95362 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–105479–18] 

RIN 1545–BO61 

Previously Taxed Earnings and Profits 

and Related Basis Adjustments 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations regarding 

previously taxed earnings and profits of 

foreign corporations and related basis 

adjustments. The proposed regulations 

affect foreign corporations with 

previously taxed earnings and profits 

and their shareholders. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by March 3, 2025. 

ADDRESSES: Commenters are strongly 

encouraged to submit public comments 

electronically. Submit electronic 

submissions via the Federal 

eRulemaking Portal at 

www.regulations.gov (indicate IRS and 

REG–105479–18) by following the 

online instructions for submitting 

comments. Requests for a public hearing 

must be submitted as prescribed in the 

‘‘Comments and Requests for a Public 

Hearing’’ section. Once submitted to the 

Federal eRulemaking Portal, comments 

cannot be edited or withdrawn. The 

Department of the Treasury (Treasury 

Department) and the IRS will publish 

for public availability any comment 

submitted electronically or on paper to 

its public docket. Send paper 

submissions to: CC:PA:01:PR (REG– 

105479–18), Room 5203, Internal 

Revenue Service, P.O. Box 7604, Ben 

Franklin Station, Washington, DC 

20044. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations 

generally, Elena M. Madaj at (202) 317– 

3576; concerning the portions of the 

proposed regulations relating to section 

1502, Jeremy Aron-Dine at (202) 317– 

6847; concerning the portions of the 

proposed regulations relating to 

partnerships, Jennifer N. Keeney at (202) 

317–6850; and concerning submissions 

of comments and requests for a public 

hearing, contact the Publications and 

Regulations Section of the Office of 

Associate Chief Counsel (Procedure and 

Administration) by email at 

publichearings@irs.gov (preferred) or by 

telephone at (202) 317–6901 (not tollfree numbers). 

SUPPLEMENTARY INFORMATION: 

Authority 

This document contains proposed 

additions and amendments to 26 CFR 

part 1 (proposed regulations) under 

sections 959 and 961 and certain other 

provisions of the Internal Revenue Code 

(Code) regarding previously taxed 

earnings and profits (PTEP). As 

discussed in the Explanation of 

Provisions, the primary provisions of 

the proposed regulations are issued 

pursuant to the express delegations of 

authority under sections 245A(g), 

743(b), 904(d)(7), 951A(f)(1)(B), 960(f), 

961(a) through (c), 965(o), 986(c)(2), 

989(c), and 1502. The proposed 

regulations are also issued pursuant to 

the express delegation of authority 

under section 7805(a). 

Background 

I. Scope 

The Background describes PTEP, 

including provisions giving rise to PTEP 

and provisions regarding the treatment 

of PTEP, and related guidance and 

issues under existing law. Any term 

used but not defined in this preamble 

has the meaning given to it in the 

proposed regulations. 

II. PTEP 

A. Overview 

Sections 959 and 961 are intended to 

operate in tandem to prevent double 

taxation of PTEP, which is earnings and 

profits (E&P) of a foreign corporation 

described in section 959(c)(1) or (c)(2). 

Section 959 designates amounts of E&P 

as PTEP based on amounts included, or 

treated as included, in gross income 

with respect to the foreign corporation 

under section 951(a). 

The remainder of this part II of the 

Background summarizes provisions 

giving rise to PTEP, provisions 

regarding the treatment of PTEP, and 

existing regulations under sections 959 

and 961. 

B. Provisions Giving Rise to PTEP 

1. Section 951(a) 

Section 951(a)(1)(A) requires a United 

States shareholder (as defined in section 

951(b) or, if applicable, section 

953(c)(1)(A)) of a foreign corporation to 

include in gross income its pro rata 

share of the corporation’s subpart F 

income (as defined in section 952) for a 

taxable year of the corporation (subpart 

F income inclusion), if the corporation 

is a controlled foreign corporation (CFC) 

(as defined in section 957(a) or, if 

applicable, section 957(b) or 

953(c)(1)(B)) at any time during the 

taxable year and the shareholder owns 

(within the meaning of section 958(a)) 

stock of the corporation on the last day 

of the taxable year on which the 

corporation is a CFC (last relevant day). 

Pursuant to section 951(a)(1)(B), the 

United States shareholder is generally 

required to also include in gross income 

its amount determined under section 

956 (section 956 amount) for the taxable 

year of the foreign corporation (section 

956 inclusion). This amount represents 

an effective repatriation of E&P and is 

computed based on certain United 

States property held by the corporation. 

Ownership of stock within the meaning 

of section 958(a) means stock owned 

directly and stock owned indirectly 

through foreign entities, including 

domestic partnerships to the extent 

treated as foreign partnerships under 

§ 1.958–1(d)(1) (discussed in part III.B of 

the Background). For purposes of the 

remainder of this preamble, a reference 

to stock ownership means stock owned 

within the meaning of section 958(a). 

Section 951(a)(2) determines a United 

States shareholder’s pro rata share of a 

foreign corporation’s subpart F income 

by first allocating a portion of such 

subpart F income to the United States 

shareholder, and then reducing such 

allocation in accordance with section 

951(a)(2)(B) to take into account certain 

distributions where ownership of the 

stock of the foreign corporation is 

acquired by the United States 

shareholder during the corporation’s 

taxable year. See § 1.951–1(b). Subpart F 

income allocated to a United States 

shareholder before the application of 

section 951(a)(2)(B) is computed by 

multiplying the subpart F income by a 

fraction, the numerator of which is the 

portion of the foreign corporation’s 

hypothetical distribution described in 

§ 1.951–1(e) that would be distributed 

with respect to the shareholder’s stock 

of the corporation, and the denominator 

of which is the amount of such 

hypothetical distribution. See § 1.951– 

1(e). The amount of the hypothetical 

distribution is equal to the foreign 

corporation’s allocable E&P, which is 

generally the corporation’s E&P for the 

taxable year (not reduced by 

distributions during the year). See 

§ 1.951–1(e)(1)(ii). 

A special rule under section 245A(e) 

treats certain hybrid dividends received 

by a CFC as subpart F income of the 

receiving CFC for purposes of section 

951(a)(1)(A). Similarly, section 964(e)(4) 

treats certain gain from a sale of stock 

of a foreign corporation by a CFC as 

subpart F income of the selling CFC for 

purposes of section 951(a)(1)(A). 

Consequently, a United States 

shareholder of such a receiving CFC or 

selling CFC includes in gross income 


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under section 951(a)(1)(A) its pro rata 

share of such subpart F income. 

2. Section 951A(a) 

Pursuant to section 951A(a), a United 

States shareholder of a CFC is required 

to include in gross income its global 

intangible low-taxed income (GILTI 

inclusion). See § 1.951A–1(b). A United 

States shareholder’s GILTI inclusion is 

determined by taking into account the 

shareholder’s pro rata share of tested 

items (as defined in § 1.951A–1(f)(5)) of 

CFCs in which the shareholder owns 

stock, such as tested income, tested loss, 

and qualified business asset investment. 

See § 1.951A–1(c). A United States 

shareholder’s pro rata share of a CFC’s 

tested items is determined in the same 

manner as a pro rata share of subpart F 

income under section 951(a)(2), subject 

to certain modifications. See § 1.951A– 

1(d). 

Section 951A(f)(1)(A) provides that a 

GILTI inclusion is treated in the same 

manner as a subpart F income inclusion 

for purposes of applying certain 

provisions of the Code, including 

sections 959 and 961. Section 

951A(f)(1)(B) grants the Secretary 

authority to provide rules for applying 

section 951A(f)(1)(A) to other provisions 

of the Code in any case in which the 

determination of subpart F income is 

required to be made at the level of the 

CFC. 

3. Section 1248(a) or (f) 

Section 1248(a) requires a United 

States person that satisfies certain 

ownership requirements with respect to 

stock in a foreign corporation to include 

gain recognized on a sale or exchange of 

stock in such foreign corporation in 

gross income as a dividend, to the 

extent of the E&P of the foreign 

corporation attributable to the stock 

(including E&P of certain lower-tier 

foreign corporations pursuant to section 

1248(c)(2), but not including PTEP 

pursuant to section 1248(d)(1)). Section 

1248(f) provides similar rules for certain 

distributions in nonrecognition 

transactions. 

Section 959(e) treats an amount 

included in gross income of any person 

as a dividend under section 1248(a) or 

(f) as an amount included in gross 

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

purposes of section 959. 

4. Section 965 

The transition tax imposed under 

section 965 as part of the Tax Cuts and 

Jobs Act, Public Law 115–97, 131 Stat. 

2054 (2017) (the Act) increased the 

subpart F income of certain foreign 

corporations and treated such foreign 

corporations as CFCs for purposes of 

section 951 (if not already the case). 

Section 965(a) and (e). Consequently, a 

United States shareholder of such a 

foreign corporation generally included 

in gross income under section 

951(a)(1)(A) its pro rata share of such 

additional subpart F income, subject to 

reduction under section 965(b) for 

certain E&P deficits attributable to stock 

of other foreign corporations owned by 

the shareholder. 

For purposes of section 959, the 

transition tax also treated the amount of 

a reduction to a United States 

shareholder’s inclusion with respect to 

a foreign corporation under section 

965(b) as an amount included in the 

shareholder’s gross income with respect 

to the foreign corporation under section 

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

C. Provisions Regarding the Treatment 

of PTEP 

1. Gross Income Exclusions Under 

Section 959 

Section 959 prevents double taxation 

by excluding PTEP from gross income of 

United States persons and CFCs. See 

H.R. Rep. No. 87–1447, at A101–102 

(1962). 

Section 959(a) provides that, when 

PTEP of a foreign corporation is 

distributed to, or would otherwise be 

included under section 951(a)(1)(B) in 

gross income of, a United States 

shareholder whose inclusion under 

section 951(a) gave rise to the PTEP, the 

PTEP is excluded from the United States 

shareholder’s gross income. Under 

successor rules within section 959(a), 

the exclusion extends to any other 

United States person who acquires from 

any person any portion of the United 

States shareholder’s interest in the 

foreign corporation (subject to any proof 

of identity rules that may be prescribed 

by the Secretary). 

Section 959(b) applies for purposes of 

section 951(a) and provides that, when 

PTEP of a CFC is distributed through a 

chain of ownership described under 

section 958(a), the PTEP is excluded 

from the gross income of another CFC in 

the chain for purposes of applying 

section 951(a) to such CFC with respect 

to the United States shareholder whose 

inclusion under section 951(a) gave rise 

to the PTEP. Under successor rules 

within section 959(b), the exclusion 

extends to any CFC of any other United 

States shareholder who acquires from 

any person any portion of the United 

States shareholder’s interest in the CFC 

(subject to any proof of identity rules 

that may be prescribed by the 

Secretary). 

Section 959(c) treats PTEP as 

distributed before E&P that is not PTEP. 

It does so by allocating distributions 

first to PTEP described in section 

959(c)(1) (PTEP resulting from a section 

956 inclusion or PTEP that have been 

excluded under section 959(a)(2)), then 

to PTEP described in section 959(c)(2) 

(all other PTEP), and finally to nonPTEP (section 959(c)(3) E&P). 

For purposes of section 959, section 

951A(f)(1) treats the portion of a United 

States shareholder’s GILTI inclusion 

that is allocated to a CFC in the same 

manner as a subpart F income inclusion. 

Section 959(f) allocates a section 956 

amount first to PTEP described in 

section 959(c)(2) and then to section 

959(c)(3) E&P, taking into account 

distributions made by the foreign 

corporation. A section 956 amount is 

not allocated to PTEP described in 

section 959(c)(1) because, under section 

956(a) and (b)(1), that PTEP is taken into 

account in determining the section 956 

amount. 

Thus, under section 959, a CFC’s E&P 

for a taxable year of the CFC is first 

classified as PTEP to reflect any subpart 

F income inclusions or GILTI inclusions 

with respect to the CFC. Next, any 

distributions made by the CFC during 

the taxable year are allocated to PTEP 

(and such PTEP is reduced). Then, any 

section 956 amount with respect to the 

CFC is determined for the taxable year, 

which is allocated to remaining section 

959(c)(2) PTEP (and such PTEP is 

reclassified as section 959(c)(1) PTEP). 

Finally, the CFC’s E&P for the taxable 

year is classified as PTEP to reflect any 

inclusion under section 951(a)(1)(B). 

2. Basis Adjustments Under Section 961 

Section 961 describes rules that 

provide for basis increases to reflect 

amounts included in gross income 

under section 951(a) and basis 

reductions and gain recognition to 

reflect distributions of PTEP. Basis 

increases prevent undistributed PTEP of 

a foreign corporation from giving rise to 

gain or a subpart F income inclusion of 

a covered shareholder, and thus 

additional tax, in a sale or exchange of 

stock of the foreign corporation or 

property through which such stock is 

owned. See H.R. Rep. No. 87–1447, at 

A106 (1962); H.R. Rep. No. 105–148, at 

529–30 (1997). Basis reductions and 

gain recognition prevent double benefits 

that would otherwise arise (for example, 

by ensuring a distribution of PTEP does 

not create a loss in the stock or other 

property on which the distribution is 

made because of basis provided under 

section 961 for the inclusion that gave 

rise to the PTEP). 

Section 961(a) provides that, under 

regulations prescribed by the Secretary, 

a United States shareholder’s basis in its 


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stock in a CFC, and basis in property 

through which it owns such stock, is 

increased by the amount included in the 

shareholder’s gross income under 

section 951(a) with respect to such stock 

or property. 

Section 961(b)(1) provides that, under 

regulations prescribed by the Secretary, 

when a United States shareholder or a 

United States person receives an 

amount that is excluded from gross 

income under section 959(a), the basis 

of the stock or other property with 

respect to which the amount is received 

is reduced by the amount so excluded. 

To the extent that an amount excluded 

from gross income under section 959(a) 

exceeds the basis of the stock or other 

property with respect to which it is 

received, section 961(b)(2) treats the 

amount as gain from the sale or 

exchange of property. 

Section 961(c) provides that, under 

regulations prescribed by the Secretary, 

if a United States shareholder owns 

stock in a CFC that is owned by another 

CFC, then adjustments similar to the 

adjustments provided by section 961(a) 

and (b) are made to the basis of such 

stock, and the basis of stock in any other 

CFC through which the United States 

shareholder owns the stock of the first 

mentioned CFC, but only for the 

purposes of determining the amount 

included under section 951 in the gross 

income of such United States 

shareholder. Under successor rules 

within section 961(c), basis adjustments 

carry over to any other United States 

shareholder who acquires from any 

person any portion of the interest of the 

United States shareholder by reason of 

which the shareholder was treated as 

owning the relevant CFC stock (subject 

to any proof of identity rules that may 

be prescribed by the Secretary). Section 

961(c) further provides that the 

adjustments described in section 961(c) 

do not apply to any stock owned by the 

United States shareholder to which a 

basis adjustment applies under section 

961(a) or (b). 

For purposes of section 961, section 

951A(f)(1) treats the portion of a United 

States shareholder’s GILTI inclusion 

that is allocated to a CFC in the same 

manner as a subpart F income inclusion. 

Section 1.965–2(f)(1) generally 

provides that basis is not increased 

under section 961 to reflect PTEP 

resulting from section 965(b), but 

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

to make certain basis adjustments. 

3. Foreign Currency Gain or Loss Under 

Section 986(c) 

Section 986(c)(1) requires the 

recognition of foreign currency gain or 

loss with respect to distributions of 

PTEP attributable to movements in 

exchange rates between the date of the 

income inclusion that gave rise to the 

PTEP and the distribution of the PTEP. 

Section 986(c)(1) further provides that 

such foreign currency gain or loss is 

treated as ordinary income or loss from 

the same source as the associated 

income inclusion. Section 986(c)(2) 

provides that the Secretary shall 

prescribe regulations with respect to 

distributions of PTEP through tiers of 

foreign corporations. Section 989(c) 

provides that the Secretary shall 

prescribe such regulations as may be 

necessary or appropriate to carry out the 

purposes of the subpart that includes 

section 986 (subpart J of part III, 

subchapter N, chapter 1, subtitle A of 

the Code). 

Notice 88–71, 1988–2 C.B. 374 (1988 

notice), provides guidance regarding 

foreign currency gain or loss with 

respect to PTEP and announced an 

intent to issue regulations consistent 

with the guidance. Under the 1988 

notice, such foreign currency gain or 

loss is determined with respect to each 

separate category of income listed in 

section 904(d)(1) pursuant to a formula 

and is recognized immediately before 

certain sales or exchanges of stock of a 

foreign corporation with respect to 

undistributed PTEP of the foreign 

corporation. See also § 1.985–5(e)(2) 

(requiring a United States shareholder to 

recognize foreign currency gain or loss 

when a CFC changes its functional 

currency to the U.S. dollar); § 1.367(b)– 

2(j)(2)(i) (application of section 986(c) to 

certain nonrecognitions). 

Section 1.986(c)–1 addresses foreign 

currency gain or loss with respect to 

distributions of PTEP resulting from 

section 965. The rules provide that 

foreign currency gain or loss with 

respect to PTEP resulting from section 

965(a) is determined based on 

movements in the exchange rate 

between December 31, 2017, and the 

time such PTEP is distributed, and that 

any such gain or loss recognized 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 the PTEP. The rules also provide 

that section 986(c) does not apply with 

respect to distributions of PTEP 

resulting from section 965(b). 

4. Foreign Income Taxes Under Sections 

164(a), 901(a), and 960(b) 

Section 164(a) generally provides that 

a taxpayer is allowed a deduction for 

certain foreign income taxes paid or 

accrued by the taxpayer. 

Section 901(a) generally provides that 

a taxpayer choosing to credit foreign 

income taxes is allowed a credit for 

certain foreign income taxes paid or 

accrued by the taxpayer plus, in the case 

of a domestic corporation, the taxes 

deemed to have been paid by the 

domestic corporation under section 960. 

Section 960(b) applies for purposes of 

sections 901 through 909 (relating to the 

foreign tax credit). Section 960(b)(1) 

provides that, if PTEP distributed by a 

CFC to a corporate United States 

shareholder of the CFC is excluded from 

gross income under section 959(a), the 

United States shareholder is deemed to 

have paid the foreign income taxes that 

are properly attributable to the PTEP 

and that have not already been deemed 

paid by a domestic corporation. 

Similarly, section 960(b)(2) provides 

that, if PTEP distributed by a CFC to 

another CFC is excluded from gross 

income under section 959(b), the 

recipient CFC is deemed to have paid 

the foreign income taxes that are 

properly attributable to the PTEP and 

that have not already been deemed paid 

by a domestic corporation. Section 

960(f) provides that the Secretary shall 

prescribe such regulations or other 

guidance as may be necessary or 

appropriate to carry out the provisions 

of section 960. Section 904(d)(1) 

provides that certain provisions 

including section 960 apply separately 

with respect to certain categories of 

income, and section 904(d)(7) provides 

that the Secretary shall prescribe such 

regulations as may be necessary or 

appropriate for the purposes of section 

904(d). 

For purposes of determining the 

amount of foreign income taxes deemed 

paid, § 1.960–3 requires the 

establishment and maintenance of 

foreign corporation-level accounts that 

track a foreign corporation’s PTEP and 

foreign income taxes associated with the 

PTEP. Those regulations adopt a system 

of accounting for PTEP in annual 

accounts for each separate section 904 

category (as defined in § 1.960–1(b)(23)) 

and further segregate each annual 

account among ten PTEP groups. 

Section 965(g) and § 1.965–5 disallow 

a percentage (referred to as the 

applicable percentage, as defined in 

§ 1.965–5(d)) of any credit or deduction 

for foreign income taxes associated with 

PTEP resulting from section 965(a) or 

(b). Section 245A(d) and § 1.245A(d)–1 

disallow the entirety of any credit or 

deduction for foreign income taxes 

associated with PTEP resulting from 

income inclusions by reason of section 

245A(e)(2) (regarding hybrid dividends) 

or certain income inclusions by reason 

of section 964(e)(4) (regarding sales of 


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stock of a foreign corporation by a CFC). 

Sections 245A(g) and 965(o) provide 

that the Secretary shall prescribe such 

regulations or other guidance as may be 

necessary or appropriate to carry out the 

provisions of sections 245A and 965, 

respectively. 

5. Election Under Section 962 

Section 962(a) provides that, under 

regulations prescribed by the Secretary, 

an individual United States shareholder 

may elect to be taxed at domestic 

corporate rates on amounts included in 

the individual’s gross income under 

section 951(a) and that those amounts 

are treated as taken into account by a 

domestic corporation for purposes of 

applying the relevant provisions of 

section 960. The election also applies to 

amounts included in the individual’s 

gross income under section 951A(a) 

because, for purposes of section 962, 

such amounts are treated in the same 

manner as a subpart F income inclusion. 

See section 951A(f)(1). The purpose of 

section 962 generally is to equate an 

individual’s tax burden with respect to 

certain earnings of a CFC with the tax 

burden the individual would have had 

if the individual were to own the CFC 

through a domestic corporation. See S. 

Rep. No. 87–1881, at 92–93 (1962). 

To carry out this purpose, section 

962(d) generally subjects PTEP to an 

additional level of taxation when 

distributed. It does so by, 

notwithstanding section 959(a)(1), 

requiring that the distributed PTEP be 

included in gross income to the extent 

it exceeds the amount of tax paid on the 

amounts to which the election under 

section 962 applied. 

Section 961(a) also carries out this 

purpose by, in the case of an election 

under section 962, limiting a basis 

increase for an income inclusion to 

which the election applied to the 

amount of tax paid by the individual 

with respect to the income inclusion. 

Additionally, in a distribution of PTEP, 

section 961(b)(1) limits a basis decrease 

to the amount that is excluded from 

gross income under section 959(a) after 

the application of section 962(d). 

6. Section 1411 

Section 1411 generally imposes a 3.8 

percent tax on the net investment 

income of certain individuals, trusts, 

and estates. Under section 1411(c)(1) 

and § 1411–4(a), net investment income 

includes certain income from dividends 

and net gain from the disposition of 

property. Section 1.1411–10 provides, 

in relevant part, rules regarding the 

application of section 1411 to 

individuals, trusts, and estates that own 

stock of a CFC, and § 1.1411–10(g) 

allows an election with respect to a CFC 

to treat amounts included in income 

under section 951(a) with respect to the 

CFC as net investment income for 

purposes of § 1.1411–4(a)(1)(i). See also 

§ 1.951A–5(b)(1) (treating a GILTI 

inclusion in the same manner as a 

subpart F income inclusion for purposes 

of applying section 1411). If the election 

provided under § 1.1411–10(g) is made, 

a distribution of E&P that is not treated 

as a dividend pursuant to section 959(d) 

is generally not treated as a dividend for 

purposes of section 1411(c)(1)(A)(i) and 

§ 1.1411–4(a)(1)(i). See § 1.1411– 

10(c)(1)(i)(B). If the election provided 

under § 1.1411–10(g) is not made, 

however, net investment income could 

reflect value attributable to PTEP, either 

when the PTEP is distributed or when 

a United States shareholder directly or 

indirectly disposes of stock of the CFC. 

Thus, if no election is made, a 

distribution of E&P that is not treated as 

a dividend pursuant to section 959(d) is 

nevertheless a dividend for purposes of 

determining net investment income 

under section 1411(c)(1)(A)(i) and 

§ 1.1411–4(a)(1)(i), provided the 

distribution is attributable to amounts 

that are or have been included in gross 

income under section 951(a) in a taxable 

year beginning after December 31, 2012. 

See § 1.1411–10(c)(1)(i)(A)(1). For 

purposes of calculating gain on the 

disposition of stock of a CFC, basis 

adjustments under section 961(a) and 

(b) are similarly not taken into account 

for section 1411 purposes in the absence 

of the election. See § 1.1411–10(d)(1). 

D. Regulations Under Sections 959 and 

961 

The current regulations under 

sections 959 and 961 were issued in 

1965 and have not been updated to 

reflect certain statutory changes (for 

example, the enactment of section 

961(c)). The regulations also do not 

address a number of issues relating to 

the operation of sections 959 and 961. 

In 2006, the Treasury Department and 

the IRS issued a notice of proposed 

rulemaking (71 FR 51155) (2006 

proposed regulations) to provide more 

complete rules and address various 

open issues under sections 959 and 961 

and related provisions. 

In 2018, the Treasury Department and 

the IRS issued Notice 2019–01, 2019–02 

I.R.B. 275 (2019 notice), which 

announced an intent to withdraw the 

2006 proposed regulations and issue a 

new notice of proposed rulemaking 

under sections 959 and 961 to address 

certain issues arising from the Act. The 

2019 notice described rules for the 

maintenance of PTEP accounts and 

other aspects relating to the operation of 

section 959 and requested comments on 

certain topics. The Treasury Department 

and the IRS received several written 

comments in response to the 2019 

notice. In 2022, the Treasury 

Department and the IRS formally 

withdrew the 2006 proposed regulations 

(87 FR 63981). 

As indicated in the 2019 notice, 

changes made by the Act had a 

significant impact on the role of PTEP 

and how it functions within the U.S. tax 

system and, in certain cases, 

exacerbated the need to address 

longstanding issues. Thus, in addition 

to the need for updated and more 

complete rules as contemplated in the 

2006 proposed regulations, the issuance 

of new regulations requires 

consideration of multiple issues raised 

by the Act. Certain significant 

considerations about the role of PTEP in 

the current U.S. tax system are 

summarized below. 

First, the Act significantly increased 

the types of income that give rise to 

PTEP, several of which involve specific 

rules and limitations to determine 

foreign currency gain or loss and the 

availability of foreign tax credits. Giving 

effect to the various rules and 

limitations introduced by the Act 

requires a detailed accounting system to 

track PTEP in new groups, and to ensure 

those rules and limitations are 

appropriately applied by taxpayers and 

can be administered by the IRS. 

The Act also substantially increased 

the amount of PTEP in the U.S. tax 

system. In many cases, a considerable 

portion of a CFC’s income has been (or 

will be) subject to tax under section 

951(a)(1)(A) or 951A(a), including by 

reason of the transition tax imposed 

under section 965, and thus only the 

residual amount of the CFC’s income 

constitutes section 959(c)(3) E&P. 

At the same time, the Act introduced 

section 245A, which in certain cases 

allows a domestic corporation to claim 

a dividends received deduction for 

section 959(c)(3) E&P. As a result, 

unlike before the Act where section 

959(c)(3) E&P generally was subject to 

U.S. tax (with a possible foreign tax 

credit in some cases) when repatriated 

to the domestic corporation, such E&P 

may now generally be repatriated 

without U.S. tax to a recipient domestic 

corporation. Nonetheless, there are 

important distinctions between section 

959(c)(3) E&P and PTEP—in particular, 

the section 245A deduction generally 

allows E&P to be distributed without a 

corresponding basis reduction (but see 

sections 961(d) and 1059), whereas a 

distribution of PTEP reduces basis (or 

gives rise to gain) in accordance with 

section 961(b). Therefore, PTEP may not 


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be preferable to section 959(c)(3) E&P 

and taxpayers might take inappropriate 

positions to maximize the existence of 

section 959(c)(3) E&P. For example, a 

taxpayer may wish to claim a section 

961 basis increase for an amount 

included in gross income but apply the 

section 245A deduction on a 

distribution of the corresponding E&P so 

that such E&P is repatriated tax-free 

without any basis reduction under 

section 961(b). To prevent this type of 

planning, it is critical for the system to 

properly maintain the PTEP character of 

that E&P so that section 961(b) applies 

when the E&P is distributed. 

Existing rules governing PTEP also do 

not adequately address structures where 

a United States shareholder owns only 

a portion of the stock in an upper-tier 

CFC that owns stock in a lower-tier CFC. 

In particular, there are no rules 

prescribing the manner in which basis 

under section 961(c) functions in these 

non-wholly owned structures. Further, 

after the enactment of section 951A in 

the Act, it is much more likely for 

United States shareholders to have 

disparate amounts of PTEP with respect 

to the same CFC because a United States 

shareholder’s GILTI inclusion is 

determined based on items attributable 

to all the stock of CFCs owned by the 

United States shareholder, and this can 

raise issues about how section 959(b) 

applies in distributions of the PTEP 

(such as the issues discussed in part 

II.D.1.ii of the Explanation of 

Provisions). Thus, changes in the Act 

have compounded already existing 

complexities with respect to the 

treatment of PTEP and basis in stock in 

non-wholly owned structures. 

Finally, existing rules do not 

sufficiently address the operation of the 

PTEP provisions with respect to 

domestic partnerships (or certain S 

corporations) in light of the enactment 

of section 951A and the extension of 

aggregate treatment to such entities in 

determining inclusions under both 

sections 951(a) and 951A(a) (as 

discussed in part III.A of the 

Background). Moreover, certain 

unresolved issues, such as whether a 

partnership obtains basis in stock of a 

CFC to account for PTEP, which had 

previously been limited to foreign 

partnerships, now apply equally to 

domestic partnerships (and certain S 

corporations). 

III. Other Guidance and Issues 

A. Regulations Under Section 958 

Before the Act, domestic partnerships 

(and S corporations by operation of 

section 1373(a)) were treated as owning 

stock of a foreign corporation for 

purposes of determining inclusions in 

gross income under section 951(a), and, 

thus, PTEP accounts under section 959 

were maintained, and related basis 

adjustments under section 961 were 

made, at the partnership level. 

Following the enactment of section 

951A in the Act, in 2019 the Treasury 

Department and the IRS published final 

regulations treating a domestic 

partnership (and certain S corporations) 

as an aggregate of its partners for 

purposes of applying section 951A and 

related provisions. TD 9866, 84 FR 

29288. That is, partners do not take into 

account a distributive share of a section 

951A inclusion with respect to the 

domestic partnership and its CFCs, but 

instead are treated as proportionately 

owning the stock of those CFCs, with 

the result that (as with foreign 

partnerships) income inclusions under 

section 951A are determined directly 

(and solely) by partners that are United 

States shareholders with respect to a 

CFC. Subsequently, in 2022, the 

Treasury Department and the IRS 

published § 1.958–1(d) which, 

consistent with the approach adopted 

under section 951A, extends the 

aggregate treatment of domestic 

partnerships to section 951. TD 9960, 87 

FR 3648. 

Under § 1.958–1(d), for purposes of 

sections 951, 951A, and 956(a), as well 

as any provision that specifically 

applies by reference to those sections (or 

regulations issued under those sections), 

a domestic partnership is generally not 

treated as owning stock of a foreign 

corporation under section 958(a), and 

stock of a foreign corporation owned by 

the domestic partnership is instead 

treated in the same manner as stock of 

a foreign corporation owned by a foreign 

partnership under section 958(a)(2) and 

§ 1.958–1(b). Accordingly, because 

sections 959 and 961 specifically apply 

by reference to sections 951 and 951A 

(in the latter case, as a result of section 

951A(f)(1)(A)), aggregate treatment of 

domestic partnerships applies for 

purposes of sections 959 and 961 

pursuant to § 1.958–1(d). Regulations do 

not, however, specifically address the 

application of sections 959 and 961 with 

respect to domestic partnerships or their 

partners under § 1.958–1(d). 

B. Regulations Under Section 1502 

Section 1502 authorizes the Secretary 

to prescribe regulations for an affiliated 

group of corporations that join in filing 

(or that are required to join in filing) a 

consolidated return (consolidated 

group, as defined in § 1.1502–1(h)) to 

clearly reflect the U.S. tax liability of the 

consolidated group and to prevent 

avoidance of such tax liability. For 

purposes of carrying out those 

objectives, section 1502 also permits the 

Secretary to prescribe rules that may be 

different from the provisions of chapter 

1 of subtitle A of the Code that would 

apply if the corporations composing the 

consolidated group filed separate 

returns. Pursuant to these rules, 

members of a consolidated group are 

treated as separate entities for some 

purposes but as divisions of a single 

corporation for other purposes. See, for 

example, § 1.1502–13(a)(2). 

Regulations issued under section 1502 

address the application of certain 

provisions of subpart F in the context of 

consolidated groups. See, for example, 

§ 1.1502–51 (application of section 

951A to consolidated groups); § 1.1502– 

80(j) (addressing determination of 

section 951(a)(2)(B) reduction for 

distributions under section 959(b) for 

purposes of sections 951(a)(1)(A) and 

951A(a)). However, regulations do not 

address the application of sections 959 

and 961 with respect to a consolidated 

group or its members. 

Explanation of Provisions 

I. Scope 

The proposed regulations provide 

rules addressing core aspects of the 

PTEP system, including rules that 

address longstanding issues under 

sections 959 and 961, account for new 

provisions and amendments under the 

Act, and implement the 1988 notice and 

2019 notice. Future guidance will 

address certain issues not addressed in 

the proposed regulations, for example, 

issues involving nonrecognition 

transactions, redemptions, transactions 

to which section 964(e) applies, and 

structures where CFCs are partners in a 

partnership. See also Notice 2024–16, 

2024–5 I.R.B. 622 (announcing intent to 

issue proposed regulations addressing 

the treatment of section 961(c) basis in 

certain transactions in which a domestic 

corporation acquires stock of a CFC in 

a liquidation described in section 332 or 

an asset reorganization described in 

section 368(a)(1)). Future guidance may 

also address any issues regarding the 

interaction of the proposed regulations 

with existing rules under other 

provisions. 

II. Section 959 Regulations 

A. Overview 

The proposed regulations under 

section 959 provide rules for PTEP 

accounting (both at the shareholderlevel and foreign corporation-level), 

exclusions from gross income, and 

related determinations and adjustments. 


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B. PTEP Accounting (Proposed § 1.959– 

2) 

1. Shareholder-Level Accounts 

i. In General 

Integral to the proposed regulations 

are annual PTEP accounts, dollar basis 

pools, and PTEP tax pools, which are 

established and maintained by a 

covered shareholder with respect to a 

foreign corporation in which the 

shareholder owns stock. See proposed 

§ 1.959–2(b)(1). These are integral 

aspects of the PTEP system because they 

ensure proper tracking of amounts 

described under provisions of the Code 

such as sections 959(a), 986(c), and 

960(b). These rules are issued pursuant 

to the express delegations of authority 

under sections 245A(g), 904(d)(7), 

960(f), 965(o), and 989(c). 

A covered shareholder means any 

United States person, other than a 

domestic partnership. See proposed 

§ 1.959–1(b); see also part VIII.A of the 

Explanation of Provisions (providing 

that an S corporation is generally treated 

in the same manner as a domestic 

partnership). Domestic partnerships are 

excluded from this definition because 

they are treated as aggregates of their 

partners in determining stock 

ownership for purposes of section 959 

(discussed in part III.A of the 

Background). A covered shareholder is 

not limited to a United States 

shareholder because the exclusion 

under section 959(a) is not limited to 

United States shareholders. For 

example, section 959(a) applies to any 

United States person who acquires from 

any person an interest in a foreign 

corporation with PTEP. 

ii. Annual PTEP Accounts 

Annual PTEP accounts track a foreign 

corporation’s PTEP with respect to a 

covered shareholder. See proposed 

§ 1.959–2(b)(1). These accounts 

represent PTEP distributable exclusively 

to the covered shareholder (or a 

successor), directly or indirectly 

through tiers, on any stock of the foreign 

corporation. 

Each annual PTEP account relates to 

a single taxable year of the foreign 

corporation and a single section 904 

category, and PTEP within an annual 

PTEP account is maintained in the 

foreign corporation’s functional 

currency and assigned among ten PTEP 

groups and two subgroups. See 

proposed § 1.959–2(b)(2). Tracking 

PTEP on an annual basis is necessary to 

apply the ‘‘last-in, first-out’’ rule for 

distributions of PTEP in section 959(c), 

and PTEP is maintained in the foreign 

corporation’s functional currency 

pursuant to section 986(b). Tracking 

PTEP by section 904 category and by 

PTEP groups is necessary to implement 

rules determining foreign currency gain 

or loss and foreign tax credits with 

respect to PTEP. 

The ten PTEP groups fall within two 

categories—section 959(c)(2) PTEP 

groups and section 959(c)(1) PTEP 

groups. See proposed § 1.959–2(b)(2)(i). 

The section 959(c)(2) groups separately 

track PTEP resulting from subpart F 

income inclusions, GILTI inclusions, 

application of section 965(a) or 965(b), 

or income inclusions to which section 

245A(d) applies (PTEP resulting from 

section 245A(e)(2) or certain PTEP 

resulting from section 959(e) 

(concerning section 1248) or section 

964(e)(4) (concerning certain 

dispositions of foreign stock)). The 

section 959(c)(1) PTEP groups 

correspond to the section 959(c)(2) 

PTEP groups and account for the 

reclassification of PTEP pursuant to 

section 959(a)(2). PTEP arising from 

section 956 inclusions is combined with 

reclassified PTEP arising from subpart F 

income inclusions. 

The two subgroups track PTEP arising 

from income inclusions of certain 

covered shareholders. See proposed 

§ 1.959–2(b)(2)(ii). One subgroup tracks 

PTEP arising from an income inclusion 

of an individual and includible in gross 

income under section 962(d) when 

distributed in a distribution to which 

section 959(a) would otherwise apply 

(taxable section 962 PTEP). The second 

subgroup tracks PTEP arising from an 

income inclusion of an individual, 

estate, or trust that would be includible 

in net investment income under section 

1411(c) when distributed (that is, the 

election under § 1.1411–10(g) is not 

made and, thus, the income inclusion 

giving rise to the PTEP was not taken 

into account in determining net 

investment income). 

Additionally, for PTEP resulting from 

the application of section 965(a) or (b), 

an adjusted applicable percentage must 

be maintained, which tracks the 

percentage of a credit or deduction for 

foreign income taxes associated with 

PTEP that is disallowed under § 1.965– 

5. See proposed § 1.959–2(b)(2)(iii)(A). 

Similarly, for PTEP resulting from the 

application of section 965(a), a section 

965(c) deduction percentage must be 

maintained, which tracks the percentage 

of foreign currency gain or loss with 

respect to PTEP that is not recognized 

under § 1.986(c)–1. See proposed 

§ 1.959–2(b)(2)(iii)(B). The adjusted 

applicable percentage and the section 

965(c) deduction percentage are tracked 

by section 904 category. Each is 

determined using a single weighted 

average across that section 904 category, 

which is intended to reduce the 

compliance burden and facilitate 

administrability in cases in which the 

applicable percentage or section 965(c) 

deduction amount differs with respect 

to PTEP in the section 904 category by 

not requiring the separate tracking of 

those percentages or amounts. See also 

part IX.B.3. of the Explanation of 

Provisions (describing transition rules 

for the initial determination of the 

adjusted applicable percentage and 

section 965(c) deduction percentage). 

iii. Dollar Basis Pools and PTEP Tax 

Pools 

Dollar basis pools track the basis in 

U.S. dollars of a foreign corporation’s 

PTEP with respect to a covered 

shareholder, and such dollar basis is 

used to determine foreign currency gain 

or loss under section 986(c). See 

proposed § 1.959–2(b)(1). PTEP tax 

pools track the U.S. dollar amount of 

foreign income taxes associated with a 

foreign corporation’s PTEP with respect 

to a covered shareholder, and such taxes 

are assigned to a creditable PTEP tax 

group to the extent eligible to be 

deemed paid under section 960(b). See 

proposed § 1.959–2(b)(1) and (4)(ii). The 

creditable PTEP tax group tracks foreign 

income taxes that are eligible to be 

deemed paid under section 960(b). 

Furthermore, together, dollar basis 

and the U.S. dollar amount of associated 

foreign income taxes determine basis 

reductions under section 961 for 

distributions of PTEP. See also part 

III.C.2 of the Explanation of Provisions. 

Tracking foreign income taxes 

associated with PTEP in a shareholderspecific manner (consistent with how 

PTEP is tracked) differs from the 

approach under existing § 1.960–3 (and 

the 1988 notice), which tracks such 

taxes only at the CFC-level (without 

regard to the shareholder whose PTEP 

account was reduced by the taxes). This 

new approach ensures that, in structures 

involving multiple covered 

shareholders, foreign income taxes are 

associated with PTEP with respect to a 

particular covered shareholder and do 

not include foreign income taxes that 

were imposed on PTEP with respect to 

another covered shareholder. Thus, in a 

distribution of PTEP to a covered 

shareholder, the covered shareholder’s 

basis is reduced under section 961(b) by 

the foreign income taxes that are (i) 

associated with (and consequently 

reduced) PTEP with respect to the 

covered shareholder, and (ii) deemed 

paid by the covered shareholder. This 

method is intended to prevent each 

covered shareholder from incurring 

double taxation on a single item of 

income, by ensuring that a covered 


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shareholder is able to take into account 

the foreign income taxes associated with 

the PTEP with respect to the covered 

shareholder. 

Generally, dollar basis pools and 

PTEP tax pools are maintained on a 

year-by-year basis, with one pool for 

each PTEP group within each annual 

PTEP account. See proposed § 1.959– 

2(b)(3) and (4). Maintenance of separate 

dollar basis pools for each PTEP group 

prevents the commingling of dollar 

basis of PTEP that is subject to different 

rules with respect to the recognition of 

foreign currency gain or loss under 

section 986(c). Maintenance of separate 

PTEP tax pools for each PTEP group 

prevents the commingling of foreign 

income taxes for which the related PTEP 

is subject to different rules regarding the 

applicability of section 960(b). 

Under an exception intended to 

simplify PTEP accounting, a covered 

shareholder may elect to combine dollar 

basis pools and PTEP tax pools across 

years. See proposed § 1.959–2(c). In 

such a case, each dollar basis pool and 

PTEP tax pool relates to PTEP assigned 

to a single PTEP group and a single 

section 904 category (without regard to 

the taxable years to which the PTEP 

relates). See proposed § 1.959–2(b)(3) 

and (4). This election is consistent with 

a comment in response to the 2019 

notice that recommended allowing 

taxpayers to pool dollar basis across 

years within section 904 categories. 

If a covered shareholder elects to 

combine dollar basis pools and PTEP 

tax pools across years, the election 

applies to the covered shareholder’s 

dollar basis pools and PTEP tax pools 

with respect to each foreign corporation 

in which the covered shareholder owns 

stock. See proposed § 1.959–2(c)(1). 

This ensures consistent treatment by not 

permitting a covered shareholder to 

maintain combined pools with respect 

to some foreign corporations but not 

others. A combined pool election may 

be revoked only with the consent of the 

Commissioner. See proposed § 1.959– 

2(c)(2). 

2. Foreign Corporation-Level Accounts 

Foreign corporation-level accounts 

track a foreign corporation’s PTEP and 

associated foreign income taxes 

(corporate PTEP accounts and corporate 

PTEP tax pools, respectively). See 

proposed § 1.959–2(d)(1) and (d)(2). A 

corporate PTEP account and corporate 

PTEP tax pool each relate to a single 

covered shareholder, and PTEP or 

foreign income taxes within such an 

account are assigned to section 904 

categories and PTEP groups (as is the 

case in shareholder-level accounts). 

These accounts reflect that PTEP and 

associated foreign income taxes are 

foreign corporation-level attributes 

(which, as discussed in part II.B.1 of the 

Explanation of Provisions, are tracked in 

a shareholder-specific manner). These 

accounts also are necessary to allocate 

and apportion current year taxes paid or 

accrued by a foreign corporation among 

the relevant statutory and residual 

groupings of the foreign corporation, as 

discussed in part II.F of the Explanation 

of Provisions, as well as for 

computations under section 956, which 

take into account E&P described in 

section 959(c)(1). Finally, as with 

shareholder-level accounts, these rules 

are issued pursuant to the express 

delegations of authority under sections 

245A(g), 904(d)(7), 960(f), 965(o), and 

989(c). 

A corporate PTEP account relating to 

a covered shareholder represents all 

PTEP within the covered shareholder’s 

annual PTEP accounts with respect to 

the foreign corporation (therefore, 

unlike shareholder-level accounts, a 

corporate PTEP account does not relate 

to a single taxable year of the foreign 

corporation). Similarly, a corporate 

PTEP tax pool for a covered shareholder 

represents all foreign income taxes 

within the covered shareholder’s PTEP 

tax pools with respect to the foreign 

corporation. Thus, as a covered 

shareholder’s annual PTEP accounts 

and PTEP tax pools with respect to a 

foreign corporation are adjusted, the 

foreign corporation-level accounts 

(including the PTEP groups within the 

accounts) are also adjusted. 

The proposed regulations do not 

provide rules for maintaining a foreign 

corporation-level account for section 

959(c)(3) E&P because the Treasury 

Department and the IRS are studying 

whether such E&P should be separately 

computed with respect to each covered 

shareholder in certain instances and 

related issues (for example, 

coordination with section 1248). For 

example, assume a case in which US1 

and US2, each a covered shareholder, 

own 60% and 40%, respectively, of the 

stock of CFC1, a foreign corporation. 

CFC1 has $75x and $0 of PTEP with 

respect to US1 and US2, respectively, 

but only $50x of total E&P as a result of 

incurring a deficit in E&P after 

generating the PTEP. Under a 

shareholder-specific approach to 

computing CFC1’s section 959(c)(3) 

E&P, such E&P would be negative $45x 

with respect to US1 ($50x × 60%¥$75x) 

and $20x with respect to US2 ($50x × 

40%¥$0). Under a non-shareholderspecific approach to computing section 

959(c)(3) E&P, CFC1’s section 959(c)(3) 

E&P would be negative $25x 

($50x¥$75x). 

The proposed regulations clarify that 

a foreign corporation’s E&P is 

determined independently of the foreign 

corporation’s PTEP. See proposed 

§ 1.959–2(d)(3). For example, in a 

distribution by a foreign corporation 

with respect to its stock, section 316 

determines the extent to which the 

distribution is made out of the foreign 

corporation’s E&P, and section 959 

determines the extent to which the 

portion that is made out of E&P is a 

distribution of PTEP. See also proposed 

§ 1.959–10(c)(2)(iii) (Example 2, 

alternative facts, regarding a 

distribution of built-in loss property). 

Additionally, as in the example in the 

preceding paragraph, the proposed 

regulations clarify that a foreign 

corporation’s E&P may be less than the 

foreign corporation’s PTEP because a 

loss does not reduce PTEP. 

C. Shareholder-Level Account 

Adjustments (Proposed § 1.959–3) 

1. In General 

The proposed regulations describe the 

adjustments made to a covered 

shareholder’s annual PTEP accounts 

(including PTEP groups within those 

accounts and, if applicable, relevant 

percentages for section 965 PTEP and 

PTEP subgroups), dollar basis pools, 

and PTEP tax pools with respect to a 

foreign corporation. See proposed 

§ 1.959–3. The rules for making these 

adjustments are issued pursuant to the 

express delegations of authority under 

sections 245A(g), 904(d)(7), 986(c)(2), 

960(f), 965(o), and 989(c). 

These adjustments reflect income 

inclusions and transactions related to a 

taxable year of the foreign corporation, 

and the adjustments preserve the 

character of the foreign corporation’s 

PTEP with respect to the covered 

shareholder (for example, the taxable 

year, section 904 category, and PTEP 

group to which PTEP relates). In 

applying these rules to tiers of foreign 

corporations, the adjustments are 

applied successively from the lowesttier foreign corporation to the highesttier foreign corporation. See proposed 

§ 1.959–3(g). 

An adjustment to annual PTEP 

accounts is treated as made at one of 

three points in time (each of which is 

discussed below in this part II.C of the 

Explanation of Provisions), which 

determines when PTEP becomes (or 

ceases to be) available for distribution to 

the covered shareholder: (i) at the 

beginning of the first day of the foreign 

corporation’s taxable year, (ii) 

concurrently with the transaction giving 

rise to the adjustment, or (iii) at the end 

of the last day of the foreign 


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corporation’s taxable year. See proposed 

§ 1.959–3(f). An adjustment to dollar 

basis pools and PTEP tax pools is 

treated as made concurrently with the 

related adjustment to annual PTEP 

accounts. 

2. Beginning of Year Adjustments 

Three types of PTEP are added to 

annual PTEP accounts at the beginning 

of the foreign corporation’s taxable year 

(even if, for example, the determination 

of the amount giving rise to the PTEP 

occurs at the end of such taxable year). 

This timing ensures that PTEP generated 

or received during the taxable year is 

available for distribution as of the start 

of the taxable year, consistent with 

sections 316(a)(2) and 959(c) (which 

determine dividend treatment and the 

application of section 959(a) or (b) based 

on E&P for the taxable year). 

The first type is PTEP arising from the 

covered shareholder’s subpart F income 

inclusion or GILTI inclusion with 

respect to the foreign corporation for the 

taxable year. See proposed § 1.959– 

3(c)(1)(i) and (ii). To reflect the addition 

of this PTEP, basis equal to the U.S. 

dollar amount of the income inclusion 

giving rise to the PTEP is added to 

related dollar basis pools. See proposed 

§ 1.959–3(d)(1)(i). 

The second type is PTEP with respect 

to the covered shareholder that is 

distributed to the foreign corporation 

during the taxable year (discussed in 

part II.D of the Explanation of 

Provisions). See proposed § 1.959– 

3(c)(1)(iii). To reflect the addition of this 

PTEP, the dollar basis and associated 

foreign income taxes of the PTEP are 

added to related dollar basis pools and 

PTEP tax pools, and such taxes are 

assigned to the creditable PTEP tax 

group to the extent the foreign 

corporation is deemed to pay the taxes 

under section 960(b)(2) and proposed 

§ 1.960–3(c). See proposed § 1.959– 

3(d)(1)(ii), (e)(1)(i). Further, the PTEP is 

reduced by current year taxes allocated 

and apportioned to the PTEP (that is, by 

foreign income taxes imposed on the 

PTEP and paid or accrued by the foreign 

corporation in the taxable year, as 

distinguished from foreign income taxes 

described in the preceding sentence, 

which were paid or accrued by another 

foreign corporation in a prior 

distribution of the PTEP). See proposed 

§ 1.959–3(c)(1)(v); see also part II.F of 

the Explanation of Provisions (rules for 

allocating and apportioning current year 

taxes to PTEP). Such current year taxes 

reduce related dollar basis pools and are 

added to related PTEP tax pools, where 

the taxes are assigned to the creditable 

PTEP tax group to the extent the foreign 

corporation is a CFC and a credit for the 

taxes is not disallowed or suspended at 

the level of the CFC. See proposed 

§ 1.959–3(d)(1)(iii), (e)(1)(ii). 

The third type is PTEP with respect 

to the covered shareholder that results 

from the application of the foreign 

corporation’s section 961(c) basis to gain 

recognized by the foreign corporation 

during the taxable year (discussed in 

part III.E of the Explanation of 

Provisions). See proposed § 1.959– 

3(c)(1)(iv). To reflect the addition of this 

PTEP, the dollar basis of the PTEP is 

added to related dollar basis pools. See 

proposed § 1.959–3(d)(1)(ii). Further, 

current year taxes allocated and 

apportioned to the PTEP reduce the 

PTEP, reduce related dollar basis pools, 

and are added to related PTEP tax pools, 

where (like in a distribution) the taxes 

are assigned to the creditable PTEP tax 

group to the extent the foreign 

corporation is a CFC and a credit for the 

taxes is not disallowed or suspended at 

the level of the CFC. See proposed 

§ 1.959–3(d)(1)(iii), (e)(1)(ii). 

3. Time of Transaction Adjustments 

Three types of PTEP are added to, or 

removed from, annual PTEP accounts 

concurrently with the relevant 

transaction occurring during the foreign 

corporation’s taxable year. 

The first type is PTEP distributed by 

the foreign corporation during the 

taxable year. See proposed § 1.959– 

3(c)(1)(vi). To reflect the removal of this 

PTEP, the dollar basis and associated 

foreign income taxes of the PTEP are 

removed from related dollar basis pools 

and PTEP tax pools. See proposed 

§ 1.959–3(d)(1)(iv), (e)(1)(iii). 

The second type is PTEP arising from 

gain recognized by the covered 

shareholder on the sale or exchange of 

stock during the taxable year that is 

recharacterized and included in gross 

income as a dividend under section 

1248 by reason of E&P attributed to 

stock of the foreign corporation under 

section 1248. See proposed § 1.959– 

3(c)(1)(vii); see also section 959(e). This 

timing prevents iterative computations 

that could result if the PTEP were 

available for distribution earlier in the 

taxable year. To reflect the addition of 

this PTEP, basis equal to the U.S. dollar 

amount of the income inclusion giving 

rise to the PTEP is added to related 

dollar basis pools. See proposed 

§ 1.959–3(d)(1)(i). The Treasury 

Department and the IRS are studying 

whether a foreign corporation’s PTEP 

should similarly be increased to reflect 

gain treated as a dividend under section 

964(e)(1) by reason of E&P of the foreign 

corporation, which amount generally 

increases the selling CFC’s PTEP, and 

welcome comments on whether 

increasing the foreign corporation’s 

PTEP would be appropriate 

notwithstanding the duplicative result 

(that is, PTEP would be in the selling 

CFC and the foreign corporation whose 

E&P gave rise to the dividend). 

The third type is PTEP that transfers 

from (or to) the covered shareholder 

under section 959’s successor rules 

(discussed in part II.G of the 

Explanation of Provisions). See 

proposed § 1.959–3(c)(1)(viii), (ix). To 

reflect the removal (or addition) of this 

PTEP, the dollar basis and associated 

foreign income taxes of the PTEP are 

removed from (or added to) related 

dollar basis pools and PTEP tax pools. 

See proposed § 1.959–3(d)(1)(iv) and (v), 

(e)(1)(iii) and (iv). 

4. End of Year Adjustments 

Two types of adjustments are made at 

the end of the foreign corporation’s 

taxable year. These adjustments relate to 

the covered shareholder’s section 956 

amount with respect to the foreign 

corporation for the taxable year. 

First, PTEP to which the section 956 

amount is allocated (which, as 

discussed in part II.E of the Explanation 

of Provisions, is excluded from the 

covered shareholder’s gross income 

under section 959(a)(2)) is reassigned 

within annual PTEP accounts from 

section 959(c)(2) PTEP groups to section 

959(c)(1) PTEP groups. See proposed 

§ 1.959–3(c)(1)(x). To reflect the 

reclassification, the dollar basis and 

associated foreign income taxes of the 

PTEP are moved from dollar basis pools 

and PTEP tax pools relating to section 

959(c)(2) PTEP groups to dollar basis 

pools and PTEP tax pools relating to 

section 959(c)(1) PTEP groups. See 

proposed § 1.959–3(d)(1)(vi), (e)(1)(v). 

Next, PTEP arising from the portion of 

the section 956 amount included in the 

covered shareholder’s gross income 

under section 951(a)(1)(B) is added to 

annual PTEP accounts. See proposed 

§ 1.959–3(c)(1)(xi). In addition, an 

amount of basis equal to the U.S. dollar 

amount of the section 956 inclusion 

giving rise to the PTEP is added to 

related dollar basis pools. See proposed 

§ 1.959–3(d)(1)(i). 

Further, additional rules address 

cases where the covered shareholder 

acquires ownership of stock of the 

foreign corporation on or after the last 

relevant day of the foreign corporation’s 

taxable year (that is, the last day of such 

taxable year on which the foreign 

corporation is a CFC) and a portion of 

a section 956 amount of a United States 

shareholder is attributable to such stock. 

See proposed § 1.959–3(c)(4). Under 

these rules, PTEP of the foreign 

corporation that has transferred to the 


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covered shareholder but to which such 

portion of the section 956 amount is 

ultimately allocated (discussed in part 

II.E of the Explanation of Provisions) is 

reclassified from section 959(c)(2) PTEP 

groups to section 959(c)(1) PTEP groups. 

Moreover, the foreign corporation’s 

PTEP with respect to the covered 

shareholder is increased to reflect the 

inclusion in income by the United 

States shareholder of such portion of the 

section 956 amount. 

D. Distributions of PTEP (Proposed 

§ 1.959–4) 

1. Application of Exclusions 

i. In General 

The proposed regulations provide 

rules regarding the exclusions from 

gross income under section 959(a)(1) 

and (b) for PTEP that is distributed to a 

covered shareholder or a CFC. See 

proposed § 1.959–4; see also part II.D.2 

of the Explanation of Provisions 

(determining distributed PTEP). 

Under the section 959(a)(1) exclusion, 

PTEP distributed to a covered 

shareholder, other than taxable section 

962 PTEP, is excluded from the covered 

shareholder’s gross income. See 

proposed § 1.959–4(b)(1); see also 

section 962(d) and proposed § 1.312– 

8(c) (domestic corporation’s receipt of 

PTEP does not increase E&P, discussed 

in part VIII.I of the Explanation of 

Provisions). 

Under the section 959(b) exclusion, 

PTEP distributed by a CFC to another 

CFC is excluded from the recipient 

CFC’s gross income for purposes of 

determining the recipient CFC’s subpart 

F income and tested income or tested 

loss, provided that the PTEP relates to 

a covered shareholder that is a United 

States shareholder in both CFCs. See 

proposed § 1.959–4(b)(2); see also 

§ 1.312–6(b) (the distribution generally 

increases the recipient CFC’s E&P) and 

proposed § 1.952–1(c)(4) (the 

distribution does not increase the 

recipient CFC’s current year E&P for 

purposes of the limitation in section 

952(c)(1)(A), discussed in part VIII.I of 

the Explanation of Provisions). 

Applying the section 959(b) exclusion 

for purposes of determining the 

recipient CFC’s tested income or tested 

loss prevents double taxation (and thus 

is consistent with the policy of section 

959) in cases where the distribution is 

not a related party dividend described 

in section 951A(c)(2)(A)(i)(IV) and 

therefore could otherwise result in 

tested income. The Treasury 

Department and the IRS are of the view 

that this approach, which is issued 

under the express delegation of 

authority in section 951A(f)(1)(B), is 

consistent with section 951A(f)(1)(A) 

(treating an inclusion under section 

951A(a) in the same manner as an 

inclusion under section 951(a)(1)(A) for 

purposes of section 959), which should 

be interpreted as allowing references to 

section 951(a) in section 959 to be 

treated as including a reference to 

section 951A(a). 

Applying the section 959(b) exclusion 

only to PTEP distributed by a CFC to 

another CFC is consistent with the 

statute. However, under the express 

delegation of authority in section 965(o), 

the proposed regulations provide a 

special rule pursuant to which a 

specified foreign corporation (as defined 

in § 1.965–1(f)(45)(i)(B)) that is not a 

CFC is treated as a CFC for purposes of 

applying the section 959(b) exclusion to 

section 965 PTEP distributed by the 

specified foreign corporation, which 

ensures that the section 959(b) 

exclusion applies to such PTEP when 

received by a CFC. See proposed 

§ 1.959–4(b)(2)(ii). The Treasury 

Department and the IRS are studying the 

application of section 959(b) to other 

PTEP distributed by a foreign 

corporation that is not a CFC (for 

example, in a case where the foreign 

corporation was a CFC when the PTEP 

was generated but is no longer a CFC 

when the PTEP is distributed). 

Irrespective of whether the section 

959(b) exclusion applies to PTEP 

distributed to a foreign corporation, the 

PTEP remains PTEP and, in a 

subsequent distribution, may be 

excluded from gross income under 

section 959(a)(1) or (b). See proposed 

§§ 1.959–2 and 1.959–3 (describing 

shareholder-level annual PTEP accounts 

and related adjustments with respect to 

a foreign corporation without regard to 

CFC status). This treatment is required 

to give effect to section 959(a), which 

does not depend on the CFC status of 

any intermediary entities through which 

a covered shareholder ultimately 

receives PTEP. 

ii. Split-Ownership Structures 

Under the proposed regulations, the 

section 959(b) exclusion applies at the 

CFC-level by excluding a distribution of 

PTEP from the recipient CFC’s gross 

income for certain purposes. In 

structures where stock of a CFC is not 

all owned by a single United States 

shareholder, the application of the 

section 959(b) exclusion at the CFClevel could, absent special rules, result 

in all United States shareholders of the 

CFC sharing any benefits of the 

exclusion (rather than just the United 

States shareholder to which the 

excluded PTEP relates) and partial 

double taxation to the United States 

shareholder to which the excluded 

PTEP relates (to the extent the exclusion 

benefits other United States 

shareholders). 

Guidance issued before the Act 

generally used a ‘‘gross-up’’ mechanism 

to address this issue. Rev. Rul. 82–16, 

1982–1 C.B. 106, considered a scenario 

where a United States shareholder 

owned 70% of the stock of an upper-tier 

CFC, with the remaining 30% owned by 

non-United States shareholders, and the 

upper-tier CFC owned all the stock of a 

lower-tier CFC. The lower-tier CFC 

earned $100x of subpart F income, 

which gave rise to a $70x subpart F 

income inclusion and, thus, $70x of 

PTEP with respect to the United States 

shareholder. In a later year, the lowertier CFC distributed $200x to the uppertier CFC. The ruling concluded that 

section 959(b) looks to the total amount 

of E&P of the lower-tier CFC that caused 

the United States shareholder’s subpart 

F income inclusion, with the result that 

section 959(b) excluded $100x (rather 

than $70x) from the upper-tier CFC’s 

subpart F income in applying section 

951(a) to the United States shareholder. 

Conversely, a $70x exclusion under 

section 959(b) would have caused the 

upper-tier CFC to have an additional 

$30x of subpart F income from the 

distribution, which would have led to a 

$21x ($30x × 70%) subpart F income 

inclusion for the United States 

shareholder even though its share of the 

distribution was all attributable to 

PTEP. 

However, a gross-up mechanism 

raises certain issues. For example, 

computing a gross-up may be complex 

or burdensome in light of the increased 

prevalence of PTEP that is not pro rata 

with respect to United States 

shareholders following the Act (for 

instance, PTEP resulting from a GILTI 

inclusion, which is not determined 

solely by reference to a particular CFC). 

Additionally, a gross-up mechanism 

could result in the need for different 

determinations of a CFC’s subpart F 

income (and tested income or tested 

loss) for different United States 

shareholders of the CFC, which is 

inconsistent with the way that these 

types of income are treated under 

existing regulations for other purposes 

of the Code such as the expense 

allocation rules or foreign tax credit 

rules. 

Accordingly, instead of a gross-up 

mechanism, the proposed regulations 

coordinate the section 959(b) exclusion 

with revisions to the pro rata share rules 

of section 951(a) (discussed in part IV.C 

of the Explanation of Provisions). Under 

this approach, a CFC’s subpart F income 

is determined with respect to all 


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shareholders by excluding the same 

amount of PTEP received by the CFC, 

and United States shareholders’ pro rata 

shares of the CFC’s subpart F income are 

computed in a manner so that any 

benefits of the application of the section 

959(b) exclusion to PTEP with respect to 

a United States shareholder generally 

inure only to that United States 

shareholder. For instance, if two United 

States shareholders own equal interests 

in a CFC, and the CFC receives a 

distribution half of which is PTEP with 

respect to one United States shareholder 

(because there is PTEP with respect to 

the United States shareholder at least 

equal to its share of distribution) and 

the other half of which gives rise to 

subpart F income (because there is no 

PTEP with respect to the other United 

States shareholder and no exception 

from subpart F income applies), then 

only the United States shareholder with 

respect to which there is no PTEP has 

a pro rata share of the subpart F income 

resulting from the distribution. 

The Treasury Department and the IRS 

are of the view that the approach in the 

proposed regulations appropriately 

carries out the shareholder-specific 

nature of section 959(b) (that is, 

excluding PTEP with respect to a United 

States shareholder from a CFC’s gross 

income for purposes of the application 

of section 951(a) to the CFC with respect 

to the United States shareholder). 

Additionally, this approach conforms 

with the approach for applying section 

961(c) which, under the proposed 

regulations (as discussed in part III.E of 

the Explanation of Provisions), also 

provides for a gross income exclusion at 

the CFC-level that is coordinated with 

the section 951(a) pro rata share rules to 

ensure its benefits generally inure only 

to the appropriate United States 

shareholder. 

iii. Issues Involving Allocation Rules 

Under Section 861 

The approach in the proposed 

regulations discussed in part II.D.1.ii of 

the Explanation of Provisions (applying 

the section 959(b) exclusion, as well as 

section 961(c), at the CFC-level) can 

lead to issues involving the rules of 

section 861 for allocating and 

apportioning deductions because a 

CFC’s deductions that are not current 

year taxes are not allocated and 

apportioned under section 861 to PTEP. 

See § 1.960–1(c)(1)(ii) and proposed 

§ 1.959–6(d)(1). 

For example, in a case where some, 

but not all, of a distribution received by 

a CFC is PTEP, an amount of the CFC’s 

deductible interest expense could 

reduce the non-PTEP portion of the 

distribution. See also proposed § 1.951– 

1(h)(2)(ii)(C) (Example 1, alternative 

facts). This may result in a benefit if the 

non-PTEP portion would give rise to 

subpart F income or tested income, but 

otherwise may not be beneficial if the 

interest deductions reduce section 

959(c)(3) E&P and thus the potential for 

a dividends received deduction under 

section 245A. Comments are requested 

on how to appropriately allocate and 

apportion deductions of a CFC when 

some, but not all, of a distribution (or 

gain recognized) is PTEP. 

For example, comments are requested 

on whether deductions that are not 

current year taxes, such as deductible 

interest expense, should be allocated 

and apportioned to, and therefore 

reduce, the CFC’s PTEP. Under this 

approach, to the extent PTEP with 

respect to a United States shareholder is 

reduced by deductions that are not 

current year taxes, the shareholder 

could be allowed to retain an equivalent 

amount of adjusted basis in property 

directly owned by the shareholder and 

on which the remaining PTEP is 

ultimately distributed, with the result 

that the shareholder would receive a 

benefit equivalent to a deduction 

(similar to the result discussed in Part 

III.C.2.ii of the Explanation of 

Provisions in the case of foreign income 

taxes that are associated with PTEP but 

not credited under section 901). 

Comments are also requested on 

whether, as an alternative to the 

approach in the proposed regulations, 

sections 959(b) and 961(c) should apply 

at the shareholder-level. Under this type 

of approach, instead of section 959(b) 

preventing a distribution to a CFC from 

giving rise to subpart F income (as it has 

historically been interpreted, but with 

respect to a particular shareholder), 

section 959(b) would generally reduce a 

United States shareholder’s pro rata 

share of the CFC’s subpart F income, to 

the extent attributable to distributed 

PTEP. Furthermore, section 961(c) 

would apply in a similar manner in the 

case of a CFC’s gain from a sale or other 

disposition of stock of a foreign 

corporation. Comments should address 

whether a CFC’s deductions that are not 

current year taxes, such as deductible 

interest expense, should be allocated 

and apportioned to gross income of the 

CFC that does not give rise to an 

inclusion at the shareholder-level under 

section 959(b) or 961(c) or whether CFClevel provisions (such as section 

954(c)(3) or (c)(6) or 964(e)(1)) apply to 

such income and, if so applied, whether 

the E&P from the income should be 

treated as section 959(c)(3) E&P or PTEP 

to ensure that the CFC-level and 

shareholder-level provisions interact 

appropriately. 

2. Determining Distributed PTEP 

i. Covered Distributions 

For a distribution to be considered a 

distribution of PTEP under section 959, 

the proposed regulations first require 

that the distribution be a covered 

distribution, which is generally defined 

as any distribution made by a foreign 

corporation with respect to its stock to 

the extent that the distribution is a 

dividend (as defined in section 316), 

determined without regard to section 

959(d). See proposed § 1.959–4(c)(1). 

While a covered distribution may 

include deemed distributions treated as 

dividends (for example, distributions 

under section 304), a covered 

distribution does not include an amount 

treated as a dividend by reason of 

section 78, 367(b), 964(e)(1), or 1248. A 

deemed dividend under section 78 is 

determined without regard to E&P (and 

does not represent a distribution of E&P 

to any shareholder), and deemed 

dividends under the other provisions, 

regardless of whether they constitute 

deemed distributions of E&P, are 

determined by excluding PTEP (apart 

from § 1.367(b)–2(j)(2)(ii), which 

separately provides for a deemed 

distribution of PTEP in certain 

nonrecognition transactions, and 

§ 1.367(b)–3(g)(1), which separately 

provides for a deemed distribution of 

E&P, including PTEP, in certain 

inbound nonrecognition transactions 

described in § 1.367(b)–3). The 

proposed regulations do not address the 

treatment of dividends arising under 

section 356(a)(2) as covered 

distributions, which will be addressed 

in future guidance regarding 

reorganizations (although no inference 

is intended as to the treatment of such 

dividends under current law). See 

proposed § 1.959–4(c)(2). 

Comments on the 2019 notice asserted 

that a distribution of PTEP should not 

depend on the existence of E&P that 

would result in a dividend under 

section 316, stating that section 959(c) 

requires applying section 316 separately 

to sections 959(c)(1), (c)(2), and (c)(3) in 

determining whether there is sufficient 

E&P under section 316 to support a 

distribution of E&P under that 

paragraph. Comments noted that the 

approach described in the 2019 notice 

was contrary to section 959(a) and 

inconsistent with the policy of section 

959 to facilitate the repatriation of 

PTEP. The Treasury Department and the 

IRS remain of the view described in the 

2019 notice under which the reference 

to section 316(a) in section 959(c) 

indicates that, under the statute, a 

distribution of PTEP cannot occur 

unless there is sufficient current or 


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accumulated E&P to support what 

would otherwise be a dividend under 

section 316. This reading of the statute 

is consistent with the principle 

underlying section 959 that PTEP 

represents a type of E&P. Thus, the 

proposed regulations do not adopt the 

comments. 

ii. Analyzing Covered Distributions 

The proposed regulations provide 

rules for determining the extent to 

which PTEP is distributed in a covered 

distribution. See proposed § 1.959–4(d). 

Under these rules, each covered 

shareholder first determines its share of 

the covered distribution, which is the 

portion of the covered distribution that 

is made to the covered shareholder or 

any portion of the covered distribution 

that is made to an upper-tier foreign 

corporation and assigned to the covered 

shareholder under proposed § 1.951–2 

(discussed in part IV.B of the 

Explanation of Provisions). See 

proposed § 1.959–4(d)(1). For this 

purpose, the portion of a covered 

distribution that is made to a 

partnership, or that is treated as made 

to the partnership in the case of tiered 

partnerships, is treated as made to the 

partnership’s partners in accordance 

with their respective distributive shares 

of such portion. See proposed § 1.959– 

4(c)(3). Thus, if a covered shareholder is 

a partner in an upper-tier partnership, 

the covered shareholder’s share of a 

covered distribution would include a 

portion of the covered distribution that 

is made to a lower-tier partnership 

because an amount of the covered 

distribution made to the lower-tier 

partnership would be treated as made to 

the upper-tier partnership by reason of 

the upper-tier partnership being a 

partner in the lower-tier partnership 

and, in turn, an amount of the covered 

distribution treated as made to the 

upper-tier partnership would be treated 

as made to the covered shareholder by 

reason of the covered shareholder being 

a partner in the upper-tier partnership. 

Next, each covered shareholder 

allocates its share of the covered 

distribution to the distributing foreign 

corporation’s PTEP with respect to the 

covered shareholder, to the extent 

thereof and in accordance with the 

composition rules described in part 

II.D.2.iii of the Explanation of 

Provisions, and then allocates any 

remaining portion of such share to the 

distributing foreign corporation’s 

section 959(c)(3) E&P. See proposed 

§ 1.959–4(d)(2) and (e)(1). For this 

purpose, the distributing foreign 

corporation’s PTEP is determined 

immediately before the covered 

distribution (and thus includes PTEP 

resulting from a subpart F income 

inclusion or GILTI inclusion for the 

distributing foreign corporation’s 

taxable year in which the covered 

distribution is made because such PTEP 

is added to the covered shareholder’s 

annual PTEP accounts at the beginning 

of the taxable year). 

Further, because the amount of a 

covered shareholder’s share of a covered 

distribution is determined on an 

aggregate basis rather than on a sharespecific basis, the proposed regulations 

treat a pro rata portion of all PTEP 

distributed in each covered 

shareholder’s share of the covered 

distribution as distributed with respect 

to each share of stock of the distributing 

foreign corporation on which the 

covered shareholder’s share of the 

covered distribution is made. See 

proposed § 1.959–4(d)(4); see also 

proposed § 1.959–10(c)(1) (Example 1). 

In this way, basis adjustments resulting 

from distributed PTEP can be made on 

each share of stock of the foreign 

corporation in accordance with section 

961 and, if applicable, PTEP of a 

recipient foreign corporation can be 

increased. 

iii. Composition Rules 

As discussed in part II.C of the 

Background, different types of PTEP can 

have different tax effects, including with 

respect to foreign currency gain or loss 

under section 986(c) or deemed paid 

taxes under section 960(b). Thus, once 

a covered shareholder has identified the 

portion of its share of a covered 

distribution that is allocated to PTEP, it 

is necessary to determine the specific 

PTEP that is distributed. The proposed 

regulations include composition rules 

for this purpose. See proposed § 1.959– 

4(d)(3) and (e)(2) through (5); see also 

proposed § 1.959–10(c)(2) (Example 2). 

Under these composition rules, PTEP 

is sourced from section 959(c)(1) PTEP 

groups before section 959(c)(2) PTEP 

groups and then from each group within 

the section 959(c)(1) PTEP groups or 

section 959(c)(2) PTEP groups, 

respectively, on a ‘‘last-in, first-out’’ 

basis, subject to a priority rule for PTEP 

resulting from section 965 (section 965 

priority rule). See proposed § 1.959– 

4(e)(2), (3). Additionally, PTEP that 

otherwise has the same priority is 

sourced first from PTEP that is not 

taxable section 962 PTEP and then from 

taxable section 962 PTEP, consistent 

with the rules currently in § 1.962–3. 

See proposed § 1.959–4(e)(4). Lastly, 

PTEP that has the same priority is 

sourced on a pro rata basis. See 

proposed § 1.959–4(e)(5). 

The section 965 priority rule sources 

PTEP in section 959(c)(1) PTEP groups 

first from the reclassified section 965(a) 

PTEP group, then from the reclassified 

section 965(b) PTEP group, and finally 

from the remaining section 959(c)(1) 

PTEP groups. See proposed § 1.959– 

4(e)(2)(ii). Similarly, for PTEP in section 

959(c)(2) PTEP groups, the section 965 

priority rule sources such PTEP first 

from the section 965(a) PTEP group, 

then from the section 965(b) PTEP 

group, and finally from the remaining 

section 959(c)(2) PTEP groups. See 

proposed § 1.959–4(e)(2)(iii). The 

section 965 priority rule, which is 

issued under the express delegation of 

authority in section 965(o), is consistent 

with the 2019 notice and is intended to 

simplify PTEP recordkeeping and IRS 

administration. 

Comments on the 2019 notice stated 

that the section 965 priority rule (as 

described in the notice) would be a 

departure from the last-in, first-out 

approach for sourcing distributions from 

E&P, and also argued that there is no 

suggestion in section 965 or its 

legislative history that such a departure 

was intended or is necessary or 

appropriate. Other comments asserted 

that the policy for the section 965 

priority rule was unclear, stating that a 

pure last-in, first-out approach does not 

impose additional burdens on taxpayers 

because once a taxpayer has determined 

its section 965 PTEP the additional 

burden of maintaining that information 

is minimal. Further, even if the section 

965 priority rule simplifies PTEP 

recordkeeping, comments noted that 

this may be outweighed by the 

reduction in foreign tax credits under 

section 960(b) that accompanies 

distributions of section 965 PTEP. 

Another comment noted that the section 

965 priority rule would adversely affect 

certain individuals who made section 

962 elections and are economically 

compelled to distribute their PTEP 

every year to pay taxes arising under 

section 951(a) because it would 

accelerate the distribution of PTEP that 

is not excluded from gross income 

under section 962(d). Given these 

concerns, and because the section 965 

priority rule departs from the 

longstanding approach in existing 

§ 1.959–3(b), comments requested that 

taxpayers be able to elect to apply a lastin, first-out approach with no 

prioritization of section 965 PTEP. 

The Treasury Department and the IRS 

continue to be of the view that the 

section 965 priority rule will simplify 

PTEP recordkeeping and IRS 

administration in the future by 

eventually eliminating section 965 PTEP 

(which, as noted in part II.C of the 

Background requires specific and 

detailed rules to apply sections 960(b) 


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and 986(c)) and reducing the overall 

number of PTEP groups that need to be 

tracked. The Treasury Department and 

the IRS are of the view that, on balance, 

this benefit outweighs the concerns 

raised in comments. Additionally, the 

section 965 priority rule is within the 

scope of the authority delegated to the 

Treasury Department and the IRS to 

administer section 965, including 

through sections 965(o) and 7805(a). 

Further, the proposed regulations do not 

adopt comments suggesting that 

taxpayers be allowed to not apply the 

section 965 priority rule because this 

would undermine the simplification 

and burden reduction policy of the rule. 

iv. Dollar Basis and Associated Foreign 

Income Taxes Rules 

The proposed regulations provide a 

pro rata approach for determining the 

dollar basis and associated foreign 

income taxes of PTEP distributed in a 

covered shareholder’s share of a covered 

distribution. See proposed § 1.959– 

4(e)(3), (f) and (g). Under this approach, 

the portion of a dollar basis pool or 

PTEP tax pool, as applicable, attributed 

to distributed PTEP is determined based 

on the percentage that such PTEP 

represents of all PTEP relating to the 

dollar basis pool or PTEP tax pool. As 

discussed in part II.B.1.iii of the 

Explanation of Provisions, dollar basis 

pools and PTEP tax pools are 

maintained separately within each 

annual PTEP account for each PTEP 

group unless a combined pool election 

is in effect, in which case each dollar 

basis pool and PTEP tax pool relates to 

PTEP assigned to a single PTEP group 

and a single section 904 category 

(without regard to the taxable years to 

which the PTEP relates). 

E. PTEP to Which a Section 956 Amount 

Is Allocated (Proposed § 1.959–5) 

The proposed regulations provide 

rules regarding the exclusion from gross 

income under section 959(a)(2) for PTEP 

that would otherwise be included under 

section 951(a)(1)(B). See proposed 

§ 1.959–5; see also proposed § 1.959– 

10(c)(4) (Example 4). Under these rules, 

a covered shareholder allocates its 

section 956 amount (that is, the amount 

determined under section 956 and 

§ 1.956–1 with respect to the covered 

shareholder and a CFC) first to the 

CFC’s PTEP that is with respect to the 

covered shareholder and assigned to 

section 959(c)(2) PTEP groups, to the 

extent thereof and in accordance with 

the principles of the composition rules 

for distributions of PTEP, and then 

allocates any remaining portion of such 

section 956 amount to the CFC’s section 

959(c)(3) E&P. See proposed § 1.959– 

5(c)(1) and (d)(1). 

For purposes of these rules, the CFC’s 

PTEP is determined on the last relevant 

day of the CFC’s taxable year to which 

the section 956 amount relates (that is, 

the last day of such taxable year on 

which the foreign corporation is a CFC). 

See proposed § 1.959–5(d)(2). However, 

the CFC’s PTEP is reduced to the extent 

it is distributed on or after the last 

relevant day to ensure that the section 

956 amount is allocated only to section 

959(c)(2) PTEP that remains after 

accounting for all covered distributions 

during the CFC’s taxable year, in 

accordance with section 959(f)(2). 

Moreover, the PTEP is determined 

without regard to any transfer of PTEP 

from the covered shareholder to a 

successor covered shareholder on (or 

after) the last relevant day, thereby 

ensuring that section 959(c)(2) PTEP 

that exists with respect to the covered 

shareholder when the covered 

shareholder’s ownership of stock of the 

CFC is determined for purposes of 

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

taken into account for purposes of 

section 959(a)(2). 

As with distributions of PTEP, the 

proposed regulations use a pro rata 

approach to determine the dollar basis 

and associated foreign income taxes of 

PTEP to which a section 956 amount is 

allocated. See proposed § 1.959–5(e) and 

(f). 

F. Allocating and Apportioning Current 

Year Taxes to PTEP (Proposed § 1.959– 

6) 

The proposed regulations provide 

rules for the application of § 1.861–20 to 

allocate and apportion current year 

taxes to the statutory groupings (as 

generally described in § 1.861–8(a)(4)) of 

PTEP of a foreign corporation. See 

proposed § 1.959–6(b) (describing the 

statutory groupings for purposes of 

proposed § 1.959–6 as the corporate 

PTEP accounts of the foreign 

corporation described in proposed 

§ 1.959–2(d)(1)). These rules are issued 

pursuant to the express delegations of 

authority under sections 245A(g), 

904(d)(7), 960(f), and 965(o). 

Under the proposed regulations, 

current year taxes are generally 

associated with PTEP to the extent the 

foreign corporation pays or accrues such 

taxes with respect to PTEP arising by 

reason of a PTEP realization event that 

occurs in the same taxable year. See 

proposed § 1.959–6(b); see also 

proposed § 1.959–10(c)(3) (Example 3). 

A PTEP realization event occurs if there 

is a distribution of PTEP or gain 

recognized on a sale, exchange, or other 

disposition of foreign stock that is 

treated as PTEP as a result of the 

application of section 961(c) basis. 

Current year taxes that are paid or 

accrued with respect to a PTEP 

realization event that occurs in a 

different taxable year may not be 

associated with PTEP of a foreign 

corporation (consistent with the rule in 

current § 1.960–1(d)(3)(ii)(B)). See 

proposed § 1.959–6(b) and 1.960– 

1(d)(3)(ii)(B). 

Proposed § 1.959–6(c) provides rules 

relating to the application of the 

allocation and apportionment rules in 

§ 1.861–20. Current year taxes (in the 

foreign corporation’s functional 

currency) are allocated and apportioned 

to each corporate PTEP account of the 

foreign corporation that is increased 

during the taxable year as the result of 

a PTEP realization event by applying the 

rules in § 1.861–20 and treating PTEP 

with respect to each covered 

shareholder arising by reason of a PTEP 

realization event as an amount of 

dividend income (in the case of a 

distribution of PTEP) or gain from the 

sale, exchange, or other disposition of 

foreign stock (in the case of PTEP 

resulting from the application of section 

961(c) basis). See proposed § 1.959–6(c) 

for purposes of identifying the 

corresponding U.S. item under § 1.861– 

20(b) through (c). While certain United 

States shareholders (taking into account 

the application of § 1.958–1(d)) must 

take into account a pro rata share of a 

CFC’s subpart F income and tested 

income (or loss), the CFC’s deductions 

are not divided into pro rata shares 

allocable to particular shareholders, and 

instead, must be allocated and 

apportioned to gross income of the CFC 

before the determination of each United 

States shareholder’s pro rata share of 

subpart F income and tested income (or 

loss). As a result, because deductions 

must be allocated and apportioned to a 

CFC’s income (rather than being 

allocated directly to United States 

shareholders), it is necessary to allocate 

and apportion current year taxes with 

respect to the statutory groupings of 

PTEP of the foreign corporation, which 

the proposed regulations provide are the 

corporate PTEP accounts described in 

proposed § 1.959–2(d)(1). 

The proposed regulations also clarify 

other aspects of allocations of 

deductions involving PTEP. In 

particular, the proposed regulations 

provide that no deductions, other than 

current year taxes, may be allocated and 

apportioned to the statutory groupings 

of PTEP of a foreign corporation 

(consistent with the rule in current 

§ 1.960–1(c)(1)(ii)). See proposed 

§ 1.959–6(d)(1). See also the request for 

comments in Part II.D.1.iii of the 


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Explanation of Provisions on an 

approach that would also allocate and 

apportion deductions, other than 

current year taxes, to PTEP. 

Finally, the proposed regulations 

provide that current year taxes paid or 

accrued by a foreign corporation that are 

denominated in a currency other than 

the functional currency of the foreign 

corporation are translated into the 

functional currency of the foreign 

corporation at the spot rate on the day 

on which the current year taxes are paid 

or accrued. See proposed § 1.959– 

6(d)(2). This currency translation rule 

applies for purposes of (i) making 

certain adjustments to accounts 

maintained under section 959 and the 

proposed regulations in the foreign 

corporation’s functional currency and 

(ii) allocating and apportioning 

functional currency amounts at the level 

of the foreign corporation. 

G. General Successor Transactions 

(Proposed § 1.959–7) 

1. In General 

If there is an acquisition of stock of a 

foreign corporation that results in a 

change of ownership of stock of the 

foreign corporation, successor rules in 

section 959 generally transfer the 

foreign corporation’s PTEP with respect 

to the covered shareholder that 

relinquishes ownership of stock of the 

foreign corporation to the covered 

shareholder that acquires ownership of 

the stock. See section 959(a) (applying 

the rules of section 959(a) to any other 

United States person who acquires any 

portion of a United States shareholder’s 

interest in a foreign corporation from 

any person); section 959(b) (similarly 

applying to any other United States 

shareholder who acquires any portion of 

a United States shareholder’s interest in 

a CFC from any person). These 

successor rules generally ensure that 

PTEP is not subject to U.S. tax again in 

the hands of the acquiring covered 

shareholder when received in a 

distribution, even though that 

shareholder did not own the stock of the 

foreign corporation when the PTEP was 

generated and therefore did not have the 

inclusion that gave rise to the PTEP. 

Additionally, the rules ensure that E&P 

retains its PTEP status and thus remains 

subject to the rules under sections 959 

and 961, rather than reverting to section 

959(c)(3) E&P and potentially becoming 

eligible for a deduction under section 

245A without a reduction in basis. 

The proposed regulations address 

certain transactions subject to the 

successor rules in section 959, which 

the proposed regulations refer to as 

general successor transactions. See 

proposed § 1.959–7(b)(1); see also part 

III.C.4 of the Explanation of Provisions 

(discussing rules for section 961(c) basis 

in general successor transactions). A 

general successor transaction occurs 

when a covered shareholder (successor 

covered shareholder) acquires 

ownership of stock of one or more 

foreign corporations (each, an acquired 

foreign corporation) that, immediately 

before the transaction, is owned by 

another covered shareholder (transferor 

covered shareholder). The acquisition 

may be direct or indirect. For example, 

a sale of stock of a foreign corporation 

by a covered shareholder (or by an 

upper-tier foreign corporation owned by 

the covered shareholder) to another 

covered shareholder (or to an upper-tier 

foreign corporation owned by such 

other covered shareholder) is a general 

successor transaction. 

However, a general successor 

transaction is determined without 

regard to any portion of an acquisition 

of ownership of stock of a foreign 

corporation that results from any of the 

following: (i) an issuance of stock or a 

partnership interest, (ii) a redemption of 

stock (within the meaning of section 

317(b)) or a liquidating distribution in 

redemption of a partnership interest, or 

(iii) a transfer of stock of a foreign 

corporation, or any property through 

which stock of a foreign corporation is 

owned, if such stock or property is 

substituted basis property. See proposed 

§ 1.959–7(b)(2). For example, an 

exchange of stock of a foreign 

corporation solely for stock of another 

foreign corporation in an exchange 

under section 351(a) or 354(a), or as part 

of an exchange described in section 361, 

is not a general successor transaction 

because such stock is substituted basis 

property, even if covered shareholders’ 

ownership of stock of the foreign 

corporation changes in the exchange. 

