---
kind: "section"
citation: "26 U.S.C. § 965"
title: "26"
title_heading: "Internal Revenue Code"
number: "965"
heading: "Treatment of deferred foreign income upon transition to participation exemption system of taxation"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/965"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter N — Tax Based on Income From Sources Within or Without the United States"
  - "Part III — Income from Sources Without the United States"
  - "Subpart F — Controlled Foreign Corporations"
---

# §965. Treatment of deferred foreign income upon transition to participation exemption system of taxation

- (a) **Treatment of deferred foreign income as subpart F income—** In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the [subpart F income](/usc/26/952.md?p=a) of such foreign corporation (as otherwise determined for such taxable year under [section 952](/usc/26/952.md)) shall be increased by the greater of—
  - (1) the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or
  - (2) the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.
- (b) **Reduction in amounts included in gross income of United States shareholders of specified foreign corporations with deficits in earnings and profits—**
  - (1) **In general—** In the case of a [taxpayer](/usc/26/1313.md?p=b) which is a [United States](/usc/26/993.md?p=g) shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of [subsection (a)](#a) as such [United States](/usc/26/993.md?p=g) shareholder’s pro rata share of the [subpart F income](/usc/26/952.md?p=a) of each deferred foreign income corporation shall be reduced by the amount of such [United States](/usc/26/993.md?p=g) shareholder’s aggregate foreign E&P deficit which is allocated under [paragraph (2)](#b-2) to such deferred foreign income corporation.
  - (2) **Allocation of aggregate foreign E&P deficit—** The aggregate foreign E&P deficit of any [United States](/usc/26/993.md?p=g) shareholder shall be allocated among the deferred foreign income corporations of such [United States](/usc/26/993.md?p=g) shareholder in an amount which bears the same proportion to such aggregate as—
    - (A) such [United States](/usc/26/993.md?p=g) shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of each such deferred foreign income corporation, bears to
    - (B) the aggregate of such [United States](/usc/26/993.md?p=g) shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of all deferred foreign income corporations of such [United States](/usc/26/993.md?p=g) shareholder.
  - (3) **Definitions related to E&P deficits—** For purposes of this subsection—
    - (A) **Aggregate foreign E&P deficit—**
      - (i) **In general—** The term “aggregate foreign E&P deficit” means, with respect to any [United States](/usc/26/993.md?p=g) shareholder, the lesser of—
        - (I) the aggregate of such shareholder’s pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of such shareholder, or
        - (II) the amount determined under [paragraph (2)(B)](#b-2-B).
      - (ii) **Allocation of deficit—** If the amount described in [clause (i)(II)](#b-3-A-i-II) is less than the amount described in [clause (i)(I)](#b-3-A-i-I), then the shareholder shall designate, in such form and manner as the Secretary determines—
        - (I) the amount of the specified E&P deficit which is to be taken into account for each E&P deficit corporation with respect to the [taxpayer](/usc/26/1313.md?p=b), and
        - (II) in the case of an E&P deficit corporation which has a [qualified deficit](/usc/26/952.md?p=c-1-B-ii) (as defined in [section 952](/usc/26/952.md)), the portion (if any) of the deficit taken into account under [subclause (I)](#b-3-A-ii-I) which is attributable to a [qualified deficit](/usc/26/952.md?p=c-1-B-ii), including the [qualified activities](/usc/26/952.md?p=c-1-B-iii) to which such portion is attributable.
    - (B) **E&P deficit foreign corporation—** The term “E&P deficit foreign corporation” means, with respect to any [taxpayer](/usc/26/1313.md?p=b), any specified foreign corporation with respect to which such [taxpayer](/usc/26/1313.md?p=b) is a [United States](/usc/26/993.md?p=g) shareholder, if, as of November 2, 2017—
      - (i) such specified foreign corporation has a deficit in post-1986 earnings and profits,
      - (ii) such corporation was a specified foreign corporation, and
      - (iii) such [taxpayer](/usc/26/1313.md?p=b) was a [United States](/usc/26/993.md?p=g) shareholder of such corporation.
    - (C) **Specified E&P deficit—** The term “specified E&P deficit” means, with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in [subparagraph (B)](#b-3-B).
  - (4) **Treatment of earnings and profits in future years—**
    - (A) **Reduced earnings and profits treated as previously taxed income when distributed—** For purposes of applying [section 959](/usc/26/959.md) in any taxable year beginning with the taxable year described in [subsection (a)](#a), with respect to any [United States](/usc/26/993.md?p=g) shareholder of a deferred foreign income corporation, an amount equal to such shareholder’s reduction under [paragraph (1)](#b-1) which is allocated to such deferred foreign income corporation under this subsection shall be treated as an amount which was included in the gross income of such [United States](/usc/26/993.md?p=g) shareholder under [section 951(a)](/usc/26/951.md?p=a).
    - (B) **E&P deficits—** For purposes of this title, with respect to any taxable year beginning with the taxable year described in [subsection (a)](#a), a [United States](/usc/26/993.md?p=g) shareholder’s pro rata share of the earnings and profits of any E&P deficit foreign corporation under this subsection shall be increased by the amount of the specified E&P deficit of such corporation taken into account by such shareholder under [paragraph (1)](#b-1), and, for purposes of [section 952](/usc/26/952.md), such increase shall be attributable to the same activity to which the deficit so taken into account was attributable.
