Exclusion From Gross Income of Previously Taxed Earnings and Profits, and Adjustments to Basis of Stock in Controlled Foreign Corporations and of Other Property, 51155-51179 [06-7195]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 167 (Tuesday, August 29, 2006)]
[Proposed Rules]
[Pages 51155-51179]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7195]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-121509-00]
RIN 1545-AY54


Exclusion From Gross Income of Previously Taxed Earnings and 
Profits, and Adjustments to Basis of Stock in Controlled Foreign 
Corporations and of Other Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance relating to the exclusion from gross income of previously 
taxed earnings and profits under section 959 of the Internal Revenue 
Code (Code) and related basis adjustments under section 961 of the 
Code. These regulations reflect relevant statutory changes made in 
years subsequent to 1983. These regulations also address a number of 
issues that the current section 959 and section 961 regulations do not 
clearly answer. These regulations, in general, will affect United 
States shareholders of controlled foreign corporations and their 
successors in interest.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 27, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-121509-00), Internal 
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 
20044 or send electronically, via the IRS Internet site at https://
www.irs.gov/regs or via the Federal eRulemaking Portal at https://
www.regulations.gov (IRS REG-121509-00).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Ethan Atticks, (202) 622-3840; concerning submissions of comments, 
Kelly Banks, (202) 622-0392 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
sections 959 and 961. Section 959(a)(1) generally provides an exclusion 
from the gross income of a United States shareholder for distributions 
of earnings and profits of a foreign corporation attributable to 
amounts which are, or have been, included in a United States 
shareholder's gross income under section 951(a). Section 959(a)(2) 
excludes from the gross income of a United States shareholder earnings 
and profits attributable to amounts which are, or have been, included 
in the gross income of a United States shareholder under section 951(a) 
which would, but for section 959(a)(2), be again included in gross 
income of a United States shareholder under section 951(a)(1)(B) as an 
amount determined under section 956 (section 956 amounts). Earnings and 
profits of a foreign corporation included in a United States 
shareholder's gross income under section 951(a) are referred to as 
previously taxed earnings and profits or previously taxed income (PTI).
    Section 959(b) generally provides that for purposes of section 
951(a), PTI shall not, when distributed through a chain of ownership 
described in section 958(a), be included in the gross income of a 
controlled foreign corporation (CFC) in such chain for purposes of the 
application of section 951(a) to such CFC.
    Section 959(c) generally provides for the allocation of 
distributions by a foreign corporation to three different categories of 
the corporation's earnings and profits: (1) PTI attributable to section 
956 amounts that are included in the gross income of a United States 
shareholder under section 951(a)(1)(B) and section 956 amounts that 
would have been so included but for section 959(a)(2), (2) PTI 
attributable to amounts included in gross income under section 
951(a)(1)(A), and (3) other earnings and profits (non-PTI). Section 
959(f) provides for the allocation of section 956 amounts first to PTI 
arising from a United States shareholder's income inclusions under 
section 951(a)(1)(A) and then to non-PTI. In addition, section 959(f) 
provides a priority rule under which actual distributions of earnings 
and profits are taken into account before section 956 amounts.
    Certain amounts are treated as amounts included in the gross income 
of a United States shareholder under section 951(a)(1)(A) for purposes 
of section 959. For example, section 959(e) generally provides that any 
amount included in the gross income of any person as a dividend by 
reason of subsection (a) or (f) of section 1248 is treated for purposes 
of section 959 as an amount included in the gross income of such person 
under section 951(a)(1)(A).
    Section 961 authorizes the Secretary of the Treasury to promulgate 
regulations adjusting the basis of stock in a foreign corporation, as 
well as the basis of other property by reason of which a United States 
person is considered under section 958(a) to own stock in a foreign 
corporation. Section 961(a) generally provides for an increase in a 
United States shareholder's basis in its CFC stock, or in the property 
by reason of which it is considered to own such stock, by the amount 
required to be included in its gross income under section 951(a) with 
respect to such stock.
    Under section 961(b), and the regulations thereunder, when a United 
States person receives an amount which is excluded from gross income 
under section 959(a), the adjusted basis of the foreign corporation 
stock or the property by reason of which the shareholder is considered 
to own such stock is reduced by the amount of the exclusion. In 
addition, section 961(c) generally provides for regulations under which 
adjustments similar to those provided for under section 961(a) and (b) 
are made to the basis of stock in a CFC which is owned by another CFC 
(and certain other CFCs in the chain) for the purpose of determining 
the amount included under section 951 in the gross income of a United 
States shareholder.
    Section 959 was enacted so that PTI is excluded from gross income 
and, thus, not taxed again when distributed by the foreign corporation. 
Moreover, section 959 effects the relevant gross income exclusion at 
the earliest possible point. Thus, the ``allocation of distribution'' 
rules of section 959(c) ensure that distributions from the foreign 
corporation are to be paid first out of earnings and profits 
attributable to amounts that have been previously included in income by 
the United States shareholders. Accordingly, as a result of its section 
951(a)(1) inclusion, a United States shareholder is made whole by 
receiving, without further U.S. tax, PTI attributable to its stock in a 
foreign corporation before it receives any taxable distributions from 
the foreign corporation. Section 961, which adjusts basis in the stock 
in a foreign corporation for PTI attributable to such stock, also 
ensures that PTI is not taxed twice if the stock in the foreign 
corporation is sold before the PTI is distributed.
    The existing regulations under sections 959 and 961 were published 
in 1965. See TD 6795 (1965-1 CB 287). Minor amendments were made to the 
regulations in 1974, 1978, and 1983. See TD 7334 (1975-1 CB 246); TD 
7545 (1978-1 CB 245); TD 7893 (1983-1 CB 132). The regulations have not 
been updated since 1983 to reflect relevant

[[Page 51156]]