Alternatively, to the extent stock of a 

foreign corporation is not substituted 

basis property in such transactions (for 

example, if basis in the stock is 

determined under section 301(d) or 

358(a)(2)), then the acquisition of 

ownership of stock of the foreign 

corporation is a general successor 

transaction. The Treasury Department 

and the IRS intend to issue additional 

rules regarding the transfer of PTEP in 

acquisitions that are not general 

successor transactions and proposed 

§§ 1.959–8 and 1.959–9 are reserved for 

this purpose. In these acquisitions, the 

Treasury Department and the IRS are 

considering adding a rule as part of 

finalization of the proposed regulations 

providing that, for any period before 

those additional rules apply and after 

existing § 1.959–1(d) (successor in 

interest rules) is removed upon 

finalization of the proposed regulations, 

PTEP will transfer automatically (that is, 

without any requirement to submit 

proof of identity to the IRS) in 

accordance with the statute and 

consistent with the manner in which 

PTEP transfers in general successor 

transactions (as discussed in part II.G.2 

of the Explanation of Provisions). The 

Treasury Department and the IRS 

request comments on this potential rule. 

2. Categories of Transferred PTEP 

The proposed regulations provide that 

two categories of an acquired foreign 

corporation’s PTEP transfer from the 

transferor covered shareholder to the 

successor covered shareholder (and thus 

become PTEP with respect to the 

successor covered shareholder) in a 

general successor transaction. See 

proposed § 1.959–7(c); see also § 1.959– 

10(c)(5) (Example 5). For both categories 

of PTEP, the transfer is not subject to 

any requirement to submit proof of 

identity to the IRS (in contrast to current 

§ 1.959–1(d)) and, thus, the transfer 

occurs automatically, although 

taxpayers should maintain sufficient 

records to substantiate the transfer on 

examination. See also § 1.245A–5(c)(4) 

(automatically transferring certain 

shareholder-level accounts in certain 

acquisitions of stock); § 1.245A(e)– 

1(d)(4)(iii) (similar). The automatic 

transfer ensures that E&P retains PTEP 

status and, therefore, will be excluded 

from income under section 959 and give 

rise to basis reductions under section 

961 in subsequent distributions. 

The first category of PTEP that 

transfers is PTEP of the acquired foreign 

corporation with respect to the 

transferor covered shareholder, as 

determined immediately before the 

general successor transaction. However, 

if the general successor transaction 

occurs before the last relevant day of the 

acquired foreign corporation’s taxable 

year, certain current year PTEP does not 

transfer because such current year PTEP 

relates to shares of stock either retained 

by the transferor covered shareholder or 

acquired by the transferor covered 

shareholder concurrently with or after 

the general successor transaction. See 

proposed § 1.959–7(c)(1). Only a pro 

rata portion of this PTEP (called general 

successor PTEP) transfers, and the 

amount is determined based on the 

percentage of a hypothetical distribution 

by the acquired foreign corporation that 

would be made with respect to the stock 

of the corporation acquired by the 

successor covered shareholder. See 

proposed § 1.959–7(d). In this way, 

distributions made by the acquired 


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foreign corporation after the general 

successor transaction will generally be 

allocated to PTEP to the same extent the 

distributions would be so allocated if 

the general successor transaction did 

not occur. 

The second category of PTEP that 

transfers is PTEP resulting from the 

application of section 1248 to gain 

recognized by the transferor covered 

shareholder in the general successor 

transaction. See proposed § 1.959– 

7(c)(2). Because section 1248 only 

applies to the extent of E&P of the 

acquired foreign corporation that is 

attributable to the stock being sold or 

exchanged in the general successor 

transaction, the Treasury Department 

and the IRS determined that it is 

appropriate for PTEP described in this 

category (called section 959(e) successor 

PTEP) to transfer in the general 

successor transaction. The transfer of all 

PTEP arising under section 1248 in a 

sale or exchange of a foreign corporation 

is consistent with existing guidance. See 

Rev. Rul. 90–31, 1990–1 C.B. 147. 

Like for distributions, the proposed 

regulations use a pro rata approach to 

determine the dollar basis and 

associated foreign income taxes of 

general successor PTEP. See proposed 

§ 1.959–7(e)(1) and (f)(1). The dollar 

basis of section 959(e) successor PTEP is 

the U.S. dollar amount of the income 

inclusion giving rise to the PTEP. See 

proposed § 1.959–7(e)(2). There are no 

associated foreign income taxes with 

respect to section 959(e) successor PTEP 

because the PTEP is newly created PTEP 

to which foreign income taxes will not 

yet have been allocated and 

apportioned. See proposed § 1.959– 

7(f)(2). 

3. Deemed Covered Shareholder 

Section 959(a) applies to any other 

United States person ‘‘who acquires 

from any person’’ any portion of a 

United States shareholder’s interest in a 

foreign corporation. See also section 

959(b) (similarly applying to an 

acquisition from ‘‘any person’’). 

Accordingly, if there is an acquisition of 

stock of a foreign corporation, section 

959 does not condition a transfer of the 

foreign corporation’s PTEP on whether 

the transfer is by or from a covered 

shareholder (or United States 

shareholder). 

For example, if a nonresident alien 

individual acquires ownership of all the 

stock of a foreign corporation that has 

PTEP from a covered shareholder and 

another covered shareholder 

subsequently acquires ownership of all 

the stock from the individual, then, 

absent an election under section 338(g), 

the foreign corporation’s PTEP transfers 

to the second covered shareholder. This 

prevents double taxation of the PTEP 

and ensures that PTEP does not become 

section 959(c)(3) E&P (potentially 

eligible for a dividends received 

deduction under section 245A(a)). 

However, existing guidance does not 

clearly address whether the amount of 

PTEP that transfers is reduced for 

transactions during the individual’s 

ownership period (for example, for E&P 

distributed by the foreign corporation to 

the individual). 

To address the transfer of a foreign 

corporation’s PTEP among covered 

shareholders where there is intervening 

foreign ownership, the proposed 

regulations treat any stock of a foreign 

corporation not owned by a covered 

shareholder as owned by a single 

hypothetical person that is deemed to be 

a covered shareholder (the deemed 

covered shareholder). See proposed 

§ 1.959–7(g). Under these rules, the 

deemed covered shareholder is treated 

in the same manner as a covered 

shareholder for purposes of transferring 

PTEP under section 959, and a reference 

to a covered shareholder includes the 

deemed covered shareholder. See 

proposed § 1.959–7(g)(1). Thus, in the 

example described in the preceding 

paragraph, the foreign corporation’s 

PTEP transfers in the first acquisition 

from the first covered shareholder to the 

deemed covered shareholder (who is a 

hypothetical person treated as owning 

all the stock of the foreign corporation 

owned by the nonresident alien 

individual). Then, in the second 

acquisition, the foreign corporation’s 

PTEP, adjusted using a reasonable 

method to reflect transactions during 

the deemed covered shareholder’s 

ownership period (for example, 

reductions for distributions), transfers 

from the deemed covered shareholder to 

the second covered shareholder. See 

§ 1.959–7(g)(2). In cases where there are 

no previous covered shareholders or 

PTEP, the deemed covered shareholder 

rules have no effect. 

The Treasury Department and the IRS 

are of the view that alternative 

approaches such as ‘‘freezing’’ a foreign 

corporation’s PTEP during periods in 

which its stock is not owned by a 

covered shareholder could 

inappropriately separate a foreign 

corporation’s PTEP from its E&P and 

give rise to double taxation or other 

distortions. For example, under such an 

alternative, a covered shareholder could 

transfer the stock of an upper-tier 

foreign corporation that owns stock of a 

lower-tier foreign corporation with 

PTEP to a nonresident alien individual, 

the lower-tier foreign corporation could 

distribute all its E&P to the upper-tier 

foreign corporation without affecting its 

PTEP, and then the stock of the uppertier foreign corporation could be 

transferred to another individual 

covered shareholder that would succeed 

to the PTEP that remains with the 

lower-tier foreign corporation even 

though it has no E&P. If the form of the 

transaction were respected for Federal 

income tax purposes, the result would 

be that a distribution by the upper-tier 

foreign corporation would not be 

sourced from PTEP and the transferred 

PTEP of the lower-tier foreign 

corporation could be distributed only to 

the extent that the lower-tier foreign 

corporation earns section 959(c)(3) E&P. 

The Treasury Department and the IRS 

recognize that shareholders of a foreign 

corporation may not track PTEP of the 

foreign corporation that transfers to the 

deemed covered shareholder. In these 

cases, a covered shareholder that 

eventually succeeds to the PTEP must 

determine the amount and character of 

the PTEP, including by reconstructing 

transactions that affected the PTEP 

while the foreign corporation was under 

foreign ownership. This reconstruction 

is similar to other determinations that 

shareholders must make in certain 

acquisitions of stock of a foreign 

corporation for which an election under 

section 338(g) is not made, for example 

determinations regarding the foreign 

corporation’s basis in assets or its E&P. 

The use of a single deemed covered 

shareholder to represent all foreign 

ownership of a foreign corporation is 

intended to ease the burden of this 

reconstruction by focusing only on 

whether and how PTEP moves under 

foreign ownership rather than, for 

example, by attributing portions of 

PTEP to each shareholder that is a 

nonresident alien individual and 

separately analyzing such portions. The 

Treasury Department and the IRS 

welcome comments about how to 

decrease the compliance burden and 

improve the administrability of this 

regime while still ensuring that the 

correct amount and character of PTEP is 

transferred from one covered 

shareholder to another even when there 

is intervening foreign ownership. For 

instance, the Treasury Department and 

the IRS welcome comments on whether 

a majority United States shareholder of 

a CFC should be permitted or required 

to track PTEP that transfers from a 

minority United States shareholder of 

that CFC to the deemed covered 

shareholder. 


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III. Section 961 Regulations 

A. Overview 

As discussed in part II.C.2 of the 

Background, section 961 authorizes 

regulations that provide for basis 

increases to reflect income inclusions 

under section 951 and basis reductions 

and gain recognition to reflect 

distributions of PTEP. Generally, the 

purpose of basis increases is to prevent 

PTEP of a foreign corporation from 

giving rise to additional U.S. tax in a 

sale or exchange of stock of the foreign 

corporation or property through which 

such stock is owned (for example, an 

interest in a partnership) when the stock 

or other property is sold before the 

PTEP is distributed. The purpose of 

basis reductions and gain recognition is 

to prevent double benefits from the 

basis increases provided under section 

961. 

Thus, the proposed regulations under 

section 961 adjust the basis in shares of 

stock of a foreign corporation owned by 

a covered shareholder, and the basis in 

any items of property through which the 

covered shareholder owns stock of the 

foreign corporation, to reflect the foreign 

corporation’s PTEP with respect to the 

covered shareholder (for example, to 

reflect income inclusions giving rise to 

the PTEP or distributions of the PTEP). 

Unlike annual PTEP accounts, basis 

adjustments under the proposed 

regulations are specific to a share of 

stock or other item of property, 

consistent with each item of property 

having separate basis under the Code. 

Timing of basis adjustments generally 

matches the timing of related 

adjustments to annual PTEP accounts. 

Further, the proposed regulations under 

section 961 provide rules for different 

types of basis under section 961, 

including the tax consequences of the 

basis, and are issued pursuant to the 

express delegations of authority in 

section 961(a), (b), and (c). 

As discussed in part III.A of the 

Background, a covered shareholder does 

not include a domestic partnership 

because a domestic partnership is 

treated as an aggregate of its partners in 

determining stock ownership for 

purposes of section 961. See proposed 

§ 1.961–1(b); see also part VIII.A of the 

Explanation of Provisions (providing 

that an S corporation is generally treated 

in the same manner as a domestic 

partnership). As also discussed in part 

III.A of the Background, under section 

958(a) stock ownership means stock 

owned directly and stock owned 

indirectly through foreign entities, 

including domestic partnerships to the 

extent treated as foreign partnerships 

under § 1.958–1(d)(1). Thus, the 

adjustments provided for by the 

proposed section 961 regulations also 

apply at the partner level to covered 

shareholders that own stock of a foreign 

corporation through one or more 

domestic (or foreign) partnerships. See 

part III.B.3 of this Explanation of 

Provisions for a discussion of basis 

provided in stock of a foreign 

corporation directly owned by a 

partnership. 

B. Types of Property Units and Basis 

(Proposed § 1.961–2) 

1. In General 

Under the proposed regulations, the 

type of basis provided in an item of 

property depends on whether the direct 

owner of the item is a covered 

shareholder, partnership, or CFC. This 

is because when the direct owner of an 

item of property is a partnership or CFC, 

covered shareholder-specific basis is 

necessary so that the benefits of basis 

provided in the item to reflect income 

inclusions of a covered shareholder 

inure only to that shareholder. 

Additionally, section 961(c) provides 

that the basis in the case of an item of 

property directly owned by a CFC only 

applies for the purposes of determining 

the amount included under section 951 

in the gross income of a United States 

shareholder. Specific rules are therefore 

needed with respect to basis 

adjustments for property owned by a 

CFC to reflect the limited purposes of 

basis under section 961(c). 

Thus, the proposed regulations set 

forth rules for three types of property 

(each referred to as a property unit) and 

basis: (i) section 961(a) ownership units 

and adjusted basis, which is provided to 

a covered shareholder, (ii) derivative 

ownership units and derived basis, 

which is provided to a partnership and 

is covered shareholder-specific, and (iii) 

section 961(c) ownership units and 

section 961(c) basis, which is provided 

to a CFC and is covered shareholderspecific. See proposed § 1.961–2; see 

also proposed § 1.961–12(c) (Example 

1). Each type of basis is maintained in 

U.S. dollars to ensure that basis 

reductions for a distribution of PTEP are 

commensurate with prior basis 

increases reflecting the income 

inclusion giving rise to the PTEP, 

regardless of movements in exchange 

rates (with any such movements taken 

into account under the rules for 

recognizing foreign currency gain or loss 

pursuant to section 986(c)). 

2. Section 961(a) Ownership Units and 

Adjusted Basis 

A section 961(a) ownership unit is a 

share of stock of a foreign corporation 

directly owned by a covered 

shareholder, or a partnership interest 

directly owned by a covered 

shareholder and through which the 

covered shareholder owns stock of a 

foreign corporation. See proposed 

§ 1.961–2(c). For example, if a covered 

shareholder directly owns an interest in 

a partnership and the partnership owns 

(directly or indirectly) stock of a foreign 

corporation, the partnership interest is a 

section 961(a) ownership unit. A 

covered shareholder is provided 

adjusted basis in a section 961(a) 

ownership unit. 

3. Derivative Ownership Units and 

Derived Basis 

A derivative ownership unit is a share 

of stock of a foreign corporation directly 

owned by a partnership and owned 

(indirectly) by one or more covered 

shareholders through only one or more 

partnerships (for example, not through a 

foreign corporation), or a partnership 

interest directly owned by another 

partnership and through which one or 

more covered shareholders own stock of 

a foreign corporation through only 

partnerships. See proposed § 1.961– 

2(d)(1). For example, if a covered 

shareholder directly owns an interest in 

a partnership and the partnership 

directly owns shares of stock of a 

foreign corporation, each share of stock 

of the foreign corporation is a derivative 

ownership unit (and the interest in the 

partnership is a section 961(a) 

ownership unit). If, instead, the 

partnership is a lower-tier partnership 

an interest in which is directly owned 

by an upper-tier partnership and the 

covered shareholder directly owns an 

interest in the upper-tier partnership, 

the upper-tier partnership’s interest in 

the lower-tier partnership is also a 

derivative ownership unit along with 

each share of stock of the foreign 

corporation directly owned by the 

lower-tier partnership (and the interest 

in the upper-tier partnership directly 

owned by the covered shareholder is a 

section 961(a) ownership unit). 

A partnership is provided derived 

basis in a derivative ownership unit, 

which is maintained separately with 

respect to each covered shareholder that 

owns the derivative ownership unit 

through only one or more partnerships. 

See proposed § 1.961–2(d)(2). Derived 

basis may be positive or negative and is 

treated as an attribute of the partnership 

but has no effect on the partnership’s 

common basis in the derivative 

ownership unit (that is, the 

partnership’s basis that is shared among 

all partners) or any other asset of the 

partnership. See part III.C of the 

Explanation of Provisions for a 


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discussion of adjustments to derived 

basis, including the allowance of 

negative derived basis. Derived basis is 

intended to operate in a manner similar 

to a basis adjustment under section 

743(b). See parts III.D and F of the 

Explanation of Provisions for the tax 

consequences of derived basis. 

4. Section 961(c) Ownership Units and 

Section 961(c) Basis 

A section 961(c) ownership unit is a 

share of stock of a foreign corporation 

directly owned by a CFC and owned 

(indirectly) by one or more covered 

shareholders. See proposed § 1.961– 

2(e)(1). For example, if a covered 

shareholder directly owns stock of an 

upper-tier CFC and the upper-tier CFC 

directly owns shares of stock of a lowertier foreign corporation, each share of 

stock of the lower-tier foreign 

corporation owned by the upper-tier 

CFC is a section 961(c) ownership unit. 

A CFC is provided section 961(c) 

basis in a section 961(c) ownership unit, 

which is maintained separately with 

respect to each covered shareholder that 

owns the section 961(c) ownership unit. 

See proposed § 1.961–2(e)(2). Section 

961(c) basis may be positive or negative 

and is treated as an attribute of the CFC 

that generally is taken into account on 

the sale, exchange, or other disposition 

of the section 961(c) ownership unit, but 

has no effect on the CFC’s adjusted basis 

in the section 961(c) ownership unit or 

any other asset of the CFC. See part III.C 

of the Explanation of Provisions for a 

discussion of adjustments to section 

961(c) basis, including the allowance of 

negative section 961(c) basis. Section 

961(c) basis applies only for the 

purposes prescribed in the section 961 

regulations and, therefore, does not 

affect the amount of the CFC’s gross 

income or E&P. See parts III.E through 

G of the Explanation of Provisions for 

the tax consequences of section 961(c) 

basis. 

5. Certain Basis Not Addressed 

i. Section 961(c) Basis and Non-CFCs 

Consistent with the statutory language 

of section 961(c), the proposed 

regulations provide for basis under 

section 961(c) only with respect to stock 

of a CFC that is directly owned by 

another CFC. Although a section 961(c) 

ownership unit is defined as a share of 

stock of a foreign corporation directly 

owned by a CFC, section 961(c) basis 

adjustments are generally made only 

with respect to section 961(c) ownership 

units that are shares of stock in a CFC, 

as discussed in part III.C of the 

Explanation of Provisions. See proposed 

§ 1.961–3 (basis increases for income 

inclusions); proposed § 1.961–4(d) 

(basis reductions for distributions); 

proposed § 1.961–5(b) (adjustments for 

foreign currency gain or loss). The 

Treasury Department and the IRS are 

studying whether, and to what extent, 

basis adjustments may or should also be 

made under section 961(c) in cases 

where stock of a CFC is owned by a 

covered shareholder through a foreign 

corporation that is not a CFC or where 

a CFC owns stock of a foreign 

corporation that used to be a CFC. 

A CFC’s section 961(c) basis with 

respect to a covered shareholder in 

stock of a lower-tier foreign corporation 

that is provided under the proposed 

regulations when that lower-tier foreign 

corporation was a CFC continues to 

exist, however, if that lower-tier foreign 

corporation ceases to be a CFC (a share 

of stock of the lower-tier foreign 

corporation is a section 961(c) 

ownership unit regardless of CFC 

status). Thus, for example, section 

961(c) basis in stock of a foreign 

corporation that was a CFC but ceases 

to be a CFC may transfer to another 

covered shareholder in a general 

successor transaction and become 

section 961(c) basis with respect to that 

covered shareholder. See proposed 

§ 1.961–5(c) (discussed in part III.C.4 of 

the Explanation of Provisions). 

Similarly, a CFC’s positive section 

961(c) basis in stock of a foreign 

corporation that was a CFC but ceases 

to be a CFC may be applied to certain 

gain recognized by the CFC with respect 

to stock of that foreign corporation. See 

proposed § 1.961–9 (discussed in part 

III.E of the Explanation of Provisions). 

ii. Partnership Interests Owned by 

Foreign Corporations 

Under the proposed regulations, a 

property unit does not include a share 

of stock of a foreign corporation or a 

partnership interest to the extent the 

share of stock or partnership interest is 

directly owned by a partnership and the 

interests of such partnership are owned 

by foreign corporations (including 

CFCs). Nor does a property unit include 

a partnership interest directly owned by 

a foreign corporation. For example, 

assume a covered shareholder directly 

owns all the stock of two upper-tier 

CFCs, the upper-tier CFCs are the only 

direct partners in a partnership, and the 

partnership directly owns all the stock 

of a lower-tier CFC. In such a case, 

neither the shares of stock of the lowertier CFC directly owned by the 

partnership, nor the upper-tier CFCs’ 

interests in the partnership, are property 

units. The Treasury Department and the 

IRS are studying whether the basis that 

should be provided in these items of 

property should be similar to derived 

basis or section 961(c) basis or have 

characteristics of both. Thus, the 

proposed regulations do not address the 

extent to which section 961 provides 

basis in such items. 

C. Basis Adjustments (Proposed 

§§ 1.961–3, 1.961–4, and 1.961–5) 

1. Basis Increases for Certain Income 

Inclusions 

i. In General 

To reflect a covered shareholder’s 

income inclusions under sections 951(a) 

and 951A(a) for a taxable year of a CFC, 

the proposed regulations provide rules 

to increase the basis of property units 

that are shares of stock of the CFC 

owned by the covered shareholder and 

the basis of any property units through 

which the covered shareholder owns 

such stock. See proposed § 1.961–3(b); 

see also proposed § 1.961–12(c) 

(Example 2). For this purpose, a 

reference to basis means adjusted basis 

of the covered shareholder in the case 

of a section 961(a) ownership unit, 

derived basis with respect to the 

covered shareholder in the case of a 

derivative ownership unit, and section 

961(c) basis with respect to the covered 

shareholder in the case of a section 

961(c) ownership unit. 

Generally, the basis of each property 

unit is increased by the amount that 

would be distributed with respect to the 

property unit in a hypothetical 

distribution by the CFC equal to the U.S. 

dollar amount of the covered 

shareholder’s income inclusions 

(hypothetical distribution rule). See 

proposed § 1.961–3(c)(1) and (4); see 

also part III.C.1.ii of the Explanation of 

Provisions (discussing additional rules 

that apply in the case of a midyear 

transaction). The hypothetical 

distribution is treated as made through 

all tiers to the covered shareholder on 

the last relevant day of the CFC’s taxable 

year (taking into account only stock or 

other property owned by the covered 

shareholder). See proposed § 1.961–3(e). 

In this way, under the grant of 

regulatory authority in section 961, a 

property unit is generally provided an 

amount of basis matching the amount by 

which basis of the property unit is 

reasonably expected to be reduced 

under section 961 when PTEP resulting 

from the income inclusions is 

subsequently distributed to the covered 

shareholder. The amount of basis 

provided to a particular property unit 

will generally equal the covered 

shareholder’s income inclusion 

attributable to that property unit, but the 

amount may differ in certain cases. 


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For example, consider a case where 

the covered shareholder owns all the 

stock of the CFC, with such stock 

consisting of a single preferred share 

with a $10x preference and common 

stock. The CFC has $100x of E&P for its 

taxable year, consisting of $90x of 

subpart F income, $0 of tested income 

or tested loss, and $10x of other income. 

The covered shareholder includes $90x 

in gross income under section 

951(a)(1)(A) (under § 1.951–1, $9x of the 

inclusion is attributable to the preferred 

share and the remaining $81x is 

attributable to the common stock), and, 

consequently, the CFC’s PTEP with 

respect to the covered shareholder 

increases by $90x. While only $9x of the 

covered shareholder’s $90x income 

inclusion is attributable to the preferred 

share, the proposed regulations increase 

the basis of the preferred share by $10x 

and the basis of the common stock by 

the remaining $80x. This approach takes 

into account that, of the first $10x of 

PTEP distributed by the CFC to the 

covered shareholder, that amount is 

likely to be distributed on the preferred 

share. And, if the basis adjustments to 

the preferred share were to instead 

match the income inclusion attributable 

to that share ($9x), the covered 

shareholder would receive a $10x 

distribution on the preferred share, thus 

potentially giving rise to gain under 

section 961(b)(2) in an amount equal to 

that difference. The proposed 

regulations prevent that result by 

adjusting the basis in the preferred share 

by $10x. The Treasury Department and 

the IRS request comments on this 

approach, including whether there are 

ways to improve the accuracy of 

allocating basis to a property unit 

without undue complexity and 

additional compliance and 

administrative burden, and without 

creating the possibility of inappropriate 

results. 

However, if the CFC distributes PTEP 

with respect to the covered shareholder 

before the last relevant day of the CFC’s 

taxable year, the policies underlying the 

hypothetical distribution rule (matching 

basis with distributed PTEP) are better 

carried out by using such actual 

distributions (rather than a hypothetical 

distribution on the last relevant day) to 

allocate basis increases among property 

units, particularly when there are 

midyear transactions (though where 

there is no midyear transaction the two 

approaches generally produce the same 

results). Thus, an actual distribution 

rule applies in these cases and 

consequently reduces the amount that 

can give rise to a basis increase pursuant 

to the hypothetical distribution rule. See 

proposed § 1.961–3(c)(3). 

The actual distribution rule applies in 

chronological order to distributions of 

the CFC’s PTEP with respect to the 

covered shareholder, and in each case 

generally increases basis of a share of 

stock of the CFC on which the 

distribution is made by the amount of 

the reduction required under section 

961 to such basis by reason of the 

distribution. See proposed § 1.961– 

3(d)(2). However, basis increases to 

stock of the CFC under the actual 

distribution rule cannot exceed the U.S. 

dollar amount of the covered 

shareholder’s income inclusions, 

excluding for this purpose an income 

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

because such inclusion does not give 

rise to PTEP that could be distributed 

before the last relevant day of the CFC’s 

taxable year. Additionally, the actual 

distribution rule applies only to 

distributions on stock of the CFC that 

the covered shareholder owns on the 

last relevant day because the covered 

shareholder’s income inclusions with 

respect to the CFC are attributable only 

to that stock. 

Basis increases to stock of the CFC 

under the actual distribution rule ‘‘tier 

up’’ through property units through 

which the covered shareholder owns 

such stock, based on how the PTEP that 

is actually distributed would be further 

distributed in a hypothetical 

distribution made at the time of the 

actual distribution. See proposed 

§ 1.961–3(d)(3). The Treasury 

Department and the IRS considered 

alternative approaches to tiering such as 

analyzing the extent to which PTEP is 

further distributed before the last 

relevant day, but those approaches 

could give rise to additional complexity 

and burden. For instance, the 

approaches could require rules tracing 

distributed PTEP through tiers of foreign 

corporation and coordinating 

applications of the actual distribution 

rule at each tier. The Treasury 

Department and the IRS welcome 

comments on the actual distribution 

rule, including whether there are ways 

to improve the accuracy of tiering 

without undue complexity and 

additional compliance and 

administrative burden. 

Generally, each basis increase under 

the hypothetical distribution rule or 

actual distribution rule is treated as 

made at the beginning of the first day of 

the CFC’s taxable year or, if later, at the 

beginning of the first day in the taxable 

year on which the covered shareholder 

owns the property unit. See proposed 

§ 1.961–3(d)(1), (e)(1). In this way, the 

timing of a basis increase generally 

matches when PTEP to which the basis 

is attributable could first be distributed 

on the property unit. Additionally, the 

portion of a basis increase for a section 

951(a)(1)(B) inclusion is treated as made 

at the end of the last day of the taxable 

year, subject to a special rule. See 

proposed § 1.961–3(e)(1). The special 

rule applies where a property unit that 

will receive a basis increase for the 

section 951(a)(1)(B) inclusion is 

transferred before the end of the taxable 

year (but on or after the last relevant day 

of the taxable year), and in such a case 

accelerates the basis increase to the 

property unit so that it is treated as 

made immediately before the transfer, 

thereby ensuring that the basis is 

available in determining the tax 

consequences of the transfer. See 

proposed § 1.961–3(e)(4). 

ii. Midyear Transactions 

Additional rules address unique 

timing considerations for basis increases 

when a midyear transaction occurs 

during the taxable year of a CFC. See 

proposed § 1.961–3(c)(2). A midyear 

transaction represents any transaction 

occurring before the last relevant day of 

the taxable year that changes the 

covered shareholder’s ownership 

structure of the CFC (for example, an 

exchange of the covered shareholder’s 

stock of the CFC or an issuance of stock 

of the CFC to the covered shareholder). 

In the case of a midyear transaction, 

a basis increase under the hypothetical 

distribution rule or actual distribution 

rule is treated as made at the earliest 

time during the CFC’s taxable year at 

which the same ownership structure is 

in place as the ownership structure 

when the relevant hypothetical or actual 

distribution is made. See proposed 

§ 1.961–3(d)(1), (e)(1). Thus, for a basis 

increase under the actual distribution 

rule, if the distribution is made before 

all midyear transactions, the basis 

increase is treated as made at the 

beginning of the first day of the CFC’s 

taxable year; on the other hand, if the 

distribution is made after a midyear 

transaction, the basis increase is treated 

as made immediately after the most 

recent midyear transaction preceding 

the distribution. This approach is 

intended to prevent distortions, 

including possible duplication of basis 

in certain cases. 

For example, assume a covered 

shareholder (US1) directly owns all the 

stock of two CFCs (CFC1 and CFC2) on 

January 1 of year 1. On June 30 of year 

1, US1 exchanges all the stock of CFC1 

solely for stock of CFC2 in an exchange 

described in section 351(a) (which is a 

midyear transaction with respect to 

CFC1 and CFC2). CFC1 makes no 


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distributions during its taxable year 

ending on December 31 of year 1, and 

US1 has a $100x subpart F income 

inclusion with respect to CFC1 for that 

taxable year. Thus, under the 

hypothetical distribution rule, US1 

increases its adjusted basis in its stock 

of CFC2 by $100x and CFC2 increases 

its section 961(c) basis with respect to 

US1 in its stock of CFC1 by $100x. 

However, basis could be inappropriately 

duplicated if the $100x basis increase in 

the stock of CFC1 were treated as made 

on January 1 of year 1, which would be 

the case absent the section 351 

exchange. This could occur if US1’s 

basis in its stock of CFC2 were to both 

be increased under the hypothetical 

distribution rule and take a basis under 

section 358(a) reflecting the basis 

increase in the stock of CFC1 under the 

hypothetical distribution rule. To 

address this, special timing rules treat 

the $100x basis increase in each of the 

stock of CFC1 and stock of CFC2 as 

made immediately after the section 351 

exchange, which is the first time during 

CFC1’s taxable year at which the same 

ownership structure is in place as the 

ownership structure on the last relevant 

day of the taxable year (when the 

hypothetical distribution determining 

the basis increase is made). 

2. Basis Reductions and Gain 

Recognition for Distributions 

i. In General 

As discussed in part II.C.2 of the 

Background, section 961(b)(1) provides 

for reductions to the basis of stock or 

other property with respect to which a 

covered shareholder receives PTEP 

excluded from its gross income under 

section 959(a), with amounts in excess 

of such basis resulting in gain under 

section 961(b)(2). Section 961(c) 

indicates that the Secretary should issue 

regulations providing for adjustments 

similar to those in section 961(b) with 

respect to PTEP received by a CFC and 

amounts in excess of section 961(c) 

basis. 

In order to implement the statutory 

language of section 961, the proposed 

regulations provide rules for reducing 

basis and recognizing gain with respect 

to property units to reflect distributions 

of PTEP. See proposed § 1.961–4; see 

also proposed § 1.961–12(c)(3) (Example 

3). These rules describe the amounts of 

adjustments, limitations on basis 

reductions, and treatment of gain under 

section 961, which can differ depending 

on the type of property unit for which 

the basis is being adjusted. The 

adjustments are treated as made 

concurrently with the distribution if the 

property unit is stock of a foreign 

corporation or, if the property unit is an 

interest in a partnership, concurrently 

with an adjustment to the partnership 

interest under section 705 resulting 

from the distribution. See proposed 

§ 1.961–4(e) and (f)(1). 

ii. Adjustments to Section 961(a) 

Ownership Units 

If a covered shareholder receives a 

distribution of PTEP that is excluded 

from its gross income under section 

959(a) (that is, PTEP other than taxable 

section 962 PTEP), then the covered 

shareholder’s adjusted basis of each 

section 961(a) ownership unit is 

generally reduced by the dollar basis 

and associated foreign income taxes of 

the PTEP received with respect to the 

section 961(a) ownership unit. See 

proposed § 1.961–4(b)(2)(i) and (ii). 

Associated foreign income taxes are 

taken into account for this purpose 

because when foreign income taxes are 

allocated and apportioned to PTEP, the 

foreign income taxes reduce the PTEP 

and the dollar basis of the PTEP, as 

discussed in part II.C.2 of the 

Explanation of Provisions. As a result, 

the sum of the dollar basis and 

associated foreign income taxes of PTEP 

represent the amount by which basis 

was increased under section 961 when 

the PTEP was generated. 

However, the associated foreign 

income taxes (which represent PTEP 

that was eliminated by foreign income 

taxes) reduce adjusted basis only to the 

extent the covered shareholder is 

allowed a credit under section 901 for 

those taxes. See proposed § 1.961– 

4(b)(2)(i). Consequently, associated 

foreign income taxes ultimately give rise 

to either a credit or an amount 

equivalent to a deduction (in the form 

of retained adjusted basis, which, in 

turn, will produce a lesser amount of 

gain or an additional amount of loss on 

a subsequent sale of the section 961(a) 

ownership unit relative to the gain or 

loss that would result if adjusted basis 

were reduced by associated foreign 

income taxes). The Treasury Department 

and the IRS are of the view that this 

prevents double taxation of PTEP but 

are studying whether the policies of 

section 245A(d) or 965(g) (denying a 

credit or deduction for foreign income 

taxes) should require reducing adjusted 

basis for associated foreign income taxes 

of PTEP resulting from section 245A(e) 

or 965. 

Further, to the extent the required 

reduction to adjusted basis of a section 

961(a) ownership unit exceeds such 

adjusted basis, the covered shareholder 

is treated as recognizing gain from a sale 

or exchange of the section 961(a) 

ownership unit, in accordance with 

section 961(b)(2). See proposed § 1.961– 

4(b)(2)(iii) and (f)(1). Basis of another 

section 961(a) ownership unit (for 

example, another share of stock of the 

foreign corporation) cannot be used to 

reduce gain under section 961(b)(2), 

which is consistent with the approach 

in section 301(c)(3), pursuant to which 

basis is not shared among shares of 

stock on distributions. See also Johnson 

v. United States, 435 F.2d 1257 (4th Cir. 

1971). 

Moreover, unlike the approach 

described in the 2006 proposed 

regulations, basis attributable to section 

961 does not shift from one share to 

another share when PTEP is distributed 

with respect to the other share. The 

Treasury Department and the IRS are of 

the view that a shifting approach could 

give rise to inappropriate results, is not 

required by section 961 (which 

increases basis for income inclusions 

without any indication that such basis 

must or should remain tied to the PTEP 

resulting from the income inclusion), 

and would depart from analogous 

provisions like section 358 (which, for 

example, increases basis for 

contributions to capital without 

subsequently shifting such basis to 

follow distributions of capital). Further, 

the approach in the proposed 

regulations is consistent with the shareby-share approach in the current 

regulations under section 961. See 

§ 1.961–2(b) and (c). 

As an example of inappropriate 

results that could arise from basis 

shifting, assume a covered shareholder 

owns all the stock of a foreign 

corporation with PTEP and contributes 

money to the corporation in exchange 

for a newly-issued share of stock, and 

the corporation subsequently distributes 

the PTEP, including on the newlyissued share. If a portion of the basis 

that had been provided under section 

961(a) for the PTEP were to shift from 

the original shares to the newly-issued 

share as a result of the distribution, then 

that basis would be added on top of the 

existing fair market value basis in the 

newly-issued share (by an amount equal 

to the amount of PTEP distributed on 

that share), which could produce a 

noneconomic loss in the newly-issued 

share. Additionally, as indicated in the 

document withdrawing the 2006 

proposed regulations (87 FR 63981), the 

Treasury Department and the IRS are 

aware of transactions in which 

taxpayers have taken positions that 

basis shifting produces large 

uneconomic losses, and the IRS may 

challenge such positions and other 

positions giving rise to abuse or 

inappropriate results. 


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iii. Adjustments to Derivative 

Ownership Units 

If, through a partnership or tiered 

partnerships, one or more covered 

shareholder partners are treated as 

receiving PTEP that is excluded from 

gross income under section 959(a) and 

the proposed section 959 regulations, 

then each such partnership’s derived 

basis with respect to such covered 

shareholders of derivative ownership 

units is reduced to reflect the PTEP 

received with respect to the derivative 

ownership units. See proposed § 1.961– 

4(c)(1); see also part II.D.2.ii of the 

Explanation of Provisions (portion of a 

covered distribution that is made to a 

partnership, or that is treated as made 

to the partnership in the case of tiered 

partnerships, is treated as made to the 

partnership’s partners in accordance 

with their respective distributive shares 

of such portion). Specifically, starting 

with the partnership at the lowest tier, 

the partnership’s derived basis with 

respect to each covered shareholder 

partner of each derivative ownership 

unit is generally reduced by the dollar 

basis and associated foreign income 

taxes of the PTEP with respect to the 

covered shareholder that is treated as 

received by the covered shareholder 

through the partnership with respect to 

the derivative ownership unit. See 

proposed § 1.961–4(c)(2)(i) and (ii). A 

basis increase under section 705 for the 

distribution occurs at the same time as 

the reduction to derived basis, with the 

result that, in tiered partnership 

structures, derived basis of an upper-tier 

partnership in a lower-tier partnership 

interest is reduced and common basis in 

the lower-tier partnership interest is 

increased (the common basis, in turn, 

may be decreased in a distribution to 

the upper-tier partnership by the lowertier partnership of the amounts that 

constituted the PTEP, for example). 

However, to the extent the required 

reduction to derived basis with respect 

to a covered shareholder of a derivative 

ownership unit exceeds the derived 

basis (for example, because a 

partnership purchased stock of a CFC 

and thus has no derived basis with 

respect to the derivative ownership 

unit), the excess first reduces the 

covered shareholder’s positive section 

743(b) basis adjustment of the derivative 

ownership unit (if any), but not below 

zero. See proposed § 1.961–4(c)(2)(iii). 

Thus, this rule, by treating the positive 

section 743(b) basis adjustment in the 

same manner as adjusted basis specific 

to the covered shareholder, is consistent 

with § 1.743–1(j) (regarding the effect of 

a basis adjustment under section 

743(b)). Then, any remaining portion of 

the excess reduces the derived basis 

below zero, subject to a limitation. See 

id. As discussed in part III.C.2.v of the 

Explanation Provisions, this limitation 

is intended to prevent reductions to 

derived basis of the derivative 

ownership unit from having the effect of 

reducing the partnership’s total basis 

(measured for this purpose by netting 

common basis and all negative derived 

basis) of the derivative ownership unit 

below zero. 

Finally, to the extent the required 

reduction to derived basis with respect 

to a covered shareholder of a derivative 

ownership unit exceeds the amount of 

positive derived basis, positive section 

743(b) basis, and negative derived basis 

created, the partnership is treated as 

recognizing gain from a sale or exchange 

of the derivative ownership unit. See 

proposed § 1.961–4(c)(2)(iv). The gain is 

allocated by the partnership solely to 

the covered shareholder and is taken 

into account in adjusting basis under 

section 705, but it has no effect on any 

partnership’s computations or 

allocations of any other items under 

section 703 or 704 or on the covered 

shareholder’s capital account. See 

proposed § 1.961–4(f)(2). 

iv. Adjustments to Section 961(c) 

Ownership Units 

If a CFC receives a distribution of 

PTEP, then the CFC’s section 961(c) 

basis with respect to each covered 

shareholder of each section 961(c) 

ownership unit is generally reduced by 

the dollar basis and associated foreign 

income taxes of the PTEP with respect 

to the covered shareholder that is 

received with respect to the section 

961(c) ownership unit. See proposed 

§ 1.961–4(d)(2)(i) and (ii). 

To the extent the required reduction 

to section 961(c) basis with respect to a 

covered shareholder of a section 961(c) 

ownership unit exceeds such section 

961(c) basis (for example, because a CFC 

purchased stock of another CFC and 

thus has no section 961(c) basis with 

respect to the section 961(c) ownership 

unit or a portion of the distributed PTEP 

is section 965(b) PTEP), the excess 

reduces the section 961(c) basis below 

zero, subject to a limitation. See 

proposed § 1.961–4(d)(2)(ii). As 

discussed in part III.C.2.v of the 

Explanation of Provisions, this 

limitation is intended to prevent 

reductions to section 961(c) basis of the 

section 961(c) ownership unit from 

having the effect of reducing the CFC’s 

total basis (measured for this purpose by 

netting adjusted basis and all negative 

section 961(c) basis) of the section 

961(c) ownership unit below zero. Then, 

any remaining portion of the excess is 

treated as gain recognized by the CFC 

from a sale or exchange of the section 

961(c) ownership unit, and such gain is 

assigned from the CFC solely to the 

covered shareholder. See proposed 

§ 1.961–4(d)(2)(iii). Gain recognized by a 

CFC under this rule applies only for 

purposes of determining amounts 

included in gross income of United 

States shareholders under proposed 

§ 1.961–11 (discussed in part III.G. of 

the Explanation of Provisions) because 

section 961(c) applies only for limited 

purposes. See proposed § 1.961–4(f)(3). 

Therefore, the gain does not affect the 

CFC’s items of gross income for 

purposes of section 952 or 951A or its 

E&P. 

The Treasury Department and the IRS 

are of the view that the gain recognition 

rules described in this part III.C.2 of the 

Explanation of Provisions appropriately 

prevent use of the same basis more than 

once, provide similar outcomes for 

similar transactions at different tiers, 

and ensure the tax consequences of the 

gain are covered shareholder-specific. 

Any alternative approach that did not 

require gain recognition under section 

961(b)(2) and (c) for amounts in excess 

of basis would necessarily have to 

narrow the application of section 961(c) 

basis (discussed in part III.E of the 

Explanation of Provisions), with the 

result that section 961(c) basis would 

not be available for use in a section 

301(c)(3) transaction and, in a sale, 

might be available for use only to the 

extent of undistributed PTEP. 

Consider the following examples 

illustrating that the proposed 

regulations provide a consistent 

approach ensuring that distributions 

appropriately reduce basis or result in 

the recognition of gain. First, assume 

US1, a covered shareholder, directly 

owns the single share of outstanding 

stock of CFC1, a newly formed foreign 

corporation. For simplicity, assume US1 

has $0 basis in its stock in CFC1. In year 

1, CFC1 generates $100x of PTEP with 

respect to US1, which increases US1’s 

adjusted basis of the share of stock of 

CFC1 from $0 to $100x. In year 2, CFC1 

makes a $100x distribution out of E&P 

and, in year 3, CFC1 makes a $100x 

distribution that is not out of E&P. In 

this case, the year 2 distribution is taxfree (that is, the distribution is excluded 

from US1’s gross income under section 

959(a) but reduces US1’s adjusted basis 

in its stock of CFC1 under section 

961(b)(1)), and the year 3 distribution 

requires US1 to recognize $100x of gain 

under section 301(c)(3). Alternatively, 

assume CFC1 generates a deficit in E&P 

in year 2 and generates E&P in year 3, 

with the result that the year 3 

distribution, but not the year 2 


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distribution, is out of E&P. In such a 

case, the year 2 $100x distribution is 

tax-free under section 301(c)(2) by 

reason of US1’s adjusted basis pursuant 

to section 961(a), and the year 3 $100x 

distribution requires US1 to recognize 

$100x of gain under section 961(b)(2), 

which appropriately prevents a double 

use of basis. 

Now assume instead that CFC2, a 

foreign corporation directly owned by 

US1, directly owns the single share of 

stock of CFC1 (rather than US1), CFC2’s 

adjusted basis of the share of stock of 

CFC1 is $0, and CFC2’s section 961(c) 

basis with respect to US1 of the share 

of stock of CFC1 is increased from $0 to 

$100x to reflect the $100x of PTEP 

generated by CFC1 with respect to US1. 

In that case, if CFC1’s year 2 

distribution is out of E&P, the year 2 

distribution is tax-free under sections 

959 and 961 and the year 3 distribution 

requires CFC2 to recognize $100x of 

gain under section 301(c)(3), which US1 

will generally include in gross income 

under section 951(a). Alternatively, if 

the year 3 distribution is out of E&P 

instead of the year 2 distribution, the 

year 2 distribution is tax-free by reason 

of CFC2’s section 961(c) basis and the 

year 3 distribution requires CFC2 to 

recognize $100x of gain pursuant to 

section 961(c), which US1 will generally 

include in gross income under the rules 

described in part III.G of the 

Explanation of Provisions. 

v. Limitations on Negative Derived Basis 

and Negative Section 961(c) Basis 

As discussed in parts III.C.2.iii and iv 

of the Explanation of Provisions, a 

partnership’s derived basis or a CFC’s 

section 961(c) basis with respect to a 

covered shareholder of a property unit 

can be reduced below zero (and 

therefore result in negative basis instead 

of triggering immediate gain 

recognition) as a result of a distribution 

of PTEP with respect to the property 

unit, subject to a limitation. The concept 

of negative section 961(c) basis stems 

from the language of section 961(c) 

(providing ‘‘adjustments similar to the 

adjustments’’ of section 961(a) and (b), 

‘‘but only for the purposes of 

determining the amount included under 

section 951’’), which contemplates 

section 961(c) basis replicating the 

outcomes that would occur for section 

951 purposes if the CFC’s adjusted basis 

could be increased or reduced under 

section 961(a) or (b). In this way, 

negative section 961(c) basis can be 

conceptualized as a reduction to 

adjusted basis that has no tax effect 

until a transaction relevant for purposes 

of section 951 occurs with respect to the 

property unit. Negative derived basis 

follows the same concept. 

Under the limitation, a distribution 

can reduce (or further reduce) derived 

basis or section 961(c) basis below zero 

only to the extent of the amount of the 

partnership’s common basis or the 

CFC’s adjusted basis of the property unit 

that is available with respect to the 

covered shareholder (determined as 

described in the next paragraph). See 

proposed § 1.961–4(c)(3)(i) and (d)(3)(i). 

In the case of a partnership, the amount 

of common basis available with respect 

to the covered shareholder is reduced by 

the covered shareholder’s negative 

section 743(b) basis adjustment of the 

derivative ownership unit (if 

applicable). See proposed § 1.961– 

4(c)(3)(i). 

The common basis or adjusted basis 

available with respect to the covered 

shareholder is determined by first 

computing the partnership’s common 

basis or the CFC’s adjusted basis of the 

property unit, reduced, as applicable, by 

all negative derived basis or all negative 

section 961(c) basis of the property unit 

(regardless of the covered shareholders 

to which the negative basis relates). See 

proposed § 1.961–4(c)(3)(ii) and 

(d)(3)(ii). This amount represents the 

partnership’s common basis or the 

CFC’s adjusted basis that is potentially 

available to reduce derived basis or 

section 961(c) basis of the property unit 

below zero. To address concurrent 

adjustments with respect to multiple 

covered shareholders, the partnership’s 

available common basis or the CFC’s 

available adjusted basis is then 

multiplied by a fraction. The fraction 

determines the basis available with 

respect to a covered shareholder based 

on relative amounts by which derived 

basis or section 961(c) basis with respect 

to the covered shareholders would be 

reduced below zero without limitation. 

The Treasury Department and the IRS 

are of the view that allowing, but 

limiting the amount of, negative basis in 

this way has the effect of permitting the 

partnership’s common basis or CFC’s 

adjusted basis of the property unit to be 

reduced to, but not below, zero. These 

rules do not affect the treatment or 

availability of a partnership’s common 

basis or a CFC’s adjusted basis under 

any other provision of the Code (and, 

thus, for example, do not impact the 

application of section 704(c)). 

The Treasury Department and the IRS 

considered other approaches to the 

limitation such as looking to a covered 

shareholder’s share of common basis or 

adjusted basis, based on the percentage 

of the interests in the partnership (using 

§ 1.743–1(d) principles, for example) or 

the stock of the CFC that is owned by 

the covered shareholder. However, 

those approaches would give rise to 

additional complexity and burden 

because, for example, they could require 

rules adjusting negative basis with 

respect to a covered shareholder to the 

extent that an issuance reduces the 

covered shareholder’s share of common 

basis or adjusted basis. Further, as 

discussed in part III.F of the 

Explanation of Provisions, rules 

requiring gain recognition in 

transactions involving negative basis 

adequately prevent a covered 

shareholder from disproportionality 

benefiting from common basis or 

adjusted basis because gain recognized 

by a partnership or a CFC under those 

rules is allocated or assigned to covered 

shareholders based on relative amounts 

of negative basis with respect to the 

covered shareholders. Thus, although a 

partnership’s common basis or a CFC’s 

adjusted basis is available with respect 

to all covered shareholders in 

determining the amount by which 

derived basis or section 961(c) basis can 

be negative, a covered shareholder will 

generally be required to include in gross 

income any gain attributable to negative 

basis with respect to the covered 

shareholder. 

The Treasury Department and the IRS 

request comments on the approach to 

limiting negative basis in the proposed 

regulations, including alternative 

methods for determining the amount of 

a partnership’s common basis or a CFC’s 

adjusted basis available with respect to 

a covered shareholder for this purpose. 

3. Basis Adjustments for Foreign 

Currency Gain or Loss 

To reflect foreign currency gain or 

loss recognized under section 986(c) by 

a covered shareholder with respect to a 

foreign corporation’s PTEP in a general 

successor transaction or other 

transaction not including a distribution 

of PTEP (see proposed § 1.986(c)–1, 

discussed in part V of the Explanation 

of Provisions), the proposed regulations 

provide rules to adjust the basis of 

property units that are shares of stock of 

the foreign corporation owned by the 

covered shareholder. These adjustments 

‘‘tier up’’ through any property units 

through which the covered shareholder 

owns such stock, with the result that the 

basis of such property units is also 

adjusted. See proposed § 1.961–5(b)(1). 

For purposes of these rules, a reference 

to basis means adjusted basis of the 

covered shareholder in the case of a 

section 961(a) ownership unit, derived 

basis with respect to the covered 

shareholder in the case of a derivative 

ownership unit, and section 961(c) basis 

with respect to the covered shareholder 


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in the case of a section 961(c) ownership 

unit. These rules are issued pursuant to 

the express delegations of authority 

under sections 965(o) and 989(c) (as 

well as those under sections 961(a), (b), 

and (c), as described in part III.A. of the 

Explanation of Provisions). 

The amount of the basis adjustments 

is equal to the amount of net foreign 

currency gain or loss. See proposed 

§ 1.961–5(b)(2). This is determined by 

comparing the sum of all foreign 

currency gain and the sum of all foreign 

currency loss that the covered 

shareholder recognizes with respect to 

the foreign corporation’s PTEP in the 

transaction under section 986(c), 

without regard to limitations on the 

recognition of such foreign currency 

gain or loss for PTEP resulting from 

section 965. 

Generally, the basis of each property 

unit is increased by the property unit’s 

share of net foreign currency gain or is 

reduced by the property unit’s share of 

net foreign currency loss, as applicable, 

determined in each case based on a 

hypothetical distribution by the foreign 

corporation equal to all PTEP of the 

foreign corporation with respect to 

which the covered shareholder 

recognizes (or, but for limitations for 

PTEP resulting from section 965, would 

recognize) foreign currency gain or loss 

in the transaction. See proposed 

§ 1.961–5(b)(3) and (4). The basis 

adjustments are treated as made 

immediately before the transaction (and 

therefore are taken into account in the 

transaction). See proposed § 1.959– 

5(b)(4). Additionally, like in the case of 

distributions of PTEP, a reduction to 

basis can reduce derived basis or section 

961(c) basis below zero and can result 

in gain recognition with respect to a 

property unit. See id. 

These basis adjustments are 

consistent with the 1988 notice and 

prevent foreign currency gain or loss 

with respect to PTEP, which is 

recognized at the covered shareholderlevel under section 986(c), from also 

being taken into account with respect to 

property units sold or exchanged in the 

transaction (which might otherwise 

occur if basis of the property units were 

not adjusted to reflect movements in 

exchange rates between the time of the 

income inclusion that gave rise to the 

PTEP (and basis) and the time of the 

transaction). The adjustments to basis 

are determined without regard to the 

limitations on the recognition of foreign 

currency gain or loss with respect to 

PTEP resulting from section 965, which 

ensures that such unrecognized foreign 

currency gain or loss does not result in 

a commensurate amount of gain or loss 

with respect to property units sold or 

exchanged in the transaction. See also 

part V.B of the Explanation of 

Provisions (discussing rules under 

which foreign currency gain or loss with 

respect to PTEP resulting from section 

965(a) is reduced based on the section 

965(c) deduction percentage, and no 

foreign currency gain or loss is 

recognized for PTEP arising under 

section 965(b)). 

4. Successor Basis 

i. In General 

If there is an acquisition of stock of a 

foreign corporation that results in a 

change of ownership of stock of the 

foreign corporation, successor rules in 

section 961(c) generally transfer the 

foreign corporation’s section 961(c) 

basis with respect to the covered 

shareholder that relinquishes ownership 

of stock of the foreign corporation to the 

covered shareholder who acquires 

ownership of the stock. See section 

961(c) (prescribed adjustments to basis 

in CFC stock also apply to any United 

States shareholder that acquires from 

any person any portion of the interest of 

a United States shareholder by reason of 

which such shareholder was treated as 

owning CFC stock). These rules 

generally ensure that undistributed 

PTEP of a lower-tier foreign corporation 

does not give rise to additional U.S. tax 

in the hands of the acquiring covered 

shareholder when stock of the 

corporation is later sold by an upper-tier 

CFC, even though the covered 

shareholder did not own such stock 

when the PTEP was generated and 

section 961(c) basis was increased. 

These successor basis rules are issued 

pursuant to the express delegation of 

authority under section 743(b) (as well 

as the express delegation of authority 

under section 961(c), as described in 

part III.A. of the Explanation of 

Provisions). 

The proposed regulations set forth 

rules for transferring section 961(c) basis 

in a general successor transaction, as 

well as for transferring a partnership’s 

derived basis if the general successor 

transaction involves an acquisition of an 

interest in a partnership (acquired 

partnership). See proposed § 1.961–5(c). 

These rules generally provide parity 

between derived basis and section 

961(c) basis in a general successor 

transaction and, in the case of an 

acquired partnership, ensure that the 

successor covered shareholder succeeds 

to derived basis (as compared to an 

approach that attempted to replace all or 

a portion of derived basis with a section 

743(b) basis adjustment, which would 

require an election under section 754 to 

be in effect or a substantial built-in 

loss). The Treasury Department and the 

IRS intend to issue additional rules 

regarding the transfer of section 961(c) 

basis and derived basis (as well as the 

transfer of PTEP) in acquisitions that are 

not general successor transactions. In 

these acquisitions, the Treasury 

Department and the IRS are considering 

adding a rule as part of finalization of 

the proposed regulations that, similar to 

the potential rule discussed in part 

II.G.1 of the Explanation of Provisions, 

provides that section 961(c) basis and 

derived basis transfer automatically in 

periods before those additional rules 

apply. 

In a general successor transaction, a 

portion of an acquired partnership’s 

derived basis or acquired foreign 

corporation’s section 961(c) basis with 

respect to the transferor covered 

shareholder of a property unit transfers 

to the successor covered shareholder 

and therefore becomes with respect to 

the successor covered shareholder. 

Thus, to reflect the general successor 

transaction, derived basis or section 

961(c) basis is increased (or reduced) by 

the basis that transfers to (or from) the 

covered shareholder, and those 

adjustments are treated as made 

concurrently with the general successor 

transaction. See proposed § 1.961– 

5(c)(1) and (2)(iii). The amount of basis 

that transfers may be a positive or 

negative amount and is equal to a pro 

rata portion of the derived basis or 

section 961(c) basis of the property unit 

immediately before the general 

successor transaction, plus any increase, 

or minus any decrease, to the basis for 

foreign currency gain or loss recognized 

under section 986(c) in the general 

successor transaction (discussed in part 

V of the Explanation of Provisions). See 

proposed § 1.961–5(c)(2)(i) and (ii). 

The pro rata portion is determined 

based on the percentage, by value, of the 

transferor covered shareholder’s 

interests in the acquired partnership or 

acquired foreign corporation that the 

successor covered shareholder acquires 

in the general successor transaction. See 

proposed § 1.961–5(c)(2)(i). This 

approach is intended to transfer derived 

basis or section 961(c) basis 

commensurate with the percentage 

change of the transferor covered 

shareholder’s indirect interests in the 

partnership’s common basis or foreign 

corporation’s adjusted basis by reason of 

the general successor transaction. The 

Treasury Department and the IRS are of 

the view that alternative approaches— 

such as transferring an amount of 

derived basis or section 961(c) basis 

equal to the amount of PTEP that 

transfers in the general successor 

transaction—could give rise to 


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inappropriate outcomes or undue 

complexity where derived basis or 

section 961(c) basis is not equal to the 

PTEP that transfers in the general 

successor transaction. 

ii. Deemed Covered Shareholder 

Consistent with the deemed covered 

shareholder rules discussed in part 

II.G.3 of the Explanation of Provisions, 

the proposed regulations provide that 

the deemed covered shareholder is 

treated in the same manner as a covered 

shareholder in determining the transfer 

of derived basis or section 961(c) basis. 

See proposed § 1.961–5(c)(3)(i). Thus, 

for example, if a covered shareholder 

owns all the stock of an upper-tier CFC, 

the upper-tier CFC directly owns all the 

stock of a lower-tier CFC, and the 

covered shareholder sells a portion of its 

stock of the upper-tier CFC to a 

nonresident alien individual, then a 

portion of the upper-tier CFC’s section 

961(c) basis in the stock of the lower-tier 

CFC transfers from the seller covered 

shareholder to the deemed covered 

shareholder. The proposed regulations 

further provide that, to the extent the 

deemed covered shareholder is treated 

as owning stock of any foreign 

corporation that is not otherwise a CFC, 

the foreign corporation is treated as a 

CFC for purposes of determining section 

961(c) basis that transfers to or from the 

deemed covered shareholder. See 

proposed § 1.961–5(c)(3)(ii). This is 

intended to allow for section 961(c) 

basis to transfer from the deemed 

covered shareholder to a subsequent 

covered shareholder (as properly 

adjusted under the proposed section 961 

regulations) even if both an upper-tier 

foreign corporation and the lower-tier 

foreign corporation in which the uppertier foreign corporation directly owns 

stock cease to be CFCs during the period 

in which the stock of the foreign 

corporations is considered owned by the 

deemed covered shareholder. 

In cases where basis of a derivative 

ownership unit or section 961(c) 

ownership unit transfers from the 

deemed covered shareholder to a 

covered shareholder, the covered 

shareholder must use a reasonable 

method to determine the amount of 

transferred basis. See proposed § 1.961– 

5(c)(3)(iii). The proposed regulations 

provide that such method must take into 

account adjustments to basis with 

respect to the deemed covered 

shareholder that would have been made 

under the proposed regulations if the 

basis were with respect to a covered 

shareholder during the time that it was 

with respect to the deemed covered 

shareholder. 

Like in the context of the deemed 

covered shareholder rules for purposes 

of transferring PTEP, the Treasury 

Department and the IRS welcome 

comments on this regime. 

iii. Coordination With Section 743(b) 

In certain general successor 

transactions in which an acquired 

partnership has a section 754 election in 

effect or a substantial built-in loss as 

defined under section 743(d), property 

of the acquired partnership will receive 

a section 743(b) basis adjustment with 

respect to the successor covered 

shareholder. Accordingly, the proposed 

regulations take into account derived 

basis that transfers to the successor 

covered shareholder in calculating the 

overall section 743(b) basis adjustment 

and its allocation among the acquired 

partnership’s assets with respect to the 

successor covered shareholder. See 

proposed § 1.961–5(d). In transactions 

involving multiple tiers of acquired 

partnerships, this coordination rule 

applies to each acquired partnership. 

5. Basis Adjustments for Deemed 

Dividends Under Section 1248(c)(2) or 

964(e)(1) 

The Treasury Department and the IRS 

are studying whether basis under 

section 961 should be increased to 

reflect gain treated as a dividend under 

section 1248(c)(2) or 964(e)(1). For 

example, to the extent gain recognized 

by a covered shareholder on a sale of 

stock of a first-tier CFC is treated as a 

dividend under section 1248(c)(2) by 

reason of E&P of a third-tier CFC (and 

therefore gives rise to PTEP under 

section 959(e)), the Treasury 

Department and the IRS are considering 

whether (and to what extent) the firsttier CFC’s and second-tier CFC’s section 

961(c) basis can and should be 

increased to reflect the resulting PTEP. 

The Treasury Department and the IRS 

request comments on this topic. 

D. Tax Consequences of Positive 

Derived Basis (Proposed § 1.961–8) 

1. In General 

The rules for a partnership’s positive 

derived basis with respect to a covered 

shareholder are generally intended to 

replicate the outcome that would occur 

on a sale, exchange, or other disposition 

of the derivative ownership unit if such 

basis were an additional amount of 

common basis taken into account in 

determining gain or loss allocable to the 

covered shareholder. These rules are 

generally modeled after the rules in 

§ 1.743–1. 

Under the proposed regulations, in a 

sale, exchange, or other disposition by 

a partnership (transferring partnership) 

of one or more derivative ownership 

units (transferred units), each partner’s 

distributive share of gain or loss 

recognized by the transferring 

partnership is first determined under 

section 704 without regard to positive 

derived basis (but with regard to any 

section 743(b) basis adjustment with 

respect to the partner). See proposed 

§ 1.961–8(b)(1). Then, positive derived 

basis is applied to each covered 

shareholder’s distributive share of such 

gain or loss, in an amount equal to the 

transferring partnership’s positive 

derived basis with respect to the 

covered shareholder of the transferred 

units, subject to two limitations 

(discussed in part III.D.2 of the 

Explanation of Provisions). See 

proposed § 1.961–8(b)(2)(i); see also 

proposed § 1.961–12(c)(4) (Example 4). 

This application of positive derived 

basis can decrease a distributive share of 

gain, increase a distributive share of 

loss, or convert a distributive share of 

gain to a distributive share of loss. 

The application of positive derived 

basis to a covered shareholder’s 

distributive share is generally treated as 

an application of positive derived basis 

by the transferring partnership. See 

proposed § 1.961–8(b)(1). However, if 

the covered shareholder owns the 

transferred units through tiered 

partnerships, only the partnership in 

which the covered shareholder directly 

owns an interest is treated as applying 

the positive derived basis). 

To coordinate with section 705, the 

proposed regulations provide that 

adjusted basis of a partnership interest 

directly owned by the covered 

shareholder is adjusted under section 

705 after taking into account the 

partnership’s application of positive 

derived basis to the covered 

shareholder’s distributive share of gain 

or loss with respect to the transferred 

units. See proposed § 1.961–8(c). On the 

other hand, in tiered partnership 

structures, an upper-tier partnership’s 

common basis in a lower-tier 

partnership interest is adjusted under 

section 705 without regard to the 

application of positive derived basis to 

the covered shareholder’s distributive 

share. See proposed § 1.961–8(d). 

Additionally, an upper-tier 

partnership’s derived basis with respect 

to the covered shareholder in a lowertier partnership interest (starting at the 

lowest-tier if there is more than one 

lower-tier partnership) is concurrently 

reduced (or gain is recognized, as 

applicable) by the amount of positive 

derived basis applied to the covered 

shareholder’s distributive share. In this 

way, an upper-tier partnership’s derived 

basis in a lower-tier partnership interest 


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is replaced with common basis under 

section 705 (which may be decreased 

under section 705(a)(2) when the lowertier partnership makes a distribution). 

2. Limitations 

As discussed in part III.D.1 of the 

Explanation of Provisions, the amount 

of positive derived basis applied to a 

covered shareholder’s distributive share 

of gain or loss with respect to 

transferred units is equal to the 

transferring partnership’s positive 

derived basis with respect to the 

covered shareholder of the transferred 

units, subject to two limitations. See 

proposed § 1.961–8(b)(2)(i). 

The first limitation applies in 

nonrecognition transactions to replicate 

the effect of additional basis under the 

‘‘boot-within-gain’’ rule of section 

351(b) or 356(a)(1), where additional 

basis might reduce the amount of gain 

realized but not the amount of gain 

recognized. See proposed § 1.961– 

8(b)(2)(ii). Under this limitation, the 

amount of positive derived basis 

applied to the covered shareholder’s 

distributive share is equal to the excess 

of the amount of positive derived basis 

with respect to the covered shareholder 

of the transferred units over the covered 

shareholder’s share of the gain realized 

but not recognized by the transferring 

partnership with respect to the 

transferred units (determined without 

regard to derived basis). In this way, 

positive derived basis is available for 

use only to the extent that, if the 

positive derived basis were additional 

common basis taken into account in 

determining gain allocable to the 

covered shareholder, such derived basis 

would reduce gain recognized with 

respect to the transferred units. 

To illustrate this limitation, assume 

US1, a covered shareholder, directly 

owns a 50 percent interest in PRS1, a 

partnership, and PRS1 directly owns the 

single share of outstanding stock of F1, 

a foreign corporation. The fair market 

value of the share is $150x. PRS1’s 

common basis of the share is $100x, and 

PRS1’s derived basis with respect to 

US1 of the share is $15x. PRS1 

exchanges the share for $120x of stock 

and $30x of money in a reorganization 

described in section 368(a)(1)(D), 

recognizing $30x of gain on the 

exchange under section 356(a)(1) (the 

lesser of the $30x of money received 

and the $50x of gain in the stock of F1) 

and therefore $20x of the $50x of 

realized gain is not recognized due to 

the boot limitation in section 356(a)(1). 

US1’s distributive share of the 

recognized gain is $15x ($30x × 50%), 

determined without regard to derived 

basis. Under the limitation in the 

proposed regulations, only $5x of 

positive derived basis is applied to such 

distributive share (thus, $10x of the 

$15x of derived basis is not available for 

use). The $5x is computed as the excess 

of $15x (the amount of positive derived 

basis with respect to US1 without regard 

to the limitation), over $10x ($20x × 

50%, which represents US1’s share of 

the realized-but-not-recognized gain). 

Accordingly, US1’s distributive share of 

gain taking into account derived basis is 

$10x (US1’s $15x distributive share of 

gain without regard to derived basis 

over $5x of positive derived basis 

available under the limitation). This 

$10x represents the amount of gain that 

would be recognized under section 

356(a)(1) and allocated to US1 if such 

were determined based on $75x of value 

(50% of each of the $120x of stock 

consideration and $30x of money) and 

$65x of basis (50% of the $100x of 

common basis, increased by the $15x of 

derived basis). 

Under the second limitation, positive 

derived basis can increase or create a 

distributive share of loss only if the 

transferring partnership recognizes, or 

would recognize, loss on the sale, 

exchange, or other disposition of the 

transferred units and a current 

deduction in respect of the loss is, or 

would be, allowable. See proposed 

§ 1.961–8(b)(2)(iii). Thus, for example, 

positive derived basis cannot create a 

distributive share of loss if the gain 

recognized with respect to the 

transferred units is pursuant to section 

301(c)(3). 

3. Certain Scenarios Not Addressed 

The proposed regulations do not 

address the interaction of derived basis 

with the rules regarding distributions by 

a partnership (for example, sections 732 

and 734). The Treasury Department and 

the IRS request comments on this 

interaction, including whether derived 

basis with respect to a covered 

shareholder should be taken into 

account in the case of a distribution by 

a partnership of a derivative ownership 

unit to the covered shareholder or to 

another partner and whether derived 

basis should be taken into account in 

the case of distributions of other types 

of assets by a partnership. 

The proposed regulations also do not 

address the effect of derived basis under 

the dividend recharacterization rules of 

section 1248. The Treasury Department 

and the IRS are studying this and other 

issues with respect to the application of 

section 1248 when stock of a foreign 

corporation is owned through a 

partnership (for example, the manner in 

which section 1248(d)(1) applies to 

exclude PTEP in determining deemed 

dividend treatment), and welcome 

comments on these issues. 

E. Tax Consequences of Positive Section 

961(c) Basis (Proposed § 1.961–9) 

1. In General 

As discussed in part III.B.4 of the 

Explanation of Provisions, a CFC’s 

section 961(c) basis applies only for the 

purposes prescribed in the section 961 

regulations and thus does not affect the 

amount of the CFC’s gross income or 

E&P. Under the rules in the proposed 

regulations for the tax consequences of 

positive section 961(c) basis, gain to 

which positive section 961(c) basis is 

applied is treated as PTEP that is 

generally excluded from the CFC’s gross 

income under section 961(c) (section 

961(c) exclusion). See proposed § 1.961– 

9. The proposed regulations describe the 

section 961(c) exclusion, the application 

of section 961(c) basis to gain, and the 

PTEP that results from such application 

(including the character of the PTEP). 

2. Section 961(c) Exclusion 

i. In General 

The section 961(c) exclusion operates 

in a similar manner to the section 959(b) 

exclusion. It provides that PTEP 

resulting from the application of a CFC’s 

section 961(c) basis to gain recognized 

by the CFC is excluded from the CFC’s 

gross income for purposes of 

determining the CFC’s subpart F income 

and tested income or tested loss, 

provided that the PTEP relates to a 

covered shareholder that is a United 

States shareholder in the CFC. See 

proposed § 1.961–9(b); see also part 

III.E.3 of the Explanation of Provisions 

(determining PTEP resulting from 

section 961(c) basis). 

The Treasury Department and the IRS 

are of the view that E&P attributable to 

gain to which section 961(c) basis is 

applied gives rise to PTEP. Section 

959(a) refers to E&P of a foreign 

corporation that is ‘‘attributable to 

amounts which are, or have been, 

included in gross income under section 

951(a) [or 951A(a)].’’ Gain recognized by 

an upper-tier foreign corporation on the 

disposition of stock of a lower-tier 

foreign corporation may likewise reflect 

amounts included in gross income 

under section 951(a) or 951A(a) with 

respect to the lower-tier foreign 

corporation and, thus, give rise to E&P 

that is attributable to such amounts. 

Because section 961(c) basis reflects 

amounts included in gross income 

under section 951(a) or 951A(a), the 

application of section 961(c) basis to 

such gain means that the resulting E&P 

is attributable to an amount included in 

gross income under section 951(a) or 


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951A(a) in accordance with the 

language of section 959(a). Additionally, 

treating the resulting E&P as PTEP 

(rather than section 959(c)(3) E&P) 

prevents double non-taxation and 

double taxation and provides symmetry 

between distributions and dispositions 

involving foreign stock, as discussed in 

part III.E.2.ii of the Explanation of 

Provisions. 

The proposed regulations apply the 

section 961(c) exclusion for purposes of 

determining a CFC’s tested income or 

tested loss pursuant to the express 

delegation of authority in section 

951A(f)(1)(B), which prevents double 

taxation and is therefore consistent with 

the policy of section 961. Additionally, 

this approach is consistent with section 

951A(f)(1)(A) (treating an inclusion 

under section 951A(a) in the same 

manner as an inclusion under section 

951(a)(1)(A) for purposes of section 

961), which should be interpreted as 

allowing references to section 951 in 

section 961(c) to be treated as including 

a reference to section 951A(a). This 

approach is also consistent with a 

comment received in response to the 

2019 notice, which requested 

clarification that section 961(c) basis 

applies for purposes of determining 

tested income, noting that some 

comments asserted that section 961(c) 

basis only applies in determining a 

CFC’s subpart F income. See also TD 

9866, 84 FR 29288, 29298 (describing 

similar comments received in response 

to proposed regulations under section 

951A). 

Further, the application of the section 

961(c) exclusion at the CFC-level is 

coordinated with the pro rata share 

rules of section 951(a) (discussed in part 

IV.C of the Explanation of Provisions). 

Under this approach, a CFC’s subpart F 

income is determined with respect to all 

shareholders by excluding the same 

amount of PTEP resulting from section 

961(c) basis of the CFC, and United 

States shareholders’ pro rata shares of 

the CFC’s subpart F income are 

computed in a manner so that any 

benefits of the application of the section 

961(c) exclusion to PTEP with respect to 

a United States shareholder generally 

inure only to that United States 

shareholder. For instance, if two United 

States shareholders own equal interests 

in a CFC and, on a sale of foreign stock 

by the CFC, the CFC recognizes gain half 

of which is treated as PTEP with respect 

to one United States shareholder 

(because there is positive section 961(c) 

basis with respect to the United States 

shareholder at least equal to its share of 

the gain) and the other half of which 

gives rise to subpart F income (because 

there is no section 961(c) basis with 

respect to the other United States 

shareholder and no exception from 

subpart F income applies), then only the 

United States shareholder with respect 

to which there is no section 961(c) basis 

has a pro rata share of the subpart F 

income resulting from the sale. 

Lastly, by applying section 961(c) at 

the CFC-level, the proposed regulations 

provide symmetry between sections 

959(b) and 961(c), which are companion 

provisions with a common purpose. 

Thus, PTEP is generally treated the 

same under the proposed regulations 

regardless of whether it arises from a 

distribution or disposition involving 

stock of a foreign corporation. As 

indicated in part II.D.1.iii of the 

Explanation of Provisions, the Treasury 

Department and the IRS request 

comments on the CFC-level approach in 

the proposed regulations, including 

alternative approaches providing 

symmetry between sections 959(b) and 

961(c) (such as a shareholder-level 

approach), or whether symmetry is 

necessary under the statute. 

ii. Considerations in Treating Sheltered 

E&P as PTEP 

The Treasury Department and the IRS 

considered treating a CFC’s E&P that is 

sheltered from tax by positive section 

961(c) basis with respect to a covered 

shareholder as section 959(c)(3) E&P. 

However, such an approach could give 

rise to double non-taxation or double 

taxation. Moreover, treating sheltered 

E&P as PTEP provides symmetry 

between distributions and dispositions 

involving foreign stock because both 

E&P to which annual PTEP accounts are 

applied and E&P to which section 961(c) 

basis is applied are treated as PTEP. 

For example, double non-taxation 

could occur if the sheltered E&P were to 

subsequently give rise to a dividend for 

which the covered shareholder is 

allowed a dividends received deduction 

under section 245A (including as a 

result of a disposition pursuant to 

section 1248(j)). In that case, the taxable 

portion of any unrealized appreciation 

in stock of the CFC, to the extent 

attributable to unrealized appreciation 

in the CFC’s assets, could be reduced by 

the amount of the dividend (because the 

dividend reduces the value of the CFC 

stock without a corresponding basis 

reduction or, in a disposition of stock, 

because gain attributable to the 

appreciation is recharacterized as a 

dividend). See also TD 9866, 84 FR 

29288, 29298 (discussing this concern 

and requesting comments). This would 

result in double non-taxation when 

combined with the covered 

shareholder’s adjusted basis (increased 

under section 961(a)) in its top-tier CFC 

stock, which generally would not be 

reduced when section 959(c)(3) E&P is 

distributed with respect to the stock. 

Treating the sheltered E&P as PTEP 

prevents this outcome because section 

961 reduces basis for distributions of 

PTEP (thereby preventing double 

benefits) and, in a disposition, PTEP is 

not taken into account under section 

1248. 

In a case where the covered 

shareholder is not eligible for a section 

245A deduction (for example, because 

the covered shareholder is an 

individual), the covered shareholder 

would generally include the sheltered 

E&P in gross income when distributed 

by the CFC if the sheltered E&P were 

treated as section 959(c)(3) E&P. This 

would represent double taxation with 

respect to the E&P that gave rise to the 

section 961(c) basis because such E&P 

was taxed under section 951(a) or 

951A(a) when earned and would in 

effect be taxed again when the sheltered 

E&P is distributed to the covered 

shareholder. Although the covered 

shareholder’s adjusted basis under 

section 961(a) in its top-tier CFC stock 

would generally not be reduced for the 

distribution of the sheltered E&P, there 

would nevertheless be double taxation 

until or unless that basis can be utilized, 

and even in that case there may be a 

character mismatch. See also TD 9866, 

84 FR 29288, 29298 (requesting 

comments on the extent to which 

adjustments should be made to the 

operation of section 961(c) to minimize 

the potential for the same item of 

income being subject to tax more than 

once); 2006 proposed regulations, 71 FR 

51155, 51162 (noting similar concerns). 

Treating the sheltered E&P as PTEP 

prevents this outcome because a 

distribution of PTEP to a covered 

shareholder is generally excluded from 

gross income under section 959(a). 

The Treasury Department and the IRS 

also considered treating sheltered E&P 

as section 959(c)(3) E&P but reducing 

basis (including the covered 

shareholder’s adjusted basis in its toptier CFC stock) to the extent the 

sheltered E&P is eligible for a section 

245A deduction. However, this 

approach is not being proposed because 

it would raise other issues, including 

the timing of the basis reduction (either 

immediately upon creation of sheltered 

E&P, which may later cause excess 

taxation, or only upon distribution of 

sheltered E&P, which would require 

additional tracking), and would not 

address the double taxation issue for 

covered shareholders that do not qualify 

for a section 245A deduction. 


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3. Application of Section 961(c) Basis to 

Gain and Resulting PTEP 

i. In General 

The rules for applying a CFC’s 

positive section 961(c) basis with 

respect to a covered shareholder are 

generally intended to replicate the 

outcome that would occur on a sale, 

exchange, or other disposition of the 

section 961(c) ownership unit if such 

basis were an additional amount of 

adjusted basis taken into account in 

determining gain allocable to the 

covered shareholder under section 951. 

Under the proposed regulations, in a 

sale, exchange, or other disposition by 

a CFC of one or more section 961(c) 

ownership units that are shares of stock 

of a single foreign corporation 

(transferred units), the CFC first 

determines gain recognized with respect 

to the transferred units (covered gain). 

See proposed § 1.961–9(c)(1). Covered 

gain is determined on an aggregate basis 

with respect to all transferred units, 

without regard to section 961(c) basis or 

loss recognized on any transferred unit 

(and before any application of section 

964(e) or other dividend 

recharacterization provisions). Then, 

portions of the covered gain are 

assigned to covered shareholders under 

proposed § 1.951–2 (the same rules that 

assign covered distributions, discussed 

in part IV.B of the Explanation of 

Provisions), and this determines a 

covered shareholder’s share of the 

covered gain. See proposed § 1.961– 

9(d)(1). 

Next, positive section 961(c) basis is 

applied (on an aggregate basis) to each 

covered shareholder’s share of the 

covered gain, in an amount equal to the 

CFC’s positive section 961(c) basis with 

respect to the covered shareholder of the 

transferred units (but not in excess of 

such share), and subject to a limitation 

in nonrecognition transactions (similar 

to the limitation rule that applies to 

derived basis discussed in part III.D.1 of 

the Explanation of Provisions). See 

proposed § 1.961–9(d)(2), (e). This 

application of positive section 961(c) 

basis characterizes the covered 

shareholder’s share of the covered gain 

as PTEP with respect to the covered 

shareholder, and that PTEP is generally 

excluded from the CFC’s gross income 

for purposes of determining its subpart 

F income and tested income or tested 

loss. See proposed § 1.961–9(b), (d)(3); 

see also proposed § 1.961–12(c)(5) 

(Example 5). 

An aggregate approach to applying 

positive section 961(c) basis allows 

positive section 961(c) basis of a 

transferred unit to be applied to a 

portion of the covered shareholder’s 

share of the covered gain that is 

recognized with respect to another 

transferred unit. For example, in a case 

where there are two transferred units, 

one of which is sold at a loss but has 

positive section 961(c) basis with 

respect to the covered shareholder and 

the other of which is sold at a gain but 

has no section 961(c) basis with respect 

to the covered shareholder, positive 

section 961(c) basis in the first 

transferred unit will be applied to gain 

recognized with respect to the second 

transferred unit (and, to the extent so 

applied, the gain will be treated as PTEP 

and will be reduced only by any foreign 

income taxes allocated and apportioned 

to the PTEP). Aggregating positive 

section 961(c) basis in this manner is 

intended to replicate the effect of 

netting gains and losses on similar types 

of property in determining a CFC’s 

subpart F income. See section 

954(c)(1)(B) (foreign personal holding 

company income includes the portion of 

gross income that consists of the excess 

of gains over losses from the sale or 

exchange of certain property). Although 

aggregation differs from the share-byshare approach under section 961 to 

adjusting basis (including for purposes 

of determining the consequences of 

distributions of PTEP), it provides a 

simpler and more direct way of 

achieving the same effect as a share-byshare approach to the use of positive 

section 961(c) basis that allows excess 

section 961(c) basis on a particular share 

to be applied to gain recognized on 

another share of stock in the same 

foreign corporation for which there is 

not sufficient section 961(c) basis to 

fully offset the gain. See also part III.E.4 

of the Explanation of Provisions 

(discussing a rule allocating PTEP to 

shares of stock in order to facilitate the 

application of dividend 

recharacterization provisions like 

section 964(e)). 

The proposed regulations, however, 

do not allow positive section 961(c) 

basis of transferred units in excess of the 

covered shareholder’s share of the 

covered gain to be applied to other 

covered gain or to create a loss that 

reduces subpart F income or tested 

income. Allowing section 961(c) basis in 

stock of a foreign corporation to only 

reduce a section 951 inclusion 

attributable to sales, exchanges, or other 

dispositions of stock of that foreign 

corporation is consistent with the 

language of section 961(c), with the 

result that only shares of stock of the 

same foreign corporation should be 

viewed as similar types of property for 

purposes of replicating the effect of 

netting under section 961(c). Unused 

positive section 961(c) basis, however, 

may be applied to gain recognized 

pursuant to section 961(c), provided the 

gain is recognized with respect to stock 

of the foreign corporation to which the 

section 961(c) basis relates, as discussed 

in part III.G of the Explanation of 

Provisions. 

ii. Character and Dollar Basis of 

Resulting PTEP 

As discussed in part II.C of the 

Background, the character of PTEP (for 

example, the taxable year, section 904 

category, and PTEP group to which the 

PTEP relates) must be tracked to ensure 

the proper application of provisions 

regarding the treatment of PTEP. 

Accordingly, the proposed regulations 

provide rules for determining the 

character of a CFC’s PTEP with respect 

to a covered shareholder that results 

from the application of positive section 

961(c) basis to the covered shareholder’s 

share of covered gain (section 961(c) 

PTEP). See proposed § 1.961–9(d)(3) and 

(f)(1). Generally, the effect of these rules 

is to duplicate undistributed PTEP of 

lower-tier foreign corporations by 

having the PTEP ‘‘tier up’’ into the CFC, 

but without reducing PTEP of the lowertier foreign corporations, and this effect 

is analogous to the effect of section 

964(e)(1) (‘‘tiering-up’’ certain section 

959(c)(3) E&P of lower-tier foreign 

corporation in certain sales or 

exchanges of stock by a CFC). 

The proposed regulations generally 

adopt a mirroring approach, which 

provides that section 961(c) PTEP takes 

the same character as PTEP that 

transfers from the covered shareholder 

under section 959 or is eliminated (for 

example, by reason of an election under 

section 338(g)) in the sale, exchange, or 

other disposition of the transferred units 

(referred to as mirrored PTEP). See 

proposed § 1.961–9(f)(2); see also 

proposed § 1.961–12(c)(5) (Example 5). 

Mirrored PTEP is increased for foreign 

income taxes associated with such 

transferred or eliminated PTEP because 

those taxes relate to PTEP to which 

section 961(c) basis used in the 

transaction is attributable. The 

mirroring rule is intended to identify 

(and duplicate) PTEP to which section 

961(c) basis used in the transaction is 

attributable in an administrable manner 

that does not impose undue burden on 

taxpayers. Alternative approaches that 

were considered include requiring 

section 961(c) basis to be established 

and maintained with the same 

characterizations with which annual 

PTEP accounts are established and 

maintained (so that section 961(c) PTEP 

could be characterized based on section 

961(c) basis, portions of would relate to 


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each PTEP group). However, the view of 

the Treasury Department and the IRS is 

that those approaches would be unduly 

burdensome because they would 

substantially increase the information 

required to be tracked under section 

961(c). 

In some cases, section 961(c) PTEP 

may be less than mirrored PTEP. This 

could occur, for example, if a foreign 

corporation’s assets depreciate in value 

before the transaction or if mirrored 

PTEP consists of PTEP attributable to 

section 965(b) (which does not increase 

section 961(c) basis). In that case, 

section 961(c) PTEP takes the same 

character as a pro rata portion of 

mirrored PTEP. In other words, the 

mirroring rule applies but mirrored 

PTEP is pro rata reduced to equal 

section 961(c) PTEP. 

In other cases, section 961(c) PTEP 

may exceed mirrored PTEP. This could 

occur if section 961(c) basis used in the 

transaction is attributable to PTEP that 

was distributed before the transaction in 

a manner different than how the PTEP 

was expected to be distributed when the 

section 961(c) basis was provided. In 

that case, the mirroring rule applies to 

the extent of mirrored PTEP, with a 

‘‘lookback’’ rule applying to the portion 

of section 961(c) PTEP that is not 

characterized under the mirroring rule 

(excess section 961(c) PTEP). See 

proposed § 1.961–9(f)(3). Under the 

lookback rule, excess section 961(c) 

PTEP takes the same character as 

lookback PTEP, which is PTEP that 

resulted from income inclusions under 

sections 951(a) and 951A(a) of the 

covered shareholder attributable to the 

transferred units (including stock of a 

lower-tier foreign corporation owned 

through the transferred units) during a 

36-month lookback period (without any 

reduction for foreign income taxes 

imposed on that PTEP). The lookback 

rule is intended to provide an 

administrable method to approximate 

PTEP that should be viewed as 

duplicated in the transaction, while 

minimizing taxpayer burden in the 

limited cases where section 961(c) PTEP 

exceeds mirrored PTEP. Like under the 

mirroring rule, lookback PTEP is pro 

rata reduced to equal excess section 

961(c) PTEP if excess section 961(c) 

PTEP is less than lookback PTEP. 

If excess section 961(c) PTEP is 

greater than lookback PTEP, the portion 

of excess section 961(c) PTEP that is not 

characterized under the lookback rule is 

characterized as PTEP relating to the 

section 245A(d) PTEP group, the taxable 

year in which the transaction occurs, 

and the general category under section 

904(d)(1)(D). See proposed § 1.961– 

9(f)(4). The Treasury Department and 

the IRS are of the view that this rule is 

a necessary consequence of balancing 

compliance and administrative burden 

with precision under the mirroring rule 

and lookback rule, and that alternative 

characterizations could inappropriately 

incentivize transactions intended to 

distribute PTEP to which section 961(c) 

basis used in the transaction is 

attributable in a manner different than 

the manner in which the PTEP was 

expected to be distributed when the 

section 961(c) basis was provided. 

