39514 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–104226–18] 

RIN 1545–BO51 

Guidance Regarding the Transition Tax 

Under Section 965 and Related 

Provisions 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations implementing 

section 965 of the Internal Revenue 

Code (‘‘Code’’) as amended by the Tax 

Cuts and Jobs Act, which was enacted 

on December 22, 2017. The proposed 

regulations would affect United States 

persons with direct or indirect 

ownership interests in certain foreign 

corporations. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by October 9, 2018. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–104226–18), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–104226– 

18), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW, 

Washington, DC 20224, or sent 

electronically via the Federal 

eRulemaking Portal at 

www.regulations.gov (indicate IRS and 

REG–104226–18). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations 

under §§ 1.962–1 and 1.962–2, 1.965–1 

through 4, 1.965–7 through 9, and 

1.986(c)–1, Leni C. Perkins at (202) 317– 

6934; concerning the proposed 

regulations under §§ 1.965–5 and 

1.965–6, Karen J. Cate at (202) 317– 

6936; concerning submissions of 

comments and requests for a public 

hearing, Regina Johnson at (202) 317– 

6901 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in this notice of proposed 

rulemaking have been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collections of information should be 

sent to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

October 9, 2018. 

Comments are specifically requested 

concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the duties of the IRS, 

including whether the information will 

have practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information (including underlying 

assumptions and methodology); 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchases of services to provide 

information. 

The collections of information in 

these proposed regulations are in 

proposed §§ 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), 1.965–7(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 information is required to be 

provided by taxpayers that make an 

election or rely on taxpayer-favorable 

rules. The information provided will be 

used by the IRS for tax compliance 

purposes. 

Estimated total annual reporting 

burden: 500,000 hours. 

Estimated average annual burden 

hours per respondent: Five hours. 

Estimated number of respondents: 

100,000. 

Estimated annual frequency of 

responses: Once. 

The number of respondents estimate 

is a rough estimate of the number of 

taxpayers completing the relevant parts 

of tax forms. The estimate of five hours 

per response is intended to capture the 

burden in gathering the required 

information for the election to 

determine the post-1986 earnings and 

profits and allocation of deficits and 

transfer agreements. In addition, the IRS 

intends that information collection 

requirements relating to the reporting 

and payment of tax under section 965 

will be set forth in forms and 

instructions. For purposes of the 

Paperwork Reduction Act, the reporting 

burden associated with that collection 

of information will be reflected in the 

OMB Form 83–I, Paperwork Reduction 

Act Submission, associated with those 

forms. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

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. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

I. In General 

This document contains proposed 

amendments to 26 CFR part 1 under 

sections 962, 965, and 986 (the 

‘‘proposed regulations’’). As amended 

by section 14103 of the Tax Cuts and 

Jobs Act, Public Law 115–97 (2017) (the 

‘‘Act’’), section 965 applies in the case 

of the last taxable year of a deferred 

foreign income corporation (‘‘DFIC’’) 

that begins before January 1, 2018. The 

Department of the Treasury (‘‘Treasury 

Department’’) and the IRS have 

previously issued guidance announcing 

regulations intended to be issued under 

section 965. 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 (collectively, the 

‘‘notices’’); see also Rev. Proc. 2018–17, 

2018–9 I.R.B. 384. The proposed 

regulations contain the rules related to 

section 965 described in the notices, 

with certain modifications, as well as 

additional guidance related to section 

965. 

II. Section 965 

A. Treatment of Accumulated Post-1986 

Deferred Foreign Income as Subpart F 

Income 

Section 965(a) provides that for the 

last taxable year of a DFIC (as defined 

in Part II.F of this Background section) 

that begins before January 1, 2018 (such 

year of the DFIC, the ‘‘inclusion year’’), 

the subpart F income of the corporation 

(as otherwise determined for such 

taxable year under section 952) shall be 

increased by the greater of (i) the 

accumulated post-1986 deferred foreign 

income (as defined in Part II.F of this 


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Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 39515 

Background section) of such corporation 

determined as of November 2, 2017, or 

(ii) the accumulated post-1986 deferred 

foreign income of such corporation 

determined as of December 31, 2017 

(each such date, an ‘‘E&P measurement 

date’’). The greater of those two amounts 

is the ‘‘section 965(a) earnings amount.’’ 

B. Determination of United States 

Shareholder’s Section 965(a) Inclusion 

Section 965(b)(1) provides that, if a 

taxpayer is a United States shareholder 

with respect to at least one DFIC and at 

least one E&P deficit foreign corporation 

(as defined in Part II.C of this 

Background section), then the portion of 

the section 965(a) earnings amount 

which would otherwise be taken into 

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

United States shareholder with respect 

to each DFIC is reduced by the amount 

of such United States shareholder’s 

aggregate foreign E&P deficit (as defined 

in Part II.C of this Background section) 

that is allocated to such DFIC. The 

portion of the section 965(a) earnings 

amount that is taken into account under 

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

shareholder, after the reduction 

described in the preceding sentence 

and, as applicable, the reduction 

described in Part II.D of this Background 

section, is referred to as the ‘‘section 

965(a) inclusion amount.’’ 

C. Allocation of Aggregate Foreign E&P 

Deficit and Definition of E&P Deficit 

Foreign Corporation 

The aggregate foreign E&P deficit of 

any United States shareholder is 

allocated to each DFIC of the United 

States shareholder in an amount that 

bears the same proportion to such 

aggregate as (i) the United States 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

DFIC bears to (ii) the aggregate of the 

United States shareholder’s pro rata 

shares of the section 965(a) earnings 

amounts of all DFICs of the United 

States shareholder. Section 965(b)(2). 

The term ‘‘aggregate foreign E&P deficit’’ 

means, with respect to any United 

States shareholder, the lesser of (A) the 

aggregate of the shareholder’s pro rata 

shares of the specified E&P deficits of 

the E&P deficit foreign corporations of 

the shareholder or (B) the aggregate of 

the shareholder’s pro rata shares of the 

section 965(a) earnings amounts of all 

DFICs of the shareholder. Section 

965(b)(3)(A)(i). 

The term ‘‘E&P deficit foreign 

corporation’’ means, with respect to any 

taxpayer, any specified foreign 

corporation (as defined in Part II.G of 

this Background section) with respect to 

which the taxpayer is a United States 

shareholder, if, as of November 2, 2017, 

(i) the specified foreign corporation had 

a deficit in post-1986 earnings and 

profits (as defined in Part II.F of this 

Background section), (ii) the corporation 

was a specified foreign corporation, and 

(iii) the taxpayer was a United States 

shareholder of the corporation. Section 

965(b)(3)(B). The term ‘‘specified E&P 

deficit’’ means, with respect to an E&P 

deficit foreign corporation, the amount 

of the E&P deficit foreign corporation’s 

deficit in post-1986 earnings and profits 

as of November 2, 2017. See section 

965(b)(3)(C). 

For purposes of applying section 959 

in any taxable year beginning with the 

inclusion year, with respect to any 

United States shareholder of a DFIC, an 

amount equal to the reduction in the 

shareholder’s pro rata share of the 

section 965(a) earnings amount of the 

DFIC by reason of the aggregate foreign 

E&P deficit allocated to such DFIC is 

treated as an amount which was 

included in the gross income of such 

United States shareholder under section 

951(a). Section 965(b)(4)(A). With 

respect to any taxable year beginning 

with the inclusion year, a United States 

shareholder’s pro rata share of the 

earnings and profits (‘‘E&P’’) of any E&P 

deficit foreign corporation is increased 

by the amount of the specified E&P 

deficit of the E&P deficit foreign 

corporation taken into account by the 

shareholder, and, for purposes of 

section 952, the increase is attributable 

to the same activity to which the deficit 

taken into account was attributable. 

Section 965(b)(4)(B). 

D. Aggregate Unused E&P Deficit 

Under section 965(b)(5), in the case of 

any affiliated group which includes at 

least one E&P net surplus shareholder 

and one E&P net deficit shareholder, the 

amount which would (but for section 

965(b)(5)) be taken into account under 

section 951(a)(1) by reason of section 

965(a) by each E&P net surplus 

shareholder is reduced (but not below 

zero) by such shareholder’s applicable 

share of the affiliated group’s aggregate 

unused E&P deficit. 

The term ‘‘affiliated group’’ has the 

meaning provided in section 1504. The 

term ‘‘E&P net surplus shareholder’’ 

means any United States shareholder 

which would (but for section 965(b)(5)) 

take into account a section 965(a) 

inclusion amount greater than zero. 

Section 965(b)(5)(B). The term ‘‘E&P net 

deficit shareholder’’ means any United 

States shareholder if (i) the aggregate 

foreign E&P deficit with respect to such 

shareholder (as defined in section 

965(b)(3)(A) without regard to clause 

(i)(II) thereof, which limits the aggregate 

foreign E&P deficit of a United States 

shareholder to the aggregate of the 

United States shareholder’s pro rata 

share of the section 965(a) earnings 

amount of all DFICs of the United States 

shareholder) exceeds (ii) the amount 

that would (but for section 965(b)(5)) be 

taken into account by such shareholder 

under section 951(a)(1) by reason of 

section 965(a) (the excess, the ‘‘excess 

aggregate foreign E&P deficit’’). Section 

965(b)(5)(C). The term ‘‘applicable 

share’’ means, with respect to any E&P 

net surplus shareholder in any affiliated 

group, the amount which bears the same 

proportion to the group’s aggregate 

unused E&P deficit as (i) the product of 

(A) the shareholder’s group ownership 

percentage, multiplied by (B) the section 

965(a) inclusion amount which would 

otherwise be taken into account by a 

United States shareholder, bears to (ii) 

the aggregate amount determined under 

clause (i) with respect to all E&P net 

surplus shareholders in the group. 

Section 965(b)(5)(E). The term 

‘‘aggregate unused E&P deficit’’ means, 

with respect to any affiliated group, the 

lesser of (i) the sum of the excess 

aggregate foreign E&P deficits 

determined with respect to each E&P net 

deficit shareholder in such affiliated 

group, or (ii) with respect to all E&P net 

surplus shareholders in the group, the 

aggregate of the product of (A) the 

shareholder’s group ownership 

percentage, multiplied by (B) the 

amount which would (but for section 

965(b)(5)) be taken into account under 

section 951(a)(1) by reason of section 

965(a) by the shareholder. Section 

965(b)(5)(D). 

E. Application of the Participation 

Exemption 

Section 965(c)(1) provides that there 

shall be allowed as a deduction for the 

taxable year of a United States 

shareholder in which a section 965(a) 

inclusion amount is included in the 

gross income of the United States 

shareholder an amount equal to the sum 

of (i) the United States shareholder’s 8 

percent rate equivalent percentage (as 

defined in section 965(c)(2)(A)) of the 

excess (if any) of (A) the section 965(a) 

inclusion amount, over (B) the amount 

of such United States shareholder’s 

aggregate foreign cash position, plus (ii) 

the United States shareholder’s 15.5 

percent rate equivalent percentage (as 

defined in section 965(c)(2)(B)) of so 

much of the United States shareholder’s 

aggregate foreign cash position as does 

not exceed the section 965(a) inclusion 

amount. The amount of the deduction 

allowed under section 965(c) to a 

United States shareholder as described 

in the preceding sentence is referred to 


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39516 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

as the ‘‘section 965(c) deduction 

amount.’’ 

Section 965(c)(3)(A) provides that the 

term ‘‘aggregate foreign cash position’’ 

means, with respect to any United 

States shareholder, the greater of (i) the 

aggregate of the United States 

shareholder’s pro rata share of the cash 

position of each specified foreign 

corporation of the United States 

shareholder determined as of the close 

of the last taxable year of the specified 

foreign corporation that begins before 

January 1, 2018, or (ii) one half of the 

sum of (A) the aggregate described in 

clause (i) determined as of the close of 

the last taxable year of each specified 

foreign corporation that ends before 

November 2, 2017, plus (B) the 

aggregate described in clause (i) 

determined as of the close of the taxable 

year of each specified foreign 

corporation which precedes the taxable 

year referred to in subclause (A). Each 

date referred to in the preceding 

sentence is referred to as a ‘‘cash 

measurement date.’’ 

The cash position of any specified 

foreign corporation is the sum of (i) cash 

held by the corporation, (ii) the net 

accounts receivable of the corporation, 

and (iii) the fair market value of the 

following assets held by the corporation 

(each asset, a ‘‘cash-equivalent asset’’): 

(A) Personal property which is of a type 

that is actively traded and for which 

there is an established financial market 

(‘‘actively traded property’’); (B) 

commercial paper, certificates of 

deposit, the securities of the Federal 

government and of any State or foreign 

government; (C) any foreign currency; 

(D) any obligation with a term of less 

than one year (‘‘short-term obligation’’); 

and (E) any asset which the Secretary 

identifies as being economically 

equivalent to any asset described in 

section 965(c)(3)(B). Section 

965(c)(3)(B). Also, for purposes of 

section 965(c), the term ‘‘net accounts 

receivable’’ means, with respect to any 

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). 

Section 965(c)(3)(C). 

Section 965(c)(3)(D) provides that net 

accounts receivable, actively traded 

property, and short-term obligations 

shall not be taken into account by a 

United States shareholder in 

determining its aggregate foreign cash 

position to the extent that the United 

States shareholder demonstrates to the 

satisfaction of the Secretary that the 

amount of the net accounts receivable, 

actively traded property, or short-term 

obligations is taken into account by the 

United States shareholder with respect 

to another specified foreign corporation. 

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

entity (other than a corporation) will be 

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. 

Section 965(c)(3)(F) provides that if 

the Secretary determines that a 

principal purpose of any transaction 

was to reduce the aggregate foreign cash 

position taken into account under 

section 965(c), the transaction shall be 

disregarded for purposes of section 

965(c). 

F. Definition of DFIC and Accumulated 

Post-1986 Deferred Foreign Income 

For purposes of section 965, a DFIC is, 

with respect to any United States 

shareholder, any specified foreign 

corporation of the United States 

shareholder that has accumulated post1986 deferred foreign income greater 

than zero as of an E&P measurement 

date. Section 965(d)(1). The term 

‘‘accumulated post-1986 deferred 

foreign income’’ means the post-1986 

earnings and profits of the specified 

foreign corporation except to the extent 

such E&P (i) 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 (ii) in the case of a 

controlled foreign corporation (‘‘CFC’’), 

if distributed, would be excluded from 

the gross income of a United States 

shareholder under section 959 

(‘‘previously taxed E&P’’). Section 

965(d)(2). Section 965(d)(3) provides 

that the term ‘‘post-1986 earnings and 

profits’’ means the E&P of the foreign 

corporation (computed in accordance 

with sections 964(a) and 986, 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 (i) as of the 

E&P measurement date that is 

applicable with respect to such foreign 

corporation, and (ii) 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. 

G. Specified Foreign Corporations and 

United States Shareholders 

Section 965(e)(1) provides that the 

term ‘‘specified foreign corporation’’ 

means (i) any CFC (regardless of 

whether there is a domestic corporate 

shareholder) and (ii) any foreign 

corporation with respect to which one 

or more domestic corporations is a 

United States shareholder (‘‘10-percent 

corporation’’). However, if a passive 

foreign investment company (as defined 

in section 1297) (‘‘PFIC’’) with respect 

to the shareholder is not a CFC, then 

such corporation is not a specified 

foreign corporation. Section 965(e)(3). 

An S corporation is treated as a 

partnership for purposes of sections 951 

through 965. See section 1373(a). For 

purposes of sections 951 and 961, a 10- 

percent corporation is treated as a CFC 

solely for purposes of taking into 

account the subpart F income of such 

corporation under section 965(a) (and 

for purposes of determining a United 

States shareholder’s pro rata share of 

any amount with respect to a specified 

foreign corporation under section 

965(f)). Section 965(e)(2). 

For taxable years of foreign 

corporations beginning before January 1, 

2018, under section 951(b), a United 

States shareholder is a United States 

person (within the meaning of section 

957(c)) that owns within the meaning of 

section 958(a), or is considered as 

owning by applying the rules of 

ownership of section 958(b), 10 percent 

or more of the total combined voting 

power of all classes of stock entitled to 

vote of the stock of a foreign 

corporation. Under section 957(c), a 

United States person generally has the 

meaning assigned to it by section 

7701(a)(30), which includes a domestic 

partnership or domestic trust. But see 

Notice 2010–41, 2010–22 I.R.B. 715 

(announcing that the Treasury 

Department and the IRS intend to issue 

regulations treating certain domestic 

partnerships as foreign partnerships for 

purposes of identifying which United 

States shareholders are required to 

include amounts in gross income under 

section 951(a)). Special rules under 

section 957(c) and § 1.957–3 apply in 

determining when individuals residing 

in certain possessions or territories of 

the United States are considered United 

States persons for purposes of sections 

951 and 965. 

H. Determination of Pro Rata Share 

Section 965(f)(1) provides that the 

determination of any United States 

shareholder’s pro rata share of any 


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Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 39517 

amount with respect to any specified 

foreign corporation shall be determined 

under rules similar to the rules of 

section 951(a)(2) by treating the amount 

in the same manner as subpart F income 

(and by treating the specified foreign 

corporation as a CFC). 

I. Special Rules for Domestic PassThrough Entities 

Section 965(f)(2) provides that the 

portion that is included in the income 

of a United States shareholder under 

section 951(a)(1) by reason of section 

965(a) that is equal to the section 965(c) 

deduction amount by reason of the 

inclusion is treated as income exempt 

from tax for purposes of sections 

705(a)(1)(B) and 1367(a)(1)(A) but not 

treated as income exempt from tax for 

purposes of determining whether an 

adjustment is made to an accumulated 

adjustments account (‘‘AAA’’) of an S 

corporation under section 1368(e)(1)(A). 

J. Foreign Tax Credit and Deduction 

Section 965(g)(1) provides that no 

credit is allowed under section 901 for 

the applicable percentage of any taxes 

paid or accrued (or treated as paid or 

accrued) with respect to any amount for 

which a section 965(c) deduction is 

allowed. 

The term ‘‘applicable percentage’’ 

means the amount (expressed as a 

percentage) equal to the sum of the 

following two amounts: 

(i) 0.771 multiplied by the ratio of (A) 

the section 965(a) inclusion amount in 

excess of the United States 

shareholder’s aggregate foreign cash 

position divided by (B) the section 

965(a) inclusion amount, and 

(ii) 0.557 multiplied by the ratio of (A) 

the amount of the section 965(a) 

inclusion amount equal to the United 

States shareholder’s aggregate cash 

position, divided by (B) the section 

965(a) inclusion amount. 

Further, no deduction is allowed for 

any tax for which credit is not allowable 

under section 901 by reason of section 

965(g)(1) (determined by treating the 

taxpayer as having elected the benefits 

of subpart A of part III of subchapter N). 

With respect to the taxes treated as 

paid or accrued by a domestic 

corporation with respect to the section 

965(a) inclusion amount, section 78 

applies only to so much of such taxes 

as bears the same proportion to the 

amount of the taxes as (i) the excess of 

(A) the section 965(a) inclusion amount, 

over (B) the section 965(c) deduction 

amount with respect to such amount, 

bears to (ii) the section 965(a) inclusion 

amount. 

K. Election Under Section 965(h) 

Concerning Payment of Net Tax 

Liability Under Section 965 

Section 965(h)(1) provides that in the 

case of a United States shareholder of a 

DFIC, the United States shareholder 

may elect to pay the net tax liability 

under section 965 in eight installments. 

Section 965(h)(6) defines the net tax 

liability under section 965 with respect 

to any United States shareholder as the 

excess (if any) of (i) the taxpayer’s net 

income tax for the taxable year in which 

an amount is included in the gross 

income of the United States shareholder 

under section 951(a)(1) by reason of 

section 965, over (ii) the taxpayer’s net 

income tax for such taxable year 

determined (A) without regard to 

section 965, and (B) without regard to 

any income or deduction properly 

attributable to a dividend received by 

the United States shareholder from any 

DFIC. For this purpose, the term ‘‘net 

income tax’’ means the regular tax 

liability reduced by the credits allowed 

under subparts A, B, and D of part IV 

of subchapter A. Section 965(h)(6)(B). 

Section 965(h)(2) provides that if a 

taxpayer makes an election under 

section 965(h), the first installment is 

due on the due date (without regard to 

extensions) for the return of tax for the 

inclusion year. Each successive 

installment is due on the due date 

(without regard to extensions) for the 

return of tax for the taxable year 

following the taxable year for which the 

previous installment payment was 

made. 

Section 965(h)(3) provides that if 

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 the assets of the 

taxpayer (including in a title 11 or 

similar case), a cessation of business by 

the taxpayer, or any similar 

circumstance, the unpaid portion of the 

remaining installments will be due on 

the date of such event (or in the case of 

a title 11 or similar case, the day before 

the petition is filed). The preceding 

sentence does not apply in the case of 

the sale of substantially all the assets of 

a taxpayer to a buyer if the buyer enters 

into an agreement with the Secretary 

under which the buyer is liable for the 

remaining installments due under 

section 965(h) in the same manner as if 

the buyer were the taxpayer. 

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

taxpayer has made an election under 

section 965(h), and subsequently, a 

deficiency is assessed with respect to 

the taxpayer’s net tax liability for 

purposes of section 965(h), then the 

amount of the deficiency will be 

prorated among the installments. The 

part of the deficiency prorated to any 

installment the date for payment of 

which has not arrived will be collected 

at the same time as, and as part of, such 

installment. The part of the deficiency 

prorated to any installment the date for 

payment of which has arrived must be 

paid upon notice and demand from the 

Secretary. However, the proration rule 

does not apply if the deficiency is due 

to negligence, intentional disregard of 

rules and regulations, or fraud with 

intent to evade tax. 

L. Election Under Section 965(i) 

Concerning Payment of Net Tax 

Liability Under Section 965 by an S 

Corporation Shareholder and Related 

Reporting Requirements 

Section 965(i)(1) provides that in the 

case of any S corporation that is a 

United States shareholder of a DFIC, 

each shareholder of the S corporation 

may elect to defer payment of the 

shareholder’s net tax liability under 

section 965 with respect to the S 

corporation until the shareholder’s 

taxable year which includes the 

triggering event with respect to such 

liability. 

Under section 965(i)(1), any net tax 

liability, payment of which is deferred 

under section 965(i)(1), will be assessed 

on the return of tax as an addition to tax 

for the shareholder’s taxable year which 

includes the triggering event with 

respect to such liability. As defined in 

section 965(i)(2), in the case of any 

shareholder’s net tax liability under 

section 965 with respect to any S 

corporation, the triggering event with 

respect to such liability is whichever of 

the following occurs first: (i) 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); (ii) 

a liquidation or sale of substantially all 

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 ceases to 

exist, or any similar circumstance; or 

(iii) a transfer of any share of stock in 

the S corporation by the taxpayer 

(including by reason of death, or 

otherwise). In the case of a transfer of 

less than all of the taxpayer’s shares of 

stock in the S corporation, the transfer 

is only a triggering event with respect to 

the portion of the taxpayer’s net tax 

liability under section 965 with respect 

to the S corporation as is properly 

allocable to the transferred stock. 

Section 965(i)(2)(B). Moreover, a 

transfer of stock in the S corporation is 

not a triggering event if the transferee 

enters into an agreement with the 


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Secretary under which the transferee is 

liable for the net tax liability under 

section 965 with respect to the stock in 

the same manner as if such transferee 

were the taxpayer. Section 965(i)(2)(C). 

