition rule. If a triggering 

event occurs on or before February 5, 

2019, the agreement must be filed by 

March 7, 2019, in order to be considered 

timely filed. 

(3) Signature requirement. The 

agreement that is filed within 30 days of 

the triggering event or by the due date 

specified in paragraph (c)(3)(v)(D)(2)(ii) 

of this section must be signed under 

penalties of perjury by the shareholder. 

(4) Terms of agreement. The 

agreement under this paragraph 

(c)(3)(v)(D) must be entitled ‘‘Consent 

Agreement Under Section 965(i)(4)(D)’’ 

and must contain the following 

information and representations— 

(i) A statement that the shareholder 

agrees to comply with all of the 

conditions and requirements of section 

965(h) and paragraph (b) of this section, 

as well as any other applicable 

requirements in the section 965 

regulations; 

(ii) The name, address, and taxpayer 

identification number of the 

shareholder; 

(iii) The amount of the section 965(i) 

net tax liability under section 965 

remaining unpaid with respect to which 

the section 965(h) election is made 

pursuant to section 965(i)(4)(D) and 

paragraph (c)(3)(v)(A) of this section, as 

determined by the shareholder, which 

amount is subject to adjustment by the 

Commissioner; and 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1909 

(iv) A representation that the 

shareholder is able to make the 

payments required under section 965(h) 

and paragraph (b) of this section with 

respect to the portion of the total net tax 

liability under section 965 remaining 

unpaid described in paragraph 

(c)(3)(v)(D)(4)(iii) of this section. 

(v) A statement as to whether the 

leverage ratio of the shareholder and all 

subsidiary members of its affiliated 

group immediately following the 

triggering event exceeds three to one; 

and 

(vi) Any additional information, 

representation, or certification required 

by the Commissioner in publications, 

forms, instructions, or other guidance. 

(5) Consent of Commissioner—(i) In 

general. If a shareholder files an 

agreement in accordance with the 

provisions of paragraph (c)(3)(v)(D) of 

this section, the shareholder will be 

considered to have obtained the consent 

of the Commissioner for purposes of 

section 965(i)(4)(D) and paragraph 

(c)(3)(v)(D)(1) of this section. However, 

if the Commissioner reviews the 

agreement and determines that 

additional information is necessary, the 

shareholder must provide such 

information upon request. 

(ii) Material misrepresentations and 

omissions. If the Commissioner 

determines that an agreement filed by a 

shareholder in accordance with the 

provisions of this paragraph (c)(3)(v)(D) 

contains a material misrepresentation or 

material omission, or if the shareholder 

does not provide the additional 

information requested under paragraph 

(c)(3)(v)(D)(5)(i) of this section within a 

reasonable timeframe communicated by 

the Commissioner to the shareholder, 

then the Commissioner may reject the 

agreement (effective as of the date of the 

related triggering event). 

(6) Leverage ratio. For purposes of 

paragraph (c)(3)(v)(D)(4)(v) of this 

section, and except as otherwise 

provided in publications, forms, 

instructions, or other guidance, the term 

leverage ratio means the ratio that the 

total indebtedness of the shareholder 

bears to the sum of its money and all 

other assets reduced (but not below 

zero) by such total indebtedness. For 

this purpose, the amount taken into 

account with respect to any asset is the 

adjusted basis thereof for purposes of 

determining gain, and the amount taken 

into account with respect to any 

indebtedness with original issue 

discount is its issue price plus the 

portion of the original issue discount 

previously accrued as determined under 

the rules of section 1272 (determined 

without regard to subsection (a)(7) or 

(b)(4) thereof). 

(4) Joint and several liability. If any 

shareholder of an S corporation makes 

a section 965(i) election, the S 

corporation is jointly and severally 

liable for the payment of the 

shareholder’s section 965(i) net tax 

liability with respect to the S 

corporation, as well as any penalties, 

additions to tax, or other additional 

amounts attributable to such net tax 

liability. 

(5) Extension of limitation on 

collection. If an S corporation 

shareholder makes a section 965(i) 

election with respect to its section 965(i) 

net tax liability with respect to an S 

corporation, any limitation on the time 

period for the collection of the net tax 

liability shall not begin before the date 

of the triggering event with respect to 

the section 965(i) net tax liability. 

(6) Annual reporting requirement—(i) 

In general. A shareholder that makes a 

section 965(i) election with respect to its 

section 965(i) net tax liability with 

respect to an S corporation is required 

to report the amount of its deferred net 

tax liability on its return of tax for the 

taxable year in which the election is 

made and on the return of tax for each 

subsequent taxable year until such net 

tax liability has been fully assessed. 

(ii) Failure to report. If a shareholder 

fails to report the amount of its deferred 

net tax liability as required with respect 

to any taxable year by the due date 

(taking into account extensions, if any) 

for the return of tax for that taxable year, 

five percent of such deferred net tax 

liability will be assessed as an addition 

to tax for such taxable year. 

(d) Section 965(m) election and 

special rule for real estate investment 

trusts—(1) In general. A real estate 

investment trust may elect under 

section 965(m) and this paragraph (d) to 

defer the inclusion in gross income (for 

purposes of the computation of real 

estate investment trust taxable income 

under section 857(b)) of its REIT section 

965 amounts and include them in 

income according to the schedule 

described in paragraph (d)(2) of this 

section. This election is revocable only 

by including in gross income (for 

purposes of the computation of real 

estate investment trust taxable income 

under section 857(b)) the full amount of 

the REIT section 965 amounts. 

(2) Inclusion schedule for section 

965(m) election. If a real estate 

investment trust makes the section 

965(m) election, the REIT section 965 

amounts will be included in the real 

estate investment trust’s gross income as 

follows— 

(i) Eight percent of the REIT section 

965 amounts in each taxable year in the 

five-taxable year period beginning with 

the taxable year the amount would 

otherwise be included; 

(ii) Fifteen percent of the REIT section 

965 amounts in the first year following 

the five year period described in 

paragraph (d)(2)(i) of this section; 

(iii) Twenty percent of the REIT 

section 965 amounts in the second year 

following the five year period described 

in paragraph (d)(2)(i) of this section; and 

(iv) Twenty-five percent of the REIT 

section 965 amounts in the third year 

following the five year period described 

in paragraph (d)(2)(i) of this section. 

(3) Manner of making election—(i) 

Eligibility. A real estate investment trust 

with section 965(a) inclusions may 

make the section 965(m) election. 

