---
kind: "range"
citation: "26 C.F.R. §§ 1.965-1–1.965-8"
title: "26"
from: "1.965-1"
to: "1.965-8"
count: 8
url: "https://uscodex.org/cfr/26/1.965-1..1.965-8"
---

# §1.965-1. Overview, general rules, and definitions.

- (a) **Overview—**
  - (1) **In general.** This section provides general rules and definitions under [section 965](/cfr/26/965.md). [Section 1.965-2](/cfr/26/1.965-2.md) provides rules relating to adjustments to earnings and profits and basis to determine and account for the application of [section 965](/cfr/26/965.md) and a rule that limits the amount of gain recognized under [section 961(b)(2)](/cfr/26/961.md?p=b-2) by reason of distributions attributable to [section 965](/cfr/26/965.md) previously taxed earnings and profits (as defined in [§ 1.965-2(g)(1)(ii)](/cfr/26/1.965-2.md?p=g-1-ii)) in the inclusion year. [Section 1.965-3](/cfr/26/1.965-3.md) provides rules regarding the determination of [section 965(c)](/cfr/26/965.md?p=c) deductions. [Section 1.965-4](/cfr/26/1.965-4.md) sets forth rules that disregard certain transactions for purposes of [section 965](/cfr/26/965.md). Sections [1.965-5](/cfr/26/1.965-5.md) and [1.965-6](/cfr/26/1.965-6.md) provide rules with respect to foreign tax credits. [Section 1.965-7](/cfr/26/1.965-7.md) provides rules regarding elections and payments. [Section 1.965-8](/cfr/26/1.965-8.md) provides rules regarding affiliated groups, including consolidated groups. [Section 1.965-9](/cfr/26/1.965-9.md) provides dates of applicability. See also §§ [1.962-1](/cfr/26/1.962-1.md) and [1.962-2](/cfr/26/1.962-2.md) (providing rules regarding the application of [section 962](/cfr/26/962.md)) and 1.986(c)-1 (providing rules regarding the application of [section 986(c)](/cfr/26/986.md?p=c)).
  - (2) **Scope.** [Paragraph (b)](#b) of this section provides the general rules concerning [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts. [Paragraph (c)](#c) of this section provides the general rule concerning [section 965(c)](/cfr/26/965.md?p=c) deduction amounts. [Paragraph (d)](#d) of this section provides a rule for specified foreign corporations that are not controlled foreign corporations. [Paragraph (e)](#e) of this section treats certain controlled domestic partnerships as foreign partnerships for purposes of [section 965](/cfr/26/965.md). [Paragraph (f)](#f) of this section provides definitions applicable for the [section 965](/cfr/26/965.md) regulations and §§ [1.962-1](/cfr/26/1.962-1.md), [1.962-2](/cfr/26/1.962-2.md), and [1.986(c)-1](/cfr/26/1.986..1.md). [Paragraph (g)](#g) of this section contains examples illustrating the general rules and definitions set forth in this section.
- (b) **Section 965(a) inclusion amounts—**
  - (1) **Inclusion of the pro rata share of the section 965(a) earnings amount.** For an inclusion year of a deferred foreign income corporation, the [subpart F](/cfr/26/subpartF.md) income of the deferred foreign income corporation (as otherwise determined for the inclusion year under [section 952](/cfr/26/952.md) and [§ 1.952-1](/cfr/26/1.952-1.md)) is increased by the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the deferred foreign income corporation. See [section 965(a)](/cfr/26/965.md?p=a). Accordingly, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder with respect to a deferred foreign income corporation generally includes in gross income under [section 951(a)(1)](/cfr/26/951.md?p=a-1) for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year its pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, and subject to reduction under [section 965(b)](/cfr/26/965.md?p=b), [paragraph (b)(2)](#b-2) of this section, and [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b). The amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's inclusion with respect to a deferred foreign income corporation as a result of [section 965(a)](/cfr/26/965.md?p=a) and this [paragraph (b)(1)](#b-1), as reduced under [section 965(b)](/cfr/26/965.md?p=b), [paragraph (b)(2)](#b-2) of this section, and [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as applicable, is referred to as the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount. Neither the [section 965(a)](/cfr/26/965.md?p=a) earnings amount nor the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount is subject to the rules or limitations in [section 952](/cfr/26/952.md) or limited by the accumulated earnings and profits of the deferred foreign income corporation on the date of the inclusion.
  - (2) **Reduction by the allocable share of the aggregate foreign E&P deficit.** For purposes of determining a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to a deferred foreign income corporation, the U.S. dollar amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, is reduced by the deferred foreign income corporation's allocable share of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign E&P deficit. See [section 965(b)](/cfr/26/965.md?p=b). If the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is a member of a consolidated group, under [§ 1.965-8(e)](/cfr/26/1.965-8.md?p=e), all [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholders that are members of the consolidated group are treated as a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder for purposes of this [paragraph (b)(2)](#b-2).
- (c) **Section 965(c) deduction amounts.** For a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is generally allowed a deduction in an amount equal to the [section 965(c)](/cfr/26/965.md?p=c) deduction amount.
- (d) **Treatment of specified foreign corporation as a controlled foreign corporation.** A specified foreign corporation described in [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section that is not otherwise a controlled foreign corporation is treated as a controlled foreign corporation solely for purposes of [paragraph (b)](#b) of this section and sections [951](/cfr/26/951.md), [961](/cfr/26/961.md), and [§ 1.1411-10](/cfr/26/1.1411-10.md). See 965(e)(2).
- (e) **Special rule for certain controlled domestic partnerships—**
  - (1) **In general.** For purposes of the [section 965](/cfr/26/965.md) regulations, a controlled domestic partnership is treated as a foreign partnership for purposes of determining the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of a specified foreign corporation and the [section 958(a)](/cfr/26/958.md?p=a) stock of the specified foreign corporation owned by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder if the following conditions are satisfied—
    - (i) Without regard to this [paragraph (e)](#e), the controlled domestic partnership is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of the specified foreign corporation and thus owns [section 958(a)](/cfr/26/958.md?p=a) stock of the specified foreign corporation (tested [section 958(a)](/cfr/26/958.md?p=a) stock);
    - (ii) If the controlled domestic partnership (and all other controlled domestic partnerships in the chain of ownership of the specified foreign corporation) were treated as foreign—
      - (A) The specified foreign corporation would continue to be a specified foreign corporation; and
      - (B) **At least one United States shareholder of the specified foreign corporation—** (1) Would be treated as a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of the specified foreign corporation; and

        (2) Would be treated as owning (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) tested [section 958(a)](/cfr/26/958.md?p=a) stock of the specified foreign corporation through another foreign corporation that is a direct or indirect partner in the controlled domestic partnership.

  - (2) **Definition of a controlled domestic partnership.** For purposes of [paragraph (e)(1)](#e-1) of this section, the term controlled domestic partnership means a domestic partnership that is controlled by a United States shareholder described in [paragraph (e)(1)(ii)(B)](#e-1-ii-B) of this section and persons related to the United States shareholder. For purposes of this [paragraph (e)(2)](#e-2), control is determined based on all the facts and circumstances, except that a partnership will be deemed to be controlled by a United States shareholder and related persons if those persons, in the aggregate, own (directly or indirectly through one or more partnerships) more than 50 percent of the interests in the partnership capital or profits. For purposes of this [paragraph (e)(2)](#e-2), a related person is, with respect to a United States shareholder, a person that is related (within the meaning of section [267(b)](/cfr/26/267.md?p=b) or [707(b)(1)](/cfr/26/707.md?p=b-1)) to the United States shareholder.
- (f) **Definitions.** This [paragraph (f)](#f) provides definitions that apply for purposes of the [section 965](/cfr/26/965.md) regulations and §§ [1.962-1](/cfr/26/1.962-1.md), [1.962-2](/cfr/26/1.962-2.md), and [1.986(c)-1](/cfr/26/1.986..1.md). Unless otherwise indicated, all amounts are expressed as positive numbers.
  - (1) **8 percent rate amount.** The term 8 percent rate amount means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, the excess, if any, of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year over the amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year as determined under [§ 1.965-3(c)](/cfr/26/1.965-3.md?p=c).
  - (2) **8 percent rate equivalent percentage.** The term 8 percent rate equivalent percentage means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, the percentage that would result in the 8 percent rate amount being subject to an 8 percent rate of tax determined by only taking into account a deduction equal to such percentage of such amount and the highest rate of tax specified in [section 11](/cfr/26/11.md) for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year. In the case of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder to which [section 15](/cfr/26/15.md) applies, the highest rate of tax under [section 11](/cfr/26/11.md) before the effective date of the change in rates and the highest rate of tax under [section 11](/cfr/26/11.md) after the effective date of such change will each be taken into account under the preceding sentence in the same proportions as the portion of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year that is before and after such effective date, respectively.
  - (3) **15.5 percent rate amount.** The term 15.5 percent rate amount means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, the amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year as determined under [§ 1.965-3(c)](/cfr/26/1.965-3.md?p=c) to the extent it does not exceed the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year.
  - (4) **15.5 percent rate equivalent percentage.** The term 15.5 percent rate equivalent percentage, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, has the meaning provided for the term “8 percent rate equivalent percentage” applied by substituting “15.5 percent rate amount” for “8 percent rate amount” and “15.5 percent rate of tax” for “8 percent rate of tax.”
  - (5) **Accounts payable.** The term accounts payable means payables arising from the purchase of property described in [section 1221(a)(1)](/cfr/26/1221.md?p=a-1) or [section 1221(a)(8)](/cfr/26/1221.md?p=a-8) or the receipt of services from vendors or suppliers, provided the payables have a term upon issuance of less than one year.
  - (6) **Accounts receivable.** The term accounts receivable means receivables described in [section 1221(a)(4)](/cfr/26/1221.md?p=a-4) that have a term upon issuance of less than one year.
  - (7) **Accumulated post-1986 deferred foreign income—**
    - (i) **In general.** The term accumulated post-1986 deferred foreign income means, with respect to a specified foreign corporation, the post-1986 earnings and profits of the specified foreign corporation except to the extent such earnings and profits—
      - (A) Are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1;
      - (B) If distributed, would, in the case of a controlled foreign corporation, be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md); or
      - (C) If distributed, would, in the case of a controlled foreign corporation that has shareholders that are not United States shareholders on an E&P measurement date, be excluded from the gross income of such shareholders under [section 959](/cfr/26/959.md) if such shareholders were United States shareholders, determined by applying the principles of Revenue Ruling 82-16, 1982-1 C.B. 106.
    - (ii) **Earnings and profits attributable to subpart F income in the same taxable year as an E&P measurement date.** For purposes of determining the accumulated post-1986 deferred foreign income of a specified foreign corporation as of an E&P measurement date, earnings and profits of the specified foreign corporation that are or would be, applying the principles of Revenue Ruling 82-16, 1982-1 C.B. 106, described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by reason of [subpart F](/cfr/26/subpartF.md) income (as defined in [section 952](/cfr/26/952.md) without regard to [section 965(a)](/cfr/26/965.md?p=a)) are described in [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and paragraph [(f)(7)(i)(B)](#f-7-i-B) or [(f)(7)(i)(C)](#f-7-i-C) of this section only to the extent that such income has been accrued by the specified foreign corporation as of the E&P measurement date. For rules regarding the interaction of sections [951](/cfr/26/951.md), [956](/cfr/26/956.md), [959](/cfr/26/959.md), and [965](/cfr/26/965.md) generally, see [§ 1.965-2(b)](/cfr/26/1.965-2.md?p=b).
  - (8) **Aggregate foreign cash position—**
    - (i) **In general.** The term aggregate foreign cash position means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that is not a member of a consolidated group, the greater of—
      - (A) The aggregate of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the cash position of each specified foreign corporation determined as of the final cash measurement date of the specified foreign corporation; or
      - (B) **One half of the sum of—** (1) The aggregate described in [paragraph (f)(8)(i)(A)](#f-8-i-A) of this section determined as of the second cash measurement date of each specified foreign corporation, plus

        (2) The aggregate described in [paragraph (f)(8)(i)(A)](#f-8-i-A) of this section determined as of the first cash measurement date of each specified foreign corporation.

    - (ii) **Other rules.** For rules for determining the aggregate foreign cash position for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, see [§ 1.965-3(c)](/cfr/26/1.965-3.md?p=c). For the rule for determining the aggregate foreign cash position of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that is a member of a consolidated group, see [§ 1.965-8(e)(3)](/cfr/26/1.965-8.md?p=e-3). For rules disregarding certain assets for purposes of determining the aggregate foreign cash position of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, see [§ 1.965-3(b)](/cfr/26/1.965-3.md?p=b).
  - (9) **Aggregate foreign E&P deficit.** The term aggregate foreign E&P deficit means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the lesser of—
    - (i) The aggregate of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the specified E&P deficit of each E&P deficit foreign corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, or
    - (ii) The aggregate of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of each deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017.
  - (10) **Aggregate section 965(a) inclusion amount.** The term aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the sum of all of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts.
  - (11) **Allocable share.** The term allocable share means, with respect to a deferred foreign income corporation and an aggregate foreign E&P deficit of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the product of the aggregate foreign E&P deficit and the ratio determined by dividing—
    - (i) The [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, by
    - (ii) The amount described in [paragraph (f)(9)(ii)](#f-9-ii) of this section with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder.
  - (12) **Bona fide hedging transaction.** The term bona fide hedging transaction means a hedging transaction that meets (or that would meet if the specified foreign corporation were a controlled foreign corporation) the requirements of a bona fide hedging transaction described in [§ 1.954-2(a)(4)(ii)](/cfr/26/1.954-2.md?p=a-4-ii), except that in the case of a specified foreign corporation that is not a controlled foreign corporation, the identification requirements of [§ 1.954-2(a)(4)(ii)(B)](/cfr/26/1.954-2.md?p=a-4-ii-B) do not apply.
  - (13) **Cash-equivalent asset—**
    - (i) **In general.** The term cash-equivalent asset means any of the following assets—
      - (A) Personal property which is of a type that is actively traded and for which there is an established financial market, other than a specified commodity;
      - (B) Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government;
      - (C) Any foreign currency;
      - (D) A short-term obligation; or
      - (E) **Derivative financial instruments, other than bona fide hedging transactions.**
    - (ii) **Specified commodity.** The term specified commodity means a commodity held, or, for purposes of [paragraph (f)(18)](#f-18) of this section, to be held, by a specified foreign corporation that, in the hands of the specified foreign corporation, is property described in section [1221(a)(1)](/cfr/26/1221.md?p=a-1) or [1221(a)(8)](/cfr/26/1221.md?p=a-8). This [paragraph (f)(13)(ii)](#f-13-ii) does not apply with respect to commodities held by a specified foreign corporation in its capacity as a dealer or trader in commodities.
  - (14) **Cash-equivalent asset hedging transaction—**
    - (i) **In general.** The term cash-equivalent asset hedging transaction means a bona fide hedging transaction identified on a specified foreign corporation's books and records as hedging a cash-equivalent asset.
    - (ii) **Aggregate hedging transactions.** For purposes of [paragraph (f)(14)(i)](#f-14-i) of this section, the amount of a bona fide hedging transaction described in [§ 1.1221-2(c)(3)](/cfr/26/1.1221-2.md?p=c-3) (an aggregate hedging transaction) that is treated as a cash-equivalent asset hedging transaction is the amount that bears the same proportion to the fair market value of the aggregate hedging transaction as the value of the cash-equivalent assets being hedged by the aggregate hedging transaction bears to the value of all assets being hedged by the aggregate hedging transaction.
  - (15) **Cash measurement dates.** The term cash measurement dates means, with respect to a specified foreign corporation, the first cash measurement date, the second cash measurement date, and the final cash measurement date, collectively, and each a cash measurement date.
  - (16) **Cash position—**
    - (i) **General rule.** The term cash position means, with respect to a specified foreign corporation, the sum of—
      - (A) Cash held by the corporation;
      - (B) The net accounts receivable of the corporation; and
      - (C) **The fair market value of the cash-equivalent assets held by the corporation.**
    - (ii) **Fair market value of cash-equivalent assets.** For purposes of determining the fair market value of a cash-equivalent asset of a specified foreign corporation, the value of the cash-equivalent asset must be adjusted by the fair market value of any cash- equivalent asset hedging transaction with respect to the cash-equivalent asset, but only to the extent that the cash-equivalent asset hedging transaction does not reduce the fair market value of the cash-equivalent asset below zero.
    - (iii) **Measurement of derivative financial instruments.** The amount of derivative financial instruments taken into account in determining the cash position of a specified foreign corporation is the aggregate fair market value of its derivative financial instruments that constitute cash-equivalent assets, provided such amount is not less than zero.
    - (iv) **Translation of cash position amounts.** The cash position of a specified foreign corporation with respect to a cash measurement date must be expressed in U.S. dollars. For this purpose, the amounts described in [paragraph (f)(16)(i)](#f-16-i) of this section must be translated (if necessary) into U.S. dollars using the spot rate on the relevant cash measurement date.
  - (17) **Deferred foreign income corporation—**
    - (i) **In general.** The term deferred foreign income corporation means a specified foreign corporation that has accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date.
    - (ii) **Priority rule.** If a specified foreign corporation satisfies the definition of a deferred foreign income corporation under [section 965(d)(1)](/cfr/26/965.md?p=d-1) and [paragraph (f)(17)(i)](#f-17-i) of this section, it is classified solely as a deferred foreign income corporation and not also as an E&P deficit foreign corporation even if it otherwise satisfies the requirements of [section 965(b)(3)(B)](/cfr/26/965.md?p=b-3-B) and [paragraph (f)(22)](#f-22) of this section.
  - (18) **Derivative financial instrument.** The term derivative financial instrument includes a financial instrument that is one of the following—
    - (i) A notional principal contract,
    - (ii) An option contract,
    - (iii) A forward contract, other than a forward contract with respect to a specified commodity (as defined in [paragraph (f)(13)(ii)](#f-13-ii) of this section), but solely to the extent that the specified foreign corporation identified, or could have identified, the forward contract as a hedging transaction (within the meaning of [§ 1.1221-2(b)](/cfr/26/1.1221-2.md?p=b)) with respect to one or more specified commodities held by the specified foreign corporation,
    - (iv) A futures contract,
    - (v) A short position in securities or commodities, other than a forward contract with respect to a specified commodity, but solely to the extent that the specified foreign corporation identified, or could have identified, the forward contract as a hedging transaction (within the meaning of [§ 1.1221-2(b)](/cfr/26/1.1221-2.md?p=b)) with respect to one or more specified commodities held by the specified foreign corporation, or
    - (vi) Any financial instrument similar to one described in [paragraphs (f)(18)(i) through (v)](#f-18-i..f-18-v) of this section.
  - (19) **Domestic pass-through entity.** The term domestic pass-through entity means a pass-through entity that is a United States person (as defined in [section 7701(a)(30)](/cfr/26/7701.md?p=a-30)).
  - (20) **Domestic pass-through owner.** The term domestic pass-through owner means, with respect to a domestic pass-through entity, a United States person (as defined in [section 7701(a)(30)](/cfr/26/7701.md?p=a-30)) that is a partner, shareholder, beneficiary, grantor, or owner, as the case may be, in the domestic pass-through entity. Notwithstanding the preceding sentence, the term does not include a partner, shareholder, beneficiary, grantor, or owner of the domestic pass-through entity that is itself a domestic pass-through entity but does include any other United States person that is an indirect partner, shareholder, beneficiary, grantor, or owner of the domestic pass-through entity through one or more other pass-through entities.
  - (21) **Domestic pass-through owner share.** The term domestic pass-through owner share means, with respect to a domestic pass-through owner and a domestic pass-through entity, the domestic pass-through owner's share of the aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount and the [section 965(c)](/cfr/26/965.md?p=c) deduction amount, as applicable, of the domestic pass-through entity, including the domestic pass-through owner's share of the aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount and [section 965(c)](/cfr/26/965.md?p=c) deduction amount, as applicable, of a domestic pass-through entity owned indirectly by the domestic pass-through owner through one or more other pass-through entities.
  - (22) **E&P deficit foreign corporation—**
    - (i) **In general.** The term E&P deficit foreign corporation means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, a specified foreign corporation, other than a deferred foreign income corporation, if, as of November 2, 2017—
      - (A) The specified foreign corporation had a deficit in post-1986 earnings and profits,
      - (B) The corporation was a specified foreign corporation, and
      - (C) **The shareholder was a United States shareholder of the corporation.**
    - (ii) **Determination of deficit in post-1986 earnings and profits.** In the case of a specified foreign corporation that has post-1986 earnings and profits that include earnings and profits described in section [959(c)(1)](/cfr/26/959.md?p=c-1) or [959(c)(2)](/cfr/26/959.md?p=c-2) (or both) and a deficit in earnings and profits (including hovering deficits, as defined in [§ 1.367(b)-7(d)(2)(i)](/cfr/26/1.367..7.md)), the specified foreign corporation has a deficit in post-1986 earnings and profits described in [paragraph (f)(22)(i)(A)](#f-22-i-A) of this section only to the extent the deficit in post-1986 earnings and profits exceeds the aggregate of its post-1986 earnings and profits described in section [959(c)(1)](/cfr/26/959.md?p=c-1) and [959(c)(2)](/cfr/26/959.md?p=c-2).
  - (23) **E&P measurement dates.** The term E&P measurement dates means November 2, 2017, and December 31, 2017, collectively, and each an E&P measurement date.
  - (24) **Final cash measurement date.** The term final cash measurement date means, with respect to a specified foreign corporation, the close of the last taxable year of the specified foreign corporation that begins before January 1, 2018, and ends on or after November 2, 2017, if any.
  - (25) **First cash measurement date.** The term first cash measurement date means, with respect to a specified foreign corporation, the close of the last taxable year of the specified foreign corporation that ends after November 1, 2015, and before November 2, 2016, if any.
  - (26) **Inclusion year.** The term inclusion year means, with respect to a deferred foreign income corporation, the last taxable year of the deferred foreign income corporation that begins before January 1, 2018.
  - (27) **Net accounts receivable.** The term net accounts receivable means, with respect to a specified foreign corporation, the excess (if any) of—
    - (i) The corporation's accounts receivable, over
    - (ii) **The corporation's accounts payable (determined consistent with the rules of section 461).**
  - (28) **Pass-through entity.** The term pass-through entity means a partnership, S corporation, or any other person (whether domestic or foreign) other than a corporation to the extent that the income or deductions of the person are included in the income of one or more direct or indirect owners or beneficiaries of the person. For example, if a domestic trust is subject to federal income tax on a portion of its [section 965(a)](/cfr/26/965.md?p=a) inclusion amount and its domestic pass-through owners are subject to tax on the remaining portion, the domestic trust is treated as a domestic pass-through entity with respect to such remaining portion.
  - (29) **Post-1986 earnings and profits—**
    - (i) **General rule.** The term post-1986 earnings and profits means, with respect to a specified foreign corporation and an E&P measurement date, the earnings and profits (including earnings and profits described in section [959(c)(1)](/cfr/26/959.md?p=c-1) and [959(c)(2)](/cfr/26/959.md?p=c-2)) of the specified foreign corporation (computed in accordance with sections [964(a)](/cfr/26/964.md?p=a) and [986](/cfr/26/986.md), subject to [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f), and by taking into account only periods when the foreign corporation was a specified foreign corporation) accumulated in taxable years beginning after December 31, 1986, and determined—
      - (A) As of the E&P measurement date, except as provided in [paragraph (f)(29)(ii)](#f-29-ii) of this section, and
      - (B) Without diminution by reason of dividends distributed during the last taxable year of the foreign corporation that begins before January 1, 2018, other than dividends distributed to another specified foreign corporation to the extent the dividends increase the post-1986 earnings and profits of the distributee specified foreign corporation.
    - (ii) **Foreign income taxes.** For purposes of determining a specified foreign corporation's post-1986 earnings and profits as of the E&P measurement date on November 2, 2017, in the case in which foreign income taxes (as defined in [section 901(m)(5)](/cfr/26/901.md?p=m-5)) of the specified foreign corporation accrue after November 2, 2017, but on or before December 31, 2017, and during the specified foreign corporation's U.S. taxable year that includes November 2, 2017, the specified foreign corporation's post-1986 earnings and profits as of November 2, 2017, are reduced by the applicable portion of such foreign income taxes. For purposes of the preceding sentence, the applicable portion of the foreign income taxes is the amount of the taxes that are attributable to the portion of the taxable income (as determined under foreign law) that accrues on or before November 2, 2017.
    - (iii) **Deficits in earnings and profits.** Any deficit related to post-1986 earnings and profits, including a hovering deficit (as defined in [§ 1.367(b)-7(d)(2)(i)](/cfr/26/1.367..7.md)), of a specified foreign corporation is taken into account for purposes of determining the post-1986 earnings and profits (including a deficit) of the specified foreign corporation.
  - (30) **Pro rata share.** The term pro rata share means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of a specified foreign corporation, a deferred foreign income corporation, or an E&P deficit foreign corporation, as applicable—
    - (i) With respect to the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of a deferred foreign income corporation, the portion of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount that would be treated as distributed to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder under [§ 1.951-1(e)](/cfr/26/1.951-1.md?p=e), determined as of the last day of the inclusion year of the deferred foreign income corporation on which it is a specified foreign corporation;
    - (ii) With respect to the specified E&P deficit of an E&P deficit foreign corporation, the portion of the specified E&P deficit allocated to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, determined by allocating the specified E&P deficit among the shareholders of the corporation's common stock in proportion to the liquidation value of the common stock held by the shareholders, determined as of the last day of the last taxable year of the E&P deficit foreign corporation that begins before January 1, 2018, provided that—
      - (A) If the corporation's common stock has a liquidation value of zero and there is at least one other class of equity with a liquidation preference relative to the common stock, then the specified E&P deficit is allocated as if it were distributed in a hypothetical distribution described in [§ 1.951-1(e)(1)(i)](/cfr/26/1.951-1.md?p=e-1-i) with respect to the most junior class of equity with a positive liquidation value to the extent of such liquidation value, and then to the next most junior class of equity to the extent of its liquidation value, and so on, applying [§ 1.951-1(e)](/cfr/26/1.951-1.md?p=e) by substituting “specified E&P deficit” for “[subpart F](/cfr/26/subpartF.md) income” each place it appears and treating the amount of current earnings and profits of the corporation for the year as being equal to the specified E&P deficit of the corporation for the year; and
      - (B) If the corporation's common stock has a liquidation value of zero and there is no other class of equity with a liquidation preference relative to the common stock, the specified E&P deficit is allocated among the common stock using any reasonable method consistently applied; and
    - (iii) With respect to the cash position of a specified foreign corporation on a cash measurement date, the portion of the cash position that would be treated as distributed to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder under [§ 1.951-1(e)](/cfr/26/1.951-1.md?p=e) if the cash position were [subpart F](/cfr/26/subpartF.md) income, determined as of the close of the cash measurement date and without regard to whether the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of the specified foreign corporation as of any other cash measurement date of the specified foreign corporation, including the final cash measurement date of the specified foreign corporation.
  - (31) **Second cash measurement date.** The term second cash measurement date means, with respect to a specified foreign corporation, the close of the last taxable year of the specified foreign corporation that ends after November 1, 2016, and before November 2, 2017, if any.
  - (32) **Section 958(a) stock.** The term [section 958(a)](/cfr/26/958.md?p=a) stock means, with respect to a specified foreign corporation, a deferred foreign income corporation, or an E&P deficit foreign corporation, as applicable, stock of the corporation owned (directly or indirectly) by a United States shareholder within the meaning of [section 958(a)](/cfr/26/958.md?p=a).
  - (33) **Section 958(a) U.S. shareholder.** The term [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder means, with respect to a specified foreign corporation, a deferred foreign income corporation, or an E&P deficit foreign corporation, as applicable, a United States shareholder of such corporation that owns [section 958(a)](/cfr/26/958.md?p=a) stock of the corporation.
  - (34) **Section 958(a) U.S. shareholder inclusion year.** The term [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year means the taxable year of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder in which or with which the last day of the inclusion year of a deferred foreign income corporation on which it is a specified foreign corporation occurs.
  - (35) **Section 965 regulations.** The term [section 965](/cfr/26/965.md) regulations means the regulations under [§§ 1.965-1 through 1.965-9](/cfr/26/1.965-1..1.965-9.md), collectively.
  - (36) **Section 965(a) earnings amount.** The term [section 965(a)](/cfr/26/965.md?p=a) earnings amount means, with respect to a deferred foreign income corporation, the greater of the accumulated post-1986 deferred foreign income of the deferred foreign income corporation as of the E&P measurement date on November 2, 2017, or the accumulated post-1986 deferred foreign income of the deferred foreign income corporation as of the E&P measurement date on December 31, 2017, determined in each case in the functional currency of the specified foreign corporation. If the functional currency of a specified foreign corporation changes between the two E&P measurement dates, the comparison must be made in the functional currency of the specified foreign corporation as of December 31, 2017, by translating the specified foreign corporation's accumulated post-1986 deferred foreign income as of November 2, 2017, into the new functional currency using the spot rate on November 2, 2017.
  - (37) **Section 965(a) inclusion.** The term [section 965(a)](/cfr/26/965.md?p=a) inclusion means, with respect to a person and a deferred foreign income corporation, an amount included in income by the person by reason of [section 965](/cfr/26/965.md) with respect to the deferred foreign income corporation, whether because the person is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of the deferred foreign income corporation with a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the deferred foreign income corporation or because the person is a domestic pass-through owner with respect to a domestic pass-through entity that is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of the deferred foreign income corporation and the person includes in income its domestic pass-through owner share of the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of the domestic pass-through entity with respect to the deferred foreign income corporation.
  - (38) **Section 965(a) inclusion amount.** The term [section 965(a)](/cfr/26/965.md?p=a) inclusion amount has the meaning provided in [paragraph (b)(1)](#b-1) of this section.
  - (39) **Section 965(a) previously taxed earnings and profits.** The term [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits has the meaning provided in [§ 1.965-2(c)](/cfr/26/1.965-2.md?p=c).
  - (40) **Section 965(b) previously taxed earnings and profits.** The term [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits has the meaning provided in [§ 1.965-2(d)](/cfr/26/1.965-2.md?p=d).
  - (41) **Section 965(c) deduction.** The term [section 965(c)](/cfr/26/965.md?p=c) deduction means, with respect to a person, an amount allowed as a deduction to the person by reason of [section 965(c)](/cfr/26/965.md?p=c), whether because the person is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder with a [section 965(c)](/cfr/26/965.md?p=c) deduction amount or because the person is a domestic pass-through owner with respect to a domestic pass-through entity that is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and the person takes into account its domestic pass-through owner share of the [section 965(c)](/cfr/26/965.md?p=c) deduction amount of the domestic pass-through entity.
  - (42) **Section 965(c) deduction amount.** The term [section 965(c)](/cfr/26/965.md?p=c) deduction amount means an amount equal to the sum of—
    - (i) A [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 8 percent rate equivalent percentage of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 8 percent rate amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, plus
    - (ii) The [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 15.5 percent rate equivalent percentage of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 15.5 percent rate amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year.
  - (43) **Short-term obligation.** The term short-term obligation means any obligation with a term upon issuance that is less than one year and any loan that must be repaid at the demand of the lender (or that must be repaid within one year of such demand), but does not include any accounts receivable.
  - (44) **Specified E&P deficit.** The term specified E&P deficit means, with respect to an E&P deficit foreign corporation, the amount of the deficit described in [paragraph (f)(22)(i)(A)](#f-22-i-A) of this section.
  - (45) **Specified foreign corporation—**
    - (i) **General rule.** Except as provided in [paragraph (f)(45)(iii)](#f-45-iii) of this section, the term specified foreign corporation means—
      - (A) A controlled foreign corporation, or
      - (B) **A foreign corporation of which one or more domestic corporations is a United States shareholder.**
    - (ii) **Special attribution rule—**
      - (A) **In general.** Solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section, stock owned, directly or indirectly, by or for—

        (1) A partner (tested partner) will not be considered as being owned by a partnership under sections [958(b)](/cfr/26/958.md?p=b) and [318(a)(3)(A)](/cfr/26/318.md?p=a-3-A) and [§ 1.958-2(d)(1)(i)](/cfr/26/1.958-2.md?p=d-1-i) if the tested partner owns less than ten percent of the interests in the partnership's capital and profits; and

        (2) A beneficiary (tested beneficiary) will not be considered as being owned by a trust under sections [958(b)](/cfr/26/958.md?p=b) and [318(a)(3)(B)](/cfr/26/318.md?p=a-3-B) and [§ 1.958-2(d)(1)(ii)](/cfr/26/1.958-2.md?p=d-1-ii) if the value of the interest of the tested beneficiary, computed actuarially, whether vested or contingent, current or remainder, is less than ten percent of the value of the trust property, assuming the maximum exercise of discretion in favor of the beneficiary.