If a triggering event occurs, section 

965(i)(4) permits a taxpayer to make an 

election under section 965(h) with 

respect to the liability to which the 

section 965(i) election applied by the 

due date for the return of tax for the 

taxable year in which the triggering 

event occurred, and the first installment 

under section 965(h) must also be paid 

by the due date (without regard to 

extensions) for the return for the taxable 

year of the triggering event. However, 

the election may only be made with the 

consent of the Secretary in the case of 

a triggering event that is a liquidation or 

sale of substantially all of the assets of 

the S corporation. See section 

965(i)(4)(D). 

Section 965(i)(3) defines a 

shareholder’s net tax liability under 

section 965 with respect to any S 

corporation as the net tax liability under 

section 965 which would be determined 

under section 965(h)(6) if the only 

amounts taken into account by the 

shareholder under section 951(a)(1) by 

reason of section 965 were allocations 

from the S corporation. 

Section 965(i)(5) provides that if any 

shareholder of an S corporation makes 

an election under section 965(i) to defer 

payment of its net tax liability under 

section 965 with respect to an S 

corporation, the S corporation is jointly 

and severally liable for the deferred 

payment and any penalty, addition to 

tax, or additional amount attributable 

thereto. 

Section 965(i)(6) provides that any 

limitation on the time period for the 

collection of a liability deferred under 

section 965(i) is not treated as beginning 

before the date of the triggering event 

with respect to such liability. 

Section 965(i)(7) requires any 

shareholder of an S corporation that 

makes an election under section 965(i) 

to report the amount of the 

shareholder’s deferred net tax liability 

on the shareholder’s return of tax for the 

taxable year for which the election is 

made and on the return of tax for each 

taxable year thereafter until the amount 

has been fully assessed. ‘‘Deferred net 

tax liability’’ means the amount of net 

tax liability under section 965 payment 

of which has been deferred under 

section 965(i) and which has not been 

assessed on a return of tax for any prior 

taxable year. Section 965(i)(7)(B). In the 

case of any failure to report any amount 

required to be reported pursuant to 

section 965(i)(7) with respect to any 

taxable year before the due date for the 

return of tax for the taxable year, there 

will be assessed on the return as an 

addition to tax 5 percent of such 

amount. Section 965(i)(7)(C). 

M. Election Under Section 965(m) 

Concerning Inclusions of Amounts 

Under Section 965 and Related 

Provisions 

Under section 965(m)(1)(B), a real 

estate investment trust (REIT) that is a 

United States shareholder of a DFIC may 

elect, in lieu of including any amount 

required to be taken into account under 

section 951(a)(1) by reason of section 

965 in the taxable year in which it 

would otherwise be included in gross 

income (for purposes of the 

computation of REIT taxable income 

under section 857(b)), to include such 

amount in gross income in eight 

installments. 

If this election is made, the REIT’s 

aggregate section 965(c) deduction must 

be determined without regard to the 

election and allocated to each taxable 

year for which an installment is 

included in the same proportion as the 

amount of the installment included in 

gross income. See section 

965(m)(2)(B)(i)(II). Furthermore, the 

REIT may not make a section 965(h) 

election for any taxable year for which 

an installment is included. See section 

965(m)(2)(B)(i)(III). Under section 

965(m)(2)(B)(ii), if there is a liquidation 

or sale of substantially all the assets of 

the REIT (including in a title 11 or 

similar case), a cessation of business by 

the trust, or any similar circumstance, 

then any amount not yet included in 

gross income will be included in gross 

income as of the day before the date of 

the event, and the unpaid portion of any 

tax liability with respect to the 

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). 

Section 965(m)(1)(A) provides that 

any amount required to be taken into 

account under section 951(a)(1) by 

reason of section 965 by a REIT that is 

a United States shareholder of a DFIC is 

not taken into account as gross income 

of the REIT for purposes of applying 

paragraphs (2) and (3) of section 856(c) 

to any taxable year for which the 

amount is taken into account under 

section 951(a)(1). 

N. Election Under Section 965(n) Not To 

Apply Net Operating Loss Deduction 

Under section 965(n)(1), a United 

States shareholder of a DFIC may make 

an election pursuant to which the 

amount described in section 965(n)(2) 

shall not be taken into account (i) in 

determining the amount of the 

shareholder’s net operating loss 

(‘‘NOL’’) deduction under section 172 

for the taxable year, or (ii) in 

determining the amount of taxable 

income for the taxable year which may 

be reduced by NOL carryovers or 

carrybacks to the taxable year under 

section 172. The amount described in 

section 965(n)(2) is the sum of (i) the 

amount required to be taken into 

account under section 951(a)(1) by 

reason of section 965 (determined after 

the application of section 965(c)), plus 

(ii) in the case of a domestic corporation 

which chooses to have the benefits of 

subpart A of part III of subchapter N for 

the taxable year, the taxes deemed to be 

paid by the corporation under 

subsections (a) and (b) of section 960 for 

the taxable year with respect to the 

amount described in section 

965(n)(2)(A) which are treated as a 

dividend under section 78. 

O. Recapture for Expatriated Entities 

Section 965(l) provides that if a 

section 965(c) deduction is allowed to a 

United States shareholder and the 

shareholder first becomes an expatriated 

entity (as defined under section 

7874(a)(2), except not including an 

entity if the surrogate foreign 

corporation with respect to it is treated 

as a domestic corporation under section 

7874(b)) at any time during the 10-year 

period beginning on the date of the 

enactment of the Act (with respect to a 

surrogate foreign corporation (as defined 

under section 7874(a)(2)(B)) that first 

becomes a surrogate foreign corporation 

during such period), the tax imposed 

under chapter 1 will be increased for the 

first taxable year in which such taxpayer 

becomes an expatriated entity by an 

amount equal to 35 percent of the 

amount of the section 965(c) deduction, 

and no credits will be allowed against 

such increase in tax. 

P. Regulations or Other Guidance 

Section 965(o) provides that the 

Secretary shall prescribe such 

regulations or other guidance as may be 

necessary or appropriate to carry out the 

provisions of section 965, including 

regulations or other guidance to provide 

appropriate basis adjustments and 

regulations or other guidance to prevent 

the avoidance of the purposes of section 

965, including through a reduction in 

E&P, changes in entity classification or 

accounting methods, or otherwise. 

III. Other Provisions 

A. Section 962 

As amended by the Act, section 962 

provides that an individual who is a 

United States shareholder may elect to 


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have the tax imposed under chapter 1 

on amounts that are included in the 

individual’s gross income under section 

951(a) be an amount equal to the tax 

that would be imposed under section 11 

if the amounts were received by a 

domestic corporation. In addition, if an 

election is made under section 962, the 

amounts included in the individual’s 

gross income under section 951(a) are 

treated as if they were received by a 

domestic corporation for purposes of 

applying section 960 (relating to foreign 

tax credits). See § 1.962–1(a). However, 

the taxable income determined for 

purposes of applying section 11 is not 

reduced by any deduction of the United 

States shareholder. See § 1.962– 

1(b)(1)(i). An election under section 962 

does not affect tax imposed under other 

chapters, including under chapter 2A. 

B. Attribution Rules in Sections 958(b) 

and 318(a) 

Section 958 provides rules for 

determining direct, indirect, and 

constructive stock ownership. Under 

section 958(a)(1), stock is considered 

owned by a person if it is owned 

directly or is owned indirectly through 

certain foreign entities under section 

958(a)(2). Under section 958(b), section 

318 applies, with certain modifications, 

to the extent that the effect is to treat 

any United States person as a United 

States shareholder within the meaning 

of section 951(b), to treat a person as a 

related person within the meaning of 

section 954(d)(3), to treat the stock of a 

domestic corporation as owned by a 

United States shareholder of a CFC for 

purposes of section 956(c)(2), or to treat 

a foreign corporation as a CFC under 

section 957. 

Section 318 provides rules that 

attribute the ownership of stock to 

certain family members, between certain 

entities and their owners, and to holders 

of options to acquire stock. Section 

318(a)(1) provides rules attributing stock 

ownership among members of a family. 

Section 318(a)(2) provides rules 

attributing stock ownership ‘‘upward’’ 

from partnerships, estates, trusts, and 

corporations to partners, beneficiaries, 

owners, and shareholders. In addition, 

section 318(a)(3) provides specific rules 

that attribute the ownership of stock 

‘‘downward’’ from partners, 

beneficiaries, owners, and shareholders 

to partnerships, estates, trusts, and 

corporations. In particular, section 

318(a)(3)(A) provides that stock owned, 

directly or indirectly, by or for a partner 

in a partnership or a beneficiary of an 

estate is considered as owned by the 

partnership or estate. This provision 

applies to all partners and beneficiaries 

without regard to the size of their 

interest in the partnership or estate. 

Section 318(a)(3)(B) similarly provides, 

subject to certain exceptions, that stock 

owned, directly or indirectly, by or for 

a beneficiary of a trust (or a person who 

is considered an owner of a trust) is 

considered owned by the trust. In 

comparison, section 318(a)(3)(C) 

provides that stock owned, directly or 

indirectly, by or for a shareholder in a 

corporation is considered owned by the 

corporation only if 50 percent or more 

in value of the stock in the corporation 

is owned, directly or indirectly, by such 

person. 

Effective for the last taxable year of 

foreign corporations beginning before 

January 1, 2018, and each subsequent 

year of the foreign corporations, and for 

the taxable years of United States 

shareholders in which or with which 

such taxable years of the foreign 

corporations end, the Act repeals 

section 958(b)(4). As in effect before 

repeal, section 958(b)(4) provided that 

subparagraphs (A), (B), and (C) of 

section 318(a)(3) (providing for 

‘‘downward’’ attribution) were not to be 

applied so as to consider a United States 

person as owning stock that is owned by 

a person who is not a United States 

person. 

C. Miscellaneous Itemized Deductions 

Under section 67(a), miscellaneous 

itemized deductions are allowed only to 

the extent that the aggregate of such 

deductions exceeds 2 percent of 

adjusted gross income. As amended by 

the Act, section 67(g) provides that for 

taxable years beginning after December 

31, 2017, and before January 1, 2026, no 

miscellaneous itemized deductions are 

allowable under section 67(a). In 

addition, under section 56(b)(1)(A)(i), an 

individual subject to the alternative 

minimum tax in 2017 is not allowed a 

deduction for any miscellaneous 

itemized deduction. Under section 

63(d), itemized deductions generally 

mean all allowable deductions except 

for the deductions allowable in arriving 

at adjusted gross income pursuant to 

section 62(a), the deduction provided by 

section 151, and the deduction provided 

in section 199A (added by the Act). 

Miscellaneous itemized deductions 

include all itemized deductions other 

than those listed in section 67(b), which 

does not reference the section 965(c) 

deduction. 

D. Section 4940 

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

including a section 965(a) inclusion, 

generally is included in the calculation 

of gross investment income of a private 

foundation for purposes of determining 

the excise tax imposed under section 

4940 (generally 2 percent of net 

investment income). Gross investment 

income under section 4940 does not 

include an inclusion under section 

951(a)(1), including a section 965(a) 

inclusion, to the extent the amount is 

included in computing the unrelated 

business income tax imposed by section 

511. See section 4940(c)(2). Section 

4940(c)(3) allows as a deduction all the 

ordinary and necessary expenses paid or 

incurred for the production or collection 

of gross investment income or for the 

management, conservation, or 

maintenance of property held for the 

production of income. 

E. Extensions of Time for Filing Income 

Tax Returns and Paying Tax for Certain 

Citizens and Residents Abroad 

In relevant part, regulations under 

section 6081 provide an extension of 

time to the fifteenth day of the sixth 

month following the close of the taxable 

year for filing returns of income taxes 

and for paying any tax shown on the 

return for United States citizens or 

residents whose tax homes and abodes, 

in a real and substantial sense, are 

outside the United States and Puerto 

Rico, and United States citizens and 

residents in military or naval service on 

duty, including non-permanent or short 

term duty, outside the United States and 

Puerto Rico (‘‘specified individuals’’). 

See § 1.6081–5(a)(5) and (6). 

Explanation of Provisions 

I. Overview of Proposed Regulations 

Proposed § 1.965–1 provides general 

rules and definitions under section 965. 

Proposed § 1.965–2 provides rules 

relating to adjustments to E&P and basis 

to determine and account for the 

application of section 965 and a rule 

that limits the amount of gain 

recognized in connection with the 

application of section 961(b)(2). 

Proposed § 1.965–3 provides rules 

regarding the determination of section 

965(c) deductions. Proposed § 1.965–4 

sets forth rules that disregard certain 

transactions for purposes of section 965. 

Proposed §§ 1.965–5 and 1.965–6 

provide rules with respect to foreign tax 

credits. Proposed § 1.965–7 provides 

rules regarding elections and payments. 

Proposed § 1.965–8 provides rules 

regarding affiliated groups, including 

consolidated groups. Proposed § 1.965– 

9 provides dates of applicability. 

Proposed §§ 1.962–1 and 1.962–2 

provide rules relating to section 962 

elections. Proposed § 1.986(c)–1 

provides rules regarding the application 

of section 986(c) in connection with 

section 965. 


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II. Definitions and General Rules 

Section 1.965–1 of the proposed 

regulations provides general rules and 

definitions under section 965, including 

general rules concerning section 965(a) 

inclusions, general rules concerning 

section 965(c) deductions, and rules 

concerning the treatment of certain 

specified foreign corporations as CFCs 

and certain controlled domestic 

partnerships as foreign partnerships. 

A. General Rules 

Proposed § 1.965–1 provides the 

general rules contained in section 

965(a), (b), and (c). Proposed § 1.965– 

1(b)(1) provides that the subpart F 

income of a DFIC for its inclusion year 

is increased by the section 965(a) 

earnings amount. Proposed § 1.965– 

1(b)(2) provides that the pro rata share 

of the DFIC’s section 965(a) earnings 

amount of a United States shareholder 

that owns, within the meaning of 

section 958(a), stock (the stock, ‘‘section 

958(a) stock’’, and the shareholder, a 

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

reduced by the DFIC’s allocable share of 

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

aggregate foreign E&P deficit. If a section 

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

a consolidated group, all section 958(a) 

U.S. shareholders that are members of a 

consolidated group are treated as a 

single section 958(a) U.S. shareholder 

for this purpose. See Part IX of this 

Explanation of Provisions section for a 

discussion of additional rules that apply 

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

shareholder that is a member of an 

affiliated group of which not all 

members are part of a consolidated 

group. The amount determined after the 

reductions referenced in the preceding 

sentences is defined as the section 

965(a) inclusion amount, which is the 

amount included by a section 958(a) 

U.S. shareholder of a DFIC for its 

taxable year in which or with which the 

DFIC’s inclusion year ends (the ‘‘section 

958(a) U.S. shareholder inclusion 

year’’). See proposed § 1.965–1(b)(1); see 

also Part II.B of the Background section 

of this preamble. The proposed 

regulations also clarify that because an 

increase in subpart F income by reason 

of section 965(a) is generally determined 

after the subpart F income is otherwise 

determined under section 952 for the 

taxable year, 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 

otherwise limited by the accumulated 

E&P of the DFIC. Id. 

Proposed § 1.965–1(c) provides that a 

section 958(a) U.S. shareholder is 

generally allowed a deduction for a 

section 965(c) deduction amount for a 

section 958(a) U.S. shareholder 

inclusion year. The proposed 

regulations clarify that a section 958(a) 

U.S. shareholder’s aggregate foreign 

cash position is applied against the 

aggregate section 965(a) inclusion 

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

shareholder inclusion year. See 

proposed § 1.965–1(f)(1)–(4), (8), (42). In 

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

shareholder with more than one section 

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

its aggregate foreign cash position is 

allocated to each year under proposed 

§ 1.965–3(c)(2), and therefore the section 

965(c) deduction amount is determined 

separately for each section 958(a) U.S. 

shareholder inclusion year. 

Consistent with section 965(e)(2), 

proposed § 1.965–1(d) provides that a 

10-percent corporation is treated as a 

CFC for purposes of sections 951 and 

961, as well as for purposes of § 1.1411– 

10, so that those rules, applicable to 

CFCs, are also applicable to DFICs that 

are not CFCs. 

Moreover, the proposed regulations 

provide that for purposes of identifying 

section 958(a) U.S. shareholders of 

specified foreign corporations and the 

section 958(a) stock of such specified 

foreign corporations owned by section 

958(a) U.S. shareholders, a domestic 

partnership is treated as a foreign 

partnership if certain conditions are 

satisfied. See proposed § 1.965–1(e)(1). 

This is an expansion on the reference in 

section 2.13 of Notice 2018–26 to Notice 

2010–41, which referred to CFCs, 

whereas the expanded rule includes 

specified foreign corporations generally. 

B. Definitions 

Section 1.965–1(f) of the proposed 

regulations sets forth definitions for 

terms that apply for all of the proposed 

regulations under section 965. Except as 

otherwise described in this Explanation 

of Provisions section, the definitions set 

forth in the proposed regulations that 

are also used in section 965 or one of 

the notices have the meaning described 

therein. This Part II.B of the Explanation 

of Provisions section also describes 

rules incorporated into certain defined 

terms that are not described elsewhere 

in this Explanation of Provisions 

section. 

1. Specified Foreign Corporation 

The proposed regulations provide that 

a specified foreign corporation means 

any CFC or 10-percent corporation, 

other than a foreign corporation that is 

a PFIC with respect to a shareholder and 

not a CFC. See proposed § 1.965– 

1(f)(45)(i) and (iii). 

Section 3.01 of Notice 2018–26 noted 

that as a result of the application of the 

constructive ownership rule in section 

318(a)(3)(A) (providing for ‘‘downward’’ 

attribution of stock from a partner to a 

partnership), it may be difficult to 

determine if a foreign corporation is a 

specified foreign corporation under 

certain circumstances. Consistent with 

that section of the notice, 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. See 

proposed § 1.965–1(f)(45)(ii). For 

purposes of the preceding sentence, an 

interest in the partnership owned by 

another partner will be considered as 

being owned by the tested partner under 

the principles of sections 958(b) and 

318, as modified pursuant to the 

preceding sentence, as if the interest in 

the partnership were stock. 

2. Post-1986 Earnings and Profits 

Section 3.02(b) of Notice 2018–07 

indicated that the reduction of post1986 earnings and profits of a specified 

foreign corporation to reflect dividends 

distributed during the corporation’s 

inclusion year to another specified 

foreign corporation (the ‘‘dividend 

reduction rule’’) is intended to address 

the potential double-counting of the 

E&P of the distributing specified foreign 

corporation in calculating the section 

965(a) inclusion amounts of a United 

States shareholder with respect to the 

distributing specified foreign 

corporation and the distributee 

specified foreign corporation. It noted, 

however, that to the extent that a 

portion of a distribution reduces the 

post-1986 earnings and profits of a 

distributing specified foreign 

corporation (for example, by reason of a 

reduction pursuant to section 312(a)(3)) 

in an amount in excess of the increase 

in the post-1986 earnings and profits of 

the distributee specified foreign 

corporation, the reduction would not 

relieve double-counting and thus would 

be inconsistent with the purpose of the 

rule. 

Accordingly, consistent with section 

3.02(b) of Notice 2018–07, the definition 

of ‘‘post-1986 earnings and profits’’ 

clarifies, in proposed § 1.965– 

1(f)(29)(i)(B), that the amount by which 

the post-1986 earnings and profits of a 


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specified foreign corporation is reduced 

under section 965(d)(3)(B) as a result of 

a distribution made to a specified 

foreign corporation in the last taxable 

year of the foreign corporation that 

begins before January 1, 2018, may not 

exceed the amount by which the post1986 earnings and profits of the 

distributee corporation is increased as a 

result of the distribution. Additionally, 

similar to section 3.03 of Notice 2018– 

26, in computing post-1986 earnings 

and profits on November 2, 2017, in 

certain cases, a reduction is allowed for 

a portion of foreign income taxes that 

accrue after November 2, 2017, and on 

or before December 31, 2017 

(‘‘applicable taxes’’). In particular, post1986 earnings and profits on November 

2, 2017, are reduced by the portion of 

the applicable taxes that are attributable 

to the portion of the taxable income (as 

determined under foreign law) that 

accrues on or before November 2, 2017, 

and during the specified foreign 

corporation’s U.S. taxable year that 

includes November 2, 2017. See 

proposed § 1.965–1(f)(29)(ii). 

Moreover, consistent with the 

Conference Report accompanying the 

Act (the ‘‘Conference Report’’) and 

section 3.03(b) of Notice 2018–13, 

proposed § 1.965–1(f)(29)(iii) provides 

that all deficits related to post-1986 

earnings and profits, including hovering 

deficits, are taken into account for 

purposes of determining the post-1986 

earnings and profits (including a deficit) 

of a specified foreign corporation. See 

H.R. Rep. No. 115–466, at 619 (2017) 

(Conf. Rep.). The fact that hovering 

deficits are taken into account for 

purposes of determining post-1986 

earnings and profits, and ultimately the 

section 965(a) inclusion amount of a 

section 958(a) U.S. shareholder, does 

not mean that hovering deficits are 

taken into account for any other 

purpose. For example, this rule does not 

result in hovering deficits being taken 

into account for purposes of 

determining post-1986 undistributed 

earnings or pre-1987 accumulated 

profits in computing the taxes deemed 

paid for the foreign tax credit. The 

Treasury Department and the IRS 

request comments on whether 

additional rules are needed to address 

the treatment of hovering deficits that 

reduce post-1986 earnings and profits of 

a DFIC, for example when the hovering 

deficit creates a specified E&P deficit. 

Comments noted that a specified 

foreign corporation that is not a CFC 

does not generally track E&P under U.S. 

tax principles and requested that 

taxpayers be allowed to use an 

alternative measurement method for 

determining its post-1986 earnings and 

profits and cash position, such as 

audited financial statements. This 

comment is not adopted in the proposed 

regulations. Generally, audited financial 

statements may serve as a starting point 

in the determination of a specified 

foreign corporation’s E&P. See § 1.964– 

1. The Treasury Department and the IRS 

appreciate that obtaining accurate 

information for U.S. federal income tax 

purposes may present administrative 

challenges, particularly in the case of 

United States shareholders that do not 

have a majority interest in a specified 

foreign corporation. However, this 

challenge is not unique to this context; 

there are numerous longstanding 

provisions in the Code where minority 

shareholders of foreign corporations 

must determine E&P consistent with 

section 312 where no alternative 

measurement method is provided. For 

example, United States persons who 

own stock in PFICs must, if they make 

an election to treat the PFIC as a 

qualified electing fund under section 

1293, determine the E&P of the PFIC in 

accordance with principles of section 

312. See section 1293(e)(3). 

Additionally, minority shareholders 

who are nonetheless United States 

shareholders of CFCs must know the 

E&P of the CFC in order to apply the 

rules under subpart F. Accordingly, the 

Treasury Department and the IRS have 

determined that it would not be 

appropriate for the proposed regulations 

to provide alternative methods for 

determining a corporation’s E&P or cash 

position. 

3. E&P Deficit Foreign Corporation 

Consistent with section 3.01 of Notice 

2018–13, under the proposed 

regulations, for purposes of determining 

the status of a specified foreign 

corporation as a DFIC or an E&P deficit 

foreign corporation, it must first be 

determined whether the specified 

foreign corporation is a DFIC. Proposed 

§ 1.965–1(f)(17)(ii) provides that, if a 

specified foreign corporation meets the 

definition of a DFIC, it is classified 

solely as a DFIC and not also as an E&P 

deficit foreign corporation, even if the 

specified foreign corporation otherwise 

satisfies the requirements of section 

965(b)(3)(B) and proposed § 1.965– 

1(f)(22). If a specified foreign 

corporation does not meet the definition 

of a DFIC, it then must be determined 

whether it is an E&P deficit foreign 

corporation. In some cases, a specified 

foreign corporation may be classified as 

neither a DFIC nor an E&P deficit 

foreign corporation, despite having post1986 earnings and profits greater than 

zero or a deficit in accumulated post1986 deferred foreign income. See 

proposed § 1.965–1(g), Example 5. 