Finally, the proposed regulations 

provide that the dollar basis of section 

961(c) PTEP is equal to the U.S. dollar 

amount of section 961(c) basis giving 

rise to the PTEP. See proposed § 1.961– 

9(g). Because section 961(c) basis is 

adjusted to take into account foreign 

currency gain or loss recognized in the 

transaction (as discussed in part III.C.3 

of the Explanation of Provisions), any 

foreign currency gain or loss 

subsequently recognized with respect to 

the section 961(c) PTEP is determined 

by reference to the time the section 

961(c) PTEP comes into existence. 

4. Coordination With Dividend 

Recharacterization Provisions 

The proposed regulations provide two 

rules to coordinate with provisions of 

the Code or regulations that would treat 

covered gain, in whole or in part, as a 

dividend. The first rule provides that 

such dividend recharacterization 

provisions do not apply to the portion 

of covered gain that is PTEP. See 

proposed § 1.961–9(c)(2). Thus, for 

example, section 961(c) basis applies 

and characterizes covered gain as PTEP 

before the application of section 964(e) 

(treating gain recognized by a CFC on 

the sale or exchange of stock in a foreign 

corporation as a dividend in certain 

cases), similar to how adjusted basis 

must be taken into account to determine 

gain recognized before applying section 

964(e). 

The second rule allocates PTEP 

resulting from section 961(c) basis to 

transferred units. See proposed § 1.961– 

9(d)(5) and (h). This rule is intended to 

facilitate the application of dividend 

recharacterization provisions by 

providing certainty about the amount of 

gain with respect to a particular 

transferred unit that is treated as PTEP, 

which otherwise might be unclear in 

light of the aggregation component in 

applying positive section 961(c) basis 

(discussed in part III.E.3.i of the 

Explanation of Provisions). 

Further, the Treasury Department and 

the IRS are studying other issues 

involving dividend recharacterization 

provisions (for example, the application 

of section 1248(d)(1) in section 964(e) 

transactions) and may address these 

issues in future guidance. 

F. Gain Recognition in Transactions 

Involving Property Units With Negative 

Basis (Proposed § 1.961–10) 

To account for negative derived basis 

and negative section 961(c) basis, the 

proposed regulations provide rules that 

treat a partnership or CFC as 

recognizing gain with respect to a 

property unit. See proposed § 1.961–10. 

These rules are consistent with the 

theory of negative basis described in 

part III.C.2.v the Explanation of 

Provisions, which provides that 

negative basis is akin to a reduction to 

common basis or adjusted basis that 

only has a tax effect when the common 

basis or adjusted basis becomes relevant 

to determining taxable income in a 

transaction. 

One set of rules applies in any 

transaction in which a partnership’s 

common basis or CFC’s adjusted basis of 

a property unit is relevant in 

determining gain or loss recognized 

with respect to the property unit—for 

example, a sale or exchange of the 

property unit or a distribution under 

section 301(c)(2) on the property unit. 

See proposed § 1.961–10(b)(1) and 

(c)(1); see also proposed § 1.961–12(c)(6) 

and (7) (Examples 6 and 7). In these 

cases, the partnership or CFC is treated 

as recognizing gain with respect to the 

property unit to the extent of the 

additional amount of gain, plus the 

lesser amount of loss, that it would have 

recognized in the transaction if its 

common basis or adjusted basis of the 

property unit were reduced by all 

negative derived basis or negative 

section 961(c) basis of the property unit. 

In this way, negative basis gives rise to 

gain that reflects income that would 

exist or counteracts loss that would not 

exist if common basis or adjusted basis 

were reduced by the negative basis, 

thereby replicating the outcome that 

would occur in the transaction if 

common basis or adjusted basis were so 

reduced. 

So, for example, in a sale of a property 

unit, negative basis of the property unit 

generally gives rise to an equal amount 

of gain. In contrast, in a distribution 

under section 301(c)(2) with respect to 

a property unit or an exchange of a 

property unit under section 351, 

negative basis of the property unit gives 

rise to an amount of gain equal to the 

gain that would have been recognized 

under section 301(c)(3) or 351(b), as 

applicable, if common basis (in the case 

of a partnership) or adjusted basis (in 

the case of a CFC) were reduced by all 

negative basis of the property unit. 


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Another set of rules applies in any 

transaction in which a property unit 

loses its status as a derivative ownership 

unit or section 961(c) ownership unit. 

This could occur, for example, as a 

result of a transfer by a partnership of 

a derivative ownership unit to a foreign 

corporation in an exchange to which 

section 351 applies, or a distribution by 

a CFC of a section 961(c) ownership unit 

to a domestic corporation in a 

transaction to which sections 332 and 

337 apply. See proposed § 1.961– 

10(b)(2)(ii) and (c)(2)(ii). This could also 

occur if an upper-tier foreign 

corporation ceases to be a CFC, in which 

case shares of stock of a lower-tier 

foreign corporation directly owned by 

the upper-tier foreign corporation would 

no longer be section 961(c) ownership 

units. In these cases, the partnership or 

CFC is treated as recognizing gain with 

respect to the property unit to the extent 

of all negative derived basis or negative 

section 961(c) basis of the property unit, 

and this addresses a concern that the 

negative basis might otherwise not be 

taken into account. The Treasury 

Department and the IRS are studying to 

what extent this set of rules should be 

narrowed or eliminated in future 

guidance if a rule is adopted that 

converts one type of basis into another 

type (for example, a rule that converts 

derived basis into section 961(c) basis or 

section 961(c) basis into adjusted basis 

in a nonrecognition transaction). 

A portion of gain recognized by a 

partnership or CFC under these rules is 

allocated by the partnership or assigned 

from the CFC, as applicable, to each 

covered shareholder by multiplying the 

gain by the percentage of the aggregate 

negative basis of the property unit that 

is negative basis with respect to the 

covered shareholder. See proposed 

§ 1.961–10(b)(3) and (c)(3). This 

approach treats the gain (which may be 

less than the aggregate negative basis of 

the property unit) as relating pro rata to 

the negative basis with respect to each 

covered shareholder, thereby preventing 

a covered shareholder from 

disproportionality benefiting from 

common basis or adjusted basis that 

enabled the creation of negative basis 

(as discussed in part III.C.2.v of the 

Explanation of Provisions) and ensuring 

the tax consequences of negative basis 

are specific to the covered shareholder 

to which the negative basis relates. 

Additionally, the gain is treated in the 

same manner as gain recognized in 

connection with distributions of PTEP 

in excess of basis (discussed in part 

III.C.2.iii and iv of the Explanation of 

Provisions), which reflects that the 

negative basis giving rise to the gain 

arose as a result of prior distributions of 

PTEP. See proposed § 1.961–10(b)(4) 

and (c)(4). Thus, the gain applies for all 

purposes of the Code in the case of a 

partnership and, in the case of a CFC, 

is recognized pursuant to section 961(c) 

and applies only for purposes of 

determining amounts included in gross 

income of United States shareholders 

under the rules discussed in part III.G 

of the Explanation of Provisions. 

Further, the gain is treated as separate 

from the transaction and therefore, for 

example, does not give rise to basis 

adjustments under section 358 or 362 in 

a nonrecognition transaction. 

Lastly, after determining gain required 

to be recognized under these rules, 

negative derived basis or negative 

section 961(c) basis that causes the gain 

to be recognized is eliminated 

concurrently with the transaction. See 

proposed § 1.961–10(b)(5) and (c)(5). 

Thus, if the covered shareholder 

continues to own the property unit (for 

example, if the transaction is a section 

301(c)(2) distribution), then such 

negative basis will cease to be taken into 

account with respect to the covered 

shareholder and, if the transaction is a 

general successor transaction, then the 

negative basis will not be taken into 

account with respect to the successor 

covered shareholder. 

G. United States Shareholder Inclusions 

for Gain Recognized Under Section 

961(c) (Proposed § 1.961–11) 

1. In General 

The proposed regulations provide 

rules requiring United States 

shareholders of a CFC to include in 

gross income their allocated portions of 

the CFC’s section 961(c) income. See 

proposed § 1.961–11; see also proposed 

§ 1.961–12(c)(8) (Example 8). A CFC’s 

section 961(c) income is, for a taxable 

year of the CFC, all gain recognized by 

the CFC pursuant to section 961(c) for 

amounts in excess of basis or by reason 

of a trigger of negative section 961(c) 

basis (as discussed in parts III.C.2.iv, 

C.3, and F of the Explanation of 

Provisions). 

These rules are intended to ensure 

section 961(c) income is taken into 

account (and thus has a tax 

consequence) at the covered 

shareholder-level such that section 

961(c) basis is treated in the same 

manner as adjusted basis in directly 

held CFC stock or derived basis (where, 

for example, amounts in excess of basis 

under section 961 are always taken into 

account at the covered shareholderlevel). Specifically, a United States 

shareholder owning stock of a CFC on 

the last relevant day of a taxable year of 

the CFC must include in gross income 

its allocated amount of the CFC’s 

section 961(c) income for that taxable 

year. See proposed § 1.961–11(b). The 

amount so allocated to a United States 

shareholder is the sum of any portions 

of such section 961(c) income assigned 

to the United States shareholder under 

the section 961 regulations (adjusted, if 

applicable, for transfers of stock of the 

CFC, as discussed in part III.G.2 of the 

Explanation of Provisions), reduced by 

any loss that the CFC is treated as 

recognizing under section 961(c) with 

respect to the United shareholder. See 

proposed § 1.961–11(c). 

This loss under section 961(c) is equal 

to the CFC’s positive section 961(c) 

basis with respect to the United States 

shareholder of section 961(c) ownership 

units sold, exchanged, or disposed of by 

the CFC in the taxable year, but only to 

the extent the positive section 961(c) 

basis is not applied to covered gain, and 

subject to two limitations. See proposed 

§ 1.961–11(e). Under the first limitation, 

positive section 961(c) basis can create 

or increase a loss under section 961(c) 

only if the CFC recognizes, or would 

recognize, loss on the sale, exchange, or 

other disposition and a current 

deduction in respect of the loss is, or 

would be, allowable. Under the second 

limitation, positive section 961(c) basis 

can create or increase a loss under 

section 961(c) only to the extent of the 

amount of section 961(c) income that 

both is otherwise allocable to the United 

States shareholder and relates to stock 

of the same foreign corporation to which 

the positive section 961(c) basis relates. 

This is consistent with the same foreign 

corporation limitation for applying 

positive section 961(c) basis to covered 

gain (discussed in part III.E.3.i of the 

Explanation of Provisions). 

The United States shareholder 

includes its allocated amount of section 

961(c) income in gross income in its 

taxable year in which or with which the 

CFC’s taxable year ends, and the 

allocated amount is treated in the same 

manner as an amount included in gross 

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

purposes of applying sections 961 and 

989(b). See proposed § 1.961–11(b). 

Thus, under section 961, the inclusion 

increases basis in the United States 

shareholder’s stock of the CFC and any 

property units through which the 

United States shareholder owns stock of 

the CFC, consistent with how a subpart 

F income inclusion increases basis. The 

inclusion does not increase the CFC’s 

PTEP, however, because the section 

961(c) income does not give rise to E&P 

at the level of the CFC, and thus there 

is no amount related to the inclusion 

satisfying section 959’s description of 

PTEP (E&P attributable to amounts 


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which are, or have been, included in 

gross income under section 951(a)). 

Moreover, increasing basis but not PTEP 

helps to ensure that gain is not 

recognized on subsequent distributions 

of PTEP the distribution of which gave 

rise to the section 961(c) income. 

2. Adjustments for Transfers of CFC 

Stock 

The proposed regulations provide 

additional rules in allocating a CFC’s 

section 961(c) income for a taxable year 

if stock of the CFC is transferred during 

the taxable year. See proposed § 1.961– 

11(d). These rules are necessary because 

gain comprising section 961(c) income 

is assigned to covered shareholders at 

the time of the transaction giving rise to 

the gain (for example, a distribution in 

excess of basis) but, due to a transfer of 

stock of the CFC, a covered shareholder 

to which a portion of the gain is 

assigned may not own stock of the CFC 

stock on the last relevant day of the 

CFC’s taxable year. 

One set of rules applies if the CFC is 

an acquired foreign corporation in a 

general successor transaction that 

occurs during the taxable year. See 

proposed § 1.961–11(d)(1). In such a 

case, if the general successor transaction 

occurs before the last relevant day of the 

taxable year, then a pro rata portion of 

section 961(c) income that is recognized 

before the general successor transaction 

and assigned to the transferor covered 

shareholder is treated as instead 

assigned to the successor covered 

shareholder. Alternatively, if the general 

successor transaction occurs on or after 

the last relevant day of the taxable year, 

then a pro rata portion of section 961(c) 

income that is recognized after the 

general successor transaction and 

assigned to the successor covered 

shareholder is treated as instead 

assigned to the transferor covered 

shareholder. In both cases, the pro rata 

portion is determined based on the 

percentage of the CFC’s section 961(c) 

basis that transfers in the general 

successor transaction. 

A second set of rules applies the 

principles of the first set of rules to 

transactions, other than general 

successor transactions, in which the 

CFC’s section 961(c) basis is transferred 

to another covered shareholder. See 

proposed § 1.961–11(d)(2). 

IV. Section 951 Regulations 

A. Overview 

The proposed regulations under 

section 951 provide two coordinated 

sets of rules regarding the assignment 

and allocation of covered items, which 

are gross income of a foreign 

corporation consisting of covered 

distributions or covered gains. One set 

applies at the foreign corporation-level 

to assign covered items to covered 

shareholders, with these rules 

identifying the portions of covered 

items to which attributes specific to a 

covered shareholder (PTEP or section 

961(c) basis) may be applied to exclude 

such portions under section 959(b) or 

961(c). See proposed § 1.951–2 

(discussed in part IV.B of the 

Explanation of Provisions). The other 

set applies at the shareholder-level to 

allocate a CFC’s subpart F income to 

United States shareholders, with these 

rules ensuring that the CFC’s subpart F 

income attributable to covered items is 

allocated consistently with how the 

covered items were assigned under the 

first set of rules. See proposed § 1.951– 

1(c) (discussed in part IV.C of the 

Explanation of Provisions). 

B. Foreign Corporation-Level Rules for 

Assigning Covered Items (Proposed 

§ 1.951–2) 

1. In General 

The proposed regulations assign 

portions of a foreign corporation’s 

covered items to covered shareholders 

that own stock of the foreign 

corporation during the foreign 

corporation’s taxable year in which the 

covered items are received or 

recognized by the foreign corporation. 

See proposed § 1.951–2(b). The 

assignments are done on a covered-itemby-covered-item basis, in each case first 

by assigning the covered item under a 

general assignment rule, and then by 

adjusting assignments for any general 

successor transactions. 

2. General Assignment Rule 

The general assignment rule assigns a 

pro rata portion of a covered item of a 

foreign corporation to each covered 

shareholder that owns stock of the 

foreign corporation on the last relevant 

day of the foreign corporation’s taxable 

year in which the covered item is 

received or recognized by the foreign 

corporation (that is, the last day of such 

taxable year on which the foreign 

corporation is a CFC). See proposed 

§ 1.951–2(c)(1); see also proposed 

§ 1.951–2(h)(3)(i) (Example 1). The pro 

rata portion is determined based on the 

percentage of the foreign corporation’s 

allocable E&P for the taxable year that 

would be allocated to the covered 

shareholder in the hypothetical 

distribution described in § 1.951–1(e), 

applied by treating allocable E&P as 

equal to the greater of the foreign 

corporation’s E&P for the taxable year 

and all covered items of the foreign 

corporation. See proposed § 1.951–2(d). 

By applying § 1.951–1(e) in this way, 

the general assignment rule is consistent 

with the principles of the pro rata share 

rules under section 951(a). See § 1.951– 

1(e). 

3. Adjustments for General Successor 

Transactions 

A foreign corporation that is an 

acquired foreign corporation in a 

general successor transaction that 

occurs before the last relevant day of a 

taxable year of the foreign corporation 

may receive or recognize a covered item 

before the general successor transaction 

(pre-transaction covered item). In that 

case, the general successor transaction 

could preclude PTEP or section 961(c) 

basis with respect to the transferor 

covered shareholder from being applied 

to the covered item (as a result of 

reducing the allocation of the foreign 

corporation’s E&P to the covered 

shareholder in the hypothetical 

distribution described in § 1.951–1(e) 

and therefore reducing the covered 

shareholder’s assignment under the 

general assignment rule). This could 

inappropriately separate PTEP and basis 

from the appropriate covered 

shareholder. 

To illustrate this issue, assume US1 is 

a covered shareholder and each of CFC1 

and CFC2 is a CFC with a calendar 

taxable year. On January 1 of year 1, 

US1 owns all the stock of CFC1, and 

CFC1 owns all the stock of CFC2. On 

June 30 of year 1, CFC2 makes a $100x 

covered distribution to CFC1, which 

immediately makes a $100x covered 

distribution to US1. On September 30 of 

year 1, US1 sells all its stock of CFC1 

to US2, an unrelated covered 

shareholder in what constitutes a 

general successor transaction. Without 

regard to the covered distributions, 

CFC2 has $100x of PTEP with respect to 

US1 (relating to the prior year) and 

CFC1 has $0 of PTEP. 

Under the general assignment rule, 

the entire $100x of the covered 

distribution received by CFC1 would be 

assigned to US2 (the covered 

shareholder owning all the stock of 

CFC1 on December 31 of year 1, the last 

relevant day of CFC1’s taxable year). As 

a result, no PTEP would be applied to 

either covered distribution (and each 

covered distribution would reduce the 

distributing CFC’s section 959(c)(3) E&P 

by $100x). 

The proposed regulations include 

additional rules to address this issue. 

Specifically, the additional rules 

increase the portion of a pre-transaction 

covered item that otherwise (without 

the additional rules) would be assigned 

to the transferor covered shareholder 


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and correspondingly decrease the 

portions of the item that otherwise 

(without the additional rules) would be 

assigned to connected covered 

shareholders. See proposed § 1.951–2(e); 

see also proposed § 1.951–2(h)(3)(ii) 

(Example 2). A connected covered 

shareholder means the successor 

covered shareholder (or any other 

covered shareholder owning the stock 

acquired in the general successor 

transaction, in the case of back-to-back 

general successor transactions, for 

example) and any covered shareholder 

related to such covered shareholder 

(determined under section 267(b) or 

707(b)). See proposed § 1.951–2(g). 

Thus, in the example above, the 

additional rules assign all the covered 

distribution received by CFC1 to US1 

(rather than to US2, a connected 

covered shareholder), and $100x of 

CFC2’s PTEP with respect to US1 is 

applied to the covered distribution 

(which, in turn, increases CFC1’s PTEP 

with respect to US1 by $100x). As a 

result, that covered distribution is 

treated in the same manner as if the sale 

had not occurred, and $100x of CFC1’s 

PTEP with respect to US1 is then 

available to be (and in fact is) 

distributed by CFC1 to US1. If, instead, 

CFC1 did not make a covered 

distribution before the sale, then $100x 

of PTEP of CFC1 with respect to US1 

would transfer from US1 to US2 in the 

sale. 

Subject to two limitations, the 

increase to the transferor covered 

shareholder’s assignment is equal to the 

additional amount of the pre-transaction 

covered item that would have been 

assigned to the transferor covered 

shareholder if the date on which the 

covered item is received or recognized 

were the last relevant day and the 

hypothetical distribution for purposes of 

the general assignment rule were treated 

as made immediately before the covered 

item is received or recognized. See 

proposed § 1.951–2(e)(2)(i). In this way, 

the transferor covered shareholder’s 

assignment of a pre-transaction covered 

item is, as illustrated above, generally 

consistent with what would have been 

its assignment if the general successor 

transaction and any subsequent 

transactions that change the ownership 

of stock of the acquired foreign 

corporation (for example, issuances of 

stock by the acquired foreign 

corporation) had not occurred. 

With the limitations, the increase 

applies only to the extent it results in 

additional PTEP or section 961(c) basis 

with respect to the transferor covered 

shareholder being applied to the pretransaction covered item, and the 

increase cannot exceed the portions of 

the covered item that otherwise 

(without the additional rules) would be 

assigned to connected covered 

shareholders. See proposed § 1.951– 

2(e)(2)(iii). Thus, the additional rules 

only shift an assignment of gross income 

identified under the principles of 

section 951(a) as allocable to covered 

shareholders that bear a defined 

relationship to the transferor covered 

shareholder (through the general 

successor transaction or relatedness). 

The Treasury Department and the IRS 

are of the view that this approach 

reasonably balances the policies of the 

general assignment rule (following the 

principles of section 951(a)) and the 

additional rules (assuring the tax 

consequences of PTEP and basis remain 

with the appropriate covered 

shareholder). 

The corresponding decrease applies, 

first, to assignments of connected 

covered shareholders owning, on the 

last relevant day, stock acquired in the 

general successor transaction and, next, 

to assignments of other connected 

covered shareholders, in each case on a 

pro rata basis. See proposed § 1.951– 

2(e)(3) and (4). With this ordering, 

assignments of such other connected 

covered shareholders are decreased only 

if their ownership of stock of the 

acquired foreign corporation increases 

after the general successor transaction. 

The Treasury Department and the IRS 

are of the view that applying the 

additional rules to such other connected 

covered shareholders maintains the 

integrity of the additional rules (for 

example, by preventing issuances to 

covered shareholders related to the 

successor covered shareholder from 

reducing the application of the 

additional rules, as could otherwise 

occur because the issuances would have 

the effect of reducing the successor 

covered shareholder’s assignment under 

the general assignment rule, which, in 

turn, would limit the increase to the 

transferor covered shareholder’s 

assignment). 

Similar additional rules apply if a 

foreign corporation is an acquired 

foreign corporation in a general 

successor transaction that occurs on or 

after the last relevant day of a taxable 

year of the foreign corporation and the 

foreign corporation receives or 

recognizes a covered item after the 

general successor transaction. See 

proposed § 1.951–2(e)(2)(ii). In these 

cases, the additional rules increase the 

portion of such an item that otherwise 

(without the additional rules) would be 

assigned to the successor covered 

shareholder, generally by 

correspondingly decreasing the portion 

of the item that otherwise (without the 

additional rules) would be assigned to 

the transferor covered shareholder. See 

also proposed § 1.951–2(h)(3)(iii) 

(Example 3). 

C. Shareholder-Level Rules for 

Allocating Subpart F Income (Proposed 

§ 1.951–1) 

Under § 1.951–1 (and as discussed in 

part II.B.1 of the Background), a CFC’s 

subpart F income is allocated to each 

United States shareholder of the CFC 

based on a fraction, the numerator of 

which is the United States shareholder’s 

share of the CFC’s allocable E&P, and 

denominator of which is the CFC’s 

allocable E&P. See § 1.951–1(e). The 

amount of subpart F income so allocated 

to a United States shareholder is the 

United States shareholder’s pro rata 

share of the foreign corporation’s 

subpart F income, subject to certain 

adjustments. See § 1.951–1(b); see also 

§ 1.951A–1(d) (determining pro rata 

shares of tested income in the same 

manner). 

If a CFC’s subpart F income 

attributable to covered items were 

allocated to United States shareholders 

in the same manner, the income might 

be allocated differently than how the 

covered items were assigned at the CFClevel as part of determining the extent 

to which the covered items are PTEP 

excluded from the CFC’s gross income 

under section 959(b) or 961(c). See also 

proposed § 1.951–2 (assignment rules, 

discussed in part IV.B of the 

Explanation of Provisions). This could 

cause the tax consequences of PTEP or 

section 961(c) basis to not be specific to 

the United States shareholder to which 

such attribute relates, which would be 

inconsistent with the shareholderspecific nature of sections 959(b) and 

961(c) and could result in partial double 

taxation to the United States 

shareholder. 

For instance, assume two unrelated 

United States shareholders are assigned 

equal portions of covered gain 

recognized by a CFC, with the half 

assigned to one United States 

shareholder characterized as PTEP 

excluded from the CFC’s gross income 

under section 961(c) (because there is 

positive section 961(c) basis with 

respect to the United States shareholder 

at least equal to such shareholder’s 

share of the covered gain) and the half 

assigned to the other United States 

shareholder characterized as subpart F 

income (because there is no section 

961(c) basis with respect to the other 

United States shareholder and no 

exception from subpart F income 

applies). In such a case, the Treasury 

Department and the IRS are of the view 

that allocating half of the subpart F 


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income from the covered gain to each 

United States shareholder would be 

inconsistent with sections 951(a) and 

961(c), as doing so would cause the 

United States shareholders to share both 

any benefits of the section 961(c) 

exclusion and any detriments of the 

inclusion in subpart F income. 

To address this, the proposed 

regulations modify § 1.951–1 so that a 

CFC’s subpart F income attributable to 

covered items is separately allocated to 

United States shareholders. See 

proposed § 1.951–1(c)(1); see also 

proposed § 1.951–1(h)(2)(ii) (Example 

1). Subpart F income attributable to 

covered items is determined on a 

covered-item-by-covered-item basis, and 

in each case is the portion of the 

covered item that is included in the 

CFC’s foreign base company income 

(adjusted net foreign base company 

income as defined in § 1.954–1(a)(5)) or 

insurance income (adjusted net 

insurance income as defined in § 1.954– 

1(a)(6)). See proposed § 1.951–1(c)(2)(i). 

The proposed regulations facilitate these 

determinations by treating each portion 

of gross foreign base company income 

(as defined in § 1.954–1(a)(2)) that 

consists of a covered item as a single 

item of income. See proposed § 1.954– 

1(c)(1)(iii)(C). 

Subpart F income attributable to a 

covered item is allocated to United 

States shareholders consistently with 

how the covered item was assigned at 

the CFC-level as part of determining the 

extent to which the covered item is 

PTEP excluded from the CFC’s gross 

income under section 959(b) or 961(c). 

Specifically, subpart F income 

attributable to a covered item is 

allocated to each United States 

shareholder based on a fraction, the 

numerator of which is the portion of the 

covered item that is both assigned at the 

CFC-level to the United States 

shareholder and included in the CFC’s 

adjusted gross foreign base company 

income or adjusted gross insurance 

company income (as defined in § 1.954– 

1(a)(3) or (6)), and the denominator of 

which is the portion of the covered item 

that is included in adjusted gross 

foreign base company income or 

adjusted gross insurance company 

income. See proposed § 1.951– 

1(c)(2)(ii). In this way, a United States 

shareholder’s pro rata share of subpart 

F income attributable to a covered item 

is the subpart F income that results from 

the United States shareholder’s assigned 

portion of the covered item. 

Then, remaining subpart F income 

(that is, subpart F income not 

attributable to covered items) is 

allocated pro rata to United States 

shareholders in accordance with 

existing § 1.951–1. Specifically, such 

subpart F income is allocated to each 

United States shareholder based on a 

fraction, the numerator of which is the 

United States shareholder’s share of the 

CFC’s allocable E&P (determined under 

§ 1.951–1(e)), and the denominator of 

which is the CFC’s allocable E&P. See 

proposed § 1.951–1(c)(2)(iii). 

Thus, under the proposed regulations, 

the effect of sections 959(b) and 961(c) 

on allocations under section 951(a) is 

limited to ensuring that any benefits of 

the application of the relevant exclusion 

to a portion of a covered item, or any 

detriments of an inclusion of such 

portion in subpart F income, generally 

inure only to the United States 

shareholder to which the portion was 

assigned in determining the extent to 

which the portion is excludable PTEP. 

Accordingly, under the proposed 

regulations, sections 959(b) and 961(c) 

do not affect the allocation of subpart F 

income attributable to gross income not 

eligible for exclusion under those 

sections. Similarly, the proposed 

regulations do not affect the allocation 

of tested items under section 951A. See 

proposed § 1.951A–1(d) (pro rata shares 

of tested income, tested loss, and 

qualified business asset investment are 

determined in the same manner as the 

determination of pro rata shares of 

subpart F income not attributable to 

covered items); see also § 1.951A– 

1(d)(5) and (6) (pro rata shares of tested 

interest expense and tested interest 

income determined by reference to pro 

rata shares of tested income and tested 

loss, as applicable). 

An alternative approach that treated 

the allocation of subpart F income 

attributable to covered items as altering 

the manner in which other income of 

the CFC is allocated would require 

broader revisions to § 1.951–1. Under 

this type of approach, a CFC would be 

treated as having four types of allocable 

income, which together would equal 

allocable E&P: subpart F income, tested 

income, excludable PTEP income (that 

is, PTEP that is distributed to, or results 

from section 961(c) basis of, the CFC 

and is excluded from the CFC’s gross 

income under section 959(b) or 961(c), 

reduced by current year taxes allocated 

and apportioned thereto), and residual 

income (equal to the excess of the CFC’s 

E&P for the taxable year over the sum 

of the other types of income). A United 

States shareholder’s share of the CFC’s 

allocable E&P would be treated as first 

relating to income attributable to 

covered items, with any remaining 

portion of the share treated as relating 

on a pro rata basis to all other income. 

However, this approach would generally 

produce the same results as the 

approach in the proposed regulations, 

except in cases where a deductible item 

(other than current year taxes) 

disproportionately reduces a covered 

item (because some, but not all, of the 

covered item is excludable PTEP and 

thus the deduction reduces only the 

non-PTEP portion of the covered item). 

Moreover, the Treasury Department and 

the IRS are of the view that sections 

959(b) and 961(c) do not require such an 

approach. 

Lastly, the Treasury Department and 

the IRS request comments on whether 

additional rules are warranted for 

allocating tested items in cases where a 

covered item is excluded from subpart 

F income by reason of section 

954(b)(3)(A)’s de minimis rule and may 

consequently give rise to tested income 

(which, under the proposed regulations, 

would be allocated under the rules for 

subpart F income not attributable to 

covered items). 

V. Section 986(c) Regulations (Proposed 

§ 1.986(c)–1) 

A. Overview 

The proposed regulations under 

section 986(c) describe the 

circumstances in which a covered 

shareholder recognizes foreign currency 

gain or loss with respect to PTEP and 

provide rules for determining the 

amount of gain or loss that is 

recognized. These rules are issued 

pursuant to the express delegations of 

authority under sections 986(c)(2), 

965(o), and 989(c). See also part VIII.F 

of the Explanation of Provisions 

(proposing to withdraw or studying 

whether to withdraw provisions 

regarding foreign currency gain or loss 

in §§ 1.985–5 and 1.985–7). 

B. Circumstances in Which Foreign 

Currency Gain or Loss Is Recognized 

Under the proposed regulations, a 

covered shareholder recognizes foreign 

currency gain or loss under section 

986(c) with respect to PTEP in two 

circumstances. See proposed § 1.986(c)– 

1(b)(1). The first circumstance is when 

PTEP is distributed to the covered 

shareholder (including PTEP treated as 

received through a partnership). The 

second circumstance is when PTEP 

ceases to be with respect to the covered 

shareholder (for example, as a result of 

being transferred to another covered 

shareholder in a general successor 

transaction or eliminated as a 

consequence of an election under 

section 338(g)). These rules, which are 

generally consistent with the 1988 

notice, provide parity between 

distributions of PTEP and dispositions 

of foreign stock that in each case present 


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the last opportunity for the covered 

shareholder to recognize foreign 

currency gain or loss with respect to 

PTEP. 

The proposed regulations provide that 

no foreign currency gain or loss is 

recognized in a distribution of PTEP to 

a foreign corporation. See proposed 

§ 1.986(c)–1(c). In these cases, the 

Treasury Department and the IRS are of 

the view that preserving the dollar basis 

of the PTEP (through adjustments to 

shareholder-level dollar basis pools) is 

the appropriate application of section 

986(c) at the time of the distribution, 

with such dollar basis then determining 

foreign currency gain or loss when the 

PTEP is subsequently distributed to the 

covered shareholder. 

Foreign currency gain or loss is also 

generally not recognized (and dollar 

basis is preserved) when PTEP transfers 

in a transaction other than a general 

successor transaction (for example, a 

transfer of stock of a CFC by a domestic 

corporation to a non-consolidated 

domestic corporation in a section 351 

transaction). See proposed § 1.986(c)– 

1(b)(5); but see § 1.367(b)–2(j)(2)(i). This 

rule limits the ability to recognize 

foreign currency gain or loss in 

nonrecognition transactions or other 

transactions where gain or loss is 

generally not recognized. Comments are 

requested on this rule and, more 

generally, whether foreign currency gain 

or loss should not be recognized and 

thus deferred in sales or other 

transactions involving related parties. 

Foreign currency gain or loss 

recognized with respect to PTEP is 

recognized concurrently with the 

transaction requiring recognition of 

such gain or loss. See proposed 

§ 1.986(c)–1(b)(4). Additionally, the 

foreign currency gain or loss is treated 

as ordinary income or loss from the 

same source and relating to the same 

section 904 category as the income 

inclusion that gave rise to the PTEP 

(consistent with the rule in § 1.904–4(p) 

for distributions of PTEP). See also 

proposed § 1.961–5(b) (adjusting basis 

for foreign currency gain or loss 

recognized in a transaction other than a 

distribution, as discussed in part III.C.3 

of this Explanation of Provisions). 

C. Determining Foreign Currency Gain 

or Loss 

Foreign currency gain or loss with 

respect to PTEP is determined by 

translating the PTEP (which is 

denominated in the foreign 

corporation’s functional currency) into 

U.S. dollars at the spot rate on the day 

of the transaction requiring recognition 

of such gain or loss and subtracting from 

that U.S. dollar amount the dollar basis 

of the PTEP. See proposed § 1.986(c)– 

1(b)(2); see also proposed § 1.959– 

10(c)(2) (Example 2). A positive 

difference is foreign currency gain and 

the absolute value of a negative 

difference is foreign currency loss. 

As a result, foreign currency gain or 

loss with respect to PTEP is based on 

movements in exchange rates between 

the time of the income inclusion giving 

rise to the PTEP (translated pursuant to 

the appropriate exchange rate) or, if 

applicable, the most recent prior 

transfer of the PTEP (treated as the 

deemed distribution described in 

section 986(c)(1)), and the date of the 

transaction requiring recognition of 

such gain or loss (treated as the actual 

distribution described in section 

986(c)(1)). 

D. Limitations 

Consistent with existing § 1.986(c)–1 

(discussed in part II.C.3 of the 

Background of this preamble), only a 

portion of foreign currency gain or loss 

with respect to PTEP resulting from 

section 965(a) is recognized, based on 

the section 965(c) deduction percentage 

with respect to the PTEP, and no foreign 

currency gain or loss is recognized with 

respect to PTEP resulting from section 

965(b). See proposed § 1.986(c)– 

1(b)(3)(i) and (ii). Further, no foreign 

currency gain or loss is recognized with 

respect to taxable section 962 PTEP 

because such PTEP is included in gross 

income pursuant to section 962(d) and, 

therefore, the foreign currency gain or 

loss is accounted for in gross income. 

See proposed § 1.986(c)–1(b)(3)(iii). 

VI. Section 960 Regulations (Proposed 

§§ 1.960–1 and1.960–3) 

Current §§ 1.960–1 and 1.960–2 

provide rules for computing the amount 

of foreign income taxes deemed paid 

under section 960(a) and (d), and 

current §§ 1.960–1 and 1.960–3 provide 

rules for computing the amount of 

foreign income taxes deemed paid 

under section 960(b). The PTEP 

accounting rules under proposed 

§ 1.959–2 replace the rules in current 

§ 1.960–3 that describe a CFC’s PTEP, 

and the rules allocating and 

apportioning current year taxes to PTEP 

in proposed § 1.959–6 replace the rules 

in current § 1.960–1 for purposes of 

applying section 960(b). Other rules 

relating to PTEP that are included in 

current §§ 1.960–1 and 1.960–3 have 

also been replaced by rules in the 

proposed regulations under section 959 

to ensure conformity and proper 

tracking of amounts described in 

sections 959 and 960(b). Current 

§§ 1.960–1 through 1.960–3, as modified 

by proposed §§ 1.960–1 and 1.960–3, 

will generally continue to describe how 

deemed paid taxes are computed under 

section 960, and incorporate updates to 

coordinate those rules with the 

proposed regulations under sections 959 

and 961. 

Proposed § 1.960–1 limits the rules in 

§ 1.960–1 to the computation of deemed 

paid taxes under section 960(a) and (d). 

To this end, proposed § 1.960–1 treats a 

CFC’s PTEP arising by reason of a PTEP 

realization event during its taxable year 

as gross income in a residual income 

group, rather than as gross income in a 

PTEP group. See proposed § 1.960– 

1(d)(2)(ii)(D). However, proposed 

§ 1.959–6 provides specific rules for 

allocating and apportioning current year 

taxes arising by reason of a PTEP 

realization event that occurred during a 

taxable year to the statutory groupings 

of PTEP of a foreign corporation. 

Additionally, proposed § 1.959–2 

generally provides rules for tracking the 

foreign income taxes associated with 

PTEP. See parts II.F and II.B of the 

Explanation of Provisions for a 

discussion of proposed §§ 1.959–6 and 

1.959–2, respectively. Finally, proposed 

§ 1.960–1(d)(3)(ii)(B) (consistent with 

current § 1.960–1(d)(3)(ii)(B)) provides 

specific rules for assigning foreign gross 

income to the statutory and residual 

groupings of income of a CFC when the 

CFC pays or accrues current year taxes 

with respect to a PTEP realization event 

that occurs in a different U.S. taxable 

year. Proposed § 1.960–1 also includes 

changes to current § 1.960–1 to conform 

with the approach and terminology used 

in the proposed regulations under 

sections 959 and 961 and in proposed 

§ 1.960–3. 

Proposed § 1.960–3 provides rules for 

determining foreign income taxes that 

are deemed paid under section 960(b) 

with respect to the receipt of a 

distribution of PTEP, primarily by 

reference to PTEP tax pools. In 

particular, the foreign income taxes that 

are properly attributable to a 

distribution of PTEP are the foreign 

income taxes removed from the 

corporate PTEP tax pools of the 

distributing CFC under proposed 

§ 1.959–2(d)(2) and the PTEP tax pools 

of the covered shareholder under 

§ 1.959–3(e)(1)(iii) (that is, the foreign 

income taxes associated with the 

distributed PTEP under proposed 

§ 1.959–4), but only to the extent the 

foreign income taxes are in the 

creditable PTEP tax group immediately 

before the distribution. 

These rules are issued pursuant to the 

express delegation of authority under 

section 960(f). 


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VII. Section 1502 Regulations (Proposed 

§ 1.1502–59) 

The proposed regulations provide 

rules specific to members of a 

consolidated group. See proposed 

§ 1.1502–59. These rules are issued 

pursuant to the express delegation of 

authority under section 1502. 

The proposed regulations provide that 

members of a consolidated group are 

treated as a single covered shareholder 

for purposes of section 959 and the 

regulations thereunder. See proposed 

§ 1.1502–59(c). This approach is 

consistent with guidance on the 

application of other international tax 

rules to consolidated groups (for 

example, §§ 1.1502–50, 1.1502–51, and 

1.1502–80(j)). 

Consequently, a consolidated group 

maintains only a single set of annual 

PTEP accounts, dollar basis pools, and 

PTEP tax pools with respect to a foreign 

corporation whose stock is owned by 

one or more members. These annual 

PTEP accounts track the foreign 

corporation’s PTEP with respect to the 

group and thus, for example, determine 

whether a covered distribution received 

by any member of the group from the 

foreign corporation is a distribution of 

PTEP. 

This application of single-entity 

treatment is important to ensure the 

proper reflection of the consolidated 

group’s income. Without the application 

of single-entity treatment for purposes 

of shareholder-level PTEP accounting, a 

consolidated group effectively could 

elect in or out of PTEP distributions by 

changing the structure through which it 

owns stock of foreign corporations. For 

example, assume that a member of a 

consolidated group (M1) owns all the 

stock of CFC and has a subpart F income 

inclusion of $100x in year 1 with 

respect to CFC. Absent single-entity 

treatment, M1, and not the consolidated 

group, would have $100x of PTEP in its 

annual PTEP accounts with respect to 

CFC. In year 2, the first $100x of 

covered distributions from CFC would 

be characterized as distributions of 

PTEP. However, if another member (M2) 

made a contribution to CFC at the 

beginning of year 2 in exchange for 50% 

of the stock of CFC, only the first $100x 

of covered distributions to M1, and no 

covered distribution to M2, would be 

characterized as a distribution of PTEP. 

Therefore, if CFC made a pro rata 

covered distribution of $100x, only $50x 

would be characterized as PTEP. 

Applying single-entity treatment thus 

ensures that changes in the location of 

ownership of foreign stock within a 

consolidated group do not change the 

group’s characterization of a 

distribution by the foreign corporation. 

In contrast, the proposed regulations 

incorporate a mix of single- and 

separate-entity treatment for purposes of 

section 961 in order to prevent basis 

shifting between members. See 

proposed § 1.1502–59(d); see also part 

III.C.2.ii of the Explanation of 

Provisions (describing how, outside of 

the consolidated group context, basis 

cannot be shared among section 961(a) 

ownership units even if owned by the 

same covered shareholder). The 

proposed regulations respect each 

member’s separate basis in its directly 

held property units, and adjustments to 

the basis of section 961(a) ownership 

units are thus computed on a separateentity basis. Consequently, a 

distribution of PTEP may result in the 

recognition of gain under section 

961(b)(2) if the distributee member has 

insufficient basis in a section 961(a) 

ownership unit. The Treasury 

Department and the IRS are of the view 

that an approach like that in the 2006 

proposed regulations, in which one 

member may access basis belonging to 

another member, would create 

opportunities for inappropriate tax 

planning by shifting basis among 

members in a way that does not reflect 

the economics of the members’ 

investments. 

For indirectly held property units (for 

example, lower-tier CFC stock), a 

consolidated group is treated as a single 

covered shareholder. For example, a 

partnership has only a single derived 

basis in a derivative ownership unit 

with respect to a group, and, similarly, 

a CFC has only a single section 961(c) 

basis in a section 961(c) ownership unit 

with respect to a group and increases to 

derived basis and section 961(c) basis 

generally are computed on a singleentity basis. However, the proposed 

regulations also include rules to prevent 

basis shifting among members with 

respect to these property units, because 

member shareholders may have 

different bases in these property units 

under other rules (for example, under 

section 743(b)). When computing 

reductions in basis to derivative 

ownership units or section 961(c) 

ownership units, the proposed rules 

provide that the group basis of the 

relevant property unit is allocated to the 

member shareholders, the basis 

reduction is computed separately for 

each member (and may trigger gain if 

there is insufficient basis), and then the 

basis is recombined. 

The proposed regulations also provide 

rules for corporations that become or 

cease to be members of a consolidated 

group. See proposed § 1.1502–59(e). 

These rules generally implement singleentity treatment by mirroring the 

principles that would apply if members 

of the group were divisions of a single 

corporation. For example, if a 

shareholder of a foreign corporation 

joins a consolidated group, solely for 

purposes of applying sections 959 and 

961, the transaction is treated as if the 

group directly acquired the stock in the 

foreign corporation. Similarly, if a 

shareholder of a foreign corporation 

ceases to be a member of a consolidated 

group, solely for purposes of applying 

sections 959 and 961, the transaction is 

treated as if the group directly disposed 

of the stock in the foreign corporation. 

When the proposed regulations are 

finalized, the Treasury Department and 

the IRS intend to conform the 

terminology in § 1.1502–80(j) (treating a 

consolidated group as a single United 

States shareholder for purposes of 

applying section 951(a)(2)(B) to 

distributions of PTEP from one CFC to 

another) to match these regulations, and 

may relocate that rule to § 1.1502–59. 

VIII. Miscellaneous Provisions 

A. S Corporations 

Consistent with section 1373(a), the 

proposed regulations generally treat an 

S corporation in the same manner as a 

domestic partnership and thus as not a 

covered shareholder. See proposed 

§§ 1.959–1(c)(1) and 1.961–1(c)(1). 

When this treatment applies, each 

owner of the S corporation maintains 

annual PTEP accounts, dollar basis 

pools, and PTEP tax pools (as 

applicable) with respect to a foreign 

corporation in which the S corporation 

owns stock (rather than the S 

corporation itself). Also, like domestic 

partnerships, an S corporation is 

provided derived basis in a derivative 

ownership unit directly owned by the S 

corporation. 

Notwithstanding the general rule that 

an S corporation is not treated as a 

covered shareholder, an exception 

provides that an S corporation is a 

covered shareholder for any taxable year 

of the S corporation for which the S 

corporation is treated as an entity 

separate from its owners in determining 

stock ownership for purposes of section 

951(a) or 951A(a). See proposed 

§§ 1.959–11(d) and 1.961–13(c); see also 

part IX.B.5 of the Explanation of 

Provisions (describing transition rules 

applicable to domestic partnerships, 

including S corporations). Thus, the 

exception applies if the S corporation 

has made an election described in 

§ 1.958–1(e), as proposed to be amended 

at 87 FR 3890 (Jan. 25, 2022), or section 

3.02 of Notice 2020–69, 2020–39 I.R.B. 


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604. Accordingly, an S corporation is a 

covered shareholder if such election is 

in effect and the S corporation thus 

includes amounts in gross income under 

sections 951(a) and 951A(a). 

Where the exception applies to an S 

corporation (and thus both the S 

corporation and its owners are covered 

shareholders), rules relating to 

distributions of PTEP, derived basis (of 

a partnership that is owned by the S 

corporation), and section 961(c) basis (of 

a CFC that is owned by the S 

corporation) apply to the S corporation 

in its capacity as a covered shareholder 

before those rules apply to an owner of 

the S corporation. See proposed 

§§ 1.959–11(d) and 1.961–13(c). For 

example, a covered distribution made to 

the S corporation is first a distribution 

of the distributing foreign corporation’s 

PTEP with respect to the S corporation, 

and then, to the extent remaining, a 

distribution of the distributing foreign 

corporation’s PTEP with respect to 

owners of the S corporation. 

B. Passive Foreign Investment 

Companies 

The proposed regulations do not 

address passive foreign investment 

companies (PFICs) (as defined in 

1297(a)) or a PFIC’s earnings and profits 

described in section 1293(c). The 

Treasury Department and the IRS are 

studying issues involving PFICs, 

including coordination of sections 959 

and 1293(c), and may address these 

issues in future guidance. 

C. Foreign Trusts and Foreign Estates 

For purposes of determining 

ownership under section 958(a)(2), 

stock owned by a foreign trust (within 

the meaning of section 7701(a)(31)(B)) 

described in sections 671 through 679 

(relating to grantors and others treated 

as substantial owners) is treated as being 

owned proportionately by its grantors or 

other persons treated as owners under 

sections 671 through 679 of any portion 

of the trust that includes the stock. See 

§ 1.958–1(b). Similarly, stock owned by 

any other foreign trust (not described in 

sections 671 through 679) or a foreign 

estate (within the meaning of section 

7701(a)(31)(A)) is treated as being 

owned proportionately by its 

beneficiaries. See id. Consistent with 

section 961(a) and (b), which provide 

for adjustments to the basis of property 

of a United States shareholder by reason 

of which the shareholder is considered 

under section 958(a)(2) as owning stock 

of a CFC, the current regulations under 

section 961 provide for adjustments to 

a United States shareholder’s basis in a 

beneficial interest in a foreign trust or 

foreign estate through which the United 

States shareholder owns stock of a CFC. 

See §§ 1.961–1 and 1.961–2. 

The proposed regulations, however, 

do not address the operation of sections 

959 and 961 with respect to foreign 

trusts (thus, for example, if a covered 

shareholder owns stock of a CFC 

through a foreign trust, the proposed 

regulations do not address the treatment 

of a covered distribution received by the 

foreign trust from the CFC or basis in 

the covered shareholder’s interest in the 

foreign trust or the trust’s stock of the 

CFC). The Treasury Department and the 

IRS are studying the manner in which 

section 959 should be applied in these 

structures to ensure that PTEP 

distributed to a covered shareholder 

through a foreign trust is properly 

excluded from the covered 

shareholder’s gross income. Comments 

are requested on the treatment of foreign 

trusts under section 959, including 

whether treatment similar to a foreign 

corporation or partnership is 

appropriate or would impose significant 

burdens on such trusts, their owners, or 

beneficiaries. Comments are also 

requested on the appropriateness and 

effect of providing basis adjustments 

under section 961 in structures 

involving these entities as well as the 

interaction between these provisions 

and the rules in section 643(i) that treat 

certain loans from foreign trusts as 

distributions. 

Comments are likewise requested on 

how foreign estates, which are also not 

addressed in the proposed regulations, 

should be treated for purposes of 

sections 959 and 961. 

D. Section 962 

Consistent with section 962(d), the 

proposed regulations do not exclude 

taxable section 962 PTEP that is 

distributed to a covered shareholder 

from the shareholder’s gross income. 

See proposed § 1.959–4(b)(1). Similarly, 

consistent with section 961(a) and (b), 

the proposed regulations do not increase 

or reduce adjusted basis or derived basis 

for taxable section 962 PTEP. See 

proposed §§ 1.961–3(f)(2) and 1.961– 

4(b)(1), (c)(1). However, the proposed 

regulations apply the section 959(b) 

exclusion to, and provide section 961(c) 

basis for, taxable section 962 PTEP to 

prevent further tax on such PTEP in 

distributions to, or dispositions of stock 

by, a CFC. See proposed §§ 1.959– 

4(b)(2) and 1.961–3. Thus, taxable 

section 962 PTEP is generally subject to 

an additional level of taxation only in 

distributions to a covered shareholder or 

dispositions of section 961(a) ownership 

units or derivative ownership units. 

Under the proposed regulations, PTEP 

retains its character as taxable section 

962 PTEP in a general successor 

transaction and thus may transfer from 

a transferor covered shareholder to a 

successor covered shareholder. 

Likewise, taxable section 962 PTEP may 

be reflected in PTEP resulting from 

section 961(c) basis. In this way, the 

proposed regulations are consistent with 

the requirement in section 962(d) that 

taxable section 962 PTEP be included in 

gross income when distributed because 

it has not been sufficiently taxed. 

Further, the proposed regulations 

remove § 1.962–3 because the proposed 

regulations generally incorporate the 

rules in § 1.962–3. See, for example, 

proposed § 1.959–4. The proposed 

regulations, however, do not incorporate 

§ 1.962–3(b)(3)(iv), which describes the 

application of a foreign corporation’s 

E&P deficit to taxable section 962 PTEP, 

and § 1.962–3(b)(4), which provides that 

§ 1.962–3 does not apply to a 

distribution of section 962 PTEP treated 

as in exchange for stock. The Treasury 

Department and the IRS request 

comments on these rules, including 

whether they continue to be needed 

and, if so, their interaction with these 

regulations. 

E. Currency Translation 

In applying the proposed regulations 

in certain cases, an amount must be 

translated into a currency different than 

the currency in which it is 

denominated. For example, in a 

distribution of PTEP to a foreign 

corporation, the PTEP must be 

translated into the functional currency 

of the recipient foreign corporation (if 

the recipient foreign corporation and 

distributing foreign corporation have 

different functional currencies) so that 

the PTEP can be added to annual PTEP 

accounts with respect to the recipient 

foreign corporation (which are 

maintained in the recipient foreign 

corporation’s functional currency). As 

an additional example, in applying 

section 961(c) basis to a CFC’s covered 

gain, the section 961(c) basis (which is 

maintained is U.S. dollars) must be 

translated into the CFC’s functional 

currency if the CFC does not use the 

U.S. dollar as its functional currency. 

Accordingly, the proposed regulations 

provide currency translation rules 

where relevant. See, for example, 

proposed §§ 1.951–2(f), 1.959–3(c)(5), 

1.959–6(d)(2), and 1.961–9(e)(3). The 

Treasury Department and the IRS 

welcome comments on these rules. 

F. Section 985 

When a CFC changes its functional 

currency to the U.S. dollar, § 1.985– 

5(e)(2) requires a United States 

shareholder of that CFC to recognize 


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foreign currency gain or loss with 

respect to PTEP under section 986(c) as 

if all of the PTEP were distributed to the 

United States shareholder immediately 

before the change. No rules currently 

require recognition of foreign currency 

gain or loss with respect to PTEP when 

a CFC with a functional currency other 

than the U.S. dollar distributes PTEP to 

a CFC with a functional currency that is 

the U.S. dollar, nor does § 1.985–5(e)(2) 

apply when a CFC changes its 

functional currency to a currency other 

than the U.S. dollar. As a result, current 

law requires recognizing foreign 

currency gain or loss on PTEP deemed 

distributed to a CFC immediately before 

it converts its functional currency to the 

U.S. dollar but not immediately after. 

As noted in part V.A of this 

Explanation of provisions, the rules in 

the proposed regulations for recognizing 

foreign currency gain or loss with 

respect to PTEP require recognizing 

such gain or loss in distributions of 

PTEP to a covered shareholder and 

dispositions of foreign stock because 

those circumstances present the last 

opportunity for the covered shareholder 

to recognize foreign currency gain or 

loss with respect to the PTEP. In the 

case of a distribution of PTEP to a 

foreign corporation, the dollar basis is 

preserved, which in turn preserves the 

appropriate application of section 986(c) 

until one of the circumstances noted in 

the previous sentence occurs. The 

Treasury Department and the IRS are of 

the view that the appropriate time to 

recognize foreign currency gain or loss 

should not depend on whether and 

when a CFC changes its functional 

currency, nor on the functional 

currencies involved. The proposed 

regulations provide a comprehensive 

system for determining and tracking the 

dollar basis of PTEP (through dollar 

basis pools, PTEP groups, and annual 

PTEP accounts), as well as for using 

these accounts to determine foreign 

currency gain or loss when appropriate. 

To the extent the rule in § 1.985–5(e)(2) 

was supported by concerns that having 

a U.S. dollar basis in PTEP that are 

measured in the U.S. dollar might create 

administrative difficulties or lead to the 

undercounting of foreign currency gain 

or loss, the Treasury Department and 

the IRS are of the view that the 

comprehensive system promulgated in 

the proposed regulations alleviates that 

concern. See, for example, part V of this 

Explanation of Provisions for rules 

determining currency gain and loss. 

Finally, the Treasury Department and 

the IRS are also concerned that the rule 

in § 1.985–5(e)(2) may permit taxpayers 

to inappropriately accelerate foreign 

currency loss by deeming a distribution 

of such PTEP to a CFC that then changes 

its functional currency to the U.S. 

dollar. Accordingly, the proposed 

regulations withdraw the rule in 

§ 1.985–5(e)(2). 

For similar reasons, the Treasury 

Department and the IRS are studying 

whether § 1.985–7(c)(3), which requires 

certain adjustments by a United States 

shareholder related to foreign currency 

gain or loss with respect to PTEP in 

cases involving dollar approximate 

separate transactions method of 

accounting, should be modified. 

G. Qualified Deficit Transition Rule for 

Domestic Partnerships (Including S 

Corporations) 

Under the qualified deficit rule of 

section 952(c)(1)(B), a United States 

shareholder’s pro rata share of any 

prior-year E&P deficit of a CFC may 

generally be used to reduce the United 

States shareholder’s subpart F income 

inclusion with respect to the CFC to the 

extent such deficit is attributable to the 

same qualified activity as the activity 

that gives rise to the current year 

subpart F income of the CFC (and has 

not already been taken into account 

under section 952(c)(1)(B)). For this 

purpose, the United States shareholder’s 

pro rata share of any prior-year E&P 

deficit is the lesser of the amount 

determined (under rules similar to 

section 951(a)(2)) at the close of the 

current taxable year or at the close of the 

taxable year in which the deficit arose. 

Section 952(c)(1)(B)(iv). 

As described in part III.A of the 

Background, because a domestic 

partnership was previously treated as an 

entity for purposes of including 

amounts in income under section 

951(a)(1)(A) with respect to CFCs it 

owned, the domestic partnership would 

have been entitled to utilize those CFCs’ 

qualified deficits to reduce its subpart F 

income inclusions. However, under 

§ 1.958–1(d), a domestic partnership is 

now generally treated as an aggregate of 

its partners for purposes of determining 

which United States shareholder has a 

subpart F income inclusion with respect 

to a CFC. To accommodate this 

aggregate approach for domestic 

partnerships, and like the transition rule 

for partnership-level accounts described 

in proposed § 1.959–11(e) and part 

IX.B.5 of the Explanation of Provisions, 

the proposed regulations provide a 

transition rule that ensures a prior-year 

E&P deficit of a CFC is taken into 

account by a domestic partnership’s 

United States shareholder partners for 

taxable years of the CFC to which 

§ 1.958–1(d) applies to the domestic 

partnership. See proposed § 1.952– 

1(c)(5). 

Under the transition rule, a United 

States shareholder that owns stock of a 

CFC through an interest in a domestic 

partnership on the transition date 

(which is the last day of the first taxable 

year of the CFC to which § 1.958–1(d) 

applies to the domestic partnership) 

takes into account its assigned portion 

of any prior-year E&P deficit of the CFC 

that arose before the application of 

§ 1.958–1(d) in determining the 

shareholder’s pro rata share of a prioryear E&P deficit under section 

952(c)(1)(B)(iv)(II). See proposed 

§ 1.952–1(c)(5)(i). The United States 

shareholder’s assigned portion is 

determined based on liquidation rights 

as of the transition date. See proposed 

§ 1.952–1(c)(5)(ii); see also part IX.B.5 of 

the Explanation of Provisions 

(discussing a similar concept used in 

pushing out annual PTEP accounts, 

dollar basis pools, and PTEP tax pools 

to partners). The United States 

shareholder’s pro rata share of the prioryear E&P deficit as of the close of the 

taxable year in which section 

952(c)(1)(B) would apply to reduce its 

subpart F income inclusion is 

determined by reference to the United 

States shareholder’s ownership of the 

stock of the CFC at such time. 

As with the proposed regulations 

generally, an S corporation is treated in 

the same manner as a domestic 

partnership for purposes of applying 

this transition rule. See section 1373(a) 

and part VIII.A of the Explanation of 

Provisions. However, unlike domestic 

partnerships, an S corporation may have 

elected to defer the application of 

§ 1.958–1(d) and maintain entity 

treatment for purposes of section 

951(a)(1)(A), in which case the 

transition rule may not apply until such 

election ceases to have effect. See part 

VIII.A of the Explanation of Provisions. 

The transition rule generally applies 

with respect to taxable years of foreign 

corporations beginning on or after the 

date the proposed regulations are 

finalized in a Treasury Decision, 

although taxpayers are permitted to 

apply the transition rule to earlier 

taxable years if certain consistency 

requirements are satisfied and the 

period of limitations on assessment is 

open for those taxable years under 

section 6501. See proposed § 1.952– 

1(c)(5)(iii). 

H. Anti-Avoidance Rules 

The proposed regulations include 

anti-avoidance rules. See proposed 

§§ 1.959–1(d) and 1.961–1(d). Under 

these rules, appropriate adjustments are 

made if a transaction, series of 


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transactions, plan, or arrangement is 

engaged in with a principal purpose of 

avoiding the purposes of section 959 or 

961 or the regulations thereunder. These 

rules are intended to address 

transactions that are designed to 

produce double-nontaxation by, for 

instance, converting distributions of 

E&P from PTEP (which generally may be 

received tax-free under section 959 but 

requires a basis reduction under section 

961) to section 959(c)(3) E&P (which 

may be received tax-free under other 

provisions and may not require a basis 

reduction) or vice versa. 

For example, assume a corporate 

covered shareholder owns all the stock 

of a foreign corporation and the foreign 

corporation has PTEP with respect to 

the corporate covered shareholder. If an 

individual who would have purchased 

newly issued shares in the foreign 

corporation instead purchases shares 

from the corporate covered shareholder 

with a principal purpose of succeeding 

to a portion of the foreign corporation’s 

PTEP with respect to the corporate 

covered shareholder’s PTEP and with 

the expectation that at some point in the 

future the corporate covered 

shareholder will contribute the proceeds 

to the foreign corporation (thus 

achieving the individual’s intended 

effect of acquiring newly issued shares, 

while also transferring the PTEP from 

the corporate covered shareholder to the 

individual), appropriate adjustments 

may be made to disregard the transfer of 

PTEP. The result would be the same if 

the transaction was entered into with a 

principal purpose of reducing the 

foreign corporation’s PTEP with respect 

to the corporate covered shareholder. 

I. Clarifications and Other Matters 

The proposed regulations clarify that 

a distribution of PTEP does not increase 

the E&P of a recipient domestic 

corporation (because the E&P of a 

domestic corporation is increased for, 

and at the time of, an inclusion giving 

rise to PTEP, and distributions to which 

sections 959 and 961(b) apply are 

described in section 312(f)(2)). See 

proposed §§ 1.312–6(f) and 1.312–8(c). 

No inference is intended as to the 

treatment under these provisions of 

other amounts a domestic corporation 

includes in its gross income as a result 

of ownership of stock in a foreign 

corporation, such as inclusions with 

respect to a PFIC, and the Treasury 

Department and IRS continue to 

consider these issues. Additionally, the 

proposed regulations clarify that, solely 

for purposes of the limitation in section 

952(c)(1)(A), PTEP received by, or 

resulting from section 961(c) basis of, a 

CFC is not included in the CFC’s current 

year E&P. See proposed § 1.952–1(c)(4). 

This treatment is consistent with 

§ 1.952–1(c)(3) (Example 1) and 

coordinates sections 952(c), 959(b), and 

961(c) so that PTEP does not have the 

effect of increasing subpart F income. 

The proposed regulations also provide 

that, for purposes of section 163(j), 

PTEP received by, or resulting from 

section 961(c) basis of, a foreign 

corporation does not give rise to 

tentative taxable income (because the 

income that gave rise to the PTEP has 

already been taken into account), and 

this rule is issued under the express 

delegation of authority in section 

163(j)(8)(B). See proposed § 1.163(j)– 

7(g)(2). Moreover, the proposed 

regulations revise § 1.951–1(a)(1) to 

reflect the repeal of provisions relating 

to foreign base company shipping 

income and foreign investments in less 

developed countries and move the 

examples in § 1.951–1(e)(7) to a separate 

example paragraph. 

The proposed regulations modify 

§ 1.905–3(b)(2)(ii) to clarify that if a 

foreign tax redetermination impacts the 

characterization or amount of a 

distribution or inclusion in any other 

year, that year is an affected year for 

which a redetermination of U.S. tax is 

required. This is a conforming change 

relating to the timing and ordering rules 

in the proposed regulations, which 

could, in certain situations, result in a 

foreign tax redetermination impacting 

the characterization or amount of a 

distribution or inclusion not only in a 

subsequent year, but in a prior year. 

IX. Applicability Dates and Transition 

Rules 

A. Applicability Dates 

1. General Applicability Date and 

Application to 2019 Notice Years 

The proposed regulations would 

generally apply to taxable years of 

foreign corporations beginning on or 

after the date the proposed regulations 

are finalized in a Treasury Decision and 

to taxable years of persons for which 

such taxable years of foreign 

corporations are relevant (general 

applicability date). See, for example, 

proposed §§ 1.951–1(i), 1.951–2(i), 

1.959–12(b), 1.960–7(c), 1.961–14(b), 

1.986(c)–1(e), and 1.1502–59(g). 

Notwithstanding the general 

applicability date, portions of the 

proposed section 959 regulations 

relating to rules described in the 2019 

notice would apply before the general 

applicability date to taxable years of 

United States shareholders (and 

successors in interest) ending after 

December 14, 2018, and taxable years of 

foreign corporations ending with or 

within those taxable years, as described 

in the 2019 notice (2019 notice years). 

See proposed § 1.959–12(c). For this 

purpose, taxpayers are required to apply 

to 2019 notice years the rules in 

proposed §§ 1.959–1(c) (treatment of S 

corporations), 1.959–2 (accounting of 

PTEP), 1.959–3 (adjustments to 

shareholder-level accounts and, 

consequently, foreign-corporation level 

accounts), 1.959–4(e) and 1.959–5(d) 

(allocation of distributions and section 

956 amounts), and the relevant 

definitions in 1.959–1(b) (collectively, 

the 2019 notice provisions). Consistent 

with the 2019 notice, PTEP is treated as 

distributed under section 959 to the 

extent the distribution constitutes a 

dividend under section 316 (determined 

without regard to section 959(d)). 

Additionally, because taxpayers may 

have maintained PTEP groups in 

accordance with the groups described in 

the 2019 notice, taxpayers may use 

those PTEP groups for 2019 notice years 

instead of the PTEP groups listed in 

proposed § 1.959–2. Furthermore, 

neither the portions of proposed 

§§ 1.959–2 and 1.959–3 relating to PTEP 

tax pools, corporate PTEP tax pools, 

adjusted applicable percentages, and 

section 965(c) deduction percentages, 

nor the portions of proposed §§ 1.959– 

3 through 1.959–5 and 1.959–7 relating 

to the timing of adjustments and 

determinations, are 2019 notice 

provisions, and, therefore, taxpayers are 

not required to apply these provisions to 

2019 notice years. 

Apart from the 2019 notice 

provisions, the proposed regulations 

would apply before the general 

applicably date only if taxpayers choose 

to apply the proposed regulations early 

in accordance with the rules described 

in part IX.A.2 of the Explanation of 

Provisions. 

2. Early Application Option 

Taxpayers would be permitted to 

choose to apply the proposed 

regulations in their entirety to taxable 

years of foreign corporations beginning 

before the general applicability date 

(such years to which the regulations are 

applied, the early application years) if 

certain conditions prescribed in 

proposed § 1.959–12(d) are satisfied 

(early application option). See, for 

example, proposed §§ 1.951–1(i), 1.951– 

2(i), 1.960–7(c), 1.961–14(b), 1.986(c)– 

1(e), and 1.1502–59(g). The early 

application option would satisfy, and 

therefore supersede, the required 

application of the 2019 notice 

provisions if the first early application 

year precedes, or is the same as, the first 

2019 notice year. See proposed § 1.959– 

12(c). 


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Under the early application option, 

taxpayers must apply the proposed 

regulations, as finalized, in their 

entirety to an early application year and 

all succeeding early application years, 

all taxable years of covered shareholders 

for which the early application years are 

relevant, and all taxable years of related 

foreign corporations (determined under 

section 267(b)) that end on or after the 

later of the last day of the first early 

application year and the first day on 

which the foreign corporations are 

related. See proposed § 1.959–12(d)(2). 

Further, all taxable years of covered 

shareholders for which the early 

application years are relevant must be 

open under section 6501, which each 

covered shareholder must confirm in a 

written statement to the foreign 

corporation that also provides the 

covered shareholder’s consent to apply 

the proposed regulations before the 

general applicability date. See proposed 

§ 1.959–12(d)(3) and (4). These 

conditions are intended to promote 

consistency and administrability. 

B. Transition Rules 

1. In General 

To facilitate the initial application of 

the proposed regulations, the proposed 

regulations include transition rules 

under section 959 for establishing and 

conforming accounts under section 959, 

as well as rules under section 961 for 

establishing derived basis and section 

961(c) basis. These rules also address 

particular transition issues relating to 

the treatment of domestic partnerships 

(including S corporations). 

2. Annual PTEP Accounts, Dollar Basis 

Pools, and Corporate PTEP Accounts 

As of the beginning of the first taxable 

year of a foreign corporation to which 

the proposed section 959 regulations 

apply pursuant to the 2019 notice or the 

early application option, a reasonable 

method must be used to establish 

annual PTEP accounts, dollar basis 

pools, and corporate PTEP accounts in 

accordance with proposed § 1.959–2, 

including to reflect any prior 

adjustments that would have been made 

under the principles of proposed 

§§ 1.959–2 through 1.959–5 and 1.959– 

7. See proposed § 1.959–11(b)(1) and 

(2)(i). Additionally, adjustments must be 

made to account for the transition tax 

under section 965. See proposed 

§ 1.959–11(b)(3). 

In establishing these accounts, any 

existing accounts of a covered 

shareholder must be conformed to the 

requirements of proposed § 1.959–2. See 

proposed § 1.959–11(b)(2)(i). Further, in 

the case of existing accounts tracking 

PTEP or dollar basis in multi-year pools, 

a reasonable method to conforming the 

accounts includes an approach 

consistent with the rules in the 2019 

notice. See proposed § 1.959– 

11(b)(2)(ii). 

Lastly, a reasonable method used to 

establish annual PTEP accounts, dollar 

basis pools, and corporate PTEP 

accounts must be consistently applied 

by the covered shareholder with respect 

to all foreign corporations in which the 

covered shareholder owns stock. The 

same method must also be applied by 

all covered shareholders that join in 

filing a federal income tax return (for 

example, domestic corporations that file 

a consolidated federal income tax return 

in cases where the early application 

option does not apply). See proposed 

§ 1.959–11(b)(2)(i). In cases where there 

are multiple covered shareholders of a 

foreign corporation, corporate PTEP 

accounts of a foreign corporation are 

established based on the reasonable 

method applied by each covered 

shareholder. Thus, for example, assume 

US1, a covered shareholder, owns all 

the stock of CFC1 and 40% of the stock 

of CFC2, and that both CFC1 and CFC2 

are foreign corporations. The remaining 

60% of the stock of CFC2 is owned by 

US2, a covered shareholder unrelated to 

US1. US1 must consistently use a 

reasonable method for establishing its 

annual PTEP accounts and dollar basis 

pools with respect to CFC1 and CFC2, 

and US2 must use a reasonable method 

for its own determination of those 

accounts with respect to CFC2. CFC1’s 

corporate PTEP accounts would then 

reflect the annual PTEP accounts of 

US1, and CFC2’s corporate PTEP 

accounts would then reflect the annual 

PTEP accounts of US1 and US2. 

3. PTEP Tax Pools, Corporate PTEP Tax 

Pools, and Section 965 Related Amounts 

As of the beginning of the first taxable 

year of a foreign corporation to which 

the proposed section 959 regulations 

apply pursuant to the general 

applicability date or the early 

application option, the proposed 

regulations require the establishment of 

PTEP tax pools, corporate PTEP tax 

pools, adjusted applicable percentages, 

and section 965(c) deduction 

percentages reflecting the foreign 

corporation’s PTEP. See proposed 

§ 1.959–11(c)(1). 

PTEP tax pools and corporate PTEP 

tax pools are established by adding a 

pro rata portion of the foreign 

corporation’s PTEP group taxes (priorlaw PTEP group taxes) with respect to 

PTEP groups (prior-law PTEP group), as 

those terms are defined in current 

§ 1.960–3, to each PTEP tax pool with 

respect to the foreign corporation. See 

proposed § 1.959–11(c)(2). This is 

determined by multiplying the prior-law 

PTEP group taxes by a fraction, the 

numerator of which is the balance of the 

prior-law PTEP group that is PTEP 

relating to the PTEP tax pool, and the 

denominator of which is the balance of 

the prior-law PTEP group. 

An adjusted applicable percentage is 

established with respect to all the 

foreign corporation’s PTEP resulting 

from section 965 within a covered 

shareholder’s annual PTEP accounts 

relating to the same section 904 category 

by calculating a weighted average of the 

applicable percentages with respect to 

the PTEP (as defined in § 1.965–5(d)). 

See proposed § 1.959–11(c)(3). A section 

965(c) deduction percentage is 

established with respect to all the 

foreign corporation’s PTEP resulting 

from section 965(a) within a covered 

shareholder’s annual PTEP accounts 

relating to the same section 904 category 

by calculating a weighted average of the 

percentages for which foreign currency 

gain or loss recognized under section 

986(c) with respect to distributions of 

the PTEP would be reduced under 

current § 1.986(c)–1. See proposed 

§ 1.959–11(c)(4). 

4. Derived Basis of Partnerships and 

Section 961(c) Basis 

As of the beginning of the first taxable 

year of a foreign corporation to which 

the proposed section 961 regulations 

apply pursuant to the general 

applicability date or the early 

application option, a partnership’s 

derived basis or a CFC’s section 961(c) 

basis of a property unit is established 

based on the amount of basis that would 

exist in the property unit if the 

principles of the applicable proposed 

section 961 regulations were to have 

applied for all prior periods, determined 

using a reasonable method. See 

proposed § 1.961–13(b)(1), (2), and (3). 

The reasonable method must be 

consistently applied to each foreign 

corporation owned by the partnership or 

CFC and with respect to each covered 

shareholder that owns an interest in the 

partnership or stock in the CFC. For this 

purpose, the establishment of section 

961(c) basis includes replacing any 

existing basis under section 961(c) in 

the property unit, to the extent a foreign 

corporation took the position under 

current law that it was afforded such 

basis, with section 961(c) basis as 

prescribed in the proposed section 961 

regulations. 

The rule for establishing derived basis 

applies to foreign partnerships and is 

also applicable to domestic partnerships 

(including S corporations) to the extent 


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that aggregate treatment applies with 

respect to the domestic partnership 

under § 1.958–1(d) or former § 1.951A– 

1(e)(1) (as in effect before TD 9960, 87 

FR 3648) before the application of the 

proposed section 961 regulations. 

However, in the case of a domestic 

partnership, the amount of any derived 

basis does not take into account 

amounts included in income by the 

domestic partnership or any lower-tier 

domestic partnership for periods in 

which aggregate treatment does not 

apply. For example, if a domestic 

partnership directly owns stock in a 

CFC, the domestic partnership’s derived 

basis is determined without regard to 

any subpart F income inclusion of the 

domestic partnership attributable to the 

CFC in a period before § 1.958–1(d) 

applies to the domestic partnership, 

which instead gives rise to adjusted 

basis of the domestic partnership under 

section 961(a). See part IX.B.5 of the 

Explanation of Provisions for a 

discussion of the treatment of such basis 

under the proposed regulations, which 

is not converted into derived basis as a 

result of § 1.958–1(d) applying to the 

domestic partnership. 

The proposed regulations also provide 

that a specified foreign corporation that 

is not otherwise a CFC is treated as a 

CFC for purposes of applying the 

principles of proposed § 1.961–3 to an 

income inclusion under section 

951(a)(1)(A) that arises by reason of 

section 965(a). See proposed § 1.961– 

13(b)(4). This rule is intended to clarify 

that basis increases are made to stock of 

a foreign corporation for inclusions 

arising under section 965(a) regardless 

of CFC status. However, no basis 

increases are afforded under section 961 

for PTEP attributable to section 965(b). 

See section 965(b)(4)(A) (providing that 

the amount of the reduction described 

in section 965(b) is treated as included 

in gross income under section 951(a) 

only for purposes of applying section 

959). 

The transition rules for the 

establishment of derived basis and 

section 961(c) basis are intended to 

facilitate the application of the rules 

governing such basis under the 

proposed regulations and should not be 

interpreted in a manner that results in 

a double benefit. To ensure this result, 

the proposed regulations provide that 

derived basis or section 961(c) basis is 

increased to reflect an income inclusion 

under section 951(a)(1)(A) or 951A(a) 

only to the extent such an increase 

would not duplicate basis at the level of 

the partnership or CFC to reflect the 

income inclusion. See proposed 

§ 1.961–13(b)(5). Thus, for example, if a 

foreign partnership was provided basis 

with respect to stock in a foreign 

corporation under § 1.965–2(h)(5)(ii) for 

an income inclusion, no derived basis is 

provided to the foreign partnership 

under the proposed regulations for the 

inclusion (and any existing basis under 

§ 1.965–2(h)(5)(ii) in the property unit 

remains and, thus, is not converted to 

derived basis). As an additional 

example, if a CFC previously claimed 

basis under section 961(c) for an income 

inclusion, section 961(c) basis is 

provided to the CFC under the proposed 

regulations for the inclusion only to the 

extent the previously-claimed-basis has 

not been used (and, therefore, can be 

replaced with section 961(c) basis 

pursuant to the proposed regulations). 

5. Treatment of Domestic Partnerships 

(Including S Corporations) 

For taxable years of a domestic 

partnership (including an S corporation 

by operation of section 1373(a)) to 

which § 1.958–1(d)(1) does not apply, 

the domestic partnership is treated as an 

entity separate from its owners in 

determining stock ownership for 

purposes of section 951(a) and therefore 

is required to include amounts in gross 

income under section 951(a). In these 

cases, foreign corporations may have 

PTEP with respect to the domestic 

partnership and the domestic 

partnership may have been provided 

basis under section 961(a). Moreover, in 

a case where former § 1.951A–1(e)(1) (as 

in effect before TD 9960, 87 FR 3648) 

treated the domestic partnership as an 

aggregate of its partners for purposes of 

applying section 951A and related 

provisions, both the domestic 

partnership and its partners may be 

United States shareholders with income 

inclusions attributable to the same CFC. 

The proposed regulations address the 

treatment of domestic partnerships 

before the application of § 1.958–1(d)(1) 

by, in these cases, treating the domestic 

partnership as a covered shareholder. 

See proposed §§ 1.959–11(d) and 1.961– 

13(c). In addition, rules regarding 

distributions of PTEP, derived basis (of 

a partnership that is owned by the 

domestic partnership), and section 

961(c) basis (of a CFC that is owned by 

the domestic partnership) apply to the 

domestic partnership in its capacity as 

a covered shareholder before those rules 

apply to covered shareholders that own 

interests in the domestic partnership. 

See proposed §§ 1.959–11(d) and 1.961– 

13(c). In this way, the PTEP and basis 

afforded with respect to a domestic 

partnership as a covered shareholder are 

taken into account before looking to the 

PTEP and basis with respect to covered 

shareholders that own interests in the 

partnership. In addition to providing a 

rule for coordinating the operation of 

these provisions in the interim period 

before § 1.958–1(d)(1) applies, this rule 

should reduce the amount of PTEP and 

basis of a domestic partnership that 

ultimately must be converted to be with 

respect to covered shareholders that 

own interests in the partnership when 

§ 1.958–1(d) applies. 

Once both § 1.958–1(d)(1) and the 

proposed regulations apply to a 

domestic partnership (and, 

consequently, the domestic partnership 

is no longer a covered shareholder), the 

proposed regulations convert the 

domestic partnership’s accounts 

described in proposed § 1.959–2 (annual 

PTEP accounts, dollar basis pools, and 

PTEP tax pools) to accounts with 

respect to covered shareholders owning 

interests in the domestic partnership, 

including the deemed covered 

shareholder to the extent any interest in 

the domestic partnership is not owned 

by a covered shareholder. See proposed 

§ 1.959–11(e). Similarly, the proposed 

regulations convert a CFC’s section 

961(c) basis with respect to the domestic 

partnership to section 961(c) basis with 

respect to covered shareholders owning 

interests in the domestic partnership 

(including the deemed covered 

shareholder). See proposed § 1.961– 

13(d). Additionally, because another 

partnership may have derived basis 

with respect to the domestic partnership 

(for example, if the domestic 

partnership owns an interest in a foreign 

partnership that owns stock of a CFC, 

with the foreign partnership having 

derived basis with respect to the 

domestic partnership), the proposed 

regulations likewise convert the other 

partnership’s derived basis to derived 

basis with respect to covered 

shareholders owning interests in the 

domestic partnership. See id. 

The conversion of the domestic 

partnership’s annual PTEP accounts, 

dollar basis pools, and PTEP tax pools 

is based on liquidation rights and occurs 

once the proposed regulations apply to 

the domestic partnership (either 

pursuant to the general applicability 

date or the early application option) or, 

if later, once § 1.958–1(d) first applies to 

the domestic partnership (including, in 

the case of S corporations, because an 

election not to apply § 1.958–1(d) ceases 

to have effect). See proposed § 1.959– 

11(e)(2)(i)(B). Because the conversion of 

accounts under these rules depends on 

when § 1.958–1(d) first applies to a 

particular domestic partnership, the 

rules may apply at different times in 

cases where stock of a foreign 

corporation is owned through tiers of 

domestic partnerships. 


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The conversion of derived basis or 

section 961(c) basis is determined 

consistently, and occurs concurrently, 

with the conversion of the accounts 

under section 959. See proposed 

§ 1.961–13(d)(2)(i) and (3)(i). The 

proposed regulations do not convert 

basis previously provided to the 

domestic partnership under section 

961(a) into derived basis, nor do the 

proposed regulations affect prior basis 

adjustments made under section 705. 

Thus, for example, if a domestic 

corporation owns an interest in a foreign 

partnership, and that foreign 

partnership owns an interest in a 

domestic partnership that owns stock of 

a CFC, the proposed regulations do not 

alter the treatment of basis provided to 

the domestic partnership in its CFC 

stock under section 961(a) or the related 

basis afforded to the foreign partnership 

in its domestic partnership interest 

under section 705. 

Special Analyses 

I. Regulatory Planning and Review— 

Economic Analysis 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520) generally 

requires that a Federal agency obtain the 

approval of the Office of Management 

and Budget before collecting 

information from the public, whether 

such collection of information is 

mandatory, voluntary, or required to 

obtain or retain a benefit. There are no 

additional information collection 

requirements associated with the 

proposed regulations. 

III. Regulatory Flexibility Act 

When an agency issues a rulemaking 

proposal, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) (RFA) requires the 

agency to prepare and make available 

for public comment an initial regulatory 

flexibility analysis that will describe the 

impact of the proposed rule on small 

entities. See 5 U.S.C. 603(a). Section 605 

of the RFA provides an exception to this 

requirement if the agency certifies that 

the proposed rulemaking will not have 

a substantial economic impact on a 

substantial number of small entities. A 

small entity is defined as a small 

business, small nonprofit organization, 

or small governmental jurisdiction. See 

U.S.C. 601(3) through (6). 

The Treasury Department and the IRS 

do not expect that the proposed 

regulations will have a significant 

economic impact on a substantial 

number of small entities within the 

meaning of sections 601(3) through (6) 

of the RFA. The proposed regulations 

provide guidance on issues regarding 

sections 959 and 961 and related 

provisions but do not change the 

economic impact of the existing 

regulations or impose any new costs on 

small entities. It is unlikely the 

proposed regulations will affect a 

substantial number of small businesses 

due to the significant resources and 

investment required to engage in the 

type of foreign operations to which the 

proposed regulations are relevant. 

However, because there is a possibility 

of significant economic impact on a 

substantial number of small entities, an 

initial regulatory flexibility analysis for 

the regulation is provided below. The 

Treasury Department and the IRS 

request comments from the public on 

the number of small entities that may be 

impacted and whether that impact will 

be economically significant. 

Pursuant to section 7805(f) of the 

Code, the proposed regulations have 

been submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on their 

impact on small businesses. 

A. Reasons Why the Action Is Being 

Considered 

The proposed regulations update the 

core aspects of the PTEP system in a 

manner that addresses both 

longstanding issues and more recent 

issues (such as those arising under the 

Act), thereby reducing potential 

uncertainty under the existing 

regulations, ensuring consistent 

outcomes across taxpayers and 

economically similar transactions, and 

preventing double taxation and double 

non-taxation. These updates to the PTEP 

system involve PTEP accounting, the 

application of section 959(b), the 

application of section 961 as to certain 

property owned by a partnership, the 

application of section 961(c), and rules 

coordinating sections 951(a), 959(b), and 

961(c). 

The proposed regulations described in 

part II of the Explanation of Provisions 

establish covered shareholder-specific 

PTEP accounts, and this accounting 

prevents inappropriate outcomes that 

could arise under an alternative 

approach in light of the Act (such as 

share-specific accounting) while 

ensuring a covered shareholder the 

benefit of PTEP relating to it. This 

covered shareholder-specific accounting 

applies to the other aspects of the PTEP 

system—namely, sections 986(c) and 

960(b)—and ensures consistency across 

the PTEP system. The proposed 

regulations also provide rules under 

sections 959(b) and 951 that address 

longstanding issues that arise in certain 

split-ownership structures (that is, 

structures in which stock of a CFC is not 

all owned by a single United States 

shareholder), which issues were 

exacerbated by the Act. 

The proposed regulations described in 

part III of the Explanation of Provisions 

provide guidance addressing 

longstanding issues under section 961. 

That is, the proposed regulations 

provide rules to adjust the basis in 

shares of stock of a foreign corporation 

owned indirectly by a covered 

shareholder through only one or more 

partnerships, and the basis under 

section 961(c) in shares of stock of a 

foreign corporation owned by a CFC, to 

reflect the foreign corporation’s PTEP 

with respect to the covered shareholder. 

Additionally, the proposed regulations, 

as discussed in part III.E of the 

Explanation of Provisions, provide rules 

treating E&P generated by gain to which 

section 961(c) is applied as PTEP. This 

approach ensures consistent outcomes 

across economically similar transactions 

regardless of how a foreign corporation’s 

PTEP is monetized (whether through a 

distribution to which section 959(b) 

applies or a disposition to which section 

961(c) applies), and, by treating the E&P 

as PTEP, reflects the policy of sections 

959 and 961 and prevents both double 

taxation and double non-taxation. 

The proposed regulations, as 

discussed in part IV of the Explanation 

of Provisions, provide rules under 

section 951 that work in tandem with 

sections 959(b) and 961(c) to perfect the 

approach discussed in the preceding 

paragraphs. These rules comprise two 

sets of rules, one applying at the foreign 

corporation-level and one applying at 

the shareholder-level, that together 

ensure that attributes like PTEP and 

section 961(c) basis are allocated to the 

appropriate shareholder, consistent with 

the shareholder-specific nature of 

sections 959(b) and 961(c). 

B. Objectives of, and Legal Basis for, the 

Proposed Regulations 

The proposed regulations are 

intended to provide guidance 

addressing core aspects of the PTEP 

system and significant statutory changes 

since the current regulations were 

finalized. The legal basis for these 

regulations is contained in various 

sections of the Code, including sections 

959, 960, 961, 965, 986, and 7805. 


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95400 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

C. Small Business Entities to Which 

These Regulations Will Apply 

Because an estimate of the number of 

small businesses affected is not 

currently feasible, this initial regulatory 

flexibility analysis assumes that a 

substantial number of small businesses 

will be affected. However, as noted 

above, the Treasury Department and the 

IRS believe that it is unlikely the 

proposed regulations will affect a 

substantial number of small businesses 

due to the significant resources and 

investment required to engage in the 

type of foreign operations to which the 

proposed regulations are relevant. The 

Treasury Department and the IRS do not 

expect that these regulations will affect 

a substantial number of small nonprofit 

or small governmental jurisdictions. 

D. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

In certain cases, the proposed 

regulations require information that 

currently is tracked at the foreign 

corporation-level to also be tracked at 

the shareholder-level. 

E. Duplicate, Overlapping, or Relevant 

Federal Rules 

The proposed regulations would 

replace portions of existing regulations. 

The Treasury Department and the IRS 

are not aware of any Federal rules that 

duplicate, overlap, or conflict with these 

regulations. 

F. Alternatives Considered 

The Treasury Department and the IRS 

considered alternatives including 

alternatives to treating E&P generated by 

gain to which section 961(c) applies as 

PTEP. One alternative, as discussed in 

part III.E.2.ii of the Explanation of 

Provisions, involved treating such E&P 

as section 959(c)(3) E&P. However, this 

approach was not adopted because it 

could lead to double taxation or double 

non-taxation, while also creating 

dissymmetry between distributions 

(E&P to which annual PTEP accounts 

apply is PTEP) and dispositions 

involving foreign stock (E&P to which 

section 961(c) basis applies is not 

PTEP). The proposed regulations, by 

providing certainty regarding 

longstanding issues under section 

961(c), reduce economic burden, and, 

by protecting the policies underlying 

sections 959 and 961, ensure a covered 

shareholder the benefit of PTEP relating 

to it; this represents the approach with 

the least economic impact. 