(ii) Timing. A section 965(m) election 

must be made no later than the due date 

(taking into account extensions, if any) 

for the return for the first year of the five 

year period described in paragraph 

(d)(2)(i) of this section. Relief is not 

available under § 301.9100–2 or 

§ 301.9100–3 to make a late election. 

(iii) Election statement. Except as 

otherwise provided in publications, 

forms, instructions, or other guidance, 

to make a section 965(m) election, a real 

estate investment trust must attach a 

statement, signed under penalties of 

perjury consistent with the rules for 

signatures applicable to the person’s 

return, to its return for the taxable year 

in which it would otherwise be required 

to include the REIT section 965 amounts 

in gross income. The statement must 

include the real estate investment trust’s 

name, taxpayer identification number, 

REIT section 965 amounts, and the 

anticipated amounts of each portion of 

the REIT section 965 amounts described 

under paragraph (d)(2) of this section, 

and the statement must be filed in the 

manner prescribed in publications, 

forms, instructions, or other guidance. 

The attachment of an unsigned copy of 

the election statement to the timely-filed 

return for the relevant taxable year 

satisfies the signature requirement of 

this paragraph (d)(3)(iii) if the real estate 

investment trust retains the original 

signed election statement in the manner 

specified by § 1.6001–1(e). 

(4) Coordination with section 965(h). 

A real estate investment trust that makes 

the section 965(m) election may not also 

make a section 965(h) election for any 

year with respect to which a section 

965(m) election is in effect. 

(5) Acceleration of inclusion. If a real 

estate investment trust makes a section 

965(m) election and subsequently there 

is a liquidation, sale, exchange, or other 

disposition of substantially all of the 

assets of the real estate investment trust 

(including in a title 11 or similar case), 

or a cessation of business by the real 

1910 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

estate investment trust, any amount not 

yet included in gross income (for 

purposes of the computation of real 

estate investment trust taxable income 

under section 857(b)) as a result of the 

section 965(m) election will be so 

included as of the day before the date 

of the event. The unpaid portion of any 

tax liability with respect to such 

inclusion will be due on the date of the 

event (or in the case of a title 11 or 

similar case, the day before the petition 

is filed). 

(6) Treatment of section 965(a) 

inclusions of a real estate investment 

trust. Regardless of whether a real estate 

investment trust has made a section 

965(m) election, and regardless of 

whether it is a United States 

shareholder of a deferred foreign income 

corporation, any section 965(a) 

inclusions of the real estate investment 

trust are not taken into account as gross 

income of the real estate investment 

trust for purposes of applying 

paragraphs (2) and (3) of section 856(c) 

for any taxable year for which the real 

estate investment trust takes into 

account a section 965(a) inclusion, 

including pursuant to paragraph (d)(2) 

of this section. 

(e) Section 965(n) election—(1) In 

general—(i) General rule. A person may 

elect to not take into account the 

amount described in paragraph (e)(1)(ii) 

of this section in determining its net 

operating loss under section 172 for the 

taxable year or in determining the 

amount of taxable income for such 

taxable year (computed without regard 

to the deduction allowable under 

section 172) that may be reduced by net 

operating loss carryovers or carrybacks 

to such taxable year under section 172. 

The election for each taxable year is 

irrevocable. 

(ii) Applicable amount for section 

965(n) election. If a person makes a 

section 965(n) election, the amount 

referred to in paragraph (e)(1)(i) of this 

section is the sum of— 

(A) The person’s section 965(a) 

inclusions for the taxable year reduced 

by the person’s section 965(c) 

deductions for the taxable year, and 

(B) In the case of a domestic 

corporation, the taxes deemed paid 

under section 960(a)(1) for the taxable 

year with respect to the person’s section 

965(a) inclusions that are treated as 

dividends under section 78. 

(iii) Scope of section 965(n) election. 

If a person makes a section 965(n) 

election, the election applies to both net 

operating losses for the taxable year for 

which the election is made and the net 

operating loss carryovers or carrybacks 

to such taxable year, each in their 

entirety. Any section 965(n) election 

made by the agent (within the meaning 

of § 1.1502–77) of a consolidated group 

applies to all net operating losses 

available to the consolidated group, 

including all components of the 

consolidated net operating loss 

deduction (as defined in § 1.1502– 

21(a)). 

(iv) [Reserved] 

(2) Manner of making election—(i) 

Eligibility. A person with a section 

965(a) inclusion may make the section 

965(n) election. 

(ii) Timing. A section 965(n) election 

must be made no later than the due date 

(taking into account extensions, if any) 

for the person’s return for the taxable 

year to which the election applies. 

Relief is not available under § 301.9100– 

2 or § 301.9100–3 to make a late 

election. 

(iii) Election statement. Except as 

otherwise provided in publications, 

forms, instructions, or other guidance, 

to make a section 965(n) election, a 

person must attach a statement, signed 

under penalties of perjury consistent 

with the rules for signatures applicable 

to the person’s return, to its return for 

the taxable year to which the election 

applies. The statement must include the 

person’s name, taxpayer identification 

number, the amounts described in 

section 965(n)(2)(A) and paragraph 

(e)(1)(ii)(A) of this section and section 

965(n)(2)(B) and paragraph (e)(1)(ii)(B) 

of this section, and the sum thereof, and 

the statement must be filed in the 

manner prescribed in publications, 

forms, instructions, or other guidance. 

The attachment of an unsigned copy of 

the election statement to the timely-filed 

return for the relevant taxable year 

satisfies the signature requirement of 

this paragraph (e)(2)(iii) if the person 

making the election retains the original 

signed election statement in the manner 

specified by § 1.6001–1(e). 

(f) Election to use alternative method 

for calculating post-1986 earnings and 

profits—(1) Effect of election for 

specified foreign corporations that do 

not have a 52–53-week taxable year. If 

an election is made under this 

paragraph (f) with respect to a specified 

foreign corporation that does not have a 

52–53-week taxable year, the amount of 

the post-1986 earnings and profits 

(including a deficit) as of the E&P 

measurement date on November 2, 

2017, is determined under paragraph 

(f)(3) of this section. The election 

described in this paragraph (f) is 

irrevocable. A specified foreign 

corporation that does not have a 52–53- 

week taxable year may not use the 

alternative method of determination in 

paragraph (f)(3) of this section for 

purposes of determining its post-1986 

earnings and profits on the E&P 

measurement date on December 31, 

2017. 

