Guidance Related to Section 951A (Global Intangible Low-Taxed Income), 51072-51111 [2018-20304]

Download as PDF 51072 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–104390–18] RIN 1545–BO54 Guidance Related to Section 951A (Global Intangible Low-Taxed Income) Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document contains proposed regulations implementing section 951A of the Internal Revenue Code. Section 951A was added to the Internal Revenue Code by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. This document also contains proposed regulations under sections 951, 1502, and 6038. These proposed regulations would affect United States shareholders of controlled foreign corporations. DATES: Written or electronic comments and requests for a public hearing must be received by November 26, 2018. ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR (REG–104390–18), Room 5203, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (indicate REG– 104390–18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG–104390– 18). FOR FURTHER INFORMATION CONTACT: Concerning proposed regulations §§ 1.951–1, 1.951A–0 through 1.951A–7, 1.6038–2, and 1.6038–5, Melinda E. Harvey or Michael Kaercher at (202) 317–6934; concerning proposed regulations §§ 1.1502–12, 1.1502–13, 1.1502–32, and 1.1502–51, Austin Diamond-Jones at (202) 317–6847 or Kevin M. Jacobs at (202) 317–5332; concerning submissions of comments or requests for a public hearing, Regina L. Johnson at (202) 317–6901 (not toll free numbers). SUPPLEMENTARY INFORMATION: daltland on DSKBBV9HB2PROD with PROPOSALS2 SUMMARY: Background This document contains proposed amendments to 26 CFR part 1 under sections 951, 951A, 1502, and 6038 (the ‘‘proposed regulations’’). Added to the Internal Revenue Code (‘‘Code’’) by VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 section 14201(a) of the Tax Cuts and Jobs Act, Public Law 115–97 (2017) (‘‘the Act’’), section 951A requires a United States shareholder (‘‘U.S. shareholder’’) of any controlled foreign corporation (‘‘CFC’’) for any taxable year to include in gross income the shareholder’s global intangible lowtaxed income (‘‘GILTI’’) for such taxable year. Section 14201(d) of the Act provides that section 951A applies to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. The proposed regulations under section 951A provide guidance for U.S. shareholders to determine the amount of GILTI to include in gross income (‘‘GILTI inclusion amount’’). Section 14201(b) of the Act added two new foreign tax credit provisions relating to GILTI—section 960(d) provides a foreign tax credit for taxes properly attributable to tested income taken into account by a domestic corporation under section 951A, and section 904(d)(1)(A) provides that any amount included in gross income under section 951A (other than passive category income) is treated as a separate category of income for purposes of section 904. In addition, section 14202(a) of the Act added section 250 to the Code providing domestic corporations a deduction equal to a percentage of their GILTI inclusion amount and foreign-derived intangible income, subject to a taxable income limitation. The proposed regulations do not include any rules relating to foreign tax credits or the deduction under section 250. Rules relating to foreign tax credits and the deduction under section 250 will be included in separate notices of proposed rulemaking. It is anticipated that the proposed regulations relating to foreign tax credits will provide rules for assigning the section 78 gross-up attributable to foreign taxes deemed paid under section 960(d) to the separate category described in section 904(d)(1)(A). Before the Act, section 951(b) defined a U.S. shareholder of a foreign corporation as a United States person (‘‘U.S. person’’) that holds at least 10 percent of the total combined voting power of all classes of stock entitled to vote in a foreign corporation. Section 14214(a) of the Act amended this definition to include a U.S. person that holds at least 10 percent of the total value of shares of all classes of stock of the foreign corporation. Section 14215(a) of the Act amended section 951(a)(1) to eliminate the requirement that a foreign corporation must be a CFC PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 for an uninterrupted period of 30 days or more in order to give rise to an inclusion under section 951(a)(1) (the ‘‘30-day requirement’’). These amendments apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end. See sections 14214(b) and 14215(b) of the Act. The proposed regulations under section 951 incorporate these amendments into the regulations and provide other guidance necessary for U.S. shareholders to coordinate subpart F and GILTI. Explanation of Provisions I. Section 951A A. Overview The Act established a participation exemption system under which certain earnings of a foreign corporation can be repatriated to a corporate U.S. shareholder without U.S. tax. See section 14101(a) of the Act and section 245A. However, Congress recognized that, without any base protection measures, the participation exemption system could incentivize taxpayers to allocate income—in particular, mobile income from intangible property—that would otherwise be subject to the full U.S. corporate tax rate to CFCs operating in low- or zero-tax jurisdictions. See Senate Committee on the Budget, 115th Cong., Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 365 (Comm. Print 2017) (‘‘Senate Explanation’’). Therefore, Congress enacted section 951A in order to subject intangible income earned by a CFC to U.S. tax on a current basis, similar to the treatment of a CFC’s subpart F income under section 951(a)(1)(A). However, in order to not harm the competitive position of U.S. corporations relative to their foreign peers, GILTI of a corporate U.S. shareholder is taxed at a reduced rate by reason of the deduction under section 250 (with the resulting U.S. tax further reduced by a portion of foreign tax credits under section 960(d)). Id. Also, due to the administrative difficulty in identifying income attributable to intangible assets, in contrast to income from tangible assets, intangible income (and thus GILTI) is determined for purposes of section 951A based on a formulaic approach, under which a 10-percent return is attributed to certain tangible assets (‘‘qualified business asset investment’’ or ‘‘QBAI’’) and then each dollar of certain income above such ‘‘normal return’’ is effectively treated as intangible income. Id. at 366. E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules Section 951A(a) provides that a U.S. shareholder of any CFC for a taxable year must include in gross income its GILTI for that year. A GILTI inclusion is treated in a manner similar to a section 951(a)(1)(A) inclusion of a CFC’s subpart F income for many purposes of the Code. See section 951A(f)(1). However, a GILTI inclusion is determined in a manner that is fundamentally different from that of an inclusion under section 951(a)(1)(A). Subpart F income is determined at the level of a CFC, and then a U.S. shareholder that owns stock directly or indirectly in the CFC generally includes in gross income its pro rata share of the CFC’s subpart F income. The amount of the shareholder’s section 951(a)(1)(A) inclusion with respect to one CFC is not taken into account in determining the shareholder’s section 951(a)(1)(A) inclusion with respect to another CFC. A U.S. shareholder’s pro rata share of a CFC’s subpart F income is generally the final step in determining its section 951(a)(1)(A) inclusion. Similar to an inclusion under section 951(a)(1)(A), the determination of a U.S. shareholder’s GILTI inclusion amount begins with the calculation of certain items of each CFC owned by the shareholder, such as tested income, tested loss, or QBAI. A U.S. shareholder then determines its pro rata share of each of these CFC-level items in a manner similar to a shareholder’s pro rata share of subpart F income under section 951(a)(2). See section 951A(e)(1). However, in contrast to an inclusion under section 951(a)(1)(A), the U.S. shareholder’s pro rata shares of these items are not amounts included in gross income, but rather amounts taken into account by the shareholder in determining the GILTI included in the shareholder’s gross income. The U.S. shareholder aggregates (and then nets or multiplies) its pro rata share of each of these items into a single shareholderlevel amount—for example, aggregate tested income reduced by aggregate tested loss becomes net CFC tested income and aggregate QBAI multiplied by 10 percent becomes deemed tangible income return. A shareholder’s GILTI inclusion amount for a taxable year is then calculated by subtracting one aggregate shareholder-level amount from another—the shareholder’s net deemed tangible income return (‘‘net DTIR’’) is the excess of deemed tangible income return over certain interest expense, and, finally, its GILTI inclusion amount is the excess of its net CFC tested income over its net DTIR. As explained above, a U.S. shareholder does not compute a separate GILTI inclusion amount with VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 respect to each CFC for a taxable year, but rather computes a single GILTI inclusion amount by reference to all its CFCs. Cf. section 951A(f)(2) (allocating the U.S. shareholder’s GILTI inclusion amount to each tested income CFC for purposes of various sections of the Code). Because a U.S. shareholder’s GILTI inclusion amount is determined based on the relevant items of all the CFCs of which it is a U.S. shareholder, the effect of the provision is generally to ensure that a U.S. shareholder is taxed on its GILTI wherever (and through whichever CFC) derived. See, for example, Senate Explanation at 366 (‘‘The Committee believes that calculating GILTI on an aggregate basis, instead of on a CFC-by-CFC basis, reflects the interconnected nature of a U.S. corporation’s global operations and is a more accurate way of determining a U.S. corporation’s global intangible income.’’). The proposed regulations under section 951A follow an outline similar to the description in this overview. Proposed §§ 1.951A–2 through 1.951A– 4 provide detailed guidance on items determined at the CFC level—that is, tested income and tested loss, QBAI, and the items necessary to determine the amount of certain interest expense that reduces net DTIR. Proposed § 1.951A–1(d) provides rules for determining the U.S. shareholder’s pro rata share of these CFC-level items. Finally, proposed § 1.951A–1(c) provides rules describing the aggregation of the U.S. shareholder’s pro rata share amounts to determine the shareholder’s GILTI inclusion amount. B. General Rules and Definitions 1. Inclusion of GILTI in Gross Income Proposed § 1.951A–1 provides general rules to determine a U.S. shareholder’s GILTI inclusion amount and associated definitions. Some of the definitions distinguish between a CFC’s taxable year and a U.S. shareholder’s taxable year. For example, a ‘‘U.S. shareholder inclusion year’’ refers to the relevant taxable year of the U.S. shareholder and is defined as a taxable year of the U.S. shareholder that includes a CFC inclusion date (as that term is defined in the proposed regulations) of the CFC. See proposed § 1.951A–1(e)(4). A ‘‘CFC inclusion year’’ refers to the relevant taxable year of the CFC beginning after December 31, 2017 (the effective date of section 951A for a foreign corporation that is a CFC). See proposed § 1.951A– 1(e)(2). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 51073 2. Determination of Net DTIR Proposed § 1.951A–1(c)(3) defines net DTIR, which is computed at the U.S. shareholder level based on QBAI (as defined in proposed § 1.951A–3(b)) held by the shareholder’s CFCs and offsets the shareholder’s net CFC tested income for purposes of determining the shareholder’s GILTI inclusion amount. A CFC’s QBAI is equal to its aggregate average adjusted bases in specified tangible property, which is defined as tangible property used in the production of tested income. See section 951A(d)(2)(A) and proposed § 1.951A– 3(c)(1). Consistent with the statute and the conference report accompanying the Act (‘‘Conference Report’’), the proposed regulations clarify that a tested loss CFC does not have specified tangible property. See H.R. Rep. No. 115–466, at 642, fn. 1536 (2017) (Conf. Rep.) and proposed § 1.951A–3(b), (c)(1), and (g)(1). Accordingly, for purposes of calculating its GILTI inclusion amount, a U.S. shareholder does not take into account the tangible property of a tested loss CFC in calculating its aggregate pro rata share of QBAI, its deemed tangible income return, or its net DTIR. 3. Determination of Pro Rata Share Section 951A(e)(1) provides that, for purposes of determining a U.S. shareholder’s GILTI inclusion amount, the shareholder’s pro rata share of a CFC’s tested income, tested loss, and QBAI ‘‘shall be determined under the rules of section 951(a)(2) in the same manner as such section applies to subpart F income.’’ Accordingly, the proposed regulations incorporate the pro rata share rules of section 951(a)(2) and § 1.951–1(b) and (e), with appropriate modifications to account for the differences between subpart F income, on the one hand, and tested income, tested loss, and QBAI, on the other. Similar to the determination of a U.S. shareholder’s pro rata share of subpart F income, proposed § 1.951A– 1(d)(1) provides that a U.S. shareholder’s pro rata share of any CFC item necessary for calculating its GILTI inclusion amount is determined by reference to the stock such shareholder owns (within the meaning of section 958(a)) in the CFC (‘‘section 958(a) stock’’) as of the close of the CFC’s taxable year, including section 958(a) stock treated as owned by the U.S. shareholder through a domestic partnership under proposed § 1.951A– 5(c). See section I.F of this Explanation of Provisions for an explanation of proposed rules for domestic partnerships and their partners. E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51074 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules In several places, the provisions of proposed § 1.951A–1(d) reference section 951(a)(2) and proposed § 1.951– 1(e), which amends existing § 1.951– 1(e). See section II.A of this Explanation of Provisions for an explanation of the proposed modifications to § 1.951–1(e). Comments requested guidance on how to determine a preferred shareholder’s pro rata share of CFC items for purposes of GILTI. Rules relating to the allocation of tested income to preferred stock are included in proposed § 1.951A–1(d)(2) by cross-reference to proposed § 1.951– 1(e). In addition, the proposed regulations provide rules relating to a preferred shareholder’s pro rata share of tested loss and QBAI. A U.S. shareholder’s pro rata share of tested income generally is determined in the same manner as its pro rata share of subpart F income under section 951(a)(2) and § 1.951–1(b) and (e) (that is, based on the relative amount that would be received by the shareholder in a year-end hypothetical distribution of all the CFC’s current year earnings). See proposed § 1.951A–1(d)(2)(i). For purposes of determining a U.S. shareholder’s pro rata share of a CFC’s QBAI, the amount of QBAI distributed in the hypothetical distribution of section 951(a)(2)(A) and § 1.951–1(e) is generally proportionate to the amount of the CFC’s tested income distributed in the hypothetical distribution. See proposed § 1.951A–1(d)(3)(i). However, a special rule in the proposed regulations provides that if a CFC’s QBAI exceeds 10 times its tested income, so that the amount of QBAI allocated to preferred stock would exceed 10 times the tested income allocated to the preferred stock under the general proportionate allocation rule, the excess amount of QBAI is allocated solely to the CFC’s common stock. See proposed § 1.951A–1(d)(3)(ii). The proposed cap on QBAI allocated to a preferred shareholder (10 times tested income) is derived from the statutory cap on the amount of QBAI that may be used to compute GILTI (10 percent of aggregate QBAI). These rules in the proposed regulations ensure that the notional ‘‘normal return’’ associated with the CFC’s QBAI generally flows to the shareholders in a manner consistent with their economic rights in the earnings of the CFC. For illustration, see proposed § 1.951A–1(d)(3)(iii), Examples 1 and 2. For purposes of determining a U.S. shareholder’s pro rata share of a CFC’s tested loss, the amount distributed in the hypothetical distribution is the amount of the tested loss, rather than the CFC’s current earnings and profits, and the tested loss is distributed solely VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 with respect to the CFC’s common stock, except in certain cases involving dividend arrearages with respect to preferred stock and common stock with no liquidation value. See proposed § 1.951A–1(d)(4)(i) through (iii). In the latter case, the proposed regulations provide that any amount of tested loss that would otherwise be distributed in the hypothetical distribution to a class of common stock that has no liquidation value is instead distributed to the most junior class of equity with a positive liquidation value to the extent of the liquidation value. See proposed § 1.951A–1(d)(4)(iii). In subsequent years, tested income is allocated to any class of stock to the extent that tested loss was allocated to such class in prior years under this special rule. See proposed § 1.951A–1(d)(2)(ii). In addition, the proposed regulations provide that section 951(a)(2)(B) is applied to reduce tested losses, but modified to treat the amount of a dividend received by another person as equal to the amount of the tested loss, without regard to whether an actual dividend is made by the tested loss CFC. See proposed § 1.951A–1(d)(4)(i)(D). The effect of this rule is to reduce a shareholder’s pro rata share of tested loss in proportion to the number of days the shareholder did not own the stock of the tested loss CFC within the meaning of section 958(a). Each of these modifications is intended to ensure that the tested loss of a CFC is allocated to each U.S. shareholder in an amount commensurate with the economic loss borne by the shareholder by reason of the tested loss. Proposed § 1.951A–1(d)(5) and (6) provide rules for determining a shareholder’s pro rata share of ‘‘tested interest expense’’ and ‘‘tested interest income.’’ Tested interest expense and tested interest income are defined in proposed § 1.951A–4, which is discussed in section I.E of this Explanation of Provisions. A U.S. shareholder’s pro rata share of a CFC’s tested interest expense for a taxable year equals the amount by which the CFC’s tested interest expense reduces the shareholder’s pro rata share of tested income, increases the shareholder’s pro rata share of tested loss, or both. Conversely, a U.S. shareholder’s pro rata share of tested interest income for a taxable year equals the amount by which the CFC’s tested interest income increases the shareholder’s pro rata share of tested income, reduces the shareholder’s pro rata share of tested loss, or both. For example, tested interest income could both increase a U.S. shareholder’s pro rata share of PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 tested income and decrease its pro rata share of tested loss if a CFC with tested income for a taxable year would have, without regard to the tested interest income, a tested loss for the taxable year. The Department of the Treasury (‘‘Treasury Department’’) and the IRS request comments on the proposed approaches for determining a U.S. shareholder’s pro rata share of a CFC’s QBAI and tested loss, including how (or whether) to allocate tested loss of a CFC when no class of CFC stock has positive liquidation value. 4. Foreign Currency Translation Because GILTI is computed at the U.S. shareholder level, the tested income, tested loss, tested interest expense, tested interest income, and QBAI of a CFC that uses a functional currency other than the U.S. dollar must be translated into U.S. dollars. The appropriate exchange rate under section 989(b)(3) for income inclusions under section 951(a)(1)(A) is the average exchange rate for the taxable year of the foreign corporation. GILTI inclusion amounts are similar to section 951(a)(1)(A) inclusions in that both inclusions are determined based on certain income (and, in the case of GILTI, certain losses) of the CFC for the taxable year of the CFC that ends with or within the taxable year of the U.S. shareholder. Therefore, the proposed regulations prescribe the same translation rule that is used for subpart F income for translating a pro rata share of tested income, tested loss, tested interest expense, tested interest income, and QBAI. See proposed § 1.951A– 1(d)(1). Similarly, a U.S. shareholder’s GILTI inclusion amount that is allocated to a tested income CFC under section 951A(f)(2) is translated from U.S. dollars into the CFC’s functional currency using the average exchange rate for the taxable year of the tested income CFC. See proposed § 1.951A–6(b)(2)(iii). C. Tested Income and Tested Loss 1. Determination of Gross Income and Allowable Deductions Under section 951A(c)(2), tested income and tested loss are determined by beginning with a CFC’s gross income, excluding certain items (gross income after exclusions, ‘‘gross tested income’’), and then subtracting properly allocable deductions determined using rules similar to the rules of section 954(b)(5). While section 951A does not specifically address which expenses of a CFC are allowable as a deduction, existing rules under § 1.952–2 apply to determine the gross income and E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules deductions of a CFC taken into account in determining its subpart F income. The Treasury Department and the IRS have determined that due to the similarities between gross tested income and subpart F income (for example, gross tested income and subpart F income are both determined at the CFC level and taxed to a U.S. shareholder on a current basis), and the overlap between CFCs impacted by GILTI and subpart F (since a CFC can have both tested income and subpart F income), the determinations of gross income and allowable deductions for GILTI should be made in a manner similar to the determination of subpart F income. Accordingly, the proposed regulations require that the gross income and allowable deduction determinations are made under the rules of § 1.952–2. See proposed § 1.951A–2(c)(2). Under § 1.952–2(a)(1) and proposed § 1.951A– 2(c)(2), subject to the special rules in § 1.952–2(c), tested income or tested loss of a CFC is determined by treating the CFC as a domestic corporation taxable under section 11 and by applying the principles of section 61 and the regulations thereunder. Therefore, only items of deduction that would be allowable in determining the taxable income of a domestic corporation may be taken into account for purposes of determining a CFC’s tested income or tested loss. If an item of a CFC would be disallowed as a deduction in determining the CFC’s taxable income if the CFC were a domestic corporation, the item cannot be taken into account for purposes of determining the tested income or tested loss of the CFC even if the item reduces the CFC’s earnings and profits. The Treasury Department and the IRS request comments on the application of the rules under § 1.952–2 for purposes of determining subpart F income, tested income, and tested loss. In particular, comments are requested as to whether these rules should allow a CFC a deduction, or require a CFC to take into account income, that is expressly limited to domestic corporations under the Code. For example, questions have arisen as to whether a CFC could be entitled to a dividends received deduction under section 245A, even though section 245A by its terms applies only to dividends received by a domestic corporation. See Conf. Rep. at 599, fn. 1486. The Treasury Department and the IRS also welcome comments on other approaches to determining tested income or tested loss, including whether additional modifications should be made to § 1.952–2 for purposes of calculating GILTI. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 Comments have also requested guidance on the interactions of section 163(j) and section 267A with section 951A. Issues related to sections 163(j), 245A, and 267A will be addressed in future guidance. 2. Income Excluded From Foreign Base Company Income and Insurance Income by Reason of Section 954(b)(4) As noted in section I.C.1 of this Explanation of Provisions, section 951A(c)(2) requires that the gross income of the CFC for the taxable year be determined without regard to certain items. One of these items is gross income excluded from foreign base company income (as defined in section 954) or insurance income (as defined in section 953) of the CFC by reason of electing the exception under section 954(b)(4) (‘‘high-tax exception’’). In response to comments, the proposed regulations clarify that this exclusion applies only to income that is excluded from foreign base company income and insurance income solely by reason of an election made to exclude the income under the high-tax exception of section 954(b)(4). Accordingly, the exclusion does not apply to income that would not otherwise be subpart F income or to categories of income that do not constitute subpart F income due to exceptions other than the high-tax exception (for example, as a result of an exception to foreign personal holding company income under section 954(c)(6) or section 954(h)). 3. Gross Income Taken Into Account in Determining Subpart F Income Another item excluded from gross tested income is gross income taken into account in determining a corporation’s subpart F income. Comments have requested guidance on the interaction between the earnings and profits limitation to subpart F income under section 952(c), including the recapture rule in section 952(c)(2), and the determination of gross tested income for purposes of section 951A. The Treasury Department and the IRS have determined that any income described in section 952(a) is ‘‘taken into account in determining subpart F income’’ regardless of whether the section 952(c) limitation applies, and therefore should not be included in gross tested income. Conversely, the recapture of subpart F income under section 952(c)(2), even if by reason of earnings and profits attributable to gross tested income, does not result in excluding any amount from gross tested income. Therefore, the proposed regulations provide that tested income and tested loss are determined without regard to the application of PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 51075 section 952(c). See proposed § 1.951A– 2(c)(4). 4. Determination of Allowable Deductions Properly Allocable to Gross Tested Income Section 951A(c)(2)(A)(ii) provides that tested income and tested loss are determined by subtracting from a CFC’s gross tested income ‘‘the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).’’ Regulations under section 954(b)(5) require taxpayers to determine net subpart F income by properly allocating and apportioning deductions to the various categories of subpart F income. For this purpose, § 1.954–1(c) provides that taxpayers must first determine the gross amount of each item of income in a category of income (as described in § 1.954–1(c)(1)(iii)) and then allocate and apportion expenses to these categories under the principles of sections 861, 864, and 904(d). Accordingly, in order to apply the principles of section 954(b)(5) to section 951A (as required under section 951A(c)(2)(A)(ii)), the proposed regulations provide that allowable deductions determined under the principles of § 1.952–2 are allocated and apportioned to gross tested income under the principles of section 954(b)(5) and § 1.954–1(c), treating gross tested income that falls within a single separate category (as defined in § 1.904– 5(a)(1)) as an additional category of income for this purpose. See proposed § 1.951A–2(c)(3). Section I.D.5 of this Explanation of Provisions describes a rule that disregards basis in specified tangible property created in certain taxable transfers occurring before the effective date of section 951A for purposes of calculating QBAI. See § 1.951A–3(h)(2). These rules are cross-referenced in proposed § 1.951A–2(c)(5) to disallow any loss or deduction related to such stepped up-basis in any depreciable or amortizable property (including, for example, intangible property) for purposes of calculating tested income or tested loss. D. QBAI 1. QBAI and Specified Tangible Property Proposed § 1.951A–3(b) provides that a tested income CFC’s QBAI for any taxable year is the average of the CFC’s aggregate adjusted bases as of the close of each quarter in specified tangible property that is used in a trade or E:\FR\FM\10OCP2.SGM 10OCP2 51076 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS2 business of the corporation and of a type with respect to which a deduction is allowable under section 167. In general, specified tangible property is tangible property used in the production of tested income. See proposed § 1.951A– 3(c)(1). Tangible property is defined as property for which the depreciation deduction provided by section 167(a) is eligible to be determined under section 168 (even if the CFC has elected not to apply section 168). See proposed § 1.951A–3(c)(2). The proposed regulations define tangible property by reference to whether the property can be depreciated under section 168 because, unlike section 167, section 168 applies only to tangible property, and there is a substantial amount of guidance delineating property subject to section 168. Property that is used in the production of both gross tested income and gross income that is not gross tested income (‘‘dual use property’’) is proportionately treated as specified tangible property. See proposed § 1.951A–3(d)(1). Generally, the proportion is determined based on the relative amount of gross tested income to income other than gross tested income that the property generates for the taxable year. See proposed § 1.951A–3(d)(2)(i). A special rule is provided for determining the proportion of the property treated as specified tangible property if the property generates no directly identifiable income (for example, because the property is used in general and administrative functions that contribute to the generation of all the income of the CFC). See proposed § 1.951A–3(d)(2)(ii). Under § 1.167(a)–2, the depreciation allowance for tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. Accordingly, for purposes of section 951A, property that may be in part depreciable qualifies as specified tangible property to the extent it is depreciable. For example, precious metal used in a manufacturing process may be considered specified tangible property in part because it is depreciable in part. See Rev. Rul. 2015– 11, 2015–21 I.R.B. 975. 2. Determination of Adjusted Basis of Specified Tangible Property Proposed § 1.951A–3(e) provides rules to determine the adjusted basis of specified tangible property for purposes of determining QBAI. The general rule in proposed § 1.951A–3(e)(1), like section 951A(d)(3), provides that the adjusted basis in any property is VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 determined by using the alternative depreciation system under section 168(g) (‘‘ADS’’) and allocating the depreciation deduction with respect to the property ratably to each day during the period in the taxable year to which the depreciation relates. ADS applies for purposes of determining QBAI irrespective of whether the basis of the property is determined using another depreciation method for other purposes of the Code. The Treasury Department and the IRS recognize that taxpayers may hold specified tangible property that was acquired before December 22, 2017, that was not depreciated using ADS. Section 951A(d) does not distinguish between property acquired before December 22, 2017, and property acquired on or after December 22, 2017. The Treasury Department and the IRS have concluded that, regardless of the date acquired, the adjusted basis in specified tangible property should be determined under ADS in order for the U.S. shareholder’s pro rata share of QBAI to be properly determined and not distorted. Therefore, the proposed regulations provide that when determining QBAI, the adjusted basis in property placed in service before December 22, 2017, is determined using ADS as if this system had applied from the date that the property was placed in service. See proposed § 1.951A–3(e)(3). 3. Short Taxable Year Net DTIR is intended to reduce a U.S. shareholder’s GILTI inclusion amount by an annual return on specified tangible property. To ensure that the net DTIR of a CFC with a taxable year of less than 12 months (a ‘‘short taxable year’’) reflects an annual return, the proposed regulations provide a methodology to reduce the QBAI of a CFC with a short taxable year to an amount that, if annualized, would produce an amount equal to the QBAI for a 12-month taxable year. See proposed § 1.951A– 3(f). 4. Specified Tangible Property Held Through a Partnership Section 951A(d)(3) 1 (the ‘‘partnership QBAI paragraph’’) states that if a CFC holds an interest in a partnership at the close of the CFC’s taxable year, the CFC takes into account under section 951A(d)(1) its ‘‘distributive share of the aggregate of the partnership’s adjusted bases (determined as of such date in the hands of the partnership)’’ in specified tangible property in computing its QBAI. The partnership QBAI paragraph 1 As enacted, section 951A(d) contains two paragraphs designated as paragraph (3). PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 further provides that a CFC’s ‘‘distributive share of the adjusted basis of any property shall be the controlled foreign corporation’s distributive share of income with respect to such property.’’ The statutory language ‘‘distributive share of the aggregate of the partnership’s adjusted basis’’ is ambiguous because the term ‘‘distributive share’’ is used in subchapter K of the Code with respect to income, gain, loss, and credits of a partnership, but not the bases of assets. A partner of a partnership has a basis in its partnership interest (‘‘outside basis’’), while the partnership has a separate basis in the assets of the partnership (‘‘inside basis’’). The proposed regulations therefore use the term ‘‘share’’ (rather than ‘‘distributive share’’) when referring to the amount of the inside basis of a partnership asset that a partner that is a CFC may include in its QBAI. The partnership QBAI paragraph provides that a CFC ‘‘shall take into account’’ under section 951A(d)(1) the CFC’s distributive share of the basis in partnership specified tangible property. Because section 951A(d)(1) requires an averaging of basis over the close of each quarter of the taxable year of the CFC, and the term ‘‘distributive share’’ as it pertains to basis is ambiguous, it is unclear based on the statute how a CFC determines its distributive share of the basis of partnership specified tangible property for purposes of determining its QBAI. One interpretation of the partnership QBAI paragraph is that a CFC partner’s QBAI is increased by an amount equal to the CFC partner’s share of the basis that the partnership has in its specified tangible property as of the close of the CFC partner’s taxable year. However, that interpretation would be contrary to the requirement in section 951A(d)(1) that the CFC’s bases in specified tangible property be averaged over four quarters. Furthermore, giving the term ‘‘distributive share’’ effect, the amount determined at the end of the CFC partner’s taxable year should be reduced for any period during the taxable year when the partnership did not own the property, whereas a CFC partner of a partnership that disposed of property before the close of the CFC’s taxable year would receive no QBAI benefit if there were a single measurement date. In addition, a requirement that a partnership’s basis in specified tangible property be measured on the last day of a CFC partner’s taxable year could be burdensome for partnerships that have one or more CFC partners with taxable years that do not coincide with the partnership’s taxable E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules year and, in those cases, would have the effect of decoupling the CFC partner’s share of the basis of partnership property used to compute the CFC partner’s QBAI from the CFC partner’s distributive share of the partnership’s income from the property that is taken into account in computing the CFC partner’s tested income. Moreover, because depreciation is treated as reducing the adjusted basis of property on each day during the taxable year, calculating a partnership’s basis on the final day of the CFC partner’s taxable year will generally result in an artificially low basis relative to calculating average adjusted basis over the course of the partnership’s taxable year. For the foregoing reasons, the proposed regulations determine a CFC partner’s share of the partnership’s adjusted basis in specified tangible property by reference to the partnership’s average adjusted basis in the property as of the close of each quarter of the partnership’s taxable year that ends with or within the CFC’s taxable year. See proposed § 1.951A– 3(g)(3). A partner that is a CFC takes into account its share of the adjusted basis of specified tangible property held by a partnership in computing QBAI if, among other things, the property ‘‘is used in the production of tested income (determined with respect to such controlled foreign corporation’s distributive share of income with respect to such property).’’ Section 951A(d)(3)(C). Consistent with the general rule for QBAI, only a tested income CFC can increase its QBAI by reason of specified tangible property owned by a partnership. See proposed § 1.951A–3(g)(1). Further, consistent with the parenthetical in the partnership QBAI paragraph, the proposed regulations provide that a CFC partner determines its share of the partnership’s average adjusted basis in specified tangible property based on the amount of its distributive share of the gross income produced by the property that is included in the CFC partner’s gross tested income relative to the total amount of gross income produced by the property. See proposed § 1.951A– 3(g)(2). The proposed regulations incorporate the dual use property rule of section 951A(d)(2)(B) in the context of specified tangible property owned indirectly through a partnership and include similar rules for addressing specified tangible property that does not produce any directly identifiable income. The calculation is performed separately for each item of specified tangible property held by the VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 partnership, taking into account the CFC partner’s distributive share of income with respect to such property. The Treasury Department and the IRS request comments on the proposed approach to specified tangible property held through a partnership, including the rules addressing specified tangible property that does not produce directly identifiable income. 5. Anti-Abuse Provisions Section 951A(d)(4) provides that ‘‘[t]he Secretary shall issue such regulations or other guidance as the Secretary determines appropriate to prevent the avoidance of the purposes of this subsection, including regulations or other guidance which provide for the treatment of property if—(A) such property is transferred, or held, temporarily, or (B) the avoidance of the purposes of this paragraph is a factor in the transfer or holding of such property.’’ The Conference Report describes the scope of section 951A(d)(4), stating that ‘‘[t]he conferees intend that non-economic transactions intended to affect tax attributes of CFCs and their U.S. shareholders (including amounts of tested income and tested loss, tested foreign income taxes, net deemed tangible income return, and QBAI) to minimize tax under this provision be disregarded.’’ Conf. Rep. at 645. One specific example illustrated in the Conference Report is a transaction that occurs after the measurement date of post-1986 earnings and profits under section 965 but before the first taxable year for which section 951A is effective in order to increase a CFC’s QBAI. Id. Consistent with section 951A(d)(4) and the Conference Report, as well as the Secretary’s broad authority under section 7805(a) to ‘‘prescribe all needful rules and regulations for the enforcement of’’ the Code, the proposed regulations provide that specified tangible property of a tested income CFC is disregarded for purposes of determining the tested income CFC’s average aggregate basis in specified tangible property if the tested income CFC acquires the property with a principal purpose of reducing the GILTI inclusion amount of a U.S. shareholder and holds the property temporarily but over at least one quarter end. See proposed § 1.951A–3(h)(1). For this purpose, property held for less than a twelve month period that includes at least one quarter end during the taxable year of a tested income CFC is treated as temporarily held and acquired with a principal purpose of reducing the GILTI inclusion amount of a U.S. shareholder. Id. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 51077 The Treasury Department and the IRS are aware that taxpayers are engaging in transactions like the ones described in the Conference Report involving taxable transfers of property from one CFC to another CFC before the first taxable year of the transferor CFC to which section 951A applies in order to provide the transferee CFC with a stepped-up basis in the transferred property that, for example, may increase a U.S. shareholder’s amount of QBAI with respect to the CFC for periods when it is subject to section 951A. See Conf. Rep. at 645. The stepped-up basis may also reduce the transferee CFC’s tested income or increase its tested loss (for example, due to increased depreciation or amortization deductions) during periods when it is subject to section 951A. The Treasury Department and the IRS have determined that it would be inappropriate for a taxpayer to reduce its GILTI inclusion amount for any taxable year by reason of a stepped-up basis in CFC assets attributable to transactions between related CFCs during the period after December 31, 2017, but before the effective date of section 951A. Accordingly, the proposed regulations disallow the benefit of a stepped-up basis in specified tangible property transferred between related CFCs during the period before the transferor CFC’s first inclusion year for purposes of calculating the transferee CFC’s QBAI. See proposed § 1.951A–3(h)(2). As discussed in section I.C.4 of this Explanation of Provisions, these rules are also cross-referenced in proposed § 1.951A–2(c)(5) to disregard a steppedup basis in any property that is depreciable or amortizable for purposes of calculating tested income and tested loss. The U.S. tax results claimed with respect to transactions that fall outside the scope of the anti-abuse rules in the proposed regulations may, nonetheless, be challenged under other statutory provisions or judicial doctrines. E. Specified Interest Expense To calculate a U.S. shareholder’s net DTIR, section 951A(b)(2)(B) provides that 10 percent of the aggregate of the shareholder’s pro rata share of the QBAI of each CFC (defined as ‘‘deemed tangible income return’’ in proposed § 1.951A–1(c)(3)(ii)) is reduced by ‘‘the amount of interest expense taken into account under subsection (c)(2)(A)(ii) in determining such shareholder’s net CFC tested income for the taxable year to the extent the interest income attributable to such expense is not taken into account in determining such shareholder’s net CFC tested income.’’ Deductions taken E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51078 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules into account under section 951A(c)(2)(A)(ii) are deductions (including taxes) that are properly allocable to gross tested income for purposes of calculating tested income and tested loss. Thus, only a U.S. shareholder’s pro rata share of interest expense that is currently deductible and properly allocable to gross tested income is taken into account for purposes of determining the interest expense described in section 951A(b)(2)(B). For purposes of the proposed regulations, interest expense described in section 951A(b)(2)(B) is referred to as ‘‘specified interest expense.’’ See proposed § 1.951A– 1(c)(3)(iii). Specified interest expense is a U.S. shareholder-level determination which is net of ‘‘attributable’’ interest income taken into account by the U.S. shareholder. Specifically, specified interest expense of a U.S. shareholder is its pro rata share of interest expense properly allocable to gross tested income reduced by its pro rata share of interest income included in gross tested income to the extent attributable to such interest expense. The effect of this formulation is to count against net DTIR only a U.S. shareholder’s pro rata share of interest expense allocable to gross tested income to the extent that the related interest income is not also reflected in the U.S. shareholder’s pro rata share of the tested income of another CFC, such as in the case of third-party interest expense or interest expense paid to related U.S. persons. The amount of interest income ‘‘attributable’’ to interest expense is not defined in section 951A(b)(2)(B). Accordingly, it is necessary to define this concept in the proposed regulations. A definition that incorporates a strict tracing approach would require a U.S. shareholder to determine each item of interest expense with respect to each debt instrument of each of its CFCs to determine whether, and to what extent, the interest income with respect to that debt instrument is taken into account by the U.S. shareholder in determining the shareholder’s net CFC tested income. However, the Treasury Department and the IRS have determined that a tracing approach for specified interest expense would be administratively burdensome and difficult to reconcile with the framework of section 951A, which generally requires a determination of CFC-level items followed by a second determination of U.S. shareholder-level aggregate pro rata shares of such items. A tracing approach for specified interest expense would necessitate a hybrid determination, in which the relevant VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 item—‘‘attributable’’ interest income— could not be determined at the level of the CFC, but rather would require a matching at the U.S. shareholder level of the shareholder’s pro rata share of each item of interest expense with its pro rata share of each item of interest income attributable to such interest expense. A tracing approach would create particular complexity with respect to interest paid between CFCs that are owned by different U.S. shareholders in different proportions or with respect to interest for which the accrual of the expense and inclusion of the income occur in separate taxable years. The Treasury Department and the IRS have instead determined that a netting approach to specified interest expense accomplishes the purpose of the specified interest expense rule in a more administrable manner and is consistent with the requirement that ‘‘attributable’’ interest income be netted against interest expense. Therefore, the proposed regulations provide that a U.S. shareholder’s specified interest expense is the excess of its aggregate pro rata share of the tested interest expense of each CFC over its aggregate pro rata share of the tested interest income of each CFC. See proposed § 1.951A– 1(c)(3)(iii). Tested interest expense and tested interest income are generally defined by reference to all interest expense and interest income that is taken into account in determining a CFC’s tested income or tested loss. See proposed § 1.951A–4(b)(1) and (2). Comments have questioned whether interest expense of a captive finance CFC must be taken into account for purposes of determining a U.S. shareholder’s specified interest expense, or whether the related interest income from unrelated customers may be available to offset such interest expense. Under a netting approach to the computation of specified interest expense, without modifications, whether a CFC’s active banking business increases or reduces the specified interest expense of a U.S. shareholder relative to other taxpayers depends on whether the third-party expense related to such business is greater than or less than interest income related to such business. The Treasury Department and the IRS have determined that a U.S. shareholder’s specified interest expense, and therefore its net DTIR and its GILTI inclusion amount, should not depend on whether the U.S. shareholder has one or more CFCs engaged in the active conduct of a financing or insurance business, as long as the interest expense of the CFC is incurred exclusively to fund such business with unrelated PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 persons and thus not incurred, for instance, to fund the acquisition of specified tangible property. Therefore, the proposed regulations exclude from the definition of tested interest expense any interest expense of a CFC that is an eligible controlled foreign corporation (within the meaning of section 954(h)(2)) or a qualifying insurance company (within the meaning of section 953(e)(3)) (‘‘qualified CFC’’), except to the extent of the qualified CFC’s assets unrelated to its financing or insurance business and any interest income received by the qualified CFC from loans to certain related persons (interest expense described in this sentence, ‘‘qualified interest expense’’). See proposed § 1.951A–4(b)(1)(iii). Further, the proposed regulations exclude from the definition of tested interest income any interest income of a qualified CFC included in the gross tested income of the qualified CFC for the CFC inclusion year that is excluded from subpart F income due to the active financing exception of section 954(h) or the active insurance exception of section 954(i) (‘‘qualified interest income’’). See proposed § 1.951A–4(b)(2)(iii). For purposes of determining specified interest expense, interest income and interest expense are defined broadly to encompass any amount treated as interest under the Code or regulations, and any other amount incurred or recognized in a transaction or series of integrated or related transactions in which the use or forbearance of funds is secured for a period of time if the expense or loss is predominately incurred in consideration of the time value of money. See proposed § 1.951A– 4(b)(1)(ii) and (2)(ii). Comments requested clarification of whether the interest expense of a tested loss CFC is used in the determination of specified interest expense. Regardless of whether interest expense increases tested loss or reduces tested income, the expense is ‘‘taken into account. . .in determining the shareholder’s net CFC tested income’’ within the meaning of section 951A(b)(2)(B). In addition, if a tested loss CFC’s interest expense were not taken into account for purposes of determining specified interest expense, a taxpayer could easily avoid specified interest expense by incurring offshore debt through a tested loss CFC. Therefore, the proposed regulations confirm that any interest expense taken into account for purposes of determining the tested income or tested loss of a CFC is also taken into account in determining a U.S. shareholder’s specified interest expense. E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules F. Domestic Partnerships and Their Partners Comments requested guidance on the treatment of domestic partnerships that own stock of CFCs. Section 951A itself does not contain any specific rules on domestic partnerships and their partners that directly or indirectly own stock of CFCs. Accordingly, proposed § 1.951A–5 provides this guidance to domestic partnerships and their partners on how to compute their GILTI inclusion amounts. This guidance also applies to S corporations and their shareholders, which are treated as partnerships and partners for purposes of sections 951 through 965. See section 1373. A domestic partnership is a U.S. person by definition under section 7701(a)(4) and (30) and can therefore be a U.S. shareholder of a CFC under section 951(b). Under current law, a domestic partnership that is a U.S. shareholder includes in gross income its section 951(a)(1)(A) inclusion with respect to a CFC, and its partners include in gross income their distributive share of such inclusion. However, as noted in section I.A of this Explanation of Provisions, there is no analog in section 951(a)(1)(A) to the U.S. shareholder-level determinations required by section 951A, and thus the level at which the section 951(a)(1)(A) determination is made—whether at the level of the partnership or its partners— does not generally affect the amount of the inclusion, if the partnership and its partners are all U.S. shareholders. On the other hand, the GILTI inclusion amount is an aggregation of the U.S. shareholder’s pro rata shares of tested income, tested loss, QBAI, tested interest expense, and tested interest income of each of its CFCs. Thus, the level at which the GILTI calculation is made dictates the CFC items to be taken into account by the shareholder, and each of these items can impact the shareholder’s GILTI inclusion amount. The Treasury Department and the IRS considered a number of approaches to applying section 951A with respect to domestic partnerships and their partners. A pure aggregate approach to the treatment of domestic partnerships and their partners would treat the partnership as an aggregate of its partners, so that each partner would calculate its own GILTI inclusion amount taking into account its pro rata share of CFC items through the partnership. However, a pure aggregate approach might also be interpreted by taxpayers to exempt small partners of a domestic partnership from the GILTI regime entirely, a result that is not VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 clearly contemplated in section 951A or its legislative history and is inconsistent with section 951. The Treasury Department and the IRS also considered a pure entity approach. Under a pure entity approach, the domestic partnership would determine its own GILTI inclusion amount, and each partner would take into gross income its distributive share of such amount. In the case of a partner that is a U.S. shareholder of CFCs owned by the partnership and other CFCs outside the partnership, a pure entity approach would effectively fragment the shareholder’s GILTI inclusion amount into multiple GILTI inclusion amounts by separating the items of the CFCs owned by the shareholder through the partnership from the items of the CFCs owned by the shareholder outside the partnership, including through other domestic partnerships. An approach that dramatically alters a U.S. shareholder’s inclusion under section 951A for a taxable year depending on the legal structure by which the shareholder owns each CFC presents both an inappropriate planning opportunity as well as a trap for the unwary. Such an approach is also inconsistent with the structure of section 951A, which requires an aggregation of all relevant items of a shareholder’s CFCs in order to compute a single GILTI inclusion amount for a U.S. shareholder. As discussed in section III.A of this Explanation of Provisions, the Treasury Department and the IRS relied on similar considerations in concluding that the relevant items of each CFC owned directly or indirectly by members of a consolidated group should be taken into account in determining the GILTI inclusion amount of each member of that group. In addition, the Treasury Department and the IRS have concluded that other provisions that are related to, and interdependent with, section 951A should apply at the level of a domestic corporate partner. Section 960(d) provides a domestic corporation that is a U.S. shareholder a credit for foreign taxes paid by a CFC that are properly attributable to tested income ‘‘taken into account’’ by the domestic corporation, and determines the amount of that credit by reference to the corporation’s aggregate pro rata share of tested income. See section 960(d)(2)(B) and (3). A domestic partnership is not eligible to claim deemed paid credits under section 960(d). Furthermore, under a pure entity approach, a domestic corporate partner of a domestic partnership may not be eligible for a deemed paid credit by reason of its PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 51079 distributive share of the partnership’s GILTI inclusion because a partner would not have a pro rata share of the tested income of any CFC owned by the partnership, and thus it would not take into account the tested income of any such CFC. Similarly, only a domestic corporation is eligible for a section 250 deduction. Nonetheless, the Conference Report indicates that the domestic corporate partners of a domestic partnership should get the benefit of a section 250 deduction, which is consistent with an aggregate approach. See Conf. Rep. at 623, fn. 1517. Based on the foregoing, the Treasury Department and the IRS have determined that the approach that best harmonizes the treatment of domestic partnerships and their partners across all provisions of the GILTI regime (sections 250, 951A, and 960(d)) is neither a pure aggregate nor a pure entity approach. Rather, the most harmonious approach treats a domestic partnership as an entity with respect to partners that are not U.S. shareholders of any CFC owned by the partnership, but treats the partnership as an aggregate for purposes of partners that are themselves U.S. shareholders with respect to one or more CFCs owned by the partnership. This approach ensures that each non-U.S. shareholder partner takes into income its distributive share of the domestic partnership’s GILTI inclusion amount (similar to subpart F), while permitting a partner that is itself a U.S. shareholder to determine a single GILTI inclusion amount by reference to all its CFCs, whether owned directly or through a partnership, as well as allowing a corporate U.S. shareholder to calculate a foreign tax credit under section 960(d) with respect to each such CFC and to compute a section 250 deduction with respect to its GILTI inclusion amount determined by reference to each such CFC. Therefore, the proposed regulations provide that, in general, a domestic partnership that is a U.S. shareholder of one or more CFCs (‘‘U.S. shareholder partnership’’) computes its own GILTI inclusion amount in the same manner as any other U.S. shareholder, and each partner takes into account its distributive share of the domestic partnership’s GILTI inclusion amount under section 702 and § 1.702– 1(a)(8)(ii). See proposed § 1.951A–5(b). However, for purposes of section 951A and the proposed regulations, a partner that is itself a U.S. shareholder (within the meaning of section 951(b)) (‘‘U.S. shareholder partner’’) of one or more CFCs owned directly or indirectly by a domestic partnership (‘‘partnership CFC’’) is treated as owning E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51080 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules proportionately section 958(a) stock in each such partnership CFC as if the partnership were a foreign partnership. See proposed § 1.951A–5(c). As a result, a partner that is itself a U.S. shareholder of a CFC owned by a domestic partnership computes its GILTI inclusion amount for a taxable year by taking into account its proportionate share of the partnership’s pro rata share of each of the relevant items—tested income, tested loss, QBAI, tested interest income, and tested interest expense—of such CFC. This rule applies regardless of whether the domestic partnership itself has a GILTI inclusion amount for the taxable year. See proposed § 1.951A–5(g), Example 6. In the case that a partner is treated as owning the section 958(a) stock of one or more partnership CFCs, the partner’s distributive share of the partnership’s GILTI inclusion amount is determined solely by reference to partnership CFCs in which the partner is not a U.S. shareholder. See proposed § 1.951A– 5(c) and (g), Example 3. A U.S. shareholder partnership is therefore required to provide to its partners their distributive share of the partnership’s GILTI inclusion amount, as well as provide to each U.S. shareholder partner the partner’s proportionate share of the partnership’s pro rata share (if any) of each CFC tested item of each partnership CFC of the partnership, and forms and instructions will be updated accordingly. See proposed § 1.951A– 5(f). To illustrate the differences between the approach taken in the proposed regulations and the pure entity approach, consider a domestic partnership (PRS) with two domestic corporate partners, US1 and US2, owning 5 percent and 95 percent of PRS, respectively. PRS owns 100 percent of the single class of stock of FS1, a CFC with tested income of $100x, and 100 percent of the single class of stock of FS2, a CFC with tested loss of $50x. US2 also owns 100 percent of the single class of stock of FS3, a CFC with tested loss of $20x. Under a pure entity approach, US2’s distributive share of PRS’s GILTI inclusion amount would be $47.50x (95% × ($100x¥$50x)), and US2’s pro rata share of FS3’s tested loss of $20x would be unused. Under the proposed regulations, US2, because it is a U.S. shareholder partner with respect to FS1 and FS2, aggregates its proportionate share of the tested income and tested loss of FS1 and FS2 with its pro rata share of the tested loss of FS3 in determining its GILTI inclusion amount of $27.50x ((95% × ($100x¥$50x))¥$20x). Accordingly, VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 under a pure entity approach, US2 would be incentivized to reorganize its ownership structure (for example, by liquidating PRS or contributing the stock of FS3 to PRS) in order to obtain the full benefit of the tested loss of FS3. Under the proposed regulations, however, US2 has the same GILTI inclusion amount whether it owns its CFCs directly or through one or more partnerships. The Treasury Department and the IRS request comments as to whether any other approach to the treatment of domestic partnerships and their partners for purposes of section 951A, including a pure entity approach or a pure aggregate approach, would more appropriately harmonize the provisions of the GILTI regime than the approach of the proposed regulations, particularly in light of the administrative and compliance burdens associated with any other approach and the approach of the proposed regulations. In addition, the Treasury Department and the IRS request comments on adjustments required by reason of computing a GILTI inclusion amount, in whole or in part, at the level of the partner of a domestic partnership, including adjustments to the partner’s basis in its partnership interest, the partner’s section 704(b) capital account, the partnership’s basis in CFC stock under section 961, and a CFC’s previously taxed earnings and profits with respect to the partner or partnership under section 959. G. Treatment of GILTI Inclusion Amount and Adjustments to Earnings and Profits and Basis 1. Treatment of GILTI as Subpart F Income for Certain Purposes A U.S. shareholder’s GILTI inclusion amount is not an inclusion under section 951(a)(1)(A). Nevertheless, for purposes of some provisions, GILTI inclusion amounts are treated similarly to section 951(a)(1)(A) inclusions. Section 951A(f)(1)(A) provides that any GILTI included in gross income is treated in the same manner as an amount included under section 951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4). Section 951A(f)(1)(B) grants the Secretary authority to provide rules applying section 951A(f)(1)(A) to other provisions of the Code. A comment requested clarification as to whether GILTI inclusion amounts are net investment income under section 1411. Pursuant to the authority in section PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 951A(f)(1)(B), the proposed regulations provide that a GILTI inclusion amount is treated in the same manner as an amount included under section 951(a)(1)(A) for purposes of applying section 1411. See proposed § 1.951A– 6(b)(1). Thus, for example, a U.S. shareholder that has made an election pursuant to § 1.1411–10(g) with respect to a CFC to treat amounts included in gross income under section 951(a)(1)(A) as net investment income and to apply the basis adjustment rules of sections 961(a) and (b) with respect to such amounts for section 1411 purposes should also treat the portion of the U.S. shareholder’s GILTI inclusion amount treated as being with respect to the CFC under section 951A(f)(2) and proposed § 1.951A–6(b)(2) as net investment income. Comments have requested that regulations clarify that an inclusion under section 951A is determined before an inclusion under section 951(a)(1)(B). The Treasury Department and the IRS have determined that clarification is unnecessary. Because a GILTI inclusion amount is treated as a section 951(a)(1)(A) inclusion for purposes of section 959, the determination of the amount included under section 951(a)(1)(B) is made after the determination of the amount of a section 951(a)(1)(A) inclusion and the GILTI inclusion amount. See section 959(a)(2) and (f)(1). The Treasury Department and the IRS intend to issue a separate notice of proposed rulemaking to update the regulations under sections 959 and 961 to account for the Act’s modifications to the U.S. international tax system, including the enactment of section 245A. The characterization of GILTI inclusions for purposes of determining the unrelated business taxable income of tax-exempt entities will be addressed in separate guidance. The Treasury Department and the IRS request comments on other areas in which the characterization of a GILTI inclusion amount is relevant, and whether it is appropriate in those areas to treat a GILTI inclusion amount in the same manner as a section 951(a)(1)(A) inclusion or in some other manner (for example, as a dividend). 