The Treasury Department and the IRS 

also considered alternatives to the 

proposed rules under section 951 that 

work in tandem with sections 959(b) 

and 961(c). But the alternatives either 

could not provide the certainty or the 

consistency of the approach in the 

proposed regulations or could not 

properly protect against double taxation 

or double non-taxation. 

The proposed regulations, and the 

PTEP system generally, apply uniformly 

to large and small business entities. The 

Treasury Department and the IRS are of 

the view that such an approach is 

necessitated by the statutory scheme; in 

other words, a small business exception 

could undermine the provisions 

comprising the PTEP system. 

Accordingly, there is no viable 

alternative to the proposed regulations 

for small entities. 

IV. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess anticipated costs 

and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a State, local, or Tribal government, 

in the aggregate, or by the private sector, 

of $100 million in 1995 dollars, updated 

annually for inflation. The proposed 

regulations do not include any Federal 

mandate that may result in expenditures 

by State, local, or Tribal governments, or 

by the private sector in excess of that 

threshold. 

V. Executive Order 13132: Federalism 

Executive Order 13132 (Federalism) 

prohibits an agency from publishing any 

rule that has federalism implications if 

the rule either imposes substantial, 

direct compliance costs on State and 

local governments, and is not required 

by statute, or preempts State law, unless 

the agency meets the consultation and 

funding requirements of section 6 of the 

Executive order. The proposed 

regulations do not have federalism 

implications, do not impose substantial 

direct compliance costs on State and 

local governments, and do not preempt 

State law within the meaning of the 

Executive order. 

Comments and Requests for a Public 

Hearing 

Before the proposed regulations are 

adopted as final regulations, 

consideration will be given to comments 

that are submitted timely to the IRS as 

prescribed in the preamble under the 

ADDRESSES section. In addition to the 

comments specifically requested in the 

Explanation of Provisions, the Treasury 

Department and the IRS request 

comments on all aspects of the proposed 

regulations. Any comments submitted 

will be made available at 

www.regulations.gov or upon request. 

A public hearing will be scheduled if 

requested in writing by any person who 

timely submits written comments. 

Requests for a public hearing are 

encouraged to be made electronically. If 

a public hearing is scheduled, notice of 

the date and time for the public hearing 

will be published in the Federal 

Register. 

Statement of Availability of IRS 

Documents 

Any IRS Revenue Procedures, 

Revenue Rulings, Notices, or other 

guidance cited in this document are 

published in the Internal Revenue 

Bulletin (or Cumulative Bulletin) and 

are available from the Superintendent of 

Documents, U.S. Government 

Publishing Office, Washington, DC 

20402, or by visiting the IRS website at 

www.irs.gov. 

Drafting Information 

The principal authors of these 

regulations are Karen R. Li, Elena M. 

Madaj and Chadwick Rowland, Office of 

Associate Chief Counsel (International). 

However, other personnel from the IRS 

and the Treasury Department 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS propose to amend 26 CFR 

part 1 as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by revising the 

entry for § 1.951–1, adding entries in 

numerical order for §§ 1.951–2, 1.959–1 

through 1.959–12, and 1.961–1 through 

1.961–13, revising the entry for 

§ 1.986(c)–1, and adding an entry in 

numerical order for § 1.1502–59 to read 

in part as follows: 

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

* * * * * 

Sections 1.951–1 and 1.951–2 also issued 

under 26 U.S.C. 951, 959, and 961. 

* * * * * 

Sections 1.959–1 through 1.959–12 also 

issued under 26 U.S.C. 245A(g), 904(d)(7), 

951A(f)(1)(B), 959, 960(f), 962, 965(o), 986, 

986(c)(2), 989(c), and 1373. 

* * * * * 

Sections 1.961–1 through 1.961–13 also 

issued under 26 U.S.C. 743(b), 959, 961 and 

961(a), (b), and (c), 965(o), and 1373. 

* * * * * 


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Section 1.986(c)–1 also issued under 26 

U.S.C. 962, 965(o), 986 and 986(c)(2), and 

989(c). 

* * * * * 

Section 1.1502–59 also issued under 26 

U.S.C. 959, 960, 961, 986, and 1502. 

* * * * * 

■ Par. 2. Section 1.163(j)–7 is amended 

by: 

■ 1. Revising paragraph (g)(2); and 

■ 2. Adding a sentence to the end of 

paragraph (m)(2). 

The revision and addition read as 

follows: 

§ 1.163(j)–7 Application of the section 

163(j) limitation to foreign corporations and 

United States shareholders. 

* * * * * 

(g) * * * 

(2) Treatment of certain dividends 

and previously taxed earnings and 

profits. For purposes of computing the 

ATI of a relevant foreign corporation for 

a taxable year, the following amounts 

are (without duplication) subtracted 

from tentative taxable income— 

(i) Any dividend included in gross 

income that is received from a related 

person, within the meaning of section 

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

distributee; and 

(ii) Any previously taxed earnings and 

profits that are distributed to the foreign 

corporation in a covered distribution 

(determined under § 1.959–4) or that 

result from the application of section 

961(c) basis to covered gain recognized 

by the foreign corporation (determined 

under § 1.961–9). 

* * * * * 

(m) * * * 

(2) * * * Paragraph (g)(2)(ii) of this 

section applies to a taxable year of a 

foreign corporation that begins on or 

after [date of publication of final 

regulations in the Federal Register] or is 

an early application year (as described 

in § 1.959–12(d)) and to a taxable year 

of a person for which such taxable year 

of that foreign corporation is relevant. 

* * * * * 

■ Par. 3. Section 1.245A(d)–1 is 

amended by: 

■ 1. Revising the first sentence of 

paragraph (c)(22); and 

■ 2. For each paragraph listed in the 

table, removing the language in the 

‘‘Remove’’ column wherever it appears 

and adding in its place the language in 

the ‘‘Add’’ column: 

Paragraph Remove Add 

(d)(2)(i) ................................................. section 951A PTEP (as defined in § 1.960– 

3(c)(2)(viii)) in a single annual PTEP account 

(as defined in § 1.960–3(c)(1)).

previously taxed earnings and profits assigned to 

the section 951A PTEP group (as defined in 

§ 1.959–1(b)) within a single annual PTEP account (as defined in § 1.959–1(b)). 

(d)(2)(ii)(B) ............................................ section 951A PTEP ................................................. previously taxed earnings and profits assigned to 

the section 951A PTEP group. 

(d)(3)(i) ................................................. section 951A PTEP (as defined in § 1.960– 

3(c)(2)(viii)) in a single annual PTEP account 

(as defined in § 1.960–3(c)(1)).

previously taxed earnings and profits assigned to 

the section 951A PTEP group (as defined in 

§ 1.959–1(b)) within a single annual PTEP account (as defined in § 1.959–1(b)). 

(d)(3)(ii)(B) ............................................ section 951A PTEP ................................................. previously taxed earnings and profits assigned to 

the section 951A PTEP group. 

(d)(4)(i) ................................................. section 951(a)(1)(A) PTEP (as defined in § 1.960– 

3(c)(2)(x)) in a single annual PTEP account (as 

defined in § 1.960–3(c)(1)).

previously taxed earnings and profits assigned to 

the section 951(a)(1)(A) PTEP group (as defined in § 1.959–1(b)) within a single annual 

PTEP account (as defined in § 1.959–1(b)). 

(d)(4)(i) ................................................. section 951(a)(1)(A) PTEP ...................................... previously taxed earnings and profits assigned to 

the section 951(a)(1)(A) PTEP group. 

(d)(4)(ii)(B)(1) through (3), and (D) ...... section 951(a)(1)(A) PTEP ...................................... previously taxed earnings and profits assigned to 

the section 951(a)(1)(A) PTEP group. 

The revision reads as follows: 

§ 1.245A(d)–1 Disallowance of foreign tax 

credit or deduction. 

* * * * * 

(c) * * * 

(22) * * * The term section 245A(d) 

PTEP means previously taxed earnings 

and profits assigned to a section 

245A(d) PTEP group or a reclassified 

section 245A(d) PTEP group (each as 

defined in § 1.959–1(b)). * * * 

* * * * * 

■ Par. 4. Section 1.312–6 is amended by 

adding paragraph (f) to read as follows: 

§ 1.312–6 Earnings and profits. 

* * * * * 

(f) An amount included in a 

corporation’s gross income under 

section 951(a) or 951A(a) for a particular 

period is taken into account in 

computing the corporation’s earnings 

and profits for that period. See also 

§ 1.312–8(c) (domestic corporation’s 

receipt of previously taxed earnings and 

profits does not increase earnings and 

profits). This paragraph (f) applies to a 

taxable year of a corporation beginning 

on or after [date of publication of final 

regulations in the Federal Register]. 

This paragraph (f) also applies to a 

taxable year of a domestic corporation 

that is a shareholder in a foreign 

corporation, if a taxable year of the 

foreign corporation that is an early 

application year (as described in 

§ 1.959–12(d)) ends with or within the 

taxable year of the domestic 

corporation. 

■ Par. 5. Section 1.312–8 is amended by 

adding paragraph (c) to read as follows: 

§ 1.312–8 Effect on earnings and profits of 

receipt of tax-free distributions requiring 

adjustment or allocation of basis of stock. 

* * * * * 

(c) Previously taxed earnings and 

profits that are distributed to a domestic 

corporation in a covered distribution 

(determined under § 1.959–4) do not 

increase the corporation’s earnings and 

profits. See §§ 1.959–4 and 1.961–4 for 

rules excluding distributed previously 

taxed earnings and profits from gross 

income and reducing basis. See also 

§ 1.312–6(f) (sections 951(a) and 951A(a) 

inclusions increase earnings and 

profits). This paragraph (c) applies to a 

taxable year of a domestic corporation 

beginning on or after [date of 

publication of final regulations in the 

Federal Register]. This paragraph (c) 

also applies to a taxable year of a 

domestic corporation that is a 

shareholder in a foreign corporation, if 

a taxable year of the foreign corporation 

that is an early application year (as 

described in § 1.959–12(d)) ends with or 

within the taxable year of the domestic 

corporation. 

■ Par. 6. Section 1.743–1 is amended by 

adding paragraphs (d)(4) and (j)(7) to 

read as follows: 


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§ 1.743–1 Optional adjustment to basis of 

partnership property. 

* * * * * 

(d) * * * 

(4) Coordination with derived basis. 

See § 1.961–5(d) for a rule coordinating 

the application of this paragraph (d) 

with derived basis that transfers to a 

transferee. 

* * * * * 

(j) * * * 

(7) Covered distributions treated as 

previously taxed earnings and profits. 

See § 1.961–4(c)(2)(iii) for rules 

regarding the use of a positive basis 

adjustment under section 743(b) upon 

the receipt of a covered distribution that 

is treated as previously taxed earnings 

and profits with respect to certain direct 

or indirect partners of the partnership. 

* * * * * 

§ 1.861–20 [Amended] 

■ Par. 7. Section 1.861–20 is amended 

by: 

■ 1. In paragraph (a), adding the 

language ‘‘1.959–6,’’ after the language, 

‘‘1.904–6,’’; 

■ 2. In paragraph (d)(2)(ii)(B), adding 

the language ‘‘§ 1.959–6(c) and’’ before 

the language ‘‘§ 1.960–1(d)(3)(ii)’’, and 

removing the language ‘‘income groups 

or PTEP groups’’ and adding the 

language ‘‘previously taxed earnings 

and profits and to income groups, 

respectively,’’ in its place; 

■ 3. In paragraph (d)(3)(i)(B)(1), adding 

the language ‘‘§ 1.959–6(c) and’’ before 

the language ‘‘§ 1.960–1(d)(3)(ii)’’, and 

removing the language ‘‘income groups 

or PTEP groups’’ and adding the 

language ‘‘previously taxed earnings 

and profits and to income groups, 

respectively,’’ in its place; and 

■ 4. In paragraph (g)(6)(i), removing the 

language ‘‘section 965(a) PTEP (as 

defined in § 1.960–3(c)(2)(vi)) in a single 

annual PTEP account (as defined in 

§ 1.960–3(c)(1))’’ and adding the 

language ‘‘previously taxed earnings 

and profits assigned to the section 

965(a) PTEP group (as defined in 

§ 1.959–1(b)) within a single annual 

PTEP account (as defined in § 1.959– 

1(b))’’ in its place. 

§ 1.904–6 [Amended] 

■ Par. 8. Section 1.904–6 is amended 

by: 

■ 1. In paragraph (e)(2), removing the 

language ‘‘§ 1.959–1’’ and adding the 

language ‘‘§ 1.959–4’’ in its place, 

adding the language ‘‘(as defined in 

§ 1.959–1(b))’’ after ‘‘annual PTEP 

account’’, and removing the language 

‘‘§ 1.960–3(c)’’ and adding the language 

‘‘§ 1.959–1(b)’’ in its place; 

■ 2. Removing paragraph (e)(3); 

■ 3. Redesignating paragraph (e)(4) as 

new paragraph (e)(3); 

■ 4. In newly redesignated paragraph 

(e)(3)(i), removing the language 

‘‘(e)(4)(ii)’’ and adding the language 

‘‘(e)(3)(ii)’’ in its place; and 

■ 5. In newly redesignated paragraph 

(e)(3)(ii)(C), removing the language 

‘‘(e)(4)(ii)(B)’’ and adding the language 

‘‘(e)(3)(ii)(B)’’ in its place. 

§ 1.905–3 [Amended] 

■ Par. 9. Section 1.905–3 is amended 

by: 

■ 1. In paragraph (a), removing the 

language ‘‘PTEP group taxes (as defined 

in § 1.960–3(d)(1))’’ and adding the 

language ‘‘a tax pool described in 

§ 1.959–2(b)(4) or (d)(2)’’ in its place; 

■ 2. In the fifth sentence of paragraph 

(a), removing the language ‘‘PTEP group 

taxes’’ and adding the language ‘‘a tax 

pool described in § 1.959–2(b)(4) or 

(d)(2)’’ in its place; 

■ 3. In the last sentence of paragraph (a), 

removing the language ‘‘PTEP group 

taxes’’ and adding the language ‘‘a tax 

pool described in § 1.959–2(b)(4) or 

(d)(2)’’ in its place; and 

■ 4. In the last sentence of paragraph 

(b)(2)(ii), removing the language 

‘‘subsequent’’. 

§ 1.905–4 [Amended] 

■ Par. 10. Section 1.905–4 is amended 

by, in paragraph (c)(6), removing the 

language ‘‘PTEP group taxes (as defined 

in § 1.960–3(d)(1))’’ and adding the 

language ‘‘a tax pool described in 

§ 1.959–2(b)(4) or (d)(2)’’ in its place. 

■ Par. 11. Section 1.951–1 is amended 

by: 

■ 1. Removing the introductory text of 

paragraph (a), revising paragraphs (a)(1) 

and (2), and adding headings for 

paragraphs (a)(3) and (4); 

■ 2. In the introductory text of 

paragraph (b)(1), removing the language 

‘‘(a)(2)(i)’’ and ‘‘(e)’’ and adding the 

language ‘‘(a)(1)(i)’’ and ‘‘(c)’’ in their 

places, respectively; 

■ 3. Adding paragraph (c); 

■ 4. Revising the heading for paragraph 

(e) and revising paragraph (e)(1)(i); 

■ 5. In paragraph (e)(1)(ii)(A), adding 

the language ‘‘and not reduced by 

distributions during the year’’ 

immediately before the semicolon; 

■ 6. In paragraph (g)(1), adding the 

language ‘‘(or, if applicable pursuant to 

section 953(c)(1)(A), any stock of such 

foreign corporation)’’ immediately 

before the period; 

■ 7. Revising paragraph (h); 

■ 8. Redesignating paragraph (e)(7) as 

paragraph (h)(1) and revising the 

heading and introductory text of newly 

redesignated paragraph (h)(1); 

■ 9. In newly redesignated paragraph 

(h)(1)(i)(I), adding the language 

‘‘covered items (within the meaning of 

paragraph (c)(3) of this section),’’ 

immediately after the language 

‘‘neither’’; 

■ 10. In newly redesignated paragraphs 

(h)(1)(ii) through (viii), removing the 

language ‘‘(e)(1) of this section’’ 

wherever it may appear and adding the 

language ‘‘(c)(1) of this section’’ in its 

place; 

■ 11. In newly redesignated paragraph 

(h)(1)(viii)(A), removing the language 

‘‘(e)(7)(vii)(A) of this section’’ and 

adding the language ‘‘(h)(1)(vii)(A) of 

this section’’ in its place; 

■ 12. Adding paragraph (h)(2); and 

■ 13. Adding paragraph (i). 

The revisions and additions read as 

follows: 

§ 1.951–1 Amounts included in gross 

income of United States shareholders. 

(a) * * * 

(1) Section 951(a) inclusions. If a 

foreign corporation is a controlled 

foreign corporation (within the meaning 

of section 957 or, if applicable, section 

953(c)(1)(B)) at any time during a 

taxable year of the foreign corporation, 

every person who is a United States 

shareholder (as defined in section 

951(b) and paragraph (g) of this section) 

of the foreign corporation at any time 

during such taxable year and owns 

(within the meaning of section 958(a)) 

stock in the foreign corporation on the 

last day in such taxable year on which 

the foreign corporation is a controlled 

foreign corporation shall, for the United 

States shareholder’s taxable year in 

which or with which such taxable year 

of the foreign corporation ends, include 

in gross income the sum of— 

(i) The United States shareholder’s 

pro rata share (determined under 

paragraph (b) of this section) of the 

foreign corporation’s subpart F income 

(as defined in section 952) for the 

taxable year of the foreign corporation; 

and 

(ii) The amount determined under 

section 956 with respect to the United 

States shareholder for the taxable year of 

the foreign corporation, but only to the 

extent not excluded from gross income 

under section 959(a)(2) and § 1.959–5. 

(2) Currency translation. See section 

989(b) for translating an amount 

included in income under this section 

into U.S. dollars. 

(3) Characterization of inclusion in 

determining a personal holding 

company. * * * 

(4) Certain stock ownership rules. 

* * * 

* * * * * 

(c) Pro rata share of subpart F 

income—(1) In general. For purposes of 

paragraph (b) of this section, a United 


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Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 95403 

States shareholder’s pro rata share of the 

foreign corporation’s subpart F income 

for the taxable year of the foreign 

corporation is the sum of all subpart F 

income allocated to the United States 

shareholder in accordance with the 

rules described in paragraph (c)(2) of 

this section. Under those rules, subpart 

F income attributable to covered items 

(that is, subpart F income attributable to 

certain distributions and certain gain 

with respect to stock) is separately 

allocated, in each case consistently with 

how the covered item is assigned at the 

foreign corporation-level under § 1.951– 

2 as part of determining the extent to 

which attributes specific to the United 

States shareholder (that is, previously 

taxed earnings and profits or section 

961(c) basis) are applied to exclude the 

covered item from the foreign 

corporation’s subpart F income under 

section 959(b) or 961(c). Then, subpart 

F income not attributable to covered 

items is allocated based on the United 

States shareholder’s share of the foreign 

corporation’s allocable earnings and 

profits (as determined under paragraph 

(e) of this section). See paragraphs (c)(3) 

and (h) of this section for definitions 

and examples, respectively. 

(2) Rules for allocating subpart F 

income—(i) Determine subpart F 

income attributable to each covered 

item. First, determine the subpart F 

income of the foreign corporation 

attributable to each covered item, 

computed as the portion of the covered 

item that is included in foreign base 

company income (as defined in § 1.954– 

1(a)(5)) or insurance income (as defined 

in § 1.954–1(a)(6)). See § 1.951–2(b) for 

the definition of a covered item. 

(ii) Allocate subpart F income 

attributable to each covered item. 

Second, allocate to the United States 

shareholder a pro rata portion of the 

subpart F income attributable to each 

covered item, determined by 

multiplying such subpart F income by a 

fraction. The numerator of the fraction 

is the portion of the covered item that 

is both assigned to the United States 

shareholder under § 1.951–2 and 

included in adjusted gross foreign base 

company income (as defined in § 1.954– 

1(a)(3)) or adjusted gross insurance 

company income (as defined in § 1.954– 

1(a)(6)), and the denominator of the 

fraction is the portion of the covered 

item that is included in adjusted gross 

foreign base company income or 

adjusted gross insurance company 

income. However, if the denominator of 

the fraction would be zero, then the 

fraction is considered to be zero. 

(iii) Allocate subpart F income not 

attributable to covered items. Third, 

allocate to the United States shareholder 

a pro rata portion of all subpart F 

income of the foreign corporation not 

attributable to covered items, 

determined by multiplying all such 

subpart F income by a fraction. The 

numerator of the fraction is the portion 

of the foreign corporation’s hypothetical 

distribution described in paragraph (e) 

of this section that would be distributed 

with respect to the stock of the 

corporation that the United States 

shareholder owns (within the meaning 

of section 958(a)), and the denominator 

of the fraction is the amount of such 

hypothetical distribution. 

(3) Definitions. For purposes of this 

paragraph (c), the term covered item has 

the meaning provided in § 1.951–2(b). 

* * * * * 

(e) Hypothetical distribution—(1) 

* * * 

(i) Hypothetical distribution and 

hypothetical distribution date. For a 

taxable year of a controlled foreign 

corporation, the hypothetical 

distribution described in this paragraph 

(e) (hypothetical distribution) is a 

distribution treated as made by the 

corporation with respect to stock of the 

corporation owned by all shareholders 

of the corporation in an amount equal 

to the corporation’s allocable earnings 

and profits for the taxable year, on the 

last day of the taxable year on which the 

corporation is a controlled foreign 

corporation (hypothetical distribution 

date). 

* * * * * 

(h) Examples—(1) Examples not 

involving covered items. The following 

examples illustrate the application of 

paragraphs (c) and (e) of this section in 

cases not involving covered items. 

* * * * * 

(2) Examples involving covered items. 

The following examples illustrate the 

application of paragraphs (c) and (e) of 

this section in cases involving covered 

items. 

(i) Assumed facts. For purposes of the 

examples in this paragraph (h)(2), 

unless otherwise indicated, the 

following facts are assumed: 

(A) US1 and US2 are unrelated 

domestic corporations that are covered 

shareholders. Neither US1 nor US2 is a 

member of a consolidated group (as 

defined in § 1.1502–1(h)). 

(B) F1, F2, and F3 are foreign 

corporations, each of which is a 

controlled foreign corporation and uses 

the British pound (£) as its functional 

currency. 

(C) Each entity uses the calendar year 

as its taxable year, and no entity has a 

short taxable year. 

(D) To the extent a covered item 

received or recognized by a foreign 

corporation is previously taxed earnings 

and profits, the covered item is 

excluded in determining the foreign 

corporation’s subpart F income and 

tested income or tested loss under 

section 959(b) and § 1.959–4 or section 

961(c) and § 1.961–9, as applicable. 

(E) To the extent a covered item 

received or recognized by a foreign 

corporation is not previously taxed 

earnings and profits, the covered item 

is— 

(1) In the case of a covered 

distribution, excluded in determining 

the foreign corporation’s subpart F 

income and tested income or tested loss 

under sections 954(c)(6) and 

951A(c)(2)(A)(i)(IV); and 

(2) In the case of covered gain, 

included in the foreign corporation’s 

foreign personal holding company 

income (as defined in section 954(c)) 

and then its adjusted gross foreign base 

company income (as defined in § 1.954– 

1(a)(3)) either because section 964(e)(1) 

does not apply or because section 

964(e)(4) applies. 

(F) The only reductions to adjusted 

gross foreign base company income (as 

defined in § 1.954–1(a)(3)) are for 

deductions under § 1.954–1(a)(4). Thus, 

there are no reductions by reason of 

section 952(c) (subpart F income limited 

to current earnings and profits) or 

section 954(b)(4) (exception for certain 

income subject to high foreign taxes). 

(G) To the extent a covered item 

received or recognized by a foreign 

corporation is excluded in determining 

the foreign corporation’s subpart F 

income and tested income or tested loss 

as described in this paragraph (h)(2)(i), 

the listed exclusion is not necessarily 

the only applicable exclusion. 

(ii) Example 1: Subpart F income 

attributable to covered items—(A) 

Facts—(1) In general. US1 and US2 each 

directly own 50% of the single class of 

outstanding stock of F1. F1 directly 

owns all the outstanding stock of each 

of F2 and F3. For F1’s taxable year 

ending on December 31 of year 3, F1’s 

gross income consists of two covered 

items, which are a £60x covered 

distribution received from F2 and £40x 

of covered gain recognized with respect 

to stock of F3. US1 and US2 are 

assigned equal portions of each covered 

item under § 1.951–2. The entirety of 

US1’s assigned portion of each covered 

item is previously taxed earnings and 

profits (because, in the case of the 

covered distribution, £30x of F2’s 

previously taxed earnings and profits 

with respect to US1 is applied to US1’s 

assigned portion and, in the case of the 

covered gain, £20x of F1’s section 961(c) 

basis with respect to US1 is applied to 

US1’s assigned portion). None of US2’s 


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assigned portion of either covered item 

is previously taxed earnings and profits 

(because F2 has no previously taxed 

earnings and profits with respect to US2 

and F1 has no section 961(c) basis with 

respect to US2). F1 has no deductions 

for the taxable year. 

(2) Subpart F income. For F1’s taxable 

year ending on December 31 of year 3, 

F1 has £20x of subpart F income 

consisting of foreign base company 

income (adjusted net foreign base 

company income as defined in § 1.954– 

1(a)(5)), which in turn consists of 

foreign personal holding company 

income (as defined in section 954(c)). 

Table 1 in this paragraph (h)(2)(ii)(A)(2) 

provides the treatment of F1’s gross 

income in computing its adjusted net 

foreign base company income. 

TABLE 1 TO PARAGRAPH (h)(2)(ii)(A)(2) OF THIS SECTION—FOREIGN BASE COMPANY INCOME ANALYSIS

Gross income 

Foreign base company income 

Adjusted gross FBCI Reductions Adjusted net FBCI 

£60x covered distribution from F2: 

US1’s £30x assigned portion ..................................................... £0 (§ 959(b)).

US2’s £30x assigned portion ..................................................... £0 (§ 954(c)(6)).

£40x covered gain on F3 stock: 

US1’s £20x assigned portion ..................................................... £0 (§ 961(c)) ................................................. £0 ............... £20x (£20x ¥ £0). 

US2’s £20x assigned portion ..................................................... £20x.

(B) Analysis. Under paragraph (c) of 

this section, F1’s subpart F income 

attributable to each covered item is 

separately allocated to US1 and US2. F1 

has £0 of subpart F income attributable 

to the covered distribution and £20x of 

subpart F income attributable to the 

covered gain because in each case that 

is the portion of the covered item that 

is included in F1’s adjusted net foreign 

base company income. See paragraph 

(c)(2)(i) of this section. The £20x of 

subpart F income attributable to the 

covered gain is allocated to each of US1 

and US2 by multiplying the amount of 

such subpart F income by a fraction, the 

numerator of which is the portion of the 

covered gain that is both assigned to the 

United States shareholder under 

§ 1.951–2 and included in F1’s adjusted 

gross foreign base company income (£0 

in the case of US1, and £20x in the case 

of US2), and the denominator of which 

is the portion of the covered gain that 

is included in F1’s adjusted gross 

foreign base company income (£20x). 

See paragraph (c)(2)(ii) of this section. 

Thus, US2 is allocated all £20x of the 

subpart F income attributable to the 

covered gain. Accordingly, for purposes 

of paragraph (b) of this section, US1 has 

a £0 pro rata share, and US2 has a £20x 

pro rata share, of F1’s £20x of subpart 

F income. See paragraph (c)(1) of this 

section. 

(C) Alternative facts: expenses—(1) 

Facts. The facts are the same as in 

paragraph (h)(2)(ii)(A) of this section, 

except as follows. Only £10x of US1’s 

assigned portion of the covered gain is 

previously taxed earnings and profits 

(because there is only £10x of section 

961(c) basis with respect to US1 

available to be applied to US1’s 

assigned portion). In addition, F1 has 

£5x of deductions, which are not foreign 

income taxes, that are definitely related 

to the covered gain. The deductions 

reduce F1’s adjusted gross foreign base 

company income by £5x in computing 

net foreign base company income under 

§ 1.954–1(a)(4). Thus, F1 has £25x of 

subpart F income, all of which is 

attributable to the covered gain. 

(2) Analysis. As summarized in Table 

1 in this paragraph (h)(2)(ii)(C)(2), the 

£25x of subpart F income attributable to 

the covered gain is allocated to each of 

US1 and US2 by multiplying the 

amount of such subpart F income by a 

fraction, the numerator of which is the 

portion of the covered gain that is both 

assigned to the United States 

shareholder under § 1.951–2 and 

included in F1’s adjusted gross foreign 

base company income (£10x in the case 

of US1, and £20x in the case of US2), 

and the denominator of which is the 

portion of the covered gain that is 

included in F1’s adjusted gross foreign 

base company income (£30x). See 

paragraph (c)(2)(ii) of this section. 

Accordingly, for purposes of paragraph 

(b) of this section, US1 has a £8.3x pro 

rata share, and US2 has a £16.7x pro 

rata share, of F1’s £25x of subpart F 

income. 

TABLE 1 TO PARAGRAPH (h)(2)(ii)(C)(2) OF THIS SECTION—FOREIGN BASE COMPANY INCOME ANALYSIS

Gross income 

Foreign base company income Allocation of subpart F income attributable to the 

covered item under § 1.951–1(c)(2)(ii) 

Adjusted gross FBCI Reductions Adjusted net FBCI US1 US2 

£60x covered distribution from F2: 

US1’s £30x assigned portion .............. £0 (§ 959(b)).

US2’s £30x assigned portion .............. £0 (§ 954(c)(6)).

£40x covered gain on F3 stock: 

US1’s £20x assigned portion .............. £10x (§ 961(c) for remaining 

£10x).

£5x ............. £25x (£30x ¥ £5x) .... £8.3x (£25x × £10x/ 

£30x).

£16.7x (£25x × £20x/ 

£30x). 

US2’s £20x assigned portion .............. £20x.

(iii) Example 2: Subpart F income 

attributable and not attributable to 

covered items—(A) Facts—(1) In 

general. US1 and US2 each directly own 

50% of the single class of outstanding 

stock of F1. F1 directly owns all the 

outstanding stock of each of F2 and F3. 

For F1’s taxable year ending on 

December 31 of year 3, F1 has £500x of 

allocable earnings and profits for 

purposes of the hypothetical 

distribution described in paragraph (e) 

of this section. F1’s gross income for the 

taxable year consists of a £60x covered 

distribution received from F2, £40x of 

covered gain recognized with respect to 

stock of F3, £295x of royalty income 

received from an unrelated person, and 

£125x of foreign oil and gas extraction 

income (as defined in section 907(c)(1)). 

US1 and US2 are assigned equal 

portions of each covered item under 

§ 1.951–2, and the entirety of US1’s 

assigned portion of each covered item, 


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but none of US2’s assigned portion of 

either covered item, is previously taxed 

earnings and profits (because, in the 

case of the covered distribution, there 

are sufficient previously taxed earnings 

and profits with respect to US1 to be 

applied to US1’s assigned portion and 

there are no previously taxed earnings 

and profits with respect to US2 to be 

applied to US2’s assigned portion, and, 

in the case of the covered gain, there is 

sufficient section 961(c) basis with 

respect to US1 to be applied to US1’s 

assigned portion and there is no section 

961(c) basis with respect to US2 to be 

applied to US2’s assigned portion). F1 

has £20x of deductions for the taxable 

year, consisting of £15x of foreign 

withholding taxes imposed on the 

covered distribution and £5x of 

expenses, which are not foreign income 

taxes, that are definitely related to the 

covered gain. The £5x of expenses 

reduce F1’s adjusted gross foreign base 

company income by £5x in computing 

net foreign base company income under 

§ 1.954–1(a)(4). 

(2) Subpart F income. For F1’s taxable 

year ending on December 31 of year 3, 

F1 has £310x of subpart F income 

consisting of foreign base company 

income (adjusted net foreign base 

company income as defined in § 1.954– 

1(a)(5)). Table 1 in this paragraph 

(h)(2)(iii)(A)(2) provides the treatment of 

F1’s items of gross income in computing 

its adjusted net foreign base company 

income. 

TABLE 1 TO PARAGRAPH (h)(2)(iii)(A)(2) OF THIS SECTION—FOREIGN BASE COMPANY INCOME ANALYSIS

Gross income 

Foreign base company income 

Adjusted gross FBCI Reductions Adjusted net FBCI 

£60x covered distribution from F2: 

US1’s £30x assigned portion ..................................................... £0 (§ 959(b)).

US2’s £30x assigned portion ..................................................... £0 (§ 954(c)(6)).

£40x covered gain on F3 stock: 

US1’s £20x assigned portion ..................................................... £0 (§ 961(c)) ................................................. £5x ............. £15x (£20x¥£5x). 

US2’s £20x assigned portion ..................................................... £20x.

£295x royalty income ........................................................................ £295x ............................................................ £0 ............... £295x (£295x¥£0). 

£125x foreign oil and gas extraction income .................................... £0.

(B) Analysis—(1) In general. Under 

paragraph (c) of this section, F1’s 

subpart F income attributable to each 

covered item is separately allocated to 

US1 and US2, and then F1’s remaining 

subpart F income is allocated to the 

United States shareholders. As 

described in paragraphs (h)(2)(iii)(B)(2) 

and (3) of this section and summarized 

in Table 1 in this paragraph 

(h)(2)(iii)(B)(1), US1 is allocated a total 

of £147.5x, and US2 is allocated a total 

of £162.5x, of subpart F income. 

Accordingly, for purposes of paragraph 

(b) of this section, US1 has a £147.5x 

pro rata share, and US2 has a £162.5x 

pro rata share, of F1’s £310x of subpart 

F income. See paragraph (c)(1) of this 

section. 

TABLE 1 TO PARAGRAPH (h)(2)(iii)(B)(1) OF THIS SECTION—FOREIGN BASE COMPANY INCOME ANALYSIS

Gross income 

Foreign base company income Allocation of subpart F income under 

§ 1.951–1(c)(2)(ii) and (iii) 

Adjusted gross FBCI Reductions Adjusted net FBCI US1 US2 

£60x covered distribution from F2: 

US1’s £30x assigned portion ............... £0 (§ 959(b)).

US2’s £30x assigned portion ............... £0 (§ 954(c)(6)).

£40x covered gain on F3 stock:.

US1’s £20x assigned portion ............... £0 (§ 961(c)) ........................ £5x ............. £15x (£20x¥£5x) ....... £0 (£15x × £0/£20x) ... £15x (£15x × £20x/ 

£20x). 

US2’s £20x assigned portion ............... £20x.

£295x royalty income .................................. £295x ................................... £0 ............... £295x (£295x¥£0) ..... £147.5x (£295x × 

£250x/£500x).

£147.5x (£295x × 

£250x/£500x). 

£125x foreign oil and gas extraction income.£0.

(2) Allocation of subpart F income 

attributable to covered items. F1 has £0 

of subpart F income attributable to the 

covered distribution and £15x of 

subpart F income attributable to the 

covered gain because in each case that 

is the portion of the covered item that 

is included in F1’s adjusted net foreign 

base company income. See paragraph 

(c)(2)(i) of this section. The £15x of 

subpart F income attributable to the 

covered gain is allocated to each of US1 

and US2 by multiplying the amount of 

such subpart F income by a fraction, the 

numerator of which is the portion of the 

covered gain that is both assigned to the 

United States shareholder under 

§ 1.951–2 and included in F1’s adjusted 

gross foreign base company income (£0 

in the case of US1, and £20x in the case 

of US2), and the denominator of which 

is the portion of the covered gain that 

is included in F1’s adjusted gross 

foreign base company income (£20x). 

See paragraph (c)(2)(ii) of this section. 

Thus, US2 is allocated all £15x of the 

subpart F income attributable to the 

covered gain. 

(3) Allocation of subpart F income not 

attributable to covered items. F1 has 

£295x of subpart F income not 

attributable to covered items 

(£310x¥£15x). This subpart F income is 

allocated to each of US1 and US2 by 

multiplying the amount of the subpart F 

income by a fraction, the numerator of 

which is portion of F1’s £500x 

hypothetical distribution described in 

paragraph (e) of this section that would 

be distributed with respect to stock of 

F1 that the United States shareholder 

owns (£250x in the case of each of US1 

and US2), and the denominator of 

which is the amount of the hypothetical 

distribution (£500x). See paragraph 

(c)(2)(iii) of this section. Thus, each of 

US1 and US2 is allocated £147.5x of the 

subpart F income not attributable to 

covered items. 

(C) Alternative facts: tested income— 

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


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paragraph (h)(2)(iii)(A) of this section, 

except that F1’s £125x item of foreign 

oil and gas extraction income is instead 

gross tested income. Because there are 

no allowable deductions properly 

allocable to the gross tested income, F1 

thus has £125x of tested income. 

(2) Analysis. The results are the same 

as in paragraph (h)(2)(iii)(B) of this 

section. In addition, each of US1 and 

US2 has a £62.5x pro rata share of F1’s 

£125x of tested income, determined by 

multiplying the amount of the tested 

income by the fraction used in 

allocating F1’s subpart F income not 

attributable to covered items to the 

United States shareholder (£250x/ 

£500x, as described in paragraph 

(h)(2)(iii)(B)(3) of this section). See 

§ 1.951A–1(d)(2). 

(i) Applicability date. This section 

applies to taxable years of foreign 

corporations that begin on or after [date 

of publication of final regulations in the 

Federal Register] or are early 

application years (as described in 

described in § 1.959–12(d)) and to 

taxable years of persons for which such 

taxable years of those foreign 

corporations are relevant. See § 1.951–1 

as contained in 26 CFR part 1 revised as 

of April 1, 2024, for a version of this 

section applicable to prior taxable years. 

■ Par. 12. Add section 1.951–2 to read 

as follows: 

§ 1.951–2 Foreign corporation-level 

assignment rules for covered items. 

(a) Scope. This section sets forth the 

rules for assigning a foreign 

corporation’s covered items to covered 

shareholders. Under §§ 1.959–4 and 

1.961–9, these assignments determine 

the extent to which shareholder-specific 

attributes (previously taxed earnings 

and profits or section 961(c) basis) are 

applied to the covered items. Paragraph 

(b) of this section defines a covered 

item. Paragraph (c) of this section 

describes the rules for assigning covered 

items. Paragraph (d) of this section 

describes a fraction determining 

assignments under the general 

assignment rule. Paragraph (e) of this 

section adjusts assignments to account 

for general successor transactions. 

Paragraph (f) of this section provides a 

currency translation rule. Paragraph (g) 

of this section provides definitions and 

rules of general applicability for 

purposes of this section. Paragraph (h) 

of this section provides examples 

illustrating the application of this 

section. Paragraph (i) of this section 

provides the applicability date of this 

section. 

(b) Covered items. A covered item is 

gross income of a foreign corporation 

that consists of either the portion of a 

covered distribution received by the 

foreign corporation (determined under 

§ 1.959–4) or a covered gain recognized 

by the foreign corporation (determined 

under § 1.961–9). Covered shareholders 

that own stock of a foreign corporation 

during a taxable year of the foreign 

corporation in which the foreign 

corporation receives or recognizes a 

covered item are assigned portions of 

the covered item in accordance with the 

rules described in paragraph (c) of this 

section. See also paragraph (g) of this 

section, incorporating § 1.959–1(b) for 

the definition of covered shareholder, 

§ 1.959–4(c) for the definition of covered 

distribution, and § 1.961–9(c) for the 

definition of covered gain. 

(c) Rules for assigning a covered 

item—(1) Determine assignments based 

on stock ownership on the last relevant 

day. First, assign a pro rata portion of 

the covered item to each covered 

shareholder that owns stock of the 

foreign corporation on the last relevant 

day of the foreign corporation’s taxable 

year (defined in § 1.959–1(b) as the last 

day of the taxable year on which the 

foreign corporation is a controlled 

foreign corporation), determined by 

multiplying the amount of the covered 

item by the fraction computed in 

accordance with paragraph (d) of this 

section. If there is no day during the 

taxable year on which the foreign 

corporation is a controlled foreign 

corporation, then treat the last day of 

the taxable year as the last relevant day. 

(2) Adjust assignments for general 

successor transactions. Second, if the 

foreign corporation is an acquired 

foreign corporation in one or more 

general successor transactions that 

occur during the foreign corporation’s 

taxable year, then, for each such general 

successor transaction (starting with the 

earliest transaction), adjust covered 

shareholders’ assigned portions of the 

covered item in accordance with 

paragraph (e) of this section. See also 

paragraph (g) of this section, 

incorporating § 1.959–7(b) for the 

definitions of acquired foreign 

corporation and general successor 

transaction. 

(d) Fraction in determining 

assignments—(1) In general. In 

determining a covered shareholder’s 

assigned portion of a covered item of a 

foreign corporation under paragraph 

(c)(1) of this section, the fraction 

described in that paragraph is computed 

as follows. The numerator of the 

fraction is the amount that would be the 

covered shareholder’s share of the 

hypothetical distribution described in 

§ 1.951–1(e) for the foreign corporation’s 

taxable year if, for purposes of this 

paragraph (d), § 1.951–1(e) were applied 

with the modifications described in 

paragraph (d)(2) of this section. The 

denominator of the fraction is the 

amount that would be the hypothetical 

distribution described in § 1.951–1(e) 

for the foreign corporation’s taxable year 

if, for purposes of this paragraph (d), 

§ 1.951–1(e) were applied with the 

modifications described in paragraph 

(d)(2) of this section. 

(2) Modifications—(i) Allocable 

earnings and profits. For purposes of 

this paragraph (d), the foreign 

corporation’s allocable earnings and 

profits (as defined in § 1.951–1(e)(1)(ii)) 

are treated as the amount that is the 

greater of— 

(A) The earnings and profits of the 

foreign corporation for the taxable year, 

determined under section 964 and not 

reduced by distributions during the 

taxable year; and 

(B) The sum of all covered items of 

the foreign corporation for the taxable 

year. 

(ii) Controlled foreign corporation 

status. For purposes of this paragraph 

(d), § 1.951–1(e) applies without regard 

to whether the foreign corporation is a 

controlled foreign corporation. In 

addition, if there is no day during the 

taxable year on which the foreign 

corporation is a controlled foreign 

corporation, then the hypothetical 

distribution date (as defined in § 1.951– 

1(e)(1)(i)) is treated as the last day of the 

taxable year. 

(e) Rules for general successor 

transactions—(1) In general. In 

adjusting covered shareholders’ 

assignments of a covered item for a 

general successor transaction under 

paragraph (c)(2) of this section, increase 

an assignment in accordance with 

paragraph (e)(2) of this section, and then 

decrease assignments in accordance 

with paragraphs (e)(3) and (4) of this 

section. Generally, under these rules 

(together with §§ 1.959–4 and 1.961–9), 

previously taxed earnings and profits or 

section 961(c) basis with respect to the 

transferor covered shareholder (if the 

general successor transaction occurs 

before the last relevant day) or successor 

covered shareholder (if the general 

successor transaction occurs on or after 

the last relevant day) are applied to a 

covered item to the same extent such 

previously taxed earnings and profits or 

section 961(c) basis would have been 

applied if the general successor 

transaction had not occurred. 

(2) Increase—(i) General successor 

transaction occurring before the last 

relevant day. If the general successor 

transaction occurs before the last 

relevant day of the taxable year but after 

the covered item is received or 

recognized, then, subject to the 


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limitation in paragraph (e)(2)(iii) of this 

section, increase the transferor covered 

shareholder’s assignment of the covered 

item as follows. Increase the assignment 

by the additional portion of the covered 

item that would have been assigned to 

the transferor covered shareholder 

under paragraph (c)(1) of this section if 

the day on which the covered item is 

received or recognized were the last 

relevant day and the hypothetical 

distribution described in paragraph 

(d)(1) of this section were treated as 

made immediately before the covered 

item is received or recognized. 

(ii) General successor transaction 

occurring on or after the last relevant 

day. If the general successor transaction 

occurs on or after the last relevant day 

of the taxable year but before the 

covered item is received or recognized, 

then, subject to the limitation in 

paragraph (e)(2)(iii) of this section, 

increase the successor covered 

shareholder’s assignment of the covered 

item as follows. Increase the assignment 

by the additional portion of the covered 

item that would have been assigned to 

the successor covered shareholder 

under paragraph (c)(1) of this section if 

the day on which the covered item is 

received or recognized were the last 

relevant day and the hypothetical 

distribution described in paragraph 

(d)(1) of this section were treated as 

made immediately before the covered 

item is received or recognized. 

(iii) Limitations. The increase 

pursuant to paragraph (e)(2)(i) or (ii) of 

this section applies only to the extent it 

results in an additional portion of the 

covered item being previously taxed 

earnings and profits that are both with 

respect to the covered shareholder 

described in that paragraph and 

excluded from the foreign corporation’s 

gross income under section 959(b) and 

§ 1.959–4 or section 961(c) and § 1.961– 

9. Further, the increase cannot exceed 

the aggregate of each connected covered 

shareholder’s assigned portion of the 

covered item under paragraph (c)(1) of 

this section. 

(3) Decreases for connected covered 

shareholders owning acquired stock. For 

each connected covered shareholder 

that owns acquired stock of the foreign 

corporation on the last relevant day of 

the taxable year, decrease the connected 

covered shareholder’s assignment (but 

not below zero) by the product of the 

increase pursuant to paragraph (e)(2) of 

this section and a fraction. The 

numerator of the fraction is the 

connected covered shareholder’s 

assigned portion of the covered item 

under paragraph (c)(1) of this section, 

and the denominator of the fraction is 

the aggregate of the assigned portion of 

the covered item under paragraph (c)(1) 

of this section of each connected 

covered shareholder described in the 

preceding sentence. 

(4) Decreases for connected covered 

shareholders not owning acquired stock. 

For each connected covered shareholder 

that does not own acquired stock of the 

foreign corporation on the last relevant 

day of the taxable year, decrease the 

connected covered shareholder’s 

assignment by the product of the 

increase pursuant to paragraph (e)(2) of 

this section, reduced by the decreases 

pursuant to paragraph (e)(3) of this 

section, and a fraction. The numerator 

of the fraction is the connected covered 

shareholder’s assigned portion of the 

covered item under paragraph (c)(1) of 

this section, and the denominator of the 

fraction is the aggregate of the assigned 

portion of the covered item under 

paragraph (c)(1) of this section of each 

connected covered shareholder 

described in the preceding sentence. 

(f) Currency rule. For purposes of this 

section, if a covered item of a foreign 

corporation is denominated in a 

currency other than the foreign 

corporation’s functional currency, then 

the covered item is translated into the 

foreign corporation’s functional 

currency at the spot rate on the day on 

which the covered item is received or 

recognized. 

(g) Definitions and rules of general 

applicability. The definitions in 

§§ 1.959–1(b) and 1.961–(b), and the 

rules of general applicability in 

§§ 1.959–1(c) and (d) and 1.961–1(c) and 

(d), apply for purposes of this section, 

with the following additions. 

Acquired stock. The term acquired 

stock means, in a general successor 

transaction, stock of an acquired foreign 

corporation the ownership of which is 

acquired by the successor covered 

shareholder. 

Connected covered shareholder. The 

term connected covered shareholder 

means, in a general successor 

transaction, a covered shareholder that 

owns acquired stock of an acquired 

foreign corporation on the last relevant 

day of the acquired foreign corporation’s 

taxable year in which the general 

successor transaction occurs, or any 

covered shareholder bearing a 

relationship described in section 267(b) 

(determined without regard to section 

267(c)(3)) or 707(b) to a covered 

shareholder first described in this 

sentence. 

Covered item. The term covered item 

has the meaning provided in paragraph 

(b) of this section. 

(h) Examples—(1) In general. This 

paragraph (h) provides examples 

illustrating the application of this 

section. 

(2) Assumed facts. For purposes of the 

examples in this paragraph (h), unless 

otherwise indicated, the following facts 

are assumed: 

(i) US1 and US2 are unrelated 

domestic corporations that are covered 

shareholders. Neither US1 nor US2 is a 

member of a consolidated group (as 

defined in § 1.1502–1(h)). 

(ii) F1, F2, and F3 are foreign 

corporations, each of which is a 

controlled foreign corporation and uses 

the British pound (£) as its functional 

currency. 

(iii) Each entity uses the calendar year 

as its taxable year, and no entity has a 

short taxable year. 

(3) Examples—(i) Example 1: General 

assignment rule and single class of 

stock—(A) Facts. US1 and US2 each 

directly own 50% of the single class of 

outstanding stock of F1. F1 directly 

owns all the outstanding stock of each 

of F2 and F3. For F1’s taxable year 

ending on December 31 of year 3, the 

last relevant day is December 31, and F1 

has £500x of earnings and profits and 

two covered items. The covered items 

are a £60x covered distribution received 

from F2 and £40x of covered gain 

recognized with respect to stock of F3. 

(B) Analysis. The portion of each 

covered item assigned to each of US1 

and US2 is determined by multiplying 

the amount of the covered item by a 

fraction, the numerator of which is the 

portion of a £500x hypothetical 

distribution treated as made by F1 on 

the last relevant day that would be 

distributed with respect to stock of F1 

that the covered shareholder owns 

(£250x in the case of each US1 and 

US2), and the denominator of which is 

the amount of the hypothetical 

distribution (£500x). See paragraphs 

(c)(1) and (d)(1) of this section; see also 

paragraph (d)(2) of this section (treating 

F1’s hypothetical distribution as equal 

to the greater of £500x, F1’s earnings 

and profits for the taxable year, and 

£100x, the sum of F1’s covered items for 

the taxable year). Thus, US1 and US2 

are each assigned £30x of the covered 

distribution (£60x × £250x/£500x) and 

£20x of the covered gain (£40x × £250x/ 

£500x). 

(C) Alternative facts: common stock 

and preferred stock—(1) Facts. The facts 

are the same as in paragraph (h)(3)(i)(A) 

of this section (Example 1), except as 

follows. The stock of F1 owned by US1 

is an 8% nonparticipating, voting 

preferred share of stock with a par value 

of £1,000x, and the stock of F1 owned 

by US2 is common stock. There are no 

accrued but unpaid dividends with 

respect to the preferred stock. 


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95408 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

(2) Analysis. The portion of each 

covered item assigned to each of US1 

and US2 is determined by multiplying 

the amount of the covered item by a 

fraction, the numerator of which is the 

portion of a £500x hypothetical 

distribution treated as made by F1 on 

the last relevant day that would be 

distributed with respect to stock of F1 

that the covered shareholder owns (£80x 

in the case of US1, computed as 0.08 × 

£1,000x, and £420x in the case of US2, 

computed as £500x ¥ £80x), and the 

denominator of which is the amount of 

the hypothetical distribution (£500x). 

See paragraphs (c)(1) and (d) of this 

section. Thus, US1 is assigned £9.6x of 

the covered distribution (£60x × £80x/ 

£500x) and £6.4x of the covered gain 

(£40x × £80x/£500x), and US2 is 

assigned £50.4x of the covered 

distribution (£60x × £420x/£500x) and 

£33.6x of the covered gain (£40x × 

£420x/£500x). 

(ii) Example 2: General successor 

transaction occurs before the last 

relevant day and after a covered 

distribution—(A) Facts. US1 directly 

owns all the shares of the single class of 

outstanding stock of F1, and F1 directly 

owns all the outstanding stock of F2. On 

June 30 of year 3, US1 sells all the stock 

of F1 to US2 for money equal to the fair 

market value of the stock in a general 

successor transaction. For F1’s taxable 

year ending on December 31 of year 3, 

the last relevant day is December 31, 

and F1 has £500x of earnings and profits 

and one covered item. The covered item 

is a £100x covered distribution received 

by F1 from F2 on March 31. 

Immediately before the covered 

distribution, F2 has £100x of previously 

taxed earnings and profits with respect 

to US1. 

(B) Analysis—(1) In general. Without 

regard to paragraphs (c)(2) and (e) of this 

section (adjustments for general 

successor transactions), US2 would be 

assigned all £100x (and thus US1 would 

be assigned none) of the covered item 

because US2 owns all the stock of F1 on 

the last relevant day and therefore US2 

would have a 100% share of a £500x 

hypothetical distribution treated as 

made by F1 on that day. See paragraphs 

(c)(1) and (d) of this section. However, 

because the sale is a general successor 

transaction occurring before the last 

relevant day but after F1 receives the 

covered item, the assignments to US1 

(the transferor covered shareholder) and 

US2 (a connected covered shareholder 

by reason of owning acquired stock of 

F1 on the last relevant day) are adjusted. 

See paragraphs (c)(2) and (e)(1) of this 

section. The specific adjustments are 

described in paragraph (h)(3)(ii)(B)(2) of 

this section. As a result of these 

adjustments, the entirety of the covered 

item is a distribution to F1 of F2’s 

previously taxed earnings and profits 

with respect to US1 under § 1.959–4. 

Moreover, the previously taxed earnings 

and profits could be distributed by F1 

to US1 before the sale and, to the extent 

not so distributed, are previously taxed 

earnings and profits of F1 that transfer 

from US1 to US2 in the sale under 

§ 1.959–7. 

(2) Adjustments. US1’s assigned 

portion of the covered item is increased 

by £100x, which is the additional 

portion of the covered item that would 

have been assigned to US1 under 

paragraph (c)(1) of this section if March 

31 were the last relevant day (and, thus, 

F1’s £500x hypothetical distribution 

were treated as made when US1 owned 

all the stock of F1 and would therefore 

have a 100% share of the hypothetical 

distribution). See paragraph (e)(2)(i) of 

this section. In determining this 

increase, the first limitation in 

paragraph (e)(2)(iii) of this section does 

not apply because a £100x increase does 

not exceed the amount of F2’s 

previously taxed earnings and profits 

with respect to US1 that could be 

applied to exclude such additional 

portion of the covered item from F1’s 

gross income under section 959(b). In 

addition, the second limitation in 

paragraph (e)(2)(iii) of this section does 

not apply because a £100x increase does 

not exceed the amount of the covered 

item assigned to US2 under paragraph 

(c)(1) of this section. The £100x increase 

to US1’s assigned portion of the covered 

item decreases US2’s assigned portion 

of the covered item from £100x to £0. 

See paragraph (e)(3) of this section. 

(C) Alternative facts: limitation on 

increase and multiple connected 

covered shareholders—(1) Facts. The 

facts are the same as in paragraph 

(h)(3)(ii)(A) of this section (Example 2), 

except as follows. Immediately before 

the £100x covered distribution on 

March 31, F2 has £90x (rather than 

£100x) of previously taxed earnings and 

profits with respect to US1. On 

September 30 of year 3, F1 issues shares 

of its single class of outstanding stock to 

US3, a corporate covered shareholder 

related to US2 within the meaning of 

section 267(b), with the result that US2 

and US3 each own half of the stock of 

F1 on the last relevant day. 

(2) Analysis—(i) In general. Without 

regard to paragraphs (c)(2) and (e) of this 

section (adjustments for general 

successor transactions), US2 and US3 

would each be assigned £50x (and thus 

US1 would be assigned none) of the 

covered item because US2 and US3 each 

own half of the stock of F1 on the last 

relevant day and therefore would each 

have a 50% share of a £500x 

hypothetical distribution treated as 

made by F1 on that day. See paragraphs 

(c)(1) and (d) of this section. However, 

because the sale is a general successor 

transaction occurring before the last 

relevant day but after F1 receives the 

covered item, the assignments to US1 

(the transferor covered shareholder), 

US2 (a connected covered shareholder 

by reason of owning acquired stock of 

F1 on the last relevant day), and US3 (a 

connected covered shareholder by 

reason of bearing a relationship 

described in section 267(b) to US2) are 

adjusted. See paragraphs (c)(2) and 

(e)(1) of this section. The specific 

adjustments are described in paragraph 

(h)(3)(ii)(C)(2)(ii) of this section. As a 

result of these adjustments, £90x of the 

covered item is a distribution to F1 of 

F2’s previously taxed earnings and 

profits with respect to US1 under 

§ 1.959–4. Moreover, the previously 

taxed earnings and profits could be 

distributed by F1 to US1 before the sale 

and, to the extent not so distributed, are 

previously taxed earnings and profits of 

F1 that transfer from US1 to US2 in the 

sale under § 1.959–7. 

(ii) Adjustments. US1’s assigned 

portion of the covered item is increased 

by £90x, which is the lesser of the 

additional portion of the covered item 

that would have been assigned to US1 

if March 31 were the last relevant day 

(£100x) and the amount of F2’s 

previously taxed earnings and profits 

with respect to US1 that could be 

applied to exclude such additional 

portion of the covered item from F1’s 

gross income under section 959(b) 

(£90x). See paragraphs (e)(2)(i) and (iii) 

of this section. Because US2 owns 

acquired stock of F1 on the last relevant 

day, the £90x increase to US1’s assigned 

portion of the covered item first 

decreases US2’s assigned portion of the 

covered item, from £50x to £0. See 

paragraph (e)(3) of this section. Then, 

the remaining £40x increase to US1’s 

assigned portion of the covered item 

decreases US3’s assigned portion of the 

covered item, from £50x to £10x. See 

paragraph (e)(4) of this section. 

(iii) Example 3: General successor 

transaction occurs after the last relevant 

day—(A) Facts. US1 directly owns all 

100 shares of the single class of 

outstanding stock of F1. F1 directly 

owns all the outstanding stock of F2. On 

March 31 of year 3, F1 issues 100 shares 

of its single class of outstanding stock to 

a nonresident alien individual and, 

consequently, F1 ceases to be a 

controlled foreign corporation. On June 

30 of year 3, US1 sells its 100 shares of 

stock of F1 to US2 for money equal to 

the stock’s fair market value in a general 


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Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 95409 

successor transaction. For F1’s taxable 

year ending on December 31 of year 3, 

the last relevant day is March 31 and F1 

has £500x of earnings and profits and 

one covered item. The covered item is 

a £100x covered distribution received 

by F1 from F2 on September 30. 

Immediately before the covered 

distribution, F2 has £50x of previously 

taxed earnings and profits with respect 

to US2 (all of which transferred from 

US1 to US2 in the Sale). 

(B) Analysis—(1) In general. Without 

regard to paragraphs (c)(2) and (e) of this 

section (adjustments for general 

successor transactions), US2 would be 

assigned none of the covered item 

because US2 owns none of the stock of 

F1 on the last relevant day and therefore 

US2 would have a 0% share of a £500x 

hypothetical distribution treated as 

made by F1 on that day. See paragraphs 

(c)(1) and (d) of this section. However, 

because the sale is a general successor 

transaction occurring on or after the last 

relevant day but before F1 receives the 

covered item, the assignments to US2 

(the successor covered shareholder) and 

US1 (a connected covered shareholder 

by reason of owning acquired stock of 

F1 on the last relevant day) are adjusted. 

See paragraphs (c)(2) and (e)(1) of this 

section. The specific adjustments are 

described in paragraph (h)(3)(iii)(B)(2) 

of this section. As a result of these 

adjustments, £50x of the covered item is 

a distribution to F1 of F2’s previously 

taxed earnings and profits with respect 

to US2 under § 1.959–4. 

(2) Adjustments. US2’s assigned 

portion of the covered item is increased 

by £50x, which is the additional portion 

of the covered item that would have 

been assigned to US2 under paragraph 

(c)(1) of this section if September 30 

were the last relevant day (and, thus, 

F1’s £500x hypothetical distribution 

were treated as made when US2 owned 

half of the stock of F1 and would 

therefore have a 50% share of the 

hypothetical distribution). See 

paragraph (e)(2)(ii) of this section. In 

determining this increase, the first 

limitation in paragraph (e)(2)(iii) of this 

section does not apply because a £50x 

increase does not exceed the amount of 

F2’s previously taxed earnings and 

profits with respect to US2 that could be 

applied to exclude such additional 

portion of the covered item from F1’s 

gross income under section 959(b). In 

addition, the second limitation in 

paragraph (e)(2)(iii) of this section does 

not apply because a £50x increase does 

not exceed the amount of the covered 

item assigned to US1 under paragraph 

(c)(1) of this section. The £50x increase 

to US2’s assigned portion of the covered 

item decreases US1’s assigned portion 

of the covered item by £50x. See 

paragraph (e)(3) of this section. 

(i) Applicability date. This section 

applies to taxable years of foreign 

corporations that begin on or after [date 

of publication of final regulations in the 

Federal Register] or are early 

application years (as described in 

§ 1.959–12(d)) and to taxable years of 

persons for which such taxable years of 

those foreign corporations are relevant. 

§ 1.951A–1 [Amended] 

■ Par. 13. Section 1.951A–1 is amended 

by, for each paragraph listed in the 

following table, removing the language 

in the ‘‘Remove’’ column wherever it 

appears and adding in its place the 

language in the ‘‘Add’’ column: 

Paragraph Remove Add 

(d)(1) .................................... § 1.951–1(b) and (e) ........................................................ § 1.951–1(b) and (c). 

(d)(1) .................................... subpart F income ............................................................ subpart F income not attributable to covered items. 

(d)(2)(i) ................................. § 1.951–1(b) and (e) ........................................................ § 1.951–1(b) and (c). 

(d)(2)(i) ................................. substituting ‘‘tested income’’ for ‘‘subpart F income’’ 

each place it appears, other than in § 1.951– 

1(e)(1)(ii)(B) and the denominator of the fraction described in § 1.951–1(b)(1)(ii)(A).

substituting ‘‘tested income’’ for ‘‘subpart F income’’ 

each place it appears in § 1.951–1(b) other than in 

the denominator of the fraction described in § 1.951– 

1(b)(1)(ii)(A), substituting ‘‘tested income of the foreign corporation’’ for ‘‘all subpart F income of the foreign corporation not attributable to covered items’’ in 

§ 1.951–1(c)(2)(iii), and substituting ‘‘such tested income’’ for ‘‘such subpart F income’’ in § 1.951– 

1(c)(2)(iii). 

(d)(3)(iii) ................................ § 1.951–1(e)(7)(vii) .......................................................... § 1.951–1(h)(1)(vii). 

(d)(3)(iii)(A)(2)(i) ................... § 1.951–1(e)(1) ................................................................ § 1.951–1(c)(2)(iii). 

(d)(4)(i) ................................. § 1.951–1(b) and (e) ........................................................ § 1.951–1(b) and (c). 

(d)(4)(i)(A) ............................ substituted for ‘‘subpart F income’’ each place it appears.substituted for ‘‘subpart F income’’ each place it appears in § 1.951–1(b) and (c), ‘‘tested loss of the foreign corporation’’ is substituted for ‘‘all subpart F income of the foreign corporation not attributable to 

covered items’’ in § 1.951–1(c)(2)(iii), and ‘‘such tested loss’’ is substituted for ‘‘such subpart F income’’ in 

§ 1.951–1(c)(2)(iii). 

(d)(4)(iv) ............................... § 1.951–1(e)(7)(viii) ......................................................... § 1.951–1(h)(1)(viii). 

■ Par. 14. Section 1.951A–2 is amended 

by: 

■ 1. In paragraph (c)(1)(iv), removing 

the language ‘‘and’’; 

■ 2. In paragraph (c)(1)(v), removing the 

period and adding the language ‘‘, and’’ 

in its place; and 

■ 3. Adding paragraph (c)(1)(vi). 

The addition reads as follows: 

§ 1.951A–2 Tested income and tested loss. 

* * * * * 

(c) * * * 

(1) * * * 

(vi) Previously taxed earnings and 

profits excluded from the corporation’s 

gross income under section 959(b) and 

§ 1.959–4 or section 961(c) and § 1.961– 

9. 

* * * * * 

■ Par. 15. Section 1.951A–7 is amended 

by adding paragraph (f) to read as 

follows: 

§ 1.951A–7 Applicability dates. 

* * * * * 

(f) Pro rata share determinations and 

exclusions under sections 959(b) and 

961(c). Sections 1.951A–1(d) and 

1.951A–2(c)(1)(vi) apply to taxable years 

of foreign corporations that begin on or 

after [date of publication of final 

regulations in the Federal Register] or 

are early application years (as described 

in § 1.959–12(d)) and to taxable years of 

persons for which such taxable years of 

those foreign corporations are relevant. 

See § 1.951A–1(d) as contained in 26 


ddrumheller on DSK120RN23PROD with PROPOSALS2
95410 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

CFR part 1 revised as of April 1, 2024, 

for a version of § 1.951A–1(d) applicable 

to prior taxable years. 

■ Par. 16. Section 1.952–1 is amended 

by adding paragraphs (c)(4), (c)(5), and 

(h) to read as follows: 

§ 1.952–1 Subpart F income defined. 

* * * * * 

(c) * * * 

(4) Coordination of earnings and 

profits limitation with sections 959(b) 

and 961(c)—(i) In general. Distributions 

of previously taxed earnings and profits 

received by a controlled foreign 

corporation, and previously taxed 

earnings and profits resulting from the 

application of a controlled foreign 

corporation’s section 961(c) basis to gain 

recognized by the controlled foreign 

corporation, are not included in the 

controlled foreign corporation’s 

earnings and profits for the taxable year 

for purposes of the limitation in section 

952(c)(1)(A). See paragraph (h) of this 

section (regarding excluding previously 

taxed earnings and profits from a 

controlled foreign corporation’s gross 

income for purposes of determining its 

subpart F income). 

(ii) Applicability date. Paragraph 

(c)(4)(i) of this section applies to taxable 

years of foreign corporations that begin 

on or after [date of publication of final 

regulations in the Federal Register] or 

are early application years (as described 

in § 1.959–12(d)) and to taxable years of 

persons for which such taxable years of 

those foreign corporations are relevant. 

(5) Transition rule for deficits of a 

domestic partnership that was an 

inclusion shareholder with respect to a 

controlled foreign corporation—(i) In 

general. For purposes of applying 

section 952(c)(1)(B) to any taxable year 

of a controlled foreign corporation, a 

United States shareholder that owns 

(within the meaning of section 958(a)) 

stock of the controlled foreign 

corporation by reason of an interest in 

a domestic partnership on the last day 

of the first taxable year of the controlled 

foreign corporation during which 

§ 1.958–1(d) applies to the domestic 

partnership (or, if earlier, the last day of 

such taxable year on which the foreign 

corporation is a controlled foreign 

corporation) (transition date) takes into 

account its assigned portion of any prior 

year deficit (determined under 

paragraph (c)(5)(ii) of this section) for 

any taxable year of the controlled 

foreign corporation ending before the 

application of § 1.958–1(d) in 

determining the United States 

shareholder’s pro rata share of a prior 

year deficit under section 

952(c)(1)(B)(iv)(II), and the domestic 

partnership ceases to take into account 

such prior year deficit. 

(ii) Assigned portion of prior year 

deficit. A United States shareholder’s 

assigned portion of a prior year deficit 

is determined on the transition date by 

multiplying a domestic partnership’s 

pro rata share of the prior year deficit 

(determined under section 

952(c)(1)(B)(iv)(II) as of the close of the 

taxable year in which the deficit arose) 

by a fraction, the numerator of which is 

the liquidation value of the United 

States shareholder’s interest in the 

partnership and the denominator of 

which is the aggregate liquidation value 

of all partners’ interests in the 

partnership. For purposes of this 

fraction, the liquidation value of a 

partner’s interest in the partnership is 

the amount of cash the partner would 

receive with respect to the interest if, on 

the transition date, the partnership (and 

any partnership through which the 

partner indirectly owns an interest in 

the partnership) sold all of its property 

for an amount of cash equal to the fair 

market value of the property (taking into 

account section 7701(g)), satisfied all of 

its liabilities (other than those described 

in § 1.752–7), paid an unrelated third 

party to assume all of its § 1.752–7 

liabilities in a fully taxable transaction, 

and then the partnership (and any 

partnership through which the partner 

indirectly owns an interest in the 

partnership) liquidated. 

(iii) Applicability date. This 

paragraph (c)(5) applies to taxable years 

of foreign corporations beginning on or 

after [date of publication of final 

regulations in the Federal Register], and 

to taxable years of United States 

shareholders in which or with which 

such taxable years of foreign corporation 

end. A United States shareholder may 

apply this paragraph (c)(5) to a taxable 

year of a foreign corporation that 

precedes the taxable years described in 

the preceding sentence if each of the 

following conditions is satisfied— 

(A) Consistent application condition. 

This paragraph (c)(5) is applied in its 

entirety to the taxable year and all 

succeeding taxable years of the foreign 

corporation, to all taxable years of 

United States shareholders to which 

such a taxable year of the foreign 

corporation is relevant, and to all 

taxable years of related foreign 

corporations that end on or after the 

later of the last day of the first taxable 

year of the foreign corporation to which 

this paragraph (c)(5) applies and the 

first day on which the foreign 

corporations are related. For purposes of 

the preceding sentence, foreign 

corporations are related if the foreign 

corporations bear a relationship to each 

other described in section 267(b). 

(B) Open period of limitations 

condition. The period of limitations on 

assessment for each taxable year 

described in paragraph (c)(5)(iii)(A) of 

this section is open under section 6501. 

(C) Written consent condition. Each 

United States shareholder described in 

paragraph (c)(5)(iii)(A) of this section 

provides to the foreign corporation a 

written statement in which the United 

States shareholder consents to apply the 

rules described in this paragraph (c)(5) 

to the taxable years of the United States 

shareholder described in paragraph 

(c)(5)(iii)(A) of this section and affirms 

that the period of limitations on 

assessment for each such taxable year is 

open under section 6501. 

* * * * * 

(h) Exclusions from gross income 

under sections 959(b) and 961(c). See 

§§ 1.959–4 and 1.961–9 for rules 

excluding previously taxed earnings and 

profits from a controlled foreign 

corporation’s gross income for purposes 

of determining its subpart F income. 

■ Par. 17. Section 1.954–1 is amended 

by: 

■ 1. In paragraph (c)(1)(iii)(A), adding 

the language ‘‘or income from a covered 

item’’ immediately after the language 

‘‘that is passive’’; and 

■ 2. Adding paragraphs (c)(1)(iii)(C) and 

(h)(4). 

The additions read as follows: 

§ 1.954–1 Foreign base company income. 

* * * * * 

(c) * * * 

(1) * * * 

(iii) * * * 

(C) Covered items. A single item of 

income is the portion of a covered item 

(as defined in § 1.951–2(b)) that— 

(1) Falls within a single category of 

foreign base company income described 

in paragraph (c)(1)(iii)(A)(1) or (2) of 

this section; 

(2) Falls within a separate category (as 

defined in § 1.904–5(a)(4)(v)); and 

(3) In the case of any amount which 

constitutes passive foreign personal 

holding company income, falls within a 

single group of passive income under 

the grouping rules of § 1.904–4(c)(3), (4), 

or (5). 

* * * * * 

(h) * * * 

(4) Paragraph (c)(1)(iii)(C) of this 

section. Paragraph (c)(1)(iii)(C) of this 

section applies to taxable years of a 

foreign corporation that begin on or after 

[date of publication of final regulations 

in the Federal Register] or are early 

application years (as described in 

§ 1.959–12(d)), and to taxable years of a 


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Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 95411 

United States shareholder of the foreign 

corporation in which or with which 

such taxable year of such foreign 

corporation ends. 

■ Par. 18. Section 1.959–1 is revised to 

read as follows: 

§ 1.959–1 Overview, definitions, and rules 

of general applicability. 

(a) Overview—(1) In general. The 

section 959 regulations provide rules 

regarding previously taxed earnings and 

profits. This section sets forth 

definitions and rules of general 

applicability. Section 1.959–2 sets forth 

rules for shareholder-level and foreign 

corporation-level accounting of a foreign 

corporation’s previously taxed earnings 

and profits. Section 1.959–3 provides 

the adjustments under section 959 to 

shareholder-level accounts with respect 

to a foreign corporation. Section 1.959– 

4 provides rules for excluding 

previously taxed earnings and profits 

received in a distribution from gross 

income of a covered shareholder or 

controlled foreign corporation. Section 

1.959–5 provides rules for excluding the 

portion of a section 956 amount that is 

allocated to previously taxed earnings 

and profits from gross income of a 

covered shareholder. Section 1.959–6 

provides rules for allocating and 

apportioning current year taxes paid or 

accrued by a foreign corporation to its 

previously taxed earnings and profits. 

Section 1.959–7 provides rules for 

transferring previously taxed earnings 

and profits in a general successor 

transaction. Sections 1.959–8 through 

1.959–9 are reserved. Section 1.959–10 

provides examples illustrating the 

application of the section 959 

regulations. Section 1.959–11 sets forth 

transition rules. Section 1.959–12 sets 

forth applicability dates. See § 1.1502– 

59 for additional rules for a 

consolidated group. 

(2) Scope. This section sets forth 

definitions and rules of general 

applicability for purposes of the section 

959 regulations. Paragraph (b) of this 

section provides definitions. Paragraph 

(c) of this section provides rules relating 

to S corporations. Paragraph (d) of this 

section provides an anti-avoidance rule. 

(b) Definitions. The following 

definitions apply for purposes of the 

section 959 regulations. 

2019 notice provisions. The term 2019 

notice provisions has the meaning 

provided in § 1.959–12(c)(2). 

Acquired foreign corporation. The 

term acquired foreign corporation has 

the meaning provided in § 1.959–7(b). 

Adjusted applicable percentage. The 

term adjusted applicable percentage has 

the meaning provided in § 1.959– 

2(b)(2)(iii)(A). 

Annual PTEP account. The term 

annual PTEP account means an account 

that is described in § 1.959–2(b)(1) and 

tracks previously taxed earnings and 

profits. 

Character. The term character means, 

with respect to previously taxed 

earnings and profits, the taxable year, 

section 904 category, PTEP group and, 

if applicable, PTEP subgroup to which 

the previously taxed earnings and 

profits relate, as well as, if applicable, 

the adjusted applicable percentage and 

section 965(c) deduction percentage 

with respect to the previously taxed 

earnings and profits. 

Controlled foreign corporation. The 

term controlled foreign corporation has 

the meaning provided in section 957(a) 

(or, if applicable, section 957(b) or 

953(c)(1)(B)). 

Corporate PTEP account. The term 

corporate PTEP account has the 

meaning provided in § 1.959–2(d)(1). 

Corporate PTEP tax pool. The term 

corporate PTEP tax pool has the 

meaning provided in § 1.959–2(d)(2). 

Covered distribution. The term 

covered distribution has the meaning 

provided in § 1.959–4(c). 

Covered gain. The term covered gain 

has the meaning provided in § 1.961– 

9(c). 

Covered shareholder. The term 

covered shareholder means a United 

States person (as described in section 

7701(a)(30)), other than a domestic 

partnership. 

Creditable PTEP tax group. The term 

creditable PTEP tax group has the 

meaning provided in § 1.959–2(b)(4)(ii). 

Current year taxes. The term current 

year taxes has the meaning provided in 

§ 1.960–1(b)(4) except that ‘‘foreign 

corporation’’ is substituted for 

‘‘controlled foreign corporation’’ and 

‘‘the foreign corporation’s taxable year’’ 

is substituted for ‘‘current taxable year’’. 

Deemed covered shareholder. The 

term deemed covered shareholder has 

the meaning provided in § 1.959–7(g). 

Dollar basis pool. The term dollar 

basis pool means an account that is 

described in § 1.959–2(b)(1) and that 

tracks the basis in U.S. dollars of 

previously taxed earnings and profits. 

Domestic partnership. The term 

domestic partnership has the meaning 

provided in section 7701(a)(2) and (4). 

See paragraph (c) of this section, 

providing that an S corporation is 

treated in the same manner as a 

domestic partnership. 

Early application corporation. The 

term early application corporation has 

the meaning provided in § 1.959– 

12(d)(1). 

Early application years. The term 

early application years has the meaning 

provided in § 1.959–12(d)(1). 

Foreign income taxes. The term 

foreign income taxes has the meaning 

provided in § 1.901–2(a). 

General successor PTEP. The term 

general successor PTEP has the meaning 

provided in § 1.959–7(c)(1). 

General successor transaction. The 

term general successor transaction has 

the meaning provided in § 1.959–7(b). 

GILTI inclusion amount. The term 

GILTI inclusion amount has the 

meaning provided in § 1.951A–1(c)(1) 

(or § 1.1502–51(b) in the case of a 

member of a consolidated group, as 

defined in § 1.1502–1(h)). 

Last relevant day. The term last 

relevant day means the last day of a 

taxable year of a foreign corporation on 

which the foreign corporation is a 

controlled foreign corporation. 

Multi-year dollar basis account. The 

term multi-year dollar basis account has 

the meaning provided in § 1.959– 

11(b)(2)(ii)(B). 

Multi-year PTEP account. The term 

multi-year PTEP account has the 

meaning provided in § 1.959– 

11(b)(2)(ii)(A). 

Own. The term own (or ownership or 

owned), when used with respect to stock 

of a foreign corporation, means to own 

the stock within the meaning of section 

958(a) and § 1.958–1(a) (thus 

determined by treating a domestic 

partnership in the same manner as a 

foreign partnership pursuant to § 1.958– 

1(d)). When used with respect to 

interests in a partnership, own (or 

ownership or owned) means to own the 

interests within the meaning of the 

preceding sentence, determined by 

treating the interests as stock of a 

foreign corporation. 

Previously taxed earnings and profits. 

The term previously taxed earnings and 

profits means earnings and profits of a 

foreign corporation that are described in 

section 959(c)(1) or (2). See § 1.959–2(b) 

and (d) for covered shareholder-level 

and foreign corporation-level 

accounting of previously taxed earnings 

and profits. 

Prior-law PTEP groups. The term 

prior-law PTEP groups has the meaning 

provided in § 1.959–11(c)(2)(iii). 

Prior-law PTEP group taxes. The term 

prior-law PTEP group taxes has the 

meaning provided in § 1.959– 

11(c)(2)(iii). 

PTEP group. The term PTEP group 

means any of the groups listed in 

§ 1.959–2(b)(2)(i). 

PTEP realization event. The term 

PTEP realization event has the meaning 

provided in § 1.959–6(b). 


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PTEP subgroup. The term PTEP 

subgroup means any of the groups listed 

in § 1.959–2(b)(2)(ii). 

PTEP tax pool. The term PTEP tax 

pool means an account that is described 

in § 1.959–2(b)(1) and that tracks the 

U.S. dollar amount of foreign income 

taxes associated with previously taxed 

earnings and profits. 

Relevant taxable year. The term 

relevant taxable year has the meaning 

provided in § 1.959–3(b). 

S corporation. The term S corporation 

has the meaning provided in section 

1361(a)(1). See paragraph (c) of this 

section, providing that an S corporation 

is treated in the same manner as a 

domestic partnership. 

Same priority PTEP. The term same 

priority PTEP has the meaning provided 

in § 1.959–4(e)(5). 

Section 904 category. The term 

section 904 category has the meaning 

provided in § 1.960–1(b). 

Section 956 amount. The term section 

956 amount has the meaning provided 

in § 1.959–5(c). 

Section 959 regulations. The term 

section 959 regulations means the 

regulations in this part issued under 

section 959. 

Section 965(c) deduction percentage. 

The term section 965(c) deduction 

percentage has the meaning provided in 

§ 1.959–2(b)(2)(iii)(B). 

Spot rate. The term spot rate has the 

meaning provided in § 1.988–1(d). 

Substituted basis property. The term 

substituted basis property has the 

meaning provided in section 

7701(a)(42). 

Successor covered shareholder. The 

term successor covered shareholder has 

the meaning provided in § 1.959–7(b). 

Subpart F income. The term subpart 

F income has the meaning provided in 

section 952 and § 1.952–1. 

Taxable year. The term taxable year 

has the meaning provided in section 

7701(a)(23), determined by treating a 

person (as described in section 

7701(a)(1)) other than an individual that 

does not otherwise have a taxable year 

as computing taxable income on the 

basis of the calendar year. 

Tested income. The term tested 

income has the meaning provided in 

section 951A(c)(2) and § 1.951A–2(b)(1). 

Tested loss. The term tested loss has 

the meaning provided in section 

951A(c)(2) and § 1.951A–2(b)(2). 

Transferor covered shareholder. The 

term transferor covered shareholder has 

the meaning provided in § 1.959–7(b). 

United States shareholder. The term 

United States shareholder has the 

meaning provided in section 951(b) (or, 

if applicable, section 953(c)(1)(A)). 

(c) Treatment of an S corporation—(1) 

In general. Except as provided in 

paragraph (c)(2) of this section, for 

purposes of the section 959 regulations, 

an S corporation is treated in the same 

manner as a domestic partnership, a 

reference to a domestic partnership 

includes an S corporation, and 

shareholders of an S corporation are 

treated as partners of such partnership. 

See section 1373(a). As applicable, the 

treatment of an S corporation and its 

shareholders under the preceding 

sentence is determined by replacing any 

partnership-specific provision with the 

equivalent provision for S corporations 

(for example, a reference to a partner’s 

distributive share of a partnership’s 

income refers to a shareholder’s pro rata 

share of an S corporation’s income). 

(2) Treatment as a covered 

shareholder for taxable years for which 

elective entity treatment applies for 

§ 1.958–1(d)(1) purposes. See § 1.959– 

11(d) for a rule treating an S corporation 

as a covered shareholder for any taxable 

year of the S corporation for which 

§ 1.958–1(d)(1) does not apply and 

§ 1.959–11(e) for a transition rule 

converting S corporation-level accounts 

(for example, annual PTEP accounts) to 

accounts of covered shareholders 

owning interests in the S corporation 

once the S corporation is no longer 

treated as a covered shareholder. 

(d) Anti-avoidance rule. If a 

transaction, series of transactions, plan, 

or arrangement is engaged in with a 

principal purpose of avoiding the 

purposes of section 959 and the section 

959 regulations, then appropriate 

adjustments are made, which may 

include adjustments to disregard the 

transaction, series of transactions, plan, 

or arrangement. 

■ Par. 19. Section 1.959–2 is revised to 

read as follows: 

§ 1.959–2 Accounting of previously taxed 

earnings and profits. 

(a) Scope. This section sets forth rules 

for shareholder-level and foreign 

corporation-level accounting of a foreign 

corporation’s previously taxed earnings 

and profits. Paragraph (b) of this section 

provides the shareholder-level 

accounting rules. Paragraph (c) of this 

section provides rules relating to 

combined pool elections for certain 

covered shareholder-level accounts. 

Paragraph (d) of this section provides 

the foreign corporation-level accounting 

rules. 

(b) Shareholder-level accounting—(1) 

In general. A covered shareholder that 

owns stock of a foreign corporation 

must establish and maintain annual 

PTEP accounts, dollar basis pools, and 

PTEP tax pools with respect to the 

foreign corporation in accordance with 

this paragraph (b) and the adjustments 

prescribed in § 1.959–3. The annual 

PTEP accounts track the foreign 

corporation’s previously taxed earnings 

and profits with respect to the covered 

shareholder, the dollar basis pools track 

the basis in U.S. dollars of the 

previously taxed earnings and profits, 

and the PTEP tax pools track the U.S. 

dollar amount of any foreign income 

taxes associated with the previously 

taxed earnings and profits. See also 

§ 1.1502–59(c)(2), treating members of a 

consolidated group as a single covered 

shareholder for purposes of section 959. 

(2) Annual PTEP accounts—(i) In 

general. Each annual PTEP account 

must relate to a single taxable year of 

the foreign corporation and a single 

section 904 category. In addition, 

previously taxed earnings and profits 

within each annual PTEP account must 

be maintained in the foreign 

corporation’s functional currency and 

assigned to the PTEP groups identified 

in the following table. 

TABLE 1 TO PARAGRAPH (b)(2)(i) OF THIS SECTION—PTEP GROUPS

Section 959(c)(1) PTEP groups Section 959(c)(2) PTEP groups 

Group Description Group Description 

General section 

959(c)(1) PTEP 

group.

Earnings and profits described in section 

959(c)(1) and not described in another 

PTEP group.

Section 951(a)(1)(A) 

PTEP group.

Earnings and profits described in section 

959(c)(2) and not described in another 

PTEP group. 

Reclassified section 

951A PTEP group.

Earnings and profits described in section 

959(c)(1) and initially assigned to the section 951A PTEP group.

Section 951A PTEP 

group.

Earnings and profits described in section 

959(c)(2) by reason of section 951A. 


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TABLE 1 TO PARAGRAPH (b)(2)(i) OF THIS SECTION—PTEP GROUPS—Continued 

Section 959(c)(1) PTEP groups Section 959(c)(2) PTEP groups 

Group Description Group Description 

Reclassified section 

245A(d) PTEP group.

Earnings and profits described in section 

959(c)(1) and initially assigned to the section 245A(d) PTEP group.

Section 245A(d) PTEP 

group.

Earnings and profits described in section 

959(c)(2) by reason of an income inclusion 

to which section 245A(d) applies. 

Reclassified section 

965(a) PTEP group.

Earnings and profits described in section 

959(c)(1) and initially assigned to the section 965(a) PTEP group.

Section 965(a) PTEP 

group.

Earnings and profits described in section 

959(c)(2) by reason of section 965(a). 

Reclassified section 

965(b) PTEP group.

Earnings and profits described in section 

959(c)(1) and initially assigned to the section 965(b) PTEP group.

Section 965(b) PTEP 

group.

Earnings and profits described in section 

959(c)(2) by reason of section 965(b). 

(ii) Subgroups—(A) In general. To the 

extent required under § 1.959–3(c), 

previously taxed earnings and profits 

assigned to a PTEP group within an 

annual PTEP account must be further 

assigned to the taxable section 962 

PTEP subgroup or taxable section 1411 

subgroup. These subgroups track 

previously taxed earnings and profits 

that will be includible in gross income 

under section 962(d) or includible in net 

investment income under section 

1411(c) when distributed to the covered 

shareholder, as applicable. 

(B) Coordination rule. A subgroup 

described in paragraph (b)(2)(ii)(A) of 

this section is not treated as a separate 

PTEP group for purposes of establishing 

and maintaining dollar basis pools and 

PTEP tax pools. 

(iii) Percentages with respect to 

section 965 previously taxed earnings 

and profits—(A) Adjusted applicable 

percentage. An adjusted applicable 

percentage must be established and 

maintained with respect to all 

previously taxed earnings and profits 

assigned to the reclassified section 

965(a) PTEP group, reclassified section 

965(b) PTEP group, section 965(a) PTEP 

group, and section 965(b) PTEP group 

and relating to a single section 904 

category (therefore without regard to the 

taxable years to which the previously 

taxed earnings and profits relate). The 

adjusted applicable percentage tracks 

the percentage of a credit or deduction 

for foreign income taxes associated with 

previously taxed earnings and profits 

that is disallowed under § 1.965–5. See 

§ 1.959–11(c)(3) for the initial 

determination of the adjusted applicable 

percentage and § 1.959–3(c)(3) for 

adjustments. 