(2) Effect of election for specified 

foreign corporations that have a 52–53- 

week taxable year. If an election is made 

under this paragraph (f) with respect to 

a specified foreign corporation that has 

a 52–53-week taxable year, the amount 

of the post-1986 earnings and profits 

(including a deficit) as of both E&P 

measurement dates is determined under 

paragraph (f)(3) of this section. The 

election described in this paragraph (f) 

is irrevocable. 

(3) Computation of post-1986 earnings 

and profits using alternative method. 

With respect to an E&P measurement 

date, the post-1986 earnings and profits 

of a specified foreign corporation for 

which an election is properly made 

equals the sum of— 

(i) The specified foreign corporation’s 

post-1986 earnings and profits 

(including a deficit) determined as of 

the notional measurement date, as if it 

were an E&P measurement date, plus 

(ii) The specified foreign corporation’s 

annualized earnings and profits amount 

with respect to the notional 

measurement date. 

(4) Definitions—(i) 52–53-week 

taxable year. The term 52–53-week 

taxable year means a taxable year 

described in § 1.441–2(a)(1). 

(ii) Annualized earnings and profits 

amount. The term annualized earnings 

and profits amount means, with respect 

to a specified foreign corporation, an 

E&P measurement date, and a notional 

measurement date, the amount equal to 

the product of the number of days 

between the notional measurement date 

and the E&P measurement date (not 

including the former, but including the 

latter) multiplied by the daily earnings 

amount of the specified foreign 

corporation. The annualized earnings 

and profits amount is expressed as a 

negative number if the E&P 

measurement date precedes the notional 

measurement date. 

(iii) Daily earnings amount. The term 

daily earnings amount means, with 

respect to a specified foreign 

corporation and a notional measurement 

date, the post-1986 earnings and profits 

(including a deficit) of the specified 

foreign corporation determined as of the 

close of the notional measurement date 

that were earned (or incurred) during 

the specified foreign corporation’s 

taxable year that includes the notional 

measurement date, divided by the 

number of days that have elapsed in 

such taxable year as of the close of the 

notional measurement date. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1911 

(iv) Notional measurement date. The 

term notional measurement date 

means— 

(A) With respect to an E&P 

measurement date of a specified foreign 

corporation with a 52–53-week taxable 

year, the closest end of a fiscal month 

to such E&P measurement date, and 

(B) With respect to the E&P 

measurement date on November 2, 

2017, of all specified foreign 

corporations not described in paragraph 

(f)(4)(iv)(A) of this section, October 31, 

2017. 

(5) Manner of making election—(i) 

Eligibility. An election with respect to a 

specified foreign corporation to use the 

alternative method of calculating post1986 earnings and profits as of an E&P 

measurement date pursuant to this 

paragraph (f) must be made on behalf of 

the specified foreign corporation by a 

controlling domestic shareholder (as 

defined in § 1.964–1(c)(5)) pursuant to 

the rules of § 1.964–1(c)(3), except that 

the controlling domestic shareholder is 

not required to file the statement 

described in § 1.964–1(c)(3)(ii). 

(ii) Timing. An election under this 

paragraph (f) must be made no later than 

the due date (taking into account 

extensions, if any) for the person’s 

return for the first taxable year in which 

the person has a section 965(a) 

inclusion amount with respect to the 

specified foreign corporation or in 

which the person takes into account a 

specified E&P deficit with respect to the 

specified corporation for purposes of 

computing a section 965(a) inclusion 

amount with respect to another 

specified foreign corporation. Relief is 

not available under § 301.9100–2 or 

§ 301.9100–3 to make a late election. 

(iii) Election statement. Except as 

otherwise provided in publications, 

forms, instructions, or other guidance, 

to make an election under this 

paragraph (f), a person must attach a 

statement, signed under penalties of 

perjury consistent with the rules for 

signatures applicable to the person’s 

return, to the person’s return for the 

taxable year described in paragraph 

(f)(5)(ii) of this section. The statement 

must include the person’s name, 

taxpayer identification number, and the 

name and taxpayer identification 

number, if any, of each of the specified 

foreign corporations with respect to 

which the election is made, and the 

statement must be filed in the manner 

prescribed in instructions or other 

guidance. The attachment of an 

unsigned copy of the election statement 

to the timely-filed return for the relevant 

taxable year satisfies the signature 

requirement of this paragraph (f)(5)(iii) 

if the person making the election retains 

the original signed election statement in 

the manner specified by § 1.6001–1(e). 

(6) Examples. The following examples 

illustrate the application of this 

paragraph (f). 

Example 1. (i)(A) Facts. FS, a foreign 

corporation, has a calendar year taxable year, 

and as of October 31, 2017, FS has post-1986 

earnings and profits of 10,000u, 3,040u of 

which were earned during the taxable year 

that includes October 31, 2017. An election 

is properly made under paragraph (f)(5) of 

this section with respect to FS, allowing FS 

to determine its post-1986 earnings and 

profits under the alternative method with 

respect to its E&P measurement date on 

November 2, 2017. 

(B) Analysis. As of the close of October 31, 

2017, the notional measurement date with 

respect to the E&P measurement date on 

November 2, 2017, 304 days have elapsed in 

the taxable year of FS that includes October 

31, 2017. Therefore, FS’s daily earnings 

amount is 10u (3,040u divided by 304), and 

FS’s annualized earnings and profits amount 

is 20u (10u multiplied by 2 (the number of 

days between the notional measurement date 

on October 31, 2017, and the E&P 

measurement date on November 2, 2017)). 

Accordingly, FS’s post-1986 earnings and 

profits as of November 2, 2017, are 10,020u 

(its post-1986 earnings and profits as of 

October 31, 2017 (10,000u), plus its 

annualized earnings and profits amount 

(20u)). 

Example 2. (ii)(A) Facts. The facts are the 

same as in paragraph (f)(6)(i)(A) of this 

section (the facts in Example 1), except that 

a deficit of 3,040u was incurred during the 

taxable year that includes October 31, 2017. 

(B) Analysis. The analysis is the same as 

in paragraph (f)(6)(i)(B) of this section (the 

analysis in Example 1), except that FS’s daily 

earnings amount is (10u) ((3,040u) divided by 

304), and FS’s annualized earnings and 

profits amount is (20u) ((10u) multiplied by 

2 (the number of days between the notional 

measurement date on October 31, 2017, and 

the E&P measurement date on November 2, 

2017)). Accordingly, FS’s post-1986 earnings 

and profits as of November 2, 2017, are 

9,980u (its post-1986 earnings and profits as 

of October 31, 2017 (10,000u), plus its 

annualized earnings and profits amount 

((20u))). 