  - (5) **Netting among United States shareholders in same affiliated group—**
    - (A) **In general—** In the case of any [affiliated group](/usc/26/864.md?p=e-5-A) which includes at least one E&P net surplus shareholder and one E&P net deficit shareholder, the amount which would (but for this paragraph) be taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of [subsection (a)](#a) by each such E&P net surplus shareholder shall be reduced (but not below zero) by such shareholder’s applicable share of the [affiliated group](/usc/26/864.md?p=e-5-A)’s aggregate unused E&P deficit.
    - (B) **E&P net surplus shareholder—** For purposes of this paragraph, the term “E&P net surplus shareholder” means any [United States](/usc/26/993.md?p=g) shareholder which would (determined without regard to this paragraph) take into account an amount greater than zero under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of [subsection (a)](#a).
    - (C) **E&P net deficit shareholder—** For purposes of this paragraph, the term “E&P net deficit shareholder” means any [United States](/usc/26/993.md?p=g) shareholder if—
      - (i) the aggregate foreign E&P deficit with respect to such shareholder (as defined in [paragraph (3)(A)](#b-3-A) without regard to [clause (i)(II)](#b-3-A-i-II) thereof), exceeds
      - (ii) the amount which would (but for this subsection) be taken into account by such shareholder under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of [subsection (a)](#a).
    - (D) **Aggregate unused E&P deficit—** For purposes of this paragraph—
      - (i) **In general—** The term “aggregate unused E&P deficit” means, with respect to any [affiliated group](/usc/26/864.md?p=e-5-A), the lesser of—
        - (I) the sum of the excesses described in [subparagraph (C)](#b-5-C), determined with respect to each E&P net deficit shareholder in such group, or
        - (II) the amount determined under [subparagraph (E)(ii)](#b-5-E-ii).
      - (ii) **Reduction with respect to E&P net deficit shareholders which are not wholly owned by the affiliated group—** If the group ownership percentage of any E&P net deficit shareholder is less than 100 percent, the amount of the excess described in [subparagraph (C)](#b-5-C) which is taken into account under [clause (i)(I)](#b-5-D-i-I) with respect to such E&P net deficit shareholder shall be such group ownership percentage of such amount.
    - (E) **Applicable share—** For purposes of this paragraph, the term “applicable share” means, with respect to any E&P net surplus shareholder in any [affiliated group](/usc/26/864.md?p=e-5-A), the amount which bears the same proportion to such group’s aggregate unused E&P deficit as—
      - (i) the product of—
        - (I) such shareholder’s group ownership percentage, multiplied by
        - (II) the amount which would (but for this paragraph) be taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of [subsection (a)](#a) by such shareholder, bears to
      - (ii) the aggregate amount determined under [clause (i)](#b-5-E-i) with respect to all E&P net surplus shareholders in such group.
    - (F) **Group ownership percentage—** For purposes of this paragraph, the term “group ownership percentage” means, with respect to any [United States](/usc/26/993.md?p=g) shareholder in any [affiliated group](/usc/26/864.md?p=e-5-A), the percentage of the [value](/usc/26/851.md?p=c-4) of the [stock](/usc/26/1504.md?p=a-4) of such [United States](/usc/26/993.md?p=g) shareholder which is held by other [includible corporations](/usc/26/1504.md?p=b) in such [affiliated group](/usc/26/864.md?p=e-5-A). Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the [affiliated group](/usc/26/864.md?p=e-5-A) is 100 percent. Any term used in this subparagraph which is also used in [section 1504](/usc/26/1504.md) shall have the same meaning as when used in such section.
- (c) **Application of participation exemption to included income—**
  - (1) **In general—** In the case of a [United States](/usc/26/993.md?p=g) shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such [United States](/usc/26/993.md?p=g) shareholder under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of this section an amount equal to the sum of—
    - (A) the [United States](/usc/26/993.md?p=g) shareholder’s 8 percent rate equivalent percentage of the excess (if any) of—
      - (i) the amount so included as gross income, over
      - (ii) the amount of such [United States](/usc/26/993.md?p=g) shareholder’s aggregate foreign [cash](/usc/26/856.md?p=c-5-K) position, plus
    - (B) the [United States](/usc/26/993.md?p=g) shareholder’s 15.5 percent rate equivalent percentage of so much of the amount described in [subparagraph (A)(ii)](#c-1-A-ii) as does not exceed the amount described in [subparagraph (A)(i)](#c-1-A-i).
  - (2) **8 and 15.5 percent rate equivalent percentages—** For purposes of this subsection—
    - (A) **8 percent rate equivalent percentage—** The term “8 percent rate equivalent percentage” means, with respect to any [United States](/usc/26/993.md?p=g) shareholder for any taxable year, the percentage which would result in the amount to which such percentage applies being subject to a 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](/usc/26/11.md) for such taxable year. In the case of any taxable year of a [United States](/usc/26/993.md?p=g) shareholder to which [section 15](/usc/26/15.md) applies, the highest rate of tax under [section 11](/usc/26/11.md) before the effective date of the change in rates and the highest rate of tax under [section 11](/usc/26/11.md) after the effective date of such change shall each be taken into account under the preceding sentence in the same proportions as the portion of such taxable year which is before and after such effective date, respectively.