statutory changes in subsequent years. For example, section 959(e) 
(described above) was added by the Deficit Reduction Act of 1984 (Pub. 
L. 98-369). Section 304(b)(6) was enacted by the IRS Restructuring and 
Reform Act of 1998 (Pub. L. 105-206) and provides that in the case of a 
section 304 transaction in which the acquiring corporation or the 
issuing corporation is a foreign corporation, the Secretary of the 
Treasury is to prescribe regulations providing rules to prevent the 
multiple inclusion of any item in income and to provide appropriate 
basis adjustments, including rules modifying the application of 
sections 959 and 961. The determination of the amount includible in a 
United States shareholder's gross income as a result of a CFC's 
investments in United States property under section 956 was modified by 
the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66). 
Congress enacted section 961(c) (described in this preamble) as part of 
the Taxpayer Relief Act of 1997 (Pub. L. 105-34) and further modified 
the provision in the Gulf Opportunity Zone Act of 2005 (Pub. L. 109-
135). Section 986 was added to the Code by the Tax Reform Act of 1986 
(Pub. L. 99-514) and provides that earnings and profits of foreign 
corporations are maintained in the foreign corporation's functional 
currency and translated into United States dollars when taken into 
account by a United States person at the appropriate exchange rate 
specified in section 989.
    Further, in addition to raising issues about the complexities of 
section 959 in cross-chain stock sales subject to section 304(a)(1), 
commentators and taxpayers have raised a number of other issues that 
the current section 959 regulations do not clearly answer. For example, 
issues have been raised about distributions of PTI through a chain of 
CFCs and the status of PTI when a United States shareholder's stock in 
a foreign corporation is sold to a foreign person. There are numerous 
other examples where the existing section 959 regulations simply do not 
provide sufficient guidance. As a result, additional regulatory 
guidance is needed to address these and other section 959 issues. In 
addition, the IRS and Treasury Department are currently studying the 
new section 954(c)(6) rule enacted by the Tax Increase Prevention and 
Reconciliation Act of 2005 (Pub. L. 109-222), which provides for look-
through treatment of payments between related CFCs under the foreign 
personal holding company rules of section 954(c), to determine whether 
that rule requires any additional regulatory guidance under section 
959. Any such guidance will be included in a subsequent project.

Explanation of Provisions

    These proposed regulations provide guidance with respect to a 
number of issues that are not specifically addressed in the current 
regulations and also resolve some of the complexities raised regarding 
the application of sections 959 and 961. The guidance needed to answer 
open issues under sections 959 and 961 is intended to be consistent 
with the legislative intent of avoiding double taxation and allowing 
United States persons to receive the full benefit of their PTI at the 
earliest possible time.
    In order to carry out this legislative intent, these regulations 
propose new rules that are primarily based on maintaining shareholder 
accounts for PTI. As described in this preamble, maintaining 
shareholder accounts for PTI will better ensure that taxpayers are able 
to receive distributions of PTI before receiving taxable distributions, 
provide consistency for treatment of PTI by taxpayers and also, provide 
more rational and clear rules for resolving many of the issues that 
have been raised by taxpayers since the current section 959 regulations 
were issued. Under the proposed rules, earnings and profits will still 
be maintained at the foreign corporation level in the PTI and non-PTI 
categories described in section 959(c) on an aggregate basis with 
respect to all of the foreign corporation's outstanding shares.
    The proposed rules also would modify the current regulations to 
reflect amendments to the law since 1965, such as the addition of 
section 959(e) and section 961(c), and the modification of sections 304 
and 956. Minor changes have also been proposed to reflect changes in 
IRS titles and organizational units used in the current regulations.

A. Shareholder-Level Exclusion Under Section 959(a)

1. In General
    Section 959 provides rules for the exclusion from gross income of 
PTI. Prop. Reg. Sec.  1.959-1 describes the scope and purpose of the 
proposed regulations under section 959 in paragraph (a), and provides 
definitions in paragraph (b). Paragraph (c) generally provides for the 
exclusion from a covered shareholder's gross income of a distribution 
or section 956 amount based upon the amount of adjustments made to a 
shareholder's PTI accounts with respect to the relevant stock under 
Prop. Reg. Sec.  1.959-3 because of that distribution or section 956 
amount, as discussed below. A covered shareholder is defined to mean a 
person who is (1) a United States person who owns stock (within the 
meaning of section 958(a)) in a foreign corporation and who has had a 
section 951(a) inclusion with respect to its stock in such corporation, 
(2) a ``successor in interest'' (defined in this preamble), or (3) a 
corporation that is not described in (1) or (2) and that owns stock 
(within the meaning of section 958(a)) in a foreign corporation in 
which another corporation is a covered shareholder described in (1) or 
(2), if both corporations are members of the same consolidated group.
2. Shareholder PTI Accounts
    Prop. Reg. Sec.  1.959-1(d)(1) requires each covered shareholder of 
a foreign corporation to maintain a PTI account for each share of stock 
in a foreign corporation that the shareholder owns directly, or 
indirectly under section 958(a). Although the PTI account is share 
specific, as a matter of administrative convenience, Prop. Reg. Sec.  
1.959-1(d)(1) permits a shareholder to maintain the account with 
respect to an entire block of stock in foreign corporation if the PTI 
attributable to each share in the block is the same. For a discussion 
of the rules for maintaining a PTI account, see Part C of this 
discussion.
3. Successors in Interest
    Section 959(a) extends the exclusion from gross income for PTI to 
any United States person who acquires from any person any portion of 
the interest of a United States shareholder (as the term is defined in 
section 951(b) or section 953(c)(1)(A)) in a foreign corporation, but 
only to the extent of that portion and subject to such proof of the 
identity of such interest as the Secretary of the Treasury may by 
regulations prescribe. Consequently, Prop. Reg. Sec.  1.959-1(d)(2)(i) 
provides that a transferee of stock in a foreign corporation acquires 
the PTI account of the transferor for such stock and may exclude PTI 
from gross income under section 959(a) by reference to the PTI account 
for the stock acquired, if the transferee is a United States person 
that can prove the right to the exclusion (successor in interest).
    In order to establish a United States person's right to the 
exclusion, the proposed regulations provide that a person must attach a 
statement to its return that provides that it is excluding amounts from 
gross income because it is a successor in interest and that provides 
the name of the foreign corporation.

[[Page 51157]]

Further, a person must be prepared to provide, within 30 days upon the 
request of the Director of Field Operations, certain additional 
information (e.g., evidence showing that the earnings and profits for 
which an exclusion is claimed are PTI and that such amounts were not 
previously excluded from the gross income of a United States person). 
The information that may be required under these proposed regulations 
remains substantially unchanged from the information that is currently 
required to be included in a statement with the United States person's 
return under Sec.  1.959-1(d).
    Moreover, Prop. Reg. Sec.  1.959-1(d)(2)(ii) provides that the 
amount of the PTI account for stock that is transferred to someone who 
is not a successor in interest (e.g., a foreign person) is preserved 
unchanged during the period of such person's ownership of such stock. 
However, section 959(a) extends the section 959(a) exclusion to a 
United States person who acquires a United States shareholder's 
interest in a foreign corporation from any person. Accordingly, Prop. 
Reg. Sec.  1.959-1(d)(2)(i) provides that if a United States person 
acquires stock in a foreign corporation from a person that is not a 
successor in interest, such as a foreign person, and the United States 
person qualifies as a successor in interest, the United States person 
acquires the PTI account attributable to the foreign corporation stock 
acquired and may exclude PTI from gross income under section 959(a) by 
reference to the PTI account for such stock.