(g) Definitions. This paragraph (g) 

provides definitions that apply for 

purposes of this section. 

(1) Deferred net tax liability. The term 

deferred net tax liability means, with 

respect to any taxable year of a person, 

the amount of the section 965(i) net tax 

liability the payment of which has been 

deferred under section 965(i) and 

paragraph (c) of this section. 

(2) REIT section 965 amounts. The 

term REIT section 965 amounts means, 

with respect to a real estate investment 

trust and a taxable year of the real estate 

investment trust, the aggregate amount 

of section 965(a) inclusions and section 

965(c) deductions that would (but for 

section 965(m)(1)(B) and paragraph (d) 

of this section) be taken into account in 

determining the real estate investment 

trust’s income for the taxable year. 

(3) Section 965(h) election. The term 

section 965(h) election means the 

election described in section 965(h)(1) 

and paragraph (b)(1) of this section. 

(4) Section 965(h) net tax liability. 

The term section 965(h) net tax liability 

means, with respect to a person that has 

made a section 965(h) election, the total 

net tax liability under section 965 

reduced by the aggregate amount of the 

person’s section 965(i) net tax liabilities, 

if any, with respect to which section 

965(i) elections are effective. 

(5) Section 965(i) election. The term 

section 965(i) election means the 

election described in section 965(i)(1) 

and paragraph (c)(1) of this section. 

(6) Section 965(i) net tax liability. The 

term section 965(i) net tax liability 

means, with respect to an S corporation 

and a shareholder of the S corporation, 

in the case in which a section 965(i) 

election is made, the amount 

determined pursuant to paragraph 

(g)(10)(i) of this section by adding before 

the word ‘‘over’’ in (g)(10)(i)(A) of this 

section ‘‘determined as if the only 

section 965(a) inclusions included in 

income by the person are domestic passthrough entity shares of section 965(a) 

inclusions by the S corporation with 

respect to deferred foreign income 

corporations of which the S corporation 

is a United States shareholder.’’ 

(7) Section 965(m) election. The term 

section 965(m) election means the 

election described in section 

965(m)(1)(B) and paragraph (d)(1) of this 

section. 

(8) Section 965(n) election. The term 

section 965(n) election means the 

election described in section 965(n)(1) 

and paragraph (e)(1)(i) of this section. 

(9) Specified individual. The term 

specified individual means, with respect 

to a taxable year, a person described in 

§ 1.6081–5(a)(5) or (6) who receives an 

extension of time to file and pay under 

§ 1.6081–5(a) for the taxable year. 

(10) Total net tax liability under 

section 965—(i) General rule. The term 

total net tax liability under section 965 

means, with respect to a person, the 

excess (if any) of— 

(A) The person’s net income tax for 

the taxable year in which the person 

includes a section 965(a) inclusion in 

income, over— 

(B) The person’s net income tax for 

the taxable year determined— 

(1) Without regard to section 965, and 

(2) Without regard to any income, 

deduction, or credit properly 

attributable to a dividend received 

(directly or through a chain of 

ownership described in section 958(a)) 

1912 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

by the person (or, in the case of a 

domestic pass-through owner, by the 

person’s domestic pass-through entity) 

from, or an inclusion under sections 

951(a)(1)(B) and 956 with respect to, a 

deferred foreign income corporation and 

paid during, or included with respect to, 

the deferred foreign income 

corporation’s inclusion year. 

(ii) Net income tax. For purposes of 

this paragraph (g)(10), the term net 

income tax means the regular tax 

liability (as defined in section 26(b)) 

reduced by the credits allowed under 

subparts A, B, and D of part IV of 

subchapter A of chapter 1 of subtitle A 

of the Internal Revenue Code. 

(iii) Foreign tax credits. The foreign 

tax credit disregarded in determining 

net income tax determined under 

paragraph (g)(10)(i)(B) of this section 

includes the credit for foreign income 

taxes deemed paid with respect to 

section 965(a) inclusions or foreign 

income taxes deemed paid with respect 

to a dividend, including a distribution 

that would have been treated as a 

dividend in the absence of section 965. 

The foreign tax credit disregarded under 

paragraph (g)(10)(i)(B) of this section 

also includes the credit for foreign 

income taxes imposed on distributions 

of section 965(a) previously taxed 

earnings and profits or 965(b) 

previously taxed earnings and profits 

made in the taxable year in which the 

person includes a section 965(a) 

inclusion in income. 

§ 1.965–8 Affiliated groups (including 

consolidated groups). 

(a) Scope. This section provides rules 

for applying section 965 and the section 

965 regulations to members of an 

affiliated group (as defined in section 

1504(a)), including members of a 

consolidated group (as defined in 

§ 1.1502–1(h)). Paragraph (b) of this 

section provides guidance regarding the 

application of section 965(b)(5) to 

determine the section 965(a) inclusion 

amounts of a member of an affiliated 

group. Paragraph (c) of this section 

provides guidance for designating the 

source of aggregate unused E&P deficits. 

Paragraph (d) provides rules regarding 

earning and profits and stock basis 

adjustments. Paragraph (e) of this 

section provides rules that treat 

members of a consolidated group as a 

single person for certain purposes. 

Paragraph (f) of this section provides 

definitions that apply for purposes of 

this section. Paragraph (g) of this section 

provides examples illustrating the 

application of this section. 

(b) Reduction of E&P net surplus 

shareholder’s pro rata share of the 

section 965(a) earnings amount of a 

deferred foreign income corporation by 

the allocable share of the applicable 

share of the aggregate unused E&P 

deficit—(1) In general. This paragraph 

(b) applies after the application of 

§ 1.965–1(b)(2) for purposes of 

determining the section 965(a) inclusion 

amount with respect to a deferred 

foreign income corporation of a section 

958(a) U.S. shareholder that is both an 

E&P net surplus shareholder and a 

member of an affiliated group in which 

not all members are members of the 

same consolidated group. If this 

paragraph (b) applies, the U.S. dollar 

amount of the section 958(a) U.S. 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

deferred foreign income corporation is 

further reduced (but not below zero) by 

the deferred foreign income 

corporation’s allocable share of the 

section 958(a) U.S. shareholder’s 

applicable share of the affiliated group’s 

aggregate unused E&P deficit. 

(2) Consolidated group as part of an 

affiliated group. If some, but not all, 

members of an affiliated group are 

members of a consolidated group, then 

the consolidated group is treated as a 

single member of the affiliated group for 

purposes of § 1.965–1(b)(2) and 

paragraph (b)(1) of this section. 