(B) Section 965(c) deduction 

percentage. A section 965(c) deduction 

percentage must be established and 

maintained with respect to all 

previously taxed earnings and profits 

assigned to the reclassified section 

965(a) PTEP group and section 965(a) 

PTEP group and relating to a single 

section 904 category (therefore without 

regard to the taxable years to which the 

previously taxed earnings and profits 

relate). The section 965(c) deduction 

percentage tracks the percentage of 

foreign currency gain or loss with 

respect to previously taxed earnings and 

profits that is not recognized under 

§ 1.986(c)–1. See § 1.959–11(c)(4) for the 

initial determination of the section 

965(c) deduction percentage and 

§ 1.959–3(c)(3) for adjustments. 

(iv) Deemed taxable years. If 

previously taxed earnings and profits 

are distributed to an upper-tier foreign 

corporation or result from the 

application of section 961(c) basis to 

gain recognized by an upper-tier 

corporation, and the previously taxed 

earnings and profits relate to a taxable 

year of a lower-tier foreign corporation 

that includes one or more days on 

which the upper-tier foreign corporation 

did not exist, then, solely for purposes 

of the establishment and maintenance of 

annual PTEP accounts, the upper-tier 

corporation is treated as having the 

taxable year or taxable years it would 

have had if it were to have existed on 

those days, determined based on the 

manner in which it computes its taxable 

income for its initial taxable year. 

(3) Dollar basis pools. Each dollar 

basis pool must relate to previously 

taxed earnings and profits assigned to a 

single PTEP group within a single 

annual PTEP account or, if a combined 

pool election applies to the covered 

shareholder, previously taxed earnings 

and profits assigned to a single PTEP 

group and relating to a single section 

904 category (therefore without regard 

to the taxable years to which the 

previously taxed earnings and profits 

relate). Basis within each dollar basis 

pool must be maintained in U.S. dollars. 

(4) PTEP tax pools—(i) In general. 

Each PTEP tax pool must relate to 

previously taxed earnings and profits 

assigned to a single PTEP group within 

a single annual PTEP account or, if a 

combined pool election applies to the 

covered shareholder, previously taxed 

earnings and profits assigned to a single 

PTEP group and relating to a single 

section 904 category (therefore without 

regard to the taxable years to which the 

previously taxed earnings and profits 

relate). Foreign income taxes within 

each PTEP tax pool must be maintained 

in U.S. dollars. 

(ii) Creditable PTEP tax group. To the 

extent required under § 1.959–3(e), 

foreign income taxes within each PTEP 

tax pool must be assigned to the 

creditable PTEP tax group. This group 

tracks foreign income taxes that are 

eligible to be deemed paid under section 

960(b). 

(c) Combined pool elections—(1) In 

general. For purposes of paragraph (c) of 

this section, a combined pool election is 

made for a taxable year of a covered 

shareholder and, once made, remains in 

effect until revoked. The combined pool 

election applies with respect to each 

foreign corporation in which the 

covered shareholder owns stock, 

beginning as of the first day of the first 

taxable year of the foreign corporation 

that ends with or within the taxable year 

of the covered shareholder for which the 

combined pool election is made or, if 

later, the first day in which the covered 

shareholder owns stock of the foreign 

corporation. 

(2) Revocation. A combined pool 

election may only be revoked with the 

consent of the Commissioner (and in the 

time and manner specified by the 

Commissioner), and such consent will 

be granted only in rare and unusual 

circumstances. 

(3) Time and manner of making 

election—(i) In general. Except as 

otherwise provided by a form, 

instruction, publication, or other 

guidance, a covered shareholder makes 

a combined pool election by, for a 

transaction related to a timely filed 

(including extensions) original Federal 

income tax return of the covered 

shareholder, computing the dollar basis 

of, or foreign income taxes associated 

with, previously taxed earnings and 

profits consistent with a combined pool 

election. 


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(ii) Sixty-month limitation on a 

subsequent election. A covered 

shareholder is not permitted to make a 

combined pool election for any taxable 

year beginning less than 60 months after 

the last day that a previous combined 

pool election applied to the covered 

shareholder (or a predecessor). 

(4) Converting to combined pools. As 

of the beginning of the first day that a 

covered shareholder’s combined pool 

election applies with respect to a foreign 

corporation, each of the covered 

shareholder’s dollar basis pools or PTEP 

tax pools with respect to the foreign 

corporation (a combined pool) is equal 

to the sum of all of the dollar basis pools 

or PTEP tax pools, as applicable, that, 

immediately before the combined pool 

election applies, related to the same 

PTEP group and section 904 category to 

which the combined pool relates. 

(d) Foreign corporation-level 

accounting—(1) Corporate PTEP 

accounts. Corporate PTEP accounts 

must be established and maintained 

with respect to a foreign corporation. 

Each corporate PTEP account must 

relate to a single covered shareholder, 

and previously taxed earnings and 

profits within a corporate PTEP account 

must be assigned to section 904 

categories and the PTEP groups 

identified in the table to paragraph 

(b)(2)(i) of this section. A corporate 

PTEP account for a covered shareholder 

is equal to the aggregate of all 

previously taxed earnings and profits 

that are within such covered 

shareholder’s annual PTEP accounts 

with respect to the foreign corporation. 

Thus, as a covered shareholder’s annual 

PTEP accounts with respect to the 

foreign corporation are adjusted under 

§ 1.959–3, the foreign corporation’s 

corporate PTEP account for the covered 

shareholder and the foreign 

corporation’s earnings and profits 

described in section 959(c)(1) or (c)(2) 

are also adjusted. 

(2) Corporate PTEP tax pools. 

Corporate PTEP tax pools must be 

established and maintained by a foreign 

corporation. Each corporate PTEP tax 

pool must relate to a single covered 

shareholder, and foreign income taxes 

within a corporate PTEP tax pool must 

be assigned to section 904 categories 

and the PTEP groups identified in the 

table to paragraph (b)(2)(i) of this 

section. A corporate PTEP tax pool 

relating to a covered shareholder is 

equal to the aggregate of all foreign 

income taxes that are within that 

covered shareholder’s PTEP tax pools 

with respect to the foreign corporation. 

Thus, as a covered shareholder’s PTEP 

tax pools with respect to the foreign 

corporation are adjusted under § 1.959– 

3, the foreign corporation’s corporate 

PTEP tax pool relating to the covered 

shareholder is also adjusted. Foreign 

income taxes within a corporate PTEP 

tax pool that are eligible to be deemed 

paid under section 960(b) are assigned 

to the creditable PTEP tax group within 

the covered shareholder’s PTEP tax 

pools. 

(3) Earnings and profits determined 

independently of previously taxed 

earnings and profits. A foreign 

corporation’s earnings and profits are 

determined independently of the foreign 

corporation’s previously taxed earnings 

and profits. Thus, for example, the 

extent to which a distribution is made 

out of a foreign corporation’s earnings 

and profits is determined independently 

of the foreign corporation’s corporate 

PTEP accounts. See section 316. 

Similarly, a foreign corporation’s 

earnings and profits may be less than 

the foreign corporation’s previously 

taxed earning and profits (with the 

result that the foreign corporation has a 

deficit in earnings and profits described 

in section 959(c)(3)). 

■ Par. 20. Section 1.959–3 is revised to 

read as follows: 

§ 1.959–3 Adjustments to shareholderlevel accounts. 

(a) Scope. This section provides the 

adjustments under section 959 to 

shareholder-level accounts with respect 

to a foreign corporation. Paragraph (b) of 

this section provides the general rule, 

pursuant to which shareholder-level 

accounts (annual PTEP accounts, dollar 

basis pools, and PTEP tax pools) are 

adjusted with respect to a foreign 

corporation to reflect income inclusions 

relating to, and transactions occurring 

within, the foreign corporation’s taxable 

year. Paragraph (c) of this section 

describes adjustments to annual PTEP 

accounts. Paragraph (d) of this section 

describes adjustments to dollar basis 

pools. Paragraph (e) of this section 

describes adjustments to PTEP tax 

pools. Paragraph (f) of this section 

provides timing rules for when 

adjustments are treated as made. 

Paragraph (g) of this section provides an 

ordering rule for the application of this 

section to tiered foreign corporations. 

See also § 1.959–2(d)(1) and (2), 

providing that as shareholder-level 

accounts are adjusted with respect to a 

foreign corporation under this section, 

the foreign corporation-level accounts 

are consequently also adjusted. 

(b) In general. To reflect income 

inclusions and transactions related to a 

taxable year of a foreign corporation 

(such taxable year for which this section 

is being applied, the relevant taxable 

year), a covered shareholder’s annual 

PTEP accounts, dollar basis pools, and 

PTEP tax pools with respect to the 

foreign corporation must be adjusted in 

accordance with the rules in this 

section. 

(c) Adjustments to annual PTEP 

accounts—(1) In general—(i) Increases 

for amounts included in gross income 

under section 951(a)(1)(A). If the foreign 

corporation is a controlled foreign 

corporation and the covered shareholder 

includes in gross income its pro rata 

share of the corporation’s subpart F 

income for the relevant taxable year 

under section 951(a)(1)(A) (including by 

reason of section 245A(e)(2) or 964(e)(4), 

but not including an amount described 

in section 959(e)), then, for each annual 

PTEP account that relates to the relevant 

taxable year and a section 904 category 

to which a portion of the inclusion is 

assigned (determined at the level of the 

covered shareholder, thus after the 

application of § 1.904–4(c)), add an 

amount of previously taxed earnings 

and profits equal to such portion to the 

annual PTEP account. Assign such 

previously taxed earnings and profits to 

the section 951(a)(1)(A) PTEP group, 

except assign previously taxed earnings 

and profits to the section 245A(d) PTEP 

group to the extent section 245A(d) 

applies to the inclusion giving rise to 

the previously taxed earnings and 

profits (see sections 245A(e)(3) and 

964(e)(4)). If applicable, further assign 

previously taxed earnings and profits to 

a PTEP subgroup in accordance with 

paragraph (c)(2) of this section. 

(ii) Increases for amounts included in 

gross income under section 951A(a). If 

the foreign corporation is a controlled 

foreign corporation and the covered 

shareholder includes in gross income 

the portion of its GILTI inclusion 

amount that is treated as with respect to 

the corporation for the relevant taxable 

year under section 951A(a) and (f)(2), 

then, for each annual PTEP account that 

relates to the relevant taxable year and 

a section 904 category to which a 

portion of the inclusion is assigned 

(determined at the level of the covered 

shareholder, thus after the application 

of § 1.904–4(c)), add an amount of 

previously taxed earnings and profits 

equal to such portion to the annual 

PTEP account. Assign such previously 

taxed earnings and profits to the section 

951A PTEP group. If applicable, further 

assign previously taxed earnings and 

profits to a PTEP subgroup in 

accordance with paragraph (c)(2) of this 

section. 

(iii) Increases for receipt of distributed 

previously taxed earnings and profits. If, 

during the relevant taxable year, 

previously taxed earnings and profits 

with respect to the covered shareholder 


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are distributed to the foreign 

corporation in a covered distribution 

(determined under § 1.959–4), then add 

such distributed previously taxed 

earnings and profits to the annual PTEP 

accounts in accordance with paragraph 

(c)(3) of this section. 

(iv) Increases for previously taxed 

earnings and profits resulting from 

section 961(c) basis. If, during the 

relevant taxable year, previously taxed 

earnings and profits with respect to the 

covered shareholder result from the 

application of positive section 961(c) 

basis to covered gain recognized by the 

foreign corporation (determined under 

§ 1.961–9), then add such resulting 

previously taxed earnings and profits to 

the annual PTEP accounts in accordance 

with paragraph (c)(3) of this section. 

(v) Decreases for current year taxes. If 

previously taxed earnings and profits 

are added to a PTEP group within an 

annual PTEP account pursuant to 

paragraph (c)(1)(iii) or (iv) of this 

section, then reduce the previously 

taxed earnings and profits in that PTEP 

group by the amount of the current year 

taxes allocated and apportioned under 

§ 1.959–6 to the corresponding PTEP 

group of the foreign corporation. The 

corresponding PTEP group of the 

foreign corporation is the PTEP group of 

the foreign corporation that is of the 

same type as the increased PTEP group 

and that is within a corporate PTEP 

account of the foreign corporation that 

is with respect to the covered 

shareholder. If the PTEP group of that 

type in multiple annual PTEP accounts 

increases pursuant to paragraph 

(c)(1)(iii) or (iv) of this section, 

apportion the amount of the current 

year taxes allocated and apportioned 

under § 1.959–6 to the corresponding 

PTEP group of the foreign corporation 

among those increased PTEP groups 

under the principles of § 1.861–20. 

(vi) Decreases for distributed 

previously taxed earnings and profits. If, 

during the relevant taxable year, the 

foreign corporation distributes 

previously taxed earnings and profits 

with respect to the covered shareholder 

in a covered distribution (determined 

under § 1.959–4), then remove such 

distributed previously taxed earnings 

and profits from the annual PTEP 

accounts. 

(vii) Increases for amounts included 

in gross income as a dividend under 

section 1248(a) or (f). If, during the 

relevant taxable year, gain recognized by 

the covered shareholder is included in 

gross income as a dividend under 

section 1248(a) or (f) by reason of 

earnings and profits of the foreign 

corporation, then, for each annual PTEP 

account that relates to the relevant 

taxable year and a section 904 category 

to which a portion of the inclusion is 

assigned (determined at the level of the 

covered shareholder, thus after the 

application of § 1.904–4(c)), add an 

amount of previously taxed earnings 

and profits equal to such portion to the 

annual PTEP account (see section 

959(e)). Assign such previously taxed 

earnings and profits to the section 

951(a)(1)(A) PTEP group, except assign 

previously taxed earnings and profits to 

the section 245A(d) PTEP group to the 

extent section 245A(d) applies to the 

inclusion giving rise to the previously 

taxed earnings and profits (including by 

reason of section 245A(e)(3)). If 

applicable, further assign previously 

taxed earnings and profits to a PTEP 

subgroup in accordance with paragraph 

(c)(2) of this section. 

(viii) Decreases with respect to 

transferor covered shareholder for 

transferred previously taxed earnings 

and profits. If, during the relevant 

taxable year, previously taxed earnings 

and profits of the foreign corporation 

transfer from the covered shareholder in 

a general successor transaction 

(determined under § 1.959–7), then 

remove such transferred previously 

taxed earnings and profits from the 

annual PTEP accounts. 

(ix) Increases with respect to 

successor covered shareholder for 

transferred previously taxed earnings 

and profits. If, during the relevant 

taxable year, previously taxed earnings 

and profits of the foreign corporation 

transfer to the covered shareholder in a 

general successor transaction 

(determined under § 1.959–7), then add 

such transferred previously taxed 

earnings and profits to the annual PTEP 

accounts in accordance with paragraph 

(c)(3) of this section. 

(x) Reassignments for previously 

taxed earnings and profits to which a 

section 956 amount is allocated. If the 

foreign corporation is a controlled 

foreign corporation and a portion of the 

covered shareholder’s section 956 

amount with respect to the corporation 

for the relevant taxable year is allocated 

to previously taxed earnings and profits 

(determined under § 1.959–5), then 

reassign such previously taxed earnings 

and profits from a section 959(c)(2) 

PTEP group to the section 959(c)(1) 

PTEP group in the same row in the table 

in § 1.959–2(b)(2)(i). If applicable, 

further assign previously taxed earnings 

and profits to the PTEP subgroup to 

which they relate. See paragraph (c)(4) 

of this section in the case of certain 

acquisitions of stock to which a section 

956 amount of another shareholder is 

attributable. 

(xi) Increases for amounts included in 

gross income under section 951(a)(1)(B). 

If the foreign corporation is a controlled 

foreign corporation and the covered 

shareholder includes in gross income a 

portion of its section 956 amount with 

respect to the corporation for the 

relevant taxable year under section 

951(a)(1)(B), then, for each annual PTEP 

account that relates to the relevant 

taxable year and a section 904 category 

to which a portion of the inclusion is 

assigned (determined at the level of the 

covered shareholder, thus after the 

application of § 1.904–4(c)), add an 

amount of previously taxed earnings 

and profits equal to such portion to the 

annual PTEP account. Assign such 

previously taxed earnings and profits to 

the general section 959(c)(1) PTEP 

group. If applicable, further assign 

previously taxed earnings and profits to 

a PTEP subgroup in accordance with 

paragraph (c)(2) of this section. See 

paragraph (c)(4) of this section in the 

case of certain acquisitions of stock to 

which a section 956 amount of another 

shareholder is attributable. 

(2) Assignment to PTEP subgroups— 

(i) Taxable section 962 PTEP subgroup. 

If the covered shareholder is an 

individual and an election under 

§ 1.962–2 applies to the covered 

shareholder’s income inclusions under 

section 951(a) or 951A(a) for the 

relevant taxable year, then further assign 

a portion of previously taxed earnings 

and profits added pursuant to paragraph 

(c)(1)(i), (ii), or (xi) of this section 

(section 951(a) or 951A(a) inclusions) to 

the taxable section 962 PTEP subgroup. 

The portion of previously taxed 

earnings and profits assigned to the 

taxable section 962 PTEP subgroup is 

equal to the excess of the previously 

taxed earnings and profits over the 

income tax paid under this chapter on 

the income inclusions giving rise to the 

previously taxed earnings and profits 

(determined by translating such tax into 

the foreign corporation’s functional 

currency at the exchange rate at which 

the income inclusion is translated into 

U.S. dollars under section 989(b)). 

(ii) Taxable section 1411 PTEP 

subgroup. If the covered shareholder is 

an individual, estate, or trust, then 

further assign previously taxed earnings 

and profits added pursuant to paragraph 

(c)(1)(i), (ii), (vii), and (xi) of this section 

(section 951(a), 951A(a), or 1248(a) or (f) 

inclusions) to the taxable section 1411 

PTEP subgroup to the extent the income 

inclusion giving rise to the previously 

taxed earnings and profits is not taken 

into account in determining net 

investment income under § 1.1411– 

4(a)(1)(i). 


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(3) Preserving the character of 

previously taxed earnings and profits— 

(i) In general. Add previously taxed 

earnings and profits that are described 

in paragraph (c)(1)(iii), (iv), or (ix) of 

this section (previously taxed earnings 

and profits received in a distribution, 

resulting from section 961(c) basis, or 

transferred to the covered shareholder) 

and that relate to a single section 904 

category and single taxable year to the 

annual PTEP account that relates to 

such section 904 category and such 

taxable year or a taxable year (including 

a deemed taxable year) that ends with, 

or closest to, the last day of such taxable 

year, as applicable. Assign the 

previously taxed earnings and profits to 

the PTEP group, and if applicable PTEP 

subgroup, to which they relate. See 

§ 1.959–4, 1.959–7, or 1.961–9 for rules 

determining the character of previously 

taxed earnings and profits received, 

transferred, or resulting from section 

961(c) basis, respectively. 

(ii) Recalculate percentages with 

respect to section 965 previously taxed 

earnings and profits—(A) In general. If 

applicable in adding previously taxed 

earnings and profits described in 

paragraph (c)(1)(iii), (iv), or (ix) of this 

section (previously taxed earnings and 

profits received in a distribution, 

resulting from section 961(c) basis, or 

transferred to the covered shareholder) 

to annual PTEP accounts relating to the 

same section 904 category, recalculate 

an adjusted applicable percentage or 

section 965(c) deduction percentage 

with respect to relevant previously 

taxed earnings and profits within such 

annual PTEP accounts so that the 

percentage is a weighted average of— 

(1) The adjusted applicable 

percentage or section 965(c) deduction 

percentage with respect to relevant 

previously taxed earnings and profits 

within the annual PTEP accounts 

immediately before the addition; and 

(2) The adjusted applicable 

percentage or section 965(c) deduction 

percentage with respect to relevant 

previously taxed earnings and profits 

added to the annual PTEP accounts. 

(B) Determining the weighted average. 

The weighted average is determined as 

the sum of the product of each 

percentage described in paragraph 

(c)(3)(ii)(A)(1) or (2) of this section and 

the amount of previously taxed earnings 

and profits described in that paragraph, 

divided by the sum of the amounts of 

previously taxed earnings and profits 

described in those paragraphs. 

(4) Certain acquisitions of stock to 

which a section 956 amount is 

attributable. If the covered shareholder 

acquires ownership of stock of the 

foreign corporation during the relevant 

taxable year but on or after the last 

relevant day of the relevant taxable year 

(for example, in a general successor 

transaction), and a portion of a section 

956 amount of a United States 

shareholder is attributable to such stock, 

then treat such portion of the section 

956 amount and any inclusion thereof 

in gross income of the United States 

shareholder as being of the covered 

shareholder for purposes of paragraphs 

(c)(1)(x) and (xi) of this section. 

(5) Currency rule. All adjustments to 

annual PTEP accounts are made in the 

functional currency of the foreign 

corporation, determined, as applicable, 

by translating an inclusion described in 

paragraph (c)(1)(ii) of this section into 

functional currency at the average 

exchange rate for the relevant taxable 

year (see § 1.951A–5(b)(3)) and by 

translating previously taxed earnings 

and profits described in paragraph 

(c)(1)(iii) of this section into functional 

currency at the spot rate on the day of 

the distribution (see section 989(b)). See 

also § 1.961–9 (determining previously 

taxed earnings and profits described in 

paragraph (c)(1)(iv) of this section in 

functional currency), and § 1.959–6 

(determining current year taxes 

described in paragraph (c)(1)(v) of this 

section in functional currency). 

(d) Adjustments to dollar basis 

pools—(1) In general—(i) Increases for 

U.S. dollar amount of income inclusions 

under sections 951(a), 951A(a), and 

1248(a) or (f). For each addition 

pursuant to paragraph (c)(1)(i), (ii), (vii), 

or (xi) of this section of previously taxed 

earnings and profits relating to a single 

dollar basis pool, add an amount of 

basis equal to the income inclusion 

under section 951(a), 951A(a), or 

1248(a) or (f) giving rise to such 

previously taxed earnings and profits to 

the dollar basis pool. 

(ii) Increases for dollar basis of 

received or resulting previously taxed 

earnings and profits. For each addition 

pursuant to paragraph (c)(1)(iii) or (iv) 

of this section of previously taxed 

earnings and profits relating to a single 

dollar basis pool, add the dollar basis of 

such previously taxed earnings and 

profits (determined under § 1.959–4 or 

1.961–9, as applicable) to the dollar 

basis pool. 

(iii) Decreases for current year taxes. 

For each reduction pursuant to 

paragraph (c)(1)(v) of this section to 

previously taxed earning and profits 

relating to a single dollar basis pool, 

reduce the basis in the dollar basis pool 

by the amount of the current year taxes 

giving rise to the reduction. 

(iv) Decreases for dollar basis of 

distributed or transferred previously 

taxed earnings and profits. For each 

removal pursuant to paragraph (c)(1)(vi) 

or (viii) of this section of previously 

taxed earnings and profits relating to a 

single dollar basis pool, remove the 

dollar basis of such previously taxed 

earnings and profits (determined under 

§ 1.959–4 or 1.959–7, as applicable) 

from the dollar basis pool. 

(v) Increases for dollar basis of 

transferred previously taxed earnings 

and profits, adjusted for foreign 

currency gain or loss. For each addition 

pursuant to paragraph (c)(1)(ix) of this 

section of previously taxed earnings and 

profits relating to a single dollar basis 

pool, add the dollar basis of such 

previously taxed earnings and profits 

(determined under § 1.959–7 and 

adjusted in accordance with the next 

sentence) to the dollar basis pool. In 

applying the preceding sentence, 

increase (or decrease) the dollar basis of 

transferred previously taxed earnings 

and profits by foreign currency gain (or 

foreign currency loss) that the transferor 

covered shareholder recognizes with 

respect to the previously taxed earnings 

and profits. In addition, determine such 

foreign currency gain or loss without 

regard to § 1.986–1(c)(3)(i) and (ii) 

(limitations for previously taxed 

earnings and profits resulting from 

section 965) and by treating the deemed 

covered shareholder in the same manner 

as a covered shareholder. 

(vi) Adjustments for dollar basis of 

previously taxed earnings and profits to 

which a section 956 amount is 

allocated. For each reassignment 

pursuant to paragraph (c)(1)(x) of this 

section of previously taxed earnings and 

profits relating to a single dollar basis 

pool, remove the dollar basis of such 

previously taxed earnings and profits 

(determined under § 1.959–5) from the 

dollar basis pool relating to the section 

959(c)(2) PTEP group from which the 

previously taxed earnings and profits 

are reassigned and add such basis to the 

dollar basis pool relating to the section 

959(c)(1) PTEP group to which the 

previously taxed earnings and profits 

are reassigned. 

(2) Currency rule. All adjustments to 

dollar basis pools are made in U.S. 

dollars, determined, as applicable, by 

translating inclusions described in 

paragraph (d)(1)(i) of this section into 

U.S. dollars in accordance with section 

989(b) and current year taxes described 

in paragraph (d)(1)(iii) of this section 

into U.S. dollars in accordance with 

section 986(a) and § 1.986(a)–1. 

(e) Adjustments to PTEP tax pools— 

(1) In general—(i) Increases for foreign 

income taxes associated with previously 

taxed earnings and profits received. For 

each addition pursuant to paragraph 

(c)(1)(iii) of this section of previously 


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taxed earnings and profits relating to a 

single PTEP tax pool, add the foreign 

income taxes that are associated with 

such previously taxed earnings and 

profits (determined under § 1.959–4(g)) 

to the PTEP tax pool. Assign such 

associated foreign income taxes to the 

creditable PTEP tax group only to the 

extent the foreign corporation is deemed 

to pay the taxes under section 960(b)(2) 

and § 1.960–3(c). See paragraph (e)(1)(ii) 

of this section for increases to PTEP tax 

pools for current year taxes paid or 

accrued by the foreign corporation on 

the receipt of the previously taxed 

earnings and profits. 

(ii) Increases for current year taxes. 

For each reduction pursuant to 

paragraph (c)(1)(v) of this section to 

previously taxed earnings and profits 

relating to a single PTEP tax pool, add 

to the PTEP tax pool the current year 

taxes giving rise to the reduction. Assign 

such current year taxes to the creditable 

PTEP tax group only if the foreign 

corporation is a controlled foreign 

corporation when the taxes are paid or 

accrued and a credit for the taxes is not 

disallowed or suspended at the level of 

the controlled foreign corporation (see, 

for example, section 245A(e)(3) and 

§ 1.245A(d)–1(a)(2) and sections 

901(k)(1), (l), and (m), 909, and 

6038(c)(1)(B)). 

(iii) Decreases for foreign income 

taxes associated with distributed or 

transferred previously taxed earnings 

and profits. For each removal pursuant 

to paragraph (c)(1)(vi) or (viii) of this 

section of previously taxed earnings and 

profits relating to a single PTEP tax 

pool, remove the foreign income taxes 

that are associated with such previously 

taxed earnings and profits (determined 

under § 1.959–4 or 1.959–7, as 

applicable) from the PTEP tax pool. 

(iv) Increases for foreign income taxes 

associated with transferred previously 

taxed earnings and profits. For each 

addition pursuant to paragraph (c)(1)(ix) 

of this section of previously taxed 

earnings and profits relating to a single 

PTEP tax pool, add the foreign income 

taxes that are associated with such 

previously taxed earnings and profits 

(determined under § 1.959–7) to the 

PTEP tax pool. Assign such associated 

foreign income taxes to the creditable 

PTEP tax group only to the extent the 

taxes related to the creditable PTEP tax 

group immediately before the general 

successor transaction. 

(v) Adjustments for foreign income 

taxes associated with previously taxed 

earnings and profits to which a section 

956 amount is allocated. For each 

reassignment pursuant to paragraph 

(c)(1)(x) of this section of previously 

taxed earnings and profits relating to a 

single PTEP tax pool, remove the foreign 

income taxes that are associated with 

such previously taxed earnings and 

profits (determined under § 1.959–5) 

from the PTEP tax pool relating to the 

section 959(c)(2) PTEP group from 

which the previously taxed earnings 

and profits are reassigned and add such 

foreign income taxes to the PTEP tax 

pool relating to the section 959(c)(1) 

PTEP group to which the previously 

taxed earnings and profits are 

reassigned. Assign such associated 

foreign income taxes to the creditable 

PTEP tax group only to the extent the 

taxes relate to the creditable PTEP tax 

group immediately before the 

reassignment. 

(2) Currency rule. All adjustments to 

PTEP tax pools are made in U.S. dollars, 

determined, as applicable, by translating 

current year taxes described in 

paragraph (e)(1)(ii) of this section into 

U.S. dollars in accordance with section 

986(a) and § 1.986(a)–1. 

(f) Timing of adjustments—(1) Annual 

PTEP accounts. An adjustment to an 

annual PTEP account is treated as made 

in accordance with the timing rules in 

the following table. In the case of 

adjustments described in paragraphs 

(c)(1)(iii) through (xi) of this section that 

are treated as made at the same time, 

such adjustments are treated as made at 

that time in sequence (starting with the 

adjustment in the earliest paragraph). 

TABLE 1 TO PARAGRAPH (f)(1) OF THIS SECTION—TIMING OF ANNUAL PTEP ACCOUNT ADJUSTMENTS

Adjustment described in this 

section Description When adjustment is treated as made 

Paragraph (c)(1)(i) .................... Increases for amounts included in gross income under section 951(a)(1)(A).Beginning of the first day of the relevant taxable year. 

Paragraph (c)(1)(ii) .................... Increases for amounts included in gross income under section 951A(a).

Paragraph (c)(1)(iii) ................... Increases for receipt of distributed previously taxed earnings 

and profits.

Paragraph (c)(1)(iv) ................... Increases for previously taxed earnings and profits resulting 

from section 961(c) basis.

Paragraph (c)(1)(v) ................... Decreases for current year taxes.

Paragraph (c)(1)(vi) ................... Decreases for distributed previously taxed earnings and profits.Concurrently with the covered distribution. 

Paragraph (c)(1)(vii) .................. Increases for amounts included in gross income as a dividend under section 1248.Concurrently with the sale or exchange. 

Paragraph (c)(1)(viii) ................. Decreases for transferred previously taxed earnings and profits.Concurrently with the general successor 

transaction. 

Paragraph (c)(1)(ix) ................... Increases for transferred previously taxed earnings and profits.

Paragraph (c)(1)(x) ................... Reassignments for previously taxed earnings and profits to 

which a section 956 amount is allocated.

End of the last day of the relevant taxable 

year. 

Paragraph (c)(1)(xi) ................... Increases for amounts included in gross income under section 951(a)(1)(B).

(2) Dollar basis pools. An adjustment 

to a dollar basis pool is treated as made 

concurrently with the related 

adjustment described in paragraph (c) of 

this section. 

(3) PTEP tax pools. An adjustment to 

a PTEP tax pool is treated as made 

concurrently with the related 

adjustment described in paragraph (c) of 

this section. 

(g) Bottom-up application to tiered 

foreign corporations. For purposes of 

applying this section to tiered foreign 

corporations, this section is applied first 

to the foreign corporation at the lowest 


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95418 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

tier, then to the foreign corporation at 

the next lowest tier, and so on. 

■ Par. 21. Section 1.959–4 is revised to 

read as follows: 

§ 1.959–4 Exclusion from gross income of 

previously taxed earnings and profits 

received in a distribution. 

(a) Scope. This section provides the 

rules for distributions of previously 

taxed earnings and profits under section 

959. Paragraph (b) of this section 

excludes previously taxed earnings and 

profits received by a covered 

shareholder or controlled foreign 

corporation in a distribution from gross 

income. Paragraph (c) of this section 

defines a covered distribution. 

Paragraph (d) of this section describes 

rules for analyzing a covered 

distribution, including rules for 

determining the extent to which a 

covered distribution is a distribution of 

previously taxed earnings and profits. 

Paragraph (e) of this section provides 

rules for allocating covered distributions 

to earnings and profits. Paragraph (f) of 

this section provides a dollar basis rule. 

Paragraph (g) of this section provides an 

associated foreign income taxes rule. 

See § 1.959–10(c)(1) and (2) (Examples 1 

and 2) for examples illustrating the 

application of this section. See also 

§§ 1.367(b)–2(j)(2)(ii) and 1.367(b)– 

3(g)(1) for deemed distributions of 

previously taxed earnings and profits 

under other provisions of the Code. 

(b) Exclusion from gross income—(1) 

Distribution by a foreign corporation to 

a covered shareholder. Previously taxed 

earnings and profits that are distributed 

to a covered shareholder, other than 

previously taxed earnings and profits 

relating to the taxable section 962 PTEP 

subgroup, are excluded from the 

covered shareholder’s gross income. 

(2) Distribution by a controlled foreign 

corporation to another controlled 

foreign corporation—(i) In general. 

Previously taxed earnings and profits 

that are distributed by a controlled 

foreign corporation to another 

controlled foreign corporation are 

excluded from the recipient controlled 

foreign corporation’s gross income, 

solely for purposes of determining the 

recipient controlled foreign 

corporation’s subpart F income and 

tested income or tested loss, and 

provided that the covered shareholder 

to which the previously taxed earnings 

and profits relate is a United States 

shareholder in both controlled foreign 

corporations. 

(ii) Treatment of a specified foreign 

corporation as a controlled foreign 

corporation. A specified foreign 

corporation (as defined in § 1.965– 

1(f)(45)(i)(B)) that is not otherwise a 

controlled foreign corporation is treated 

as a controlled foreign corporation for 

purposes of applying paragraph (b)(2)(i) 

of this section to previously taxed 

earnings and profits resulting from the 

application of section 965 that are 

distributed by the specified foreign 

corporation. 

(3) Additional consequences. Upon a 

distribution of previously taxed 

earnings and profits, see paragraph 

(d)(5) of this section for adjustments to 

previously taxed earnings and profits, 

§ 1.961–4 for basis adjustments, 

§ 1.986(c)–1 for recognition of foreign 

currency gain or loss if the distribution 

is to a covered shareholder, and § 1.960– 

3 for deemed paid foreign income taxes 

if the distribution is to a United States 

shareholder that is a corporation or to a 

controlled foreign corporation. See also 

section 962(d) (previously taxed 

earnings and profits distributed to a 

covered shareholder and relating to the 

taxable section 962 PTEP subgroup are 

included in gross income); § 1.1411– 

10(c)(1)(i)(A)(1) (previously taxed 

earnings and profits distributed to a 

covered shareholder and relating to the 

taxable section 1411 subgroup are 

included in net investment income). 

(c) Covered distribution—(1) In 

general. A covered distribution is a 

distribution of property made by a 

foreign corporation to its shareholders 

with respect to its stock, to the extent 

that the distribution is a dividend (as 

defined in section 316), determined 

without regard to section 959(d), and 

not including an amount treated as a 

dividend by reason of section 78, 367(b), 

964(e)(1), or 1248. In a covered 

distribution, previously taxed earnings 

and profits are distributed in accordance 

with the rules described in paragraph 

(d) of this section. 

(2) [Reserved] 

(3) Treatment of a partner’s 

distributive share of a covered 

distribution. For purposes of the section 

959 regulations, if a portion of a covered 

distribution is made or is treated as 

made under this paragraph (c)(3) to a 

partnership, a partner’s distributive 

share of such portion is treated as a 

portion of the covered distribution made 

to the partner. 

(d) Rules for analyzing a covered 

distribution—(1) Determine each 

covered shareholder’s share of the 

covered distribution. First, determine 

each covered shareholder’s share of the 

covered distribution, computed as the 

sum of— 

(i) Any portion of the covered 

distribution that is made to the covered 

shareholder, and 

(ii) Any portions of the covered 

distribution that are made to upper-tier 

foreign corporations and assigned to the 

covered shareholder under § 1.951–2. 

(2) Determine distributed previously 

taxed earnings and profits. Second, 

determine the extent to which each 

covered shareholder’s share of the 

covered distribution is a distribution of 

previously taxed earnings and profits in 

accordance with paragraph (e) of this 

section. 

(3) Determine dollar basis and 

associated foreign income taxes. Third, 

determine the dollar basis of, and 

foreign income taxes associated with, 

distributed previously taxed earnings 

and profits in accordance with 

paragraphs (f) and (g) of this section. 

(4) Treat distributed previously taxed 

earnings and profits as distributed pro 

rata with respect to shares of stock of 

the foreign corporation. Fourth, treat a 

pro rata portion of all previously taxed 

earnings and profits distributed in each 

covered shareholder’s share of the 

covered distribution as distributed with 

respect to each share of stock of the 

foreign corporation owned by the 

covered shareholder, determined by 

multiplying all such previously taxed 

earnings and profits by a fraction. The 

numerator of the fraction is the sum of 

any portion of the covered distribution 

that is made with respect to the share of 

stock to the covered shareholder and 

any portions of the covered distribution 

that are made with respect to the share 

of stock to upper-tier foreign 

corporations and assigned to the 

covered shareholder under § 1.951–2. 

The denominator of the fraction is the 

amount of the covered shareholder’s 

share of the covered distribution. 

(5) Adjust previously taxed earnings 

and profits and make related account 

adjustments. Fifth, decrease the 

distributing foreign corporation’s 

previously taxed earnings and profits, 

and if applicable increase a recipient 

foreign corporation’s previously taxed 

earnings and profits, to reflect the 

covered distribution and make the 

related adjustments described in 

§ 1.959–3 to each covered shareholder’s 

accounts. 

(e) Allocation of distributions—(1) In 

general. A covered shareholder’s share 

of a covered distribution (determined 

under paragraph (d)(1) of this section) is 

first allocated to previously taxed 

earnings and profits of the foreign 

corporation that are with respect to the 

covered shareholder immediately before 

the covered distribution (as reflected in 

the covered shareholder’s annual PTEP 

accounts with respect to the foreign 

corporation), to the extent thereof and in 

accordance with paragraphs (e)(2) 

through (5) of this section. Any 

remaining portion of such share is 


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allocated to the foreign corporation’s 

earnings and profits described in section 

959(c)(3). 

(2) Priority rules—(i) Section 959(c)(1) 

rule. Allocate the covered shareholder’s 

share of the covered distribution first to 

previously taxed earnings and profits 

assigned to a section 959(c)(1) PTEP 

group and then to previously taxed 

earnings and profits assigned to a 

section 959(c)(2) PTEP group. 

(ii) Rules within section 959(c)(1) 

PTEP groups. In allocating the covered 

shareholder’s share of the covered 

distribution to previously taxed 

earnings and profits assigned to section 

959(c)(1) PTEP groups, allocate first to 

previously taxed earnings and profits 

assigned to the reclassified section 

965(a) PTEP group, then to previously 

taxed earnings and profits assigned to 

the reclassified section 965(b) PTEP 

group, and finally to previously taxed 

earnings and profits assigned to the 

remaining section 959(c)(1) PTEP 

groups. 

(iii) Rules within section 959(c)(2) 

PTEP groups. In allocating the covered 

shareholder’s share of the covered 

distribution to previously taxed 

earnings and profits assigned to section 

959(c)(2) PTEP groups, allocate first to 

previously taxed earnings and profits 

assigned to the section 965(a) PTEP 

group, then to previously taxed earnings 

and profits assigned to the section 

965(b) PTEP group, and finally to 

previously taxed earnings and profits 

assigned to the remaining section 

959(c)(2) PTEP groups. 

(3) Last-in, first-out rule. In allocating 

the covered shareholder’s share of the 

covered distribution to previously taxed 

earnings and profits assigned to a single 

PTEP group or PTEP groups with the 

same priority (for example, the section 

951(a)(1)(A) PTEP group, section 951A 

PTEP group, and section 245A(d) PTEP 

group), allocate first to previously taxed 

earnings and profits that relate to the 

most recent taxable year, then to 

previously taxed earnings and profits 

that relate to the next most recent 

taxable year, and so on. 

(4) Section 962 ordering rule. In 

allocating the covered shareholder’s 

share of the covered distribution to 

previously taxed earnings and profits 

that are assigned to a single PTEP group 

or PTEP groups with the same priority 

and that relate to the same taxable year, 

allocate first to previously taxed 

earnings and profits that are not 

assigned to the taxable section 962 PTEP 

subgroup, and then to previously taxed 

earnings and profits that are assigned to 

such subgroup. 

(5) Pro rata rule. In allocating the 

covered shareholder’s share of the 

covered distribution to previously taxed 

earnings and profits that are assigned to 

a single PTEP group or PTEP groups 

with the same priority and that relate to 

the same taxable year and have the same 

classification for section 962 purposes 

(same priority PTEP), allocate to a pro 

rata portion of same priority PTEP, 

determined by multiplying all same 

priority PTEP by a fraction, the 

numerator of which is the amount to be 

allocated to same priority PTEP, and the 

denominator of which is the amount of 

same priority PTEP. 

(f) Dollar basis rule. The dollar basis 

of previously taxed earnings and profits 

distributed in a covered shareholder’s 

share of a covered distribution 

(determined under paragraph (d)(2) of 

this section) is computed separately 

with respect to previously taxed 

earnings and profits relating to a single 

dollar basis pool, and in each case is 

equal to a pro rata portion of the dollar 

basis pool immediately before the 

covered distribution. The pro rata 

portion is determined by multiplying all 

basis in the dollar basis pool by a 

fraction, the numerator of which is 

previously taxed earnings and profits 

distributed in the covered shareholder’s 

share of the covered distribution and 

relating to the dollar basis pool, and the 

denominator of which is all previously 

taxed earnings and profits relating to the 

dollar basis pool. 

(g) Associated foreign income taxes 

rule. The foreign income taxes that are 

associated with previously taxed 

earnings and profits distributed in a 

covered shareholder’s share of a covered 

distribution (determined under 

paragraph (d)(2) of this section) are 

computed separately with respect to 

previously taxed earnings and profits 

relating to a single PTEP tax pool, and 

in each case are equal to a pro rata 

portion of the PTEP tax pool 

immediately before the covered 

distribution. The pro rata portion is 

determined by multiplying all foreign 

income taxes in the PTEP tax pool by a 

fraction, the numerator of which is 

previously taxed earnings and profits 

distributed in the covered shareholder’s 

share of the covered distribution and 

relating to the PTEP tax pool, and the 

denominator of which is all previously 

taxed earnings and profits relating to the 

PTEP tax pool. Thus, associated foreign 

income taxes are sourced pro rata from 

foreign income taxes assigned to the 

creditable PTEP tax group in the PTEP 

tax pool and other foreign income taxes 

in the PTEP tax pool. 

■ Par. 22. Sections 1.959–5 through 

1.959–12 are added to read as follows: 

Sec. 

* * * * * 

1.959–5 Exclusion of a section 956 amount 

from gross income to the extent allocated 

to previously taxed earnings and profits. 

1.959–6 Allocating and apportioning 

current year taxes to previously taxed 

earnings and profits of a foreign 

corporation. 

1.959–7 General successor transactions. 

1.959–8 and 1.959–9 [Reserved] 

1.959–10 Examples. 

1.959–11 Transition rules. 

1.959–12 Applicability dates. 

* * * * * 

§ 1.959–5 Exclusion of a section 956 

amount from gross income to the extent 

allocated to previously taxed earnings and 

profits. 

(a) Scope. This section provides rules 

for previously taxed earnings and profits 

to which a section 956 amount is 

allocated. Paragraph (b) of this section 

defines a section 956 amount. Paragraph 

(c) of this section describes rules for 

analyzing a section 956 amount, 

including rules for determining the 

extent to which a section 956 amount is 

excluded from gross income under 

section 959(a)(2). Paragraph (d) of this 

section provides rules for allocating a 

section 956 amount to previously taxed 

earnings and profits. Paragraph (e) of 

this section provides a dollar basis rule. 

Paragraph (f) of this section provides an 

associated foreign income taxes rule. 

See § 1.959–10(c)(4) (Example 4) for an 

example illustrating the application of 

this section. 

(b) Section 956 amount. A section 956 

amount is the amount determined under 

section 956 and § 1.956–1 with respect 

to a covered shareholder and a 

controlled foreign corporation. A 

section 956 amount is excluded from 

gross income in accordance with the 

rules described in paragraph (c) of this 

section. 

(c) Rules for analyzing a section 956 

amount—(1) Determine the portion of 

the section 956 amount excluded from 

gross income under section 959(a)(2). 

First, the portion of the section 956 

amount that it is allocated to section 

959(c)(2) previously taxed earnings and 

profits, which is determined in 

accordance with paragraph (d) of this 

section, is excluded from the covered 

shareholder’s gross income. 

(2) Determine dollar basis and 

associated foreign income taxes. 

Second, determine the dollar basis of, 

and foreign income taxes associated 

with, previously taxed earnings and 

profits to which the section 956 amount 

is allocated in accordance with 

paragraphs (e) and (f) of this section. 

(3) Adjust previously taxed earnings 

and profits and make related account 


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adjustments. Third, reassign the 

controlled foreign corporation’s 

previously taxed earnings and profits to 

which the section 956 amount is 

allocated from section 959(c)(2) PTEP 

groups to section 959(c)(1) PTEP groups, 

and if applicable increase the controlled 

foreign corporation’s previously taxed 

earnings and profits assigned to the 

general section 959(c)(1) PTEP group by 

reason of section 951(a)(1)(B), to reflect 

the section 956 amount and make the 

related adjustments described in 

§ 1.959–3. 

(d) Allocation of section 956 

amounts—(1) In general. A covered 

shareholder’s section 956 amount is first 

allocated to previously taxed earnings 

and profits of the controlled foreign 

corporation that are with respect to the 

covered shareholder and assigned to 

section 959(c)(2) PTEP groups 

(determined as described in paragraph 

(d)(2) of this section)), to the extent 

thereof and in accordance with the 

principles of § 1.959–4(e)(2)(iii) through 

(5). Any remaining portion of the 

section 956 amount is allocated to the 

controlled foreign corporation’s 

earnings and profits described in section 

959(c)(3). 

(2) Determination of previously taxed 

earnings and profits. In applying 

paragraph (d)(1) of this section, 

previously taxed earnings and profits 

are determined on the last relevant day 

of the controlled foreign corporation’s 

taxable year to which the section 956 

amount relates, but are reduced to the 

extent distributed during the taxable 

year, and are determined without regard 

to any transfer of previously taxed 

earnings and profits from the covered 

shareholder on (or after) the last 

relevant day of the taxable year. 

(e) Dollar basis rule. The dollar basis 

of previously taxed earnings and profits 

to which a covered shareholder’s 

section 956 amount is allocated 

(determined under paragraph (d)(1) of 

this section) is computed separately 

with respect to previously taxed 

earnings and profits relating to a single 

dollar basis pool, and in each case is 

equal to a pro rata portion of the dollar 

basis pool determined in the same 

manner as previously taxed earnings 

and profits are determined in paragraph 

(d)(2) of this section. The pro rata 

portion is determined by multiplying all 

basis in the dollar basis pool by a 

fraction, the numerator of which is 

previously taxed earnings and profits to 

which the section 956 amount is 

allocated and relating to the dollar basis 

pool, and the denominator of the which 

is all previously taxed earnings and 

profits relating to the dollar basis pool. 

(f) Associated foreign income taxes 

rule. The foreign income taxes that are 

associated with previously taxed 

earnings and profits to which a covered 

shareholder’s section 956 amount is 

allocated (determined under paragraph 

(d)(1) of this section) are computed 

separately with respect to previously 

taxed earnings and profits relating to a 

single PTEP tax pool, and in each case 

are equal to a pro rata portion of the 

PTEP tax pool determined in the same 

manner as previously taxed earnings 

and profits are determined in paragraph 

(d)(2) of this section. The pro rata 

portion is determined by multiplying all 

foreign income taxes in the PTEP tax 

pool by a fraction, the numerator of 

which is previously taxed earnings and 

profits to which the section 956 amount 

is allocated and relating to the PTEP tax 

pool, and the denominator of which is 

all previously taxed earnings and profits 

relating to the PTEP tax pool. Thus, 

associated foreign income taxes are 

sourced pro rata from foreign income 

taxes assigned to the creditable PTEP 

tax group in the PTEP tax pool and 

other foreign income taxes in the PTEP 

tax pool. 

§ 1.959–6 Allocating and apportioning 

current year taxes to previously taxed 

earnings and profits of a foreign 

corporation. 

(a) Scope. This section provides rules 

for allocating and apportioning current 

year taxes for purposes of sections 959 

and 960(b). Paragraph (b) of this section 

provides the general rule for 

determining which foreign income taxes 

paid or accrued by a foreign corporation 

may be allocated and apportioned to 

previously taxed earnings and profits. 

Paragraph (c) of this section provides 

rules for the application of § 1.861–20 to 

allocate and apportion current year 

taxes among corporate PTEP accounts. 

Paragraph (d) of this section provides 

additional rules regarding the allocation 

and apportionment of deductions to 

previously taxed earnings and profits 

and a currency translation rule. See 

§ 1.959–10(c)(3) (Example 3) for an 

example illustrating the application of 

this section. 

(b) In general. Current year taxes that 

a foreign corporation pays or accrues 

during its taxable year by reason of a 

PTEP realization event that occurs 

during the same taxable year are 

allocated and apportioned to the 

statutory groupings (as generally 

described in § 1.861–8(a)(4)) of 

previously taxed earnings and profits of 

the foreign corporation and to the 

residual grouping in accordance with 

the rules of paragraph (c) of this section. 

For purposes of this section, the 

statutory groupings are the corporate 

PTEP accounts of the foreign 

corporation described in § 1.959–2(d)(1). 

A PTEP realization event is an increase 

to the previously taxed earnings and 

profits of a foreign corporation by 

reason of its receipt of a covered 

distribution (as determined under 

§ 1.959–4) or the application of section 

961(c) basis of the foreign corporation to 

covered gain (as determined under 

§ 1.961–9) during the taxable year, as 

determined under § 1.959–2(d)(1). 

Current year taxes that are paid or 

accrued with respect to a PTEP 

realization event that occurs in a 

different taxable year may not be 

allocated and apportioned to the 

corporate PTEP accounts of a foreign 

corporation. See § 1.960–1(d)(3)(ii)(B) 

for rules regarding the assignment of 

foreign gross income to the statutory 

and residual groupings of income of a 

controlled foreign corporation when the 

controlled foreign corporation pays or 

accrues current year taxes with respect 

to a PTEP realization event that occurs 

in a different taxable year. 

(c) Rules for allocating and 

apportioning current year taxes to 

previously taxed earnings and profits. 

Allocate and apportion current year 

taxes that a foreign corporation pays or 

accrues during its taxable year by reason 

of a PTEP realization event that occurs 

during the same taxable year (translated, 

if applicable, into the foreign 

corporation’s functional currency as 

described in paragraph (d)(3) of this 

section) to its statutory groupings of 

previously taxed earnings and profits 

and to the residual grouping in 

accordance with the rules of § 1.861–20. 

For this purpose, foreign gross income 

that a foreign corporation includes 

under foreign law by reason of a 

distribution that it receives, or by reason 

of its disposition of stock, is assigned to 

its statutory groupings of previously 

taxed earnings and profits by treating 

previously taxed earnings and profits 

arising from the distribution or 

disposition as included in the U.S. 

dividend amount or the U.S. capital 

gain amount, respectively, for purposes 

of applying § 1.861–20(d)(1). For the 

definitions of U.S. dividend amount and 

U.S. capital gain amount, see § 1.861– 

20(b). 

(d) Additional rules—(1) No 

deductions other than deductions for 

current year taxes paid or accrued with 

respect to a PTEP realization event that 

occurs in the same taxable year are 

allocated or apportioned to the statutory 

groupings of previously taxed earnings 

and profits of a foreign corporation. No 

deductions of a foreign corporation, 

other than deductions for current year 


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taxes that the foreign corporation pays 

or accrues during its taxable year with 

respect to a PTEP realization event that 

occurs in the same taxable year, may be 

allocated or apportioned under section 

861 to the statutory groupings of 

previously taxed earnings and profits of 

the foreign corporation. 

(2) Currency rule. For purposes of this 

section, if current year taxes that a 

foreign corporation pays or accrues are 

denominated in a currency other than 

the foreign corporation’s functional 

currency, then the current year taxes are 

translated into the foreign corporation’s 

functional currency at the spot rate on 

the day on which the current year taxes 

are paid or accrued. See section 986(a) 

and § 1.986(a)–1 for rules translating 

current year taxes into U.S. dollars. 

§ 1.959–7 General successor transactions. 

(a) Scope. This section identifies 

certain transactions in which a foreign 

corporation’s previously taxed earnings 

and profits with respect to a covered 

shareholder transfer to (and thus 

become previously taxed earnings and 

profits with respect to) another covered 

shareholder under section 959 (defined 

as general successor transactions) and 

provides rules for determining the 

previously taxed earnings and profits 

that transfer. Paragraph (b) of this 

section provides definitions. Paragraph 

(c) of this section describes rules for 

analyzing a general successor 

transaction, including rules for 

determining previously taxed earnings 

and profits that transfer in the general 

successor transaction. Paragraph (d) of 

this section describes a fraction 

determining the pro rata portion of 

certain previously taxed earnings and 

profits that transfer. Paragraph (e) of this 

section provides a dollar basis rule. 

Paragraph (f) of this section provides an 

associated foreign income taxes rule. 

Paragraph (g) of this section provides 

rules regarding the deemed covered 

shareholder. See § 1.959–10(c)(5) 

(Example 5) for an example illustrating 

the application of this section. See also 

§§ 1.959–8 and 1.959–9, regarding the 

extent to which previously taxed 

earnings and profits transfer under 

section 959 in a transaction other than 

a general successor transaction. 

(b) General successor transaction—(1) 

In general. A general successor 

transaction is any transaction in which 

a covered shareholder (the successor 

covered shareholder) acquires 

ownership of stock of one or more 

foreign corporations (each, an acquired 

foreign corporation) that, immediately 

before the transaction, is owned by 

another covered shareholder (the 

transferor covered shareholder), 

determined without regard to any 

portion of an acquisition of ownership 

of stock that results from a transaction 

described in paragraph (b)(2) of this 

section. In a general successor 

transaction, previously taxed earnings 

and profits of each acquired foreign 

corporation transfer from the transferor 

covered shareholder to the successor 

covered shareholder (and thus become 

with respect to the successor covered 

shareholder) in accordance with the 

rules described in paragraph (c) of this 

section. 

(2) Certain transactions. A transaction 

is described in this paragraph (b)(2) if 

the transaction is— 

(i) An issuance of stock or a 

partnership interest, 

(ii) A redemption of stock (within the 

meaning of section 317(b)) or a 

liquidating distribution in redemption 

of a partnership interest, or 

(iii) A transfer of stock of a foreign 

corporation, or any property through 

which stock of a foreign corporation is 

owned, if such stock or property is 

substituted basis property. 

(3) Additional consequences. Upon a 

general successor transaction, see 

§ 1.961–5 for basis adjustments and 

§ 1.986(c)–1 for recognition of foreign 

currency gain or loss by the transferor 

covered shareholder. 

(c) Rules for analyzing a general 

successor transaction—(1) Determine 

general successor PTEP—(i) In general. 

First, determine general successor 

PTEP, which for each acquired foreign 

corporation is computed by multiplying 

all previously taxed earnings and profits 

of the acquired foreign corporation that 

are with respect to the transferor 

covered shareholder immediately before 

the general successor transaction by the 

fraction computed in accordance with 

paragraph (d) of this section. 

(ii) Previously taxed earnings and 

profits not eligible to transfer if the 

general successor transaction is before 

the last relevant day. In applying 

paragraph (c)(1)(i) of this section, if the 

general successor transaction is before 

the last relevant day of the acquired 

foreign corporation’s taxable year that 

includes the general successor 

transaction, then do not take into 

account (and thus do not transfer to the 

successor covered shareholder) any 

previously taxed earnings and profits 

that result from an income inclusion of 

the transferor covered shareholder 

under section 951(a)(1)(A) or 951A(a) 

for such taxable year (as accounted for 

in adjusting annual PTEP accounts 

pursuant to § 1.959–3(c)(1)(i) and (ii)). 

For example, if the successor covered 

shareholder acquires less than all of the 

transferor covered shareholder’s stock of 

the acquired foreign corporation, and 

the transferor covered shareholder 

continues to own the retained stock on 

the last relevant day, then any 

previously taxed earnings and profits 

resulting from the transferor covered 

shareholder’s income inclusions under 

section 951(a)(1)(A) and 951A for the 

acquired foreign corporation’s taxable 

year do not transfer in the general 

successor transaction. 

(2) Determine section 959(e) successor 

PTEP. Second, determine section 959(e) 

successor PTEP, which for each 

acquired foreign corporation is all the 

previously taxed earnings and profits of 

the acquired foreign corporation that, 

under section 959(e), result from the 

application of section 1248 to gain 

recognized by the transferor covered 

shareholder in the general successor 

transaction (as accounted for in 

adjusting annual PTEP accounts 

pursuant to § 1.959–3(c)(1)(vii)). 

(3) Determine dollar basis and 

associated foreign income taxes. Third, 

determine the dollar basis of, and 

foreign income taxes associated with, 

general successor PTEP and section 

959(e) successor PTEP in accordance 

with paragraph (e) of this section. 

(4) Transfer previously taxed earnings 

and profits and make related account 

adjustments. Fourth, transfer general 

successor PTEP and section 959(e) 

successor PTEP from the transferor 

covered shareholder to the successor 

covered shareholder and make the 

related adjustments described in 

§ 1.959–3. 

(d) Fraction in determining general 

successor PTEP—(1) In general. In 

determining general successor PTEP of 

an acquired foreign corporation, the 

fraction described in paragraph (c)(1)(i) 

of this section is computed as follows. 

The numerator of the fraction is the 

portion of the acquired foreign 

corporation’s hypothetical distribution 

described in paragraph (d)(2) of this 

section that, under the principles of 

§ 1.951–1(e)(2) through (6), would be 

distributed with respect to the stock of 

the acquired foreign corporation the 

ownership of which is acquired by the 

successor covered shareholder in the 

general successor transaction. The 

denominator of the fraction is the 

amount of such hypothetical 

distribution. However, if the 

denominator of the fraction would be 

zero, then the fraction is considered to 

be zero. 

(2) Hypothetical distribution. The 

hypothetical distribution described in 

this paragraph (d)(2) is a hypothetical 

distribution treated as made by the 

acquired foreign corporation with 

respect to stock of the acquired foreign 


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corporation, immediately before the 

general successor transaction and in an 

amount equal to the acquired foreign 

corporation’s previously taxed earnings 

and profits with respect to the transferor 

covered shareholder (determined as 

described in paragraph (c)(1) of this 

section). In the hypothetical 

distribution, stock of the acquired 

foreign corporation is taken into account 

only to the extent owned by the 

transferor covered shareholder 

immediately before the general 

successor transaction, and the earnings 

and profits of the acquired foreign 

corporation are treated as equal to the 

amount of the hypothetical distribution. 

(e) Dollar basis rule—(1) General 

successor PTEP. The dollar basis of 

previously taxed earnings and profits 

composing general successor PTEP 

(determined under paragraph (c)(1) of 

this section) is computed separately 

with respect to previously taxed 

earnings and profits relating to a single 

dollar basis pool, and in each case is 

equal to a pro rata portion of the dollar 

basis pool immediately before the 

general successor transaction. The pro 

rata portion is determined by 

multiplying all basis in the dollar basis 

pool by a fraction, the numerator of 

which is previously taxed earnings and 

profits composing general successor 

PTEP and relating to the dollar basis 

pool, and the denominator of which is 

all previously taxed earnings and profits 

relating to the dollar basis pool. 

(2) Section 959(e) successor PTEP. 

The dollar basis of previously taxed 

earnings and profits composing section 

959(e) successor PTEP (determined 

under paragraph (c)(2) of this section) is 

equal to the U.S. dollar amount of the 

income inclusion giving rise to the 

previously taxed earnings and profits (as 

accounted for in increasing dollar basis 

pools pursuant to § 1.959–3(d)(1)(i)). 

(f) Associated foreign income taxes 

rule—(1) General successor PTEP. The 

foreign income taxes that are associated 

with previously taxed earnings and 

profits composing general successor 

PTEP (determined under paragraph 

(c)(1) of this section) are computed 

separately with respect to previously 

taxed earnings and profits relating to a 

single PTEP tax pool, and in each case 

are equal to a pro rata portion of the 

PTEP tax pool immediately before the 

general successor transaction. The pro 

rata portion is determined by 

multiplying all foreign income taxes in 

the PTEP tax pool by a fraction, the 

numerator of which is previously taxed 

earnings and profits composing general 

successor PTEP and relating to the PTEP 

tax pool, and the denominator of which 

is all previously taxed earnings and 

profits relating to the PTEP tax pool. 

Thus, associated foreign income taxes 

are sourced pro rata from foreign 

income taxes assigned to the creditable 

PTEP tax group in the PTEP tax pool 

and other foreign income taxes in the 

PTEP tax pool. 

(2) Section 959(e) successor PTEP. 

The foreign income taxes associated 

with previously taxed earnings and 

profits composing section 959(e) 

successor PTEP (determined under 

paragraph (c)(2) of this section) are zero. 

(g) Deemed covered shareholder—(1) 

In general. The deemed covered 

shareholder is a hypothetical person 

that is treated as owning all the stock of 

any foreign corporation that is not 

owned by a covered shareholder. For 

purposes of transferring previously 

taxed earnings and profits under section 

959, the deemed covered shareholder is 

treated in the same manner as a covered 

shareholder and a reference to a covered 

shareholder includes the deemed 

covered shareholder. Thus, for example, 

if a covered shareholder sells stock of a 

foreign corporation to a nonresident 

alien individual, then the sale is a 

general successor transaction and 

previously taxed earnings and profits of 

the foreign corporation transfer from the 

seller covered shareholder to the 

deemed covered shareholder under this 

section. Moreover, if the individual 

subsequently sells stock of the foreign 

corporation to a covered shareholder, 

then previously taxed earnings and 

profits of the foreign corporation 

(adjusted consistent with § 1.959–3, 

including to reflect distributions from 

the foreign corporation to the 

individual) transfer from the deemed 

covered shareholder to the buyer 

covered shareholder under this section. 

(2) Determining previously taxed 

earnings and profits that transfer from 

the deemed covered shareholder. In a 

transaction in which previously taxed 

earnings and profits of a foreign 

corporation transfer from the deemed 

covered shareholder to a covered 

shareholder, the covered shareholder 

must use a reasonable method in 

determining the amount and character 

of the transferred previously taxed 

earnings and profits and in determining 

the foreign income taxes associated with 

the transferred previously taxed 

earnings and profits. Such method must 

take into account adjustments to 

previously taxed earnings and profits 

with respect to the deemed covered 

shareholder that would have been made 

under § 1.959–3 if the previously taxed 

earnings and profits were respect to a 

covered shareholder. 

§§ 1.959–8 and 1.959–9 [Reserved] 

§ 1.959–10 Examples. 

(a) In general. This section provides 

examples that illustrate the application 

of §§ 1.959–1 through 1.959–9. 

(b) Assumed facts. For purposes of the 

examples in this section, unless 

otherwise indicated, the following facts 

are assumed: 

(1) US1 and US2 are unrelated 

domestic corporations that are covered 

shareholders, each of which uses the 

U.S. dollar as its functional currency 

and has a combined pool election in 

effect under § 1.959–2(c). Neither US1 

nor US2 is a member of a consolidated 

group (as defined in § 1.1502–1(h)). 

(2) F1 and F2 are foreign corporations, 

each of which is a controlled foreign 

corporation and uses the British pound 

(£) as its functional currency. 

(3) PRS is a partnership. 

(4) Each entity uses the calendar year 

as its taxable year, and no entity has a 

short taxable year. 

(5) Tables depicting annual PTEP 

accounts, dollar basis pools, or PTEP tax 

pools do not depict accounts or PTEP 

groups with a balance of zero. 

(c) Examples—(1) Example 1: 

Exclusion from gross income of 

previously taxed earnings and profits 

distributed in a covered distribution—(i) 

Facts. US1 directly owns all 100 shares 

of the single class of outstanding stock 

of F1. In year 3, F1 makes a £300x 

distribution of money with respect to its 

stock (£3x with respect to each share), 

and the entirety of this £300x is a 

covered distribution (a dividend as 

defined in section 316, determined 

without regard to section 959(d)). 

Immediately before the covered 

distribution, F1 has £180x of previously 

taxed earnings and profits with respect 

to US1, none of which is assigned to the 

taxable section 962 PTEP group. This 

example only analyzes the extent to 

which previously taxed earnings and 

profits are distributed and excluded 

from gross income under section 959. 

See paragraph (c)(2) of this section 

(Example 2) for an illustration of 

composition, dollar basis, and 

associated foreign income taxes of 

distributed previously taxed earnings 

and profits, along with foreign currency 

gain or loss under section 986(c) and 

deemed paid taxes under section 960(b). 

See also § 1.961–4 (basis reductions and 

gain recognition for distributions of 

previously taxed earnings and profits). 

(ii) Analysis. For purposes of 

analyzing the covered distribution, 

US1’s share of the covered distribution 

is the entire £300x because that amount 

of the covered distribution is made to 

US1. See § 1.959–4(d)(1). Such share is 


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allocated first to F1’s previously taxed 

earnings and profits that are with 

respect to US1 immediately before the 

covered distribution (£180x) and then to 

F1’s earnings and profits described in 

section 959(c)(3) and, therefore, is a 

distribution of £180x of previously 

taxed earnings and profits and £120x of 

earnings and profits described in section 

959(c)(3). See § 1.959–4(d)(2) and (e)(1). 

These previously taxed earnings and 

profits are treated as distributed pro rata 

with respect to the stock of F1 on which 

US1’s share of the covered distribution 

is made. See § 1.959–4(d)(4). 

Accordingly, £1.8x of previously taxed 

earnings and profits is treated as 

distributed with respect to each share of 

F1 stock, computed by multiplying the 

£180x distributed previously taxed 

earnings and profits by a fraction, the 

numerator of which is the portion of 

US1’s share of the covered distribution 

that is made with respect to the share of 

F1 stock (£3x), and the denominator of 

which is the amount of US1’s share of 

the covered distribution (£300x). See id. 

US1 excludes the £180x of previously 

taxed earnings and profits distributed to 

it from its gross income. See § 1.959– 

4(b)(1); see also § 1.312–8(c) (US1’s 

receipt of previously taxed earnings and 

profits does not increase its earnings 

and profits). 

(iii) Alternative facts: splitownership—(A) Facts. The facts are the 

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

section (Example 1), except as follows. 

US1 owns all the outstanding stock of 

F2, and US1 directly owns 80%, and F2 

directly owns 20%, of the stock of F1. 

Thus, US1 receives a £240x portion, and 

F2 receives a £60x portion, of the £300x 

covered distribution made by F1. Under 

§ 1.951–2, US1 is assigned the entirety 

of the £60x portion of the covered 

distribution received by F2. 

(B) Analysis. For purposes of 

analyzing the covered distribution, 

US1’s share of the covered distribution 

is the entire £300x, the sum of the 

portion of the covered distribution that 

is made to US1 (£240x) and the portion 

of the covered distribution that is made 

to F2 and assigned to US1 under 

§ 1.951–2 (£60x). See § 1.959–4(d)(1). As 

is the case in paragraph (c)(1)(ii) of this 

section, such share is treated as a 

distribution of £1.8x of previously taxed 

earnings and profits with respect to each 

share of F1 stock (and F1’s previously 

taxed earnings and profits with respect 

to US1 are reduced by the £180x of 

distributed previously taxed earnings 

and profits). Accordingly, US1 is treated 

as receiving £144x of previously taxed 

earnings and profits (£1.8x × 80 shares 

of F1 stock directly owned by US1) and 

F2 is treated as receiving £36x of 

previously taxed earnings and profits 

(£1.8x × 20 shares of F1 stock directly 

owned by F2). US1 excludes the £144x 

of previously taxed earnings and profits 

distributed to it from its gross income. 

See § 1.959–4(b)(1). F2 excludes the 

£36x of previously taxed earnings 

distributed to it from its gross income, 

solely for purposes of determining its 

subpart F income and tested income or 

tested loss. See § 1.959–4(b)(2)(i). 

(iv) Alternative facts: partnershipstructure—(A) Facts. The facts are the 

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

section (Example 1), except as follows. 

PRS directly owns all the stock of F1. 

US1 and US2, in the aggregate, directly 

own all the interests in PRS, and PRS’s 

partnership agreement provides that 

US1 has a 60% share, and US2 has a 

40% share, of any of PRS’s items of 

income, gain, deduction, or loss. The 

covered distribution made by F1 is 

equal to £500x (£5x with respect to each 

share) and thus gives rise to £500x of 

dividend income to PRS, of which US1 

has a £300x distributive share (£500x × 

60%) and US2 has a £200x distributive 

share (£500x × 40%). Immediately 

before the covered distribution, F1 has 

no previously taxed earnings and profits 

with respect to US2. 

(B) Analysis—(1) US1’s share of the 

covered distribution. US1 is treated as 

receiving £300x of the covered 

distribution, equal to its distributive 

share of the covered distribution. See 

§ 1.959–4(c)(3). Therefore, for purposes 

of analyzing the covered distribution, 

US1’s share of the covered distribution 

is £300x (the amount of the covered 

distribution treated as made to US1). 

See § 1.959–4(d)(1). For such share, the 

results are the same as in paragraph 

(c)(1)(ii) of this section. 

(2) US2’s share of the covered 

distribution. US2 is treated as receiving 

£200x of the covered distribution, equal 

to its distributive share of the covered 

distribution. See § 1.959–4(c)(3). 

Therefore, for purposes of analyzing the 

covered distribution, US2’s share of the 

covered distribution is £200x (the 

amount of the covered distribution 

treated as made to US2). See § 1.959– 

4(d)(1). The entirety of such share is a 

distribution of earnings and profits 

described in section 959(c)(3) because 

F1 has no previously taxed earnings and 

profits with respect to US2. See § 1.959– 

4(d)(2) and (e)(1). US2 excludes none of 

its £200x distributive share of the 

covered distribution from its gross 

income under section 959 because none 

of the covered distribution received by 

US2 is previously taxed earnings and 

profits. 

(2) Example 2: Composition, dollar 

basis, and associated foreign income 

taxes of distributed previously taxed 

earnings and profits—(i) Facts. US1 

directly owns all 100 shares of the 

single class of outstanding stock of F1. 

In year 8, F1 makes a £225x distribution 

of money with respect to its stock 

(£2.25x with respect to each share), and 

the entirety of this £225x is a covered 

distribution. On the day of the covered 

distribution, the spot rate is $1:£0.4. 

Tables 1 through 3 in this paragraph 

(c)(2)(i) provide F1’s previously taxed 

earnings and profits with respect to 

US1, determined immediately before the 

covered distribution and thus reflecting 

adjustments pursuant to § 1.959–3 for 

US1’s income inclusions under sections 

951(a)(1)(A) and 951A (£80x and £70x, 

respectively) for F1’s taxable year 

ending on December 31 of year 8. Some 

of the previously taxed earnings and 

profits are previously taxed earnings 

and profits that were distributed to F1 

by other foreign corporations in earlier 

years. The adjusted applicable 

percentage with respect to previously 

taxed earnings and profits that resulted 

from section 965(a) or (b) and relate to 

the general category is 60%, and the 

section 965(c) deduction percentage 

with respect to previously taxed 

earnings and profits that resulted from 

965(a) and relate to the general category 

is 60%. 

TABLE 1 TO PARAGRAPH (c)(2)(i) OF THIS SECTION—US1’S ANNUAL PTEP ACCOUNTS WITH RESPECT TO F1 

Taxable year 

§ 904 category 

Total General category Passive category 

§ 951A category 

§ 965(a) 

PTEP group 

§ 965(b) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

Reclassified 

§ 951A 

PTEP group 

§ 951A 

PTEP group 

Year 8 .............................................................................. .................... .................... £50x £30x .................... £70x £150x 

Year 3 .............................................................................. .................... .................... .......................... .......................... £65x 10x 75x 


ddrumheller on DSK120RN23PROD with PROPOSALS2
95424 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

TABLE 1 TO PARAGRAPH (c)(2)(i) OF THIS SECTION—US1’S ANNUAL PTEP ACCOUNTS WITH RESPECT TO F1— 

Continued 

Taxable year 

§ 904 category 

Total General category Passive category 

§ 951A category 

§ 965(a) 

PTEP group 

§ 965(b) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

Reclassified 

§ 951A 

PTEP group 

§ 951A 

PTEP group 

Year 1 .............................................................................. £20x £20x .......................... 20x .................... .................... 60x 

TABLE 2 TO PARAGRAPH (c)(2)(i) OF THIS SECTION—US1’S DOLLAR BASIS POOLS WITH RESPECT TO F1 

[Combined pool election] 

§ 904 category 

General category Passive 

category 

§ 951A category 

§ 965(a) 

PTEP group 

§ 965(b) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

Reclassified 

§ 951A 

PTEP group 

§ 951A 

PTEP group 

$40x ............................................................................................................................... $40x $125x $115x $188.5x $204x 

TABLE 3 TO PARAGRAPH (c)(2)(i) OF THIS SECTION—US1’S PTEP TAX POOLS WITH RESPECT TO F1 

[Combined pool election] 

§ 904 category 

General category Passive 

category 

§ 951A category 

§ 965(a) 

PTEP group 

§ 965(b) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

Reclassified 

§ 951A 

PTEP group 

§ 951A 

PTEP group 

Creditable PTEP tax group ................................................................... $10x $10x .......................... $6x $26x $4x 

Other taxes ............................................................................................ .................... .................... .......................... 4x .................... ....................

(ii) Analysis—(A) Distributed 

previously taxed earnings and profits. 

The entirety of US1’s share of the 

covered distribution (£225x) is allocated 

to F1’s previously taxed earnings and 

profits that are with respect to US1 

immediately before the covered 

distribution because such previously 

taxed earnings and profits (£285x, 

computed as £150x + £75x + £60x, as set 

forth in table 1 in paragraph (c)(2)(i) of 

this section), are at least equal to such 

share. See § 1.959–4(d)(2) and (e)(1). 

Specifically, US1’s share of the covered 

distribution is allocated first to the £65x 

of previously taxed earnings and profits 

assigned to the reclassified section 951A 

PTEP group, second to the £20x of 

previously taxed earnings and profits 

assigned to the section 965(a) PTEP 

group, and third to the £20x of 

previously taxed earnings and profits 

assigned to the section 965(b) PTEP 

group. See § 1.959–4(e)(2). The 

remaining portion of US1’s share of the 

covered distribution (£120x, computed 

as £225x¥£65x¥£20x¥£20x) is 

allocated pro rata to previously taxed 

earnings and profits that relate to year 

8 and, therefore, is allocated to £40x of 

previously taxed earnings and profits 

assigned to the section 951(a)(1)(A) 

PTEP group and relating to year 8 and 

the general category (computed as £50x 

× £120x/£150x), £24x of previously 

taxed earnings and profits assigned to 

the section 951(a)(1)(A) PTEP group and 

relating to year 8 and the passive 

category (computed as £30x × £120x/ 

£150x), and £56x of previously taxed 

earnings and profits assigned to the 

section 951A PTEP group and relating to 

year 8 and the section 951A category 

(computed as £70x × £120x/£150x). See 

§ 1.959–4(e)(3) and (e)(5). US1 excludes 

the £225x of previously taxed earnings 

and profits distributed to it from its 

gross income. See § 1.959–4(b)(1); see 

also § 1.961–4 (basis reductions and 

gain recognition for distributions of 

previously taxed earnings and profits). 

(B) Dollar basis and foreign currency 

gain or loss. The dollar basis of 

previously taxed earnings and profits 

distributed in US1’s share of the 

covered distribution (described in 

paragraph (c)(2)(ii)(A) of this section) is 

computed separately with respect to 

previously taxed earnings and profits 

relating to a single dollar basis pool, and 

in each case is equal to a pro rata 

portion of the dollar basis pool 

immediately before the covered 

distribution (determined by multiplying 

all basis in the dollar basis pool by a 

fraction, the numerator of which is 

previously taxed earnings and profits 

distributed in the US1’s share of the 

covered distribution and relating to the 

dollar basis pool, and the denominator 

of which is all previously taxed earnings 

and profits relating to the dollar basis 

pool). See § 1.959–4(f). Under 

§ 1.986(c)–1, US1 recognizes foreign 

currency gain or loss with respect to 

previously taxed earnings and profits 

distributed to it, determined by 

translating the previously taxed 

earnings and profits into U.S. dollars 

using the spot rate on the day of the 

covered distribution and then 

subtracting from that U.S. dollar amount 

the dollar basis of the previously taxed 

earnings and profits. US1 does not 

recognize 60% (the section 965(c) 

deduction percentage) of the foreign 

currency gain or loss with respect to the 

previously taxed earnings and profits 

relating to the section 965(a) PTEP 

group. Table 1 in this paragraph 

(c)(2)(ii)(B) provides computations for 

dollar basis and foreign currency gain or 

loss with respect to each group of 

distributed previously taxed earnings 

and profits. Thus, US1 recognizes a total 

of $8.8x of foreign currency gain and 

$28.8x of foreign currency loss. 


ddrumheller on DSK120RN23PROD with PROPOSALS2
Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 95425 

TABLE 1 TO PARAGRAPH (c)(2)(ii)(B) OF THIS SECTION—DOLLAR BASIS AND FOREIGN CURRENCY (FX) GAIN OR LOSS OF

DISTRIBUTED PTEP 

Taxable year 

§ 904 category 

General category Passive category § 951A category 

§ 965(a) 

PTEP group 

§ 965(b) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

Reclassified § 951A 

PTEP group 

§ 951A 

PTEP group 

Year 8: 

Distributed 

PTEP.

.............................. .............................. £40x ............................. £24x ............................. ...................................... £56x 

Dollar basis ... .............................. .............................. $100x ($125x × £40x/ 

£50x).

$55.2x ($115x × £24x/ 

£50x).

...................................... $142.8x ($204x × £56x/ 

£80x) 

FX gain or 

loss.

.............................. .............................. $0 (£40x × $1/ 

*£0.4¥$100x).

$4.8x gain (£24x × $1 

£0.4¥$55.2x).

...................................... $2.8x loss (£56x × $1/ 

£0.4¥$142.8x) 

Year 3: 

Distributed 

PTEP.

.............................. .............................. ...................................... ...................................... £56x.

Dollar basis ... .............................. .............................. ...................................... ...................................... $188.5x ($188.5x × 

£65x/£65x).

FX gain or 

loss.

.............................. .............................. ...................................... ...................................... $26x loss (£65x × $1/ 

£0.4¥$188.5x).

Year 1: 

Distributed 

PTEP.

£20x ..................... £20x.

Dollar basis ... $40x ($40x × 

£20x/£20x).

$40x ($40x × 

£20x/£20x).

FX gain or 

loss.

$4x gain ((£20x × 

$1/£0.4¥$40x) 

× (100%¥60%)).

Not applicable.

(C) Associated foreign income taxes. 

The foreign income taxes that are 

associated with previously taxed 

earnings and profits distributed in US1’s 

share of the covered distribution 

(described in paragraph (c)(2)(ii)(A) of 

this section) are computed separately 

with respect to previously taxed 

earnings and profits relating to a single 

PTEP tax pool, and in each case are 

equal to a pro rata portion of the PTEP 

tax pool immediately before the covered 

distribution (determined by multiplying 

all foreign income taxes in the PTEP tax 

pool by a fraction, the numerator of 

which is previously taxed earnings and 

profits distributed in US1’s share of the 

covered distribution and relating to the 

PTEP tax pool, and the denominator of 

which is all previously taxed earnings 

and profits relating to the PTEP tax 

pool). See § 1.959–4(g). Table 1 in this 

paragraph (c)(2)(ii)(C) provides these 

computations (and refers to associated 

foreign income taxes sourced from the 

creditable PTEP tax group as ‘‘creditable 

taxes’’ and associated foreign income 

taxes not sourced from the creditable 

PTEP tax group as ‘‘other taxes’’). 

TABLE 1 TO PARAGRAPH (c)(2)(ii)(C) OF THIS SECTION—ASSOCIATED FOREIGN INCOME TAXES OF DISTRIBUTED PTEP 

Taxable year 

§ 904 category 

General category Passive category § 951A category 

§ 965(a) 

PTEP group 

§ 965(b) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

Reclassified § 951A 

PTEP group 

§ 951A 

PTEP group 

Year 8: 

Distributed PTEP .................................... .................................... £40x £24x ............................ .................................... £56x. 

Creditable Taxes .................................... .................................... $0 $2.9x ($6x × £24x/ 

£50x).

.................................... $2.8x ($4x × £56x/ 

£80x). 

Other Taxes ......... .................................... .................................... .......................... $1.9x ($4x × £24x/ 

£50x).

Year 3: 

Distributed PTEP .................................... .................................... .......................... ..................................... £65x.

Creditable Taxes .................................... .................................... .......................... ..................................... $26x ($26x × £65x/ 

£65x).

Other Taxes.

Year 1: 

Distributed PTEP £20x ........................... £20x.

Creditable Taxes $10x ($10x × £20x/ 

£20x).

$10x ($10x × £20x/ 

£20x).

Other Taxes.

(D) Deemed paid taxes. Under section 

960(b), because F1 is a controlled 

foreign corporation in which US1 is a 

United States shareholder, US1 is 

deemed to pay the foreign income taxes 

properly attributable to previously taxed 

earnings and profits distributed to it, 

which are the foreign income taxes that 

are both associated with the previously 

taxed earnings and profits and sourced 

from the creditable PTEP tax group. See 

§ 1.960–3(b). Thus, US1 is deemed to 

pay $51.7x of foreign income taxes 

($2.9x + $2.8x + $26x + $10x + $10x). 

Under § 1.965–5(c), US1 is disallowed a 

credit for 60% (the adjusted applicable 

percentage) of the foreign income taxes 

deemed paid with respect to the 

previously taxed earnings and profits 

relating to the section 965(a) PTEP 

group or section 965(b) PTEP group, 


ddrumheller on DSK120RN23PROD with PROPOSALS2
95426 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

with the result that in each case US1 is 

disallowed a credit for $6x of the foreign 

income taxes deemed paid with respect 

to each of those groups of previously 

taxed earnings and profits ($10x × 60%). 

(E) Account adjustments. To reflect 

the covered distribution, the distributed 

previously taxed earnings and profits, 

the dollar basis of the distributed 

previously taxed earnings and profits, 

and the foreign income taxes associated 

with the distributed previously taxed 

earnings and profits are removed from 

US1’s annual PTEP accounts, dollar 

basis pools, and PTEP tax pools with 

respect to F1. See § 1.959–3(c)(1)(vi), 

(d)(1)(iv), and (e)(1)(iii). These 

adjustments are treated as made 

concurrently with the covered 

distribution. See § 1.959–3(f). In 

addition, the distributed previously 

taxed earnings and profits, and the 

foreign income taxes associated with 

distributed previously taxed earnings 

and profits, are removed from F1’s 

corporate PTEP accounts and corporate 

PTEP tax pools for US1, and these 

adjustments are also treated as made 

concurrently with the covered 

distribution. See § 1.959–2(d). 

(iii) Alternative facts: distribution of 

built-in loss property—(A) Facts. The 

facts are the same as in paragraph 

(c)(2)(i) of this section (Example 2), 

except that, in the covered distribution 

(which continues to be £225x), F1 

distributes property other than money. 

At the time of the covered distribution, 

the fair market value of the property is 

£225x and F1’s adjusted basis of the 

property is £250x. Thus, the covered 

distribution decreases F1’s earnings and 

profits by £250x. See sections 301(b)(1) 

and 312(a)(3). 

(B) Analysis. The results are the same 

as in paragraph (c)(2)(ii) of this section 

and thus the covered distribution 

decreases F1’s previously taxed earnings 

and profits by £225x. The remainder of 

the £250x decrease to F1’s earnings and 

profits under section 312(a)(3) is 

accounted for by decreasing (including 

below zero, if applicable) F1’s earnings 

and profits described in section 

959(c)(3) by £25x. 

(iv) Alternative facts: distribution to a 

foreign corporation—(A) Facts. The 

facts are the same as in paragraph 

(c)(2)(i) of this section (Example 2), 

except as follows. US1 directly owns all 

the stock of F2, and F2 directly owns all 

100 shares of the single class of stock of 

F1. Thus, F2 receives the entirety of the 

£225x covered distribution made by F1. 

Under § 1.951–2, US1 is assigned the 

entirety of the £225x covered 

distribution received by F2. 

(B) Analysis. The results are the same 

as described in paragraph (c)(2)(ii) of 

this section, except that F2 excludes the 

£225x of distributed previously taxed 

earnings and profits from its gross 

income in accordance with § 1.959– 

4(b)(2), US1 does not recognize foreign 

currency gain or loss with respect to the 

distributed previously taxed earnings 

and profits in accordance with 

§ 1.986(c)–1(c), and F2 is deemed to pay 

the $51.7x of foreign income taxes that 

are both associated with the distributed 

previously taxed earnings and profits 

and sourced from the creditable PTEP 

tax group in accordance with § 1.960– 

3(c). In addition, the distributed 

previously taxed earnings and profits 

(£225x), the dollar basis of the 

distributed previously taxed earnings 

and profits ($566.5x), and the foreign 

income taxes associated with the 

distributed previously taxed earnings 

and profits ($51.7x + $1.9x = $53.6x) are 

added to US1’s annual PTEP accounts, 

dollar basis pools, and PTEP tax pools 

with respect to F2. See § 1.959– 

3(c)(1)(iii), (d)(1)(ii), and (e)(1)(i). Only 

the $51.7x portion of the associated 

foreign income taxes that F2 is deemed 

to pay are assigned to the creditable 

PTEP tax group within US1’s PTEP tax 

pools with respect to F2. See § 1.959– 

3(e)(1)(i). These adjustments are treated 

as made at the beginning of F2’s taxable 

year ending on December 31 of year 8. 

See § 1.959–3(f). In addition, the 

distributed previously taxed earnings 

and profits, and the foreign income 

taxes associated with the distributed 

previously taxed earnings and profits, 

are added to F2’s corporate PTEP 

accounts and corporate PTEP tax pools 

for US1, and these adjustments are also 

treated as made at the beginning of F2’s 

taxable year ending on December 31 of 

year 8. See § 1.959–2(d). 