    - (B) **15.5 percent rate equivalent percentage—** The term “15.5 percent rate equivalent percentage” means, with respect to any [United States](/usc/26/993.md?p=g) shareholder for any taxable year, the percentage determined under [subparagraph (A)](#c-2-A) applied by substituting “15.5 percent rate of tax” for “8 percent rate of tax”.
  - (3) **Aggregate foreign cash position—** For purposes of this subsection—
    - (A) **In general—** The term “aggregate foreign [cash](/usc/26/856.md?p=c-5-K) position” means, with respect to any [United States](/usc/26/993.md?p=g) shareholder, the greater of—
      - (i) the aggregate of such [United States](/usc/26/993.md?p=g) shareholder’s pro rata share of the [cash](/usc/26/856.md?p=c-5-K) position of each specified foreign corporation of such [United States](/usc/26/993.md?p=g) shareholder determined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2018, or
      - (ii) one half of the sum of—
        - (I) the aggregate described in [clause (i)](#c-3-A-i) determined as of the close of the last taxable year of each such specified foreign corporation which ends before November 2, 2017, plus
        - (II) the aggregate described in [clause (i)](#c-3-A-i) determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in [subclause (I)](#c-3-A-ii-I).
    - (B) **Cash position—** For purposes of this paragraph, the [cash](/usc/26/856.md?p=c-5-K) position of any specified foreign corporation is the sum of—
      - (i) [cash](/usc/26/856.md?p=c-5-K) held by such foreign corporation,
      - (ii) the net accounts receivable of such foreign corporation, plus
      - (iii) the fair market [value](/usc/26/851.md?p=c-4) of the following assets held by such corporation:
        - (I) Personal [property](/usc/26/317.md?p=a) which is of a type that is actively traded and for which there is an established financial market.
        - (II) Commercial paper, certificates of deposit, the [securities](/usc/26/368.md?p=a-2-F-vii) of the Federal government and of any State or foreign government.
        - (III) Any foreign currency.
        - (IV) Any obligation with a term of less than one year.
        - (V) Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph.
    - (C) **Net accounts receivable—** For purposes of this paragraph, the term “net accounts receivable” means, with respect to any specified foreign corporation, the excess (if any) of—
      - (i) such corporation’s accounts receivable, over
      - (ii) such corporation’s accounts payable (determined consistent with the rules of [section 461](/usc/26/461.md)).
    - (D) **Prevention of double counting—** [Cash](/usc/26/856.md?p=c-5-K) positions of a specified foreign corporation described in clause [(ii)](#c-3-B-ii), [(iii)(I)](#c-3-B-iii-I), or [(iii)(IV)](#c-3-B-iii-IV) of subparagraph (B) shall not be taken into account by a [United States](/usc/26/993.md?p=g) shareholder under [subparagraph (A)](#c-3-A) to the extent that such [United States](/usc/26/993.md?p=g) shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into account by such [United States](/usc/26/993.md?p=g) shareholder with respect to another specified foreign corporation.
    - (E) **Cash positions of certain non-corporate entities taken into account—** An entity (other than a corporation) shall be treated as a specified foreign corporation of a [United States](/usc/26/993.md?p=g) shareholder for purposes of determining such [United States](/usc/26/993.md?p=g) shareholder’s aggregate foreign [cash](/usc/26/856.md?p=c-5-K) position if any [interest](/usc/26/856.md?p=f-1) in such entity is held by a specified foreign corporation of such [United States](/usc/26/993.md?p=g) shareholder (determined after application of this subparagraph) and such entity would be a specified foreign corporation of such [United States](/usc/26/993.md?p=g) shareholder if such entity were a foreign corporation.
    - (F) **Anti-abuse—** If the Secretary determines that a principal purpose of any transaction was to reduce the aggregate foreign [cash](/usc/26/856.md?p=c-5-K) position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection.
- (d) **Deferred foreign income corporation; accumulated post-1986 deferred foreign income—** For purposes of this section—
  - (1) **Deferred foreign income corporation—** The term “deferred foreign income corporation” means, with respect to any [United States](/usc/26/993.md?p=g) shareholder, any specified foreign corporation of such [United States](/usc/26/993.md?p=g) shareholder which has accumulated post-1986 deferred foreign income (as of the date referred to in paragraph [(1)](#a-1) or [(2)](#a-2) of subsection (a)) greater than zero.
  - (2) **Accumulated post-1986 deferred foreign income—** The term “accumulated post-1986 deferred foreign income” means the post-1986 earnings and profits except to the extent such earnings—
    - (A) are attributable to income of the specified foreign corporation which is effectively connected with the conduct of a [trade or business within the United States](/usc/26/864.md?p=b) and subject to tax under this chapter, or
    - (B) in the case of a controlled foreign corporation, if distributed, would be excluded from the gross income of a [United States](/usc/26/993.md?p=g) shareholder under section 959.