Comments requested that previously 

taxed E&P should be disregarded in 

determining a specified E&P deficit of 

an E&P deficit foreign corporation. 

Section 965(b)(3)(B) provides that a 

specified foreign corporation is an E&P 

deficit foreign corporation if it has 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), earnings and 

profits 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), explicitly excludes previously 

taxed E&P. See section 965(d)(2)(B) 

(citing section 959). Accordingly, the 

proposed regulations provide that 

previously taxed E&P is not excluded in 

determining the existence and amount 

of a specified E&P deficit, which is 

defined in reference to post-1986 

earnings and profits and not in reference 

to accumulated post-1986 deferred 

foreign income. The Treasury 

Department and the IRS are considering 

other rules with respect to the 

definitions of post-1986 earnings and 

profits, accumulated post-1986 deferred 

foreign income, and specified E&P 

deficit in connection with the 

finalization of these proposed 

regulations. See section 965(o). The 

Treasury Department and the IRS 

welcome comments on this subject. 

4. Accumulated Post-1986 Deferred 

Foreign Income 

Consistent with section 3.02(c) of 

Notice 2018–07, proposed § 1.965– 

1(f)(7)(i)(C) provides that in the case of 

a CFC that has shareholders that are not 

United States shareholders on an E&P 

measurement date, the accumulated 

post-1986 deferred foreign income of the 

CFC on such E&P measurement date is 

reduced by amounts that would be 

described in section 965(d)(2)(B) if those 

shareholders were United States 

shareholders. In such cases, the 

principles of Revenue Ruling 82–16, 

1982–1 C.B. 106, apply in order to 

determine the amounts by which 

accumulated post-1986 deferred foreign 

income is reduced. 


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Proposed § 1.965–1(f)(7)(ii) clarifies 

that, for purposes of determining the 

accumulated post-1986 deferred foreign 

income of a specified foreign 

corporation as of an E&P measurement 

date, the E&P of the specified foreign 

corporation that are described in section 

959(c)(2) (or that would be described in 

section 959(c)(2) applying the principles 

of Revenue Ruling 82–16, 1982–1 C.B. 

106) by reason of subpart F income are 

treated as described in section 

965(d)(2)(B) and proposed § 1.965– 

1(f)(7)(i)(B) or (f)(7)(i)(C) only to the 

extent that such income is accrued by 

the specified foreign corporation as of 

such E&P measurement date. For rules 

regarding the interaction of sections 

951, 956, 959, and 965 generally, see 

Part IV.A of this Explanation of 

Provisions section. 

5. Cash Measurement Dates 

Consistent with section 3.02 of Notice 

2018–26, the definitions of the cash 

measurement dates, and of pro rata 

share, provide the following: 

(i) The final cash measurement date of 

a specified foreign corporation 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; 

(ii) 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; 

(iii) The first 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, 2015, and before 

November 2, 2016, if any; and 

(iv) A United States shareholder takes 

into account its pro rata share of the 

cash position of a specified foreign 

corporation as of any cash measurement 

date of the specified foreign corporation 

on which the United States shareholder 

is a United States shareholder of the 

specified foreign corporation, regardless 

of whether the United States 

shareholder is a United States 

shareholder of the specified foreign 

corporation as of any other cash 

measurement date, including the final 

cash measurement date of the specified 

foreign corporation. 

See proposed § 1.965–1(f)(24), (31), 

(25), and (30)(iii), respectively. Section 

3.02 of Notice 2018–26 also announced 

that for purposes of applying the rules 

contained therein, a 52–53-week taxable 

year is deemed to begin on the first day 

of the calendar month nearest to the first 

day of the 52–53-week taxable year and 

is deemed to end or close on the last day 

of the calendar month nearest to the last 

day of the 52–53-week taxable year, as 

the case may be. See § 1.441–2(c). The 

Treasury Department and the IRS have 

determined that the rules contained in 

§ 1.441–2(c), which relate to the 

application of effective dates, are not 

relevant in determining when a 52–53- 

week taxable year is considered to begin 

or end for purposes of the cash 

measurement dates; instead, the actual 

dates on which such a year begins and 

ends should be taken into account in 

determining cash measurement dates. 

Therefore, the proposed regulations do 

not contain the rule in section 3.02 of 

Notice 2018–26 referring to § 1.441–2(c). 

Comments requested guidance on the 

measurement of cash when a section 

381 transaction occurs during the last 

year of a specified foreign corporation 

that begins before January 1, 2018. The 

Treasury Department and the IRS have 

defined cash measurement date in the 

notices and largely adopted the 

definition in the proposed regulations. 

The Treasury Department and the IRS 

have determined that these rules 

provide appropriate guidance, and 

therefore additional rules are not 

necessary. See also Part V.A.2 of this 

Explanation of Provisions section, for a 

discussion of the rules for disregarding 

certain assets to prevent doublecounting under section 965(c)(3)(D), and 

Part VI.A of this Explanation of 

Provisions section, for a discussion of 

the anti-avoidance rule in proposed 

§ 1.965–4(b), which could apply, for 

example, to liquidations that reduce a 

section 958(a) U.S. shareholder’s 

aggregate foreign cash position. 

6. Cash Position & Derivative Financial 

Instruments 

Consistent with section 3.01(c) of 

Notice 2018–07, the proposed 

regulations address the treatment of 

derivative financial instruments for 

purposes of measuring the cash position 

of a specified foreign corporation. 

Generally, the cash position of any 

specified foreign corporation includes, 

among other things, the fair market 

value of the cash-equivalent assets held 

by the corporation. See proposed 

§ 1.965–1(f)(16)(i)(C). Consistent with 

section 3.01(c) of Notice 2018–07, the 

proposed regulations define the term 

cash-equivalent asset to include 

derivative financial instruments held by 

the specified foreign corporation that is 

not a bona fide hedging transaction. See 

proposed § 1.965–1(f)(13)(v). Derivative 

financial instruments include notional 

principal contracts, options contracts, 

forward contracts, futures contracts, 

short positions in securities and 

commodities, and any similar financial 

instruments. See proposed § 1.965– 

1(f)(18). 

The proposed regulations provide that 

the value of each derivative financial 

instrument that must be taken into 

account in determining the cash 

position of a specified foreign 

corporation may be positive or negative, 

but that the aggregate amount taken into 

account for all derivative financial 

instruments (excluding bona fide 

hedging transactions) of a specified 

foreign corporation cannot be less than 

zero. See proposed § 1.965–1(f)(16)(iii). 

Consistent with section 3.01(c) of 

Notice 2018–07, the proposed 

regulations also provide that if a 

derivative financial transaction is a bona 

fide hedging transaction that is used to 

hedge a cash-equivalent asset, the value 

of the cash-equivalent asset identified 

on the taxpayer’s books and records as 

the asset being hedged must be adjusted 

by the fair market value of the bona fide 

hedging transaction that is used to 

hedge such cash-equivalent asset (such 

hedging transaction, a ‘‘cash-equivalent 

asset hedging transaction’’). See 

proposed § 1.965–1(f)(16)(ii). The value 

of a cash-equivalent asset hedging 

transaction must be taken into account 

in determining the cash position of a 

specified foreign corporation whether 

the cash-equivalent asset hedging 

transaction has positive or negative 

value, but only to the extent that the 

cash-equivalent asset hedging 

transaction (or transactions) does not 

reduce the fair market value of the asset 

being hedged below zero. Id. A bona 

fide hedging transaction with respect to 

an asset that is not a cash-equivalent 

asset or with respect to a liability (as 

described in § 1.1221–2(b)(2)) is not 

included in a specified foreign 

corporation’s cash position for purposes 

of section 965(c)(3)(B). 

The proposed regulations define a 

bona fide hedging transaction as a 

hedging transaction that meets the 

requirements of a bona fide hedging 

transaction described in § 1.954– 

2(a)(4)(ii) and that is properly identified 

as such in accordance with the 

requirements of that subparagraph. 

Proposed § 1.965–1(f)(12). Consistent 

with the definition of a bona fide 

hedging transaction in § 1.954– 

2(a)(4)(ii), in the case of an asset 

hedging transaction, the risk being 

hedged may be with respect to ordinary 

property, section 1231 property, or a 

section 988 transaction. Because the 

identification requirements of § 1.954– 

2(a)(4)(ii) are generally relevant only to 

CFCs, whereas section 965 applies to all 

specified foreign corporations, the 

proposed regulations provide that the 


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identification requirements apply only 

with respect to CFCs. Id. 

7. Accounts Receivable and Accounts 

Payable 

Consistent with section 3.04(a) of 

Notice 2018–13 as well as the 

clarification provided in section 3.06 of 

Notice 2018–26, the definitions of 

‘‘accounts payable’’ and ‘‘accounts 

receivable’’ in proposed § 1.965–1(f)(5) 

and (6) 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. In addition, 

receivables that are treated as accounts 

receivable within the meaning of section 

965(c)(3)(C)(i) and proposed § 1.965– 

1(f)(6) are not also treated as short-term 

obligations. See proposed § 1.965– 

1(f)(43). 

Comments requested modifications to 

the definition of accounts payable for 

purposes of determining a specified 

foreign corporation’s cash position, 

including that accounts payable be 

defined to include payables related to 

the licensing of intellectual property, 

payables to employees in the ordinary 

course of business, and payables arising 

from property described in section 

1221(a)(2). The term ‘‘accounts payable’’ 

is not defined in the statute, and the 

Treasury Department and the IRS have 

determined that the definition in the 

proposed regulations is consistent with 

the ordinary meaning of accounts 

payable. Therefore no change is made in 

the proposed regulations to the 

definition of accounts payable. 

8. Short-Term Obligations 

Consistent with section 3.04(b) of 

Notice 2018–13, proposed § 1.965– 

1(f)(43) provides that, for purposes of 

determining a specified foreign 

corporation’s cash position, a loan that 

must be repaid on the demand of the 

lender (or that must be repaid within 

one year of such demand) is treated as 

a short-term obligation, regardless of the 

stated term of the instrument, and thus 

is included in the specified foreign 

corporation’s cash position. In response 

to a comment, proposed § 1.965–1(f)(43) 

clarifies that an instrument’s term upon 

issuance is used for purposes of 

determining whether an obligation is a 

short-term obligation. 

A comment requested that taxpayers 

be able to prove, based on facts and 

circumstances, that a demand loan 

should not be treated as a short-term 

obligation. The Treasury Department 

and the IRS have determined that any 

facts-and-circumstances test would not 

be administrable, particularly to the 

extent that the test required a 

determination of a taxpayer’s subjective 

intent with respect to the payment of 

the loan. Accordingly, this comment is 

not adopted. 

9. Pro Rata Share 

Consistent with section 3.03(a) of 

Notice 2018–13, the proposed 

regulations provide that, for purposes of 

determining a United States 

shareholder’s pro rata share of the 

specified E&P deficit of an E&P deficit 

foreign corporation that has multiple 

classes of stock outstanding, the 

specified E&P deficit is allocated among 

the shareholders of the corporation’s 

common stock and in proportion to the 

value of the common stock held by such 

shareholders. See proposed § 1.965– 

1(f)(30)(ii). Comments are requested 

regarding whether there are 

circumstances in which a specified E&P 

deficit should be allocated to 

shareholders of an E&P deficit foreign 

corporation’s preferred stock and, if so, 

how to allocate as between shareholders 

of common stock and shareholders of 

preferred stock as well as among 

shareholders of preferred stock. The 

proposed regulations also clarify that, 

for purposes of determining a 

shareholder’s pro rata share of a 

specified E&P deficit, the value of the 

common stock is determined as of the 

last day of the last taxable year of the 

E&P deficit foreign corporation that 

begins before January 1, 2018. Id. 

See Part II.B.5 of this Explanation of 

Provisions section for a discussion of 

the definition of pro rata share with 

respect to the cash position of a 

specified foreign corporation. 

10. Domestic Pass-Through Entities 

As explained in section 3.05(b) of 

Notice 2018–26, section 965 increases 

the amount included in the gross 

income of a United States shareholder 

under section 951(a)(1) only if the 

United States shareholder owns section 

958(a) stock of one or more specified 

foreign corporations. See section 

951(a)(2)(A). Accordingly, if a domestic 

pass-through entity is a United States 

shareholder of a DFIC and owns section 

958(a) stock of the DFIC, the section 

965(a) inclusion amount with respect to 

the section 958(a) stock and the section 

965(c) deduction amount with respect to 

the section 965(a) inclusion amount are 

each determined at the level of the 

domestic pass-through entity. See 

section 951(a)(1). However, the 

domestic pass-through owners of the 

domestic pass-through entity are subject 

to federal income tax on their share of 

the aggregate section 965(a) inclusion 

amount with respect to section 958(a) 

stock owned by the domestic passthrough entity. Accordingly, in the case 

of a domestic pass-through entity that is 

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

respect to one or more DFICs, each 

domestic pass-through owner takes into 

account its share of the aggregate section 

965(a) inclusion amount with respect to 

section 958(a) stock of one or more 

DFICs of the domestic pass-through 

entity and its share of the section 965(c) 

deduction amount with respect to such 

amount (each, a ‘‘domestic pass-through 

owner share’’), regardless of whether 

such domestic pass-through owner is 

also a United States shareholder with 

respect to such DFIC, giving rise to a 

‘‘section 965(a) inclusion’’ and a 

‘‘section 965(c) deduction’’ to the 

domestic pass-through owner. See 

proposed § 1.965–1(f)(21), (37) and (41). 

For this purpose, a pass-through 

owner’s share is determined under the 

provisions of subchapter K of the Code. 

Proposed § 1.965–3(g) provides that 

an aggregate section 965(a) inclusion 

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

shareholder inclusion year and the 

related section 965(c) deduction amount 

must be allocated in the same 

proportion. For example, if a domestic 

pass-through owner is allocated 50 

percent of an aggregate section 965(a) 

inclusion amount with respect to 

section 958(a) stock of a domestic passthrough entity, the domestic passthrough owner must be allocated 50 

percent of the related section 965(c) 

deduction amount. If the domestic passthrough owner is also a section 958(a) 

U.S. shareholder with respect to the 

DFIC because it owns section 958(a) 

stock of the DFIC, the section 965(a) 

inclusion amount with respect to the 

section 958(a) stock of the domestic 

pass-through owner and the section 

965(c) deduction amount with respect to 

such amount are determined separately 

from the domestic pass-through owner’s 

share of the aggregate section 965(a) 

inclusion amount and section 965(c) 

deduction amount of the domestic passthrough entity. 

Consistent with section 3.05(b) of 

Notice 2018–26, proposed § 1.965– 

1(f)(19) defines the term ‘‘domestic passthrough entity’’ to mean a pass-through 

entity that is a United States person (as 

defined in section 7701(a)(30)), and 


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proposed § 1.965–1(f)(28) defines the 

term ‘‘pass-through entity’’ to mean a 

partnership, S corporation, or any other 

person to the extent that the income or 

deductions of such person are included 

in the income of one or more direct or 

indirect owners or beneficiaries of the 

person. Accordingly, if, for example, a 

domestic trust owns section 958(a) stock 

of a single DFIC and 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. As 

defined, a pass-through entity does not 

include a REIT or a regulated 

investment company (‘‘RIC’’). The term 

‘‘domestic pass-through owner’’ means a 

United States person that is a partner, 

shareholder, beneficiary, grantor, or 

owner, as the case may be, in a domestic 

pass-through entity, except that, in the 

case of tiered pass-through entities, the 

term does not include a partner, 

shareholder, beneficiary, grantor, or 

owner that is itself a domestic passthrough entity. See proposed § 1.965– 

1(f)(20). In the case of tiered passthrough entities, a reference to a 

domestic pass-through owner includes a 

United States person that is an indirect 

partner, shareholder, beneficiary, 

grantor, or owner through one or more 

other pass-through entities, and a 

reference to a domestic pass-through 

owner share of the aggregate section 

965(a) inclusion amount and section 

965(c) deduction amount of a domestic 

pass-through entity includes such 

domestic pass-through owner’s share of 

the aggregate section 965(a) inclusion 

amount and section 965(c) deduction 

amount of a domestic pass-through 

entity owned indirectly by the domestic 

pass-through owner through one or 

more other pass-through entities. See 

proposed § 1.965–1(f)(20) and (21). 

C. Foreign Currency Translation 

Consistent with section 3.05(a) of 

Notice 2018–13, the proposed 

regulations provide that, for purposes of 

determining the section 965(a) earnings 

amount of a specified foreign 

corporation, the accumulated post-1986 

deferred foreign income of the specified 

foreign corporation as of each of the E&P 

measurement dates must be compared 

in the functional currency of the 

specified foreign corporation. See 

proposed § 1.965–1(f)(36). 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 E&P as of 

November 2, 2017, into the new 

functional currency using the spot rate 

on November 2, 2017. Id.; see also 

proposed § 1.965–4(c)(1) (disregarding 

any such change in functional currency 

for purposes of applying section 965 to 

a United States shareholder of the 

specified foreign corporation under 

certain circumstances). 

Furthermore, the proposed 

regulations are consistent with section 

3.05(b) of Notice 2018–13, which 

indicates that the spot rate on December 

31, 2017, is to be used for translating the 

section 965(a) earnings amount of a 

DFIC into U.S. dollars for purposes of 

determining the section 965(a) inclusion 

amount of a United States shareholder 

with respect to the DFIC, as well as for 

purposes of translating other amounts 

necessary for the application of section 

965(b), including (i) translating a section 

965(a) earnings amount into U.S. dollars 

in computing amounts described in 

section 965(b)(2)(A) and (B), (ii) 

translating a specified E&P deficit into 

U.S. dollars in order to determine a 

United States shareholder’s aggregate 

foreign E&P deficit under section 

965(b)(3)(A), (iii) translating a section 

965(a) inclusion amount with respect to 

a DFIC (if the amount was reduced by 

an aggregate foreign E&P deficit under 

section 965(b)(1)) back into the 

functional currency of the DFIC for 

purposes of determining the E&P of the 

DFIC described in section 959(c)(2), and 

(iv) translating the portion of the U.S. 

dollar-denominated aggregate foreign 

E&P deficit allocated to a DFIC under 

section 965(b)(2) into the functional 

currency of the DFIC for purposes of 

determining its E&P described in section 

959(c)(2) by reason of section 

965(b)(4)(A). See proposed §§ 1.965– 

1(b)(1), (f)(9) and (11), and 1.965–2(c) 

and (d). Proposed § 1.965–6(b) also 

provides that in applying section 902, 

the section 965(a) inclusion amount 

must be translated (if necessary) back 

into the DFIC’s functional currency 

using the spot rate on December 31, 

2017. 

Section 3.05(c) of Notice 2018–13 

describes regulations to ensure that the 

cash position of a specified foreign 

corporation with respect to any cash 

measurement date is expressed in U.S. 

dollars, so that the amount of a United 

States shareholder’s aggregate foreign 

cash position is the greater of the 

aggregate amounts on each cash 

measurement date. In determining the 

cash position attributable to net 

accounts receivable, the amount of 

accounts receivable and accounts 

payable (in each case, if not otherwise 

denominated in U.S. dollars) must be 

translated into U.S. dollars at the spot 

rate on the relevant cash measurement 

date. The fair market value of assets 

described in section 965(c)(3)(B)(iii) 

must also be determined in U.S. dollars 

on the relevant cash measurement date. 

For example, in the case of foreign 

currency, the fair market value equals 

the currency amount translated at the 

spot rate on the relevant cash 

measurement date. Consistent with 

section 3.05(c) of Notice 2018–13, the 

proposed regulations provide that 

amounts taken into account in 

determining the cash position are 

translated (if necessary) using the spot 

rate on the relevant cash measurement 

date. See proposed § 1.965–1(f)(16)(iv). 

III. Section 962 Elections 

The proposed regulations provide 

rules consistent with section 5 of Notice 

2018–26 related to elections under 

section 962. Proposed § 1.962–2(a) 

clarifies that an individual domestic 

pass-through owner that is a United 

States shareholder with respect to a 

DFIC may make an election under 

section 962 with respect to the 

individual’s share of the section 965(a) 

inclusion amount of a domestic passthrough entity with respect to the DFIC, 

and an individual who is not a United 

States shareholder of a DFIC is not 

permitted to make an election under 

section 962 with respect to the 

individual’s share of a section 965(a) 

inclusion amount of a domestic passthrough entity with respect to the DFIC. 

See also proposed § 1.962– 

1(b)(1)(i)(A)(1)(ii). 

In addition, notwithstanding the rule 

in current § 1.962–1(b)(1)(i) providing 

that a deduction of a United States 

shareholder does not reduce the amount 

included in gross income under section 

951(a) for purposes of computing the 

amount of tax that would be imposed 

under section 11, the Treasury 

Department and the IRS have 

determined that in the case of a taxpayer 

making an election under section 962, 

the section 965(c) deduction (which is 

generally available to United States 

shareholders of DFICs, including 

individuals) should be allowed with 

respect to the tax imposed under section 

11 rather than under section 1. See H.R. 

Rep. No. 115–466, at 620 (2017) (Conf. 

Rep.). Thus, under proposed § 1.962– 

1(b)(1)(i)(B), ‘‘taxable income’’ as used 

in section 11 is reduced by a taxpayer’s 

section 965(c) deduction with respect to 

a section 965(a) inclusion to which the 

section 962 election applies. However, 

the proposed regulations clarify that, 

subject to future guidance, ‘‘taxable 


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income’’ as used in section 11 is not 

reduced by any other amounts, 

including any other deductions. 

To clarify that a section 965(c) 

deduction taken into account in 

determining ‘‘taxable income’’ as used 

in section 11 cannot then be deducted 

again at the individual level, the 

proposed regulations provide that any 

section 965(c) deduction allowed in 

determining ‘‘taxable income’’ as used 

in section 11 for purposes of computing 

the tax due as a result of a section 962 

election is not also allowed for purposes 

of determining an individual’s actual 

taxable income. See proposed § 1.965– 

3(e)(1). 

IV. Adjustments to E&P and Basis 

Proposed § 1.965–2 contains rules 

related 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). 

A. Determination of and Adjustments to 

E&P in the Last Taxable Year of a 

Specified Foreign Corporation That 

Begins Before January 1, 2018, for 

Purposes of Applying Sections 959 and 

965 

Consistent with section 3.02(d) of 

Notice 2018–07, the proposed 

regulations clarify the interaction 

between the rules under sections 959 

and 965 in 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 

of the specified foreign corporation in 

which or with which such year ends. 

Proposed § 1.965–2(b) provides the 

following rules relating to adjustments 

to E&P for determining a section 958(a) 

U.S. shareholder’s inclusion under 

section 951(a)(1), including by reason of 

section 965(a) and proposed § 1.965– 

1(b), and the treatment of distributions 

under section 959: First, the subpart F 

income of the specified foreign 

corporation is determined without 

regard to section 965(a), and a section 

958(a) U.S. shareholder’s inclusion 

under section 951(a)(1)(A) by reason of 

such amount is taken into account. 

Second, the treatment of a 

distribution from the specified foreign 

corporation to another specified foreign 

corporation that is made before January 

1, 2018, is determined under section 

959. 