      - (B) **Attribution for purposes of the ten percent standard.** For purposes of [paragraph (f)(45)(ii)(A)](#f-45-ii-A) of this section, an interest in a partnership or trust owned by a partner or beneficiary other than the tested partner or tested beneficiary will be considered as being owned by the tested partner or tested beneficiary under the principles of sections [958(b)](/cfr/26/958.md?p=b) and [318](/cfr/26/318.md), as modified by this [paragraph (f)(45)(ii)](#f-45-ii), as if interests in a partnership or trust were stock.
    - (iii) **Passive foreign investment companies.** A foreign corporation that is a passive foreign investment company (as defined in [section 1297](/cfr/26/1297.md)) with respect to a United States shareholder and that is not a controlled foreign corporation is not a specified foreign corporation of the United States shareholder.
  - (46) **Spot rate.** The term spot rate has the meaning provided in [§ 1.988-1(d)](/cfr/26/1.988-1.md?p=d).
  - (47) **United States shareholder.** The term United States shareholder has the meaning provided in [section 951(b)](/cfr/26/951.md?p=b).
- (g) **Examples.** The following examples illustrate the definitions and general rules set forth in this section.
  - (1) **Example 1. Definition of specified foreign corporation—**
    - (i) **Facts.** A, an individual, owns 1% of the interests in a partnership, PS, and 10% by vote and value of the stock of a foreign corporation, FC. PS owns 100% of the stock of a domestic corporation, DC. A United States citizen, USI, owns an additional 10% by vote and value of the stock of FC. The remaining 80% by vote and value of the stock of FC is owned by non-United States persons that are unrelated to A, USI, DC, and PS.
    - (ii) **Analysis.**
      - (A) Absent the application of sections [958(b)](/cfr/26/958.md?p=b), [318(a)(3)(A)](/cfr/26/318.md?p=a-3-A), and [318(a)(3)(C)](/cfr/26/318.md?p=a-3-C), and § [1.958-2(d)(1)(i)](/cfr/26/1.958-2.md?p=d-1-i) and [(iii)](/cfr/26/1.958-2.md?p=d-1-iii), FC would not be a specified foreign corporation because FC is not a controlled foreign corporation and there would be no domestic corporation that is a United States shareholder of FC. However, under sections [958(b)](/cfr/26/958.md?p=b) and [318(a)(3)(A)](/cfr/26/318.md?p=a-3-A) and [§ 1.958-2(d)(1)(i)](/cfr/26/1.958-2.md?p=d-1-i), absent the special attribution rule in [paragraph (f)(45)(ii)](#f-45-ii) of this section, PS would be treated as owning 10% of the stock of FC. As a result, under sections [958(b)](/cfr/26/958.md?p=b), [318(a)(5)(A)](/cfr/26/318.md?p=a-5-A), and [318(a)(3)(C)](/cfr/26/318.md?p=a-3-C), and § [1.958-2(f)(1)(i)](/cfr/26/1.958-2.md?p=f-1-i) and [(d)(1)(iii)](/cfr/26/1.958-2.md?p=d-1-iii), DC would be treated as owning the stock of FC treated as owned by PS, and thus DC would be a United States shareholder with respect to FC, causing FC to be a specified foreign corporation within the meaning of [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section. The results would be the same whether A or PS or both are domestic or foreign persons.
      - (B) Under the special attribution rule in [paragraph (f)(45)(ii)](#f-45-ii) of this section, solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section, the stock of FC owned by A is not considered as being owned by PS under sections [958(b)](/cfr/26/958.md?p=b) and [318(a)(3)(A)](/cfr/26/318.md?p=a-3-A) and [§ 1.958-2(d)(1)(i)](/cfr/26/1.958-2.md?p=d-1-i) because A owns less than 10% of the interests in PS's capital and profits. Accordingly, FC is not a specified foreign corporation within the meaning of [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section.
  - (2) **Example 2. Definition of specified foreign corporation—**
    - (i) **Facts.** The facts are the same as in [paragraph(g)(1)(i)](#g-1-i) of this section (the facts in Example 1), except that A is a foreign corporation wholly owned by B, a foreign corporation, and B directly owns 9% of the interests in PS.
    - (ii) **Analysis.** Applying the principles of sections [958(b)](/cfr/26/958.md?p=b) and [318](/cfr/26/318.md), as modified by [paragraph (f)(45)(ii)](#f-45-ii) of this section, as if the interest in PS were stock, A is treated as owning the interests in PS owned by B (in addition to the 1% interest in PS that A owns directly), and thus A is not treated as owning less than 10% of the interests in PS's capital and profits. Accordingly, the special attribution rule in [paragraph (f)(45)(ii)](#f-45-ii) of this section does not apply, and PS is treated as owning A's stock of FC for purposes of determining whether FC is a specified foreign corporation within the meaning of [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section. Accordingly, under the analysis described in paragraph (ii)(A) of Example 1 of [paragraph (g)(1)](#g-1) of this section, FC is a specified foreign corporation within the meaning of [section 965(e)(1)(B)](/cfr/26/965.md?p=e-1-B) and [paragraph (f)(45)(i)(B)](#f-45-i-B) of this section.
  - (3) **Example 3. Determination of accumulated post-1986 deferred foreign income—**
    - (i) **Facts.** USP, a domestic corporation, and FP, a foreign corporation unrelated to USP, have owned 70% and 30% respectively, by vote and value, of the only class of stock of FS, a foreign corporation, from January 1, 2016, until December 31, 2017. USP and FS both have a calendar year taxable year. FS had no income until its taxable year ending December 31, 2016, in which it had 100u of income, all of which constituted [subpart F](/cfr/26/subpartF.md) income, and USP included 70u in income with respect to FS under [section 951(a)(1)](/cfr/26/951.md?p=a-1) for such year. FS earned no income in 2017. Therefore, FS's post-1986 earnings and profits are 100u as of both E&P measurement dates.
    - (ii) **Analysis.** Because USP included 70u in income with respect to FS under section [951(a)(1)](/cfr/26/951.md?p=a-1), [70u](/cfr/26/70u.md) of such post-1986 earnings and profits would, if distributed, be excluded from the gross income of USP under [section 959](/cfr/26/959.md). Thus, FS's accumulated post-1986 deferred foreign income would be reduced by 70u pursuant to [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and [paragraph (f)(7)(i)(B)](#f-7-i-B) of this section. Furthermore, under [paragraph (f)(7)(i)(C)](#f-7-i-C) of this section, the accumulated post-1986 deferred foreign income of FS is reduced by amounts that would be excluded from the gross income of FP if FP were a United States shareholder, consistent with the principles of Revenue Ruling 82-16. Accordingly, FS's accumulated post-1986 deferred foreign income is reduced by the remaining 30u of the 100u of post-1986 earnings and profits to which USP's 70u of [section 951(a)(1)](/cfr/26/951.md?p=a-1) income inclusions were attributable. As a result, FS's accumulated post-1986 deferred foreign income is 0u (100u minus 70u minus 30u).
  - (4) **Example 4. Determination of status as a deferred foreign income corporation or an E&P deficit foreign corporation; specified foreign corporation is solely a deferred foreign income corporation—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of FS, a foreign corporation. As of November 2, 2017, FS has a deficit in post-1986 earnings and profits of 150u. As of December 31, 2017, FS has 200u of post-1986 earnings and profits. FS does not have earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder.
    - (ii) **Analysis.** FS's accumulated post-1986 deferred foreign income is equal to its post-1986 earnings and profits because no adjustment to post-1986 earnings and profits is made under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](#f-7). Under [paragraph (f)(17)(i)](#f-17-i) of this section, FS is a deferred foreign income corporation because FS has accumulated post-1986 deferred foreign income greater than zero as of the E&P measurement date on December 31, 2017. In addition, under [paragraph (f)(17)(ii)](#f-17-ii) of this section, because FS is a deferred foreign income corporation, FS is not also an E&P deficit foreign corporation, notwithstanding that FS has a deficit in post-1986 earnings and profits as of the E&P measurement date on November 2, 2017.
  - (5) **Example 5. Determination of status as a deferred foreign income corporation or an E&P deficit foreign corporation; specified foreign corporation is neither a deferred foreign income corporation nor an E&P deficit foreign corporation—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of FS, a foreign corporation. As of both November 2, 2017, and December 31, 2017, FS has 100u of earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) and a deficit of 90u in earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3), all of which were accumulated in taxable years beginning after December 31, 1986, while FS was a specified foreign corporation. Accordingly, as of both November 2, 2017, and December 31, 2017, FS has 10u of post-1986 earnings and profits.
    - (ii) **Analysis—**
      - (A) **Determination of status as a deferred foreign income corporation.** Under [paragraph (f)(17)](#f-17) of this section, for purposes of determining whether FS is a deferred foreign income corporation, a determination must be made whether FS has accumulated post-1986 deferred foreign income greater than zero as of either the E&P measurement date on November 2, 2017, or the E&P measurement date on December 31, 2017. Under [section 965(d)(2)](/cfr/26/965.md?p=d-2) and [paragraph (f)(7)](#f-7) of this section, FS's accumulated post-1986 deferred foreign income is its post-1986 earnings and profits, except to the extent such earnings and profits are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder. Disregarding FS's 100u of post-1986 earnings and profits described in [paragraph (f)(7)(i)(B)](#f-7-i-B) of this section, FS has a 90u deficit in accumulated post-1986 deferred foreign income as of both E&P measurement dates. Accordingly, FS does not have accumulated post-1986 deferred foreign income greater than zero as of either E&P measurement date, and, therefore, FS is not a deferred foreign income corporation.
      - (B) **Determination of status as an E&P deficit foreign corporation.** Under [paragraph (f)(22)(i)](#f-22-i) of this section, for purposes of determining whether FS is an E&P deficit foreign corporation, a determination must be made whether FS has a deficit in post-1986 earnings and profits as of the E&P measurement date on November 2, 2017. Under [paragraph (f)(22)(ii)](#f-22-ii) of this section, because the deficit in the earnings and profits of FS described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) of 90u does not exceed the earnings and profits of FS described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) of 100u, FS does not have a deficit in post-1986 earnings and profits as of the E&P measurement date on November 2, 2017, and, therefore, FS is not an E&P deficit foreign corporation. Accordingly, FS is neither a deferred foreign income corporation nor an E&P deficit foreign corporation.
  - (6) **Example 6. Application of currency translation rules—**
    - (i) **Facts.** As of November 2, 2017, and December 31, 2017, USP, a domestic corporation, owns all of the stock of CFC1, an E&P deficit foreign corporation with the “u” as its functional currency; CFC2, an E&P deficit foreign corporation with the “v” as its functional currency; CFC3, a deferred foreign income corporation with the “y” as its functional currency; and CFC4, a deferred foreign income corporation with the “z” as its functional currency. USP, CFC1, CFC2, CFC3, and CFC4 each have a calendar year taxable year. As of December 31, 2017, 1u=$1, .75v=$1, .50y=$1, and .25z=$1. CFC1 has a specified E&P deficit of 100u, CFC2 has a specified E&P deficit of 120v, CFC3 has a [section 965(a)](/cfr/26/965.md?p=a) earnings amount of 50y, and CFC4 has a [section 965(a)](/cfr/26/965.md?p=a) earnings amount of 75z.
    - (ii) **Analysis.**
      - (A) Under [paragraph (f)(38)](#f-38) of this section, for purposes of determining USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC3 and CFC4, the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of each of CFC3 and CFC4 is translated into U.S. dollars at the spot rate on December 31, 2017, which equals $100 (50y at .50y=$1) and $300 (75z at .25z=$1), respectively. Furthermore, USP's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amounts, as translated, is $100 and $300, respectively, or 100% of each [section 965(a)](/cfr/26/965.md?p=a) earnings amount.
      - (B) Under [paragraph (f)(9)](#f-9) of this section, for purposes of determining USP's aggregate foreign E&P deficit, the specified E&P deficit of each of CFC1 and CFC2 is translated into U.S. dollars at the spot rate on December 31, 2017, which equals $100 (100u at 1u=$1) and $160 (120v at .75v=$1), respectively. Furthermore USP's pro rata share of each specified E&P deficit, as translated, is $100 and $160, respectively, or 100% of each specified E&P deficit. Therefore, USP's aggregate foreign E&P deficit is $260.
      - (C) Under [section 965(b)(1)](/cfr/26/965.md?p=b-1) and [paragraph (b)(2)](#b-2) of this section, for purposes of determining USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to each of CFC3 and CFC4, the U.S. dollar amount of USP's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of each of CFC3 and CFC4 is reduced by each of CFC3 and CFC4's allocable share of USP's aggregate foreign E&P deficit. Under [section 965(b)(2)](/cfr/26/965.md?p=b-2) and [paragraph (f)(11)](#f-11) of this section, CFC3's allocable share of USP's aggregate foreign E&P deficit of $260 is $65 ($260 × ($100/$400)) and CFC4's allocable share of USP's aggregate foreign E&P deficit is $195 ($260 × ($300/400)). After reduction under [section 965(b)(1)](/cfr/26/965.md?p=b-1) and [paragraph (b)(2)](#b-2) of this section, the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of USP with respect to CFC3 is $35 ($100−$65) and the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of USP with respect to CFC4 is $105 ($300−$195). Under [§ 1.965-2(c)](/cfr/26/1.965-2.md?p=c), the [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits of each of CFC3 and CFC4, translated into the respective functional currencies of CFC3 and CFC4 at the spot rate on December 31, 2017, are 17.5y ($35 at .50y=$1) and 26.25z ($105 at .25z=$1), respectively. Under [§ 1.965-6(b)(1)](/cfr/26/1.965-6.md?p=b-1), for purposes of applying [section 960(a)(1)](/cfr/26/960.md?p=a-1), the amounts treated as a dividend paid by each of CFC3 and CFC4, translated into the respective functional currencies of CFC3 and CFC4 at the spot rate on December 31, 2017, are 17.5y ($35 at .50y=$1) and 26.25z ($105 at .25z=$1).
      - (D) For purposes of determining the [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits of each of CFC3 and CFC4 under [section 965(b)(4)(A)](/cfr/26/965.md?p=b-4-A) and [§ 1.965-2(d)(1)](/cfr/26/1.965-2.md?p=d-1) as a result of the reduction to USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC3 and CFC4, the amount of the aggregate foreign E&P deficit of USP allocated to each of CFC3 and CFC4 under [section 965(b)(2)](/cfr/26/965.md?p=b-2) and [paragraph (f)(11)](#f-11) of this section, translated into the respective functional currencies of CFC3 and CFC4 at the spot rate on December 31, 2017, is 32.5y ($65 at .50y=$1) and 48.75z ($195 at .25z=$1), respectively.
  - (7) **Example 7. Determination of cash measurement dates and pro rata shares of cash positions—**
    - (i) **Facts.** Except as otherwise provided, for all relevant periods, USP, a domestic corporation, has owned directly at least 10% of the stock of CFC1, CFC2, CFC3, and CFC4, each a foreign corporation. CFC1 and CFC2 have calendar year taxable years. CFC3 and CFC4 have taxable years that end on November 30. No entity has a short taxable year, except as a result of the transactions described below.
      - (A) USP transferred all of its stock of CFC2 to an unrelated person on June 30, 2016, at which point USP ceased to be a United States shareholder with respect to CFC2.
      - (B) CFC4 dissolved on December 30, 2010, and, as a result, its final taxable year ended on December 30, 2010.
    - (ii) **Analysis.** Each of CFC1, CFC2, CFC3, and CFC4 is a specified foreign corporation of USP, subject to the sale of CFC2 on June 30, 2016, and the dissolution of CFC4 on December 30, 2010. Under the definition of aggregate foreign cash position in [paragraph (f)(8)(i)](#f-8-i) of this section, the definition of pro rata share of a cash position in [paragraph (f)(30)(iii)](#f-30-iii) of this section, and the definitions of the final cash measurement date, second cash measurement date, and first cash measurement date in paragraphs [(f)(24)](#f-24), [(25)](#f-25), and [(31)](#f-31) of this section, the cash measurement dates of the specified foreign corporations to be taken into account by USP in determining its aggregate foreign cash position are summarized in the following table:
  - (8) **Example 8. Determination of section 958(a) U.S. shareholder in case of a controlled domestic partnership—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1 and CFC2. CFC1 and CFC2 own 60% and 40%, respectively, of the interests in the capital and profits of DPS, a domestic partnership. DPS owns all of the stock of CFC3 and CFC4. This ownership structure has existed since the date of formation of CFC1, CFC2, CFC3, and CFC4. CFC1, CFC2, CFC3, and CFC4 are each a foreign corporation. USP, DPS, CFC1, CFC2, CFC3, and CFC4 have calendar year taxable years. On both E&P measurement dates, CFC3 has 50u of accumulated post-1986 deferred foreign income. On both E&P measurement dates, CFC4 has a deficit in post-1986 earnings and profits of 30u. On all cash measurement dates, CFC1, CFC2, and CFC3 each have a cash position of 0u, and CFC4 has a cash position of 200u.
    - (ii) **Analysis.** DPS is a controlled domestic partnership with respect to USP within the meaning of [paragraph (e)(2)](#e-2) of this section because more than 50% of the interests in its capital and profits are owned by persons related to USP within the meaning of [section 267(b)](/cfr/26/267.md?p=b), CFC1 and CFC2, and thus DPS is controlled by USP and related persons. Without regard to [paragraph (e)](#e) of this section, DPS is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of CFC3 and CFC4, each of which is a controlled foreign corporation. If DPS were treated as foreign, CFC3 and CFC4 would each continue to be a controlled foreign corporation, and USP would be treated as a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of each of CFC3 and CFC4, and would be treated as owning (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) tested [section 958(a)](/cfr/26/958.md?p=a) stock of each of CFC3 and CFC4 through CFC1 and CFC2, which are both partners in DPS. Thus, under [paragraph (e)(1)](#e-1) of this section, DPS is treated as a foreign partnership for purposes of determining the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of both CFC3 and CFC4 and the [section 958(a)](/cfr/26/958.md?p=a) stock of both CFC3 and CFC4 owned by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder. Thus, USP's pro rata share of CFC3's [section 965(a)](/cfr/26/965.md?p=a) earnings amount is 50u, and its pro rata share of CFC4's specified E&P deficit is 30u. USP's aggregate foreign cash position is 200u. DPS is not a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder with respect to either CFC3 or CFC4.

# §1.965-2. Adjustments to earnings and profits and basis.

- (a) **Scope.** This section provides rules relating to adjustments to earnings and profits and basis to determine and account for the application of section [965(a)](/cfr/26/965.md?p=a) and [(b)](/cfr/26/965.md?p=b) and [§ 1.965-1(b)](/cfr/26/1.965-1.md?p=b) and a rule that limits the amount of gain recognized under [section 961(b)(2)](/cfr/26/961.md?p=b-2) by reason of distributions attributable to [section 965](/cfr/26/965.md) previously taxed earnings and profits (as defined in [paragraph (g)(1)(ii)](#g-1-ii) of this section) in the inclusion year. [Paragraph (b)](#b) of this section provides rules relating to adjustments to earnings and profits of a specified foreign corporation for purposes of applying sections [902](/cfr/26/902.md), [959](/cfr/26/959.md), [960](/cfr/26/960.md), and [965](/cfr/26/965.md). [Paragraph (c)](#c) of this section provides rules regarding adjustments to earnings and profits by reason of [section 965(a)](/cfr/26/965.md?p=a). [Paragraph (d)](#d) of this section provides rules regarding adjustments to earnings and profits by reason of [section 965(b)](/cfr/26/965.md?p=b). [Paragraph (e)](#e) provides rules regarding adjustments to basis by reason of [section 965(a)](/cfr/26/965.md?p=a). [Paragraph (f)](#f) of this section provides an election to make certain adjustments to basis corresponding to adjustments to earnings and profits by reason of [section 965(b)](/cfr/26/965.md?p=b). [Paragraph (g)](#g) of this section provides rules that limit the amount of gain recognized in connection with the application of [section 961(b)(2)](/cfr/26/961.md?p=b-2) and that require related reductions in basis. [Paragraph (h)](#h) of this section provides rules regarding basis adjustments. Paragraph (i) of this section provides definitions that apply for purposes of this section. [Paragraph (j)](#j) of this section provides examples illustrating the application of this section.
- (b) **Determination of and adjustments to earnings and profits of a specified foreign corporation for purposes of applying sections 902, 959, 960, and 965.** For the taxable year of a specified foreign corporation in which an E&P measurement date occurs, and the last taxable year of a specified foreign corporation that begins before January 1, 2018, and the taxable year of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder in which or with which any such year ends, the adjustments to earnings and profits described in [paragraphs (b)(1) through (b)(5)](#b-1..b-5) of this section apply in sequence. For purposes of determining the consequences under sections [902](/cfr/26/902.md) and [960](/cfr/26/960.md) of a distribution or an inclusion under [section 951(a)(1)](/cfr/26/951.md?p=a-1), after the application of those paragraphs, the ordering rule in [§ 1.960-1(i)(2)](/cfr/26/1.960-1.md?p=i-2) applies except that [section 902](/cfr/26/902.md) is applied with respect to any distributions from the specified foreign corporation described in [paragraph (b)(2)](#b-2) of this section that are not disregarded under [§ 1.965-4](/cfr/26/1.965-4.md) before [section 960](/cfr/26/960.md) is applied with respect to an inclusion or distribution described in paragraph [(b)(3)](#b-3), [(b)(4)](#b-4), or [(b)(5)](#b-5) of this section.
  - (1) Each of the [subpart F](/cfr/26/subpartF.md) income of the specified foreign corporation and the amount required to be included in income under [section 1248](/cfr/26/1248.md), if any, are determined without regard to [section 965(a)](/cfr/26/965.md?p=a), but taking into account any relevant distributions, and earnings and profits of the specified foreign corporation that are described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder are increased to the extent of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a) (including to the extent provided in [section 959(e)](/cfr/26/959.md?p=e)).
  - (2) The treatment of a distribution by the specified foreign corporation to another specified foreign corporation that is made before January 1, 2018, and, in the case of a taxable year of a specified foreign corporation before its last taxable year that begins before January 1, 2018, any other distribution from the specified foreign corporation made before the relevant E&P measurement date, is determined under [section 959](/cfr/26/959.md).
  - (3) Each of the post-1986 earnings and profits (including a deficit) of the specified foreign corporation, the accumulated post-1986 deferred foreign income of the specified foreign corporation, the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the specified foreign corporation, and the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the specified foreign corporation, if any, is determined, taking into account the rules of [§ 1.965-4](/cfr/26/1.965-4.md), and the earnings and profits (including a deficit) of the specified foreign corporation are adjusted as provided in paragraphs [(c)](#c) and [(d)](#d) of this section. For a rule disregarding [subpart F](/cfr/26/subpartF.md) income earned after an E&P measurement date for purposes of calculating accumulated post-1986 deferred foreign income as of the E&P measurement date, see [§ 1.965-1(f)(7)(ii)](/cfr/26/1.965-1.md?p=f-7-ii).
  - (4) The treatment of distributions described in [paragraph (b)(2)](#b-2) of this section that are disregarded under [§ 1.965-4](/cfr/26/1.965-4.md) is redetermined (if necessary) and the treatment of all distributions from the specified foreign corporation other than those described in [paragraph (b)(2)](#b-2) of this section is determined under [section 959](/cfr/26/959.md).
  - (5) An amount is determined under [section 956](/cfr/26/956.md) with respect to the specified foreign corporation and the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder; earnings and profits of the specified foreign corporation described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder are reclassified as earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1) with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder to the extent the amount determined under [section 956](/cfr/26/956.md) would, but for [section 959(a)(2)](/cfr/26/959.md?p=a-2), be included by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder under [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B); and earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1) with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder are further increased to the extent of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's inclusion under [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B).
- (c) **Adjustments to earnings and profits by reason of section 965(a).** The earnings and profits of a deferred foreign income corporation described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder are increased by an amount equal to the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder with respect to the deferred foreign income corporation, if any, translated (if necessary) into the functional currency of the deferred foreign income corporation using the spot rate on December 31, 2017, provided the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount is included in income by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder. For purposes of the [section 965](/cfr/26/965.md) regulations, the earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by reason of this [paragraph (c)](#c) and the earnings and profits initially described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by reason of this [paragraph (c)](#c) but subsequently reclassified as earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1), if any, are referred to as [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits. Furthermore, the earnings and profits (including a deficit) of the deferred foreign income corporation that are described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) (or that would be described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) but for the application of [section 965(a)](/cfr/26/965.md?p=a) and the [section 965](/cfr/26/965.md) regulations) are reduced (or, in the case of a deficit, increased) by an amount equal to the [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits.
- (d) **Adjustments to earnings and profits by reason of section 965(b)—**
  - (1) **Adjustments to earnings and profits described in section 959(c)(2) and (c)(3) of deferred foreign income corporations.** The earnings and profits of a deferred foreign income corporation described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder are increased by an amount equal to the reduction to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the deferred foreign income corporation under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), and [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as applicable, translated (if necessary) into the functional currency of the deferred foreign income corporation using the spot rate on December 31, 2017, provided the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder includes the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount (if any) with respect to the deferred foreign income corporation in income. For purposes of the [section 965](/cfr/26/965.md) regulations, the earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by reason of this [paragraph (d)](#d) and the earnings and profits initially described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by reason of this [paragraph (d)](#d) but subsequently reclassified as earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1) are referred to as [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits, and are treated as having been previously included in the gross income of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder under [section 951](/cfr/26/951.md) for purposes of [section 1248(d)(1)](/cfr/26/1248.md?p=d-1). Furthermore, the earnings and profits (including a deficit) described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) of the deferred foreign income corporation (or that would be described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) but for the application of [section 965(b)](/cfr/26/965.md?p=b) and the [section 965](/cfr/26/965.md) regulations) are reduced (or, in the case of a deficit, increased) by an amount equal to the [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits.
  - (2) **Adjustments to earnings and profits described in section 959(c)(3) of E&P deficit foreign corporations—**
    - (i) **Increase in earnings and profits by an amount equal to the portion of the section 958(a) U.S. shareholder's pro rata share of the specified E&P deficit taken into account—**
      - (A) **In general.** For an E&P deficit foreign corporation's last taxable year that begins before January 1, 2018, the earnings and profits of the E&P deficit foreign corporation described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) are increased by an amount equal to the portion of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), and [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as determined under [paragraph (d)(2)(ii)](#d-2-ii) of this section, translated (if necessary) into the functional currency of the E&P deficit foreign corporation using the spot rate on December 31, 2017. For purposes of [section 316](/cfr/26/316.md), the earnings and profits of the E&P deficit foreign corporation attributable to the increase described in the preceding sentence are not treated as earnings and profits of the taxable year described in [section 316(a)(2)](/cfr/26/316.md?p=a-2). See also [§ 1.965-6(b)(3)](/cfr/26/1.965-6.md?p=b-3) for the timing of this adjustment for purposes of determining foreign taxes deemed paid under sections [902](/cfr/26/902.md) and [960](/cfr/26/960.md).
      - (B) **Reduction of a qualified deficit.** For purposes of [section 952](/cfr/26/952.md), a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the earnings and profits of an E&P deficit foreign corporation is increased by an amount equal to the portion of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as applicable, as determined under [paragraph (d)(2)(ii)](#d-2-ii) of this section, translated (if necessary) into the functional currency of the E&P deficit foreign corporation using the spot rate on December 31, 2017, and such increase is attributable to the same activity to which the deficit so taken into account was attributable.
    - (ii) **Determination of portion of a section 958(a) U.S. shareholder's pro rata share of a specified E&P deficit taken into account—**
      - (A) **In general.** The portion of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of a specified E&P deficit of an E&P deficit foreign corporation taken into account under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as applicable, is 100 percent of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the specified E&P deficit if either of the following conditions is satisfied:

        (1) The [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder (including a consolidated group of which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is a member) does not have an excess aggregate foreign E&P deficit (as defined in [§ 1.965-8(f)(7)(i)](/cfr/26/1.965-8.md?p=f-7-i)), or

        (2) If the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is a member of an affiliated group in which not all members are members of the same consolidated group, the amount described in [§ 1.965-8(f)(1)(i)(B)](/cfr/26/1.965-8.md?p=f-1-i-B) with respect to the affiliated group is equal to or greater than the amount described [§ 1.965-8(f)(1)(i)(A)](/cfr/26/1.965-8.md?p=f-1-i-A).

      - (B) **Designation of portion of a section 958(a) U.S. shareholder's pro rata share of a specified E&P deficit taken into account.** If neither the condition in paragraph (d)(2)(ii)(A)(1) nor the condition in paragraph (d)(2)(ii)(A)(2) is satisfied with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, then the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder must designate the portion taken into account by reporting to each E&P deficit foreign corporation of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, and maintaining, in its books and records, a statement setting forth the following information—

        (1) The portion of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as designated under [§ 1.965-8(c)](/cfr/26/1.965-8.md?p=c), as applicable, and

        (2) In the case of an E&P deficit foreign corporation that has a qualified deficit (as determined under [section 952](/cfr/26/952.md) and [§ 1.952-1](/cfr/26/1.952-1.md)), the portion (if any) of the [section 958(a)](/cfr/26/958.md?p=a) shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under paragraph (d)(2)(ii)(B)(1) of this section that is attributable to a qualified deficit, including the qualified activities to which such portion is attributable.

- (e) **Adjustments to basis by reason of section 965(a)—**
  - (1) **General rule.** Except as provided in [paragraph (e)(2)](#e-2) of this section, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in [section 958(a)](/cfr/26/958.md?p=a) stock of a deferred foreign income corporation, or a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in applicable property with respect to a deferred foreign income corporation, is increased by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the deferred foreign income corporation included in income by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder. See [section 961(a)](/cfr/26/961.md?p=a).
  - (2) **Section 962 election.** In the case of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder who has made an election under [section 962](/cfr/26/962.md) for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's inclusion year, the increase in basis in the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's [section 958(a)](/cfr/26/958.md?p=a) stock of, or applicable property with respect to, a deferred foreign income corporation cannot exceed an amount equal to the amount of tax paid under chapter 1 of the Code with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the deferred foreign income corporation, taking into account any [section 965(h)](/cfr/26/965.md?p=h) election made by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder.
- (f) **Adjustments to basis by reason of section 965(b)—**
  - (1) **In general.** Except as provided in [paragraph (f)(2)](#f-2) of this section, no adjustments to basis of stock or property are made under [section 961](/cfr/26/961.md) (or any other provision of the Code) to take into account the reduction to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of a deferred foreign income corporation under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as applicable.
  - (2) **Election to make adjustments to basis to account for the application of section 965(b)—**
    - (i) **In general.** If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder makes the election as provided in this [paragraph (f)(2)](#f-2), the adjustments to basis described in [paragraph (f)(2)(ii)](#f-2-ii) of this section are made with respect to each deferred foreign income corporation and each E&P deficit foreign corporation in which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder owns [section 958(a)](/cfr/26/958.md?p=a) stock.
    - (ii) **Basis adjustments—**
      - (A) **Increase in basis with respect to a deferred foreign income corporation—** (1) In general. Except as provided in paragraphs (f)(2)(ii)(A)(2) and (C) of this section, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in [section 958(a)](/cfr/26/958.md?p=a) stock of a deferred foreign income corporation, or a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in applicable property with respect to a deferred foreign income corporation, is increased by an amount equal to the [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits of the deferred foreign income corporation with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017.

        (2) Limited basis adjustment. A [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder may, in lieu of applying paragraph (f)(2)(ii)(A)(1) of this section, designate the amount by which it increases its basis in [section 958(a)](/cfr/26/958.md?p=a) stock of, or applicable property with respect to, a deferred foreign income corporation, provided that—

        (i) The increase does not exceed the [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits of the deferred foreign income corporation with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017; and

        (ii) The aggregate amount of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's increases in basis with respect to stock or applicable property pursuant to paragraph (f)(2)(ii)(A)(2) of this section does not exceed the aggregate amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's reductions in basis pursuant to [paragraph (f)(2)(ii)(B)](#f-2-ii-B) of this section subject to the limitation under paragraph (f)(2)(ii)(B)(2) of this section.

      - (B) **Reduction in basis with respect to an E&P deficit foreign corporation—** (1) In general. Except as provided in paragraphs (f)(2)(ii)(B)(2) and (f)(2)(ii)(C) of this section, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in [section 958(a)](/cfr/26/958.md?p=a) stock of an E&P deficit foreign corporation, or a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in applicable property with respect to an E&P deficit foreign corporation, is reduced by an amount equal to the portion of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation taken into account under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), and [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b), as applicable, as determined under [paragraph (d)(2)(ii)](#d-2-ii) of this section, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017. For rules requiring gain recognition, see [paragraph (h)(3)](#h-3) of this section.

        (2) Limited basis adjustment. If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder adjusts its basis in [section 958(a)](/cfr/26/958.md?p=a) stock of, or applicable property with respect to, one or more deferred foreign income corporations under paragraph (f)(2)(ii)(A)(2) of this section, the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate reductions in basis in [section 958(a)](/cfr/26/958.md?p=a) stock of, or applicable property with respect to, an E&P deficit foreign corporation pursuant to paragraph (f)(2)(ii)(B)(1) of this section on a day may not exceed the amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in the [section 958(a)](/cfr/26/958.md?p=a) stock of, or applicable property with respect to, such E&P deficit foreign corporation, determined without taking into account specified basis adjustments to the [section 958(a)](/cfr/26/958.md?p=a) stock of, or applicable property with respect to, such E&P deficit foreign corporation.