    To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders which are not [United States](/usc/26/993.md?p=g) shareholders, accumulated post-1986 deferred foreign income shall be appropriately reduced by amounts which would be described in [subparagraph (B)](#d-2-B) if such shareholders were [United States](/usc/26/993.md?p=g) shareholders.

  - (3) **Post-1986 earnings and profits—** The term “post-1986 earnings and profits” means the earnings and profits of the foreign corporation (computed in accordance with sections [964(a)](/usc/26/964.md?p=a) and [986](/usc/26/986.md), and by only taking into account 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 date referred to in paragraph [(1)](#a-1) or [(2)](#a-2) of subsection (a), whichever is applicable with respect to such foreign corporation, and
    - (B) without diminution by reason of [dividends](/usc/26/316.md?p=a) distributed during the taxable year described in [subsection (a)](#a) other than [dividends](/usc/26/316.md?p=a) distributed to another specified foreign corporation.
- (e) **Specified foreign corporation—**
  - (1) **In general—** For purposes of this section, the term “specified foreign corporation” means—
    - (A) any controlled foreign corporation, and
    - (B) any foreign corporation with respect to which one or more domestic corporations is a [United States](/usc/26/993.md?p=g) shareholder.
  - (2) **Application to certain foreign corporations—** For purposes of sections [951](/usc/26/951.md) and [961](/usc/26/961.md), a foreign corporation described in [paragraph (1)(B)](#e-1-B) shall be treated as a controlled foreign corporation solely for purposes of taking into account the [subpart F income](/usc/26/952.md?p=a) of such corporation under [subsection (a)](#a) (and for purposes of applying [subsection (f)](#f)).
  - (3) **Exclusion of passive foreign investment companies—** Such term shall not include any corporation which is a passive foreign [investment company](/usc/26/368.md?p=a-2-F-iii) (as defined in [section 1297](/usc/26/1297.md)) with respect to the shareholder and which is not a controlled foreign corporation.
- (f) **Determinations of pro rata share—**
  - (1) **In general—** For purposes of this section, the [determination](/usc/26/1313.md?p=a) of any [United States](/usc/26/993.md?p=g) shareholder’s pro rata share of any amount with respect to any specified foreign corporation shall be determined under rules similar to the rules of [section 951(a)(2)](/usc/26/951.md?p=a-2) by treating such amount in the same manner as [subpart F income](/usc/26/952.md?p=a) (and by treating such specified foreign corporation as a controlled foreign corporation).
  - (2) **Special rules—** The portion which is included in the income of a [United States](/usc/26/993.md?p=g) shareholder under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of [subsection (a)](#a) which is equal to the deduction allowed under [subsection (c)](#c) by reason of such inclusion—
    - (A) shall be treated as income exempt from tax for purposes of sections [705(a)(1)(B)](/usc/26/705.md?p=a-1-B) and [1367(a)(1)(A)](/usc/26/1367.md?p=a-1-A), and
    - (B) shall not be treated as income exempt from tax for purposes of determining whether an adjustment shall be made to an accumulated adjustment account under [section 1368(e)(1)(A)](/usc/26/1368.md?p=e-1-A).
- (g) **Disallowance of foreign tax credit, etc.**
  - (1) **In general—** No credit shall be allowed under [section 901](/usc/26/901.md) for the [applicable percentage](/usc/26/414.md?p=l-2-B) of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section.
  - (2) **Applicable percentage—** For purposes of this subsection, the term “[applicable percentage](/usc/26/414.md?p=l-2-B)” means the amount (expressed as a percentage) equal to the sum of—
    - (A) 0.771 multiplied by the ratio of—
      - (i) the excess to which [subsection (c)(1)(A)](#c-1-A) applies, divided by
      - (ii) the sum of such excess plus the amount to which [subsection (c)(1)(B)](#c-1-B) applies, plus
    - (B) 0.557 multiplied by the ratio of—
      - (i) the amount to which [subsection (c)(1)(B)](#c-1-B) applies, divided by
      - (ii) the sum described in [subparagraph (A)(ii)](#g-2-A-ii).
  - (3) **Denial of deduction—** No deduction shall be allowed under this chapter for any tax for which credit is not allowable under [section 901](/usc/26/901.md) by reason of [paragraph (1)](#g-1) (determined by treating the [taxpayer](/usc/26/1313.md?p=b) as having elected the benefits of subpart A of part III of subchapter N).
  - (4) **Coordination with section 78—** With respect to the taxes treated as paid or accrued by a domestic corporation with respect to amounts which are includible in gross income of such domestic corporation by reason of this section, [section 78](/usc/26/78.md) shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as—
    - (A) the excess of—
      - (i) the amounts which are includible in gross income of such domestic corporation by reason of this section, over
      - (ii) the deduction allowable under [subsection (c)](#c) with respect to such amounts, bears to
    - (B) such amounts.
- (h) **Election to pay liability in installments—**
  - (1) **In general—** In the case of a [United States](/usc/26/993.md?p=g) shareholder of a deferred foreign income corporation, such [United States](/usc/26/993.md?p=g) shareholder may elect to pay the net tax liability under this section in 8 installments of the following amounts:
    - (A) 8 percent of the net tax liability in the case of each of the first 5 of such installments,
    - (B) 15 percent of the net tax liability in the case of the 6th such installment,