Third, 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 of the section 958(a) 

U.S. shareholder with respect to the 

specified foreign corporation, if any, is 

determined, and the E&P (including a 

deficit) of the specified foreign 

corporation are adjusted as provided in 

proposed § 1.965–2(c) and (d) (as 

discussed in Part IV.B of this 

Explanation of Provisions 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 Part 

II.B.4 of this Explanation of Provisions 

section and proposed § 1.965–2(j), 

Example 2 and Example 3. 

Fourth, the treatment of all 

distributions from the specified foreign 

corporation other than those described 

in step 2 is determined under section 

959. 

Fifth, an amount is determined under 

section 956 with respect to the specified 

foreign corporation and the section 

958(a) U.S. shareholder, and the 

shareholder’s inclusion under section 

951(a)(1)(B) is taken into account. 

B. Adjustments to E&P by Reason of 

Section 965(a) and (b) 

1. Adjustments to E&P by Reason of 

Section 965(a) 

Proposed § 1.965–2(c) provides that if 

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

section 965(a) inclusion with respect to 

a DFIC, the DFIC will have previously 

taxed E&P with respect to the section 

958(a) U.S. shareholder in an amount 

equal to the section 965(a) inclusion 

amount (referred to as ‘‘section 965(a) 

previously taxed earnings and profits’’). 

Because section 965(a) previously taxed 

earnings and profits must be tracked in 

functional currency whereas the section 

965(a) inclusion amount is in U.S. 

dollars, as noted in Part II.C of this 

Explanation of Provisions section, the 

proposed regulations provide that the 

section 965(a) inclusion amount must be 

translated (if necessary) into the 

functional currency of the DFIC using 

the spot rate on December 31, 2017, in 

determining the amount of the section 

965(a) previously taxed earnings and 

profits. 

Under proposed § 1.965–2(c), the E&P 

of a DFIC described in section 959(c)(3) 

are reduced by an amount equal to the 

section 965(a) previously taxed earnings 

and profits of the corporation. In certain 

cases, the section 965(a) inclusion 

amount with respect to the DFIC, and 

therefore the section 965(a) previously 

taxed earnings and profits of the DFIC 

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

shareholder, may exceed the E&P 

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

DFIC. For example, this will be the case 

when a DFIC incurs a loss after the E&P 

measurement date on which it 

determines its section 965(a) earnings 

amount and before the end of its 

inclusion year. In such a case, under the 

proposed regulations, a deficit in E&P 

described in section 959(c)(3) will be 

created or increased. 

2. Adjustments to E&P by Reason of 

Section 965(b) 

Proposed § 1.965–2(d) provides rules 

relating to E&P of DFICs and E&P deficit 

foreign corporations by reason of a 

reduction under section 965(b)(1) and 

proposed § 1.965–1(b)(2) (reduction by 

the DFIC’s allocable share of a section 

958(a) U.S. shareholder’s aggregate 

foreign E&P deficit) or section 965(b)(5) 

and proposed § 1.965–8(b) (reduction by 

the DFIC’s allocable share of a section 

958(a) U.S. shareholder’s applicable 

share of an affiliated group’s aggregate 

unused E&P deficit) (collectively, the 

‘‘reduction rules’’). 

i. Adjustments to E&P of DFICs 

Under proposed § 1.965–2(d)(1), if a 

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

rata share of the section 965(a) earnings 

amount of a DFIC is reduced under the 

reduction rules, the DFIC will have 

previously taxed E&P (referred to as 

‘‘section 965(b) previously taxed 

earnings and profits’’) with respect to 

the section 958(a) U.S. shareholder in an 

amount equal to the amount of the 

reduction, if any, translated (if 

necessary) into the functional currency 

of the DFIC using the spot rate on 

December 31, 2017. For purposes of 

applying section 959, section 965(b) 

previously taxed earnings and profits 

are treated as E&P that are included in 

the gross income of the section 958(a) 

U.S. shareholder under section 

951(a)(1)(A). Furthermore, the E&P 

(including a deficit) described in section 

959(c)(3) of the DFIC are reduced (or, in 

the case of a deficit, increased) by an 

amount equal to the section 965(b) 

previously taxed earnings and profits. 

ii. Adjustments to E&P of E&P Deficit 

Foreign Corporations 

Under proposed § 1.965–2(d)(2)(i)(A), 

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 the reduction rules, translated (if 

necessary) into the functional currency 


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of the E&P deficit foreign corporation 

using the spot rate on December 31, 

2017. The proposed regulations clarify 

that the E&P increased by reason of this 

provision are not treated as E&P of the 

taxable year described in section 

316(a)(2). See also proposed § 1.965– 

6(c)(3) for a rule on the timing of this 

adjustment for purposes of determining 

a deemed paid credit allowed under 

sections 902 and 960 with respect to the 

E&P deficit foreign corporation (which 

is discussed in Part VII.C.1 of this 

Explanation of Provisions section). 

In addition, proposed § 1.965– 

2(d)(2)(i)(B) provides that, for purposes 

of section 952, a section 958(a) U.S. 

shareholder’s pro rata share of the E&P 

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 the reduction rules, 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. 

Proposed § 1.965–2(d)(2)(ii) provides 

rules for determining 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 the reduction rules. 

Proposed § 1.965–2(d)(2)(ii)(A) details 

the circumstances in which all of a pro 

rata share of a specified E&P deficit will 

be taken into account. Proposed 

§ 1.965–2(d)(2)(ii)(B) provides that if the 

rule in the preceding sentence does not 

apply, a section 958(a) U.S. shareholder 

must designate the portion taken into 

account. 

C. Adjustments to Basis by Reason of 

Section 965(a) and (b) 

1. Adjustments to Basis by Reason of 

Section 965(a) 

Proposed § 1.965–2(e) provides that, 

under section 961(a), a section 958(a) 

U.S. shareholder’s basis in section 

958(a) stock of a DFIC, or property 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 a DFIC (‘‘applicable property’’), is 

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

shareholder’s section 965(a) inclusion 

amount with respect to the DFIC. 

However, rules relating to basis 

adjustments in the case of a section 962 

election are reserved. Comments are 

requested as to the appropriate amount 

of a basis adjustment with respect to a 

DFIC with respect to which a section 

962 election is effective. 

2. Adjustments to Basis by Reason of 

Section 965(b) 

Proposed § 1.965–2(f)(1) clarifies that, 

in general, 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 

DFIC under the reduction rules. 

However, section 965(o) provides 

authority to write regulations 

concerning basis adjustments in 

contemplation of the fact that ‘‘basis 

adjustments (increases or decreases) 

may be necessary with respect to both 

the stock of the DFIC and the E&P 

deficit foreign corporation.’’ H.R. Rep. 

No. 115–466, at 620 (2017) (Conf. Rep.). 

The Conference Report stated: 

For example, with respect to the stock of 

the deferred foreign income corporation, the 

Secretary may determine that a basis increase 

is appropriate in the taxable year of the 

section 951A [sic] inclusion or, alternatively, 

the Secretary may modify the application of 

section 961(b)(1) with respect to such stock. 

Moreover, with respect to the stock of the 

E&P deficit [foreign] corporation, the 

Secretary may require a reduction in basis for 

the taxable year in which the U.S. 

shareholder’s pro rata share of the earnings 

of the E&P deficit [foreign] corporation are 

increased. 

Id. at 620–21. 

The Treasury Department and the IRS 

have determined that an increase to the 

basis of stock of DFICs is appropriate 

only if there is a corollary reduction to 

the basis of the stock of E&P deficit 

foreign corporations. However, the 

Treasury Department and the IRS 

recognize that such reduction, which 

could in certain cases give rise to gain, 

could be overly burdensome for 

taxpayers. Accordingly, proposed 

§ 1.965–2(f)(2) allows taxpayers to elect 

to make the relevant basis adjustments, 

in which case such adjustments must be 

consistently made with respect to all 

section 958(a) stock of specified foreign 

corporations owned by a section 958(a) 

U.S. shareholder and related persons. 

The relevant basis adjustments are (i) an 

increase in the section 958(a) U.S. 

shareholder’s basis in the section 958(a) 

stock of a DFIC or applicable property 

with respect to a DFIC 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, and (ii) a reduction in 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 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. However, as 

noted in Part IV.C.1 of this Explanation 

of Provisions section, rules relating to 

basis adjustments in the case of a 

section 962 election are reserved. An 

election under § 1.965–2(f)(2) is 

generally made by attaching a statement, 

signed under penalties of perjury, to 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 shareholder that 

begins before January 1, 2018, including 

the shareholder’s name and taxpayer 

identification number and a statement 

that the shareholder and all related 

persons make the election. See proposed 

§ 1.965–2(f)(2)(iii)(B). 

D. Gain-Reduction Rule 

Consistent with section 3.03 of Notice 

2018–07, and with the modification 

described in section 4 of Notice 2018– 

13, proposed § 1.965–2(g)(1) provides a 

gain-reduction rule pursuant to which, 

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

receives distributions through a chain of 

ownership described under section 

958(a) from a DFIC during the inclusion 

year that are attributable to section 

965(a) previously taxed earnings and 

profits, the amount of gain that would 

otherwise be recognized under section 

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

shareholder with respect to the section 

958(a) stock of the DFIC, or applicable 

property with respect to the DFIC, is 

reduced (but not below zero) by an 

amount equal to the section 965(a) 

previously taxed earnings and profits of 

the DFIC with respect to the section 

958(a) U.S. shareholder. 

If a taxpayer makes the election 

described in proposed § 1.965–2(f)(2), 

the gain-reduction rule will also apply 

to distributions attributable to section 

965(b) previously taxed earnings and 

profits, and the amount of gain that 

would otherwise be recognized by the 

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

reduced by the amount of the section 

965(b) previously taxed earnings and 

profits of the DFIC with respect to the 

section 958(a) U.S. shareholder. 

In order to ensure that the amount of 

gain in the section 958(a) stock or 

applicable property that would have 

been recognized under section 961(b)(2) 

remains reflected in the section 958(a) 

stock or applicable property, proposed 

§ 1.965–2(g)(2) provides that the basis in 

the section 958(a) stock or applicable 


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property must be reduced by the 

amount that would have been 

recognized as gain. 

E. Rules of Application for Basis 

Adjustments 

The proposed regulations provide 

certain rules of application common to 

all basis adjustments described in 

proposed § 1.965–2(e), (f)(2), and (g)(2) 

(‘‘specified basis adjustments’’). See 

proposed § 1.965–2(h). The rules 

address the timing and allocation among 

shares of the specified basis 

adjustments. See proposed § 1.965– 

2(h)(1) and (4). They also require netting 

of the specified basis adjustments and 

gain recognition to the extent that a net 

downward adjustment would exceed 

basis. See proposed § 1.965–2(h)(2) and 

(3). In addition, they make clear that the 

specified basis adjustments are limited 

to adjustments to property held by a 

section 958(a) U.S. shareholder, except 

in circumstances involving foreign passthrough entities. See proposed § 1.965– 

2(h)(5). 

V. Section 965(c) Deductions 

Proposed § 1.965–3 provides rules 

regarding section 965(c) deductions and 

section 965(c) deduction amounts. 

A. Determination of Aggregate Foreign 

Cash Position 

1. Disregard of Certain Obligations 

Between Related Specified Foreign 

Corporations 

Consistent with section 3.01(b) and (c) 

of Notice 2018–07, the proposed 

regulations provide 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 the corresponding cash 

measurement dates 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 

corresponding cash measurement dates. 

See proposed § 1.965–3(b)(1). 

2. Disregard of Certain Assets To 

Prevent Double Counting 

Section 3.05(a) of Notice 2018–26 

announced the intent to issue forms, 

publications, regulations, or other 

guidance specifying the documentation 

that a United States shareholder must 

maintain or provide, and the time and 

manner for providing any such 

documentation, in order to make the 

required demonstration to the Secretary 

to rely on section 965(c)(3)(D) in 

excluding net accounts receivable, 

actively traded property, and short-term 

obligations in determining its aggregate 

foreign cash position. To disregard 

assets under this rule, the proposed 

regulations provide that a section 958(a) 

U.S. shareholder must attach a 

statement to its timely filed return 

(taking into account extensions, if any) 

containing a description of the asset that 

would be taken into account with 

respect to both specified foreign 

corporations; a statement of the amount 

by which its pro rata share of the cash 

position of one specified foreign 

corporation is reduced; a detailed 

explanation of why there would 

otherwise be double-counting, including 

the computation of the amount taken 

into account with respect to the other 

specified foreign corporation; and an 

explanation of why the rule described in 

Part V.A.1 of this Explanation of 

Provisions section does not apply to 

disregard such amounts. See proposed 

§ 1.965–3(b)(2). 

B. Determination of Aggregate Foreign 

Cash Position for Section 958(a) U.S. 

Shareholder Inclusion Year 

Consistent with section 3.05(a) of 

Notice 2018–07, the proposed 

regulations provide that in the case of a 

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

a section 965(a) inclusion amount in 

more than one taxable year, the amount 

of the aggregate foreign cash position 

taken into account in the first taxable 

year will equal the lesser of the section 

958(a) U.S. shareholder’s aggregate 

foreign cash position or the aggregate 

965(a) inclusion amount taken into 

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

shareholder in that taxable year. 

Furthermore, the amount of the section 

958(a) U.S. shareholder’s aggregate 

foreign cash position taken into account 

in any succeeding taxable year will be 

the lesser of the excess, if any, of its 

aggregate foreign cash position over the 

amount of its aggregate foreign cash 

position taken into account in preceding 

taxable years, or the aggregate section 

965(a) inclusion amount taken into 

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

shareholder in such succeeding taxable 

year. See proposed § 1.965–3(c)(2). 

In addition, also consistent with 

section 3.05(a) of Notice 2018–07, the 

proposed regulations provide that, for 

purposes of determining the aggregate 

foreign cash position of a section 958(a) 

U.S. shareholder for a taxable year in 

which it takes into account a section 

965(a) inclusion amount, a section 

958(a) U.S. shareholder can 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 taxable year of the 

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

filed (taking into account extensions, if 

any) will be zero as of the cash 

measurement date with which the year 

of the 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 was treated as zero pursuant 

to the preceding sentence for a section 

958(a) U.S. shareholder inclusion year 

(an ‘‘estimated section 958(a) U.S. 

shareholder inclusion year’’), the final 

cash measurement date amount in fact 

exceeds the average of the first and 

second cash measurement date amounts 

with respect to the section 958(a) 

shareholder, and the shareholder’s 

aggregate section 965(a) inclusion 

amount in fact exceeds the final cash 

measurement date amount, interest and 

penalties will not be imposed if the 

section 958(a) U.S. shareholder makes 

appropriate adjustments by amending 

the return for the estimated section 

958(a) U.S. shareholder inclusion year 

to reflect the correct aggregate foreign 

cash position 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. See proposed § 1.965– 

3(c)(3). 

C. Recapture of Section 965(c) 

Deductions for Expatriated Entities 

Proposed § 1.965–3(d) harmonizes the 

rule provided in section 965(l) requiring 

the recapture of a section 965(c) 

deduction by an expatriated entity with 

the expanded scope of availability of 

section 965(c) deductions (that is, to a 

domestic pass-through owner that is not 

itself a United States shareholder) by 

requiring recapture of all section 965(c) 

deductions taken into account by an 

expatriated entity without regard to 

whether the expatriated entity was itself 

a United States shareholder. 

D. Treatment of Section 965(c) 

Deductions Under Certain Code 

Provisions 

Consistent with section 3.06 of Notice 

2018–26, proposed § 1.965–3(f)(1) 

provides that a section 965(c) deduction 

will not be treated as an itemized 

deduction for any purpose of the Code 

(including, as described in Notice 2018– 

26, for purposes of sections 56 and 67). 

The Treasury Department and the IRS 

are aware that the rules of subchapter K 

and subchapter S may prevent a partner 

or S corporation shareholder from 

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through owner share of a section 965(c) 

deduction amount in certain 

circumstances if allocated by a 

partnership or S corporation separately 

from the corresponding section 965(a) 

inclusion amount, particularly to the 

extent that a partnership or S 

corporation makes distributions to one 

or more partners or shareholders (as the 

case may be) during the year of its 

section 965(a) inclusion. See, e.g., 

section 1366(d). Accordingly, proposed 

§ 1.965–3(f)(2)(i) provides that in the 

case of a domestic partnership or S 

corporation, 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). 

Furthermore, the proposed regulations 

incorporate the rules concerning basis 

and AAA adjustments contained in 

section 965(f)(2) and provide an 

example illustrating the application of 

the rules described in this paragraph. 

See proposed § 1.965–3(f)(2)(i)(B), (ii), 

and (iii). 

The proposed regulations clarify 

whether a United States person that 

must pay tax under section 1411 on a 

section 965(a) inclusion is entitled to 

take into account a section 965(c) 

deduction for purposes of determining 

the amount of such tax. Section 965(c) 

deductions are intended to reduce the 

rate of income tax to which section 

965(a) inclusions are subject. See H.R. 

Rep. No. 115–466, at 620 (2017) (Conf. 

Rep.). The Treasury Department and the 

IRS have determined that the section 

965(c) deduction was not intended to 

reduce the rate of tax imposed by nonincome tax provisions outside of 

chapter 1. Accordingly, proposed 

§ 1.965–3(f)(3) provides 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. Consistent with the 

rule for section 1411, proposed § 1.965– 

3(f)(4) provides that 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 for purposes of 

section 4940(c)(3)(A). 

VI. Disregard of Certain Transactions 

Proposed § 1.965–4 provides rules 

that disregard certain transactions for 

purposes of applying section 965. In 

particular, proposed § 1.965–4 provides 

rules that disregard (i) transactions 

undertaken with a principal purpose of 

reducing the section 965 tax liability 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. 

A. Anti-Avoidance Rules 

The proposed regulations provide 

rules, consistent with section 3.04 of 

Notice 2018–26, to prevent the 

avoidance of section 965, including an 

anti-avoidance rule disregarding certain 

transactions and rules disregarding 

certain changes in accounting methods 

and entity classification elections. See 

proposed § 1.965–4(b) through (e). The 

application of the anti-avoidance rule is 

based on whether there is a ‘‘change in 

the amount of a section 965 element’’ 

rather than a change in the section 965 

tax liability, as described in the notice. 

See proposed § 1.965–4(b)(1). For this 

purpose, generally there is a change in 

the amount of a section 965 element if 

there is a reduction of a section 958(a) 

inclusion amount or aggregate foreign 

cash position or an increase in deemed 

paid foreign income taxes as a result of 

a section 965(a) inclusion. See proposed 

§ 1.965–4(d) and (e)(1). 

Comments requested that the antiavoidance rule not apply to the extent 

a reduction in tax liability by reason of 

section 965 is offset by an equal amount 

of tax increase pursuant to a different 

Code provision. This comment is not 

adopted. The Conference Report reflects 

an intent for the Treasury Department 

and the IRS to address all strategies for 

avoiding a section 965(a) inclusion, 

without regard to the effect on overall 

tax liability. See H.R. Rep. No. 115–466, 

at 619 (2017) (Conf. Rep.). Furthermore, 

it would be difficult for the IRS to 

determine whether a particular increase 

in tax liability for non-section 965 

reasons is related to the reduction in the 

taxpayer’s section 965(a) inclusion. 

Finally, the anti-avoidance rule 

generally does not apply without a 

principal purpose of changing the 

amount of a section 965 element. 

Depending on the facts and 

circumstances, transactions that do not 

reduce overall tax liability may not meet 

the principal purpose test described in 

proposed § 1.965–4(b)(1). 

Comments also requested a de 

minimis exception for the antiavoidance rule. This comment is not 

adopted. The Treasury Department and 

the IRS have determined that any 

reduction in tax imposed by reason of 

section 965 through tax avoidance 

strategies occurring after November 2, 

2017, is inconsistent with congressional 

intent and should not be respected. 

Comments to Notice 2018–26 

requested that the rule disregarding 

changes to methods of accounting not 

apply when the change is from an 

impermissible to a permissible method, 

and that a principal purpose test should 

apply. These comments are not adopted. 

Proposed § 1.965–4(c)(1) does not affect 

a taxpayer’s ability to change its method 

of accounting, including to change to a 

permissible method. Instead, the rule 

disregarding an accounting method 

change is relevant only for the limited 

purpose of determining the amount of a 

taxpayer’s section 965 elements. 

The choice of a November 2, 2017, 

measurement date reflects an intent to 

impose a transition tax on a snapshot of 

earnings as of a date that coincides with 

the introduction of the Act in Congress, 

and reflects a general policy of 

disregarding taxpayer actions occurring 

after November 2, 2017, that reduce the 

taxpayer’s liability imposed by reason of 

section 965, even if such future actions 

are otherwise respected under the Code. 

Such actions can include changes in 

accounting methods, whether to 

methods that are permissible or 

impermissible and regardless of the 

principal purpose for such change. A 

rule disregarding such changes is also 

consistent with the Conference Report, 

which reflects a clear intent for the 

Treasury Department and the IRS to 

exercise their authority under section 

965(o) to disregard accounting method 

changes that reduce a taxpayer’s tax 

liability under section 965. See H.R. 

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

Rep.). 

B. Disregard of Certain Transactions 

Occurring Between E&P Measurement 

Dates 

In section 3.02(a) of Notice 2018–07, 

the Treasury Department and the IRS 

announced the intent to issue 

regulations to address the possibility of 

double-counting or double non-counting 

in the computation of post-1986 

earnings and profits arising from 

amounts paid or incurred (including 

certain dividends) between related 

specified foreign corporations of a 

United States shareholder that occur 

between E&P measurement dates and 

that would otherwise reduce the post1986 earnings and profits as of 

December 31, 2017, of the specified 

foreign corporation that paid or incurred 

such amounts. The notice contained 

examples illustrating fact patterns 

involving double-counting or double 

non-counting to be addressed by the 

future regulations. The proposed 

regulations provide, consistent with 

section 3.02(a) of Notice 2018–07, that 

amounts paid or incurred between 

related specified foreign corporations of 

a section 958(a) U.S. shareholder 


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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). 

A number of comments requested that 

these rules be expanded to cover other 

transactions that could lead to double 

counting and double non-counting in 

the computation of post-1986 earnings 

and profits of a specified foreign 

corporation, including: (i) Deductible 

payments by a specified foreign 

corporation to a United States 

shareholder or to a partnership owned 

by the United States shareholder; and 

(ii) distributions by specified foreign 

corporations to a United States 

shareholder. The recommendations in 

these comments are not adopted. The 

Treasury Department and the IRS have 

determined that the concerns regarding 

issues of double counting and double 

non-counting in the computation of 

post-1986 earnings and profits of a 

specified foreign corporation relate to 

transactions occurring between 

specified foreign corporations rather 

than between a specified foreign 

corporation and a United States 

shareholder. See H.R. Rep. No. 115–466, 

at 619 (2017) (Conf. Rep.). Payments by 

a specified foreign corporation to a 

United States shareholder only affect 

the post-1986 earnings and profits of a 

single specified foreign corporation, and 

thus do not result in double counting in 

determining a United States 

shareholder’s section 965(a) inclusion 

amount. Additionally, 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 and that would 

need to be considered if such payments 

were disregarded. For example, a 

distribution from a specified foreign 

corporation to its United States 

shareholder may permit the United 

States 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 United 

States shareholder’s section 965(a) 

inclusion amount. 

VII. Foreign Tax Credits 

A. In General 

Section 14301 of the Act repealed 

section 902 effective for taxable years of 

foreign corporations beginning after 

December 31, 2017, and taxable years of 

United States shareholders in which or 

with which such taxable years of foreign 

corporations end. The proposed 

regulations include, in addition to rules 

under 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. 