      - (C) **Section 962 election.** In the case of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder who has made an election under [section 962](/cfr/26/962.md) for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's inclusion year, the adjustments provided in paragraphs [(f)(2)(ii)(A)](#f-2-ii-A) and [(B)](#f-2-ii-B) of this section do not apply.
    - (iii) **Rules regarding the election—**
      - (A) **Consistency requirement.** In order for the election described in this [paragraph (f)(2)](#f-2) to be effective, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and each [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of an E&P deficit foreign corporation or of a deferred foreign income corporation with respect to which the second [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount is reduced under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b) that is related to the first [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder must make the election described in this [paragraph (f)(2)](#f-2). For purposes of this [paragraph (f)(2)(iii)(A)](#f-2-iii-A), a person is treated as related to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder if the person bears a relationship to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder described in section [267(b)](/cfr/26/267.md?p=b) or [707(b)](/cfr/26/707.md?p=b).
      - (B) **Manner of making election—** (1) Timing—(i) In general. Except as provided in paragraph (f)(2)(iii)(B)(1)(ii) of this section, the election provided in this [paragraph (f)(2)](#f-2) must be made no later than the due date (taking into account extensions, if any) for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's return for the first taxable year that includes the last day of the last taxable year of a deferred foreign income corporation or E&P deficit foreign corporation of the shareholder that begins before January 1, 2018. Relief is not available under § [301.9100-2](/cfr/26/301.9100-2.md) or [301.9100-3](/cfr/26/301.9100-3.md) to file a late election. Except as provided in paragraph (f)(2)(iii)(B)(1)(ii) of this section, the election provided in this [paragraph (f)(2)](#f-2) is irrevocable.

        (ii) Transition rule. If the due date referred to in paragraph (f)(2)(iii)(B)(1)(i) of this section occurs before May 6, 2019, the election must be made by May 6, 2019. In the case of an election made before February 5, 2019, the election may be revoked by attaching a statement, signed under penalties of perjury, to an amended return filed by May 6, 2019. The statement must contain the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's name and taxpayer identification number and a statement that the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and all related persons, as defined in [paragraph (f)(2)(iii)(A)](#f-2-iii-A) of this section, that are [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholders of E&P deficit foreign corporations or of deferred foreign income corporations with respect to which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount is reduced under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b) revoke the election provided in this [paragraph (f)(2)](#f-2).

        (2) Election statement. Except as otherwise provided in publications, forms, instructions, or other guidance, to make the election provided in this [paragraph (f)(2)](#f-2), a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder must attach a statement, signed under penalties of perjury consistent with the rules for signatures applicable to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholders return, to its return for the first taxable year that includes the last day of the last taxable year of a deferred foreign income corporation or E&P deficit foreign corporation of the shareholder that begins before January 1, 2018. The statement must include the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's name, taxpayer identification number, and a statement that the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and all related persons, as defined in [paragraph (f)(2)(iii)(A)](#f-2-iii-A) of this section, that are [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholders of E&P deficit foreign corporations or of deferred foreign income corporations with respect to which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount is reduced under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b) make the election provided in this [paragraph (f)(2)](#f-2). If the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder increases its basis in stock or applicable property under paragraph (f)(2)(ii)(A)(2) of this section and decreases its basis in stock or applicable property pursuant to [paragraph (f)(2)(ii)(B)](#f-2-ii-B) of this section subject to the limitation under paragraph (f)(2)(ii)(B)(2) of this section, the election statement must so indicate. The attachment of an unsigned copy of the election statement to the timely-filed return for the relevant taxable year satisfies the signature requirement of this paragraph (f)(2)(iii)(B)(2) if the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder retains the original signed election statement in the manner specified by [§ 1.6001-1(e)](/cfr/26/1.6001-1.md?p=e).

- (g) **Gain reduction rule—**
  - (1) **Reduction in gain recognized under section 961(b)(2) by reason of distributions attributable to section 965 previously taxed earnings and profits in the inclusion year—**
    - (i) **In general.** If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder receives a distribution from a deferred foreign income corporation (including through a chain of ownership described under [section 958(a)](/cfr/26/958.md?p=a)) during the inclusion year of the deferred foreign income corporation that is attributable to [section 965](/cfr/26/965.md) previously taxed earnings and profits of the deferred foreign income corporation, then the amount of gain that otherwise would be recognized under [section 961(b)(2)](/cfr/26/961.md?p=b-2) by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's [section 958(a)](/cfr/26/958.md?p=a) stock of the deferred foreign income corporation or interest in applicable property with respect to the deferred foreign income corporation is reduced (but not below zero) by an amount equal to the [section 965](/cfr/26/965.md) previously taxed earnings and profits of the deferred foreign income corporation with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, translated (if necessary) into U.S. dollars at the spot rate on December 31, 2017.
    - (ii) **Definition of section 965 previously taxed earnings and profits.** For purposes of [paragraph (g)(1)(i)](#g-1-i) of this section, the term [section 965](/cfr/26/965.md) previously taxed earnings and profits means, with respect to a deferred foreign income corporation and a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the sum of the [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits of the deferred foreign income corporation with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, and, if the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder has made the election described in [paragraph (f)(2)](#f-2) of this section, the [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits of the deferred foreign income corporation with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder.
  - (2) **Reduction in basis by an amount equal to the gain reduction amount.** If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder does not recognize gain under [section 961(b)(2)](/cfr/26/961.md?p=b-2) by reason of [paragraph (g)(1)](#g-1) of this section with respect to a distribution from a deferred foreign income corporation (including through a chain of ownership described under [section 958(a)](/cfr/26/958.md?p=a)), the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in the [section 958(a)](/cfr/26/958.md?p=a) stock of the deferred foreign income corporation, or the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in the applicable property with respect to the deferred foreign income corporation, is reduced by the amount of gain that would otherwise be recognized by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder without regard to [paragraph (g)(1)](#g-1) of this section.
- (h) **Rules of application for specified basis adjustments.** This [paragraph (h)](#h) applies for purposes of making any adjustment to the basis of [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property with respect to a specified foreign corporation described in paragraph [(e)](#e), [(f)(2)](#f-2), or [(g)(2)](#g-2) of this section (collectively, specified basis adjustments, and each a specified basis adjustment).
  - (1) **Timing of basis adjustments.** Except as provided in [paragraph (e)(2)](#e-2) of this section, a specified basis adjustment to [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property with respect to a specified foreign corporation is made as of the last day of the last taxable year of the specified foreign corporation that begins before January 1, 2018, on which it is a specified foreign corporation.
  - (2) **Netting of basis adjustments.** If one or more specified basis adjustments occur on the same day with respect to the same [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property, a single basis adjustment is made as of the close of such day with respect to such stock or applicable property in an amount equal to the net amount, if any, of the increase or reduction, as applicable.
  - (3) **Gain recognition for reduction in excess of basis.** The excess (if any) of a net reduction in basis with respect to [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder by reason of one or more specified basis adjustments over the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's basis in such stock or applicable property without regard to the specified basis adjustments is treated as gain from the sale or exchange of property.
  - (4) **Adjustments with respect to each share—**
    - (i) **Section 958(a) stock.** If a specified basis adjustment is made with respect to [section 958(a)](/cfr/26/958.md?p=a) stock, the specified basis adjustment is made with respect to each share of the [section 958(a)](/cfr/26/958.md?p=a) stock in a manner consistent with the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount or specified E&P deficit, as applicable, by reason of such share.
    - (ii) **Applicable property.** If a specified basis adjustment is made with respect to applicable property, the adjustment is made with respect to the applicable property in a manner consistent with the application of [paragraph (h)(4)(i)](#h-4-i) of this section.
  - (5) **Stock or property for which adjustments are made—**
    - (i) **In general.** Except as provided in [paragraph (h)(5)(ii)](#h-5-ii) of this section, a specified basis adjustment is made solely with respect to [section 958(a)](/cfr/26/958.md?p=a) stock owned by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder within the meaning of [section 958(a)(1)(A)](/cfr/26/958.md?p=a-1-A) or applicable property owned directly by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder.
    - (ii) **Special rule for an interest in a foreign pass-through entity.** If the applicable property of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder described in [paragraph (h)(5)(i)](#h-5-i) of this section is an interest in a foreign pass-through entity, then, for purposes of determining the foreign pass-through entity's basis in [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property, as applicable, with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, a specified basis adjustment is made with respect to [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder owned through the foreign pass-through entity in the same manner as if the [section 958(a)](/cfr/26/958.md?p=a) stock or applicable property were owned directly by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder. In the case of tiered foreign pass-through entities, this [paragraph (h)(5)(ii)](#h-5-ii) applies with respect to each foreign pass-through entity.
    - (i) **Definitions.** This paragraph (i) provides definitions that apply for purposes of this section.
  - (1) **Applicable property.** The term applicable property means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and a specified foreign corporation, property owned by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder (including through one or more foreign pass-through entities) by reason of which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is considered under [section 958(a)(2)](/cfr/26/958.md?p=a-2) as owning [section 958(a)](/cfr/26/958.md?p=a) stock of the specified foreign corporation.
  - (2) **Foreign pass-through entity.** The term foreign pass-through entity means a foreign partnership or a foreign estate or trust (as defined in [section 7701(a)(31)](/cfr/26/7701.md?p=a-31)) (including a controlled domestic partnership treated as a foreign partnership pursuant to [§ 1.965-1(e)](/cfr/26/1.965-1.md?p=e)).
  - (3) **Property.** The term property has the meaning provided in [§ 1.961-1(b)(1)](/cfr/26/1.961-1.md?p=b-1).
- (j) **Examples.** The following examples illustrate the application of this section.
  - (1) **Example 1. Determination of accumulated post-1986 deferred foreign income with subpart F income earned before E&P measurement date on November 2, 2017—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP, CFC1, and CFC2 all have taxable years ending December 31, 2017. As of January 1, 2017, CFC1 has no earnings and profits, and CFC2 has 100u of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) that were accumulated in taxable years beginning after December 31, 1986, while CFC2 was a specified foreign corporation, and $21x of post-1986 foreign income taxes. None of CFC2's earnings and profits are attributable to income treated as effectively connected with the conduct of a trade or business within the United States. On March 1, 2017, CFC1 earns 30u of [subpart F](/cfr/26/subpartF.md) income (as defined in [section 952](/cfr/26/952.md)), and CFC2 earns 20u of [subpart F](/cfr/26/subpartF.md) income. No foreign income tax is imposed on CFC1's or CFC2's [subpart F](/cfr/26/subpartF.md) income. For purposes of [section 904](/cfr/26/904.md), the post-1986 undistributed earnings, [subpart F](/cfr/26/subpartF.md) income, and post-1986 foreign income taxes are in the general category. On July 1, 2017, CFC2 distributes 40u to CFC1. On November 1, 2017, CFC1 distributes 60u to USP. USP does not have an aggregate foreign E&P deficit. USP includes in gross income all amounts that it is required to include under [section 951](/cfr/26/951.md). No foreign income tax is imposed or withheld on the distribution by CFC2 to CFC1 or the distribution by CFC1 to USP.
    - (ii) **Analysis—**
      - (A) **Adjustments to section 959(c) classification of earnings and profits for inclusion under section 951(a)(1)(A) without regard to section 965.** The distribution from CFC2 to CFC1 does not give rise to [subpart F](/cfr/26/subpartF.md) income to CFC1 due to the application of [section 954(c)(6)](/cfr/26/954.md?p=c-6). Accordingly, USP's inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a) is 30u with respect to CFC1 and 20u with respect to CFC2 for their taxable years ending December 31, 2017. As a result of the inclusions under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A), CFC1 and CFC2 increase their earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by 30u and 20u, respectively.
      - (B) **Distributions between specified foreign corporations before January 1, 2018.** The distribution of 40u from CFC2 to CFC1 is treated as a distribution of 20u out of earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) (attributable to inclusions under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a)) and 20u out of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3).
      - (C) **Section 965(a) inclusion amount.** USP determines whether CFC1 and CFC2 are deferred foreign income corporations and, if so, determines its [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC1 and CFC2. CFC1 and CFC2 are specified foreign corporations, and CFC1 and CFC2 each have accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date. Accordingly, CFC1 and CFC2 are deferred foreign income corporations. USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to each of CFC1 and CFC2, respectively, equals the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of CFC1 and CFC2, respectively.

        (1) CFC1 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC1 is 20u, the amount of its accumulated post-1986 deferred foreign income as of both November 2, 2017, and December 31, 2017, which is equal to 70u of post-1986 earnings and profits (30u earned and 40u attributable to the CFC2 distribution) reduced by 50u of such post-1986 earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) (30u earned and 20u attributable to the CFC2 distribution) under [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and [§ 1.965-1(f)(7)(i)(B)](/cfr/26/1.965-1.md?p=f-7-i-B). Under [section 965(d)(3)(B)](/cfr/26/965.md?p=d-3-B) and [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B), the post-1986 earnings and profits of CFC1 are not reduced by the 60u distribution to USP.

        (2) CFC2 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC2 is 80u, the amount of its accumulated post-1986 deferred foreign income as of both November 2, 2017, and December 31, 2017, which is equal to the amount of CFC2's post-1986 earnings and profits of 80u. CFC2's accumulated post-1986 deferred foreign income is equal to its post-1986 earnings and profits because CFC2 does not have earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder, and, therefore, no adjustment is made under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7). CFC2's 80u of post-1986 earnings and profits consists of 120u of earnings and profits that it earned, reduced by the 40u distribution to CFC1 under [section 965(d)(3)(B)](/cfr/26/965.md?p=d-3-B) and [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B). The amount of the reduction to the post-1986 earnings and profits of CFC2 for the 40u distribution is not limited by [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B) because CFC1's post-1986 earnings and profits are increased by 40u as a result of the distribution. Furthermore, because the 40u distribution was made on July 1, 2017, which is before the E&P measurement date on November 2, 2017, [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f) is not relevant.

        (3) Effect on earnings and profits described in section [959(c)(2)](/cfr/26/959.md?p=c-2) and [(3)](/cfr/26/959.md?p=c-3). CFC1 and CFC2 increase their earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC1 and CFC2, 20u and 80u, respectively, and reduce their earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) by an equivalent amount.

      - (D) **Distribution to United States shareholder.** The distribution from CFC1 to USP is treated as a distribution of 60u out of the earnings and profits of CFC1 described in [section 959(c)(2)](/cfr/26/959.md?p=c-2), which include earnings and profits attributable to the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount taken into account by USP.
      - (E) **Section 902 and section 960 consequences—** (1) Distribution by and inclusions with respect to CFC2. Under [section 960](/cfr/26/960.md), USP is deemed to pay $3.50x ($21x × (20u/120u)) of CFC2's post-1986 foreign income taxes as a result of its inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a) with respect to CFC2. As a result of the distribution from CFC2 to CFC1, CFC2's post-1986 foreign income taxes are reduced, and CFC1's post-1986 foreign income taxes are increased, by the foreign income taxes deemed paid by CFC1 under [section 902](/cfr/26/902.md) of $3.50x (($21x−$3.50x) × (20u/120u−20u)). Under [section 960](/cfr/26/960.md), USP is deemed to pay $14x (($21x−$3.50x−$3.50x) × 80u/(120u−40u)) of CFC2's post-1986 foreign income taxes as a result of its [section 965(a)](/cfr/26/965.md?p=a) inclusion with respect to CFC2. The taxes deemed paid by USP as a result of its [section 965(a)](/cfr/26/965.md?p=a) inclusion with respect to CFC2 are subject to the applicable percentage disallowance under [section 965(g)](/cfr/26/965.md?p=g).

        (2) Inclusions with respect to CFC1. As determined in paragraph (j)(1)(ii)(E)(1) of this section (paragraph (E)(1) in the analysis in this Example 1), as a result of the distribution from CFC2 to CFC1, CFC1 is deemed under [section 902](/cfr/26/902.md) to pay $3.50x of CFC2's post-1986 foreign income taxes. Under [section 960](/cfr/26/960.md), USP is deemed to pay $2.10x ($3.50x × (30u/(30u + 20u))) of CFC1's post-1986 foreign income taxes as a result of its inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a) with respect to CFC1. Under [section 960](/cfr/26/960.md), USP is deemed to pay $1.40x (($3.50x−$2.10x) × 20u/(30u + 20u−30u)) of CFC1's post-1986 foreign income taxes as a result of its [section 965(a)](/cfr/26/965.md?p=a) inclusion with respect to CFC1. The taxes deemed paid by USP as a result of its [section 965(a)](/cfr/26/965.md?p=a) inclusion with respect to CFC1 are subject to the applicable percentage disallowance under [section 965(g)](/cfr/26/965.md?p=g).

  - (2) **Example 2. Determination of accumulated post-1986 deferred foreign income with subpart F income earned after E&P measurement date on November 2, 2017—**
    - (i) **Facts.** The facts are the same as in [paragraph (j)(1)(i)](#j-1-i) of this section (the facts in Example 1), except that on December 1, 2017, CFC1 earns an additional 50u of [subpart F](/cfr/26/subpartF.md) income (as defined in [section 952](/cfr/26/952.md)), and neither CFC1 nor CFC2 has any post-1986 foreign income taxes.
    - (ii) **Analysis—**
      - (A) **Adjustments to section 959(c) classification of earnings and profits for inclusion under section 951(a)(1)(A) without regard to section 965.** USP determines its inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a), which is 80u with respect to CFC1 and 20u with respect to CFC2 for their taxable years ending December 31, 2017. As a result of the inclusions under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A), CFC1 and CFC2 increase their earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by 80u and 20u, respectively.
      - (B) **Distributions between specified foreign corporations before January 1, 2018.** The analysis is the same as in [paragraph (j)(1)(ii)(B)](#j-1-ii-B) of this section (paragraph (B) in the analysis in Example 1).
      - (C) **Section 965(a) inclusion amount.** USP determines whether CFC1 and CFC2 are deferred foreign income corporations and, if so, determines its [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC1 and CFC2. CFC1 and CFC2 are specified foreign corporations, and CFC1 and CFC2 each have accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date. Accordingly, CFC1 and CFC2 are deferred foreign income corporations. USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to each of CFC1 and CFC2, respectively, equals the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of CFC1 and CFC2, respectively.

        (1) CFC1 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC1 is 20u, the greater of—

        (i) The amount of its accumulated post-1986 deferred foreign income as of November 2, 2017, 20u, which is equal to 70u of post-1986 earnings and profits (30u earned and 40u attributable to the CFC2 distribution) reduced by 50u of such post-1986 earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) without regard to the [subpart F](/cfr/26/subpartF.md) income earned after November 2, 2017 (30u earned and 20u attributable to the CFC2 distribution) under [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and § [1.965-1(f)(7)(i)(B)](/cfr/26/1.965-1.md?p=f-7-i-B) and [(ii)](/cfr/26/1.965-1.md?p=f-7-i-ii), and

        (ii) The amount of its accumulated post-1986 deferred foreign income as of December 31, 2017, 20u, which is equal to 120u of post-1986 earnings and profits (80u earned and 40u attributable to the CFC2 distribution) reduced by 100u of such post-1986 earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) with regard to the [subpart F](/cfr/26/subpartF.md) income earned on or before December 31, 2017 (80u earned and 20u attributable to the CFC2 distribution) under [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and § [1.965-1(f)(7)(i)(B)](/cfr/26/1.965-1.md?p=f-7-i-B) and [(ii)](/cfr/26/1.965-1.md?p=f-7-i-ii).

        (2) CFC2 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The analysis is the same as in paragraph (j)(1)(ii)(C)(2) of this section (paragraph (C)(2) in the analysis in Example 1)).

        (3) Effect on earnings and profits described in section [959(c)(2)](/cfr/26/959.md?p=c-2) and [(3)](/cfr/26/959.md?p=c-3). The analysis is the same as in paragraph (j)(1)(ii)(C)(3) of this section (paragraph (C)(3) in the analysis in Example 1).

      - (D) **Distribution to United States shareholder.** The analysis is the same as in [paragraph (j)(1)(ii)(D)](#j-1-ii-D) of this section (paragraph (D) in the analysis in Example 1).
  - (3) **Example 3. Determination of accumulated post-1986 deferred foreign income with subpart F income earned after E&P measurement date on November 2, 2017, but previously taxed earnings and profits attributable to the subpart F income distributed before E&P measurement date on November 2, 2017—**
    - (i) **Facts.** The facts are the same as in [paragraph (j)(1)(i)](#j-1-i) of this section (the facts in Example 1), except that on December 1, 2017, CFC2 earns an additional 50u of [subpart F](/cfr/26/subpartF.md) income (as defined in [section 952](/cfr/26/952.md)), and neither CFC1 nor CFC2 has any post-1986 foreign income taxes.
    - (ii) **Analysis—**
      - (A) **Adjustments to section 959(c) classification of earnings and profits for inclusion under section 951(a)(1)(A) without regard to section 965.** USP determines its inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a), which is 30u with respect to CFC1 and 70u with respect to CFC2 for their taxable years ending December 31, 2017. As a result of the inclusions under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A), CFC1 and CFC2 increase their earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by 30u and 70u, respectively.
      - (B) **Distributions between specified foreign corporations before January 1, 2018.** The distribution of 40u from CFC2 to CFC1 is treated as a distribution of 40u out of earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) (attributable to inclusions under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a)).
      - (C) **Section 965(a) inclusion amount.** USP determines whether CFC1 and CFC2 are deferred foreign income corporations, and, if so, determines its [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC1 and CFC2. Because USP wholly owns CFC1 and CFC2 under [section 958(a)](/cfr/26/958.md?p=a) and USP does not have an aggregate foreign E&P deficit, USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to each of CFC1 and CFC2, respectively, equals the [section 965(a)](/cfr/26/965.md?p=a) earnings amount, if any, of CFC1 and CFC2, respectively.

        (1) CFC1 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. CFC1 is not a deferred foreign income corporation and does not have a [section 965(a)](/cfr/26/965.md?p=a) earnings amount because the amount of its accumulated post-1986 deferred foreign income as of both November 2, 2017, and December 31, 2017, is 0u, which is equal to 70u of post-1986 earnings and profits (30u earned and 40u attributable to the CFC2 distribution) reduced by 70u of such post-1986 earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) (30u earned and 40u attributable to the CFC2 distribution) under [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and [§ 1.965-1(f)(7)(i)(B)](/cfr/26/1.965-1.md?p=f-7-i-B).

        (2) CFC2 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC2 is 100u, the greater of the amounts in paragraph (j)(3)(ii)(C)(2)(i) and (ii) of this section (paragraph (C)(2)(i) and (ii) in the analysis in this Example 3)—

        (i) The amount of its accumulated post-1986 deferred foreign income as of November 2, 2017, 80u. CFC2's 80u of accumulated post-1986 deferred foreign income as of November 2, 2017, is equal to its 80u of post-1986 earnings and profits because no adjustment is made under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7), as CFC2 does not have earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder, without regard to the [subpart F](/cfr/26/subpartF.md) income earned after November 2, 2017. CFC2's 80u of post-1986 earnings and profits consists of 120u of earnings and profits that it earned, reduced by the 40u distribution to CFC1 under [section 965(d)(3)(B)](/cfr/26/965.md?p=d-3-B) and [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B). The amount of the reduction to the post-1986 earnings and profits of CFC2 for the 40u distribution is not limited by [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B) because CFC1's post-1986 earnings and profits are increased by 40u as a result of the distribution. Furthermore, because the 40u distribution was made on July 1, 2017, which is before any E&P measurement date, [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f) is not relevant.

        (ii) The amount of its accumulated post-1986 deferred foreign income as of December 31, 2017, 100u, which is equal to 130u of post-1986 earnings and profits reduced by 30u of such post-1986 earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) with regard to the [subpart F](/cfr/26/subpartF.md) income earned before December 31, 2017, under [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and § [1.965-1(f)(7)(i)(B)](/cfr/26/1.965-1.md?p=f-7-i-B) and [(ii)](/cfr/26/1.965-1.md?p=f-7-i-ii). CFC2's 130u of post-1986 earnings and profits consists of 170u of earnings and profits that it earned, reduced by the 40u distribution to CFC1 under [section 965(d)(3)(B)](/cfr/26/965.md?p=d-3-B) and [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B).

        (3) Effect on earnings and profits described in section [959(c)(2)](/cfr/26/959.md?p=c-2) and [(3)](/cfr/26/959.md?p=c-3). CFC2 increases its earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC2, 100u, and reduces its earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) by an equivalent amount.

      - (D) **Distribution to United States shareholder.** The analysis is the same as in [paragraph (j)(1)(ii)(D)](#j-1-ii-D) of this section (paragraph (D) in the analysis in Example 1).
  - (4) **Example 4. Determination of accumulated post-1986 deferred foreign income with distribution made after E&P measurement date on November 2, 2017—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP, CFC1, and CFC2 all have taxable years ending December 31, 2017. As of January 1, 2017, CFC1 has 10u of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) that were accumulated in taxable years beginning after December 31, 1986, while CFC1 was a specified foreign corporation, and $2x of post-1986 foreign income taxes; and CFC2 has 100u of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) that were accumulated in taxable years beginning after December 31, 1986, while CFC2 was a specified foreign corporation and $10x of post-1986 foreign income taxes. For purposes of [section 904](/cfr/26/904.md), the post-1986 undistributed earnings and post-1986 foreign income taxes are in the general category. None of CFC1's or CFC2's earnings and profits are attributable to income treated as effectively connected with the conduct of a trade or business within the United States. On December 1, 2017, CFC2 distributes 100u to CFC1, and CFC1 distributes 10u to USP. USP does not have an aggregate foreign E&P deficit. USP includes in gross income all amounts that it is required to include under [section 951](/cfr/26/951.md). No foreign income tax is imposed or withheld on the distribution by CFC2 to CFC1 or the distribution by CFC1 to USP. USP does not apply [§ 1.965-4(f)(3)](/cfr/26/1.965-4.md?p=f-3) to determine the post-1986 earnings and profits of CFC1 and CFC2.
    - (ii) **Analysis—**
      - (A) **Adjustments to section 959(c) classification of earnings and profits for inclusion under section 951(a)(1)(A) without regard to section 965.** The distribution from CFC2 to CFC1 does not give rise to [subpart F](/cfr/26/subpartF.md) income to CFC1 due to the application of [section 954(c)(6)](/cfr/26/954.md?p=c-6). Accordingly, USP does not have an inclusion under [section 951(a)(1)(A)](/cfr/26/951.md?p=a-1-A) without regard to [section 965(a)](/cfr/26/965.md?p=a) with respect to CFC1 or CFC2 for their taxable years ending December 31, 2017. As a result, neither CFC1 nor CFC2 has earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2).
      - (B) **Distributions between specified foreign corporations before January 1, 2018.** The distribution of 100u from CFC2 to CFC1 is initially treated as a distribution out of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3).
      - (C) **Section 965(a) inclusion amount.** USP determines whether CFC1 and CFC2 are deferred foreign income corporations, and, if so, determines its [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC1 and CFC2. CFC1 and CFC2 are specified foreign corporations, and CFC1 and CFC2 each have accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date. Accordingly, CFC1 and CFC2 are deferred foreign income corporations. USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to each of CFC1 and CFC2, respectively, equals the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of CFC1 and CFC2, respectively.

        (1) CFC1 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC1 is 10u, the amount of its accumulated post-1986 deferred foreign income as of both November 2, 2017, and December 31, 2017, which is equal to the amount of CFC1's post-1986 earnings and profits of 10u. CFC1's accumulated post-1986 deferred foreign income is equal to its post-1986 earnings and profits because CFC1 does not have earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder, and therefore no adjustment is made under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7). But for [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f), CFC1's post-1986 earnings and profits as of December 31, 2017, would be 110u, but because the distribution from CFC2 is a specified payment, it is disregarded in determining CFC1's post-1986 earnings and profits as of December 31, 2017, under [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f). Under [section 965(d)(3)(B)](/cfr/26/965.md?p=d-3-B) and [§ 1.965-1(f)(29)(i)(B)](/cfr/26/1.965-1.md?p=f-29-i-B), the post-1986 earnings and profits of CFC1 are not reduced by the 10u distribution to USP.

        (2) CFC2 [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC2 is 100u, the amount of its accumulated post-1986 deferred foreign income as of both November 2, 2017, and December 31, 2017, which is equal to the amount of CFC2's post-1986 earnings and profits of 100u. CFC2's accumulated post-1986 deferred foreign income is equal to its post-1986 earnings and profits because CFC2 does not have earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder, and therefore no adjustment is made under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7). But for [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f), CFC2's post-1986 earnings and profits as of December 31, 2017, would be 0u, but because the distribution to CFC1 is a specified payment, it is disregarded in determining CFC2's post-1986 earnings and profits as of December 31, 2017, under [§ 1.965-4(f)](/cfr/26/1.965-4.md?p=f).

        (3) Effect on earnings and profits described in section [959(c)(2)](/cfr/26/959.md?p=c-2) and [(3)](/cfr/26/959.md?p=c-3). CFC1 and CFC2 increase their earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts with respect to CFC1 and CFC2, 10u and 100u, respectively, and reduce their earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) by an equivalent amount.

      - (D) **Distributions—** (1) Distribution that is a specified payment. The distribution from CFC2 to CFC1 is recharacterized as a distribution of 100u out of the earnings and profits of CFC2 described in [section 959(c)(2)](/cfr/26/959.md?p=c-2), which include earnings and profits attributable to the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount taken into account by USP.

        (2) Distribution to United States shareholder. The distribution from CFC1 to USP is treated as a distribution of 10u out of the earnings and profits of CFC1 described in [section 959(c)(2)](/cfr/26/959.md?p=c-2), which include earnings and profits attributable to the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount taken into account by USP.

      - (E) **Section 902 and section 960 consequences.** Under [section 960](/cfr/26/960.md), USP is deemed to pay $10x ($10x × (100u/100u)) of CFC2's post-1986 foreign income taxes as a result of its [section 965(a)](/cfr/26/965.md?p=a) inclusion with respect to CFC2 and $2x ($2x × (10u/10u) of CFC1's post-1986 foreign income taxes as a result of its [section 965(a)](/cfr/26/965.md?p=a) inclusion with respect to CFC1. Such taxes are subject to the applicable percentage disallowance under [section 965(g)](/cfr/26/965.md?p=g).
  - (5) **Example 5. Determination of accumulated post-1986 deferred foreign income with section 951(a)(1)(B) inclusion after E&P measurement date on November 2, 2017—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of CFC, a foreign corporation. USP has a taxable year ending December 31, 2017, and CFC has a taxable year ending November 30, 2017. As of December 1, 2016, CFC has 110u of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) that were accumulated in taxable years beginning after December 31, 1986, while CFC was a specified foreign corporation. CFC holds 150u of United States property throughout its taxable year ending November 30, 2017, but disposes of it on December 1, 2017, recognizing no gain or loss on the property. Between December 1, 2017, and December 31, 2017, CFC earns an additional 10u of income that does not constitute [subpart F](/cfr/26/subpartF.md) income or income treated as effectively connected with the conduct of a trade or business within the United States that gives rise to 10u of earnings and profits. USP includes in income all amounts that it is required to include under [section 951](/cfr/26/951.md).
    - (ii) **Analysis—**
      - (A) **Section 965(a) inclusion amount.** USP determines whether CFC is a deferred foreign income corporation, and, if so, determines its [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC. CFC is a specified foreign corporation, and CFC has accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date. Accordingly, CFC is a deferred foreign income corporation. USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC equals the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of CFC.

        (1) CFC [section 965(a)](/cfr/26/965.md?p=a) earnings amount. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC is 110u, the greater of the amount of its accumulated post-1986 deferred foreign income as of November 2, 2017, which is 110u, and the amount of its accumulated post-1986 deferred foreign income as of December 31, 2017, which is 10u. CFC's accumulated post-1986 deferred foreign income as of November 2, 2017, is equal to its 110u of post-1986 earnings and profits, which are not reduced by the 110u of earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1) as a result of USP's [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) inclusion with respect to CFC as of December 31, 2017, because such amounts would not be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7) if distributed on November 2, 2017. CFC's accumulated post-1986 deferred foreign income as of December 31, 2017, is equal to its 120u of post-1986 earnings and profits reduced by the 110u of earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1) as a result of USP's [section 951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) inclusion with respect to CFC as of December 31, 2017, which would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7) if distributed on December 31, 2017.

        (2) Effect on earnings and profits described in section [959(c)(2)](/cfr/26/959.md?p=c-2) and [(3)](/cfr/26/959.md?p=c-3). In USP's taxable year ending December 31, 2018, CFC increases its earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC, 110u, and reduces its earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) by an equivalent amount.