    - (C) 20 percent of the net tax liability in the case of the 7th such installment, and
    - (D) 25 percent of the net tax liability in the case of the 8th such installment.
  - (2) **Date for payment of installments—** If an election is made under [paragraph (1)](#h-1), the first installment shall be paid on the [due date](/usc/26/430.md?p=k-6-B) (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year described in [subsection (a)](#a) and each succeeding installment shall be paid on the [due date](/usc/26/430.md?p=k-6-B) (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made.
  - (3) **Acceleration of payment—** If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of substantially all the assets of the [taxpayer](/usc/26/1313.md?p=b) (including in a [title 11](/usc/11.md) or similar case), a cessation of business by the [taxpayer](/usc/26/1313.md?p=b), or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a [title 11](/usc/11.md) or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a [taxpayer](/usc/26/1313.md?p=b) to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the [taxpayer](/usc/26/1313.md?p=b).
  - (4) **Proration of deficiency to installments—** If an election is made under [paragraph (1)](#h-1) to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, the deficiency shall be prorated to the installments payable under [paragraph (1)](#h-1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.
  - (5) **Election—** Any election under [paragraph (1)](#h-1) shall be made not later than the [due date](/usc/26/430.md?p=k-6-B) for the return of tax for the taxable year described in [subsection (a)](#a) and shall be made in such manner as the Secretary shall provide.
  - (6) **Net tax liability under this section—** For purposes of this subsection—
    - (A) **In general—** The net tax liability under this section with respect to any [United States](/usc/26/993.md?p=g) shareholder is the excess (if any) of—
      - (i) such [taxpayer](/usc/26/1313.md?p=b)’s net income tax for the taxable year in which an amount is included in the gross income of such [United States](/usc/26/993.md?p=g) shareholder under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of this section, over
      - (ii) such [taxpayer](/usc/26/1313.md?p=b)’s net income tax for such taxable year determined—
        - (I) without regard to this section, and
        - (II) without regard to any income or deduction properly attributable to a [dividend](/usc/26/316.md?p=a) received by such [United States](/usc/26/993.md?p=g) shareholder from any deferred foreign income corporation.
    - (B) **Net income tax—** The term “net income tax” means the [regular tax liability](/usc/26/26.md?p=b-1) reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A.
- (i) **Special rules for S corporation shareholders—**
  - (1) **In general—** In the case of any [S corporation](/usc/26/1361.md?p=a-1) which is a [United States](/usc/26/993.md?p=g) shareholder of a deferred foreign income corporation, each shareholder of such [S corporation](/usc/26/1361.md?p=a-1) may elect to defer payment of such shareholder’s net tax liability under this section with respect to such [S corporation](/usc/26/1361.md?p=a-1) until the shareholder’s taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return of tax as an addition to tax in the shareholder’s taxable year which includes such triggering event.
  - (2) **Triggering event—**
    - (A) **In general—** In the case of any shareholder’s net tax liability under this section with respect to any [S corporation](/usc/26/1361.md?p=a-1), the triggering event with respect to such liability is whichever of the following occurs first:
      - (i) Such corporation ceases to be an [S corporation](/usc/26/1361.md?p=a-1) (determined as of the first day of the first taxable year that such corporation is not an [S corporation](/usc/26/1361.md?p=a-1)).
      - (ii) A liquidation or sale of substantially all the assets of such [S corporation](/usc/26/1361.md?p=a-1) (including in a [title 11](/usc/11.md) or similar case), a cessation of business by such [S corporation](/usc/26/1361.md?p=a-1), such [S corporation](/usc/26/1361.md?p=a-1) ceases to exist, or any similar circumstance.
      - (iii) A transfer of any share of [stock](/usc/26/1504.md?p=a-4) in such [S corporation](/usc/26/1361.md?p=a-1) by the [taxpayer](/usc/26/1313.md?p=b) (including by reason of death, or otherwise).
    - (B) **Partial transfers of stock—** In the case of a transfer of less than all of the [taxpayer](/usc/26/1313.md?p=b)’s shares of [stock](/usc/26/1504.md?p=a-4) in the [S corporation](/usc/26/1361.md?p=a-1), such transfer shall only be a triggering event with respect to so much of the [taxpayer](/usc/26/1313.md?p=b)’s net tax liability under this section with respect to such [S corporation](/usc/26/1361.md?p=a-1) as is properly allocable to such [stock](/usc/26/1504.md?p=a-4).
    - (C) **Transfer of liability—** A transfer described in [clause (iii)](#i-2-A-iii) of subparagraph (A) shall not be treated as a triggering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such [stock](/usc/26/1504.md?p=a-4) in the same manner as if such transferee were the [taxpayer](/usc/26/1313.md?p=b).
  - (3) **Net tax liability—** A shareholder’s net tax liability under this section with respect to any [S corporation](/usc/26/1361.md?p=a-1) is the net tax liability under this section which would be determined under [subsection (h)(6)](#h-6) if the only [subpart F income](/usc/26/952.md?p=a) taken into account by such shareholder by reason of this section were allocations from such [S corporation](/usc/26/1361.md?p=a-1).