(3) Example 3: Current year taxes 

imposed on a covered distribution—(i) 

Facts. US1 directly owns 60%, and US2 

directly owns 40%, of the single class of 

outstanding stock of F2. F2 owns all the 

outstanding stock of F1. In year 3, F1 

makes a £500x covered distribution to 

F2. Foreign withholding taxes of £75x 

(£500x × 15%) are paid on the covered 

distribution. F2 takes foreign income 

taxes into account when paid, the 

withholding taxes meet the definition of 

current year taxes for F2’s taxable year 

ending on December 31 of year 3, and, 

other than pursuant to section 245A(d), 

no credits for taxes are disallowed or 

suspended at the level of F2. On the day 

of the covered distribution, the spot rate 

is $1:£0.5. Under § 1.959–4, the entirety 

of US1’s £300x share of the covered 

distribution (£500x × 60%) is a 

distribution of F1’s previously taxed 

earnings and profits with respect to 

US1, and none of US2’s £200x share of 

the covered distribution (£500x × 40%) 

is a distribution of previously taxed 

earnings and profits. The distributed 

previously taxed earnings and profits 

consist of £120x of previously taxed 

earnings and profits assigned to the 

section 951(a)(1)(A) PTEP group and 

relating to year 2 and the passive 

category (Character A PTEP), £80x of 

previously taxed earnings and profits 

assigned to the section 245A(d) PTEP 

group and relating to year 2 and the 

passive category (Character B PTEP), 

£70x of previously taxed earnings and 

profits assigned to the section 

951(a)(1)(A) PTEP group and relating to 

year 1 and the general category 

(Character C PTEP), and £30x of 

previously taxed earnings and profits 

assigned to the section 951(a)(1)(A) 

PTEP group and relating to year 1 and 

the passive category (Character D 

PTEP), as summarized in table 1 in this 

paragraph (c)(3)(i). This example only 

analyzes the allocation and 

apportionment of the current year taxes 

and related adjustments to previously 

taxed earnings and profits accounts. See 

also § 1.959–4 (exclusion from gross 

income of previously taxed earnings and 

profits received in a distribution); 

§ 1.986(c)–1(c) (no foreign currency gain 

or loss recognized in distributions of 

previously taxed earnings and profits to 

a foreign corporation); § 1.961–4 (basis 

reductions and gain recognition for 

distributions of previously taxed 

earnings and profits). 

TABLE 1 TO PARAGRAPH (c)(3)(i) OF THIS SECTION—DISTRIBUTED PTEP 

Taxable year 

§ 904 category 

General category Passive category 

§ 951(a)(1)(A) PTEP group § 951(a)(1)(A) PTEP group § 245A(d) PTEP group 

Year 2 ............................................ ....................................................... £120x (Character A) ..................... £80x (Character B). 


ddrumheller on DSK120RN23PROD with PROPOSALS2

I 

I 
Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 95427 

TABLE 1 TO PARAGRAPH (c)(3)(i) OF THIS SECTION—DISTRIBUTED PTEP—Continued 

Taxable year 

§ 904 category 

General category Passive category 

§ 951(a)(1)(A) PTEP group § 951(a)(1)(A) PTEP group § 245A(d) PTEP group 

Year 1 ............................................ £70x (Character C) ....................... £30x (Character D).

(ii) Analysis—(A) In general. As a 

result of the covered distribution, which 

is a PTEP realization event, F2 has 

£300x of previously taxed earnings and 

profits with respect to US1 and £0 of 

previously taxed earnings and profits 

with respect to US2. The foreign gross 

income that F2 includes by reason of its 

receipt of the covered distribution is 

assigned to the statutory groupings, 

which are described in § 1.959–2(d)(1), 

and residual grouping by treating the 

previously taxed earnings and profits 

arising from such distribution as 

included in the U.S. dividend amount 

for purposes of § 1.861–20(d)(1). See 

§ 1.959–6(c). The relevant statutory 

groupings are F2’s corporate PTEP 

accounts that were increased by reason 

of its receipt of a covered distribution 

which was previously taxed earnings 

and profits with respect to US1 and the 

remaining portion of the covered 

distribution is assigned to the residual 

income grouping. See id. The £75x of 

current year taxes imposed on the 

covered distribution is allocated and 

apportioned to the previously taxed 

earnings and profits (US1’s share of the 

covered distribution) and the residual 

income grouping (US2’s share of the 

covered distribution) pro rata, with the 

result that £45x (£75x × £300x/£500x) is 

allocated and apportioned to previously 

taxed earnings and profits arising from 

the covered distribution and the 

remaining £30 (£75x × £200x/£500x) is 

assigned to the residual income 

grouping. See id. 

(B) Allocation and apportionment of 

current year taxes among PTEP groups. 

The £45x of current year taxes allocated 

and apportioned to the previously taxed 

earnings and profits arising from the 

PTEP realization event with respect to 

US1 is further allocated and 

apportioned among the section 904 

categories and PTEP groups within each 

corporate PTEP account that is 

increased by reason of F2’s PTEP 

realization event. See § 1.959–6(b) and 

(c). Accordingly, £18x of current year 

taxes is allocated and apportioned to 

Character A PTEP (£45x × £120x/ 

£300x), £12x of current year taxes is 

allocated and apportioned to Character 

B PTEP £45x × £80x/£300x), £10.5x of 

current year taxes is allocated and 

apportioned to Character C PTEP (£45x 

× £70x/£300x), and £4.5x of current year 

taxes is allocated and apportioned to 

Character D PTEP (£45x × £30x/£300x), 

each within F2’s corporate PTEP 

account with respect to US1. 

(C) Account adjustments—(1) 

Shareholder-level accounts. After the 

current year taxes are allocated and 

apportioned to the corporate PTEP 

accounts of F2 with respect to US1, the 

previously taxed earnings and profits in 

US1’s PTEP groups within its annual 

PTEP accounts are reduced to reflect the 

current year taxes allocated and 

apportioned to the corresponding PTEP 

groups of F2. See § 1.959–3(c)(1)(v). 

These adjustments are treated as made 

at the beginning of F2’s taxable year 

ending on December 31 of year 3. See 

§ 1.959–3(f). Concurrently with this 

reduction, US1’s dollar basis pools with 

respect to F2 are reduced by $90x, the 

U.S. dollar amount of the reduction that 

reflects the current year taxes allocated 

and apportioned to the distributed 

previously taxed earnings and profits 

(£45x × $1/£0.5), and $90x of current 

year taxes is added to US1’s PTEP tax 

pools with respect to F2. See § 1.959– 

3(d)(1)(iii) and (d)(2), (e)(1)(ii) and 

(e)(2); see also section 986(a) and 

§ 1.986(a)–1 (translation of foreign 

income taxes into U.S. dollars). Tables 

1 through 3 in this paragraph 

(c)(3)(ii)(C) summarize the adjustments 

to US1’s accounts to reflect the current 

year taxes. 

TABLE 1 TO PARAGRAPH (c)(3)(ii)(C)(1) OF THIS SECTION—US1’S ANNUAL PTEP ACCOUNTS WITH RESPECT TO F2— 

ADJUSTMENTS FOR CURRENT YEAR TAXES

Taxable year 

§ 904 category 

General category Passive category 

§ 951(a)(1)(A) PTEP group § 951(a)(1)(A) PTEP group § 245A(d) PTEP group 

Year 2 ............................................ ....................................................... £18x reduction .............................. £12x reduction. 

Year 1 ............................................ £10.5x reduction ........................... £4.5x reduction.

TABLE 2 TO PARAGRAPH (c)(3)(ii)(C)(1) OF THIS SECTION—US1’S DOLLAR BASIS POOLS WITH RESPECT TO F2 

(COMBINED POOL ELECTION)—ADJUSTMENTS FOR CURRENT YEAR TAXES

§ 904 category 

General category Passive category 

§ 951(a)(1)(A) PTEP group § 951(a)(1)(A) PTEP group § 245A(d) PTEP group 

$21x reduction (£10.5x × $1/£0.5) ............................... $45x reduction ((£18x + £4.5x) × $1/£0.5) .................. $24x reduction (£12x × $1/£0.5). 


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TABLE 3 TO PARAGRAPH (c)(3)(ii)(C)(1) OF THIS SECTION—US1’S PTEP TAX POOLS WITH RESPECT TO F2 (COMBINED

POOL ELECTION)—ADJUSTMENTS FOR CURRENT YEAR TAXES

§ 904 category 

General category Passive category 

§ 951(a)(1)(A) PTEP group § 951(a)(1)(A) PTEP group § 245A(d) PTEP group 

Creditable PTEP tax group .................... $21x increase (£10.5x × $1/£0.5) ......... $45x increase ((£18x + £4.5x) × $1/ 

£0.5).

Other taxes ............................................ ............................................................... ............................................................... $24x increase (£12x × $1/£0.5). 

(2) Corporate-level accounts. 

Concurrently with the adjustments 

described in paragraph (c)(3)(ii)(C)(1) of 

this section, the previously taxed 

earnings and profits in F2’s corporate 

PTEP accounts for US1 are reduced by 

£45x and the foreign income taxes in 

F2’s corporate PTEP tax pools for US1 

are increased by $90x. See § 1.959–2(d). 

(4) Example 4: Section 956 amount— 

(i) Facts. Individual A, a citizen of the 

United States, owns all the outstanding 

stock of F1 and does not make an 

election to apply the provisions of 

section 962 for any taxable year. For 

F1’s taxable year ending on December 

31 of year 3, the last relevant day is 

December 31 and Individual A’s section 

956 amount (amount determined under 

section 956 and § 1.956–1) is £200x. At 

the beginning of the last relevant day, 

F1 has £125x of previously taxed 

earnings and profits with respect to 

Individual A, all of which relate to F1’s 

taxable year ending on December 31 of 

year 1 and are assigned to section 

959(c)(2) PTEP groups. On the last 

relevant day, F1 makes a £75x covered 

distribution to Individual A, the entirety 

of which is allocated to (and thus is a 

distribution of) F1’s previously taxed 

earnings and profits with respect to 

Individual A under § 1.959–4. This 

example only analyzes the extent to 

which the section 956 amount is 

allocated to previously taxed earnings 

and profits and excluded from gross 

income under section 959, along with 

related adjustments to annual PTEP 

accounts. See also § 1.959–3(d) and (e) 

(related adjustments to dollar basis 

pools and PTEP tax pools). 

(ii) Analysis—(A) Allocation to 

previously taxed earnings and profits. 

Individual A’s section 956 amount is 

first allocated to F1’s previously taxed 

earnings and profits that are with 

respect to Individual A and assigned to 

section 959(c)(2) PTEP groups on the 

last relevant day, but reduced to reflect 

the covered distribution (£50x, 

computed as £125x ¥ £75x). See 

§ 1.959–5(c)(1) and (d). The £50x 

portion of the section 956 amount 

allocated to previously taxed earnings 

and profits is excluded from Individual 

A’s gross income. See § 1.959–5(c)(1). 

Under section 951(a)(1)(B), Individual A 

includes the remaining £150x of the 

section 956 amount (translated into U.S. 

dollars in accordance with section 

989(b)) in its gross income. 

(B) Annual PTEP account 

adjustments. To reflect the section 956 

amount, the £50x of previously taxed 

earnings and profits to which the 

section 956 amount is allocated are 

reassigned from section 959(c)(2) PTEP 

groups to section 959(c)(1) PTEP groups 

within Individual A’s annual PTEP 

accounts relating to F1’s taxable year 

ending on December 31 of year 1, and 

then £150x of previously taxed earnings 

and profits are added to Individual A’s 

annual PTEP accounts relating to F1’s 

taxable year ending on December 31 of 

year 3, where they are assigned to the 

general section 959(c)(1) PTEP group. 

See § 1.959–3(c)(1)(x) and (xi). These 

adjustments are treated as made at the 

end of the last day of F1’s taxable year 

ending on December 31 of year 3. See 

§ 1.959–3(f)(1). 

(5) Example 5: General successor 

transaction—(i) Facts. US1 directly 

owns all 100 shares of the single class 

of outstanding stock of F1. On June 30 

of year 3, US1 sells 40 shares of stock 

of F1 to US2 for money equal to the fair 

market value of the shares. Section 304 

does not apply to the sale. Immediately 

before the sale, F1 has £180x of 

previously taxed earnings and profits 

with respect to US1, none of which 

resulted from an income inclusion of 

US1 for F1’s taxable year ending on 

December 31 of year 3 under section 

951(a)(1)(A) or 951A(a) because F1 has 

no subpart F income or tested income 

for such taxable year. As a result of gain 

that US1 recognizes on the sale and 

includes in gross income as a dividend 

under section 1248(a) by reason of F1’s 

earnings and profits described in section 

959(c)(3), F1’s previously taxed earnings 

and profits with respect to US1 are 

increased by £20x under section 959(e) 

and § 1.959–3(c)(1)(vii), concurrently 

with the sale. This example only 

discusses the extent to which previously 

taxed earnings and profits transfer 

under section 959. See also § 1.959–3 

(related adjustments to annual PTEP 

accounts, dollar basis pools, and PTEP 

tax pools); § 1.986(c)–1 (recognition of 

foreign currency gain or loss with 

respect to transferred previously taxed 

earnings and profits). 

(ii) Analysis—(A) In general. The sale 

is a general successor transaction in 

which F1 is an acquired foreign 

corporation, US1 is the transferor 

covered shareholder, and US2 is the 

successor covered shareholder. See 

§ 1.959–7(b)(1). As described in 

paragraphs (c)(5)(ii)(B) and (C) of this 

section, there is £72x of general 

successor PTEP and £20x of section 

959(e) successor PTEP. Such previously 

taxed earnings and profits transfer from 

US1 to US2, concurrently with the 

general successor transaction. See 

§ 1.959–3(f)(1). 

(B) General successor PTEP. General 

successor PTEP is a pro rata portion of 

F1’s previously taxed earnings and 

profits that are with respect to US1 

immediately before the general 

successor transaction (£180x), 

determined by multiplying all such 

previously taxed earnings and profits by 

40%, which is the percentage of a £180x 

hypothetical distribution treated as 

made by F1 immediately before the 

general successor transaction that would 

be distributed with respect to stock of 

F1 that US2 acquires in the general 

successor transaction. See § 1.959– 

7(c)(1)(i) and (d). Thus, there is £72x of 

general successor PTEP, sourced pro 

rata from each PTEP group within each 

of US1’s annual PTEP accounts with 

respect to F1. See also § 1.959–7(e)(1) 

and (f)(1) (rules for determining the 

dollar basis and associated foreign 

income taxes of general successor 

PTEP). 

(C) Section 959(e) successor PTEP. 

Section 959(e) successor PTEP is all 

£20x of F1’s previously taxed earnings 

and profits with respect to US1 that, 

under section 959(e), result from the 

application of section 1248 to gain 

recognized by US1 in the general 

successor transaction. See § 1.959– 

7(c)(2); see also § 1.959–7(e)(2) and (f)(2) 

(providing the dollar basis of section 

959(e) successor PTEP, and providing 


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that the foreign income taxes associated 

with section 959(e) successor PTEP is 

zero). 

(iii) Alternative facts: previously taxed 

earnings and profits not eligible to 

transfer—(A) Facts. The facts are the 

same as in paragraph (c)(5)(i) of this 

section (Example 5), except as follows. 

F1 has £10x of subpart F income for its 

taxable year ending on December 31 of 

year 3 and thus US1 includes £6x (£10x 

× 60% of stock of F1 retained by US1) 

in its gross income for such taxable year 

under section 951(a)(1)(A). 

Consequently, F1 has an additional £6x 

of previously taxed earnings and profits 

with respect to US1 immediately before 

the sale. 

(B) Analysis. The results are the same 

as described in paragraph (c)(5)(ii) of 

this section. None of the additional £6x 

of previously taxed earnings and profits 

transfer to US2 because the general 

successor transaction is before 

December 31 of year 3, the last relevant 

day of F1’s taxable year that includes 

the general successor transaction. See 

§ 1.959–7(c)(1)(ii). 

(iv) Alternative facts: deemed covered 

shareholder—(A) Facts. The facts are 

the same as in paragraph (c)(5)(i) of this 

section (Example 5), except that the 

purchaser of the shares of stock of F1 is 

a nonresident alien individual 

(Individual B). 

(B) Analysis. The results are the same 

as described in paragraph (c)(5)(ii) of 

this section, applied by substituting the 

deemed covered shareholder (who is a 

hypothetical person treated as owning 

all the stock of F1 owned by Individual 

B) for US2. See § 1.959–7(g). Thus, if a 

covered shareholder subsequently 

acquires a portion of Individual B’s 

stock of F1, then a portion of F1’s 

previously taxed earnings and profits 

with respect to the deemed covered 

shareholder (adjusted consistent with 

§ 1.959–3, including to reflect any 

distributions from F1 to Individual B) 

transfer from the deemed covered 

shareholder to the acquiror covered 

shareholder. 

§ 1.959–11 Transition rules. 

(a) Scope. This section sets forth 

transition rules for the section 959 

regulations. Paragraph (b) of this section 

addresses the establishment of annual 

PTEP accounts, dollar basis pools, and 

corporate PTEP accounts and provides 

for adjustments to reflect the transition 

tax under section 965. Paragraph (c) of 

this section addresses the establishment 

of PTEP tax pools, corporate PTEP tax 

pools, adjusted applicable percentages, 

and section 965(c) deduction 

percentages. Paragraph (d) of this 

section treats a domestic partnership 

(including an S corporation) as a 

covered shareholder for periods in 

which § 1.958–1(d)(1) does not apply. 

Paragraph (e) converts accounts of a 

domestic partnership (including an S 

corporation) to accounts of covered 

shareholders owning interests in the 

domestic partnership when both 

§ 1.958–1(d)(1) and the section 959 

regulations apply. 

(b) Establishing annual PTEP 

accounts, dollar basis pools, and 

corporate PTEP accounts and 

adjustments for section 965 transition 

tax—(1) In general. When applying the 

2019 notice provisions pursuant to 

§ 1.959–12(c) (interim application of 

2019 notice provisions), or the section 

959 regulations (other than §§ 1.959–8 

and 1.959–9) pursuant to § 1.959–12(d) 

(optional early application), to a taxable 

year of a foreign corporation, annual 

PTEP accounts, dollar basis pools, and 

corporate PTEP accounts are established 

and adjusted in accordance with the 

rules described in paragraphs (b)(2) and 

(3) of this section. 

(2) Establishment of accounts—(i) In 

general. As of the beginning of the first 

taxable year of the foreign corporation to 

which the 2019 notice provisions apply, 

or, if earlier, the first taxable year of the 

foreign corporation to which the section 

959 regulations (other than §§ 1.959–8 

and 1.959–9) apply, a reasonable 

method (consistently applied) must be 

used to establish annual PTEP accounts, 

dollar basis pools, and corporate PTEP 

accounts reflecting the foreign 

corporation’s previously taxed earnings 

and profits, including to reflect 

adjustments to previously taxed 

earnings and profits that would have 

been made if the principles of §§ 1.959– 

2 through 1.959–5 and 1.959–7 were to 

have previously applied. Establishing 

accounts in accordance with the 

preceding sentence includes conforming 

any of a covered shareholder’s existing 

previously taxed earnings and profits 

accounts with respect to the foreign 

corporation, or dollar basis accounts 

with respect to the previously taxed 

earnings and profits, to the requirements 

of § 1.959–2. In addition, a covered 

shareholder is treated as consistently 

applying a reasonable method only if 

the covered shareholder and any 

covered shareholders with which the 

covered shareholder joins in filing a 

Federal income tax return apply that 

method with respect to all foreign 

corporations in which the covered 

shareholders own stock. 

(ii) Multi-year accounts—(A) 

Previously taxed earnings and profits. 

To the extent a covered shareholder has 

an account reflecting previously taxed 

earnings and profits of the foreign 

corporation that relate to two or more 

taxable years and are described in the 

next sentence (multi-year PTEP 

account), a reasonable method to 

conforming the multi-year PTEP 

account to the requirements of § 1.959– 

2 includes treating such previously 

taxed earnings and profits as assigned to 

the general section 959(c)(1) PTEP group 

or the section 951(a)(1)(A) PTEP group 

(as applicable) within an annual PTEP 

account that relates to the last taxable 

year of the foreign corporation ending 

on or before December 31, 2017, and the 

section 904 category to which the multiyear PTEP account relates. Previously 

taxed earnings and profits are described 

in this sentence to the extent they are 

described in section 959(c)(1)(A) by 

reason of section 951(a)(1)(B) and not by 

reason of section 959(a)(2); described in 

section 959(c)(1)(B), including by reason 

of section 959(a)(3) (before its repeal); or 

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

of section 951(a)(1)(A) and without 

regard to section 965(a), 965(b)(4)(A), 

951A(f)(2), 245A(e)(2), 959(e), or 

964(e)(4). 

(B) Dollar basis. To the extent a 

covered shareholder has an account 

reflecting the dollar basis of previously 

taxed earnings and profits of the foreign 

corporation that relate to two or more 

taxable years (multi-year dollar basis 

account), a reasonable method for 

conforming the multi-year dollar basis 

account to the requirements of § 1.959– 

2 includes treating previously taxed 

earnings and profits to which the multiyear dollar basis account relates as 

having a dollar basis equal to a pro rata 

portion of the multi-year dollar basis 

account, and placing that dollar basis 

into the related dollar basis pool. The 

pro rata portion is determined by 

multiplying the multi-year dollar basis 

account by a fraction, the numerator of 

which is previously taxed earnings and 

profits to which the multi-year dollar 

basis account relates, and the 

denominator of which is all previously 

taxed earnings and profits to which the 

multi-year dollar basis account relates. 

(3) Adjustments for section 965 

transition tax—(i) Increases for amounts 

included in gross income under section 

951(a)(1)(A) by reason of section 965(a). 

When adding previously taxed earnings 

and profits to annual PTEP accounts to 

reflect an amount a covered shareholder 

includes in gross income under section 

951(a)(1)(A) with respect to the foreign 

corporation by reason of section 965(a), 

assign such previously taxed earnings 

and profits to the section 965(a) PTEP 

group (rather than the section 

951(a)(1)(A) PTEP group). 

(ii) Increases for section 965(b) 

reductions. For purposes of adjusting 


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95430 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

annual PTEP accounts and dollar basis 

pools, treat an amount that a covered 

shareholder would have included in 

gross income under section 951(a)(1)(A) 

with respect to the foreign corporation 

but for section 965(b) and § 1.965– 

1(b)(2) or 1.965–8(b), as applicable, as 

included in the covered shareholder’s 

gross income under section 951(a)(1)(A) 

with respect to the foreign corporation, 

and assign previously taxed earnings 

and profits resulting from such 

treatment to the section 965(b) PTEP 

group (rather than the section 

951(a)(1)(A) PTEP group). 

(c) Establishing PTEP tax pools, 

corporate PTEP tax pools, adjusted 

applicable percentages, and section 

965(c) deduction percentages—(1) In 

general. As of the beginning of the first 

taxable year of a foreign corporation to 

which the section 959 regulations (other 

than §§ 1.959–8 and 1.959–9) apply 

pursuant to § 1.959–12(b) (general 

applicability date) or, if applicable, 

§ 1.959–12(d) (optional early 

application), PTEP tax pools, corporate 

PTEP tax pools, adjusted applicable 

percentages, and section 965(c) 

deduction percentages reflecting the 

foreign corporation’s previously taxed 

earnings and profits must be established 

in accordance with the rules described 

in paragraphs (c)(2) through (4) of this 

section. 

(2) PTEP tax pools and corporate 

PTEP tax pools. PTEP tax pools and 

corporate PTEP tax pools are established 

by adding a pro rata portion of the 

foreign corporation’s prior-law PTEP 

group taxes with respect to a prior-law 

PTEP group (defined in this paragraph 

(c)(2)) to each PTEP tax pool with 

respect to the foreign corporation, 

determined by multiplying such priorlaw PTEP group taxes by a fraction. The 

numerator of the fraction is the balance 

of the prior-law PTEP group that is 

previously taxed earnings and profits 

relating to the PTEP tax pool, and the 

denominator of the fraction is the 

balance of the prior-law PTEP group. 

For purposes of this paragraph (c)(2), 

prior-law PTEP group taxes and priorlaw PTEP groups mean PTEP group 

taxes and PTEP groups, respectively, as 

defined in § 1.960–3 as contained in 26 

CFR part 1 revised as of April 1, 2024. 

(3) Adjusted applicable percentage. 

An adjusted applicable percentage is 

established with respect to all of the 

foreign corporation’s previously taxed 

earnings and profits assigned to the 

reclassified section 965(a) PTEP group, 

reclassified section 965(b) PTEP group, 

section 965(a) PTEP group, and section 

965(b) PTEP group within a covered 

shareholder’s annual PTEP accounts 

relating to the same section 904 category 

by calculating a weighted average of the 

applicable percentages (as defined in 

§ 1.965–5(d)) with respect to the 

previously taxed earnings and profits. 

The weighted average is determined as 

the sum of the product of each such 

applicable percentage and the amount of 

previously taxed earnings and profits to 

which the applicable percentage relates, 

divided by the sum of the amount of 

previously taxed earnings and profits 

described in the preceding sentence. For 

purposes of this paragraph (c)(3), 

applicable percentages and previously 

taxed earnings and profits are 

determined as of the beginning of the 

taxable year. 

(4) Section 965(c) deduction 

percentage. A section 965(c) deduction 

percentage is established with respect to 

all of the foreign corporation’s 

previously taxed earnings and profits 

assigned to the reclassified section 

965(a) PTEP group and section 965(a) 

PTEP group within a covered 

shareholder’s annual PTEP accounts 

relating to the same section 904 category 

by calculating a weighted average of the 

percentages for which foreign currency 

gain or loss recognized under section 

986(c) with respect to distributions of 

the previously taxed earnings and 

profits would be reduced under 

§ 1.986(c)–1 as contained in 26 CFR part 

1 revised as of April 1, 2024. The 

weighted average is determined as the 

sum of the product of each such 

percentage and the amount of 

previously taxed earnings and profits to 

which the percentage relates, divided by 

the sum of the amount of previously 

taxed earnings and profits described in 

the preceding sentence. For purposes of 

this paragraph (c)(4), percentages for 

which foreign currency gain or loss 

would be reduced under § 1.986(c)–1 

and previously taxed earnings and 

profits are determined as of the 

beginning of the taxable year. 

(d) Treatment of domestic 

partnerships (including S corporations) 

before application of § 1.958–1(d)(1). 

For purposes of the section 959 

regulations, a domestic partnership 

(including an S corporation) is treated 

as a covered shareholder for any taxable 

year of the domestic partnership to 

which § 1.958–1(d)(1) does not apply. If 

a domestic partnership is treated as a 

covered shareholder, then rules 

regarding distributions of previously 

taxed earnings and profits apply to the 

domestic partnership in its capacity as 

a covered shareholder before those rules 

apply to covered shareholders that own 

interests in the domestic partnership. In 

such a case, for example, a covered 

distribution made to the domestic 

partnership is first a distribution of the 

distributing foreign corporation’s 

previously taxed earnings and profits 

with respect to the partnership and 

then, to the extent remaining, a 

distribution of the distributing foreign 

corporation’s previously taxed earnings 

and profits with respect to covered 

shareholders owning interests in the 

partnership. 

(e) Converting domestic partnershiplevel (including S corporation-level) 

accounts to partner-level accounts after 

the application of § 1.958–1(d)(1)—(1) In 

general. As of the beginning of the first 

taxable year of a domestic partnership 

(including an S corporation) to which 

both § 1.958–1(d)(1) and the section 959 

regulations (other than §§ 1.959–8 and 

1.959–9) apply (pursuant to § 1.959– 

12(c) (general applicability date) or (d) 

(optional early application)), the 

domestic partnership’s accounts 

described in § 1.959–2 with respect to a 

foreign corporation are converted to 

accounts of covered shareholders 

owning interests in the partnership in 

accordance with the rules described in 

paragraphs (e)(2) through (4) of this 

section. 

(2) Rules for converting accounts—(i) 

Allocate previously taxed earnings and 

profits to each covered shareholder—(A) 

In general. First, allocate a pro rata 

portion of the foreign corporation’s 

previously taxed earnings and profits 

with respect to the domestic partnership 

to each covered shareholder owning an 

interest in the partnership at the 

beginning of the taxable year, 

determined by multiplying all the 

foreign corporation’s previously taxed 

earnings and profits with respect to the 

partnership by a fraction. The 

numerator of the fraction is the 

liquidation value of the covered 

shareholder’s interest in the 

partnership, and the denominator of the 

fraction is the aggregate liquidation 

value of all partners’ interests in the 

partnership (determined in each case 

under paragraph (e)(2)(i)(B) of this 

section). 

(B) Liquidation value. For purposes of 

this paragraph (e)(2)(i), the liquidation 

value of a partner’s interest in the 

partnership is the amount of cash the 

partner would receive with respect to 

the interest if, at the beginning of the 

taxable year, the partnership (and any 

partnership through which the partner 

indirectly owns an interest in the 

partnership) sold all of its property for 

an amount of cash equal to the fair 

market value of the property (taking into 

account section 7701(g)), satisfied all of 

its liabilities (other than those described 

in § 1.752–7), paid an unrelated third 

party to assume all of its § 1.752–7 

liabilities in a fully taxable transaction, 


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and then the partnership (and any 

partnership through which the partner 

indirectly owns an interest in the 

partnership) liquidated. Moreover, any 

change to a partnership agreement made 

with a principal purpose of altering the 

allocation of previously taxed earnings 

and profits under this paragraph (e)(2)(i) 

is disregarded. 

(ii) Compute dollar basis and 

associated foreign income taxes. 

Second, treat the dollar basis of, or 

foreign income taxes associated with, 

previously taxed earnings and profits 

allocated to each covered shareholder as 

the same as what would be the dollar 

basis of, or foreign income taxes 

associated with, the previously taxed 

earnings and profits under § 1.959–4 if 

the previously taxed earnings and 

profits were distributed at the beginning 

of the taxable year. 

(iii) Eliminate the domestic 

partnership’s accounts and increase 

covered shareholders’ accounts. Third, 

eliminate the domestic partnership’s 

annual PTEP accounts, dollar basis 

pools, and PTEP tax pools with respect 

to the foreign corporation. Concurrently 

with such eliminations, increase each 

covered shareholder’s annual PTEP 

accounts, dollar basis pools, and PTEP 

tax pools with respect to the foreign 

corporation to reflect the foreign 

corporation’s previously taxed earnings 

and profits that are allocated to the 

covered shareholder or the dollar basis 

of, or foreign income taxes associated 

with, the previously taxed earnings and 

profits, as applicable. 

(3) Coordination with section 986(c). 

No foreign currency gain or loss is 

recognized with respect to previously 

taxed earnings and profits under section 

986(c) as a result of previously taxed 

earnings and profits ceasing to be with 

respect to the domestic partnership 

pursuant to this paragraph (e) 

(notwithstanding § 1.986(c)–1). 

(4) Coordination with deemed covered 

shareholder rules. The portion, if any, of 

the foreign corporation’s previously 

taxed earnings and profits with respect 

to the domestic partnership that does 

not give rise to an increase to a covered 

shareholder’s annual PTEP accounts 

with respect to the foreign corporation 

under paragraph (e)(1) of this section 

becomes previously taxed earnings and 

profits of the foreign corporation with 

respect to the deemed covered 

shareholder for purposes of 

subsequently transferring the previously 

taxed earnings and profits under section 

959. See § 1.959–7(g) for rules regarding 

the deemed covered shareholder. 

§ 1.959–12 Applicability dates. 

(a) Scope. This section sets forth 

applicability dates for the section 959 

regulations. Paragraph (b) of this section 

provides the general applicability dates. 

Paragraph (c) of this section provides 

interim application for certain 

provisions. Paragraph (d) of this section 

allows early application. 

(b) In general. Sections 1.959–1 

through 1.959–7 and 1.959–10 and 

1.959–11 apply to taxable years of 

foreign corporations beginning on or 

after [date of publication of final 

regulations in the Federal Register] and 

to taxable years of persons for which 

such taxable years of those foreign 

corporations are relevant. 

(c) Interim application of 2019 notice 

provisions—(1) In general. For taxable 

years of United States shareholders (and 

successors in interest) ending after 

December 14, 2018, and to which 

§§ 1.959–1 through 1.959–7 and 1.959– 

10 and 1.959–11 do not apply pursuant 

to paragraph (b) or (d) of this section, 

and taxable years of foreign corporations 

ending with or within such taxable 

years, the 2019 notice provisions 

(defined in paragraph (c)(2) of this 

section) and § 1.959–11 apply. 

(2) 2019 notice provisions. The 2019 

notice provisions means §§ 1.959–1(c) 

(treatment of an S corporation), 1.959– 

2 (accounting of previously taxed 

earnings and profits), 1.959–3 

(adjustments to shareholder-level 

accounts and, consequently, foreign 

corporation-level accounts), 1.959–4(e) 

and 1.959–5(d) (allocation of 

distributions and section 956 amounts), 

and the relevant definitions in § 1.959– 

1(b), along with treating previously 

taxed earnings and profits as distributed 

under section 959 only to the extent that 

the distribution is a dividend (as 

defined in section 316), determined 

without regard to section 959(d). For 

purposes of applying the 2019 notice 

provisions, the PTEP groups listed in 

the following table may be used in lieu 

of the PTEP groups listed in § 1.959–2, 

the portions of §§ 1.959–2 and 1.959–3 

relating to PTEP tax pools, corporate 

PTEP tax pools, adjusted applicable 

percentages, and section 965(c) 

deduction percentages do not apply, 

and the portions of §§ 1.959–3 through 

1.959–5 and 1.959–7 relating to the 

timing of adjustments and 

determinations do not apply. 

TABLE 1 TO PARAGRAPH (c)(2) OF THIS SECTION—2019 NOTICE PTEP GROUPS

Section 959(c)(1) PTEP groups Section 959(c)(2) PTEP groups 

Group Description Group Description 

Reclassified section 965(a) 

PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 965(a).

Section 965(a) PTEP 

group.

Earnings and profits described in section 959(c)(2) 

by reason of section 965(a). 

Reclassified section 965(b) 

PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 965(b)(4)(A).

Section 965(b) PTEP 

group.

Earnings and profits described in section 959(c)(2) 

by reason of section 965(b)(4)(A). 

Section 951(a)(1)(B) PTEP 

group.

Earnings and profits described in section 

959(c)(1)(A) by reason of section 951(a)(1)(B) 

and not by reason of section 959(a)(2).

Reclassified section 951A 

PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 951A(f)(2).

Section 951A PTEP 

group.

Earnings and profits described in section 959(c)(2) 

by reason of section 951A(f)(2). 

Reclassified section 

245A(e)(2) PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 245A(e)(2).

Section 245A(e)(2) PTEP 

group.

Earnings and profits described in section 959(c)(2) 

by reason of section 245A(e)(2). 

Reclassified section 959(e) 

PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 959(e).

Section 959(e) PTEP 

group.

Earnings and profits described in section 959(c)(2) 

by reason of section 959(e). 

Reclassified section 

964(e)(4) PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 964(e)(4).

Section 964(e) PTEP 

group.

Earnings and profits described in section 959(c)(2) 

by reason of section 964(e)(4). 


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TABLE 1 TO PARAGRAPH (c)(2) OF THIS SECTION—2019 NOTICE PTEP GROUPS—Continued 

Section 959(c)(1) PTEP groups Section 959(c)(2) PTEP groups 

Group Description Group Description 

Reclassified section 

951(a)(1)(A) PTEP group.

Earnings and profits described in section 

959(c)(1)(A) that were initially described in section 

959(c)(2) by reason of section 951(a)(1)(A) and 

not described in another PTEP group.

Section 951(a)(1)(A) 

PTEP group.

Earnings and profits described in section 959(c)(2) 

by reason of section 951(a)(1)(A) and not described in another PTEP group. 

Section 956A PTEP group Earnings and profits described in section 

959(c)(1)(B), including by reason of section 

959(a)(3) (before its repeal).

(d) Early application—(1) In general. 

Sections 1.959–1 through 1.959–7 and 

1.959–10 and 1.959–11 may be applied 

to a taxable year of a foreign corporation 

not described in paragraph (b) of this 

section, and then must be applied to all 

succeeding taxable years of the foreign 

corporation not described in paragraph 

(b) of this section, if the conditions 

described in paragraphs (d)(2) through 

(4) of this section are satisfied. The 

foreign corporation described in the 

preceding sentence is the early 

application corporation and any taxable 

years to which the early application 

corporation applies §§ 1.959–1 through 

1.959–7, 1.959–10, and 1.959–11 

pursuant to the preceding sentence are 

the early application years. 

(2) Consistent application condition— 

(i) In general. The provisions described 

in paragraph (d)(2)(ii) of this section are 

applied in their entirety to the early 

application years and all taxable years 

of covered shareholders for which the 

early application years are relevant. In 

addition, §§ 1.959–1 through 1.959–7, 

1.959–10, and 1.959–11 are applied in 

their entirety pursuant to paragraph (d) 

of this section to all taxable years that 

both are of foreign corporations that are 

related to the early application 

corporation and end on or after the later 

of the last day of the first early 

application year and the first day on 

which the foreign corporations are 

related to the early application 

corporation. For purposes of the 

preceding sentence, foreign corporations 

are related if the foreign corporations 

bear a relationship to each other 

described in section 267(b). 

(ii) Provisions. The provisions 

described in this paragraph (d)(2)(ii) are 

§§ 1.163(j)–7(g)(2)(ii), 1.245A(d)–1(d), 

1.312–6(f), 1.312–8(c), 1.861–20, 1.904– 

6(e), 1.905–3, 1.905–4(c)(6), 1.951–1, 

1.951–2, 1.951A–1(d), 1.951A– 

2(c)(1)(vi), 1.952–1(c)(4), 1.954– 

1(c)(1)(iii)(C), 1.959–1 through 1.959–7, 

1.959–10, 1.959–11, 1.960–1, 1.960–3, 

1.961–1 through 1.961–5, 1.961–8 

through 1.961–13, 1.965–5(d)(5), 

1.986(a)–1, 1.986(c)–1, and 1.1502–59. 

(3) Open period of limitations 

condition. The period of limitations on 

assessment for each taxable year 

described in paragraph (d)(2) of this 

section is open under section 6501. 

(4) Written consent condition. Each 

covered shareholder described in 

paragraph (d)(2) of this section provides 

to the early application corporation a 

written statement in which the covered 

shareholder consents to apply the rules 

described in paragraph (d)(2) of this 

section to the taxable years of the 

covered shareholder described in 

paragraph (d)(2) of this section and 

affirms that the period of limitations on 

assessment for each such taxable year is 

open under section 6501. 

■ Par. 23. Section 1.960–1 is amended 

by: 

■ 1. Revising paragraph (a)(1); 

■ 2. Revising paragraphs (b)(1) and 

(b)(3); 

■ 3. Removing paragraph (b)(12); 

■ 4. Redesignating paragraphs (b)(13) 

through (b)(16) as paragraphs (b)(12) 

through (b)(15), respectively; 

■ 5. Revising newly redesignated 

paragraph (b)(15); 

■ 6. Redesignating paragraph (b)(17) as 

paragraph (b)(16), and revising newly 

redesignated paragraph (b)(16); 

■ 7. Adding a new paragraph (b)(17); 

■ 8. Removing paragraphs (b)(18) 

through (b)(21); 

■ 9. Redesignating paragraphs (b)(22) 

through (b)(24) as paragraphs (b)(18) 

through (b)(20), respectively; 

■ 10. Removing paragraph (b)(25); 

■ 11. Redesignating paragraphs (b)(26) 

and (b)(27) as paragraphs (b)(21) and 

(b)(22), respectively, and revising newly 

redesignated paragraphs (b)(21) and 

(b)(22); 

■ 12. Removing paragraph (b)(28); 

■ 13. Redesignating paragraphs (b)(29) 

through (b)(38) as paragraphs (b)(23) 

through (b)(32), respectively; 

■ 14. Revising paragraphs (c)(1)(i) 

through (iii); 

■ 15. In paragraph (c)(1)(iv), removing 

the language ‘‘§ 1.960–3(b)’’ and adding 

the language ‘‘§ 1.960–3’’ in its place; 

■ 16. Removing paragraph (c)(1)(v); 

■ 17. Redesignating paragraphs (c)(1)(vi) 

and (vii) as paragraphs (c)(1)(v) and 

(c)(1)(vi), respectively; 

■ 18. Revising newly redesignated 

paragraphs (c)(1)(v) and (vi); 

■ 19. Revising paragraph (c)(2); 

■ 20. Revising paragraph (d)(1); 

■ 21. Revising paragraphs (d)(2)(i) and 

(d)(2)(ii)(A) and (D); 

■ 22. Revising the heading of paragraph 

(d)(3) and the introductory text of 

paragraph (d)(3)(i); 

■ 23. Revising the last sentence of 

paragraph (d)(3)(i)(A) and the last two 

sentences of paragraph (d)(3)(ii)(A); 

■ 24. Revising paragraph (d)(3)(ii)(B); 

and 

■ 25. Revising paragraphs (e) and (f). 

The additions and revisions read as 

follows: 

§ 1.960–1 Overview, definitions, and 

computational rules for determining foreign 

income taxes deemed paid under section 

960(a), (b), and (d). 

(a) Overview—(1) Scope of §§ 1.960–1 

through 1.960–3. This section and 

§ 1.960–2 provide rules for attributing 

foreign income taxes paid or accrued by 

a controlled foreign corporation to its 

income that a corporate United States 

shareholder of the controlled foreign 

corporation takes into account in 

determining its subpart F inclusion or 

GILTI inclusion amount. This section 

provides definitions, identifies the 

statutory and residual groupings for 

purposes of section 960(a) and (d), and 

sets forth computational rules for 

determining the amount of income and 

taxes assigned to each grouping. Section 

1.960–2 provides rules for computing 

the amount of foreign income taxes 

deemed paid by a corporate United 

States shareholder of a controlled 

foreign corporation under section 960(a) 

and (d). Section 1.960–3 provides rules 

for determining the foreign income taxes 

that are deemed paid by a corporate 

United States shareholder in a 

controlled foreign corporation, or by a 

controlled foreign corporation that is a 

shareholder in another controlled 

foreign corporation, under section 

960(b). This section, § 1.960–2, and 

§ 1.960–3 provide the exclusive rules for 

determining the foreign income taxes 

deemed paid by a domestic corporation 

or controlled foreign corporation under 

section 960. Only foreign income taxes 

paid or accrued by a controlled foreign 


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corporation that are properly 

attributable under these rules to an item 

of income that a corporate United States 

shareholder of the controlled foreign 

corporation includes as a subpart F 

inclusion or GILTI inclusion amount 

may be deemed paid by the domestic 

corporation under section 960(a) or (d). 

Only foreign income taxes that are 

properly attributable under § 1.960–3 to 

previously taxed earnings and profits 

that are distributed by a controlled 

foreign corporation may be deemed paid 

by a domestic corporation or a 

controlled foreign corporation under 

section 960(b). This section, § 1.960–2, 

and § 1.960–3 also apply for purposes of 

any provision that treats a taxpayer as 

a domestic corporation that is deemed 

to pay foreign income taxes or treats a 

foreign corporation as a controlled 

foreign corporation for purposes of 

section 960. See, for example, sections 

962(a)(2) and 1293(f). 

* * * * * 

(b) * * * 

(1) Annual PTEP account. The term 

annual PTEP account has the meaning 

provided in § 1.959–1(b). 

* * * * * 

(3) Current taxable year. The term 

current taxable year means the U.S. 

taxable year of a controlled foreign 

corporation which ends with or within 

the U.S. taxable year of a United States 

shareholder of the controlled foreign 

corporation. 

* * * * * 

(15) Previously taxed earnings and 

profits. The term previously taxed 

earnings and profits has the meaning 

provided in § 1.959–1(b). 

(16) PTEP group. The term PTEP 

group has the meaning provided in 

§ 1.959–1(b). 

(17) PTEP realization event. The term 

PTEP realization event has the meaning 

provided in § 1.959–1(b). 

* * * * * 

(21) Specified section 959(a) 

distribution. The term specified section 

959(a) distribution means a distribution 

of previously taxed earnings and profits, 

as determined under § 1.959–4, that a 

domestic corporation that is a United 

States shareholder in a controlled 

foreign corporation receives (or is 

treated as receiving pursuant to § 1.959– 

4(c)(3)) from the controlled foreign 

corporation and that is excluded from 

the income of the recipient domestic 

corporation under § 1.959–4(b)(1). 

(22) Section 959(b) distribution. The 

term section 959(b) distribution means a 

distribution of previously taxed 

earnings and profits, as determined 

under § 1.959–4, that a controlled 

foreign corporation receives from 

another controlled foreign corporation 

and that is excluded from the income of 

the recipient controlled foreign 

corporation for purposes of determining 

the recipient controlled foreign 

corporation’s subpart F income and 

tested income or tested loss under 

§ 1.959–4(b)(2). 

* * * * * 

(c) * * * 

(1) * * * 

(i) First, items of gross income of a 

controlled foreign corporation for the 

current taxable year are assigned to 

section 904 categories and included in 

income groups within those section 904 

categories under the rules in paragraph 

(d)(2) of this section. See section 959 

and the regulations thereunder for rules 

regarding the receipt of a section 959(b) 

distribution by a controlled foreign 

corporation. 

(ii) Second, deductions (other than for 

current year taxes) of a controlled 

foreign corporation for the current 

taxable year are allocated and 

apportioned to reduce gross income in 

the section 904 categories and the 

income groups within a section 904 

category. See paragraph (d)(3)(i) of this 

section. Additionally, the functional 

currency amounts of current year taxes 

are allocated and apportioned to reduce 

gross income in the section 904 

categories and the income groups within 

a section 904 category. See paragraph 

(d)(3)(ii) of this section. For rules 

regarding the allocation and 

apportionment of foreign income taxes 

paid or accrued by a foreign corporation 

to previously taxed earnings and profits, 

see § 1.959–6. 

(iii) Third, for purposes of computing 

foreign income taxes deemed paid 

under section 960(a) and (d), eligible 

current year taxes that were allocated 

and apportioned to income groups in 

the section 904 categories are translated 

into U.S. dollars in accordance with 

section 986(a) and § 1.986(a)–1. 

* * * * * 

(v) Fifth, paragraphs (c)(1)(i) through 

(iv) of this section are repeated for each 

next higher-tier controlled foreign 

corporation in the chain. 

(vi) Sixth, with respect to the highesttier controlled foreign corporation in a 

chain that is owned directly (or 

indirectly through one or more 

partnerships) by the domestic 

corporation, foreign income taxes that 

are deemed paid under section 960(b)(1) 

in connection with the receipt of a 

specified section 959(a) distribution by 

the domestic corporation are computed 

under the rules of § 1.960–3. 

(2) Current taxable year items. For a 

current taxable year, the items of 

income and deductions (including for 

taxes), and the U.S. dollar amounts of 

current year taxes, that are included in 

the computations described in this 

section are the items that a controlled 

foreign corporation accrues and takes 

into account during the current taxable 

year. An item of income with respect to 

a current taxable year does not include 

an amount included as subpart F 

income of a controlled foreign 

corporation by reason of the 

recharacterization of a recapture 

account established in a prior U.S. 

taxable year (and the corresponding 

earnings and profits) of the controlled 

foreign corporation under section 

952(c)(2) and § 1.952–1(f). 

* * * * * 

(d) * * * 

(1) Scope. This paragraph (d) provides 

rules for assigning gross income 

(including gains) of a controlled foreign 

corporation for the current taxable year 

to a section 904 category and income 

group within a section 904 category, and 

for allocating and apportioning 

deductions (including losses and 

current year taxes) and the U.S. dollar 

amount of eligible current year taxes of 

the controlled foreign corporation for 

the current taxable year among the 

section 904 categories and income 

groups within a section 904 category. 

See § 1.959–6 for rules for allocating and 

apportioning foreign income taxes paid 

or accrued by a foreign corporation to 

previously taxed earnings and profits. 

(2) * * * 

(i) Assigning items of gross income to 

section 904 categories. Items of gross 

income of a controlled foreign 

corporation for the current taxable year 

are first assigned to a section 904 

category of the controlled foreign 

corporation under §§ 1.904–4 and 

1.904–5. Income of a controlled foreign 

corporation cannot be assigned to the 

section 951A category. See § 1.904–4(g). 

But see § 1.959–2(b)(2)(i) for rules 

relating to the assignment of previously 

taxed earnings and profits to PTEP 

groups within an annual PTEP account, 

which may assign previously taxed 

earnings and profits to the section 951A 

PTEP group. 

(ii) * * * 

(A) In general. Gross income within a 

section 904 category is assigned to a 

subpart F income group, tested income 

group, or residual income group under 

the rules of this paragraph (d)(2)(ii). See 

§ 1.959–2(d) for rules regarding the 

accounting of previously taxed earnings 

and profits by a foreign corporation. 

* * * * * 

(D) Residual income group. The term 

residual income group means the 


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income group within a section 904 

category that is not in a subpart F 

income group or tested income group. 

For purposes of this paragraph 

(d)(2)(ii)(D), treat items of gross income 

that give rise to previously taxed 

earnings and profits described in 

§ 1.959–6(b) as gross income in a 

residual income group. See paragraph 

(d)(3)(ii)(B) of this section for rules 

regarding the assignment of foreign 

gross income to the statutory and 

residual groupings of income of a 

controlled foreign corporation when the 

controlled foreign corporation pays or 

accrues current year taxes with respect 

to a PTEP realization event that occurs 

in a different taxable year. 

* * * * * 

(3) Allocation and apportionment of 

deductions among section 904 

categories and income groups within a 

section 904 category—(i) In general. 

Gross income of a controlled foreign 

corporation in each income group 

within each section 904 category is 

reduced by deductions (including losses 

and current year taxes) of the controlled 

foreign corporation for the current 

taxable year under the rules in this 

paragraph (d)(3)(i). For purposes of this 

paragraph (d)(3), allocate and apportion 

current year taxes arising by reason of 

a PTEP realization event that occurs in 

the same taxable year to the residual 

income group within a section 904 

category under § 1.959–6(c). For 

additional rules regarding the allocation 

and apportionment of deductions 

(including foreign income taxes) paid or 

accrued by a foreign corporation to 

previously taxed earnings and profits, 

see § 1.959–6. 

(A) * * * See paragraph (d)(3)(ii) of 

this section for special rules for 

allocating and apportioning current year 

taxes to section 904 categories and 

income groups. 

* * * * * 

(ii) * * * 

(A) * * * For special rules regarding 

current year taxes paid or accrued with 

respect to a PTEP realization event that 

occurs in a different taxable year, see 

paragraph (d)(3)(ii)(B) of this section. 

For purposes of determining foreign 

income taxes deemed paid under 

section 960(a) and (d) and § 1.960–2, the 

U.S. dollar amount of eligible current 

year taxes is assigned to the section 904 

categories and income groups to which 

the eligible current year taxes are 

allocated and apportioned. 

(B) Current year taxes that a 

controlled foreign corporation pays or 

accrues that relate to a PTEP realization 

event that occurs in a different U.S. 

taxable year. If a current year tax is 

allocated and apportioned by reference 

to foreign gross income that includes 

previously taxed earnings and profits 

with respect to a PTEP realization event 

that occurs in a different taxable year, 

the foreign gross income is assigned to 

the subpart F income group, tested 

income group, or residual income group 

to which the income that gave rise to the 

previously taxed earning and profits 

would be assigned if that income were 

recognized by that controlled foreign 

corporation under Federal income tax 

principles in the current taxable year. 

For example, a net basis tax paid or 

accrued with respect to a section 959(b) 

distribution that occurred in the 

preceding taxable year would be 

assigned to a section 904 category and 

to a subpart F income group, tested 

income group, or residual income group 

by reference to the income that gave rise 

to the previously taxed earnings and 

profits. 

(e) Current year taxes related to a 

residual income group are not deemed 

paid. Current year taxes paid or accrued 

by a controlled foreign corporation that 

are allocated and apportioned under 

paragraph (d)(3)(ii) of this section to a 

residual income group cannot be 

deemed paid under section 960 for any 

taxable year, except to the extent such 

taxes are allocated and apportioned to 

previously taxed earnings and profits 

under § 1.959–6 and deemed paid by a 

domestic corporation under § 1.960–3. 

(f) Example. The following example 

illustrates the application of this section 

and § 1.960–3. 

(1) Facts—(i) CFC1 and CFC2. CFC1, 

a controlled foreign corporation, 

conducts business in Country X. CFC1 

uses the ‘‘u’’ as its functional currency. 

At all relevant times, 1u = $1. CFC1 

owns all the stock of CFC2, a controlled 

foreign corporation. All the stock of 

CFC1 and CFC2 is owned (within the 

meaning of section 958(a)) by corporate 

United States shareholders that use the 

calendar year as their U.S. taxable year. 

CFC1 and CFC2 both use the calendar 

year as their U.S. and foreign taxable 

years. 

(ii) Income of CFC1 and CFC2. In Year 

3, CFC1 earns 2,000,000u of gross 

income that is foreign base company 

sales income, and 1,000,000u of interest 

income from unrelated persons, for both 

U.S. and Country X tax law purposes. 

Under Country X tax law, CFC1’s 

interest income is exempt from tax. In 

Year 3, CFC1 also receives a section 

959(b) distribution from CFC2 of 

4,000,000u of previously taxed earnings 

and profits, in the general category and 

relating to a single PTEP group and 

taxable year. There are no foreign 

income taxes associated with the 

previously taxed earnings and profits 

distributed by CFC2 at the level of CFC2 

under § 1.959–4. The section 959(b) 

distribution is treated as a dividend 

taxable to CFC1 under Country X tax 

law. In Year 3, CFC2 earns no gross 

income and receives no distributions. 

(iii) Deductions of CFC1 and CFC2 

other than taxes. For both U.S. and 

Country X tax purposes, in Year 3, CFC1 

incurs 1,500,000u of deductible 

expenses other than current year taxes 

that are allocable to all gross income. 

For U.S. tax purposes, under §§ 1.861– 

8 through 1.861–14T, 1,000,000u of the 

deductions are apportioned to CFC1’s 

foreign base company sales income and 

500,000u of the deductions are 

apportioned to CFC1’s interest income. 

Under Country X tax law, 1,000,000u of 

deductions are apportioned to the 

4,000,000u treated as a dividend, and 

500,000u of deductions are apportioned 

to the 2,000,000u of foreign base 

company sales income. Under Country 

X tax law, no deductions are 

apportioned to the interest income. 

Under Country X tax law, CFC1 pays 

eligible current year taxes of 900,000u 

on a base of 4,500,000u (7,000,000u 

gross income ¥ 1,000,000u exemption 

and 1,500,000u deductions) consisting 

of 3,000,000u (4,000,000u ¥ 

1,000,000u) of previously taxed earnings 

and profits, 1,000,000u of interest 

income (exempt from tax under Country 

X law), and 1,500,000u (2,000,000u ¥ 

500,000u) of foreign base company sales 

income. In Year 3, CFC2 has no 

expenses (including current year taxes). 

(2) Analysis—(i) CFC2. Under 

paragraph (c)(1) of this section, the 

computational rules of paragraph (c)(1) 

of this section are applied beginning 

with CFC2. However, CFC2 has no gross 

income or expenses in Year 3. 

Accordingly, the computational rules in 

paragraphs (c)(1)(i) through (iv) of this 

section are not relevant with respect to 

CFC2. Under paragraph (c)(1)(v) of this 

section, the rules in paragraph (c)(1)(i) 

through (iv) of this section are then 

applied to CFC1. 

(ii) CFC1—(A) Step 1. Under 

paragraph (c)(1)(i) of this section, 

CFC1’s items of gross income for the 

current taxable year are assigned to 

section 904 categories and included in 

income groups within those section 904 

categories. Under paragraph (d)(2)(i) of 

this section and § 1.904–4, the interest 

income is passive category income and 

the foreign base company sales income 

is general category income. Under 

paragraph (d)(2)(ii) of this section, the 

1,000,000u of interest income is 

assigned to a subpart F income group 

(the ‘‘FPHCI income group’’) within the 

passive category because it is foreign 


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personal holding company income 

described in § 1.954–1(c)(1)(iii)(A)(1)(i) 

that falls within a single group of 

income under § 1.904–4(c)(3)(iii) for 

passive income that is subject to no 

withholding tax or other foreign tax. 

The 2,000,000u of foreign base company 

sales income is assigned to a subpart F 

income group within the general 

category (the ‘‘FBCSI income group’’), 

because it is foreign base company 

income described in § 1.954– 

1(c)(1)(iii)(A)(2)(i). Under paragraph 

(d)(2) of this section, the 4,000,000u of 

previously taxed earnings and profits is 

treated as a U.S. dividend amount (as 

defined in § 1.861–20(b)(21)) and is 

assigned to the residual income group 

within the general category for purposes 

of applying section 960(a) and (d) and 

§§ 1.960–1 and 1.960–2. 

(B) Step 2—(1) Allocation and 

apportionment of deductions other than 

taxes. Under paragraph (c)(1)(ii) of this 

section, CFC1’s deductions for the 

current taxable year are allocated and 

apportioned among the section 904 

categories and income groups within a 

section 904 category that were increased 

as provided in paragraph (c)(1)(i) of this 

section. Under paragraph (d)(3)(i) of this 

section and §§ 1.861–8 through 1.861– 

14T, 1,000,000u of deductions are 

allocated and apportioned to the FBCSI 

income group within the general 

category, and 500,000u of deductions 

are allocated and apportioned to the 

FPHCI income group within the passive 

category. Therefore, CFC1 has 

1,000,000u (2,000,000u ¥ 1,000,000u) 

of pre-tax income attributable to the 

FBCSI income group within the general 

category and 500,000u (1,000,000u ¥ 

500,000u) of pre-tax income attributable 

to the FPHCI income group within the 

passive category. For U.S. tax purposes, 

no deductions other than eligible 

current year taxes are allocated and 

apportioned to the 4,000,000u of 

previously taxed earnings and profits in 

CFC1’s residual income group within 

the general category because no 

deductions of CFC1 other than 

deductions for current year taxes are 

allocated and apportioned to previously 

taxed earnings and profits under section 

861. See paragraph (d)(3)(i) of this 

section and § 1.959–6(d)(1). 

(2) Allocation and apportionment of 

current year taxes. Under paragraph 

(c)(1)(ii) of this section, CFC1’s current 

year taxes are allocated and apportioned 

among the section 904 categories and 

income groups within a section 904 

category that were increased as 

provided in paragraph (c)(1)(i) of this 

section. Under paragraphs (d)(3)(i) and 

(ii) of this section, for purposes of 

allocating and apportioning taxes to 

reduce the income in a section 904 

category or an income group, § 1.861–20 

(as modified by § 1.904–6(c)) is applied 

to determine the amount of foreign 

taxable income, computed under 

Country X tax law but characterized 

under Federal income tax law, in each 

section 904 category and income group 

that is included in the Country X tax 

base. For Country X tax purposes, 

1,000,000u of deductions are allocated 

and apportioned to CFC1’s 4,000,000u 

of previously taxed earnings and profits, 

which is assigned to the residual 

income grouping within the general 

category, 500,000u of deductions are 

allocated and apportioned to the FBCSI 

income group within the general 

category, and no deductions are 

allocated and apportioned to the FPHCI 

income group in the passive category. 

Therefore, for Country X tax purposes, 

CFC1 has 3,000,000u of foreign taxable 

income assigned to the residual income 

group within the general category, 

1,500,000u of foreign taxable income 

assigned to the FBCSI income group 

within the general category, and no 

taxable income assigned to the FPHCI 

income group within the passive 

category. Under paragraphs (d)(3)(i) and 

(ii) of this section and § 1.959–6, 

600,000u (3,000,000u/4,500,000u × 

900,000u) of the 900,000u eligible 

current year taxes paid by CFC1 are 

related to the residual income group 

within the general category, and 

300,000u (1,500,000u/4,500,000u × 

900,000u) are related to the FBCSI 

income group within the general 

category. No current year taxes are 

allocated or apportioned to the FPHCI 

income group within the passive 

category because the interest expense is 

exempt from Country X tax. See 

§ 1.959–6 for rules allocating and 

apportioning the 600,000u of current 

year taxes among the corporate PTEP 

accounts, section 904 categories, and 

PTEP groups. Thus, for U.S. tax 

purposes, CFC1 has 3,400,000u of 

previously taxed earnings and profits 

(4,000,000u ¥ 600,000u) in the residual 

income group within the general 

category (see §§ 1.959–2 and 1.959–3 for 

rules relating to accounting for 

previously taxed earnings and profits), 

500,000u of income in the FPHCI 

income group within the passive 

category, and 700,000u of income 

(1,000,000u ¥ 300,000u) in the FBCSI 

income group within the general 

category. 

(C) Step 3. Under paragraph (c)(1)(iii) 

of this section, for purposes of 

computing foreign income taxes deemed 

paid under section 960(a), CFC1 has 

$300,000 of current year taxes in the 

FBCSI income group within the general 

category. Under paragraph (e) of this 

section, the United States shareholders 

of CFC1 cannot claim a credit with 

respect to the $600,000 of taxes on 

CFC1’s income in the residual income 

group under section 960, except to the 

extent the taxes are allocated and 

apportioned to previously taxed 

earnings and profits under § 1.959–6 

and deemed paid by a domestic 

corporation under section 960(b) and 

§ 1.960–3. 

(D) Step 4. Under paragraph (c)(1)(iv) 

of this section, the United States 

shareholders of CFC1 compute current 

year taxes deemed paid under section 

960(a) and (d) and the rules of § 1.960– 

2. None of the Country X tax is allocated 

to CFC1’s FPHCI income group. 

Therefore, there are no current year 

taxes deemed paid by CFC1’s United 

States shareholders with respect to their 

passive category subpart F inclusions. 

Country X tax equal to $300,000 is 

allocated and apportioned to CFC1’s 

FBCSI income group. Therefore, 

$300,000 of the current year taxes are 

deemed paid by CFC1’s United States 

shareholders with respect to their 

general category subpart F inclusions. 

See § 1.960–2(b)(5) and (c)(7) for 

examples of the application of section 

960(a) and (d) and the rules in § 1.960– 

2. The remaining $600,000 of Country X 

tax is allocated and apportioned to the 

residual income group within the 

general category with respect to the 

previously taxed earnings and profits 

and will generally be allocated and 

apportioned to previously taxed 

earnings and profits under the rules in 

§ 1.959–6. 

(E) Step 5. Paragraph (c)(1)(v) of this 

section does not apply because CFC1 is 

the highest-tier controlled foreign 

corporation in the chain. 

(F) Step 6. Paragraph (c)(1)(vi) of this 

section does not apply because CFC1 

did not make a specified section 959(a) 

distribution. 

■ Par. 24. Section 1.960–3 is revised to 

read as follows: 

§ 1.960–3 Foreign income taxes deemed 

paid under section 960(b). 

(a) Scope. This section provides rules 

for determining foreign income taxes 

that are deemed paid under section 

960(b) with respect to the receipt of 

distributions of previously taxed 

earnings and profits. Paragraph (b) of 

this section describes the foreign 

income taxes that a domestic 

corporation is deemed to pay with 

respect to its receipt of a specified 

section 959(a) distribution. Paragraph 

(c) of this section describes the foreign 

income taxes that a controlled foreign 


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corporation is deemed to pay with 

respect to its receipt of a section 959(b) 

distribution. For rules regarding the 

maintenance and adjustment by a 

foreign corporation of corporate PTEP 

accounts and corporate PTEP tax pools 

with respect to each of its covered 

shareholders, see § 1.959–2(d). For rules 

regarding the maintenance and 

adjustment by a covered shareholder of 

annual PTEP accounts and PTEP tax 

pools with respect to a foreign 

corporation in which it owns stock, see 

§§ 1.959–2(b) and 1.959–3(c) and (e). 

(b) Foreign income taxes deemed paid 

under section 960(b)(1)—(1) In general. 

A domestic corporation that is a United 

States shareholder of a controlled 

foreign corporation is deemed to have 

paid the foreign income taxes that are 

properly attributable to a specified 

section 959(a) distribution that it 

receives from the controlled foreign 

corporation and that have not been 

deemed to have been paid by a domestic 

corporation under section 960 for the 

current taxable year or any prior taxable 

year. A credit for foreign income taxes 

deemed paid under this section may be 

subject to disallowance under other 

provisions of the Code or regulations in 

this title that apply at the level of the 

United States shareholder. 

(2) Properly attributable. The foreign 

income taxes that are properly 

attributable to a specified section 959(a) 

distribution are the foreign income taxes 

that are removed under §§ 1.959–2(d)(2) 

and 1.959–3(e)(1)(iii) from each 

creditable PTEP tax group (as defined in 

§ 1.959–2(b)(4)(ii)) by reason of the 

specified section 959(a) distribution. 

(c) Foreign income taxes deemed paid 

under section 960(b)(2)—(1) In general. 

A controlled foreign corporation is 

deemed to have paid the foreign income 

taxes that are properly attributable to a 

section 959(b) distribution that it 

receives from another controlled foreign 

corporation and that have not been 

deemed to have been paid by a domestic 

corporation under section 960 for the 

current taxable year or any prior taxable 

year. 

(2) Properly attributable. The foreign 

income taxes that are properly 

attributable to a section 959(b) 

distribution received by a controlled 

foreign corporation are the foreign 

income taxes that are removed under 

§§ 1.959–2(d)(2) and 1.959–3(e)(1)(iii) 

from each creditable PTEP tax group (as 

defined in § 1.959–1(b)) by reason of the 

section 959(b) distribution. 

■ Par. 25. Section 1.960–7 is amended 

by: 

■ 1. In the first sentence of paragraph 

(a), removing the language ‘‘paragraph 

(b)’’ and adding the language 

‘‘paragraphs (b) and (c)’’ in its place; 

and 

■ 2. Adding a new paragraph (c). 

The addition reads as follows: 

§ 1.960–7 Applicability dates. 

* * * * * 

(c) Sections 1.960–1 and 1.960–3 

apply to taxable years of a foreign 

corporation that begin on or after [date 

of publication of final regulations in the 

Federal Register] or are early 

application years (as described in 

§ 1.959–12(d)), and to taxable years of a 

domestic corporation that is a United 

States shareholder of the foreign 

corporation in which or with which 

such taxable years of such foreign 

corporation end. See §§ 1.960–1 and 

1.960–3 as contained in 26 CFR part 1 

revised as of April 1, 2024, for a version 

of these sections applicable to prior 

taxable years. 

■ Par. 26. Section 1.961–1 is revised to 

read as follows: 

§ 1.961–1 Overview, definitions, and rules 

of general applicability. 

(a) Overview—(1) In general. The 

section 961 regulations provide rules for 

basis adjustments related to previously 

taxed earnings and profits. Section 

1.961–1 sets forth definitions and rules 

of general applicability. Section 1.961– 

2 describes the types of property units 

and types of basis for purposes of 

applying section 961. Section 1.961–3 

provides basis increases for income 

inclusions. Section 1.961–4 provides 

reductions to basis and gain recognition 

for distributions of previously taxed 

earnings and profits. Section 1.961–5 

provides basis adjustments for foreign 

currency gain or loss and for general 

successor transactions. Sections 1.961–6 

and 1.961–7 are reserved. Section 

1.961–8 describes the consequences of 

positive derived basis. Section 1.961–9 

describes the consequences of positive 

section 961(c) basis. Section 1.961–10 

describes the consequences of negative 

derived basis and negative section 

961(c) basis. Section 1.961–11 provides 

for the inclusion by United States 

shareholders in a controlled foreign 

corporation of the controlled foreign 

corporation’s income arising under 

section 961(c). Section 1.961–12 

provides examples illustrating the 

application of the section 961 

regulations. Section 1.961–13 sets forth 

transition rules. Section 1.961–14 sets 

forth applicability dates. See § 1.1502– 

59 for additional rules for a 

consolidated group. 

(2) Scope. This section sets forth 

definitions and rules of general 

applicability for purposes of the section 

961 regulations. Paragraph (b) of this 

section provides definitions. Paragraph 

(c) of this section provides rules relating 

to S corporations. Paragraph (d) of this 

section provides an anti-avoidance rule. 

(b) Definitions. The definitions in 

§ 1.959–1(b) apply for purposes of the 

section 961 regulations, with the 

following additions. 

Acquired partnership. The term 

acquired partnership has the meaning 

provided in § 1.961–5(c)(1). 

Common basis. The term common 

basis means a partnership’s adjusted 

basis of an item of property, excluding 

any basis that is solely with respect to 

a specific partner (for example, a section 

743(b) basis adjustment or derived 

basis). 

Covered gain. The term covered gain 

has the meaning provided in § 1.961– 

9(c)(1). 

Derived basis. The term derived basis 

means basis described in § 1.961– 

2(d)(2). 

Derivative ownership unit. The term 

derivative ownership unit has the 

meaning provided in § 1.961–2(d)(1). 

Lookback PTEP. The term lookback 

PTEP has the meaning provided in 

§ 1.961–9(f)(3)(ii). 

Lower-tier partnership interest. The 

term lower-tier partnership interest has 

the meaning provided in § 1.961–8(d). 

Midyear transaction. The term 

midyear transaction has the meaning 

provided in § 1.961–3(c)(2). 

Mirrored PTEP. The term mirrored 

PTEP has the meaning provided in 

§ 1.961–9(f)(2)(ii). 

Negative derived basis. The term 

negative derived basis means the 

amount by which derived basis with 

respect to a covered shareholder of a 

derivative ownership unit is less than 

zero. 

Negative section 961(c) basis. The 

term negative section 961(c) basis means 

the amount by which section 961(c) 

basis with respect to a covered 

shareholder of a section 961(c) 

ownership unit is less than zero. 

Net foreign currency gain. The term 

net foreign currency gain has the 

meaning provided in § 1.961–5(b)(2). 

Net foreign currency loss. The term 

net foreign currency loss has the 

meaning provided in § 1.961–5(b)(2). 

Nonrecognition transaction. The term 

nonrecognition transaction has the 

meaning provided in section 

7701(a)(45). 

Positive derived basis. The term 

positive derived basis means the amount 

by which derived basis with respect to 

a covered shareholder of a derivative 

ownership unit is greater than zero. 

Positive section 961(c) basis. The term 

positive section 961(c) basis means the 

amount by which section 961(c) basis 


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with respect to a covered shareholder of 

a section 961(c) ownership unit is 

greater than zero. 

Property unit. The term property unit 

has the meaning provided in § 1.961– 

2(b). 

Relevant taxable year. The term 

relevant taxable year has the meaning 

provided in § 1.961–3(b). 

Section 951(a)(1)(A) inclusion 

amount. The term section 951(a)(1)(A) 

inclusion amount has the meaning 

provided in § 1.961–3(c)(1)(ii). 

Section 951(a)(1)(B) inclusion 

amount. The term section 951(a)(1)(B) 

inclusion amount has the meaning 

provided in § 1.961–3(c)(1)(iii). 

Section 961 regulations. The term 

section 961 regulations means the 

regulations in this part issued under 

section 961. 

Section 961(a) ownership unit. The 

term section 961(a) ownership unit has 

the meaning provided in § 1.961–2(c). 

Section 961(c) basis. The term section 

961(c) basis means basis described in 

§ 1.961–2(e)(2). 

Section 961(c) income. The term 

section 961(c) income has the meaning 

provided in § 1.961–11(b). 

Section 961(c) ownership unit. The 

term section 961(c) ownership unit has 

the meaning provided in § 1.961–2(e)(1). 

Section 961(c) PTEP. The term section 

961(c) PTEP has the meaning provided 

in § 1.961–9(f)(1). 

Transferred units. The term 

transferred units has the meaning 

provided in § 1.961–8(b)(1) or § 1.961– 

9(c)(1), as applicable. 

Transferring partnership. The term 

transferring partnership has the 

meaning provided in § 1.961–8(b)(1). 

Upper-tier partnership. The term 

upper-tier partnership has the meaning 

provided in § 1.961–8(d). 

(c) Treatment of an S corporation—(1) 

In general. Except as provided in 

paragraph (c)(2) of this section, for 

purposes of the section 961 regulations, 

an S corporation is treated in the same 

manner as a domestic partnership, a 

reference to a domestic partnership 

includes an S corporation, and 

shareholders of an S corporation are 

treated as partners of such partnership. 

See section 1373(a). As applicable, the 

treatment of an S corporation and its 

shareholders under the preceding 

sentence is determined by replacing any 

partnership-specific provision with the 

equivalent provision for S corporations 

(for example, a reference to an 

adjustment under section 705 to a 

partner’s basis in its partnership interest 

refers to the adjustment under section 

1367 to a shareholder’s basis in its stock 

of an S corporation). 

(2) Treatment as a covered 

shareholder for taxable years for which 

elective entity treatment applies for 

§ 1.958–1(d)(1) purposes. See § 1.961– 

13(c) for a rule treating an S corporation 

as a covered shareholder for any taxable 

year of the S corporation for which 

§ 1.958–1(d)(1) does not apply and 

§ 1.961–13(d) for a transition rule 

converting basis with respect to an S 

corporation to basis with respect to 

covered shareholders owning interests 

in the S corporation once the S 

corporation is no longer treated as a 

covered shareholder. 

(d) Anti-avoidance rule. If a 

transaction, series of transactions, plan, 

or arrangement is engaged in with a 

principal purpose of avoiding the 

purposes of section 961 and the section 

961 regulations, then appropriate 

adjustments are made, which may 

include adjustments to disregard the 

transaction, series of transactions, plan, 

or arrangement. 

■ Par. 27. Section 1.961–2 is revised to 

read as follows: 

§ 1.961–2 Types of property units and 

basis. 

(a) Scope. This section describes the 

types of property units and types of 

basis for purposes of applying section 

961. Paragraph (b) of this section defines 

a property unit and provides the general 

rule for basis of a property unit. 

Paragraphs (c) through (e) of this section 

provide definitions and rules for section 

961(a) ownership units, derivative 

ownership units, and section 961(c) 

ownership units, respectively. See 

§§ 1.961–3 through 1.961–11 for basis 

adjustments and the effects of basis and 

§ 1.961–12(c)(1) (Example 1) for an 

example illustrating the application of 

this section. 

(b) Property unit. A property unit is a 

section 961(a) ownership unit, 

derivative ownership unit, or section 

961(c) ownership unit, as applicable 

(defined in paragraphs (c) through (e) of 

this section). Basis in a property unit 

must be established and maintained in 

U.S. dollars in accordance with this 

section and the adjustments prescribed 

in the section 961 regulations. 

(c) Section 961(a) ownership unit. A 

section 961(a) ownership unit is a share 

of stock of a foreign corporation directly 

owned by a covered shareholder, or an 

interest in a partnership directly owned 

by a covered shareholder and through 

which the covered shareholder owns 

stock of a foreign corporation. A covered 

shareholder is provided adjusted basis 

in a section 961(a) ownership unit. 

(d) Derivative ownership unit—(1) In 

general. A derivative ownership unit is 

a share of stock of a foreign corporation 

directly owned by a partnership and 

owned (indirectly) by one or more 

covered shareholders through only one 

or more partnerships, or an interest in 

a partnership directly owned by another 

partnership and through which one or 

more covered shareholders own stock of 

a foreign corporation through only 

partnerships. A partnership is provided 

derived basis in a derivative ownership 

unit in accordance with paragraph (d)(2) 

of this section. 

(2) Derived basis. Derived basis is 

basis of a derivative ownership unit that 

must be established and maintained 

separately with respect to each covered 

shareholder that owns the derivative 

ownership unit through only one or 

more partnerships. Derived basis with 

respect to a covered shareholder may be 

a positive or negative amount and is 

treated as an attribute of the partnership 

that directly owns the derivative 

ownership unit. 

(e) Section 961(c) ownership unit—(1) 

In general. A section 961(c) ownership 

unit is a share of stock of a foreign 

corporation directly owned by a 

controlled foreign corporation and 

owned (indirectly) by one or more 

covered shareholders. A controlled 

foreign corporation is provided section 

961(c) basis in a section 961(c) 

ownership unit in accordance with 

paragraph (e)(2) of this section. 

(2) Section 961(c) basis. Section 

961(c) basis is basis of a section 961(c) 

ownership unit that must be established 

and maintained separately with respect 

to each covered shareholder that owns 

the section 961(c) ownership unit. 

Section 961(c) basis with respect to a 

covered shareholder may be a positive 

or negative amount and is treated as an 

attribute of the controlled foreign 

corporation that directly owns the 

section 961(c) ownership unit. Section 

961(c) basis applies only for the 

purposes prescribed in the section 961 

regulations and, therefore, for example 

does not affect the amount of the 

controlled foreign corporation’s gross 

income or the amount of its earnings 

and profits. 

■ Par. 28. Sections 1.961–3 through 

1.961–14 are added to read as follows: 

Sec. 

* * * * * 

1.961–3 Basis increases for certain income 

inclusions. 

1.961–4 Basis reductions and gain 

recognition for distributions. 

1.961–5 Basis adjustments for foreign 

currency gain or loss and for general 

successor transactions. 

1.961–6 and 1.961–7 [Reserved] 

1.961–8 Application of positive derived 

basis to covered shareholders’ 

distributive shares of gain or loss. 


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1.961–9 Exclusion from gross income of 

previously taxed earnings and profits 

resulting from positive section 961(c) 

basis. 

1.961–10 Gain recognition for negative 

basis. 

1.961–11 Amounts included in gross 

income of United States shareholders. 

1.961–12 Examples. 

1.961–13 Transition rules. 

1.961–14 Applicability dates. 

* * * * * 

§ 1.961–3 Basis increases for certain 

income inclusions. 

(a) Scope. This section provides the 

increases to basis under section 961 for 

inclusions under sections 951(a) and 

951A(a) and § 1.961–11. Paragraph (b) of 

this section provides the general rule, 

pursuant to which, to reflect a covered 

shareholder’s income inclusions for a 

controlled foreign corporation’s taxable 

year, basis of certain property units 

(shares of stock of the controlled foreign 

corporation directly owned by the 

covered shareholder, property through 

which the covered shareholder owns 

(indirectly) stock of the controlled 

foreign corporation, and shares of stock 

of the controlled foreign corporation 

owned (indirectly) by the covered 

shareholder), is increased. Paragraph (c) 

of this section describes the specific 

rules for increasing basis pursuant to 

paragraph (b) of this section. Paragraph 

(d) of this section determines certain 

basis increases based on distributions of 

previously taxed earnings and profits by 

the controlled foreign corporation 

during the taxable year. Paragraph (e) of 

this section determines certain basis 

increases based on a hypothetical 

distribution, to the extent paragraph (d) 

of this section does not increase basis. 

Paragraph (f) of this section provides 

limitations on basis increases in certain 

cases. See § 1.961–12(c)(2) (Example 2) 

for an example illustrating the 

application of this section. 

(b) In general. To reflect a covered 

shareholder’s income inclusions for a 

taxable year of a controlled foreign 

corporation (such taxable year for which 

this section is being applied, the 

relevant taxable year), basis of property 

units that are shares of stock of the 

controlled foreign corporation owned by 

the covered shareholder, and basis of 

any property units through which the 

covered shareholder owns stock of the 

controlled foreign corporation, is in 

each case increased in accordance with 

the rules described in paragraph (c) of 

this section. Generally, under those 

rules, basis increases begin at the level 

of stock of the controlled foreign 

corporation and then tier through 

property units through which the 

covered shareholder owns such stock, 

with at each level basis increases 

allocated among property units based on 

how previously taxed earnings and 

profits resulting from the income 

inclusions are, or likely will be, 

distributed on the property units (thus, 

the allocations may differ from the 

extent to which the income inclusions 

are attributable to the property units). 

Solely for purposes of this section, a 

reference to the basis of a property unit 

means adjusted basis in the case of a 

section 961(a) ownership unit, derived 

basis with respect to the covered 

shareholder in the case of a derivative 

ownership unit, or section 961(c) basis 

with respect to the covered shareholder 

in the case of a section 961(c) ownership 

unit. 

(c) Rules for increasing basis—(1) 

Determine amount of income inclusions 

giving rise to increases to basis—(i) In 

general. First, determine the amount of 

the covered shareholder’s income 

inclusions with respect to the controlled 

foreign corporation for the relevant 

taxable year that give rise to increases to 

basis under section 961, computed as 

the sum of the section 951(a)(1)(A) 

inclusion amount and section 

951(a)(1)(B) inclusion amount (defined 

in paragraphs (c)(1)(ii) and (iii) of this 

section). 

(ii) Section 951(a)(1)(A) inclusion 

amount. The section 951(a)(1)(A) 

inclusion amount is the sum of any 

amount (in U.S. dollars) that the 

covered shareholder includes in gross 

income with respect to the controlled 

foreign corporation for the relevant 

taxable year under section 951(a)(1)(A) 

or 951A(a) or § 1.961–11. 

(iii) Section 951(a)(1)(B) inclusion 

amount. The section 951(a)(1)(B) 

inclusion amount is the amount (in U.S. 

dollars) that the covered shareholder 

includes in gross income with respect to 

the controlled foreign corporation for 

the relevant taxable year under section 

951(a)(1)(B). 

(2) Determine if any midyear 

transactions occur. Second, determine if 

any midyear transactions (which affect 

the timing of certain basis adjustments 

under paragraphs (d) and (e) of this 

section) occur within the relevant 

taxable year. A midyear transaction is 

any sale, exchange, or other disposition 

(including an issuance or redemption) 

occurring before the last relevant day of 

the relevant taxable year and involving 

one or more items of property that, 

immediately before or after the sale, 

exchange, or other disposition are stock 

of the controlled foreign corporation 

owned by the covered shareholder or 

property through which the covered 

shareholder owns stock of the 

controlled foreign corporation. 

(3) Apply actual distribution rule. 

Third, if, before the last relevant day of 

the relevant taxable year, the controlled 

foreign corporation distributes 

previously taxed earnings and profits 

with respect to the covered shareholder 

in a covered distribution (determined 

under § 1.959–4), then increase basis for 

a portion of the section 951(a)(1)(A) 

inclusion amount in accordance with 

paragraph (d) of this section. 

(4) Apply hypothetical distribution 

rule. Fourth, increase basis for any 

remaining portion of the section 

951(a)(1)(A) inclusion amount and the 

section 951(a)(1)(B) inclusion amount in 

accordance with paragraph (e) of this 

section. 

(d) Actual distribution rule—(1) In 

general. For each distribution described 

in paragraph (c)(3) of this section 

(starting with the earliest distribution), 

increase basis of property units that are 

shares of stock of the controlled foreign 

corporation and, if applicable, property 

units through which the covered 

shareholder owns such shares, in 

accordance with paragraphs (d)(2) and 

(3) of this section. Treat each such 

increase to basis as made at the 

beginning of the first day of the relevant 

taxable year, unless the distribution is 

made after any midyear transactions, in 

which case treat each such increase as 

made immediately after the midyear 

transaction that most recently precedes 

the distribution. 

(2) Increases to basis of shares of 

stock of the controlled foreign 

corporation. Increase the basis of each 

property unit that is a share of stock of 

the controlled foreign corporation that 

the covered shareholder owns on the 

last relevant day of the relevant taxable 

year by the amount of the adjustment 

required under § 1.961–4 (basis 

reductions and gain recognition for 

distributions) to such basis by reason of 

the distribution, subject to the following 

limitation. Do not increase the basis of 

the share by an amount greater than the 

product of the section 951(a)(1)(A) 

inclusion amount, reduced by all 

increases to basis under this paragraph 

(d)(2) by reason of earlier distributions, 

and a fraction, the numerator of which 

is the portion of the distribution that is 

made with respect to the share, and the 

denominator of which is the amount of 

the distribution. 

(3) Increases to basis of property units 

through which the covered shareholder 

owns stock of the controlled foreign 

corporation. If, when the distribution is 

made, the covered shareholder owns 

stock of the controlled foreign 

corporation through one or more 

property units, then increase the basis of 

each such property unit by the portion 


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of the hypothetical distribution 

described in paragraph (e)(2) of this 

section (modified as described in the 

next sentence) that would be distributed 

with respect to the property unit in 

accordance with paragraph (e)(3) of this 

section, subject to the limitations in 

paragraph (f) of this section. For 

purposes of this paragraph (d)(3), the 

hypothetical distribution is treated as 

made when the distribution of 

previously taxed earnings and profits is 

made, the amount of the hypothetical 

distribution is equal to the increase to 

basis under paragraph (d)(2) of this 

section by reason of the distribution of 

previously taxed earnings and profits, 

and, at the level of the controlled 

foreign corporation, the hypothetical 

distribution is made in the same manner 

as the distribution of previously taxed 

earnings and profits. 

(e) Hypothetical distribution rule—(1) 

In general. Increase the basis of each 

property unit that the covered 

shareholder owns on the last relevant 

day of the relevant taxable year by the 

portion of the hypothetical distribution 

described in paragraph (e)(2) of this 

section that would be distributed with 

respect to the property unit in 

accordance with paragraph (e)(3) of this 

section, subject to the limitations in 

paragraph (f) of this section. Except as 

provided in paragraph (e)(4) of this 

section, treat a portion of each such 

increase to basis as made at the end of 

the last day of the relevant taxable year, 

determined by multiplying the amount 

of the increase to basis by a fraction, the 

numerator of which is the section 

951(a)(1)(B) inclusion amount, and the 

denominator of which is the amount of 

the hypothetical distribution. Treat the 

remaining portion of each such increase 

to basis as made at the beginning of the 

first day of the relevant taxable year on 

which the covered shareholder owns the 

property unit, unless there are any 

midyear transactions, in which case 

treat each such remaining portion as 

made immediately after the last midyear 

transaction occurring during the 

relevant taxable year. 

(2) Hypothetical distribution. The 

hypothetical distribution described in 

this paragraph (e)(2) is a hypothetical 

distribution treated as made by the 

controlled foreign corporation, through 

all property (if any) through which the 

covered shareholder owns stock of the 

controlled foreign corporation, to the 

covered shareholder on the last relevant 

day of the relevant taxable year. The 

amount of the hypothetical distribution 

is equal to the section 951(a)(1)(A) 

inclusion amount, reduced by any 

increases to basis under paragraph (d)(2) 

of this section, plus the section 

951(a)(1)(B) inclusion amount. In the 

hypothetical distribution, stock of the 

controlled foreign corporation and other 

property is taken into account only to 

the extent owned by the covered 

shareholder on the last relevant day, 

and the earnings and profits of the 

controlled foreign corporation and any 

foreign corporations through which the 

hypothetical distribution is treated as 

made are in each case treated as equal 

to the amount of the hypothetical 

distribution. 

(3) Distribution rights. The portion of 

the hypothetical distribution that would 

be distributed with respect to a property 

unit is determined under the principles 

of § 1.951–1(e)(2) through (6). However, 

an earlier distribution affects property 

units’ distribution rights for purposes of 

the hypothetical distribution to the 

extent such earlier distribution results 

in the section 951(a)(1)(A) inclusion 

amount increasing basis under 

paragraph (d) of this section. 

(4) Certain increase to basis for 

section 951(a)(1)(B) inclusion amount. If 

basis of a property unit is increased 

pursuant to the second sentence of 

paragraph (e)(1) of this section, and at 

the end of the last day of the relevant 

taxable year the covered shareholder 

either does not own the property unit or 

owns the property unit in a manner 

different than how the covered 

shareholder owns the property unit at 

the time of the hypothetical distribution 

described in paragraph (e)(2) of this 

section, then treat such increase to basis 

as made immediately before the 

transaction in which the covered 

shareholder ceases to own the property 

unit in the same manner as it owns the 

property unit at the time of such 

hypothetical distribution. In addition, 

treat such increase to basis as made after 

the determination of any amount that 

must be included in gross income as a 

dividend (for example, under section 

1248 or § 1.367(b)–4) as a result of such 

transaction. 