      - (B) **Section 956 inclusion.** In USP's taxable year ending December 31, 2017, USP increases its earnings and profits described in [section 959(c)(1)](/cfr/26/959.md?p=c-1) by USP's amount included under sections [951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) and [956](/cfr/26/956.md) with respect to CFC, 110u, and reduces its earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) by an equivalent amount.
  - (6) **Example 6. Section 1248 inclusion—**
    - (i) **Facts.** USP1, a domestic corporation, owns all of the stock of CFC, a foreign corporation, until it sells all of such stock to USP2, a domestic corporation, on December 1, 2017, in a sale on which USP1 recognizes $100x of gain. Throughout 2017, 1u=$1x. USP1, USP2, and CFC all have taxable years ending December 31, 2017. As of January 1, 2017, CFC has 100u of earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) that were accumulated in taxable years beginning after December 31, 1986, while CFC was wholly owned by USP1. On March 1, 2017, CFC distributes 20u to USP1. None of CFC's earnings and profits are attributable to income treated as effectively connected with the conduct of a trade or business within the United States. USP2 does not have an aggregate foreign E&P deficit. USP1 and USP2 include in income all amounts that they are required to include under sections [951](/cfr/26/951.md) and [1248](/cfr/26/1248.md).
    - (ii) **Analysis—**
      - (A) **Adjustments to section 959(c) classification of earnings and profits for section 1248 inclusion.** USP1's inclusion under [section 1248](/cfr/26/1248.md) with respect to CFC is $80x ($100x−$20x). As a result of the inclusion under [section 1248](/cfr/26/1248.md), under [section 959(e)](/cfr/26/959.md?p=e), CFC increases its earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by 80u.
      - (B) **Section 965(a) inclusion amount.** USP2 determines whether CFC is a deferred foreign income corporation and, if so, determines its [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC. CFC is a specified foreign corporation, and CFC has accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date. Accordingly, CFC is a deferred foreign income corporation. USP2's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC equals the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of CFC. The [section 965(a)](/cfr/26/965.md?p=a) earnings amount with respect to CFC is 20u, the amount of its accumulated post-1986 deferred foreign income as of both November 2, 2017, and December 31, 2017, which is equal to 100u of post-1986 earnings and profits reduced by 80u of such post-1986 earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) under [section 965(d)(2)(B)](/cfr/26/965.md?p=d-2-B) and [§ 1.965-1(f)(7)(i)(B)](/cfr/26/1.965-1.md?p=f-7-i-B). CFC increases its earnings and profits described in [section 959(c)(2)](/cfr/26/959.md?p=c-2) by USP2's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC, 20u, and reduces its earnings and profits that would be described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) but for the application of [section 965(a)](/cfr/26/965.md?p=a) by an equivalent amount.
      - (C) **Distributions to United States shareholders.** The distributions from CFC to USP1 (including the deemed dividend under [section 1248](/cfr/26/1248.md)) are treated as distributions out of the earnings and profits of CFC described in [section 959(c)(3)](/cfr/26/959.md?p=c-3).
  - (7) **Example 7. Distribution attributable to section 965(a) previously taxed earnings and profits—**
    - (i) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a specified foreign corporation that has no post-1986 earnings and profits (or deficit in post-1986 earnings and profits), and CFC1 owns all the stock of CFC2, a deferred foreign income corporation. USP is a calendar year taxpayer. CFC1's last taxable year beginning before January 1, 2018, ends on November 30, 2018; CFC2 has an inclusion year that ends on November 30, 2018. The functional currency of CFC1 and CFC2 is the U.S. dollar. USP's adjusted basis in the stock of CFC1 is zero. On January 1, 2018, CFC2 distributes $100x to CFC1, and CFC1 distributes $100x to USP. USP has a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of $100x with respect to CFC2 that is taken into account for USP's taxable year ending December 31, 2018. CFC2 has no earnings and profits described in section [959(c)(1)](/cfr/26/959.md?p=c-1) or [(2)](/cfr/26/959.md?p=c-2) other than [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits.
    - (ii) **Analysis.** Under [paragraph (c)](#c) of this section, CFC2 has $100x of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits with respect to USP. USP receives a distribution from CFC2 through a chain of ownership described in [section 958(a)](/cfr/26/958.md?p=a) during the inclusion year of CFC2 that is attributable to the $100x of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits of CFC2. Under [paragraph (g)(1)](#g-1) of this section, the amount of gain that USP otherwise would recognize with respect to the stock of CFC1 under [section 961(b)(2)](/cfr/26/961.md?p=b-2) is reduced (but not below zero) by $100x, the amount of CFC2's [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits with respect to USP. As of the close of November 30, 2018, USP's basis in CFC1 is increased under [paragraph (e)](#e) of this section by USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC2 ($100x), and is reduced under [paragraph (g)(2)](#g-2) of this section by the amount of gain that would have been recognized by USP under [section 961(b)(2)](/cfr/26/961.md?p=b-2) but for the application of [paragraph (g)(1)](#g-1) of this section ($100x).
  - (8) **Example 8. Distribution attributable to section 965(b) previously taxed earnings and profits; parent-subsidiary—**
    - (i) **Facts.** The facts are the same as in [paragraph (j)(7)(i)](#j-7-i) of this section (the facts in Example 7), except that CFC1 has a specified E&P deficit of $100x. Because of the specified E&P deficit of CFC1, USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC2 is reduced to zero pursuant to [section 965(b)(1)](/cfr/26/965.md?p=b-1) and [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2). USP makes the election described in [paragraph (f)(2)](#f-2) of this section.
    - (ii) **Analysis—**
      - (A) **Application of the gain reduction rule.** Under [paragraph (d)(1)](#d-1) of this section, CFC2 has $100x of [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits with respect to USP, and, under [paragraph (d)(2)](#d-2) of this section, CFC1's earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) are increased by $100x to $0. USP receives a distribution from CFC2 through a chain of ownership described in [section 958(a)](/cfr/26/958.md?p=a) during the inclusion year of CFC2 that is attributable to the $100x of [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits of CFC2. Under [paragraph (g)(1)](#g-1) of this section, the amount of gain that USP otherwise would recognize with respect to the stock of CFC1 under [section 961(b)(2)](/cfr/26/961.md?p=b-2) is reduced (but not below zero) by $100x, the amount of CFC2's [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits with respect to USP under [paragraph (d)(1)](#d-1) of this section.
      - (B) **Adjustments to the basis of CFC1.** Because USP makes the election described in [paragraph (f)(2)](#f-2) of this section, as of the close of November 30, 2018, USP's basis in CFC1 is increased under [paragraph (f)(2)(ii)(A)](#f-2-ii-A) of this section by an amount equal to CFC2's [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits with respect to USP under [paragraph (d)(1)](#d-1) of this section ($100x), reduced under [paragraph (f)(2)(ii)(B)](#f-2-ii-B) of this section by an amount equal to the portion of the specified E&P deficit of CFC1 taken into account in determining USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC2 ($100x), and reduced under [paragraph (g)(2)](#g-2) of this section by the amount of gain that would have been recognized by USP with respect to the stock of CFC1 under [section 961(b)(2)](/cfr/26/961.md?p=b-2) but for the application of [paragraph (g)(1)](#g-1) of this section ($100x). Under paragraph [(h)(2)](#h-2) and [(3)](#h-3) of this section, the excess of the net reduction from the adjustments under paragraphs [(f)](#f) and [(g)](#g) of this section over USP's basis in the stock of CFC1 (in this case, $100x) is treated as gain recognized by USP from the sale or exchange of property.
  - (9) **Example 9. Distribution attributable to section 965(b) previously taxed earnings and profits; brother-sister—**
    - (i) **Facts.** The facts are the same as in [paragraph (j)(8)(i)](#j-8-i) of this section (the facts in Example 8), except that USP owns all the stock of CFC2, USP's adjusted basis in the stock of CFC2 is zero, CFC1 made no distributions, and on January 1, 2018, CFC2 distributes $100x to USP.
    - (ii) **Analysis—**
      - (A) **Application of the gain reduction rule.** Under [paragraph (d)(1)](#d-1) of this section, CFC2 has $100x of [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits with respect to USP, and, under [paragraph (d)(2)](#d-2) of this section, CFC1's earnings and profits described in [section 959(c)(3)](/cfr/26/959.md?p=c-3) (deficit of $100x) are increased by $100x to $0. USP receives a distribution from CFC2 during the inclusion year of CFC2 that is attributable to the $100x of [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits of CFC2. Under [paragraph (g)(1)](#g-1) of this section, the amount of gain that USP otherwise would recognize with respect to the stock of CFC2 under [section 961(b)(2)](/cfr/26/961.md?p=b-2) is reduced (but not below zero) by $100x, the amount of CFC2's [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits with respect to USP under [paragraph (d)(1)](#d-1) of this section.
      - (B) **Adjustments to the basis of CFC1 and CFC2.** Because USP makes the election described in [paragraph (f)(2)](#f-2) of this section, as of the close of November 30, 2018, USP's basis in the stock of CFC2 is increased under [paragraph (f)(2)(ii)(A)](#f-2-ii-A) of this section by the amount of CFC2's [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits with respect to USP under [paragraph (d)(1)](#d-1) of this section ($100x) and reduced under [paragraph (g)(2)](#g-2) of this section by the amount of gain that would have been recognized by USP with respect to the stock of CFC2 under [section 961(b)(2)](/cfr/26/961.md?p=b-2) but for the application of [paragraph (g)(1)](#g-1) of this section ($100x). As of the close of November 30, 2018, USP's basis in CFC1 is reduced under [paragraph (f)(2)(ii)(B)](#f-2-ii-B) of this section by an amount equal to the portion of USP's pro rata share of the specified E&P deficit of CFC1 taken into account in determining USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC2 ($100x). Under [paragraph (h)(3)](#h-3) of this section, the excess of the reduction under [paragraph (f)](#f) of this section over USP's basis in the stock of CFC1 (in this case, $100x) is treated as gain recognized by USP from the sale or exchange of property.

# §1.965-3. Section 965(c) deductions.

- (a) **Scope.** This section provides rules regarding [section 965(c)](/cfr/26/965.md?p=c) deductions and [section 965(c)](/cfr/26/965.md?p=c) deduction amounts. [Paragraph (b)](#b) of this section provides rules for disregarding certain assets for purposes of determining the aggregate foreign cash position of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder. [Paragraph (c)](#c) of this section provides rules for determining the aggregate foreign cash position for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year. [Paragraph (d)](#d) of this section provides a rule regarding certain expatriated entities. [Paragraph (e)](#e) of this section provides a rule for the treatment of [section 965(c)](/cfr/26/965.md?p=c) deductions in connection with an election under [section 962](/cfr/26/962.md). [Paragraph (f)](#f) of this section provides rules regarding the treatment of a [section 965(c)](/cfr/26/965.md?p=c) deduction under certain provisions of the Internal Revenue Code. [Paragraph (g)](#g) of this section provides a rule for domestic pass-through entities.
- (b) **Rules for disregarding certain assets for determining aggregate foreign cash position—**
  - (1) **Disregard of certain obligations between related specified foreign corporations.** In determining the aggregate foreign cash position of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, any account receivable, account payable, short-term obligation, or derivative financial instrument between a specified foreign corporation with respect to which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder owns [section 958(a)](/cfr/26/958.md?p=a) stock and a related specified foreign corporation on corresponding cash measurement dates is disregarded to the extent of the smallest of the product of the amount of the item on such corresponding cash measurement dates of each specified foreign corporation and the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's ownership percentage of [section 958(a)](/cfr/26/958.md?p=a) stock of the specified foreign corporation owned by the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder on such dates. For purposes of this paragraph (b)(1)(i), a specified foreign corporation is treated as a related specified foreign corporation with respect to another specified foreign corporation if, as of the cash measurement date referred to in the preceding sentence of each specified foreign corporation, the specified foreign corporations are related persons within the meaning of [section 954(d)(3)](/cfr/26/954.md?p=d-3), substituting the term “specified foreign corporation” for “controlled foreign corporation” in each place that it appears.
  - (2) **Disregard of other assets upon demonstration of double-counting.** For purposes of determining the aggregate foreign cash position of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the cash position of a specified foreign corporation on a cash measurement date is reduced by amounts of net accounts receivable, actively traded property, and short-term obligations to the extent such amounts are attributable to amounts taken into account in determining the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the cash position of another specified foreign corporation on the corresponding cash measurement date of such other specified corporation and to the extent not disregarded pursuant to [paragraph (b)(1)](#b-1) of this section. However, the preceding sentence applies only if the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder attaches a statement containing the information outlined in [paragraphs (b)(2)(i) through (v)](#b-2-i..b-2-v) of this section to its timely filed return (taking into account extensions, if any) for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, or, if the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder has multiple [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion years, the later of such years. Relief is not available under § [301.9100-2](/cfr/26/301.9100-2.md) or [301.9100-3](/cfr/26/301.9100-3.md) to allow late filing of the statement. The statement must contain the following information with respect to each specified foreign corporation for which the cash position is reduced under this [paragraph (b)(2)](#b-2)—
    - (i) A description of the asset that would be taken into account with respect to both specified foreign corporations,
    - (ii) A statement of the amount by which its pro rata share of the cash position of one specified foreign corporation is reduced,
    - (iii) A detailed explanation of why there would otherwise be double-counting, including the computation of the amount taken into account with respect to the other specified foreign corporation, and
    - (iv) **An explanation of why paragraph (b)(1) of this section does not apply to disregard such amount.**
  - (3) **Disregard of portion of cash position of noncorporate entities treated as specified foreign corporations.** If an entity is treated as a specified foreign corporation of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder pursuant to [section 965(c)(3)(E)](/cfr/26/965.md?p=c-3-E), for purposes of determining the aggregate foreign cash position of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the cash position of the entity (determined taking into account paragraphs [(b)(1)](#b-1) and [(b)(2)](#b-2) of this section) is reduced by the amount of the pro rata share attributable to deemed stock of the entity not owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a), applied by treating domestic pass-through entities as foreign) by a specified foreign corporation of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder (determined without taking into account [section 965(c)(3)(E)](/cfr/26/965.md?p=c-3-E)).
  - (4) **Examples.** The following examples illustrate the application of this [paragraph (b)](#b).
    - (i) **Example 1—**
      - (A) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation. CFC1 owns 95% of the only class of stock of CFC2, also a foreign corporation, and 40% of the only class of stock of CFC3, also a foreign corporation. The remaining 5% of the only class of stock of CFC2 is owned by a person unrelated to USP, CFC1, and CFC2; and the remaining 60% of the only class of stock of CFC3 is owned by a person unrelated to USP and CFC1. USP, CFC1, and CFC3 have calendar year taxable years. CFC2 has a taxable year ending on November 30. On November 15, 2015, CFC1 makes a loan of $100x to CFC2, which is required to be and is, in fact, repaid on January 1, 2016. On November 15, 2016, CFC2 sells inventory to CFC1 in exchange for an account receivable of $200x, which is required to be and is, in fact, repaid on December 15, 2016. On August 1, 2017, CFC1 makes a loan of $300x to CFC3, which is required to be and is, in fact, repaid on January 31, 2018.
      - (B) **Analysis—** (1) Loan from CFC1 to CFC2. For purposes of determining the aggregate foreign cash position of USP, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of CFC1, under [paragraph (b)(1)](#b-1) of this section, because CFC1 and CFC2 are related within the meaning of [paragraph (b)(1)](#b-1) of this section, the short-term obligation of CFC2 held by CFC1 outstanding on the first cash measurement date of each specified foreign corporation, November 30, 2015, and December 31, 2015, respectively, is disregarded to the extent of 95%, the smallest ownership percentage of [section 958(a)](/cfr/26/958.md?p=a) stock of CFC1 and CFC2 owned by USP on such first cash measurement dates. Accordingly, USP only takes into account $5 ($100−95% of $100) of the short-term obligation in determining CFC1's cash position for purposes of determining its aggregate foreign cash position.

        (2) Account receivable of CFC1 held by CFC2. Because the account receivable of CFC1 held by CFC2 on its second cash measurement date, November 30, 2016, is not outstanding on CFC1's second cash measurement date, December 31, 2016, [paragraph (b)(1)](#b-1) of this section does not apply to disregard any portion of such account receivable.

        (3) Loan from CFC1 to CFC3. Because CFC3 is not related to CFC1 within the meaning of [paragraph (b)(1)](#b-1) of this section, [paragraph (b)(1)](#b-1) of this section does not apply to disregard any portion of such short-term obligation.

    - (ii) **Example 2—**
      - (A) **Facts.** The facts are the same as in [paragraph (b)(4)(i)(A)](#b-4-i-A) of this section (the facts in Example 1), except that on December 1, 2015, CFC1 sells 5% of the stock of CFC2 to an unrelated person.
      - (B) **Analysis.** The analysis is the same as in [paragraph (b)(4)(i)(B)](#b-4-i-B) of this section (the analysis in Example 1), except that the short-term obligation of CFC2 held by CFC1 outstanding on both of their first cash measurement dates, November 30, 2015, and December 31, 2015, respectively, is disregarded under [paragraph (b)(1)](#b-1) of this section to the extent of 90%, the smallest ownership percentage of [section 958(a)](/cfr/26/958.md?p=a) stock of CFC1 and CFC2 by USP on such first cash measurement dates. Accordingly, USP takes into account $10 ($100−90% of $100) of the short-term obligation in determining CFC1's cash position for purposes of determining its aggregate foreign cash position.
    - (iii) **Example 3—**
      - (A) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation, which owns 45% of the only class of stock of CFC2, also a foreign corporation. The remainder of the CFC2 stock is actively traded on an established financial market but is not owned by any person related to USP or CFC1. USP, CFC1, and CFC2 have calendar year taxable years. The value of the CFC2 stock owned by CFC1 is $500x on each of the cash measurement dates. Also on each of the cash measurement dates, CFC2 has $300x of assets described in [section 965(c)(3)(B)](/cfr/26/965.md?p=c-3-B) and [§ 1.965-1(f)(16)](/cfr/26/1.965-1.md?p=f-16) that are taken into account in determining its cash position.
      - (B) **Analysis.** For purposes of determining USP's aggregate foreign cash position, USP's pro rata share of the cash position of CFC1 on each cash measurement date may be reduced by the amount of the stock of CFC2 to the extent attributable to amounts taken into account in determining USP's pro rata share of the cash position of CFC2 on such cash measurement date (that is, to the extent of the $135x taken into account with respect to CFC2), provided USP attaches a statement to its timely filed return (taking into account extensions, if any) containing the following: A description of the CFC2 stock and the assets of CFC2 taken into account in determining its cash position; a statement that USP's pro rata share of the cash position of CFC1 is being reduced by $135x; the computation of the $135x taken into account with respect to CFC2; and an explanation of why [paragraph (b)(1)](#b-1) of this section does not apply to disregard such amount.
    - (iv) **Example 4—**
      - (A) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1 and CFC2, each a foreign corporation. USP, CFC1, and CFC2 have calendar year taxable years. CFC1 buys goods on credit from a third party for $100x and thus has an account payable of $100x. CFC1 modifies the goods and sells to CFC2 for $105x in exchange for an account receivable of $105x. CFC2 modifies the goods and sells to another third party for $110x in exchange for an account receivable of $110x. All of the accounts payable and accounts receivable are outstanding on the final cash measurement date.
      - (B) **Analysis.** For purposes of determining USP's aggregate foreign cash position, on the final cash measurement date, CFC1 has net accounts receivable of $0 because, pursuant to [paragraph (b)(1)](#b-1) of this section, CFC1's account receivable from CFC2 is disregarded, and CFC2 has net accounts receivable of $110x because, pursuant to [paragraph (b)(1)](#b-1) of this section, CFC2's account payable to CFC1 is disregarded. USP cannot rely on the rule in [paragraph (b)(2)](#b-2) of this section because no amounts attributable to CFC2's net accounts receivable are taken into account with respect to another specified foreign corporation.
    - (v) **Example 5—**
      - (A) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1 and CFC2, each a foreign corporation. USP and CFC1 own 60% and 40%, respectively, of the interests in the capital and profits of PS1, a partnership. PS1 and CFC2 own 70% and 30%, respectively, of the interests in the capital and profits of PS2, a partnership. On each cash measurement date, PS1's cash position of $100x consists entirely of cash, and PS2's cash position of $200x includes a $50x short-term obligation of CFC2.
      - (B) **Analysis—** (1) Treatment of PS1. Because an interest in PS1 is held by CFC1, a specified foreign corporation of USP, and PS1 would be a specified foreign corporation of USP if it were a foreign corporation, PS1 is treated as a specified foreign corporation of USP for purposes of determining USP's aggregate foreign cash position. Without regard to [paragraph (b)(3)](#b-3) of this section, USP must take into account $100x, its pro rata share of PS1's cash position, for purposes of determining its aggregate foreign cash position. However, 60% of that amount is attributable to deemed stock of PS1 that is not owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) by a specified foreign corporation of USP. Accordingly, pursuant to [paragraph (b)(3)](#b-3) of this section, the amount of PS1's cash position that USP must take into account for purposes of determining its aggregate foreign cash position is reduced by $60x (60% of $100x) to $40x ($100x−$60x).

        (2) Treatment of PS2. Because an interest in PS2 is held by CFC2, a specified foreign corporation of USP, and PS2 would be a specified foreign corporation of USP if it were a foreign corporation, PS2 is treated as a specified foreign corporation of USP for purposes of determining USP's aggregate foreign cash position. USP, CFC1, CFC2, PS1, and PS2 all have calendar year taxable years. For purposes of determining the aggregate foreign cash position of USP, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder of PS2, under [paragraph (b)(1)](#b-1) of this section, the short-term obligation of CFC2 held by PS2 outstanding on each cash measurement date of each specified foreign corporation is disregarded on such cash measurement dates. Accordingly, without regard to [paragraph (b)(3)](#b-3) of this section, USP must take into account $150x ($200x−$50x) of PS2's cash position for purposes of determining its aggregate foreign cash position. However, 42% (60% × 70%) of that amount is attributable to deemed stock of PS2 that is not owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a), applied by treating PS1 as foreign if it is a domestic pass-through entity) by a specified foreign corporation of USP (determined without taking into account [section 965(c)(3)(E)](/cfr/26/965.md?p=c-3-E)). Accordingly, pursuant to [paragraph (b)(3)](#b-3) of this section, the amount of PS2's cash position that USP must take into account for purposes of determining its aggregate foreign cash position is reduced by $63x (42% of $150x) to $87x ($150x−$63x).

- (c) **Determination of aggregate foreign cash position for a section 958(a) U.S. shareholder inclusion year—**
  - (1) **Single section 958(a) U.S. shareholder inclusion year.** If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder has a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, then the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year is equal to the aggregate foreign cash position of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder.
  - (2) **Multiple section 958(a) U.S. shareholder inclusion years.** If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder has multiple [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion years, then the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position for each [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year is determined by allocating the aggregate foreign cash position to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year under paragraphs [(c)(2)(i)](#c-2-i) and [(c)(2)(ii)](#c-2-ii) of this section.
    - (i) **Allocation to first section 958(a) U.S. shareholder inclusion year.** A portion of the aggregate foreign cash position of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is allocated to the first [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year in an amount equal to the lesser of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position or the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year.
    - (ii) **Allocation to succeeding section 958(a) U.S. shareholder inclusion years.** The amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position allocated to any succeeding [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year equals the lesser of the excess, if any, of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate foreign cash position over the aggregate amount of its aggregate foreign cash position allocated to preceding [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion years under [paragraph (c)(2)(i)](#c-2-i) of this section and this [paragraph (c)(2)(ii)](#c-2-ii) or the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for such succeeding [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year.
  - (3) **Estimation of aggregate foreign cash position.** For purposes of determining the aggregate foreign cash position of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder may assume that its pro rata share of the cash position of any specified foreign corporation whose last taxable year beginning before January 1, 2018, ends after the date the return for such [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year (the estimated [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year) is timely filed (taking into account extensions, if any) is zero as of the cash measurement date with which the taxable year of such specified foreign corporation ends. If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the cash position of a specified foreign corporation is treated as zero pursuant to the preceding sentence, the amount described in [§ 1.965-1(f)(8)(i)(A)](/cfr/26/1.965-1.md?p=f-8-i-A) with respect to such [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder in fact exceeds the amount described in [§ 1.965-1(f)(8)(i)(B)](/cfr/26/1.965-1.md?p=f-8-i-B) with respect to such [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, and the aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for the estimated [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year exceeds the amount described in [§ 1.965-1(f)(8)(i)(B)](/cfr/26/1.965-1.md?p=f-8-i-B) with respect to such [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, interest and penalties will not be imposed if such [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder amends the return for the estimated [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year to account for the correct aggregate foreign cash position for the year. The amended return must be filed by the due date (taking into account extensions, if any) for the return for the year after the estimated [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year.
  - (4) **Examples.** The following examples illustrate the application of this [paragraph (c)](#c).
    - (i) **Example 1. Estimation of aggregate foreign cash position for a section 958(a) U.S. shareholder inclusion year—**
      - (A) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP is a calendar year taxpayer. CFC1 has a taxable year ending on December 31, and CFC2 has a taxable year ending on November 30. The cash position of CFC1 on each of December 31, 2015, December 31, 2016, and December 31, 2017, is $100x. The cash position of CFC2 on each of November 30, 2015, and November 30, 2016, is $200x. USP has a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of $300x with respect to CFC1.
      - (B) **Analysis.** In determining its aggregate foreign cash position for its 2017 taxable year, USP may assume that its pro rata share of the cash position of CFC2 will be zero as of November 30, 2018, for purposes of filing its return due on April 18, 2018 (or due on October 15, 2018, with extension). Therefore, USP's aggregate foreign cash position is treated as $300x, which is the greater of (a) $300x, 50% of the sum of USP's pro rata shares of the cash position of CFC1 as of December 31, 2015, and December 31, 2016, and of the cash position of CFC2 as of November 30, 2015, and November 30, 2016, and (b) $100x, USP's pro rata share of the cash position of CFC1 as of December 31, 2017. If USP's pro rata share of the cash position of CFC2 as of November 30, 2018, in fact exceeds $200x, USP must amend its return for its 2017 taxable year to reflect the correct aggregate foreign cash position by the due date for its return for its 2018 taxable year, April 15, 2019 (or October 15, 2019, with extension).
    - (ii) **Example 2. Allocation of aggregate foreign cash position among section 958(a) U.S. shareholder inclusion years—**
      - (A) **Facts.** The facts are the same as in [paragraph (c)(4)(i)(A)](#c-4-i-A) of this section (the facts in Example 1), except that the cash position of each of CFC1 and CFC2 on all relevant cash measurement dates is $200x, with the result that USP has an aggregate foreign cash position determined under [§ 1.965-1(f)(8)(i)](/cfr/26/1.965-1.md?p=f-8-i) of $400x. For its 2017 taxable year, USP has a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC1 of $300x, and for its 2018 taxable year, USP has a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to CFC2 of $300x.
      - (B) **Analysis.** Under [paragraph (c)(2)(i)](#c-2-i) of this section, USP's aggregate foreign cash position for 2017 is $300x, which is the lesser of USP's aggregate foreign cash position determined under [§ 1.965-1(f)(8)(i)](/cfr/26/1.965-1.md?p=f-8-i) ($400x) or the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount ($300x) that USP takes into account in 2017. Under [paragraph (c)(2)(ii)](#c-2-ii) of this section, the amount of USP's aggregate foreign cash position for 2018 is $100x, USP's aggregate foreign cash position determined under [§ 1.965-1(f)(8)(i)](/cfr/26/1.965-1.md?p=f-8-i) ($400x) reduced by the amount of its aggregate foreign cash position for 2017 ($300x) under [paragraph (c)(2)(i)](#c-2-i) of this section.
- (d) **Increase of income by section 965(c) deduction of an expatriated entity—**
  - (1) **In general.** If a person is allowed a [section 965(c)](/cfr/26/965.md?p=c) deduction and the person (or a successor) first becomes an expatriated entity, with respect to a surrogate foreign corporation, at any time during the 10-year period beginning on December 22, 2017, then the tax imposed by chapter 1 of the Internal Revenue Code is increased for the first taxable year in which such person becomes an expatriated entity by an amount equal to 35 percent of the person's [section 965(c)](/cfr/26/965.md?p=c) deductions, and no credits are allowed against such increase in tax. The preceding sentence applies only if the surrogate foreign corporation first becomes a surrogate foreign corporation on or after December 22, 2017.
  - (2) **Definition of expatriated entity.** For purposes of [paragraph (d)(1)](#d-1) of this section, the term expatriated entity has the same meaning given such term under [section 7874(a)(2)](/cfr/26/7874.md?p=a-2), except that such term does not include an expatriated entity if the surrogate foreign corporation with respect to the expatriated entity is treated as a domestic corporation under [section 7874(b)](/cfr/26/7874.md?p=b).
  - (3) **Definition of surrogate foreign corporation.** For purposes of [paragraph (d)(1)](#d-1) of this section, the term surrogate foreign corporation has the meaning given such term in [section 7874(a)(2)(B)](/cfr/26/7874.md?p=a-2-B).
- (e) **Section 962 election—**
  - (1) **In general.** In the case of an individual (including a trust or estate) that makes an election under [section 962](/cfr/26/962.md), any [section 965(c)](/cfr/26/965.md?p=c) deduction taken into account under [§ 1.962-1(b)(1)(i)(B)](/cfr/26/1.962-1.md?p=b-1-i-B) in determining taxable income as used in [section 11](/cfr/26/11.md) is not taken into account for purposes of determining the individual's taxable income under [section 1](/cfr/26/1.md).
  - (2) **Example.** The following example illustrates the application of the rule in this [paragraph (e)](#e).
    - (i) **Facts.** USI, a United States citizen, owns 10% of the capital and profits of USPRS, a domestic partnership that has a calendar year taxable year, the remainder of which is owned by foreign persons unrelated to USI or USPRS. USPRS owns all of the stock of FS, a foreign corporation that is a controlled foreign corporation with a calendar year taxable year. USPRS has a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to FS of $1,000x and has a [section 965(c)](/cfr/26/965.md?p=c) deduction amount of $700x. FS has no post-1986 foreign income taxes. USI makes a valid election under [section 962](/cfr/26/962.md) for 2017.
    - (ii) **Analysis.** USI's “taxable income” described in [§ 1.962-1(b)(1)(i)](/cfr/26/1.962-1.md?p=b-1-i) equals $100x (USI's domestic pass-through owner share of USPRS's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount) minus $70x (USI's domestic pass-through owner share of USPRS's [section 965(c)](/cfr/26/965.md?p=c) deduction amount), or $30x. No other deductions are allowed in determining this amount. USI's tax on the $30x [section 965(a)](/cfr/26/965.md?p=a) inclusion will be equal to the tax that would be imposed on such amount under [section 11](/cfr/26/11.md) if USI were a domestic corporation. Under [paragraph (e)(1)](#e-1) of this section, USI cannot deduct $70x for purposes of determining USI's taxable income that is subject to tax under [section 1](/cfr/26/1.md).
- (f) **Treatment of section 965(c) deduction under certain provisions of the Internal Revenue Code—**
  - (1) **Sections 62(a) and 63(d).** A [section 965(c)](/cfr/26/965.md?p=c) deduction is treated as a deduction described in [section 62(a)](/cfr/26/62.md?p=a) and is not treated as an itemized deduction for any purpose of the Internal Revenue Code.
  - (2) **Sections 705, 1367, and 1368—**
    - (i) **Adjustments to basis.** In the case of a domestic partnership or S corporation—
      - (A) The aggregate amount of its [section 965(a)](/cfr/26/965.md?p=a) inclusions net of the aggregate amount of its [section 965(c)](/cfr/26/965.md?p=c) deductions is treated as a separately stated item of net income solely for purposes of calculating basis under [section 705(a)](/cfr/26/705.md?p=a) and [§ 1.705-1(a)](/cfr/26/1.705-1.md?p=a) and [section 1367(a)(1)](/cfr/26/1367.md?p=a-1) and [§ 1.1367-1(f)](/cfr/26/1.1367-1.md?p=f), and
      - (B) The aggregate amount of its [section 965(a)](/cfr/26/965.md?p=a) inclusions equal to the aggregate amount of its [section 965(c)](/cfr/26/965.md?p=c) deductions is treated as income exempt from tax solely for purposes of calculating basis under sections [705(a)(1)(B)](/cfr/26/705.md?p=a-1-B), [1367(a)(1)(A)](/cfr/26/1367.md?p=a-1-A), and [§ 1.1367-1(f)](/cfr/26/1.1367-1.md?p=f).
    - (ii) **S corporation accumulated adjustments account.** In the case of an S corporation, the aggregate amount of its [section 965(a)](/cfr/26/965.md?p=a) inclusions equal to the aggregate amount of its [section 965(c)](/cfr/26/965.md?p=c) deductions is treated as income not exempt from tax solely for purposes of determining whether an adjustment is made to an accumulated adjustments account under [section 1368(e)(1)(A)](/cfr/26/1368.md?p=e-1-A) and [§ 1.1368-2(a)(2)](/cfr/26/1.1368-2.md?p=a-2).
    - (iii) **Example.** The following example illustrates the application of this [paragraph (f)(2)](#f-2).
      - (A) **Facts.** USI, a United States citizen, owns all of the stock of S Corp, an S corporation, which owns all of the stock of FS, a foreign corporation. S Corp has a [section 965(a)](/cfr/26/965.md?p=a) inclusion of $1,000x with respect to FS and has a $700x [section 965(c)](/cfr/26/965.md?p=c) deduction.
      - (B) **Analysis.** As a result of the application of [paragraph (f)(2)(i)(A)](#f-2-i-A) of this section, solely for purposes of calculating basis under [section 1367(a)(1)](/cfr/26/1367.md?p=a-1) and [§ 1.1367-1(f)](/cfr/26/1.1367-1.md?p=f), USI treats as a separately stated item of net income $300x (its pro rata share of the net of S Corp's $1,000x aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion and S Corp's $700x aggregate [section 965(c)](/cfr/26/965.md?p=c) deduction). Accordingly, USI's basis in S Corp is increased under [section 1367(a)(1)](/cfr/26/1367.md?p=a-1) by $300x. As a result of the application of [paragraph (f)(2)(i)(B)](#f-2-i-B) of this section, an amount of S Corp's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion equal to its aggregate [section 965(c)](/cfr/26/965.md?p=c) deduction, $700x, is treated as tax exempt income solely for purposes of calculating basis under [section 1367(a)(1)(A)](/cfr/26/1367.md?p=a-1-A) and [§ 1.1367-1(f)](/cfr/26/1.1367-1.md?p=f), and accordingly, USI's basis in S Corp is further increased by its pro rata share of such amount, $700x. S Corp's accumulated adjustments account (“AAA”) is increased under [section 1368(e)(1)(A)](/cfr/26/1368.md?p=e-1-A) by the $1,000x [section 965(a)](/cfr/26/965.md?p=a) inclusion taken into account and reduced by the $700x [section 965(c)](/cfr/26/965.md?p=c) deduction taken into account. In addition, as a result of the application of [paragraph (f)(2)(ii)](#f-2-ii) of this section, S Corp's AAA is further increased by an amount of S Corp's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion equal to its aggregate [section 965(c)](/cfr/26/965.md?p=c) deduction, $700x, which is not treated as tax-exempt income for purposes of [§ 1.1368-2(a)(2)](/cfr/26/1.1368-2.md?p=a-2).
  - (3) **Section 1411.** For purposes of [section 1411](/cfr/26/1411.md) and [§ 1.1411-4(f)(6)](/cfr/26/1.1411-4.md?p=f-6), a [section 965(c)](/cfr/26/965.md?p=c) deduction is not treated as being properly allocable to any [section 965(a)](/cfr/26/965.md?p=a) inclusion.
  - (4) **Section 4940.** For purposes of [section 4940(c)(3)(A)](/cfr/26/4940.md?p=c-3-A), a [section 965(c)](/cfr/26/965.md?p=c) deduction is not treated as an ordinary and necessary expense paid or incurred for the production or collection of gross investment income.
- (g) **Domestic pass-through entities.** For purposes of determining a domestic pass-through owner share, a [section 965(c)](/cfr/26/965.md?p=c) deduction amount of a domestic pass-through entity must be allocated to a domestic pass-through owner in the same proportion as an aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of the domestic pass-through entity for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year is allocated to the domestic pass-through owner.