2. Interaction With Sections 163(e)(3)(B)(i) and 267(a)(3)(B) Section 267(a)(3)(B) generally provides that a deduction for an item payable to a related CFC is not allowed until paid, except to the extent that an amount attributable to that item is includible (determined without regard to properly allocable deductions and qualified deficits) in the gross income of E:\FR\FM\10OCP2.SGM 10OCP2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS2 a U.S. shareholder. Section 163(e)(3)(B)(i) provides a similar rule for original issue discount on a debt instrument held by a related CFC. The Treasury Department and the IRS have determined that deductions should not be deferred under sections 163(e)(3)(B)(i) and 267(a)(3)(B) to the extent an item is taken into account in determining a U.S. shareholder’s GILTI inclusion amount. Accordingly, the proposed regulations provide that a deduction is allowed under sections 163(e)(3)(B)(i) and 267(a)(3)(B) for an item taken into account in determining the net CFC tested income of a U.S. shareholder, including a U.S. shareholder treated under the proposed regulations as owning section 958(a) stock of a CFC owned by a domestic partnership. See proposed § 1.951A– 6(c)(1). In the case of a U.S. shareholder that is a domestic partnership, this rule applies only to the extent that one or more U.S. persons (other than domestic partnerships) that are direct or indirect partners of the domestic partnership include in gross income their distributive share of the partnership’s GILTI inclusion amount or the item is taken into account by a U.S. shareholder partner of the domestic partnership by reason of § 1.951A–5(c). See proposed § 1.951A–6(c)(2). 3. Basis Adjustments for the Use of Tested Losses In determining a U.S. shareholder’s net CFC tested income, the U.S. shareholder’s pro rata share of a tested loss of one CFC may offset the shareholder’s pro rata share of tested income of another CFC. Under the statute, such a use of a tested loss does not reduce the U.S. shareholder’s basis in the stock of the tested loss CFC, increase the stock basis of the tested income CFC, or affect the earnings and profits of either the tested loss CFC or the tested income CFC. The Treasury Department and the IRS have determined that in certain cases the lack of adjustments to stock basis of a tested loss CFC can lead to inappropriate results. For example, if the U.S. shareholder’s basis in the stock of the tested loss CFC is not reduced to reflect the use of the tested loss to offset tested income taken into account by the U.S. shareholder, the U.S. shareholder would recognize a second and duplicative benefit of the loss—either through the recognition of a loss or the reduction of gain—if the stock of the tested loss CFC is disposed of. See Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934) (denying the loss on stock of subsidiaries upon liquidation when operating losses were previously VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 claimed from the subsidiaries’ operations because ‘‘[i]f allowed, this would be the practical equivalent of double deduction’’); U.S. v. Skelly Oil. Co., 394 U.S. 678 (1969) (‘‘the Code should not be interpreted to allow respondent ‘the practical equivalent of a double deduction’’’ (citing Charles Ilfeld Co.)); § 1.161–1. On the other hand, in the case of a corporate U.S. shareholder, but not in the case of an individual, gain recognized on the disposition of a CFC attributable to offset tested income would, in most cases, be eliminated as a result of the application of section 964(e) or section 1248(a) and (j), to the extent the gain is recharacterized as a dividend that is eligible for the dividends received deduction under section 245A. Accordingly, proposed § 1.951A–6(e) generally provides that in the case of a corporate U.S. shareholder (excluding regulated investment companies and real estate investment trusts), for purposes of determining the gain, loss, or income on the direct or indirect disposition of stock of a CFC, the basis of the stock is reduced by the amount of tested loss that has been used to offset tested income in calculating net CFC tested income of the U.S. shareholder. The basis reduction is only made at the time of the disposition and therefore does not affect the stock basis prior to a disposition. Requiring the basis reduction only at the time of the disposition prevents the use of tested losses alone from causing the recognition of gain if the reduction exceeds the amount of stock basis. The basis adjustments apply only to the extent a ‘‘net’’ tested loss of the controlled foreign corporation has been used. This limitation is intended to ensure that the reduction applies only to the extent necessary to eliminate the duplicative loss in the stock. For example, if a $100x tested loss of a CFC (CFC1) offsets $100x of tested income of another CFC (CFC2) in one year in determining a U.S. shareholder’s net CFC tested income, and in the next year CFC1 has $20x of tested income that is offset by a $20x tested loss of CFC2, then the $100x used tested loss attributable to the CFC1 stock from the first year is reduced by the $20x of its tested income from the second year that was offset by the tested loss of CFC2, resulting in a ‘‘net’’ used tested loss of $80x. See proposed § 1.951A–6(e)(2). Similar adjustments apply when the tested loss CFC is treated as owned by the U.S. shareholder through certain intervening foreign entities by reason of section 958(a)(2) to prevent the indirect use of the duplicative loss through the disposition of interests in those intervening entities. The regulations PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 51081 provide an exception to those rules in certain cases when the tested loss CFC and the CFC that generated the tested income that is offset by the tested loss are in the same section 958(a)(2) ownership chain; adjustments are not appropriate in these cases because there is no duplicative loss to the extent the shares of both CFCs are directly or indirectly disposed of. See proposed § 1.951A–6(e)(1)(ii). A direct disposition of the stock of a CFC can result in the indirect disposition of the stock of one or more lower-tier CFCs. See proposed § 1.951A–6(e)(6)(ii)(B). In such a case, basis adjustments may be made to both the stock of the upper-tier CFC and the stock of the lower-tier CFCs. Accordingly, the proposed regulations provide ordering rules for making these adjustments that, in general, are intended to prevent gain resulting from a basis adjustment attributable to the use of a single tested loss from being taken into account more than once. See proposed § 1.951A–6(e)(1)(iv). The proposed regulations also include rules that take into account certain nonrecognition transactions involving CFCs, such as the acquisition of CFC stock by a domestic corporation and transactions described in section 381. See proposed § 1.951A–6(e)(4)(ii) and (e)(5). These rules are intended to prevent the elimination or avoidance of the basis adjustments through these types of transactions. Finally, the proposed regulations provide a special rule to address dispositions of CFC stock by another CFC that is not wholly owned by a single domestic corporation. See proposed § 1.951A–6(e)(7). This rule, which is consistent with proposed § 1.961–3(b) and Revenue Ruling 82–16, 1982–1 C.B. 106, is intended to ensure that the appropriate amount of subpart F income is taken into account by U.S. shareholders of the CFC as a result of the disposition. The Treasury Department and the IRS request comments on these rules, including whether additional adjustments to stock basis or earnings and profits should be made to account for a used tested loss or offset tested income (for example, whether adjustments should be provided that are consistent with those set forth in proposed § 1.965–2(d) and (f) (REG– 104226–18, 83 FR 39514, August 9, 2018)). Comments are also requested on whether similar rules should apply to non-corporate U.S. shareholders, taking into account the fact that non-corporate U.S. shareholders are not entitled to a dividends received deduction under section 245A. Additionally, comments E:\FR\FM\10OCP2.SGM 10OCP2 51082 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules are requested as to whether the definition of ‘‘disposition’’ should be modified. For example, the Treasury Department and the IRS are considering broadening the term to include transactions that do not involve an actual transfer of stock but might result in taxable gain but for the presence of tax basis in CFC stock. Examples of such transactions include distributions subject to section 301(c)(2) or 1059. daltland on DSKBBV9HB2PROD with PROPOSALS2 II. Section 951 A. Pro Rata Share Rules Section 1.951–1(e) was revised in 2005 and 2006 to address certain avoidance structures, such as structures that resulted in non-economic allocations of subpart F income to shareholders of CFCs that are not U.S. shareholders. The Treasury Department and the IRS have become aware of additional avoidance structures. For example, the existing regulations require an allocation of earnings and profits between classes of stock with discretionary distribution rights based on the fair market value of the stock. While this rule appropriately allocates subpart F income in some cases (for example, involving multiple classes of common stock), some taxpayers have attempted to improperly allocate subpart F income by applying these rules to certain structures involving shares with preferred liquidation and distribution rights. Similar avoidance structures involve cumulative preferred stock with dividends that compound less frequently than annually. This notice of proposed rulemaking proposes to amend § 1.951–1(e) to address these avoidance structures, which implicate section 951A as well as section 951. The proposed regulations clarify that, for purposes of determining a U.S. shareholder’s pro rata share of subpart F income, earnings and profits for the taxable year are first hypothetically distributed among the classes of stock and then hypothetically distributed to each share in the class on the hypothetical distribution date, which is the last day of the CFC’s taxable year on which it is a CFC. In lieu of prescribing a determination based on fair market value, the proposed regulations provide that the amount of earnings and profits that would be distributed with respect to classes of stock is based on all relevant facts and circumstances. See proposed § 1.951– 1(e)(3). In addition, the proposed regulations disregard any transaction or arrangement that is part of a plan a principal purpose of which is to reduce a U.S. shareholder’s pro rata share of the subpart F income of a CFC. See VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 proposed § 1.951–1(e)(6). This rule also applies for purposes of determining a U.S. shareholder’s pro rata share of amounts for purposes of calculating the shareholder’s GILTI inclusion amount. Id. As a result of adding this broader rule, the proposed regulations do not include the specific anti-avoidance rule involving section 304 transactions in existing § 1.951–1(e)(3)(v). The proposed regulations also modify § 1.951–1(e) in specific ways to take into account section 951A. For example, the proposed regulations provide that a U.S. shareholder’s pro rata share of a CFC’s subpart F income is determined by reference to the shareholder’s proportionate share of the total current earnings and profits that would be distributed in the hypothetical distribution. In addition to determining a U.S. shareholder’s pro rata share of a CFC’s subpart F income, § 1.951–1(e) also applies for purposes of determining the shareholder’s pro rata share of the CFC’s tested income. See also proposed § 1.951A–1(d)(2). However, because tested income is not limited to the earnings and profits of a CFC, and because a CFC’s tested loss increases its earnings and profits for purposes of determining the subpart F income limitation in section 952(c)(1), the earnings and profits allocated in the hypothetical distribution may exceed the earnings and profits of the CFC computed under section 964. Accordingly, the hypothetical distribution in the proposed regulations is based on the greater of the section 964 earnings and profits or the sum of the subpart F income (increased by reason of any tested loss add-back under section 951A(c)(2)(B)(ii) and proposed § 1.951A–6(d)) and tested income of the CFC. B. Partnership Blocker Structures Notice 2010–41, 2010–22 I.R.B. 715, stated that forthcoming regulations would treat a domestic partnership as a foreign partnership for purposes of identifying the U.S. shareholder of a CFC required to include in gross income its pro rata share of the CFC’s subpart F income in the circumstances described in the notice. The Treasury Department and the IRS have determined that the same rules should also apply to identify the U.S. shareholder of a CFC for purposes of section 951A. Accordingly, the proposed regulations treat certain controlled domestic partnerships as foreign partnerships for purposes of identifying a U.S. shareholder for purposes of sections 951 through 964. See also proposed § 1.965–1(e) (REG– 104226–18, 83 FR 39514, August 9, PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 2018) (adopting a similar partnership blocker rule for purposes of the section 965 regulations). C. Other Modifications The proposed regulations also update § 1.951–1 consistent with the modification in the Act of the definition of a U.S. shareholder and the elimination in the Act of the 30-day requirement. See proposed § 1.951–1(a) and (g)(1). III. Section 1502 A. In General Section 1502 provides the Secretary authority to prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. A consolidated group member’s inclusion of subpart F income under section 951(a)(1)(A) is determined at the member level. However, as discussed in section I.A of this Explanation of Provisions, a section 951(a)(1)(A) inclusion with respect to a CFC is determined solely by reference to the subpart F income of the CFC, and therefore determining a member’s section 951(a)(1)(A) inclusion solely by reference to a CFC the stock of which is owned (within the meaning of section 958(a)) by the member is not distortive of the consolidated group’s income tax liability. As a result, the location of the CFC within the group generally has no effect on the consolidated group’s income tax liability by reason of section 951(a)(1)(A). In contrast, section 951A requires an aggregate, U.S. shareholderlevel calculation, under which a member’s pro rata share of the relevant items of one CFC can increase or decrease a member’s GILTI inclusion amount otherwise resulting from its ownership of another CFC. Accordingly, a determination of a member’s GILTI inclusion amount solely based on its pro rata share of the items of a CFC the stock of which is owned (within the meaning of section 958(a)) by that member may not result in a clear reflection of the consolidated group’s income tax liability. For example, a consolidated group could segregate one CFC with tested interest expense under one member and another CFC with QBAI under another member, thereby increasing the net DTIR of the second E:\FR\FM\10OCP2.SGM 10OCP2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules member relative to the consolidated group’s net DTIR if determined at a group level. Alternatively, a strict, separate-entity application of section 951A could inappropriately increase a consolidated group’s income tax liability, because one member’s excess pro rata share of tested losses or QBAI over tested income would be unavailable to reduce another member’s GILTI inclusion amount. daltland on DSKBBV9HB2PROD with PROPOSALS2 B. Section 1.1502–51 In response to comments, the Treasury Department and the IRS have determined that a member’s GILTI inclusion amount should be determined by reference to the relevant items of each CFC owned by members of the same consolidated group. As discussed in section I.A of this Explanation of Provisions, a U.S. shareholder includes in gross income its GILTI inclusion amount for any taxable year. GILTI inclusion amount is defined under proposed § 1.951A–1(c)(1) as, with respect to a U.S. shareholder for a taxable year of the shareholder, the excess (if any) of the shareholder’s net CFC tested income over the shareholder’s net DTIR for the taxable year. Under proposed § 1.1502–51, this definition applies equally to a U.S. shareholder that is a member of a consolidated group. However, consistent with the authority in section 1502, the proposed regulations provide special definitions of net CFC tested income and net DTIR in order to clearly reflect the income tax liability of the consolidated group. Specifically, the proposed regulations provide that, to determine a member’s GILTI inclusion amount, the pro rata shares of tested loss, QBAI, tested interest expense, and tested interest income of each member are aggregated, and then a portion of each aggregate amount is allocated to each member of the group that is a U.S. shareholder of a tested income CFC based on the proportion of such member’s aggregate pro rata share of tested income to the total tested income of the consolidated group. See proposed § 1.1502–51(e). As discussed in section I.G.3 of this Explanation of Provisions, proposed § 1.951A–6(e) provides that the adjusted basis of the stock of a CFC is adjusted immediately before its disposition. Proposed § 1.1502–51(c) provides special rules for making these adjustments to the adjusted basis of the stock of a CFC owned by a member in a manner that reflects the special definitions applicable to members. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 C. Section 1.1502–32 Section 1.1502–32 provides rules for adjusting the basis of the stock of a subsidiary owned by another member to reflect, among other items, the subsidiary’s items of income. Accordingly, no new rules are necessary to adjust the basis of the stock of a member because of a GILTI inclusion. However, as previously discussed, proposed §§ 1.951A–6(e) and 1.1502– 51(c) provide rules for adjusting the basis of the stock of a CFC immediately before its disposition. As a result, proposed § 1.1502–32(b)(3)(ii)(E) and (iii)(C) provide for adjustments to the basis of the stock of a member to reflect those rules. Specifically, the proposed rules treat a portion of a member’s offset tested income amount as tax-exempt income and all of a member’s used tested loss amount as a noncapital, nondeductible expense. As previously discussed, the Treasury Department and the IRS have determined that in the case of a corporate U.S. shareholder, gain recognized on the disposition of stock of a CFC attributable to offset tested income would, in most cases, be eliminated as a result of the application of section 964(e)(4) or section 1248(a) and (j), to the extent the gain or income is eligible for the dividends received deduction under section 245A. In order to not incentivize a sale of the stock of a CFC over a sale of stock of a member, proposed § 1.1502–32(b)(3)(ii)(F) provides that a member is also treated as receiving tax-exempt income immediately before another member recognizes income, gain, deduction, or loss with respect to a share of the first member’s stock. The amount of this additional tax-exempt income is the net offset tested income amount allocable to the shares of any CFC owned by the first member to the extent that a distribution of such amount would have been characterized as a dividend eligible for a section 245A deduction and not subject to section 1059. The Treasury Department and the IRS request comments regarding the coordination of the rules of proposed §§ 1.951A–6(e) and 1.1502–51(c) with the investment adjustment regime of § 1.1502–32. Comments are specifically requested on: (1) Whether the amount of the adjustments to the basis of member stock should be limited to the amount of the adjustments to the basis of the stock of a CFC under the rules of proposed § 1.951A–6(e); (2) whether the adjustments to the basis of member stock should all be made on a current basis, made to the extent of the basis adjustments provided in proposed PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 51083 § 1.951A–6(e) on a current basis with any remaining adjustments being made at the time of a disposition of stock of a CFC or of a member, or made only at the time of a disposition of the stock of a CFC or of a member; and (3) whether rules should provide that a deduction under section 245A should not be treated as tax-exempt income to the extent that the underlying dividend is attributable to offset tested income for which basis adjustments have already been made. Additionally, comments are specifically requested as to whether there are any circumstances in which there should be a deemed disposition of the stock of a CFC owned by a member, such that the rules of proposed § 1.951A–6(e) would apply, including, but not limited to, a deconsolidation or taxable disposition of the stock of a member that owns (directly or indirectly) the stock of a CFC to either a person outside of the consolidated group or to another member, and a transfer of the stock of a member in an intercompany transaction that is a nonrecognition transaction. Similarly, comments are specifically requested as to whether there are other transactions that should be described in the definition of transferred shares in proposed § 1.1502–32(b)(3)(ii)(F)(1), such as a deemed disposition pursuant to § 1.1502–19(c)(1)(iii)(B). Lastly, comments are specifically requested as to whether any other adjustments are necessary to prevent the duplication of gain or loss resulting from a member’s ownership of a CFC, including situations where a member owning a CFC joins another consolidated group. In response to comments received, no new rules are being proposed under § 1.1502–33, which provides rules for adjusting the earnings and profits of a subsidiary and any member owning stock of the subsidiary. The Treasury Department and the IRS request comments on whether additional rules under § 1.1502–33 or any other regulations issued under section 1502 are necessary. IV. Sections 1.6038–2(a) and 1.6038–5 Under section 6038(a)(1), U.S. persons that control foreign corporations must file certain information returns with respect to those corporations. Before the Act, a U.S. shareholder would not have had an income inclusion under section 951(a)(1) with respect to a foreign corporation unless the corporation had been a CFC for an uninterrupted period of at least 30 days during the taxable year. While section 6038 does not limit the reporting requirements to foreign corporations that a U.S. person controls for an uninterrupted period of at least E:\FR\FM\10OCP2.SGM 10OCP2 51084 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS2 30 days, § 1.6038–2(a) does provide for such a limit. To coordinate with the amendment to section 951(a)(1) that removed the 30-day requirement, this notice of proposed rulemaking proposes to revise § 1.6038–2(a) to provide that certain information reporting is required for U.S. persons that control a foreign corporation at any time during an annual accounting period. Section 6038(a)(4) allows the Secretary to require any U.S. shareholder of a CFC to provide information required under section 6038(a)(1), which includes information that is similar to the listed information in section 6038(a)(1)(A) through (a)(1)(E), as well as information that ‘‘the Secretary determines to be appropriate to carry out the provisions of this title.’’ In order to effectively administer and enforce section 951A, the Treasury Department and the IRS have determined that, in general, U.S. shareholders must file a new Schedule I–1, Information for Global Intangible Low-Taxed Income, to Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, as well as new Form 8992, U.S Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), to provide the information that a U.S. shareholder needs with respect to each of its CFCs to determine the U.S. shareholder’s GILTI inclusion amount for a taxable year. Proposed § 1.6038–5 provides the filing requirements for new Form 8992. V. Applicability Dates Consistent with the applicability date of section 951A, proposed §§ 1.951– 1(e)(1)(ii)(B), 1.951A–1 through 1.951A– 6, 1.1502–32(b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C), and 1.1502–51 are proposed to apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. See section 7805(b)(2). Proposed § 1.951–1(e) (pro rata share of subpart F income) (other than § 1.951–1(e)(1)(ii)(B)) is proposed to apply to taxable years of U.S. shareholders ending on or after October 3, 2018. See section 7805(b)(1)(B). Consistent with the applicability date of the modification to section 951 in the Act, proposed § 1.951–1(a) (controlled foreign corporations) and § 1.951–1(g) (definition of U.S. shareholder) are proposed to apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end. See section VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 7805(b)(2). Proposed § 1.951–1(h) (special rule for partnership blocker structure) is proposed to apply to taxable years of domestic partnerships ending on or after May 14, 2010. See Notice 2010–41 and section 7805(b)(1)(C). Although proposed § 1.951–1(h) applies for purposes of both section 951 and section 951A, the only practical effect of applying this rule to taxable years of domestic partnerships ending on or after May 14, 2010, and before January 1, 2018, concerns the application of section 951. The proposed rule does not have relevance to the application of section 951A until the first taxable year of a CFC owned by a domestic partnership beginning after December 31, 2017 (the effective date of section 951A). Proposed § 1.6038–2(a) (information returns required of U.S. persons with respect to annual accounting periods of certain foreign corporations) and proposed § 1.6038–5 (information returns required of certain U.S. persons to report amounts determined with respect to certain foreign corporations for GILTI purposes) are proposed to apply to taxable years of foreign corporations beginning on or after October 3, 2018. See sections 6038(a)(3) and 7805(b)(1)(B). Special Analyses Regulatory Planning and Review— Economic Analysis Executive Orders 13563 and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The Executive Order 13771 designation for any final rule resulting from these proposed regulations will be informed by comments received. The proposed regulations have been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant. Accordingly, the proposed regulations have been reviewed by OIRA. For more detail on PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 the economic analysis, please refer to the following analysis. A. Overview The proposed regulations provide taxpayers with computational, definitional, and anti-avoidance guidance regarding the application of section 951A. They provide guidance for U.S. shareholders to determine the amount of GILTI to include in gross income and how to compute the components of GILTI. Among other benefits, this clarity helps ensure that taxpayers all calculate GILTI in a similar manner, which promotes efficiency and equity contingent on the provisions of the overall Code. The proposed regulations under sections 951A, 1502, and 6038 (proposed §§ 1.951A–1 through 1.951A– 7, 1.1502–12, 1.1502–13, 1.1502–32, and 1.1502–51, and 1.6038–5) provide details for taxpayers (including members of a consolidated group) regarding the computation of certain components of GILTI (for example, tested income and tested loss, QBAI, net deemed tangible income return, and specified interest expense), describe the consequences of a GILTI inclusion for purposes of other sections of the Code, and detail the reporting requirements associated with GILTI. These proposed regulations further establish anti-abuse rules to prevent taxpayers from taking measures to inappropriately reduce their GILTI through certain transfers of property. They also disallow certain losses that reduce GILTI from being used a second time. The proposed regulations under sections 951 and 6038 (proposed §§ 1.951–1 and 1.6038–2) prevent taxpayers from avoiding an inclusion of subpart F income under section 951(a) or the inclusion of GILTI under section 951A through certain artificial arrangements involving the ownership of CFC stock, coordinate the calculation of a U.S. shareholder’s subpart F with its GILTI, and conform the regulations to other amendments in the Act, including a modification to the definition of U.S. shareholder for purposes of sections 951(a) and 951A and the elimination of the 30-day CFC status requirement. This economic analysis describes the economic benefits and costs of the proposed regulations. B. Economic Analysis of the Proposed Regulations 1. Background Because section 951A is a new Code section, many of the details behind the relevant terms and necessary calculations required for the E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules computation of a U.S. shareholder’s GILTI inclusion amount would benefit from greater specificity. Thus, as is expected after the passage of major tax reform legislation, the regulations answer open questions and provide detail and specificity for the definitions and concepts described in section 951A, so that U.S. shareholders can readily and accurately determine their GILTI inclusion amounts. For example, the regulations provide definitions of crucial terms, such as tested income, tested loss, specified tangible property, and specified interest expense. As discussed in section I.A. of the Explanation of Provisions, although a GILTI inclusion is treated similarly to an inclusion of subpart F income for some purposes, it is determined in a manner fundamentally different from that of a subpart F inclusion. Therefore, in some cases it is appropriate for the regulations to rely on subpart F principles, but in other cases different rules are necessary. For example, the regulations apply subpart F rules for purposes of (1) determining a U.S. shareholder’s pro rata share of certain items of a CFC, (2) translating foreign currency to U.S. dollars, (3) determining gross income and allowable deductions, and (4) allocating and apportioning allowable deductions to gross tested income. However, it would be inappropriate to rely on subpart F rules for the GILTI computations that are performed at the U.S. shareholder level because subpart F income is determined solely at the level of a CFC. For example, the regulations provide detail on how a U.S. shareholder determines its specified interest expense at the shareholder level based on the interest expense and interest income of each CFC owned by the shareholder. Additionally, the proposed regulations provide rules regarding the interaction of certain aspects of section 951A with other provisions. For example, they clarify that, regarding the interaction of the earnings and profits limitation (including recapture) for subpart F income and the determination of gross tested income, tested income and tested loss are computed without regard to the earnings and profits limitation in section 952(c). In addition, the proposed regulations provide that GILTI inclusion amounts are considered net investment income under section 1411. Finally, the proposed regulations provide that certain deductions between related parties are not deferred under sections 163(e)(3)(B)(i) and 267(a)(3)(B) to the extent the income is taken into account in determining a U.S. shareholder’s GILTI inclusion amount. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 Section 951A provides the Secretary of the Treasury the authority to issue regulations and other guidance to prevent the avoidance of the purposes of section 951A(d). As such, regulations under §§ 1.951A–2 and 1.951A–3 provide that certain transactions that reduce a U.S. shareholder’s GILTI inclusion amount, for example, by increasing a CFC’s qualified business asset investment (QBAI) or decreasing a CFC’s tested income, will be disregarded for purposes of the GILTI computation. Further, the Treasury Department and the IRS have determined that, in the absence of any adjustment, inappropriate results may arise in cases that a U.S. shareholder’s pro rata share of the tested loss of one CFC offsets the shareholder’s pro rata share of the tested income of another CFC in determining the shareholder’s GILTI inclusion amount. In particular, a U.S. shareholder disposing of the stock of a tested loss CFC could recognize second, duplicative benefits from a single economic loss. Therefore, the proposed regulations provide that, when determining gain or loss on the disposition of the stock of a tested loss CFC, the U.S. shareholder’s basis in the stock of the tested loss CFC is reduced by the cumulative amount of tested losses that were used to offset tested income in determining the shareholder’s net CFC tested income. The statute is silent on the computation of GILTI for members of a consolidated group and for domestic partnerships and their partners. Absent these regulations, there would be uncertainty among taxpayers as to whether to calculate a GILTI inclusion amount at the level of a member or its consolidated group, or at the level of a domestic partnership or its partners. Without guidance, different taxpayers would likely take different positions on these matters. The proposed regulations provide clarity by (1) determining the GILTI inclusion amount of each member of a consolidated group by taking into account the relevant items of each CFC owned by members of such group, and (2) providing guidance on the computation of the GILTI inclusion amount of domestic partnerships and their partners. Finally, these proposed regulations provide reporting requirements necessary to properly administer and enforce section 951A. In particular, the Treasury Department and the IRS have determined that U.S. shareholders must file a new Schedule I–1, Information for Global Intangible Low-Taxed Income, associated with Form 5471, Information Return of U.S. Persons With Respect To PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 51085 Certain Foreign Corporations, as well as new Form 8992, U.S Shareholder Calculation of Global Intangible LowTaxed Income (GILTI), in order to provide the information that a U.S. shareholder is using with respect to each of its CFCs to determine the U.S. shareholder’s GILTI inclusion amount for a taxable year. The proposed regulations also provide that a U.S. shareholder partnership must include on its Schedule K–1, associated with Form 1065, U.S. Return of Partnership Income, certain information necessary for its partners to determine their distributive share of the partnership’s GILTI inclusion amount or, in the case of U.S. shareholder partners, to determine their own GILTI inclusion amounts. Finally, to coordinate with the amendment to section 951(a)(1) that removed the 30-day CFC status requirement for subpart F inclusions, the proposed regulations provide that certain information reporting is required for U.S. persons that control a foreign corporation at any time during an annual accounting period. 2. Anticipated Benefits and Costs of the Proposed Regulations a. Baseline The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations against a baseline—the way the world would look in the absence of the proposed regulations. b. Anticipated Benefits The Treasury Department and the IRS expect that the certainty and clarity provided by these proposed regulations, relative to the baseline, will enhance U.S. economic performance under the statute. Because a tax has not previously been imposed on GILTI and the statute is silent on certain aspects of definitions and calculations, taxpayers can particularly benefit from enhanced specificity regarding the relevant terms and necessary calculations they are required to apply under the statute. In the absence of this enhanced specificity, similarly situated taxpayers might interpret the statutory rules of section 951A differently, potentially resulting in inequitable outcomes. For example, different taxpayers might pursue income-generating activities based on different assumptions about whether that income will be counted as GILTI, and some taxpayers may forego specific investments that other taxpayers deem worthwhile based on different interpretations of the tax consequences alone. The guidance provided in these regulations helps to ensure that E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51086 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules taxpayers face more uniform incentives when making economic decisions, a tenet of economic efficiency. Consistent reporting across taxpayers also increases the IRS’s ability to consistently enforce the tax rules, thus increasing equity and decreasing opportunities for tax evasion. For example, the proposed regulations provide a definition of specified interest expense that adopts a netting approach. Alternatives would be to adopt a tracing approach or to remain silent. The Treasury Department and the IRS rejected a tracing approach because it would be more burdensome for taxpayers due to the complexity of matching, at the U.S. shareholder-level, of the shareholder’s pro rata share of each item of interest expense with its pro rata share of each item of interest income. The Treasury Department and the IRS also rejected the option of remaining silent because if taxpayers relied on statutory language alone, taxpayers would adopt different approaches because the statute does not define what ‘‘attributable’’ means, leaving it open to differing interpretations. As discussed above, there are similarities between GILTI and subpart F. Where appropriate, these proposed regulations rely on rules already developed under subpart F. Since taxpayers to whom GILTI applies are already subject to the subpart F regime, it is less costly to them to apply rules they are already familiar with, and they will benefit in reduced time and cost spent learning new rules. For example, the proposed regulations apply existing subpart F rules for determining allowable deductions for GILTI purposes. By relying on existing infrastructure, the proposed regulations allow taxpayers to use the same analysis that they already conduct for subpart F purposes. For additional discussion of the rules for determining allowable deductions, see section I.C.1 of the Explanation of Provisions section. The Treasury Department and the IRS next considered the benefits and costs of providing these specific proposed terms, calculations, and other details regarding GILTI. In developing these proposed regulations, the Treasury Department and the IRS have generally aimed to apply the principle that an economically efficient tax system would treat income derived from similar economic decisions similarly, to the extent consistent with the statute and considerations of administrability of the tax system. Similar economic decisions, in the context of GILTI, are those that involve property of a similar degree of immobility and that demonstrate active business operations and presence in any VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 particular jurisdiction. See, for example, Senate Explanation, at 366. An economically efficient tax system would also generally keep the choice among businesses’ ownership and organizational structures neutral contingent on the provisions of the corporate income tax and other tax provisions that may affect organizational structure. The Treasury Department and the IRS expect that the proposed regulations, in providing that GILTI be generally calculated on a consolidated group basis and at the partner level in the case of partners that are U.S. shareholders of one or more partnership CFCs, will ensure that shareholders face uniform tax treatment on their GILTI-relevant investments regardless of ownership or organizational structure, thus encouraging market-driven as opposed to tax-driven structuring decisions. If, as an alternative policy approach, GILTI were determined solely at the level of a member (in the case of consolidated groups) or solely at the level of a partnership (in the case of domestic partnerships and their partners), many taxpayers would be compelled to reorganize their ownership structures just to obtain the full aggregation of CFC attributes as envisioned by Congress. Yet other taxpayers would be incentivized to reorganize in an attempt to avoid full aggregation so as to reduce their inclusion below an amount that accurately reflects their GILTI. For an illustration, see section I.F of the Explanation of Provisions. Therefore, the Treasury Department and the IRS propose that GILTI be calculated on a consolidated group basis and at the partner level in the case of partners that are U.S. shareholders of one or more partnership CFCs. The preamble discusses further why those approaches were taken, as well as describing alternative approaches considered. The Treasury Department and the IRS request comments on this proposed approach. c. Anticipated Impacts on Administrative and Compliance Costs Because the statute requires payment of tax regardless of the issuance of regulations or instructions, the new forms, revisions to existing forms, and proposed regulations can lower the burden on taxpayers of determining their tax liability. The Treasury Department and the IRS expect that the proposed regulations will reduce the costs for taxpayers to comply with the Act, relative to the baseline of no promulgated regulations. The proposed regulations require that each U.S. shareholder partnership provide to each PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 partner its distributive share of the partnership’s GILTI inclusion amount and, if the partner is a U.S. shareholder of one or more partnership CFCs, the partner’s proportionate share of the partnership’s pro rata share of each relevant item of the partnership CFC. Under the baseline, the burden would potentially have fallen on each partner, who would be required to determine its own distributive share of the partnership’s GILTI inclusion amount or, if a U.S. shareholder of a partnership CFC, determine its own GILTI inclusion amount by reference to the partnership’s pro rata share of items of the partnership CFC. While this latter burden is difficult to assess, because it is unclear how partners would calculate these amounts in the absence of a determination by the partnership and it is similarly unclear what efforts might be made by the partnership to help the partners fulfill this obligation, the Treasury Department and the IRS expect that it would be significantly greater than the burden incurred under the proposed regulations. Proposed § 1.6038–2(a) increases record-keeping requirements for taxpayers because it requires all taxpayers to file Form 5471 if they held stock in a CFC during the taxable year regardless of the duration of the holding period, rather than only if they held the stock for a 30-day period under the current regulation. The changes in the proposed regulation derive directly from statutory changes to the holding period requirement in the Act. C. Paperwork Reduction Act The collections of information in these proposed regulations with respect to section 951A are in proposed §§ 1.951A–5(f) and 1.6038–5. A separate collection of information applicable to controlling U.S. shareholders of a foreign corporation is in proposed § 1.6038–2(a). The collection of information in proposed § 1.6038–5 is mandatory for each U.S. shareholder (including a U.S. shareholder partner) that owns (within the meaning of section 958(a)) stock of a CFC. The collection of information in proposed § 1.6038–5 is satisfied by submitting a new reporting form, Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), with an income tax return. In addition, for those U.S. shareholders that are required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, a new Schedule I–1, Information for Global Intangible Low-Taxed Income, has been added. For purposes of the Paperwork Reduction Act of 1995 (44 E:\FR\FM\10OCP2.SGM 10OCP2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules U.S.C. 3507(d)) (‘‘PRA’’), the reporting burden associated with proposed § 1.6038–5 will be reflected in the IRS Form 14029, Paperwork Reduction Act Submission, associated with Form 5471 (OMB control number 1545–0704) and the new Form 8992 (OMB control number 1545–0123). The collection of information in proposed § 1.951A–5(f) requires each U.S. shareholder partnership to provide to its partners their distributive share of the partnership’s GILTI inclusion amount, as well as provide to each U.S. shareholder partner their proportionate share of the partnership’s pro rata share (if any) of each CFC tested item of each partnership CFC of the partnership. The Treasury Department and the IRS anticipate revising Schedule K–1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or its instructions to require the provision of this information. For purposes of the PRA, the reporting burden associated with proposed § 1.951A–5(f) will be reflected in the IRS Form 14029, Paperwork Reduction Act Submission, associated with Schedule K–1 (Form 1065, OMB control number 1545–0123). The collection of information currently required from a U.S. person that controls a foreign corporation is revised by proposed § 1.6038–2(a). Section 1.6038–2(a) presently requires only those U.S. persons with uninterrupted control of a foreign corporation for 30 days or more during the shareholder’s annual accounting period to file Form 5471 for that period. 51087 Consistent with statutory changes in the Act, the revised collection of information in proposed § 1.6038–2(a) eliminates the 30-day holding period as a precondition to reporting and requires every U.S. person that controls a foreign corporation at any time during an annual accounting period to file Form 5471 for that period. For purposes of the PRA, the reporting burden associated with proposed § 1.6038–2(a) will be reflected in the IRS Form 14029, Paperwork Reduction Act Submission, associated with Form 5471. When available, drafts of IRS forms are posted for comment at https:// apps.irs.gov/app/picklist/list/ draftTaxForms.html. RELATED NEW OR REVISED TAX FORMS Schedule I–1 (Form 5471) ........................................................................................... Form 8992 ................................................................................................................... Form 1065/1120S, Schedule K ................................................................................... Form 5471 (30 days) ................................................................................................... daltland on DSKBBV9HB2PROD with PROPOSALS2 D. Regulatory Flexibility Act It is hereby certified that this notice of proposed rulemaking will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). The domestic small business entities that are subject to section 951A and this notice of proposed rulemaking are those domestic small business entities that are U.S. shareholders of a CFC.2 Generally, a U.S. shareholder is any U.S. person that owns 10 percent or more of a foreign corporation’s stock, measured either by value or voting power. A CFC is a foreign corporation in which more than 50 percent of its stock is owned by U.S. shareholders, again measured either by value or voting power. Data about the number of domestic small business entities potentially affected by these regulations are not readily available. The domestic small business entities that are subject to the requirements of proposed § 1.951A–5(f) or 1.6038–5 of this notice of proposed rulemaking are U.S. shareholders of one or more CFCs. 2 The Treasury Department and the IRS estimate that there are 25,000–35,000 respondents of all sizes that are likely to file Schedule I–1, Form 5471. Only a small proportion of these are likely to be small businesses. The Treasury Department and the IRS request comments on the number of small businesses that are likely to file Schedule I–1. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 New Revision of existing form ✓ ✓ ........................ ........................ ........................ ........................ ✓ ✓ The Treasury Department and the IRS do not have data to assess the number of small entities potentially affected by § 1.951A–5(f) or 1.6038–5. However, businesses that are U.S. shareholders of CFCs are generally not small businesses because the ownership of sufficient stock in a CFC in order to be a U.S. shareholder generally entails significant resources and investment. Therefore, the Treasury Department and the IRS do not believe that a substantial number of domestic small business entities will be subject to proposed § 1.951A–5(f) or 1.6038–5. Consequently, the Treasury Department and the IRS do not believe that proposed § 1.951A–5(f) or 1.6038– 5 will have a significant economic impact on a substantial number of domestic small business entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act is not required with respect to the collection of information requirements of proposed § 1.951A–5(f) or 1.6038–5. Existing § 1.6038–2(a) requires only those U.S. persons with uninterrupted control of a foreign corporation for 30 days or more during the shareholder’s annual accounting period to file Form 5471 for that period. Proposed § 1.6038– 2(a) eliminates the 30-day holding period as a precondition to reporting and requires every U.S. person that controls a foreign corporation at any time during an annual accounting PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 Number of respondents (estimated) 25,000–35,000 25,000–35,000 8,000–12,000 <1,000 period to file Form 5471 for that period. As a result, those U.S. shareholders that control a foreign corporation for less than 30 days will now be required to file Form 5471 pursuant to proposed § 1.6038–2(a). The domestic small business entities subject to the requirements of proposed § 1.6038–2(a) are those domestic small business entities that control a foreign corporation at any time during a taxable year. For these purposes, a domestic small business entity controls a foreign corporation by owning more than 50 percent of that foreign corporation’s stock, measured either by voting power or value. The Treasury Department and the IRS do not believe that a substantial number of domestic small business entities that are controlling shareholders of a foreign corporation will become Form 5471 filers due to the information collection in proposed § 1.6038–2(a) for the following reasons. First, significant resources and investment are required for a U.S. person to own and operate a business in a foreign country as a corporation. Second, the Treasury Department and the IRS believe that satisfying the stock ownership requirement for control for purposes of proposed § 1.6038–2(a) requires a potential outlay of significant resources and investment, including active involvement in managing the foreign corporation due to controlling ownership of the corporation, such that E:\FR\FM\10OCP2.SGM 10OCP2 51088 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules few domestic small business entities are likely to control foreign corporations for purposes of proposed § 1.6038–2(a). For these reasons, the Treasury Department and the IRS do not believe it likely that a domestic small business entity would have controlling ownership of a foreign corporation for less than a 30-day period in a taxable year. As a result, the Treasury Department and the IRS do not believe that a substantial number of domestic small business entities will be affected by the proposed § 1.6038–2(a) eliminating the 30-day holding period as a precondition to filing Form 5471. Consequently, the Treasury Department and the IRS do not believe that proposed § 1.6038–2(a) will have a significant economic impact on a substantial number of domestic small business entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act is not required with respect to the requirements of proposed § 1.6038–2(a). Notwithstanding this certification, the Treasury Department and the IRS invite comments from the public about the impact of this proposed rule on small entities. Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses. The IRS invites the public to comment on this certification. daltland on DSKBBV9HB2PROD with PROPOSALS2 E. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2018, that threshold is approximately $150 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. F. Executive Order 13132: Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 proposed rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Comments and Requests for Public Hearing Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations, and specifically on the issues identified in sections I.B.3, I.C.1, I.D.4, I.F, I.G.1, I.G.3, and III.C of the Explanations of Provisions. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, then notice of the date, time, and place for the public hearing will be published in the Federal Register. Drafting Information The principal authors of the proposed regulations are Melinda E. Harvey and Michael Kaercher of the Office of Associate Chief Counsel (International) and Austin Diamond-Jones and Kevin M. Jacobs of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in the development of the proposed regulations. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries ■ PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.951–1 also issued under 26 U.S.C. 7701(a). * * * Sections 1.951A–2 and 1.951A–3 also issued under 26 U.S.C. 951A(d). * * * Section 1.951A–5 also issued under 26 U.S.C. 6031. Section 1.951A–6 also issued under 26 U.S.C. 951A(f)(1)(B). * * * Section 1.1502–51 also issued under 26 U.S.C. 1502. * * * Section 1.6038–2 also issued under 26 U.S.C. 6038. * * * Section 1.6038–5 also issued under 26 U.S.C. 6038. * * * Par. 2. Section 1.951–1 is amended by: ■ 1. Revising the introductory language in paragraph (a). ■ 2. Revising paragraphs (e) and (g)(1). ■ 3. Adding paragraphs (h) and (i). The revisions and additions read as follows: ■ § 1.951–1 Amounts included in gross income of United States shareholders. (a) In general. If a foreign corporation is a controlled foreign corporation (within the meaning of section 957) at any time during any taxable year of such corporation, every person— * * * * * (e) Pro rata share of subpart F income defined—(1) In general—(i) Hypothetical distribution. For purposes of paragraph (b) of this section, a United States shareholder’s pro rata share of a controlled foreign corporation’s subpart F income for a taxable year is the amount that bears the same ratio to the corporation’s subpart F income for the taxable year as the amount of the corporation’s current earnings and profits that would be distributed with respect to the stock of the corporation which the United States shareholder owns (within the meaning of section 958(a)) for the taxable year bears to the total amount of the corporation’s current earnings and profits that would be distributed with respect to the stock owned by all the shareholders of the corporation if all the current earnings and profits of the corporation for the taxable year (not reduced by actual distributions during the year) were distributed (hypothetical distribution) on the last day of the corporation’s taxable year on which such corporation is a controlled foreign corporation (hypothetical distribution date). (ii) Determination of current earnings and profits. For purposes of this paragraph (e), the amount of current earnings and profits of a controlled foreign corporation for a taxable year is treated as the greater of the following two amounts: E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules (A) The earnings and profits of the corporation for the taxable year determined under section 964; or (B) The sum of the subpart F income (as determined under section 952 and increased as provided under section 951A(c)(2)(B)(ii) and § 1.951A–6(d)) of the corporation for the taxable year and the tested income (as defined in section 951A(c)(2)(A) and § 1.951A–2(b)(1)) of the corporation for the taxable year. (2) One class of stock. If a controlled foreign corporation for a taxable year has only one class of stock outstanding, the amount of the corporation’s current earnings and profits distributed in the hypothetical distribution with respect to each share in the class of stock is determined as if the hypothetical distribution were made pro rata with respect to each share in the class of stock. (3) More than one class of stock. If a controlled foreign corporation for a taxable year has more than one class of stock outstanding, the amount of the corporation’s current earnings and profits distributed in the hypothetical distribution with respect to each class of stock is determined under this paragraph (e)(3) based on the distribution rights of each class of stock on the hypothetical distribution date, and then further distributed pro rata with respect to each share in the class of stock. Subject to paragraphs (e)(4) through (6) of this section, the distribution rights of a class of stock are determined taking into account all facts and circumstances related to the economic rights and interest in the current earnings and profits of the corporation of each class, including the terms of the class of stock, any agreement among the shareholders and, where appropriate, the relative fair market value of shares of stock. (4) Special rules—(i) Redemptions, liquidations, and returns of capital. Notwithstanding the terms of any class of stock of the controlled foreign corporation or any agreement or arrangement with respect thereto, no amount of current earnings and profits is distributed in the hypothetical distribution with respect to a particular class of stock to the extent that a distribution of such amount would constitute a distribution in redemption of stock (even if such redemption would be treated as a distribution of property to which section 301 applies pursuant to section 302(d)), a distribution in liquidation, or a return of capital. (ii) Certain cumulative preferred stock. If a controlled foreign corporation has outstanding a class of redeemable preferred stock with cumulative dividend rights and dividend arrearages VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 that do not compound at least annually at a rate that equals or exceeds the applicable Federal rate (as defined in section 1274(d)(1)) (AFR), the amount of the corporation’s current earnings and profits distributed in the hypothetical distribution with respect to the class of stock may not exceed the amount of dividends actually paid during the taxable year with respect to the class of stock plus the present value of the unpaid current dividends with respect to the class determined using the AFR that applies on the date the stock is issued for the term from such issue date to the mandatory redemption date and assuming the dividends will be paid at the mandatory redemption date. For purposes of this paragraph (e)(4)(ii), if the class of preferred stock does not have a mandatory redemption date, the mandatory redemption date is the date that the class of preferred stock is expected to be redeemed based on all facts and circumstances. (iii) Dividend arrearages. If there is an arrearage in dividends for prior taxable years with respect to a class of preferred stock of a controlled foreign corporation, an amount of the corporation’s current earnings and profits is distributed in the hypothetical distribution to the class of preferred stock by reason of the arrearage only to the extent the arrearage exceeds the accumulated earnings and profits of the controlled foreign corporation remaining from prior taxable years beginning after December 31, 1962, as of the beginning of the taxable year, or the date on which such stock was issued, whichever is later. If there is an arrearage in dividends for prior taxable years with respect to more than one class of preferred stock, the previous sentence is applied to each class in order of priority, except that the accumulated earnings and profits remaining after the applicable date are reduced by the earnings and profits necessary to satisfy arrearages with respect to classes of stock with a higher priority. For purposes of this paragraph (e)(4)(iii), the amount of any arrearage is determined by taking into account the time value of money principles in paragraph (e)(4)(ii) of this section. (5) Restrictions or other limitations on distributions—(i) In general. A restriction or other limitation on distributions of an amount of earnings and profits by a controlled foreign corporation is not taken into account in determining the amount of the corporation’s current earnings and profits distributed in a hypothetical distribution to a class of stock of the controlled foreign corporation. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 51089 (ii) Definition. For purposes of paragraph (e)(5)(i) of this section, a restriction or other limitation on distributions includes any limitation that has the effect of limiting the distribution of an amount of earnings and profits by a controlled foreign corporation with respect to a class of stock of the corporation, other than currency or other restrictions or limitations imposed under the laws of any foreign country as provided in section 964(b). (iii) Exception for certain preferred distributions. For purposes of paragraph (e)(5)(i) of this section, the right to receive periodically a fixed amount (whether determined by a percentage of par value, a reference to a floating coupon rate, a stated return expressed in terms of a certain amount of U.S. dollars or foreign currency, or otherwise) with respect to a class of stock the distribution of which is a condition precedent to a further distribution of earnings and profits that year with respect to any class of stock (not including a distribution in partial or complete liquidation) is not a restriction or other limitation on the distribution of earnings and profits by a controlled foreign corporation. (iv) Illustrative list of restrictions and limitations. Except as provided in paragraph (e)(5)(iii) of this section, restrictions or other limitations on distributions include, but are not limited to— (A) An arrangement that restricts the ability of a controlled foreign corporation to pay dividends on a class of stock of the corporation until a condition or conditions are satisfied (for example, until another class of stock is redeemed); (B) A loan agreement entered into by a controlled foreign corporation that restricts or otherwise affects the ability to make distributions on its stock until certain requirements are satisfied; or (C) An arrangement that conditions the ability of a controlled foreign corporation to pay dividends to its shareholders on the financial condition of the corporation. (6) Transactions and arrangements with a principal purpose of reducing pro rata shares. For purposes of this paragraph (e), any transaction or arrangement that is part of a plan a principal purpose of which is the avoidance of Federal income taxation, including, but not limited to, a transaction or arrangement to reduce a United States shareholder’s pro rata share of the subpart F income of a controlled foreign corporation, which transaction or arrangement would avoid Federal income taxation without regard E:\FR\FM\10OCP2.SGM 10OCP2 51090 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS2 to this paragraph (e)(6), is disregarded in determining such United States shareholder’s pro rata share of the subpart F income of the corporation. This paragraph (e)(6) also applies for purposes of the pro rata share rules described in § 1.951A–1(d) that reference this paragraph (e), including the rules in § 1.951A–1(d)(3) that determine the pro rata share of qualified business asset investment based on the pro rata share of tested income. (7) Examples. The application of this section is illustrated by the examples in this paragraph (e)(7). (i) Common facts for examples in paragraph (e)(7). Except as otherwise stated, the following facts are assumed for purposes of the examples. (A) FC1 is a controlled foreign corporation. (B) USP1, USP2, and USP3 are domestic corporations and United States shareholders of FC1. (C) Individual A is a foreign individual, and FC2 is a foreign corporation. (D) All persons use the calendar year as their taxable year. (E) Any ownership of FC1 by any shareholder is for all of Year 1. (F) The common shareholders of FC1 are entitled to dividends when declared by FC1’s board of directors. (G) There are no accrued but unpaid dividends with respect to preferred shares, and common shares have positive liquidation value. (H) FC1 makes no distributions during Year 1. (I) There are no other facts and circumstances related to the economic rights and interest of any class of stock in the current earnings and profits of a foreign corporation, and no transaction or arrangement was entered into as part of a plan a principal purpose of which is the avoidance of Federal income taxation. (J) FC1 does not have tested income within the meaning of section 951A(c)(2)(A) and § 1.951A–2(b)(1) or tested loss within the meaning of section 951A(c)(2)(B) and § 1.951A– 2(b)(2). (ii) Example 1: Single class of stock— (A) Facts. FC1 has outstanding 100 shares of one class of stock. USP1 owns 60 shares of FC1. USP2 owns 40 shares of FC1. For Year 1, FC1 has $1,000x of earnings and profits and $100x of subpart F income within the meaning of section 952. (B) Facts. Analysis. FC1 has one class of stock. Therefore, under paragraph (e)(2) of this section, FC1’s current earnings and profits of $1,000x are distributed in the hypothetical distribution pro rata to each share of stock. Accordingly, under paragraph (e)(1) of this section, for Year 1, USP1’s pro rata share of FC1’s subpart F income is $60x VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 ($100x × $600x/$1,000x) and USP2’s pro rata share of FC1’s subpart F income is $40x ($100x × $400x/$1,000x). (iii) Example 2: Common and preferred stock— (A) Facts. FC1 has outstanding 70 shares of common stock and 30 shares of 4% nonparticipating, voting preferred stock with a par value of $10x per share. USP1 owns all of the common shares. Individual A owns all of the preferred shares. For Year 1, FC1 has $100x of earnings and profits and $50x of subpart F income within the meaning of section 952. In Year 1, FC1 distributes as a dividend $12x to Individual A with respect to Individual A’s preferred shares. (B) Analysis. The distribution rights of the preferred shares are not a restriction or other limitation within the meaning of paragraph (e)(5) of this section. Under paragraph (e)(3) of this section, the amount of FC1’s current earnings and profits distributed in the hypothetical distribution with respect to Individual A’s preferred shares is $12x and with respect to USP1’s common shares is $88x. Accordingly, under paragraph (e)(1) of this section, USP1’s pro rata share of FC1’s subpart F income is $44x ($50x × $88x/ $100x) for Year 1. (iv) Example 3: Restriction based on cumulative income— (A) Facts. FC1 has outstanding 10 shares of common stock and 400 shares of 2% nonparticipating, voting preferred stock with a par value of $1x per share. USP1 owns all of the common shares. FC2 owns all of the preferred shares. USP1 and FC2 cause the governing documents of FC1 to provide that no dividends may be paid to the common shareholders until FC1 cumulatively earns $100,000x of income. For Year 1, FC1 has $50x of earnings and profits and $50x of subpart F income within the meaning of section 952. In Year 1, FC1 distributes as a dividend $8x to FC2 with respect to FC2’s preferred shares. (B) Analysis. The agreement restricting FC1’s ability to pay dividends to common shareholders until FC1 cumulatively earns $100,000x of income is a restriction or other limitation within the meaning of paragraph (e)(5) of this section. Therefore, the restriction is disregarded for purposes of determining the amount of FC1’s current earnings and profits distributed in the hypothetical distribution to a class of stock. The distribution rights of the preferred shares are not a restriction or other limitation within the meaning of paragraph (e)(5) of this section. Under paragraph (e)(3) of this section, the amount of FC1’s current earnings and profits distributed in the hypothetical distribution with respect to FC2’s preferred shares is $8x and with respect to USP1’s common shares is $42x. Accordingly, under paragraph (e)(1) of this section, USP1’s pro rata share of FC1’s subpart F income is $42x for Year 1. (v) Example 4: Redemption rights— (A) Facts. FC1 has outstanding 40 shares of common stock and 10 shares of 4% nonparticipating, voting preferred stock with a par value of $50x per share. Pursuant to the terms of the preferred stock, FC1 has the right to redeem at any time, in whole or in part, the preferred stock. FC2 owns all of the preferred shares. USP1, wholly owned by FC2, owns all of the common shares. For PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 Year 1, FC1 has $100x of earnings and profits and $100x of subpart F income within the meaning of section 952. In Year 1, FC1 distributes as a dividend $20x to FC2 with respect to FC2’s preferred shares. (B) Analysis. If FC1 were treated as having redeemed any preferred shares, the redemption would be treated as a distribution to which section 301 applies under section 302(d) due to FC2’s constructive ownership of the common shares. However, under paragraph (e)(4)(i) of this section, no amount of earnings and profits is distributed in the hypothetical distribution to the preferred shareholders on the hypothetical distribution date as a result of FC1’s right to redeem, in whole or in part, the preferred shares. FC1’s redemption rights with respect to the preferred shares cannot affect the distribution of current earnings and profits in the hypothetical distribution to FC1’s shareholders. As a result, the amount of FC1’s current earnings and profits distributed in the hypothetical distribution with respect to FC2’s preferred shares is $20x and with respect to USP1’s common shares is $80x. Accordingly, under paragraph (e)(1) of this section, USP1’s pro rata share of FC1’s subpart F income is $80x for Year 1. (vi) Example 5: Shareholder owns common and preferred stock— (A) Facts. FC1 has outstanding 40 shares of common stock and 60 shares of 6% nonparticipating, nonvoting preferred stock with a par value of $100x per share. USP1 owns 30 shares of the common stock and 15 shares of the preferred stock during Year 1. The remaining 10 shares of common stock and 45 shares of preferred stock of FC1 are owned by Individual A. For Year 1, FC1 has $1,000x of earnings and profits and $500x of subpart F income within the meaning of section 952. (B) Analysis. Under paragraph (e)(5)(iii) of this section, the right of the holder of the preferred stock to receive 6% of par value is not a restriction or other limitation within the meaning of paragraph (e)(5) of this section. The amount of FC1’s current earnings and profits distributed in the hypothetical distribution with respect to FC1’s preferred shares is $360x (0.06 × $100x × 60) and with respect to its common shares is $640x ($1,000x¥$360x). As a result, the amount of FC1’s current earnings and profits distributed in the hypothetical distribution to USP1 is $570x, the sum of $90x ($360x × 15/ 60) with respect to its preferred shares and $480x ($640x × 30/40) with respect to its common shares. Accordingly, under paragraph (e)(1) of this section, USP1’s pro rata share of the subpart F income of FC1 is $285x ($500x × $570x/$1,000x). (vii) Example 6: Subpart F income and tested income— (A) Facts. FC1 has outstanding 700 shares of common stock and 300 shares of 4% nonparticipating, voting preferred stock with a par value of $100x per share. USP1 owns all of the common shares. USP2 owns all of the preferred shares. For Year 1, FC1 has $10,000x of earnings and profits, $2,000x of subpart F income within the meaning of section 952, and $9,000x of tested income within the meaning of section 951A(c)(2)(A) and § 1.951A–2(b)(1). (B) Analysis—(1) Pro rata share of subpart F income. The current earnings and profits of E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules FC1 determined under paragraph (e)(1)(ii) of this section are $11,000x, the greater of FC1’s earnings and profits as determined under section 964 ($10,000x) or the sum of FC1’s subpart F income and tested income ($2,000x + $9,000x). The amount of FC1’s current earnings and profits distributed in the hypothetical distribution with respect to USP2’s preferred shares is $1,200x (.04 × $100x × 300) and with respect to USP1’s common shares is $9,800x ($11,000x¥$1,200x). Accordingly, under paragraph (e)(1) of this section, USP1’s pro rata share of FC1’s subpart F income is $1,782x ($2,000x × $9,800x/$11,000x), and USP2’s pro rata share of FC1’s subpart F income is $218x ($2,000x × $1,200x/ $11,000x). (2) Pro rata share of tested income. The same analysis applies for the hypothetical distribution with respect to the tested income as under paragraph (ii)(A) of this Example 6 with respect to the subpart F income. Accordingly, under § 1.951A–1(d)(2), USP1’s pro rata share of FC1’s tested income is $8,018x ($9,000x × $9,800x/$11,000x), and USP2’s pro rata share of FC1’s tested income is $982x ($9,000x × $1,200x/$11,000x) for Year 1. (viii) Example 7: Subpart F income and tested loss— (A) Facts. The facts are the same as in paragraph (A) of Example 6, except that for Year 1, FC1 has $8,000x of earnings and profits, $10,000x of subpart F income within the meaning of section 952 (but without regard to the limitation in section 952(c)), and $2,000x of tested loss within the meaning of section 951A(c)(2)(B) and § 1.951A–2(b)(2). Under section 951A(c)(2)(B)(ii) and § 1.951A–6(d), the earnings and profits of FC1 are increased for purposes of section 952 by the amount of FC1’s tested loss. Accordingly, taking into account section 951A(c)(2)(B)(ii) and § 1.951A–6(d), the subpart F income of FC1 is $10,000x. (B) Analysis—(1) Pro rata share of subpart F income. The current earnings and profits determined under paragraph (e)(1)(ii) of this section are $10,000x, the greater of the earnings and profits of FC1 determined under section 964 ($8,000x) or the sum of FC1’s subpart F income and tested income ($10,000x + $0). The amount of FC1’s current earnings and profits distributed in the hypothetical distribution with respect to USP2’s preferred shares is $1,200x (.04 × $100x × 300) and with respect to Corp A’s common shares is $8,800x ($10,000x¥$1,200x). Accordingly, under paragraph (e)(1) of this section, for Year 1, USP1’s pro rata share of FC1’s subpart F income is $8,800x and USP2’s pro rata share of FC1’s subpart F income is $1,200x. (2) Pro rata share of tested loss. The current earnings and profits determined under § 1.951A–1(d)(4)(i)(B) are $2,000x, the amount of FC1’s tested loss. Under § 1.951A– 1(d)(4)(i)(C), the entire $2,000x tested loss is distributed in the hypothetical distribution with respect to USP1’s common shares. Accordingly, USP1’s pro rata share of the tested loss is $2,000x. * * * (g) * * * VerDate Sep<11>2014 * * 22:14 Oct 09, 2018 Jkt 247001 (1) In general. For purposes of sections 951 through 964, the term ‘‘United States shareholder’’ means, with respect to a foreign corporation, a United States person (as defined in section 957(c)) who owns within the meaning of section 958(a), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation. * * * * * (h) Special rule for partnership blocker structures—(1) In general. For purposes of sections 951 through 964, a controlled domestic partnership is treated as a foreign partnership in determining the stock of a controlled foreign corporation owned (within the meaning of section 958(a)) by a United States person if the following conditions are satisfied— (i) Without regard to this paragraph (h), the controlled domestic partnership owns (within the meaning of section 958(a)) stock of a controlled foreign corporation; and (ii) If the controlled domestic partnership (and all other controlled domestic partnerships in the chain of ownership of the controlled foreign corporation) were treated as foreign— (A) The controlled foreign corporation would continue to be a controlled foreign corporation; and (B) At least one United States shareholder of the controlled foreign corporation would be treated as owning (within the meaning of section 958(a)) stock of the controlled foreign corporation through another foreign corporation that is a direct or indirect partner in the controlled domestic partnership. (2) Definition of a controlled domestic partnership. For purposes of paragraph (h)(1) of this section, the term controlled domestic partnership means, with respect to a United States shareholder described in paragraph (h)(1)(ii)(B) of this section, a domestic partnership that is controlled by the United States shareholder and persons related to the United States shareholder. For purposes of this paragraph (h)(2), control generally is determined based on all the facts and circumstances, except that a partnership will be deemed to be controlled by a United States shareholder and related persons in any case in which those persons, in the aggregate, own (directly or indirectly through one or more partnerships) more than 50 percent of the interests in the PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 51091 partnership capital or profits. For purposes of this paragraph (h)(2), a related person is, with respect to a United States shareholder, a person that is related to the United States shareholder within the meaning of section 267(b) or 707(b)(1). (3) Example— (i) Facts. USP, a domestic corporation, owns all of the stock of CFC1 and CFC2. CFC1 and CFC2 own 60% and 40%, respectively, of the interests in the capital and profits of DPS, a domestic partnership. DPS owns all of the stock of CFC3. Each of CFC1, CFC2, and CFC3 is a controlled foreign corporation. USP, DPS, CFC1, CFC2, and CFC3 all use the calendar year as their taxable year. For Year 1, CFC3 has $100x of subpart F income (as defined under section 952) and $100x of earnings and profits. (ii) Analysis. DPS is a controlled domestic partnership with respect to USP within the meaning of paragraph (h)(2) of this section because more than 50% of the interests in its capital or profits are owned by persons related to USP within the meaning of section 267(b) (that is, CFC1 and CFC2), and thus DPS is controlled by USP and related persons. Without regard to paragraph (h) of this section, DPS is a United States shareholder that owns (within the meaning of section 958(a)) stock of CFC3, a controlled foreign corporation. If DPS were treated as foreign, CFC3 would continue to be a controlled foreign corporation, and USP would be treated as owning (within the meaning of section 958(a)) stock in CFC3 through CFC1 and CFC2, which are both partners in DPS. Thus, under paragraph (h)(1) of this section, DPS is treated as a foreign partnership for purposes of determining the stock of CFC3 owned (within the meaning of section 958(a)) by USP. Accordingly, USP’s pro rata share of CFC3’s subpart F income for Year 1 is $100x, and USP includes in its gross income $100x under section 951(a)(1)(A). DPS is not a United States shareholder of CFC3 for purposes of sections 951 through 964. (i) Applicability dates. Paragraphs (a), (e)(1)(ii)(B), and (g)(1) of this section apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end. Except for paragraph (e)(1)(ii)(B), paragraph (e) of this section applies to taxable years of United States shareholders ending on or after October 3, 2018. Paragraph (h) of this section applies to taxable years of domestic partnerships ending on or after May 14, 2010. * * * * * ■ Par. 3. Section 1.951A–0 is added to read as follows: § 1.951A–0 Outline of section 951A regulations. This section lists the headings for §§ 1.951A–1 through 1.951A–7. E:\FR\FM\10OCP2.SGM 10OCP2 51092 § 1.951A–1 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules General provisions. (a) Overview. (1) In general. (2) Scope. (b) Inclusion of global intangible lowtaxed income. (c) Determination of GILTI inclusion amount. (1) In general. (2) Definition of net CFC tested income. (3) Definition of net deemed tangible income return. (i) In general. (ii) Definition of deemed tangible income return. (iii) Definition of specified interest expense. (4) Determination of GILTI inclusion amount for consolidated groups. (d) Determination of pro rata share. (1) In general. (2) Tested income. (i) In general. (ii) Special rule for prior allocation of tested loss. (3) Qualified business asset investment. (i) In general. (ii) Special rule for preferred stock in case of excess QBAI. (iii) Examples. (4) Tested loss. (i) In general. (ii) Special rule in case of accrued but unpaid dividends. (iii) Special rule for stock with no liquidation value. (iv) Examples. (5) Tested interest expense. (6) Tested interest income. (e) Definitions. (1) CFC inclusion date. (2) CFC inclusion year. (3) Section 958(a) stock. (4) U.S. shareholder inclusion year. daltland on DSKBBV9HB2PROD with PROPOSALS2 § 1.951A–2 Tested income and tested loss. (a) Scope. (b) Definitions related to tested income and tested loss. (1) Tested income and tested income CFC. (2) Tested loss and tested loss CFC. (c) Rules relating to the determination of tested income and tested loss. (1) Definition of gross tested income. (2) Determination of gross tested income and allowable deductions. (3) Allocation of deductions to gross tested income. (4) Nonapplication of section 952(c). (i) In general. (ii) Example. (5) Disregard of basis in property related to certain transfers during the disqualified period. (i) In general. (ii) Definition of specified property. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 (iii) Definition of disqualified basis. (iv) Example. § 1.951A–3 Qualified business asset investment. (a) Scope. (b) Definition of qualified business asset investment. (c) Specified tangible property. (1) In general. (2) Tangible property. (d) Dual use property. (1) In general. (2) Dual use ratio. (3) Example. (e) Determination of adjusted basis of specified tangible property. (1) In general. (2) Effect of change in law. (3) Specified tangible property placed in service before enactment of section 951A. (f) Special rules for short taxable years. (1) In general. (2) Determination of quarter closes. (3) Reduction of qualified business asset investment. (4) Example. (g) Partnership property. (1) In general. (2) Definitions related to partnership QBAI. (i) In general. (ii) Partnership QBAI ratio. (iii) Partnership specified tangible property. (3) Determination of adjusted basis. (4) Examples. (h) Anti-abuse rules for certain transfers of property. (1) Disregard of basis in specified tangible property held temporarily. (2) Disregard of basis in specified tangible property related to transfers during the disqualified period. (i) In general. (ii) Determination of disqualified basis. (A) In general. (B) Definition of qualified gain amount. (C) Definition of disqualified transfer. (D) Definition of disqualified period. (E) Related person. (iii) Examples. § 1.951A–4 Tested interest expense and tested interest income. (a) Scope. (b) Definitions related to specified interest expense. (1) Tested interest expense. (i) In general. (ii) Interest expense. (iii) Qualified interest expense. (iv) Qualified CFC. (2) Tested interest income. (i) In general. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 (ii) Interest income. (iii) Qualified interest income. (c) Examples. § 1.951A–5 Domestic partnerships and their partners. (a) Scope. (b) In general. (1) Determination of GILTI inclusion amount of a U.S. shareholder partnership. (2) Determination of distributive share of U.S. shareholder partnership’s GILTI inclusion amount of partner other than a U.S. shareholder partner. (c) Determination of GILTI inclusion amount of a U.S. shareholder partner. (d) Tiered U.S. shareholder partnerships. (e) Definitions. (1) CFC tested item. (2) Partnership CFC. (3) U.S. shareholder partner. (4) U.S. shareholder partnership. (f) Reporting requirement. (g) Examples. § 1.951A–6 Treatment of GILTI inclusion amount and adjustments to earnings and profits and basis related to tested loss CFCs. (a) Scope. (b) Treatment as subpart F income for certain purposes. (1) In general. (2) Allocation of GILTI inclusion amount to tested income CFCs. (i) In general. (ii) Example. (iii) Translation of portion of GILTI inclusion amount allocated to tested income CFC. (c) Treatment as an amount includible in the gross income of a United States person. (1) In general. (2) Special rule for a United States shareholder that is a domestic partnership. (d) Increase of earnings and profits of tested loss CFC for purposes of section 952(c)(1)(A). (e) Adjustments to basis related to net used tested loss. (1) In general. (i) Disposition of stock of a controlled foreign corporation. (ii) Disposition of stock of an uppertier controlled foreign corporation. (iii) Disposition of an interest in a foreign entity other than a controlled foreign corporation. (iv) Order of application of basis reductions. (v) No duplicative adjustments. (2) Net used tested loss amount. (i) In general. (ii) Used tested loss amount. (3) Net offset tested income amount. E:\FR\FM\10OCP2.SGM 10OCP2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules (i) In general. (ii) Offset tested income amount. (4) Attribution to stock. (i) In general. (ii) Nonrecognition transactions. (5) Section 381 transactions. (6) Other definitions. (i) Domestic corporation. (ii) Disposition. (7) Special rule for disposition by controlled foreign corporation less than 100 percent owned by a single domestic corporation. (8) Special rules for members of a consolidated group. (9) Examples. § 1.951A–7 Applicability dates. Par. 4. Section 1.951A–1 is added to read as follows: ■ daltland on DSKBBV9HB2PROD with PROPOSALS2 § 1.951A–1 General provisions. (a) Overview—(1) In general. This section and §§ 1.951A–2 through 1.951A–7 (collectively, the section 951A regulations) provide rules to determine a United States shareholder’s income inclusion under section 951A and certain definitions for purposes of section 951A and the section 951A regulations. This section provides general rules for determining a United States shareholder’s inclusion of global intangible low-taxed income. Section 1.951A–2 provides rules for determining a controlled foreign corporation’s tested income or tested loss. Section 1.951A– 3 provides rules for determining a controlled foreign corporation’s qualified business asset investment. Section 1.951A–4 provides rules for determining a controlled foreign corporation’s tested interest expense and tested interest income. Section 1.951A–5 provides rules relating to the application of section 951A and the section 951A regulations to domestic partnerships and their partners. Section 1.951A–6 provides rules relating to the treatment of the inclusion of global intangible low-taxed income for certain purposes and adjustments to earnings and profits and basis of a controlled foreign corporation related to a tested loss. Section 1.951A–7 provides dates of applicability. (2) Scope. Paragraph (b) of this section provides the general rule requiring a United States shareholder to include in gross income its global intangible lowtaxed income for a U.S. shareholder inclusion year. Paragraph (c) of this section provides rules for determining the amount of a United States shareholder’s global intangible lowtaxed income for the U.S. shareholder inclusion year, including a rule for the application of section 951A and the section 951A regulations to VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 consolidated groups. Paragraph (d) of this section provides rules for determining a United States shareholder’s pro rata share of certain items for purposes of determining the United States shareholder’s global intangible low-taxed income. Paragraph (e) of this section provides additional general definitions for purposes of this section and the section 951A regulations. (b) Inclusion of global intangible lowtaxed income. Each person who is a United States shareholder (as defined in section 951(b)) of any controlled foreign corporation (as defined in section 957) and owns section 958(a) stock (as defined in paragraph (e)(3) of this section) in any such controlled foreign corporation includes in gross income in the U.S. shareholder inclusion year (as defined in paragraph (e)(4) of this section) the shareholder’s GILTI inclusion amount (as defined in paragraph (c) of this section), if any, for the U.S. shareholder inclusion year. (c) Determination of GILTI inclusion amount—(1) In general. Except as provided in paragraph (c)(4) of this section, the term GILTI inclusion amount means, with respect to a United States shareholder and a U.S. shareholder inclusion year, the excess (if any) of— (i) The shareholder’s net CFC tested income (as defined in paragraph (c)(2) of this section) for the year, over (ii) The shareholder’s net deemed tangible income return (as defined in paragraph (c)(3) of this section) for the year. (2) Definition of net CFC tested income. The term net CFC tested income means, with respect to a United States shareholder and a U.S. shareholder inclusion year, the excess (if any) of— (i) The aggregate of the shareholder’s pro rata share of the tested income of each tested income CFC (as defined in § 1.951A–2(b)(1)) for the year, over (ii) The aggregate of the shareholder’s pro rata share of the tested loss of each tested loss CFC (as defined in § 1.951A– 2(b)(2)) for the year. (3) Definition of net deemed tangible income return—(i) In general. The term net deemed tangible income return means, with respect to a United States shareholder and a U.S. shareholder inclusion year, the excess (if any) of— (A) The shareholder’s deemed tangible income return (as defined in paragraph (c)(3)(ii) of this section) for the year, over (B) The shareholder’s specified interest expense (as defined in paragraph (c)(3)(iii) of this section) for the year. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 51093 (ii) Definition of deemed tangible income return. The term deemed tangible income return means, with respect to a United States shareholder and a U.S. shareholder inclusion year, 10 percent of the aggregate of the shareholder’s pro rata share of the qualified business asset investment (as defined in § 1.951A–3(b)) of each tested income CFC for the year. (iii) Definition of specified interest expense. The term specified interest expense means, with respect to a United States shareholder and a U.S. shareholder inclusion year, the excess (if any) of— (A) The aggregate of the shareholder’s pro rata share of the tested interest expense (as defined in § 1.951A–4(b)(1)) of each controlled foreign corporation for the year, over (B) The aggregate of the shareholder’s pro rata share of the tested interest income (as defined in § 1.951A–4(b)(2)) of each controlled foreign corporation for the year. (4) Determination of GILTI inclusion amount for consolidated groups. For purposes of section 951A and the section 951A regulations, a member of a consolidated group (as defined in § 1.1502–1(h)) determines its GILTI inclusion amount under the rules provided in § 1.1502–51. (d) Determination of pro rata share— (1) In general. For purposes of paragraph (c) of this section, each United States shareholder that owns section 958(a) stock in a controlled foreign corporation as of a CFC inclusion date (as defined in paragraph (e)(1) of this section) determines for a U.S. shareholder inclusion year that includes such CFC inclusion date its pro rata share (if any) of the controlled foreign corporation’s tested income, tested loss, qualified business asset investment, tested interest expense, and tested interest income (each a CFC tested item), as applicable, for the CFC inclusion year (as defined in paragraph (e)(2) of this section). Except as otherwise provided in this paragraph (d), a United States shareholder’s pro rata share of each CFC tested item is determined independently of its pro rata share of any other CFC tested item. Except as modified in this paragraph (d), a United States shareholder’s pro rata share of any CFC tested item is determined under the rules of section 951(a)(2) and § 1.951–1(b) and (e) in the same manner as those provisions apply to subpart F income. Under section 951(a)(2) and § 1.951–1(b) and (e), as modified by this paragraph (d), a United States shareholder’s pro rata share of any CFC tested item for a U.S. shareholder inclusion year is E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51094 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules determined with respect to the section 958(a) stock of the controlled foreign corporation owned by the United States shareholder on the CFC inclusion date. A United States shareholder’s pro rata share of any CFC tested item is translated into United States dollars using the average exchange rate for the CFC inclusion year of the controlled foreign corporation. Paragraphs (d)(2) through (5) of this section provide rules for determining a United States shareholder’s pro rata share of each CFC tested item of a controlled foreign corporation. (2) Tested income—(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, a United States shareholder’s pro rata share of the tested income of each tested income CFC for a U.S. shareholder inclusion year is determined under section 951(a)(2) and § 1.951–1(b) and (e), substituting ‘‘tested income’’ for ‘‘subpart F income’’ each place it appears, other than in § 1.951– 1(e)(1)(ii)(B). (ii) Special rule for prior allocation of tested loss. In any case in which tested loss has been allocated to any class of stock in a prior CFC inclusion year under paragraph (d)(4)(iii) of this section, tested income is first allocated to each such class of stock in the order of its liquidation priority to the extent of the excess (if any) of the sum of the tested loss allocated to each such class of stock for each prior CFC inclusion year under paragraph (d)(4)(iii) of this section, over the sum of the tested income allocated to each such class of stock for each prior CFC inclusion year under this paragraph (d)(2)(ii). Paragraph (d)(2)(i) of this section applies for purposes of determining a United States shareholder’s pro rata share of the remainder of the tested income, except that, for purposes of the hypothetical distribution of section 951(a)(2)(A) and § 1.951–1(b) and (e), the amount of current earnings and profits of the tested income CFC is reduced by the amount of tested income allocated under the first sentence of this paragraph (d)(2)(ii). For an example of the application of this paragraph (d)(2), see Example 2 of paragraph (d)(4)(iv) of this section. (3) Qualified business asset investment—(i) In general. Except as provided in paragraph (d)(3)(ii) of this section, a United States shareholder’s pro rata share of the qualified business asset investment of a tested income CFC for a U.S. shareholder inclusion year bears the same ratio to the total qualified business asset investment of the tested income CFC for the CFC inclusion year as the United States shareholder’s pro rata share of the tested VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 income of the tested income CFC for the U.S. shareholder inclusion year bears to the total tested income of the tested income CFC for the CFC inclusion year. (ii) Special rule for preferred stock in case of excess QBAI. If a tested income CFC’s qualified business asset investment for a CFC inclusion year exceeds 10 times its tested income for the CFC inclusion year (such excess, excess QBAI), a United States shareholder’s pro rata share of the tested income CFC’s qualified business asset investment is the sum of its pro rata share determined under paragraph (d)(3)(i) of this section without regard to the excess QBAI, plus its pro rata share determined under paragraph (d)(3)(i) of this section solely with respect to the excess QBAI and without regard to tested income allocated to any share of preferred stock of the tested income CFC under paragraph (d)(2) of this section. (iii) Examples. The following examples illustrate the application of paragraphs (d)(2) and (3) of this section. See also § 1.951–1(e)(7), Example 6 (illustrating a United States shareholder’s pro rata share of tested income). (A) Example 1— (1) Facts. FS, a controlled foreign corporation, has outstanding 70 shares of common stock and 30 shares of 4% nonparticipating, cumulative preferred stock with a par value of $10x per share. P Corp, a domestic corporation and a United States shareholder of FS, owns all of the common shares. Individual A, a United States shareholder, owns all of the preferred shares. Both FS and P Corp use the calendar year as their taxable year. Individual A and P Corp are shareholders of FS for all of Year 4. At the beginning of Year 4, FS had no dividend arrearages with respect to its preferred stock. For Year 4, FS has $100x of earnings and profits, $120x of tested income, and no subpart F income within the meaning of section 952. FS also has $750x of qualified business asset investment for Year 4. (2) Analysis—(i) Determination of pro rata share of tested income. For purposes of determining P Corp’s pro rata share of FS’s tested income under paragraph (d)(2) of this section, the amount of FS’s current earnings and profits for purposes of the hypothetical distribution described in § 1.951–1(e)(1)(i) is $120x, the greater of its earnings and profits as determined under section 964 ($100x) or the sum of its subpart F income and tested income ($0 + $120x). Under paragraph (d)(2) of this section and § 1.951–1(e)(3), the amount of FS’s current earnings and profits distributed in the hypothetical distribution is $12x (.04 × $10x × 30) with respect to Individual A’s preferred shares and $108x ($120x¥$12x) with respect to P Corp’s common shares. Accordingly, under paragraph (d)(2) of this section and § 1.951– 1(e)(1), Individual A’s pro rata share of FS’s tested income is $12x, and P Corp’s pro rata share of FS’s tested income is $108x for Year 4. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 (ii) Determination of pro rata share of qualified business asset investment. The special rule of paragraph (d)(3)(ii) of this section does not apply because FS’s qualified business asset investment of $750x does not exceed $1,200x, which is 10 times FS’s tested income of $120x. Accordingly, under the general rule of paragraph (d)(3)(i) of this section, Individual A’s and P Corp’s pro rata share of FS’s qualified business asset investment bears the same ratio to FS’s total qualified business asset investment as Individual A’s and P Corp’s pro rata share, respectively, of FS’s tested income bears to FS’s total tested income. Thus, Individual A’s pro rata share of FS’s qualified business asset investment is $75x ($750x × $12x/$120x), and P Corp’s pro rata share of FS’s qualified business asset investment is $675x ($750x × $108x/$120x). (B) Example 2— (1) Facts. The facts are the same as in paragraph (1) of Example 1, except that FS has $1,500x of qualified business asset investment for Year 4. (2) Analysis. (i) Determination of pro rata share of tested income. The analysis and the result are the same as in paragraph (2)(i) of Example 1. (ii) Determination of pro rata share of qualified business asset investment. The special rule of paragraph (d)(3)(ii) of this section applies because FS’s qualified business asset investment of $1,500x exceeds $1,200x, which is 10 times FS’s tested income of $120x. Under paragraph (d)(3)(ii) of this section, Individual A’s and P Corp’s pro rata share of FS’s qualified business asset investment is the sum of their pro rata share determined under paragraph (d)(3)(i) of this section without regard to the excess QBAI plus their pro rata share with respect to the excess QBAI but without regard to tested income allocated to preferred stock under paragraph (d)(2) of this section. Without regard to the excess QBAI of $300x, Individual A’s pro rata share of FS’s qualified business asset investment is $120x ($1,200x × $12x/$120x), and P Corp’s pro rata share of FS’s qualified business asset investment is $1,080x ($1,200x × $108x/$120x). Solely with respect to the excess QBAI and without regard to tested income allocated to the preferred stock under paragraph (d)(2) of this section, Individual A’s pro rata share of FS’s qualified business asset investment is $0 ($300x × $0/$108x), and P Corp’s pro rata share of FS’s qualified business asset investment is $300x ($300x × $108x/$108x). Thus, Individual A’s pro rata share of FS’s qualified business asset investment is $120x ($120x + $0), and P Corp’s pro rata share of FS’s qualified business asset investment is $1,380x ($1,080x + $300x). (4) Tested loss—(i) In general. A United States shareholder’s pro rata share of the tested loss of each tested loss CFC for a U.S. shareholder inclusion year is determined under section 951(a)(2) and § 1.951–1(b) and (e) with the following modifications— (A) ‘‘Tested loss’’ is substituted for ‘‘subpart F income’’ each place it appears; (B) For purposes of the hypothetical distribution described in section E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules 951(a)(2)(A) and § 1.951–1(e)(1)(i), the amount of current earnings and profits of a controlled foreign corporation for a CFC inclusion year is treated as being equal to the tested loss of the tested loss CFC for the CFC inclusion year; (C) Except as provided in paragraphs (d)(4)(ii) and (iii) of this section, the hypothetical distribution described in section 951(a)(2)(A) and § 1.951– 1(e)(1)(i) is treated as made solely with respect to the common stock of the tested loss CFC; and (D) The amount of the dividend received by any other person for purposes of section 951(a)(2)(B) and § 1.951–1(b)(1)(ii) is treated as being equal to the amount of the tested loss of the tested loss CFC for the CFC inclusion year (regardless of whether, or the extent to which, the other person actually receives a dividend). (ii) Special rule in case of accrued but unpaid dividends. If a tested loss CFC’s earnings and profits that have accumulated since the issuance of preferred shares are reduced below the amount necessary to satisfy any accrued but unpaid dividends with respect to such preferred shares, then the amount by which the tested loss reduces the earnings below the amount necessary to satisfy the accrued but unpaid dividends is distributed in the hypothetical distribution described in section 951(a)(2)(A) and § 1.951– 1(e)(1)(i) with respect to the preferred stock of the tested loss CFC and the remainder of the tested loss is distributed with respect to the common stock of the tested loss CFC. (iii) Special rule for stock with no liquidation value. If a tested loss CFC’s common stock has a liquidation value of zero and there is at least one other class of equity with a liquidation preference relative to the common stock, then the tested loss is distributed in the hypothetical distribution described in section 951(a)(2)(A) and § 1.951– 1(e)(1)(i) with respect to the most junior class of equity with a positive liquidation value to the extent of such liquidation value. Thereafter, tested loss is distributed with respect to the next most junior class of equity to the extent of its liquidation value and so on. All determinations of liquidation value are to be made as of the beginning of the CFC inclusion year of the tested loss CFC. (iv) Examples.The following examples illustrate the application of this paragraph (d)(4). See also § 1.951– 1(e)(7), Example 7 (illustrating a United States shareholder’s pro rata share of subpart F income and tested loss). (A) Example— (1) Facts. FS, a controlled foreign corporation, has outstanding 70 VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 shares of common stock and 30 shares of 4% nonparticipating, cumulative preferred stock with a par value of $10x per share. P Corp, a domestic corporation and a United States shareholder of FS, owns all of the common shares. Individual A, a United States citizen and a United States shareholder, owns all of the preferred shares. FS, Individual A, and P Corp all use the calendar year as their taxable year. Individual A and P Corp are shareholders of FS for all of Year 5. At the beginning of Year 5, FS had earnings and profits of $120x, which accumulated after the issuance of the preferred stock. At the end of Year 5, the accrued but unpaid dividends with respect to the preferred stock are $36x. For Year 5, FS has a $100x tested loss, and no other items of income, gain, deduction or loss. At the end of Year 5, FS has earnings and profits of $20x. (2) Analysis. FS is a tested loss CFC for Year 5. Before taking into account the tested loss in Year 5, FS had sufficient earnings and profits to satisfy the accrued but unpaid dividends of $36x. The amount of the reduction in earnings below the amount necessary to satisfy the accrued but unpaid dividends attributable to the tested loss is $16x ($36x¥($120x¥$100x)). Accordingly, under paragraph (d)(4)(ii) of this section, Individual A’s pro rata share of the Year 5 tested loss is $16x, and P Corp’s pro rata share of the tested loss is $84x ($100x–$16x). (B) Example 2—(1) Facts. FS, a controlled foreign corporation, has outstanding 100 shares of common stock and 50 shares of 4% nonparticipating, cumulative preferred stock with a par value of $100x per share. P Corp, a domestic corporation and a United States shareholder of FS, owns all of the common shares. Individual A, a United States citizen and a United States shareholder, owns all of the preferred shares. FS, Individual A, and P Corp all use the calendar year as their taxable year. Individual A and P Corp are shareholders of FS for all of Year 1 and Year 2. At the beginning of Year 1, the common stock had no liquidation value and the preferred stock had a liquidation value of $5,000x and no accrued but unpaid dividends. In Year 1, FS has a tested loss of $1,000x and no other items of income, gain, deduction, or loss. In Year 2, FS has tested income of $3,000x and no other items of income, gain, deduction, or loss and paid no dividends. FS has earnings and profits of $3,000x for Year 2. At the end of Year 2, FS has accrued but unpaid dividends of $400x with respect to the preferred stock ($5000x × 0.04 for Year 1 and $5000x × 0.04 for Year 2). (2) Analysis—(i) Year 1. FS is a tested loss CFC in Year 1. The common stock of FS has liquidation value of zero and the preferred stock has a liquidation preference relative to the common stock. The tested loss ($1,000x) does not exceed the liquidation value of the preferred stock ($5,000x). Accordingly, under paragraph (d)(4)(iii) of this section, the tested loss is distributed with respect to the preferred stock in the hypothetical distribution described in section 951(a)(2)(A) and § 1.951–1(e). Individual A’s pro rata share of the tested loss is $1,000x, and P Corp’s pro rata share of the tested loss is $0. (ii) Year 2. FS is a tested income CFC in Year 2. Because $1,000x of tested loss was PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 51095 allocated to the preferred stock in Year 1 under paragraph (d)(4)(iii) of this section, the first $1,000x of tested income in Year 2 is allocated to the preferred stock under paragraph (d)(2)(ii) of this section. P Corp’s and Individual A’s pro rata shares of the remaining $2,000x of tested income are determined under the general rule of paragraph (d)(2)(i) of this section, except that for purposes of the hypothetical distribution the amount of FS’s current earnings and profits is reduced by the tested income allocated under paragraph (d)(2)(ii) of this section to $2,000x ($3,000x¥$1,000x). Accordingly, under paragraph (d)(2)(i) of this section, the amount of FS’s current earnings and profits distributed in the hypothetical distribution with respect to Individual A’s preferred stock is $400x ($400x of accrued but unpaid dividends) and with respect to P Corp’s common stock is $1,600x ($2,000x¥$400x). Individual A’s pro rata share of the tested income is $1,400x ($1,000x + $400x), and P Corp’s pro rata share of the tested income is $1,600x. (5) Tested interest expense. A United States shareholder’s pro rata share of tested interest expense of a controlled foreign corporation for a U.S. shareholder inclusion year is equal to the amount by which the tested interest expense reduces the shareholder’s pro rata share of tested income of the controlled foreign corporation for the U.S. shareholder inclusion year, increases the shareholder’s pro rata share of tested loss of the controlled foreign corporation for the U.S. shareholder inclusion year, or both. (6) Tested interest income. A United States shareholder’s pro rata share of tested interest income of a controlled foreign corporation for a U.S. shareholder inclusion year is equal to the amount by which the tested interest income increases the shareholder’s pro rata share of tested income of the controlled foreign corporation for the U.S. shareholder inclusion year, reduces the shareholder’s pro rata share of tested loss of the controlled foreign corporation for the U.S. shareholder inclusion year, or both. (e) Definitions. This paragraph (e) provides additional definitions that apply for purposes of the section 951A regulations. Other definitions relevant to the section 951A regulations are included in §§ 1.951A–2 through 1.951A–6. (1) CFC inclusion date. The term CFC inclusion date means the last day of a CFC inclusion year on which a foreign corporation is a controlled foreign corporation. (2) CFC inclusion year. The term CFC inclusion year means any taxable year of a foreign corporation beginning after December 31, 2017, at any time during which the corporation is a controlled foreign corporation. E:\FR\FM\10OCP2.SGM 10OCP2 51096 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules (3) Section 958(a) stock. The term section 958(a) stock means stock of a controlled foreign corporation owned (directly or indirectly) by a United States shareholder within the meaning of section 958(a). (4) U.S. shareholder inclusion year. The term U.S. shareholder inclusion year means a taxable year of a United States shareholder that includes a CFC inclusion date of a controlled foreign corporation of the United States shareholder. ■ Par. 5. Section 1.951A–2 is added to read as follows: daltland on DSKBBV9HB2PROD with PROPOSALS2 § 1.951A–2 Tested income and tested loss. (a) Scope. This section provides general rules for determining the tested income or tested loss of a controlled foreign corporation for purposes of determining a United States shareholder’s net CFC tested income under § 1.951A–1(c)(2). Paragraph (b) of this section provides definitions related to tested income and tested loss. Paragraph (c) of this section provides rules for determining the gross tested income of a controlled foreign corporation and the deductions that are properly allocable to gross tested income. (b) Definitions related to tested income and tested loss—(1) Tested income and tested income CFC. The term tested income means the excess (if any) of a controlled foreign corporation’s gross tested income for a CFC inclusion year, over the allowable deductions (including taxes) properly allocable to the gross tested income for the CFC inclusion year (a controlled foreign corporation with tested income for a CFC inclusion year, a tested income CFC). (2) Tested loss and tested loss CFC. The term tested loss means the excess (if any) of a controlled foreign corporation’s allowable deductions (including taxes) properly allocable to gross tested income (or that would be allocable to gross tested income if there were gross tested income) for a CFC inclusion year, over the gross tested income of the controlled foreign corporation for the CFC inclusion year (a controlled foreign corporation without tested income for a CFC inclusion year, a tested loss CFC). (c) Rules relating to the determination of tested income and tested loss—(1) Definition of gross tested income. The term gross tested income means the gross income of a controlled foreign corporation for a CFC inclusion year determined without regard to— (i) Items of income described in section 952(b), VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 (ii) Gross income taken into account in determining the subpart F income of the corporation, (iii) Gross income excluded from the foreign base company income (as defined in section 954) or the insurance income (as defined in section 953) of the corporation solely by reason of an election made under section 954(b)(4) and § 1.954–1(d)(5), (iv) Dividends received by the corporation from related persons (as defined in section 954(d)(3)), and (v) Foreign oil and gas extraction income (as defined in section 907(c)(1)) of the corporation. (2) Determination of gross income and allowable deductions. For purposes of determining tested income and tested loss, the gross income and allowable deductions of a controlled foreign corporation for a CFC inclusion year are determined under the rules of § 1.952– 2 for determining the subpart F income of a controlled foreign corporation. (3) Allocation of deductions to gross tested income. Any deductions of a controlled foreign corporation allowable under paragraph (c)(2) of this section are allocated and apportioned to gross tested income under the principles of section 954(b)(5) and § 1.954–1(c), by treating gross tested income that falls within a single separate category (as defined in § 1.904–5(a)(1)) as a single item of gross income, in addition to the items set forth in § 1.954–1(c)(1)(iii). (4) Nonapplication of section 952(c)— (i) In general. The gross tested income and allowable deductions properly allocable to gross tested income of a controlled foreign corporation for a CFC inclusion year are determined without regard to the application of section 952(c). (ii) Example. The following example illustrates the application of this paragraph (c)(4). section, the gross tested income of FS is determined without regard to section 952(c)(1). Therefore, in determining the gross tested income of FS in Year 1, the $100x foreign base company income of FS in Year 1 is excluded under paragraph (c)(1)(ii) of this section, and FS has no gross tested income in Year 1. In Year 2, under section 952(c)(2), FS’s earnings and profits ($100x) in excess of its subpart F income ($0) are treated as subpart F income. Therefore, FS has subpart F income of $100x in Year 2, and A Corp has an inclusion of $100x with respect to FS under section 951(a)(1)(A). Under paragraph (c)(4)(i) of this section, the gross tested income of FS is determined without regard to section 952(c)(2). Accordingly, FS’s income in Year 2 is not subpart F income described in paragraph (c)(1)(ii) of this section, and FS has $100x of gross tested income in Year 2. gross tested income in paragraphs (c)(1)(i) through (v) of this section. FS has no allowable deductions properly allocable to gross tested income for Year 2. (2) Analysis. As a result of the earnings and profits limitation of section 952(c)(1), FS has no subpart F income in Year 1, and A Corp has no inclusion with respect to FS under section 951(a)(1)(A). Under paragraph (c)(4)(i) of this (iv) Example— (A) Facts. USP, a domestic corporation, owns all of the stock of CFC1 and CFC2, each a controlled foreign corporation. Both USP and CFC1 use the calendar year as their taxable year. CFC2 uses a taxable year ending November 30. On November 1, 2018, before the start of its first CFC inclusion year, CFC2 sells intangible property to CFC1 that is amortizable under (5) Disregard of basis in property related to certain transfers during the disqualified period—(i) In general. Any deduction or loss attributable to disqualified basis of any specified property allocated and apportioned to gross tested income under paragraph (c)(3) of this section is disregarded for purposes of determining tested income or tested loss of a controlled foreign corporation. For purposes of this paragraph (c)(5), in the case that a deduction or loss arises with respect to specified property with disqualified basis and adjusted basis other than disqualified basis, the deduction or loss is treated as attributable to the disqualified basis in the same proportion that the disqualified basis bears to the total adjusted basis of the property. (ii) Definition of specified property. The term specified property means property that is of a type with respect to which a deduction is allowable under section 167 or 197. (iii) Definition of disqualified basis. Solely for purposes of paragraph (c)(5)(i) of this section, the term disqualified basis has the meaning set forth in (A) Example—(1) Facts. A Corp, a domestic § 1.951A–3(h)(2)(ii) (including with corporation, owns 100% of the single class of respect to property owned by a stock of FS, a controlled foreign corporation. partnership by reason of § 1.951A– Both A Corp and FS use the calendar year 3(g)(3)), except that, in applying the as their taxable year. In Year 1, FS has provisions of § 1.951A–3(h)(2) to foreign base company