B. CFC-Level Exclusion Under Section 959(b)

    The earnings and profits of a CFC (lower-tier CFC) attributable to 
amounts which are, or have been, included in the gross income of a 
United States shareholder under section 951(a) shall not, when 
distributed through a chain of ownership described in section 958(a), 
be also included in the gross income of the CFC receiving the 
distribution (upper-tier CFC) in such chain for purposes of the 
application of section 951(a) to such upper-tier CFC with respect to 
such United States shareholder. Prop. Reg. Sec.  1.959-2 contains rules 
relating to the section 959(b) exclusion. These rules are intended to 
reflect the holding of Rev. Rul. 82-16 (1982-1 CB 106) as well as rules 
regarding cross-chain sales of stock in a foreign corporation by a CFC 
subject to section 304(a)(1).
    In Rev. Rul. 82-16, an upper-tier CFC, 70 percent owned by a United 
States shareholder (USP) and 30 percent owned by a foreign person, 
received a distribution of $200x of earnings and profits from a lower-
tier CFC wholly-owned by the upper-tier CFC. The lower-tier CFC had 
earned $100x of subpart F income for the year of the distribution ($70x 
of which was included in USP's gross income under section 951(a)) and a 
$100 of non-subpart F income. The ruling held that $100x, rather than 
$70x, was excluded from the gross income of the upper-tier CFC under 
section 959(b). If only $70x were excluded, USP would be required to 
include in gross income $21x of subpart F income with respect to the 
remaining $30x included in the upper-tier CFC's gross income, resulting 
in a total inclusion in USP's gross income of $91x ((70% x $30) + (70% 
x $100)).
    Prop. Reg. Sec.  1.959-2(a) addresses the issue raised in Rev. Rul. 
82-16, and accordingly, provides that, the amount of the exclusion 
provided under section 959(b) is the entire amount distributed by the 
lower-tier CFC to the upper-tier CFC that gave rise (in whole or in 
part) to an adjustment of the United States shareholder's PTI accounts 
with respect to the stock it owns (within the meaning of section 
958(a)) in the lower-tier and upper-tier CFC under Prop. Reg. Sec.  
1.959-3(e)(3) (discussed in this preamble). This amount shall not 
exceed the earnings and profits of the distributor CFC attributable to 
amounts described in section 951(a). Such amount is not limited to the 
amount of the adjustment to the United States shareholder's PTI 
account.
    For example, under the facts of Rev. Rul. 82-16, the amount 
excluded from the upper-tier CFC's gross income for purposes of 
applying section 951(a) to USP under Prop. Reg. Sec.  1.959-2(a) is 
$100x. That is, the entire amount of the earnings and profits 
distributed by the lower-tier CFC that were attributable to amounts 
described in section 951(a) and that caused an adjustment to USP's PTI 
accounts in both the upper- and lower-tier CFCs under Prop. Reg. Sec.  
1.959-3(e)(3).
    Prop. Reg. Sec.  1.959-2(a) produces results consistent with Rev. 
Rul. 82-16, while ensuring that section 959(b) does not inappropriately 
prevent taxation under section 951(a) of a United States shareholder 
that has acquired stock in a CFC from a person who was not taxed on the 
subpart F income of a lower-tier CFC in the year such income was earned 
(e.g., a foreign person). For example, assume the same facts as those 
of Rev. Rul. 82-16, except that: (1) The subpart F income was earned by 
the lower-tier CFC in year 1, (2) another United States shareholder 
(DC) acquired the 30 percent interest in the upper-tier CFC in year 2 
from the foreign person with a zero PTI account, and (3) the lower-tier 
CFC did not distribute any property until year 3. Under Prop. Reg. 
Sec.  1.959-2(a), the section 959(b) exclusion for the upper-tier CFC 
for purposes of calculating USP's section 951(a) inclusion is still 
$100. In contrast, Prop. Reg. Sec.  1.959-2(a) provides that the 
section 959(b) exclusion for the upper-tier CFC for purposes of 
determining DC's section 951(a) inclusion is zero because none of the 
earnings and profits distributed were attributable to amounts included 
in income under section 951(a) with respect to DC or the person to whom 
DC is a successor in interest. Therefore, DC may have an income 
inclusion under section 951(a).
    In addition, Prop. Reg. Sec.  1.959-2(b) provides guidance with 
respect to the application of section 959(b) in the context of stock 
sales subject to section 304(a)(1) where the selling corporation is a 
CFC. The proposed regulations clarify that in the case of a deemed 
redemption resulting from a transaction described in section 304(a)(1) 
in which earnings and profits of an acquiring foreign corporation or an 
acquired foreign corporation or both are deemed distributed to a 
selling CFC, the selling CFC is deemed for purposes of section 959(b) 
to receive such distributions through a chain of ownership described 
under section 958(a).

C. Maintenance of PTI Accounts

    The proposed regulations contain detailed rules regarding the 
maintenance of shareholder PTI accounts and the maintenance of pools of 
PTI and non-PTI earnings and profits with respect to a foreign 
corporation, including rules for adjusting PTI accounts as a result of 
certain transactions. In addition, the proposed regulations provide 
rules for covered shareholders that have more than one share of stock 
in a foreign corporation and covered shareholders that are members of a 
consolidated group.
1. Shareholder-Level Accounting of PTI
    The proposed regulations provide that a covered shareholder's PTI 
account with respect to its stock in a foreign corporation shall 
identify the amounts included in gross income by a United States 
shareholder under section 951(a)(1)(A) with respect to the stock (PTI 
described in section 959(c)(2)), and amounts that are included in the 
gross income of a United States shareholder under section 951(a)(1)(B) 
and section 956 amounts that would have been so included but for 
section 959(a)(2) (PTI described in section 959(c)(1)) by such 
shareholder who owns the stock or by

[[Page 51158]]