# §1.965-4. Disregard of certain transactions.

- (a) **Scope.** This section provides rules that disregard certain transactions for purposes of applying [section 965](/cfr/26/965.md) to a United States shareholder. [Paragraph (b)](#b) of this section provides rules that disregard transactions undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder. [Paragraph (c)](#c) of this section provides rules that disregard certain changes in method of accounting and entity classification elections that would otherwise change the amount of a [section 965](/cfr/26/965.md) element. [Paragraph (d)](#d) of this section defines the term [section 965](/cfr/26/965.md) element. [Paragraph (e)](#e) of this section provides rules of application concerning paragraphs [(b)](#b) and [(c)](#c) of this section. [Paragraph (f)](#f) of this section provides rules that disregard certain transactions occurring between E&P measurement dates. Paragraph (g) of this section provides examples illustrating the application of this section.
- (b) **Transactions undertaken with a principal purpose of changing the amount of a section 965 element—**
  - (1) **General rule.** Except as otherwise provided in [paragraph (e)(3)](#e-3) of this section, a transaction is disregarded for purposes of determining the amounts of all [section 965](/cfr/26/965.md) elements of a United States shareholder if each of the following conditions is satisfied with respect to any [section 965](/cfr/26/965.md) element of the United States shareholder—
    - (i) The transaction occurs, in whole or in part, on or after November 2, 2017 (the specified date);
    - (ii) The transaction is undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of the United States shareholder; and
    - (iii) The transaction would, without regard to this [paragraph (b)(1)](#b-1), change the amount of the [section 965](/cfr/26/965.md) element of the United States shareholder.
  - (2) **Presumptions and exceptions for the application of the general rule—**
    - (i) **Overview.** Under [paragraphs (b)(2)(iii) through (v)](#b-2-iii..b-2-v) of this section, certain transactions are presumed to be undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder for purposes of [paragraph (b)(1)](#b-1) of this section. The presumptions described in [paragraphs (b)(2)(iii) through (v)](#b-2-iii..b-2-v) of this section may be rebutted only if facts and circumstances clearly establish that the transaction was not undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder. A taxpayer that takes the position that the presumption is rebutted must attach a statement to its return for its taxable year in which or with which the relevant taxable year of the relevant specified foreign corporation ends disclosing that it has rebutted the presumption. In the case of a transaction described in paragraph [(b)(2)(iii)](#b-2-iii) or [(iv)](#b-2-iv) of this section, if the presumption does not apply because the transaction occurs in the ordinary course of business, whether the transaction was undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder must be determined under all the facts and circumstances. Under [paragraphs (b)(2)(iii) through (v)](#b-2-iii..b-2-v) of this section, certain transactions are treated per se as being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder, and, therefore, such transactions are disregarded under [paragraph (b)(1)](#b-1) of this section if the conditions of paragraphs [(b)(1)(i)](#b-1-i) and [(iii)](#b-1-iii) of this section are satisfied. Further, under [paragraph (b)(2)(iii)](#b-2-iii) of this section, certain distributions are treated per se as not being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder and therefore are not disregarded under [paragraph (b)(1)](#b-1) of this section.
    - (ii) **Definitions—**
      - (A) **Relatedness.** For purposes of [paragraphs (b)(2)(iii) through (v)](#b-2-iii..b-2-v) of this section, a person is treated as related to a United States shareholder if, either immediately before or immediately after the transaction (or series of related transactions), the person bears a relationship to the United States shareholder described in [section 267(b)](/cfr/26/267.md?p=b) or [section 707(b)](/cfr/26/707.md?p=b).
      - (B) **Transfer—** (1) In general. For purposes of paragraphs [(b)(2)(iii)](#b-2-iii) and [(v)](#b-2-v) of this section, the term transfer includes any disposition of stock or property, including a sale or exchange, contribution, distribution, issuance, redemption, recapitalization, or loan of stock or property, and includes an indirect transfer of stock or property.

        (2) Indirect transfer. For purposes of paragraph (b)(2)(ii)(B)(1) of this section, the term indirect transfer includes a transfer of property or stock owned by an entity through a transfer of an interest in such entity (or an interest in an entity that has a direct or indirect interest in such entity), and a transfer of property or stock to a person through a transfer of property or stock to a pass-through entity of which such person is a direct or indirect owner.

    - (iii) **Cash reduction transactions—**
      - (A) **General rule.** For purposes of [paragraph (b)(1)](#b-1) of this section, a cash reduction transaction is presumed to be undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder. For this purpose, the term cash reduction transaction means a transfer of cash, accounts receivable, or cash-equivalent assets by a specified foreign corporation to a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of the specified foreign corporation, or an assumption by a specified foreign corporation of an account payable of a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of the specified foreign corporation, if such transfer or assumption would, without regard to [paragraph (b)(1)](#b-1) of this section, reduce the aggregate foreign cash position of the United States shareholder. The presumption described in this [paragraph (b)(2)(iii)](#b-2-iii) does not apply to a cash reduction transaction that occurs in the ordinary course of business.
      - (B) **Per se rules for certain distributions.** Notwithstanding the presumption described in [paragraph (b)(2)(iii)(A)](#b-2-iii-A) of this section, except in the case of a specified distribution, a cash reduction transaction that is a distribution by a specified foreign corporation to a United States shareholder of the specified foreign corporation is treated per se as not being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of the United States shareholder for purposes of [paragraph (b)(1)](#b-1) of this section. A specified distribution is treated per se as being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder for purposes of [paragraph (b)(1)](#b-1) of this section. For purposes of this [paragraph (b)(2)(iii)(B)](#b-2-iii-B), the term specified distribution means a cash reduction transaction that is a distribution by a specified foreign corporation of a United States shareholder if and to the extent that, at the time of the distribution, there was a plan or intention for the distributee to transfer cash, accounts receivable, or cash-equivalent assets to any specified foreign corporation of the United States shareholder or a distribution that is a non pro rata distribution to a foreign person that is related to the United States shareholder. For purposes of the preceding sentence, there is no plan or intention for the distributee to transfer cash, accounts receivable, or cash-equivalent assets to any specified foreign corporation of the United States shareholder if the transfer is pursuant to a legal obligation entered into before November 2, 2017. A taxpayer that takes the position that a cash reduction transaction is not a specified distribution because a transfer of cash, accounts receivable, or cash-equivalent asset is pursuant to a legal obligation entered into before November 2, 2017, must attach a statement to its return for its taxable year in which or with which the relevant taxable year of the relevant specified foreign corporation ends disclosing the position.
    - (iv) **E&P reduction transactions—**
      - (A) **General rule.** For purposes of [paragraph (b)(1)](#b-1) of this section, an E&P reduction transaction is presumed to be undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder. For purposes of this [paragraph (b)(2)(iv)](#b-2-iv), the term E&P reduction transaction means a transaction between a specified foreign corporation and any of a United States shareholder of the specified foreign corporation, another specified foreign corporation of a United States shareholder of the specified foreign corporation, or any person related to a United States shareholder of the specified foreign corporation, if the transaction would, without regard to [paragraph (b)(1)](#b-1) of this section, reduce either the accumulated post-1986 deferred foreign income or the post-1986 undistributed earnings (as defined in [section 902(c)(1)](/cfr/26/902.md?p=c-1)) of the specified foreign corporation or another specified foreign corporation of any United States shareholder of such specified foreign corporation. The presumption described in this [paragraph (b)(2)(iv)(A)](#b-2-iv-A) does not apply to an E&P reduction transaction that occurs in the ordinary course of business.
      - (B) **Per se rule for specified transactions.** A specified transaction is treated per se as being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder for purposes of [paragraph (b)(1)](#b-1) of this section. For purposes of the preceding sentence, the term specified transaction means an E&P reduction transaction that involves one or more of the following: A complete liquidation of a specified foreign corporation to which [section 331](/cfr/26/331.md) applies; a sale or other disposition of stock by a specified foreign corporation; or a distribution by a specified foreign corporation that reduces the earnings and profits of the specified foreign corporation pursuant to [section 312(a)(3)](/cfr/26/312.md?p=a-3).
    - (v) **Pro rata share transactions—**
      - (A) **General rule.** For purposes of [paragraph (b)(1)](#b-1) of this section, a pro rata share transaction is presumed to be undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder. For this purpose, the term pro rata share transaction means either a pro rata share reduction transaction or an E&P deficit transaction.

        (1) Definition of pro rata share reduction transaction. For purposes of this [paragraph (b)(2)(v)(A)](#b-2-v-A), the term pro rata share reduction transaction means a transfer of the stock of a specified foreign corporation by either a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of the specified foreign corporation (including by the specified foreign corporation itself) to a person related to the United States shareholder if the transfer would, without regard to [paragraph (b)(1)](#b-1) of this section, reduce the United States shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the specified foreign corporation, reduce the United States shareholder's pro rata share of the cash position of the specified foreign corporation, or both.

        (2) Definition of E&P deficit transaction. For purposes of this [paragraph (b)(2)(v)(A)](#b-2-v-A), the term E&P deficit transaction means a transfer to either a United States shareholder or a person related to the United States shareholder of the stock of an E&P deficit foreign corporation by a person related to the United States shareholder (including by the E&P deficit foreign corporation itself) if the transfer would, without regard to [paragraph (b)(1)](#b-1) of this section, increase the United States shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation.

      - (B) **Per se rule for internal group transactions.** An internal group transaction is treated per se as being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder for purposes of [paragraph (b)(1)](#b-1) of this section. For purposes of the preceding sentence, the term internal group transaction means a pro rata share transaction if, immediately before or after the transfer, the transferor of the stock of the specified foreign corporation and the transferee of such stock are members of an affiliated group in which the United States shareholder is a member. For this purpose, the term affiliated group has the meaning set forth in [section 1504(a)](/cfr/26/1504.md?p=a), determined without regard to [paragraphs (1) through (8)](/cfr/26/1504.md?p=b-1..b-8) of section 1504(b), and the term members of an affiliated group means entities included in the same affiliated group. For purposes of identifying an affiliated group and the members of such group, each partner in a partnership, as determined without regard to this sentence, is treated as holding its proportionate share of the stock held by the partnership, as determined under the rules and principles of [sections 701 through 777](/cfr/26/701..777.md), and if one or more members of an affiliated group own, in the aggregate, at least 80 percent of the interests in a partnership's capital or profits, the partnership will be treated as a corporation that is a member of the affiliated group.
      - (C) **Example.** The following example illustrates the application of the rules in this [paragraph (b)(2)(v)](#b-2-v).

        (1) Facts. FP, a foreign corporation, owns all of the stock of USP, a domestic corporation. USP owns all of the stock of FS, a foreign corporation. USP has a calendar year taxable year; FS's taxable year ends November 30. On January 2, 2018, USP transfers all of the stock of FS to FP in exchange for cash. On January 3, 2018, FS makes a distribution with respect to the stock transferred to FP. USP treats the transaction as a taxable sale of the FS stock and claims a dividends received deduction under [section 245A](/cfr/26/245A.md) with respect to its deemed dividend under [section 1248(j)](/cfr/26/1248.md?p=j) as a result of the sale. FS has post-1986 earnings and profits as of December 31, 2017, and no post-1986 earnings and profits that are attributable to income effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1 or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md).

        (2) Analysis. The transfer of the stock of FS is a pro rata share reduction transaction and thus a pro rata share transaction because such transfer is by USP, a United States shareholder, to FP, a person related to USP, and the transfer would, without regard to the rule in [paragraph (b)(1)](#b-1) of this section, reduce USP's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of FS. Because USP and FP are also members of an affiliated group within the meaning of [paragraph (b)(2)(v)(B)](#b-2-v-B) of this section, the transfer of the stock of FS is also an internal group transaction and is treated per se as being undertaken with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of USP. Accordingly, because the transfer occurs after the specified date and reduces USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to FS, the transfer is disregarded for purposes of determining any [section 965](/cfr/26/965.md) element of USP with the result that, among other things, USP's pro rata share of FS's [section 965(a)](/cfr/26/965.md?p=a) earnings amount is determined as if USP owned (within the meaning of [section 958(a)](/cfr/26/958.md?p=a)) 100% of the stock of FS on the last day of FS's inclusion year and no other person received a distribution with respect to such stock during such year. See section [951(a)(2)(A)](/cfr/26/951.md?p=a-2-A) and [(B)](/cfr/26/951.md?p=a-2-B).

- (c) **Disregard of certain changes in method of accounting and entity classification elections—**
  - (1) **Changes in method of accounting.** Any change in method of accounting made for a taxable year of a specified foreign corporation that ends in 2017 or 2018 is disregarded for purposes of determining the amounts of all [section 965](/cfr/26/965.md) elements with respect to a United States shareholder if the change in method of accounting would, without regard to this [paragraph (c)(1)](#c-1), change the amount of any [section 965](/cfr/26/965.md) element described in paragraph [(d)(1)](#d-1) or [(2)](#d-2) of this section with respect to the United States shareholder, or change the amount of the [section 965](/cfr/26/965.md) element described in [paragraph (d)(3)](#d-3) of this section other than by reason of an increase in a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the specified foreign corporation, regardless of whether the change in method of accounting is made with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element with respect to the United States shareholder. The rule described in the preceding sentence applies regardless of whether the change in method of accounting was made in accordance with the procedures described in Rev. Proc. 2015-13, 2015-5 I.R.B. 419 (or successor), and regardless of whether the change in method of accounting was properly made, but it does not apply to a change in method of accounting for which the original and/or duplicate copy of any Form 3115, “Application for Change in Accounting Method,” requesting the change was filed before the specified date (as defined in [paragraph (b)(1)](#b-1) of this section).
  - (2) **Entity classification elections.** Except as otherwise provided in [paragraph (e)(3)](#e-3) of this section, an election under [§ 301.7701-3](/cfr/26/301.7701-3.md) to change the classification of an entity that is filed on or after the specified date (as defined in [paragraph (b)(1)](#b-1) of this section) is disregarded for purposes of determining the amounts of all [section 965](/cfr/26/965.md) elements of a United States shareholder if the election would, without regard to this [paragraph (c)(2)](#c-2), change the amount of any [section 965](/cfr/26/965.md) element of the United States shareholder, regardless of whether the election is made with a principal purpose of changing the amount of a [section 965](/cfr/26/965.md) element of the United States shareholder. An election filed on or after the specified date is subject to the preceding sentence even if the election was filed with an effective date that is before the specified date.
- (d) **Definition of a section 965 element.** For purposes of paragraphs [(b)](#b) and [(c)](#c) of this section, the term [section 965](/cfr/26/965.md) element means, with respect to a United States shareholder, any of the following amounts (collectively, [section 965](/cfr/26/965.md) elements)—
  - (1) The United States shareholder's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to a specified foreign corporation;
  - (2) The aggregate foreign cash position of the United States shareholder; or
  - (3) The amount of foreign income taxes of a specified foreign corporation deemed paid by the United States shareholder under [section 960](/cfr/26/960.md) as a result of a [section 965(a)](/cfr/26/965.md?p=a) inclusion.
- (e) **Rules for applying paragraphs (b) and (c) of this section—**
  - (1) **Determination of whether there is a change in the amount of a section 965 element.** For purposes of paragraphs [(b)](#b) and [(c)](#c) of this section, there is a change in the amount of a [section 965](/cfr/26/965.md) element of a United States shareholder as a result of a transaction, change in accounting method, or election to change an entity's classification, if, without regard to paragraph [(b)(1)](#b-1), [(c)(1)](#c-1), or [(c)(2)](#c-2) of this section, the transaction, change in accounting method, or change in entity classification would—
    - (i) Reduce the amount described in [paragraph (d)(1)](#d-1) of this section,
    - (ii) Reduce the amount described in [paragraph (d)(2)](#d-2) of this section, but only if such amount is less than the United States shareholder's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount, or
    - (iii) **Increase the amount described in paragraph (d)(3) of this section.**
  - (2) **Treatment of domestic pass-through owners as United States shareholders.** For purposes of paragraphs [(b)](#b) and [(c)](#c) of this section, if a domestic pass-through entity is a United States shareholder, then a domestic pass-through owner with respect to the domestic pass-through entity that is not otherwise a United States shareholder is treated as a United States shareholder.
  - (3) **Exception for certain incorporation transactions—**
    - (i) **In general.** Paragraphs [(b)](#b) and [(c)(2)](#c-2) of this section do not apply to disregard a transfer of stock of a specified foreign corporation by a United States shareholder to a domestic corporation (for this purpose, including an S corporation), provided that—
      - (A) The transferee's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the transferred stock of the specified foreign corporation is no lower than the transferor's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the transferred stock of the specified foreign corporation, determined without regard to the transfer; and
      - (B) The transferee and the transferor determine their aggregate foreign cash position under [paragraph (e)(3)(ii)](#e-3-ii) of this section.
    - (ii) **Aggregate foreign cash position.** In the case of a transfer described in [paragraph (e)(3)(i)](#e-3-i) of this section, in order to rely on the exception in [paragraph (e)(3)(i)](#e-3-i) of this section—
      - (A) The transferee must treat its pro rata share of the cash position of a specified foreign corporation as of a cash measurement date as of which it did not own the transferred stock of the specified foreign corporation as including the transferor's pro rata share of the cash position of the specified foreign corporation with respect to the transferred stock of the specified foreign corporation as of such cash measurement date for purposes of determining its aggregate foreign cash position; and
      - (B) The transferor must treat its pro rata share of the cash position of a specified foreign corporation as of a cash measurement date as of which it did not own the transferred stock of the specified foreign corporation as including the transferee's pro rata share of the cash position of the specified foreign corporation with respect to the transferred stock of the specified foreign corporation as of such cash measurement date for purposes of determining its aggregate foreign cash position.
  - (4) **Consequences of liquidation—**
    - (i) **In general.** In the case of a liquidation of a specified foreign corporation that is disregarded for purposes of determining the [section 965](/cfr/26/965.md) elements of a United States shareholder pursuant to paragraph [(b)](#b) or [(c)(2)](#c-2) of this section, for purposes of determining the amounts of the [section 965](/cfr/26/965.md) elements of the United States shareholder, the date that is treated as the last day of the taxable year of the specified foreign corporation is the later of—
      - (A) The date of the liquidation; and
      - (B) **The specified liquidation date, if any.**
    - (ii) **Specified liquidation date.** The term specified liquidation date means, in the case of a liquidation of a specified foreign corporation pursuant to an entity classification election that is disregarded for purposes of determining the [section 965](/cfr/26/965.md) elements of a United States shareholder—
      - (A) November 30, 2017, with respect to a United States shareholder that must include in income under [§ 1.367(b)-3](/cfr/26/1.367..3.md) as a deemed dividend the all earnings and profits amount with respect to the United States shareholder's stock of the liquidating specified foreign corporation; or
      - (B) The date of filing of the entity classification election, with respect to all other United States shareholders.
- (f) **Disregard of certain transactions occurring between E&P measurement dates—**
  - (1) **Disregard of specified payments.** Except as provided in [paragraph (f)(3)](#f-3) of this section, a specified payment made by a specified foreign corporation (payor specified foreign corporation) to another specified foreign corporation (payee specified foreign corporation) is disregarded for purposes of determining the post-1986 earnings and profits of each of the payor specified foreign corporation and the payee specified foreign corporation as of the E&P measurement date on December 31, 2017.
  - (2) **Definition of specified payment.** For purposes of [paragraph (f)(1)](#f-1) of this section, the term specified payment means any amount paid or accrued by the payor specified foreign corporation, including a distribution by the payor specified foreign corporation with respect to its stock, if each of the following conditions are satisfied:
    - (i) Immediately before or immediately after the payment or accrual of the amount, the payor specified foreign corporation and the payee specified foreign corporation are related within the meaning of [section 954(d)(3)](/cfr/26/954.md?p=d-3), substituting the term “specified foreign corporation” for “controlled foreign corporation” in each place that it appears;
    - (ii) The payment or accrual of the amount occurs after November 2, 2017, and on or before December 31, 2017; and
    - (iii) The payment or accrual of the amount would, without regard to the application of [paragraph (f)(1)](#f-1) of this section, reduce the post-1986 earnings and profits of the payor specified foreign corporation as of the E&P measurement date on December 31, 2017.
  - (3) **Non-application of disregard rule.** A [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder may determine the post-1986 earnings and profits of a specified foreign corporation without regard to [paragraph (f)(1)](#f-1) of this section, provided that it and every [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder related to the first [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder determines the post-1986 earnings and profits of each of its specified foreign corporations without regard to [paragraph (f)(1)](#f-1) of this section. For purposes of this [paragraph (f)(3)](#f-3), a person is treated as related to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder if the person bears a relationship to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder described in section [267(b)](/cfr/26/267.md?p=b) or [707(b)](/cfr/26/707.md?p=b).
  - (4) **Examples.** The following examples illustrate the application of the rules in this [paragraph (f)](#f).
    - (i) **Example 1. Deductible payment between wholly owned specified foreign corporations is a specified payment—**
      - (A) **Facts.** USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP, CFC1, and CFC2 have calendar year taxable years. On November 2, 2017, each of CFC1 and CFC2 has post-1986 earnings and profits of 100u. Neither CFC1 nor CFC2 has post-1986 earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1 or that, if distributed, would be excluded from the gross income of a United States shareholder under [section 959](/cfr/26/959.md) or from the gross income of another shareholder if such shareholder were a United States shareholder; therefore, no adjustment is made under [section 965(d)(2)](/cfr/26/965.md?p=d-2) or [§ 1.965-1(f)(7)](/cfr/26/1.965-1.md?p=f-7), and each of CFC1's and CFC2's accumulated post-1986 deferred foreign income is equal to such corporation's post-1986 earnings and profits. On November 3, 2017, CFC2 makes a deductible payment of 10u to CFC1. The payment does not constitute [subpart F](/cfr/26/subpartF.md) income. CFC1 and CFC2 have no other items of income or deduction.
      - (B) **Analysis.** The payment from CFC2 to CFC1 is a specified payment because (1) CFC1 and CFC2 are related specified foreign corporations; (2) the payment occurs after November 2, 2017, and on or before December 31, 2017; and (3) the payment would, without regard to the application of the rule in [paragraph (f)(1)](#f-1) of this section, reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017. Under [paragraph (f)(1)](#f-1) of this section, the payment is disregarded, and CFC1 and CFC2 each have post-1986 earnings and profits of 100u as of December 31, 2017. Accordingly, the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of each of CFC1 and CFC2 is 100u.
    - (ii) **Example 2. Distribution is a specified payment—**
      - (A) **Facts.** The facts are the same as in [paragraph (f)(4)(i)(A)](#f-4-i-A) of this section (the facts in Example 1), except instead of a deductible payment to CFC1, CFC2 makes a 10u distribution on November 3, 2017, that, without regard to [paragraph (f)(1)](#f-1) of this section would reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017, and increase the post-1986 earnings and profits of CFC1 as of the E&P measurement date on December 31, 2017, by 10u.
      - (B) **Analysis.** The distribution is a specified payment because (1) CFC1 and CFC2 are related specified foreign corporations; (2) the distribution occurs after November 2, 2017, and on or before December 31, 2017; and (3) the distribution would, without regard to the application of the rule in [paragraph (f)(1)](#f-1) of this section, reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017. Under [paragraph (f)(1)](#f-1) of this section, the distribution is disregarded with the result that CFC1 and CFC2 each have post-1986 earnings and profits of 100u as of the E&P measurement date on December 31, 2017, and a [section 965(a)](/cfr/26/965.md?p=a) earnings amount of 100u.
    - (iii) **Example 3. Deductible payment between related (but not wholly owned) specified foreign corporations is a specified payment—**
      - (A) **Facts.** The facts are the same as in [paragraph (f)(4)(i)(A)](#f-4-i-A) of this section (the facts in Example 1), except that CFC1 owns only 51% of the only class of stock of CFC2, the remainder of which is owned by USI, a United States citizen unrelated to USP, CFC1, and CFC2.
      - (B) **Analysis.** The analysis is the same as in [paragraph (f)(4)(i)(B)](#f-4-i-B) of this section (the analysis in Example 1); thus, the payment is disregarded with the result that CFC1 and CFC2 each have post-1986 earnings and profits of 100u as of the E&P measurement date on December 31, 2017, and a [section 965(a)](/cfr/26/965.md?p=a) earnings amount of 100u.
    - (iv) **Example 4. Deductible payment between unrelated specified foreign corporations is not a specified payment—**
      - (A) **Facts.** The facts are the same as in [paragraph (f)(4)(i)(A)](#f-4-i-A) of this section (the facts in Example 1), except that CFC1 owns only 50% of the only class of stock of CFC2, the remainder of which is owned by USI, a United States citizen unrelated to USP, CFC1, and CFC2.
      - (B) **Analysis.** [Paragraph (f)(1)](#f-1) of this section does not apply because CFC1 and CFC2 are not related. Thus, the payment is taken into account with the result that CFC1 has post-1986 earnings and profits of 110u as of the E&P measurement date on December 31, 2017, and a [section 965(a)](/cfr/26/965.md?p=a) earnings amount of 110u.
    - (v) **Example 5. Deductible payment and income accrued from unrelated persons are not specified payments—**
      - (A) **Facts.** The facts are the same as in [paragraph (f)(4)(i)(A)](#f-4-i-A) of this section (the facts in Example 1), except that CFC2 does not make a deductible payment to CFC1, and, between E&P measurement dates, CFC2 accrues gross income of 20u from a person that is not related to CFC2, and CFC1 incurs a deductible expense of 20u to a person that is not related to CFC1.
      - (B) **Analysis.** [Paragraph (f)(1)](#f-1) of this section does not apply because neither the deductible expense of CFC1 nor the income accrual by CFC2 are attributable to a specified payment.
    - (vi) **Example 6. Deductible payment and income accrued with respect to unrelated persons are not specified payments; deductible payment between wholly specified foreign corporations is a specified payment—**
      - (A) **Facts.** The facts are the same as in [paragraph (f)(4)(v)(A)](#f-4-v-A) of this section (the facts in Example 5), except that CFC2 also makes a deductible payment of 10u to CFC1 on November 3, 2017.
      - (B) **Analysis.** The deductible payment is a specified payment because (1) CFC1 and CFC2 are related specified foreign corporations; (2) the payment occurs after November 2, 2017, and on or before December 31, 2017; and (3) the deductible payment would, without regard to the application of the rule in [paragraph (f)(1)](#f-1) of this section, reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017. Accordingly, under [paragraph (f)(1)](#f-1) of this section, the deductible payment is disregarded with the result that CFC1 and CFC2 have 80u and 120u of post-1986 earnings and profits as of the E&P measurement date on December 31, 2017, respectively. Accordingly, CFC1 and CFC2 have [section 965(a)](/cfr/26/965.md?p=a) earnings amounts of 100u and 120u, respectively.