B. Allowance of a Credit or Deduction 

for Foreign Income Taxes 

1. Scope 

Section 965(g)(1) provides that no 

credit is allowed under section 901 for 

the applicable percentage of any taxes 

paid or accrued (or treated as paid or 

accrued) with respect to any amount for 

which a section 965(c) deduction 

amount is allowed. The Conference 

Report does not elaborate on the 

meaning of ‘‘taxes paid or accrued’’ or 

‘‘taxes treated as paid or accrued.’’ 

Comments requested clarification of the 

meaning of these terms and the scope of 

section 965(g). Under the proposed 

regulations, ‘‘taxes paid or accrued’’ 

refers to foreign income taxes paid or 

accrued directly by the taxpayer under 

section 901, and ‘‘taxes treated as paid 

or accrued’’ includes foreign income 

taxes deemed paid by the taxpayer 

under section 960, foreign income taxes 

allocated to an entity under § 1.901– 

2(f)(4), and a distributive share of taxes 

paid by a partnership. 

2. Applicable Percentage 

The proposed regulations clarify that 

the term ‘‘applicable percentage’’ is 

determined with respect to a section 

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

958(a) U.S. shareholder inclusion year. 

As a result, if a section 958(a) U.S. 

shareholder has more than one section 

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

the shareholder might have more than 

one applicable percentage as a result of 

differing aggregate foreign cash 

positions for those different section 

958(a) U.S. shareholder inclusion years. 

See proposed § 1.965–5(d)(1). In 

addition, if a person is a domestic passthrough owner with respect to more 

than one domestic pass-through entity, 

each of which is a section 958(a) U.S. 

shareholder, the person might have a 

different applicable percentage with 

respect to each of those domestic passthrough entities because of differing 

aggregate foreign cash positions of those 

entities, as well as a different applicable 

percentage with respect to the person’s 

section 958(a) stock, if any. See 

proposed § 1.965–5(d)(2). Therefore, the 

amount of foreign tax credits disallowed 

under section 965(g) and proposed 

§ 1.965–5(b) and (c) could differ 

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

shareholder inclusion year and section 

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

foreign income taxes relate. 

3. Foreign Income Taxes Paid or 

Accrued Directly by Taxpayer 

For purposes of section 965(g)(1), 

foreign income taxes paid or accrued 

directly by a taxpayer include foreign 

income taxes imposed on the taxpayer 

on a distribution of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits. Section 965(g)(3) provides 

that no deduction is allowed for any tax 

for which a credit is not allowable 

under section 901 by reason of section 

965(g)(1). The proposed regulations 

provide that 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. The proposed 

regulations also provide that neither a 

deduction 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. See proposed 

§ 1.965–5(b). 

Accordingly, 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, 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. 


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4. Foreign Income Taxes Treated as Paid 

or Accrued by Taxpayer 

i. Section 960(a)(1) 

For taxable years of foreign 

corporations beginning before January 1, 

2018, and taxable years of United States 

shareholders in which or with which 

such taxable years of foreign 

corporations end, section 960(a)(1) 

provides that, if there is included under 

section 951(a) in the gross income of a 

domestic corporation any amount 

attributable to E&P of a foreign 

corporation which is a member of a 

qualified group (as defined in section 

902(b)) with respect to the domestic 

corporation, then, except to the extent 

provided in regulations, section 902 

shall be applied as if the amount so 

included were a dividend paid by such 

foreign corporation (determined by 

applying section 902(c) in accordance 

with section 904(d)(3)(B)). The proposed 

regulations provide that a credit under 

section 901 is not allowed for the 

applicable percentage of any foreign 

income taxes treated as paid or accrued 

under section 960(a)(1) (for taxable 

years of foreign corporations beginning 

before January 1, 2018, and to taxable 

years of United States persons in which 

or with which such taxable years of 

foreign corporations end) with respect 

to any amount for which a section 

965(c) deduction is allowed for a section 

958(a) U.S. shareholder inclusion year. 

ii. Section 960(a)(3) 

For a taxable year of a foreign 

corporation beginning before January 1, 

2018, section 960(a)(3) provides that any 

portion of a distribution from such a 

foreign corporation received by a 

domestic corporation which is excluded 

from gross income under section 959(a) 

is treated by the domestic corporation as 

a dividend, solely for purposes of taking 

into account under section 902 any 

foreign taxes, on or with respect to the 

accumulated profits of such foreign 

corporation from which such 

distribution is made, which were not 

deemed paid by the domestic 

corporation for any prior taxable year. 

Accordingly, the proposed regulations 

provide that the credit allowed under 

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

foreign income taxes imposed on an 

upper-tier foreign corporation on 

distributions of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits from a lower-tier foreign 

corporation. See proposed § 1.965– 

5(c)(1)(ii). Furthermore, section 

960(a)(3) does not allow a credit for 

foreign income taxes attributable to the 

portion of a section 965(a) earnings 

amount that was reduced pursuant to 

section 965(b) since such taxes were not 

imposed on a distribution of previously 

taxed E&P. Instead, because section 

965(b) previously taxed earnings and 

profits are treated as having been 

included in a United States 

shareholder’s income under section 

951(a), foreign income taxes that would 

have been deemed paid with respect to 

section 965(b) previously taxed earnings 

and profits under section 960(a)(1) had 

such amounts actually been included in 

income are treated as having been 

deemed paid, with the result that no 

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

or any other provision of the Code for 

such taxes. Id. 

The proposed regulations also provide 

that the disallowance under section 

965(g) applies to foreign taxes deemed 

paid under section 960(a)(3) with 

respect to distributions of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits with respect to a section 

958(a) U.S. shareholder inclusion year. 

For example, if a lower-tier foreign 

corporation distributes section 965(a) 

previously taxed earnings and profits to 

an upper-tier foreign corporation, and 

the upper-tier foreign corporation pays 

a foreign withholding tax with respect 

to the distribution of the section 965(a) 

previously taxed earnings and profits, 

such withholding tax would be 

creditable under section 960(a)(3) upon 

a distribution by the upper-tier foreign 

corporation to an eligible domestic 

corporation. However, the domestic 

corporation cannot claim a credit for the 

applicable percentage of such 

withholding tax. See proposed § 1.965– 

5(c)(ii). 

The Act replaces section 960(a)(3) 

with section 960(b). The proposed 

regulations only address distributions 

out of section 965(a) previously taxed 

earnings and profits and section 965(b) 

previously taxed earnings and profits in 

years before the effective date of section 

960(b) in the Act. The Treasury 

Department and the IRS anticipate that 

future regulations will provide similar 

rules in connection with new section 

960(b). 

iii. Disallowance of Deduction 

The proposed regulations clarify that 

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. See 

proposed § 1.965–5(c)(2). 

C. Computation of Foreign Income 

Taxes Deemed Paid 

1. General Rule and Exception 

Comments requested clarification 

regarding the determination of deemed 

paid taxes under section 960 in 

connection with section 965. One 

comment also requested specific 

changes to the application of sections 

902 and 960 that would permit a 

taxpayer to reduce the post-1986 

undistributed earnings of a DFIC by the 

amount of any deficit from an E&P 

deficit foreign corporation that reduced 

the section 965(a) earnings amount of 

the DFIC. In general, the proposed 

regulations confirm that sections 902 

and 960 apply in the same manner for 

section 965(a) inclusions as for other 

inclusions under section 951(a)(1)(A), 

and therefore a DFIC’s post-1986 

undistributed earnings is not reduced by 

specified E&P deficits from an E&P 

deficit foreign corporation. 

A comment noted that in determining 

the indirect credit with respect to a 

section 965(a) inclusion, the numerator 

of the section 902 fraction (as defined in 

proposed § 1.965–6(c)(1)) may be greater 

than the denominator given that the 

section 965(a) inclusion is determined 

on one of two measurement dates. For 

example, if the amount of the 

accumulated post-1986 deferred foreign 

income of a DFIC is greater on 

November 2, 2017, than such amount is 

on December 31, 2017, the section 

965(a) earnings amount of the DFIC will 

be based on E&P as of the November 2, 

2017 date. However, the denominator of 

the section 902 fraction, post-1986 

undistributed earnings, is determined as 

of the close of the taxable year of the 

foreign corporation and without 

diminution by reason of earnings 

distributed or otherwise included in 

income during the year. Section 

902(c)(1). Where the post-1986 

undistributed earnings as of the close of 

the DFIC’s U.S. taxable year is positive, 

but less than the section 965(a) earnings 

amount, this could result in a section 

902 fraction greater than one. 

The section 902 fraction cannot 

exceed one. See H.H. Robertson Co. v. 

Commissioner of Internal Revenue, 59 

T.C. 53 (1972), aff’d 500 F.2d 1399 (3d 

Cir. 1974). For the avoidance of doubt, 

the proposed regulations clarify that 

when the denominator of the section 

902 fraction is positive but less than the 

numerator of such fraction, the section 

902 fraction is one. See proposed 

§ 1.965–6(c)(2). 

Comments also requested that 

taxpayers be deemed to pay taxes when 

the denominator of the section 902 

fraction is zero or less than zero, either 


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Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 39531 

by treating the DFIC as having post-1986 

undistributed earnings equal to the 

DFIC’s post-1986 foreign income taxes, 

or by determining the DFIC’s post-1986 

undistributed earnings as of the 

measurement date used to determine its 

section 965(a) earnings amount. This 

comment is not adopted. The Treasury 

Department and the IRS have 

determined that the Act was not 

intended to alter the application of 

sections 902 and 960 with respect to 

section 965. Thus, the proposed 

regulations confirm that when the 

denominator of the section 902 fraction 

is zero or less than zero, no taxes are 

deemed paid with respect to the section 

965(a) inclusion. See proposed § 1.965– 

6(c)(2); cf. § 1.902–1(b)(4) (providing 

that no foreign income taxes are deemed 

paid in the case of a distribution out of 

current E&P that is treated as a ‘‘nimble’’ 

dividend under section 316(a)(2) when 

there is a deficit in accumulated E&P). 

Section 965(b)(4)(B), which provides 

that 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 

such shareholder by reason of allocation 

of such deficit to a DFIC, does not 

indicate whether that increase applies 

for purposes of determining the post1986 undistributed earnings in the last 

taxable year of an E&P deficit foreign 

corporation that begins before January 1, 

2018. The Treasury Department and the 

IRS have determined that section 

965(b)(4)(B) should not apply for 

purposes of section 902 in that year. 

Therefore, the proposed regulations 

provide that post-1986 undistributed 

earnings of an E&P deficit foreign 

corporation are increased by reason of 

section 965(b)(4)(B) or proposed 

§ 1.965–2(d)(2)(i) 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. 

Comments also recommended that, to 

the extent that a hovering deficit is 

treated as reducing the post-1986 

earnings and profits of a DFIC, those 

taxes should be added to the DFIC’s 

post-1986 foreign income taxes in the 

inclusion year with respect to the DFIC. 

The Treasury Department and the IRS 

have determined that the existing rules 

adequately address this issue and 

decline to adopt this comment. The 

proposed regulations do not provide 

special rules for foreign income taxes 

that are related to hovering deficits; as 

a result, the rules in § 1.367(b)–7 

continue to apply with respect to such 

foreign income taxes. 

2. Taxes Deemed Paid in the Case of 

Certain Lower-Tier Corporations 

A credit is allowable under section 

960(a)(1) for taxes paid or accrued by a 

foreign corporation only if it is a 

member of a qualified group (as defined 

in section 902(b)) with respect to the 

domestic corporation. Section 902(b)(2) 

states that the term ‘‘qualified group’’ 

does not include any foreign 

corporation below the third tier in the 

chain unless the foreign corporation is 

a CFC and the domestic corporation is 

a United States shareholder with respect 

to it. Comments requested clarification 

as to whether a 10-percent corporation 

treated as a CFC under section 965(e)(2) 

for purposes of sections 951 and 961 is 

treated as a CFC for purposes of section 

902(b). 

Section 965(e)(2) applies to treat a 10- 

percent corporation as a CFC solely for 

purposes of taking into account the 

subpart F income of such corporation 

under section 965(a) and for purposes of 

determining the United States 

shareholder’s pro rata share of the 

section 965(a) inclusion amount. The 

proposed regulations also treat a 10- 

percent corporation as a CFC for other 

limited purposes. See Part I.A of this 

Explanation of Provisions. However, 

section 965 does not modify the 

computation of foreign income taxes 

deemed paid under sections 902 and 

960, or for purposes of any other Code 

section. Therefore, the proposed 

regulations clarify that a United States 

shareholder is not entitled to an indirect 

credit with respect to a 10-percent 

corporation that is below the third tier 

in a chain of foreign corporations of the 

United States shareholder. See proposed 

§ 1.965–1(d). 

D. Allocation and Apportionment of 

Expenses 

The generally applicable rules of 

sections 861 through 865 and the 

regulations thereunder for allocating 

and apportioning deductions to separate 

categories of income described in 

section 904(d)(1) and § 1.904–4(m) 

apply for purposes of determining the 

foreign tax credits allowed by reason of 

a section 965(a) inclusion. For purposes 

of allocating and apportioning any 

deductible expense, any tax-exempt 

asset (and any income from such asset) 

is not taken into account. See section 

864(e)(3). A similar rule applies in the 

case of the portion of any dividend 

(other than a qualifying dividend as 

defined in section 243(b)) equal to the 

deduction allowable under section 243 

or 245(a) with respect to such dividend 

and in the case of a like portion of any 

stock the dividends on which would be 

so deductible and would not be 

qualifying dividends (as so defined). 

The proposed regulations confirm that 

the allowance of a deduction under 

section 965(c) with respect to the 

section 965(a) inclusion does not result 

in any portion of the section 965(a) 

inclusion being treated as exempt 

income. In addition, the assets to which 

the section 965(a) inclusion relates are 

not treated as exempt assets under 

section 864(e)(3) or § 1.861–8T(d). 

The proposed regulations also 

confirm that section 965(a) previously 

taxed earnings and profits and 965(b) 

previously taxed earnings and profits, 

like all previously taxed E&P, do not 

give rise to exempt treatment under 

section 864(e)(3). See proposed § 1.965– 

6(d). 

Under section 864(e)(4), for purposes 

of allocating and apportioning expenses 

on the basis of assets, the adjusted basis 

in stock of any nonaffiliated 10-percent 

owned corporation is increased by the 

E&P accumulated during the period the 

taxpayer held the stock, or reduced (but 

not below zero) by deficits in E&P of the 

corporation attributable to the stock for 

such period. The purpose for this 

adjustment is to better approximate the 

value of such stock. See Joint Committee 

on Tax’n, General Explanation of the 

Tax Reform Act of 1986 (Pub. L. 99–514) 

(May 4, 1987), JCS–10–87, at p.87 

(adjustment to E&P ‘‘takes account of 

some changes in value attributable to 

taxpayer’s equity interests in such 

corporations’’). 

In order to avoid double counting of 

previously taxed E&P and the basis 

adjustments under section 961, section 

864(e)(4)(D) provides that proper 

adjustments must be made to the E&P of 

a corporation to account for previously 

taxed E&P and reflected in the adjusted 

basis of the stock. See Joint Committee 

on Tax’n, General Explanation of the 

Tax Reform Act of 1986 (Pub. L. 99–514) 

(May 4, 1987), JCS–10–87, at p.91. 

Section 1.861–12T(c)(2)(i)(B) provides 

that a taxpayer’s basis in stock of a CFC 

shall not include any amount included 

in basis under section 961. At the same 

time, all E&P (including previously 

taxed E&P) generally increase the 

taxpayer’s adjusted basis in stock of a 

CFC. 

As a result of the enactment of section 

965, the Treasury Department and the 

IRS recognize that the application of 

section 965(b)(4)(A) and (B) may 

warrant the issuance of special rules for 

the determination of adjusted basis. 

Furthermore, a different rule may be 

needed if a taxpayer has made an 

election under proposed § 1.965–2(f)(2) 

to adjust its basis to reflect the use of a 

specified E&P deficit. The Treasury 


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39532 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

Department and the IRS request 

comments on what rules may be 

appropriate, including whether the rules 

under § 1.861–12(c)(2) should be 

modified. 

E. Application of Section 904 

The proposed regulations do not 

address the assignment of a section 

965(a) inclusion and the related taxes to 

a separate category of income. The 

Treasury Department and the IRS have 

determined that the application of 

section 904 is clear with respect to 

section 951(a) inclusions regardless of 

whether the DFIC is a CFC or a 10- 

percent corporation. Furthermore, the 

Treasury Department and the IRS have 

determined that no clarification is 

necessary with respect to § 1.904–6 for 

purposes of relating the creditable 

portion of the foreign income taxes with 

respect to a section 965(a) inclusion to 

a separate category of income. For 

example, withholding tax imposed on a 

distribution of section 965(a) previously 

taxed earnings and profits and section 

965(b) previously taxed earnings and 

profits will be related to the separate 

category of income to which the original 

section 965(a) inclusion was assigned. 

See § 1.904–6(b)(2) and (c), Example 7. 

The Treasury Department and the IRS 

request comments on whether more 

guidance is necessary with respect to 

the assignment of the section 965(a) 

inclusion and the related taxes to a 

separate category or categories of 

income. 

In addition, comments are requested 

on whether additional rules are needed 

for determining the amount of the 

increase in the section 904 limitation 

with respect to distributions of section 

965(a) previously taxed earnings and 

profits and section 965(b) previously 

taxed earnings and profits, taking into 

account the section 965(c) deduction 

and the disallowed foreign taxes under 

section 965(g). See section 960(b) 

(effective with respect to taxable years 

of foreign corporations beginning before 

January 1, 2018, and to taxable years of 

United States shareholders with or 

within which such taxable years of 

those foreign corporations end) and 

section 960(c) for later years. 

VIII. Election, Payment, and Other 

Special Rules 

A. In General 

Section 965 provides certain elections 

that taxpayers can make with respect to 

the application of section 965. See Parts 

II.K through N of the Background 

section of this preamble. As discussed 

in Part II.B.10 of this Explanation of 

Provisions section and in section 3.05(b) 

of Notice 2018–26, if the United States 

shareholder of a DFIC is a domestic 

pass-through entity and owns section 

958(a) stock of the DFIC, then each 

domestic pass-through owner of the 

domestic pass-through entity will take 

into account its share of the section 

965(a) inclusion amount with respect to 

the section 958(a) stock of the DFIC of 

the domestic pass-through entity and 

the section 965(c) deduction amount 

with respect to such amount, regardless 

of whether the domestic pass-through 

owner is itself also a United States 

shareholder with respect to the DFIC. 

The elections described in Parts II.K 

through N of the Background section of 

this preamble under sections 965(h) (the 

‘‘section 965(h) election’’), 965(m) (the 

‘‘section 965(m) election’’), and 965(n) 

(the ‘‘section 965(n) election’’) are 

available to a United States shareholder 

of a DFIC under the terms of section 

965. However, because a domestic passthrough owner will take into account its 

share of a section 965(a) inclusion 

amount (and the related section 965(c) 

deduction amount) whether or not it is 

itself a United States shareholder, the 

proposed regulations provide, 

consistent with section 3.05(b) of Notice 

2018–26, that a domestic pass-through 

owner may make the section 965(h) 

election, the section 965(m) election, 

and the section 965(n) election. 

B. Net Tax Liability Under Section 965 

The proposed regulations define a 

new term, ‘‘total net tax liability under 

section 965,’’ which reflects the 

definition of net tax liability under 

section 965 in section 965(h)(6) with 

respect to a person as if the person were 

a United States shareholder of all DFICs 

with respect to which it has section 

965(a) inclusions, consistent with 

section 3.05(c) of Notice 2018–26. See 

proposed § 1.965–7(g)(10). However, the 

proposed regulations provide that the 

dividends excluded pursuant to the 

second prong of the computation (the 

‘‘without’’ prong) include dividends 

received directly or through a chain of 

ownership described in section 958(a). 

See proposed § 1.965–7(g)(10)(i)(B)(2). 

For purposes of determining a 

person’s total net tax liability under 

section 965, the proposed regulations 

also clarify the computation of the 

foreign tax credit for purposes of the 

amount described in section 

965(h)(6)(A)(ii)(II) and proposed 

§ 1.965–7(g)(10)(i)(B) (the net income 

tax liability determined without regard 

to section 965 and dividends from 

DFICs). Specifically, the proposed 

regulations provide that the foreign tax 

credits disregarded in determining net 

income tax determined under section 

965(h)(6)(A)(ii)(II) and proposed 

§ 1.965–7(g)(10)(i)(B) includes the 

credits 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, as well as the 

credits for foreign income taxes imposed 

on distributions of section 965(a) 

previously taxed earnings and profits or 

section 965(b) previously taxed earnings 

and profits made in the taxable year in 

which the person includes a section 

965(a) inclusion in income. 

C. Section 965(h) Election 

The proposed regulations provide that 

the section 965(h) election may be made 

by any person with a section 965(h) net 

tax liability (which includes a section 

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

pass-through owner in a domestic passthrough entity that is a section 958(a) 

U.S. shareholder, but not a domestic 

pass-through entity itself). Under the 

proposed regulations, the section 965(h) 

election may be revoked only by paying 

the full amount of the unpaid section 

965(h) net tax liability. See proposed 

§ 1.965–7(b)(1). The proposed 

regulations also provide that a section 

965(h) election is made with respect to 

the section 965(h) net tax liability of a 

person, which is the person’s 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 elections under 

section 965(i) are effective. See 

proposed § 1.965–7(g)(4). 

1. Underpayment of an Installment 

As noted in Part II.K of the 

Background section of this preamble, 

section 965(h)(3) provides that an 

addition to tax for failure to timely pay 

an installment required under section 

965(h) is an acceleration event with 

respect to the unpaid portion of the 

remaining installments. Section 

965(h)(4) provides that if a taxpayer has 

made an election under section 965(h), 

and subsequently a deficiency is 

assessed with respect to the taxpayer’s 

net tax liability for purposes of section 

965(h), then the amount of the 

deficiency will be prorated among the 

installments. 

Comments requested clarification 

regarding whether the underpayment of 

an installment (including payment of 

the first installment that reflects a 

section 965(h) net tax liability lower 

than what is calculated on a tax return 

filed by the extended due date) would 

constitute an acceleration event under 

section 965(h)(3) or would result in the 


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proration under section 965(h)(4) of the 

difference between the section 965(h) 

net tax liability initially calculated and 

the subsequently determined section 

965(h) net tax liability. The proposed 

regulations provide that if a person is 

assessed a deficiency with respect to the 

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

or the person timely files a return 

increasing the amount of its section 

965(h) net tax liability above the amount 

taken into account in the payment of the 

first installment, or the person files an 

amended return increasing the amount 

of its section 965(h) net tax liability, the 

deficiency or additional amount will be 

prorated among the installments under 

section 965(h)(4). This proration rule 

does not apply if the deficiency or 

additional liability is due to negligence, 

intentional disregard of rules and 

regulations, or fraud with intent to 

evade tax, in which case, the proposed 

regulations clarify that the deficiency is 

payable on notice and demand. See 

proposed § 1.965–7(b)(1)(ii)(C). 

A comment also requested guidance 

regarding whether an underpayment of 

the first installment would prevent a 

taxpayer from making an election under 

section 965(h). The proposed 

regulations provide that if a taxpayer 

makes a section 965(h) election and 

does not pay the correct amount for the 

first installment, and if the rule in the 

preceding paragraph applies to prorate 

the additional liability, the remaining 

installment payments due pursuant to 

the section 965(h) election will not be 

accelerated, and the taxpayer’s section 

965(h) election will not be affected. See 

proposed § 1.965–7(b)(1)(ii). 