a successor in interest. A shareholder account must also reflect these 
amounts in the functional currency of the foreign corporation and the 
annual dollar basis of each category of PTI in the account.
2. Corporate-Level Accounting of PTI
    The proposed regulations also provide that separate aggregate 
categories (with respect to all of the shareholders of a foreign 
corporation) of PTI described in section 959(c)(1) and section 
959(c)(2) and non-PTI shall be maintained with respect to foreign 
corporations. These categories of earnings and profits of a foreign 
corporation shall be maintained in the functional currency of the 
foreign corporation.
    The proposed regulations reflect the basic allocation rules under 
section 959(c) and (e). Those rules provide that distributions are 
considered to be made on a last-in first-out basis under section 
316(a), first from any PTI described in section 959(c)(1), then from 
PTI described in section 959(c)(2), and finally from non-PTI earnings 
and profits. In addition, section 956 amounts are allocated first to 
section 959(c)(2) earnings and profits and then to non-PTI earnings and 
profits. Consequently, PTI resulting from section 956 amounts in a 
prior year cannot exclude section 956 amounts in a later year from 
otherwise being included in a United States shareholder's gross income 
under section 951(a)(1)(B).
    The proposed regulations also provide that these allocations to PTI 
are made in conjunction with the shareholder-level adjustments to 
shareholder-level PTI accounts. In addition, any adjustments to 
earnings and profits required under section 312 or other sections of 
the Code or Treasury regulations shall generally be made only to non-
PTI.
3. Foreign Currency and Foreign Tax Credit Rules
    The proposed regulations also contain several rules that reflect 
the significant changes made to the foreign currency translation rules 
since the existing section 959 regulations were issued. The proposed 
regulations also contain rules regarding the foreign tax credit rules 
relating to PTI.
a. Dollar Basis Pooling Election
    The proposed regulations provide that a shareholder account must 
reflect the annual dollar basis of each category of PTI in the account. 
However, Prop. Reg.Sec.  1.959-3(b)(2)(ii) allows taxpayers to elect to 
treat distributions as being made from a single pool of post-1986 PTI 
for purposes of computing foreign currency gain or loss under section 
986(c) and basis adjustments under section 961 with respect to 
distributions of PTI. Thus, the reduction of the basis of shares in a 
foreign corporation and the foreign currency gain (or loss) 
attributable to a PTI distribution may both be determined by assigning 
a pro rata portion of the shareholder's aggregate dollar basis in its 
PTI account to a distribution of PTI. Notice 88-71 (1988-2 C.B. 374) 
makes this pooled approach available to taxpayers for purposes of 
section 986(c) at the taxpayer's election, but it does not provide 
guidance as to how this election is made. The proposed regulations 
provide that the election is made by using a dollar basis pool to 
compute foreign currency gain or loss under section 986(c) with respect 
to distributions of PTI of a foreign corporation, or to compute gain or 
loss with respect to its stock in the foreign corporation, whichever 
occurs first. Any subsequent change in the taxpayer's method of 
assigning dollar basis may only be made with the consent of the 
Commissioner.
b. Taxes and Other Expenses Attributable to PTI
    Prop. Reg. Sec.  1.959-3(c) provides that the corporate-level and 
shareholder-level PTI accounts are reduced by the functional currency 
amount of any income, war profits, or excess profits taxes imposed by 
any foreign country or a possession of the United States on or with 
respect to PTI as it is distributed by a foreign corporation to another 
foreign corporation through a chain of ownership described in section 
958(a). The proposed regulations further provide that such taxes are 
not added to the foreign corporation's post-1986 foreign income taxes 
pool, which is maintained with respect to the foreign corporation's 
post-1986 undistributed earnings. Rather, such taxes are maintained in 
a separate account and allowed as a credit pursuant to section 
960(a)(3) when the associated PTI is distributed to a United States 
shareholder (or its successor in interest). This rule ensures that 
amounts previously included in income that are used to pay creditable 
foreign taxes and so are unavailable for distribution to covered 
shareholders reduce the amount of PTI available for distribution but 
may be claimed as a foreign tax credit at the appropriate time. The 
proposed regulations also provide for corresponding adjustments to the 
covered shareholder's dollar basis of the PTI account.
    Prop. Reg. Sec.  1.959-3(d) provides that no expenses of a foreign 
corporation, other than creditable foreign income taxes described in 
Prop. Reg. Sec.  1.959-3(c), shall be allocated and apportioned to 
reduce PTI. By allocating all such expenses to non-PTI, this rule 
preserves the amount of PTI that may be distributed to a United States 
shareholder (or its successor in interest) in a non-taxable manner.
4. Adjustment of Shareholder PTI Accounts
    The proposed regulations generally provide rules for the adjustment 
of a covered shareholder's PTI account upon an inclusion of income by 
the shareholder under section 951, an actual distribution of earnings 
and profits to the shareholder, or a determination of a section 956 
amount with respect to the shareholder. The proposed regulations 
provide that the adjustment of PTI accounts occur according to the 
ordering rules of section 959 to determine the tax consequences of the 
various events. For purposes of determining the tax consequences to a 
covered shareholder in a foreign corporation, the proposed regulations 
provide that with respect to a foreign corporation's taxable year, and 
for the taxable year of the covered shareholder in which or with which 
such taxable year of the foreign corporation ends, the following events 
are taken into account in the following order: (1) The covered 
shareholder's inclusion of subpart F income or other amounts in gross 
income under section 951(a)(1)(A) for a taxable year, (2) any actual 
distributions of current or accumulated earnings and profits by a 
foreign corporation during the year, including redemptions treated as 
distributions of property to which section 301 applies pursuant to 
section 302(d); and (3) any investments in United States property by a 
CFC during the year resulting in a section 956 amount for one or more 
United States shareholders for the year. For purposes of the proposed 
regulations, amounts included in the gross income of any person as a 
dividend under section 1248(a) or (f) are generally treated as section 
951(a)(1)(A) inclusions.
    Thus, under Prop. Reg. Sec.  1.959-3(e)(2), at the end of the 
foreign corporation's taxable year, a shareholder's PTI account is 
first adjusted upward by the amount of any subpart F income included in 
gross income by the shareholder under section 951(a) with respect to 
the shareholder's stock in the foreign corporation. Next, a 
shareholder's PTI account is adjusted downward by the amount of any 
distributions of PTI to the shareholder with respect to the stock 
during the year. However, a PTI account can never be reduced below 
zero. Third, to the extent that any section 956

[[Page 51159]]