# §1.965-5. Allowance of credit or deduction for foreign income taxes.

- (a) **Scope.** This section provides rules for the allowance of a credit or deduction for foreign income taxes in connection with the application of [section 965](/cfr/26/965.md). [Paragraph (b)](#b) of this section provides rules under [section 965(g)](/cfr/26/965.md?p=g) for the allowance of a credit or deduction for foreign income taxes paid or accrued. [Paragraph (c)](#c) of this section provides rules for the allowance of a credit or deduction for foreign income taxes treated as paid or accrued in connection with the application of [section 965](/cfr/26/965.md). [Paragraph (d)](#d) of this section defines the term applicable percentage.
- (b) **Rules for foreign income taxes paid or accrued—**
  - (1) **In general.** Neither a deduction (including under [section 164](/cfr/26/164.md)) nor a credit under [section 901](/cfr/26/901.md) is allowed for the applicable percentage of any foreign income taxes paid or accrued with respect to any amount for which a [section 965(c)](/cfr/26/965.md?p=c) deduction is allowed for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year. Neither a deduction (including under [section 164](/cfr/26/164.md)) nor a credit under [section 901](/cfr/26/901.md) is allowed for the applicable percentage of any foreign income taxes attributable to a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits. Accordingly, for example, no deduction or credit is allowed for the applicable percentage of any withholding taxes imposed on a United States shareholder by the jurisdiction of residence of the distributing foreign corporation with respect to a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits. Similarly, for example, no deduction or credit is allowed for the applicable percentage of foreign income taxes imposed on a United States citizen by the citizen's jurisdiction of residence upon receipt of a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits.
  - (2) **Attributing taxes to section 959(a) distributions of section 965 previously taxed earnings and profits.** For purposes of [paragraph (b)(1)](#b-1) of this section, foreign income taxes are attributable to a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits if such taxes would be allocated and apportioned to a distribution of such previously taxed earnings and profits under the principles of [§ 1.904-6(a)(1)(iv)](/cfr/26/1.904-6.md?p=a-1-iv), regardless of whether an actual distribution is made or recognized for Federal income tax purposes. Therefore, for example, a credit or deduction for the applicable percentage of foreign income taxes imposed on a United States shareholder that pays foreign tax on a distribution that is not recognized for Federal income tax purposes (for example, in the case of a consent dividend or stock dividend upon which a withholding tax is imposed) is not allowed under [paragraph (b)(1)](#b-1) of this section to the extent it is attributable to a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits under the principles of [§ 1.904-6(a)(1)(iv)](/cfr/26/1.904-6.md?p=a-1-iv). For taxable years of foreign corporations beginning after December 31, 2019, in lieu of applying the principles of [§ 1.904-6](/cfr/26/1.904-6.md) under this [paragraph (b)(2)](#b-2), the rules in [§ 1.861-20](/cfr/26/1.861-20.md) apply by treating the portion of a distribution attributable to [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits and the portion of a distribution attributable to [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits each as a statutory grouping, and the portion of the distribution that is attributable to other earnings and profits as the residual grouping. See [§ 1.861-20(g)(7)](/cfr/26/1.861-20.md?p=g-7) (Example 6).
- (c) **Rules for foreign income taxes treated as paid or accrued—**
  - (1) **Disallowed credit—**
    - (i) **In general.** A credit under [section 901](/cfr/26/901.md) is not allowed for the applicable percentage of any foreign income taxes treated as paid or accrued with respect to any amount for which a [section 965(c)](/cfr/26/965.md?p=c) deduction is allowed for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year. For purposes of the preceding sentence, taxes treated as paid or accrued include foreign income taxes deemed paid under [section 960(a)(1)](/cfr/26/960.md?p=a-1) with respect to a [section 965(a)](/cfr/26/965.md?p=a) inclusion, foreign income taxes deemed paid under [section 960(a)(3)](/cfr/26/960.md?p=a-3) (as in effect on December 21, 2017) or [section 960(b)](/cfr/26/960.md?p=b) (as applicable to taxable years of controlled foreign corporations beginning after December 31, 2017) with respect to distributions of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits, foreign income taxes allocated to an entity under [§ 1.901-2(f)(4)](/cfr/26/1.901-2.md?p=f-4), and a distributive share of foreign income taxes paid or accrued by a partnership.
    - (ii) **Foreign income taxes deemed paid under section 960(a)(3) (as in effect on December 21, 2017).** Foreign income taxes deemed paid by a domestic corporation under [section 960(a)(3)](/cfr/26/960.md?p=a-3) with respect to a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits include only the foreign income taxes paid or accrued by an upper-tier foreign corporation with respect to a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits from a lower-tier foreign corporation. No credit is allowed under [section 960(a)(3)](/cfr/26/960.md?p=a-3) or any other section for foreign income taxes that would have been deemed paid under [section 960(a)(1)](/cfr/26/960.md?p=a-1) with respect to the portion of a [section 965(a)](/cfr/26/965.md?p=a) earnings amount that is reduced under [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2) or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b).
    - (iii) **Foreign income taxes deemed paid under section 960(b) (as applicable to taxable years of controlled foreign corporations beginning after December 31, 2017, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end).** [Paragraph (c)(1)(i)](#c-1-i) of this section applies to foreign income taxes deemed paid under [section 960(b)](/cfr/26/960.md?p=b) (as in effect for a taxable year of a controlled foreign corporation beginning after December 31, 2017, and a taxable year of a United States person in which or with which such controlled foreign corporation's taxable year ends) only if such taxes are deemed paid under [§ 1.960-3(b)(1)](/cfr/26/1.960-3.md?p=b-1) with respect to distributions to a domestic corporation of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits. See also § [1.960-3(c)(2)(i)](/cfr/26/1.960-3.md?p=c-2-i), [(ii)](/cfr/26/1.960-3.md?p=c-2-ii), [(vi)](/cfr/26/1.960-3.md?p=c-2-vi), or [(vii)](/cfr/26/1.960-3.md?p=c-2-vii). Foreign income taxes that would have been deemed paid under [section 960(a)(1)](/cfr/26/960.md?p=a-1) (as in effect on December 21, 2017) with respect to the portion of a [section 965(a)](/cfr/26/965.md?p=a) earnings amount that was reduced under [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2) or [§ 1.965-8(b)](/cfr/26/1.965-8.md?p=b) are not eligible to be deemed paid under [section 960(b)](/cfr/26/960.md?p=b) and [§ 1.960-3(b)](/cfr/26/1.960-3.md?p=b) or any other section of the Code.
  - (2) **Disallowed deduction.** No deduction (including under [section 164](/cfr/26/164.md)) is allowed for the applicable percentage of any foreign income taxes treated as paid or accrued with respect to any amount for which a [section 965(c)](/cfr/26/965.md?p=c) deduction is allowed. Such taxes include foreign income taxes allocated to an entity under [§ 1.901-2(f)(4)](/cfr/26/1.901-2.md?p=f-4) and a distributive share of foreign income taxes paid or accrued by a partnership.
  - (3) **Coordination with section 78—**
    - (i) **In general.** With respect to foreign income taxes deemed paid by a domestic corporation with respect to its [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, [section 78](/cfr/26/78.md) applies only to so much of such taxes as bears the same proportion to the amount of such taxes as—
      - (A) **The excess of—** (1) The [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, over

        (2) The [section 965(c)](/cfr/26/965.md?p=c) deduction amount allowable with respect to such [section 965(a)](/cfr/26/965.md?p=a) inclusion amount, bears to

      - (B) **Such section 965(a) inclusion amount.**
    - (ii) **Domestic corporation that is a domestic pass-through owner.** With respect to foreign income taxes deemed paid by a domestic corporation attributable to such corporation's domestic pass-through owner share of a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of a domestic pass-through entity, [section 78](/cfr/26/78.md) applies only to so much of such taxes as bears the same proportion to the amount of such taxes as the proportion determined under [paragraph (c)(3)(i)](#c-3-i) of this section as applied to the domestic pass-through entity's [section 965(a)](/cfr/26/965.md?p=a) inclusion amount for a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year.
- (d) **Applicable percentage—**
  - (1) **In general.** For purposes of this section, except as provided in paragraph [(d)(2)](#d-2) and [(d)(3)](#d-3) of this section, the term applicable percentage means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, the amount (expressed as a percentage) equal to the sum of—
    - (i) 0.771 multiplied by the ratio of—
      - (A) The [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 8 percent rate amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, divided by
      - (B) The sum of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 8 percent rate amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year plus the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 15.5 percent rate amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year; plus
    - (ii) 0.557 multiplied by the ratio of—
      - (A) The [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's 15.5 percent rate amount for the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, divided by
      - (B) **The amount described in paragraph (d)(1)(i)(B) of this section.**
  - (2) **No section 965(a) inclusion amount.** If a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder does not have an aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount, the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's applicable percentage is 55.7 percent.
  - (3) **Applicable percentage for domestic pass-through owners.** In the case of a domestic pass-through owner with respect to a domestic pass-through entity, the domestic pass-through owner's applicable percentage that is applied to foreign income taxes attributable to the domestic pass-through owner share of the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount or of distributions of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits is equal to the applicable percentage determined under paragraph [(d)(1)](#d-1) or [(2)](#d-2) of this section, as applicable, with respect to the domestic pass-through entity.
  - (4) **Applicable percentage with respect to certain distributions of previously taxed earnings and profits.** In the case of a distribution of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits (other than with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder described in [paragraph (d)(2)](#d-2) of this section), the applicable percentage that is applied to foreign income taxes attributable to the distribution is the applicable percentage that applied with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder and the [section 958(a)](/cfr/26/958.md?p=a) U.S. inclusion year in which, or with which, the inclusion year of the relevant deferred foreign income corporation ends. For this purpose, the relevant deferred foreign income corporation is the deferred foreign income corporation with respect to which the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder had the [section 965(a)](/cfr/26/965.md?p=a) inclusion as a result of which the [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits first arose (as described in [§ 1.965-2(c)](/cfr/26/1.965-2.md?p=c)) or the [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits first arose (as described in [§ 1.965-2(d)](/cfr/26/1.965-2.md?p=d)).

# §1.965-6. Computation of foreign income taxes deemed paid and allocation and apportionment of deductions.

- (a) **Scope.** This section provides rules for the computation of foreign income taxes deemed paid and the allocation and apportionment of deductions. [Paragraph (b)](#b) of this section provides the general rules for the computation of foreign income taxes deemed paid under sections [902](/cfr/26/902.md) and [960](/cfr/26/960.md). [Paragraph (c)](#c) of this section provides rules for allocation and apportionment of expenses. [Paragraph (d)](#d) of this section provides rules for foreign income taxes associated with hovering deficits.
- (b) **Computation of foreign incomes taxes deemed paid—**
  - (1) **In general.** For purposes of determining foreign income taxes deemed paid under [section 960(a)(1)](/cfr/26/960.md?p=a-1) with respect to a [section 965(a)](/cfr/26/965.md?p=a) inclusion attributable to a deferred foreign income corporation that is a member of a qualified group (as defined in [section 902(b)(2)](/cfr/26/902.md?p=b-2)), [section 902](/cfr/26/902.md) applies as if the [section 965(a)](/cfr/26/965.md?p=a) inclusion, translated (if necessary) into the functional currency of the deferred foreign income corporation using the spot rate on December 31, 2017, were a dividend paid by the deferred foreign income corporation. For purposes of computing the amount of foreign income taxes deemed paid under [section 960(a)(1)](/cfr/26/960.md?p=a-1), §§ [1.965-2(b)](/cfr/26/1.965-2.md?p=b), [1.965-5](/cfr/26/1.965-5.md), sections [902](/cfr/26/902.md) and [960](/cfr/26/960.md), the regulations under those sections, and this section apply.
  - (2) **Dividend or inclusion in excess of post-1986 undistributed earnings.** When the denominator of the [section 902](/cfr/26/902.md) fraction is positive but less than the numerator of such fraction, the [section 902](/cfr/26/902.md) fraction is one. When the denominator of the [section 902](/cfr/26/902.md) fraction is zero or less than zero, the [section 902](/cfr/26/902.md) fraction is zero, and no foreign taxes are deemed paid.
  - (3) **Treatment of adjustment under section 965(b)(4)(B).** For purposes of [section 902(c)(1)](/cfr/26/902.md?p=c-1), the post-1986 undistributed earnings of an E&P deficit foreign corporation are increased under [section 965(b)(4)(B)](/cfr/26/965.md?p=b-4-B) and [§ 1.965-2(d)(2)(i)(A)](/cfr/26/1.965-2.md?p=d-2-i-A) as of the first day of the foreign corporation's first taxable year following the E&P deficit foreign corporation's last taxable year that begins before January 1, 2018.
  - (4) **Section 902 fraction.** The term [section 902](/cfr/26/902.md) fraction means, with respect to either a deferred foreign income corporation or an E&P deficit foreign corporation, the fraction that is—
    - (i) The dividends paid by, or the inclusion under [section 951(a)(1)](/cfr/26/951.md?p=a-1) (including a [section 965(a)](/cfr/26/965.md?p=a) inclusion) with respect to, the foreign corporation, as applicable (the numerator), divided by
    - (ii) The foreign corporation's post-1986 undistributed earnings or pre-1987 accumulated profits, as applicable (the denominator).
- (c) **Allocation and apportionment of deductions.** For purposes of allocating and apportioning expenses, a [section 965(c)](/cfr/26/965.md?p=c) deduction does not result in any gross income, including a [section 965(a)](/cfr/26/965.md?p=a) inclusion, being treated as exempt, excluded, or eliminated income within the meaning of [section 864(e)(3)](/cfr/26/864.md?p=e-3) or [§ 1.861-8T(d)](/cfr/26/1.861-8T.md?p=d). Similarly, a [section 965(c)](/cfr/26/965.md?p=c) deduction does not result in the treatment of stock as an exempt asset within the meaning of [section 864(e)(3)](/cfr/26/864.md?p=e-3) or [§ 1.861-8T(d)](/cfr/26/1.861-8T.md?p=d). In addition, consistent with the general inapplicability of [§ 1.861-8T(d)(2)](/cfr/26/1.861-8T.md?p=d-2) to earnings and profits described in section [959(c)(1)](/cfr/26/959.md?p=c-1) or [959(c)(2)](/cfr/26/959.md?p=c-2), neither [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits nor [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits are treated as giving rise to gross income that is exempt, excluded, or eliminated income. Similarly, the asset that gives rise to a [section 965(a)](/cfr/26/965.md?p=a) inclusion, [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits, or [section 965(b)](/cfr/26/965.md?p=b) previously taxed earnings and profits is not treated as a tax-exempt asset.
- (d) **Hovering deficits.** In the last taxable year that begins before January 1, 2018, of a deferred foreign income corporation that is also a foreign surviving corporation, as defined in [§ 1.367(b)-7(a)](/cfr/26/1.367..7.md), solely for purposes of determining the amount of related taxes that are included in post-1986 foreign income taxes under [§ 1.367(b)-7(d)(2)(iii)](/cfr/26/1.367..7.md)—
  - (1) The post-transaction earnings described in [§ 1.367(b)-7(d)(2)(ii)](/cfr/26/1.367..7.md) that can be offset by a hovering deficit include any post-transaction earnings earned in that year that were not considered accumulated because they were included in income under [section 965](/cfr/26/965.md) and [§ 1.965-1(b)(1)](/cfr/26/1.965-1.md?p=b-1) by a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder; and
  - (2) Any offset for purposes of [§ 1.367(b)-7(d)(2)(ii)](/cfr/26/1.367..7.md) is treated as occurring on the last day of the foreign surviving corporation's inclusion year.

# §1.965-7. Elections, payment, and other special rules.

- (a) **Scope.** This section provides rules regarding certain elections and payments. [Paragraph (b)](#b) of this section provides rules regarding the [section 965(h)](/cfr/26/965.md?p=h) election. [Paragraph (c)](#c) of this section provides rules regarding the [section 965(i)](/cfr/26/965.md?p=i) election. [Paragraph (d)](#d) of this section provides rules regarding the [section 965(m)](/cfr/26/965.md?p=m) election and a special rule for real estate investment trusts. [Paragraph (e)](#e) of this section provides rules regarding the [section 965(n)](/cfr/26/965.md?p=n) election. [Paragraph (f)](#f) of this section provides rules regarding the election to use the alternative method for calculating post-1986 earnings and profits. [Paragraph (g)](#g) of this section provides definitions that apply for purposes of this section.
- (b) **Section 965(h) election—**
  - (1) **In general.** Any person with a [section 965(h)](/cfr/26/965.md?p=h) net tax liability (that is, a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder or a domestic pass-through owner with respect to a domestic pass-through entity that is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, but not a domestic pass-through entity itself) may elect under [section 965(h)](/cfr/26/965.md?p=h) and this [paragraph (b)](#b) to pay its [section 965(h)](/cfr/26/965.md?p=h) net tax liability in eight installments. This election may be revoked only by paying the full amount of the remaining unpaid [section 965(h)](/cfr/26/965.md?p=h) net tax liability.
    - (i) **Amount of installments.** Except as provided in [paragraph (b)(3)](#b-3) of this section, if a person makes a [section 965(h)](/cfr/26/965.md?p=h) election, the amounts of the installments are—
      - (A) Eight percent of the [section 965(h)](/cfr/26/965.md?p=h) net tax liability in the case of each of the first five installments;
      - (B) Fifteen percent of the [section 965(h)](/cfr/26/965.md?p=h) net tax liability in the case of the sixth installment;
      - (C) Twenty percent of the [section 965(h)](/cfr/26/965.md?p=h) net tax liability in the case of the seventh installment; and
      - (D) **Twenty-five percent of the section 965(h) net tax liability in the case of the eighth installment.**
    - (ii) **Increased installments due to a deficiency or a timely filed or amended return—**
      - (A) **In general.** If a person makes a [section 965(h)](/cfr/26/965.md?p=h) election, except as provided in [paragraph (b)(1)(ii)(C)](#b-1-ii-C) of this section, any deficiency or additional liability will be prorated to the installments described under [paragraph (b)(1)(i)](#b-1-i) of this section if any of the following occur:

        (1) A deficiency is assessed with respect to the person's [section 965(h)](/cfr/26/965.md?p=h) net tax liability;

        (2) The person files a return by the due date of the return (taking into account extensions, if any) increasing the amount of its [section 965(h)](/cfr/26/965.md?p=h) net tax liability beyond that taken into account in paying the first installment described under [paragraph (b)(1)(i)](#b-1-i) of this section; or

        (3) The person files an amended return that reflects an increase in the amount of its [section 965(h)](/cfr/26/965.md?p=h) net tax liability.

      - (B) **Timing.** If the due date for the payment of an installment to which the deficiency is prorated has passed, the amount prorated to such installment must be paid on notice and demand by the Secretary, or, in the case of an additional liability reported on a return increasing the amount of the [section 965(h)](/cfr/26/965.md?p=h) net tax liability after payment of the first installment or on an amended return, with the filing of the return. If the due date for the payment of an installment to which the deficiency or additional liability is prorated has not passed, then such amount will be due at the same time as, and as part of, the relevant installment.
      - (C) **Exception for negligence, intentional disregard, or fraud.** If a deficiency or additional liability is due to negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax, the proration rule of this [paragraph (b)(1)(ii)](#b-1-ii) will not apply, and the deficiency or additional liability (as well as any applicable interest and penalties) must be paid on notice and demand by the Secretary or, in the case of an additional liability reported on a return increasing the amount of the [section 965(h)](/cfr/26/965.md?p=h) net tax liability after payment of the first installment or on an amended return, with the filing of the return.
    - (iii) **Due date of installments—**
      - (A) **In general.** If a person makes a [section 965(h)](/cfr/26/965.md?p=h) election, the first installment payment is due on the due date (without regard to extensions) for the return for the relevant taxable year. For purposes of this [paragraph (b)](#b), the term relevant taxable year means, in the case in which the person is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder inclusion year, or, in the case in which the person is a domestic pass-through owner, the taxable year in which the person has the [section 965(a)](/cfr/26/965.md?p=a) inclusion to which the [section 965(h)](/cfr/26/965.md?p=h) net tax liability is attributable. Each succeeding installment payment is due on the due date (without regard to extensions) for the return for the taxable year following the taxable year with respect to which the previous installment payment was made.
      - (B) **Extension for specified individuals.** If a person is a specified individual with respect to a taxable year within which an installment payment is due pursuant to [paragraph (b)(1)(iii)(A)](#b-1-iii-A) of this section, then, for purposes of determining the due date of an installment payment under [paragraph (b)(1)(iii)(A)](#b-1-iii-A) of this section, the due date of the return (without regard to extensions) due within the taxable year will be treated as the fifteenth day of the sixth month following the close of the prior taxable year. This [paragraph (b)(1)(iii)(B)](#b-1-iii-B) is applicable regardless of whether the person is a specified individual with respect to the relevant taxable year.
  - (2) **Manner of making election—**
    - (i) **Eligibility.** Any person with a [section 965(h)](/cfr/26/965.md?p=h) net tax liability may make the [section 965(h)](/cfr/26/965.md?p=h) election, provided that, with respect to the person, none of the acceleration events described in [paragraph (b)(3)(ii)](#b-3-ii) of this section has occurred before the election is made. Notwithstanding the preceding sentence, a person that would be eligible to make the [section 965(h)](/cfr/26/965.md?p=h) election but for the occurrence of an event described in [paragraph (b)(3)(ii)](#b-3-ii) of this section may make the [section 965(h)](/cfr/26/965.md?p=h) election if the exception described in [paragraph (b)(3)(iii)(A)](#b-3-iii-A) of this section applies.
    - (ii) **Timing.** A [section 965(h)](/cfr/26/965.md?p=h) election must be made no later than the due date (taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request) for the return for the relevant taxable year. Relief is not available under [§ 301.9100-2](/cfr/26/301.9100-2.md) or [§ 301.9100-3](/cfr/26/301.9100-3.md) to file a late election.
    - (iii) **Election statement.** Except as otherwise provided in publications, forms, instructions, or other guidance, to make a [section 965(h)](/cfr/26/965.md?p=h) election, a person must attach a statement, signed under penalties of perjury consistent with the rules for signatures applicable to the person's return, to its return for the relevant taxable year. The statement must include the person's name, taxpayer identification number, total net tax liability under [section 965](/cfr/26/965.md), [section 965(h)](/cfr/26/965.md?p=h) net tax liability, [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to which a [section 965(i)](/cfr/26/965.md?p=i) election is effective (if applicable), and the anticipated amounts of each installment described under [paragraph (b)(1)(i)](#b-1-i) of this section. The statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance. The attachment of an unsigned copy of the election statement to the timely-filed return for the relevant taxable year satisfies the signature requirement of this [paragraph (b)(2)(iii)](#b-2-iii) if the person making the election retains the original signed election statement in the manner specified by [§ 1.6001-1(e)](/cfr/26/1.6001-1.md?p=e).
  - (3) **Acceleration of payment—**
    - (i) **Acceleration.** Notwithstanding [paragraph (b)(1)(i)](#b-1-i) of this section, if a person makes a [section 965(h)](/cfr/26/965.md?p=h) election and an acceleration event described in [paragraph (b)(3)(ii)](#b-3-ii) of this section subsequently occurs, then, except as provided in [paragraph (b)(3)(iii)](#b-3-iii) of this section, the unpaid portion of the remaining installments will be due on the date of the acceleration event (or in the case of a [title 11](/cfr/11.md) or similar case, the day before the petition is filed).
    - (ii) **Acceleration events.** The following events are acceleration events for purposes of [paragraph (b)(3)(i)](#b-3-i) of this section with respect to a person that has made a [section 965(h)](/cfr/26/965.md?p=h) election—
      - (A) An addition to tax is assessed for the failure to timely pay an installment described in [paragraph (b)(1)(i)](#b-1-i) of this section;
      - (B) A liquidation, sale, exchange, or other disposition of substantially all of the assets of the person (including in a [title 11](/cfr/11.md) or similar case, or, in the case of an individual, by reason of death);
      - (C) In the case of a person that is not an individual, a cessation of business by the person;
      - (D) Any event that results in the person no longer being a United States person, including a resident alien (as defined in [section 7701(b)(1)(A)](/cfr/26/7701.md?p=b-1-A)) becoming a nonresident alien (as defined in [section 7701(b)(1)(B)](/cfr/26/7701.md?p=b-1-B));
      - (E) In the case of a person that was not a member of any consolidated group, the person becoming a member of a consolidated group;
      - (F) In the case of a consolidated group, the group ceasing to exist (including by reason of the acquisition of a consolidated group within the meaning of [§ 1.1502-13(j)(5)](/cfr/26/1.1502-13.md?p=j-5)) or the group otherwise discontinuing in the filing of a consolidated return; or
      - (G) A determination by the Commissioner described in the second sentence of paragraph (b)(3)(iii)(C)(2) of this section.
    - (iii) **Eligible section 965(h) transferee exception—**
      - (A) **In general.** [Paragraph (b)(3)(i)](#b-3-i) of this section does not apply (such that the unpaid portion of all remaining installments will not be due as of the date of the acceleration event) to a person with respect to which an acceleration event occurs if the requirements described in paragraphs (b)(3)(iii)(A)(1) and (2) of this section are satisfied. A person with respect to which an acceleration event described in this [paragraph (b)(3)(iii)(A)](#b-3-iii-A) occurs is referred to as an eligible [section 965(h)](/cfr/26/965.md?p=h) transferor.

        (1) Requirement to have a covered acceleration event. The acceleration event satisfies the requirements of this paragraph (b)(3)(iii)(A)(1) if it is described in—

        (i) [Paragraph (b)(3)(ii)(B)](#b-3-ii-B) of this section, and the acceleration event is a qualifying consolidated group member transaction within the meaning of [paragraph (b)(3)(iii)(E)](#b-3-iii-E) of this section;

        (ii) [Paragraph (b)(3)(ii)(B)](#b-3-ii-B) of this section (other than, in the case of an individual, an acceleration event caused by reason of death) in a transaction that is not a qualifying consolidated group member transaction;

        (iii) [Paragraph (b)(3)(ii)(E)](#b-3-ii-E) of this section;

        (iv) [Paragraph (b)(3)(ii)(F)](#b-3-ii-F) of this section, and the acceleration event results from the acquisition of a consolidated group within the meaning of [§ 1.1502-13(j)(5)](/cfr/26/1.1502-13.md?p=j-5), and the acquired consolidated group members join a different consolidated group as of the day following the acquisition;

        (v) [Paragraph (b)(3)(ii)(F)](#b-3-ii-F) of this section, and the group ceases to exist as a result of the transfer of all of the assets of one or more members of the consolidated group to other members with only one entity remaining (the successor entity); or

        (vi) [Paragraph (b)(3)(ii)(F)](#b-3-ii-F) of this section, and the group ceases to exist as a result of the termination of the subchapter S election pursuant to [section 1362(d)](/cfr/26/1362.md?p=d) of a shareholder of the common parent of the consolidated group and, for the shareholder's taxable year immediately following the termination, the shareholder joins in the filing of a consolidated return as a consolidated group that includes all of the former members of the former consolidated group.

        (2) Requirement to enter into a transfer agreement. An eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and an eligible [section 965(h)](/cfr/26/965.md?p=h) transferee (as defined in paragraph (b)(3)(iii)(B)(1) of this section) must enter into an agreement with the Commissioner that satisfies the requirements of [paragraph (b)(3)(iii)(B)](#b-3-iii-B) of this section.

      - (B) **Transfer agreement—** (1) Eligibility. A transfer agreement that satisfies the requirements of this [paragraph (b)(3)(iii)(B)](#b-3-iii-B) must be entered into by an eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and an eligible [section 965(h)](/cfr/26/965.md?p=h) transferee. For this purpose, the term eligible [section 965(h)](/cfr/26/965.md?p=h) transferee refers to a single United States person that is not a domestic pass-through entity and that—

        (i) With respect to an acceleration event described in paragraph (b)(3)(iii)(A)(1)(i) of this section, is a departing member (as defined in paragraph (b)(3)(iii)(E)(1)(i) of this section) or its qualified successor (as defined in paragraph (b)(3)(iii)(E)(2) of this section);

        (ii) With respect to an acceleration event described in paragraph (b)(3)(iii)(A)(1)(ii) of this section, acquires substantially all of the assets of an eligible [section 965(h)](/cfr/26/965.md?p=h) transferor;

        (iii) With respect to an acceleration event described in paragraph (b)(3)(iii)(A)(1)(iii) of this section, is the agent (within the meaning of [§ 1.1502-77](/cfr/26/1.1502-77.md)) of the consolidated group that the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor joins;

        (iv) With respect to an acceleration event described in paragraph (b)(3)(iii)(A)(1)(iv) of this section, is the agent (within the meaning of [§ 1.1502-77](/cfr/26/1.1502-77.md)) of the surviving consolidated group;

        (v) With respect to an acceleration event described in paragraph (b)(3)(iii)(A)(1)(v) of this section, is the successor entity (within the meaning of paragraph (b)(3)(iii)(A)(1)(v) of this section); or

        (vi) With respect an acceleration event described in paragraph (b)(3)(iii)(A)(1)(vi) of this section, is the agent (within the meaning of [§ 1.1502-77](/cfr/26/1.1502-77.md)) of the consolidated group that includes the shareholder whose subchapter S election was terminated and all of the former members of the former consolidated group.

        (2) Filing requirements—(i) In general. A transfer agreement must be timely filed. Except as provided in paragraph (b)(3)(iii)(B)(2)(ii) of this section, a transfer agreement is considered timely filed only if the transfer agreement is filed within 30 days of the date that the acceleration event occurs. The transfer agreement must be filed in accordance with the rules provided in publications forms, instructions, or other guidance. In addition, a duplicate copy of the transfer agreement must be attached to the returns of both the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee and the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor for the taxable year during which the acceleration event occurs filed by the due date for such returns (taking into account extensions, if any). Relief is not available under § [301.9100-2](/cfr/26/301.9100-2.md) or [301.9100-3](/cfr/26/301.9100-3.md) to file a transfer agreement late.

        (ii) Transition rule. If an acceleration event occurs on or before February 5, 2019, the transfer agreement must be filed by March 7, 2019, to be considered timely filed.

        (3) Signature requirement. The transfer agreement that is filed within 30 days of the acceleration event or by the due date specified in paragraph (b)(3)(iii)(B)(2)(ii) of this section must be signed under penalties of perjury by a person who is authorized to sign a return on behalf of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and a person who is authorized to sign a return on behalf of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee.

        (4) Terms of agreement. A transfer agreement under this [paragraph (b)(3)(iii)(B)](#b-3-iii-B) must be entitled “Transfer Agreement Under [Section 965(h)(3)](/cfr/26/965.md?p=h-3)” and must contain the following information and representations—

        (i) A statement that the document constitutes an agreement by the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee to assume the liability of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor for any unpaid installment payments of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor under [section 965(h)](/cfr/26/965.md?p=h);

        (ii) A statement that the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee (and, if the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor continues in existence immediately after the acceleration event, the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor) agrees to comply with all of the conditions and requirements of [section 965(h)](/cfr/26/965.md?p=h) and [paragraph (b)](#b) of this section, as well as any other applicable requirements in the [section 965](/cfr/26/965.md) regulations;

        (iii) The name, address, and taxpayer identification number of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee;

        (iv) The amount of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor's [section 965(h)](/cfr/26/965.md?p=h) net tax liability remaining unpaid, as determined by the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor, which amount is subject to adjustment by the Commissioner;

        (v) A copy of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor's most recent Form 965-A or Form 965-B, as applicable, if the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor has been required to file a Form 965-A or Form 965-B;

        (vi) A detailed description of the acceleration event that led to the transfer agreement;

        (vii) A representation that the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee is able to make the remaining payments required under [section 965(h)](/cfr/26/965.md?p=h) and [paragraph (b)](#b) of this section with respect to the [section 965(h)](/cfr/26/965.md?p=h) net tax liability being assumed;

        (viii) If the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor continues to exist immediately after the acceleration event, an acknowledgement that the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and any successor to the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor will remain jointly and severally liable for any unpaid installment payments of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor under [section 965(h)](/cfr/26/965.md?p=h), including, if applicable, under [§ 1.1502-6](/cfr/26/1.1502-6.md);

        (ix) A statement as to whether the leverage ratio of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee and all subsidiary members of its affiliated group immediately after the acceleration event exceeds three to one, which ratio may be modified as provided in publications, forms, instructions, or other guidance;

        (x) A certification by the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee stating that the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee waives the right to a notice of liability and consents to the immediate assessment of the portion of the [section 965(h)](/cfr/26/965.md?p=h) net tax liability remaining unpaid; and

        (xi) Any additional information, representation, or certification required by the Commissioner in publications, forms, instructions, or other guidance.

        (5) Consolidated groups. For purposes of this [paragraph (b)(3)(iii)(B)](#b-3-iii-B), in the case of a consolidated group, the terms “eligible [section 965(h)](/cfr/26/965.md?p=h) transferor” and “eligible [section 965(h)](/cfr/26/965.md?p=h) transferee” each refer to a consolidated group that is a party to a covered acceleration event described in paragraph (b)(3)(iii)(A)(1) of this section. In such a case, any transfer agreement under this [paragraph (b)(3)(iii)(B)](#b-3-iii-B) must be entered into by the agent (as defined in [§ 1.1502-77](/cfr/26/1.1502-77.md)) of the relevant consolidated group.

        (6) Leverage ratio. For purposes of paragraph (b)(3)(iii)(B)(4)(ix) of this section, and except as otherwise provided in publications, forms, instructions, or other guidance, the term leverage ratio means the ratio that the total indebtedness of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee bears to the sum of its money and all other assets reduced (but not below zero) by such total indebtedness. For this purpose, the amount taken into account with respect to any asset is the adjusted basis thereof for purposes of determining gain, and the amount taken into account with respect to any indebtedness with original issue discount is its issue price plus the portion of the original issue discount previously accrued as determined under the rules of [section 1272](/cfr/26/1272.md) (determined without regard to subsection (a)(7) or (b)(4) thereof).

      - (C) **Consent of Commissioner—** (1) In general. Except as otherwise provided in publications, forms, instructions, or other guidance, if an eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and an eligible [section 965(h)](/cfr/26/965.md?p=h) transferee file a transfer agreement in accordance with the provisions of [paragraph (b)(3)(iii)(B)](#b-3-iii-B) of this section, the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee will be considered to have entered into an agreement described in paragraph (b)(3)(iii)(A)(2) of this section with the Commissioner for purposes of [section 965(h)(3)](/cfr/26/965.md?p=h-3) and [paragraph (b)(3)(iii)](#b-3-iii) of this section. If the Commissioner determines that additional information is necessary (for example, additional information regarding the ability of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee to fully pay the remaining [section 965(h)](/cfr/26/965.md?p=h) net tax liability), the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee must provide such information upon request.

        (2) Material misrepresentations and omissions. If the Commissioner determines that an agreement filed by an eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and an eligible [section 965(h)](/cfr/26/965.md?p=h) transferee contains a material misrepresentation or material omission, or if the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee does not provide the additional information requested under paragraph (b)(3)(iii)(C)(1) of this section within a reasonable timeframe communicated by the Commissioner to the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee, then the Commissioner may reject the transfer agreement (effective as of the date of the related acceleration event). In the alternative, on the date that the Commissioner determines that the transfer agreement includes a material misrepresentation or material omission, the Commissioner may determine that an acceleration event has occurred with respect to the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee as of the date of the determination, such that any unpaid installment payments of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor that were assumed by the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee become due on the date of the determination.

      - (D) **Effect of assumption—** (1) In general. If the exception in this [paragraph (b)(3)(iii)](#b-3-iii) applies with respect to an eligible [section 965(h)](/cfr/26/965.md?p=h) transferor and an eligible [section 965(h)](/cfr/26/965.md?p=h) transferee, the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee assumes all of the outstanding obligations and responsibilities of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor with respect to the [section 965(h)](/cfr/26/965.md?p=h) net tax liability as though the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee had included the [section 965(a)](/cfr/26/965.md?p=a) inclusion in income. Accordingly, the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee is responsible for making payments and reporting with respect to any unpaid installment payments. In addition, for example, if an acceleration event described in [paragraph (b)(3)(ii)](#b-3-ii) of this section occurs with respect to an eligible [section 965(h)](/cfr/26/965.md?p=h) transferee, any unpaid installment payments of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor that were assumed by the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee will become due on the date of such event, subject to any applicable exception in [paragraph (b)(3)(iii)](#b-3-iii) of this section.

        (2) Eligible [section 965(h)](/cfr/26/965.md?p=h) transferor liability. An eligible [section 965(h)](/cfr/26/965.md?p=h) transferor (or a successor) remains jointly and severally liable for any unpaid installment payments of the eligible [section 965(h)](/cfr/26/965.md?p=h) transferor that were assumed by the eligible [section 965(h)](/cfr/26/965.md?p=h) transferee, as well as any penalties, additions to tax, or other additional amounts attributable to such net tax liability.

      - (E) **Qualifying consolidated group member transaction—** (1) Definition of qualifying consolidated group member transaction. For purposes of this [paragraph (b)(3)](#b-3), the term qualifying consolidated group member transaction means a transaction in which—

        (i) A member of a consolidated group (the departing member) ceases to be a member of the consolidated group (including by reason of the distribution, sale, or exchange of the departing member's stock);

        (ii) The transaction results in the consolidated group (which is treated as a single person for this purpose under [§ 1.965-8(e)(1)](/cfr/26/1.965-8.md?p=e-1)) being treated as transferring substantially all of its assets for purposes of [paragraph (b)(3)(ii)(B)](#b-3-ii-B) of this section; and

        (iii) The departing member either continues to exist immediately after the transaction or has a qualified successor.

        (2) Definition of qualified successor. For purposes of this [paragraph (b)(3)](#b-3), the term qualified successor means, with respect to a departing member described in this [paragraph (b)(3)(iii)(E)](#b-3-iii-E), another domestic corporation (or consolidated group) that acquires substantially all of the assets of the departing member (including in a transaction described in [section 381(a)(2)](/cfr/26/381.md?p=a-2)).