(f) Limitations—(1) Section 961(c) 

ownership units that are not stock of a 

controlled foreign corporation. Section 

961(c) basis of a section 961(c) 

ownership unit is increased only if the 

section 961(c) ownership unit is a share 

of stock of a controlled foreign 

corporation. 

(2) Taxable section 962 previously 

taxed earnings and profits. The portion 

of an income inclusion that gives rise to 

previously taxed earnings and profits 

relating to the taxable section 962 PTEP 

subgroup does not increase adjusted 

basis of a section 961(a) ownership unit 

or derived basis of a derivative 

ownership unit. 

(3) Derivative ownership units that are 

partially owned by foreign corporations. 

If a derivative ownership unit is owned 

(indirectly) by one or more foreign 

corporations, then an increase to 

derived basis of the derivative 

ownership unit resulting from a 

hypothetical distribution described in 

paragraph (d)(3) or (e)(2) of this section 

cannot exceed the portion of the 

hypothetical distribution that would be 

distributed to the covered shareholder 

through only the derivative ownership 

unit and any interests in partnerships. 

§ 1.961–4 Basis reductions and gain 

recognition for distributions. 

(a) Scope. This section sets forth the 

rules for reducing basis and recognizing 

gain under section 961 for distributions 

of previously taxed earnings and profits. 

Paragraph (b) of this section describes 

adjustments to section 961(a) ownership 

units in the case of distributions of 

previously taxed earnings and profits to 

a covered shareholder. Paragraph (c) of 

this section describes adjustments to 

derivative ownership units in the case 

of distributions of previously taxed 

earnings and profits through one or 

more partnerships to one or more 

covered shareholders. Paragraph (d) of 

this section describes adjustments to 

section 961(c) ownership units in the 

case of distributions of previously taxed 

earnings and profits to a controlled 

foreign corporation. Paragraph (e) of this 

section provides timing rules for when 

adjustments are treated as made. 

Paragraph (f) of this section provides 

rules regarding the treatment of gain 

recognized under this section. See 

§ 1.961–12(c)(3) (Example 3) for an 

example illustrating the application of 

this section. 

(b) Adjustments to section 961(a) 

ownership units—(1) In general. If a 

covered shareholder receives previously 

taxed earnings and profits that are 

excluded from its gross income under 

section 959(a) and § 1.959–4, then the 

resulting adjustments under section 961 

to the covered shareholder’s adjusted 

basis of section 961(a) ownership units 

are determined in accordance with the 

rules described in paragraph (b)(2) of 

this section. 

(2) Rules for adjusting basis—(i) 

Determine amounts of adjustments. 

First, determine the amount of the 

adjustment to the covered shareholder’s 

adjusted basis of each section 961(a) 

ownership unit, which is equal to the 

dollar basis of, and foreign income taxes 

associated with, previously taxed 

earnings and profits that are received 

with respect to such section 961(a) 

ownership unit (determined under 

§ 1.959–4), but only including foreign 


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income taxes for which the covered 

shareholder is allowed a credit under 

section 901. 

(ii) Reduce basis. Second, reduce the 

covered shareholder’s adjusted basis of 

each section 961(a) ownership unit by 

the amount of the adjustment to such 

adjusted basis (determined under 

paragraph (b)(2)(i) of this section), but 

not below zero. 

(iii) Recognize gain. Third, to the 

extent that the amount of an adjustment 

to the covered shareholder’s adjusted 

basis of a section 961(a) ownership unit 

(determined under paragraph (b)(2)(i) of 

this section) exceeds such adjusted 

basis, treat the covered shareholder as 

recognizing gain with respect to such 

section 961(a) ownership unit in 

accordance with paragraph (f) of this 

section. 

(c) Adjustments to derivative 

ownership units—(1) In general. If, 

through a partnership, one or more 

covered shareholders receive previously 

taxed earnings and profits that are 

excluded from the covered 

shareholders’ gross income under 

section 959(a) and § 1.959–4, then the 

resulting adjustments under section 961 

to the partnership’s derived basis of 

derivative ownership units are 

determined in accordance with the rules 

described in paragraph (c)(2) of this 

section. In the case of tiered 

partnerships, each tiered partnership’s 

derived basis of derivative ownership 

units is adjusted as described in 

paragraph (c)(2) of this section, starting 

with the partnership at the lowest tier. 

(2) Rules for adjusting basis—(i) 

Determine amounts of adjustments. 

First, determine the amount of the 

adjustment to the partnership’s derived 

basis with respect to each covered 

shareholder of each derivative 

ownership unit, which is equal to the 

dollar basis of, and foreign income taxes 

associated with, previously taxed 

earnings and profits that are both with 

respect to such covered shareholder and 

received with respect to such derivative 

ownership unit (determined under 

§ 1.959–4). 

(ii) Reduce positive derived basis. 

Second, reduce the partnership’s 

derived basis with respect to each 

covered shareholder of each derivative 

ownership unit by the amount of the 

adjustment to such derived basis 

(determined under paragraph (c)(2)(i) of 

this section), but not below zero. 

(iii) Reduce positive section 743(b) 

basis (if applicable) and increase 

negative derived basis. Third, to the 

extent that the amount of an adjustment 

to the partnership’s derived basis with 

respect to a covered shareholder of a 

derivative ownership unit (determined 

under paragraph (c)(2)(i) of this section) 

exceeds the related reduction to positive 

derived basis (determined under 

paragraph (c)(2)(ii) of this section), 

reduce the covered shareholder’s 

positive section 743(b) basis adjustment 

of such derivative ownership unit (if 

applicable), but not below zero, and 

then, if applicable, reduce such derived 

basis below zero, but only to the extent 

permitted under paragraph (c)(3) of this 

section. 

(iv) Recognize and allocate gain. 

Fourth, to the extent that the amount of 

an adjustment to the partnership’s 

derived basis with respect to a covered 

shareholder of a derivative ownership 

unit (determined under paragraph 

(c)(2)(i) of this section) exceeds the 

aggregate of the related reductions to 

derived basis (determined under 

paragraphs (c)(2)(ii) and (iii) of this 

section) and positive section 743(b) 

basis (determined under paragraph 

(c)(2)(iii) of this section), treat the 

partnership as recognizing gain with 

respect to such derivative ownership 

unit in accordance with paragraph (f) of 

this section, and allocate the gain solely 

to the covered shareholder. 

(3) Limitation on reducing derived 

basis—(i) In general. An adjustment to 

a partnership’s derived basis with 

respect to a covered shareholder of a 

derivative ownership unit can reduce 

(or further reduce) such derived basis 

below zero only to the extent of the 

amount of common basis of such 

derivative ownership unit available 

with respect to the covered shareholder 

(determined under paragraph (c)(3)(ii) of 

this section), less, if applicable, the 

covered shareholder’s negative section 

743(b) basis adjustment of the derivative 

ownership unit (expressed as a positive 

amount). 

(ii) Determining common basis 

available with respect to the covered 

shareholder. In applying paragraph 

(c)(3)(i) of this section, the amount of 

common basis of the derivative 

ownership unit available with respect to 

the covered shareholder is equal to the 

product of the following amounts— 

(A) The partnership’s common basis 

of the derivative ownership unit 

(translated, if applicable, into U.S. 

dollars at the spot rate on the day on 

which the adjustment described in 

paragraph (c)(3)(i) of this section would 

be treated as reducing basis), reduced by 

all negative derived basis of the 

derivative ownership unit (determined 

immediately before the adjustment 

described in paragraph (c)(3)(i) of this 

section would be treated as made); and 

(B) A fraction, the numerator of which 

is the amount by which the adjustment 

described in paragraph (c)(3)(i) of this 

section would reduce derived basis with 

respect to the covered shareholder 

below zero if derived basis could be 

reduced without limitation, and the 

denominator of which is the sum of the 

amounts by which the adjustment 

described in paragraph (c)(3)(i) of this 

section and any concurrent adjustments 

to derived basis with respect to other 

covered shareholders would reduce 

derived basis of the derivative 

ownership unit below zero if derived 

basis could be reduced without 

limitation. 

(d) Adjustments to section 961(c) 

ownership units—(1) In general. If a 

controlled foreign corporation receives 

previously taxed earnings and profits 

that are excluded from its gross income 

under section 959(b) and § 1.959–4, then 

the resulting adjustments under section 

961 to the controlled foreign 

corporation’s section 961(c) basis of 

section 961(c) ownership units are 

determined in accordance with the rules 

described in paragraph (d)(2) of this 

section. 

(2) Rules for adjusting basis—(i) 

Determine amounts of adjustments. 

First, determine the amount of the 

adjustment to the controlled foreign 

corporation’s section 961(c) basis with 

respect to each covered shareholder of 

each section 961(c) ownership unit, 

which is equal to the dollar basis of, and 

foreign income taxes associated with, 

previously taxed earnings and profits 

that are both with respect to such 

covered shareholder and received with 

respect to such section 961(c) 

ownership unit (determined under 

§ 1.959–4). 

(ii) Reduce basis. Second, reduce the 

controlled foreign corporation’s section 

961(c) basis with respect to each 

covered shareholder of each section 

961(c) ownership unit by the amount of 

the adjustment to such section 961(c) 

basis, including below zero, but only to 

the extent permitted under paragraph 

(d)(3) of this section. 

(iii) Recognize and assign gain. Third, 

to the extent that the amount of an 

adjustment to the controlled foreign 

corporation’s section 961(c) basis with 

respect to a covered shareholder of a 

section 961(c) ownership unit 

(determined under paragraph (d)(2)(i) of 

this section) exceeds the related 

reduction to section 961(c) basis 

(determined under paragraph (d)(2)(ii) 

of this section), treat the controlled 

foreign corporation as recognizing gain 

with respect to such section 961(c) 

ownership unit in accordance with 

paragraph (f) of this section, and assign 

the gain solely to the covered 

shareholder. 


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(3) Limitation on reducing section 

961(c) basis—(i) In general. An 

adjustment to a controlled foreign 

corporation’s section 961(c) basis with 

respect to a covered shareholder of a 

section 961(c) ownership unit can 

reduce (or further reduce) such section 

961(c) basis below zero only to the 

extent of the amount of adjusted basis 

of such section 961(c) ownership unit 

available with respect to the covered 

shareholder (determined under 

paragraph (d)(3)(ii) of this section). 

(ii) Determining adjusted basis 

available with respect to the covered 

shareholder. In applying paragraph 

(d)(3)(i) of this section, the amount of 

adjusted basis of the section 961(c) 

ownership unit available with respect to 

the covered shareholder is equal to the 

product of the following amounts— 

(A) The controlled foreign 

corporation’s adjusted basis of the 

section 961(c) ownership unit 

(translated, if applicable, into U.S. 

dollars at the spot rate on the day on 

which the adjustment described in 

paragraph (d)(3)(i) of this section would 

be treated as reducing basis), reduced by 

all negative section 961(c) basis of the 

section 961(c) ownership unit 

(determined immediately before the 

adjustment described in paragraph 

(d)(3)(i) of this section would be treated 

as made); and 

(B) A fraction, the numerator of which 

is the amount by which the adjustment 

described in paragraph (d)(3)(i) of this 

section would reduce section 961(c) 

basis with respect to the covered 

shareholder below zero if section 961(c) 

basis could be reduced without 

limitation, and the denominator of 

which is the sum of the amounts by 

which the adjustment described in 

paragraph (d)(3)(i) of this section and 

any concurrent adjustments to section 

961(c) basis with respect to other 

covered shareholders would reduce 

section 961(c) basis of the section 961(c) 

ownership unit below zero if section 

961(c) basis could be reduced below 

zero without limitation. 

(e) Timing of basis reductions—(1) 

Basis of stock. A reduction to basis of 

stock of a foreign corporation under 

paragraph (b), (c), or (d) of this section 

is treated as made concurrently with the 

distribution giving rise to the basis 

reduction (and before any other 

adjustment to basis by reason of the 

distribution, for example, under section 

301(c)(2)). 

(2) Basis of partnership interests. A 

reduction to basis of an interest in a 

partnership under paragraph (b) or (c) of 

this section is treated as made 

concurrently with the adjustment under 

section 705 to such interest in the 

partnership by reason of the distribution 

giving rise to the basis reduction. 

(f) Treatment of gain—(1) In general. 

Gain treated as recognized with respect 

to a section 961(a) ownership unit, 

derivative ownership unit, or section 

961(c) ownership unit under paragraph 

(b), (c), or (d) of this section is treated 

as gain from a sale or exchange of such 

ownership unit occurring concurrent 

with when the adjustment described in 

that paragraph would be treated as 

reducing basis. 

(2) Gain recognized by a partnership. 

Gain treated as recognized by a 

partnership under paragraph (c) of this 

section constitutes an item of gain solely 

with respect to the covered shareholder 

to which it is allocated and has no effect 

on any partnership’s computation or 

allocation of any other item under 

section 703 or 704 or on the covered 

shareholder’s capital account. The gain 

is treated as the covered shareholder’s 

distributive share of gain of the 

partnership (derived through each 

partnership through which the covered 

shareholder owns the partnership 

recognizing the gain, if applicable) and 

is taken into account in adjusting basis 

under section 705. 

(3) Gain recognized by a controlled 

foreign corporation. Gain treated as 

recognized by a controlled foreign 

corporation under paragraph (d) of this 

section is gain recognized pursuant to 

section 961(c). Such gain applies only 

for purposes of determining amounts 

included in gross income of United 

States shareholders of the controlled 

foreign corporation under § 1.961–11 

and, therefore, for example does not 

affect the controlled foreign 

corporation’s items of gross income for 

purposes of section 952 or 951A or its 

earnings and profits. 

(4) Translation rule. If applicable, 

gain treated as recognized by a 

partnership or controlled foreign 

corporation under paragraph (c) or (d) of 

this section is translated into functional 

currency at the spot rate on the day on 

which the gain is treated as recognized. 

§ 1.961–5 Basis adjustments for foreign 

currency gain or loss and for general 

successor transactions. 

(a) Scope. This section sets forth the 

rules for adjusting basis under section 

961 for foreign currency gain or loss 

recognized with respect to previously 

taxed earnings and profits under section 

986(c) and for general successor 

transactions. Paragraph (b) of this 

section provides the adjustments for 

foreign currency gain or loss. Paragraph 

(c) of this section provides the 

adjustments for general successor 

transactions. Paragraph (d) of this 

section coordinates with section 743(b). 

(b) Adjustments for foreign currency 

gain or loss—(1) In general. If a covered 

shareholder recognizes foreign currency 

gain or loss with respect to a foreign 

corporation’s previously taxed earnings 

and profits under § 1.986(c)–1 in a 

transaction other than a distribution of 

the previously taxed earnings and 

profits, then basis of property units that 

are shares of stock of the foreign 

corporation owned by the covered 

shareholder, and basis of any property 

units through which the covered 

shareholder owns stock of the foreign 

corporation, is in each case adjusted in 

accordance with the rules described in 

paragraphs (b)(2) through (4) of this 

section. Generally, under those rules, 

basis adjustments begin at the level of 

stock of the foreign corporation and 

then tier through property units through 

which the covered shareholder owns 

such stock, with at each level basis 

adjustments allocated among property 

units based on proportionate shares of 

foreign currency gain or loss. Solely for 

purposes of this paragraph (b), a 

reference to the basis of a property unit 

means adjusted basis in the case of a 

section 961(a) ownership unit, derived 

basis with respect to the covered 

shareholder in the case of a derivative 

ownership unit, or section 961(c) basis 

with respect to the covered shareholder 

in the case of a section 961(c) ownership 

unit. 

(2) Determine net foreign currency 

gain or loss. First, determine the amount 

of foreign currency gain or loss that 

gives rise to adjustments to basis, 

computed by comparing the sum of all 

foreign currency gain and the sum of all 

foreign currency loss that the covered 

shareholder recognizes with respect to 

the foreign corporation’s previously 

taxed earnings and profits in the 

transaction under § 1.986(c)–1(b), 

without regard to § 1.986(c)–1(b)(3)(i) 

and (ii) (limitations for previously taxed 

earnings and profits resulting from 

section 965). The excess of the sum of 

foreign currency gain over the sum of 

foreign currency loss is net foreign 

currency gain, and the excess of the sum 

of foreign currency loss over the sum of 

foreign currency gain is net foreign 

currency loss. 

(3) Determine each property unit’s 

share of net foreign currency gain or 

loss—(i) In general. Second, determine 

each property unit’s share of net foreign 

currency gain or net foreign currency 

loss by multiplying the net foreign 

currency gain or net foreign currency 

loss, as applicable, by a fraction (which 

is based on a hypothetical distribution 

by the foreign corporation of previously 


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95442 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

taxed earnings and profits with respect 

to which the covered shareholder 

recognizes, or would recognize, foreign 

currency gain or loss in the transaction). 

The numerator of the fraction is the 

portion of the hypothetical distribution 

described in paragraph (b)(3)(ii) of this 

section that, under the principles of 

§ 1.951–1(e)(2) through (6), would be 

distributed with respect to the property 

unit, and the denominator of the 

fraction is the amount of such 

hypothetical distribution. 

(ii) Hypothetical distribution. The 

hypothetical distribution described in 

this paragraph (b)(3)(ii) is a hypothetical 

distribution treated as made by the 

foreign corporation, through all property 

(if any) through which the covered 

shareholder owns stock of the foreign 

corporation, to the covered shareholder 

immediately before the transaction. The 

amount of the hypothetical distribution 

is equal to all previously taxed earnings 

and profits of the foreign corporation 

with respect to which the covered 

shareholder recognizes (or, but for 

§ 1.986(c)–1(b)(3)(i) and (ii), would 

recognize) any foreign currency gain or 

loss in the transaction. In the 

hypothetical distribution, stock of the 

foreign corporation is taken into account 

only to the extent owned by the covered 

shareholder immediately before but not 

immediately after the transaction, and 

other property is taken into account 

only to the extent owned by the covered 

shareholder immediately before the 

transaction. The earnings and profits of 

the foreign corporation and any foreign 

corporations through which the 

hypothetical distribution is treated as 

made are in each case treated as equal 

to the amount of the hypothetical 

distribution. 

(4) Adjust basis—(i) In general. Third, 

adjust the basis of each property unit in 

accordance with paragraph (b)(4)(ii) or 

(iii) of this section, as applicable, 

starting with property units at the 

lowest tier and subject to the limitation 

in paragraph (b)(4)(iv) of this section. 

Treat each such adjustment to basis as 

made immediately before the 

transaction (and therefore take the 

adjustments into account in determining 

the Federal income tax consequences of 

the transaction). 

(ii) Basis increases for net foreign 

currency gain. In the case of net foreign 

currency gain, increase the basis of each 

property unit by the property unit’s 

share of the net foreign currency gain 

(determined under paragraph (b)(3) of 

this section). 

(iii) Basis reductions and gain 

recognition for net foreign currency loss. 

In the case of net foreign currency loss, 

reduce the basis of each property unit 

by the property unit’s share of net 

foreign currency loss (determined under 

paragraph (b)(3) of this section) or 

recognize gain in accordance with the 

principles of § 1.961–4 (applied by 

treating such share of net foreign 

currency loss as the amount of the 

adjustment to basis described in 

§ 1.961–4(b)(2)(i), (c)(2)(i), or (d)(2)(i), as 

applicable). 

(iv) Limitation for section 961(c) 

ownership units. Section 961(c) basis of 

a section 961(c) ownership unit is 

adjusted only if the section 961(c) 

ownership unit is a share of stock of a 

controlled foreign corporation. A 

specified foreign corporation (as defined 

in § 1.965–1(f)(45)(i)(B)) that is not 

otherwise a controlled foreign 

corporation is treated as a controlled 

foreign corporation for purposes of 

applying this paragraph (b)(4) to foreign 

currency gain or loss with respect to 

previously taxed earnings and profits 

resulting from the application of section 

965(a). 

(c) Successor basis—(1) In general. In 

a general successor transaction, derived 

basis of each partnership in which the 

successor covered shareholder acquires 

ownership of a partnership interest 

(each an acquired partnership), and 

section 961(c) basis of each acquired 

foreign corporation, transfers from the 

transferor covered shareholder to the 

successor covered shareholder (and thus 

becomes derived basis or section 961(c) 

basis with respect to the successor 

covered shareholder) in accordance 

with the rules described in paragraph 

(c)(2) this section. Solely for purposes of 

this paragraph (c), a reference to the 

basis of a property unit means derived 

basis with respect to the transferor 

covered shareholder in the case of a 

derivative ownership unit, or section 

961(c) basis with respect to the 

transferor covered shareholder in the 

case of a section 961(c) ownership unit. 

(2) Rules for transferring basis—(i) 

Allocate basis before adjustment for 

foreign currency gain or loss. First, for 

each property unit directly owned by an 

acquired partnership or acquired foreign 

corporation, allocate to the successor 

covered shareholder a pro rata portion 

of the basis of the property unit 

immediately before the adjustments 

pursuant to paragraph (b) of this section 

by reason of the general successor 

transaction, determined by multiplying 

such basis by a fraction. The numerator 

of the fraction is the value of the interest 

in the acquired partnership or stock of 

the acquired corporation, as applicable, 

ownership of which is acquired by the 

successor covered shareholder in the 

general successor transaction. The 

denominator of the fraction is the total 

value of all the interests of the acquired 

partnership or all the stock of the 

acquired foreign corporation, as 

applicable, that the transferor covered 

shareholder owns immediately before 

the general successor transaction. 

(ii) Adjust allocations for foreign 

currency gain or loss. Second, adjust the 

allocation of basis of each property unit 

as follows. Increase the allocation to the 

successor covered shareholder by the 

amount of the increase to basis of the 

property unit pursuant to paragraph (b) 

of this section by reason of the general 

successor transaction. Decrease the 

allocation to the successor covered 

shareholder by the amount of the 

reduction to basis of the property unit 

pursuant to paragraph (b) of this section 

by reason of the general successor 

transaction. 

(iii) Transfer of successor basis. 

Third, transfer basis from the transferor 

covered shareholder to the successor 

covered shareholder by reducing basis 

with respect to the transferor covered 

shareholder, and increasing basis with 

respect to the successor covered 

shareholder, of each property unit by 

the amount of basis of the property unit 

allocated to the successor covered 

shareholder under paragraphs (c)(2)(i) 

and (ii) of this section (if such amount 

is positive) or, if such amount is 

negative, by increasing basis with 

respect to the transferor covered 

shareholder and reducing basis with 

respect to the successor covered 

shareholder by such amount, expressed 

as a positive number. Treat each such 

transfer of basis as made concurrently 

with the general successor transaction. 

(3) Deemed covered shareholder—(i) 

In general. For purposes of transferring 

basis under this paragraph (c), the 

deemed covered shareholder is treated 

in the same manner as a covered 

shareholder and a reference to a covered 

shareholder includes the deemed 

covered shareholder. Thus, for example, 

if a covered shareholder sells an interest 

in a partnership that directly owns stock 

of a foreign corporation to a nonresident 

alien individual in a general successor 

transaction, then derived basis of the 

partnership transfers from the seller 

covered shareholder to the deemed 

covered shareholder under this 

paragraph (c). Moreover, if the 

individual subsequently sells the 

partnership interest to a covered 

shareholder, then derived basis of the 

partnership (adjusted consistent with 

the section 961 regulations, including to 

reflect distributions from the foreign 

corporation to the individual) transfers 

from the deemed covered shareholder to 

the buyer covered shareholder under 

this paragraph (c). 


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(ii) Treatment as controlled foreign 

corporation stock. Solely for purposes of 

determining section 961(c) basis that 

transfers to or from the deemed covered 

shareholder under this paragraph (c), 

any foreign corporation in which the 

deemed covered shareholder is treated 

as owning stock is treated as a 

controlled foreign corporation (to the 

extent the foreign corporation is not 

otherwise a controlled foreign 

corporation). Thus, for example, if a 

covered shareholder sells stock of an 

upper-tier foreign corporation that 

directly owns stock of a lower-tier 

foreign corporation to a nonresident 

alien individual in a general successor 

transaction, the upper-tier foreign 

corporation’s shares of stock in the 

lower-tier foreign corporation remain 

section 961(c) ownership units and 

section 961(c) basis of the upper-tier 

foreign corporation transfers from the 

seller covered shareholder to the 

deemed covered shareholder under this 

paragraph (c) even if the upper-tier 

foreign corporation ceases to be a 

controlled foreign corporation as a 

result of the sale. Consequently, if the 

individual subsequently sells the stock 

of the upper-tier foreign corporation to 

a covered shareholder and, as a result, 

the upper-tier foreign corporation 

becomes a controlled foreign 

corporation, then section 961(c) basis of 

the upper-tier foreign corporation 

(adjusted consistent with the section 

961 regulations, including to reflect 

distributions from the lower-tier foreign 

corporation to the upper-tier foreign 

corporation) transfers from the deemed 

covered shareholder to the buyer 

covered shareholder under this 

paragraph (c). 

(iii) Determining basis that transfers 

from the deemed covered shareholder. 

In a transaction in which basis of a 

derivative ownership unit or section 

961(c) ownership unit transfers from the 

deemed covered shareholder to a 

covered shareholder, the covered 

shareholder must use a reasonable 

method in determining the amount of 

transferred basis. Such method must 

take into account adjustments to basis 

with respect to the deemed covered 

shareholder that would have been made 

under the section 961 regulations if the 

basis were with respect to a covered 

shareholder during the time that it was 

with respect to the deemed covered 

shareholder. 

(d) Coordination of successor derived 

basis with section 743(b). For purposes 

of a basis adjustment under section 

743(b) with respect to a derivative 

ownership unit directly owned by an 

acquired partnership, the amount of any 

basis adjustment with respect to the 

successor covered shareholder to the 

acquired partnership’s assets is 

calculated under § 1.743–1(d) and 

allocated under § 1.755–1(b) by 

including any derived basis in the basis 

of the derivative ownership unit that is 

transferred to the successor covered 

shareholder under paragraph (c)(2) of 

this section for purposes of gain and 

loss calculations and basis allocations 

under those provisions. 

§§ 1.961–6 and 1.961–7 [Reserved]. 

§ 1.961–8 Application of positive derived 

basis to covered shareholders’ distributive 

shares of gain or loss. 

(a) Scope. This section describes the 

consequences of a partnership’s positive 

derived basis. Paragraph (b) of this 

section applies positive derived basis to 

covered shareholders’ distributive 

shares of gain or loss recognized by a 

partnership on a sale, exchange, or other 

disposition of derivative ownership 

units. Paragraph (c) of this section 

describes related basis adjustments to 

certain partnership interests directly 

owned by a covered shareholder. 

Paragraph (d) of this section describes 

related basis adjustments to certain 

lower-tier partnership interests directly 

owned by an upper-tier partnership. See 

§ 1.961–12(c)(4) (Example 4) for an 

example illustrating the application of 

this section. 

(b) Sale, exchange, or other 

disposition of derivative ownership 

units with positive derived basis—(1) In 

general. In a sale, exchange, or other 

disposition by a partnership 

(transferring partnership) of one or more 

derivative ownership units (transferred 

units), each partner’s distributive share 

of gain or loss recognized by the 

transferring partnership on the sale, 

exchange, or other disposition is first 

determined without regard to derived 

basis (taking into a partner’s section 

743(b) basis adjustment). Then, positive 

derived basis is applied to each covered 

shareholder’s distributive share of such 

gain or loss in accordance with 

paragraph (b)(2) of this section. Such 

application of positive derived basis to 

a covered shareholder’s distributive 

share is treated as an application of 

positive derived basis by the 

transferring partnership, unless the 

covered shareholder owns the 

transferred units through multiple 

partnerships, in which case only 

partnerships in which the covered 

shareholder directly owns an interest 

are treated as applying the positive 

derived basis. 

(2) Application of positive derived 

basis—(i) In general. A covered 

shareholder’s distributive share of gain 

or loss with respect to transferred units 

(determined without regard to derived 

basis, and expressed as a negative 

amount in the case of a distributive 

share of loss) is adjusted by subtracting 

the transferring partnership’s positive 

derived basis with respect to the 

covered shareholder of the transferred 

units, subject to the limitations in 

paragraphs (b)(2)(ii) and (iii) of this 

section, as applicable. 

(ii) Limitation in nonrecognition 

transactions. In a nonrecognition 

transaction, the amount of positive 

derived basis that is taken into account 

in applying paragraph (b)(2)(i) of this 

section with respect to the covered 

shareholder is limited to the excess of 

the amount of positive derived basis 

that would be taken into account by the 

covered shareholder but for this 

paragraph (b)(2)(ii) over the covered 

shareholder’s share of the gain realized 

but not recognized by the transferring 

partnership with respect to the 

transferred units. The covered 

shareholder’s share of such realized-butnot-recognized gain is determined by 

multiplying the amount of that gain of 

the transferring partnership by a 

fraction, the numerator of which is the 

covered shareholder’s distributive share 

of gain recognized by the transferring 

partnership with respect to the 

transferred units (determined without 

regard to derived basis), and the 

denominator of which is the amount of 

gain recognized by the transferring 

partnership with respect to the 

transferred units (determined without 

regard to derived basis). 

(iii) Limitation on loss. Positive 

derived basis can create or increase a 

distributive share of loss only if loss is, 

or would be if there were a loss, 

recognized by the transferring 

partnership on the sale, exchange, or 

other disposition of the transferred units 

and a current deduction in respect of 

the loss is, or would be, allowable. 

(iv) Translation rule. If applicable, 

positive derived basis is translated into 

functional currency at the spot rate on 

the day on which the sale, exchange, or 

other disposition occurs. 

(c) Basis adjustment to top-tier 

partnership interest. In the case of a 

partnership interest that is directly 

owned by a covered shareholder and 

through which the covered shareholder 

owns the transferred units described in 

paragraph (b) of this section, adjusted 

basis of such interest is adjusted under 

section 705 after taking into account the 

partnership’s application of positive 

derived basis to the covered 

shareholder’s distributive share of gain 

or loss with respect to the transferred 


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units (determined under paragraph 

(b)(2) of this section). 

(d) Basis adjustments to lower-tier 

partnership interests. In the case of a 

partnership interest (lower-tier 

partnership interest) that is directly 

owned by another partnership (uppertier partnership) and through which a 

covered shareholder owns the 

transferred units described in paragraph 

(b) of this section, the upper-tier 

partnership’s basis in such lower-tier 

partnership interest is adjusted as 

described in this paragraph (d). 

Common basis in the lower-tier 

partnership interest is adjusted under 

section 705 without regard to the 

application of positive derived basis to 

the covered shareholder’s distributive 

share of gain or loss with respect to the 

transferred units (determined under 

paragraph (b)(2) of this section). 

Concurrently with and taking into 

account the adjustment under section 

705, derived basis with respect to the 

covered shareholder of the lower-tier 

partnership interest is reduced by the 

amount of positive derived basis 

applied to the covered shareholder’s 

distributive share of gain or loss with 

respect to the transferred units 

(determined under paragraph (b)(2) of 

this section) or gain is recognized in 

accordance with the principles of 

§ 1.961–4 (applied by treating such 

amount of applied positive derived 

basis as the amount of the adjustment to 

basis described in § 1.961–4(c)(2)(i)). If 

there is more than one lower-tier 

partnership, adjustments to derived 

basis under this paragraph (d) are made 

starting with the partnership at the 

lowest tier. 

§ 1.961–9 Exclusion from gross income of 

previously taxed earnings and profits 

resulting from positive section 961(c) basis. 

(a) Scope. This section describes the 

consequences of positive section 961(c) 

basis. Paragraph (b) of this section 

excludes from gross income previously 

taxed earnings and profits resulting 

from the application of section 961(c) 

basis to covered gain. Paragraph (c) of 

this section defines covered gain. 

Paragraph (d) of this section describes 

rules for analyzing covered gain. 

Paragraph (e) of this section provides 

rules for applying positive section 

961(c) basis to covered gain. Paragraph 

(f) of this section provides rules 

characterizing covered gain as 

previously taxed earnings and profits. 

Paragraph (g) of this section provides a 

dollar basis rule. Paragraph (h) of this 

section provides a rule allocating 

previously taxed earnings and profits to 

shares of stock. See § 1.961–12(c)(5) 

(Example 5) for an example illustrating 

the application of this section. 

(b) Exclusion from gross income of 

previously taxed earnings and profits 

resulting from section 961(c) basis. 

Previously taxed earnings and profits 

that result from the application of a 

controlled foreign corporation’s section 

961(c) basis to covered gain are 

excluded from the controlled foreign 

corporation’s gross income, solely for 

purposes of determining the controlled 

foreign corporation’s subpart F income 

and tested income or tested loss, and 

provided that the covered shareholder 

to which the previously taxed earnings 

and profits relate is a United States 

shareholder in the controlled foreign 

corporation. 

(c) Covered gain—(1) In general. 

Covered gain is all gain recognized by 

a controlled foreign corporation on a 

sale, exchange, or other disposition of 

one or more section 961(c) ownership 

units that are shares of stock of a single 

corporation (transferred units), 

determined without regard to loss 

recognized on any transferred unit and 

without regard to section 961(c) basis. 

Covered gain includes amounts treated 

as gain from a sale, exchange, or other 

disposition (for example, under section 

301(c)(3)), other than gain recognized 

pursuant to section 961(c) (for example, 

for distributions of previously taxed 

earnings and profits in excess of basis 

under § 1.961–4(d)). Section 961(c) basis 

is applied to covered gain, and 

previously taxed earnings and profits 

result from such application of section 

961(c) basis, in accordance with the 

rules described in paragraph (d) of this 

section. 

(2) Coordination with dividend 

recharacterization provisions. Section 

964(e)(1) (or any provision of the Code 

or regulations in this title that would 

treat covered gain as a dividend in 

whole or in part) does not apply to the 

portion of covered gain to which section 

961(c) basis is applied and that, 

consequently, is previously taxed 

earnings and profits. 

(d) Rules for analyzing covered gain— 

(1) Determine each covered 

shareholder’s share of the covered gain. 

First, determine each covered 

shareholder’s share of the covered gain, 

computed as the portion of the covered 

gain that is assigned to the covered 

shareholder under § 1.951–2. 

(2) Apply section 961(c) basis. 

Second, apply the controlled foreign 

corporation’s positive section 961(c) 

basis to each covered shareholder’s 

share of the covered gain in accordance 

with paragraph (e) of this section. 

(3) Characterize covered gain as 

previously taxed earnings and profits. 

Third, characterize the portion of each 

covered shareholder’s share of the 

covered gain to which section 961(c) 

basis is applied as previously taxed 

earnings and profits of the controlled 

foreign corporation in accordance with 

paragraph (f) of this section. Such 

characterization does not reduce 

previously taxed earnings and profits of 

the foreign corporation in which shares 

of stock are transferred units or any 

foreign corporation in which stock is 

owned through the transferred units. 

(4) Determine dollar basis. Fourth, 

determine the dollar basis of previously 

taxed earnings and profits resulting 

from section 961(c) basis in accordance 

with paragraph (g) of this section. 

(5) Treat resulting previously taxed 

earnings and profits as recognized with 

respect to particular transferred units. 

Fifth, treat previously taxed earnings 

and profits resulting from section 961(c) 

basis as recognized with respect to 

particular transferred units by allocating 

such previously taxed earnings and 

profits in accordance with paragraph (h) 

of this section. Such allocation is taken 

into account, for example, in applying 

section 964(e)(1) (taking into account 

paragraph (c)(2) of this section) to gain 

recognized with respect to a particular 

transferred unit. 

(6) Adjust previously taxed earnings 

and profits and make related account 

adjustments. Sixth, increase the 

controlled foreign corporation’s 

previously taxed earnings and profits to 

reflect previously taxed earnings and 

profits resulting from section 961(c) 

basis and make the related adjustments 

described in § 1.959–3 to each covered 

shareholder’s accounts. 

(e) Application of positive section 

961(c) basis—(1) In general. In a sale, 

exchange, or other disposition in which 

a controlled foreign corporation 

recognizes covered gain, the controlled 

foreign corporation’s positive section 

961(c) basis with respect to a covered 

shareholder of the transferred units is 

applied to such covered shareholder’s 

share of the covered gain (determined 

under paragraph (d)(1) of this section), 

to the extent thereof and subject to the 

limitation in paragraph (e)(2) of this 

section. 

(2) Limitation in nonrecognition 

transactions. In a nonrecognition 

transaction, the amount of positive 

section 961(c) basis that is taken into 

account in applying paragraph (e)(1) of 

this section with respect to the covered 

shareholder is limited to the excess of 

the amount of positive section 961(c) 

basis that would be taken into account 

by the covered shareholder but for this 

paragraph (e)(2) over the covered 

shareholder’s share of the gain realized 


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but not recognized by the controlled 

foreign corporation with respect to the 

transferred units. The covered 

shareholder’s share of such realized-butnot-recognized gain is determined by 

multiplying the amount of that gain of 

the controlled foreign corporation by a 

fraction, the numerator of which is the 

covered shareholder’s share of covered 

gain with respect to the transferred units 

(determined under paragraph (d)(1) of 

this section), and the denominator of 

which is the amount of covered gain 

with respect to the transferred units 

(determined under paragraph (c)(1) of 

this section). 

(3) Translation rule. If applicable, 

positive section 961(c) basis is 

translated into functional currency of 

the controlled foreign corporation at the 

spot rate on the day on which the sale, 

exchange, or other disposition occurs. 

(4) Unused positive section 961(c) 

basis. See § 1.961–11(c)(2) and (e) for 

rules applying positive section 961(c) 

basis in excess of covered gain to gain 

recognized pursuant to section 961(c). 

(f) Characterization of covered gain as 

previously taxed earnings and profits— 

(1) In general. The portion of a covered 

shareholder’s share of covered gain to 

which section 961(c) basis is applied 

(determined under paragraph (d)(2) of 

this section) is characterized as 

previously taxed earnings and profits 

with respect to the covered shareholder 

(section 961(c) PTEP) in accordance 

with the rules described in paragraphs 

(f)(2) through (4) of this section. 

(2) Mirroring rule—(i) In general. The 

portion of section 961(c) PTEP that does 

not exceed the amount of mirrored 

PTEP (defined in paragraph (f)(2)(ii) of 

this section) has the same character as 

a pro rata portion of mirrored PTEP. The 

pro rata portion is determined by 

multiplying mirrored PTEP by a 

fraction, the numerator of which is the 

portion of section 961(c) PTEP 

described in the preceding sentence and 

the denominator of which is the amount 

of mirrored PTEP. 

(ii) Mirrored PTEP. For purposes of 

this paragraph (f)(2), mirrored PTEP is— 

(A) All previously taxed earnings and 

profits that transfer from the covered 

shareholder under § 1.959–7 in the sale, 

exchange, or other disposition in which 

the covered gain is recognized (or that 

would so transfer if the transferred units 

were sold in a general successor 

transaction); and 

(B) All previously taxed earnings and 

profits that would exist if foreign 

income taxes associated with previously 

taxed earnings and profits described in 

paragraph (f)(2)(ii)(A) of this section 

(determined under § 1.959–7 and, if 

applicable, translated into the 

functional currency of the foreign 

corporation to which the previously 

taxed earnings and profits would relate 

at the spot rate on the day on which the 

sale, exchange, or other disposition 

occurs) were treated as an additional 

amount of such previously taxed 

earnings and profits. 

(iii) Currency rule. For purposes of 

this paragraph (f)(2), if any previously 

taxed earnings and profits described in 

paragraph (f)(2)(ii) of this section are 

denominated in a currency other than 

the functional currency of the controlled 

foreign corporation recognizing the 

covered gain, then such previously 

taxed earnings and profits are translated 

into such controlled foreign 

corporation’s functional currency at the 

spot rate on the day on which the 

covered gain is recognized. 

(3) Lookback rule—(i) In general. The 

portion of section 961(c) PTEP that is 

not characterized under paragraph (f)(2) 

of this section, if any, and that does not 

exceed the amount of lookback PTEP 

(defined in paragraph (f)(3)(ii) of this 

section) has the same character as a pro 

rata portion of lookback PTEP. The pro 

rata portion is determined by 

multiplying lookback PTEP by a 

fraction, the numerator of which is the 

portion of section 961(c) PTEP 

described in the preceding sentence and 

the denominator of which is the amount 

of lookback PTEP. 

(ii) Lookback PTEP. For purposes of 

this paragraph (f)(3), lookback PTEP is 

all previously taxed earnings and profits 

that both— 

(A) Resulted from an income 

inclusion under section 951(a) or 

951A(a) of the covered shareholder 

attributable to the transferred units 

(including stock owned through the 

transferred units); and 

(B) Were related to a taxable year of 

a foreign corporation ending during the 

36-month period that ends on the day 

on which the covered gain is 

recognized. 

(iii) Currency rule. For purposes of 

this paragraph (f)(3), if any previously 

taxed earnings and profits described in 

paragraph (f)(3)(ii) of this section are 

denominated in a currency other than 

the functional currency of the controlled 

foreign corporation recognizing the 

covered gain, then such previously 

taxed earnings and profits are translated 

into such controlled foreign 

corporation’s functional currency by 

translating the U.S. dollar amount of the 

income inclusion giving rise to the 

previously taxed earnings and profits at 

the spot rate on the day on which the 

covered gain is recognized. 

(4) Section 245A(d) PTEP rule. The 

portion of section 961(c) PTEP that is 

not characterized under paragraphs 

(f)(2) and (3) of this section, if any, is 

characterized as relating to the section 

245A(d) PTEP group, the taxable year of 

the controlled foreign corporation in 

which the covered gain is recognized, 

and the general category income under 

section 904(d)(1)(D). 

(g) Dollar basis rule. The dollar basis 

of previously taxed earnings and profits 

with respect to a covered shareholder 

that result from section 961(c) basis 

(determined under paragraph (d)(3) of 

this section) is equal to the U.S. dollar 

amount of the section 961(c) basis 

giving rise to such previously taxed 

earnings and profits. 

(h) Allocation of previously taxed 

earnings and profits—(1) In general. 

Previously taxed earnings and profits 

with respect to a covered shareholder 

that result from section 961(c) basis 

(determined under paragraph (d)(3) of 

this section) are allocated to transferred 

units in accordance with the rules of 

paragraph (h)(2) of this section. 

(2) Rules—(i) Stacking rule. First, 

allocate to each transferred unit an 

amount of previously taxed earnings 

and profits equal to the lesser of the 

amount of positive section 961(c) basis 

with respect to the covered shareholder 

of the transferred unit (to the extent 

taken into account in applying 

paragraph (e)(1) of this section) and the 

portion of the covered shareholder’s 

share of the covered gain that is 

recognized with respect to the 

transferred unit. 

(ii) Pro rata rule. Second, allocate to 

each transferred unit a pro rata portion 

of any amount of previously taxed 

earnings and profits not allocated under 

paragraph (h)(2)(i) of this section, 

determined by multiplying such amount 

by a fraction. The numerator of the 

fraction is the portion of the covered 

shareholder’s share of the covered gain 

that is recognized with respect to the 

transferred unit, less the amount of 

previously taxed earnings and profits 

allocated to the transferred unit under 

paragraph (h)(2)(i) of this section. The 

denominator of the fraction is the 

amount of previously taxed earnings 

and profits not allocated under 

paragraph (h)(2)(i) of this section. 

§ 1.961–10 Gain recognition for negative 

basis. 

(a) Scope. This section describes the 

consequences of negative derived basis 

and negative section 961(c) basis. 

Paragraph (b) of this section sets forth a 

rule requiring gain recognition for 

negative derived basis. Paragraph (c) of 

this section sets forth a rule requiring 

gain recognition for negative section 

961(c) basis. See § 1.961–12(c)(6) and (7) 


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(Examples 6 and 7) for examples 

illustrating the application of this 

section. 

(b) Gain recognition for negative 

derived basis—(1) In general. If a 

partnership has negative derived basis 

of a derivative ownership unit, then, in 

any transaction involving the derivative 

ownership unit (for example, a sale, 

exchange, or distribution under section 

301(c)(2)), the partnership is treated as 

recognizing gain with respect to the 

derivative ownership unit in accordance 

with the rules described in paragraphs 

(b)(2) through (5) of this section. 

(2) Amount of gain—(i) In general. 

The amount of the gain recognized is 

equal to the additional amount of gain, 

plus the lesser amount of loss 

(expressed as a positive amount), that 

the partnership would have recognized 

in the transaction if, immediately before 

the transaction, the partnership’s 

common basis of the derivative 

ownership unit were reduced by all 

negative derived basis of the derivative 

ownership unit. Thus, for example, in a 

sale of the derivative ownership unit, 

the amount of the gain recognized is 

generally equal to the sum of all 

negative derived basis of the derivative 

ownership unit and, in a nonrecognition 

transaction, the amount of the gain 

recognized may be less than the sum of 

all negative derived basis of the 

derivative ownership unit. 

(ii) Special rule if derivative 

ownership unit ceases to be a derivative 

ownership unit. If the derivative 

ownership unit is not a derivative 

ownership unit immediately after the 

transaction (including, for example, 

because the derivative ownership unit is 

redeemed, or becomes directly owned 

by a foreign corporation or covered 

shareholder, in the transaction), then, 

notwithstanding paragraph (b)(2)(i) of 

this section, the amount of the gain 

recognized is equal to the sum of all 

negative derived basis of the derivative 

ownership unit. 

(iii) Translation rule. If applicable, 

negative derived basis is translated into 

functional currency at the spot rate on 

the day on which the transaction 

involving the derivative ownership unit 

occurs. 

(3) Allocation of gain. A pro rata 

portion of the gain is allocated to each 

covered shareholder, determined by 

multiplying the amount of such gain by 

a fraction. The numerator of the fraction 

is the negative derived basis with 

respect to the covered shareholder of the 

derivative ownership unit, and the 

denominator of the fraction is the sum 

of all negative derived basis of the 

derivative ownership unit. 

(4) Treatment of gain. The gain is 

treated in the same manner as gain 

recognized under § 1.961–4(c) for 

distributions of previously taxed 

earnings and profits in excess of basis 

(and thus the rules in § 1.961–4(f) apply 

to the gain), except that the gain is 

recognized concurrently with, but 

separate from, the transaction. 

(5) Negative derived basis eliminated 

to the extent it gives rise to gain. 

Negative derived basis is eliminated to 

the extent it increases the amount of 

gain recognized under this paragraph 

(b), concurrent with the transaction. 

(c) Gain recognition for negative 

section 961(c) basis—(1) In general. If a 

controlled foreign corporation has 

negative section 961(c) basis of a section 

961(c) ownership unit, then, in any 

transaction involving the section 961(c) 

ownership unit (for example, a sale, 

exchange, or distribution under section 

301(c)(2)), the controlled foreign 

corporation is treated as recognizing 

gain with respect to the section 961(c) 

ownership unit in accordance with the 

rules described in paragraphs (c)(2) 

through (5) of this section. 

(2) Amount of gain—(i) In general. 

The amount of the gain recognized is 

equal to the additional amount of gain, 

plus the lesser amount of loss 

(expressed as a positive amount), that 

the controlled foreign corporation 

would have recognized in the 

transaction if, immediately before the 

transaction, the controlled foreign 

corporation’s adjusted basis of the 

section 961(c) ownership unit were 

reduced by all negative section 961(c) 

basis of the section 961(c) ownership 

unit. Thus, for example, in a sale of the 

section 961(c) ownership unit, the 

amount of the gain recognized is 

generally equal to the sum of all 

negative section 961(c) basis of the 

section 961(c) ownership unit and, in a 

nonrecognition transaction, the amount 

of the gain recognized may be less than 

the sum of all negative section 961(c) 

basis of the section 961(c) ownership 

unit. 

(ii) Special rule if section 961(c) 

ownership unit ceases to be a section 

961(c) ownership unit. If the section 

961(c) ownership unit is not a section 

961(c) ownership unit immediately after 

the transaction (including, for example, 

because the section 961(c) ownership 

unit is redeemed, or becomes directly 

owned by a covered shareholder, in the 

transaction), then, notwithstanding 

paragraph (c)(2)(i) of this section, the 

amount of the gain recognized is equal 

to the sum of all negative section 961(c) 

basis of the section 961(c) ownership 

unit. 

(iii) Translation rule. If applicable, 

negative section 961(c) basis is 

translated into functional currency of 

the controlled foreign corporation at the 

spot rate on the day on which the 

transaction involving the section 961(c) 

ownership unit occurs. 

(3) Assignment of gain. A pro rata 

portion of the gain is assigned to each 

covered shareholder, determined by 

multiplying the amount of such gain by 

a fraction. The numerator of the fraction 

is the negative section 961(c) basis with 

respect to the covered shareholder of the 

section 961(c) ownership unit, and the 

denominator of the fraction is the sum 

of all negative section 961(c) basis of the 

section 961(c) ownership unit. 

(4) Treatment of gain. The gain is 

treated in the same manner as gain 

recognized under § 1.961–4(d) for 

distributions of previously taxed 

earnings and profits in excess of basis 

(and thus the rules in § 1.961–4(f) apply 

to the gain), except that the gain is 

recognized concurrently with, but 

separate from, the transaction. Thus, the 

gain is recognized pursuant to section 

961(c) and therefore applies only for 

purposes of determining amounts 

included in gross income of United 

States shareholders of the controlled 

foreign corporation under § 1.961–11. 

(5) Negative section 961(c) basis 

eliminated to the extent it gives rise to 

gain. Negative section 961(c) basis is 

eliminated to the extent it increases the 

amount of gain recognized under this 

paragraph (c), concurrent with the 

transaction. 

§ 1.961–11 Amounts included in gross 

income of United States shareholders. 

(a) Scope. This section sets forth rules 

regarding amounts that United States 

shareholders of a controlled foreign 

corporation must include in gross 

income under section 961(c) to account 

for gain recognized by the controlled 

foreign corporation pursuant to section 

961(c) (for distributions of previously 

taxed earnings and profits in excess of 

basis under § 1.961–4(d), for foreign 

currency loss in excess of basis under 

§ 1.961–5(b), or for negative section 

961(c) basis under § 1.961–10(c)). 

Paragraph (b) of this section provides 

the general rule. Paragraph (c) of this 

section allocates gain recognized 

pursuant to section 961(c) to a United 

States shareholder. Paragraph (d) of this 

section adjusts allocations of gain to 

reflect transfers of stock of the 

controlled foreign corporation. 

Paragraph (e) of this section determines 

loss recognized under section 961(c) 

with respect to a United States 

shareholder. See § 1.961–12(c)(8) 

(Example 8) for an example illustrating 


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the application of this section. See also 

§ 1.961–3, regarding basis increases for 

an inclusion under this section. 

(b) In general. If a United States 

shareholder owns stock of a controlled 

foreign corporation on the last relevant 

day of a taxable year of the controlled 

foreign corporation, and the controlled 

foreign corporation recognizes gain 

pursuant to section 961(c) within that 

taxable year (all such gain, section 

961(c) income), then the United States 

shareholder includes in gross income 

the amount of section 961(c) income 

that is allocated to the United States 

shareholder (determined under 

paragraph (c) of this section). The 

inclusion is for the United States 

shareholder’s taxable year in which or 

with which the controlled foreign 

corporation’s taxable year ends and is 

treated in the same manner as an 

amount included in gross income under 

section 951(a)(1)(A) solely for purposes 

of increasing basis under § 1.961–3 and 

translation into U.S. dollars under 

989(b). 

(c) Allocation of section 961(c) 

income. For purposes of paragraph (b) of 

this section, the amount of the 

controlled foreign corporation’s section 

961(c) income that is allocated to a 

United States shareholder is the excess 

(if any) of— 

(1) The sum of any portions of section 

961(c) income that are assigned to the 

United States shareholder under 

§ 1.961–4, 1.961–5, or 1.961–10, 

adjusted, if applicable, in accordance 

with paragraph (d) of this section as a 

result of transfers of stock of the 

controlled foreign corporation; over 

(2) The amount of loss that the 

controlled foreign corporation is treated 

as recognizing under section 961(c) with 

respect to the United shareholder in 

accordance with paragraph (e) of this 

section. 

(d) Rules for transfers of stock of the 

controlled foreign corporation—(1) 

General successor transactions—(i) 

General successor transaction occurring 

before the last relevant day. For 

purposes of paragraph (c)(1) of this 

section, if the controlled foreign 

corporation is an acquired foreign 

corporation in a general successor 

transaction that occurs before the last 

relevant day of the controlled foreign 

corporation’s taxable year, then treat a 

pro rata portion of section 961(c) 

income that is both recognized before 

the general successor transaction and 

assigned to the transferor covered 

shareholder under § 1.961–4, 1.961–5, 

or 1.961–10 as instead assigned to the 

successor covered shareholder, 

determined by multiplying such section 

961(c) income by the fraction described 

in § 1.961–5(c)(2)(i) for determining the 

controlled foreign corporation’s section 

961(c) basis that transfers in the general 

successor transaction. 

(ii) General successor transaction 

occurring on or after the last relevant 

day. For purposes of paragraph (c)(1) of 

this section, if the controlled foreign 

corporation is an acquired foreign 

corporation in a general successor 

transaction that occurs on or after the 

last relevant day of the controlled 

foreign corporation’s taxable year, then 

treat a pro rata portion of section 961(c) 

income that is both recognized after the 

general successor transaction and 

assigned to the successor covered 

shareholder under § 1.961–4, 1.961–5, 

or 1.961–10 as instead assigned to the 

transferor covered shareholder, 

determined by multiplying such section 

961(c) income by the fraction described 

in § 1.961–5(c)(2)(i) for determining the 

controlled foreign corporation’s section 

961(c) basis that transfers in the general 

successor transaction. 

(2) Other transfers. The principles of 

paragraph (d)(1) of this section apply to 

transactions, other than general 

successor transactions, in which the 

controlled foreign corporation’s 961(c) 

basis transfers to another covered 

shareholder. 

(e) Determining loss under section 

961(c)—(1) In general. For purposes of 

paragraph (c)(2) of this section, the 

amount of loss that the controlled 

foreign corporation is treated as 

recognizing under section 961(c) with 

respect to the United States shareholder 

is, subject to the limitations in 

paragraph (e)(2) of this section, equal to 

the sum of the controlled foreign 

corporation’s positive section 961(c) 

basis with respect to the United States 

shareholder of section 961(c) ownership 

units that are sold, exchanged, or 

otherwise disposed of by the controlled 

foreign corporation within the 

controlled foreign corporation’s taxable 

year, reduced by the amount of such 

positive section 961(c) basis that is 

applied to covered gain under § 1.961– 

9. 

(2) Limitations—(i) In general. 

Positive section 961(c) basis of section 

961(c) ownership units increases the 

amount of loss that the controlled 

foreign corporation is treated as 

recognizing under section 961(c) only if 

loss is, or would be if there were a loss, 

recognized by the controlled foreign 

corporation on the sale, exchange, or 

other disposition of the section 961(c) 

ownership units and a current 

deduction in respect of the loss is, or 

would be, allowable. 

(ii) Loss recognized only to the extent 

of certain gain. Positive section 961(c) 

basis of section 961(c) ownership units 

that are shares of stock of a single 

foreign corporation increases the 

amount of loss that the controlled 

foreign corporation is treated as 

recognizing under section 961(c) only to 

the extent of the portion of the amount 

described in paragraph (c)(1) of this 

section that is recognized with respect 

to stock of such foreign corporation. 

(3) Translation rule. If applicable, 

positive section 961(c) basis of section 

961(c) ownership units is translated into 

the controlled foreign corporation’s 

functional currency at the spot rate on 

the day of the sale, exchange, or other 

disposition of the section 961(c) 

ownership units. 

§ 1.961–12 Examples. 

(a) In general. This section provides 

examples that illustrate the application 

of §§ 1.961–1 through 1.961–11. 

(b) Assumed facts. For purposes of the 

examples in this section, unless 

otherwise indicated, the following facts 

are assumed for U.S. tax purposes: 

(1) US1 and US2 are unrelated 

domestic corporations that are covered 

shareholders, each of which uses the 

U.S. dollar as its functional currency 

and chooses to claim a credit for foreign 

income taxes pursuant to section 901. 

Neither US1 nor US2 is a member of a 

consolidated group (as defined in 

§ 1.1502–1(h)). 

(2) F1, F2, and F3 are foreign 

corporations, each of which is a 

controlled foreign corporation and uses 

the British pound (£) as its functional 

currency. 

(3) PRS1 and PRS2 are partnerships. 

(4) Each entity uses the calendar year 

as its taxable year, and no entity has a 

short taxable year. 

(5) There are no adjustments under 

section 743(b) to the basis of any 

partnership property. 

(c) Examples—(1) Example 1: Types 

of property units and basis—(i) Facts. 

US1 directly owns 60, and US2 directly 

owns 40, of the 100 shares of the single 

class of outstanding stock of F1. F1 

directly owns all 50 shares of the single 

class of outstanding stock of F2. This 

example only analyzes the types of basis 

provided under section 961 in the items 

of property. 

(ii) Analysis. Each of the 60 shares of 

stock of F1 directly owned by US1 and 

the 40 shares of stock of F1 directly 

owned by US2 is a section 961(a) 

ownership unit in which the covered 

shareholder (US1 or US2) is provided 

adjusted basis. See § 1.961–2(c). In 

addition, each of the 50 shares of stock 

of F2 directly owned by F1, a controlled 

foreign corporation, is a section 961(c) 

ownership unit in which F1 is provided 


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section 961(c) basis. See § 1.961–2(e)(1). 

F1’s section 961(c) basis in each section 

961(c) ownership unit is maintained 

separately with respect to each of US1 

and US2. See § 1.961–2(e)(2). Further, 

each of the section 961(a) ownership 

units and section 961(c) ownership 

units is a property unit, and adjusted 

basis or section 961(c) basis in the 

property unit, as applicable, is 

maintained in U.S. dollars. See § 1.961– 

2(b). 

(iii) Alternative facts: partnership 

structure—(A) Facts. The facts are the 

same as paragraph (c)(1)(i) of this 

section (Example 1), except that US1 

and US2, in the aggregate, directly own 

all the interests in PRS1, and PRS1 

directly owns all 100 of the shares of 

stock of F1. 

(B) Analysis. The interest in PRS1 

directly owned by each of US1 and US2 

is a section 961(a) ownership unit in 

which the covered shareholder (US1 or 

US2) is provided adjusted basis. See 

§ 1.961–2(c). In addition, each of the 100 

shares of stock of F1 directly owned by 

PRS1 is a derivative ownership unit in 

which PRS1 is provided derived basis. 

See § 1.961–2(d)(1). PRS1’s derived 

basis in each derivative ownership unit 

is established and maintained separately 

with respect to each of US1 and US2. 

See § 1.961–2(d)(2). Further, as is the 

case in paragraph (c)(1)(ii) of this 

section, each of the 50 shares of stock 

of F2 directly owned by F1, a controlled 

foreign corporation, is a section 961(c) 

ownership unit in which F1 is provided 

section 961(c) basis, and that basis is 

maintained separately with respect to 

each of US1 and US2. Moreover, each of 

the section 961(a) ownership units, 

derivative ownership units, and section 

961(c) ownership units is a property 

unit, and adjusted basis, derived basis, 

or section 961(c) basis in the property 

unit, as applicable, is maintained in 

U.S. dollars. See § 1.961–2(b). 

(2) Example 2: Basis increases for 

income inclusions—(i) Facts. US1 

directly owns all 100 shares of the 

single class of outstanding stock of F1, 

and F1 directly owns all 50 shares of the 

single class of outstanding stock of F2. 

Thus, the shares of stock of F1 directly 

owned by US1 are section 961(a) 

ownership units, and the shares of stock 

of F2 directly owned by F1 are section 

961(c) ownership units. For F2’s taxable 

year ending on December 31 of year 3, 

the last relevant day is December 31 and 

US1 includes $80x in gross income 

under section 951(a)(1)(A) (its pro rata 

share of F2’s subpart F income, 

translated into U.S. dollars in 

accordance with section 989(b)) and 

$120x in gross income under section 

951A(a) (the portion of its GILTI 

inclusion amount that is treated as with 

respect to F2 for the taxable year under 

section 951A(f)(2)). F2 does not make 

any covered distributions, and therefore 

does not distribute any previously taxed 

earnings and profits, during the taxable 

year. This example only analyzes basis 

increases for the income inclusions. See 

also § 1.312–6(f) (income inclusions 

increase US1’s earnings and profits); 

§ 1.959–3 (adjustments to previously 

taxed earnings and profits accounts). 

(ii) Analysis—(A) In general. To 

reflect US1’s income inclusions for F2’s 

taxable year ending on December 31 of 

year 3, basis of shares of stock of F2, and 

basis of shares of stock of F1 (property 

units through which US1 owns stock of 

F2), is in each case increased in 

accordance with § 1.961–3. See § 1.961– 

3(b). In the case of stock of F2, F1’s 

section 961(c) basis with respect to US1 

is increased because shares of stock of 

F2 are section 961(c) ownership units 

and F2 is a controlled foreign 

corporation, as required by § 1.961– 

3(f)(1). In the case of stock of F1, US1’s 

adjusted basis is increased because 

shares of stock of F1 are section 961(a) 

ownership units. Paragraph (c)(2)(ii)(B) 

of this section provides the specific 

increases to basis. 

(B) Increases to basis of each property 

unit. The amount of US1’s income 

inclusions with respect to F2 that give 

rise to increases to basis under section 

961 is $200x ($80x + $120x). See 

§ 1.961–3(c)(1). In determining the 

specific increases to basis, the actual 

distribution rule in § 1.961–3(d) does 

not apply because F2 does not distribute 

any previously taxed earnings and 

profits before the last relevant day. See 

§ 1.961–3(c)(3). Thus, the hypothetical 

distribution rule in § 1.961–3(e) 

determines the entirety of the increases 

to basis for the income inclusions. See 

§ 1.961–3(c)(4). Under the hypothetical 

distribution rule, the basis of each share 

of stock of F2 is increased by $4x ($200x 

÷ 50 shares), and the basis of each share 

of stock of F1 is increased by $2x ($200x 

÷ 100 shares), which in each case is 

equal to the portion of a $200x 

hypothetical distribution treated as 

made by F2 through all tiers to US1 on 

the last relevant day that would be 

distributed with respect to the property 

unit. See § 1.961–3(e). These increases 

to basis are treated as made at the 

beginning of F2’s taxable year 3 because 

there are no midyear transactions and 

the entirety of the $200x of income 

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

or 951A(a). See § 1.961–3(c)(2) and 

(e)(1). Accordingly, at the beginning of 

F2’s taxable year 3, F1 increases its 

section 961(c) basis with respect to US1 

of each share of stock of F2 by $4x, and 

US1 increases its adjusted basis of each 

share of stock of F1 by $2x. 

(iii) Alternative facts: midyear 

transaction and actual distribution 

rule—(A) Facts. The facts are the same 

as in paragraph (c)(2)(i) of this section, 

except as follows. On January 1 of year 

3, US1 directly owns all the stock of F2. 

On March 31 of year 3, F2 distributes 

previously taxed earnings and profits to 

US1 (pro rata with respect to the shares 

of stock of F2) and, consequently, US1 

is required under § 1.961–4 (basis 

reductions and gain recognition for 

distributions) to adjust its adjusted basis 

of each share of stock of F2 by $3x (the 

sum of the dollar basis and associated 

foreign income taxes of the previously 

taxed earnings and profits that are 

distributed on the share). On June 30 of 

year 3, F1 is formed and US1 

immediately contributes all its stock of 

F2 to F1 in exchange for 100 shares of 

stock of F1. Thus, before the 

contribution, shares of stock of F2 are 

section 961(a) ownership units and, 

beginning as of the contribution, all the 

shares of stock of F1 are section 961(a) 

ownership units and all the shares of 

stock of F2 are section 961(c) ownership 

units. 

(B) Analysis—(1) In general. To reflect 

US1’s income inclusions for F2’s taxable 

year ending on December 31 of year 3, 

basis of shares of stock of F2, and basis 

of shares of stock of F1 (property units 

through which US1 owns stock of F2), 

is in each case increased in accordance 

with § 1.961–3. See § 1.961–3(b). In the 

case of stock of F2, because shares of the 

stock are section 961(a) ownership units 

before the contribution and section 

961(c) ownership units after the 

contribution, the type of basis that is 

increased depends on the timing of 

adjustments. Specifically, in the case of 

stock of F2 and an increase to basis that 

is treated as made before the 

contribution, the basis that is increased 

is US1’s adjusted basis because shares of 

stock of F2 are section 961(a) ownership 

units before the contribution. In the case 

of stock of F2 and an increase to basis 

that is treated as made after the 

contribution, the basis that is increased 

is F1’s section 961(c) basis with respect 

to US1 because shares of stock of F2 are 

section 961(c) ownership units after the 

contribution and F2 is a controlled 

foreign corporation, as required by 

§ 1.961–3(f)(1). In the case of stock of 

F1, US1’s adjusted basis is increased 

because shares of stock of F1 are section 

961(a) ownership units. Paragraph 

(c)(2)(iii)(B)(2) of this section provides 

the specific increases to basis. 

(2) Increases to basis of each property 

unit. The amount of US1’s income 

inclusions with respect to F2 that give 


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rise to increases to basis under section 

961 is $200x ($80x + $120x). See 

§ 1.961–3(c)(1). In determining the 

specific increases to basis for the 

income inclusions, the actual 

distribution rule in § 1.961–3(d) applies 

because F2’s distribution of previously 

taxed earnings and profits is made 

before the last relevant day. See § 1.961– 

3(c)(3). Under the actual distribution 

rule, basis of each share of stock of F2 

is increased by $3x, which is equal to 

the adjustment required under § 1.961– 

4 to the basis of such share by reason 

of the distribution, and thus basis of 

stock of F2 increases by $150x in total 

($3x × 50 shares). See § 1.961–3(d)(2). 

These increases to basis are treated as 

made at the beginning of F2’s taxable 

year because the distribution is made 

before the contribution of all the stock 

of F2 to F1, the sole midyear transaction 

occurring within the taxable year. See 

§ 1.961–3(c)(2) and (d)(1). Then, the 

hypothetical distribution rule in 

§ 1.961–3(e) determines increases to 

basis for the remaining $50x of income 

inclusions ($200x of income inclusions 

¥ $150x of basis increases to stock of 

F2 under the actual distribution rule). 

See § 1.961–3(c)(4). Under the 

hypothetical distribution rule, the basis 

of each share of stock of F2, and the 

basis of each share of stock of F1, is 

increased by the portion of a $50x 

hypothetical distribution treated as 

made by F2 through all tiers to US1 on 

the last relevant day that would be 

distributed with respect to the property 

unit. See § 1.961–3(e). These increases 

to basis are treated as made immediately 

after the contribution (the sole midyear 

transaction occurring within F2’s 

taxable year). See § 1.961–3(e)(1). Table 

1 in this paragraph (c)(2)(iii)(B)(2) 

provides the increases to basis. 

TABLE 1 TO PARAGRAPH (c)(2)(iii)(B)(2) OF THIS SECTION—BASIS INCREASES TO REFLECT US1’S INCOME INCLUSIONS

WITH RESPECT TO F2 

Basis increases 

January 1 of year 3 June 30 of year 3 

US1’s adjusted basis of stock of F1 (100 shares) ............................... .......................................................................... $0.5x increase for each share ($50x hypothetical distribution ÷ 100 shares). 

Stock of F2 (50 shares): 

US1’s adjusted basis (before contribution) .................................... $3x increase for each share (actual distribution rule).

F1’s section 961(c) basis with respect to US1 (as of contribution) .......................................................................... $1x increase for each share ($50x hypothetical distribution ÷ 50 shares). 

(iv) Alternative facts: partnership 

structure and section 951(a)(1)(B) 

inclusion—(A) Facts. The facts are the 

same as in paragraph (c)(2)(i) of this 

section (Example 2), except as follows. 

US1 is a citizen of the United States 

(rather than a domestic corporation), 

referred to as Individual A for purposes 

of the rest of this paragraph (c)(2)(iv), 

and does not make an election to apply 

the provisions of section 962 for any 

taxable year. PRS1 directly owns all the 

stock of F1, and Individual A owns 

60%, and a nonresident alien individual 

owns 40%, of the interests in PRS1. 

Thus, the interest in PRS1 directly 

owned by Individual A is a section 

961(a) ownership unit, the shares of 

stock of F1 directly owned by PRS1 are 

derivative ownership units, and the 

shares of stock of F2 directly owned by 

F1 are section 961(c) ownership units. 

In addition, for F2’s taxable year ending 

on December 31 of year 3, Individual A 

includes $80x in gross income under 

section 951(a)(1)(A) (its pro rata share of 

F2’s subpart F income, translated into 

U.S. dollars in accordance with section 

989(b)), $120x in gross income under 

section 951A(a) (the portion of its GILTI 

inclusion amount that is treated as with 

respect to F2 for the taxable year under 

section 951A(f)(2)), and $50x in gross 

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

portion of its section 956 amount that is 

not allocated to previously taxed 

earnings and profits, translated into U.S. 

dollars in accordance with section 

989(b)). 

(B) Analysis—(1) In general. To reflect 

Individual A’s income inclusions for 

F2’s taxable year ending on December 

31 of year 3, basis of shares of stock of 

F2, and basis of shares of stock of F1 

and basis of Individual A’s interest in 

PRS1 (property units through which 

Individual A owns stock of F2), is in 

each case increased in accordance with 

§ 1.961–3. See § 1.961–3(b). In the case 

of stock of F2, the basis that is increased 

is F1’s section 961(c) basis with respect 

to Individual A because shares of stock 

of F2 are section 961(c) ownership units 

and F2 is a controlled foreign 

corporation, as required by § 1.961– 

3(f)(1). In the case of stock of F1, PRS1’s 

derived basis with respect to Individual 

A is increased because shares of stock 

of F1 are derivative ownership units. In 

the case of Individual A’s interest in 

PRS1, Individual A’s adjusted basis is 

increased because its interest in PRS1 is 

a section 961(a) ownership unit. 

Paragraph (c)(2)(iv)(B) of this section 

provides the specific increases to basis. 

(2) Increases to basis of each property 

unit. The amount of Individual A’s 

income inclusions with respect to F2 

that give rise to increases to basis under 

section 961 is $250x ($80x + $120x + 

$50x). See § 1.961–3(c)(1). The 

hypothetical distribution rule in 

§ 1.961–3(e) determines the entirety of 

the increases to basis for the income 

inclusions. See § 1.961–3(c)(3) and (4). 

Under the hypothetical distribution 

rule, the basis of each property unit is 

increased by the portion of a $250x 

hypothetical distribution treated as 

made by F2 through all tiers to 

Individual A on the last relevant day 

that would be distributed with respect 

to the property unit (determined by 

regarding stock of F2 and other property 

only to the extent owned by Individual 

A on the last relevant day). See § 1.961– 

3(e). In addition, because 20% of the 

$250x of income inclusions is under 

section 951(a)(1)(B) ($50x/$250x), 20% 

of each increase to basis is treated as 

made at the end of the last day of F2’s 

taxable year (which is when the 

previously taxed earnings and profits 

resulting from the income inclusion 

under section 951(a)(1)(B) are added to 

previously taxed earnings and profits 

accounts), with the remaining 80% 

treated as made at the beginning of the 

taxable year (which is when the 

previously taxed earnings and profits 

resulting from the income inclusions 

under sections 951(a)(1)(A) and 951A(a) 

are added to previously taxed earnings 

and profits accounts). See § 1.961– 

3(e)(1). Table 1 in this paragraph 

(c)(2)(iii)(B)(2) provides the increases to 

basis. 


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95450 Federal Register / Vol. 89, No. 231 / Monday, December 2, 2024 / Proposed Rules 

TABLE 1 TO PARAGRAPH (c)(2)(iv)(B)(2) OF THIS SECTION—BASIS INCREASES TO REFLECT INDIVIDUAL A’S INCOME

INCLUSIONS WITH RESPECT TO F2 

Basis increases 

January 1 of year 3 December 31 of year 3 

Individual A’s adjusted basis of its interest in PRS1 ............................ $200x increase ($250x × 80%) ....................... $50x increase ($250x × 20%). 

PRS1’s derived basis with respect to Individual A of stock of F1 (100 

shares).

$2x increase for each share ($250x ÷ 100 

shares × 80%).

$0.5 increase for each share ($250x ÷ 100 

shares × 20%). 

F1’s section 961(c) basis with respect to Individual A of stock of F2 

(50 shares).

$4x increase for each share ($250x ÷ 50 

shares × 80%).

$1x increase for each share ($250x ÷ 50 

shares × 20%). 

(3) Example 3: Basis reductions and 

gain recognition for distributions—(i) 

Facts. US1 and US2, in the aggregate, 

directly own all the shares of the single 

class of outstanding stock of F1. In year 

3, F1 makes a covered distribution (pro 

rata with respect to the shares of stock 

of F1). Under § 1.959–4, the entirety of 

the portion of the covered distribution 

received by each of US1 and US2 is 

previously taxed earnings and profits 

excluded from the covered 

shareholder’s (US1’s or US2’s) gross 

income. In addition, the sum of the 

dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits that are distributed 

on each share of stock of F1 owned by 

US1 is $6x, and the sum of the dollar 

basis and associated foreign income 

taxes of the previously taxed earnings 

and profits that are distributed on each 

share of stock of F1 owned by US2 is 

$4x. Immediately before the covered 

distribution, US1’s adjusted basis of 

each of its shares of stock of F1 is $4.5x, 

and US2’s adjusted basis of each of its 

shares of stock of F1 is $3x. Each of US1 

and US2 is deemed to pay the entirety 

of the associated foreign income taxes of 

the previously taxed earnings and 

profits distributed to it under section 

960(b) (because all such taxes are 

sourced from the creditable PTEP tax 

group and the covered shareholder is a 

United States shareholder of F1) and is 

allowed a credit under section 901 for 

the entirety of such taxes. This example 

only analyzes adjustments to basis of 

US1’s and US2’s shares of stock of F1 

(section 961(a) ownership units) under 

section 961. See also § 1.959–3 

(adjustments to previously taxed 

earnings and profits accounts). 

(ii) Analysis—(A) In general. Under 

§ 1.961–4(b), each of US1 and US2 

reduces its adjusted basis of, and if 

applicable recognizes gain with respect 

to, each share of stock of F1 on which 

it receives previously taxed earnings 

and profits. The specific adjustments are 

provided in paragraphs (c)(3)(ii)(B) 

through (D) of this section and 

summarized in table 1 in this paragraph 

(c)(3)(ii)(A). 

TABLE 1 TO PARAGRAPH (c)(3)(ii)(A) OF THIS SECTION—BASIS ADJUSTMENTS RESULTING FROM F1’S DISTRIBUTION OF

PTEP 

Basis immediately before the covered 

distribution 

Adjustments to basis under § 1.961–4(b) 

US1’s adjusted basis of its shares of 

stock of F1.

$4.5x for each share ............................. $6x adjustment for each share ............. $4.5x reduction to basis (to $0). 

$1.5x gain recognized. 

US2’s adjusted basis of its shares of 

stock of F1.

$3x for each share ................................ $4x adjustment for each share ............. $3x reduction to basis (to $0). 

$1x gain recognized. 

(B) US1’s receipt of previously taxed 

earnings and profits. As a result of 

US1’s receipt of previously taxed 

earnings and profits, the amount of the 

adjustment to US1’s adjusted basis of 

each of its shares of stock of F1 is $6x, 

the dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits received on the 

share. See § 1.961–4(b)(2)(i). 

Consequently, US1 reduces its adjusted 

basis of each of its shares of stock of F1 

($4.5x) to $0 and then is treated as 

recognizing $1.5x of gain with respect to 

the share (computed as the excess of the 

$6x adjustment to basis over the $4.5x 

reduction to basis). See § 1.961– 

4(b)(2)(ii) and (iii). 

(C) US2’s receipt of previously taxed 

earnings and profits. As a result of 

US2’s receipt of previously taxed 

earnings and profits, the amount of the 

adjustment to US2’s adjusted basis of 

each of its shares of stock of F1 is $4x, 

the dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits received on the 

share. See § 1.961–4(b)(2)(i). 

Consequently, US2 reduces its adjusted 

basis of each of its shares of stock of F1 

($3x) to $0 and then is treated as 

recognizing $1x of gain with respect to 

the share (computed as the excess of the 

$4x adjustment to basis over the $3x 

reduction to basis). See § 1.961– 

4(b)(2)(ii) and (iii). 

(D) Timing of adjustments. The 

reductions to adjusted basis described 

in paragraphs (c)(3)(ii)(B) and (C) of this 

section are treated as made, and the 

gains described in those paragraphs are 

treated as recognized, concurrently with 

the covered distribution. See § 1.961– 

4(e)(1) and (f)(1). 

(iii) Alternative facts: previously taxed 

earnings and profits received through a 

partnership—(A) Facts. The facts are the 

same as in paragraph (c)(3)(i) of this 

section (Example 3), except as follows. 

PRS1 directly owns all the shares of the 

single class of outstanding stock of F1, 

and US1 and US2, in the aggregate, 

directly own all the interests in PRS1. 

Under § 1.959–4, the entirety of the 

portion of the covered distribution 

treated as received by each of US1 and 

US2 through PRS1 is previously taxed 

earnings and profits excluded from the 

covered shareholder’s (US1’s or US2’s) 

gross income. In addition, the sum of 

the dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits that are both with 

respect to US1 and distributed on each 

share of stock of F1 is $6x, and the sum 

of the dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits that are both with 

respect to US2 and distributed on each 

share of stock of F1 is $4x. Immediately 

before the covered distribution, for each 

share of stock of F1, PRS1’s common 

basis is $2.5x, its derived basis with 

respect to US1 is $3x, and its derived 

basis with respect to US2 is $2x. This 


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paragraph (c)(3)(iii) analyzes 

adjustments to basis of PRS1’s shares of 

stock of F1 (derivative ownership units) 

under section 961. See also § 1.961–4(b) 

(related adjustments to basis of US1’s 

and US2’s interests in PRS1). 

(B) Analysis—(1) In general. Under 

§ 1.961–4(c), PRS1 reduces its derived 

basis of, and if applicable recognizes 

gain with respect to, each share of stock 

of F1 on which US1 or US2 receives 

previously taxed earnings and profits 

through PRS1. The specific adjustments 

are provided in paragraphs 

(c)(3)(iii)(B)(2) through (5) of this 

section and summarized in table 1 in 

this paragraph (c)(3)(iii)(B)(1). 

TABLE 1 TO PARAGRAPH (c)(3)(iii)(B)(1) OF THIS SECTION—BASIS ADJUSTMENTS RESULTING FROM F1’S DISTRIBUTION

OF PTEP 

PRS1 derived basis immediately 

before the covered distribution 

Adjustments to PRS1 derived basis under § 1.961–4(c) 

PRS1’s derived basis with respect to US1 of its 

shares of stock of F1.

$3x for each share ......................... $6x adjustment for each share ...... $4.5x reduction to basis (to negative $1.5x). 

$1.5x gain recognized. 

PRS1’s derived basis with respect to US2 of its 

shares of stock of F1.

$2x for each share ......................... $4x adjustment for each share ...... $3x reduction to basis (to negative 

$1x). 

$1x gain recognized. 

(2) US1’s receipt of previously taxed 

earnings and profits through PRS1. As 

a result of US1’s receipt of previously 

taxed earnings and profits through 

PRS1, the amount of the adjustment to 

PRS1’s derived basis with respect to 

US1 of each of PRS1’s shares of stock of 

F1 is $6x, the dollar basis and 

associated foreign income taxes of the 

previously taxed earnings and profits 

that are both with respect to US1 and 

received on the share. See § 1.961– 

4(c)(2)(i). Consequently, PRS1 reduces 

its derived basis with respect to US1 of 

each of its shares of stock of F1 ($3x) to 

$0 and then reduces such derived basis 

below zero in accordance with the 

limitation in § 1.961–4(c)(3), which 

permits a $1.5x reduction below zero to 

the derived basis because $1.5x of 

PRS1’s common basis of the share is 

available with respect to US1 (as 

described in paragraph (c)(3)(iii)(B)(4) of 

this section). See § 1.961–4(c)(2)(ii) and 

(iii), (c)(3)(i). Further, PRS1 is treated as 

recognizing $1.5x of gain with respect to 

each of its shares of stock of F1 

(computed as the excess of the $6x 

adjustment to basis over the sum of the 

$3x reduction to positive derived basis 

and the $1.5x reduction of derived basis 

below zero), and this gain is allocated 

solely to US1. See § 1.961–4(c)(2)(iv); 

see also § 1.961–4(f)(2) (taking the gain 

into account in adjusting US1’s basis in 

its interest in PRS1 under section 705). 

(3) US2’s receipt of previously taxed 

earnings and profits through PRS1. As 

a result of US2’s receipt of previously 

taxed earnings and profits through 

PRS1, the amount of the adjustment to 

PRS1’s derived basis with respect to 

US2 of each of PRS1’s shares of stock of 

F1 is $4x, the dollar basis and 

associated foreign income taxes of the 

previously taxed earnings and profits 

that are both with respect to US2 and 

received on the share. See § 1.961– 

4(c)(2)(i). Consequently, PRS1 reduces 

its derived basis with respect to US2 of 

each of its shares of stock of F1 ($2x) to 

$0 and then reduces such derived basis 

below zero in accordance with the 

limitation in § 1.961–4(c)(3), which 

permits a $1x reduction below zero to 

the derived basis because $1x of PRS1’s 

common basis of the share is available 

with respect to US2 (as described in 

paragraph (c)(3)(iii)(B)(4) of this 

section). See § 1.961–4(c)(2)(ii) and (iii) 

and (c)(3)(i). Further, PRS1 is treated as 

recognizing $1x of gain with respect to 

each of its shares of stock of F1 

(computed as the excess of the $4x 

adjustment to basis over the sum of the 

$2x reduction to positive derived basis 

and the $1x reduction of derived basis 

below zero), and this gain is allocated 

solely to US2. See § 1.961–4(c)(2)(iv); 

see also § 1.961–4(f)(2) (taking the gain 

into account in adjusting US2’s basis in 

its interest in PRS1 under section 705). 

(4) Available common basis. For each 

of PRS1’s shares of stock of F1, the 

amount of common basis of the share 

that is available with respect to each of 

US1 and US2 is determined by 

multiplying $2.5x (the common basis of 

the share, reduced by all negative 

derived basis of the share existing 

immediately before the distribution 

being analyzed, of which there is none) 

by a fraction. See § 1.961–4(c)(3)(ii). The 

numerator of the fraction is the amount 

by which PRS1’s derived basis with 

respect to the covered shareholder of the 

share would be reduced below zero if 

derived basis could be reduced without 

limitation and, accordingly, is $3x in 

the case of the derived basis with 

respect to US1 (computed as the excess 

of the $6x adjustment to basis over the 

$3x reduction to positive derived basis) 

and is $2x in the case of derived basis 

with respect to US2 (computed as the 

excess of the $4x adjustment to basis 

over the $2x reduction to positive 

derived basis). The denominator of the 

fraction is the sum of the amounts by 

which any of PRS1’s derived basis of the 

share would be reduced below zero if 

derived basis could be reduced without 

limitation ($5x, computed as the $3x 

with respect to US1 plus the $2x with 

respect to US2). Therefore, for each of 

PRS1’s shares of stock of F1, there is 

$1.5x of common basis available with 

respect to US1 ($2.5x × $3x/$5x) and 

$1x of common basis available with 

respect to US2 ($2.5x × $2x/$5x), and 

this common basis permits a $1.5x and 

$1x reduction below zero to derived 

basis with respect to US1 and US2, 

respectively (as described in paragraphs 

(c)(3)(iii)(B)(2) and (3) of this section). 

See also § 1.961–10(b) (gain resulting 

from negative derived basis is allocated 

to covered shareholders in proportion to 

relative negative derived basis). 

(5) Timing of adjustments. The 

reductions to derived basis described in 

paragraphs (c)(3)(iii)(B)(2) and (3) of this 

section are treated as made, and the 

gains described in those paragraphs are 

treated as recognized, concurrently with 

the covered distribution. See § 1.961– 

4(e)(1) and (f)(1). 

(iv) Alternative facts: previously taxed 

earnings and profits received by a 

controlled foreign corporation—(A) 

Facts. The facts are the same as in 

paragraph (c)(3)(i) of this section 

(Example 3), except as follows. US1 and 

US2, in the aggregate, directly own all 

the outstanding stock of F2 and are 

United States shareholders of F2. F2 

directly owns all the shares of the single 

class of outstanding stock of F1. Under 

§ 1.959–4, the entirety of each of US1’s 

and US2’s share of F1’s covered 

distribution is previously taxed earnings 

and profits excluded from F2’s gross 

income for purposes of determining its 

subpart F income and tested income or 

tested loss. In addition, the sum of the 

dollar basis and associated foreign 

income taxes of the previously taxed 


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earnings and profits that are both with 

respect to US1 and distributed on each 

share of stock of F1 is $6x, and the sum 

of the dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits that are both with 

respect to US2 and distributed on each 

share of stock of F1 is $4x. Immediately 

before the covered distribution, for each 

share of stock of F1, F2’s adjusted basis 

is £1.25x, its section 961(c) basis with 

respect to US1 is $3x, and its section 

961(c) basis with respect to US2 is $2x. 

On the day of the covered distribution, 

the spot rate is $1:£0.5. This paragraph 

(c)(3)(iv) analyzes adjustments to basis 

of F2’s shares of stock of F1 (section 

961(c) ownership units) under section 

961. 

(B) Analysis—(1) In general. Under 

§ 1.961–4(d), F2 reduces its section 

961(c) basis of, and if applicable 

recognizes gain with respect to, each 

share of stock of F1 on which it receives 

previously taxed earnings and profits. 

The specific adjustments are provided 

in paragraphs (c)(3)(iv)(B)(2) through (5) 

of this section and summarized in table 

1 in this paragraph (c)(3)(iv)(B)(1). 

TABLE 1 TO PARAGRAPH (c)(3)(iv)(B)(1) OF THIS SECTION—BASIS ADJUSTMENTS RESULTING FROM F1’S DISTRIBUTION

OF PTEP 

F2 section 961(c) basis 

immediately before the 

covered distribution 

Adjustments to F2 section 961(c) basis under § 1.961–4(d) 

F2’s section 961(c) basis with respect to US1 of its 

shares of stock of F1.

$3x for each share ......................... $6x adjustment for each share ...... $4.5x reduction to basis (to negative $1.5x). 

$1.5x gain recognized. 

F2’s section 961(c) basis with respect to US2 of its 

shares of stock of F1.

$2x for each share ......................... $4x adjustment for each share ...... $3x reduction to basis (to negative 

$1x). 