income of $100x, a loss in foreign oil and gas extraction income determine the disqualified basis, the of $100x, and earnings and profits of $0. FS term ‘‘specified property’’ is substituted has no other income. In Year 2, FS has gross for ‘‘specified tangible property’’ and income of $100x and earnings and profits of the term ‘‘controlled foreign $100x. Without regard to section 952(c)(2), in corporation’’ is substituted for ‘‘tested Year 2 FS has no income described in any income CFC’’ each place they appear. of the categories of income excluded from PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 E:\FR\FM\10OCP2.SGM 10OCP2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules section 197 in exchange for $100x of cash. The intangible property has a basis of $20x in the hands of CFC2, and CFC2 recognizes $80x of gain as a result of the sale ($100x¥$20x). CFC2’s gain is not subject to U.S. tax or taken into account in determining USP’s inclusion under section 951(a)(1)(A). (B) Analysis. The sale by CFC1 is a disqualified transfer (within the meaning of § 1.951A–3(h)(2)(ii)(C), as modified by paragraph (c)(5)(iii) of this section) because it is a transfer of specified property, CFC2 and CFC1 are related persons, and the transfer occurs during the disqualified period (within the meaning of § 1.951A–3(h)(2)(ii)(D)). The disqualified basis is $80x, the excess of CFC1’s adjusted basis in the property immediately after the disqualified transfer ($100x), over the sum of CFC2’s basis in the property immediately before the transfer ($20x) and the qualified gain amount (as defined in § 1.951A–3(h)(2)(ii)(B)) ($0). Accordingly, under paragraph (c)(5)(i) of this section, any deduction or loss attributable to the disqualified basis is disregarded for purposes of determining the tested income or tested loss of any CFC for any CFC inclusion year. Par. 6. Section 1.951A–3 is added to read as follows: ■ daltland on DSKBBV9HB2PROD with PROPOSALS2 § 1.951A–3 Qualified business asset investment. (a) Scope. This section provides general rules for determining the qualified business asset investment of a controlled foreign corporation for purposes of determining a United States shareholder’s deemed tangible income return under § 1.951A–1(c)(3)(ii). Paragraph (b) of this section defines qualified business asset investment. Paragraph (c) of this section defines tangible property and specified tangible property. Paragraph (d) of this section provides rules and examples for determining the portion of property that is specified tangible property when the property is used in the production of both gross tested income and gross income that is not gross tested income. Paragraph (e) of this section provides rules for determining the adjusted basis of specified tangible property. Paragraph (f) of this section provides rules for determining qualified business asset investment of a tested income CFC with a short taxable year. Paragraph (g) of this section provides rules and examples for increasing the qualified business asset investment of a tested income CFC by reason of property owned through a partnership. Paragraph (h) of this section provides anti-abuse rules that disregard the basis of specified tangible property transferred in certain transactions when determining the qualified business asset investment of a tested income CFC. (b) Definition of qualified business asset investment. The term qualified VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 business asset investment means the average of a tested income CFC’s aggregate adjusted bases as of the close of each quarter of a CFC inclusion year in specified tangible property that is used in a trade or business of the tested income CFC and is of a type with respect to which a deduction is allowable under section 167. A tested loss CFC has no qualified business asset investment. See paragraph (f) of this section for rules relating to the qualified business asset investment of a tested income CFC with a short taxable year. (c) Specified tangible property—(1) In general. The term specified tangible property means, subject to paragraph (d) of this section, tangible property used in the production of gross tested income. None of the tangible property of a tested loss CFC is specified tangible property. (2) Tangible property. The term tangible property means property for which the depreciation deduction provided by section 167(a) is eligible to be determined under section 168 without regard to section 168(f)(1), (2), or (5) and the date placed in service. (d) Dual use property—(1) In general. In the case of tangible property of a tested income CFC that is used in both the production of gross tested income and the production of gross income that is not gross tested income in a CFC inclusion year, the portion of the adjusted basis in the property treated as adjusted basis in specified tangible property for the CFC inclusion year is determined by multiplying the average of the tested income CFC’s adjusted basis in the property by the dual use ratio with respect to the property for the CFC inclusion year. (2) Dual use ratio. The term dual use ratio means, with respect to specified tangible property: (i) In the case of specified tangible property that produces directly identifiable income for a CFC inclusion year, the ratio of the gross tested income produced by the property for the CFC inclusion year to the total amount of gross income produced by the property for the CFC inclusion year. (ii) In the case of specified tangible property that does not produce directly identifiable income for a CFC inclusion year, the ratio of the gross tested income of the tested income CFC for the CFC inclusion year to the total amount of gross income of the tested income CFC for the CFC inclusion year. (3) Example. The following example illustrates the application of this paragraph (d). (i) Example— (A) Facts. FS is a tested income CFC. FS owns a machine that only packages Product A. In Year 1, FS sells Product A to related and unrelated resellers PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 51097 and earns $1,000x of gross income. For Year 1, sales of Product A produce gross tested income of $750x and foreign base company sales income (as defined in section 954(d)) of $250x. The average adjusted basis of the machine for Year 1 in the hands of FS is $4,000x. FS also owns an office building for its administrative functions with an average adjusted basis for Year 1 of $10,000x. The office building does not produce directly identifiable income. FS has no other specified tangible property. For year 1, FS also earns $1,250x of gross tested income and $2,750x of foreign base company sales income from sales of Product B. Neither the machine nor the office building is used in the production of income related to Product B. For Year 1, FS’s gross tested income is $2,000x and its total gross income is $5,000x. (B) Analysis. The machine and office building are both property for which the depreciation deduction provided by section 167(a) is eligible to be determined under section 168. Therefore, under paragraph (c)(2) of this section, the machine and office building are tangible property. Under paragraph (d)(1) of this section, the portion of the basis in the machine treated as basis in specified tangible property is equal to FS’s average basis in the machine for the year ($4,000x), multiplied by the dual use ratio under paragraph (d)(2)(i) of this section (75%), which is the proportion that the gross tested income produced by the property ($750x) bears to the total gross income produced by the property ($1,000x). Accordingly, $3,000x ($4,000x × 75%) of FS’s adjusted basis in the machine is taken into account in determining the average of FS’s aggregate adjusted bases described in paragraph (b) of this section. Under paragraph (d)(1) of this section, the portion of the basis in the office building treated as basis in specified tangible property is equal to FS’s average basis in the office building for the year ($10,000x), multiplied by the dual use ratio under paragraph (d)(2)(ii) of this section (40%), which is the ratio of FS’s gross tested income for Year 1 ($2,000x) to FS’s total gross income for Year 1 ($5,000x). Accordingly, $4,000x ($10,000x × 40%) of FS’s adjusted basis in the office building is taken into account in determining the average of FS’s aggregate adjusted bases described in paragraph (b) of this section. (e) Determination of adjusted basis of specified tangible property—(1) In general. The adjusted basis in specified tangible property is determined by using the alternative depreciation system under section 168(g), and by allocating the depreciation deduction with respect to such property for the CFC inclusion year ratably to each day during the period in the taxable year to which such depreciation relates. (2) Effect of change in law. The determination of adjusted basis for purposes of paragraph (b) of this section is made without regard to any provision of law enacted after December 22, 2017, unless such later enacted law specifically and directly amends the E:\FR\FM\10OCP2.SGM 10OCP2 51098 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS2 definition of qualified business asset investment under section 951A. (3) Specified tangible property placed in service before enactment of section 951A. The adjusted basis in property placed in service before December 22, 2017, is determined using the alternative depreciation system under section 168(g), as if this system had applied from the date that the property was placed in service. (f) Special rules for short taxable years—(1) In general. In the case of a tested income CFC that has a CFC inclusion year that is less than twelve months (a short taxable year), the rules for determining the qualified business asset investment of the tested income CFC under this section are modified as provided in paragraphs (f)(2) and (3) of this section with respect to the CFC inclusion year. (2) Determination of quarter closes. For purposes of determining quarter closes, in determining the qualified business asset investment of a tested income CFC for a short taxable year, the quarters of the tested income CFC for purposes of this section are the full quarters beginning and ending within the short taxable year (if any), determining quarter length as if the tested income CFC did not have a short taxable year, plus one or more short quarters (if any). (3) Reduction of qualified business asset investment. The qualified business asset investment of a tested income CFC for a short taxable year is the sum of— (i) The sum of the tested income CFC’s aggregate adjusted bases in specified tangible property as of the close of each full quarter (if any) in the CFC inclusion year divided by four, plus (ii) The tested income CFC’s aggregate adjusted bases in specified tangible property as of the close of each short quarter (if any) in the CFC inclusion year multiplied by the sum of the number of days in each short quarter divided by 365. (4) Example. The following example illustrates the application of this paragraph (f). (i) Example— (A) Facts. USP1, a domestic corporation, owns all of the stock of FS, a controlled foreign corporation. USP1 owns FS from the beginning of Year 1. On July 15, Year 1, USP1 sells FS to USP2, an unrelated person. USP2 makes a section 338(g) election with respect to the purchase of FS, as a result of which FS’s taxable year is treated as ending on July 15. USP1, USP2, and FS all use the calendar year as their taxable year. FS’s aggregate adjusted bases in specified tangible property are $250x as of March 31, $300x as of June 30, $275x as of July 15, $500x as of September 30, and $450x as of December 31. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 (B) Analysis—(1) Determination of short taxable years and quarters. FS has two short taxable years in Year 1. The first short taxable year is from January 1 to July 15, with two full quarters (January 1–March 31 and April 1–June 30) and one short quarter (July 1–July 15). The second taxable year is from July 16 to December 31, with one short quarter (July 16–September 30) and one full quarter (October 1–December 31). (2) Calculation of qualified business asset investment for the first short taxable year. Under paragraph (f)(2) of this section, for the first short taxable year in Year 1, FS has three quarter closes (March 31, June 30, and July 15). Under paragraph (f)(3) of this section, the qualified business asset investment of FS for the first short taxable year is $148.80x, the sum of $137.50x (($250x + $300x)/4) attributable to the two full quarters and $11.30x ($275x × 15/365) attributable to the short quarter. (3) Calculation of qualified business asset investment for the second short taxable year. Under paragraph (f)(2) of this section, for the second short taxable year in Year 1, FS has two quarter closes (September 30 and December 31). Under paragraph (f)(3) of this section, the qualified business asset investment of FS for the second short taxable year is $217.98x, the sum of $112.50x ($450x/4) attributable to the one full quarter and $105.48x ($500x × 77/365) attributable to the short quarter. (g) Partnership property—(1) In general. For purposes of paragraph (b) of this section, if a tested income CFC holds an interest in one or more partnerships as of the close of the CFC inclusion year, the qualified business asset investment of the tested income CFC for the CFC inclusion year is increased by the sum of the tested income CFC’s partnership QBAI with respect to each partnership for the CFC inclusion year. A tested loss CFC has no partnership QBAI for a CFC inclusion year. (2) Definitions related to partnership QBAI—(i) In general. The term partnership QBAI means the sum of the tested income CFC’s share of the partnership’s adjusted basis in partnership specified tangible property as of the close of a partnership taxable year that ends with or within a CFC inclusion year. A tested income CFC’s share of the partnership’s adjusted basis in partnership specified tangible property is determined separately with respect to each partnership specified tangible property of the partnership by multiplying the partnership’s adjusted basis in the property by the partnership QBAI ratio with respect to the property. If the partnership’s taxable year is less than twelve months, the principles of paragraph (f) of this section apply in determining a tested income CFC’s partnership QBAI with respect to the partnership. PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 (ii) Partnership QBAI ratio. The term partnership QBAI ratio means, with respect to partnership specified tangible property: (A) In the case of partnership specified tangible property that produces directly identifiable income for a partnership taxable year, the ratio of the tested income CFC’s distributive share of the gross income produced by the property for the partnership taxable year that is included in the gross tested income of the tested income CFC for the CFC inclusion year to the total gross income produced by the property for the partnership taxable year. (B) In the case of partnership specified tangible property that does not produce directly identifiable income for a partnership taxable year, the ratio of the tested income CFC’s distributive share of the gross income of the partnership for the partnership taxable year that is included in the gross tested income of the tested income CFC for the CFC inclusion year to the total amount of gross income of the partnership for the partnership taxable year. (iii) Partnership specified tangible property. The term partnership specified tangible property means tangible property (as defined in paragraph (c)(2) of this section) of a partnership that is— (A) Used in the trade or business of the partnership, (B) Of a type with respect to which a deduction is allowable under section 167, and (C) Used in the production of tested income. (3) Determination of adjusted basis. For purposes of this paragraph (g), a partnership’s adjusted basis in partnership specified tangible property is determined based on the average of the partnership’s adjusted basis in the property as of the close of each quarter in the partnership taxable year. The principles of paragraphs (e) and (h) of this section apply for purposes of determining a partnership’s adjusted basis in partnership specified tangible property and the portion of such adjusted basis taken into account in determining a tested income CFC’s partnership QBAI. (4) Examples. The following examples illustrate the rules of this paragraph (g). (i) Example 1— (A) Facts. FC, a tested income CFC, is a partner in PRS. Both FC and PRS use the calendar year as their taxable year. PRS owns two assets, Asset A and Asset B, both of which are tangible property used in PRS’s trade or business that it depreciates under section 168. The average of PRS’s adjusted basis as of the close of each quarter of PRS’s taxable year in Asset A is $100x and the average of PRS’s adjusted basis as of the end of each quarter of PRS’s taxable year in E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules Asset B is $50x. Asset A produces $10x of directly identifiable gross income in Year 1, and Asset B produces $50x of directly identifiable gross income in Year 1. FC’s distributive share of the gross income from Asset A is $8x and its distributive share of the gross income from Asset B is $10x. FC’s entire distributive share of income from Asset A and Asset B is included in FC’s gross tested income for Year 1. PRS partners’ distributive shares satisfy the requirements of section 704. (B) Analysis. Each of Asset A and Asset B is partnership specified tangible property because each is tangible property, of a type with respect to which a deduction is allowable under section 167, used in PRS’s trade or business, and used in the production of tested income. FC’s partnership QBAI ratio for Asset A is 80%, the ratio of FC’s distributive share of the gross income from Asset A for Year 1 that is included in FC’s gross tested income ($8x) to the total gross income produced by Asset A for Year 1 ($10x). FC’s partnership QBAI ratio for Asset B is 20%, the ratio of FC’s distributive share of the gross income from Asset B for Year 1 that is included in FC’s gross tested income ($10x) to the total gross income produced by Asset B for Year 1 ($50x). FC’s share of the average of PRS’s adjusted basis of Asset A is $80x, PRS’s adjusted basis in Asset A of $100x multiplied by FC’s partnership QBAI ratio for Asset A of 80%. FC’s share of the average of PRS’s adjusted basis of Asset B is $10x, PRS’s adjusted basis in Asset B of $50x multiplied by FC’s partnership QBAI ratio for Asset B of 20%. Therefore, FC’s partnership QBAI with respect to PRS is $90x ($80x + $10x). Accordingly, under paragraph (g)(1) of this section, FC increases its qualified business asset investment for Year 1 by $90x. (ii) Example 2— (A) Facts. FC, a tested income CFC, owns a 50% interest in PRS. PRS owns Asset A, which is specified tangible property. The average of PRS’s adjusted basis as of the close of each quarter of PRS’s taxable year in Asset A is $100x. FC has the same taxable year as PRS. Asset A produces $20x of directly identifiable gross income in Year 1, and PRS has $22x of expenses in Year 1 that are properly allocable to such income. Therefore, FC’s allocation of net income or loss from PRS is $1x loss, which is comprised of FC’s distributive share of the gross income from Asset A of $10x, all of which is included in FC’s gross tested income for Year 1, and FC’s distributive share of the expenses related to Asset A of $11x, all of which is taken into account in determining its tested income under § 1.951– 2(c). PRS has no other income or loss in Year 1. FC also has $8x of gross tested income from other sources in Year 1, and no deductions properly allocable to such income. PRS partners’ distributive shares satisfy the requirements of section 704. (B) Analysis. FC’s partnership QBAI ratio for Asset A is 50%, the ratio of FC’s distributive share of the gross income from Asset A for Year 1 that is included in FC’s gross tested income ($10x) to the total gross income produced by Asset A for Year 1 ($20x). FC’s share of the average of PRS’s adjusted basis in Asset A is $50x, PRS’s adjusted basis in Asset A of $100x multiplied VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 by FC’s partnership QBAI ratio for Asset A of 50%. FC increases its qualified business asset investment by $50x, notwithstanding that FC would not be a tested income CFC but for its $8x of gross tested income from other sources. (h) Anti-abuse rules for certain transfers of property—(1) Disregard of basis in specified tangible property held temporarily. If a tested income CFC (acquiring CFC) acquires specified tangible property (as defined in paragraph (c)(1) of this section) with a principal purpose of reducing the GILTI inclusion amount of a United States shareholder for any U.S. shareholder inclusion year, and the tested income CFC holds the property temporarily but over at least the close of one quarter, the specified tangible property is disregarded in determining the acquiring CFC’s average adjusted basis in specified tangible property for purposes of determining the acquiring CFC’s qualified business asset investment for any CFC inclusion year during which the tested income CFC held the property. For purposes of this paragraph (h)(1), specified tangible property held by the tested income CFC for less than a twelve month period that includes at least the close of one quarter during the taxable year of a tested income CFC is treated as temporarily held and acquired with a principal purpose of reducing the GILTI inclusion amount of a United States shareholder for a U.S. shareholder inclusion year if such acquisition would, but for this paragraph (h)(1), reduce the GILTI inclusion amount of a United States shareholder for a U.S. shareholder inclusion year. (2) Disregard of basis in specified tangible property related to transfers during the disqualified period—(i) In general. For purposes of determining the qualified business asset investment of a tested income CFC for a CFC inclusion year, in applying the alternative depreciation system under section 168(g) to determine the tested income CFC’s adjusted basis in specified tangible property, any disqualified basis with respect to the specified tangible property is not taken into account. (ii) Determination of disqualified basis—(A) In general. The term disqualified basis means, with respect to specified tangible property, the excess (if any) of the property’s adjusted basis immediately after a disqualified transfer, over the sum of the property’s adjusted basis immediately before the disqualified transfer and the qualified gain amount with respect to the disqualified transfer. Disqualified basis may be reduced or eliminated through PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 51099 depreciation, amortization, sales or exchanges, section 362(e), and other methods. In such circumstances, in the case of specified tangible property with disqualified basis and adjusted basis other than disqualified basis, the disqualified basis is reduced or eliminated in the same proportion that the disqualified basis bears to the total adjusted basis of the property. (B) Definition of qualified gain amount. The term qualified gain amount means, with respect to a disqualified transfer, the sum of the following amounts: (1) The amount of gain recognized by a controlled foreign corporation (transferor CFC) on the disqualified transfer of the specified tangible property that is subject to U.S. federal income tax under section 882 (except to the extent the gain is subject to a reduced rate of tax, or is exempt from tax, pursuant to an applicable treaty obligation of the United States); and (2) Any United States shareholder’s pro rata share of the gain recognized by the transferor CFC on the disqualified transfer of the specified tangible property (determined without regard to properly allocable deductions) taken into account in determining the United States shareholder’s inclusion under section 951(a)(1)(A), excluding any amount that is described in paragraph (h)(2)(ii)(B)(1) of this section. (C) Definition of disqualified transfer. The term disqualified transfer means a transfer of specified tangible property during a transferor CFC’s disqualified period by the transferor CFC to a related person in which gain was recognized, in whole or in part, by the transferor CFC, regardless of whether the property was specified tangible property in the hands of the transferor CFC. For purposes of the preceding sentence, a transfer includes any disposition, sale or exchange, contribution, or distribution of the specified tangible property, and includes an indirect transfer (for example, a transfer of an interest in a partnership is treated as a transfer of the assets of the partnership and transfer by or to a partnership is treated as a transfer by or to its partners). (D) Definition of disqualified period. The term disqualified period means, with respect to a transferor CFC, the period beginning on January 1, 2018, and ending as of the close of the transferor CFC’s last taxable year that is not a CFC inclusion year. A transferor CFC that has a CFC inclusion year beginning January 1, 2018, has no disqualified period. (E) Related person. For purposes of this paragraph (h)(2), a person is related to a controlled foreign corporation if the E:\FR\FM\10OCP2.SGM 10OCP2 51100 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules person bears a relationship to the controlled foreign corporation described in section 267(b) or 707(b) immediately before or immediately after the transfer. (iii) Examples. The following examples illustrate the application of this paragraph (h)(2). (A) Example 1— (1) Facts. USP, a domestic corporation, owns all of the stock of CFC1 and CFC2, each a controlled foreign corporation. Both USP and CFC1 use the calendar year as their taxable year. CFC2 uses a taxable year ending November 30. On November 1, 2018, before the start of its first CFC inclusion year, CFC2 sells specified tangible property that has a basis of $10x in the hands of CFC2 to CFC1 in exchange for $100x of cash. CFC2 recognizes $90x of gain as a result of the sale ($100x¥$10x), $30x of which is foreign base company income (within the meaning of section 954). USP includes in gross income under section 951(a)(1)(A) its pro rata share of the subpart F income of $30x. CFC2’s gain is not otherwise subject to U.S. tax or taken into account in determining USP’s inclusion under section 951(a)(1)(A). (2) Analysis. The transfer is a disqualified transfer because it is a transfer of specified tangible property; CFC1 and CFC2 are related persons; and the transfer occurs during the disqualified period, the period that begins on January 1, 2018, and ends the last day before the first CFC inclusion year of CFC2 (November 30, 2018). The disqualified basis is $60x, the excess of CFC1’s adjusted basis in the property immediately after the disqualified transfer ($100x), over the sum of CFC2’s basis in the property immediately before the transfer ($10x) and USP’s pro rata share of the gain recognized by CFC1 on the transfer of the property taken into account by USP under section 951(a)(1)(A) ($30x). Accordingly, under paragraph (h)(2)(i) of this section, for purposes of determining the qualified business asset investment of any tested income CFC for any CFC inclusion year, in applying section 168(g) to determine the CFC’s basis in the specified tangible property, the $60x disqualified basis of the property is not taken into account. (B) Example 2— (1) Facts. The facts are the same as in paragraph (1) of Example 1, except that CFC2 uses the calendar year as its taxable year. (2) Analysis. Because CFC2 has a taxable year beginning January 1, 2018, CFC2 has no disqualified period. Accordingly, the property was not transferred during a disqualified period of CFC2, and there is no disqualified basis with respect to the property. Par. 7 Section 1.951A–4 is added to read as follows: daltland on DSKBBV9HB2PROD with PROPOSALS2 ■ § 1.951A–4 Tested interest expense and tested interest income. (a) Scope. This section provides general rules for determining the tested interest expense and tested interest income of a controlled foreign corporation for purposes of determining a United States shareholder’s specified interest expense under § 1.951A– VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 1(c)(3)(iii). Paragraph (b) of this section provides the definitions related to tested interest expense and tested interest income. Paragraph (c) of this section provides examples illustrating these definitions and the application of § 1.951A–1(c)(3)(iii). The amount of specified interest expense determined under § 1.951A–1(c)(3)(iii) and this section is the amount of interest expense described in section 951A(b)(2)(B). (b) Definitions related to specified interest expense—(1) Tested interest expense—(i) In general. The term tested interest expense means interest expense paid or accrued by a controlled foreign corporation taken into account in determining the tested income or tested loss of the controlled foreign corporation for the CFC inclusion year under § 1.951A–2(c), reduced by the qualified interest expense of the controlled foreign corporation. (ii) Interest expense. The term interest expense means any expense or loss that is treated as interest expense by reason of the Internal Revenue Code or the regulations thereunder, and any other expense or loss incurred in a transaction or series of integrated or related transactions in which the use of funds is secured for a period of time if such expense or loss is predominately incurred in consideration of the time value of money. (iii) Qualified interest expense. The term qualified interest expense means, with respect to a qualified CFC, the interest expense paid or accrued by the qualified CFC taken into account in determining the tested income or tested loss of the qualified CFC for the CFC inclusion year, multiplied by the fraction (not to exceed one) described in paragraph (b)(1)(iii)(A) of this section, and then reduced (but not to less than zero) by the amount described in paragraph (b)(1)(iii)(B) of this section. (A) The numerator of the fraction described in this paragraph (b)(1)(iii)(A) is the average of the aggregate adjusted bases as of the close of each quarter of obligations or financial instruments held by the qualified CFC that give rise to income excluded from foreign personal holding company income (as defined in section 954(c)(1)) by reason of section 954(h) or (i), and the denominator is the average of the aggregate adjusted bases as of the close of each quarter of all assets held by the qualified CFC. For purposes of this paragraph (b)(1)(iii)(A), the basis of the stock of another qualified CFC held by a qualified CFC is treated as basis of an obligation or financial instrument giving rise to income excluded from foreign personal holding company income by PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 reason of section 954(h) or (i) in an amount equal to the basis of the stock multiplied by the fraction described in this paragraph (b)(1)(iii)(A) determined with respect to the assets of such other qualified CFC. (B) The amount described in this paragraph (b)(1)(iii)(B) is the amount of interest income of the qualified CFC for the CFC inclusion year that is excluded from foreign personal holding company income (as defined in section 954(c)(1)) by reason of section 954(c)(3) or (6). (iv) Qualified CFC. The term qualified CFC means an eligible controlled foreign corporation (within the meaning of section 954(h)(2)) or a qualifying insurance company (within the meaning of section 953(e)(3)). (2) Tested interest income—(i) In general. The term tested interest income means interest income included in the gross tested income of a controlled foreign corporation for the CFC inclusion year, reduced by qualified interest income of the controlled foreign corporation. (ii) Interest income. The term interest income means any income or gain that is treated as interest income by reason of the Internal Revenue Code or the regulations thereunder, and any other income or gain recognized in a transaction or series of integrated or related transactions in which the forbearance of funds is secured for a period of time if such income or gain is predominately derived from consideration of the time value of money. (iii) Qualified interest income. The term qualified interest income means, with respect to a qualified CFC, interest income of the qualified CFC included in the gross tested income of the qualified CFC for the CFC inclusion year that is excluded from foreign personal holding company income (as defined in section 954(c)(1)) by reason of section 954(h) or (i). (c) Examples. The following examples illustrate the application of this section. (1) Example 1: Wholly-owned CFCs— (i) Facts. A Corp, a domestic corporation, owns 100% of the single class of stock of each of FS1 and FS2, each a controlled foreign corporation. A Corp, FS1, and FS2 all use the calendar year as their taxable year. In Year 1, FS1 pays $100x of interest to FS2. Also, in Year 1, FS2 pays $100x of interest to a bank that is not related to A Corp, FS1, or FS2. The interest paid by each of FS1 and FS2 is taken into account in determining the tested income and tested loss of FS1 and FS2 under § 1.951A–2(c), and the interest received by FS2 is not foreign personal holding company income (as defined in section 954(c)(1)) by reason of section 954(c)(6) and thus is included in gross tested income. For Year 1, taking into account E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules interest income and expense, FS1 has $500x of tested income and FS2 has $400x of tested loss. Neither FS1 nor FS2 is a qualified CFC. (ii) Analysis—(A) CFC-level determination; tested interest expense and tested interest income. FS1 has $100x of tested interest expense for Year 1. FS2 has $100x of tested interest expense and $100x of tested interest income for Year 1. (B) United States shareholder-level determination; pro rata share and specified interest expense. Under § 1.951A–1(d)(5) and (6), A Corp’s pro rata share of FS1’s tested interest expense is $100x, its pro rata share of FS2’s tested interest expense is $100x, and its pro rata share of FS2’s tested interest income is $100x. For Year 1, A Corp’s aggregate pro rata share of tested interest expense is $200x and its aggregate pro rata share of tested interest income is $100x. Accordingly, under § 1.951A–1(c)(3)(iii), A Corp’s specified interest expense is $100x ($200x¥$100x) for Year 1. (2) Example 2: Less than wholly-owned CFCs— (i) Facts. The facts are the same as in paragraph (i) of Example 1, except that A Corp owns 50% of the single class of stock of FS1 and 80% of the single class of stock of FS2. (ii) Analysis. (A) CFC-level determination; tested interest expense and tested interest income. The analysis is the same as in paragraph (ii)(A) of Example 1. (B) United States shareholder-level determination; pro rata share and specified interest expense. Under § 1.951A–1(d)(5) and (6), A Corp’s pro rata share of FS1’s tested interest expense is $50x ($100x × 0.50), its pro rata share of FS2’s tested interest expense is $80x ($100x × 0.80), and its pro rata share of FS2’s tested interest income is $80x ($100x × 0.80). For Year 1, A Corp’s aggregate pro rata share of the tested interest expense is $130x and its aggregate pro rata share of the tested interest income is $80x. Accordingly, under § 1.951A–1(c)(3)(iii), A Corp’s specified interest expense is $50x ($130x ¥ $80x) for Year 1. (3) Example 3: Qualified CFC—(i) Facts. B Corp, a domestic corporation, owns 100% of the single class of stock of each of FS1 and FS2, each a controlled foreign corporation. B Corp, FS1, and FS2 all use the calendar year as their taxable year. FS2 is an eligible controlled foreign corporation within the meaning of section 954(h)(2). In Year 1, FS1 pays $100x of interest to FS2, which interest income is excluded from the foreign personal holding company income (as defined in section 954(c)(1)) of FS2 by reason of section 954(c)(6). Also, in Year 1, FS2 pays $250x of interest to a bank, and receives an additional $300x of interest from customers that are not related to FS2, which interest income is excluded from foreign personal holding company income by reason of section 954(h). The interest paid by each of FS1 and FS2 is taken into account in determining the tested income and tested loss of FS1 and FS2, and the interest received by FS2 is included in gross tested income. FS1 is not a qualified CFC. FS2 does not own stock in any qualified CFC. FS2’s average adjusted bases in obligations or financial instruments that give rise to income excluded from foreign personal holding company income by reason VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 of section 954(h) is $8,000x, and FS2’s average adjusted bases in all its assets is $10,000x. (ii) Analysis—(A) CFC-level determination; tested interest expense and tested interest income. FS1 has $100x of tested interest expense for Year 1. FS2 is a qualified CFC because it is an eligible controlled foreign corporation within the meaning of section 954(h)(2). As a result, in determining the tested interest income and tested interest expense of FS2, the qualified interest income and qualified interest expense of FS2 are excluded. FS2 has qualified interest income of $300x, the amount of FS2’s interest income that is excluded from foreign personal holding company income by reason of section 954(h). In addition, FS2 has qualified interest expense of $100x, the amount of FS2’s interest expense taken into account in determining FS2’s tested income or tested loss under § 1.951A–2(c) ($250x), multiplied by a fraction, the numerator of which is FS2’s average adjusted bases in obligations or financial instruments that give rise to income excluded from foreign personal holding company income by reason of section 954(h) ($8,000x), and the denominator of which is F2’s average adjusted bases in all its assets ($10,000x), and then reduced by the amount of the interest income received from FS1 excluded from foreign personal holding company income by reason of section 954(c)(6) ($100x). Therefore, for Year 1, FS2 has tested interest income of $100x ($400x ¥ $300x) and tested interest expense of $150x ($250x ¥ $100x). (B) United States shareholder-level determination; pro rata share and specified interest expense. Under § 1.951A–1(d)(5) and (6), B Corp’s pro rata share of FS1’s tested interest expense is $100x, its pro rata share of FS2’s tested interest expense is $150x, and its pro rata share of FS2’s tested interest income is $100x. For Year 1, B Corp’s aggregate pro rata share of tested interest expense is $250x ($100x + $150x) and its aggregate pro rata share of tested interest income is $100x ($0 + $100x). Accordingly, under § 1.951A–1(c)(3)(iii), B Corp’s specified interest expense is $150x ($250x ¥ $100x) for Year 1. Par. 8. Section 1.951A–5 is added to read as follows: ■ § 1.951A–5 Domestic partnerships and their partners. (a) Scope. This section provides rules regarding the application of section 951A and the section 951A regulations to domestic partnerships that own (within the meaning of section 958(a)) stock in one or more controlled foreign corporations and to partners of such domestic partnerships, including United States persons (within the meaning of section 957(c)). Paragraph (b) of this section provides rules for the determination of the GILTI inclusion amount of a domestic partnership and the distributive share of such amount of a partner that is not a United States shareholder with respect to one or more controlled foreign corporations owned PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 51101 by the domestic partnership. Paragraph (c) of this section provides rules for the determination of the GILTI inclusion amount of a partner that is a United States shareholder with respect to one or more controlled foreign corporations owned by a domestic partnership. Paragraph (d) of this section provides rules for tiered domestic partnerships. Paragraph (e) of this section provides the definitions of CFC tested item, partnership CFC, U.S. shareholder partner, and U.S. shareholder partnership. Paragraph (f) of this section requires a domestic partnership to provide certain information to each partner necessary for the partner to determine its GILTI inclusion amount or its distributive share of the partnership’s GILTI inclusion amount. Paragraph (g) of this section provides examples illustrating the rules of this section. For rules regarding the treatment of certain controlled domestic partnerships owned through one or more foreign corporations as foreign partnerships for purposes of sections 951 through 964, including section 951A and the section 951A regulations, see § 1.951–1(h). (b) In general—(1) Determination of GILTI inclusion amount of a U.S. shareholder partnership. A U.S. shareholder partnership determines its GILTI inclusion amount for its U.S. shareholder inclusion year under the general rules applicable to United States shareholders in section 951A and the section 951A regulations. (2) Determination of distributive share of U.S. shareholder partnership’s GILTI inclusion amount of a partner other than a U.S. shareholder partner. Each partner of a U.S. shareholder partnership that is not a U.S. shareholder partner takes into account its distributive share of the U.S. shareholder partnership’s GILTI inclusion amount (if any) for the U.S. shareholder inclusion year in accordance with section 702 and § 1.702–1(a)(8)(ii). (c) Determination of GILTI inclusion amount of a U.S. shareholder partner. For purposes of section 951A and the section 951A regulations, section 958(a) stock of a partnership CFC owned by a U.S. shareholder partnership is treated as section 958(a) stock owned proportionately by each U.S. shareholder partner that is a United States shareholder of the partnership CFC in the same manner as if the U.S. shareholder partnership were a foreign partnership under section 958(a)(2) and § 1.958–1(b). Accordingly, for purposes of determining a U.S. shareholder partner’s GILTI inclusion amount, the U.S. shareholder partner determines its pro rata share of any CFC tested item of E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51102 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules a partnership CFC based on the section 958(a) stock owned by the U.S. shareholder partner by reason of this paragraph (c). In addition, a U.S. shareholder partner’s distributive share of the GILTI inclusion amount of a U.S. shareholder partnership is determined without regard to the partnership’s pro rata share of any CFC tested item of a partnership CFC with respect to which the U.S. shareholder partner is a United States shareholder. (d) Tiered U.S. shareholder partnerships. In the case of tiered U.S. shareholder partnerships, section 958(a) stock of a partnership CFC treated as owned under paragraph (c) of this section by a U.S. shareholder partner that is also a U.S. shareholder partnership is treated as section 958(a) stock owned by the U.S. shareholder partnership for purposes of applying paragraph (c) of this section to a U.S. shareholder partner of such U.S. shareholder partnership. (e) Definitions. The following definitions apply for purposes of this section: (1) CFC tested item. The term CFC tested item has the meaning set forth in § 1.951A–1(d)(1). (2) Partnership CFC. The term partnership CFC means, with respect to a U.S. shareholder partnership, a controlled foreign corporation stock of which is owned (within the meaning of section 958(a)) by the U.S. shareholder partnership. (3) U.S. shareholder partner. The term U.S. shareholder partner means, with respect to a U.S. shareholder partnership and a partnership CFC of the U.S. shareholder partnership, a United States person that is a partner in the U.S. shareholder partnership and that is also a United States shareholder (as defined in section 951(b)) of the partnership CFC. (4) U.S. shareholder partnership. The term U.S. shareholder partnership means a domestic partnership (within the meaning of section 7701(a)(4)) that is a United States shareholder of one or more controlled foreign corporations. (f) Reporting requirement. A U.S. shareholder partnership must furnish to each partner on or with such partner’s Schedule K–1 (Form 1065 or successor form) for each U.S. shareholder inclusion year of the partnership the partner’s distributive share of the partnership’s GILTI inclusion amount (if any) and, with respect to a U.S. shareholder partner, the partner’s proportionate share of the partnership’s pro rata share (if any) of each CFC tested item of each partnership CFC of the partnership and any other information VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 required in the form or instructions. See section 6031(b). (g) Examples. The following examples illustrate the rules of this section. None of the persons in the following examples own an interest in any controlled foreign corporation other than as described. (1) Example 1: Domestic partnership with partners that are not United States shareholders— (i) Facts. Eleven U.S. citizens (‘‘individuals’’) each own a 9% interest of PRS, a domestic partnership. The remaining 1% interest of PRS is owned by X Corp, a domestic corporation. None of the individuals or X Corp are related. PRS owns 100% of the single class of stock of FC, a controlled foreign corporation. The individuals, X Corp, PRS, and FC all use the calendar year as their taxable year. In Year 1, FC has $130x of tested income and $50x of qualified business asset investment. (ii) Analysis—(A) Partnership-level calculation. PRS is a U.S. shareholder partnership with respect to FC. Under paragraph (b)(1) of this section, PRS determines its GILTI inclusion amount for Year 1. PRS’s pro rata share of FC’s tested income is $130x. PRS’s pro rata share of FC’s qualified business asset investment is $50x. PRS’s net CFC tested income is $130x. PRS’s net deemed tangible income return is $5x ($50x × 0.10). PRS’s GILTI inclusion amount for Year 1 is $125x ($130x ¥ $5x). (B) Partner-level calculation. Neither X Corp nor the individuals are U.S. shareholder partners with respect to FC. Accordingly, under paragraph (b)(2) of this section, each of the individuals and X Corp includes its distributive share of PRS’s GILTI inclusion amount ($11.25x each for the individuals and $1.25x for X Corp) in gross income for Year 1. (2) Example 2: Domestic partnership with partners that are United States shareholders; multiple partnership CFCs— (i) Facts. X Corp and Y Corp are domestic corporations that own 40% and 60%, respectively, of PRS, a domestic partnership. PRS owns 100% of the single class of stock of FC1 and of FC2, each a controlled foreign corporation. X Corp, Y Corp, PRS, FC1, and FC2 all use the calendar year as their taxable year. In Year 1, FC1 has $130x of tested income and $50x of qualified business asset investment, and FC2 has $30x of tested loss. (ii) Analysis—(A) Partnership-level calculation. PRS is a U.S. shareholder partnership with respect to each of FC1 and FC2. Under paragraph (b)(1) of this section, PRS determines its GILTI inclusion amount for Year 1. PRS’s pro rata share of FC1’s tested income is $130x and of FC2’s tested loss is $30x. PRS’s pro rata share of FC1’s qualified business asset investment is $50x. PRS’s net CFC tested income is $100x ($130x ¥ $30x). PRS’s net deemed tangible income return is $5x ($50x × 0.10). PRS’s GILTI inclusion amount for Year 1 is $95x ($100x ¥ $5x). (B) Partner-level calculation. X Corp and Y Corp are U.S. shareholder partners with respect to FC1 and FC2. Accordingly, under paragraph (c) of this section, X Corp and Y Corp are treated as owning section 958(a) PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 stock of FC1 and FC2 proportionately as if PRS were a foreign partnership. Thus, X Corp’s pro rata share of FC1’s tested income is $52x ($130x × 0.40), and its pro rata share of FC2’s tested loss is $12x ($30x × 0.40). X Corp’s pro rata share of FC1’s qualified business asset investment is $20x ($50x × 0.40). Accordingly, X Corp’s net CFC tested income is $40x ($52x ¥ $12x), and its net deemed tangible income return is $2x ($20x × 0.10). X Corp’s GILTI inclusion amount for Year 1 is $38x ($40x ¥ $2x). Y Corp’s pro rata share of FC1’s tested income is $78x ($130x × 0.60), and its pro rata share of FC2’s tested loss is $18x ($30x × 0.60). Y Corp’s pro rata share of FC1’s qualified business asset investment is $30x ($50x × 0.60). Accordingly, Y Corp’s net CFC tested income is $60x ($78x ¥ $18x), and its net deemed tangible income return is $3x ($30x × 0.10). Y Corp’s GILTI inclusion amount for Year 1 is $57x ($60x ¥ $3x). Because X Corp and Y Corp are both U.S. shareholder partners with respect to FC1 and FC2, the only partnership CFCs of PRS, X Corp and Y Corp each includes its proportionate share of PRS’s share of each CFC tested item of FC1 and FC2 under paragraph (c) of this section rather than including a distributive share of the GILTI inclusion amount of PRS. (3) Example 3: Domestic partnership with partners that are United States shareholders with respect to some, but not all, of the controlled foreign corporations owned by the domestic partnership— (i) Facts. X Corp and Y Corp are domestic corporations that own 40% and 60%, respectively, of PRS, a domestic partnership. PRS owns 20% of the single class of stock of FC1 and 10% of the single class of stock of FC2. In addition, Y Corp owns 100% of the single class of stock of FC3. FC1, FC2, and FC3 are controlled foreign corporations. X Corp, Y Corp, PRS, FC1, FC2, and FC3 all use the calendar year as their taxable year. In Year 1, FC1 has $100x of tested income, FC2 has $80x of tested income, and FC3 has $10x of tested loss. (ii) Analysis. (A) Partnership-level calculation. PRS is a U.S. shareholder partnership with respect to each of FC1 and FC2. Under paragraph (b)(1) of this section, PRS determines its GILTI inclusion amount for Year 1. PRS’s pro rata share of FC1’s tested income is $20x ($100x × 0.20) and of FC2’s tested income is $8x ($80x × 0.10). PRS’s net CFC tested income is $28x ($20x + $8x). PRS has no net deemed tangible income return. PRS’s GILTI inclusion amount for Year 1 is $28x. (B) Partner-level calculation—(1) X Corp. X Corp is not a U.S. shareholder partner with respect to either FC1 or FC2 because X Corp owns (within the meaning of section 958) less than 10% of each of FC1 (40% × 20% = 8%) and FC2 (40% × 10% = 4%). Accordingly, under paragraph (b)(2) of this section, X Corp includes in income its distributive share, or $11.20x ($28x × 0.40), of PRS’s GILTI inclusion amount in Year 1. (2) Y Corp. Y Corp is a United States shareholder of FC3. Y Corp is also a U.S. shareholder partner with respect to FC1, because it owns (within the meaning of section 958) at least 10% (60% × 20% = 12%) of the stock of FC1, but not with respect to E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules FC2, because Y Corp owns (within the meaning of section 958) less than 10% of the stock of FC2 (60% × 10% = 6%). Accordingly, under paragraph (c) of this section, Y Corp is treated as owning section 958(a) stock of FC1 proportionately as if PRS were a foreign partnership. Thus, Y Corp’s pro rata share of FC1’s tested income is $12x ($20x × 0.60). Y Corp’s pro rata share of FC3’s tested loss is $10x ($10x × 1). Accordingly, Y Corp’s net CFC tested income is $2x ($12x ¥ $10x) and Y Corp has no net deemed tangible income return. Y Corp’s GILTI inclusion amount for Year 1 is $2x. In addition, under paragraph (c) of this section, for purposes of determining Y Corp’s distributive share of PRS’s GILTI inclusion amount, Y Corp’s distributive share of PRS’s GILTI inclusion amount is determined without regard to PRS’s pro rata share of any item of FC1. PRS’s GILTI inclusion amount computed solely with respect to FC2 is $8x ($80x × 0.10). Y Corp’s distributive share of PRS’s GILTI inclusion amount is $4.80x ($8x × 0.60) in Year 1. (4) Example 4: Tiered domestic partnerships—(i) Facts. X Corp and Y Corp are domestic corporations that own, respectively, a 20% interest and an 80% interest in PRS1, an upper-tier domestic partnership. PRS1 owns a 40% interest in PRS2, a lower-tier domestic partnership. The remaining 60% of PRS2 is owned by Z Corp, a controlled foreign corporation. PRS2 is not a controlled domestic partnership within the meaning of § 1.951–1(h)(2) (because no United States shareholder of Z Corp (or related persons) controls PRS2). PRS2 owns 80% of the single class of stock of FC, a controlled foreign corporation. X Corp, Y Corp, Z Corp, PRS1, PRS2, and FC all use the calendar year as their taxable year. In Year 1, FC has $100x of tested income and $50x of qualified business asset investment. (ii) Analysis. (A) Lower-tier partnershiplevel calculation. PRS2 is a U.S. shareholder partnership with respect to FC, because PRS2 directly owns 80% of the single class of stock of FC. Under paragraph (b)(1) of this section, PRS2 determines its GILTI inclusion amount for its taxable year. PRS2’s pro rata share of FC’s tested income is $80x ($100x × 0.80). PRS2’s pro rata share of FC’s qualified business asset investment is $40x ($50x × 0.80). PRS2’s net CFC tested income is $80x, and its net deemed tangible income return is $4x ($40x × 0.10). PRS2’s GILTI inclusion amount for Year 1 is $76x ($80x ¥ $4x). (B) Non-U.S. shareholder partner calculation. Z Corp is not a U.S. shareholder partner of FC. Therefore, under paragraph (b)(2) of this section, in Year 1, Z Corp includes in income Z Corp’s distributive share of PRS2’s GILTI inclusion amount, or $45.60x ($76x × 0.60). Z Corp’s gross tested income in Year 1 includes this amount. (C) Upper-tier partnership-level calculation. PRS1 is a U.S. shareholder partner with respect to FC because it owns (within the meaning of section 958) more than 10% of the stock of FC (40% × 100% (by reason of the application of section 958(b)(2)) = 40%). Accordingly, under paragraph (c) of this section, PRS1 is treated as owning section 958(a) stock of FC proportionately as if PRS2 were a foreign VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 partnership. Thus, PRS1’s pro rata share of FC’s tested income is $32x ($100x × 0.80 × 0.40), and its pro rata share of FC’s qualified business asset investment is $16x ($50x × 0.80 × 0.40). PRS1’s net CFC tested income is $32x, and its net deemed tangible income return is $1.60x ($16x × 0.10). PRS1’s GILTI inclusion amount for Year 1 is $30.40x ($32x ¥ $1.60x). (D) Upper-tier partnership partner-level calculation—(1) Treatment of upper-tier partnership. For purposes of applying paragraph (c) of this section to determine X Corp and Y Corp’s GILTI inclusion amount, PRS1 is treated as owning section 958(a) stock of FC. (2) X Corp. X Corp is not a U.S. shareholder partner with respect to FC because it owns (within the meaning of section 958) less than 10% (20% × 40% × 100% (by reason of the application of section 958(b)(2)) = 8%) of the stock of FC. Accordingly, under paragraph (b)(2) of this section, X Corp includes its distributive share of PRS1’s GILTI inclusion amount in Year 1, which is $6.08x ($30.40x × 0.20). (3) Y Corp. Y Corp is a U.S. shareholder partner with respect to FC because it owns (within the meaning of section 958) more than 10% (80% × 40% × 100% (by reason of the application of section 958(b)(2)) = 32%) of the stock of FC. Accordingly, under paragraphs (c) and (d) of this section, Y Corp is treated as owning section 958(a) stock of FC proportionately as if PRS1 and PRS2 were foreign partnerships. Thus, Y Corp’s pro rata share of FC’s tested income is $25.60x ($100x × 0.80 × 0.40 × 0.80), and its pro rata share of FC’s qualified business asset investment is $12.80x ($50x × 0.80 × 0.40 × 0.80). Y Corp’s net CFC tested income is $25.60x, its net deemed tangible income return is $1.28x ($12.80x × 0.10), and its GILTI inclusion amount is $24.32x ($25.60x ¥ $1.28x). Because Y Corp is a U.S. shareholder partner with respect to FC, the only partnership CFC of PRS1, Y Corp has no distributive share of the GILTI inclusion amount of PRS1 under paragraph (c) of this section. (5) Example 5: S corporation and its shareholders— (i) Facts. Individual A, a U.S. citizen, and Grantor Trust, a trust all of which is treated under sections 671 through 679 as owned by Individual B, a U.S. citizen, respectively own 5% and 95% of the single class of stock of Corporation X, an S corporation. Corporation X owns 100% of the single class of stock of FC, a controlled foreign corporation. Individual A, Grantor Trust, Individual B, Corporation X, and FC all use the calendar year as their taxable year. In Year 1, FC has $200x of tested income and $100x of qualified business asset investment. (ii) Analysis—(A) S corporation-level calculation. An S corporation is treated as a partnership for purposes of sections 951 through 965 under section 1373. Corporation X is a U.S. shareholder partnership with respect to FC, a partnership CFC. Accordingly, under paragraph (b)(1) of this section, Corporation X determines its GILTI inclusion amount for Year 1. Corporation X’s pro rata share of FC’s tested income is $200x, and its pro rata share of FC’s qualified business asset investment is $100x. Corporation X’s net CFC tested income is PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 51103 $200x, and its net deemed tangible income return is $10x ($100x × 0.10). Corporation X’s GILTI inclusion amount for Year 1 is $190x ($200x ¥ $10x). (B) S corporation shareholder-level calculation—(1) Individual A. Individual A is not a U.S. shareholder partner with respect to FC because it owns (within the meaning of section 958) less than 10% (5% × 100% = 5%) of the FC stock. Accordingly, under paragraph (b)(2) of this section, Individual A includes in gross income its proportionate share of Corporation X’s GILTI inclusion amount, which is $9.50x ($190x × 0.05). (2) Grantor Trust. Because Individual B is treated as owning all of Grantor Trust under sections 671 through 679, Individual B is treated as if it directly owns the shares of stock in Corporation X owned by Grantor Trust. As a result, Individual B is treated as a U.S. shareholder partner with respect to FC because it owns (within the meaning of section 958) more than 10% (95% × 100% = 95%) of the FC stock. Accordingly, under paragraph (c) of this section, Individual B is treated as owning section 958(a) stock of FC proportionately as if Corporation X were a foreign partnership. Thus, Individual B’s pro rata share of FC’s tested income is $190x ($200x × 0.95) and its pro rata share of FC’s qualified business asset investment is $95x ($100x × 0.95). Individual B’s net CFC tested income is $190x, and its net deemed tangible income return is $9.50x ($95x × 0.10). Individual B’s GILTI inclusion amount for Year 1 is $180.5x ($190x ¥ $9.50x). Because Individual B is a U.S. shareholder partner with respect to FC, the only partnership CFC of Corporation X, Individual B has no distributive share of the GILTI inclusion amount of Corporation X under paragraph (c) of this section. (6) Example 6: Domestic partnership with no GILTI inclusion amount— (i) Facts. X Corp is a domestic corporation that owns a 90% interest in PRS, a domestic partnership. The remaining 10% of PRS is owned by Y, a foreign individual. PRS owns 100% of the single class of stock of FC1, a controlled foreign corporation, and 100% of the single class of stock of FC2, a controlled foreign corporation. X Corp owns 100% of the single class of stock of FC3, a controlled foreign corporation. X Corp, PRS, FC1, FC2, and FC3 all use the calendar year as their taxable year. In Year 1, FC1 has $100x of tested loss and $80x of tested interest expense, FC2 has $50x of tested income, and FC3 has $150x of tested income and $500x of qualified business asset investment in Year 1. (ii) Analysis—(A) Partnership-level calculation. PRS is a U.S. shareholder partnership with respect to FC1 and FC2. Under paragraph (b)(1) of this section, PRS determines its GILTI inclusion amount for Year 1. PRS’s pro rata share of FC1’s tested loss is $100x, and PRS’s pro rata share of FC2’s tested income is $50x. PRS’s net CFC tested income is $0 ($50x ¥ 100x), and therefore PRS has no GILTI inclusion amount for Year 1. (B) Partner-level calculation. X Corp is a U.S. shareholder partner with respect to FC1 and FC2 because X Corp owns (within the meaning of section 958) at least 10% of each (90% × 100% = 90%). Accordingly, under E:\FR\FM\10OCP2.SGM 10OCP2 51104 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules paragraph (c) of this section, X Corp is treated as owning section 958(a) stock of FC1 and FC2 proportionately as if PRS were a foreign partnership. X Corp’s pro rata share of FC1’s tested loss is $90x ($100x × 0.90), and X Corp’s pro rata share of FC1’s tested interest expense is $72x ($80 × 0.90). X Corp’s pro rata share of FC2’s tested income is $45x ($50x × 0.90). X Corp’s pro rata share of FC3’s tested income