  - (4) **Election to pay deferred liability in installments—** In the case of a [taxpayer](/usc/26/1313.md?p=b) which elects to defer payment under [paragraph (1)](#i-1)—
    - (A) [subsection (h)](#h) shall be applied separately with respect to the liability to which such election applies,
    - (B) an election under [subsection (h)](#h) with respect to such liability shall be treated as timely made if made not later than the [due date](/usc/26/430.md?p=k-6-B) for the return of tax for the taxable year in which the triggering event with respect to such liability occurs,
    - (C) the first installment under [subsection (h)](#h) with respect to such liability shall be paid not later than such [due date](/usc/26/430.md?p=k-6-B) (but determined without regard to any extension of time for filing the return), and
    - (D) if the triggering event with respect to any net tax liability is described in [paragraph (2)(A)(ii)](#i-2-A-ii), an election under [subsection (h)](#h) with respect to such liability may be made only with the consent of the Secretary.
  - (5) **Joint and several liability of S corporation—** If any shareholder of an [S corporation](/usc/26/1361.md?p=a-1) elects to defer payment under [paragraph (1)](#i-1), such [S corporation](/usc/26/1361.md?p=a-1) shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto.
  - (6) **Extension of limitation on collection—** Any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with respect to such liability.
  - (7) **Annual reporting of net tax liability—**
    - (A) **In general—** Any shareholder of an [S corporation](/usc/26/1361.md?p=a-1) which makes an election under [paragraph (1)](#i-1) shall report the amount of such shareholder’s deferred net tax liability on such shareholder’s return of tax for the taxable year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns.
    - (B) **Deferred net tax liability—** For purposes of this paragraph, the term “deferred net tax liability” means, with respect to any taxable year, the amount of net tax liability payment of which has been deferred under [paragraph (1)](#i-1) and which has not been assessed on a return of tax for any prior taxable year.
    - (C) **Failure to report—** In the case of any failure to report any amount required to be reported under [subparagraph (A)](#i-7-A) with respect to any taxable year before the [due date](/usc/26/430.md?p=k-6-B) for the return of tax for such taxable year, there shall be assessed on such return as an addition to tax 5 percent of such amount.
  - (8) **Election—** Any election under [paragraph (1)](#i-1)—
    - (A) shall be made by the shareholder of the [S corporation](/usc/26/1361.md?p=a-1) not later than the [due date](/usc/26/430.md?p=k-6-B) for such shareholder’s return of tax for the taxable year which includes the close of the taxable year of such [S corporation](/usc/26/1361.md?p=a-1) in which the amount described in [subsection (a)](#a) is taken into account, and
    - (B) shall be made in such manner as the Secretary shall provide.
- (j) **Reporting by S corporation—** Each [S corporation](/usc/26/1361.md?p=a-1) which is a [United States](/usc/26/993.md?p=g) shareholder of a specified foreign corporation shall report in its return of tax under [section 6037(a)](/usc/26/6037.md?p=a) the amount includible in its gross income for such taxable year by reason of this section and the amount of the deduction allowable by [subsection (c)](#c). Any copy provided to a shareholder under [section 6037(b)](/usc/26/6037.md?p=b) shall include a statement of such shareholder’s pro rata share of such amounts.
- (k) **Extension of limitation on assessment—** Notwithstanding [section 6501](/usc/26/6501.md), the limitation on the time period for the assessment of the net tax liability under this section (as defined in [subsection (h)(6)](#h-6)) shall not expire before the date that is 6 years after the return for the taxable year described in such subsection was filed.
- (l) **Recapture for expatriated entities—**
  - (1) **In general—** If a deduction is allowed under [subsection (c)](#c) to a [United States](/usc/26/993.md?p=g) shareholder and such shareholder first becomes an expatriated entity at any time during the 10-year period beginning on the date of the enactment of the Tax Cuts and Jobs Act[^1] (with respect to a surrogate foreign corporation which first becomes a surrogate foreign corporation during such period), then—
    - (A) the tax imposed by this chapter shall be increased for the first taxable year in which such [taxpayer](/usc/26/1313.md?p=b) becomes an expatriated entity by an amount equal to 35 percent of the amount of the deduction allowed under [subsection (c)](#c), and
    - (B) no credits shall be allowed against the increase in tax under [subparagraph (A)](#l-1-A).
  - (2) **Expatriated entity—** For purposes of this subsection, the term “expatriated entity” has the same meaning given such term under [section 7874(a)(2)](/usc/26/7874.md?p=a-2), except that such term shall not include an entity if the surrogate foreign corporation with respect to the entity is treated as a domestic corporation under [section 7874(b)](/usc/26/7874.md?p=b).
  - (3) **Surrogate foreign corporation—** For purposes of this subsection, the term “surrogate foreign corporation” has the meaning given such term in [section 7874(a)(2)(B)](/usc/26/7874.md?p=a-2-B).
- (m) **Special rules for United States shareholders which are real estate investment trusts—**
  - (1) **In general—** If a [real estate investment trust](/usc/26/856.md?p=a) is a [United States](/usc/26/993.md?p=g) shareholder in 1 or more deferred foreign income corporations—