2. Acceleration Events 

The proposed regulations provide that 

if a taxpayer makes a section 965(h) 

election, and subsequently an 

acceleration event described in section 

965(h)(3) and proposed § 1.965– 

7(b)(3)(ii) occurs, the unpaid portion of 

all remaining installments of the 

taxpayer’s section 965(h) net tax 

liability generally will be accelerated 

and due on the date of the event. 

Proposed § 1.965–7(b)(3)(ii) lists the 

events treated as acceleration events for 

this purpose. As noted in Section II.K of 

the Background section of this 

preamble, acceleration events include 

an addition to tax for failure to timely 

pay an installment required under 

section 965(h), a liquidation or sale of 

substantially all the assets of the 

taxpayer (including in a title 11 or 

similar case), a cessation of business by 

the taxpayer, or any similar 

circumstance. The proposed regulations 

identify circumstances similar to those 

referenced in section 965(h)(3). 

Proposed § 1.965–7(b)(3)(ii)(B) provides 

that, in addition to a liquidation or sale 

of substantially all of the assets of a 

taxpayer, any exchange or other 

disposition of substantially all of the 

assets of a taxpayer constitutes an 

acceleration event. In addition, 

proposed § 1.965–7(b)(3)(ii)(D) provides 

that any event that results in a person 

no longer being a United States person 

(including, for example, a resident alien 

becoming a nonresident alien) is an 

acceleration event. Proposed § 1.965– 

7(b)(3)(ii)(E) provides that a person that 

was not a member of any consolidated 

group becoming a member of a 

consolidated group is treated as an 

acceleration event with respect to the 

person. Proposed § 1.965–7(b)(3)(ii)(F) 

provides that when a consolidated 

group ceases to exist, or otherwise no 

longer files a consolidated return, that 

constitutes an acceleration event. 

A comment requested guidance 

specifying that the liquidation of a 

member of a consolidated group, other 

than the consolidated parent, would not 

constitute an acceleration event for 

purposes of section 965(h)(3). Because 

proposed § 1.965–8(e)(1) provides that 

all of the members of a consolidated 

group are treated as a single person for 

purposes of the section 965(h) election, 

a liquidation of one member of the 

group would not constitute an 

acceleration event for purposes of 

section 965(h)(3) and proposed § 1.965– 

7(b). 

The proposed regulations provide an 

exception (the ‘‘eligible section 965(h) 

transferee exception’’) pursuant to 

which the acceleration provisions of 

section 965(h)(3) and proposed § 1.965– 

7(b)(3)(ii) do not apply (such that the 

unpaid portion of all remaining 

installments will not be due as of the 

date specified therein) to a person with 

respect to which an acceleration event 

occurs if the requirements described in 

proposed § 1.965–7(b)(3)(iii)(A)(1) 

(describing the acceleration events 

eligible for this exception) and (2) 

(setting forth the terms of a required 

transfer agreement) are satisfied. 

Generally, acceleration events eligible 

for this exception include (i) 

liquidations, sales, exchanges, or other 

dispositions of substantially all of the 

assets of a person (with the exception of, 

in the case of an individual, by reason 

of death, and with special rules 

applying in the case of a consolidated 

group), (ii) a corporation that was not a 

member of any consolidated group 

becoming a member of a consolidated 

group, and (iii) a consolidated group 

ceasing to exist by reason of acquisition 

and immediately joining another 

consolidated group. In each case, the 

exception applies only to the extent that 

the person with respect to which an 

acceleration event occurs (an ‘‘eligible 

section 965(h) transferor’’) and an 

eligible section 965(h) transferee 

(generally, a United states person that is 

not a domestic pass-through entity and 

that satisfies certain requirements set 

forth in the proposed regulations) enter 

into a transfer agreement described in 

proposed § 1.965–7(b)(3)(iii)(B). 

Generally, a transfer agreement must 

include various acknowledgments, 

representations, and information, 

including 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); an 

agreement that the eligible section 

965(h) transferee agrees to comply with 

all of the conditions and requirements 

of section 965(h) and proposed § 1.965– 

7(b), as well as any other applicable 

requirements in the section 965 

regulations; a representation that the 

eligible section 965(h) transferee is able 

to make the remaining payments 

required under section 965(h) and 

proposed § 1.965–7(b) with respect to 

the section 965(h) net tax liability being 

assumed; and, 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. See proposed § 1.965– 

7(b)(3)(iii)(B)(4). The proposed 

regulations also provide procedural 

rules regarding the completion and 

submission of a transfer agreement, as 

well as rules relating to the 

Commissioner’s review of such 

agreements. See generally proposed 

§ 1.965–7(b)(3)(iii)(B) and (C). 

3. Election Mechanics 

Section 965(h)(5) provides that a 

section 965(h) election must be made no 

later than the due date (taking into 

account extensions, if any) for the return 

for the taxable year in which the 

taxpayer has the section 965(a) 

inclusions to which the section 965(h) 

net tax liability is attributable and must 

be made in the manner prescribed by 

the Secretary. A comment requested that 

taxpayers with section 965(a) inclusions 

be treated as having made a section 

965(h) election by default. The Treasury 

Department and the IRS decline to 

adopt this comment because the statute 


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provides for an affirmative election, and 

the proposed regulations provide an 

extended period in which to make it. 

Under proposed § 1.965–7(b)(2)(ii), 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, without regard to 

whether an extension request was made. 

The election is made by attaching a 

statement, signed under penalties of 

perjury, to the taxpayer’s return for the 

relevant taxable year including the 

taxpayer’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 

anticipated amounts of each 

installment. Proposed § 1.965– 

7(b)(2)(iii). 

4. Application to Non-Chapter 1 Taxes 

Comments requested that the 

Treasury Department and the IRS 

provide that tax imposed under section 

1411 on section 965(a) inclusions be 

payable in installments under section 

965(h). However, because the definition 

of net income tax in section 965(h)(6)(B) 

refers to credits allowed under subparts 

A, B, and D of part IV of subchapter A 

of chapter 1 of subtitle A of the Code, 

the Treasury Department and the IRS 

have determined that section 965(h) 

applies only with respect to tax imposed 

under subchapter A of chapter 1 of 

subtitle A of the Code. Accordingly, 

elections may not be made under 

section 965(h) to pay tax imposed under 

other subchapters or chapters (such as, 

for example, the taxes imposed under 

sections 1411 and 4940) in eight 

installments. See also sections 55(a)(2) 

and 26(b)(2) (excluding the minimum 

tax under section 55 from the definition 

of regular tax). 

D. Section 965(i) Election 

As discussed in Part II.L of the 

Background section of this preamble, 

section 965(i) provides that a 

shareholder of an S corporation that is 

itself a United States shareholder of a 

DFIC may elect to defer payment of its 

net tax liability under section 965 with 

respect to such S corporation until the 

shareholder’s taxable year which 

includes a triggering event with respect 

to such liability. The proposed 

regulations provide guidance regarding 

how an S corporation shareholder can 

make a section 965(i) election and, 

consistent with section 3.05(b) of Notice 

2018–26, provide that any shareholder 

of an S corporation that is a United 

States shareholder of a DFIC, whether it 

owns section 958(a) stock of such DFIC 

or not, may make the election. However, 

if the S corporation is not a United 

States shareholder with respect to a 

DFIC, the shareholders of that S 

corporation may not make a section 

965(i) election for their shares of the 

section 965(a) inclusion or section 

965(c) deduction with respect to that 

DFIC. See proposed § 1.965–7(c) and 

(g)(6). 

Furthermore, the proposed 

regulations implement the statutory 

reporting requirements in section 

965(i)(7) until the section 965(i) net tax 

liability is fully assessed. See proposed 

§ 1.965–7(c)(6). 

1. Election Mechanics 

The proposed regulations provide 

procedural rules regarding how an S 

corporation shareholder can make the 

section 965(i) election. A section 965(i) 

election must be made no later than the 

due date (taking into account 

extensions, if any) for the S corporation 

shareholder’s return for the 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 by attaching a statement, 

signed under penalties of perjury, to its 

return for that year. 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 § 1.965– 

7(g)(10)(i)(A) as modified by § 1.965– 

1(f)–7(g)(6) for purposes of determining 

the section 965(i) net tax liability with 

respect to the S corporation, the amount 

described in § 1.965–7(g)(10)(i)(B), and 

the section 965(i) net tax liability with 

respect to the S corporation. See 

proposed § 1.965–7(c)(2)(ii) and (iii). 

2. Triggering Events 

The proposed regulations also provide 

rules concerning triggering events 

described in section 965(i)(2). An event 

will not be treated as a triggering event 

(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 triggering event is the 

transfer of any share of stock of the S 

corporation by the shareholder 

(including by reason of death or 

otherwise), and the shareholder (an 

‘‘eligible section 965(i) transferor’’) and 

an eligible section 965(i) transferee (a 

United States person that is not a 

domestic pass-through entity) enter into 

a transfer agreement. See generally 

proposed § 1.965–7(c)(3)(iv); see also 

§ 1.965–7(c)(4)(iv)(B)(4) (setting forth 

the required terms of a transfer 

agreement). 

3. Consent for Section 965(h) Election in 

the Event of a Triggering Event 

The proposed regulations also provide 

rules for an S corporation shareholder to 

obtain the consent of the Secretary to 

make a section 965(h) election in the 

event of a triggering event that is 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. See 

proposed § 1.965–7(c)(3)(v)(D). To 

obtain consent, the shareholder 

intending to make the section 965(h) 

election must file the agreement 

described in proposed § 1.965– 

7(c)(3)(v)(D)(4) and must provide, with 

its timely-filed return for the taxable 

year during which the triggering event 

occurs (taking into account extensions, 

if any), the election statement for the 

section 965(h) election. See proposed 

§ 1.965–7(c)(3)(v)(D)(2). For the required 

terms of the agreement, see generally 

proposed § 1.965–7(c)(3)(v)(D). 

A comment requested guidance 

specifying that if an S corporation 

shareholder makes a section 965(i) 

election, the S corporation’s income 

inclusion is not deferred, and the S 

corporation’s AAA should be increased 

by the gross amount (and not the net 

amount after the application of the 

section 965(c) deduction). Because, by 

its terms, a section 965(i) election affects 

only the timing of assessment and 

payment of an S corporation 

shareholder’s section 965(a) net tax 

liability and not the timing or amount 

of the section 965(a) inclusion of either 

the S corporation or the S corporation 

shareholder, the Treasury Department 

and the IRS have determined that it is 

not necessary that the proposed 

regulations provide this additional 

guidance. See Part V.D of this 

Explanation of Provisions section for a 

discussion of the consequences of 

section 965(a) inclusions and section 

965(c) deductions for the AAA of an S 

corporation. 

E. Section 965(m) Election 

The proposed regulations provide 

procedural rules regarding how a REIT 

can make the section 965(m) election. A 

REIT makes a section 965(m) election by 

attaching a statement, signed under 

penalties of perjury, to its return for the 

taxable year in which it would 


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otherwise be required to include REIT 

section 965 amounts (as defined in 

proposed § 1.965–7(g)(2)) in gross 

income. The statement must include the 

REIT’s name, taxpayer identification 

number, REIT section 965 amounts, and 

anticipated amounts of each portion of 

the REIT section 965 amounts to be 

included in each year. Proposed 

§ 1.965–7(d)(3)(ii) and (iii). With respect 

to a REIT that has made the section 

965(m) election, adjustments described 

in proposed § 1.965–2 to the E&P of any 

specified foreign corporations held by 

the REIT, and the basis of stock of a 

specified foreign corporation and other 

applicable property held by a REIT, are 

made as of the close of each year in 

which an installment is included in the 

gross income of the REIT. A comment 

requested that RICs also be allowed to 

make a similar election to include any 

amount required to be taken into 

account under section 951(a)(1) by 

reason of section 965 in eight 

installments. This comment is not 

adopted because the statute provides the 

election solely for REITs. 

For the reasons discussed in Part 

VIII.A of this Explanation of Provisions 

section, the proposed regulations also 

provide that no section 965(a) 

inclusions of a REIT are taken into 

account as gross income for purposes of 

section 856(c)(2) and (3), regardless of 

whether the REIT is a United States 

shareholder with respect to the DFIC 

with respect to which it has a section 

965(a) inclusion. See section 

965(m)(1)(A) and proposed § 1.965– 

7(d)(6). 

F. Section 965(n) Election 

As discussed in Part II.N of the 

Background section of this preamble, 

section 965(n) provides that a United 

States shareholder of a DFIC may elect 

to exclude the amount described in 

section 965(n)(2) from the determination 

of the amount of the NOL deduction 

under section 172 of such shareholder 

for such taxable year or the amount of 

taxable income for such taxable year 

which may be reduced by NOL 

carryovers or carrybacks to such taxable 

year under section 172. The proposed 

regulations provide procedural rules 

regarding how a taxpayer may make the 

section 965(n) election, clarify the effect 

of the election, and provide that the 

election is irrevocable. 

1. Scope of Election 

As discussed in section 3.05(d) of 

Notice 2018–26, comments have 

requested clarification regarding the 

scope of the section 965(n) election as 

a result of the use of the term 

‘‘deduction’’ in section 965(n)(1)(A). An 

NOL ‘‘deduction’’ for a taxable year 

generally refers to the amount of an 

NOL carried to such taxable year from 

a prior or subsequent year rather than 

the NOL arising from such year. 

Compare section 172(a) and (c). 

However, interpreting ‘‘deduction’’ in 

section 965(n)(1)(A) to refer to 

carryovers or carrybacks to the taxable 

year (and not the NOL for the taxable 

year) would cause that paragraph to be 

duplicative of section 965(n)(1)(B), 

which already provides that amounts 

described in section 965(n)(2) are 

disregarded for purposes of applying 

NOL carryovers or carrybacks to such 

taxable year under section 172. The 

Treasury Department and the IRS have 

determined that section 965(n)(1)(A) 

was intended to apply to a different set 

of losses than those to which section 

965(n)(1)(B) applies. A comment also 

requested clarification regarding 

whether taxpayers could make the 

section 965(n) election for only a 

portion of their NOLs. The Treasury 

Department and the IRS have 

determined that the election was 

intended to apply to the NOL amount in 

its entirety. Accordingly, the proposed 

regulations provide that if a section 

965(n) election is made for a taxable 

year, the election applies to NOLs for 

the taxable year for which the election 

is made as well as the NOL carryovers 

or carrybacks to such taxable year, each 

in their entirety. See proposed § 1.965– 

7(e)(1)(iii). 

A comment also requested 

clarification regarding whether 

consolidated groups could make the 

section 965(n) election. The proposed 

regulations clarify that the section 

965(n) election also applies to all 

components of the consolidated NOL 

deduction (as defined in § 1.1502– 

21(a)). Id. 

2. Election Mechanics 

A person makes a section 965(n) 

election by attaching a statement, signed 

under penalties of perjury, to its return 

for the taxable year (taking into account 

extensions, if any) to which the election 

applies. Proposed § 1.965–7(e)(2)(ii). 

The statement must include the person’s 

name, taxpayer identification number, 

the amounts described in section 

965(n)(2)(A) and proposed § 1.965– 

7(e)(1)(ii)(A) and section 965(n)(2)(B) 

and proposed § 1.965–7(e)(1)(ii)(B), and 

the sum thereof. Proposed § 1.965– 

7(e)(2)(iii). 

G. Election To Use Alternative Method 

for Calculation of Post-1986 Earnings 

and Profits 

Under section 965(a) and (d)(3), a 

United States shareholder of a specified 

foreign corporation must determine its 

accumulated post-1986 deferred foreign 

income as of either of the two E&P 

measurement dates (November 2, 2017, 

and December 31, 2017) by determining 

its post-1986 earnings and profits as of 

each of those dates. As discussed in 

section 3.02 of Notice 2018–13, it may 

be impractical for some taxpayers to 

determine the post-1986 earnings and 

profits of a specified foreign corporation 

as of the November 2, 2017, E&P 

measurement date because it does not 

fall on the last day of a month. 

Therefore, the proposed regulations 

provide that an election may be made to 

determine the post-1986 earnings and 

profits of a specified foreign corporation 

using the alternative method. See 

proposed § 1.965–7(f). 

Under the alternative method, for a 

specified foreign corporation other than 

a specified foreign corporation with a 

52–53-week taxable year (as described 

in § 1.441–2(a)(1)), the amount of its 

post-1986 earnings and profits as of the 

November 2, 2107, E&P measurement 

date equals the sum of (1) the specified 

foreign corporation’s post-1986 earnings 

and profits as of October 31, 2017, and 

(2) the specified foreign corporation’s 

‘‘annualized earnings and profits 

amount.’’ For this purpose, the term 

‘‘annualized earnings and profits 

amount’’ means the amount equal to the 

product of two (the number of days after 

October 31, 2017, and on or before the 

measurement date on November 2, 

2017) and the ‘‘daily earnings amount’’ 

of the specified foreign corporation. The 

‘‘daily earnings amount’’ of the 

specified foreign corporation is the post1986 earnings and profits (including a 

deficit) of the specified foreign 

corporation as of the close of October 

31, 2017, that were accumulated during 

the specified foreign corporation’s 

taxable year that includes October 31, 

2017, divided by the number of days 

that have elapsed in that taxable year as 

of the close of October 31, 2017. A 

specified foreign corporation that does 

not have a 52–53-week taxable year may 

not use the alternative method to 

determine its post-1986 earnings and 

profits as of the December 31, 2017, 

measurement date. See proposed 

§ 1.965–7(f)(1), (3), and (4). 

For a specified foreign corporation 

that has a 52–53-week taxable year, an 

election to use the alternative method 

applies to both measurement dates, in 

each case determining the post-1986 

earnings and profits consistent with the 

method described in the previous 

paragraph as of the closest end of a 

fiscal month to each measurement date. 

For example, if the closest end of a 

fiscal month of a specified foreign 


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corporation that has a 52–53-week 

taxable year occurs after a measurement 

date, the annualized earnings amount is 

subtracted from (rather than added to) 

the post-1986 earnings and profits of the 

specified foreign corporation as of the 

fiscal month end. See proposed § 1.965– 

7(f)(2), (3), and (4). See proposed 

§ 1.965–7(f)(5) for details on how to 

make the election. 

A comment requested that individuals 

be permitted to calculate post-1986 

earnings and profits by prorating E&P 

for the November 2, 2017, measurement 

date based on year-end numbers. This 

comment is not adopted. Allowing 

individuals to use year-end numbers 

and prorate to November 2, 2017, would 

allow taxpayers to base their post-1986 

earnings and profits for both dates on 

the E&P as of a single date, contrary to 

the intent of the two E&P measurement 

dates in the statute. 

IX. Affiliated Groups (Including 

Consolidated Groups) 

Proposed § 1.965–8 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)). 

A. Treatment of Consolidated Groups 

1. Treated as a Single United States 

Shareholder 

The proposed regulations 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 purposes of section 

965(b) and proposed § 1.965–1(b)(2), 

and that all members of a consolidated 

group are treated as a single person for 

purposes of paragraphs (h), (k), and (n) 

of section 965 and proposed § 1.965–7. 

See proposed § 1.965–8(e). Thus, for 

example, the determination of whether 

the sale of assets by a member of a 

consolidated group to a non-member 

would constitute a sale of substantially 

all of the assets of the taxpayer for 

purposes of causing an acceleration 

event under section 965(h)(3) and 

proposed § 1.965–7(b)(3) 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 (but generally does not include 

the stock of another consolidated group 

member). 

This rule does not apply to treat all 

members of a consolidated group as a 

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

single person, as applicable, for 

purposes of determining the amount of 

any member’s inclusion under section 

951 (including a section 965(a) 

inclusion), any member’s section 965(c) 

deduction, or any purpose other than 

those specifically listed in proposed 

§ 1.965–8(e)(1). The proposed 

regulations also clarify that for purposes 

of computing the foreign income taxes 

deemed paid with respect to a section 

965(a) inclusion, the foreign income 

taxes deemed paid must be computed 

on a separate member basis. Therefore, 

a domestic corporation is not deemed to 

pay any foreign income taxes with 

respect to a section 965(a) inclusion 

from a foreign corporation that is not a 

member of a qualified group with 

respect to the domestic corporation, 

even if other members of the domestic 

corporation’s consolidated group qualify 

to compute deemed paid credits with 

respect to that foreign corporation. 

Sections 960(a)(3), 902(b). 

2. Aggregate Foreign Cash Position of a 

Member of a Consolidated Group 

For purposes of computing a 

member’s section 965(c) deduction, the 

member’s aggregate foreign cash 

position generally is determined by 

reference to its pro rata share of the 

consolidated group’s aggregate foreign 

cash position as a whole. Specifically, 

the proposed regulations provide that 

the aggregate foreign cash position with 

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

shareholder that is a member of a 

consolidated group equals 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. For this purpose, 

the term ‘‘group cash ratio’’ means the 

ratio of the consolidated group aggregate 

foreign cash position (generally, the sum 

of the aggregate foreign cash positions of 

the members of a consolidated group) to 

the sum of the aggregate section 965(a) 

inclusion amounts of all members of the 

consolidated group. See proposed 

§ 1.965–8(e)(3), (f)(4), and (f)(8). 

3. Adjustments to E&P and Stock Basis 

As described in section 3.04 of Notice 

2018–07, the proposed regulations 

indicate that the regulations under 

§ 1.1502–32 provide for adjustments to 

the basis of the stock of each member of 

the consolidated group. See proposed 

§ 1.965–8(d)(2). 

B. Affiliated Groups 

The proposed regulations include 

guidance regarding the application of 

section 965(b)(5) to determine the 

section 965(a) inclusion amounts of a 

member of an affiliated group. Proposed 

§ 1.965–8(b) applies when, after the 

application of the rules in proposed 

§ 1.965–1(b)(2) (which generally 

implements the operative rule of section 

965(b)(1)), a section 958(a) U.S. 

shareholder 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. When proposed 

§ 1.965–8(b) applies, the U.S. dollar 

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

shareholder’s pro rata share of the 

section 965(a) earnings amount of a 

DFIC is reduced (but not below zero) by 

the DFIC’s allocable share of the section 

958(a) U.S. shareholder’s applicable 

share of the affiliated group’s aggregate 

unused E&P deficit. The proposed 

regulations include rules and 

definitions for determining, 

respectively, a DFIC’s allocable share 

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

applicable share of an affiliated group’s 

aggregate unused E&P deficit. See 

proposed § 1.965–8(f)(2) and (3). 

For purposes of this rule, 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. 

Proposed § 1.965–8(b)(2). 

C. Source of Aggregate Unused E&P 

Deficits 

Proposed § 1.965–8(c) provides 

guidance for designating the source of 

an aggregate unused E&P deficit of an 

affiliated group that is not a 

consolidated group when, generally, the 

amount of the affiliated group’s 

aggregate unused E&P deficit exceeds 

the aggregate section 965(a) inclusion 

amounts of E&P net surplus 

shareholders of the affiliated group 

determined without regard to the 

application of section 965(b)(5) and 

proposed § 1.965–8(b)). Generally, when 

proposed § 1.965–8(c) applies, each 

member of an 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 of the affiliated group) setting 

forth the portion of its excess aggregate 

foreign E&P deficit that is taken into 

account by one or more net E&P net 

surplus shareholders of the 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 this rule. Proposed § 1.965– 

8(c)(2). 


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X. Application of Section 986(c) 

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). 

Consistent with section 3.05 of Notice 

2018–07, 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, consistent with the statute and 

other indicia of congressional intent. 

See H.R. Rep. No. 115–466, at 620 

(2017) (Conf. Rep.), and proposed 

§ 1.986(c)–1(b). 