(c) Designation of portion of excess 

aggregate foreign E&P deficit taken into 

account—(1) In general. This paragraph 

(c) provides rules for designating the 

source of an aggregate unused E&P 

deficit of an affiliated group that is not 

also a consolidated group taken into 

account under section 965(b)(5) and 

paragraph (b) of this section if the 

amount described in paragraph 

(f)(1)(i)(A) of this section with respect to 

the affiliated group exceeds the amount 

described in paragraph (f)(1)(i)(B) of this 

section with respect to the affiliated 

group. If this paragraph (c)(1) applies, 

each member of the affiliated group that 

is an E&P net deficit shareholder must 

designate by maintaining in its books 

and records a statement (identical to the 

statement maintained by all other such 

members) setting forth the portion of the 

excess aggregate foreign E&P deficit of 

the E&P net deficit shareholder taken 

into account under section 965(b)(5) and 

paragraph (b) of this section. See 

§ 1.965–2(d)(2)(ii)(B) for a rule for 

designating the portion of a section 

958(a) U.S. shareholder’s pro rata share 

of a specified E&P deficit of an E&P 

deficit foreign corporation taken into 

account under section 965(b), § 1.965– 

1(b)(2), and paragraph (b) of this section, 

as applicable. 

(2) Consolidated group as part of an 

affiliated group. If some, but not all, 

members of an affiliated group are 

properly treated as members of a 

consolidated group, then the 

consolidated group is treated as a single 

member of the affiliated group for 

purposes of applying paragraph (c)(1) of 

this section. 

(d) Adjustments to earning and profits 

and stock basis. 

(1) [Reserved] 

(2) Consolidated groups. See 

§ 1.1502–33(d)(1) for adjustments to 

members’ earnings and profits and 

§ 1.1502–32(b)(3) for adjustments to 

members’ basis. 

(e) Treatment of a consolidated group 

as a single section 958(a) U.S. 

shareholder or a single person—(1) In 

general. All members of a consolidated 

group that are section 958(a) U.S. 

shareholders of a specified foreign 

corporation are treated as a single 

section 958(a) U.S. shareholder for 

purposes of section 965(b), § 1.965– 

1(b)(2), and § 1.965–3. Furthermore, all 

members of a consolidated group are 

treated as a single person for purposes 

of paragraphs (h), (k), and (n) of section 

965 and § 1.965–7. Thus, for example, 

any election governed by section 965(h) 

and § 1.965–7(b) must be made by the 

agent (within the meaning of § 1.1502– 

77) of the group as a single election on 

behalf of all members of the 

consolidated group. Similarly, the 

determination of whether the transfer of 

assets by one member to a non-member 

of the consolidated group would 

constitute an acceleration event under 

section § 1.965–7(b)(3)(ii)(B) takes into 

account all of the assets of the 

consolidated group, which for purposes 

of this determination, includes all of the 

assets of each consolidated group 

member. In analyzing issues relating to 

the transfer of assets of a consolidated 

group, appropriate adjustments are 

made to prevent the duplication of 

assets or asset value. 

(2) Limitation. Paragraph (e)(1) of this 

section does not apply to treat all 

members of a consolidated group as a 

single section 958(a) U.S. shareholder or 

a single person, as applicable, for 

purposes of determining the amount of 

any member’s inclusion under section 

951 (including a section 965(a) 

inclusion), the foreign income taxes 

deemed paid with respect to a section 

965(a) inclusion (see sections 960 and 

902), or any purpose other than those 

specifically listed in paragraph (e)(1) of 

this section or another provision of the 

section 965 regulations. 

(3) Determination of section 965(c) 

deduction amount. For purposes of 

determining the section 965(c) 

deduction amount of any section 958(a) 

U.S. shareholder that is a member of a 

consolidated group, the aggregate 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1913 

foreign cash position of the section 

958(a) U.S. shareholder is equal to the 

aggregate section 965(a) inclusion 

amount of the section 958(a) U.S. 

shareholder multiplied by the group 

cash ratio of the consolidated group. 

(f) Definitions. This paragraph (f) 

provides definitions that apply for 

purposes of applying the section 965 

regulations to members of an affiliated 

group, including members of a 

consolidated group. 

(1) Aggregate unused E&P deficit—(i) 

General rule. The term aggregate unused 

E&P deficit means, with respect to an 

affiliated group, the lesser of— 

(A) The sum of the excess aggregate 

foreign E&P deficit with respect to each 

E&P net deficit shareholder that is a 

member of the affiliated group, or 

(B) The amount determined under 

paragraph (f)(3)(ii) of this section. 

(ii) Reduction with respect to E&P net 

deficit shareholders that are not wholly 

owned by the affiliated group. If the 

group ownership percentage of an E&P 

net deficit shareholder is less than 100 

percent, the amount of the excess 

aggregate foreign E&P deficit with 

respect to the E&P net deficit 

shareholder that is taken into account 

under paragraph (f)(1)(i) of this section 

is the product of the group ownership 

percentage multiplied by the excess 

aggregate foreign E&P deficit. 

(2) Allocable share. The term 

allocable share means, with respect to a 

deferred foreign income corporation and 

an E&P net surplus shareholder’s 

applicable share of an aggregate unused 

E&P deficit of an affiliated group, the 

product of the E&P net surplus 

shareholder’s applicable share of the 

affiliated group’s aggregate unused E&P 

deficit and the ratio described in 

§ 1.965–1(f)(11) with respect to the 

deferred foreign income corporation. 

(3) Applicable share. The term 

applicable share means, with respect to 

an E&P net surplus shareholder and an 

aggregate unused E&P deficit of an 

affiliated group, the amount that bears 

the same proportion to the affiliated 

group’s aggregate unused E&P deficit 

as— 

(i) The product of— 

(A) The E&P net surplus shareholder’s 

group ownership percentage, multiplied 

by 

(B) The amount that would (but for 

section 965(b)(5) and paragraph (b) of 

this section) constitute the E&P net 

surplus shareholder’s aggregate section 

965(a) inclusion amount, bears to 

(ii) The aggregate amount determined 

under paragraph (f)(3)(i) of this section 

with respect to all E&P net surplus 

shareholders that are members of the 

group. 