is $150x, and its pro rata share of FC3’s qualified business asset investment is $500x. X Corp’s net CFC tested income is $105x ($45x + $150x ¥ $90x). X Corp’s deemed tangible income return is $50x ($500x × 0.10), but its net deemed tangible income return is $0 ($50x ¥ $72x). X Corp has a GILTI inclusion amount of $105x ($105x ¥ $0) for Year 1. Par. 9. Section 1.951A–6 is added to read as follows: ■ daltland on DSKBBV9HB2PROD with PROPOSALS2 § 1.951A–6 Treatment of GILTI inclusion amount and adjustments to earnings and profits and basis related to tested loss CFCs. (a) Scope. This section provides rules relating to the treatment of GILTI inclusion amounts and adjustments to earnings and profits and basis to account for tested losses. Paragraph (b) of this section provides that a GILTI inclusion amount is treated in the same manner as an amount included under section 951(a)(1)(A) for purposes of applying certain sections of the Code. Paragraph (c) of this section provides rules for the treatment of amounts taken into account in determining the net CFC tested income when applying sections 163(e)(3)(B)(i) and 267(a)(3)(B). Paragraph (d) of this section provides rules that increase the earnings and profits of a tested loss CFC for purposes of section 952(c)(1)(A). Paragraph (e) of this section provides rules for certain basis adjustments to the stock of a controlled foreign corporation by reason of tested losses used to reduce a domestic corporation’s net CFC tested income upon the disposition of the stock of the controlled foreign corporation. (b) Treatment as subpart F income for certain purposes—(1) In general. A GILTI inclusion amount is treated in the same manner as an amount included under section 951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 1411, 6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4), and with respect to other sections of the Internal Revenue Code as provided in other guidance published in the Internal Revenue Bulletin. (2) Allocation of GILTI inclusion amount to tested income CFCs—(i) In general. For purposes of the sections referred to in paragraph (b)(1) of this section, the portion of the GILTI VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 inclusion amount of a United States shareholder treated as being with respect to each controlled foreign corporation of the United States shareholder for the U.S. shareholder inclusion year is— (A) In the case of a tested loss CFC, zero, and (B) In the case of a tested income CFC, the portion of the GILTI inclusion amount of the United States shareholder which bears the same ratio to such inclusion amount as the United States shareholder’s pro rata share of the tested income of the tested income CFC for the U.S. shareholder inclusion year bears to the aggregate amount of the United States shareholder’s pro rata share of the tested income of each tested income CFC for the U.S. shareholder inclusion year. (ii) Example— (A) Facts. USP, a domestic corporation, owns all of the stock of three controlled foreign corporations, CFC1, CFC2, and CFC3. USP, CFC1, CFC2, and CFC3 all use the calendar year as their taxable year. In Year 1, CFC1 has tested income of $100x, CFC2 has tested income of $300x, and CFC3 has tested loss of $50x. Neither CFC1 nor CFC2 has qualified business asset investment. (B) Analysis. In Year 1, USP has a GILTI inclusion amount of $350x ($100x + $300x¥$50x). The aggregate amount of USP’s pro rata share of tested income from CFC1 and CFC2 is $400x ($100x + $300x). The portion of USP’s GILTI inclusion amount treated as being with respect to CFC1 is $87.50x ($350x x $100x/$400x). The portion of USP’s GILTI inclusion amount treated as being with respect to CFC2 is $262.50x ($350x x $300x/$400x). The portion of USP’s GILTI inclusion amount treated as being with respect to CFC3 is $0 because CFC3 is a tested loss CFC. (iii) Translation of portion of GILTI inclusion amount allocated to tested income CFC. The portion of the GILTI inclusion amount of a United States shareholder allocated to a tested income CFC under section 951A(f)(2) and paragraph (b)(2)(i) of this section is translated into the functional currency of the tested income CFC using the average exchange rate for the CFC inclusion year of the tested income CFC. (c) Treatment as an amount includible in the gross income of a United States person—(1) In general. For purposes of sections 163(e)(3)(B)(i) and 267(a)(3)(B), an item (including original issue discount) is treated as includible in the gross income of a United States person to the extent that such item increases a United States shareholder’s pro rata share of tested income of a controlled foreign corporation for a U.S. shareholder inclusion year, reduces the shareholder’s pro rata share of tested loss of a controlled foreign corporation PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 for the U.S. shareholder inclusion year, or both. (2) Special rule for a United States shareholder that is a domestic partnership. In the case of a United States shareholder that is a domestic partnership (within the meaning of section 7701(a)(4)), an item is described in paragraph (c)(1) of this section only to the extent one or more United States persons (other than domestic partnerships) that are direct or indirect partners of the domestic partnership include in gross income their distributive share of the GILTI inclusion amount (if any) of the domestic partnership for the U.S. shareholder inclusion year of the domestic partnership in which such item accrues or such item is taken into account under paragraph (c)(1) of this section by a U.S. shareholder partner (within the meaning of § 1.951A–5(e)(3)) of the domestic partnership by reason of § 1.951A–5(c). (d) Increase of earnings and profits of tested loss CFC for purposes of section 952(c)(1)(A). For purposes of section 952(c)(1)(A) with respect to a CFC inclusion year, the earnings and profits of a tested loss CFC are increased by an amount equal to the tested loss of the tested loss CFC for the CFC inclusion year. (e) Adjustments to basis related to net used tested loss—(1) In general—(i) Disposition of stock of a controlled foreign corporation. In the case of a disposition of section 958(a) stock of a controlled foreign corporation owned (directly or indirectly) by a domestic corporation (specified stock), the adjusted basis of the specified stock is reduced immediately before the disposition by the domestic corporation’s net used tested loss amount with respect to the controlled foreign corporation (if any) attributable to the specified stock. If the reduction described in the preceding sentence exceeds the adjusted basis in the specified stock immediately before the disposition, such excess is treated as gain from the sale or exchange of the stock for the taxable year in which the disposition occurs. (ii) Disposition of stock of an uppertier controlled foreign corporation. In the case of a disposition of specified stock of a controlled foreign corporation (upper-tier CFC) by reason of which a domestic corporation owns, or has owned, section 958(a) stock of any other controlled foreign corporation (lowertier CFC), for purposes of determining the reduction under paragraph (e)(1)(i) of this section, the domestic corporation’s net used tested loss amount (if any) with respect to the E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules upper-tier CFC attributable to the specified stock is— (A) Increased by the sum of the domestic corporation’s net used tested loss amounts with respect to each lower-tier CFC attributable to the specified stock; and (B) Reduced (but not below zero) by the sum of the domestic corporation’s net offset tested income amounts with respect to the upper-tier CFC and each lower-tier CFC attributable to the specified stock. (iii) Disposition of an interest in a foreign entity other than a controlled foreign corporation. In the case of a disposition of an interest in a foreign entity other than a controlled foreign corporation through which entity a domestic corporation owns section 958(a) stock of a controlled foreign corporation, for purposes of paragraph (e)(1)(i) and (ii) of this section, the controlled foreign corporation is treated as a lower-tier CFC, the interest in the entity is treated as specified stock of a controlled foreign corporation, and the entity is treated as an upper-tier CFC with respect to which the domestic corporation has neither a net used tested loss amount nor a net offset tested income amount. (iv) Order of application of basis reductions. In the event of an indirect disposition described in paragraph (e)(6)(ii)(B) of this section, the basis reduction described in paragraph (e)(1)(i) of this section is deemed to occur at the lowest-tier CFC first and, thereafter, up the chain of ownership until adjustments are made to the specified stock directly owned by the person making the disposition described in paragraph (e)(6)(ii)(A) of this section. (v) No duplicative adjustments. No item is taken into account under this paragraph (e)(1) to adjust the basis of specified stock of a controlled foreign corporation to the extent that such amount has previously been taken into account with respect to a prior basis adjustment with respect to such stock under this paragraph (e)(1). Moreover, the basis of specified stock is not reduced to the extent a taxpayer can demonstrate to the satisfaction of the Secretary that such adjustments would duplicate prior reductions to the basis of such stock under section 362(e)(2). (2) Net used tested loss amount—(i) In general. The term net used tested loss amount means, with respect to a domestic corporation and a controlled foreign corporation, the excess (if any) of— (A) The aggregate of the domestic corporation’s used tested loss amount with respect to the controlled foreign VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 corporation for each U.S. shareholder inclusion year, over (B) The aggregate of the domestic corporation’s offset tested income amount with respect to the controlled foreign corporation for each U.S. shareholder inclusion year. (ii) Used tested loss amount. The term used tested loss amount means, with respect to a domestic corporation and a tested loss CFC for a U.S. shareholder inclusion year— (A) In the case of a domestic corporation that has net CFC tested income for the U.S. shareholder inclusion year, the domestic corporation’s pro rata share of the tested loss of the tested loss CFC for the U.S. shareholder inclusion year, or (B) In the case of a domestic corporation without net CFC tested income for the U.S. shareholder inclusion year, the amount that bears the same ratio to the domestic corporation’s pro rata share of the tested loss of the tested loss CFC for the U.S. shareholder inclusion year as the aggregate of the domestic corporation’s pro rata share of the tested income of each tested income CFC for the U.S. shareholder inclusion year bears to the aggregate of the domestic corporation’s pro rata share of the tested loss of each tested loss CFC for the U.S. shareholder inclusion year. (3) Net offset tested income amount— (i) In general. The term net offset tested income amount means, with respect to a domestic corporation and a controlled foreign corporation, the excess (if any) of the amount described in paragraph (e)(2)(i)(B) of this section over the amount described in paragraph (e)(2)(i)(A) of this section. (ii) Offset tested income amount. The term offset tested income amount means, with respect to a domestic corporation and a tested income CFC for a U.S. shareholder inclusion year— (A) In the case of a domestic corporation that has net CFC tested income for the U.S. shareholder inclusion year, the amount that bears the same ratio to the domestic corporation’s pro rata share of the tested income of the tested income CFC for the U.S. shareholder inclusion year as the aggregate of the domestic corporation’s pro rata share of the tested loss of each tested loss CFC for the U.S. shareholder inclusion year bears to the aggregate of the domestic corporation’s pro rata share of the tested income of each tested income CFC for the U.S. shareholder inclusion year, or (B) In the case of a domestic corporation without net CFC tested income for the U.S. shareholder inclusion year, the domestic PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 51105 corporation’s pro rata share of the tested income of the tested income CFC for the U.S. shareholder inclusion year. (4) Attribution to stock—(i) In general. The portion of a domestic corporation’s net used tested loss amount or net offset tested income amount with respect to a controlled foreign corporation (including a lower-tier CFC) attributable to specified stock for purposes of paragraph (e)(1) of this section is determined based on the domestic corporation’s pro rata share of the tested loss and tested income, as applicable, of the controlled foreign corporation for each U.S. shareholder inclusion year with respect to such specified stock. See § 1.951A–1(d)(1), (2), and (4) for rules regarding the determination of pro rata share amounts of tested income and tested loss. (ii) Nonrecognition transactions. In the case of specified stock acquired by a domestic corporation in a nonrecognition transaction (as defined in section 7701(a)(45)), the principles of § 1.1248–8 apply to determine the domestic corporation’s net used tested loss amount or net offset tested income amount with respect to a controlled foreign corporation attributable to specified stock. For purposes of applying the principles of § 1.1248–8, tested income is treated as earnings and profits and tested loss is treated as a deficit in earnings and profits. (5) Section 381 transactions. If a controlled foreign corporation with respect to which a United States shareholder has a net used tested loss amount or net offset tested income amount is a distributor or transferor corporation in a transaction described in section 381(a) (acquired CFC) in which a controlled foreign corporation is the acquiring corporation (acquiring CFC), the domestic corporation’s net used tested loss amount or net offset tested income amount with respect to the acquiring CFC is increased by the amount of the net used tested loss amount or net offset tested income amount of the acquired CFC. This paragraph (e)(5) does not apply to the extent that the acquiring CFC is an upper-tier CFC and such amounts would be taken into account under paragraph (e)(1)(ii) of this paragraph if the stock of the acquiring CFC were disposed of. (6) Other definitions. The following additional definitions apply for purposes of this paragraph (e): (i) Domestic corporation. The term domestic corporation means a domestic corporation other than a real estate investment trust (as defined in section 856) or a regulated investment company (as defined in section 851). E:\FR\FM\10OCP2.SGM 10OCP2 51106 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS2 (ii) Disposition. The term disposition means— (A) Any transfer of specified stock that is taxable, in whole or in part, including a sale or exchange, contribution, or distribution of the stock, including a deemed sale or exchange by reason of the specified stock becoming worthless within the meaning of section 165(g), or (B) Any indirect disposition of specified stock of a lower-tier CFC as a result of a disposition described in paragraph (e)(6)(ii)(A) of this section of specified stock of an upper-tier CFC. (7) Special rule for disposition by controlled foreign corporation less than 100 percent owned by a single domestic corporation. In the case of a disposition by a controlled foreign corporation that is not 100 percent owned, within the meaning of section 958(a), by a single domestic corporation, if a reduction to basis described in paragraph (e)(1) of this section by reason of a domestic corporation’s net used tested loss amount results in an increase to the controlled foreign corporation’s foreign personal holding company income (as defined in section 954(c)(1)), the domestic corporation’s pro rata share of the subpart F income of the controlled foreign corporation, as otherwise determined under section 951(a)(2) and § 1.951–1(b) and (e), is increased by the amount of such increase, and no other shareholder takes such subpart F income into account under section 951(a)(1)(A). (8) Special rules for members of a consolidated group. For purposes of the section 951A regulations, a member determines its net used tested loss amount and the adjustments made as a result of the amount under the rules provided in § 1.1502–51(c). (9) Examples. The following examples illustrate the application of the rules in this paragraph (e). (i) Example 1— (A) Facts. USP, a domestic corporation, owns 100% of the single class of stock of CFC1 and CFC2. USP1, CFC1, and CFC2 all use the calendar year as their taxable year. In Year 1, CFC2 has $90x of tested loss and CFC1 has $100x of tested income. At the beginning of Year 2, USP sells all of the stock of CFC2 to an unrelated buyer for cash. USP has no used tested loss amount or offset tested income amount with respect to CFC2 in any year prior to Year 1. USP has not owned stock in any other CFC by reason of owning stock of CFC1 and CFC2. (B) Analysis. At the time of the disposition, USP has a net used tested loss amount of $90x with respect to CFC2 attributable to the CFC2 stock, which is the specified stock. Because USP does not own (and has not owned), within the meaning of section 958(a)(2), stock in any lower-tier CFCs by reason of the CFC2 stock, there is no VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 adjustment to the net used tested loss amount of $90x pursuant to paragraph (e)(1)(ii) of this section. Accordingly, immediately before the disposition of the CFC2 stock, the basis of the CFC2 stock is reduced by $90x under paragraph (e)(1)(i) of this section. (ii) Example 2— (A) Facts. The facts are the same as in paragraph (A) of Example 1, except that USP sells only 90% of the shares of CFC2. (B) Analysis. The analysis is the same as in paragraph (B) of Example 1, except that USP’s net used tested loss amount attributable to the CFC2 stock that was disposed of is only $81x (90% x $90x) under paragraph (e)(4)(i) of this section. Accordingly, immediately before the disposition of such stock, the basis in the CFC2 stock disposed of is reduced by $81x under paragraph (e)(1)(i) of this section. (iii) Example 3— (A) Facts. The facts are the same as in paragraph (A) of Example 1, except that USP sells the CFC2 stock at the beginning of Year 3 and during Year 2 CFC1 has $10x of tested loss that offsets Year 2 tested income of CFC2. (B) Analysis. USP has a net used tested loss amount of $80x with respect to CFC2 attributable to the CFC2 stock, the amount of USP’s used tested loss amount with respect to CFC2 attributable to the CFC2 stock in Year 1 of $90x reduced by USP’s offset tested income amount with respect to CFC2 attributable to the CFC2 stock in Year 2 of $10x. Accordingly, immediately before the disposition of the CFC2 stock, the basis of the CFC2 stock is reduced by $80x under paragraph (e)(1)(i) of this section. (iv) Example 4— (A) Facts. USP, a domestic corporation, owns 100% of the single class of stock of CFC1, and CFC1 owns 100% of the single class of stock of CFC2. USP1, CFC1, and CFC2 all use the calendar year as their taxable year. In Year 1, CFC1 has $100x of tested loss that offsets CFC2’s $100x of tested income. USP sells the stock of CFC1 at the beginning of Year 2. USP has no used tested loss amount or offset tested income amount with respect to CFC1 or CFC2 in any year prior to Year 1. USP has not owned stock in any other CFC by reason of owning stock of CFC1 and CFC2. (B) Analysis—(1) Direct disposition. At the time of the disposition, USP has a net used tested loss amount of $100x with respect to CFC1 attributable to the CFC1 stock. However, because USP owns, within the meaning of section 958(a)(2), CFC2 stock by reason of the CFC1 stock, USP’s $100x net used tested loss amount with respect to CFC1 attributable to the CFC1 stock is reduced by USP’s $100x net offset tested income amount with respect to CFC2 attributable to the CFC1 stock. Accordingly, there is no adjustment to the basis of the CFC1 stock under paragraph (e)(1)(i) of this section. (2) Indirect disposition. Under paragraph (e)(6)(ii)(B) of this section, USP’s disposition of the CFC1 stock also constitutes an indirect disposition of the CFC2 stock because CFC1 is an upper-tier CFC and CFC2 is a lower-tier CFC within the meaning of paragraph (e)(1)(ii) of this section. However, USP has no net used tested loss amount with respect to CFC2 attributable to the CFC2 stock. Accordingly, there is no adjustment to the PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 basis of the CFC2 stock under paragraph (e)(1) of this section. (v) Example 5— (A) Facts. The facts are the same as in paragraph (A) of Example 4, except that in Year 1 CFC2 has $100x of tested loss that offsets CFC1’s $100x of tested income. CFC1 sells the stock of CFC2 at the beginning of Year 2. (B) Analysis. USP, a domestic corporation, owns within the meaning of section 958(a) stock of CFC2. Accordingly, immediately before the disposition, CFC1’s basis in the CFC2 stock is reduced by USP’s net used tested loss amount with respect to CFC2 attributable to the CFC2 stock of $100x under paragraph (e)(1)(i) of this section. (2) Indirect disposition. (vi) Example 6— (A) Facts. The facts are the same as in paragraph (A) of Example 5, except that instead of CFC1 selling the stock of CFC2, USP sells the stock of CFC1. (B) Analysis—(1) Direct disposition. USP has no net used tested loss amount with respect to CFC1 attributable to the stock of CFC1. However, because USP owns, within the meaning of section 958(a)(2), stock of CFC2 by reason of owning stock of CFC1, under paragraph (e)(1)(ii) of this section, USP’s net used tested loss amount attributable to the stock of CFC1 ($0) is increased by USP’s net used tested loss amount with respect to CFC2 attributable to the CFC1 stock ($100x), and reduced by USP’s net offset tested income amount with respect to CFC1 attributable to the CFC1 stock ($100x). Accordingly, there is no adjustment to the basis of the CFC1 stock under paragraph (e)(1) of this section. (2) Indirect disposition. Under paragraph (e)(6)(ii)(B) of this section, USP’s disposition of CFC1 stock also constitutes an indirect disposition of the CFC2 stock because CFC1 is an upper-tier CFC and CFC2 is a lower-tier CFC within the meaning of paragraph (e)(1)(ii) of this section. Accordingly, immediately before the disposition, CFC1’s basis in the CFC2 stock is reduced by USP’s net used tested loss amount with respect to CFC2 attributable to the CFC2 stock of $100x under paragraph (e)(1)(i) of this section. Under paragraph (e)(1)(iv) of this section, the basis reduction to CFC2’s shares is deemed to occur immediately before any reductions occur with respect to the stock of CFC1, of which there are none. (vii) Example 7— (A) Facts. USP1, a domestic corporation, owns 90% of the single class of stock of CFC1, and CFC1 owns 100% of the single class of stock of CFC2. USP1 also owns 100% of the single class of stock of CFC3. The remaining 10% of the stock of CFC1 is owned by USP2, a person unrelated to USP1. USP2 owns no other CFCs. USP1, USP2, CFC1, CFC2, and CFC3 all use the calendar year as their taxable year. In Year 1, CFC1 has no tested income or tested loss, CFC2 has tested loss of $100x, and CFC3 has tested income of $100x. CFC1 has no other earnings or income in Year 1. At the beginning of Year 2, CFC1 sells CFC2. Without regard to this paragraph (e), CFC1 would recognize no gain or loss with respect to the CFC2 stock. USP1 has not owned stock in any other controlled foreign corporation by reason of owning stock of CFC1, CFC2, and CFC3. E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules (B) Analysis. At the time of the disposition, USP2 has no net used tested loss amount with respect to CFC2. At the time of the disposition, USP1 has a net used tested loss amount of $90x with respect to CFC2 attributable to the CFC2 stock, which is the specified stock. Because USP1 does not own (and has not owned), within the meaning of section 958(a)(2), stock in any lower-tier CFCs by reason of the CFC2 stock, there is no adjustment to the net used tested loss amount of $90x pursuant to paragraph (e)(1)(ii) of this section. Accordingly, immediately before the disposition of the CFC2 stock, the basis of the CFC2 stock is reduced by $90x under paragraph (e)(1)(i) of this section. As a result, CFC1 recognizes gain of $90x on the disposition of the CFC2 stock, which results in $90x of foreign personal holding company income and $90x of earnings and profits. Under paragraph (e)(7) of this section, USP1’s pro rata share of the subpart F income of CFC1 is increased by $90x, and USP2 does not take such subpart F income into account under section 951(a)(1)(A). (viii) Example 8—(A) Facts. USP, a domestic corporation, owns 100% of the single class of stock of CFC1 and CFC2, and CFC1 owns 100% of the single class of stock of CFC3 and CFC4. USP, CFC1, CFC2, CFC3, and CFC4 all use the calendar year as their taxable year. In Year 1, CFC1 has no tested income or tested loss, CFC2 has $200x of tested income, and CFC3 and CFC4 each have tested loss of $100x. During Year 2, CFC3 liquidates into CFC1 in a nontaxable transaction described under section 332, and CFC1 sells the stock of CFC4 to an unrelated third party for cash. During Year 2, none of CFC1, CFC2, CFC3, or CFC4 earn tested income or tested loss. At the beginning of Year 3, USP sells the stock of CFC1 to an unrelated third party for cash. USP has not owned stock in any other CFC by reason of owning stock in CFC1, CFC2, CFC3, or CFC4. (B) Analysis. (1) CFC3’s liquidation into CFC1 is not a disposition within the meaning of paragraph (e)(6)(ii)(A) of this section because CFC1 does not recognize gain or loss in whole or in part with respect to the stock of CFC3 under section 332. Furthermore, CFC1 does not inherit CFC3’s net used tested loss amount under paragraph (e)(5) of this section because CFC1 is an upper-tier CFC with respect to CFC3 and would take such amounts into account under paragraph (e)(1)(ii) of this section at the time of a future disposition. That is, the CFC3 stock is section 958(a) stock that USP has owned by reason of its ownership of CFC1 within the meaning of paragraph (e)(1)(ii) of this section. (2) At the time of CFC1’s sale of the stock of CFC4, USP has a $100x net used tested loss amount with respect to CFC4 attributable to the CFC4 stock, which is the specified stock. Because USP has not owned, within the meaning of section 958(a)(2), stock in any lower-tier CFCs by reason of the CFC4 stock, there is no adjustment to the net used tested loss amount of $100x pursuant to paragraph (e)(1)(ii) of this section. Accordingly, immediately before the disposition of the CFC4 stock, the basis of the CFC4 stock is reduced by $100x under paragraph (e)(1)(i) of this section. VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 (3) At the time of USP’s sale of CFC1, USP has no net used tested loss amount with respect to CFC1 attributable to the CFC1 stock. However, USP has owned, within the meaning of section 958(a)(2), stock of lowertier CFCs (CFC3 and CFC4) by reason of its ownership of CFC1. Thus, USP’s net used tested loss amount attributable to the stock of CFC1 ($0) is increased by USP’s net used tested loss amounts with respect to CFC3 and CFC4 attributable to the CFC1 stock ($200x). Accordingly, immediately before the disposition of the CFC1 stock, the basis of the CFC1 stock is reduced by $200x under paragraph (e)(1)(i) of this section. The rule prohibiting duplicative adjustments under paragraph (e)(1)(v) of this section does not prevent this basis reduction because the net used tested loss amounts with respect to the CFC3 and CFC4 stock were not previously taken into account to reduce the basis of CFC1 stock. Par. 10. Section 1.951A–7 is added to read as follows: ■ § 1.951A–7 Applicability dates. Sections 1.951A–1 through 1.951A–6 apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. ■ Par. 11. Section 1.1502–12 is amended by adding paragraph (s) to read as follows: § 1.1502–12 Separate taxable income. * * * * * (s) See § 1.1502–51 for rules relating to the computation of a member’s GILTI inclusion amount under section 951A and related basis adjustments. ■ Par. 12. Section 1.1502–13 is amended by adding paragraph (c) to Example 4 in paragraph (f)(7). The addition reads as follows: § 1.1502–13 * * * (f) * * * (7) * * * Intercompany transactions. * * Example 4. * * * (c) Application of § 1.1502–51(c)(5) to all cash intercompany reorganization under section 368(a)(1)(D). The facts are the same as in paragraph (a) of this Example 4, except that S’s sole asset is stock of a controlled foreign corporation, within the meaning of section 957, with respect to which S has a net used tested loss amount (within the meaning of § 1.1502–51(e)(15)) of $15. As in paragraph (b) of this Example 4, S is treated as receiving additional B stock with a fair market value of $100 (in lieu of the $100) and, under section 358, a basis of $25 which S distributes to M in liquidation. Immediately after the sale, pursuant to § 1.1502–51(c)(5), the basis in the B stock received by M is reduced by $15 (the amount of the net used tested loss amount with respect to the controlled foreign corporation) to $10. Following the basis reduction PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 51107 pursuant to § 1.1502–51(c)(5), the B stock (with the exception of the nominal share which is still held by M) received by M is treated as redeemed for $100, and the redemption is treated under section 302(d) as a distribution to which section 301 applies. M’s basis of $10 in the B stock is reduced under § 1.1502–32(b)(3)(v), resulting in an excess loss account of $90 in the nominal share. (See § 1.302–2(c).) M’s deemed distribution of the nominal share of B stock to P under § 1.368–2(l) will result in M generating an intercompany gain under section 311(b) of $90, to be subsequently taken into account under the matching and acceleration rules. * * * * * Par. 13. Section 1.1502–32 is amended by: ■ 1. Adding paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C). ■ 2. Revising paragraph (j). The revision and additions read as follows: ■ § 1.1502–32 * Investment adjustments. * * * * (b) * * * (3) * * * (ii) * * * (E) Adjustment for the offset tested income amount of a controlled foreign corporation in relation to section 951A. S’s tax-exempt income for a taxable year includes the aggregate of S’s offset tested income amounts (within the meaning of § 1.1502–51(c)(3)) with respect to a controlled foreign corporation (within the meaning of section 957) for all of its U.S. shareholder inclusion years (within the meaning of § 1.951A–1(e)(4)), to the extent such aggregate does not exceed the excess (if any) of— (1) The aggregate of S’s used tested loss amounts (within the meaning of § 1.1502–51(c)(2)) with respect to the controlled foreign corporation for all of its U.S. shareholder inclusion years, over (2) The aggregate of S’s offset tested income amounts with respect to the controlled foreign corporation for all of its U.S. shareholder inclusion years previously treated as tax-exempt income pursuant to this paragraph. (F) Adjustment for the net offset tested income amount of a controlled foreign corporation in relation to section 951A. S will be treated as having tax-exempt income immediately prior to a transaction (recognition event) in which another member of the group recognizes income, gain, deduction, or loss with respect to a share of S’s stock to the extent provided in this paragraph (b)(3)(ii)(F). S’s tax-exempt income is equal to the portion of the allocable amount that would have been characterized as a dividend to which E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51108 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules section 245A, but not section 1059, would have applied if the allocable amount had been distributed by a controlled foreign corporation to the owner of the transferred shares immediately before the recognition event. For purposes of this paragraph— (1) The term transferred shares means the shares of a controlled foreign corporation that S owns within the meaning of section 958(a) or is considered to own by applying the rules of ownership of section 958(b) and that are indirectly transferred as part of the recognition event; and (2) The term allocable amount means the net offset tested income amount (within the meaning of § 1.1502– 51(e)(14)) allocable to the transferred shares. (iii) * * * (C) Adjustment for the used tested loss amount of a controlled foreign corporation in relation to section 951A. S’s noncapital, nondeductible expense includes its amount of used tested loss amount (within the meaning of § 1.1502–51(c)(2)) with respect to a controlled foreign corporation (within the meaning of section 957) for a U.S. shareholder inclusion year (within the meaning of § 1.951A–1(e)(4)). * * * * * (j) Applicability date—(1) In general. Paragraph (b)(4)(iv) of this section applies to any original consolidated Federal income tax return due (without extensions) after June 14, 2007. For original consolidated Federal income tax returns due (without extensions) after May 30, 2006, and on or before June 14, 2007, see § 1.1502–32T as contained in 26 CFR part 1 in effect on April 1, 2007. For original consolidated Federal income tax returns due (without extensions) on or before May 30, 2006, see § 1.1502–32 as contained in 26 CFR part 1 in effect on April 1, 2006. (2) Adjustment for the offset tested income amount, net offset tested income amount, and used tested loss amount of a controlled foreign corporation. Paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C) of this section apply to any consolidated Federal income tax return for a taxable year in which or with which the taxable year of a controlled foreign corporation beginning after December 31, 2017, ends. * * * * * ■ Par. 14. Section 1.1502–51 is added to read as follows: § 1.1502–51 Consolidated section 951A. (a) In general. This section provides rules for applying section 951A and §§ 1.951A–1 through 1.951A–7 (the section 951A regulations) to each VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 member of a consolidated group (each, a member) that is a United States shareholder of any controlled foreign corporation. Paragraph (b) describes the inclusion of the GILTI inclusion amount by a member of a consolidated group. Paragraph (c) modifies the rules provided in § 1.951A–6(e) for adjustments to basis related to used tested loss amount. Paragraph (d) provides rules governing basis adjustments to member stock resulting from the application of § 1.951A–6(e) and paragraph (c) of this section. Paragraph (e) provides definitions for purposes of this section. Paragraph (f) provides examples illustrating the rules of this section. Paragraph (g) provides an applicability date. (b) Calculation of the GILTI inclusion amount for a member of a consolidated group. Each member who is a United States shareholder of any controlled foreign corporation includes in gross income in the U.S. shareholder inclusion year the member’s GILTI inclusion amount, if any, for the U.S. shareholder inclusion year. See section 951A(a) and § 1.951A–1(b). The GILTI inclusion amount of a member for a U.S. shareholder inclusion year is the excess (if any) of the member’s net CFC tested income for the U.S. shareholder inclusion year, over the member’s net deemed tangible income return for the U.S. shareholder inclusion year, determined using the definitions provided in paragraph (e) of this section. (c) Adjustments to basis related to used tested loss amount—(1) In general. The adjusted basis of the section 958(a) stock of a controlled foreign corporation that is owned (directly or indirectly) by a member (specified stock) or an interest in a foreign entity other than a controlled foreign corporation by reason of which a domestic corporation owns (within the meaning of section 958(a)(2)) stock of a controlled foreign corporation is adjusted immediately before its disposition pursuant to § 1.951A–6(e). The amount of the adjustment is determined using the rules provided in paragraphs (c)(2), (3), and (4) of this section. (2) Determination of used tested loss amount. For purposes of the section 951A regulations and this section, the term used tested loss amount means, with respect to a member and a tested loss CFC for a U.S. shareholder inclusion year— (i) In the case of the consolidated group tested income equaling or exceeding the consolidated group tested loss for a U.S. shareholder inclusion year, the member’s pro rata share (determined under § 1.951A–1(d)(4)) of PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 the tested loss of the tested loss CFC for the U.S. shareholder inclusion year. (ii) In the case of the consolidated group tested income being less than the consolidated group tested loss for a U.S. shareholder inclusion year, the amount that bears the same ratio to the member’s pro rata share (determined under § 1.951A–1(d)(4)) of the tested loss of the tested loss CFC for the U.S. shareholder inclusion year as the consolidated group tested income for the U.S. shareholder inclusion year bears to the consolidated group tested loss for the U.S. shareholder inclusion year. (3) Determination of offset tested income amount. For purposes of the section 951A regulations and this section, the term offset tested income amount means, with respect to a member and a tested income CFC for a U.S. shareholder inclusion year— (i) In the case of the consolidated group tested income exceeding the consolidated group tested loss for a U.S. shareholder inclusion year, the amount that bears the same ratio to the member’s pro rata share (determined under § 1.951A–1(d)(2)) of the tested income of the tested income CFC for the U.S. shareholder inclusion year as the consolidated group tested loss for the U.S. shareholder inclusion year bears to the consolidated group tested income for the U.S. shareholder inclusion year. (ii) In the case of the consolidated group tested income equaling or being less than the consolidated group tested loss for a U.S. shareholder inclusion year, the member’s pro rata share (determined under § 1.951A–1(d)(2)) of the tested income of the tested income CFC for the U.S. shareholder inclusion year. (4) Special rule for disposition by a controlled foreign corporation less than 100 percent owned by a single domestic corporation. For purposes of determining the application of § 1.951A–6(e)(7), the amount of stock in the controlled foreign corporation a member owns, within the meaning of section 958(a), includes any stock that the member is considered as owning by applying the rules of ownership of section 958(b). (5) Special rule for intercompany nonrecognition transactions. If a member engages in a nonrecognition transaction (within the meaning of section 7701(a)(45)), with another member in which stock of a controlled foreign corporation that has a net used tested loss amount is directly transferred, the adjusted basis of the nonrecognition property (within the meaning of section 358) received in the nonrecognition transaction is E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules immediately reduced by the amount of the net used tested loss amount. In cases of intercompany transactions that are governed by § 1.368–2(l), the reduction in basis pursuant to this paragraph (c)(5) is made prior to the application of § 1.1502–13(f)(3). See § 1.1502–13(f)(7), Example 4(c). (d) Adjustments to the basis of a member. For adjustments to the basis of a member related to paragraph (c) of this section, see § 1.1502–32(b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C). (e) Definitions. The following definitions apply for purposes of the section— (1) Aggregate tested income. With respect to a member, the term aggregate tested income means the aggregate of the member’s pro rata share (determined under § 1.951A–1(d)(2)) of the tested income of each tested income CFC for a U.S. shareholder inclusion year. (2) Aggregate tested loss. With respect to a member, the term aggregate tested loss means the aggregate of the member’s pro rata share (determined under § 1.951A–1(d)(4)) of the tested loss of each tested loss CFC for a U.S. shareholder inclusion year. (3) Allocable share. The term allocable share means, with respect to a member that is a United States shareholder and a U.S. shareholder inclusion year— (i) With respect to consolidated group QBAI, the product of the consolidated group QBAI of the member’s consolidated group and the member’s GILTI allocation ratio. (ii) With respect to consolidated group specified interest expense, the product of the consolidated group specified interest expense of the member’s consolidated group and the member’s GILTI allocation ratio. (iii) With respect to consolidated group tested loss, the product of the consolidated group tested loss of the member’s consolidated group and the member’s GILTI allocation ratio. (4) Consolidated group QBAI. With respect to a consolidated group, the term consolidated group QBAI means the sum of each member’s pro rata share (determined under § 1.951A–1(d)(3)) of the qualified business asset investment of each tested income CFC for a U.S. shareholder inclusion year. (5) Consolidated group specified interest expense. With respect to a consolidated group, the term consolidated group specified interest expense means the excess (if any) of— (i) The sum of each member’s pro rata share (determined under § 1.951A– 1(d)(5)) of the tested interest expense of each controlled foreign corporation for VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 the U.S. shareholder inclusion year, over (ii) The sum of each member’s pro rata share (determined under § 1.951A– 1(d)(6)) of the tested interest income of each controlled foreign corporation for the U.S. shareholder inclusion year. (6) Consolidated group tested income. With respect to a consolidated group, the term consolidated group tested income means the sum of each member’s aggregate tested income for a U.S. shareholder inclusion year. (7) Consolidated group tested loss. With respect to a consolidated group, the term consolidated group tested loss means the sum of each member’s aggregate tested loss for a U.S. shareholder inclusion year. (8) Controlled foreign corporation. The term controlled foreign corporation means a controlled foreign corporation as defined in section 957. (9) Deemed tangible income return. With respect to a member, the term deemed tangible income return means 10 percent of the member’s allocable share of the consolidated group QBAI. (10) GILTI allocation ratio. With respect to a member, the term GILTI allocation ratio means the ratio of— (i) The aggregate tested income of the member for a U.S. shareholder inclusion year, to (ii) The consolidated group tested income of the consolidated group of which the member is a member for the U.S. shareholder inclusion year. (11) GILTI inclusion amount. With respect to a member, the term GILTI inclusion amount has the meaning provided in paragraph (b) of this section. (12) Net CFC tested income. With respect to a member, the term net CFC tested income means the excess (if any) of— (i) The member’s aggregate tested income, over (ii) The member’s allocable share of the consolidated group tested loss. (13) Net deemed tangible income return. With respect to a member, the term net deemed tangible income return means the excess (if any) of the member’s deemed tangible income return over the member’s allocable share of the consolidated group specified interest expense. (14) Net offset tested income amount. The term net offset tested income amount means, with respect to a member and a controlled foreign corporation, the excess (if any) of the amount described in paragraph (e)(15)(ii) of this section over the amount described in paragraph (e)(15)(i) of this section. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 51109 (15) Net used tested loss amount. The term net used tested loss amount means, with respect to a member and a controlled foreign corporation, the excess (if any) of — (i) The aggregate of the member’s pro rata share of each used tested loss amount of the controlled foreign corporation for each U.S. shareholder inclusion year over (ii) The aggregate of the member’s pro rata share of each offset tested income amount of the controlled foreign corporation for each U.S. shareholder inclusion year. (16) Offset tested income amount. The term offset tested income amount has the meaning provided in paragraph (c)(3) of this section. (17) Qualified business asset investment. The term qualified business asset investment has the meaning provided in § 1.951A–3(b). (18) Tested income. The term tested income has the meaning provided in § 1.951A–2(b)(1). (19) Tested income CFC. The term tested income CFC has the meaning provided in § 1.951A–2(b)(1). (20) Tested interest expense. The term tested interest expense has the meaning provided in § 1.951A–4(b)(1). (21) Tested interest income. The term tested interest income has the meaning provided in § 1.951A–4(b)(2). (22) Tested loss. The term tested loss has the meaning provided in § 1.951A– 2(b)(2). (23) Tested loss CFC. The term tested loss CFC has the meaning provided in § 1.951A–2(b)(2). (24) United States shareholder. The term United States shareholder has the meaning provided in § 1.951–1(g)(1). (25) U.S. shareholder inclusion year. The term U.S. shareholder inclusion year has the meaning provided in § 1.951A–1(e)(4). (26) Used tested loss amount. The term used tested loss amount has the meaning provided in paragraph (c)(2) of this section. (f) Examples. The following examples illustrate the rules of this section. For purposes of the examples in this section, unless otherwise stated: P is the common parent of the P consolidated group; P owns all of the single class of stock of subsidiaries USS1, USS2, and USS3, all of whom are members of the P consolidated group; CFC1, CFC2, CFC3, and CFC4 are all controlled foreign corporations (within the meaning of paragraph (e)(8) of this section); and the taxable year of all persons is the calendar year. (1) Example 1: Calculation of net CFC tested income within a consolidated group E:\FR\FM\10OCP2.SGM 10OCP2 daltland on DSKBBV9HB2PROD with PROPOSALS2 51110 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules when all CFCs are wholly owned by a member— (i) Facts. USS1 owns all of the single class of stock of CFC1. USS2 owns all of the single class of stock of each of CFC2 and CFC3. USS3 owns all of the single class of stock of CFC4. In Year 1, CFC1 has tested loss of $100, CFC2 has tested income of $200x, CFC3 has tested loss of $200x, and CFC4 has tested income of $600x. Neither CFC2 nor CFC4 has qualified business asset investment in Year 1. (ii) Analysis—(A) Consolidated group tested income and GILTI allocation ratio. USS1 has no aggregate tested income; USS2’s aggregate tested income is $200x, its pro rata share (within the meaning of § 1.951A– 1(d)(2)) of CFC2’s tested income; and USS3’s aggregate tested income is $600x, its pro rata share (within the meaning of § 1.951A– 1(d)(2)) of CFC4’s tested income. Therefore, under paragraph (e)(6) of this section, the P consolidated group’s consolidated group tested income is $800x ($200x + $600x). As a result, the GILTI allocation ratios of USS1, USS2, and USS3 are 0 ($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x), respectively. (B) Consolidated group tested loss. Under paragraph (e)(7) of this section, the P consolidated group’s consolidated group tested loss is $300x ($100x + $200x), the aggregate of USS1’s aggregate tested loss, which is equal to its pro rata share (within the meaning of § 1.951A–1(d)(4)) of CFC1’s tested loss ($100x), and USS2’s aggregate tested loss, which is equal to its pro rata share (within the meaning of § 1.951A– 1(d)(4)) of CFC3’s tested loss ($200x). Under paragraph (e)(3)(iii) of this section, a member’s allocable share of the consolidated group tested loss is the product of the consolidated group tested loss of the member’s consolidated group and the member’s GILTI allocation ratio. Therefore, the allocable shares of the consolidated group tested loss of USS1, USS2, and USS3 are $0 (0 × $300x), $75x (0.25 × $300x), and $225x (0.75 × $300x), respectively. (C) Calculation of net CFC tested income. Under paragraph (e)(12) of this section, a member’s net CFC tested income is the excess (if any) of the member’s aggregate tested income over the member’s allocable share of the consolidated group tested loss. As a result, USS1’s, USS2’s, and USS3’s net CFC tested income amounts are $0 ($0¥$0), $125x ($200x¥$75x), and $375x ($600x¥$225x), respectively. (2) Example 2: Calculation of net CFC tested income within a consolidated group when ownership of a tested loss CFC is split between members— (i) Facts. The facts are the same as in paragraph (i) of Example 1, except that USS2 and USS3 each own 50% of the single class of stock of CFC3. (ii) Analysis. As in paragraph (ii) of Example 1, USS1 has no aggregate tested income and a GILTI allocation ratio of 0, USS2 has $200x of aggregate tested income and a GILTI allocation ratio of 0.25, and USS3 has $600x of aggregate tested income and a GILTI allocation ratio of 0.75. Additionally, the P consolidated group’s consolidated group tested loss is $300x (the aggregate of USS1’s aggregate tested loss, which is equal to its pro rata share (within VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 the meaning of § 1.951A–1(d)(4)) of CFC1’s tested loss ($100x); USS2’s aggregate tested loss, which is equal to its pro rata share (within the meaning of § 1.951A–1(d)(4)) of CFC3’s tested loss ($100x); and USS3’s aggregate tested loss, which is equal to its pro rata share (within the meaning of § 1.951A– 1(d)(4)) of CFC3’s tested loss ($100x)). As a result, under paragraph (e)(12) of this section, as in paragraph (ii)(C) of Example 1, USS1’s, USS2’s, and USS3’s net CFC tested income amounts are $0 ($0—$0), $125x ($200x— $75x), and $375x ($600x—$225x), respectively. (3) Example 3: Calculation of GILTI inclusion amount— (i) Facts. The facts are the same as in paragraph (i) of Example 1, except that CFC2 and CFC4 have qualified business asset investment of $500x and $2000x, respectively, for Year 1. In Year 1, CFC1 and CFC4 each have tested interest expense (within the meaning of § 1.951A– 4(b)(1)) of $25x, and CFC1, CFC2, CFC3, and CFC4 have $0 of tested interest income (within the meaning of § 1.951A–4(b)(2)). CFC1’s tested loss of $100x and CFC4’s tested income of $600x take into account the interest paid. (ii) Analysis—(A) GILTI allocation ratio. As in paragraph (ii) of Example 1, the GILTI allocation ratios of USS1, USS2, and USS3 are 0 ($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x), respectively. (B) Consolidated group QBAI. Under paragraph (e)(4) of this section, the P consolidated group’s consolidated group QBAI is $2,500x ($500x + $2,000x), the aggregate of USS2’s pro rata share (determined under § 1.951A–1(d)(3)) of the qualified business asset investment of CFC2 and USS3’s pro rata share (determined under § 1.951A–1(d)(3)) of the qualified business asset investment of CFC4. Under paragraph (e)(3)(i) of this section, a member’s allocable share of consolidated group QBAI is the product of the consolidated group QBAI of the member’s consolidated group and the member’s GILTI allocation ratio. Therefore, the allocable shares of the consolidated group QBAI of each of USS1, USS2, and USS3 are $0 (0 × $2,500x), $625x (0.25 × $2,500x), and $1,875x (0.75 × $2,500x), respectively. (C) Consolidated group specified interest expense—(1) Pro rata share of tested interest expense. USS1’s pro rata share of the tested interest expense of CFC1 is $25x, the amount by which the tested interest expense increases USS1’s pro rata share of CFC1’s tested loss (from $75x to $100x) for Year 1. USS3’s pro rata share of the tested interest expense of CFC4 is also $25x, the amount by which the tested interest expense decreases USS1’s pro rata share of CFC4’s tested income (from $625x to $600x). See § 1.951A– 1(d)(5). (2) Consolidated group specified interest expense. Under paragraph (e)(5) of this section, the P consolidated group’s consolidated group specified interest expense is $50x, the excess of the sum of each member’s pro rata share of the tested interest expense of each controlled foreign corporation ($50x, $25x from USS1 + $25x from USS3), over the sum of each member’s pro rata share of tested interest income ($0). Under paragraph (e)(3)(ii) of this section, a PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 member’s allocable share of consolidated group specified interest expense is the product of the consolidated group specified interest expense of the member’s consolidated group and the member’s GILTI allocation ratio. Therefore, the allocable shares of consolidated group specified interest expense of USS1, USS2, and USS3 are $0 (0 × $50x), $12.50x (0.25 × $50x), and $37.50x (0.75 × $50x), respectively. (D) Calculation of deemed tangible income return. Under paragraph (e)(9) of this section, a member’s deemed tangible income return means 10 percent of the member’s allocable share of the consolidated group QBAI. As a result, USS1’s, USS2’s, and USS3’s deemed tangible income returns are $0 (0¥$0), $62.50x (0.1 ¥ $625x), and $187.50x (0.1 ¥ $1,875x), respectively. (E) Calculation of net deemed tangible income return. Under paragraph (e)(13) of this section, a member’s net deemed tangible income return means the excess (if any) of a member’s deemed tangible income return over the member’s allocable share of the consolidated group specified interest. As a result, USS1’s, USS2’s, and USS3’s net deemed tangible income returns are $0 ($0¥$0), $50x ($62.50x¥$12.50x), and $150x ($187.50x¥$37.50x), respectively. (F) Calculation of GILTI inclusion amount. Under paragraph (b) of this section, a member’s GILTI inclusion amount for a U.S. shareholder inclusion year is the excess (if any) of the member’s net CFC tested income for the U.S. shareholder inclusion year, over the shareholder’s net deemed tangible income return for the U.S. shareholder inclusion year. As described in paragraph (ii)(C) of Example 1, the amounts of USS1’s, USS2’s, and USS3’s net CFC tested income are $0, $125x, and $375x, respectively. As described in paragraph (ii)(E) of this Example 3, the amounts of USS1’s, USS2’s, and USS3’s net deemed tangible income return are $0, $50x, and $150x, respectively. As a result, under paragraph (b) of this section, USS1’s, USS2’s, and USS3’s GILTI inclusion amounts are $0 ($0¥$0), $75x ($125x¥$50x), and $225x ($375x¥$150x), respectively. (G) Calculation of used tested loss amount and offset tested income amount. As described in paragraph (ii)(A) of Example 1, P consolidated group’s consolidated group tested income is $800x. As described in paragraph (ii)(B) of Example 1, P consolidated group’s consolidated group tested loss is $300x. Therefore, the P consolidated group’s consolidated group tested income exceeds its consolidated group tested loss. As a result, USS1 has a $100x used tested loss amount with respect to CFC1 and USS2 has a $200x used tested loss amount with respect to CFC3. Additionally, USS2 has a $75x offset tested income amount with respect to CFC2 ($200x x $300x/$800x) and USS3 has a $225x offset tested income amount with respect to CFC3 ($600x x $300x/$800x). See paragraph (c) of this section. P will adjust its basis in USS1 and USS2 pursuant to the rule in § 1.1502– 32(b)(3)(iii)(C). (g) Applicability date. This section applies to taxable years of foreign corporations beginning after December E:\FR\FM\10OCP2.SGM 10OCP2 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Proposed Rules 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. ■ Par. 15. Section 1.6038–2 is amended by: ■ 1. Revising the section heading. ■ 2. Revising the first sentence in paragraph (a). ■ 3. Revising paragraph (m). The revisions read as follows: § 1.6038–2 Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations. (a) Requirement of return. Every U.S. person shall make a separate annual information return with respect to each annual accounting period (described in paragraph (e) of this section) of each foreign corporation which that person controls (as defined in paragraph (b) of this section) at any time during such annual accounting period. * * * * * * * * (m) Applicability dates. This section applies to taxable years of foreign corporations beginning on or after October 3, 2018. See 26 CFR 1.6038–2 (revised as of April 1, 2018) for rules applicable to taxable years of foreign corporations beginning before such date. ■ Par. 16. Section 1.6038–5 is added to read as follows: § 1.6038–5 Information returns required of certain United States persons to report amounts determined with respect to certain foreign corporations for global intangible low-taxed income (GILTI) purposes. daltland on DSKBBV9HB2PROD with PROPOSALS2 (a) Requirement of return. Except as provided in paragraph (d) of this section, each United States person who is a United States shareholder (as defined in section 951(b)) of any controlled foreign corporation must make an annual return on Form 8992, ‘‘U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI),’’ (or successor form) for each U.S. shareholder inclusion year (as defined VerDate Sep<11>2014 22:14 Oct 09, 2018 Jkt 247001 in § 1.951A–1(e)(4)) setting forth the information with respect to each such controlled foreign corporation, in such form and manner, as Form 8992 (or successor form) prescribes. (b) Time and manner for filing. Returns on Form 8992 (or successor form) required under paragraph (a) of this section for a taxable year must be filed with the United States person’s income tax return on or before the due date (taking into account extensions) for filing that person’s income tax return. (c) Failure to furnish information—(1) Penalties. If any person required to file Form 8992 (or successor form) under section 6038 and this section fails to furnish the information prescribed on Form 8992 within the time prescribed by paragraph (b) of this section, the penalties imposed by section 6038(b) and (c) may apply. (2) Increase in penalty. If a failure described in paragraph (c)(1) of this section continues for more than 90 days after the date on which the Director of Field Operations, Area Director, or Director of Compliance Campus Operations mails notice of such failure to the person required to file Form 8992, such person shall pay a penalty of $10,000, in addition to the penalty imposed by section 6038(b)(1), for each 30-day period (or a fraction of) during which such failure continues after such 90-day period has expired. The additional penalty imposed by section 6038(b)(2) and this paragraph (c)(2) shall be limited to a maximum of $50,000 for each failure. (3) Reasonable cause—(i) For purposes of section 6038(b) and (c) and this section, the time prescribed for furnishing information under paragraph (b) of this section, and the beginning of the 90-day period after mailing of notice by the director under paragraph (c)(2) of this section, shall be treated as being not earlier than the last day on which reasonable cause existed for failure to furnish the information. PO 00000 Frm 00041 Fmt 4701 Sfmt 9990 51111 (ii) To show that reasonable cause existed for failure to furnish information as required by section 6038 and this section, the person required to report such information must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement containing a declaration that it is made under the penalties of perjury. The statement must be filed with the director where the return is required to be filed. The director shall determine whether the failure to furnish information was due to reasonable cause, and if so, the period of time for which such reasonable cause existed. In the case of a return that has been filed as required by this section except for an omission of, or error with respect to, some of the information required, if the person who filed the return establishes to the satisfaction of the director that the person has substantially complied with this section, then the omission or error shall not constitute a failure under this section. (d) Exception from filing requirement. Any United States person that does not own, within the meaning of section 958(a), stock of a controlled foreign corporation in which the United States person is a United States shareholder for a taxable year is not required to file Form 8992. For this purpose, a U.S. shareholder partner (as defined in § 1.951A–5(e)(3)) with respect to a partnership CFC (as defined in § 1.951A–5(e)(2)) is treated as owning, within the meaning of section 958(a), stock of the partnership CFC. (e) Applicability date. This section applies to taxable years of controlled foreign corporations beginning on or after October 3, 2018. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2018–20304 Filed 10–3–18; 4:15 pm] BILLING CODE 4830–01–P E:\FR\FM\10OCP2.SGM 10OCP2