Because section 965(b) previously 

taxed earnings and profits are not 

included in gross income under section 

951(a)(1), the Treasury Department and 

the IRS have determined it would not be 

appropriate to apply section 986(c) with 

respect to distributions of those E&P. 

Therefore, 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. 

XI. Other Comments 

A. Repeal of Section 958(b)(4) 

Effective for the last taxable year of 

foreign corporations beginning before 

January 1, 2018, and each subsequent 

year, and for the taxable years of United 

States shareholders in which or with 

which such taxable years of the foreign 

corporations end, the Act repealed 

section 958(b)(4). Before repeal, section 

958(b)(4) provided that subparagraphs 

(A), (B), and (C) of section 318(a)(3) 

were not to be applied to consider a 

United States person to own stock 

which is owned by a person who is not 

a United States person. As discussed in 

Part III.B of the Background section of 

this preamble, the subparagraphs of 

section 318(a)(3) generally attribute 

stock owned by a person to a 

partnership, estate, trust, or corporation 

in which such person has an interest 

(so-called ‘‘downward’’ attribution). 

Multiple comments requested 

guidance be issued addressing the 

repeal of section 958(b)(4). This issue is 

beyond the scope of the proposed 

regulations. 

However, consistent with section 5.02 

of Notice 2018–13, the instructions to 

Form 5471 will be amended to provide 

an exception from certain filing 

requirements for a United States person 

that is a United States shareholder with 

respect to a CFC or other specified 

foreign corporation if no United States 

shareholder (including the United States 

person) owns, within the meaning of 

section 958(a), stock of the CFC or other 

specified foreign corporation, and the 

foreign corporation is a CFC or specified 

foreign corporation solely because a 

United States person is considered to 

own the stock of the CFC or other 

specified foreign corporation owned by 

a foreign person under section 318(a)(3). 

Consistent with section 6 of Notice 

2018–13 and section 7 of Notice 2018– 

26, taxpayers may rely on this exception 

with respect to the last taxable year of 

a foreign corporation beginning before 

January 1, 2018, and each subsequent 

year of the foreign corporation, and for 

the taxable years of a United States 

shareholder in which or with which 

these taxable years of the foreign 

corporation end. 

B. Reporting and Filing 

1. Section 965 Reporting and Filing 

Requirements 

The proposed regulations provide 

guidance regarding filing and reporting 

with respect to section 965(h) elections, 

section 965(i) elections, section 965(m) 

elections, and section 965(n) elections, 

as well as the election to use the 

alternative method to calculate post– 

1986 earnings and profits. In addition, 

the relevant forms and instructions will 

be updated, as necessary, for taxpayers 

to properly report amounts under 

section 965 and the proposed 

regulations. For the 2017 tax year, 

instructions for how and when to 

properly report section 965-related 

amounts and file returns reporting such 

amounts, as well as instructions for how 

and when to make payments with 

respect to a net tax liability under 

section 965, were provided in 

Frequently Asked Questions (FAQs) that 

are available at the IRS website. The 

FAQs were posted on March 13, 2018, 

and updated on April 13, 2018, and 

June 4, 2018. 

2. Extensions 

Comments requested an extension of 

time for reporting and paying section 

965-related amounts and an extension of 

time for making the section 965(h) 

election. The statute provides for an 

extended time to file returns reporting 

section 965-related amounts and to 

make applicable elections. In addition, 

with the section 965(h) election, the 

statute provides a method for taxpayers 

to delay payment of the total net tax 

liability under section 965. 

Furthermore, as discussed in Part 

VIII.C.3 of this Explanation of 

Provisions section, the proposed 

regulations provide that a taxpayer 

eligible to make a section 965(h) 

election may make the election on its 

timely-filed return taking into account 

extensions, if any, or any additional 

time that would have been granted if the 

person had made an extension request. 

In addition, as described in section 

3.05(e) of Notice 2018–26, the proposed 

regulations provide that for a person 

who is a specified individual (as 

defined in proposed § 1.965–7(g)(9)) for 

the year within which an installment 

payment would be required to be made 

who makes a section 965(h) election and 

who otherwise receives an extension of 

time to file and pay under § 1.6081– 

5(a)(5) or (6), the due date for an 

installment payment will be the 

fifteenth day of the sixth month 

following the close of the prior taxable 

year, regardless of whether the person 

was a specified individual for the year 

of the person’s section 965(a) inclusion. 

See proposed § 1.965–7(b)(1)(iii)(B). 

Moreover, the IRS has announced relief 

from additions to tax (and related 

acceleration events under section 

965(h)(3)) for certain individual filers 

that do not timely pay their first 

installment of tax due with respect to 

the 2017 tax year under section 965(h). 

For more information, see ‘‘Questions 

and Answers about Reporting Related to 

Section 965 on 2017 Tax Returns,’’ Q&A 

16, available at https://www.irs.gov/ 

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

on-2017-tax-returns. Thus, comments 

requesting additional extensions are not 

adopted. 

C. Individuals 

1. In General 

Numerous comments were received 

requesting guidance exempting 

individuals from the application of 

section 965. The statute is clear that 

section 965 applies to all United States 

shareholders. In addition, the 

Conference Report makes clear that 

section 965 applies to individuals as 

well as corporate shareholders by 

providing, ‘‘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.’’ H.R. 

Rep. No. 115–466, at 606 (2017) (Conf. 

Rep.). Because the statute and legislative 


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history are clear that section 965 was 

intended to apply to all United States 

shareholders, including individuals, the 

Treasury Department and the IRS have 

determined that providing the requested 

relief is not appropriate. 

2. Rates of Tax on Section 965(a) 

Inclusions 

Comments also requested that 

guidance be provided changing the 

application of the participation 

exemption to individuals. As discussed 

in Part II.E of the Background section of 

this preamble, the amount of the 

participation exemption depends on the 

application of the United States 

shareholder’s 8 percent rate equivalent 

percentage (as defined in section 

965(c)(2)(A) and proposed § 1.965– 

1(f)(2)) and its 15.5 percent rate 

equivalent percentage (as defined in 

section 965(c)(2)(B) and proposed 

§ 1.965–1(f)(4)). Both the 8 percent rate 

equivalent percentage and the 15.5 

percent rate equivalent percentage are 

based off of the highest rate of tax 

specified in section 11, which is 

applicable to corporations. As a result, 

when the participation exemption is 

calculated for individuals, the 

applicable rates of tax may not be 8 

percent and 15.5 percent. 

However, this result was anticipated 

by Congress. The Conference Report 

provides, ‘‘Individual U.S. shareholders, 

and the investors in U.S. shareholders 

that are pass-through entities generally 

can elect application of corporate rates 

for the year of inclusion.’’ H.R. Rep. No. 

115–466, at 620 (2017) (Conf. Rep.). As 

discussed in Part III of this Explanation 

of Provisions section, individuals may 

make an election under section 962 to 

have the tax imposed under chapter 1 

on amounts that are included in the 

individual’s gross income under section 

951(a) with respect to a foreign 

corporation with respect to which it is 

a United States shareholder be equal to 

the tax that would be imposed under 

section 11 if the amounts were received 

by a domestic corporation. Accordingly, 

because of the availability of the section 

962 election and Congress’s express 

intent with respect to the rate equivalent 

percentages, these comments are not 

adopted. 

D. Determination of Aggregate Foreign 

Cash Position 

1. Liquidity-Based Exceptions 

A number of comments were received 

requesting guidance modifying the 

definition of a specified foreign 

corporation’s cash position or the 

calculation of a United States 

shareholder’s aggregate foreign cash 

position. For example, comments 

requested guidance excluding certain 

assets from a specified foreign 

corporation’s cash position, or 

otherwise providing special rules with 

respect to those assets, including (i) 

cash used, or intended to be used, to 

fund foreign acquisitions; (ii) blocked, 

restricted, or segregated cash; (iii) cash 

used, or to be used, to pay third-party 

payables within a specified period (for 

example, 12 months after a cash 

measurement date); (iv) obligations with 

respect to which there was an inclusion 

under section 956; (v) cash held in a 

fiduciary or trust capacity; (vi) cash held 

or attributable to an entity that is 

engaged in a regulated industry, such as 

life insurance; and (vii) cash pledged 

against defined liabilities as well as 

potential or contingent liabilities. In 

addition, comments requested 

exceptions for commodities 

representing inventory or supplies and 

stock of a publicly traded company in 

which the specified foreign corporation 

holds at least 10 percent of the stock, 

each of which is personal property of a 

type that is actively traded and for 

which there is an established financial 

market, and thus included in the cash 

position of a specified foreign 

corporation. 

In general, these comments are 

premised on the view that an asset that 

otherwise would be included in the 

cash position of a specified foreign 

corporation should be excluded to the 

extent that the asset cannot be otherwise 

employed; that is, if the asset is not 

sufficiently ‘‘liquid.’’ Although the 

legislative history describing a specified 

foreign corporation’s cash position 

refers to earnings that are ‘‘liquid,’’ 

neither the legislative history nor the 

statute indicates that the cash position 

of a specified foreign corporation should 

be determined by reference to an 

analysis of whether any particular asset 

should be considered a liquid asset. See, 

e.g., Senate Committee on Finance, 

Explanation of the Bill, at 360–361 

(November 22, 2017) (‘‘The cash 

position of an entity consists of all cash, 

net accounts receivables, 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, and short-term 

obligations.’’). Instead, as the 

Conference Report notes, the statute 

includes a specific list of assets that are 

included in the cash position of a 

specified foreign corporation. 

The Treasury Department and the IRS 

have determined that the definition of 

cash position in section 965(c)(3)(B) is 

the best indication of what Congress 

believed was a liquid asset. Depending 

on the facts, any particular asset may be 

required to be used for a specific 

purpose, or a taxpayer may intend to 

retain the asset for a lengthy period of 

time. However, the Treasury 

Department and the IRS have 

determined that it would not be 

administrable to create individual 

regulatory exceptions to the statute in 

the absence of a statutory standard for 

liquidity because it would likely require 

introducing a facts-and-circumstances 

test that analyzes the liquidity of every 

asset, which would be difficult to 

administer. Furthermore, while some 

assets that would otherwise be treated 

as cash-equivalent assets could be 

excluded from a specified foreign 

corporation’s cash position for being 

insufficiently liquid, other assets that 

are not treated as cash-equivalent assets 

but are liquid would need to be 

included in a specified foreign 

corporation’s cash position. 

Accordingly, the proposed regulations 

do not introduce new regulatory 

exceptions to the definition of cash 

position. The Treasury Department and 

the IRS welcome comments with respect 

to the definition of cash position of a 

specified foreign corporation. 

2. Other Modifications Requested to 

Statutory Rules 

Comments also requested 

modifications to the rules regarding the 

calculation of a specified foreign 

corporation’s cash position or a United 

States shareholder’s aggregate foreign 

cash position, including requests that (i) 

accounts payable be allowed to offset 

both accounts receivable and other 

components of a specified foreign 

corporation’s cash position; (ii) the pro 

rata share of cash held through a passthrough entity be limited to the amount 

of cash that a specified foreign 

corporation would have been entitled to 

on liquidation of the pass-through 

entity; (iii) the cash position be reduced 

by section 301(c) cash distributions by 

the specified foreign corporation when 

using the average of the aggregate cash 

positions on the first two cash 

measurement dates; and (iv) the cash 

position be reduced by undistributed 

previously taxed E&P. The Treasury 

Department and the IRS have 

determined that the statute is 

unambiguous as to how, in each of these 

circumstances, a specified foreign 

corporation’s cash position or a United 

States shareholder’s aggregate foreign 

cash position should be determined, 

such that it is unnecessary to provide 

guidance or to revise the operation of 


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the statute by regulation under these 

circumstances. 

3. Notional Cash Pooling Arrangements 

Comments requested that the 

proposed regulations provide that 

notional cash pooling arrangements are 

treated as creating intercompany 

receivables for purposes of section 965. 

The proposed regulations do not adopt 

this recommendation. The 

determination of whether transactions 

in a notional cash pooling arrangement 

are treated as occurring among 

participants in the arrangement, or 

between the participants and a third 

party, depends on the application of 

federal income tax principles. Cf. Rev. 

Rul. 87–89, 1987–2 C.B. 195. 

4. Non-Corporate Entities Under Section 

965(c)(3)(E) 

A comment requested clarification 

regarding whether section 965(c)(3)(E), 

which treats a non-corporate entity held 

by a specified foreign corporation as a 

specified foreign corporation (if it 

would otherwise be a specified foreign 

corporation if it was a foreign 

corporation) for purposes of taking into 

account its cash position, applies to an 

entity that is disregarded as an entity 

separate from its owner for U.S. federal 

income tax purposes (‘‘disregarded 

entity’’). The Treasury Department and 

the IRS have determined that it is clear 

under existing law that the assets of a 

disregarded entity are considered as 

held directly by the disregarded entity’s 

owner, such that the rule in section 

965(c)(3)(E) does not apply with respect 

to disregarded entities, and no specific 

rules addressing the application of 

section 965(c)(3)(E) are necessary. See 

generally § 301.7701–2(a). 

E. Blocked Foreign Income 

Comments requested that the 

proposed regulations provide rules with 

respect to income subject to certain 

exchange controls or other foreign legal 

restrictions. Generally, section 964(b) 

and § 1.964–2 (the blocked foreign 

income rules) provide that no part of the 

E&P of a CFC are included in the CFC’s 

E&P for purposes of sections 952 and 

956 if it is established to the satisfaction 

of the Secretary that the E&P could not 

have been distributed by the CFC to 

United States shareholders that own the 

stock of the CFC due to currency or 

other foreign legal restrictions. Section 

965(a) inclusion amounts are not, 

however, limited by section 952, such 

that the blocked foreign income rules do 

not affect the determination of such 

amounts. Comments requested that the 

proposed regulations adopt rules similar 

to the blocked foreign income rules for 

purposes of section 965 by reducing the 

post-1986 earnings and profits of a 

specified foreign corporation by an 

amount equal to any amounts subject to 

restrictions on distributions by a 

specified foreign corporation. 

The Treasury Department and the IRS 

have determined that it is not 

appropriate to provide rules similar to 

the blocked foreign income rules for 

purposes of computing post-1986 

earnings and profits. Section 965(d)(3) 

expressly provides that the term post1986 earnings and profits means E&P 

‘‘computed in accordance with section 

964(a) and 986,’’ giving rise to a clear 

inference that the principles of section 

964(b) should not be given effect in 

computing post-1986 earnings and 

profits. 

F. Additional Comments 

Several other comments were 

received that did not pertain to section 

965 or were otherwise outside the scope 

of the section 965 regulations. Some of 

those comments related to reporting and 

payment requirements and have been 

addressed in the FAQs that are available 

at the IRS website. Other comments that 

did not relate to the rules described in 

Notices 2018–07, 2018–17, or 2018–26 

or that were outside the scope of this 

notice of proposed rulemaking are not 

addressed in this preamble. In addition, 

other comments were received after the 

proposed regulations had been 

substantially developed, such that the 

Treasury Department and the IRS did 

not have time to fully consider the 

comments. The Treasury Department 

and the IRS will include these 

comments in the administrative record 

for the notice of proposed rulemaking 

on this subject in the Proposed Rules 

section of this issue of the Federal 

Register and fully consider the 

comments in connection with 

finalization of the proposed regulations. 

XII. Applicability Dates 

Consistent with the applicability date 

of section 965, as amended by the Act, 

under section 7805(b)(2), the proposed 

regulations 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. Taxpayers may choose to apply 

the rules in proposed § 1.965–7 in their 

entirety to all tax years as if they were 

final regulations. 

For the avoidance of doubt, proposed 

§ 1.965–9(b) clarifies that the rules 

described in proposed §§ 1.965–4 apply 

to all foreign corporation and 

shareholder taxable years described in 

proposed § 1.965–9(b), even if the 

relevant transaction, the effective date of 

a change in method of accounting or 

entity classification election, or 

specified payment occurred in a prior 

taxable year. This is because the 

proposed regulations affect only the tax 

consequences in taxable years described 

in proposed § 1.965–9(b) and do not 

affect any prior taxable year. 

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. This proposed 

rule has been designated a ‘‘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 proposed rule has been 

reviewed by the Office of Management 

and Budget. The Treasury Department 

requests comment on this designation. 

A. Need for the Proposed Regulations 

These regulations implement section 

965 of the Internal Revenue Code as 

amended by the Act. The proposed 

regulations provide rules for 

determining the section 965(a) inclusion 

amount of a U.S. shareholder of a 

foreign corporation with deferred 

foreign income. The proposed 

regulations directly implement the 

statutory requirements. The Senate 

Committee on Finance stated with 

respect to section 965 that, ‘‘[t]o 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.’’ See Senate 

Committee on Finance, Explanation of 

the Bill, at 358 (November 22, 2017). 


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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 

earnings and profits not previously 

taxed by the United States, regardless of 

whether those earnings are repatriated. 

Cash or cash-equivalent assets held by 

a foreign corporation result in a higher 

rate of repatriation tax than non-cash 

assets, such as plant, property, and 

equipment. The tax applies to the 

accumulated stock of deferred earnings 

and profits 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 proposed regulations. 

The proposed regulations address 

open questions regarding the 

application of section 965. They provide 

rules related to section 965 described in 

the three 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 proposed 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, and 

thus taxpayers would have made 

decisions relevant to section 965 in the 

absence of specific guidance. The 

following qualitative analysis describes 

the anticipated impacts of the proposed 

regulations relative to the baseline. 

D. Consideration of Alternatives 

For a discussion of the alternatives 

considered in the promulgation of the 

proposed regulations, see the 

Explanation of Provisions section of this 

preamble. For example, see Part II.B of 

the Explanation of the Provisions 

section for a discussion of the 

alternatives considered with respect to 

the determination of, among other 

things, post-1986 earnings and profits 

(E&P), cash measurement dates, and 

short-term obligations and Part IV.C.2 of 

the Explanation of Provisions section for 

a discussion of the alternatives 

considered to the rule permitting 

elective basis adjustments to the stock of 

certain deferred foreign income 

corporations and E&P deficit foreign 

corporations. 

E. Anticipated Benefits 

In consultation with taxpayers, the 

Treasury Department 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 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. As a result of this 

analysis, the regulations aim to reduce 

double 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. 

Inequitable outcomes may also arise 

in the absence of the proposed 

regulations due to uncertainty and 

ambiguity over interpretation of the 

section 965 requirements. Absent these 

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, 

an inequitable situation. The proposed 

regulations aim to reduce uncertainty 

and ambiguity by: (1) Providing that all 

members of a consolidated group that 

are U.S. shareholders of a specified 

foreign corporation are treated as a 

single U.S. shareholder; (2) introducing 

definitions of terminology used; (3) 

coordinating foreign tax credit rules; (4) 

making explicit the process for making 

elections and paying the tax, and (5) 

providing dates of applicability. 

F. Anticipated Impacts on 

Administrative and Compliance Costs 

Absent these regulations, different 

parties would likely interpret the statute 

in different ways. In addition to the 

impacts described above, different 

parties interpreting the statute in 

different ways implies increased 

administrative costs for the Internal 

Revenue Service and increased 

compliance costs for taxpayers while 

the inevitable disputes are dealt with 

through sub-regulatory guidance or 

resolved through litigation. 

For a discussion of the one-time 

annual reporting burden associated with 

the statute see the Paperwork Reduction 

Act (PRA) section of this preamble, 

which provides further detail regarding 

the assumptions underlying these 

estimates. These estimates 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 leads to a 

PRA-based estimate of the reporting 

costs to taxpayers of $47,500,000. This 

is a one-time paperwork burden 

associated with a one-time tax, and 

Treasury anticipates all paperwork 

burdens to be incurred within the next 

year. Any subsequent reporting (such as 

over the eight-year payment period) 

would be nominal burdens that 

implement payments calculated in the 

initial year. This estimate does not 

disaggregate the cost specifically due to 

the proposed regulations. The Treasury 

Department solicits comments on the 

assumptions and appropriateness of the 

methodology used to calculate the 

compliance costs imposed by the 

proposed regulations relative to the 

baseline. 

II. Executive Order 13771 

This proposed rule is expected to be 

an Executive Order 13771 regulatory 

action. Details on the estimated costs of 

this proposed rule can be found in the 

rule’s economic analysis. 

III. Regulatory Flexibility Analysis 

The Regulatory Flexibility Act (5 

U.S.C. chapter 6) does not apply 

because the regulations do not impose a 

collection of information on small 

entities. Any burden on small entities in 

these regulations stems from the 

collection of information requirements 

in proposed §§ 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– 

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


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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). It is hereby certified that 

these collection of information 

requirements will not have a significant 

economic impact on a substantial 

number of small entities. Accordingly, 

an initial regulatory flexibility analysis 

is not required. This certification is 

based on several facts. First, the average 

burden is five hours, which is minimal, 

particularly in comparison to other 

regulatory requirements related to 

owning stock in a specified foreign 

corporation. Second, the requirements 

apply only if a taxpayer chooses to make 

an election or rely on a favorable rule. 

Third, the collections of information 

apply to the owners of specified foreign 

corporations. Because it takes 

significant resources and investment for 

a foreign business to be operated in 

corporate form by a United States 

person, specified foreign corporations 

will infrequently be small entities. 

Moreover, because the collection of 

information requirements apply to the 

owners of specified foreign corporations 

rather than the specified foreign 

corporations themselves, a specified 

foreign corporation that was a small 

entity would not be subject to the 

collections of information. Fourth, the 

collection of information requirements 

in this regulation apply primarily to 

persons that are United States 

shareholders of specified foreign 

corporations. The ownership of 

sufficient stock in specified foreign 

corporations in order to constitute a 

United States shareholder generally 

entails significant resources and 

investment, such that businesses that 

are United States shareholders are 

generally not small businesses. Pursuant 

to section 7805(f), this notice of 

proposed rulemaking has been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Comments and Requests for a Public 

Hearing 

Before the proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ADDRESSES heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed rules. All comments will be 

available at www.regulations.gov or 

upon request. A public hearing will be 

scheduled if requested in writing by any 

person that timely submits written 

comments. If a public hearing is 

scheduled, notice of the date, time, and 

place for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal authors of the proposed 

regulations are Leni C. Perkins 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 proposed 

regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding 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)(7) (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– 

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

shareholder; plus 

(2) 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) of 

this section if the shareholder were a 

domestic corporation; over 

(B) The sum of his section 965(c) 

deduction amount (as defined in 

§ 1.965–1(f)(42)) and his domestic passthrough 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 for the 

taxable year, but not any other 

deductions or amounts. 

* * * * * 

(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 corporations 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 passVerDate Sep<11>2014 18:04 Aug 08, 2018 Jkt 244001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 E:\FR\FM\09AUP2.SGM 09AUP2

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through 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 

corporations ends. 

■ Par. 4. Section 1.965–0 is added to 

read as follows: 

§ 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. 

(14) Cash-equivalent asset hedging 

transaction. 

(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. 

(25) Inclusion year. 

(26) 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. 

(iii) Passive foreign investment companies. 

(46) Spot rate. 

(47) United States shareholder. 

(g) Examples. 

§ 1.965–2 Adjustments to earnings and 

profits and basis. 

(a) Scope. 

(b) Determination of and adjustments to 

earnings and profits in the last taxable year 

of a specified foreign corporation that begins 

before January 1, 2018, for purposes of 

applying sections 959 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). 

(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. 

(B) Reduction in basis with respect to an 

E&P deficit foreign corporation. 

(C) Section 962 election. 

(iii) Rules regarding the election. 

(A) Consistency requirement. 

(B) Making 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. 

§ 1.965–3 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) Examples. 

(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. 

(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. 