    - (A) any amount required to be taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of this section shall not be taken into account as gross income of the [real estate investment trust](/usc/26/856.md?p=a) for purposes of applying paragraphs [(2)](/usc/26/856.md?p=c-2) and [(3)](/usc/26/856.md?p=c-3) of section 856(c) to any taxable year for which such amount is taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1), and
    - (B) if the [real estate investment trust](/usc/26/856.md?p=a) elects the application of this subparagraph, notwithstanding [subsection (a)](#a), any amount required to be taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of this section shall, in lieu of the taxable year in which it would otherwise be included in gross income (for purposes of the computation of [real estate investment trust](/usc/26/856.md?p=a) [taxable income](/usc/26/63.md?p=a) under [section 857(b)](/usc/26/857.md?p=b)), be included in gross income as follows:
      - (i) 8 percent of such amount in the case of each of the taxable years in the 5-taxable year period beginning with the taxable year in which such amount would otherwise be included.
      - (ii) 15 percent of such amount in the case of the 1st taxable year following such period.
      - (iii) 20 percent of such amount in the case of the 2nd taxable year following such period.
      - (iv) 25 percent of such amount in the case of the 3rd taxable year following such period.
  - (2) **Rules for trusts electing deferred inclusion—**
    - (A) **Election—** Any election under [paragraph (1)(B)](#m-1-B) shall be made not later than the [due date](/usc/26/430.md?p=k-6-B) for the first taxable year in the 5-taxable year period described in [clause (i)](#m-1-B-i) of paragraph (1)(B) and shall be made in such manner as the Secretary shall provide.
    - (B) **Special rules—** If an election under [paragraph (1)(B)](#m-1-B) is in effect with respect to any [real estate investment trust](/usc/26/856.md?p=a), the following rules shall apply:
      - (i) **Application of participation exemption—** For purposes of [subsection (c)(1)](#c-1)—
        - (I) the aggregate amount to which subparagraph [(A)](#c-1-A) or [(B)](#c-1-B) of subsection (c)(1) applies shall be determined without regard to the election,
        - (II) each such aggregate amount shall be allocated to each taxable year described in [paragraph (1)(B)](#m-1-B) in the same proportion as the amount included in the gross income of such [United States](/usc/26/993.md?p=g) shareholder under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of this section is allocated to each such taxable year.
        - (III) **No installment payments.—** The [real estate investment trust](/usc/26/856.md?p=a) may not make an election under [subsection (g)](#g) for any taxable year described in [paragraph (1)(B)](#m-1-B).
      - (ii) **Acceleration of inclusion—** If there is a liquidation or sale of substantially all the assets of the [real estate investment trust](/usc/26/856.md?p=a) (including in a [title 11](/usc/11.md) or similar case), a cessation of business by such trust, or any similar circumstance, then any amount not yet included in gross income under [paragraph (1)(B)](#m-1-B) shall be included in gross income as of the day before the date of the event and the unpaid portion of any tax liability with respect to such inclusion shall be due on the date of such event (or in the case of a [title 11](/usc/11.md) or similar case, the day before the petition is filed).
- (n) **Election not to apply net operating loss deduction—**
  - (1) **In general—** If a [United States](/usc/26/993.md?p=g) shareholder of a deferred foreign income corporation elects the application of this subsection for the taxable year described in [subsection (a)](#a), then the amount described in [paragraph (2)](#n-2) shall not be taken into account—
    - (A) in determining the amount of the net operating loss deduction under [section 172](/usc/26/172.md) of such shareholder for such taxable year, or
    - (B) in determining the amount of [taxable income](/usc/26/63.md?p=a) for such taxable year which may be reduced by net operating loss carryovers or carrybacks to such taxable year under section 172.
  - (2) **Amount described—** The amount described in this paragraph is the sum of—
    - (A) the amount required to be taken into account under [section 951(a)(1)](/usc/26/951.md?p=a-1) by reason of this section (determined after the application of [subsection (c)](#c)), plus
    - (B) in the case of a domestic corporation which chooses to have the benefits of subpart A of part III of subchapter N for the taxable year, the taxes deemed to be paid by such corporation under subsections [(a)](/usc/26/960.md?p=a) and [(b)](/usc/26/960.md?p=b) of section 960 for such taxable year with respect to the amount described in [subparagraph (A)](#n-2-A) which are treated as a [dividends](/usc/26/316.md?p=a)[^2] under section 78.
  - (3) **Election—** Any election under this subsection shall be made not later than the [due date](/usc/26/430.md?p=k-6-B) (including extensions) for filing the return of tax for the taxable year and shall be made in such manner as the Secretary shall prescribe.
- (o) **Regulations—** The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including—
  - (1) regulations or other guidance to provide appropriate basis adjustments, and
  - (2) regulations or other guidance to prevent the avoidance of the purposes of this section, including through a reduction in earnings and profits, through changes in entity classification or accounting methods, or otherwise.