amount for the year is equal to (or less than) the amount of PTI 
described in section 959(c)(2), an amount of such PTI equal to the 
section 956 amount is reclassified as PTI described in section 
959(c)(1), but does not decrease the shareholder's PTI account. 
Finally, the shareholder's PTI account is adjusted upward by any 
section 956 amount in excess of the PTI described in section 959(c)(2) 
for the year. Corresponding adjustments are made to the dollar basis of 
the PTI account.
    This sequence of adjustments may be affected by the PTI sharing 
rules discussed below. Although the sharing rules are described in 
greater detail in Prop. Reg. Sec. Sec.  1.959-3(f) and (g), the order 
of the adjustments described in these sections are provided for in the 
steps described in Prop. Reg. Sec.  1.959-3(e)(2).
    The amount of a downward adjustment to the covered shareholder's 
PTI account under the second step described above is excluded from the 
shareholder's gross income under section 959(a)(1) and Prop. Reg. Sec.  
1.959-1(c)(1). Similarly, the amount of section 959(c)(2) PTI which is 
reclassified as section 959(c)(1) PTI under the third step described 
above is excluded from the covered shareholder's gross income under 
section 959(a)(2) and Prop. Reg. Sec.  1.959-1(c)(2).
5. Adjustment to PTI Accounts Upon Distributions to Intermediary CFCs
    Where stock in a lower-tier CFC is owned indirectly by a United 
States shareholder (or successor in interest) through one or more 
upper-tier CFCs in a chain of ownership under section 958(a), the 
shareholder's PTI accounts with respect to stock in the relevant 
foreign corporations in the chain must be adjusted when the lower-tier 
CFC makes a distribution of PTI to an upper-tier CFC in the chain. 
Prop. Reg. Sec.  1.959-3(e)(3) provides that the shareholder's PTI 
account with respect to stock in the distributing foreign corporation 
is decreased by the amount of PTI distributed with respect to such 
stock, and the shareholder's PTI account with respect to stock in the 
recipient foreign corporation is increased by the same amount (in 
addition to being increased by any non-PTI portion of the distribution 
that results in an inclusion in the shareholder's gross income under 
section 951(a) as subpart F income of the receiving CFC). Prop. Reg. 
Sec.  1.959-3(e)(3) provides a spot rate translation convention for 
cases in which the distributing and receiving corporations use 
different functional currencies.
6. Effect of Deficits in Earnings and Profits
    Prop. Reg. Sec.  1.959-3(e)(5) provides that a shareholder's PTI 
account is not adjusted to take into account any deficit in earnings 
and profits of the corporation for the taxable year. Deficits will 
reduce only the non-PTI of the corporation under section 312.
7. Distribution in Excess of the PTI Account
    Under Prop. Reg. Sec.  1.959-3(e)(5), when a foreign corporation 
distributes to a shareholder an amount exceeding the PTI account with 
respect to the relevant stock, the treatment of the excess amount 
depends on the facts and circumstances. Subject to the PTI sharing 
rules discussed below, the excess amount of a distribution generally is 
treated as a dividend under section 316 to the extent of the 
distributing corporation's non-PTI, and thereafter as a return of 
capital (reducing the shareholder's basis in its stock in the foreign 
corporation) under section 301(c)(2). Any portion of the distribution 
remaining after the shareholder's basis of the stock in the foreign 
corporation is reduced to zero is treated as capital gain under section 
301(c)(3).
8. PTI Sharing Rules
    The purpose of section 959 is to prevent double taxation of amounts 
that have been previously included in gross income by a United States 
shareholder under section 951(a) and, importantly, to prevent such 
double taxation at the earliest possible time. Section 951 subjects a 
United States shareholder to tax on undistributed income of a CFC, so 
the ordering rule of section 959(c) effectuates this statutory purpose 
by treating actual distributions to the shareholder as coming first out 
of PTI. As one of the goals of section 959 is to treat distributions as 
first coming from PTI, the IRS and Treasury Department believe that a 
United States shareholder (or successor in interest) should be entitled 
to exclude from gross income under section 959(a) all of a foreign 
corporation's distributions of earnings and profits and section 956 
amounts to the extent of PTI associated with any of the United States 
person's stock in the foreign corporation, before that person is 
required to include additional distributions of earnings and profits or 
section 956 amounts of the foreign corporation in gross income.
    The IRS and Treasury Department believe that similar rules should 
apply with respect to members of a consolidated group. Although the 
taxation of a consolidated group represents a hybrid of single and 
separate entity treatment, consolidated attribute utilization is 
generally based on single entity treatment. For example, when 
determining consolidated taxable income for a given year, subject to 
certain limitations, the group is entitled to offset its income with 
any consolidated net operating losses that are carried forward to such 
year (regardless of which member or members recognized the income or 
incurred the losses). Given the broad regulatory authority of section 
1502 and the statutory mandate in section 959 to allow United States 
shareholders (or successors in interest) to recover PTI at the earliest 
possible time, the IRS and Treasury Department believe that PTI is an 
attribute for which single entity treatment of United States 
consolidated groups is appropriate. As a result, the IRS and Treasury 
Department have concluded that a shareholder of a foreign corporation 
that is a member of a consolidated group should be entitled to exclude 
from gross income under section 959(a) all of a foreign corporation's 
distributions of earnings and profits, and section 956 amounts, to the 
extent of PTI associated with any stock in the foreign corporation 
owned by any member of the consolidated group (with appropriate 
adjustments). Therefore, the proposed regulations provide for sharing 
of PTI between accounts of different members of a consolidated group in 
a manner similar to the sharing of PTI between multiple accounts of a 
single shareholder, as described below.
a. Shareholder With Multiple PTI Accounts
    Prop. Reg. Sec.  1.959-3(f) provides a special rule that applies 
when a United States shareholder has more than one PTI account with 
respect to stock in a foreign corporation, and during its taxable year, 
the foreign corporation distributes earnings and profits in an amount 
that exceeds one or more of such PTI accounts. In that case, the 
shareholder's PTI accounts with respect to all of its other stock in 
the foreign corporation that it owns at the end of the foreign 
corporation's taxable year shall be reduced, in the aggregate, by the 
amount of the excess, on a pro rata basis by reference to the level of 
such PTI accounts (after such PTI accounts have first been adjusted to 
reflect any distributions of earnings and profits with respect to those 
blocks of stock).
    The aggregate reduction in such PTI accounts produces a 
corresponding increase in the PTI account that would have been exceeded 
by the amount

[[Page 51160]]