        (3) Departure of multiple members of a consolidated group. Multiple members that deconsolidate from the same consolidated group as a result of a single transaction are treated as a single departing member to the extent that, immediately after the transaction, they become members of the same (second) consolidated group, which would be treated as a single person under [§ 1.965-8(e)(1)](/cfr/26/1.965-8.md?p=e-1).

- (c) **Section 965(i) election—**
  - (1) **In general.** Each shareholder of an S corporation (including a person listed in [§ 1.1362-6(b)(2)](/cfr/26/1.1362-6.md?p=b-2) with respect to a trust or estate, but not a domestic pass-through entity itself) that is a United States shareholder of a deferred foreign income corporation may elect under [section 965(i)](/cfr/26/965.md?p=i) and this [paragraph (c)](#c) to defer the payment of the shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation until the shareholder's taxable year that includes a triggering event described in [paragraph (c)(3)](#c-3) of this section. This election may be revoked only by paying the full amount of the unpaid [section 965(i)](/cfr/26/965.md?p=i) net tax liability.
  - (2) **Manner of making election—**
    - (i) **Eligibility.** Each shareholder with a [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to an S corporation may make the [section 965(i)](/cfr/26/965.md?p=i) election with respect to such S corporation, provided that, with respect to the shareholder, none of the triggering events described in [paragraph (c)(3)(ii)](#c-3-ii) of this section have occurred before the election is made. Notwithstanding the preceding sentence, a shareholder that would be eligible to make the [section 965(i)](/cfr/26/965.md?p=i) election but for the occurrence of an event described in [paragraph (c)(3)(ii)](#c-3-ii) of this section may make the [section 965(i)](/cfr/26/965.md?p=i) election if an exception described in [paragraph (c)(3)(iv)](#c-3-iv) of this section applies.
    - (ii) **Timing.** A [section 965(i)](/cfr/26/965.md?p=i) election must be made no later than the due date (taking into account extensions, if any) for the shareholder's return for each taxable year that includes the last day of the taxable year of the S corporation in which the S corporation has a [section 965(a)](/cfr/26/965.md?p=a) inclusion to which the shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability is attributable. Relief is not available under § [301.9100-2](/cfr/26/301.9100-2.md) or [301.9100-3](/cfr/26/301.9100-3.md) to make a late election.
    - (iii) **Election statement.** Except as otherwise provided in publications, forms, instructions, or other guidance, to make a [section 965(i)](/cfr/26/965.md?p=i) election, a shareholder must attach a statement, signed under penalties of perjury consistent with the rules for signatures applicable to the person's return, to its return for the taxable year that includes the last day of a taxable year of the S corporation in which the S corporation has a [section 965(a)](/cfr/26/965.md?p=a) inclusion to which the shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability is attributable. The statement must include the shareholder's name, taxpayer identification number, the name and taxpayer identification number of the S corporation with respect to which the election is made, the amount described in [paragraph (g)(10)(i)(A)](#g-10-i-A) of this section as modified by [paragraph (g)(6)](#g-6) of this section for purposes of determining the [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation, the amount described in [paragraph (g)(10)(i)(B)](#g-10-i-B) of this section, and the [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation. The statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance. The attachment of an unsigned copy of the election statement to the timely-filed return for the relevant taxable year satisfies the signature requirement of this [paragraph (c)(2)(iii)](#c-2-iii) if the shareholder retains the original signed election statement in the manner specified by [§ 1.6001-1(e)](/cfr/26/1.6001-1.md?p=e).
  - (3) **Triggering events—**
    - (i) **In general.** If a shareholder makes a [section 965(i)](/cfr/26/965.md?p=i) election with respect to an S corporation, the shareholder defers payment of its [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation until the shareholder's taxable year that includes the occurrence of a triggering event described in [paragraph (c)(3)(ii)](#c-3-ii) of this section with respect to the [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation. If a triggering event described in [paragraph (c)(3)(ii)](#c-3-ii) of this section with respect to an S corporation occurs, except as provided in [paragraph (c)(3)(iv)](#c-3-iv) of this section, the shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation will be assessed as an addition to tax for the shareholder's taxable year that includes the triggering event.
    - (ii) **Triggering events.** The following events are considered triggering events for purposes of [paragraph (c)(3)(i)](#c-3-i) of this section with respect to a shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to an S corporation—
      - (A) The corporation ceases to be an S corporation (determined as of the first day of the first taxable year that the corporation is not an S corporation);
      - (B) A liquidation, sale, exchange, or other disposition of substantially all of the assets of the S corporation (including in a [title 11](/cfr/11.md) or similar case), a cessation of business by the S corporation, or the S corporation ceasing to exist;
      - (C) The transfer of any share of stock of the S corporation by the shareholder (including by reason of death or otherwise) that results in a change of ownership for federal income tax purposes; or
      - (D) A determination by the Commissioner described in the second sentence of paragraph (c)(3)(iv)(C)(2) of this section.
    - (iii) **Partial transfers.** If an S corporation shareholder transfers less than all of its shares of stock of the S corporation, the transfer will be a triggering event only with respect to the portion of a shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability that is properly allocable to the transferred shares.
    - (iv) **Eligible section 965(i) transferee exception—**
      - (A) **In general.** [Paragraph (c)(3)(i)](#c-3-i) of this section will not apply (such that a shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to an S corporation will not be assessed as an addition to tax for the shareholder's taxable year that includes the triggering event) if the requirements described in paragraphs (c)(3)(iv)(A)(1) and (2) of this section are satisfied. A shareholder with respect to which a triggering event described in this [paragraph (c)(3)(iv)(A)](#c-3-iv-A) occurs is referred to as an eligible [section 965(i)](/cfr/26/965.md?p=i) transferor.

        (1) Requirement to have a covered triggering event. The triggering event satisfies the requirements of this paragraph (c)(3)(iv)(A)(1) if it is described in [paragraph (c)(3)(ii)(C)](#c-3-ii-C) of this section.

        (2) Requirement to enter into a transfer agreement. The shareholder with respect to which a triggering event occurs and an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee (as defined in paragraph (c)(3)(iv)(B)(1) of this section) must enter into an agreement with the Commissioner that satisfies the requirements of [paragraph (c)(3)(iv)(B)](#c-3-iv-B) of this section.

      - (B) **Transfer agreement—** (1) Eligibility. A transfer agreement that satisfies the requirements of this [paragraph (c)(3)(iv)(B)](#c-3-iv-B) may be entered into by an eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee. For this purpose, the term eligible [section 965(i)](/cfr/26/965.md?p=i) transferee refers to a single United States person that becomes a shareholder of the S corporation (including a person listed in [§ 1.1362-6(b)(2)](/cfr/26/1.1362-6.md?p=b-2) with respect to a trust or estate, but not a domestic pass-through entity itself). In the case of a transfer that consists of multiple partial transfers (as described in [paragraph (c)(3)(iii)](#c-3-iii) of this section), a transfer agreement that satisfies the requirements of this [paragraph (c)(3)(iv)(B)](#c-3-iv-B) may be entered into by an eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee for each partial transfer.

        (2) Filing requirements—(i) In general. A transfer agreement must be timely filed. Except as provided in paragraphs (c)(3)(iv)(B)(2)(ii) and (iii) of this section, a transfer agreement is considered timely filed only if the transfer agreement is filed within 30 days of the date that the triggering event occurs. The transfer agreement must be filed in accordance with the rules provided in publications, forms, instructions, or other guidance. In addition, a duplicate copy of the transfer agreement must be attached to the returns of both the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee and the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor for the taxable year during which the triggering event occurs filed by the due date (taking into account extensions, if any) for such returns. Relief is not available under § [301.9100-2](/cfr/26/301.9100-2.md) or [301.9100-3](/cfr/26/301.9100-3.md) to file a transfer agreement late.

        (ii) Transition rule. If a triggering event occurs on or before February 5, 2019, the transfer agreement must be filed by March 7, 2019, to be considered timely filed.

        (iii) Death of eligible [section 965(i)](/cfr/26/965.md?p=i) transferor. If the triggering event is the death of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor, the transfer agreement must be filed by the later of the unextended due date for the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor's final income tax return or March 7, 2019.

        (3) Signature requirement. The transfer agreement that is filed within 30 days of the triggering event or by the due date specified in paragraph (c)(3)(iv)(B)(2)(ii) or (iii) of this section must be signed under penalties of perjury by a person who is authorized to sign a return on behalf of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and a person who is authorized to sign a return on behalf of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee.

        (4) Terms of agreement. A transfer agreement under this [paragraph (c)(3)(iv)(B)](#c-3-iv-B) must be entitled “Transfer Agreement Under [Section 965(i)(2)](/cfr/26/965.md?p=i-2)” and must contain the following information and representations:

        (i) A statement that the document constitutes an agreement by the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee to assume the liability of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor for the unpaid portion of the [section 965(i)](/cfr/26/965.md?p=i) net tax liability, or, in the case of a partial transfer, for the unpaid portion of the [section 965(i)](/cfr/26/965.md?p=i) net tax liability attributable to the transferred stock;

        (ii) A statement that the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee agrees to comply with all of the conditions and requirements of [section 965(i)](/cfr/26/965.md?p=i) and [paragraph (c)](#c) of this section, including the annual reporting requirement, as well as any other applicable requirements in the [section 965](/cfr/26/965.md) regulations;

        (iii) The name, address, and taxpayer identification number of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee;

        (iv) The amount of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor's unpaid [section 965(i)](/cfr/26/965.md?p=i) net tax liability or, in the case of a partial transfer, the unpaid portion of the [section 965(i)](/cfr/26/965.md?p=i) net tax liability attributable to the transferred stock, each as determined by the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor, which amount is subject to adjustment by the Commissioner;

        (v) A copy of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor's most recent Form 965-A, if the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor has been required to file a Form 965-A;

        (vi) A detailed description of the triggering event that led to the transfer agreement, including the name and taxpayer identification number of the S corporation with respect to which the [section 965(i)](/cfr/26/965.md?p=i) election was effective;

        (vii) A representation that the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee is able to pay the [section 965(i)](/cfr/26/965.md?p=i) net tax liability being assumed;

        (viii) An acknowledgement that the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and any successor to the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor will remain jointly and severally liable for the [section 965(i)](/cfr/26/965.md?p=i) net tax liability being assumed by the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee;

        (ix) A statement as to whether the leverage ratio of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee immediately after the triggering event exceeds three to one, which ratio may be modified as provided in publications, forms, instructions, or other guidance;

        (x) Any additional information, representation, or certification required by the Commissioner in publications, forms, instructions, or other guidance.

        (5) Special rule in the case of death of eligible [section 965(i)](/cfr/26/965.md?p=i) transferor. Except in the case of transfers to trusts, if the triggering event is the death of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor, and the identity of the beneficiary or beneficiaries (in the case of multiple partial transfers) is determined as of the due date for the transfer agreement described in paragraph (c)(3)(iv)(B)(2)(iii) of this section, then the transfer may be treated as a transfer directly between the eligible 965(i) transferor and the beneficiary or beneficiaries. If, however, the identity of the beneficiary or beneficiaries is not determined as of the due date for the transfer agreement described in paragraph (c)(3)(iv)(B)(2)(iii) of this section, then the transfer must be treated first as a transfer between the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and his or her estate at the time of death and second as a transfer between the estate and the beneficiary or beneficiaries when the shares are actually transferred to the beneficiary or beneficiaries. Separate transfer agreements must be filed for each transfer. The transfer from the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor to his or her estate is a transfer resulting from a triggering event that is the death of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor, and the transfer agreement is subject to the timing rules in paragraph (c)(3)(iv)(B)(2)(iii) of this section. The transfer from the estate to the beneficiary or beneficiaries is not a transfer resulting from a triggering event that is the death of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor, and the transfer agreement is subject to the timing rules in paragraph (c)(3)(iv)(B)(2)(i) and (ii) of this section.

        (6) Leverage ratio. For purposes of paragraph (c)(3)(iv)(B)(4)(ix) of this section, and except as otherwise provided in publications, forms, instructions, or other guidance, the term leverage ratio means the ratio that the total indebtedness of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee bears to the sum of its money and all other assets reduced (but not below zero) by such total indebtedness. For this purpose, the amount taken into account with respect to any asset is the adjusted basis thereof for purposes of determining gain, and the amount taken into account with respect to any indebtedness with original issue discount is its issue price plus the portion of the original issue discount previously accrued as determined under the rules of [section 1272](/cfr/26/1272.md) (determined without regard to subsection (a)(7) or (b)(4) thereof).

      - (C) **Consent of Commissioner—** (1) In general. Except as otherwise provided in publications, forms, instructions, or other guidance, if an eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee file a transfer agreement in accordance with the provisions of [paragraph (c)(3)(iv)(B)](#c-3-iv-B) of this section, the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee will be considered to have entered into an agreement with the Commissioner for purposes of [section 965(i)(2)](/cfr/26/965.md?p=i-2) and [paragraph (c)(3)(iv)](#c-3-iv) of this section. If the Commissioner determines that additional information is necessary (for example, additional information regarding the ability of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee to pay the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor's unpaid [section 965(i)](/cfr/26/965.md?p=i) net tax liability), the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee must provide such information upon request.

        (2) Material misrepresentations and omissions. If the Commissioner determines that an agreement filed by an eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee contains a material misrepresentation or material omission, or if the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee does not provide the additional information requested under paragraph (c)(3)(iv)(C)(1) of this section within a reasonable timeframe communicated by the Commissioner to the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee, then the Commissioner may reject the transfer agreement (effective as of the date of the related triggering event). In the alternative, on the date that the Commissioner determines that the transfer agreement includes a material misrepresentation or material omission, the Commissioner may determine that a triggering event has occurred with respect to the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee as of the date of the determination, such that the unpaid [section 965(i)](/cfr/26/965.md?p=i) net tax liability of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor that was assumed by the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee becomes due on the date of the determination.

      - (D) **Effect of assumption—** (1) In general. When the exception in this [paragraph (c)(3)(iv)](#c-3-iv) applies with respect to an eligible [section 965(i)](/cfr/26/965.md?p=i) transferor and an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee, the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee assumes all of the outstanding obligations and responsibilities of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor with respect to the [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation as though the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee had included the [section 965(a)](/cfr/26/965.md?p=a) inclusion in income. Accordingly, the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee is responsible for making payments and reporting with respect to any unpaid [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation. In addition, for example, if a triggering event described in [paragraph (c)(3)(ii)](#c-3-ii) of this section occurs with respect to an eligible [section 965(i)](/cfr/26/965.md?p=i) transferee, any unpaid portion of the [section 965(i)](/cfr/26/965.md?p=i) net tax liability of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor that was assumed by the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee becomes due on the date of such event, subject to any applicable exception in paragraph [(c)(3)(iv)](#c-3-iv) or [(v)](#c-3-v) of this section.

        (2) Eligible [section 965(i)](/cfr/26/965.md?p=i) transferor liability. An eligible [section 965(i)](/cfr/26/965.md?p=i) transferor remains jointly and severally liable for any unpaid installment payments of the eligible [section 965(i)](/cfr/26/965.md?p=i) transferor that were assumed by the eligible [section 965(i)](/cfr/26/965.md?p=i) transferee, as well as any penalties, additions to tax, or other additional amounts attributable to such net tax liability.

    - (v) **Coordination with section 965(h) election—**
      - (A) **In general.** Subject to the limitation described in [paragraph (c)(3)(v)(D)](#c-3-v-D) of this section, a shareholder that has made a [section 965(i)](/cfr/26/965.md?p=i) election with respect to an S corporation, upon the occurrence of a triggering event with respect to such S corporation, may make a [section 965(h)](/cfr/26/965.md?p=h) election with respect to the portion of the shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to such S corporation that is assessed as an addition to tax for the shareholder's taxable year that includes the triggering event pursuant to [paragraph (c)(3)(i)](#c-3-i) of this section as if such portion were a [section 965(h)](/cfr/26/965.md?p=h) net tax liability.
      - (B) **Timing for election.** A [section 965(h)](/cfr/26/965.md?p=h) election made pursuant to [section 965(i)(4)](/cfr/26/965.md?p=i-4) and [paragraph (c)(3)(v)(A)](#c-3-v-A) of this section must be made no later than the due date (taking into account extensions, if any) for the shareholder's return for the taxable year in which the triggering event with respect to the S corporation occurs. Relief is not available under [§ 301.9100-2](/cfr/26/301.9100-2.md) or [§ 301.9100-3](/cfr/26/301.9100-3.md) to make a late election.
      - (C) **Due date for installment.** If a shareholder makes a [section 965(h)](/cfr/26/965.md?p=h) election pursuant to [section 965(i)(4)](/cfr/26/965.md?p=i-4) and [paragraph (c)(3)(v)(A)](#c-3-v-A) of this section, the payment of the first installment (as described in [paragraph (b)(1)(i)](#b-1-i) of this section) must be made no later than the due date (without regard to extensions) for the shareholder's return of tax for the taxable year in which the triggering event with respect to the S corporation occurs.
      - (D) **Limitation—** (1) In general. Notwithstanding [paragraph (c)(3)(v)(A)](#c-3-v-A) of this section, if the triggering event with respect to an S corporation is a triggering event described in [paragraph (c)(3)(ii)(B)](#c-3-ii-B) of this section, then the [section 965(h)](/cfr/26/965.md?p=h) election may only be made with the consent of the Commissioner.

        (2) Manner of obtaining consent—(i) In general. In order to obtain the consent of the Commissioner as required by paragraph (c)(3)(v)(D)(1) of this section, the shareholder intending to make the [section 965(h)](/cfr/26/965.md?p=h) election must file the agreement described in paragraph (c)(3)(v)(D)(4) of this section within 30 days of the occurrence of the triggering event, except as described in paragraph (c)(3)(v)(D)(2)(ii) of this section. The agreement must be filed in accordance with the rules provided in publications, forms, instructions, or other guidance. In addition, a duplicate copy of the agreement must be filed, with the shareholder's timely-filed return for the taxable year during which the triggering event occurs (taking into account extensions, if any), along with the election statement described in [paragraph (b)(2)(iii)](#b-2-iii) of this section. Relief is not available under [§ 301.9100-2](/cfr/26/301.9100-2.md) or [§ 301.9100-3](/cfr/26/301.9100-3.md) to file an agreement late.

        (ii) Transition rule. If a triggering event occurs on or before February 5, 2019, the agreement must be filed by March 7, 2019, in order to be considered timely filed.

        (3) Signature requirement. The agreement that is filed within 30 days of the triggering event or by the due date specified in paragraph (c)(3)(v)(D)(2)(ii) of this section must be signed under penalties of perjury by the shareholder.

        (4) Terms of agreement. The agreement under this [paragraph (c)(3)(v)(D)](#c-3-v-D) must be entitled “Consent Agreement Under [Section 965(i)(4)(D)](/cfr/26/965.md?p=i-4-D)” and must contain the following information and representations—

        (i) A statement that the shareholder agrees to comply with all of the conditions and requirements of [section 965(h)](/cfr/26/965.md?p=h) and [paragraph (b)](#b) of this section, as well as any other applicable requirements in the [section 965](/cfr/26/965.md) regulations;

        (ii) The name, address, and taxpayer identification number of the shareholder;

        (iii) The amount of the [section 965(i)](/cfr/26/965.md?p=i) net tax liability under [section 965](/cfr/26/965.md) remaining unpaid with respect to which the [section 965(h)](/cfr/26/965.md?p=h) election is made pursuant to [section 965(i)(4)(D)](/cfr/26/965.md?p=i-4-D) and [paragraph (c)(3)(v)(A)](#c-3-v-A) of this section, as determined by the shareholder, which amount is subject to adjustment by the Commissioner; and

        (iv) A representation that the shareholder is able to make the payments required under [section 965(h)](/cfr/26/965.md?p=h) and [paragraph (b)](#b) of this section with respect to the portion of the total net tax liability under [section 965](/cfr/26/965.md) remaining unpaid described in paragraph (c)(3)(v)(D)(4)(iii) of this section.

        (v) A statement as to whether the leverage ratio of the shareholder and all subsidiary members of its affiliated group immediately following the triggering event exceeds three to one; and

        (vi) Any additional information, representation, or certification required by the Commissioner in publications, forms, instructions, or other guidance.

        (5) Consent of Commissioner—(i) In general. If a shareholder files an agreement in accordance with the provisions of [paragraph (c)(3)(v)(D)](#c-3-v-D) of this section, the shareholder will be considered to have obtained the consent of the Commissioner for purposes of [section 965(i)(4)(D)](/cfr/26/965.md?p=i-4-D) and paragraph (c)(3)(v)(D)(1) of this section. However, if the Commissioner reviews the agreement and determines that additional information is necessary, the shareholder must provide such information upon request.

        (ii) Material misrepresentations and omissions. If the Commissioner determines that an agreement filed by a shareholder in accordance with the provisions of this [paragraph (c)(3)(v)(D)](#c-3-v-D) contains a material misrepresentation or material omission, or if the shareholder does not provide the additional information requested under paragraph (c)(3)(v)(D)(5)(i) of this section within a reasonable timeframe communicated by the Commissioner to the shareholder, then the Commissioner may reject the agreement (effective as of the date of the related triggering event).

        (6) Leverage ratio. For purposes of paragraph (c)(3)(v)(D)(4)(v) of this section, and except as otherwise provided in publications, forms, instructions, or other guidance, the term leverage ratio means the ratio that the total indebtedness of the shareholder bears to the sum of its money and all other assets reduced (but not below zero) by such total indebtedness. For this purpose, the amount taken into account with respect to any asset is the adjusted basis thereof for purposes of determining gain, and the amount taken into account with respect to any indebtedness with original issue discount is its issue price plus the portion of the original issue discount previously accrued as determined under the rules of [section 1272](/cfr/26/1272.md) (determined without regard to subsection (a)(7) or (b)(4) thereof).

  - (4) **Joint and several liability.** If any shareholder of an S corporation makes a [section 965(i)](/cfr/26/965.md?p=i) election, the S corporation is jointly and severally liable for the payment of the shareholder's [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to the S corporation, as well as any penalties, additions to tax, or other additional amounts attributable to such net tax liability.
  - (5) **Extension of limitation on collection.** If an S corporation shareholder makes a [section 965(i)](/cfr/26/965.md?p=i) election with respect to its [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to an S corporation, any limitation on the time period for the collection of the net tax liability shall not begin before the date of the triggering event with respect to the [section 965(i)](/cfr/26/965.md?p=i) net tax liability.
  - (6) **Annual reporting requirement—**
    - (i) **In general.** A shareholder that makes a [section 965(i)](/cfr/26/965.md?p=i) election with respect to its [section 965(i)](/cfr/26/965.md?p=i) net tax liability with respect to an S corporation is required to report the amount of its deferred net tax liability on its return of tax for the taxable year in which the election is made and on the return of tax for each subsequent taxable year until such net tax liability has been fully assessed.
    - (ii) **Failure to report.** If a shareholder fails to report the amount of its deferred net tax liability as required with respect to any taxable year by the due date (taking into account extensions, if any) for the return of tax for that taxable year, five percent of such deferred net tax liability will be assessed as an addition to tax for such taxable year.
- (d) **Section 965(m) election and special rule for real estate investment trusts—**
  - (1) **In general.** A real estate investment trust may elect under [section 965(m)](/cfr/26/965.md?p=m) and this [paragraph (d)](#d) to defer the inclusion in gross income (for purposes of the computation of real estate investment trust taxable income under [section 857(b)](/cfr/26/857.md?p=b)) of its REIT [section 965](/cfr/26/965.md) amounts and include them in income according to the schedule described in [paragraph (d)(2)](#d-2) of this section. This election is revocable only by including in gross income (for purposes of the computation of real estate investment trust taxable income under [section 857(b)](/cfr/26/857.md?p=b)) the full amount of the REIT [section 965](/cfr/26/965.md) amounts.
  - (2) **Inclusion schedule for section 965(m) election.** If a real estate investment trust makes the [section 965(m)](/cfr/26/965.md?p=m) election, the REIT [section 965](/cfr/26/965.md) amounts will be included in the real estate investment trust's gross income as follows—
    - (i) Eight percent of the REIT [section 965](/cfr/26/965.md) amounts in each taxable year in the five-taxable year period beginning with the taxable year the amount would otherwise be included;
    - (ii) Fifteen percent of the REIT [section 965](/cfr/26/965.md) amounts in the first year following the five year period described in [paragraph (d)(2)(i)](#d-2-i) of this section;
    - (iii) Twenty percent of the REIT [section 965](/cfr/26/965.md) amounts in the second year following the five year period described in [paragraph (d)(2)(i)](#d-2-i) of this section; and
    - (iv) Twenty-five percent of the REIT [section 965](/cfr/26/965.md) amounts in the third year following the five year period described in [paragraph (d)(2)(i)](#d-2-i) of this section.
  - (3) **Manner of making election—**
    - (i) **Eligibility.** A real estate investment trust with [section 965(a)](/cfr/26/965.md?p=a) inclusions may make the [section 965(m)](/cfr/26/965.md?p=m) election.
    - (ii) **Timing.** A [section 965(m)](/cfr/26/965.md?p=m) election must be made no later than the due date (taking into account extensions, if any) for the return for the first year of the five year period described in [paragraph (d)(2)(i)](#d-2-i) of this section. Relief is not available under [§ 301.9100-2](/cfr/26/301.9100-2.md) or [§ 301.9100-3](/cfr/26/301.9100-3.md) to make a late election.
    - (iii) **Election statement.** Except as otherwise provided in publications, forms, instructions, or other guidance, to make a [section 965(m)](/cfr/26/965.md?p=m) election, a real estate investment trust must attach a statement, signed under penalties of perjury consistent with the rules for signatures applicable to the person's return, to its return for the taxable year in which it would otherwise be required to include the REIT [section 965](/cfr/26/965.md) amounts in gross income. The statement must include the real estate investment trust's name, taxpayer identification number, REIT [section 965](/cfr/26/965.md) amounts, and the anticipated amounts of each portion of the REIT [section 965](/cfr/26/965.md) amounts described under [paragraph (d)(2)](#d-2) of this section, and the statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance. The attachment of an unsigned copy of the election statement to the timely-filed return for the relevant taxable year satisfies the signature requirement of this [paragraph (d)(3)(iii)](#d-3-iii) if the real estate investment trust retains the original signed election statement in the manner specified by [§ 1.6001-1(e)](/cfr/26/1.6001-1.md?p=e).
  - (4) **Coordination with section 965(h).** A real estate investment trust that makes the [section 965(m)](/cfr/26/965.md?p=m) election may not also make a [section 965(h)](/cfr/26/965.md?p=h) election for any year with respect to which a [section 965(m)](/cfr/26/965.md?p=m) election is in effect.
  - (5) **Acceleration of inclusion.** If a real estate investment trust makes a [section 965(m)](/cfr/26/965.md?p=m) election and subsequently there is a liquidation, sale, exchange, or other disposition of substantially all of the assets of the real estate investment trust (including in a [title 11](/cfr/11.md) or similar case), or a cessation of business by the real estate investment trust, any amount not yet included in gross income (for purposes of the computation of real estate investment trust taxable income under [section 857(b)](/cfr/26/857.md?p=b)) as a result of the [section 965(m)](/cfr/26/965.md?p=m) election will be so included as of the day before the date of the event. The unpaid portion of any tax liability with respect to such inclusion will be due on the date of the event (or in the case of a [title 11](/cfr/11.md) or similar case, the day before the petition is filed).
  - (6) **Treatment of section 965(a) inclusions of a real estate investment trust.** Regardless of whether a real estate investment trust has made a [section 965(m)](/cfr/26/965.md?p=m) election, and regardless of whether it is a United States shareholder of a deferred foreign income corporation, any [section 965(a)](/cfr/26/965.md?p=a) inclusions of the real estate investment trust are not taken into account as gross income of the real estate investment trust for purposes of applying paragraphs (2) and (3) of section 856(c) for any taxable year for which the real estate investment trust takes into account a [section 965(a)](/cfr/26/965.md?p=a) inclusion, including pursuant to [paragraph (d)(2)](#d-2) of this section.
- (e) **Section 965(n) election—**
  - (1) **In general—**
    - (i) **General rule.** A person may elect to not take into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section in determining its net operating loss under [section 172](/cfr/26/172.md) for the taxable year or in determining the amount of taxable income for such taxable year (computed without regard to the deduction allowable under [section 172](/cfr/26/172.md)) that may be reduced by net operating loss carryovers or carrybacks to such taxable year under [section 172](/cfr/26/172.md). Except as provided in [paragraph (e)(2)(ii)(B)](#e-2-ii-B) of this section, the election for each taxable year is irrevocable. If the [section 965(n)](/cfr/26/965.md?p=n) election creates or increases a net operating loss under [section 172](/cfr/26/172.md) for the taxable year, then the taxable income of the person for the taxable year cannot be less than the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section. The amount of deductions equal to the amount by which a net operating loss is created or increased for the taxable year by reason of the [section 965(n)](/cfr/26/965.md?p=n) election (the deferred amount) is not taken into account in computing taxable income or the separate foreign tax credit limitations under [section 904](/cfr/26/904.md) for that year. The source and separate category (as defined in [§ 1.904-5(a)(4)(v)](/cfr/26/1.904-5.md?p=a-4-v)) components of the deferred amount are determined in accordance with [paragraph (e)(1)(iv)](#e-1-iv) of this section.
    - (ii) **Applicable amount for section 965(n) election.** If a person makes a [section 965(n)](/cfr/26/965.md?p=n) election, the amount referred to in [paragraph (e)(1)(i)](#e-1-i) of this section is the sum of—
      - (A) The person's [section 965(a)](/cfr/26/965.md?p=a) inclusions for the taxable year reduced by the person's [section 965(c)](/cfr/26/965.md?p=c) deductions for the taxable year, and
      - (B) In the case of a domestic corporation, the taxes deemed paid under [section 960(a)(1)](/cfr/26/960.md?p=a-1) for the taxable year with respect to the person's [section 965(a)](/cfr/26/965.md?p=a) inclusions that are treated as dividends under [section 78](/cfr/26/78.md).
    - (iii) **Scope of section 965(n) election.** If a person makes a [section 965(n)](/cfr/26/965.md?p=n) election, the election applies to both net operating losses for the taxable year for which the election is made and the net operating loss carryovers or carrybacks to such taxable year, each in their entirety. Any [section 965(n)](/cfr/26/965.md?p=n) election made by the agent (within the meaning of [§ 1.1502-77](/cfr/26/1.1502-77.md)) of a consolidated group applies to all net operating losses available to the consolidated group, including all components of the consolidated net operating loss deduction (as defined in [§ 1.1502-21(a)](/cfr/26/1.1502-21.md?p=a)).
    - (iv) **Effect of section 965(n) election—**
      - (A) **In general.** The [section 965(n)](/cfr/26/965.md?p=n) election for a taxable year applies solely for purposes of determining the amount of net operating loss under [section 172](/cfr/26/172.md) for the taxable year and determining the amount of taxable income for the taxable year (computed without regard to the deduction allowable under [section 172](/cfr/26/172.md)) that may be reduced by net operating loss carryovers or carrybacks to such taxable year under [section 172](/cfr/26/172.md). [Paragraph (e)(1)(iv)(B)](#e-1-iv-B) of this section provides a rule for coordinating the [section 965(n)](/cfr/26/965.md?p=n) election's effect on [section 172](/cfr/26/172.md) with the computation of the separate foreign tax credit limitations under [section 904](/cfr/26/904.md).
      - (B) **Ordering rule for allocation and apportionment of deductions for purposes of the section 904 limitation.** The effect of a [section 965(n)](/cfr/26/965.md?p=n) election with respect to a taxable year on the computation of the separate foreign tax credit limitations under [section 904](/cfr/26/904.md) is computed as follows and in the following order.

        (1) Deductions, including those that create or increase a net operating loss for the taxable year by reason of the [section 965(n)](/cfr/26/965.md?p=n) election, are allocated and apportioned under [§§ 1.861-8 through 1.861-17](/cfr/26/1.861-8..1.861-17.md) to the relevant statutory and residual groupings, taking into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section. The source and separate category of the net operating loss carryover or carryback to the taxable year, if any, is determined under the rules of [§ 1.904(g)-3(b)](/cfr/26/1.904..3.md), taking into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section. Therefore, if the amount of the net operating loss carryover or carryback to the taxable year (as reduced by reason of the [section 965(n)](/cfr/26/965.md?p=n) election) exceeds the U.S. source loss component of the net operating loss that is carried over under [§ 1.904(g)-3(b)(3)(i)](/cfr/26/1.904..3.md), but such excess is less than the potential carryovers (or carrybacks) of the separate limitation losses that are part of the net operating loss, the potential carryovers (or carrybacks) are proportionately reduced as provided in § [1.904(g)-3(b)(3)(ii)](/cfr/26/1.904..3.md) or [(iii)](/cfr/26/1.904.md?p=iii), as applicable.