(4) Consolidated group aggregate 

foreign cash position. The term 

consolidated group aggregate foreign 

cash position means, with respect to a 

consolidated group, the aggregate 

foreign cash position (as defined in 

§ 1.965–1(f)(8)(i)) determined by treating 

each member of the consolidated group 

that is a section 958(a) U.S. shareholder 

as a single section 958(a) U.S. 

shareholder pursuant to paragraph (e)(1) 

of this section. 

(5) E&P net deficit shareholder. The 

term E&P net deficit shareholder means 

a section 958(a) U.S. shareholder that 

has an excess aggregate foreign E&P 

deficit. 

(6) E&P net surplus shareholder. The 

term E&P net surplus shareholder 

means a section 958(a) U.S. shareholder 

that would (but for section 965(b)(5) and 

paragraph (b) of this section) have an 

aggregate section 965(a) inclusion 

amount greater than zero. 

(7) Excess aggregate foreign E&P 

deficit. The term excess aggregate 

foreign E&P deficit means, with respect 

to a section 958(a) U.S. shareholder, the 

amount, if any, by which the amount 

described in § 1.965–1(f)(9)(i) with 

respect to the section 958(a) U.S. 

shareholder exceeds the amount 

described in § 1.965–1(f)(9)(ii) with 

respect to the section 958(a) U.S. 

shareholder. 

(8) Group cash ratio. The term group 

cash ratio means, with respect to a 

consolidated group, the ratio of— 

(i) The consolidated group aggregate 

foreign cash position, to 

(ii) The sum of the aggregate section 

965(a) inclusion amounts of all 

members of the consolidated group. 

(9) Group ownership percentage. The 

term group ownership percentage 

means, with respect to a section 958(a) 

U.S. shareholder that is a member of an 

affiliated group, the percentage of the 

value of the stock of the United States 

shareholder which is held by other 

includible corporations in the affiliated 

group. Notwithstanding the preceding 

sentence, the group ownership 

percentage of the common parent of the 

affiliated group is 100 percent. Any term 

used in this paragraph (f)(9) that is also 

used in section 1504 has the same 

meaning as when used in such section. 

Additionally, if the term is used in the 

context of a rule for which all members 

of a consolidated group are treated as a 

single section 958(a) U.S. shareholder 

under paragraph (e)(1) of this section, 

then the group ownership percentage is 

determined solely with respect to the 

value of the stock of the common parent 

of the consolidated group held by other 

includible corporations that are not 

members of the consolidated group. 

(g) Examples. The following examples 

illustrate the application of this section. 

Example 1. (1) Application of affiliated 

group rule. (i) Facts. (A) In general. USP 

owns all of the stock of USS1, USS2, and 

USS3. Each of USP, USS1, USS2, and USS3 

is a domestic corporation and is a member of 

an affiliated group of which USP is the 

common parent (the ‘‘USP Group’’). The USP 

Group has not elected to file a consolidated 

federal income tax return. USS1 owns all of 

the stock of CFC1 and CFC2, USS2 owns all 

of the stock of CFC3, and USS3 owns all of 

the stock of CFC4. Each of CFC1, CFC2, 

CFC3, and CFC4 is a controlled foreign 

corporation within the meaning of section 

957(a), and, therefore, each is a specified 

foreign corporation under section 965(e) and 

§ 1.965–1(f)(45). Each of USP, USS1, USS2, 

USS3, CFC1, CFC2, CFC3, and CFC4 has the 

calendar year as its taxable year. 

(B) Facts relating to section 965. CFC1 and 

CFC3 are deferred foreign income 

corporations with section 965(a) earnings 

amounts of $600x and $300x, respectively. 

CFC1 and CFC3 have cash positions of $0x 

and $50x, respectively, on each of their cash 

measurement dates. CFC2 and CFC4 are E&P 

deficit foreign corporations with specified 

E&P deficits of $400x and $100x, 

respectively. CFC2 and CFC4 have cash 

positions of $100x and $50x, respectively, on 

each of their cash measurement dates. The 

cash positions all consist solely of cash. 

CFC1, CFC2, CFC3, and CFC4 all use the U.S. 

dollar as their functional currency. 

(ii) Analysis. (A) Section 965(a) inclusion 

amounts before application of section 

965(b)(5). USS1 is a section 958(a) U.S. 

shareholder with respect to CFC1 and CFC2; 

USS2 is a section 958(a) U.S. shareholder 

with respect to CFC3; and USS3 is a section 

958(a) U.S. shareholder with respect to CFC4. 

USS1’s pro rata share of CFC1’s section 

965(a) earnings amount is $600x. Under 

section 965(b)(3)(A) and § 1.965–1(f)(9), 

USS1’s aggregate foreign E&P deficit is 

$400x, the lesser of the aggregate of USS1’s 

pro rata share of the specified E&P deficit of 

each E&P deficit foreign corporation ($400x) 

and the amount described in § 1.965– 

1(f)(9)(ii) with respect to USS1 ($600x). 

Under section 965(b) and § 1.965–1(b)(2), in 

determining its section 965(a) inclusion 

amount with respect to CFC1, USS1 reduces 

its pro rata share of the U.S. dollar amount 

of section 965(a) earnings amount of CFC1 by 

CFC1’s allocable share of USS1’s aggregate 

foreign E&P deficit. CFC1’s allocable share of 

USS1’s aggregate foreign E&P deficit is 

$400x, which is the product of USS1’s 

aggregate foreign E&P deficit ($400x) and 1, 

which is the ratio determined by dividing 

USS1’s pro rata share of the section 965(a) 

earnings amount of CFC1 ($600x), by the 

amount described in § 1.965–1(f)(9)(ii) with 

respect to USS1 ($600x). Accordingly, under 

section 965(b) and § 1.965–1(b)(2) (before 

applying section 965(b)(5) and paragraph (b) 

of this section), USS1’s section 965(a) 

inclusion amount with respect to CFC1 

would be $200x (USS1’s pro rata share of the 

section 965(a) earnings amount of CFC1 of 

$600x reduced by CFC1’s allocable share of 

USS1’s aggregate foreign E&P deficit of 

$400x). Under section 965(b) and § 1.965– 

1914 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

1(b)(2) (before applying section 965(b)(5) and 

paragraph (b) of this section), USS2’s section 

965(a) inclusion amount with respect to 

CFC3 would be $300x (USS2’s pro rata share 

of the section 965(a) earnings amount of 

CFC3). 

(B) Application of section 965(b)(5)—(1) 

Determination of E&P net surplus 

shareholders and E&P net deficit 

shareholders. USS1 is an E&P net surplus 

shareholder because it would have an 

aggregate section 965(a) inclusion amount of 

$200x but for the application of section 

965(b)(5) and paragraph (b) of this section. 