Agencies

[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Proposed Rules]
[Pages 51072-51111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20304]



[[Page 51071]]

Vol. 83

Wednesday,

No. 196

October 10, 2018

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Guidance Related to Section 951A (Global Intangible Low-Taxed Income); 
Proposed Rule

Federal Register / Vol. 83 , No. 196 / Wednesday, October 10, 2018 / 
Proposed Rules

[[Page 51072]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-104390-18]
RIN 1545-BO54


Guidance Related to Section 951A (Global Intangible Low-Taxed 
Income)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations implementing 
section 951A of the Internal Revenue Code. Section 951A was added to 
the Internal Revenue Code by the Tax Cuts and Jobs Act, which was 
enacted on December 22, 2017. This document also contains proposed 
regulations under sections 951, 1502, and 6038. These proposed 
regulations would affect United States shareholders of controlled 
foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 26, 2018.

ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR 
(REG-104390-18), Room 5203, Post Office Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (indicate 
REG-104390-18), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW, Washington, DC 20224, or sent electronically, 
via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-
104390-18).

FOR FURTHER INFORMATION CONTACT: Concerning proposed regulations 
Sec. Sec.  1.951-1, 1.951A-0 through 1.951A-7, 1.6038-2, and 1.6038-5, 
Melinda E. Harvey or Michael Kaercher at (202) 317-6934; concerning 
proposed regulations Sec. Sec.  1.1502-12, 1.1502-13, 1.1502-32, and 
1.1502-51, Austin Diamond-Jones at (202) 317-6847 or Kevin M. Jacobs at 
(202) 317-5332; concerning submissions of comments or requests for a 
public hearing, Regina L. Johnson at (202) 317-6901 (not toll free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to 26 CFR part 1 under 
sections 951, 951A, 1502, and 6038 (the ``proposed regulations''). 
Added to the Internal Revenue Code (``Code'') by section 14201(a) of 
the Tax Cuts and Jobs Act, Public Law 115-97 (2017) (``the Act''), 
section 951A requires a United States shareholder (``U.S. 
shareholder'') of any controlled foreign corporation (``CFC'') for any 
taxable year to include in gross income the shareholder's global 
intangible low-taxed income (``GILTI'') for such taxable year. Section 
14201(d) of the Act provides that section 951A applies to taxable years 
of foreign corporations beginning after December 31, 2017, and to 
taxable years of U.S. shareholders in which or with which such taxable 
years of foreign corporations end. The proposed regulations under 
section 951A provide guidance for U.S. shareholders to determine the 
amount of GILTI to include in gross income (``GILTI inclusion 
amount'').
    Section 14201(b) of the Act added two new foreign tax credit 
provisions relating to GILTI--section 960(d) provides a foreign tax 
credit for taxes properly attributable to tested income taken into 
account by a domestic corporation under section 951A, and section 
904(d)(1)(A) provides that any amount included in gross income under 
section 951A (other than passive category income) is treated as a 
separate category of income for purposes of section 904. In addition, 
section 14202(a) of the Act added section 250 to the Code providing 
domestic corporations a deduction equal to a percentage of their GILTI 
inclusion amount and foreign-derived intangible income, subject to a 
taxable income limitation. The proposed regulations do not include any 
rules relating to foreign tax credits or the deduction under section 
250. Rules relating to foreign tax credits and the deduction under 
section 250 will be included in separate notices of proposed 
rulemaking. It is anticipated that the proposed regulations relating to 
foreign tax credits will provide rules for assigning the section 78 
gross-up attributable to foreign taxes deemed paid under section 960(d) 
to the separate category described in section 904(d)(1)(A).
    Before the Act, section 951(b) defined a U.S. shareholder of a 
foreign corporation as a United States person (``U.S. person'') that 
holds at least 10 percent of the total combined voting power of all 
classes of stock entitled to vote in a foreign corporation. Section 
14214(a) of the Act amended this definition to include a U.S. person 
that holds at least 10 percent of the total value of shares of all 
classes of stock of the foreign corporation. Section 14215(a) of the 
Act amended section 951(a)(1) to eliminate the requirement that a 
foreign corporation must be a CFC for an uninterrupted period of 30 
days or more in order to give rise to an inclusion under section 
951(a)(1) (the ``30-day requirement''). These amendments apply to 
taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of U.S. shareholders with or within which 
such taxable years of foreign corporations end. See sections 14214(b) 
and 14215(b) of the Act. The proposed regulations under section 951 
incorporate these amendments into the regulations and provide other 
guidance necessary for U.S. shareholders to coordinate subpart F and 
GILTI.

Explanation of Provisions

I. Section 951A

A. Overview

    The Act established a participation exemption system under which 
certain earnings of a foreign corporation can be repatriated to a 
corporate U.S. shareholder without U.S. tax. See section 14101(a) of 
the Act and section 245A. However, Congress recognized that, without 
any base protection measures, the participation exemption system could 
incentivize taxpayers to allocate income--in particular, mobile income 
from intangible property--that would otherwise be subject to the full 
U.S. corporate tax rate to CFCs operating in low- or zero-tax 
jurisdictions. See Senate Committee on the Budget, 115th Cong., 
Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 365 
(Comm. Print 2017) (``Senate Explanation''). Therefore, Congress 
enacted section 951A in order to subject intangible income earned by a 
CFC to U.S. tax on a current basis, similar to the treatment of a CFC's 
subpart F income under section 951(a)(1)(A). However, in order to not 
harm the competitive position of U.S. corporations relative to their 
foreign peers, GILTI of a corporate U.S. shareholder is taxed at a 
reduced rate by reason of the deduction under section 250 (with the 
resulting U.S. tax further reduced by a portion of foreign tax credits 
under section 960(d)). Id. Also, due to the administrative difficulty 
in identifying income attributable to intangible assets, in contrast to 
income from tangible assets, intangible income (and thus GILTI) is 
determined for purposes of section 951A based on a formulaic approach, 
under which a 10-percent return is attributed to certain tangible 
assets (``qualified business asset investment'' or ``QBAI'') and then 
each dollar of certain income above such ``normal return'' is 
effectively treated as intangible income. Id. at 366.

[[Page 51073]]

    Section 951A(a) provides that a U.S. shareholder of any CFC for a 
taxable year must include in gross income its GILTI for that year. A 
GILTI inclusion is treated in a manner similar to a section 
951(a)(1)(A) inclusion of a CFC's subpart F income for many purposes of 
the Code. See section 951A(f)(1). However, a GILTI inclusion is 
determined in a manner that is fundamentally different from that of an 
inclusion under section 951(a)(1)(A). Subpart F income is determined at 
the level of a CFC, and then a U.S. shareholder that owns stock 
directly or indirectly in the CFC generally includes in gross income 
its pro rata share of the CFC's subpart F income. The amount of the 
shareholder's section 951(a)(1)(A) inclusion with respect to one CFC is 
not taken into account in determining the shareholder's section 
951(a)(1)(A) inclusion with respect to another CFC. A U.S. 
shareholder's pro rata share of a CFC's subpart F income is generally 
the final step in determining its section 951(a)(1)(A) inclusion.
    Similar to an inclusion under section 951(a)(1)(A), the 
determination of a U.S. shareholder's GILTI inclusion amount begins 
with the calculation of certain items of each CFC owned by the 
shareholder, such as tested income, tested loss, or QBAI. A U.S. 
shareholder then determines its pro rata share of each of these CFC-
level items in a manner similar to a shareholder's pro rata share of 
subpart F income under section 951(a)(2). See section 951A(e)(1). 
However, in contrast to an inclusion under section 951(a)(1)(A), the 
U.S. shareholder's pro rata shares of these items are not amounts 
included in gross income, but rather amounts taken into account by the 
shareholder in determining the GILTI included in the shareholder's 
gross income. The U.S. shareholder aggregates (and then nets or 
multiplies) its pro rata share of each of these items into a single 
shareholder-level amount--for example, aggregate tested income reduced 
by aggregate tested loss becomes net CFC tested income and aggregate 
QBAI multiplied by 10 percent becomes deemed tangible income return. A 
shareholder's GILTI inclusion amount for a taxable year is then 
calculated by subtracting one aggregate shareholder-level amount from 
another--the shareholder's net deemed tangible income return (``net 
DTIR'') is the excess of deemed tangible income return over certain 
interest expense, and, finally, its GILTI inclusion amount is the 
excess of its net CFC tested income over its net DTIR.
    As explained above, a U.S. shareholder does not compute a separate 
GILTI inclusion amount with respect to each CFC for a taxable year, but 
rather computes a single GILTI inclusion amount by reference to all its 
CFCs. Cf. section 951A(f)(2) (allocating the U.S. shareholder's GILTI 
inclusion amount to each tested income CFC for purposes of various 
sections of the Code). Because a U.S. shareholder's GILTI inclusion 
amount is determined based on the relevant items of all the CFCs of 
which it is a U.S. shareholder, the effect of the provision is 
generally to ensure that a U.S. shareholder is taxed on its GILTI 
wherever (and through whichever CFC) derived. See, for example, Senate 
Explanation at 366 (``The Committee believes that calculating GILTI on 
an aggregate basis, instead of on a CFC-by-CFC basis, reflects the 
interconnected nature of a U.S. corporation's global operations and is 
a more accurate way of determining a U.S. corporation's global 
intangible income.'').
    The proposed regulations under section 951A follow an outline 
similar to the description in this overview. Proposed Sec. Sec.  
1.951A-2 through 1.951A-4 provide detailed guidance on items determined 
at the CFC level--that is, tested income and tested loss, QBAI, and the 
items necessary to determine the amount of certain interest expense 
that reduces net DTIR. Proposed Sec.  1.951A-1(d) provides rules for 
determining the U.S. shareholder's pro rata share of these CFC-level 
items. Finally, proposed Sec.  1.951A-1(c) provides rules describing 
the aggregation of the U.S. shareholder's pro rata share amounts to 
determine the shareholder's GILTI inclusion amount.

B. General Rules and Definitions

1. Inclusion of GILTI in Gross Income
    Proposed Sec.  1.951A-1 provides general rules to determine a U.S. 
shareholder's GILTI inclusion amount and associated definitions. Some 
of the definitions distinguish between a CFC's taxable year and a U.S. 
shareholder's taxable year. For example, a ``U.S. shareholder inclusion 
year'' refers to the relevant taxable year of the U.S. shareholder and 
is defined as a taxable year of the U.S. shareholder that includes a 
CFC inclusion date (as that term is defined in the proposed 
regulations) of the CFC. See proposed Sec.  1.951A-1(e)(4). A ``CFC 
inclusion year'' refers to the relevant taxable year of the CFC 
beginning after December 31, 2017 (the effective date of section 951A 
for a foreign corporation that is a CFC). See proposed Sec.  1.951A-
1(e)(2).
2. Determination of Net DTIR
    Proposed Sec.  1.951A-1(c)(3) defines net DTIR, which is computed 
at the U.S. shareholder level based on QBAI (as defined in proposed 
Sec.  1.951A-3(b)) held by the shareholder's CFCs and offsets the 
shareholder's net CFC tested income for purposes of determining the 
shareholder's GILTI inclusion amount. A CFC's QBAI is equal to its 
aggregate average adjusted bases in specified tangible property, which 
is defined as tangible property used in the production of tested 
income. See section 951A(d)(2)(A) and proposed Sec.  1.951A-3(c)(1). 
Consistent with the statute and the conference report accompanying the 
Act (``Conference Report''), the proposed regulations clarify that a 
tested loss CFC does not have specified tangible property. See H.R. 
Rep. No. 115-466, at 642, fn. 1536 (2017) (Conf. Rep.) and proposed 
Sec.  1.951A-3(b), (c)(1), and (g)(1). Accordingly, for purposes of 
calculating its GILTI inclusion amount, a U.S. shareholder does not 
take into account the tangible property of a tested loss CFC in 
calculating its aggregate pro rata share of QBAI, its deemed tangible 
income return, or its net DTIR.
3. Determination of Pro Rata Share
    Section 951A(e)(1) provides that, for purposes of determining a 
U.S. shareholder's GILTI inclusion amount, the shareholder's pro rata 
share of a CFC's tested income, tested loss, and QBAI ``shall be 
determined under the rules of section 951(a)(2) in the same manner as 
such section applies to subpart F income.'' Accordingly, the proposed 
regulations incorporate the pro rata share rules of section 951(a)(2) 
and Sec.  1.951-1(b) and (e), with appropriate modifications to account 
for the differences between subpart F income, on the one hand, and 
tested income, tested loss, and QBAI, on the other. Similar to the 
determination of a U.S. shareholder's pro rata share of subpart F 
income, proposed Sec.  1.951A-1(d)(1) provides that a U.S. 
shareholder's pro rata share of any CFC item necessary for calculating 
its GILTI inclusion amount is determined by reference to the stock such 
shareholder owns (within the meaning of section 958(a)) in the CFC 
(``section 958(a) stock'') as of the close of the CFC's taxable year, 
including section 958(a) stock treated as owned by the U.S. shareholder 
through a domestic partnership under proposed Sec.  1.951A-5(c). See 
section I.F of this Explanation of Provisions for an explanation of 
proposed rules for domestic partnerships and their partners.

[[Page 51074]]

    In several places, the provisions of proposed Sec.  1.951A-1(d) 
reference section 951(a)(2) and proposed Sec.  1.951-1(e), which amends 
existing Sec.  1.951-1(e). See section II.A of this Explanation of 
Provisions for an explanation of the proposed modifications to Sec.  
1.951-1(e). Comments requested guidance on how to determine a preferred 
shareholder's pro rata share of CFC items for purposes of GILTI. Rules 
relating to the allocation of tested income to preferred stock are 
included in proposed Sec.  1.951A-1(d)(2) by cross-reference to 
proposed Sec.  1.951-1(e). In addition, the proposed regulations 
provide rules relating to a preferred shareholder's pro rata share of 
tested loss and QBAI.
    A U.S. shareholder's pro rata share of tested income generally is 
determined in the same manner as its pro rata share of subpart F income 
under section 951(a)(2) and Sec.  1.951-1(b) and (e) (that is, based on 
the relative amount that would be received by the shareholder in a 
year-end hypothetical distribution of all the CFC's current year 
earnings). See proposed Sec.  1.951A-1(d)(2)(i). For purposes of 
determining a U.S. shareholder's pro rata share of a CFC's QBAI, the 
amount of QBAI distributed in the hypothetical distribution of section 
951(a)(2)(A) and Sec.  1.951-1(e) is generally proportionate to the 
amount of the CFC's tested income distributed in the hypothetical 
distribution. See proposed Sec.  1.951A-1(d)(3)(i). However, a special 
rule in the proposed regulations provides that if a CFC's QBAI exceeds 
10 times its tested income, so that the amount of QBAI allocated to 
preferred stock would exceed 10 times the tested income allocated to 
the preferred stock under the general proportionate allocation rule, 
the excess amount of QBAI is allocated solely to the CFC's common 
stock. See proposed Sec.  1.951A-1(d)(3)(ii). The proposed cap on QBAI 
allocated to a preferred shareholder (10 times tested income) is 
derived from the statutory cap on the amount of QBAI that may be used 
to compute GILTI (10 percent of aggregate QBAI). These rules in the 
proposed regulations ensure that the notional ``normal return'' 
associated with the CFC's QBAI generally flows to the shareholders in a 
manner consistent with their economic rights in the earnings of the 
CFC. For illustration, see proposed Sec.  1.951A-1(d)(3)(iii), Examples 
1 and 2.
    For purposes of determining a U.S. shareholder's pro rata share of 
a CFC's tested loss, the amount distributed in the hypothetical 
distribution is the amount of the tested loss, rather than the CFC's 
current earnings and profits, and the tested loss is distributed solely 
with respect to the CFC's common stock, except in certain cases 
involving dividend arrearages with respect to preferred stock and 
common stock with no liquidation value. See proposed Sec.  1.951A-
1(d)(4)(i) through (iii). In the latter case, the proposed regulations 
provide that any amount of tested loss that would otherwise be 
distributed in the hypothetical distribution to a class of common stock 
that has no liquidation value is instead distributed to the most junior 
class of equity with a positive liquidation value to the extent of the 
liquidation value. See proposed Sec.  1.951A-1(d)(4)(iii). In 
subsequent years, tested income is allocated to any class of stock to 
the extent that tested loss was allocated to such class in prior years 
under this special rule. See proposed Sec.  1.951A-1(d)(2)(ii). In 
addition, the proposed regulations provide that section 951(a)(2)(B) is 
applied to reduce tested losses, but modified to treat the amount of a 
dividend received by another person as equal to the amount of the 
tested loss, without regard to whether an actual dividend is made by 
the tested loss CFC. See proposed Sec.  1.951A-1(d)(4)(i)(D). The 
effect of this rule is to reduce a shareholder's pro rata share of 
tested loss in proportion to the number of days the shareholder did not 
own the stock of the tested loss CFC within the meaning of section 
958(a). Each of these modifications is intended to ensure that the 
tested loss of a CFC is allocated to each U.S. shareholder in an amount 
commensurate with the economic loss borne by the shareholder by reason 
of the tested loss.
    Proposed Sec.  1.951A-1(d)(5) and (6) provide rules for determining 
a shareholder's pro rata share of ``tested interest expense'' and 
``tested interest income.'' Tested interest expense and tested interest 
income are defined in proposed Sec.  1.951A-4, which is discussed in 
section I.E of this Explanation of Provisions. A U.S. shareholder's pro 
rata share of a CFC's tested interest expense for a taxable year equals 
the amount by which the CFC's tested interest expense reduces the 
shareholder's pro rata share of tested income, increases the 
shareholder's pro rata share of tested loss, or both. Conversely, a 
U.S. shareholder's pro rata share of tested interest income for a 
taxable year equals the amount by which the CFC's tested interest 
income increases the shareholder's pro rata share of tested income, 
reduces the shareholder's pro rata share of tested loss, or both. For 
example, tested interest income could both increase a U.S. 
shareholder's pro rata share of tested income and decrease its pro rata 
share of tested loss if a CFC with tested income for a taxable year 
would have, without regard to the tested interest income, a tested loss 
for the taxable year.
    The Department of the Treasury (``Treasury Department'') and the 
IRS request comments on the proposed approaches for determining a U.S. 
shareholder's pro rata share of a CFC's QBAI and tested loss, including 
how (or whether) to allocate tested loss of a CFC when no class of CFC 
stock has positive liquidation value.
4. Foreign Currency Translation
    Because GILTI is computed at the U.S. shareholder level, the tested 
income, tested loss, tested interest expense, tested interest income, 
and QBAI of a CFC that uses a functional currency other than the U.S. 
dollar must be translated into U.S. dollars. The appropriate exchange 
rate under section 989(b)(3) for income inclusions under section 
951(a)(1)(A) is the average exchange rate for the taxable year of the 
foreign corporation. GILTI inclusion amounts are similar to section 
951(a)(1)(A) inclusions in that both inclusions are determined based on 
certain income (and, in the case of GILTI, certain losses) of the CFC 
for the taxable year of the CFC that ends with or within the taxable 
year of the U.S. shareholder. Therefore, the proposed regulations 
prescribe the same translation rule that is used for subpart F income 
for translating a pro rata share of tested income, tested loss, tested 
interest expense, tested interest income, and QBAI. See proposed Sec.  
1.951A-1(d)(1). Similarly, a U.S. shareholder's GILTI inclusion amount 
that is allocated to a tested income CFC under section 951A(f)(2) is 
translated from U.S. dollars into the CFC's functional currency using 
the average exchange rate for the taxable year of the tested income 
CFC. See proposed Sec.  1.951A-6(b)(2)(iii).

C. Tested Income and Tested Loss

1. Determination of Gross Income and Allowable Deductions
    Under section 951A(c)(2), tested income and tested loss are 
determined by beginning with a CFC's gross income, excluding certain 
items (gross income after exclusions, ``gross tested income''), and 
then subtracting properly allocable deductions determined using rules 
similar to the rules of section 954(b)(5). While section 951A does not 
specifically address which expenses of a CFC are allowable as a 
deduction, existing rules under Sec.  1.952-2 apply to determine the 
gross income and

[[Page 51075]]

deductions of a CFC taken into account in determining its subpart F 
income. The Treasury Department and the IRS have determined that due to 
the similarities between gross tested income and subpart F income (for 
example, gross tested income and subpart F income are both determined 
at the CFC level and taxed to a U.S. shareholder on a current basis), 
and the overlap between CFCs impacted by GILTI and subpart F (since a 
CFC can have both tested income and subpart F income), the 
determinations of gross income and allowable deductions for GILTI 
should be made in a manner similar to the determination of subpart F 
income. Accordingly, the proposed regulations require that the gross 
income and allowable deduction determinations are made under the rules 
of Sec.  1.952-2. See proposed Sec.  1.951A-2(c)(2). Under Sec.  1.952-
2(a)(1) and proposed Sec.  1.951A-2(c)(2), subject to the special rules 
in Sec.  1.952-2(c), tested income or tested loss of a CFC is 
determined by treating the CFC as a domestic corporation taxable under 
section 11 and by applying the principles of section 61 and the 
regulations thereunder. Therefore, only items of deduction that would 
be allowable in determining the taxable income of a domestic 
corporation may be taken into account for purposes of determining a 
CFC's tested income or tested loss. If an item of a CFC would be 
disallowed as a deduction in determining the CFC's taxable income if 
the CFC were a domestic corporation, the item cannot be taken into 
account for purposes of determining the tested income or tested loss of 
the CFC even if the item reduces the CFC's earnings and profits.
    The Treasury Department and the IRS request comments on the 
application of the rules under Sec.  1.952-2 for purposes of 
determining subpart F income, tested income, and tested loss. In 
particular, comments are requested as to whether these rules should 
allow a CFC a deduction, or require a CFC to take into account income, 
that is expressly limited to domestic corporations under the Code. For 
example, questions have arisen as to whether a CFC could be entitled to 
a dividends received deduction under section 245A, even though section 
245A by its terms applies only to dividends received by a domestic 
corporation. See Conf. Rep. at 599, fn. 1486. The Treasury Department 
and the IRS also welcome comments on other approaches to determining 
tested income or tested loss, including whether additional 
modifications should be made to Sec.  1.952-2 for purposes of 
calculating GILTI.
    Comments have also requested guidance on the interactions of 
section 163(j) and section 267A with section 951A. Issues related to 
sections 163(j), 245A, and 267A will be addressed in future guidance.
2. Income Excluded From Foreign Base Company Income and Insurance 
Income by Reason of Section 954(b)(4)
    As noted in section I.C.1 of this Explanation of Provisions, 
section 951A(c)(2) requires that the gross income of the CFC for the 
taxable year be determined without regard to certain items. One of 
these items is gross income excluded from foreign base company income 
(as defined in section 954) or insurance income (as defined in section 
953) of the CFC by reason of electing the exception under section 
954(b)(4) (``high-tax exception''). In response to comments, the 
proposed regulations clarify that this exclusion applies only to income 
that is excluded from foreign base company income and insurance income 
solely by reason of an election made to exclude the income under the 
high-tax exception of section 954(b)(4). Accordingly, the exclusion 
does not apply to income that would not otherwise be subpart F income 
or to categories of income that do not constitute subpart F income due 
to exceptions other than the high-tax exception (for example, as a 
result of an exception to foreign personal holding company income under 
section 954(c)(6) or section 954(h)).
3. Gross Income Taken Into Account in Determining Subpart F Income
    Another item excluded from gross tested income is gross income 
taken into account in determining a corporation's subpart F income. 
Comments have requested guidance on the interaction between the 
earnings and profits limitation to subpart F income under section 
952(c), including the recapture rule in section 952(c)(2), and the 
determination of gross tested income for purposes of section 951A. The 
Treasury Department and the IRS have determined that any income 
described in section 952(a) is ``taken into account in determining 
subpart F income'' regardless of whether the section 952(c) limitation 
applies, and therefore should not be included in gross tested income. 
Conversely, the recapture of subpart F income under section 952(c)(2), 
even if by reason of earnings and profits attributable to gross tested 
income, does not result in excluding any amount from gross tested 
income. Therefore, the proposed regulations provide that tested income 
and tested loss are determined without regard to the application of 
section 952(c). See proposed Sec.  1.951A-2(c)(4).
4. Determination of Allowable Deductions Properly Allocable to Gross 
Tested Income
    Section 951A(c)(2)(A)(ii) provides that tested income and tested 
loss are determined by subtracting from a CFC's gross tested income 
``the deductions (including taxes) properly allocable to such gross 
income under rules similar to the rules of section 954(b)(5) (or to 
which such deductions would be allocable if there were such gross 
income).'' Regulations under section 954(b)(5) require taxpayers to 
determine net subpart F income by properly allocating and apportioning 
deductions to the various categories of subpart F income. For this 
purpose, Sec.  1.954-1(c) provides that taxpayers must first determine 
the gross amount of each item of income in a category of income (as 
described in Sec.  1.954-1(c)(1)(iii)) and then allocate and apportion 
expenses to these categories under the principles of sections 861, 864, 
and 904(d). Accordingly, in order to apply the principles of section 
954(b)(5) to section 951A (as required under section 
951A(c)(2)(A)(ii)), the proposed regulations provide that allowable 
deductions determined under the principles of Sec.  1.952-2 are 
allocated and apportioned to gross tested income under the principles 
of section 954(b)(5) and Sec.  1.954-1(c), treating gross tested income 
that falls within a single separate category (as defined in Sec.  
1.904-5(a)(1)) as an additional category of income for this purpose. 
See proposed Sec.  1.951A-2(c)(3).
    Section I.D.5 of this Explanation of Provisions describes a rule 
that disregards basis in specified tangible property created in certain 
taxable transfers occurring before the effective date of section 951A 
for purposes of calculating QBAI. See Sec.  1.951A-3(h)(2). These rules 
are cross-referenced in proposed Sec.  1.951A-2(c)(5) to disallow any 
loss or deduction related to such stepped up-basis in any depreciable 
or amortizable property (including, for example, intangible property) 
for purposes of calculating tested income or tested loss.

D. QBAI

1. QBAI and Specified Tangible Property
    Proposed Sec.  1.951A-3(b) provides that a tested income CFC's QBAI 
for any taxable year is the average of the CFC's aggregate adjusted 
bases as of the close of each quarter in specified tangible property 
that is used in a trade or

[[Page 51076]]

business of the corporation and of a type with respect to which a 
deduction is allowable under section 167. In general, specified 
tangible property is tangible property used in the production of tested 
income. See proposed Sec.  1.951A-3(c)(1). Tangible property is defined 
as property for which the depreciation deduction provided by section 
167(a) is eligible to be determined under section 168 (even if the CFC 
has elected not to apply section 168). See proposed Sec.  1.951A-
3(c)(2). The proposed regulations define tangible property by reference 
to whether the property can be depreciated under section 168 because, 
unlike section 167, section 168 applies only to tangible property, and 
there is a substantial amount of guidance delineating property subject 
to section 168.
    Property that is used in the production of both gross tested income 
and gross income that is not gross tested income (``dual use 
property'') is proportionately treated as specified tangible property. 
See proposed Sec.  1.951A-3(d)(1). Generally, the proportion is 
determined based on the relative amount of gross tested income to 
income other than gross tested income that the property generates for 
the taxable year. See proposed Sec.  1.951A-3(d)(2)(i). A special rule 
is provided for determining the proportion of the property treated as 
specified tangible property if the property generates no directly 
identifiable income (for example, because the property is used in 
general and administrative functions that contribute to the generation 
of all the income of the CFC). See proposed Sec.  1.951A-3(d)(2)(ii).
    Under Sec.  1.167(a)-2, the depreciation allowance for tangible 
property applies only to that part of the property which is subject to 
wear and tear, to decay or decline from natural causes, to exhaustion, 
and to obsolescence. Accordingly, for purposes of section 951A, 
property that may be in part depreciable qualifies as specified 
tangible property to the extent it is depreciable. For example, 
precious metal used in a manufacturing process may be considered 
specified tangible property in part because it is depreciable in part. 
See Rev. Rul. 2015-11, 2015-21 I.R.B. 975.
2. Determination of Adjusted Basis of Specified Tangible Property
    Proposed Sec.  1.951A-3(e) provides rules to determine the adjusted 
basis of specified tangible property for purposes of determining QBAI. 
The general rule in proposed Sec.  1.951A-3(e)(1), like section 
951A(d)(3), provides that the adjusted basis in any property is 
determined by using the alternative depreciation system under section 
168(g) (``ADS'') and allocating the depreciation deduction with respect 
to the property ratably to each day during the period in the taxable 
year to which the depreciation relates. ADS applies for purposes of 
determining QBAI irrespective of whether the basis of the property is 
determined using another depreciation method for other purposes of the 
Code.
    The Treasury Department and the IRS recognize that taxpayers may 
hold specified tangible property that was acquired before December 22, 
2017, that was not depreciated using ADS. Section 951A(d) does not 
distinguish between property acquired before December 22, 2017, and 
property acquired on or after December 22, 2017. The Treasury 
Department and the IRS have concluded that, regardless of the date 
acquired, the adjusted basis in specified tangible property should be 
determined under ADS in order for the U.S. shareholder's pro rata share 
of QBAI to be properly determined and not distorted. Therefore, the 
proposed regulations provide that when determining QBAI, the adjusted 
basis in property placed in service before December 22, 2017, is 
determined using ADS as if this system had applied from the date that 
the property was placed in service. See proposed Sec.  1.951A-3(e)(3).
3. Short Taxable Year
    Net DTIR is intended to reduce a U.S. shareholder's GILTI inclusion 
amount by an annual return on specified tangible property. To ensure 
that the net DTIR of a CFC with a taxable year of less than 12 months 
(a ``short taxable year'') reflects an annual return, the proposed 
regulations provide a methodology to reduce the QBAI of a CFC with a 
short taxable year to an amount that, if annualized, would produce an 
amount equal to the QBAI for a 12-month taxable year. See proposed 
Sec.  1.951A-3(f).
4. Specified Tangible Property Held Through a Partnership
    Section 951A(d)(3) \1\ (the ``partnership QBAI paragraph'') states 
that if a CFC holds an interest in a partnership at the close of the 
CFC's taxable year, the CFC takes into account under section 951A(d)(1) 
its ``distributive share of the aggregate of the partnership's adjusted 
bases (determined as of such date in the hands of the partnership)'' in 
specified tangible property in computing its QBAI. The partnership QBAI 
paragraph further provides that a CFC's ``distributive share of the 
adjusted basis of any property shall be the controlled foreign 
corporation's distributive share of income with respect to such 
property.''
---------------------------------------------------------------------------

    \1\ As enacted, section 951A(d) contains two paragraphs 
designated as paragraph (3).
---------------------------------------------------------------------------

    The statutory language ``distributive share of the aggregate of the 
partnership's adjusted basis'' is ambiguous because the term 
``distributive share'' is used in subchapter K of the Code with respect 
to income, gain, loss, and credits of a partnership, but not the bases 
of assets. A partner of a partnership has a basis in its partnership 
interest (``outside basis''), while the partnership has a separate 
basis in the assets of the partnership (``inside basis''). The proposed 
regulations therefore use the term ``share'' (rather than 
``distributive share'') when referring to the amount of the inside 
basis of a partnership asset that a partner that is a CFC may include 
in its QBAI.
    The partnership QBAI paragraph provides that a CFC ``shall take 
into account'' under section 951A(d)(1) the CFC's distributive share of 
the basis in partnership specified tangible property. Because section 
951A(d)(1) requires an averaging of basis over the close of each 
quarter of the taxable year of the CFC, and the term ``distributive 
share'' as it pertains to basis is ambiguous, it is unclear based on 
the statute how a CFC determines its distributive share of the basis of 
partnership specified tangible property for purposes of determining its 
QBAI. One interpretation of the partnership QBAI paragraph is that a 
CFC partner's QBAI is increased by an amount equal to the CFC partner's 
share of the basis that the partnership has in its specified tangible 
property as of the close of the CFC partner's taxable year. However, 
that interpretation would be contrary to the requirement in section 
951A(d)(1) that the CFC's bases in specified tangible property be 
averaged over four quarters. Furthermore, giving the term 
``distributive share'' effect, the amount determined at the end of the 
CFC partner's taxable year should be reduced for any period during the 
taxable year when the partnership did not own the property, whereas a 
CFC partner of a partnership that disposed of property before the close 
of the CFC's taxable year would receive no QBAI benefit if there were a 
single measurement date. In addition, a requirement that a 
partnership's basis in specified tangible property be measured on the 
last day of a CFC partner's taxable year could be burdensome for 
partnerships that have one or more CFC partners with taxable years that 
do not coincide with the partnership's taxable

[[Page 51077]]

year and, in those cases, would have the effect of decoupling the CFC 
partner's share of the basis of partnership property used to compute 
the CFC partner's QBAI from the CFC partner's distributive share of the 
partnership's income from the property that is taken into account in 
computing the CFC partner's tested income. Moreover, because 
depreciation is treated as reducing the adjusted basis of property on 
each day during the taxable year, calculating a partnership's basis on 
the final day of the CFC partner's taxable year will generally result 
in an artificially low basis relative to calculating average adjusted 
basis over the course of the partnership's taxable year. For the 
foregoing reasons, the proposed regulations determine a CFC partner's 
share of the partnership's adjusted basis in specified tangible 
property by reference to the partnership's average adjusted basis in 
the property as of the close of each quarter of the partnership's 
taxable year that ends with or within the CFC's taxable year. See 
proposed Sec.  1.951A-3(g)(3).
    A partner that is a CFC takes into account its share of the 
adjusted basis of specified tangible property held by a partnership in 
computing QBAI if, among other things, the property ``is used in the 
production of tested income (determined with respect to such controlled 
foreign corporation's distributive share of income with respect to such 
property).'' Section 951A(d)(3)(C). Consistent with the general rule 
for QBAI, only a tested income CFC can increase its QBAI by reason of 
specified tangible property owned by a partnership. See proposed Sec.  
1.951A-3(g)(1). Further, consistent with the parenthetical in the 
partnership QBAI paragraph, the proposed regulations provide that a CFC 
partner determines its share of the partnership's average adjusted 
basis in specified tangible property based on the amount of its 
distributive share of the gross income produced by the property that is 
included in the CFC partner's gross tested income relative to the total 
amount of gross income produced by the property. See proposed Sec.  
1.951A-3(g)(2). The proposed regulations incorporate the dual use 
property rule of section 951A(d)(2)(B) in the context of specified 
tangible property owned indirectly through a partnership and include 
similar rules for addressing specified tangible property that does not 
produce any directly identifiable income. The calculation is performed 
separately for each item of specified tangible property held by the 
partnership, taking into account the CFC partner's distributive share 
of income with respect to such property.
    The Treasury Department and the IRS request comments on the 
proposed approach to specified tangible property held through a 
partnership, including the rules addressing specified tangible property 
that does not produce directly identifiable income.
5. Anti-Abuse Provisions
    Section 951A(d)(4) provides that ``[t]he Secretary shall issue such 
regulations or other guidance as the Secretary determines appropriate 
to prevent the avoidance of the purposes of this subsection, including 
regulations or other guidance which provide for the treatment of 
property if--(A) such property is transferred, or held, temporarily, or 
(B) the avoidance of the purposes of this paragraph is a factor in the 
transfer or holding of such property.'' The Conference Report describes 
the scope of section 951A(d)(4), stating that ``[t]he conferees intend 
that non-economic transactions intended to affect tax attributes of 
CFCs and their U.S. shareholders (including amounts of tested income 
and tested loss, tested foreign income taxes, net deemed tangible 
income return, and QBAI) to minimize tax under this provision be 
disregarded.'' Conf. Rep. at 645. One specific example illustrated in 
the Conference Report is a transaction that occurs after the 
measurement date of post-1986 earnings and profits under section 965 
but before the first taxable year for which section 951A is effective 
in order to increase a CFC's QBAI. Id.
    Consistent with section 951A(d)(4) and the Conference Report, as 
well as the Secretary's broad authority under section 7805(a) to 
``prescribe all needful rules and regulations for the enforcement of'' 
the Code, the proposed regulations provide that specified tangible 
property of a tested income CFC is disregarded for purposes of 
determining the tested income CFC's average aggregate basis in 
specified tangible property if the tested income CFC acquires the 
property with a principal purpose of reducing the GILTI inclusion 
amount of a U.S. shareholder and holds the property temporarily but 
over at least one quarter end. See proposed Sec.  1.951A-3(h)(1). For 
this purpose, property held for less than a twelve month period that 
includes at least one quarter end during the taxable year of a tested 
income CFC is treated as temporarily held and acquired with a principal 
purpose of reducing the GILTI inclusion amount of a U.S. shareholder. 
Id.
    The Treasury Department and the IRS are aware that taxpayers are 
engaging in transactions like the ones described in the Conference 
Report involving taxable transfers of property from one CFC to another 
CFC before the first taxable year of the transferor CFC to which 
section 951A applies in order to provide the transferee CFC with a 
stepped-up basis in the transferred property that, for example, may 
increase a U.S. shareholder's amount of QBAI with respect to the CFC 
for periods when it is subject to section 951A. See Conf. Rep. at 645. 
The stepped-up basis may also reduce the transferee CFC's tested income 
or increase its tested loss (for example, due to increased depreciation 
or amortization deductions) during periods when it is subject to 
section 951A. The Treasury Department and the IRS have determined that 
it would be inappropriate for a taxpayer to reduce its GILTI inclusion 
amount for any taxable year by reason of a stepped-up basis in CFC 
assets attributable to transactions between related CFCs during the 
period after December 31, 2017, but before the effective date of 
section 951A. Accordingly, the proposed regulations disallow the 
benefit of a stepped-up basis in specified tangible property 
transferred between related CFCs during the period before the 
transferor CFC's first inclusion year for purposes of calculating the 
transferee CFC's QBAI. See proposed Sec.  1.951A-3(h)(2). As discussed 
in section I.C.4 of this Explanation of Provisions, these rules are 
also cross-referenced in proposed Sec.  1.951A-2(c)(5) to disregard a 
stepped-up basis in any property that is depreciable or amortizable for 
purposes of calculating tested income and tested loss.
    The U.S. tax results claimed with respect to transactions that fall 
outside the scope of the anti-abuse rules in the proposed regulations 
may, nonetheless, be challenged under other statutory provisions or 
judicial doctrines.

E. Specified Interest Expense

    To calculate a U.S. shareholder's net DTIR, section 951A(b)(2)(B) 
provides that 10 percent of the aggregate of the shareholder's pro rata 
share of the QBAI of each CFC (defined as ``deemed tangible income 
return'' in proposed Sec.  1.951A-1(c)(3)(ii)) is reduced by ``the 
amount of interest expense taken into account under subsection 
(c)(2)(A)(ii) in determining such shareholder's net CFC tested income 
for the taxable year to the extent the interest income attributable to 
such expense is not taken into account in determining such 
shareholder's net CFC tested income.'' Deductions taken

[[Page 51078]]

into account under section 951A(c)(2)(A)(ii) are deductions (including 
taxes) that are properly allocable to gross tested income for purposes 
of calculating tested income and tested loss. Thus, only a U.S. 
shareholder's pro rata share of interest expense that is currently 
deductible and properly allocable to gross tested income is taken into 
account for purposes of determining the interest expense described in 
section 951A(b)(2)(B). For purposes of the proposed regulations, 
interest expense described in section 951A(b)(2)(B) is referred to as 
``specified interest expense.'' See proposed Sec.  1.951A-1(c)(3)(iii).
    Specified interest expense is a U.S. shareholder-level 
determination which is net of ``attributable'' interest income taken 
into account by the U.S. shareholder. Specifically, specified interest 
expense of a U.S. shareholder is its pro rata share of interest expense 
properly allocable to gross tested income reduced by its pro rata share 
of interest income included in gross tested income to the extent 
attributable to such interest expense. The effect of this formulation 
is to count against net DTIR only a U.S. shareholder's pro rata share 
of interest expense allocable to gross tested income to the extent that 
the related interest income is not also reflected in the U.S. 
shareholder's pro rata share of the tested income of another CFC, such 
as in the case of third-party interest expense or interest expense paid 
to related U.S. persons.
    The amount of interest income ``attributable'' to interest expense 
is not defined in section 951A(b)(2)(B). Accordingly, it is necessary 
to define this concept in the proposed regulations. A definition that 
incorporates a strict tracing approach would require a U.S. shareholder 
to determine each item of interest expense with respect to each debt 
instrument of each of its CFCs to determine whether, and to what 
extent, the interest income with respect to that debt instrument is 
taken into account by the U.S. shareholder in determining the 
shareholder's net CFC tested income. However, the Treasury Department 
and the IRS have determined that a tracing approach for specified 
interest expense would be administratively burdensome and difficult to 
reconcile with the framework of section 951A, which generally requires 
a determination of CFC-level items followed by a second determination 
of U.S. shareholder-level aggregate pro rata shares of such items. A 
tracing approach for specified interest expense would necessitate a 
hybrid determination, in which the relevant item--``attributable'' 
interest income--could not be determined at the level of the CFC, but 
rather would require a matching at the U.S. shareholder level of the 
shareholder's pro rata share of each item of interest expense with its 
pro rata share of each item of interest income attributable to such 
interest expense. A tracing approach would create particular complexity 
with respect to interest paid between CFCs that are owned by different 
U.S. shareholders in different proportions or with respect to interest 
for which the accrual of the expense and inclusion of the income occur 
in separate taxable years.
    The Treasury Department and the IRS have instead determined that a 
netting approach to specified interest expense accomplishes the purpose 
of the specified interest expense rule in a more administrable manner 
and is consistent with the requirement that ``attributable'' interest 
income be netted against interest expense. Therefore, the proposed 
regulations provide that a U.S. shareholder's specified interest 
expense is the excess of its aggregate pro rata share of the tested 
interest expense of each CFC over its aggregate pro rata share of the 
tested interest income of each CFC. See proposed Sec.  1.951A-
1(c)(3)(iii). Tested interest expense and tested interest income are 
generally defined by reference to all interest expense and interest 
income that is taken into account in determining a CFC's tested income 
or tested loss. See proposed Sec.  1.951A-4(b)(1) and (2).
    Comments have questioned whether interest expense of a captive 
finance CFC must be taken into account for purposes of determining a 
U.S. shareholder's specified interest expense, or whether the related 
interest income from unrelated customers may be available to offset 
such interest expense. Under a netting approach to the computation of 
specified interest expense, without modifications, whether a CFC's 
active banking business increases or reduces the specified interest 
expense of a U.S. shareholder relative to other taxpayers depends on 
whether the third-party expense related to such business is greater 
than or less than interest income related to such business. The 
Treasury Department and the IRS have determined that a U.S. 
shareholder's specified interest expense, and therefore its net DTIR 
and its GILTI inclusion amount, should not depend on whether the U.S. 
shareholder has one or more CFCs engaged in the active conduct of a 
financing or insurance business, as long as the interest expense of the 
CFC is incurred exclusively to fund such business with unrelated 
persons and thus not incurred, for instance, to fund the acquisition of 
specified tangible property. Therefore, the proposed regulations 
exclude from the definition of tested interest expense any interest 
expense of a CFC that is an eligible controlled foreign corporation 
(within the meaning of section 954(h)(2)) or a qualifying insurance 
company (within the meaning of section 953(e)(3)) (``qualified CFC''), 
except to the extent of the qualified CFC's assets unrelated to its 
financing or insurance business and any interest income received by the 
qualified CFC from loans to certain related persons (interest expense 
described in this sentence, ``qualified interest expense''). See 
proposed Sec.  1.951A-4(b)(1)(iii). Further, the proposed regulations 
exclude from the definition of tested interest income any interest 
income of a qualified CFC included in the gross tested income of the 
qualified CFC for the CFC inclusion year that is excluded from subpart 
F income due to the active financing exception of section 954(h) or the 
active insurance exception of section 954(i) (``qualified interest 
income''). See proposed Sec.  1.951A-4(b)(2)(iii).
    For purposes of determining specified interest expense, interest 
income and interest expense are defined broadly to encompass any amount 
treated as interest under the Code or regulations, and any other amount 
incurred or recognized in a transaction or series of integrated or 
related transactions in which the use or forbearance of funds is 
secured for a period of time if the expense or loss is predominately 
incurred in consideration of the time value of money. See proposed 
Sec.  1.951A-4(b)(1)(ii) and (2)(ii).
    Comments requested clarification of whether the interest expense of 
a tested loss CFC is used in the determination of specified interest 
expense. Regardless of whether interest expense increases tested loss 
or reduces tested income, the expense is ``taken into account. . .in 
determining the shareholder's net CFC tested income'' within the 
meaning of section 951A(b)(2)(B). In addition, if a tested loss CFC's 
interest expense were not taken into account for purposes of 
determining specified interest expense, a taxpayer could easily avoid 
specified interest expense by incurring offshore debt through a tested 
loss CFC. Therefore, the proposed regulations confirm that any interest 
expense taken into account for purposes of determining the tested 
income or tested loss of a CFC is also taken into account in 
determining a U.S. shareholder's specified interest expense.