        (2) If a net operating loss is created or increased for the taxable year by reason of the [section 965(n)](/cfr/26/965.md?p=n) election, the deferred amount (as defined in [paragraph (e)(1)(i)](#e-1-i) of this section) is not allowed as a deduction for the taxable year. See [paragraph (e)(1)(i)](#e-1-i) of this section. The deferred amount (which is the corresponding addition to the net operating loss for the taxable year) comprises a ratable portion of the deductions (including the deduction allowed under [section 965(c)](/cfr/26/965.md?p=c)) allocated and apportioned to each statutory and residual grouping under paragraph (e)(1)(iv)(B)(1) of this section. Such ratable portion equals the deferred amount multiplied by a fraction, the numerator of which is the deductions allocated and apportioned to the statutory or residual grouping under paragraph (e)(1)(iv)(B)(1) of this section and the denominator of which is the total deductions described in paragraph (e)(1)(iv)(B)(1) of this section. Accordingly, the fraction described in the previous sentence takes into account the deferred amount.

        (3) Taxable income and the separate foreign tax credit limitations under [section 904](/cfr/26/904.md) for the taxable year are computed without taking into account any deferred amount. Deductions allocated and apportioned to the statutory and residual groupings under paragraph (e)(1)(iv)(B)(1) of this section, to the extent deducted in the taxable year rather than deferred to create or increase a net operating loss, are combined with income in the statutory and residual groupings to which those deductions are assigned in order to compute the amount of separate limitation income or loss in each separate category and U.S. source income or loss for the taxable year. Section [904(b)](/cfr/26/904.md?p=b), [(f)](/cfr/26/904.md?p=f), and [(g)](/cfr/26/904.md?p=g) are then applied to determine the applicable foreign tax credit limitations for the taxable year.

  - (2) **Manner of making election—**
    - (i) **Eligibility.** A person with a [section 965(a)](/cfr/26/965.md?p=a) inclusion may make the [section 965(n)](/cfr/26/965.md?p=n) election.
    - (ii) **Timing—**
      - (A) **In general.** A [section 965(n)](/cfr/26/965.md?p=n) election must be made no later than the due date (taking into account extensions, if any) for the person's return for the taxable year to which the election applies. Relief is not available under [§ 301.9100-2](/cfr/26/301.9100-2.md) or [§ 301.9100-3](/cfr/26/301.9100-3.md) of this chapter to make a late election.
      - (B) **Transition rule.** In the case of a [section 965(n)](/cfr/26/965.md?p=n) election made before June 21, 2019, the election may be revoked by attaching a statement, signed under penalties of perjury, to an amended return for the taxable year to which the election applies (the election year). The statement must include the person's name, taxpayer identification number, and a statement that the person revokes the [section 965(n)](/cfr/26/965.md?p=n) election. The amended return to which the statement is attached must be filed by—

        (1) In the case of a revocation with respect to an election due before February 5, 2019, the due date (taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request) for the return for the taxable year following the election year; or

        (2) In the case of a revocation with respect to an election due on or after February 5, 2019, the due date (taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request) for the return for the election year.

    - (iii) **Election statement.** Except as otherwise provided in publications, forms, instructions, or other guidance, to make a [section 965(n)](/cfr/26/965.md?p=n) election, a person must attach a statement, signed under penalties of perjury consistent with the rules for signatures applicable to the person's return, to its return for the taxable year to which the election applies. The statement must include the person's name, taxpayer identification number, the amounts described in [section 965(n)(2)(A)](/cfr/26/965.md?p=n-2-A) and [paragraph (e)(1)(ii)(A)](#e-1-ii-A) of this section and [section 965(n)(2)(B)](/cfr/26/965.md?p=n-2-B) and [paragraph (e)(1)(ii)(B)](#e-1-ii-B) of this section, and the sum thereof, and the statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance. The attachment of an unsigned copy of the election statement to the timely-filed return for the relevant taxable year satisfies the signature requirement of this [paragraph (e)(2)(iii)](#e-2-iii) if the person making the election retains the original signed election statement in the manner specified by [§ 1.6001-1(e)](/cfr/26/1.6001-1.md?p=e).
  - (3) **Examples.** The following examples illustrate the application of [paragraph (e)(1)(iv)](#e-1-iv) of this section.
    - (i) **Example 1: Net operating loss in inclusion year—**
      - (A) **Facts.** USP, a domestic corporation, has a [section 965(a)](/cfr/26/965.md?p=a) inclusion of $100x and has a [section 965(c)](/cfr/26/965.md?p=c) deduction of $70x for its taxable year ending December 31, 2017. USP also includes in gross income the amount treated as dividends under [section 78](/cfr/26/78.md) of $50x (the foreign taxes deemed paid under [section 960(a)](/cfr/26/960.md?p=a) for the taxable year with respect to USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion). The [section 965(a)](/cfr/26/965.md?p=a) inclusion and the [section 78](/cfr/26/78.md) dividends are foreign source general category income. During the 2017 taxable year, USP also has U.S. source gross income of $150x and other deductions of $210x, comprising $60x of interest expense and $150x of other deductible expenses that are not definitely related to any gross income. USP's total tax book value of its assets, as determined under §§ [1.861-9(g)(2)](/cfr/26/1.861-9.md?p=g-2) and [1.861-9T(g)(3)](/cfr/26/1.861-9T.md?p=g-3), is divided equally between assets that generate foreign source general category income and assets that generate U.S. source income. USP elects under [paragraph (e)(1)(i)](#e-1-i) of this section to not take into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section in determining its net operating loss under [section 172](/cfr/26/172.md) for the taxable year. Before taking into account the [section 965(n)](/cfr/26/965.md?p=n) election, USP's total deductions are $280x ($210x + $70x) and USP's taxable income is $20x ($100x + $50x + $150x−$70x−$210x).
      - (B) **Analysis—** . (1) The amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section is $80x ($100x [section 965(a)](/cfr/26/965.md?p=a) inclusion−$70x [section 965(c)](/cfr/26/965.md?p=c) deduction + $50x [section 78](/cfr/26/78.md) dividends). Not taking into account the $80x creates a net operating loss under [section 172](/cfr/26/172.md) of $60x ($20x taxable income without regard to the [section 965(n)](/cfr/26/965.md?p=n) election−$80x) for the taxable year (the “deferred amount”). Under [paragraph (e)(1)(i)](#e-1-i) of this section, the deferred amount of $60x constitutes a net operating loss and is not allowed as a deduction for the taxable year. USP's taxable income for the year is $80x ($100x + $50x + $150x−($280x−$60x)).

        (2) Under paragraph (e)(1)(iv)(B)(1) of this section, deductions are allocated and apportioned under [§§ 1.861-8 through 1.861-17](/cfr/26/1.861-8..1.861-17.md) to the relevant statutory and residual groupings, taking into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section. Under [§ 1.861-8(b)](/cfr/26/1.861-8.md?p=b), USP's [section 965(c)](/cfr/26/965.md?p=c) deduction is definitely related to the [section 965(a)](/cfr/26/965.md?p=a) inclusion, and, therefore, is allocated solely to foreign source general category income. Under [§ 1.861-9T](/cfr/26/1.861-9T.md), based on USP's asset values, the interest expense of $60x is ratably apportioned $30x to foreign source general category income and $30x to U.S. source income. Under [§ 1.861-8(c)(3)](/cfr/26/1.861-8.md?p=c-3), based on $150x of gross U.S. source income and $150x of gross foreign source general category income, the other expenses of $150x are ratably apportioned $75x to foreign source general category income and $75x to U.S. source income. Therefore, USP's deductions allocated and apportioned to foreign source general category income are $175x ($70x + $30x + $75x) and its deductions allocated and apportioned to U.S. source income are $105x ($30x + $75x).

        (3) Under paragraph (e)(1)(iv)(B)(2) of this section, the deferred amount of $60x comprises a ratable portion of the allocated and apportioned deductions. Therefore, $37.5x ($60x × $175x/$280x) of the deferred amount comprises deductions allocated and apportioned to foreign source general category income, and $22.5x ($60x × $105x/$280x) comprises deductions allocated and apportioned to U.S. source income.

        (4) Under paragraph (e)(1)(iv)(B)(3) of this section, for purposes of the separate foreign tax credit limitation under [section 904](/cfr/26/904.md), foreign source general category income for the taxable year is computed without taking into account the $37.5x of the deferred amount that is attributable to the deductions allocated and apportioned to the foreign source general category. Therefore, for the 2017 taxable year, foreign source general category income is $12.5x ($100x [section 965(a)](/cfr/26/965.md?p=a) inclusion + $50x [section 78](/cfr/26/78.md) dividends−($175x deductions−$37.5x deferred amount). The remaining taxable income of $67.5x is U.S. source income.

    - (ii) **Example 2: Net operating loss carryover to the inclusion year—**
      - (A) **Facts.** USP, a domestic corporation, has a [section 965(a)](/cfr/26/965.md?p=a) inclusion of $100x and has a [section 965(c)](/cfr/26/965.md?p=c) deduction of $60x for its taxable year ending December 31, 2017. USP also includes in gross income the amount treated as dividends under [section 78](/cfr/26/78.md) of $40x (the foreign taxes deemed paid under [section 960(a)](/cfr/26/960.md?p=a) for the taxable year with respect to USP's [section 965(a)](/cfr/26/965.md?p=a) inclusion). The [section 965(a)](/cfr/26/965.md?p=a) inclusion and the [section 78](/cfr/26/78.md) dividends are foreign source general category income. USP also has U.S. source gross income of $200x, foreign source passive category gross income of $100x, and other deductions of $140x. Under [§ 1.861-8(b)](/cfr/26/1.861-8.md?p=b), USP's $60x [section 965(c)](/cfr/26/965.md?p=c) deduction is definitely related to the [section 965(a)](/cfr/26/965.md?p=a) inclusion, and, therefore, is allocated solely to foreign source general category income. Under [§§ 1.861-8 through 1.861-17](/cfr/26/1.861-8..1.861-17.md), USP allocates and apportions the other $140x of deductions as follows: $40x to foreign source general category income, $40x to foreign source passive category income, and $60x to U.S. source income. USP has a net operating loss of $260x for the 2016 taxable year consisting of a $120x U.S. source loss, a $75x general category separate limitation loss, and a $65x passive category separate limitation loss. Under [paragraph (e)(1)(i)](#e-1-i) of this section, USP elects to not take into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section in determining the amount of taxable income that may be reduced by net operating loss carryovers and carrybacks to the taxable year under [section 172](/cfr/26/172.md). USP's taxable income before taking into account the [section 965(n)](/cfr/26/965.md?p=n) election and any net operating loss carryover deduction is $240x:
      - (B) **Analysis—** . (1) The amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section is $80x ($100x [section 965(a)](/cfr/26/965.md?p=a) inclusion−$60x [section 965(c)](/cfr/26/965.md?p=c) deduction + $40x [section 78](/cfr/26/78.md) dividends). As a result of the [section 965(n)](/cfr/26/965.md?p=n) election, the net operating loss deduction allowed in the 2017 taxable year is reduced from $240x to $160x (the amount of USP's taxable income reduced by the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section).

        (2) Under paragraph (e)(1)(iv)(B)(1) of this section, the source and separate category of the net operating loss deduction allowed in the 2017 taxable year is determined under the rules of [§ 1.904(g)-3(b)](/cfr/26/1.904..3.md), taking into account the amount described in [paragraph (e)(1)(ii)](#e-1-ii) of this section. Under [§ 1.904(g)-3(b)(3)(i)](/cfr/26/1.904..3.md), first the $120x U.S. source component of the net operating loss is allocated to U.S. source income for the 2017 taxable year. Because the total tentative carryover under [§ 1.904(g)-3(b)(3)(ii)](/cfr/26/1.904..3.md) of $100x ($40x in the general category and $60x in the passive category) exceeds the remaining net operating loss deduction of $40x ($160x−$120x), the tentative carryover amount from each separate category is reduced proportionately, to $16x ($40x × $40x/$100x) for the general category and $24x ($40x × $60x/$100x) for the passive category. Accordingly, $16x of the general category component of the net operating loss is carried forward, and $24x of the passive category component of the net operating loss is carried forward and combined with income in the same respective categories for the 2017 taxable year. After allocation of the net operating loss carryover from 2016, USP's taxable income for the 2017 taxable year is as follows:

- (f) **Election to use alternative method for calculating post-1986 earnings and profits—**
  - (1) **Effect of election for specified foreign corporations that do not have a 52-53-week taxable year.** If an election is made under this [paragraph (f)](#f) with respect to a specified foreign corporation that does not have a 52-53-week taxable year, the amount of the post-1986 earnings and profits (including a deficit) as of the E&P measurement date on November 2, 2017, is determined under [paragraph (f)(3)](#f-3) of this section. The election described in this [paragraph (f)](#f) is irrevocable. A specified foreign corporation that does not have a 52-53-week taxable year may not use the alternative method of determination in [paragraph (f)(3)](#f-3) of this section for purposes of determining its post-1986 earnings and profits on the E&P measurement date on December 31, 2017.
  - (2) **Effect of election for specified foreign corporations that have a 52-53-week taxable year.** If an election is made under this [paragraph (f)](#f) with respect to a specified foreign corporation that has a 52-53-week taxable year, the amount of the post-1986 earnings and profits (including a deficit) as of both E&P measurement dates is determined under [paragraph (f)(3)](#f-3) of this section. The election described in this [paragraph (f)](#f) is irrevocable.
  - (3) **Computation of post-1986 earnings and profits using alternative method.** With respect to an E&P measurement date, the post-1986 earnings and profits of a specified foreign corporation for which an election is properly made equals the sum of—
    - (i) The specified foreign corporation's post-1986 earnings and profits (including a deficit) determined as of the notional measurement date, as if it were an E&P measurement date, plus
    - (ii) The specified foreign corporation's annualized earnings and profits amount with respect to the notional measurement date.
  - (4) **Definitions—**
    - (i) **52-53-week taxable year.** The term 52-53-week taxable year means a taxable year described in [§ 1.441-2(a)(1)](/cfr/26/1.441-2.md?p=a-1).
    - (ii) **Annualized earnings and profits amount.** The term annualized earnings and profits amount means, with respect to a specified foreign corporation, an E&P measurement date, and a notional measurement date, the amount equal to the product of the number of days between the notional measurement date and the E&P measurement date (not including the former, but including the latter) multiplied by the daily earnings amount of the specified foreign corporation. The annualized earnings and profits amount is expressed as a negative number if the E&P measurement date precedes the notional measurement date.
    - (iii) **Daily earnings amount.** The term daily earnings amount means, with respect to a specified foreign corporation and a notional measurement date, the post-1986 earnings and profits (including a deficit) of the specified foreign corporation determined as of the close of the notional measurement date that were earned (or incurred) during the specified foreign corporation's taxable year that includes the notional measurement date, divided by the number of days that have elapsed in such taxable year as of the close of the notional measurement date.
    - (iv) **Notional measurement date.** The term notional measurement date means—
      - (A) With respect to an E&P measurement date of a specified foreign corporation with a 52-53-week taxable year, the closest end of a fiscal month to such E&P measurement date, and
      - (B) With respect to the E&P measurement date on November 2, 2017, of all specified foreign corporations not described in [paragraph (f)(4)(iv)(A)](#f-4-iv-A) of this section, October 31, 2017.
  - (5) **Manner of making election—**
    - (i) **Eligibility.** An election with respect to a specified foreign corporation to use the alternative method of calculating post-1986 earnings and profits as of an E&P measurement date pursuant to this [paragraph (f)](#f) must be made on behalf of the specified foreign corporation by a controlling domestic shareholder (as defined in [§ 1.964-1(c)(5)](/cfr/26/1.964-1.md?p=c-5)) pursuant to the rules of [§ 1.964-1(c)(3)](/cfr/26/1.964-1.md?p=c-3), except that the controlling domestic shareholder is not required to file the statement described in [§ 1.964-1(c)(3)(ii)](/cfr/26/1.964-1.md?p=c-3-ii).
    - (ii) **Timing.** An election under this [paragraph (f)](#f) must be made no later than the due date (taking into account extensions, if any) for the person's return for the first taxable year in which the person has a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to the specified foreign corporation or in which the person takes into account a specified E&P deficit with respect to the specified corporation for purposes of computing a [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to another specified foreign corporation. Relief is not available under [§ 301.9100-2](/cfr/26/301.9100-2.md) or [§ 301.9100-3](/cfr/26/301.9100-3.md) to make a late election.
    - (iii) **Election statement.** Except as otherwise provided in publications, forms, instructions, or other guidance, to make an election under this [paragraph (f)](#f), a person must attach a statement, signed under penalties of perjury consistent with the rules for signatures applicable to the person's return, to the person's return for the taxable year described in [paragraph (f)(5)(ii)](#f-5-ii) of this section. The statement must include the person's name, taxpayer identification number, and the name and taxpayer identification number, if any, of each of the specified foreign corporations with respect to which the election is made, and the statement must be filed in the manner prescribed in instructions or other guidance. The attachment of an unsigned copy of the election statement to the timely-filed return for the relevant taxable year satisfies the signature requirement of this [paragraph (f)(5)(iii)](#f-5-iii) if the person making the election retains the original signed election statement in the manner specified by [§ 1.6001-1(e)](/cfr/26/1.6001-1.md?p=e).
  - (6) **Examples.** The following examples illustrate the application of this [paragraph (f)](#f).
- (g) **Definitions.** This [paragraph (g)](#g) provides definitions that apply for purposes of this section.
  - (1) **Deferred net tax liability.** The term deferred net tax liability means, with respect to any taxable year of a person, the amount of the [section 965(i)](/cfr/26/965.md?p=i) net tax liability the payment of which has been deferred under [section 965(i)](/cfr/26/965.md?p=i) and [paragraph (c)](#c) of this section.
  - (2) **REIT section 965 amounts.** The term REIT [section 965](/cfr/26/965.md) amounts means, with respect to a real estate investment trust and a taxable year of the real estate investment trust, the aggregate amount of [section 965(a)](/cfr/26/965.md?p=a) inclusions and [section 965(c)](/cfr/26/965.md?p=c) deductions that would (but for [section 965(m)(1)(B)](/cfr/26/965.md?p=m-1-B) and [paragraph (d)](#d) of this section) be taken into account in determining the real estate investment trust's income for the taxable year.
  - (3) **Section 965(h) election.** The term [section 965(h)](/cfr/26/965.md?p=h) election means the election described in [section 965(h)(1)](/cfr/26/965.md?p=h-1) and [paragraph (b)(1)](#b-1) of this section.
  - (4) **Section 965(h) net tax liability.** The term [section 965(h)](/cfr/26/965.md?p=h) net tax liability means, with respect to a person that has made a [section 965(h)](/cfr/26/965.md?p=h) election, the total net tax liability under [section 965](/cfr/26/965.md) reduced by the aggregate amount of the person's [section 965(i)](/cfr/26/965.md?p=i) net tax liabilities, if any, with respect to which [section 965(i)](/cfr/26/965.md?p=i) elections are effective.
  - (5) **Section 965(i) election.** The term [section 965(i)](/cfr/26/965.md?p=i) election means the election described in [section 965(i)(1)](/cfr/26/965.md?p=i-1) and [paragraph (c)(1)](#c-1) of this section.
  - (6) **Section 965(i) net tax liability.** The term [section 965(i)](/cfr/26/965.md?p=i) net tax liability means, with respect to an S corporation and a shareholder of the S corporation, in the case in which a [section 965(i)](/cfr/26/965.md?p=i) election is made, the amount determined pursuant to [paragraph (g)(10)(i)](#g-10-i) of this section by adding before the word “over” in (g)(10)(i)(A) of this section “determined as if the only [section 965(a)](/cfr/26/965.md?p=a) inclusions included in income by the person are domestic pass-through entity shares of [section 965(a)](/cfr/26/965.md?p=a) inclusions by the S corporation with respect to deferred foreign income corporations of which the S corporation is a United States shareholder.”
  - (7) **Section 965(m) election.** The term [section 965(m)](/cfr/26/965.md?p=m) election means the election described in [section 965(m)(1)(B)](/cfr/26/965.md?p=m-1-B) and [paragraph (d)(1)](#d-1) of this section.
  - (8) **Section 965(n) election.** The term [section 965(n)](/cfr/26/965.md?p=n) election means the election described in [section 965(n)(1)](/cfr/26/965.md?p=n-1) and [paragraph (e)(1)(i)](#e-1-i) of this section.
  - (9) **Specified individual.** The term specified individual means, with respect to a taxable year, a person described in § [1.6081-5(a)(5)](/cfr/26/1.6081-5.md?p=a-5) or [(6)](/cfr/26/1.6081-5.md?p=a-6) who receives an extension of time to file and pay under [§ 1.6081-5(a)](/cfr/26/1.6081-5.md?p=a) for the taxable year.
  - (10) **Total net tax liability under section 965—**
    - (i) **General rule.** The term total net tax liability under [section 965](/cfr/26/965.md) means, with respect to a person, the excess (if any) of—
      - (A) The person's net income tax for the taxable year in which the person includes a [section 965(a)](/cfr/26/965.md?p=a) inclusion in income, over—
      - (B) **The person's net income tax for the taxable year determined—** (1) Without regard to [section 965](/cfr/26/965.md), and

        (2) Without regard to any income, deduction, or credit properly attributable to a dividend received (directly or through a chain of ownership described in [section 958(a)](/cfr/26/958.md?p=a)) by the person (or, in the case of a domestic pass-through owner, by the person's domestic pass-through entity) from, or an inclusion under sections [951(a)(1)(B)](/cfr/26/951.md?p=a-1-B) and [956](/cfr/26/956.md) with respect to, a deferred foreign income corporation and paid during, or included with respect to, the deferred foreign income corporation's inclusion year.

    - (ii) **Net income tax.** For purposes of this [paragraph (g)(10)](#g-10), the term net income tax means the regular tax liability (as defined in [section 26(b)](/cfr/26/26.md?p=b)) reduced by the credits allowed under subparts [A](/cfr/26/subpartA.md), [B](/cfr/26/subpartB.md), and D of part IV of subchapter A of chapter 1 of subtitle A of the Internal Revenue Code.
    - (iii) **Foreign tax credits.** The foreign tax credit disregarded in determining net income tax determined under [paragraph (g)(10)(i)(B)](#g-10-i-B) of this section includes the credit for foreign income taxes deemed paid with respect to [section 965(a)](/cfr/26/965.md?p=a) inclusions or foreign income taxes deemed paid with respect to a dividend, including a distribution that would have been treated as a dividend in the absence of [section 965](/cfr/26/965.md). The foreign tax credit disregarded under [paragraph (g)(10)(i)(B)](#g-10-i-B) of this section also includes the credit for foreign income taxes imposed on distributions of [section 965(a)](/cfr/26/965.md?p=a) previously taxed earnings and profits or 965(b) previously taxed earnings and profits made in the taxable year in which the person includes a [section 965(a)](/cfr/26/965.md?p=a) inclusion in income.

# §1.965-8. Affiliated groups (including consolidated groups).

- (a) **Scope.** This section provides rules for applying [section 965](/cfr/26/965.md) and the [section 965](/cfr/26/965.md) regulations to members of an affiliated group (as defined in [section 1504(a)](/cfr/26/1504.md?p=a)), including members of a consolidated group (as defined in [§ 1.1502-1(h)](/cfr/26/1.1502-1.md?p=h)). [Paragraph (b)](#b) of this section provides guidance regarding the application of [section 965(b)(5)](/cfr/26/965.md?p=b-5) to determine the [section 965(a)](/cfr/26/965.md?p=a) inclusion amounts of a member of an affiliated group. [Paragraph (c)](#c) of this section provides guidance for designating the source of aggregate unused E&P deficits. [Paragraph (d)](#d) provides rules regarding earning and profits and stock basis adjustments. [Paragraph (e)](#e) of this section provides rules that treat members of a consolidated group as a single person for certain purposes. [Paragraph (f)](#f) of this section provides definitions that apply for purposes of this section. [Paragraph (g)](#g) of this section provides examples illustrating the application of this section.
- (b) **Reduction of E&P net surplus shareholder's pro rata share of the section 965(a) earnings amount of a deferred foreign income corporation by the allocable share of the applicable share of the aggregate unused E&P deficit—**
  - (1) **In general.** This [paragraph (b)](#b) applies after the application of [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2) for purposes of determining the [section 965(a)](/cfr/26/965.md?p=a) inclusion amount with respect to a deferred foreign income corporation of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that is both an E&P net surplus shareholder and a member of an affiliated group in which not all members are members of the same consolidated group. If this [paragraph (b)](#b) applies, the U.S. dollar amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of the [section 965(a)](/cfr/26/965.md?p=a) earnings amount of the deferred foreign income corporation is further reduced (but not below zero) by the deferred foreign income corporation's allocable share of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's applicable share of the affiliated group's aggregate unused E&P deficit.
  - (2) **Consolidated group as part of an affiliated group.** If some, but not all, members of an affiliated group are members of a consolidated group, then the consolidated group is treated as a single member of the affiliated group for purposes of [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2) and [paragraph (b)(1)](#b-1) of this section.
- (c) **Designation of portion of excess aggregate foreign E&P deficit taken into account—**
  - (1) **In general.** This [paragraph (c)](#c) provides rules for designating the source of an aggregate unused E&P deficit of an affiliated group that is not also a consolidated group taken into account under [section 965(b)(5)](/cfr/26/965.md?p=b-5) and [paragraph (b)](#b) of this section if the amount described in [paragraph (f)(1)(i)(A)](#f-1-i-A) of this section with respect to the affiliated group exceeds the amount described in [paragraph (f)(1)(i)(B)](#f-1-i-B) of this section with respect to the affiliated group. If this [paragraph (c)(1)](#c-1) applies, each member of the affiliated group that is an E&P net deficit shareholder must designate by maintaining in its books and records a statement (identical to the statement maintained by all other such members) setting forth the portion of the excess aggregate foreign E&P deficit of the E&P net deficit shareholder taken into account under [section 965(b)(5)](/cfr/26/965.md?p=b-5) and [paragraph (b)](#b) of this section. See [§ 1.965-2(d)(2)(ii)(B)](/cfr/26/1.965-2.md?p=d-2-ii-B) for a rule for designating the portion of a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder's pro rata share of a specified E&P deficit of an E&P deficit foreign corporation taken into account under [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), and [paragraph (b)](#b) of this section, as applicable.
  - (2) **Consolidated group as part of an affiliated group.** If some, but not all, members of an affiliated group are properly treated as members of a consolidated group, then the consolidated group is treated as a single member of the affiliated group for purposes of applying [paragraph (c)(1)](#c-1) of this section.
- (d) **Adjustments to earning and profits and stock basis.**
  - (1) [Reserved]
  - (2) **Consolidated groups.** See [§ 1.1502-33(d)(1)](/cfr/26/1.1502-33.md?p=d-1) for adjustments to members' earnings and profits and [§ 1.1502-32(b)(3)](/cfr/26/1.1502-32.md?p=b-3) for adjustments to members' basis.
- (e) **Treatment of a consolidated group or other affiliated group as a single section 958(a) U.S. shareholder or a single person—**
  - (1) **In general.** All members of a consolidated group that are [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholders of a specified foreign corporation are treated as a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder for purposes of [section 965(b)](/cfr/26/965.md?p=b), [§ 1.965-1(b)(2)](/cfr/26/1.965-1.md?p=b-2), and [§ 1.965-3](/cfr/26/1.965-3.md). Furthermore, all members of a consolidated group are treated as a single person for purposes of paragraphs (h), (k), and (n) of section 965 and [§ 1.965-7](/cfr/26/1.965-7.md). In addition, all members of an affiliated group that are [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholders of a specified foreign corporation are treated as a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder for purposes of [§ 1.965-2(f)](/cfr/26/1.965-2.md?p=f). Thus, for example, any election governed by [section 965(h)](/cfr/26/965.md?p=h) and [§ 1.965-7(b)](/cfr/26/1.965-7.md?p=b) must be made by the agent (within the meaning of [§ 1.1502-77](/cfr/26/1.1502-77.md)) of the group as a single election on behalf of all members of the consolidated group. Similarly, the determination of whether the transfer of assets by one member to a non-member of the consolidated group would constitute an acceleration event under [§ 1.965-7(b)(3)(ii)(B)](/cfr/26/1.965-7.md?p=b-3-ii-B) takes into account all of the assets of the consolidated group, which for purposes of this determination, includes all of the assets of each consolidated group member. In analyzing issues relating to the transfer of assets of a consolidated group, appropriate adjustments are made to prevent the duplication of assets or asset value.
  - (2) **Limitation.** [Paragraph (e)(1)](#e-1) of this section does not apply to treat all members of a consolidated group as a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder or a single person, as applicable, for purposes of determining the amount of any member's inclusion under [section 951](/cfr/26/951.md) (including a [section 965(a)](/cfr/26/965.md?p=a) inclusion), the foreign income taxes deemed paid with respect to a [section 965(a)](/cfr/26/965.md?p=a) inclusion (see sections [960](/cfr/26/960.md) and [902](/cfr/26/902.md)), or any purpose other than those specifically listed in [paragraph (e)(1)](#e-1) of this section or another provision of the [section 965](/cfr/26/965.md) regulations.
  - (3) **Determination of section 965(c) deduction amount.** For purposes of determining the [section 965(c)](/cfr/26/965.md?p=c) deduction amount of any [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that is a member of a consolidated group, the aggregate foreign cash position of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder is equal to the aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount of the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder multiplied by the group cash ratio of the consolidated group.
- (f) **Definitions.** This [paragraph (f)](#f) provides definitions that apply for purposes of applying the [section 965](/cfr/26/965.md) regulations to members of an affiliated group, including members of a consolidated group.
  - (1) **Aggregate unused E&P deficit—**
    - (i) **General rule.** The term aggregate unused E&P deficit means, with respect to an affiliated group, the lesser of—
      - (A) The sum of the excess aggregate foreign E&P deficit with respect to each E&P net deficit shareholder that is a member of the affiliated group, or
      - (B) **The amount determined under paragraph (f)(3)(ii) of this section.**
    - (ii) **Reduction with respect to E&P net deficit shareholders that are not wholly owned by the affiliated group.** If the group ownership percentage of an E&P net deficit shareholder is less than 100 percent, the amount of the excess aggregate foreign E&P deficit with respect to the E&P net deficit shareholder that is taken into account under [paragraph (f)(1)(i)](#f-1-i) of this section is the product of the group ownership percentage multiplied by the excess aggregate foreign E&P deficit.
  - (2) **Allocable share.** The term allocable share means, with respect to a deferred foreign income corporation and an E&P net surplus shareholder's applicable share of an aggregate unused E&P deficit of an affiliated group, the product of the E&P net surplus shareholder's applicable share of the affiliated group's aggregate unused E&P deficit and the ratio described in [§ 1.965-1(f)(11)](/cfr/26/1.965-1.md?p=f-11) with respect to the deferred foreign income corporation.
  - (3) **Applicable share.** The term applicable share means, with respect to an E&P net surplus shareholder and an aggregate unused E&P deficit of an affiliated group, the amount that bears the same proportion to the affiliated group's aggregate unused E&P deficit as—
    - (i) **The product of—**
      - (A) The E&P net surplus shareholder's group ownership percentage, multiplied by
      - (B) The amount that would (but for [section 965(b)(5)](/cfr/26/965.md?p=b-5) and [paragraph (b)](#b) of this section) constitute the E&P net surplus shareholder's aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount, bears to
    - (ii) The aggregate amount determined under [paragraph (f)(3)(i)](#f-3-i) of this section with respect to all E&P net surplus shareholders that are members of the group.
  - (4) **Consolidated group aggregate foreign cash position.** The term consolidated group aggregate foreign cash position means, with respect to a consolidated group, the aggregate foreign cash position (as defined in [§ 1.965-1(f)(8)(i)](/cfr/26/1.965-1.md?p=f-8-i)) determined by treating each member of the consolidated group that is a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder as a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder pursuant to [paragraph (e)(1)](#e-1) of this section.
  - (5) **E&P net deficit shareholder.** The term E&P net deficit shareholder means a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that has an excess aggregate foreign E&P deficit.
  - (6) **E&P net surplus shareholder.** The term E&P net surplus shareholder means a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that would (but for [section 965(b)(5)](/cfr/26/965.md?p=b-5) and [paragraph (b)](#b) of this section) have an aggregate [section 965(a)](/cfr/26/965.md?p=a) inclusion amount greater than zero.
  - (7) **Excess aggregate foreign E&P deficit.** The term excess aggregate foreign E&P deficit means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder, the amount, if any, by which the amount described in [§ 1.965-1(f)(9)(i)](/cfr/26/1.965-1.md?p=f-9-i) with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder exceeds the amount described in [§ 1.965-1(f)(9)(ii)](/cfr/26/1.965-1.md?p=f-9-ii) with respect to the [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder.
  - (8) **Group cash ratio.** The term group cash ratio means, with respect to a consolidated group, the ratio of—
    - (i) The consolidated group aggregate foreign cash position, to
    - (ii) **The sum of the aggregate section 965(a) inclusion amounts of all members of the consolidated group.**
  - (9) **Group ownership percentage.** The term group ownership percentage means, with respect to a [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder that is a member of an affiliated group, the percentage of the value of the stock of the United States shareholder which is held by other includible corporations in the affiliated group. Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this [paragraph (f)(9)](#f-9) that is also used in [section 1504](/cfr/26/1504.md) has the same meaning as when used in such section. Additionally, if the term is used in the context of a rule for which all members of a consolidated group are treated as a single [section 958(a)](/cfr/26/958.md?p=a) U.S. shareholder under [paragraph (e)(1)](#e-1) of this section, then the group ownership percentage is determined solely with respect to the value of the stock of the common parent of the consolidated group held by other includible corporations that are not members of the consolidated group.
- (g) **Examples.** The following examples illustrate the application of this section.