distributed but for the operation of this sharing rule. That PTI 
account is then reduced to zero to reflect the amount of earnings and 
profits distributed with respect to that block of stock during the 
year.
    Similarly, if the section 959(c)(2) portion of a PTI account for a 
share in a foreign corporation is exceeded by the section 956 amount 
attributable to the share, the aggregate amount of the section 
959(c)(2) portion of the PTI accounts for all other stock of the 
foreign corporation owned by the shareholder on the last day of the 
foreign corporation's taxable year is available for purposes of 
excluding the section 956 amount from gross income under section 
959(a)(2).
b. Shareholder That Is a Member of a Consolidated Group
    Prop. Reg. Sec.  1.959-3(g) provides similar sharing rules where 
stock in a foreign corporation is owned by two or more members of a 
consolidated group. For purposes of administrative convenience, 
however, this rule focuses on whether the shareholders are members of 
the same consolidated group at the end of the foreign corporation's 
taxable year and not at the time the PTI in question was generated. 
Specifically, if the total amount of a United States shareholder's PTI 
account or accounts for stock in a foreign corporation is exceeded by 
the amount of earnings and profits distributed by the corporation to 
the shareholder during the year, the PTI accounts of other members of 
the shareholder's consolidated group who own stock in the corporation 
are decreased on a pro rata basis (after adjustment) and the 
shareholder's PTI accounts or account, as the case may be, will be 
correspondingly increased and then adjusted downward to zero.
    Similarly, if the total amount of the section 959(c)(2) portion of 
a shareholder's PTI account or accounts for stock in a foreign 
corporation is exceeded by the shareholder's section 956 amount for the 
year, the aggregate amount of the section 959(c)(2) portions of the PTI 
accounts of other member's of the shareholder's consolidated group at 
the end of the foreign corporation's taxable year who own stock in the 
foreign corporation will be available to the shareholder for purposes 
of excluding the section 956 amount from gross income under section 
959(a)(2).
9. Redemptions, Including Section 304 Transactions
    The proposed regulations provide rules for the adjustment of PTI 
accounts and the effect on the corporation's non-PTI when a foreign 
corporation redeems its stock. The effect of a distribution in 
redemption of stock (redemption distribution) depends on whether the 
redemption distribution is treated as a payment in exchange for the 
stock under sections 302(a) or 303, or as a distribution of property to 
which section 301 applies pursuant to section 302(d).
a. Redemptions Treated as Sales or Exchanges
    If a redemption distribution is treated as a sale or exchange, 
generally the amount chargeable to the earnings and profits of the 
redeeming corporation is limited by section 312(n)(7) to a ratable 
share of the earnings and profits. Where the redeeming corporation is a 
foreign corporation and there is a PTI account with respect to the 
redeemed stock, the proposed regulations provide that section 312(n)(7) 
is applied by limiting the reduction of the redeeming corporation's 
earnings and profits to an amount which does not exceed the sum of (1) 
the amount in the PTI account for the redeemed stock and (2) a ratable 
share of the corporation's non-PTI attributable to the redeemed shares, 
if any. This sum first reduces the PTI account with respect to the 
redeemed stock and then reduces the corporation's non-PTI.
    The IRS and Treasury Department believe that, in the case where a 
foreign corporation redeems stock in a transaction treated as a sale or 
exchange for an amount that is less than the PTI account for that 
stock, it would be inappropriate to transfer the remainder of the PTI 
account to any other PTI accounts with respect to stock in the foreign 
corporation. Under section 961(a) and the regulations thereunder, the 
basis of stock in a foreign corporation is increased by the amount 
included in the shareholder's gross income under section 951(a), which 
is reflected in the PTI account with respect to such stock. The 
shareholder recovers this increase in basis upon a sale of the stock, 
preventing the shareholder from suffering double taxation on gain 
attributable to PTI (or in appropriate cases enabling the shareholder 
to recognize a loss). Consequently, under the proposed regulations, the 
remainder of the PTI account in the situation described above is not 
transferred to any other PTI account because it was already accounted 
for in the treatment of the redemption as a sale or exchange. Any 
corporate-level PTI attributable to the redeemed stock that remains 
after the reduction under section 312(n)(7) loses its character as PTI 
and is reclassified as non-PTI of the corporation. The IRS and Treasury 
Department believe that because the redeemed shareholder is able to use 
the loss resulting from the redemption to offset other income, its 
excess PTI must become other earnings and profits that remain with the 
foreign corporation so that those earnings and profits can be subject 
to tax.
b. Redemptions Treated as Section 301 Distributions
    If, under section 302(d), a redemption distribution is treated as a 
distribution of property to which section 301 applies, the proposed 
regulations provide that the rules of Prop. Reg. Sec. Sec.  1.959-1 and 
-3 shall apply in the same manner as they do to any other distribution 
to which section 301(c) applies. The PTI account with respect to the 
redeemed stock is reduced by the amount of the redemption distribution. 
If the redemption distribution exceeds such PTI account, the sharing 
rules described above regarding nonredemptive distributions of earnings 
and profits will be applicable. If, instead, the PTI account with 
respect to the redeemed shares exceeds the amount of the redemption 
distribution, the excess PTI is reallocated to the PTI accounts with 
respect to the remaining stock in the foreign corporation in a manner 
consistent with, and in proportion to, the proper adjustments of the 
basis in the remaining shares of the foreign corporation pursuant to 
Sec.  1.302-2(c). Accordingly, the proposed regulations also require 
proper adjustment of the basis of the shareholder's remaining stock in 
the redeeming corporation, and of stock in the redeeming corporation 
held by related persons (not limited to members of the shareholder's 
consolidated group).
c. Deemed Redemptions Under Section 304
    With respect to amounts paid to acquire stock in a transaction 
described in section 304(a)(1) and to which section 301(c) applies, the 
rules of Prop. Reg. Sec. Sec.  1.959-1 and -3 shall apply in the same 
manner as they do to any other distribution to which section 301(c) 
applies. As discussed below, the sharing rules described above are 
applicable to such redemption distributions that are treated as 
distributions of property to which section 301 applies. In addition, a 
covered shareholder receiving such a distribution of earnings and 
profits shall have a PTI account with respect to the stock of each 
foreign corporation deemed to have distributed its earnings and profits 
under section 304(b)(2).

[[Page 51161]]

    The Senate Report on the IRS Restructuring and Reform Act of 1998 
states with respect to the Secretary's authority to prescribe 
regulations resulting from the enactment of section 304(b)(6), ``It is 
expected that such regulations will provide for an exclusion from 
income for distributions from earnings and profits of the acquiring 
corporation and the issuing corporation that represent previously taxed 
income under subpart F. It further is expected that such regulations 
will provide for appropriate adjustments to the basis of stock held by 
the corporation treated as receiving the distribution or by the 
corporation that had the prior inclusion with respect to the previously 
taxed income.'' S. Rep. No. 105-174 at 179 (1998). The Conference 
agreement on the Act follows the Senate amendment. H.R. Conf. Rep. No. 
105-599 (1998).
    In the case where members of a United States consolidated group own 
stock in the issuing corporation and the acquiring corporation in a 
section 304(a)(1) transaction, the PTI accounting and sharing rules are 
intended to prevent double taxation of PTI, as intended by Congress in 
enacting sections 304(b)(6) and 959. A lower-tier, cross-chain 
acquisition of stock is generally subject to section 304(a)(1) and the 
transferor is treated as having transferred the stock in the issuing 
corporation to the acquiring corporation in exchange for stock in the 
acquiring corporation in a transaction to which section 351(a) applies. 
The acquiring corporation is treated as having redeemed those shares 
pursuant to a redemption distribution to which section 301 applies. As 
a result, in accordance with these regulations, a PTI account with 
respect to the stock in the foreign corporation that is treated as 
redeemed under section 304(a)(1) would be considered to arise at the 
time of the transaction. Any PTI accounts with respect to stock in the 
foreign corporation owned by other members of the shareholder's 
consolidated group would be reduced, and the PTI account of the 
redeemed shareholder increased (and then reduced to zero), under the 
PTI sharing rules described above.