$1x gain recognized. 

(2) F2’s receipt of previously taxed 

earnings and profits with respect to 

US1. As a result of F2’s receipt of 

previously taxed earnings and profits 

with respect to US1, the amount of the 

adjustment to F2’s section 961(c) basis 

with respect to US1 of each of F2’s 

shares of stock of F1 is $6x, the dollar 

basis and associated foreign income 

taxes of the previously taxed earnings 

and profits that are both with respect to 

US1 and received on the share. See 

§ 1.961–4(d)(2)(i). Consequently, F2 

reduces its section 961(c) basis with 

respect to US1 of each of its shares of 

stock of F1 ($3x) to $0 and then reduces 

such section 961(c) basis below zero in 

accordance with the limitation in 

§ 1.961–4(d)(3), which permits a $1.5x 

reduction below zero to the section 

961(c) basis because $1.5x of F2’s 

adjusted basis of the share is available 

with respect to US1 (as described in 

paragraph (c)(3)(iv)(B)(4) of this 

section). See § 1.961–4(d)(2)(ii) and 

(d)(3)(i). Further, F2 is treated as 

recognizing £0.75x of gain with respect 

to each of its shares of stock of F1 

(computed as the excess of the $6x 

adjustment to basis over the sum of the 

$3x reduction to positive section 961(c) 

basis and the $1.5x reduction of section 

961(c) basis below zero ($1.5x excess), 

with such excess of $1.5x translated into 

British pounds at $1:£0.5), and this gain 

is assigned solely to US1. See § 1.961– 

4(d)(2)(iii) and (f)(4). Moreover, the gain 

applies only for purposes of 

determining amounts included in gross 

income of US1 and US2 (the United 

States shareholders of F2) under 

§ 1.961–11. See § 1.961–4(f)(3). 

(3) F2’s receipt of previously taxed 

earnings and profits with respect to 

US2. As a result of F2’s receipt of 

previously taxed earnings and profits 

with respect to US2, the amount of the 

adjustment to F2’s section 961(c) basis 

with respect to US2 of each of F2’s 

shares of stock of F1 is $4x, the dollar 

basis and associated foreign income 

taxes of the previously taxed earnings 

and profits that are both with respect to 

US2 and received on the share. See 

§ 1.961–4(d)(2)(i). Consequently, F2 

reduces its section 961(c) basis with 

respect to US2 of each of its shares of 

stock of F1 ($2x) to $0 and then reduces 

such section 961(c) basis below zero in 

accordance with the limitation in 

§ 1.961–4(d)(3), which permits a $1x 

reduction below zero to the section 

961(c) basis because $1x of F2’s 

adjusted basis of the share is available 

with respect to US2 (as described in 

paragraph (c)(3)(iv)(B)(4) of this 

section). See § 1.961–4(d)(2)(ii) and 

(d)(3)(i). Further, F2 is treated as 

recognizing £0.5x of gain with respect to 

each of its shares of stock of F1 

(computed as the excess of the $4x 

adjustment to basis over the sum of the 

$2x reduction to positive section 961(c) 

basis and the $1x reduction of section 

961(c) basis below zero ($1x excess), 

with such excess of $1x translated into 

British pounds at $1:£0.5), and this gain 

is assigned solely to US2. See § 1.961– 

4(d)(2)(iii) and (f)(4). Moreover, the gain 

applies only for purposes of 

determining amounts included in gross 

income of US1 and US2 (the United 

States shareholders of F2) under 

§ 1.961–11. See § 1.961–4(f)(3). 

(4) Available adjusted basis. For each 

of F2’s shares of stock of F1, the amount 

of adjusted basis of the share that is 

available with respect to each of US1 

and US2 is determined by multiplying 

$2.5x (the £1.25x of adjusted basis of the 

share translated into U.S. dollars at 

$1:£0.5, reduced by all negative derived 

basis of the share existing immediately 

before the distribution being analyzed, 

of which there is none) by a fraction. 

See § 1.961–4(d)(3)(ii). The numerator of 

the fraction is the amount by which F2’s 

section 961(c) basis with respect to the 

covered shareholder of the share would 

be reduced below zero if section 961(c) 

basis could be reduced without 

limitation and, accordingly, is $3x in 

the case of the section 961(c) basis with 

respect to US1 (computed as the excess 

of the $6x adjustment to basis over the 

$3x reduction to positive section 961(c) 

basis) and is $2x in the case of section 

961(c) basis with respect to US2 

(computed as the excess of the $4x 

adjustment to basis over the $2x 

reduction to positive section 961(c) 

basis). The denominator of the fraction 

is the sum of the amounts by which any 

of F2’s section 961(c) basis of the share 

would be reduced below zero if section 

961(c) basis could be reduced without 

limitation ($5x, computed as the $3x 

with respect to US1 plus the $2x with 

respect to US2). Therefore, for each of 

F2’s shares of stock of F1, there is $1.5x 

of adjusted basis available with respect 

to US1 ($2.5x × $3x/$5x) and $1x of 

adjusted basis available with respect to 

US2 ($2.5x × $2x/$5x), and this adjusted 

basis permits a $1.5x and $1x reduction 

below zero to section 961(c) basis with 

respect to US1 and US2, respectively (as 

described in paragraphs (c)(3)(iv)(B)(2) 

and (3) of this section). See also § 1.961– 

10(c) (gain resulting from negative 

section 961(c) basis is allocated to 


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covered shareholders in proportion to 

relative negative section 961(c) basis). 

(5) Timing of adjustments. The 

reductions to section 961(c) basis 

described in paragraphs (c)(3)(iv)(B)(2) 

and (3) of this section are treated as 

made, and the gains described in those 

paragraphs are treated as recognized, 

concurrently with the covered 

distribution. See § 1.961–4(e)(1) and 

(f)(1). 

(4) Example 4: Use of positive derived 

basis—(i) Facts. US1 and a nonresident 

alien individual, in the aggregate, 

directly own all the interests in PRS1. 

PRS1 directly owns all the shares of the 

single class of outstanding stock of F1 

(derivative ownership units). In year 3, 

PRS1 sells all the stock of F1 for money 

equal to the stock’s fair market value. 

Section 304 does not apply to the sale. 

US1’s distributive share of gain 

recognized by PRS1 on the sale is $60x, 

determined without regard to derived 

basis. Immediately before the sale (and 

taking into account any adjustments 

under § 1.961–5(b) resulting from the 

sale), PRS1’s positive derived basis with 

respect to US1 of the shares of stock of 

F1 is $50x in total. In addition, PRS1 

has no negative derived basis in any of 

the shares. This example only analyzes 

the application of positive derived basis 

to US1’s distributive share of gain on 

the sale. See also § 1.959–3 (adjustments 

to previously taxed earnings and profits 

accounts); § 1.959–7 (transfer of 

previously taxed earnings and profits in 

general successor transactions); 

§ 1.986(c)–1 (foreign currency gain or 

loss recognized in general successor 

transactions). 

(ii) Analysis. PRS1 is treated as 

applying its $50x of positive derived 

basis with respect to US1 of the stock 

of F1 to US1’s $60x distributive share of 

gain on the sale. See § 1.961–8(b). As 

result, US1’s distributive share of gain 

on the sale is adjusted by $50x, to a 

$10x distributive share of gain. See also 

§ 1.961–8(c) (for purposes of adjusting 

US1’s adjusted basis of its interest in 

PRS1 under section 705, US1’s 

distributive share on the sale is $10x of 

gain). 

(iii) Alternative facts: positive derived 

basis creates a distributive share of 

loss—(A) Facts. The facts are the same 

as in paragraph (c)(4)(i) of this section, 

except that PRS1’s positive derived 

basis with respect to US1 of the shares 

of stock of F1 is $75x in total. In 

addition, if there were a loss in PRS1’s 

stock of F1, PRS1 would recognize all 

such loss in the sale and a current 

deduction in respect of the loss would 

be allowable. 

(B) Analysis. PRS1 is treated as 

applying its $75x of positive derived 

basis with respect to US1 of the stock 

of F1 to US1’s $60x distributive share of 

gain on the sale. See § 1.961–8(b). As 

result, US1’s distributive share of the 

gain on the sale is adjusted by $75x, to 

a $15x distributive share of loss. See 

also § 1.961–8(c) (for purposes of 

adjusting US1’s adjusted basis of its 

interest in PRS1 under section 705, 

US1’s distributive share on the sale is 

$15x of loss). 

(iv) Alternative facts: tiered 

partnerships—(A) Facts. The facts are 

the same as in paragraph (c)(4)(i) of this 

section (Example 4), except as follows. 

US1 and a nonresident alien individual, 

in the aggregate, directly own all the 

interests in PRS2. PRS2 and a 

nonresident alien individual, in the 

aggregate, directly own all the interests 

in PRS1. US1’s distributive share of gain 

recognized by PRS1 on the sale (through 

its interest in PRS2) is $55x, determined 

without regard to derived basis. 

(B) Analysis. PRS2 is treated as 

applying PRS1’s $50x of positive 

derived basis with respect to US1 of the 

stock of F1 to US1’s $55x distributive 

share of gain on the sale. See § 1.961– 

8(b). As result, US1’s distributive share 

of gain on the sale is adjusted by $50x, 

to a $5x distributive share of gain. See 

also § 1.961–8(c) (for purposes of 

adjusting US1’s adjusted basis of its 

interest in PRS2 under section 705, 

US1’s distributive share on the sale is 

$5x of gain); § 1.961–8(d) (for purposes 

of adjusting PRS2’s common basis of its 

interest in PRS1 under section 705, 

PRS2’s distributive share of gain is 

determined without regard to the 

application of positive derived basis; 

concurrently with the adjustment under 

section 705, reducing PRS2’s derived 

basis with respect to US1 of the interest 

in PRS1 by $50x, the amount of positive 

derived basis applied to US1’s 

distributive share of gain). 

(5) Example 5: Use of positive section 

961(c) basis—(i) Facts. US1 and a 

nonresident alien individual, in the 

aggregate, directly own all the shares of 

the single class of outstanding stock of 

F1. F1 directly owns all the shares of the 

single class of outstanding stock of F2 

(section 961(c) ownership units). In year 

3, F1 sells all the stock of F2 for money 

equal to the stock’s fair market value. 

Section 304 does not apply to the sale. 

F1 recognizes £100x of gain on the sale, 

determined without regard to loss 

recognized on any share and without 

regard to section 961(c) basis. This 

£100x is covered gain and US1 is 

assigned a £60x portion of the covered 

gain under § 1.951–2. Immediately 

before the sale (and taking into account 

any adjustments under § 1.961–5(b) 

resulting from the sale), F1’s positive 

section 961(c) basis with respect to US1 

of the shares of stock of F2 is £50x in 

total (as translated from U.S. dollars into 

British pounds at the spot rate on the 

day of the sale). In addition, F1 has no 

negative section 961(c) basis in any of 

the shares. Table 1 in this paragraph 

(c)(5)(i) provides the previously taxed 

earnings and profits of F2 that transfer 

from US1 in the sale to a successor 

covered shareholder under § 1.959–7 

(total of £44x), along with the foreign 

income taxes that are associated with 

such previously taxed earnings and 

profits (total of £6x, as translated from 

U.S. dollars into British pounds at the 

spot rate on the day of the sale for 

purposes of § 1.961–9(f)(2)). This 

example only analyzes the extent to 

which previously taxed earnings and 

profits result from the application of 

F1’s section 961(c) basis and are 

excluded from F1’s gross income under 

section 961(c). See also § 1.959–3 

(adjustments to previously taxed 

earnings and profits accounts); 

§ 1.986(c)–1 (foreign currency gain or 

loss recognized in general successor 

transactions). 

TABLE 1 TO PARAGRAPH (c)(5)(i) OF THIS SECTION—F2 PTEP TRANSFERRING FROM US1 & ASSOCIATED FOREIGN

INCOME TAXES

Taxable year 

§ 904 category 

General category Passive 

category 

§ 951A 

category 

§ 951(a)(1)(A) 

PTEP group 

§ 245A(d) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951A 

PTEP group 

Year 2: 

Transferred PTEP .............................................................................................................. .......................... .......................... .......................... £10x 

Taxes.


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TABLE 1 TO PARAGRAPH (c)(5)(i) OF THIS SECTION—F2 PTEP TRANSFERRING FROM US1 & ASSOCIATED FOREIGN

INCOME TAXES—Continued 

Taxable year 

§ 904 category 

General category Passive 

category 

§ 951A 

category 

§ 951(a)(1)(A) 

PTEP group 

§ 245A(d) 

PTEP group 

§ 951(a)(1)(A) 

PTEP group 

§ 951A 

PTEP group 

Year 1: 

Transferred PTEP .............................................................................................................. £7.2x £4x £4.8x 18x 

Taxes ................................................................................................................................. 1.8x 1x 1.2x 2x 

(ii) Analysis—(A) In general. For 

purposes of analyzing the covered gain, 

US1’s share of the covered gain is £60x 

because that amount of the covered gain 

is assigned to US1 under § 1.951–2. See 

§ 1.961–9(d)(1). All £50x of F1’s positive 

section 961(c) basis with respect to US1 

of the stock of F2 is applied to such 

share. See § 1.961–9(d)(2) and (e)(1). As 

a result, £50x of the covered gain is 

previously taxed earnings and profits of 

F1 with respect to US1, characterized as 

described in paragraph (c)(5)(ii)(B) of 

this section. See § 1.961–9(d)(3) and 

(f)(1). F1 excludes the £50x of 

previously taxed earnings resulting from 

section 961(c) basis from its gross 

income, solely for purposes of 

determining its subpart F income and 

tested income or tested loss. See 

§ 1.961–9(b). 

(B) Character of previously taxed 

earnings and profits resulting from 

section 961(c) basis. The mirroring rule 

in § 1.961–9(f)(2) determines the 

specific character of all £50x of F1’s 

previously taxed earnings and profits 

resulting from section 961(c) basis 

because the amount of such previously 

taxed earnings and profits does not 

exceed the amount of mirrored PTEP, of 

which there is £50x. See § 1.961– 

9(f)(2)(i). The mirrored PTEP is the 

previously taxed earnings and profits 

described in table 1 to paragraph 

(c)(5)(i) of this section, determined by 

treating foreign income taxes associated 

with transferred previously taxed 

earnings and profits as additional 

previously taxed earnings and profits 

(£44x + £6x). See § 1.961–9(f)(2)(ii). 

Under the mirroring rule, the £50x of 

previously taxed earnings and profits 

resulting from section 961(c) basis have 

the same character as the £50x of 

mirrored PTEP, as summarized in table 

1 in this paragraph (c)(5)(ii)(B). See 

§ 1.961–9(f)(2)(i); see also § 1.961–9(g) 

and (h) (dollar basis rule and rule for 

allocating previously taxed earnings and 

profits to specific shares of stock). 

TABLE 1 TO PARAGRAPH (c)(5)(ii)(B) OF THIS SECTION—F1 PTEP RESULTING FROM § 961(C) BASIS

Taxable year 

§ 904 category 

General category Passive category § 951A category 

§ 951(a)(1)(A) 

PTEP group 

§ 245A(d) PTEP 

group 

§ 951(a)(1)(A) 

PTEP group 

§ 951A 

PTEP group 

Year 2 ..................................................................... ........................................... .......................................... ........................................... £10x (£10x + £0). 

Year 1 ..................................................................... £9x ....................................

(£7.2x + £1.8x) ..................

£5x ...................................

(£4x + £1x) ......................

£6x ....................................

(£4.8x + £1.2x) ..................

£20x 

(£18x + £2x). 

(iii) Alternative facts: unused section 

961(c) basis—(A) Facts. The facts are the 

same as in paragraph (c)(5)(i) of this 

section (Example 5), except that the 

amount of F1’s covered gain is £70x 

(instead of £100x) and US1 is assigned 

a £42x (instead of £60x) portion of the 

covered gain under § 1.951–2. 

(B) Analysis. For purposes of 

analyzing the covered gain, US1’s share 

of the covered gain is £42x, and £42x of 

F1’s £50x of positive section 961(c) 

basis with respect to US1 of the stock 

of F2 is applied to such share. See 

§ 1.961–9(d)(1) and (2), (e)(1). As a 

result, £42x of the covered gain is 

previously taxed earnings and profits of 

F1 with respect to US1, with the same 

character as a pro rata portion of the 

previously taxed earnings and profits set 

forth in table 1 to paragraph (c)(5)(ii)(B) 

of this section, determined by 

multiplying all such previously taxed 

earnings and profits by 84% (computed 

as $42x of previously taxed earnings 

and profits resulting from section 961(c) 

basis divided by £50x of mirrored 

PTEP). See § 1.961–9(d)(3), (f)(1) and (2). 

Moreover, the £8x of F1’s positive 

section 961(c) basis that is not applied 

to the covered gain is taken into account 

only for purposes of determining 

amounts included in gross income of 

United States shareholders of F1 under 

§ 1.961–11. 

(6) Example 6: Gain recognition for 

negative derived basis—(i) Facts. US1 

and US2, in the aggregate, directly own 

all the interests in PRS1. PRS1 directly 

owns all the shares of the single class of 

stock of F1 (derivative ownership units). 

In year 3, PRS1 sells all the stock of F1 

for money equal to the stock’s fair 

market value. Section 304 does not 

apply to the sale, and the shares of stock 

of F1 remain derivative ownership units 

immediately after the sale (because the 

buyer is a partnership the interests in 

which are owned by one or more 

covered shareholders). PRS1 recognizes 

$2x of loss with respect to each share of 

stock of F1, determined without regard 

to derived basis and allocated to US1 

and US2 in accordance with section 

704. Immediately before the sale (and 

taking into account any adjustments 

under § 1.961–5(b) resulting from the 

sale), for each share of stock of F1, 

PRS1’s derived basis with respect to 

US1 is negative $1.5x and its derived 

basis with respect to US2 is negative 

$1x. This example only analyzes the 

consequences of negative derived basis 

in the sale. See also § 1.959–3 

(adjustments to previously taxed 

earnings and profits accounts); § 1.959– 

7 (transfer of previously taxed earnings 

and profits in general successor 

transactions); § 1.986(c)–1 (foreign 

currency gain or loss recognized in 

general successor transactions). 

(ii) Analysis. As a result of negative 

derived basis, PRS1 is treated as 

recognizing gain with respect to each 

share of stock of F1. See § 1.961– 


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10(b)(1). For each share of stock of F1, 

the amount of such gain is $2.5x, which 

is the lesser amount of loss ($2x, 

expressed as a positive amount), plus 

the additional amount of gain ($0.5x), 

that PRS1 would have recognized with 

respect to the share if PRS1’s common 

basis of the share were reduced by $2.5x 

(the sum of all PRS1’s negative derived 

basis of the share), and thus all negative 

derived basis gives rise to gain. See 

§ 1.961–10(b)(2)(i); compare paragraph 

(c)(6)(iii) of this section (scenario where 

less than all negative derived basis gives 

rise to gain). A pro rata portion of the 

$2.5x of gain treated as recognized with 

respect to each share of stock of F1 is 

allocated to US1 and US2 by 

multiplying the amount of such gain by 

a fraction, the numerator of which is 

PRS1’s negative derived basis with 

respect to the covered shareholder of the 

share ($1.5x in the case of US1, and $1x 

in the case of US2), and the 

denominator of which is the sum of all 

PRS1’s negative derived basis of the 

share ($2.5x). See § 1.961–10(b)(3). 

Thus, in addition to the allocation in 

accordance with section 704 of the $2x 

of loss that PRS1 recognizes with 

respect to each share of stock of F1, US1 

is allocated $1.5x, and US2 is allocated 

$1x, of the $2.5x of gain treated as 

recognized by PRS1 with respect to each 

share of stock of F1. See § 1.961– 

10(b)(4); see also § 1.961–4(f)(2) (gain 

allocated to US1 or US2 is taken into 

account in adjusting US1’s or US2’s 

basis in its interest in PRS1 under 

section 705). 

(iii) Alternative facts: section 301(c)(2) 

distribution—(A) Facts. The facts are the 

same as in paragraph (c)(6)(i) of this 

section (Example 6), except as follows. 

PRS1 does not sell any stock of F1. In 

year 3, F1 makes a distribution that is 

$10x with respect to each share of its 

stock. None of the distribution is a 

covered distribution because F1 has no 

accumulated or current year earnings 

and profits in year 3. Immediately 

before the distribution, for each share of 

stock of F1, PRS1’s common basis is 

$12x, its derived basis with respect to 

US1 is negative $1.5x, and its derived 

basis with respect to US2 is negative 

$1x. Thus, section 301(c)(2) applies to 

the entirety of the $10x that is 

distributed with respect to each share of 

stock of F1. This example only analyzes 

the consequences of negative derived 

basis in the distribution. 

(B) Analysis. PRS1 determines the 

amount of gain it is treated as 

recognizing as a result of negative 

derived basis by calculating the 

additional amount of gain that it would 

have recognized with respect to each 

share of stock of F1 under section 

301(c)(3) if its common basis of the 

share were reduced by $2.5x (the sum 

of all PRS1’s negative derived basis of 

the share). See § 1.961–10(b)(2)(i). 

Specifically, if PRS1’s common basis of 

each share were reduced by $2.5x, the 

common basis would be $9.5x ($12x ¥ 

$2.5x), such that the distribution of 

$10x on the share would result in $9.5x 

being treated as a return of basis under 

section 301(c)(2) and $0.5x being treated 

as gain recognized under section 

301(c)(3). Thus, PRS1 is treated as 

recognizing $0.5x of gain with respect to 

each share as a result of the $2.5x of 

negative derived basis of the share, and 

PRS1 retains the remaining $2x of 

negative derived basis of the share 

(which, under these facts, is equal to the 

portion of the common basis of the 

share that is not reduced by the 

distribution under section 301(c)(2) 

($12x ¥ $10x, or $2x)). A pro rata 

portion of the $0.5x of gain treated as 

recognized with respect to each share of 

stock of F1 is allocated to US1 and US2 

by multiplying the amount of such gain 

by a fraction, the numerator of which is 

PRS1’s negative derived basis with 

respect to the covered shareholder of the 

share ($1.5x in the case of US1, and $1x 

in the case of US2), and the 

denominator of which is the sum of all 

PRS1’s negative derived basis of the 

share ($2.5x). See § 1.961–10(b)(3). 

Thus, US1 is allocated $0.3x, and US2 

is allocated $0.2x, of the $0.5x of gain 

treated as recognized by PRS1 with 

respect to each share of stock of F1. See 

§ 1.961–10(b)(4); see also § 1.961–4(f)(2) 

(gain allocated to US1 or US2 is taken 

into account in adjusting US1’s or US2’s 

basis in its interest in PRS1 under 

section 705). Immediately after the 

distribution, for each share of stock of 

F1, PRS1’s derived basis with respect to 

US1 is negative $1.2x (negative $1.5x + 

$0.3x) and its derived basis with respect 

to US2 is negative $0.8x (negative $1x 

+ $0.2x). See § 1.961–10(b)(5). 

(7) Example 7: Gain recognition for 

negative section 961(c) basis—(i) Facts. 

US1 and US2, in the aggregate, directly 

own all the shares of the single class of 

stock of F1 and are United States 

shareholders of F1. F1 directly owns all 

the shares of the single class of stock of 

F2 (section 961(c) ownership units). In 

year 3, F1 sells all the stock of F2 for 

money equal to the stock’s fair market 

value. Section 304 does not apply to the 

sale, and the shares of stock of F2 

remain section 961(c) ownership units 

immediately after the sale (because the 

buyer is a controlled foreign 

corporation). F1 recognizes £2x of loss 

with respect to each share of stock of F2, 

determined without regard to section 

961(c) basis. Immediately before the sale 

(and taking into account any 

adjustments under § 1.961–5(b) 

resulting from the sale), for each share 

of stock of F2, F1’s section 961(c) basis 

with respect to US1 is negative £1.5x 

and its section 961(c) basis with respect 

to US2 is negative £1x (as translated 

from U.S. dollars into British pounds at 

the spot rate on the day of the sale). This 

example only analyzes the 

consequences of negative section 961(c) 

basis in the sale. See also § 1.959–3 

(adjustments to previously taxed 

earnings and profits accounts); § 1.959– 

7 (transfer of previously taxed earnings 

and profits in general successor 

transactions); § 1.986(c)–1 (foreign 

currency gain or loss recognized in 

general successor transactions). 

(ii) Analysis. As a result of negative 

section 961(c) basis, F1 is treated as 

recognizing gain with respect to each 

share of stock of F2. See § 1.961– 

10(c)(1). For each share of stock of F2, 

the amount of such gain is £2.5x, which 

is the lesser amount of loss (£2x, 

expressed as a positive amount), plus 

the additional amount of gain (£0.5x), 

that F1 would have recognized with 

respect to the share if F1’s adjusted 

basis of the share were reduced by £2.5x 

(the sum of all F1’s negative section 

961(c) basis of the share), and thus all 

negative section 961(c) basis gives rise 

to gain. See § 1.961–10(c)(2)(i); compare 

paragraph (c)(7)(iii) of this section 

(scenario where less than all negative 

section 961(c) basis gives rise to gain). 

A pro rata portion of the £2.5x of gain 

treated as recognized with respect to 

each share of stock of F2 is assigned to 

US1 and US2 by multiplying the 

amount of such gain by a fraction, the 

numerator of which is F1’s negative 

section 961(c) basis with respect to the 

covered shareholder of the share (£1.5x 

in the case of US1, and £1x in the case 

of US2), and the denominator of which 

is the sum of all F1’s negative section 

961(c) basis of the share (£2.5x). See 

§ 1.961–10(c)(3). Thus, US1 is assigned 

£1.5x, and US2 is assigned £1x, of the 

£2.5x of gain treated as recognized by F1 

with respect to each share of stock of F2. 

Moreover, the gain applies only for 

purposes of determining amounts 

included in gross income of US1 and 

US2 (the United States shareholders of 

F1) under § 1.961–11. See § 1.961– 

10(c)(4); see also §§ 1.961–4(f)(3) (the 

gain does not affect F1’s items of gross 

income for purposes of section 952 or 

951A or its earnings and profits). 

(iii) Alternative facts: section 351 

exchange with boot—(A) Facts. The 

facts are the same as in paragraph 

(c)(7)(i) of this section (Example 7), 

except as follows. Instead of the sale, F1 


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contributes property, including all its 

stock of F2, to F3, a controlled foreign 

corporation, in exchange for stock of F3 

and money equal, in the aggregate, to 

the fair market value of the contributed 

property. Other unrelated persons also 

contribute property to F3 in exchange 

for stock of F3 as part of the same 

transaction. Section 351(b) applies to 

F1’s exchange, but sections 304 and 

362(e) do not, and no income inclusions 

are required under § 1.367(b)–4. The 

shares of stock of F2 remain section 

961(c) ownership units immediately 

after the contribution (because F3 is a 

controlled foreign corporation). In the 

exchange, for each share of stock of F2, 

F1 receives stock of F3 and £10x of 

money but recognizes no gain because 

F1’s adjusted basis of the share is £2x 

greater than the fair market value of the 

share. Immediately before the exchange 

(and taking into account any 

adjustments under § 1.961–5(b) 

resulting from the exchange), for each 

share of stock of F2, F1’s section 961(c) 

basis with respect to US1 is negative 

£1.5x and its section 961(c) basis with 

respect to US2 is negative £1x (as 

translated from U.S. dollars into British 

pounds at the spot rate on the day of the 

exchange). This example only analyzes 

the consequences of negative section 

961(c) basis in the exchange. 

(B) Analysis. F1 determines the 

amount of gain it is treated as 

recognizing as a result of negative 

section 961(c) basis by calculating the 

additional amount of gain that it would 

have recognized with respect to each 

share of stock of F2 under section 351(b) 

if its adjusted basis of the share were 

reduced by £2.5x (the sum of all F1’s 

negative section 961(c) basis of the 

share). See § 1.961–10(c)(2)(i). 

Specifically, a £2.5x reduction to F1’s 

adjusted basis of each share would 

convert a £2x loss on the share into a 

£0.5x gain, which would then be 

recognized pursuant to section 351(b) in 

the exchange. Thus, F1 is treated as 

recognizing £0.5x of gain with respect to 

each share as a result of the £2.5x of 

negative section 961(c) basis of the 

share, and the remaining £2x of negative 

section 961(c) basis of the share is 

retained (which, under these facts, is 

equal to the loss in the share that is not 

recognized in the exchange (£2x, the 

excess of the adjusted basis of the share 

over the fair market value of the share)). 

A pro rata portion of the £0.5x of gain 

treated as recognized with respect to 

each share of stock of F2 is assigned to 

US1 and US2 by multiplying the 

amount of such gain by a fraction, the 

numerator of which is F1’s negative 

section 961(c) basis with respect to the 

covered shareholder of the share (£1.5x 

in the case of US1, and £1x in the case 

of US2), and the denominator of which 

is the sum of all F1’s negative section 

961(c) basis of the share (£2.5x). See 

§ 1.961–10(c)(3). Thus, US1 is assigned 

£0.3x, and US2 is assigned £0.2x, of the 

£0.5x of gain treated as recognized by F1 

with respect to each share of stock of F2. 

Moreover, the gain applies only for 

purposes of determining amounts 

included in gross income of US1 and 

US2 (the United States shareholders of 

F1) under § 1.961–11. See § 1.961– 

10(c)(4); see also §§ 1.961–4(f)(3) (the 

gain does not affect F1’s items of gross 

income for purposes of section 952 or 

951A or its earnings and profits). 

Immediately after the exchange, for each 

share of stock of F2, the functional 

currency amount of F3’s section 961(c) 

basis with respect to US1 is negative 

£1.2x (negative £1.5x + £0.3x) and its 

section 961(c) basis with respect to US2 

is negative £0.8x (negative £1x + £0.2x). 

See § 1.961–10(c)(5). 

(8) Example 8: Amounts included in 

gross income of United States 

shareholders—(i) Facts. US1 and US2, 

in the aggregate, directly own all the 

shares of the single class of stock of F1 

and are United States shareholders of 

F1. F1 directly owns all the shares of the 

single class of stock of each of F2 and 

F3 (section 961(c) ownership units). For 

F1’s taxable year ending on December 

31 of year 3, F1 recognizes £50x of 

section 961(c) income. The section 

961(c) income consists of £10x of gain 

recognized as a result of F1’s receipt of 

previously taxed earnings and profits 

from F2 and £40x of gain recognized as 

a result of F1’s sale of stock of F3 with 

negative section 961(c) basis. US1 and 

US2 are assigned equal portions of the 

£10x gain under § 1.961–4(d) (basis 

reductions and gain recognition for 

distributions) and US2 is assigned all 

the £40x gain under § 1.961–10(c) (gain 

recognition for negative basis). F1 has 

no positive section 961(c) basis in any 

of the sold shares of stock of F3. This 

example only analyzes the allocation of 

F1’s section 961(c) income and resulting 

inclusions in gross income of United 

States shareholders under section 

961(c). 

(ii) Analysis. Under § 1.961–11, F1’s 

£50x of section 961(c) income is 

allocated to each of US1 and US2 by 

adding up the amounts of the section 

961(c) income that are assigned to each 

United States shareholder. See § 1.961– 

11(c). No additional computations are 

required because F1 does not recognize 

any loss under section 961(c) and there 

are no transfers of stock of F1. See id. 

Thus, US1 is allocated £5x (£5x of gain 

with respect to stock of F2 plus £0 of 

gain with respect to stock of F3), and 

US2 is allocated £45x (£5x of gain with 

respect to stock of F2 plus £40x of gain 

with respect to stock of F3), of the 

section 961(c) income. Accordingly, 

US1 includes £5x in its gross income 

and US2 includes £45x in its gross 

income, in each case for the United 

States shareholder’s (US1’s or US2’s) 

taxable year ending on December 31 of 

year 3 and translated into U.S. dollars 

in accordance with section 989(b). See 

§ 1.961–11(b). Under § 1.961–3, each of 

US1’s and US2’s income inclusion 

increases its adjusted basis of its stock 

of F1 by the U.S. dollar amount of the 

inclusion. 

(iii) Alternative facts: loss under 

section 961(c)—(A) Facts. The facts are 

the same as in paragraph (c)(8)(i) of this 

section (Example 8), except as follows. 

F1 is treated as recognizing £7x of loss 

under section 961(c) with respect to 

US2 because F1 has positive section 

961(c) basis with respect to US2 in some 

of the sold shares of stock of F3 and, 

under § 1.961–9, all but £7x of such 

positive section 961(c) basis is applied 

to US2’s share of covered gain 

recognized by F1 on the sale of stock of 

F3. 

(B) Analysis. Under § 1.961–11, F1’s 

£50x of section 961(c) income is 

allocated to each of US1 and US2 by 

first adding up the amounts of the 

section 961(c) income that are assigned 

to the United States shareholder (£5x in 

the case of US1, and £45x in the case 

of US2) and then reducing (but not 

below zero) such sum by the amount of 

loss F1 is treated as recognizing under 

section 961(c) with respect to the United 

States shareholder (£0 in the case of 

US1, and £7x in the case of US2). See 

§ 1.961–11(c). Thus, US1 is allocated 

£5x (£5x ¥ £0), and US2 is allocated 

£38x (£45x ¥ £7x), of the section 961(c) 

income. Accordingly, US1 includes £5x 

in its gross income and US2 includes 

£38x in its gross income, in each case 

for the United States shareholder’s 

(US1’s or US2’s) taxable year ending on 

December 31 of year 3 and translated 

into U.S. dollars in accordance with 

section 989(b). See § 1.961–11(b). Under 

§ 1.961–3, each of US1’s and US2’s 

income inclusion increases its adjusted 

basis of its stock of F1 by the U.S. dollar 

amount of the inclusion. 

§ 1.961–13 Transition rules. 

(a) Scope. This section sets forth 

transition rules for the section 961 

regulations. Paragraph (b) of this section 

addresses the establishment of derived 

basis of a partnership and section 961(c) 

basis of a controlled foreign corporation. 

Paragraph (c) of this section treats a 

domestic partnership (including an S 


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corporation) as a covered shareholder 

for periods in which § 1.958–1(d)(1) 

does not apply. Paragraph (d) of this 

section converts basis with respect to a 

domestic partnership (including an S 

corporation) to basis with respect to 

covered shareholders owning interests 

in the domestic partnership when both 

§ 1.958–1(d)(1) and the section 961 

regulations first apply. 

(b) Establishing derived basis of a 

partnership and section 961(c) basis of 

a controlled foreign corporation—(1) In 

general. As of the beginning of the first 

taxable year of a foreign corporation to 

which the section 961 regulations (other 

than §§ 1.961–6 and 1.961–7) apply 

pursuant to § 1.961–14(b), a 

partnership’s derived basis of derivative 

ownership units, and a controlled 

foreign corporation’s section 961(c) 

basis of section 961(c) ownership units, 

that are shares of stock of the foreign 

corporation or property through one or 

more covered shareholders own stock of 

the foreign corporation must be 

established in accordance with the rules 

described in paragraphs (b)(2) through 

(5) of this section. 

(2) Derived basis—(i) In general. The 

partnership’s derived basis of each 

derivative ownership unit is established 

by increasing derived basis with respect 

to each covered shareholder by the U.S. 

dollar amount of derived basis with 

respect to the covered shareholder that 

would exist at the beginning of the 

taxable year (and therefore would not 

have been decreased in a distribution or 

general successor transaction, for 

example) if the principles of §§ 1.961– 

2 through 1.961–5, 1.961–8, and 1.961– 

10 were to have previously applied, 

determined using a reasonable method 

(consistently applied to each foreign 

corporation whose stock is owned by 

the partnership and with respect to each 

covered shareholder that owns an 

interest in the partnership). In the case 

of a domestic partnership, the increase 

described in the preceding sentence is 

determined without regard to an income 

inclusion of the domestic partnership or 

any lower-tier domestic partnership (for 

example, an income inclusion of the 

domestic partnership under section 

951(a)(1)(A) that occurs in a period 

before § 1.958–1(d) applies to the 

domestic partnership). 

(3) Section 961(c) basis. The 

controlled foreign corporation’s section 

961(c) basis of each section 961(c) 

ownership unit is established by 

increasing section 961(c) basis with 

respect to each covered shareholder by 

the U.S. dollar amount of section 961(c) 

basis with respect to the covered 

shareholder that would exist at the 

beginning of the taxable year (and 

therefore would not have been 

decreased in a distribution or general 

successor transaction, for example) if 

the principles of §§ 1.961–2 through 

1.961–5, 1.961–9, 1.961–10, and 1.961– 

11 were to have previously applied, 

determined using a reasonable method 

(consistently applied to each foreign 

corporation whose stock is owned by 

the controlled foreign corporation and 

with respect to each covered 

shareholder that owns stock in the 

controlled foreign corporation). 

(4) Treatment of a specified foreign 

corporation as a controlled foreign 

corporation. A specified foreign 

corporation (as defined in § 1.965– 

1(f)(45)(i)(B)) that is not otherwise a 

controlled foreign corporation is treated 

as a controlled foreign corporation for 

purposes of the application of the 

principles of § 1.961–3 to an income 

inclusion under section 951(a)(1)(A) by 

reason of section 965(a). 

(5) Anti-duplication rule. Derived 

basis or section 961(c) basis is increased 

under this paragraph (b) to reflect an 

income inclusion under section 

951(a)(1)(A) or 951A(a) only to the 

extent such an increase would not 

duplicate basis (including basis 

previously used) at the level of the 

partnership or the controlled foreign 

corporation, as applicable, to reflect the 

income inclusion (for example, in the 

case of a foreign partnership, basis 

previously provided under § 1.965– 

2(h)(5)(ii)). 

(c) Treatment of domestic 

partnerships (including S corporations) 

before application of § 1.958–1(d)(1). 

For purposes of the section 961 

regulations, a domestic partnership 

(including an S corporation) is treated 

as a covered shareholder for any taxable 

year of the domestic partnership to 

which § 1.958–1(d)(1) does not apply. If 

a domestic partnership is treated as a 

covered shareholder, then rules 

regarding derived basis (of a partnership 

that is owned by the domestic 

partnership) or section 961(c) basis (of 

a controlled foreign corporation that is 

owned by the domestic partnership) 

apply to the domestic partnership in its 

capacity as a covered shareholder before 

those rules apply to a covered 

shareholder that owns interests in the 

domestic partnership. In such a case, for 

example, covered gain recognized by a 

controlled foreign corporation and 

assigned to the domestic partnership is 

first previously taxed earnings and 

profits by reason of the controlled 

foreign corporation’s positive section 

961(c) basis with respect to the domestic 

partnership and then, to the extent 

remaining, previously taxed earnings 

and profits by reason of positive section 

961(c) basis with respect to covered 

shareholders owning interests in the 

domestic partnership. 

(d) Converting basis with respect to 

domestic partnerships (including S 

corporations) to basis with respect to 

partners (or shareholders) after the 

application of § 1.958–1(d)(1)—(1) In 

general. As of the beginning of the first 

taxable year of a domestic partnership 

(including an S corporation) to which 

both § 1.958–1(d)(1) and the section 961 

regulations (other than §§ 1.961–6 and 

1.961–7) apply (pursuant to § 1.961– 

14(b)), the rules described in paragraphs 

(d)(2) through (4) of this section apply 

to convert— 

(i) A lower-tier partnership’s derived 

basis with respect to the domestic 

partnership of derivative ownership 

units (if such derived basis was earlier 

established pursuant to paragraphs 

(b)(2) and (c) of this section) to derived 

basis with respect to covered 

shareholders owning interests in the 

domestic partnership; and 

(ii) A controlled foreign corporation’s 

section 961(c) basis with respect to the 

domestic partnership of section 961(c) 

ownership units (if such section 961(c) 

basis was earlier established pursuant to 

paragraphs (b)(3) and (c) of this section) 

to section 961(c) basis with respect to 

covered shareholders owning interests 

in the domestic partnership. 

(2) Rules for converting derived basis 

with respect to a domestic partnership— 

(i) Allocate derived basis to each 

covered shareholder. First, allocate a 

pro rata portion of the lower-tier 

partnership’s derived basis with respect 

to the domestic partnership of each 

derivative ownership unit to each 

covered shareholder owning an interest 

in the domestic partnership at the 

beginning of the taxable year, 

determined by multiplying the derived 

basis with respect to the domestic 

partnership by the fraction described in 

§ 1.959–11(e)(2)(i)(A) for the covered 

shareholder and the domestic 

partnership. 

(ii) Transfer derived basis. Second, 

transfer to each covered shareholder the 

portion of the lower-tier partnership’s 

derived basis with respect to the 

domestic partnership of each derivative 

ownership unit that is allocated to the 

covered shareholder under paragraph 

(d)(2)(i) of this section. 

(3) Rules for converting section 961(c) 

basis with respect to a domestic 

partnership—(i) Allocate section 961(c) 

basis to each covered shareholder. First, 

allocate a pro rata portion of the 

controlled foreign corporation’s section 

961(c) basis with respect to the domestic 

partnership of each section 961(c) 

ownership unit to each covered 


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shareholder owning an interest in the 

domestic partnership at the beginning of 

the taxable year, determined by 

multiplying the section 961(c) basis 

with respect to the domestic partnership 

by the fraction described in § 1.959– 

11(e)(2)(i)(A) for the covered 

shareholder and the domestic 

partnership. 

(ii) Transfer section 961(c) basis. 

Second, transfer to each covered 

shareholder the portion of the 

controlled foreign corporation’s section 

961(c) basis with respect to the domestic 

partnership of each section 961(c) 

ownership unit that is allocated to the 

covered shareholder under paragraph 

(d)(3)(i) of this section. 

(4) Coordination with deemed covered 

shareholder rules. The portion, if any, of 

the lower-tier partnership’s derived 

basis with respect to the domestic 

partnership, or the controlled foreign 

corporation’s section 961(c) basis with 

respect to the domestic partnership, that 

does not increase derived basis or 

section 961(c) basis with respect to a 

covered shareholder becomes with 

respect to the deemed covered 

shareholder for purposes of 

subsequently transferring the basis 

under § 1.961–5(c). 

§ 1.961–14 Applicability dates. 

(a) Scope. This section sets forth 

applicability dates for the section 961 

regulations. Paragraph (b) of this section 

provides the applicability dates. 

(b) Applicability dates. Sections 

1.961–1 through 1.961–5 and 1.961–8 

through 1.961–13 apply to taxable years 

of foreign corporations that begin on or 

after [date of publication of final 

regulations in the Federal Register] or 

are early application years (as described 

in § 1.959–12(d)) and to taxable years of 

persons for which such taxable years of 

those foreign corporations are relevant. 

■ Par. 29. Section 1.962–1 is amended 

by: 

■ 1. Removing the last sentence in 

paragraph (a)(3); and 

■ 2. Adding paragraph (a)(4). 

The addition reads as follows: 

§ 1.962–1 Limitation of tax for individuals 

on amounts included in gross income 

under section 951(a). 

(a) * * * 

(4) See section 959 and the 

regulations in this part issued under 

section 959 for rules regarding 

previously taxed earnings and profits, 

including previously taxed earnings and 

profits assigned to the taxable section 

962 PTEP subgroup (as defined in 

§ 1.959–2(b)(2)(ii)(A)). 

* * * * * 

§ 1.962–3 [Removed]. 

■ Par. 30. Section 1.962–3 is removed. 

■ Par. 31. Section 1.965–5 is amended 

by: 

■ 1. In the introductory text of 

paragraph (d)(1), removing the language 

‘‘and (d)(3)’’ and adding the language 

‘‘through (d)(5)’’ in its place; and 

■ 2. Adding paragraph (d)(5). 

The addition reads as follows: 

§ 1.965–5 Allowance of credit or deduction 

for foreign income taxes. 

* * * * * 

(d) * * * 

(5) Adjusted applicable percentage for 

certain taxable years. For taxable years 

to which §§ 1.959–1 through 1.959–7 

and 1.959–10 and 1.959–11 apply (see 

§ 1.959–12), the term applicable 

percentage means ‘‘adjusted applicable 

percentage’’ as defined in § 1.959– 

2(b)(2)(iii)(A), except for purposes of 

§ 1.959–11(c)(3) (initial determination of 

the adjusted applicable percentage). 

■ Par. 32. Section 1.965–9 is amended 

by adding paragraph (d) to read as 

follows: 

§ 1.965–9 Applicability Dates. 

* * * * * 

(d) Applicability date for adjusted 

applicable percentage. Section 1.965– 

5(d)(5) applies to taxable years of 

foreign corporations that begin on or 

after [date of publication of final 

regulations in the Federal Register] or 

are early application years (as described 

in § 1.959–12(d)) and to taxable years of 

persons for which such taxable years of 

those foreign corporations are relevant. 

§ 1.985–5 [Amended]. 

■ Par. 33. Section 1.985–5 is amended 

by removing the language ‘‘(e)(2),’’ from 

the last sentence in paragraph (a) and 

removing and reserving paragraph (e)(2). 

§ 1.986(a)–1 [Amended]. 

■ Par. 34. Section 1.986(a)–1 is 

amended by: 

■ 1. In paragraph (c), removing the 

language ‘‘PTEP group taxes (as defined 

in § 1.960–3(d)(1))’’ from the first 

sentence and adding the language ‘‘the 

corporate PTEP tax pool (as defined in 

§ 1.959–1(b)) or any covered 

shareholder’s PTEP tax pool (as defined 

in § 1.959–1(b))’’ in its place. 

■ 2. In paragraph (e)(1) removing the 

language ‘‘PTEP group taxes’’ and 

adding the language ‘‘a PTEP tax pool’’ 

in its place. 

■ 3. In paragraph (e)(2) removing the 

language ‘‘PTEP group taxes (as defined 

in § 1.960–3(d)(1))’’ in the first sentence 

and adding the language ‘‘the corporate 

PTEP tax pool (as defined in § 1.959– 

1(b)) or any covered shareholder’s PTEP 

tax pool (as defined in § 1.959–1(b))’’ in 

its place, and removing the language 

‘‘PTEP group taxes’’ in the second 

sentence and adding the language ‘‘a 

PTEP tax pool’’ in its place. 

■ 4. In paragraph (e)(3) removing the 

language ‘‘PTEP group taxes’’ in the last 

sentence and adding the language ‘‘a 

PTEP tax pool’’ in its place. 

■ Par. 35. Section 1.986(c)–1 is revised 

to read as follows: 

§ 1.986(c)–1 Foreign currency gain or loss 

with respect to previously taxed earnings 

and profits. 

(a) Scope. This section provides rules 

for the recognition of foreign currency 

gain or loss with respect to previously 

taxed earnings and profits (as described 

in section 959) under section 986(c). 

Paragraph (b) of this section provides 

rules for distributions of previously 

taxed earnings and profits to a covered 

shareholder and certain transactions 

that transfer or eliminate previously 

taxed earnings and profits. Paragraph (c) 

of this section provides a rule for 

distributions of previously taxed 

earnings and profits to a foreign 

corporation. Paragraph (d) of this 

section provides definitions. Paragraph 

(e) of this section provides the 

applicability date of this section. See 

§ 1.961–5 for related basis adjustments 

in certain cases and § 1.959–10(c)(2) 

(Example 2) for an example illustrating 

the application of this section. See also 

§ 1.367(b)–2(j)(2) for the interaction of 

certain nonrecognition transactions and 

section 986(c). 

(b) Recognition of foreign currency 

gain or loss—(1) In general. If, in any 

transaction, previously taxed earnings 

and profits with respect to a covered 

shareholder are distributed to the 

covered shareholder or cease to be with 

respect to the covered shareholder (for 

example, because the previously taxed 

earnings and profits transfer from the 

covered shareholder in a general 

successor transaction or are eliminated 

by reason of an election under section 

338(g)), then the covered shareholder 

recognizes foreign currency gain or loss 

with respect to such previously taxed 

earnings and profits in accordance with 

the rules described in paragraphs (b)(2) 

through (4) of this section, subject to the 

exception in paragraph (b)(5) of this 

section for transfers of previously taxed 

earnings and profits other than in a 

general successor transaction. 

(2) Determining foreign currency gain 

or loss. Foreign currency gain or loss is 

determined by comparing the U.S. 

dollar amount of the previously taxed 

earnings and profits described in 

paragraph (b)(1) of this section on the 

day on which the transaction occurs to 


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the dollar basis of the previously taxed 

earnings and profits. If the U.S. dollar 

amount exceeds the dollar basis, the 

excess is foreign currency gain. If the 

dollar basis exceeds the U.S. dollar 

amount, the excess is foreign currency 

loss. If applicable, the U.S. dollar 

amount is determined by translating the 

previously taxed earnings and profits 

into U.S. dollars at the spot rate on the 

day on which the transaction occurs. 

See §§ 1.959–4 and 1.959–7 for 

determining dollar basis in distributions 

and general successor transactions, 

respectively. 

(3) Limitations—(i) Section 965(a) 

previously taxed earnings and profits. In 

the case of previously taxed earnings 

and profits that are described in 

paragraph (b)(1) of this section and 

relate to the reclassified section 965(a) 

PTEP group or section 965(a) PTEP 

group, only a portion of foreign 

currency gain or loss with respect to the 

previously taxed earnings and profits is 

recognized, determined by multiplying 

the amount of the foreign currency gain 

or loss by the excess of 100 percent over 

the section 965(c) deduction percentage 

with respect to the previously taxed 

earnings and profits. 

(ii) Section 965(b) previously taxed 

earnings and profits. No foreign 

currency gain or loss is recognized with 

respect to previously taxed earnings and 

profits that are described in paragraph 

(b)(1) of this section and relate to the 

reclassified section 965(b) PTEP group 

or section 965(b) PTEP group. 

(iii) Taxable section 962 earnings and 

profits. No foreign currency gain or loss 

is recognized with respect to previously 

taxed earnings and profits that are 

described in paragraph (b)(1) of this 

section and relate to the taxable section 

962 PTEP subgroup. 

(4) Treatment of foreign currency gain 

or loss. Foreign currency gain or loss 

described in paragraph (b)(1) of this 

section is recognized concurrently with 

the transaction and is treated as 

ordinary income or loss from the same 

source, and relating to the same section 

904 category, as the income inclusion to 

which the previously taxed earnings 

and profits are attributable. 

(5) Exception for transfer of 

previously taxed earnings and profits 

other than in a general successor 

transaction. Except as provided in 

§ 1.367(b)–2(j)(2)(i), no foreign currency 

gain or loss is recognized with respect 

to previously taxed earnings and profits 

when the previously taxed earnings and 

profits transfer to another covered 

shareholder in a transaction other than 

a general successor transaction. 

(c) Distributions of previously taxed 

earnings and profits to a foreign 

corporation. No foreign currency gain or 

loss is recognized with respect to 

previously taxed earnings and profits 

when the previously taxed earnings and 

profits are distributed to a foreign 

corporation. 

(d) Definitions. The definitions in 

§ 1.959–1(b) apply for purposes of this 

section. 

(e) Applicability date. This section 

applies to taxable years of foreign 

corporations that begin on or after [date 

of publication of final regulations in the 

Federal Register] or are early 

application years (as described in 

§ 1.959–12(d)) and to taxable years of 

persons for which such taxable years of 

those foreign corporations are relevant. 

See § 1.986(c)–1 as contained in 26 CFR 

part 1 revised as of April 1, 2024, for a 

version of this section applicable to 

prior taxable years. 

■ Par. 36. Section 1.1411–10 is 

amended by adding a sentence at the 

end of paragraph (c)(1)(i)(A)(1) to read 

as follows: 

§ 1.1411–10 Controlled foreign 

corporations and passive foreign 

investment companies. 

* * * * * 

(c) * * * 

(1) * * * 

(i) * * * 

(A) * * * 

(1) * * * See section 959 and the 

regulations in this part issued under 

section 959 for rules regarding 

previously taxed earnings and profits, 

including previously taxed earnings and 

profits assigned to the taxable section 

1411 PTEP subgroup (as defined in 

§ 1.959–2(b)(2)(ii)(A)). 

* * * * * 

■ Par. 37. Section 1.1502–59 is added to 

read as follows: 

§ 1.1502–59 Previously taxed earnings and 

profits and related basis adjustments. 

(a) Overview and scope. This section 

addresses the consequences to 

consolidated groups of previously taxed 

earnings and profits of foreign 

corporations, including under section 

959 (regarding exclusions from gross 

income of distributions of previously 

taxed earnings and profits of foreign 

corporations) and section 961 (regarding 

basis adjustments to the stock of foreign 

corporations and other property). 

Paragraph (b) of this section provides 

definitions. Paragraph (c) of this section 

provides rules to treat a consolidated 

group as a single covered shareholder 

for purposes of the rules relating to 

previously taxed earnings and profits. 

Paragraph (d) of this section addresses 

the application of section 961 to 

consolidated groups. Paragraph (e) of 

this section addresses members that join 

or leave a consolidated group. Paragraph 

(f) of this section contains examples. 

Paragraph (g) of this section provides 

the applicability date of this section. 

(b) Definitions. The definitions and 

rules of general applicability in 

§§ 1.959–1 and 1.961–1 apply for 

purposes of this section, with the 

following additions: 

(1) Departing transaction. The term 

departing transaction has the meaning 

provided in paragraph (e)(3) of this 

section. 

(2) Group derived basis. The term 

group derived basis has the meaning 

provided in paragraph (d)(2)(ii) of this 

section. 

(3) Group section 961(c) basis. The 

term group section 961(c) basis has the 

meaning provided in paragraph (d)(2)(ii) 

of this section. 

(4) Joining transaction. The term 

joining transaction has the meaning 

provided in paragraph (e)(2) of this 

section. 

(5) Member shareholder. The term 

member shareholder means a member 

that owns stock of a foreign corporation. 

(6) Section 959 rules. The term section 

959 rules means section 959 and the 

section 959 regulations. 

(7) Section 961 rules. The term section 

961 rules means section 961 and the 

section 961 regulations. 

(c) Single covered shareholder 

treatment under section 959—(1) 

Overview. This paragraph (c) addresses 

the application of the section 959 rules 

to a consolidated group. Paragraph (c)(2) 

of this section provides the general rule 

that treats the group as a single covered 

shareholder. Paragraphs (c)(3) through 

(5) of this section describe the 

application of this general rule: 

paragraph (c)(3) of this section 

addresses the maintenance of group 

PTEP accounts; paragraph (c)(4) of this 

section provides for the allocation of 

PTEP among members; and paragraph 

(c)(5) of this section addresses 

intercompany transfers of foreign 

corporation stock. Where other 

provisions of the Code or regulations 

reference the section 959 rules (for 

example, sections 960(b) and 986(c)), 

the treatment described in this 

paragraph (c) applies for purposes of the 

application of those provisions. 

(2) In general. For purposes of 

applying the section 959 rules, members 

of a consolidated group are treated as a 

single covered shareholder. However, 

each member computes and takes into 

account its own items with respect to 

the stock of foreign corporations 

(including items allocated by a 

partnership, or assigned from a 

controlled foreign corporation, to the 


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member). For example, if a member 

receives a distribution from a foreign 

corporation, that member takes into 

account the tax consequences of the 

distribution. 

(3) PTEP accounting. For purposes of 

applying §§ 1.959–2 (regarding 

accounting of previously taxed earnings 

and profits) and 1.959–3 (regarding 

adjustments to shareholder-level 

accounts relating to previously taxed 

earnings and profits)— 

(i) A consolidated group establishes 

and maintains a single set of annual 

PTEP accounts, dollar basis pools, and 

PTEP tax pools with respect to a foreign 

corporation whose stock is owned by 

one or more members (for example, a 

consolidated group has a single 

combined pool election under § 1.959– 

2(c)); and 

(ii) A foreign corporation establishes 

and maintains a single corporate PTEP 

account and corporate PTEP tax pool 

with respect to a consolidated group. 

(4) Allocation of group accounts—(i) 

In general. When necessary (for 

example, to determine a member 

shareholder’s section 956 amount or 

foreign currency gain or loss under 

section 986(c)), the relevant amount of 

the consolidated group’s accounts 

described in paragraph (c)(3) of this 

section is allocated among the member 

shareholders. The relevant amount is 

the amount that the single covered 

shareholder would access if all members 

of a consolidated group were treated as 

a single covered shareholder. The 

allocation is made in proportion to each 

member shareholder’s share of the item 

at issue relative to the total amount of 

the item for all member shareholders. 

(ii) Application to covered 

distributions—(A) Overview. The 

allocation rule in paragraph (c)(4)(i) of 

this section applies if one or more 

member shareholders receive, or are 

assigned under § 1.951–2, a portion of a 

covered distribution (each, a member’s 

portion), then each member shareholder 

is allocated a portion of the group’s 

accounts described in paragraph (c)(3) 

of this section to determine the extent 

to which the member’s portion is 

previously taxed earnings and profits 

under § 1.959–4. 

(B) The relevant amount of the 

covered distribution. For purposes of 

allocating the group accounts, the 

relevant amount is the amount of the 

total portion of the covered distribution 

received by or assigned to all member 

shareholders (group’s portion) that 

would be previously taxed earnings and 

profits to a single covered shareholder. 

This amount is determined under 

§ 1.959–4 based on the consolidated 

group’s accounts described in paragraph 

(c)(3) of this section. 

(C) Member shareholder’s PTEP 

amount for covered distribution. The 

extent to which the member’s portion is 

previously taxed earnings and profits 

under § 1.959–4 is determined by 

multiplying the amount determined 

under paragraph (c)(4)(ii)(B) of this 

section by a fraction. The numerator of 

the fraction is the member’s portion, 

and the denominator is the group’s 

portion. 

(5) Intercompany transfers. Because a 

group maintains a single set of accounts 

under paragraph (c)(3) of this section 

(that is, member shareholders do not 

have their own accounts), an 

intercompany transfer (within the 

meaning of § 1.1502–13(b)(1)) of the 

stock of a foreign corporation is not a 

general successor transaction as defined 

in § 1.959–7(b). 

(d) Basis under section 961—(1) 

Overview. This paragraph (d) addresses 

the application of the section 961 rules 

to consolidated groups. Paragraph (d)(2) 

of this section contains the general rule 

providing for single- or separate-entity 

treatment of the group with respect to 

different types of property units. 

Paragraphs (d)(3) and (4) of this section, 

respectively, address basis increases and 

reductions under section 961. Paragraph 

(d)(5) of this section addresses the use 

of the group’s basis to determine gain or 

loss on a property unit. 

(2) Treatment of property units—(i) 

Section 961(a) ownership units. Because 

member shareholders directly own 

section 961(a) ownership units, 

adjustments to these ownership units 

under the section 961 rules are made 

separately to member shareholders’ 

actual ownership interests. 

(ii) Derivative ownership units and 

section 961(c) ownership units. 

Members of a consolidated group are 

treated as a single covered shareholder 

for purposes of accounting for the basis 

of derivative ownership units and 

section 961(c) ownership units. 

Therefore, a partnership has a single 

derived basis with respect to a 

consolidated group in a derivative 

ownership unit (group derived basis), 

and a controlled foreign corporation has 

a single section 961(c) basis with respect 

to a consolidated group in a section 

961(c) ownership unit (group section 

961(c) basis). 

(3) Basis increases for income 

inclusions and gains—(i) In general. 

Adjustments under §§ 1.961–3 (for 

inclusions under sections 951(a), 

951A(a), and 961) and 1.961–5(b) 

(relating to foreign currency gain) are 

determined based on each member 

shareholder’s respective income 

inclusions under sections 951(a) and 

951A(a), foreign currency gain under 

section 986(c), or income inclusions 

under § 1.961–11. To the extent the 

adjustment is to a section 961(a) 

ownership unit, the adjustments are 

made separately to each member 

shareholder’s section 961(a) ownership 

unit. In contrast, to the extent the 

adjustment is to a derivative ownership 

unit or a section 961(c) ownership unit, 

the adjustment is made to the group 

derived basis or the group section 961(c) 

basis. 

(ii) Example. A member (M1) directly 

owns all the stock of a foreign 

corporation (CFC1), which directly 

owns all the preferred stock in another 

foreign corporation (CFC3). Another 

member (M2) owns all the stock of a 

foreign corporation (CFC2), which owns 

all the common stock of CFC3. M1 and 

M2 have section 951(a) inclusions 

resulting from CFC3’s subpart F income. 

M1’s basis in its CFC1 stock, which is 

determined separately with respect to 

M1, and the group section 961(c) basis 

in CFC1’s preferred stock in CFC3, are 

both adjusted based on M1’s inclusion. 

Similarly, M2’s basis in its CFC2 stock, 

which is determined separately with 

respect to M2, and the group section 

961(c) basis in CFC2’s common stock in 

CFC3, are both adjusted based on M2’s 

inclusion. 

(4) Basis reductions—(i) Reductions to 

basis of section 961(a) ownership units. 

Reductions to the basis of section 961(a) 

ownership units under §§ 1.961–4 (for 

distributions of previously taxed 

earnings and profits) and 1.961–5(b) 

(relating to foreign currency loss) are 

determined on a separate-entity basis. 

See paragraph (d)(2)(i) of this section. 

(ii) Reductions to derived basis or 

section 961(c) basis. This paragraph 

(d)(4)(ii) coordinates the application of 

the section 961 rules to determine how 

to reduce group derived basis and group 

section 961(c) basis under §§ 1.961–4 

and 1.961–5. 

(A) Step 1: Proportionate allocation of 

derived basis and section 961(c) basis. 

When the section 961 rules apply to 

reduce derived basis or section 961(c) 

basis, the group derived basis and group 

section 961(c) basis is allocated to the 

member shareholders. The allocation is 

made in proportion to each member 

shareholder’s share of the item at issue 

relative to the total for all member 

shareholders (for example, in proportion 

to a member shareholder’s PTEP amount 

for a covered distribution, as described 

in paragraph (c)(4)(ii)(C) of this section). 

(B) Step 2: Separate entity basis 

reduction. The member shareholders 

separately apply the section 961 rules to 

make the necessary basis reductions, 


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taking into account the amount of group 

derived basis and group section 961(c) 

basis allocated to that member in 

paragraph (d)(4)(ii)(A) of this section 

(step 1) (for example, see § 1.961–4(d) 

for adjustments to section 961(c) 

ownership units for distributions of 

previously taxed earnings and profits to 

a controlled foreign corporation owned 

by member shareholders). To the extent 

the basis reduction exceeds the relevant 

basis in the ownership unit with respect 

to the member shareholder, the 

partnership or controlled foreign 

corporation recognizes gain (for 

example, see § 1.961–4(f)), which is 

allocated or assigned to the member 

shareholder. 

(C) Step 3: Recombination of derived 

basis and section 961(c) basis. After 

applying the rules in paragraphs 

(d)(4)(ii)(A) and (B) of this section, to 

the extent there is any remaining 

positive derived basis or positive 

section 961(c) basis, or any resulting 

negative derived basis or negative 

section 961(c) basis, those bases are 

combined to produce the group derived 

basis or group section 961(c) basis for 

the relevant ownership unit. 

(5) Use of group derived basis and 

group section 961(c) basis to determine 

gain or loss—(i) Section 1.961–8(b)(1) 

gain or loss. This paragraph (d)(5)(i) 

applies when a member shareholder is 

allocated a distributive share of gain or 

loss as described in § 1.961–8(b)(1). For 

purposes of applying positive derived 

basis under § 1.961–8(b)(2), the member 

shareholder is allocated a portion of the 

relevant group derived basis in 

proportion to the member shareholder’s 

ownership interest in the foreign 

corporation described in § 1.961–8(b)(1) 

relative to the aggregate of all ownership 

interests in the foreign corporation of all 

member shareholders. The relevant 

group derived basis is the amount of 

derived basis the single covered 

shareholder would access if all members 

of the consolidated group were treated 

as a single covered shareholder. 

(ii) Section 1.961–9(c) covered gain. 

This paragraph (d)(5)(ii) applies when a 

member shareholder is assigned a share 

of covered gain under § 1.951–2. For 

purposes of applying positive section 

961(c) basis under § 1.961–9(e), the 

member shareholder is allocated a 

portion of the relevant group section 

961(c) basis in proportion to the 

member shareholder’s share of covered 

gain relative to the total for all member 

shareholders. The relevant group 

section 961(c) basis is the amount of 

section 961(c) basis the single covered 

shareholder would access if all members 

of a consolidated group were treated as 

a single covered shareholder. 

(e) Consequences of joining or leaving 

a consolidated group—(1) In general. 

For purposes of applying the section 

959 rules and the section 961 rules, a 

transaction in which a member 

shareholder joins or leaves a 

consolidated group is treated in the 

same manner as an acquisition or 

disposition of the stock of a foreign 

corporation owned by the member at the 

time the member joins or leaves the 

consolidated group, as applicable. 

Paragraphs (e)(2) and (3) of this section 

coordinate the application of §§ 1.959– 

7 (general successor transaction rules) 

and 1.961–5 (successor basis rules) to 

transactions in which a member 

shareholder joins or leaves a 

consolidated group, respectively. 

Paragraph (e)(4) of this section 

coordinates the application of section 

986(c) to such transactions. The rules of 

this paragraph (e) apply only to 

transactions treated as acquisitions or 

dispositions of stock of the member 

shareholder (for example, if a member 

shareholder is sold to an unrelated party 

and an election under section 338(h)(10) 

is made, paragraph (e)(3) of this section 

does not apply). 

(2) Joining transactions—(i) In 

general. A transaction (joining 

transaction) in which a corporation 

(joining member) becomes a member of 

a consolidated group is treated in the 

same manner as a general successor 

transaction. In the joining transaction, 

the transferor covered shareholder is the 

joining member, the successor covered 

shareholder is the consolidated group, 

and the consolidated group is treated as 

acquiring ownership of all the stock of 

foreign corporations owned by the 

joining member. Thus, for example, any 

previously taxed earnings and profits in 

the joining member’s annual PTEP 

accounts with respect to a foreign 

corporation are added to the 

consolidated group’s annual PTEP 

accounts with respect to the foreign 

corporation. Similarly, a controlled 

foreign corporation’s section 961(c) 

basis with respect to the joining member 

in a section 961(c) ownership unit is 

added to the controlled foreign 

corporation’s section 961(c) basis with 

respect to the consolidated group in that 

unit, and a partnership’s derived basis 

with respect to the joining member in a 

derivative ownership unit is added to 

the partnership’s derived basis with 

respect to the consolidated group in that 

unit. 

(ii) Combined pool election. The 

consolidated group’s combined pool 

election status pursuant to § 1.959–2(c) 

controls after a joining transaction. 

(3) Departing transactions—(i) In 

general. A transaction (departing 

transaction) in which a member 

shareholder (departing member) ceases 

to be a member of a consolidated group 

is treated in the same manner as a 

general successor transaction. In the 

departing transaction, the transferor 

covered shareholder is the consolidated 

group, the successor covered 

shareholder is the departing member, 

and the departing member is treated as 

acquiring ownership of all the stock of 

foreign corporations owned by the 

departing member at the time of the 

departing transaction. Thus, for 

example, any previously taxed earnings 

and profits in the consolidated group’s 

annual PTEP accounts with respect to 

the foreign corporation are allocated 

between the consolidated group and the 

departing member shareholder. 

Similarly, a controlled foreign 

corporation’s section 961(c) basis in a 

section 961(c) ownership unit with 

respect to the consolidated group is 

allocated between the consolidated 

group and the departing member, and a 

partnership’s derived basis in a 

derivative ownership unit with respect 

to the consolidated group is allocated 

between the consolidated group and the 

departing member. 

(ii) Combined pool election. The 

departing member retains the 

consolidated group’s combined pool 

election status under § 1.959–2(c). 

However, if the departing member joins 

a new consolidated group, paragraph 

(e)(2)(ii) of this section applies to the 

new consolidated group. 

(4) Coordination with section 986(c). 

Joining transactions and departing 

transactions do not result in recognition 

of foreign currency gain or loss under 

section 986(c) (notwithstanding 

§ 1.986(c)–1). Thus, for example, the 

dollar basis of previously taxed earnings 

and profits in a joining member’s annual 

PTEP accounts carries over when 

adding the previously taxed earnings 

and profits to the consolidated group’s 

annual PTEP accounts pursuant to 

paragraph (e)(2)(i) of this section. 

(f) Examples—(1) In general. This 

paragraph (f) provides examples 

illustrating the application of this 

section. These examples do not discuss 

every consequence of the transactions 

under related provisions of the Code 

and regulations. 

(2) Assumed facts. For purposes of the 

examples in this paragraph (f), unless 

otherwise indicated, the following facts 

are assumed: 

(i) USP, USS1, and USS2 are domestic 

corporations, each of which uses the 

U.S. dollar as its functional currency. 

USP is the common parent of the P 

consolidated group (P group), USS1 and 

USS2 are members of the P group, and 


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all the stock of USS1 and USS2 is 

owned by USP. 

(ii) F1 and F2 are controlled foreign 

corporations, each of which uses the 

British pound (£) as its functional 

currency. 

(iii) PRS1 is a partnership. 

(iv) Each entity uses the calendar year 

as its taxable year, and no entity has a 

short taxable year. 

(v) There are no adjustments under 

section 743(b) to the basis of any 

partnership property. 

(3) Example 1: Exclusion from gross 

income of distributed previously taxed 

earnings and profits—(i) Facts. Each of 

USS1 and USS2 directly owns 50 of the 

100 shares of the single class of 

outstanding stock of F1. In year 3, F1 

makes a £300x distribution of money 

with respect to its stock (£3x with 

respect to each share), and the entirety 

of this £300x is a covered distribution 

(a dividend as defined in section 316, 

determined without regard to section 

959(d)). Immediately before the covered 

distribution, F1 has £180x of previously 

taxed earnings and profits with respect 

to the P group, none of which is 

assigned to the taxable section 962 PTEP 

group. 

(ii) Analysis. For purposes of 

analyzing the covered distribution 

under § 1.959–4, the P group is treated 

as a single covered shareholder. See 

paragraph (c)(2) of this section. The P 

group’s share of the covered distribution 

is the entire £300x because the entire 

covered distribution is made to 

members of the P group (£150x to USS1 

plus £150x to USS2). See § 1.959– 

4(d)(1). The £300x are allocated first to 

F1’s previously taxed earnings and 

profits that are with respect to the P 

group immediately before the covered 

distribution (£180x), and then to F1’s 

earnings and profits described in section 

959(c)(3). Therefore, the £300x consist 

of £180x of previously taxed earnings 

and profits and £120x of earnings and 

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

See § 1.959–4(d)(2) and (e)(1). These 

previously taxed earnings and profits 

are treated as distributed pro rata with 

respect to the F1 stock on which the P 

group’s share of the covered distribution 

is made. See § 1.959–4(d)(4) and 

paragraph (c)(4)(ii) of this section. 

Accordingly, £1.8x of previously taxed 

earnings and profits is treated as 

distributed with respect to each share of 

F1 stock. See id. USS1 and USS2 each 

excludes the £90x ((£150x ÷ £300x) × 

£180x) of previously taxed earnings and 

profits distributed to it from its gross 

income. See § 1.959–4(b)(1) and 

paragraph (c)(4)(ii) of this section. 

Moreover, the distributions of 

previously taxed earnings and profits to 

USS1 and USS2 do not result in any 

investment adjustments under § 1.1502– 

32 (see § 1.1502–32(b)(5)(ii), Example 9) 

or adjustments to earnings and profits 

(see §§ 1.312–8(c) and 1.1502–33). 

Because this analysis depends only on 

F1’s PTEP with respect to the P group, 

these results do not depend on whether 

USS1 or USS2 owned F1 stock or had 

income inclusions with respect to F1 

during the taxable years to which the 

distributed previously taxed earnings 

and profits relate. 

(4) Example 2: Basis increases for 

income inclusions—(i) Facts. F1 has two 

classes of stock outstanding. USS1 

directly owns all 100 shares of F1 

common stock, and USS2 directly owns 

all 100 shares of F1 preferred stock. F1 

directly owns all 50 shares of the single 

class of outstanding stock of F2. The 

shares of F1 stock directly owned by 

USS1 or USS2 are section 961(a) 

ownership units, and the shares of F2 

stock directly owned by F1 are section 

961(c) ownership units. For year 3, 

USS1 includes $60x and USS2 includes 

$40x in gross income under section 

951(a)(1)(A) with respect to F2 (their pro 

rata shares of F2’s subpart F income, 

translated into U.S. dollars in 

accordance with section 989(b)). F2 

does not make any covered 

distributions, and therefore does not 

distribute any previously taxed earnings 

and profits, during the taxable year. 

(ii) Analysis—(A) In general. To 

reflect USS1’s and USS2’s income 

inclusions for year 3, the basis of the F2 

stock and F1 stock is increased in 

accordance with § 1.961–3. See § 1.961– 

3(b). F1’s section 961(c) basis in the F2 

stock with respect to the P group is 

increased based on the total inclusions 

of the P group, because members of a 

consolidated group are treated as a 

single covered shareholder for purposes 

of accounting for basis of section 961(c) 

ownership units, and because all of the 

P group’s inclusions arise with respect 

to this F2 stock. See paragraphs (d)(2)(ii) 

and (d)(3)(i) of this section. USS1’s 

adjusted basis in the F1 common stock 

and USS2’s adjusted basis in the F1 

preferred stock are increased based on 

each member’s separate inclusion, 

because adjustments to section 961(a) 

ownership units are made separately to 

member shareholders’ actual ownership 

interests. See paragraphs (d)(2)(i) and 

(d)(3)(i) of this section. 

(B) Increases to basis of each property 

unit. The amount of the P group’s 

income inclusions with respect to F2 

that give rise to increases to basis under 

section 961 is $100x ($60x + $40x). See 

§ 1.961–3(c)(1) and paragraph (d)(3) of 

this section. Under § 1.961–3(e), the 

section 961(c) basis with respect to the 

P group of each share of F2 stock is 

increased by $2x ($100x ÷ 50 shares). 

The basis of each share of F1 common 

stock owned by USS1 is increased by 

$0.60x ($60x ÷ 100 shares) and the basis 

of each share of F1 preferred stock 

owned by USS2 is increased by $0.40x 

($40x ÷ 100 shares). These increases to 

basis are treated as made at the 

beginning of F2’s taxable year. See 

§ 1.961–3(c)(2) and (e)(1). These 

adjustments to the basis of the section 

961(a) ownership units may be different 

from the adjustments that would be 

made under § 1.961–3(e) if they were all 

held by a single owner. 

(C) Section 1502 basis and E&P 

adjustments. USP increases its basis in 

its USS1 stock by $60x and in its USS2 

stock by $40x, reflecting each member’s 

inclusion in income under section 

951(a)(1)(A). See § 1.1502–32(b)(2)(i). 

Because the income inclusions increase 

USS1’s and USS2’s earnings and profits 

(see § 1.312–6(f)), USP’s earnings and 

profits are increased under § 1.1502– 

33(b)(1). 

(5) Example 3: Basis reductions and 

gain recognition for distributions from 

upper-tier foreign corporation—(i) 

Facts. USS1 and USS2 directly own all 

the shares of the single class of 

outstanding stock of F1, with USS1 

owning 60 shares and USS2 owning 40 

shares. In year 3, F1 makes a pro rata 

covered distribution to USS1 and USS2. 

Under § 1.959–4, the entirety of the 

covered distribution is previously taxed 

earnings and profits with respect to the 

P group and excluded from the 

members’ gross income. In addition, the 

sum of the dollar basis and associated 

foreign income taxes of the previously 

taxed earnings and profits that are 

distributed on each share of F1 stock is 

$6x. Immediately before the covered 

distribution, USS1’s adjusted basis in 

each share of its F1 stock is $8x, and 

USS2’s adjusted basis in each share of 

its F1 stock is $5x. Each of USS1 and 

USS2 is deemed to pay the entirety of 

the associated foreign income taxes of 

the previously taxed earnings and 

profits distributed to it under section 

960(b) (because all such taxes are 

sourced from the creditable PTEP tax 

group and the member is a United States 

shareholder of F1) and is allowed a 

credit under section 901 for the entirety 

of such taxes. 

(ii) Analysis. Under § 1.961–4(b), each 

of USS1 and USS2 separately reduces 

its adjusted basis in each share of F1 

stock on which it receives previously 

taxed earnings and profits and, if 

applicable, recognizes gain with respect 

to those shares. See paragraph (d)(4)(i) 

of this section. The adjustment to each 

share of F1 stock is $6x, the sum of the 


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dollar basis and associated foreign 

income taxes of the previously taxed 

earnings and profits received by the 

member on the share. See § 1.961– 

4(b)(2)(i). The basis of each of USS1’s 

shares of F1 stock is reduced to $2x ($8x 

original basis ¥ $6x adjustment). See 

§ 1.961–4(b)(2)(ii). The basis of each of 

USS2’s shares of F1 stock is reduced to 

$0x, and USS2 recognizes $1x of gain 

per share ($5x original basis ¥ $6x 

adjustment). See § 1.961–4(b)(2)(ii) and 

(iii). These adjustments are treated as 

made concurrently with the covered 

distribution. See § 1.961–4(e)(1) and 

(f)(1). 

(6) Example 4: Basis reductions and 

gain recognition for distributions from 

lower-tier foreign corporation—(i) Facts. 

USS1 and USS2 directly own all the 

shares of the single class of outstanding 

stock of F1, with USS1 owning 60 

shares and USS2 owning 40 shares. F1 

directly owns all the shares of the single 

class of outstanding stock of F2. In year 

3, F2 makes a covered distribution to 

F1. Under § 1.959–4, the entirety of the 

covered distribution is previously taxed 

earnings and profits that are with 

respect to the P group and excluded 

from F1’s gross income for purposes of 

determining its subpart F income and its 

tested income or tested loss. In addition, 

the sum of the dollar basis and 

associated foreign income taxes of the 

previously taxed earnings and profits 

that are distributed on each share of F2 

stock is $6x. Immediately before the 

covered distribution, F1’s adjusted basis 

in each share of F2 stock is £1.50x, and 

its section 961(c) basis with respect to 

the P group in each share is $5x. On the 

day of the covered distribution, the spot 

rate is $1:£0.5. 

(ii) Analysis. Under § 1.961–4(d), F1 

reduces its section 961(c) basis in each 

share of F2 stock on which it receives 

previously taxed earnings and profits. If 

applicable, F1 recognizes gain with 

respect to those shares. These 

adjustments are made separately with 

respect to USS1 and USS2. See 

paragraph (d)(4)(ii) of this section. First, 

under paragraph (d)(4)(ii)(A) of this 

section, for each share of F2 stock, F1’s 

section 961(c) basis with respect to the 

P group is allocated proportionately to 

USS1 ($3x, or 60%) and USS2 ($2x, or 

40%). Next, under paragraph 

(d)(4)(ii)(B) of this section, the basis 

reductions are made separately for each 

of USS1 and USS2. For each share of F2 

stock, USS1’s portion of F1’s section 

961(c) basis ($3x) is reduced by USS1’s 

share of the dollar basis and associated 

foreign income taxes ($3.60x = 60% × 

$6x). See § 1.961–4(d)(2). Because the 

reduction exceeds the positive section 

961(c) basis, it must be tested against 

the limitation in § 1.961–4(d)(3). The 

amount of F1’s adjusted basis in each 

share that is available with respect to 

USS1 is £0.90x (60% × £1.50x), which 

is equal to $1.80x. Because $1.80x is 

greater than $0.60x, USS1’s portion of 

F1’s section 961(c) basis is reduced to 

negative $0.60x ($3x ¥ $3.60x), and no 

gain is recognized under § 1.961– 

4(d)(2)(iii). Similarly, USS2’s share of 

F1’s section 961(c) basis in each share 

of F2 stock ($2x) is reduced by its share 

of the dollar basis and associated foreign 

income taxes ($2.40x = 40% × $6x). The 

amount of F1’s adjusted basis in each 

share that is available with respect to 

USS2 is £0.60x (40% × £1.50x), which 

is equal to $1.20x. Therefore, USS2’s 

portion of F1’s section 961(c) basis is 

reduced to negative $0.40x ($2x ¥ 

$2.40x), and no gain is recognized under 

§ 1.961–4(d)(2)(iii). Finally, under 

paragraph (d)(4)(ii)(C) of this section, 

the separately computed section 961(c) 

bases are recombined. As a result, F1’s 

section 961(c) basis with respect to the 

P group in each share of F2 stock is 

negative $1x (negative $0.60x + negative 

$0.40x = negative $1x). The reductions 

to section 961(c) basis are treated as 

made concurrently with the covered 

distribution. See § 1.961–4(e)(1) and 

(f)(1). 

(iii) Alternative facts: distribution in 

excess of basis. The facts are the same 

as in paragraph (f)(6)(i) of this section 

(Example 4), except that the sum of the 

dollar basis and associated foreign 

income taxes per share of F2 stock is 

$9x instead of $6x. The application of 

paragraph (d)(4)(ii)(A) of this section is 

the same as in paragraph (f)(6)(ii) of this 

section. When applying paragraph 

(d)(4)(ii)(B) of this section, the basis 

reductions per share are $5.40x (60% × 

$9x) for USS1 and $3.60x (40% × $9x) 

for USS2. Because the reductions again 

exceed the positive section 961(c) basis, 

they must be tested against the 

limitation in § 1.961–4(d)(3). The 

amounts of F1’s adjusted basis in each 

share that are available with respect to 

each member are the same as in 

paragraph (f)(6)(ii) of this section. For 

USS1, because the $1.80x limitation is 

less than $2.40x ($3x section 961(c) 

basis ¥ $5.40x adjustment), USS1’s 

portion of F1’s section 961(c) basis per 

share is reduced to negative $1.80x, and 

$0.60x ($2.40x ¥ $1.80x) of gain per 

share is recognized under § 1.961– 

4(d)(2)(iii), with this gain assigned 

solely to USS1. Similarly, for USS2, the 

$1.20x limitation is less than $1.60x 

($2x section 961(c) basis ¥ $3.60x 

adjustment). Therefore, USS2’s portion 

of F1’s section 961(c) basis per share is 

reduced to negative $1.20x, and $0.40x 

($1.60x ¥ $1.20x) of gain per share is 

recognized under § 1.961–4(d)(2)(iii), 

with this gain assigned solely to USS2. 

The basis of USS1 and USS2’s F1 stock 

is increased under § 1.961–3 to reflect 

the gains recognized by F1 and included 

in the member’s gross income pursuant 

to § 1.961–11. Finally, under paragraph 

(d)(4)(ii)(C) of this section, the 

separately computed section 961(c) 

bases are recombined. As a result, F1’s 

section 961(c) basis with respect to the 

P group in each share of F2 stock is 

negative $3x (negative $1.80x + negative 

$1.20x = negative $3x). 

(7) Example 5: Use of positive derived 

basis—(i) Facts. USS1, USS2, and a 

nonresident alien individual, in the 

aggregate, directly own all the interests 

in PRS1, with USS1 and USS2 owning 

equal interests in PRS1. PRS1 directly 

owns all the shares of the single class of 

outstanding stock of F1 (derivative 

ownership units). In year 3, PRS1 sells 

all the F1 stock to an unrelated party for 

money. The distributive share of the 

gain recognized by PSI is $30x to each 

of USS1 and USS2, determined without 

regard to derived basis. Immediately 

before the sale (and taking into account 

any adjustments under § 1.961–5(b) 

resulting from the sale), PRS1’s positive 

derived basis with respect to the P 

group in the F1 stock is $50x in total. 

In addition, PRS1 has no negative 

derived basis with respect to the P 

group in any of the shares. 

(ii) Analysis. In applying PRS1’s 

positive derived basis with respect to 

the P group in the F1 stock, a pro rata 

portion of such derived basis is taken 

into account with respect to each 

member. See paragraph (d)(5)(i) of this 

section. Thus, because USS1 and USS2 

own equal interests in PRS1, $25x (or 

50%) of the derived basis is taken into 

account with respect to each of USS1 

and USS2. Accordingly, for each of 

USS1 and USS2, PRS1 is treated as 

applying $25x of derived basis to the 

member’s $30x distributive share of gain 

on the sale. See § 1.961–8(b). As result, 

each member’s distributive share of gain 

on the sale is adjusted by $25x, to a $5x 

distributive share of gain. See also 

§ 1.961–8(c) (for purposes of adjusting 

each member’s adjusted basis in its 

PRS1 interest under section 705, the 

member’s distributive share of gain on 

the sale is $5x). 

(8) Example 6: Use of positive section 

961(c) basis—(i) Facts. USS1, USS2, and 

a nonresident alien individual, in the 

aggregate, directly own all the shares of 

the single class of outstanding stock of 

F1. USS1 and USS2 own an equal 

number of shares of F1. F1 directly 

owns all the shares of the single class of 

outstanding stock of F2 (section 961(c) 


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ownership units). In year 3, F1 sells all 

the F2 stock to an unrelated party for 

money. F1 recognizes £100x of gain on 

the sale, determined without regard to 

loss recognized on any share and 

without regard to section 961(c) basis. 

This £100x is covered gain, and each of 

USS1 and USS2 is assigned a £30x 

portion of the covered gain under 

§ 1.951–2. Immediately before the sale 

(and taking into account any 

adjustments under § 1.961–5(b) 

resulting from the sale), F1’s positive 

section 961(c) basis in the F2 stock with 

respect to the P group is £50x (as 

translated from U.S. dollars into British 

pounds at the spot rate on the day of the 

sale). In addition, F1 has no negative 

section 961(c) basis with respect to the 

P group in any of the shares. 

(ii) Analysis. In applying F1’s positive 

section 961(c) basis with respect to the 

P group of the F2 stock, a pro rata 

portion of such section 961(c) basis is 

taken into account with respect to each 

member. See paragraph (d)(5)(ii) of this 

section. Thus, because USS1 and USS2 

own equal interests in F1, £25x (£30x ÷ 

£60x, or 50%) of the section 961(c) basis 

is taken into account with respect to 

each of USS1 and USS2. All £25x of the 

section 961(c) basis taken into account 

with respect to each of USS1 and USS2 

is applied to the member’s £30x share 

of the covered gain. See § 1.961–9(d)(2) 

and (e)(1). As a result, a total of £50x of 

the covered gain is previously taxed 

earnings and profits of F1 with respect 

to the P group, characterized in 

accordance with § 1.961–9(f)(2) through 

(4). See § 1.961–9(d)(3), (f)(1) and 

paragraph (c)(1) of this section. F1 

excludes the £50x of previously taxed 

earnings resulting from section 961(c) 

basis from its gross income, solely for 

purposes of determining its subpart F 

income and tested income or tested loss. 

See § 1.961–9(b). 

(g) Applicability date. This section 

applies to a taxable year of a 

consolidated group for which a taxable 

year of a foreign corporation is relevant 

if such taxable year of the foreign 

corporation begins on or after [date of 

publication of final regulations in the 

Federal Register] or is an early 

application year (as described in 

§ 1.959–12(d)). 

Heather C. Maloy, 

Acting Deputy Commissioner. 

[FR Doc. 2024–27227 Filed 11–29–24; 8:45 am] 

BILLING CODE 4830–01–P 


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