USS2 is also an E&P net surplus shareholder 

because it would have an aggregate section 

965(a) inclusion amount of $300x but for the 

application of section 965(b)(5) and 

paragraph (b) of this section. USS3 is an E&P 

net deficit shareholder because it has an 

excess aggregate foreign E&P deficit of $100x. 

(2) Determining section 965(a) inclusion 

amounts under section 965(b)(5). Under 

section 965(b) and paragraph (b) of this 

section, for purposes of determining the 

section 965(a) inclusion amount of a section 

958(a) U.S. shareholder with respect to a 

deferred foreign income corporation, if, after 

applying § 1.965–1(b)(2), the section 958(a) 

U.S. shareholder is an E&P net surplus 

shareholder, then the U.S. dollar amount of 

the section 958(a) U.S. shareholder’s pro rata 

share of the section 965(a) earnings amount 

of the deferred foreign income corporation is 

further reduced (but not below zero) by the 

deferred foreign income corporation’s 

allocable share of the section 958(a) U.S. 

shareholder’s applicable share of the 

affiliated group’s aggregate unused E&P 

deficit. USS3 is the only E&P net deficit 

shareholder in the USP Group, and, 

therefore, the aggregate unused E&P deficit of 

the USP Group is equal to USS3’s excess 

aggregate foreign E&P deficit ($100x). The 

applicable share of the USP Group’s 

aggregate unused E&P deficit of each of USS1 

and USS2, respectively, is an amount that 

bears the same proportion to the USP Group’s 

aggregate unused E&P deficit as the product 

of the group ownership percentage of USS1 

and USS2, respectively, multiplied by the 

amount that would (but for section 965(b)(5) 

and paragraph (b) of this section) constitute 

the aggregate section 965(a) inclusion amount 

of USS1 and USS2, respectively, bears to the 

aggregate of such amounts with respect to 

both USS1 and USS2. Therefore, USS1’s 

applicable share of the USP Group’s 

aggregate unused E&P deficit is $40 ($100x × 

($200x/($200x + $300x))) and USS2’s 

applicable share of the USP Group’s 

aggregate unused E&P deficit is $60x ($100x 

× ($300x/($200x + $300x))). Because USS1 is 

a section 958(a) U.S. shareholder with 

respect to only one deferred foreign income 

corporation, the entire $60x of USS1’s 

applicable share of the USP Group’s 

aggregate unused E&P deficit is treated as 

CFC1’s allocable share of USS1’s applicable 

share of the USP Group’s aggregate unused 

E&P deficit, and thus USS1’s section 965(a) 

inclusion amount with respect to CFC1 is 

reduced to $160x ($200x¥$40x). Because 

USS2 is a section 958(a) U.S. shareholder 

with respect to only one deferred foreign 

income corporation, the entire $60x of 

USS2’s applicable share of the USP Group’s 

aggregate unused E&P deficit is treated as 

CFC3’s allocable share of USS2’s applicable 

share of the USP Group’s aggregate unused 

E&P deficit, and thus USS2’s section 965(a) 

inclusion amount with respect to CFC3 is 

reduced to $240x ($300x¥$60x). 

(C) Aggregate foreign cash position. Under 

section 965(c) and § 1.965–1(c), a section 

958(a) U.S. shareholder that includes a 

section 965(a) inclusion amount in income is 

allowed a deduction equal to the section 

965(c) deduction amount. The section 965(c) 

deduction amount is computed by taking into 

account the aggregate foreign cash position of 

the section 958(a) U.S. shareholder. Under 

§ 1.965–1(f)(8)(i), the aggregate foreign cash 

position of USS1 is $100x, and the aggregate 

foreign cash position of USS2 is $50x. 

(D) Section 965(c) deduction amount. The 

section 965(c) deduction amount of USS1 is 

$102x, which is equal to (i) USS1’s 8 percent 

rate equivalent percentage (77.1428571%) of 

its 8 percent rate amount for USS1’s 2017 

year ($60x ($160x¥$100x)), plus USS1’s 15.5 

percent rate equivalent percentage 

(55.7142857%) of its 15.5 percent rate 

amount for USS1’s 2017 year ($100x). The 

section 965(c) deduction amount of USS2 is 

$174.43x, which is equal to (i) USS2’s 8 

percent rate equivalent percentage 

(77.1428571%) of its 8 percent rate amount 

for USS2’s 2017 year ($190x ($240x¥$50x)), 

plus USS2’s 15.5 percent rate equivalent 

percentage (55.7142857%) of its 15.5 percent 

rate amount for USS2’s 2017 year ($50x). 

Because USS3 has no section 965(a) 

inclusion amount, it has no section 965(c) 

deduction amount and therefore is not 

allowed a section 965(c) deduction. 

Example 2. (2) Application to members of 

a consolidated group. (i) Facts. The facts are 

the same as in paragraph (g)(1)(i) of this 

section (the facts in Example 1), except that 

the USP Group has elected to file a 

consolidated return. 

(ii) Analysis—(A) Section 965(a) inclusion 

amount—(1) Single section 958(a) U.S. 

shareholder treatment. Because each of 

USS1, USS2, and USS3 is a section 958(a) 

U.S. shareholder of a specified foreign 

corporation and is a member of a 

consolidated group, paragraph (e)(1) of this 

section applies to treat USS1, USS2, and 

USS3 as a single section 958(a) U.S. 

shareholder for purposes of section 965(b) 

and § 1.965–1(b)(2). 

(2) Determination of inclusion amount. The 

single section 958(a) U.S. shareholder 

composed of USS1, USS2, and USS3 is a 

section 958(a) U.S. shareholder with respect 

to CFC1, CFC2, CFC3, and CFC4. Under 

§ 1.965–1(b)(2), in determining USS1’s 

section 965(a) inclusion amount, the single 

section 958(a) U.S. shareholder decreases its 

pro rata share of the U.S. dollar amount of 

the section 965(a) earnings amount of CFC1 

by CFC1’s allocable share of the aggregate 

foreign E&P deficit of the single section 

958(a) U.S. shareholder. CFC1’s allocable 

share of the aggregate foreign E&P deficit is 

$333.33x, which is the product of the 

aggregate foreign E&P deficit of the single 

section 958(a) U.S. shareholder ($500x 

($400x + $100x)) and .67, which is the ratio 

determined by dividing its pro rata share of 

the section 965(a) earnings amount of CFC1 

($600x) by the amount described in § 1.965– 

1(f)(9)(ii) with respect to the single section 

958(a) U.S. shareholder ($900x ($600x + 

$300x)). Therefore, USS1’s section 965(a) 

inclusion amount with respect to CFC1 is 

$266.67 (its pro rata share of the section 

965(a) earnings amount of CFC1 ($600) less 

CFC1’s allocable share of the aggregate 

foreign E&P deficit of the single section 

958(a) U.S. shareholder ($333.33x)). 