D. Basis Adjustments

    The proposed regulations contain corresponding amendments to the 
regulations under section 961. These proposed regulations generally 
provide for increases and reductions in the basis of foreign 
corporation stock or other property through which foreign corporation 
stock is owned which match the increases and reductions in the PTI 
account with respect to such stock under the section 959 proposed 
regulations. The proposed regulations provide translation conventions 
for determining dollar basis adjustments under section 961 as a result 
of inclusions under section 951(a), distributions, and the foreign 
income taxes imposed on PTI as it is distributed through tiers of 
foreign corporations.
    The proposed regulations also implement section 961(c) by providing 
for adjustments to the basis of stock in a CFC that is held by another 
CFC in a chain of ownership described in section 958(a) for the purpose 
of determining the amount properly includible in gross income under 
section 951(a) by a United States shareholder upon a sale of stock in a 
lower-tier CFC.
    The regulations also contain rules describing basis adjustments 
resulting from cross-chain sales of foreign corporation stock under 
section 304(a)(1).

E. Basis Adjustments of Consolidated Group Members

    In the case where there is sharing of PTI among members of a U.S. 
consolidated group, the proposed regulations also clarify the 
interaction of the investment adjustment provisions in the consolidated 
return regulations with the section 961 basis adjustment provisions. 
Accordingly, the proposed regulations clarify that a consolidated group 
member who utilizes PTI of another member shall treat the increase in 
its PTI account as the receipt of tax exempt income under Prop. Reg. 
Sec.  1.1502-32(b)(3)(ii)(D), and a member whose PTI is utilized shall 
treat the reduction in its PTI account as a noncapital nondeductible 
expense under Prop. Reg. Sec.  1.1502-32(b)(3)(iii)(B) for purposes of 
making the investment adjustments required by Sec.  1.1502-32.

F. Proposed Effective Date and Transition Rule

    These regulations are proposed to apply to taxable years of foreign 
corporations beginning on or after the date these regulations are 
published as final regulations in the Federal Register, and taxable 
years of U.S. shareholders with or within which such taxable years of 
foreign corporations end. After these regulations become effective, 
foreign corporations and shareholders who are currently accounting for 
PTI in a manner other than that which is provided in these regulations 
may use any reasonable method to conform their current accounting of 
PTI to the rules provided in these regulations.

Request for Comments

A. Coordination of Shareholder-Level and Corporate-Level Accounts

    Prop. Reg. Sec.  1.959-3(e)(4) requires aggregate categories of PTI 
to be maintained at the corporate level and to be adjusted in 
accordance with adjustments made to the individual shareholder-level 
PTI accounts. No explicit rules are provided for how shareholder-level 
and corporate-level PTI information is to be shared between the 
shareholders of a foreign corporation. Comments are requested on 
whether such information sharing rules are necessary, and if so, how 
they should operate to ensure conformity between shareholder-level and 
corporate-level PTI accounting.

B. PTI and Consolidated Groups

    The application of the PTI sharing rules in the proposed 
regulations result in corresponding adjustments to the basis of stock 
in the sharing member corporations (and potentially higher tier 
members) held by other members of the shareholder's consolidated group. 
As noted above, the IRS and Treasury Department believe that the PTI 
sharing rules result in the corresponding basis adjustments under the 
current investment adjustment provisions. There is some tension between 
single and separate entity treatment of a consolidated group regarding 
the PTI sharing rules, and the IRS and Treasury Department are 
continuing to study how to balance the policy in favor of minimizing 
multiple income inclusions with the policy of preserving the location 
of attributes within a consolidated group. In particular, the IRS and 
Treasury Department are concerned about the potential basis shifting 
that may occur as a result of the PTI sharing rules. The IRS and 
Treasury Department request comments on the proposed rules and whether 
there are more appropriate rules for determining the basis of: (1) The 
stock in a member of the consolidated group that transfers PTI to 
another member of the consolidated group under the proposed 
regulations, (2) the stock in the member of the consolidated group that 
receives the transferred PTI under the proposed regulations and (3) the 
stock in the higher tier members of the consolidated group that 
directly or indirectly own the stock in the members of the consolidated 
group whose PTI accounts are affected by the sharing rules in the 
proposed regulations.
    The proposed regulations do not limit the application of the PTI 
sharing rules between members of a consolidated group to PTI earned by 
a foreign

[[Page 51162]]

corporation while the member with excess PTI was a member of such 
group. The IRS and Treasury Department did not adopt such a limitation 
out of concern that it would be overly complex and concern that such a 
limitation might not be consistent with the successor in interest rule. 
However, the IRS and Treasury Department recognize that some may 
believe that such a limitation might be more consistent with other 
attribute sharing rules in the consolidated group context. 
Consequently, the IRS and Treasury Department request comments as to 
whether a limitation on PTI sharing between members of a consolidated 
group similar to those of Sec.  1.1502-21(c) is appropriate.
    The IRS and Treasury Department believe that transactions described 
in section 304 are generally covered by the PTI sharing rules contained 
in Prop. Reg. Sec. Sec.  1.959-3(h)(1) through (3) that are applicable 
to typical redemptions. However, a specific rule has also been provided 
in Prop. Reg. Sec.  1.959-3(h)(4) that makes the PTI sharing rules 
explicitly applicable to transactions described in section 304(a)(1) 
that are treated as distributions of property to which section 301 
applies. The IRS and Treasury Department request comments regarding 
whether the PTI sharing rules should also be made explicitly applicable 
to transactions described in section 304(a)(1) that are treated as 
sales or exchanges or to transactions described in section 304(a)(2). 
In addition, comments are requested on whether rules should be provided 
to address the proper allocation of PTI after a transaction described 
in section 355.

C. PTI and Section 367(b) Transactions

    On November 15, 2000, the IRS and Treasury Department issued 
proposed regulations in the Federal Register (65 FR 69138) (REG-116050-
99) addressing (1) the carryover of certain tax attributes, such as 
earnings and profits and foreign income tax accounts, when two 
corporations combine in a section 367(b) transaction described in 
section 381, and (2) the allocation of certain tax attributes when a 
corporation distributes stock in another corporation in a section 
367(b) transaction (a foreign divisive transaction). In the preamble to 
those proposed regulations, the IRS and Treasury Department indicated 
that further guidance under section 959 would be required prior to 
addressing PTI issues that arise under section 367(b). At that time the 
IRS and Treasury Department requested comments with respect to proposed 
Sec.  1.367(b) regarding whether PTI should be transferable and retain 
its character as PTI for section 959 purposes, as well as the various 
implications that result from that determination. Additionally, in the 
2000 proposed regulations, the IRS and Treasury Department requested 
comments with respect to Sec.  1.367(b)-8 of the proposed regulations 
regarding the proper adjustment of the PTI of a CFC following a foreign 
divisive transaction.
    On August 8, 2006, the IRS and Treasury Department issued final 
regulations under Sec. Sec.  1.367(b)-3 and -7 with respect to the 
carryover of non-PTI amounts, among other things, while reserving final 
regulations under Sec.  1.367(b)-8 with respect to the allocation of 
tax attributes in foreign divisive transactions.
    The IRS and Treasury Department invite comments regarding the 
proper extension of the principles in these proposed regulations 
(including shareholder-level accounting of PTI and the PTI sharing 
rules) to Sec. Sec.  1.367(b)-3 and -7, as well as Prop. Reg. Sec.  
1.367(b)--8.