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(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. 

(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. 

(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. 

(f) Disregard of certain transactions 

occurring between E&P measurement dates. 

(1) Disregard of specified payments. 

(2) Definition of specified payment. 

(3) Definition of tentative E&P 

measurement date. 

(g) Examples. 

§ 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) Foreign income taxes deemed paid 

under section 960(b) (as applicable to taxable 

years of foreign corporations beginning after 

December 31, 2017, and to taxable years of 

United States persons in which or with 

which such taxable years of foreign 

corporations end). 

(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) Applicable percentage for domestic 

pass-through owners. 

§ 1.965–6 Computation of foreign income 

taxes deemed paid and allocation and 

apportionment of deductions. 

(a) Scope. 

(b) Computation of foreign incomes taxes 

deemed paid. 

(c) Section 902 fraction. 

(1) In general. 

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

(3) Treatment of adjustment under section 

965(b)(4)(B). 

(d) Allocation and apportionment of 

deductions. 

§ 1.965–7 Elections and payment 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. 

(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. 

(3) Signature requirement. 

(4) Terms of agreement. 

(C) Consent of Commissioner. 

(1) In general. 

(2) Material misrepresentations and 

omissions. 

(D) Effect of assumption. 

(1) In general. 

(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. 

(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. 

(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. 


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(i) Eligibility. 

(ii) Timing. 

(iii) Election statement. 

(6) Examples. 

(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) Adjustments to earnings and profits and 

stock basis. 

(1) Affiliated groups that are not 

consolidated groups. 

(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. 

§ 1.965–9 Applicability dates. 

(a) In general. 

(b) Applicability dates for rules 

disregarding certain transactions. 

■ Par. 5. Section 1.965–1 is added to 

read as follows: 

§ 1.965–1 Overview, general rules, and 

definitions. 

(a) Overview—(1) In general. The 

section 965 regulations provide rules 

under section 965. 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 a foreign partnership 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 

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 


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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, with 

respect to a United States shareholder 

described in paragraph (e)(1)(ii)(B) of 

this section, a domestic partnership that 

is controlled by the United States 

shareholder 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 

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 


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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. 

(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. The term 

cash-equivalent asset means any of the 

following assets— 

(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) A short-term obligation; or 

(v) Derivative financial instruments, 

other than bona fide hedging 

transactions. 

(14) Cash-equivalent asset hedging 

transaction. 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 cashequivalent asset. 

(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) 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, 

(iv) A futures contract, 

(v) A short position in securities or 

commodities, 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, 


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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 

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 

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

determined as of the last day of the 

inclusion year of the deferred foreign 

income 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 by allocating the 

specified E&P deficit among the 

shareholders of the corporation’s 

common stock and in proportion to the 

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; and 


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(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 section 951(a)(2)(A) 

and § 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 

inclusion year of a deferred foreign 

income corporation ends. 

(35) Section 965 regulations. The term 

section 965 regulations means the 

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. 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 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 five percent of the 

interests in the partnership’s capital and 

profits. For purposes of the preceding 

sentence, an interest in the partnership 

owned by another partner will be 

considered as being owned by the tested 

partner under the principles of sections 

958(b) and 318, as modified by this 

paragraph (f)(45)(ii), as if the interest in 

the partnership 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 with 

respect to the United States shareholder. 

(46) Spot rate. The term spot rate has 

the meaning provided in § 1.988–1(d). 


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(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. 

Example 1. Definition of specified foreign 

corporation. (i) Facts. A, an individual, owns 

100% of the stock of a domestic corporation, 

DC, and 1% of the interests in a partnership, 

PS. A United States citizen, USI, owns 10% 

of the interests in PS and 10% by vote and 

value of the stock of a foreign corporation, 

FC. The remaining 90% 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 100% of the 

stock of DC and 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 the same whether A or PS or 

both are domestic or foreign persons. 

(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 DC 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 5% 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. 

Example 2. Definition of specified foreign 

corporation. (i) Facts. The facts are the same 

as in paragraph (i) of Example 1 of this 

paragraph (g), except that A is a corporation 

wholly owned by B, and B directly owns 4% 

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 5% 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 DC 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 this paragraph (g), FC is a specified foreign 

corporation within the meaning of section 

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

section. 

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). 

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. 

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 


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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. 

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 

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), 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. 

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 

with respect to 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. 

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 


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section 958(a) shareholder with respect to 

either CFC3 or CFC4. 

■ Par. 6. Section 1.965–2 is added to 

read as follows: 

§ 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 in its last taxable 

year that begins before January 1, 2018, 

for purposes of applying sections 959 

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 

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 in the last 

taxable year of a specified foreign 

corporation that begins before January 

1, 2018, for purposes of applying 

sections 959 and 965. For 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 such year ends, the 

adjustments to earnings and profits 

described in paragraphs (b)(1) through 

(b)(5) of this section are applied in 

sequence. 

(1) The subpart F income of the 

specified foreign corporation is 

determined without regard to section 

965(a), 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). 

(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, 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 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 sections 

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 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. 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 


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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 

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(c)(3) for the timing of this 

adjustment for purposes of determining 

a deemed paid credit allowed 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) 

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) [Reserved] 

(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. Except as provided 

in paragraph (f)(2)(ii)(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. 

(B) Reduction in basis with respect to 

an E&P deficit foreign corporation. 

Except as provided in paragraph 

(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. 

(C) Section 962 election. [Reserved] 

(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) 


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U.S. shareholder and each person that is 

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

related to the 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. 

(ii) Transition rule. If the due date 

referred to in paragraph (f)(2)(iii)(B)(1)(i) 

of this section occurs before September 

10, 2018, the election must be made by 

October 9, 2018. 

(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, 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 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, make the election provided in 

this paragraph (f)(2). 

(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. 

(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. A 

specified basis adjustment to section 

958(a) stock or applicable property with 

respect to a specified foreign 

corporation is 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. 

(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 


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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)). 

(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. 

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. On March 1, 2017, CFC1 earns 

30u of subpart F income (as defined in 

section 952), and CFC2 earns 20u of subpart 

F income. 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. 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

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 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 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 

they are, 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 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. 

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 

(i) of Example 1 of this paragraph (j), except 

that on December 1, 2017, CFC1 earns an 

additional 50u of subpart F income (as 

defined in section 952). 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

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 (ii)(B) of 

Example 1 of this paragraph (j). 

(C) Section 965(a) inclusion amount. USP 

determines whether CFC1 and CFC2 are 

deferred foreign income corporations, and, if 

they are, 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 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 

(ii)(C)(2) of Example 1 of this paragraph (j). 

(3) Effect on earnings and profits described 

in section 959(c)(2) and (3). The analysis is 

the same as in paragraph (ii)(C)(3) of 

Example 1 of this paragraph (j). 


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(D) Distribution to United States 

shareholder. The analysis is the same as in 

paragraph (ii)(D) of Example 1 of this 

paragraph (j). 

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 (i) of Example 1 of this 

paragraph (j), except that on December 1, 

2017, CFC2 earns an additional 50u of 

subpart F income (as defined in section 952). 

(ii) Analysis. (A) Adjustments to section 

959(c) classification of earnings and profits 

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 

they are, 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— 

(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 (ii)(D) of Example 1 of this 

paragraph (j). 

Example 4. 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 

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, and CFC1’s adjusted basis in 

the stock of CFC2 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). 

Example 5. Distribution attributable to 

section 965(b) previously taxed earnings and 

profits; parent-subsidiary. (i) Facts. The facts 

are the same as in paragraph (i) of Example 

4 of this paragraph (j), 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 


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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. 

Example 6. Distribution attributable to 

section 965(b) previously taxed earnings and 

profits; brother-sister. (i) Facts. The facts are 

the same as in paragraph (i) of Example 5 of 

this paragraph (j), 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. 

■ Par. 7. Section 1.965–3 is added to 

read as follows: 

§ 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 a cash measurement date 

is disregarded to the extent of the 

smallest of the product of the amount of 

the item on such cash measurement date 

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 

date. 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 

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 such 

cash measurement date 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) Examples. The following examples 

illustrate the application of this 

paragraph (b). 

Example 1. (i) 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. 

(ii) Analysis—(A) 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 


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(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. 

(B) 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. 

(C) 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 shortterm obligation. 

Example 2. (i) Facts. The facts are the same 

as in Example 1, except that on December 1, 

2015, CFC1 sells 5% of the stock of CFC2 to 

an unrelated person. 

(ii) Analysis. The analysis is the same as 

in Example 1, except that the short-term 

obligation of CFC2 held by CFC1 outstanding 

on both of their first cash measurement dates, 

November 30, 2015, and December 31, 2015, 

respectively, is disregarded under paragraph 

(b)(1) of this section to the extent of 90%, the 

smallest ownership percentage of section 

958(a) stock of CFC1 and CFC2 by USP on 

such first cash measurement dates. 

Accordingly, USP takes into account $10 

($100 ¥ 90% of $100) of the short-term 

obligation in determining CFC1’s cash 

position for purposes of determining its 

aggregate foreign cash position. 

Example 3. (i) 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. 

(ii) 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. 

Example 4. (i) 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. 

(ii) Analysis. For purposes of determining 

USP’s aggregate foreign cash position, on the 

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 

$110, 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. 

(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 


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(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). 

Example 1. Estimation of aggregate foreign 

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

shareholder inclusion year—(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 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. 

(ii) 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 $300, 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, 

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 $200, 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). 

Example 2. Allocation of aggregate foreign 

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

shareholder inclusion years—(i) Facts. The 

facts are the same as in paragraph (i) of 

Example 1 of this paragraph (c)(4), except 

that the cash position of each of CFC1 and 

CFC2 on all relevant cash measurement dates 

is $200, with the result that USP has an 

aggregate foreign cash position determined 

under § 1.965–1(f)(8)(i) of $400. For its 2017 

taxable year, USP has a section 965(a) 

inclusion amount with respect to CFC1 of 

$300, and for its 2018 taxable year, USP has 

a section 965(a) inclusion amount with 

respect to CFC2 of $300. 

(ii) Analysis. Under paragraph (c)(2)(i) of 

this section, USP’s aggregate foreign cash 

position for 2017 is $300, which is the lesser 

of USP’s aggregate foreign cash position 

determined under § 1.965–1(f)(8)(i) ($400) or 

the section 965(a) inclusion amount ($300) 

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 $100, USP’s aggregate 

foreign cash position determined under 

§ 1.965–1(f)(8)(i) ($400) reduced by the 

amount of its aggregate foreign cash position 

for 2017 ($300) 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 entity if 

the surrogate foreign corporation with 

respect to the 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). 

Example. (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 $1,000 and has a section 965(c) 

deduction amount of $700. FS has no post1986 foreign income taxes (as defined in 

section 902(c)(1) as in effect before December 

22, 2017). 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 $100 

(USI’s domestic pass-through owner share of 

USPRS’s section 965(a) inclusion amount) 

minus $70 (USI’s domestic pass-through 

owner share of USPRS’s section 965(c) 

deduction amount), or $30. No other 

deductions are allowed in determining this 

amount. USI’s tax on the $30 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 $70 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) Section 

63(d). A section 965(c) deduction 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 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). 

Example. (i) 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 $1,000 with 

respect to FS and has a $700 section 965(c) 

deduction. 

(ii) 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 $300 (its pro rata share of the net of 

S Corp’s $1,000 aggregate section 965(a) 

inclusion and S Corp’s $700 aggregate section 

965(c) deduction). Accordingly, USI’s basis 

in S Corp is increased under section 

1367(a)(1) by $300. As a result of the 


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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, $700, 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, $700. S Corp’s 

accumulated adjustments account (AAA) is 

increased under section 1368(e)(1)(A) by the 

$1,000 section 965(a) inclusion taken into 

account and reduced by the $700 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, $700, 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 

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. 

■ Par. 8. Section 1.965–4 is added to 

read as follows: 

§ 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. 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 


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39560 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

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 

any specified foreign corporation of the 

United States shareholder or the 

distribution is a non pro rata 

distribution to a foreign person that is 

related to the United States shareholder. 

(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), an 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). 

Example. (i) 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. 

(ii) 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 


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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 

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 with respect 

to the United States shareholder, 

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. 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) of 

this section, 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 paragraph (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 paragraph 

(b) and (c) of this section, if a domestic 

pass-through entity is a United States 

shareholder, then a domestic passthrough owner, with respect to the 

domestic pass-through entity, that is not 

otherwise a United States shareholder is 

treated as a United States shareholder. 

(f) Disregard of certain transactions 

occurring between E&P measurement 

dates—(1) Disregard of specified 

payments. 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 payor specified foreign 

corporation and the payee specified 

foreign corporation do not have the 

same tentative E&P measurement date; 

(iii) The payment or accrual of the 

amount occurs after November 2, 2017, 

and on or before December 31, 2017; 

and 

(iv) 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) Definition of tentative E&P 

measurement date. For purposes of 

paragraph (f)(2) of this section, the term 

tentative E&P measurement date 

means— 

(i) With respect to a specified foreign 

corporation that is not described in 

paragraph (f)(3)(ii) of this section, the 

E&P measurement date of the specified 

foreign corporation that, without regard 

to the application of paragraph (f)(1) of 

this section, would result in the ‘‘greater 

of’’ amount of accumulated post-1986 

deferred foreign income described in 

section 965(a) and § 1.965–1(f)(36); and 

(ii) With respect to a specified foreign 

corporation that, without regard to the 

application of paragraph (f)(1) of this 

section, would be an E&P deficit foreign 

corporation, the E&P measurement date 

as of November 2, 2017. 


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(4) Examples. The following examples 

illustrate the application of the rules in 

this paragraph (f). 

Example 1. Deductible payment between 

wholly owned specified foreign corporations 

is a specified payment. (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 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. 

(ii) Analysis. (A) Determination of tentative 

E&P measurement date. Without regard to 

paragraph (f)(1) of this section, as of the E&P 

measurement date on December 31, 2017, 

CFC1 has post-1986 earnings and profits of 

110u (100u plus 10u income from the 

payment from CFC2), and CFC2 has post1986 earnings and profits of 90u (100u minus 

10u deduction from the payment to CFC1). 

Therefore, the tentative E&P measurement 

date of CFC1 is December 31, 2017 (110u), 

and the tentative E&P measurement date of 

CFC2 is November 2, 2017 (100u). 

(B) Application of the requirements for a 

specified payment. The payment from CFC2 

to CFC1 is a specified payment because (A) 

CFC1 and CFC2 are related specified foreign 

corporations; (B) CFC1 and CFC2 do not have 

the same tentative measurement date; (C) the 

payment occurs after November 2, 2017, and 

on or before December 31, 2017; and (D) 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. 

Example 2. Distribution is a specified 

payment. (i) Facts. The facts are the same as 

in paragraph (i) of Example 1 of this 

paragraph (f)(4), 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. 

(ii) Analysis. (A) Determination of tentative 

E&P measurement date. The analysis is the 

same as in paragraph (ii)(A) of Example 1 of 

this paragraph (f)(4). 

(B) Application of the requirements for a 

specified payment. The distribution is a 

specified payment because (A) CFC1 and 

CFC2 are related specified foreign 

corporations; (B) CFC1 and CFC2 do not have 

the same tentative measurement date; (C) the 

distribution occurs after November 2, 2017, 

and on or before December 31, 2017; and (D) 

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. 

Example 3. Deductible payment between 

related (but not wholly owned) specified 

foreign corporations is a specified payment. 

(i) Facts. The facts are the same as in 

paragraph (i) of Example 1 of this paragraph 

(f)(4), 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. 

(ii) Analysis. The analysis is the same as 

in paragraph (ii) of Example 1 of this 

paragraph (f)(4); 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. 

Example 4. Deductible payment between 

unrelated specified foreign corporations is 

not a specified payment. (i) Facts. The facts 

are the same as in paragraph (i) of Example 

1 of this paragraph (f)(4), 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. 

(ii) 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. 

Example 5. Deductible payment and 

income accrued from unrelated persons are 

not specified payments. (i) Facts. The facts 

are the same as in paragraph (i) of Example 

1 of this paragraph (f)(4), 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. 

(ii) 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. 

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. 

(i) Facts. The facts are the same as in 

paragraph (i) of Example 5 of this paragraph 

(f)(4), except that CFC2 also makes a 

deductible payment of 10u to CFC1 on 

November 3, 2017. 

(ii) Analysis. (A) Determination of tentative 

E&P measurement date. Without regard to 

paragraph (f)(1) of this section, as of the E&P 

measurement date on December 31, 2017, 

CFC1 has post-1986 earnings and profits of 

90u (100u minus 20u deductible expense 

plus 10u income from the payment from 

CFC2), and CFC2 has post-1986 earnings and 

profits of 110u (100u plus 20u gross income 

minus 10u deduction from the deductible 

payment to CFC1). Therefore, the tentative 

E&P measurement date of CFC1 is November 

2, 2017 (100u) and the tentative E&P 

measurement date of CFC2 is December 31, 

2017 (110u). 

(B) Application of the requirements for a 

specified payment. The deductible payment 

is a specified payment because (A) CFC1 and 

CFC2 are related specified foreign 

corporations; (B) CFC1 and CFC2 do not have 

the same tentative measurement date; (C) the 

payment occurs after November 2, 2017, and 

on or before December 31, 2017; and (D) 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. 

■ Par. 9. Section 1.965–5 is added to 

read as follows: 

§ 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 


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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, 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, 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. 

(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) 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 shall apply 

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 

shall apply 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, 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 

(B) The amount described in 

paragraph (d)(1)(i)(B) of this section. 

(2) Applicable percentage for 

domestic pass-through owners. In the 

case of a domestic pass-through owner 

that has a domestic pass-through owner 

share of a domestic pass-through 

entity’s section 965(a) inclusion 

amount, the domestic pass-through 

owner’s applicable percentage that is 

applied to foreign income taxes 

attributable to such section 965(a) 

inclusion amount is equal to the 

applicable percentage determined under 

paragraph (d)(1) of this section with 

respect to the domestic pass-through 

entity that is the section 958(a) U.S. 

shareholder. 

■ Par. 10. Section 1.965–6 is added to 

read as follows: 

§ 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. 

Paragraphs (b) and (c) of this section 

provide the general rules for the 

computation of foreign income taxes 

deemed paid under sections 902 and 

960. Paragraph (d) of this section 

provides rules for allocation and 

apportionment of expenses. 

(b) Computation of foreign incomes 

taxes deemed paid. 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, 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. 

(c) Section 902 fraction—(1) In 

general. The term section 902 fraction 

means, with respect to a foreign 

corporation that is either a deferred 

foreign income corporation or an E&P 


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39564 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

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 (the numerator), divided 

by 

(ii) The foreign corporation’s post1986 undistributed earnings (the 

denominator). See section 902(a). 

(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. 

(d) 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. 

■ Par. 11. Section 1.965–7 is added to 

read as follows: 

§ 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. For additional 

definitions that apply for purposes of 

the section 965 regulations, see § 1.965– 

1(f). 

(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 

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 (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 or additional liability is 

prorated has passed, the amount 

prorated to such installment must be 

paid on notice and demand by the 

Secretary. 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 


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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 have 

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, 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. 

(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 

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; or 

(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. 

(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) 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; 

or 

(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. 

(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 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 


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39566 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

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 before September 10, 2018, 

the transfer agreement must be filed by 

October 9, 2018 in order to be 

considered timely filed. 

(3) Signature requirement. The 

transfer agreement that is filed within 

30 days of the acceleration event 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 

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 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; 

(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; 

and 

(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. 

(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. 

(C) Consent of Commissioner—(1) In 

general. Except as otherwise provided 

in publications, instructions, forms, 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, 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 

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 


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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, other than a 

domestic pass-through entity, of an S 

corporation 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)(ii) 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, 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. 

(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; or 

(C) The transfer of any share of stock 

of the S corporation by the shareholder 

(including by reason of death or 

otherwise). 

(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)(iv)(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 

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 is not 

a domestic pass-through entity. 

(2) Filing requirements—(i) In general. 

A transfer agreement must be timely 

filed. Except as provided in paragraph 

(c)(3)(iv)(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 

triggering event occurs. The transfer 

agreement must be filed in accordance 

with the rules provided in 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 


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39568 Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 

§ 301.9100–2 or 301.9100–3 to file a 

transfer agreement late. 

(ii) Transition rule. If a triggering 

event occurs before September 10, 2018, 

the transfer agreement must be filed by 

October 9, 2018 in order to be 

considered timely filed. 

(3) Signature requirement. The 

transfer agreement that is filed within 

30 days of the triggering event 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 is 

subject to adjustment by the 

Commissioner; 

(v) A copy of the eligible section 

965(i) transferor’s most recent 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; and 

(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. 

(C) Consent of Commissioner—(1) In 

general. Except as otherwise provided 

in publications, instructions, forms, 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 net section 965(i) 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, 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 has made 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) 


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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 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 before September 10, 2018, 

the agreement must be filed by October 

9, 2018 in order to be considered timely 

filed. 

(3) Signature requirement. The 

agreement that is filed within 30 days of 

the triggering event 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 is 

subject to adjustment by the 

Commissioner; and 

(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)(iii) of this section. 

(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, then the 

Commissioner may reject the agreement 

(effective as of the date of the related 

triggering event). 

(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 

liability 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 S corporation. 

(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, 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 


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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. 

(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 

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)). 

(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, 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 instructions 

or other guidance. 

(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 


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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. 

(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). 

(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, 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 the specified foreign 

corporation with respect to which the 

election is made, and the statement 

must be filed in the manner prescribed 

in instructions or other guidance. 

(6) Examples. The following examples 

illustrate the application of this 

paragraph (f). 

Example 1. (i) 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. 

(ii) 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. (i) Facts. The facts are the 

same as in paragraph (i) of Example 1 of this 

paragraph (f)(6), except that a deficit of 

3,040u was incurred during the taxable year 

that includes October 31, 2017. 

(ii) Analysis. The analysis is the same as 

in paragraph (ii) of Example 1 of this 

paragraph (f)(6), 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)) 

by the person (or, in the case of a 

domestic pass-through owner, by the 

person’s domestic pass-through entity) 

from a deferred foreign income 

corporation. 

(ii) Net income tax. For purposes of 

this paragraph (g)(10), the term net 


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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. 

■ Par. 12. Section 1.965–8 is added to 

read as follows: 

§ 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. For 

additional definitions that apply for 

purposes of the section 965 regulations, 

see § 1.965–1(f). 

(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) [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) and § 1.965– 

1(b)(2). 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. 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 

for purposes of determining the amount 

of any member’s section 965(c) 

deduction amount. However, 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 

foreign cash position of the section 

958(a) U.S. shareholder is equal to the 


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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 sum of the 

amount that would be the aggregate 

foreign cash position (as defined in 

§ 1.965–1(f)(8)(i)) of each member of the 

consolidated group that is a section 

958(a) U.S. shareholder determined as if 

each such member were not a member 

of a consolidated group. 

(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. 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. 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– 

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 


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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. Application to members of a 

consolidated group. (i) Facts. The facts are 

the same as in paragraph (i) of Example 1 of 

this paragraph (g), 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 

($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) 


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Federal Register / Vol. 83, No. 154 / Thursday, August 9, 2018 / Proposed Rules 39575 

inclusion amount, it has no section 965(c) 

deduction amount and therefore is not 

allowed a section 965(c) deduction. 

■ Par. 13. Section 1.965–9 is added to 

read as follows: 

§ 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. 14. 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. 

[FR Doc. 2018–16476 Filed 8–3–18; 4:15 pm] 

BILLING CODE 4830–01–P 


sradovich on DSK3GMQ082PROD with PROPOSALS2