Similarly, under § 1.965–1(b)(2), in 

determining the section 965(a) inclusion 

amount of USS2, the single section 958(a) 

U.S. shareholder decreases its pro rata share 

of the U.S. dollar amount of the section 

965(a) earnings amount of CFC3 by CFC3’s 

allocable share of the aggregate foreign E&P 

deficit of the single section 958(a) U.S. 

shareholder. CFC3’s allocable share of the 

aggregate foreign E&P deficit is $166.67x, 

which is the product of the aggregate foreign 

E&P deficit of the single section 958(a) U.S. 

shareholder ($500x) and .33, which is the 

ratio determined by dividing its pro rata 

share of the section 965(a) earnings amount 

of CFC3 ($300x) by the amount described in 

§ 1.965–1(f)(9)(ii) with respect to the single 

section 958(a) U.S. shareholder ($900x 

($600x + $300x)). Therefore, USS2’s section 

965(a) inclusion amount with respect to 

CFC3 is $133.33x (its pro rata share of the 

section 965(a) earnings amount of CFC3 

($300x) less CFC3’s allocable share of the 

aggregate foreign E&P deficit of the single 

section 958(a) U.S. shareholder ($166.67x)). 

(B) Consolidated group aggregate foreign 

cash position. Because USS1 and USS2 are 

members of a consolidated group, the 

aggregate foreign cash position of each of 

USS1 and USS2 is determined under 

paragraph (e)(3) of this section. Under 

paragraph (e)(3) of this section, the aggregate 

foreign cash position of each of USS1 and 

USS2 is equal to the aggregate section 965(a) 

inclusion amount of USS1 and USS2, 

respectively, multiplied by the group cash 

ratio of the USP Group, as determined 

pursuant to paragraph (f)(8) of this section. 

The group cash ratio of the USP Group is .50, 

which is the ratio of the USP Group’s 

consolidated group aggregate foreign cash 

position ($200x ($50x + $100x + $50x)) and 

the sum of the aggregate section 965(a) 

inclusion amounts of all members of the USP 

Group ($400x ($266.67x + $133.33x)). 

Therefore, under paragraph (e)(3) of this 

section, the aggregate foreign cash positions 

of USS1 and USS2 are, respectively, 

$133.34x ($266.67x × ($200x/$400x)) and 

$66.67 ($133.33x × ($200x/400x)). 

(C) Section 965(c) deduction amount. The 

section 965(c) deduction amount of USS1 is 

$177.14x, which is equal to (i) USS1’s 8 

percent rate equivalent percentage 

(77.1428571%) of its 8 percent rate amount 

for USS1’s 2017 year ($133.33x 

($266.67x¥$133.34x)), plus USS1’s 15.5 

percent rate equivalent percentage 

(55.7142857%) of its 15.5 percent rate 

amount for USS1’s 2017 year ($133.34x). The 

section 965(c) deduction amount of USS2 is 

$88.56x, which is equal to (i) USS2’s 8 

percent rate equivalent percentage 

(77.1428571%) of its 8 percent rate amount 

for USS2’s 2017 year ($66.66x 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1915 

($133.33x¥$66.67x)), plus USS2’s 15.5 

percent rate equivalent percentage 

(55.7142857%) of its 15.5 percent rate 

amount for USS2’s 2017 year ($66.67x). 

Because USS3 has no section 965(a) 

inclusion amount, it has no section 965(c) 

deduction amount and therefore is not 

allowed a section 965(c) deduction. 

§ 1.965–9 Applicability dates. 

(a) In general. Sections 1.965–1 

through 1.965–8 apply beginning the 

last taxable year of a foreign corporation 

that begins before January 1, 2018, and 

with respect to a United States person, 

beginning the taxable year in which or 

with which such taxable year of the 

foreign corporation ends. 

(b) Applicability dates for rules 

disregarding certain transactions. 

Section 1.965–4 applies regardless of 

whether, with respect to a foreign 

corporation, the transaction, effective 

date of a change in method of 

accounting, effective date of an entity 

classification election, or specified 

payment described in § 1.965–4 

occurred before the first day of the 

foreign corporation’s last taxable year 

that begins before January 1, 2018, or, 

with respect to a United States person, 

the transaction, effective date of a 

change in method of accounting, 

effective date of an entity classification 

election, or specified payment described 

in § 1.965–4 occurred before the first 

day of the taxable year of the United 

States person in which or with which 

the taxable year of the foreign 

corporation ends. 

■ Par. 5. Section 1.986(c)–1 is added to 

read as follows: 

§ 1.986(c)–1 Coordination with section 

965. 

(a) Amount of foreign currency gain or 

loss. Foreign currency gain or loss with 

respect to distributions of section 965(a) 

previously taxed earnings and profits (as 

defined in § 1.965–1(f)(39)) is 

determined based on movements in the 

exchange rate between December 31, 

2017, and the time such distributions 

are made. 

(b) Section 965(a) previously taxed 

earnings and profits. Any gain or loss 

recognized under section 986(c) with 

respect to distributions of section 965(a) 

previously taxed earnings and profits is 

reduced in the same proportion as the 

reduction by a section 965(c) deduction 

amount (as defined in § 1.965–1(f)(42)) 

of the section 965(a) inclusion amount 

(as defined in § 1.965–1(f)(38)) that gave 

rise to such section 965(a) previously 

taxed earnings and profits. 

(c) Section 965(b) previously taxed 

earnings and profits. Section 986(c) 

does not apply with respect to 

distributions of section 965(b) 

previously taxed earnings and profits (as 

defined in § 1.965–1(f)(40)). 

(d) Applicability dates. The section 

applies beginning the last taxable year 

of a foreign corporation that begins 

before January 1, 2018, and with respect 

to a United States person, for the taxable 

year in which or with which such 

taxable year of the foreign corporation 

ends. 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 19, 2018. 

David J. Kautter, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2019–00265 Filed 2–4–19; 8:45 am] 

BILLING CODE 4830–01–P