[[Page 51079]]

F. Domestic Partnerships and Their Partners

    Comments requested guidance on the treatment of domestic 
partnerships that own stock of CFCs. Section 951A itself does not 
contain any specific rules on domestic partnerships and their partners 
that directly or indirectly own stock of CFCs. Accordingly, proposed 
Sec.  1.951A-5 provides this guidance to domestic partnerships and 
their partners on how to compute their GILTI inclusion amounts. This 
guidance also applies to S corporations and their shareholders, which 
are treated as partnerships and partners for purposes of sections 951 
through 965. See section 1373.
    A domestic partnership is a U.S. person by definition under section 
7701(a)(4) and (30) and can therefore be a U.S. shareholder of a CFC 
under section 951(b). Under current law, a domestic partnership that is 
a U.S. shareholder includes in gross income its section 951(a)(1)(A) 
inclusion with respect to a CFC, and its partners include in gross 
income their distributive share of such inclusion. However, as noted in 
section I.A of this Explanation of Provisions, there is no analog in 
section 951(a)(1)(A) to the U.S. shareholder-level determinations 
required by section 951A, and thus the level at which the section 
951(a)(1)(A) determination is made--whether at the level of the 
partnership or its partners--does not generally affect the amount of 
the inclusion, if the partnership and its partners are all U.S. 
shareholders. On the other hand, the GILTI inclusion amount is an 
aggregation of the U.S. shareholder's pro rata shares of tested income, 
tested loss, QBAI, tested interest expense, and tested interest income 
of each of its CFCs. Thus, the level at which the GILTI calculation is 
made dictates the CFC items to be taken into account by the 
shareholder, and each of these items can impact the shareholder's GILTI 
inclusion amount.
    The Treasury Department and the IRS considered a number of 
approaches to applying section 951A with respect to domestic 
partnerships and their partners. A pure aggregate approach to the 
treatment of domestic partnerships and their partners would treat the 
partnership as an aggregate of its partners, so that each partner would 
calculate its own GILTI inclusion amount taking into account its pro 
rata share of CFC items through the partnership. However, a pure 
aggregate approach might also be interpreted by taxpayers to exempt 
small partners of a domestic partnership from the GILTI regime 
entirely, a result that is not clearly contemplated in section 951A or 
its legislative history and is inconsistent with section 951.
    The Treasury Department and the IRS also considered a pure entity 
approach. Under a pure entity approach, the domestic partnership would 
determine its own GILTI inclusion amount, and each partner would take 
into gross income its distributive share of such amount. In the case of 
a partner that is a U.S. shareholder of CFCs owned by the partnership 
and other CFCs outside the partnership, a pure entity approach would 
effectively fragment the shareholder's GILTI inclusion amount into 
multiple GILTI inclusion amounts by separating the items of the CFCs 
owned by the shareholder through the partnership from the items of the 
CFCs owned by the shareholder outside the partnership, including 
through other domestic partnerships. An approach that dramatically 
alters a U.S. shareholder's inclusion under section 951A for a taxable 
year depending on the legal structure by which the shareholder owns 
each CFC presents both an inappropriate planning opportunity as well as 
a trap for the unwary. Such an approach is also inconsistent with the 
structure of section 951A, which requires an aggregation of all 
relevant items of a shareholder's CFCs in order to compute a single 
GILTI inclusion amount for a U.S. shareholder. As discussed in section 
III.A of this Explanation of Provisions, the Treasury Department and 
the IRS relied on similar considerations in concluding that the 
relevant items of each CFC owned directly or indirectly by members of a 
consolidated group should be taken into account in determining the 
GILTI inclusion amount of each member of that group.
    In addition, the Treasury Department and the IRS have concluded 
that other provisions that are related to, and interdependent with, 
section 951A should apply at the level of a domestic corporate partner. 
Section 960(d) provides a domestic corporation that is a U.S. 
shareholder a credit for foreign taxes paid by a CFC that are properly 
attributable to tested income ``taken into account'' by the domestic 
corporation, and determines the amount of that credit by reference to 
the corporation's aggregate pro rata share of tested income. See 
section 960(d)(2)(B) and (3). A domestic partnership is not eligible to 
claim deemed paid credits under section 960(d). Furthermore, under a 
pure entity approach, a domestic corporate partner of a domestic 
partnership may not be eligible for a deemed paid credit by reason of 
its distributive share of the partnership's GILTI inclusion because a 
partner would not have a pro rata share of the tested income of any CFC 
owned by the partnership, and thus it would not take into account the 
tested income of any such CFC. Similarly, only a domestic corporation 
is eligible for a section 250 deduction. Nonetheless, the Conference 
Report indicates that the domestic corporate partners of a domestic 
partnership should get the benefit of a section 250 deduction, which is 
consistent with an aggregate approach. See Conf. Rep. at 623, fn. 1517.
    Based on the foregoing, the Treasury Department and the IRS have 
determined that the approach that best harmonizes the treatment of 
domestic partnerships and their partners across all provisions of the 
GILTI regime (sections 250, 951A, and 960(d)) is neither a pure 
aggregate nor a pure entity approach. Rather, the most harmonious 
approach treats a domestic partnership as an entity with respect to 
partners that are not U.S. shareholders of any CFC owned by the 
partnership, but treats the partnership as an aggregate for purposes of 
partners that are themselves U.S. shareholders with respect to one or 
more CFCs owned by the partnership. This approach ensures that each 
non-U.S. shareholder partner takes into income its distributive share 
of the domestic partnership's GILTI inclusion amount (similar to 
subpart F), while permitting a partner that is itself a U.S. 
shareholder to determine a single GILTI inclusion amount by reference 
to all its CFCs, whether owned directly or through a partnership, as 
well as allowing a corporate U.S. shareholder to calculate a foreign 
tax credit under section 960(d) with respect to each such CFC and to 
compute a section 250 deduction with respect to its GILTI inclusion 
amount determined by reference to each such CFC.
    Therefore, the proposed regulations provide that, in general, a 
domestic partnership that is a U.S. shareholder of one or more CFCs 
(``U.S. shareholder partnership'') computes its own GILTI inclusion 
amount in the same manner as any other U.S. shareholder, and each 
partner takes into account its distributive share of the domestic 
partnership's GILTI inclusion amount under section 702 and Sec.  1.702-
1(a)(8)(ii). See proposed Sec.  1.951A-5(b). However, for purposes of 
section 951A and the proposed regulations, a partner that is itself a 
U.S. shareholder (within the meaning of section 951(b)) (``U.S. 
shareholder partner'') of one or more CFCs owned directly or indirectly 
by a domestic partnership (``partnership CFC'') is treated as owning

[[Page 51080]]

proportionately section 958(a) stock in each such partnership CFC as if 
the partnership were a foreign partnership. See proposed Sec.  1.951A-
5(c). As a result, a partner that is itself a U.S. shareholder of a CFC 
owned by a domestic partnership computes its GILTI inclusion amount for 
a taxable year by taking into account its proportionate share of the 
partnership's pro rata share of each of the relevant items--tested 
income, tested loss, QBAI, tested interest income, and tested interest 
expense--of such CFC. This rule applies regardless of whether the 
domestic partnership itself has a GILTI inclusion amount for the 
taxable year. See proposed Sec.  1.951A-5(g), Example 6. In the case 
that a partner is treated as owning the section 958(a) stock of one or 
more partnership CFCs, the partner's distributive share of the 
partnership's GILTI inclusion amount is determined solely by reference 
to partnership CFCs in which the partner is not a U.S. shareholder. See 
proposed Sec.  1.951A-5(c) and (g), Example 3. A U.S. shareholder 
partnership is therefore required to provide to its partners their 
distributive share of the partnership's GILTI inclusion amount, as well 
as provide to each U.S. shareholder partner the partner's proportionate 
share of the partnership's pro rata share (if any) of each CFC tested 
item of each partnership CFC of the partnership, and forms and 
instructions will be updated accordingly. See proposed Sec.  1.951A-
5(f).
    To illustrate the differences between the approach taken in the 
proposed regulations and the pure entity approach, consider a domestic 
partnership (PRS) with two domestic corporate partners, US1 and US2, 
owning 5 percent and 95 percent of PRS, respectively. PRS owns 100 
percent of the single class of stock of FS1, a CFC with tested income 
of $100x, and 100 percent of the single class of stock of FS2, a CFC 
with tested loss of $50x. US2 also owns 100 percent of the single class 
of stock of FS3, a CFC with tested loss of $20x. Under a pure entity 
approach, US2's distributive share of PRS's GILTI inclusion amount 
would be $47.50x (95% x ($100x-$50x)), and US2's pro rata share of 
FS3's tested loss of $20x would be unused. Under the proposed 
regulations, US2, because it is a U.S. shareholder partner with respect 
to FS1 and FS2, aggregates its proportionate share of the tested income 
and tested loss of FS1 and FS2 with its pro rata share of the tested 
loss of FS3 in determining its GILTI inclusion amount of $27.50x ((95% 
x ($100x-$50x))-$20x). Accordingly, under a pure entity approach, US2 
would be incentivized to reorganize its ownership structure (for 
example, by liquidating PRS or contributing the stock of FS3 to PRS) in 
order to obtain the full benefit of the tested loss of FS3. Under the 
proposed regulations, however, US2 has the same GILTI inclusion amount 
whether it owns its CFCs directly or through one or more partnerships.
    The Treasury Department and the IRS request comments as to whether 
any other approach to the treatment of domestic partnerships and their 
partners for purposes of section 951A, including a pure entity approach 
or a pure aggregate approach, would more appropriately harmonize the 
provisions of the GILTI regime than the approach of the proposed 
regulations, particularly in light of the administrative and compliance 
burdens associated with any other approach and the approach of the 
proposed regulations. In addition, the Treasury Department and the IRS 
request comments on adjustments required by reason of computing a GILTI 
inclusion amount, in whole or in part, at the level of the partner of a 
domestic partnership, including adjustments to the partner's basis in 
its partnership interest, the partner's section 704(b) capital account, 
the partnership's basis in CFC stock under section 961, and a CFC's 
previously taxed earnings and profits with respect to the partner or 
partnership under section 959.

G. Treatment of GILTI Inclusion Amount and Adjustments to Earnings and 
Profits and Basis

1. Treatment of GILTI as Subpart F Income for Certain Purposes
    A U.S. shareholder's GILTI inclusion amount is not an inclusion 
under section 951(a)(1)(A). Nevertheless, for purposes of some 
provisions, GILTI inclusion amounts are treated similarly to section 
951(a)(1)(A) inclusions. Section 951A(f)(1)(A) provides that any GILTI 
included in gross income is treated in the same manner as an amount 
included under section 951(a)(1)(A) for purposes of applying sections 
168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 
993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 
6654(d)(2)(D), and 6655(e)(4).
    Section 951A(f)(1)(B) grants the Secretary authority to provide 
rules applying section 951A(f)(1)(A) to other provisions of the Code. A 
comment requested clarification as to whether GILTI inclusion amounts 
are net investment income under section 1411. Pursuant to the authority 
in section 951A(f)(1)(B), the proposed regulations provide that a GILTI 
inclusion amount is treated in the same manner as an amount included 
under section 951(a)(1)(A) for purposes of applying section 1411. See 
proposed Sec.  1.951A-6(b)(1). Thus, for example, a U.S. shareholder 
that has made an election pursuant to Sec.  1.1411-10(g) with respect 
to a CFC to treat amounts included in gross income under section 
951(a)(1)(A) as net investment income and to apply the basis adjustment 
rules of sections 961(a) and (b) with respect to such amounts for 
section 1411 purposes should also treat the portion of the U.S. 
shareholder's GILTI inclusion amount treated as being with respect to 
the CFC under section 951A(f)(2) and proposed Sec.  1.951A-6(b)(2) as 
net investment income.
    Comments have requested that regulations clarify that an inclusion 
under section 951A is determined before an inclusion under section 
951(a)(1)(B). The Treasury Department and the IRS have determined that 
clarification is unnecessary. Because a GILTI inclusion amount is 
treated as a section 951(a)(1)(A) inclusion for purposes of section 
959, the determination of the amount included under section 
951(a)(1)(B) is made after the determination of the amount of a section 
951(a)(1)(A) inclusion and the GILTI inclusion amount. See section 
959(a)(2) and (f)(1). The Treasury Department and the IRS intend to 
issue a separate notice of proposed rulemaking to update the 
regulations under sections 959 and 961 to account for the Act's 
modifications to the U.S. international tax system, including the 
enactment of section 245A.
    The characterization of GILTI inclusions for purposes of 
determining the unrelated business taxable income of tax-exempt 
entities will be addressed in separate guidance. The Treasury 
Department and the IRS request comments on other areas in which the 
characterization of a GILTI inclusion amount is relevant, and whether 
it is appropriate in those areas to treat a GILTI inclusion amount in 
the same manner as a section 951(a)(1)(A) inclusion or in some other 
manner (for example, as a dividend).
2. Interaction With Sections 163(e)(3)(B)(i) and 267(a)(3)(B)
    Section 267(a)(3)(B) generally provides that a deduction for an 
item payable to a related CFC is not allowed until paid, except to the 
extent that an amount attributable to that item is includible 
(determined without regard to properly allocable deductions and 
qualified deficits) in the gross income of

[[Page 51081]]

a U.S. shareholder. Section 163(e)(3)(B)(i) provides a similar rule for 
original issue discount on a debt instrument held by a related CFC.
    The Treasury Department and the IRS have determined that deductions 
should not be deferred under sections 163(e)(3)(B)(i) and 267(a)(3)(B) 
to the extent an item is taken into account in determining a U.S. 
shareholder's GILTI inclusion amount. Accordingly, the proposed 
regulations provide that a deduction is allowed under sections 
163(e)(3)(B)(i) and 267(a)(3)(B) for an item taken into account in 
determining the net CFC tested income of a U.S. shareholder, including 
a U.S. shareholder treated under the proposed regulations as owning 
section 958(a) stock of a CFC owned by a domestic partnership. See 
proposed Sec.  1.951A-6(c)(1). In the case of a U.S. shareholder that 
is a domestic partnership, this rule applies only to the extent that 
one or more U.S. persons (other than domestic partnerships) that are 
direct or indirect partners of the domestic partnership include in 
gross income their distributive share of the partnership's GILTI 
inclusion amount or the item is taken into account by a U.S. 
shareholder partner of the domestic partnership by reason of Sec.  
1.951A-5(c). See proposed Sec.  1.951A-6(c)(2).
3. Basis Adjustments for the Use of Tested Losses
    In determining a U.S. shareholder's net CFC tested income, the U.S. 
shareholder's pro rata share of a tested loss of one CFC may offset the 
shareholder's pro rata share of tested income of another CFC. Under the 
statute, such a use of a tested loss does not reduce the U.S. 
shareholder's basis in the stock of the tested loss CFC, increase the 
stock basis of the tested income CFC, or affect the earnings and 
profits of either the tested loss CFC or the tested income CFC.
    The Treasury Department and the IRS have determined that in certain 
cases the lack of adjustments to stock basis of a tested loss CFC can 
lead to inappropriate results. For example, if the U.S. shareholder's 
basis in the stock of the tested loss CFC is not reduced to reflect the 
use of the tested loss to offset tested income taken into account by 
the U.S. shareholder, the U.S. shareholder would recognize a second and 
duplicative benefit of the loss--either through the recognition of a 
loss or the reduction of gain--if the stock of the tested loss CFC is 
disposed of. See Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934) 
(denying the loss on stock of subsidiaries upon liquidation when 
operating losses were previously claimed from the subsidiaries' 
operations because ``[i]f allowed, this would be the practical 
equivalent of double deduction''); U.S. v. Skelly Oil. Co., 394 U.S. 
678 (1969) (``the Code should not be interpreted to allow respondent 
`the practical equivalent of a double deduction''' (citing Charles 
Ilfeld Co.)); Sec.  1.161-1. On the other hand, in the case of a 
corporate U.S. shareholder, but not in the case of an individual, gain 
recognized on the disposition of a CFC attributable to offset tested 
income would, in most cases, be eliminated as a result of the 
application of section 964(e) or section 1248(a) and (j), to the extent 
the gain is recharacterized as a dividend that is eligible for the 
dividends received deduction under section 245A. Accordingly, proposed 
Sec.  1.951A-6(e) generally provides that in the case of a corporate 
U.S. shareholder (excluding regulated investment companies and real 
estate investment trusts), for purposes of determining the gain, loss, 
or income on the direct or indirect disposition of stock of a CFC, the 
basis of the stock is reduced by the amount of tested loss that has 
been used to offset tested income in calculating net CFC tested income 
of the U.S. shareholder. The basis reduction is only made at the time 
of the disposition and therefore does not affect the stock basis prior 
to a disposition. Requiring the basis reduction only at the time of the 
disposition prevents the use of tested losses alone from causing the 
recognition of gain if the reduction exceeds the amount of stock basis.
    The basis adjustments apply only to the extent a ``net'' tested 
loss of the controlled foreign corporation has been used. This 
limitation is intended to ensure that the reduction applies only to the 
extent necessary to eliminate the duplicative loss in the stock. For 
example, if a $100x tested loss of a CFC (CFC1) offsets $100x of tested 
income of another CFC (CFC2) in one year in determining a U.S. 
shareholder's net CFC tested income, and in the next year CFC1 has $20x 
of tested income that is offset by a $20x tested loss of CFC2, then the 
$100x used tested loss attributable to the CFC1 stock from the first 
year is reduced by the $20x of its tested income from the second year 
that was offset by the tested loss of CFC2, resulting in a ``net'' used 
tested loss of $80x. See proposed Sec.  1.951A-6(e)(2).
    Similar adjustments apply when the tested loss CFC is treated as 
owned by the U.S. shareholder through certain intervening foreign 
entities by reason of section 958(a)(2) to prevent the indirect use of 
the duplicative loss through the disposition of interests in those 
intervening entities. The regulations provide an exception to those 
rules in certain cases when the tested loss CFC and the CFC that 
generated the tested income that is offset by the tested loss are in 
the same section 958(a)(2) ownership chain; adjustments are not 
appropriate in these cases because there is no duplicative loss to the 
extent the shares of both CFCs are directly or indirectly disposed of. 
See proposed Sec.  1.951A-6(e)(1)(ii).
    A direct disposition of the stock of a CFC can result in the 
indirect disposition of the stock of one or more lower-tier CFCs. See 
proposed Sec.  1.951A-6(e)(6)(ii)(B). In such a case, basis adjustments 
may be made to both the stock of the upper-tier CFC and the stock of 
the lower-tier CFCs. Accordingly, the proposed regulations provide 
ordering rules for making these adjustments that, in general, are 
intended to prevent gain resulting from a basis adjustment attributable 
to the use of a single tested loss from being taken into account more 
than once. See proposed Sec.  1.951A-6(e)(1)(iv).
    The proposed regulations also include rules that take into account 
certain nonrecognition transactions involving CFCs, such as the 
acquisition of CFC stock by a domestic corporation and transactions 
described in section 381. See proposed Sec.  1.951A-6(e)(4)(ii) and 
(e)(5). These rules are intended to prevent the elimination or 
avoidance of the basis adjustments through these types of transactions.
    Finally, the proposed regulations provide a special rule to address 
dispositions of CFC stock by another CFC that is not wholly owned by a 
single domestic corporation. See proposed Sec.  1.951A-6(e)(7). This 
rule, which is consistent with proposed Sec.  1.961-3(b) and Revenue 
Ruling 82-16, 1982-1 C.B. 106, is intended to ensure that the 
appropriate amount of subpart F income is taken into account by U.S. 
shareholders of the CFC as a result of the disposition.
    The Treasury Department and the IRS request comments on these 
rules, including whether additional adjustments to stock basis or 
earnings and profits should be made to account for a used tested loss 
or offset tested income (for example, whether adjustments should be 
provided that are consistent with those set forth in proposed Sec.  
1.965-2(d) and (f) (REG-104226-18, 83 FR 39514, August 9, 2018)). 
Comments are also requested on whether similar rules should apply to 
non-corporate U.S. shareholders, taking into account the fact that non-
corporate U.S. shareholders are not entitled to a dividends received 
deduction under section 245A. Additionally, comments

[[Page 51082]]

are requested as to whether the definition of ``disposition'' should be 
modified. For example, the Treasury Department and the IRS are 
considering broadening the term to include transactions that do not 
involve an actual transfer of stock but might result in taxable gain 
but for the presence of tax basis in CFC stock. Examples of such 
transactions include distributions subject to section 301(c)(2) or 
1059.

II. Section 951

A. Pro Rata Share Rules

    Section 1.951-1(e) was revised in 2005 and 2006 to address certain 
avoidance structures, such as structures that resulted in non-economic 
allocations of subpart F income to shareholders of CFCs that are not 
U.S. shareholders. The Treasury Department and the IRS have become 
aware of additional avoidance structures. For example, the existing 
regulations require an allocation of earnings and profits between 
classes of stock with discretionary distribution rights based on the 
fair market value of the stock. While this rule appropriately allocates 
subpart F income in some cases (for example, involving multiple classes 
of common stock), some taxpayers have attempted to improperly allocate 
subpart F income by applying these rules to certain structures 
involving shares with preferred liquidation and distribution rights. 
Similar avoidance structures involve cumulative preferred stock with 
dividends that compound less frequently than annually.
    This notice of proposed rulemaking proposes to amend Sec.  1.951-
1(e) to address these avoidance structures, which implicate section 
951A as well as section 951. The proposed regulations clarify that, for 
purposes of determining a U.S. shareholder's pro rata share of subpart 
F income, earnings and profits for the taxable year are first 
hypothetically distributed among the classes of stock and then 
hypothetically distributed to each share in the class on the 
hypothetical distribution date, which is the last day of the CFC's 
taxable year on which it is a CFC. In lieu of prescribing a 
determination based on fair market value, the proposed regulations 
provide that the amount of earnings and profits that would be 
distributed with respect to classes of stock is based on all relevant 
facts and circumstances. See proposed Sec.  1.951-1(e)(3). In addition, 
the proposed regulations disregard any transaction or arrangement that 
is part of a plan a principal purpose of which is to reduce a U.S. 
shareholder's pro rata share of the subpart F income of a CFC. See 
proposed Sec.  1.951-1(e)(6). This rule also applies for purposes of 
determining a U.S. shareholder's pro rata share of amounts for purposes 
of calculating the shareholder's GILTI inclusion amount. Id. As a 
result of adding this broader rule, the proposed regulations do not 
include the specific anti-avoidance rule involving section 304 
transactions in existing Sec.  1.951-1(e)(3)(v).
    The proposed regulations also modify Sec.  1.951-1(e) in specific 
ways to take into account section 951A. For example, the proposed 
regulations provide that a U.S. shareholder's pro rata share of a CFC's 
subpart F income is determined by reference to the shareholder's 
proportionate share of the total current earnings and profits that 
would be distributed in the hypothetical distribution. In addition to 
determining a U.S. shareholder's pro rata share of a CFC's subpart F 
income, Sec.  1.951-1(e) also applies for purposes of determining the 
shareholder's pro rata share of the CFC's tested income. See also 
proposed Sec.  1.951A-1(d)(2). However, because tested income is not 
limited to the earnings and profits of a CFC, and because a CFC's 
tested loss increases its earnings and profits for purposes of 
determining the subpart F income limitation in section 952(c)(1), the 
earnings and profits allocated in the hypothetical distribution may 
exceed the earnings and profits of the CFC computed under section 964. 
Accordingly, the hypothetical distribution in the proposed regulations 
is based on the greater of the section 964 earnings and profits or the 
sum of the subpart F income (increased by reason of any tested loss 
add-back under section 951A(c)(2)(B)(ii) and proposed Sec.  1.951A-
6(d)) and tested income of the CFC.

B. Partnership Blocker Structures

    Notice 2010-41, 2010-22 I.R.B. 715, stated that forthcoming 
regulations would treat a domestic partnership as a foreign partnership 
for purposes of identifying the U.S. shareholder of a CFC required to 
include in gross income its pro rata share of the CFC's subpart F 
income in the circumstances described in the notice. The Treasury 
Department and the IRS have determined that the same rules should also 
apply to identify the U.S. shareholder of a CFC for purposes of section 
951A. Accordingly, the proposed regulations treat certain controlled 
domestic partnerships as foreign partnerships for purposes of 
identifying a U.S. shareholder for purposes of sections 951 through 
964. See also proposed Sec.  1.965-1(e) (REG-104226-18, 83 FR 39514, 
August 9, 2018) (adopting a similar partnership blocker rule for 
purposes of the section 965 regulations).

C. Other Modifications

    The proposed regulations also update Sec.  1.951-1 consistent with 
the modification in the Act of the definition of a U.S. shareholder and 
the elimination in the Act of the 30-day requirement. See proposed 
Sec.  1.951-1(a) and (g)(1).

III. Section 1502

A. In General

    Section 1502 provides the Secretary authority to

prescribe such regulations as he may deem necessary in order that 
the tax liability of any affiliated group of corporations making a 
consolidated return and of each corporation in the group, both 
during and after the period of affiliation, may be returned, 
determined, computed, assessed, collected, and adjusted, in such 
manner as clearly to reflect the income-tax liability and the 
various factors necessary for the determination of such liability, 
and in order to prevent avoidance of such tax liability.

    A consolidated group member's inclusion of subpart F income under 
section 951(a)(1)(A) is determined at the member level. However, as 
discussed in section I.A of this Explanation of Provisions, a section 
951(a)(1)(A) inclusion with respect to a CFC is determined solely by 
reference to the subpart F income of the CFC, and therefore determining 
a member's section 951(a)(1)(A) inclusion solely by reference to a CFC 
the stock of which is owned (within the meaning of section 958(a)) by 
the member is not distortive of the consolidated group's income tax 
liability. As a result, the location of the CFC within the group 
generally has no effect on the consolidated group's income tax 
liability by reason of section 951(a)(1)(A). In contrast, section 951A 
requires an aggregate, U.S. shareholder-level calculation, under which 
a member's pro rata share of the relevant items of one CFC can increase 
or decrease a member's GILTI inclusion amount otherwise resulting from 
its ownership of another CFC. Accordingly, a determination of a 
member's GILTI inclusion amount solely based on its pro rata share of 
the items of a CFC the stock of which is owned (within the meaning of 
section 958(a)) by that member may not result in a clear reflection of 
the consolidated group's income tax liability. For example, a 
consolidated group could segregate one CFC with tested interest expense 
under one member and another CFC with QBAI under another member, 
thereby increasing the net DTIR of the second

[[Page 51083]]

member relative to the consolidated group's net DTIR if determined at a 
group level. Alternatively, a strict, separate-entity application of 
section 951A could inappropriately increase a consolidated group's 
income tax liability, because one member's excess pro rata share of 
tested losses or QBAI over tested income would be unavailable to reduce 
another member's GILTI inclusion amount.

B. Section 1.1502-51

    In response to comments, the Treasury Department and the IRS have 
determined that a member's GILTI inclusion amount should be determined 
by reference to the relevant items of each CFC owned by members of the 
same consolidated group. As discussed in section I.A of this 
Explanation of Provisions, a U.S. shareholder includes in gross income 
its GILTI inclusion amount for any taxable year. GILTI inclusion amount 
is defined under proposed Sec.  1.951A-1(c)(1) as, with respect to a 
U.S. shareholder for a taxable year of the shareholder, the excess (if 
any) of the shareholder's net CFC tested income over the shareholder's 
net DTIR for the taxable year. Under proposed Sec.  1.1502-51, this 
definition applies equally to a U.S. shareholder that is a member of a 
consolidated group. However, consistent with the authority in section 
1502, the proposed regulations provide special definitions of net CFC 
tested income and net DTIR in order to clearly reflect the income tax 
liability of the consolidated group. Specifically, the proposed 
regulations provide that, to determine a member's GILTI inclusion 
amount, the pro rata shares of tested loss, QBAI, tested interest 
expense, and tested interest income of each member are aggregated, and 
then a portion of each aggregate amount is allocated to each member of 
the group that is a U.S. shareholder of a tested income CFC based on 
the proportion of such member's aggregate pro rata share of tested 
income to the total tested income of the consolidated group. See 
proposed Sec.  1.1502-51(e).
    As discussed in section I.G.3 of this Explanation of Provisions, 
proposed Sec.  1.951A-6(e) provides that the adjusted basis of the 
stock of a CFC is adjusted immediately before its disposition. Proposed 
Sec.  1.1502-51(c) provides special rules for making these adjustments 
to the adjusted basis of the stock of a CFC owned by a member in a 
manner that reflects the special definitions applicable to members.

C. Section 1.1502-32

    Section 1.1502-32 provides rules for adjusting the basis of the 
stock of a subsidiary owned by another member to reflect, among other 
items, the subsidiary's items of income. Accordingly, no new rules are 
necessary to adjust the basis of the stock of a member because of a 
GILTI inclusion. However, as previously discussed, proposed Sec. Sec.  
1.951A-6(e) and 1.1502-51(c) provide rules for adjusting the basis of 
the stock of a CFC immediately before its disposition. As a result, 
proposed Sec.  1.1502-32(b)(3)(ii)(E) and (iii)(C) provide for 
adjustments to the basis of the stock of a member to reflect those 
rules. Specifically, the proposed rules treat a portion of a member's 
offset tested income amount as tax-exempt income and all of a member's 
used tested loss amount as a noncapital, nondeductible expense.
    As previously discussed, the Treasury Department and the IRS have 
determined that in the case of a corporate U.S. shareholder, gain 
recognized on the disposition of stock of a CFC attributable to offset 
tested income would, in most cases, be eliminated as a result of the 
application of section 964(e)(4) or section 1248(a) and (j), to the 
extent the gain or income is eligible for the dividends received 
deduction under section 245A. In order to not incentivize a sale of the 
stock of a CFC over a sale of stock of a member, proposed Sec.  1.1502-
32(b)(3)(ii)(F) provides that a member is also treated as receiving 
tax-exempt income immediately before another member recognizes income, 
gain, deduction, or loss with respect to a share of the first member's 
stock. The amount of this additional tax-exempt income is the net 
offset tested income amount allocable to the shares of any CFC owned by 
the first member to the extent that a distribution of such amount would 
have been characterized as a dividend eligible for a section 245A 
deduction and not subject to section 1059.
    The Treasury Department and the IRS request comments regarding the 
coordination of the rules of proposed Sec. Sec.  1.951A-6(e) and 
1.1502-51(c) with the investment adjustment regime of Sec.  1.1502-32. 
Comments are specifically requested on: (1) Whether the amount of the 
adjustments to the basis of member stock should be limited to the 
amount of the adjustments to the basis of the stock of a CFC under the 
rules of proposed Sec.  1.951A-6(e); (2) whether the adjustments to the 
basis of member stock should all be made on a current basis, made to 
the extent of the basis adjustments provided in proposed Sec.  1.951A-
6(e) on a current basis with any remaining adjustments being made at 
the time of a disposition of stock of a CFC or of a member, or made 
only at the time of a disposition of the stock of a CFC or of a member; 
and (3) whether rules should provide that a deduction under section 
245A should not be treated as tax-exempt income to the extent that the 
underlying dividend is attributable to offset tested income for which 
basis adjustments have already been made. Additionally, comments are 
specifically requested as to whether there are any circumstances in 
which there should be a deemed disposition of the stock of a CFC owned 
by a member, such that the rules of proposed Sec.  1.951A-6(e) would 
apply, including, but not limited to, a deconsolidation or taxable 
disposition of the stock of a member that owns (directly or indirectly) 
the stock of a CFC to either a person outside of the consolidated group 
or to another member, and a transfer of the stock of a member in an 
intercompany transaction that is a nonrecognition transaction. 
Similarly, comments are specifically requested as to whether there are 
other transactions that should be described in the definition of 
transferred shares in proposed Sec.  1.1502-32(b)(3)(ii)(F)(1), such as 
a deemed disposition pursuant to Sec.  1.1502-19(c)(1)(iii)(B). Lastly, 
comments are specifically requested as to whether any other adjustments 
are necessary to prevent the duplication of gain or loss resulting from 
a member's ownership of a CFC, including situations where a member 
owning a CFC joins another consolidated group.
    In response to comments received, no new rules are being proposed 
under Sec.  1.1502-33, which provides rules for adjusting the earnings 
and profits of a subsidiary and any member owning stock of the 
subsidiary. The Treasury Department and the IRS request comments on 
whether additional rules under Sec.  1.1502-33 or any other regulations 
issued under section 1502 are necessary.

IV. Sections 1.6038-2(a) and 1.6038-5

    Under section 6038(a)(1), U.S. persons that control foreign 
corporations must file certain information returns with respect to 
those corporations. Before the Act, a U.S. shareholder would not have 
had an income inclusion under section 951(a)(1) with respect to a 
foreign corporation unless the corporation had been a CFC for an 
uninterrupted period of at least 30 days during the taxable year. While 
section 6038 does not limit the reporting requirements to foreign 
corporations that a U.S. person controls for an uninterrupted period of 
at least

[[Page 51084]]

30 days, Sec.  1.6038-2(a) does provide for such a limit. To coordinate 
with the amendment to section 951(a)(1) that removed the 30-day 
requirement, this notice of proposed rulemaking proposes to revise 
Sec.  1.6038-2(a) to provide that certain information reporting is 
required for U.S. persons that control a foreign corporation at any 
time during an annual accounting period.
    Section 6038(a)(4) allows the Secretary to require any U.S. 
shareholder of a CFC to provide information required under section 
6038(a)(1), which includes information that is similar to the listed 
information in section 6038(a)(1)(A) through (a)(1)(E), as well as 
information that ``the Secretary determines to be appropriate to carry 
out the provisions of this title.'' In order to effectively administer 
and enforce section 951A, the Treasury Department and the IRS have 
determined that, in general, U.S. shareholders must file a new Schedule 
I-1, Information for Global Intangible Low-Taxed Income, to Form 5471, 
Information Return of U.S. Persons With Respect To Certain Foreign 
Corporations, as well as new Form 8992, U.S Shareholder Calculation of 
Global Intangible Low-Taxed Income (GILTI), to provide the information 
that a U.S. shareholder needs with respect to each of its CFCs to 
determine the U.S. shareholder's GILTI inclusion amount for a taxable 
year. Proposed Sec.  1.6038-5 provides the filing requirements for new 
Form 8992.

V. Applicability Dates

    Consistent with the applicability date of section 951A, proposed 
Sec. Sec.  1.951-1(e)(1)(ii)(B), 1.951A-1 through 1.951A-6, 1.1502-
32(b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C), and 1.1502-51 are 
proposed to apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of U.S. shareholders in 
which or with which such taxable years of foreign corporations end. See 
section 7805(b)(2). Proposed Sec.  1.951-1(e) (pro rata share of 
subpart F income) (other than Sec.  1.951-1(e)(1)(ii)(B)) is proposed 
to apply to taxable years of U.S. shareholders ending on or after 
October 3, 2018. See section 7805(b)(1)(B). Consistent with the 
applicability date of the modification to section 951 in the Act, 
proposed Sec.  1.951-1(a) (controlled foreign corporations) and Sec.  
1.951-1(g) (definition of U.S. shareholder) are proposed to apply to 
taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of U.S. shareholders with or within which 
such taxable years of foreign corporations end. See section 7805(b)(2). 
Proposed Sec.  1.951-1(h) (special rule for partnership blocker 
structure) is proposed to apply to taxable years of domestic 
partnerships ending on or after May 14, 2010. See Notice 2010-41 and 
section 7805(b)(1)(C). Although proposed Sec.  1.951-1(h) applies for 
purposes of both section 951 and section 951A, the only practical 
effect of applying this rule to taxable years of domestic partnerships 
ending on or after May 14, 2010, and before January 1, 2018, concerns 
the application of section 951. The proposed rule does not have 
relevance to the application of section 951A until the first taxable 
year of a CFC owned by a domestic partnership beginning after December 
31, 2017 (the effective date of section 951A). Proposed Sec.  1.6038-
2(a) (information returns required of U.S. persons with respect to 
annual accounting periods of certain foreign corporations) and proposed 
Sec.  1.6038-5 (information returns required of certain U.S. persons to 
report amounts determined with respect to certain foreign corporations 
for GILTI purposes) are proposed to apply to taxable years of foreign 
corporations beginning on or after October 3, 2018. See sections 
6038(a)(3) and 7805(b)(1)(B).

Special Analyses

Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. The 
Executive Order 13771 designation for any final rule resulting from 
these proposed regulations will be informed by comments received.
    The proposed regulations have been designated by the Office of 
Information and Regulatory Affairs (OIRA) as subject to review under 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations. OIRA has determined 
that the proposed rulemaking is significant. Accordingly, the proposed 
regulations have been reviewed by OIRA. For more detail on the economic 
analysis, please refer to the following analysis.

A. Overview

    The proposed regulations provide taxpayers with computational, 
definitional, and anti-avoidance guidance regarding the application of 
section 951A. They provide guidance for U.S. shareholders to determine 
the amount of GILTI to include in gross income and how to compute the 
components of GILTI. Among other benefits, this clarity helps ensure 
that taxpayers all calculate GILTI in a similar manner, which promotes 
efficiency and equity contingent on the provisions of the overall Code.
    The proposed regulations under sections 951A, 1502, and 6038 
(proposed Sec. Sec.  1.951A-1 through 1.951A-7, 1.1502-12, 1.1502-13, 
1.1502-32, and 1.1502-51, and 1.6038-5) provide details for taxpayers 
(including members of a consolidated group) regarding the computation 
of certain components of GILTI (for example, tested income and tested 
loss, QBAI, net deemed tangible income return, and specified interest 
expense), describe the consequences of a GILTI inclusion for purposes 
of other sections of the Code, and detail the reporting requirements 
associated with GILTI. These proposed regulations further establish 
anti-abuse rules to prevent taxpayers from taking measures to 
inappropriately reduce their GILTI through certain transfers of 
property. They also disallow certain losses that reduce GILTI from 
being used a second time.
    The proposed regulations under sections 951 and 6038 (proposed 
Sec. Sec.  1.951-1 and 1.6038-2) prevent taxpayers from avoiding an 
inclusion of subpart F income under section 951(a) or the inclusion of 
GILTI under section 951A through certain artificial arrangements 
involving the ownership of CFC stock, coordinate the calculation of a 
U.S. shareholder's subpart F with its GILTI, and conform the 
regulations to other amendments in the Act, including a modification to 
the definition of U.S. shareholder for purposes of sections 951(a) and 
951A and the elimination of the 30-day CFC status requirement. This 
economic analysis describes the economic benefits and costs of the 
proposed regulations.

B. Economic Analysis of the Proposed Regulations

1. Background
    Because section 951A is a new Code section, many of the details 
behind the relevant terms and necessary calculations required for the

[[Page 51085]]

computation of a U.S. shareholder's GILTI inclusion amount would 
benefit from greater specificity. Thus, as is expected after the 
passage of major tax reform legislation, the regulations answer open 
questions and provide detail and specificity for the definitions and 
concepts described in section 951A, so that U.S. shareholders can 
readily and accurately determine their GILTI inclusion amounts. For 
example, the regulations provide definitions of crucial terms, such as 
tested income, tested loss, specified tangible property, and specified 
interest expense.
    As discussed in section I.A. of the Explanation of Provisions, 
although a GILTI inclusion is treated similarly to an inclusion of 
subpart F income for some purposes, it is determined in a manner 
fundamentally different from that of a subpart F inclusion. Therefore, 
in some cases it is appropriate for the regulations to rely on subpart 
F principles, but in other cases different rules are necessary. For 
example, the regulations apply subpart F rules for purposes of (1) 
determining a U.S. shareholder's pro rata share of certain items of a 
CFC, (2) translating foreign currency to U.S. dollars, (3) determining 
gross income and allowable deductions, and (4) allocating and 
apportioning allowable deductions to gross tested income. However, it 
would be inappropriate to rely on subpart F rules for the GILTI 
computations that are performed at the U.S. shareholder level because 
subpart F income is determined solely at the level of a CFC. For 
example, the regulations provide detail on how a U.S. shareholder 
determines its specified interest expense at the shareholder level 
based on the interest expense and interest income of each CFC owned by 
the shareholder.
    Additionally, the proposed regulations provide rules regarding the 
interaction of certain aspects of section 951A with other provisions. 
For example, they clarify that, regarding the interaction of the 
earnings and profits limitation (including recapture) for subpart F 
income and the determination of gross tested income, tested income and 
tested loss are computed without regard to the earnings and profits 
limitation in section 952(c). In addition, the proposed regulations 
provide that GILTI inclusion amounts are considered net investment 
income under section 1411. Finally, the proposed regulations provide 
that certain deductions between related parties are not deferred under 
sections 163(e)(3)(B)(i) and 267(a)(3)(B) to the extent the income is 
taken into account in determining a U.S. shareholder's GILTI inclusion 
amount.
    Section 951A provides the Secretary of the Treasury the authority 
to issue regulations and other guidance to prevent the avoidance of the 
purposes of section 951A(d). As such, regulations under Sec. Sec.  
1.951A-2 and 1.951A-3 provide that certain transactions that reduce a 
U.S. shareholder's GILTI inclusion amount, for example, by increasing a 
CFC's qualified business asset investment (QBAI) or decreasing a CFC's 
tested income, will be disregarded for purposes of the GILTI 
computation.
    Further, the Treasury Department and the IRS have determined that, 
in the absence of any adjustment, inappropriate results may arise in 
cases that a U.S. shareholder's pro rata share of the tested loss of 
one CFC offsets the shareholder's pro rata share of the tested income 
of another CFC in determining the shareholder's GILTI inclusion amount. 
In particular, a U.S. shareholder disposing of the stock of a tested 
loss CFC could recognize second, duplicative benefits from a single 
economic loss. Therefore, the proposed regulations provide that, when 
determining gain or loss on the disposition of the stock of a tested 
loss CFC, the U.S. shareholder's basis in the stock of the tested loss 
CFC is reduced by the cumulative amount of tested losses that were used 
to offset tested income in determining the shareholder's net CFC tested 
income.
    The statute is silent on the computation of GILTI for members of a 
consolidated group and for domestic partnerships and their partners. 
Absent these regulations, there would be uncertainty among taxpayers as 
to whether to calculate a GILTI inclusion amount at the level of a 
member or its consolidated group, or at the level of a domestic 
partnership or its partners. Without guidance, different taxpayers 
would likely take different positions on these matters. The proposed 
regulations provide clarity by (1) determining the GILTI inclusion 
amount of each member of a consolidated group by taking into account 
the relevant items of each CFC owned by members of such group, and (2) 
providing guidance on the computation of the GILTI inclusion amount of 
domestic partnerships and their partners.
    Finally, these proposed regulations provide reporting requirements 
necessary to properly administer and enforce section 951A. In 
particular, the Treasury Department and the IRS have determined that 
U.S. shareholders must file a new Schedule I-1, Information for Global 
Intangible Low-Taxed Income, associated with Form 5471, Information 
Return of U.S. Persons With Respect To Certain Foreign Corporations, as 
well as new Form 8992, U.S Shareholder Calculation of Global Intangible 
Low-Taxed Income (GILTI), in order to provide the information that a 
U.S. shareholder is using with respect to each of its CFCs to determine 
the U.S. shareholder's GILTI inclusion amount for a taxable year. The 
proposed regulations also provide that a U.S. shareholder partnership 
must include on its Schedule K-1, associated with Form 1065, U.S. 
Return of Partnership Income, certain information necessary for its 
partners to determine their distributive share of the partnership's 
GILTI inclusion amount or, in the case of U.S. shareholder partners, to 
determine their own GILTI inclusion amounts. Finally, to coordinate 
with the amendment to section 951(a)(1) that removed the 30-day CFC 
status requirement for subpart F inclusions, the proposed regulations 
provide that certain information reporting is required for U.S. persons 
that control a foreign corporation at any time during an annual 
accounting period.
2. Anticipated Benefits and Costs of the Proposed Regulations
a. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the proposed regulations against a baseline--the way the world 
would look in the absence of the proposed regulations.
b. Anticipated Benefits
    The Treasury Department and the IRS expect that the certainty and 
clarity provided by these proposed regulations, relative to the 
baseline, will enhance U.S. economic performance under the statute. 
Because a tax has not previously been imposed on GILTI and the statute 
is silent on certain aspects of definitions and calculations, taxpayers 
can particularly benefit from enhanced specificity regarding the 
relevant terms and necessary calculations they are required to apply 
under the statute. In the absence of this enhanced specificity, 
similarly situated taxpayers might interpret the statutory rules of 
section 951A differently, potentially resulting in inequitable 
outcomes. For example, different taxpayers might pursue income-
generating activities based on different assumptions about whether that 
income will be counted as GILTI, and some taxpayers may forego specific 
investments that other taxpayers deem worthwhile based on different 
interpretations of the tax consequences alone. The guidance provided in 
these regulations helps to ensure that

[[Page 51086]]

taxpayers face more uniform incentives when making economic decisions, 
a tenet of economic efficiency. Consistent reporting across taxpayers 
also increases the IRS's ability to consistently enforce the tax rules, 
thus increasing equity and decreasing opportunities for tax evasion.
    For example, the proposed regulations provide a definition of 
specified interest expense that adopts a netting approach. Alternatives 
would be to adopt a tracing approach or to remain silent. The Treasury 
Department and the IRS rejected a tracing approach because it would be 
more burdensome for taxpayers due to the complexity of matching, at the 
U.S. shareholder-level, of the shareholder's pro rata share of each 
item of interest expense with its pro rata share of each item of 
interest income. The Treasury Department and the IRS also rejected the 
option of remaining silent because if taxpayers relied on statutory 
language alone, taxpayers would adopt different approaches because the 
statute does not define what ``attributable'' means, leaving it open to 
differing interpretations.
    As discussed above, there are similarities between GILTI and 
subpart F. Where appropriate, these proposed regulations rely on rules 
already developed under subpart F. Since taxpayers to whom GILTI 
applies are already subject to the subpart F regime, it is less costly 
to them to apply rules they are already familiar with, and they will 
benefit in reduced time and cost spent learning new rules. For example, 
the proposed regulations apply existing subpart F rules for determining 
allowable deductions for GILTI purposes. By relying on existing 
infrastructure, the proposed regulations allow taxpayers to use the 
same analysis that they already conduct for subpart F purposes. For 
additional discussion of the rules for determining allowable 
deductions, see section I.C.1 of the Explanation of Provisions section.
    The Treasury Department and the IRS next considered the benefits 
and costs of providing these specific proposed terms, calculations, and 
other details regarding GILTI. In developing these proposed 
regulations, the Treasury Department and the IRS have generally aimed 
to apply the principle that an economically efficient tax system would 
treat income derived from similar economic decisions similarly, to the 
extent consistent with the statute and considerations of 
administrability of the tax system. Similar economic decisions, in the 
context of GILTI, are those that involve property of a similar degree 
of immobility and that demonstrate active business operations and 
presence in any particular jurisdiction. See, for example, Senate 
Explanation, at 366.
    An economically efficient tax system would also generally keep the 
choice among businesses' ownership and organizational structures 
neutral contingent on the provisions of the corporate income tax and 
other tax provisions that may affect organizational structure. The 
Treasury Department and the IRS expect that the proposed regulations, 
in providing that GILTI be generally calculated on a consolidated group 
basis and at the partner level in the case of partners that are U.S. 
shareholders of one or more partnership CFCs, will ensure that 
shareholders face uniform tax treatment on their GILTI-relevant 
investments regardless of ownership or organizational structure, thus 
encouraging market-driven as opposed to tax-driven structuring 
decisions. If, as an alternative policy approach, GILTI were determined 
solely at the level of a member (in the case of consolidated groups) or 
solely at the level of a partnership (in the case of domestic 
partnerships and their partners), many taxpayers would be compelled to 
reorganize their ownership structures just to obtain the full 
aggregation of CFC attributes as envisioned by Congress. Yet other 
taxpayers would be incentivized to reorganize in an attempt to avoid 
full aggregation so as to reduce their inclusion below an amount that 
accurately reflects their GILTI. For an illustration, see section I.F 
of the Explanation of Provisions. Therefore, the Treasury Department 
and the IRS propose that GILTI be calculated on a consolidated group 
basis and at the partner level in the case of partners that are U.S. 
shareholders of one or more partnership CFCs. The preamble discusses 
further why those approaches were taken, as well as describing 
alternative approaches considered. The Treasury Department and the IRS 
request comments on this proposed approach.
c. Anticipated Impacts on Administrative and Compliance Costs
    Because the statute requires payment of tax regardless of the 
issuance of regulations or instructions, the new forms, revisions to 
existing forms, and proposed regulations can lower the burden on 
taxpayers of determining their tax liability. The Treasury Department 
and the IRS expect that the proposed regulations will reduce the costs 
for taxpayers to comply with the Act, relative to the baseline of no 
promulgated regulations. The proposed regulations require that each 
U.S. shareholder partnership provide to each partner its distributive 
share of the partnership's GILTI inclusion amount and, if the partner 
is a U.S. shareholder of one or more partnership CFCs, the partner's 
proportionate share of the partnership's pro rata share of each 
relevant item of the partnership CFC. Under the baseline, the burden 
would potentially have fallen on each partner, who would be required to 
determine its own distributive share of the partnership's GILTI 
inclusion amount or, if a U.S. shareholder of a partnership CFC, 
determine its own GILTI inclusion amount by reference to the 
partnership's pro rata share of items of the partnership CFC. While 
this latter burden is difficult to assess, because it is unclear how 
partners would calculate these amounts in the absence of a 
determination by the partnership and it is similarly unclear what 
efforts might be made by the partnership to help the partners fulfill 
this obligation, the Treasury Department and the IRS expect that it 
would be significantly greater than the burden incurred under the 
proposed regulations.
    Proposed Sec.  1.6038-2(a) increases record-keeping requirements 
for taxpayers because it requires all taxpayers to file Form 5471 if 
they held stock in a CFC during the taxable year regardless of the 
duration of the holding period, rather than only if they held the stock 
for a 30-day period under the current regulation. The changes in the 
proposed regulation derive directly from statutory changes to the 
holding period requirement in the Act.

C. Paperwork Reduction Act

    The collections of information in these proposed regulations with 
respect to section 951A are in proposed Sec. Sec.  1.951A-5(f) and 
1.6038-5. A separate collection of information applicable to 
controlling U.S. shareholders of a foreign corporation is in proposed 
Sec.  1.6038-2(a).
    The collection of information in proposed Sec.  1.6038-5 is 
mandatory for each U.S. shareholder (including a U.S. shareholder 
partner) that owns (within the meaning of section 958(a)) stock of a 
CFC. The collection of information in proposed Sec.  1.6038-5 is 
satisfied by submitting a new reporting form, Form 8992, U.S. 
Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), 
with an income tax return. In addition, for those U.S. shareholders 
that are required to file Form 5471, Information Return of U.S. Persons 
with Respect to Certain Foreign Corporations, a new Schedule I-1, 
Information for Global Intangible Low-Taxed Income, has been added. For 
purposes of the Paperwork Reduction Act of 1995 (44

[[Page 51087]]

U.S.C. 3507(d)) (``PRA''), the reporting burden associated with 
proposed Sec.  1.6038-5 will be reflected in the IRS Form 14029, 
Paperwork Reduction Act Submission, associated with Form 5471 (OMB 
control number 1545-0704) and the new Form 8992 (OMB control number 
1545-0123).
    The collection of information in proposed Sec.  1.951A-5(f) 
requires each U.S. shareholder partnership to provide to its partners 
their distributive share of the partnership's GILTI inclusion amount, 
as well as provide to each U.S. shareholder partner their proportionate 
share of the partnership's pro rata share (if any) of each CFC tested 
item of each partnership CFC of the partnership. The Treasury 
Department and the IRS anticipate revising Schedule K-1 (Form 1065), 
Partner's Share of Income, Deductions, Credits, etc., or its 
instructions to require the provision of this information. For purposes 
of the PRA, the reporting burden associated with proposed Sec.  1.951A-
5(f) will be reflected in the IRS Form 14029, Paperwork Reduction Act 
Submission, associated with Schedule K-1 (Form 1065, OMB control number 
1545-0123).
    The collection of information currently required from a U.S. person 
that controls a foreign corporation is revised by proposed Sec.  
1.6038-2(a). Section 1.6038-2(a) presently requires only those U.S. 
persons with uninterrupted control of a foreign corporation for 30 days 
or more during the shareholder's annual accounting period to file Form 
5471 for that period. Consistent with statutory changes in the Act, the 
revised collection of information in proposed Sec.  1.6038-2(a) 
eliminates the 30-day holding period as a precondition to reporting and 
requires every U.S. person that controls a foreign corporation at any 
time during an annual accounting period to file Form 5471 for that 
period. For purposes of the PRA, the reporting burden associated with 
proposed Sec.  1.6038-2(a) will be reflected in the IRS Form 14029, 
Paperwork Reduction Act Submission, associated with Form 5471.
    When available, drafts of IRS forms are posted for comment at 
https://apps.irs.gov/app/picklist/list/draftTaxForms.html.