## Footnotes

[^1]: See References in Text note below.
[^2]: So in original.

## Source credit

(Added Pub. L. 108–357, title IV, § 422(a), Oct. 22, 2004, 118 Stat. 1514; amended Pub. L. 109–135, title IV, § 403(q), Dec. 21, 2005, 119 Stat. 2627; Pub. L. 115–97, title I, § 14103(a), Dec. 22, 2017, 131 Stat. 2195.)

## Notes

### Editorial Notes

### References in Text

The date of the enactment of the Tax Cuts and Jobs Act, referred to in subsec. (l)(1), probably means the date of the enactment of title I of Pub. L. 115–97, which was approved Dec. 22, 2017. Prior versions of the bill that was enacted into law as Pub. L. 115–97 included such Short Title, but it was not enacted as part of title I of Pub. L. 115–97.

### Amendments

2017—Pub. L. 115–97 amended section generally. Prior to amendment, section related to temporary dividends received deduction.

2005—Subsec. (a)(2)(B). Pub. L. 109–135, § 403(q)(1), inserted “from another controlled foreign corporation in such chain of ownership” before “, but only to the extent”.

Subsec. (b)(2)(A). Pub. L. 109–135, § 403(q)(2), inserted “cash” before “dividends”.

Subsec. (b)(3). Pub. L. 109–135, § 403(q)(3), inserted at end “The Secretary may prescribe such regulations as may be necessary or appropriate to prevent the avoidance of the purposes of this paragraph, including regulations which provide that cash dividends shall not be taken into account under subsection (a) to the extent such dividends are attributable to the direct or indirect transfer (including through the use of intervening entities or capital contributions) of cash or other property from a related person (as so defined) to a controlled foreign corporation.”

Subsec. (c)(1). Pub. L. 109–135, § 403(q)(4), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “The term ‘applicable financial statement’ means, with respect to a United States shareholder, the most recently audited financial statement (including notes and other documents which accompany such statement) which includes such shareholder—

“(A) which is certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and

“(B) which is used for the purposes of a statement or report—

“(i) to creditors,

“(ii) to shareholders, or

“(iii) for any other substantial nontax purpose.

In the case of a corporation required to file a financial statement with the Securities and Exchange Commission, such term means the most recent such statement filed on or before June 30, 2003.”

Subsec. (d)(2). Pub. L. 109–135, § 403(q)(5), substituted “directly allocable” for “properly allocated and apportioned”.

Subsec. (d)(4). Pub. L. 109–135, § 403(q)(6), added par. (4).

Subsec. (e)(1). Pub. L. 109–135, § 403(q)(7), inserted “which are imposed by foreign countries and possessions of the United States and are” after “taxes” in concluding provisions.

Subsec. (f). Pub. L. 109–135, § 403(q)(8), inserted “on or” before “before the due date” in concluding provisions.

### Statutory Notes and Related Subsidiaries

### Effective Date of 2005 Amendment

Amendments by Pub. L. 109–135 effective as if included in the provisions of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which they relate, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title.

### Effective Date

Section applicable to taxable years ending on or after Oct. 22, 2004, see section 422(d) of Pub. L. 108–357, set out as an Effective Date of 2004 Amendments note under section 56 of this title.