D. Foreign Currency Gain or Loss and Foreign Tax Credits With Respect 
to PTI Distributions

    Under section 986(c) of the Code, foreign currency gain or loss 
with respect to distributions of PTI that is attributable to movements 
in exchange rates between the date(s) of the income inclusion that 
created the PTI and the distribution of such PTI shall be recognized 
and treated as ordinary income or loss from the same source as the 
associated income inclusion. The IRS and Treasury Department invite 
comments regarding additional guidance that may be needed under section 
986(c) in light of the proposed regulations under section 959. The IRS 
and Treasury Department also invite comments regarding additional 
guidance that is needed to ensure that section 960(a)(3) provides 
appropriate foreign tax credit rules with respect to taxes imposed on 
PTI that is distributed through tiers of foreign corporations.

E. Section 962

    The IRS and Treasury Department have not determined how the 
proposed accounting rules and basis rules should apply to a United 
States individual shareholder who has elected to be taxed as a 
corporation under section 962. Therefore, those rules are reserved for 
future study. The IRS and Treasury Department, however, invite comments 
about how the PTI rules and basis rules should apply for purposes of 
section 962.

F. Section 961(c) Basis Adjustments

    Section 961(c) is by its terms only applicable for purposes of 
determining the amount included under section 951 in gross income of a 
United States shareholder. Consequently, the IRS and Treasury 
Department have so limited the application of Prop. Reg. Sec.  1.961-3. 
In the event of a sale of a lower-tier CFC by an upper-tier CFC for 
which the rules of section 961(c) are implicated in determining the 
gain on the sale, the basis created in the lower-tier CFC stock for 
purposes of applying section 951 would not apply, for example, to 
determine the earnings and profits of the upper-tier CFC. However, the 
IRS and Treasury Department are concerned about the potential double 
taxation that may result in the event of the later distribution of 
these earnings and profits to a United States person.

G. Transition Rule

    These regulations are proposed to apply to taxable years of foreign 
corporations beginning on or after the date these regulations are 
published as final regulations in the Federal Register, and taxable 
years of U.S. shareholders with or within which such taxable years of 
foreign corporations end. After these regulations become effective, 
foreign corporations and shareholders who are currently accounting for 
PTI in a manner other than that which is provided in these regulations 
may use any reasonable method to conform their current accounting of 
PTI to the rules provided in these regulations. Comments are requested 
on whether more detailed transition rules should be provided, and, if 
so, how such transition rules should operate to conform existing 
methods of PTI accounting with the method of PTI accounting required by 
these regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations and because 
the proposed regulation does not impose a collection of information on 
small entities, the Regulatory Flexibility Act (5 U.S.C. Ch. 6) does 
not apply. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
business.

[[Page 51163]]

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these regulations is Ethan Atticks, Office 
of Associate Chief Counsel (International). However, other personnel 
from the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income Taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing all entries for Sec.  1.1502-12 and Sec.  1.1502-32 and by 
adding entries in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.959-1 also issued under 26 U.S.C. 304(b)(6), 959 and 
1502.
    Section 1.959-2 also issued under 26 U.S.C. 304(b)(6) and 959.
    Section 1.959-3 also issued under 26 U.S.C. 304(b)(6), 959 and 
1502.
    Section 1.959-4 also issued under 26 U.S.C. 304(b)(6) and 959. * 
* *
    Section 1.961-1 also issued under 26 U.S.C. 961.
    Section 1.961-2 also issued under 26 U.S.C. 961.
    Section 1.961-3 also issued under 26 U.S.C. 961.
    Section 1.961-4 also issued under 26 U.S.C. 304(b)(6) and 961. * 
* *
    Section 1.1502-12 also issued under 26 U.S.C. 959, 961 and 1502. 
* * *
    Section 1.1502-32 also issued under 26 U.S.C. 301, 959, 961, 
1502 and 1503. * * *

    Par. 2. Section 1.959-1 is revised to read as follows:


Sec.  1.959-1  Exclusion from gross income of United States persons of 
previously taxed earnings and profits.

    (a) In general. Section 959(a) provides an exclusion whereby the 
earnings and profits of a foreign corporation attributable to amounts 
which are, or have been, included in a United States shareholder's 
gross income under section 951(a) are not taxed again when distributed 
(directly or indirectly through a chain of ownership described in 
section 958(a)) from such foreign corporation to such shareholder (or 
any other United States person who acquires from any person any portion 
of the interest of such United States shareholder in such foreign 
corporation, but only to the extent of such portion, and subject to 
such proof of the identity of such interest as the Secretary may by 
regulations prescribe). Section 959(a) also excludes from gross income 
of a United States shareholder earnings and profits attributable to 
amounts which are, or have been, included in the gross income of such 
shareholder under section 951(a) which would, but for section 
959(a)(2), be again included in the gross income of such shareholder 
(or any other United States person who acquires from any person any 
portion of the interest of such United States shareholder in such 
foreign corporation, but only to the extent of such portion, and 
subject to such proof of the identity of such interest as the Secretary 
may by regulations prescribe) under section 951(a)(1)(B). Section 
959(b) provides that for purposes of section 951(a), the earnings and 
profits of a CFC attributable to amounts that are, or have been, 
included in the gross income of a United States shareholder under 
section 951(a) shall not, when distributed through a chain of ownership 
described in section 958(a), be included in the gross income of a CFC 
in such chain for purposes of the application of section 951(a) to such 
CFC with respect to such United States shareholder (or any other United 
States person who acquires from any person any portion of the interest 
of such United States shareholder in such foreign corporation, but only 
to the extent of such portion, and subject to such proof of the 
identity of such interest as the Secretary may by regulations 
prescribe). Section 959(c) provides rules for the allocation of 
distributions to the various categories of previously taxed earnings 
and profits of a foreign corporation and the foreign corporation's non-
previously taxed earnings and profits. Section 959(d) provides that, 
except as provided in section 960(a)(3), any distribution excluded from 
gross income under section 959(a) shall be treated as a distribution 
which is not a dividend; except that such distributions shall 
immediately reduce earnings and profits. Section 959(e) provides that, 
for purposes of sections 959 and 960(b), any amount included in the 
gross income of any person as a dividend by reason of subsection (a) or 
(f) of section 1248 shall be treated as an amount included in the gross 
income of such person (or, in any case to which section 1248(e) 
applies, of the