                                        Related New or Revised Tax Forms
----------------------------------------------------------------------------------------------------------------
                                                                          Revision of     Number of respondents
                                                             New         existing form         (estimated)
----------------------------------------------------------------------------------------------------------------
Schedule I-1 (Form 5471).............................         [check]   ...............            25,000-35,000
Form 8992............................................         [check]   ...............            25,000-35,000
Form 1065/1120S, Schedule K..........................  ...............         [check]              8,000-12,000
Form 5471 (30 days)..................................  ...............         [check]                    <1,000
----------------------------------------------------------------------------------------------------------------

D. Regulatory Flexibility Act

    It is hereby certified that this notice of proposed rulemaking will 
not have a significant economic impact on a substantial number of small 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6).
    The domestic small business entities that are subject to section 
951A and this notice of proposed rulemaking are those domestic small 
business entities that are U.S. shareholders of a CFC.\2\ Generally, a 
U.S. shareholder is any U.S. person that owns 10 percent or more of a 
foreign corporation's stock, measured either by value or voting power. 
A CFC is a foreign corporation in which more than 50 percent of its 
stock is owned by U.S. shareholders, again measured either by value or 
voting power. Data about the number of domestic small business entities 
potentially affected by these regulations are not readily available.
---------------------------------------------------------------------------

    \2\ The Treasury Department and the IRS estimate that there are 
25,000-35,000 respondents of all sizes that are likely to file 
Schedule I-1, Form 5471. Only a small proportion of these are likely 
to be small businesses. The Treasury Department and the IRS request 
comments on the number of small businesses that are likely to file 
Schedule I-1.
---------------------------------------------------------------------------

    The domestic small business entities that are subject to the 
requirements of proposed Sec.  1.951A-5(f) or 1.6038-5 of this notice 
of proposed rulemaking are U.S. shareholders of one or more CFCs. The 
Treasury Department and the IRS do not have data to assess the number 
of small entities potentially affected by Sec.  1.951A-5(f) or 1.6038-
5. However, businesses that are U.S. shareholders of CFCs are generally 
not small businesses because the ownership of sufficient stock in a CFC 
in order to be a U.S. shareholder generally entails significant 
resources and investment. Therefore, the Treasury Department and the 
IRS do not believe that a substantial number of domestic small business 
entities will be subject to proposed Sec.  1.951A-5(f) or 1.6038-5. 
Consequently, the Treasury Department and the IRS do not believe that 
proposed Sec.  1.951A-5(f) or 1.6038-5 will have a significant economic 
impact on a substantial number of domestic small business entities. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act is not required with respect to the collection of 
information requirements of proposed Sec.  1.951A-5(f) or 1.6038-5.
    Existing Sec.  1.6038-2(a) requires only those U.S. persons with 
uninterrupted control of a foreign corporation for 30 days or more 
during the shareholder's annual accounting period to file Form 5471 for 
that period. Proposed Sec.  1.6038-2(a) eliminates the 30-day holding 
period as a precondition to reporting and requires every U.S. person 
that controls a foreign corporation at any time during an annual 
accounting period to file Form 5471 for that period. As a result, those 
U.S. shareholders that control a foreign corporation for less than 30 
days will now be required to file Form 5471 pursuant to proposed Sec.  
1.6038-2(a). The domestic small business entities subject to the 
requirements of proposed Sec.  1.6038-2(a) are those domestic small 
business entities that control a foreign corporation at any time during 
a taxable year. For these purposes, a domestic small business entity 
controls a foreign corporation by owning more than 50 percent of that 
foreign corporation's stock, measured either by voting power or value. 
The Treasury Department and the IRS do not believe that a substantial 
number of domestic small business entities that are controlling 
shareholders of a foreign corporation will become Form 5471 filers due 
to the information collection in proposed Sec.  1.6038-2(a) for the 
following reasons. First, significant resources and investment are 
required for a U.S. person to own and operate a business in a foreign 
country as a corporation. Second, the Treasury Department and the IRS 
believe that satisfying the stock ownership requirement for control for 
purposes of proposed Sec.  1.6038-2(a) requires a potential outlay of 
significant resources and investment, including active involvement in 
managing the foreign corporation due to controlling ownership of the 
corporation, such that

[[Page 51088]]

few domestic small business entities are likely to control foreign 
corporations for purposes of proposed Sec.  1.6038-2(a). For these 
reasons, the Treasury Department and the IRS do not believe it likely 
that a domestic small business entity would have controlling ownership 
of a foreign corporation for less than a 30-day period in a taxable 
year. As a result, the Treasury Department and the IRS do not believe 
that a substantial number of domestic small business entities will be 
affected by the proposed Sec.  1.6038-2(a) eliminating the 30-day 
holding period as a precondition to filing Form 5471. Consequently, the 
Treasury Department and the IRS do not believe that proposed Sec.  
1.6038-2(a) will have a significant economic impact on a substantial 
number of domestic small business entities. Therefore, a Regulatory 
Flexibility Analysis under the Regulatory Flexibility Act is not 
required with respect to the requirements of proposed Sec.  1.6038-
2(a).
    Notwithstanding this certification, the Treasury Department and the 
IRS invite comments from the public about the impact of this proposed 
rule on small entities.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small businesses. The IRS 
invites the public to comment on this certification.

E. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2018, that threshold is approximately $150 million. This 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

F. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Comments and Requests for Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations, and specifically on the issues identified in 
sections I.B.3, I.C.1, I.D.4, I.F, I.G.1, I.G.3, and III.C of the 
Explanations of Provisions. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, then notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of the proposed regulations are Melinda E. 
Harvey and Michael Kaercher of the Office of Associate Chief Counsel 
(International) and Austin Diamond-Jones and Kevin M. Jacobs of the 
Office of Associate Chief Counsel (Corporate). However, other personnel 
from the IRS and the Treasury Department participated in the 
development of the proposed regulations.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

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

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.951-1 also issued under 26 U.S.C. 7701(a). * * *
    Sections 1.951A-2 and 1.951A-3 also issued under 26 U.S.C. 
951A(d). * * *
    Section 1.951A-5 also issued under 26 U.S.C. 6031.
    Section 1.951A-6 also issued under 26 U.S.C. 951A(f)(1)(B). * * 
*
    Section 1.1502-51 also issued under 26 U.S.C. 1502. * * *
    Section 1.6038-2 also issued under 26 U.S.C. 6038. * * *
    Section 1.6038-5 also issued under 26 U.S.C. 6038. * * *

0
Par. 2. Section 1.951-1 is amended by:
0
1. Revising the introductory language in paragraph (a).
0
2. Revising paragraphs (e) and (g)(1).
0
3. Adding paragraphs (h) and (i).
    The revisions and additions read as follows:


Sec.  1.951-1  Amounts included in gross income of United States 
shareholders.

    (a) In general. If a foreign corporation is a controlled foreign 
corporation (within the meaning of section 957) at any time during any 
taxable year of such corporation, every person--
* * * * *
    (e) Pro rata share of subpart F income defined--(1) In general--(i) 
Hypothetical distribution. For purposes of paragraph (b) of this 
section, a United States shareholder's pro rata share of a controlled 
foreign corporation's subpart F income for a taxable year is the amount 
that bears the same ratio to the corporation's subpart F income for the 
taxable year as the amount of the corporation's current earnings and 
profits that would be distributed with respect to the stock of the 
corporation which the United States shareholder owns (within the 
meaning of section 958(a)) for the taxable year bears to the total 
amount of the corporation's current earnings and profits that would be 
distributed with respect to the stock owned by all the shareholders of 
the corporation if all the current earnings and profits of the 
corporation for the taxable year (not reduced by actual distributions 
during the year) were distributed (hypothetical distribution) on the 
last day of the corporation's taxable year on which such corporation is 
a controlled foreign corporation (hypothetical distribution date).
    (ii) Determination of current earnings and profits. For purposes of 
this paragraph (e), the amount of current earnings and profits of a 
controlled foreign corporation for a taxable year is treated as the 
greater of the following two amounts:

[[Page 51089]]

    (A) The earnings and profits of the corporation for the taxable 
year determined under section 964; or
    (B) The sum of the subpart F income (as determined under section 
952 and increased as provided under section 951A(c)(2)(B)(ii) and Sec.  
1.951A-6(d)) of the corporation for the taxable year and the tested 
income (as defined in section 951A(c)(2)(A) and Sec.  1.951A-2(b)(1)) 
of the corporation for the taxable year.
    (2) One class of stock. If a controlled foreign corporation for a 
taxable year has only one class of stock outstanding, the amount of the 
corporation's current earnings and profits distributed in the 
hypothetical distribution with respect to each share in the class of 
stock is determined as if the hypothetical distribution were made pro 
rata with respect to each share in the class of stock.
    (3) More than one class of stock. If a controlled foreign 
corporation for a taxable year has more than one class of stock 
outstanding, the amount of the corporation's current earnings and 
profits distributed in the hypothetical distribution with respect to 
each class of stock is determined under this paragraph (e)(3) based on 
the distribution rights of each class of stock on the hypothetical 
distribution date, and then further distributed pro rata with respect 
to each share in the class of stock. Subject to paragraphs (e)(4) 
through (6) of this section, the distribution rights of a class of 
stock are determined taking into account all facts and circumstances 
related to the economic rights and interest in the current earnings and 
profits of the corporation of each class, including the terms of the 
class of stock, any agreement among the shareholders and, where 
appropriate, the relative fair market value of shares of stock.
    (4) Special rules--(i) Redemptions, liquidations, and returns of 
capital. Notwithstanding the terms of any class of stock of the 
controlled foreign corporation or any agreement or arrangement with 
respect thereto, no amount of current earnings and profits is 
distributed in the hypothetical distribution with respect to a 
particular class of stock to the extent that a distribution of such 
amount would constitute a distribution in redemption of stock (even if 
such redemption would be treated as a distribution of property to which 
section 301 applies pursuant to section 302(d)), a distribution in 
liquidation, or a return of capital.
    (ii) Certain cumulative preferred stock. If a controlled foreign 
corporation has outstanding a class of redeemable preferred stock with 
cumulative dividend rights and dividend arrearages that do not compound 
at least annually at a rate that equals or exceeds the applicable 
Federal rate (as defined in section 1274(d)(1)) (AFR), the amount of 
the corporation's current earnings and profits distributed in the 
hypothetical distribution with respect to the class of stock may not 
exceed the amount of dividends actually paid during the taxable year 
with respect to the class of stock plus the present value of the unpaid 
current dividends with respect to the class determined using the AFR 
that applies on the date the stock is issued for the term from such 
issue date to the mandatory redemption date and assuming the dividends 
will be paid at the mandatory redemption date. For purposes of this 
paragraph (e)(4)(ii), if the class of preferred stock does not have a 
mandatory redemption date, the mandatory redemption date is the date 
that the class of preferred stock is expected to be redeemed based on 
all facts and circumstances.
    (iii) Dividend arrearages. If there is an arrearage in dividends 
for prior taxable years with respect to a class of preferred stock of a 
controlled foreign corporation, an amount of the corporation's current 
earnings and profits is distributed in the hypothetical distribution to 
the class of preferred stock by reason of the arrearage only to the 
extent the arrearage exceeds the accumulated earnings and profits of 
the controlled foreign corporation remaining from prior taxable years 
beginning after December 31, 1962, as of the beginning of the taxable 
year, or the date on which such stock was issued, whichever is later. 
If there is an arrearage in dividends for prior taxable years with 
respect to more than one class of preferred stock, the previous 
sentence is applied to each class in order of priority, except that the 
accumulated earnings and profits remaining after the applicable date 
are reduced by the earnings and profits necessary to satisfy arrearages 
with respect to classes of stock with a higher priority. For purposes 
of this paragraph (e)(4)(iii), the amount of any arrearage is 
determined by taking into account the time value of money principles in 
paragraph (e)(4)(ii) of this section.
    (5) Restrictions or other limitations on distributions--(i) In 
general. A restriction or other limitation on distributions of an 
amount of earnings and profits by a controlled foreign corporation is 
not taken into account in determining the amount of the corporation's 
current earnings and profits distributed in a hypothetical distribution 
to a class of stock of the controlled foreign corporation.
    (ii) Definition. For purposes of paragraph (e)(5)(i) of this 
section, a restriction or other limitation on distributions includes 
any limitation that has the effect of limiting the distribution of an 
amount of earnings and profits by a controlled foreign corporation with 
respect to a class of stock of the corporation, other than currency or 
other restrictions or limitations imposed under the laws of any foreign 
country as provided in section 964(b).
    (iii) Exception for certain preferred distributions. For purposes 
of paragraph (e)(5)(i) of this section, the right to receive 
periodically a fixed amount (whether determined by a percentage of par 
value, a reference to a floating coupon rate, a stated return expressed 
in terms of a certain amount of U.S. dollars or foreign currency, or 
otherwise) with respect to a class of stock the distribution of which 
is a condition precedent to a further distribution of earnings and 
profits that year with respect to any class of stock (not including a 
distribution in partial or complete liquidation) is not a restriction 
or other limitation on the distribution of earnings and profits by a 
controlled foreign corporation.
    (iv) Illustrative list of restrictions and limitations. Except as 
provided in paragraph (e)(5)(iii) of this section, restrictions or 
other limitations on distributions include, but are not limited to--
    (A) An arrangement that restricts the ability of a controlled 
foreign corporation to pay dividends on a class of stock of the 
corporation until a condition or conditions are satisfied (for example, 
until another class of stock is redeemed);
    (B) A loan agreement entered into by a controlled foreign 
corporation that restricts or otherwise affects the ability to make 
distributions on its stock until certain requirements are satisfied; or
    (C) An arrangement that conditions the ability of a controlled 
foreign corporation to pay dividends to its shareholders on the 
financial condition of the corporation.
    (6) Transactions and arrangements with a principal purpose of 
reducing pro rata shares. For purposes of this paragraph (e), any 
transaction or arrangement that is part of a plan a principal purpose 
of which is the avoidance of Federal income taxation, including, but 
not limited to, a transaction or arrangement to reduce a United States 
shareholder's pro rata share of the subpart F income of a controlled 
foreign corporation, which transaction or arrangement would avoid 
Federal income taxation without regard

[[Page 51090]]

to this paragraph (e)(6), is disregarded in determining such United 
States shareholder's pro rata share of the subpart F income of the 
corporation. This paragraph (e)(6) also applies for purposes of the pro 
rata share rules described in Sec.  1.951A-1(d) that reference this 
paragraph (e), including the rules in Sec.  1.951A-1(d)(3) that 
determine the pro rata share of qualified business asset investment 
based on the pro rata share of tested income.
    (7) Examples. The application of this section is illustrated by the 
examples in this paragraph (e)(7).
    (i) Common facts for examples in paragraph (e)(7). Except as 
otherwise stated, the following facts are assumed for purposes of the 
examples.
    (A) FC1 is a controlled foreign corporation.
    (B) USP1, USP2, and USP3 are domestic corporations and United 
States shareholders of FC1.
    (C) Individual A is a foreign individual, and FC2 is a foreign 
corporation.
    (D) All persons use the calendar year as their taxable year.
    (E) Any ownership of FC1 by any shareholder is for all of Year 1.
    (F) The common shareholders of FC1 are entitled to dividends when 
declared by FC1's board of directors.
    (G) There are no accrued but unpaid dividends with respect to 
preferred shares, and common shares have positive liquidation value.
    (H) FC1 makes no distributions during Year 1.
    (I) There are no other facts and circumstances related to the 
economic rights and interest of any class of stock in the current 
earnings and profits of a foreign corporation, and no transaction or 
arrangement was entered into as part of a plan a principal purpose of 
which is the avoidance of Federal income taxation.
    (J) FC1 does not have tested income within the meaning of section 
951A(c)(2)(A) and Sec.  1.951A-2(b)(1) or tested loss within the 
meaning of section 951A(c)(2)(B) and Sec.  1.951A-2(b)(2).

    (ii) Example 1: Single class of stock-- (A) Facts. FC1 has 
outstanding 100 shares of one class of stock. USP1 owns 60 shares of 
FC1. USP2 owns 40 shares of FC1. For Year 1, FC1 has $1,000x of 
earnings and profits and $100x of subpart F income within the 
meaning of section 952.
    (B) Facts. Analysis. FC1 has one class of stock. Therefore, 
under paragraph (e)(2) of this section, FC1's current earnings and 
profits of $1,000x are distributed in the hypothetical distribution 
pro rata to each share of stock. Accordingly, under paragraph (e)(1) 
of this section, for Year 1, USP1's pro rata share of FC1's subpart 
F income is $60x ($100x x $600x/$1,000x) and USP2's pro rata share 
of FC1's subpart F income is $40x ($100x x $400x/$1,000x).
    (iii) Example 2: Common and preferred stock-- (A) Facts. FC1 has 
outstanding 70 shares of common stock and 30 shares of 4% 
nonparticipating, voting preferred stock with a par value of $10x 
per share. USP1 owns all of the common shares. Individual A owns all 
of the preferred shares. For Year 1, FC1 has $100x of earnings and 
profits and $50x of subpart F income within the meaning of section 
952. In Year 1, FC1 distributes as a dividend $12x to Individual A 
with respect to Individual A's preferred shares.
    (B) Analysis. The distribution rights of the preferred shares 
are not a restriction or other limitation within the meaning of 
paragraph (e)(5) of this section. Under paragraph (e)(3) of this 
section, the amount of FC1's current earnings and profits 
distributed in the hypothetical distribution with respect to 
Individual A's preferred shares is $12x and with respect to USP1's 
common shares is $88x. Accordingly, under paragraph (e)(1) of this 
section, USP1's pro rata share of FC1's subpart F income is $44x 
($50x x $88x/$100x) for Year 1.
    (iv) Example 3: Restriction based on cumulative income-- (A) 
Facts. FC1 has outstanding 10 shares of common stock and 400 shares 
of 2% nonparticipating, voting preferred stock with a par value of 
$1x per share. USP1 owns all of the common shares. FC2 owns all of 
the preferred shares. USP1 and FC2 cause the governing documents of 
FC1 to provide that no dividends may be paid to the common 
shareholders until FC1 cumulatively earns $100,000x of income. For 
Year 1, FC1 has $50x of earnings and profits and $50x of subpart F 
income within the meaning of section 952. In Year 1, FC1 distributes 
as a dividend $8x to FC2 with respect to FC2's preferred shares.
    (B) Analysis. The agreement restricting FC1's ability to pay 
dividends to common shareholders until FC1 cumulatively earns 
$100,000x of income is a restriction or other limitation within the 
meaning of paragraph (e)(5) of this section. Therefore, the 
restriction is disregarded for purposes of determining the amount of 
FC1's current earnings and profits distributed in the hypothetical 
distribution to a class of stock. The distribution rights of the 
preferred shares are not a restriction or other limitation within 
the meaning of paragraph (e)(5) of this section. Under paragraph 
(e)(3) of this section, the amount of FC1's current earnings and 
profits distributed in the hypothetical distribution with respect to 
FC2's preferred shares is $8x and with respect to USP1's common 
shares is $42x. Accordingly, under paragraph (e)(1) of this section, 
USP1's pro rata share of FC1's subpart F income is $42x for Year 1.
    (v) Example 4: Redemption rights-- (A) Facts. FC1 has 
outstanding 40 shares of common stock and 10 shares of 4% 
nonparticipating, voting preferred stock with a par value of $50x 
per share. Pursuant to the terms of the preferred stock, FC1 has the 
right to redeem at any time, in whole or in part, the preferred 
stock. FC2 owns all of the preferred shares. USP1, wholly owned by 
FC2, owns all of the common shares. For Year 1, FC1 has $100x of 
earnings and profits and $100x of subpart F income within the 
meaning of section 952. In Year 1, FC1 distributes as a dividend 
$20x to FC2 with respect to FC2's preferred shares.
    (B) Analysis. If FC1 were treated as having redeemed any 
preferred shares, the redemption would be treated as a distribution 
to which section 301 applies under section 302(d) due to FC2's 
constructive ownership of the common shares. However, under 
paragraph (e)(4)(i) of this section, no amount of earnings and 
profits is distributed in the hypothetical distribution to the 
preferred shareholders on the hypothetical distribution date as a 
result of FC1's right to redeem, in whole or in part, the preferred 
shares. FC1's redemption rights with respect to the preferred shares 
cannot affect the distribution of current earnings and profits in 
the hypothetical distribution to FC1's shareholders. As a result, 
the amount of FC1's current earnings and profits distributed in the 
hypothetical distribution with respect to FC2's preferred shares is 
$20x and with respect to USP1's common shares is $80x. Accordingly, 
under paragraph (e)(1) of this section, USP1's pro rata share of 
FC1's subpart F income is $80x for Year 1.
    (vi) Example 5: Shareholder owns common and preferred stock-- 
(A) Facts. FC1 has outstanding 40 shares of common stock and 60 
shares of 6% nonparticipating, nonvoting preferred stock with a par 
value of $100x per share. USP1 owns 30 shares of the common stock 
and 15 shares of the preferred stock during Year 1. The remaining 10 
shares of common stock and 45 shares of preferred stock of FC1 are 
owned by Individual A. For Year 1, FC1 has $1,000x of earnings and 
profits and $500x of subpart F income within the meaning of section 
952.
    (B) Analysis. Under paragraph (e)(5)(iii) of this section, the 
right of the holder of the preferred stock to receive 6% of par 
value is not a restriction or other limitation within the meaning of 
paragraph (e)(5) of this section. The amount of FC1's current 
earnings and profits distributed in the hypothetical distribution 
with respect to FC1's preferred shares is $360x (0.06 x $100x x 60) 
and with respect to its common shares is $640x ($1,000x-$360x). As a 
result, the amount of FC1's current earnings and profits distributed 
in the hypothetical distribution to USP1 is $570x, the sum of $90x 
($360x x 15/60) with respect to its preferred shares and $480x 
($640x x 30/40) with respect to its common shares. Accordingly, 
under paragraph (e)(1) of this section, USP1's pro rata share of the 
subpart F income of FC1 is $285x ($500x x $570x/$1,000x).
    (vii) Example 6: Subpart F income and tested income-- (A) Facts. 
FC1 has outstanding 700 shares of common stock and 300 shares of 4% 
nonparticipating, voting preferred stock with a par value of $100x 
per share. USP1 owns all of the common shares. USP2 owns all of the 
preferred shares. For Year 1, FC1 has $10,000x of earnings and 
profits, $2,000x of subpart F income within the meaning of section 
952, and $9,000x of tested income within the meaning of section 
951A(c)(2)(A) and Sec.  1.951A-2(b)(1).
    (B) Analysis--(1) Pro rata share of subpart F income. The 
current earnings and profits of

[[Page 51091]]

FC1 determined under paragraph (e)(1)(ii) of this section are 
$11,000x, the greater of FC1's earnings and profits as determined 
under section 964 ($10,000x) or the sum of FC1's subpart F income 
and tested income ($2,000x + $9,000x). The amount of FC1's current 
earnings and profits distributed in the hypothetical distribution 
with respect to USP2's preferred shares is $1,200x (.04 x $100x x 
300) and with respect to USP1's common shares is $9,800x ($11,000x-
$1,200x). Accordingly, under paragraph (e)(1) of this section, 
USP1's pro rata share of FC1's subpart F income is $1,782x ($2,000x 
x $9,800x/$11,000x), and USP2's pro rata share of FC1's subpart F 
income is $218x ($2,000x x $1,200x/$11,000x).
    (2) Pro rata share of tested income. The same analysis applies 
for the hypothetical distribution with respect to the tested income 
as under paragraph (ii)(A) of this Example 6 with respect to the 
subpart F income. Accordingly, under Sec.  1.951A-1(d)(2), USP1's 
pro rata share of FC1's tested income is $8,018x ($9,000x x $9,800x/
$11,000x), and USP2's pro rata share of FC1's tested income is $982x 
($9,000x x $1,200x/$11,000x) for Year 1.
    (viii) Example 7: Subpart F income and tested loss-- (A) Facts. 
The facts are the same as in paragraph (A) of Example 6, except that 
for Year 1, FC1 has $8,000x of earnings and profits, $10,000x of 
subpart F income within the meaning of section 952 (but without 
regard to the limitation in section 952(c)), and $2,000x of tested 
loss within the meaning of section 951A(c)(2)(B) and Sec.  1.951A-
2(b)(2). Under section 951A(c)(2)(B)(ii) and Sec.  1.951A-6(d), the 
earnings and profits of FC1 are increased for purposes of section 
952 by the amount of FC1's tested loss. Accordingly, taking into 
account section 951A(c)(2)(B)(ii) and Sec.  1.951A-6(d), the subpart 
F income of FC1 is $10,000x.
    (B) Analysis--(1) Pro rata share of subpart F income. The 
current earnings and profits determined under paragraph (e)(1)(ii) 
of this section are $10,000x, the greater of the earnings and 
profits of FC1 determined under section 964 ($8,000x) or the sum of 
FC1's subpart F income and tested income ($10,000x + $0). The amount 
of FC1's current earnings and profits distributed in the 
hypothetical distribution with respect to USP2's preferred shares is 
$1,200x (.04 x $100x x 300) and with respect to Corp A's common 
shares is $8,800x ($10,000x-$1,200x). Accordingly, under paragraph 
(e)(1) of this section, for Year 1, USP1's pro rata share of FC1's 
subpart F income is $8,800x and USP2's pro rata share of FC1's 
subpart F income is $1,200x.
    (2) Pro rata share of tested loss. The current earnings and 
profits determined under Sec.  1.951A-1(d)(4)(i)(B) are $2,000x, the 
amount of FC1's tested loss. Under Sec.  1.951A-1(d)(4)(i)(C), the 
entire $2,000x tested loss is distributed in the hypothetical 
distribution with respect to USP1's common shares. Accordingly, 
USP1's pro rata share of the tested loss is $2,000x.
* * * * *
    (g) * * *
    (1) In general. For purposes of sections 951 through 964, the term 
``United States shareholder'' means, with respect to a foreign 
corporation, a United States person (as defined in section 957(c)) who 
owns within the meaning of section 958(a), or is considered as owning 
by applying the rules of ownership of section 958(b), 10 percent or 
more of the total combined voting power of all classes of stock 
entitled to vote of such foreign corporation, or 10 percent or more of 
the total value of shares of all classes of stock of such foreign 
corporation.
* * * * *
    (h) Special rule for partnership blocker structures--(1) In 
general. For purposes of sections 951 through 964, a controlled 
domestic partnership is treated as a foreign partnership in determining 
the stock of a controlled foreign corporation owned (within the meaning 
of section 958(a)) by a United States person if the following 
conditions are satisfied--
    (i) Without regard to this paragraph (h), the controlled domestic 
partnership owns (within the meaning of section 958(a)) stock of a 
controlled foreign corporation; and
    (ii) If the controlled domestic partnership (and all other 
controlled domestic partnerships in the chain of ownership of the 
controlled foreign corporation) were treated as foreign--
    (A) The controlled foreign corporation would continue to be a 
controlled foreign corporation; and
    (B) At least one United States shareholder of the controlled 
foreign corporation would be treated as owning (within the meaning of 
section 958(a)) stock of the controlled foreign corporation through 
another foreign corporation that is a direct or indirect partner in the 
controlled domestic partnership.
    (2) Definition of a controlled domestic partnership. For purposes 
of paragraph (h)(1) of this section, the term controlled domestic 
partnership means, with respect to a United States shareholder 
described in paragraph (h)(1)(ii)(B) of this section, a domestic 
partnership that is controlled by the United States shareholder and 
persons related to the United States shareholder. For purposes of this 
paragraph (h)(2), control generally is determined based on all the 
facts and circumstances, except that a partnership will be deemed to be 
controlled by a United States shareholder and related persons in any 
case in which those persons, in the aggregate, own (directly or 
indirectly through one or more partnerships) more than 50 percent of 
the interests in the partnership capital or profits. For purposes of 
this paragraph (h)(2), a related person is, with respect to a United 
States shareholder, a person that is related to the United States 
shareholder within the meaning of section 267(b) or 707(b)(1).

    (3) Example-- (i) Facts. USP, a domestic corporation, owns all 
of the stock of CFC1 and CFC2. CFC1 and CFC2 own 60% and 40%, 
respectively, of the interests in the capital and profits of DPS, a 
domestic partnership. DPS owns all of the stock of CFC3. Each of 
CFC1, CFC2, and CFC3 is a controlled foreign corporation. USP, DPS, 
CFC1, CFC2, and CFC3 all use the calendar year as their taxable 
year. For Year 1, CFC3 has $100x of subpart F income (as defined 
under section 952) and $100x of earnings and profits.
    (ii) Analysis. DPS is a controlled domestic partnership with 
respect to USP within the meaning of paragraph (h)(2) of this 
section because more than 50% of the interests in its capital or 
profits are owned by persons related to USP within the meaning of 
section 267(b) (that is, CFC1 and CFC2), and thus DPS is controlled 
by USP and related persons. Without regard to paragraph (h) of this 
section, DPS is a United States shareholder that owns (within the 
meaning of section 958(a)) stock of CFC3, a controlled foreign 
corporation. If DPS were treated as foreign, CFC3 would continue to 
be a controlled foreign corporation, and USP would be treated as 
owning (within the meaning of section 958(a)) stock in CFC3 through 
CFC1 and CFC2, which are both partners in DPS. Thus, under paragraph 
(h)(1) of this section, DPS is treated as a foreign partnership for 
purposes of determining the stock of CFC3 owned (within the meaning 
of section 958(a)) by USP. Accordingly, USP's pro rata share of 
CFC3's subpart F income for Year 1 is $100x, and USP includes in its 
gross income $100x under section 951(a)(1)(A). DPS is not a United 
States shareholder of CFC3 for purposes of sections 951 through 964.

    (i) Applicability dates. Paragraphs (a), (e)(1)(ii)(B), and (g)(1) 
of this section apply to taxable years of foreign corporations 
beginning after December 31, 2017, and to taxable years of United 
States shareholders with or within which such taxable years of foreign 
corporations end. Except for paragraph (e)(1)(ii)(B), paragraph (e) of 
this section applies to taxable years of United States shareholders 
ending on or after October 3, 2018. Paragraph (h) of this section 
applies to taxable years of domestic partnerships ending on or after 
May 14, 2010.
* * * * *
0
Par. 3. Section 1.951A-0 is added to read as follows:


Sec.  1.951A-0  Outline of section 951A regulations.

    This section lists the headings for Sec. Sec.  1.951A-1 through 
1.951A-7.

[[Page 51092]]

Sec.  1.951A-1  General provisions.

    (a) Overview.
    (1) In general.
    (2) Scope.
    (b) Inclusion of global intangible low-taxed income.
    (c) Determination of GILTI inclusion amount.
    (1) In general.
    (2) Definition of net CFC tested income.
    (3) Definition of net deemed tangible income return.
    (i) In general.
    (ii) Definition of deemed tangible income return.
    (iii) Definition of specified interest expense.
    (4) Determination of GILTI inclusion amount for consolidated 
groups.
    (d) Determination of pro rata share.
    (1) In general.
    (2) Tested income.
    (i) In general.
    (ii) Special rule for prior allocation of tested loss.
    (3) Qualified business asset investment.
    (i) In general.
    (ii) Special rule for preferred stock in case of excess QBAI.
    (iii) Examples.
    (4) Tested loss.
    (i) In general.
    (ii) Special rule in case of accrued but unpaid dividends.
    (iii) Special rule for stock with no liquidation value.
    (iv) Examples.
    (5) Tested interest expense.
    (6) Tested interest income.
    (e) Definitions.
    (1) CFC inclusion date.
    (2) CFC inclusion year.
    (3) Section 958(a) stock.
    (4) U.S. shareholder inclusion year.


Sec.  1.951A-2  Tested income and tested loss.

    (a) Scope.
    (b) Definitions related to tested income and tested loss.
    (1) Tested income and tested income CFC.
    (2) Tested loss and tested loss CFC.
    (c) Rules relating to the determination of tested income and tested 
loss.
    (1) Definition of gross tested income.
    (2) Determination of gross tested income and allowable deductions.
    (3) Allocation of deductions to gross tested income.
    (4) Nonapplication of section 952(c).
    (i) In general.
    (ii) Example.
    (5) Disregard of basis in property related to certain transfers 
during the disqualified period.
    (i) In general.
    (ii) Definition of specified property.
    (iii) Definition of disqualified basis.
    (iv) Example.


Sec.  1.951A-3  Qualified business asset investment.

    (a) Scope.
    (b) Definition of qualified business asset investment.
    (c) Specified tangible property.
    (1) In general.
    (2) Tangible property.
    (d) Dual use property.
    (1) In general.
    (2) Dual use ratio.
    (3) Example.
    (e) Determination of adjusted basis of specified tangible property.
    (1) In general.
    (2) Effect of change in law.
    (3) Specified tangible property placed in service before enactment 
of section 951A.
    (f) Special rules for short taxable years.
    (1) In general.
    (2) Determination of quarter closes.
    (3) Reduction of qualified business asset investment.
    (4) Example.
    (g) Partnership property.
    (1) In general.
    (2) Definitions related to partnership QBAI.
    (i) In general.
    (ii) Partnership QBAI ratio.
    (iii) Partnership specified tangible property.
    (3) Determination of adjusted basis.
    (4) Examples.
    (h) Anti-abuse rules for certain transfers of property.
    (1) Disregard of basis in specified tangible property held 
temporarily.
    (2) Disregard of basis in specified tangible property related to 
transfers during the disqualified period.
    (i) In general.
    (ii) Determination of disqualified basis.
    (A) In general.
    (B) Definition of qualified gain amount.
    (C) Definition of disqualified transfer.
    (D) Definition of disqualified period.
    (E) Related person.
    (iii) Examples.


Sec.  1.951A-4  Tested interest expense and tested interest income.

    (a) Scope.
    (b) Definitions related to specified interest expense.
    (1) Tested interest expense.
    (i) In general.
    (ii) Interest expense.
    (iii) Qualified interest expense.
    (iv) Qualified CFC.
    (2) Tested interest income.
    (i) In general.
    (ii) Interest income.
    (iii) Qualified interest income.
    (c) Examples.


Sec.  1.951A-5  Domestic partnerships and their partners.

    (a) Scope.
    (b) In general.
    (1) Determination of GILTI inclusion amount of a U.S. shareholder 
partnership.
    (2) Determination of distributive share of U.S. shareholder 
partnership's GILTI inclusion amount of partner other than a U.S. 
shareholder partner.
    (c) Determination of GILTI inclusion amount of a U.S. shareholder 
partner.
    (d) Tiered U.S. shareholder partnerships.
    (e) Definitions.
    (1) CFC tested item.
    (2) Partnership CFC.
    (3) U.S. shareholder partner.
    (4) U.S. shareholder partnership.
    (f) Reporting requirement.
    (g) Examples.


Sec.  1.951A-6  Treatment of GILTI inclusion amount and adjustments to 
earnings and profits and basis related to tested loss CFCs.

    (a) Scope.
    (b) Treatment as subpart F income for certain purposes.
    (1) In general.
    (2) Allocation of GILTI inclusion amount to tested income CFCs.
    (i) In general.
    (ii) Example.
    (iii) Translation of portion of GILTI inclusion amount allocated to 
tested income CFC.
    (c) Treatment as an amount includible in the gross income of a 
United States person.
    (1) In general.
    (2) Special rule for a United States shareholder that is a domestic 
partnership.
    (d) Increase of earnings and profits of tested loss CFC for 
purposes of section 952(c)(1)(A).
    (e) Adjustments to basis related to net used tested loss.
    (1) In general.
    (i) Disposition of stock of a controlled foreign corporation.
    (ii) Disposition of stock of an upper-tier controlled foreign 
corporation.
    (iii) Disposition of an interest in a foreign entity other than a 
controlled foreign corporation.
    (iv) Order of application of basis reductions.
    (v) No duplicative adjustments.
    (2) Net used tested loss amount.
    (i) In general.
    (ii) Used tested loss amount.
    (3) Net offset tested income amount.

[[Page 51093]]

    (i) In general.
    (ii) Offset tested income amount.
    (4) Attribution to stock.
    (i) In general.
    (ii) Nonrecognition transactions.
    (5) Section 381 transactions.
    (6) Other definitions.
    (i) Domestic corporation.
    (ii) Disposition.
    (7) Special rule for disposition by controlled foreign corporation 
less than 100 percent owned by a single domestic corporation.
    (8) Special rules for members of a consolidated group.
    (9) Examples.


Sec.  1.951A-7  Applicability dates.

0
Par. 4. Section 1.951A-1 is added to read as follows:


Sec.  1.951A-1  General provisions.

    (a) Overview--(1) In general. This section and Sec. Sec.  1.951A-2 
through 1.951A-7 (collectively, the section 951A regulations) provide 
rules to determine a United States shareholder's income inclusion under 
section 951A and certain definitions for purposes of section 951A and 
the section 951A regulations. This section provides general rules for 
determining a United States shareholder's inclusion of global 
intangible low-taxed income. Section 1.951A-2 provides rules for 
determining a controlled foreign corporation's tested income or tested 
loss. Section 1.951A-3 provides rules for determining a controlled 
foreign corporation's qualified business asset investment. Section 
1.951A-4 provides rules for determining a controlled foreign 
corporation's tested interest expense and tested interest income. 
Section 1.951A-5 provides rules relating to the application of section 
951A and the section 951A regulations to domestic partnerships and 
their partners. Section 1.951A-6 provides rules relating to the 
treatment of the inclusion of global intangible low-taxed income for 
certain purposes and adjustments to earnings and profits and basis of a 
controlled foreign corporation related to a tested loss. Section 
1.951A-7 provides dates of applicability.
    (2) Scope. Paragraph (b) of this section provides the general rule 
requiring a United States shareholder to include in gross income its 
global intangible low-taxed income for a U.S. shareholder inclusion 
year. Paragraph (c) of this section provides rules for determining the 
amount of a United States shareholder's global intangible low-taxed 
income for the U.S. shareholder inclusion year, including a rule for 
the application of section 951A and the section 951A regulations to 
consolidated groups. Paragraph (d) of this section provides rules for 
determining a United States shareholder's pro rata share of certain 
items for purposes of determining the United States shareholder's 
global intangible low-taxed income. Paragraph (e) of this section 
provides additional general definitions for purposes of this section 
and the section 951A regulations.
    (b) Inclusion of global intangible low-taxed income. Each person 
who is a United States shareholder (as defined in section 951(b)) of 
any controlled foreign corporation (as defined in section 957) and owns 
section 958(a) stock (as defined in paragraph (e)(3) of this section) 
in any such controlled foreign corporation includes in gross income in 
the U.S. shareholder inclusion year (as defined in paragraph (e)(4) of 
this section) the shareholder's GILTI inclusion amount (as defined in 
paragraph (c) of this section), if any, for the U.S. shareholder 
inclusion year.
    (c) Determination of GILTI inclusion amount--(1) In general. Except 
as provided in paragraph (c)(4) of this section, the term GILTI 
inclusion amount means, with respect to a United States shareholder and 
a U.S. shareholder inclusion year, the excess (if any) of--
    (i) The shareholder's net CFC tested income (as defined in 
paragraph (c)(2) of this section) for the year, over
    (ii) The shareholder's net deemed tangible income return (as 
defined in paragraph (c)(3) of this section) for the year.
    (2) Definition of net CFC tested income. The term net CFC tested 
income means, with respect to a United States shareholder and a U.S. 
shareholder inclusion year, the excess (if any) of--
    (i) The aggregate of the shareholder's pro rata share of the tested 
income of each tested income CFC (as defined in Sec.  1.951A-2(b)(1)) 
for the year, over
    (ii) The aggregate of the shareholder's pro rata share of the 
tested loss of each tested loss CFC (as defined in Sec.  1.951A-
2(b)(2)) for the year.
    (3) Definition of net deemed tangible income return--(i) In 
general. The term net deemed tangible income return means, with respect 
to a United States shareholder and a U.S. shareholder inclusion year, 
the excess (if any) of--
    (A) The shareholder's deemed tangible income return (as defined in 
paragraph (c)(3)(ii) of this section) for the year, over
    (B) The shareholder's specified interest expense (as defined in 
paragraph (c)(3)(iii) of this section) for the year.
    (ii) Definition of deemed tangible income return. The term deemed 
tangible income return means, with respect to a United States 
shareholder and a U.S. shareholder inclusion year, 10 percent of the 
aggregate of the shareholder's pro rata share of the qualified business 
asset investment (as defined in Sec.  1.951A-3(b)) of each tested 
income CFC for the year.
    (iii) Definition of specified interest expense. The term specified 
interest expense means, with respect to a United States shareholder and 
a U.S. shareholder inclusion year, the excess (if any) of--
    (A) The aggregate of the shareholder's pro rata share of the tested 
interest expense (as defined in Sec.  1.951A-4(b)(1)) of each 
controlled foreign corporation for the year, over
    (B) The aggregate of the shareholder's pro rata share of the tested 
interest income (as defined in Sec.  1.951A-4(b)(2)) of each controlled 
foreign corporation for the year.
    (4) Determination of GILTI inclusion amount for consolidated 
groups. For purposes of section 951A and the section 951A regulations, 
a member of a consolidated group (as defined in Sec.  1.1502-1(h)) 
determines its GILTI inclusion amount under the rules provided in Sec.  
1.1502-51.
    (d) Determination of pro rata share--(1) In general. For purposes 
of paragraph (c) of this section, each United States shareholder that 
owns section 958(a) stock in a controlled foreign corporation as of a 
CFC inclusion date (as defined in paragraph (e)(1) of this section) 
determines for a U.S. shareholder inclusion year that includes such CFC 
inclusion date its pro rata share (if any) of the controlled foreign 
corporation's tested income, tested loss, qualified business asset 
investment, tested interest expense, and tested interest income (each a 
CFC tested item), as applicable, for the CFC inclusion year (as defined 
in paragraph (e)(2) of this section). Except as otherwise provided in 
this paragraph (d), a United States shareholder's pro rata share of 
each CFC tested item is determined independently of its pro rata share 
of any other CFC tested item. Except as modified in this paragraph (d), 
a United States shareholder's pro rata share of any CFC tested item is 
determined under the rules of section 951(a)(2) and Sec.  1.951-1(b) 
and (e) in the same manner as those provisions apply to subpart F 
income. Under section 951(a)(2) and Sec.  1.951-1(b) and (e), as 
modified by this paragraph (d), a United States shareholder's pro rata 
share of any CFC tested item for a U.S. shareholder inclusion year is

[[Page 51094]]

determined with respect to the section 958(a) stock of the controlled 
foreign corporation owned by the United States shareholder on the CFC 
inclusion date. A United States shareholder's pro rata share of any CFC 
tested item is translated into United States dollars using the average 
exchange rate for the CFC inclusion year of the controlled foreign 
corporation. Paragraphs (d)(2) through (5) of this section provide 
rules for determining a United States shareholder's pro rata share of 
each CFC tested item of a controlled foreign corporation.
    (2) Tested income--(i) In general. Except as provided in paragraph 
(d)(2)(ii) of this section, a United States shareholder's pro rata 
share of the tested income of each tested income CFC for a U.S. 
shareholder inclusion year is determined under section 951(a)(2) and 
Sec.  1.951-1(b) and (e), substituting ``tested income'' for ``subpart 
F income'' each place it appears, other than in Sec.  1.951-
1(e)(1)(ii)(B).
    (ii) Special rule for prior allocation of tested loss. In any case 
in which tested loss has been allocated to any class of stock in a 
prior CFC inclusion year under paragraph (d)(4)(iii) of this section, 
tested income is first allocated to each such class of stock in the 
order of its liquidation priority to the extent of the excess (if any) 
of the sum of the tested loss allocated to each such class of stock for 
each prior CFC inclusion year under paragraph (d)(4)(iii) of this 
section, over the sum of the tested income allocated to each such class 
of stock for each prior CFC inclusion year under this paragraph 
(d)(2)(ii). Paragraph (d)(2)(i) of this section applies for purposes of 
determining a United States shareholder's pro rata share of the 
remainder of the tested income, except that, for purposes of the 
hypothetical distribution of section 951(a)(2)(A) and Sec.  1.951-1(b) 
and (e), the amount of current earnings and profits of the tested 
income CFC is reduced by the amount of tested income allocated under 
the first sentence of this paragraph (d)(2)(ii). For an example of the 
application of this paragraph (d)(2), see Example 2 of paragraph 
(d)(4)(iv) of this section.
    (3) Qualified business asset investment--(i) In general. Except as 
provided in paragraph (d)(3)(ii) of this section, a United States 
shareholder's pro rata share of the qualified business asset investment 
of a tested income CFC for a U.S. shareholder inclusion year bears the 
same ratio to the total qualified business asset investment of the 
tested income CFC for the CFC inclusion year as the United States 
shareholder's pro rata share of the tested income of the tested income 
CFC for the U.S. shareholder inclusion year bears to the total tested 
income of the tested income CFC for the CFC inclusion year.
    (ii) Special rule for preferred stock in case of excess QBAI. If a 
tested income CFC's qualified business asset investment for a CFC 
inclusion year exceeds 10 times its tested income for the CFC inclusion 
year (such excess, excess QBAI), a United States shareholder's pro rata 
share of the tested income CFC's qualified business asset investment is 
the sum of its pro rata share determined under paragraph (d)(3)(i) of 
this section without regard to the excess QBAI, plus its pro rata share 
determined under paragraph (d)(3)(i) of this section solely with 
respect to the excess QBAI and without regard to tested income 
allocated to any share of preferred stock of the tested income CFC 
under paragraph (d)(2) of this section.
    (iii) Examples. The following examples illustrate the application 
of paragraphs (d)(2) and (3) of this section. See also Sec.  1.951-
1(e)(7), Example 6 (illustrating a United States shareholder's pro rata 
share of tested income).

    (A) Example 1-- (1) Facts. FS, a controlled foreign corporation, 
has outstanding 70 shares of common stock and 30 shares of 4% 
nonparticipating, cumulative preferred stock with a par value of 
$10x per share. P Corp, a domestic corporation and a United States 
shareholder of FS, owns all of the common shares. Individual A, a 
United States shareholder, owns all of the preferred shares. Both FS 
and P Corp use the calendar year as their taxable year. Individual A 
and P Corp are shareholders of FS for all of Year 4. At the 
beginning of Year 4, FS had no dividend arrearages with respect to 
its preferred stock. For Year 4, FS has $100x of earnings and 
profits, $120x of tested income, and no subpart F income within the 
meaning of section 952. FS also has $750x of qualified business 
asset investment for Year 4.
    (2) Analysis--(i) Determination of pro rata share of tested 
income. For purposes of determining P Corp's pro rata share of FS's 
tested income under paragraph (d)(2) of this section, the amount of 
FS's current earnings and profits for purposes of the hypothetical 
distribution described in Sec.  1.951-1(e)(1)(i) is $120x, the 
greater of its earnings and profits as determined under section 964 
($100x) or the sum of its subpart F income and tested income ($0 + 
$120x). Under paragraph (d)(2) of this section and Sec.  1.951-
1(e)(3), the amount of FS's current earnings and profits distributed 
in the hypothetical distribution is $12x (.04 x $10x x 30) with 
respect to Individual A's preferred shares and $108x ($120x-$12x) 
with respect to P Corp's common shares. Accordingly, under paragraph 
(d)(2) of this section and Sec.  1.951-1(e)(1), Individual A's pro 
rata share of FS's tested income is $12x, and P Corp's pro rata 
share of FS's tested income is $108x for Year 4.
    (ii) Determination of pro rata share of qualified business asset 
investment. The special rule of paragraph (d)(3)(ii) of this section 
does not apply because FS's qualified business asset investment of 
$750x does not exceed $1,200x, which is 10 times FS's tested income 
of $120x. Accordingly, under the general rule of paragraph (d)(3)(i) 
of this section, Individual A's and P Corp's pro rata share of FS's 
qualified business asset investment bears the same ratio to FS's 
total qualified business asset investment as Individual A's and P 
Corp's pro rata share, respectively, of FS's tested income bears to 
FS's total tested income. Thus, Individual A's pro rata share of 
FS's qualified business asset investment is $75x ($750x x $12x/
$120x), and P Corp's pro rata share of FS's qualified business asset 
investment is $675x ($750x x $108x/$120x).
     (B) Example 2--  (1) Facts. The facts are the same as in 
paragraph (1) of Example 1, except that FS has $1,500x of qualified 
business asset investment for Year 4.
    (2) Analysis. (i) Determination of pro rata share of tested 
income. The analysis and the result are the same as in paragraph 
(2)(i) of Example 1.
    (ii) Determination of pro rata share of qualified business asset 
investment. The special rule of paragraph (d)(3)(ii) of this section 
applies because FS's qualified business asset investment of $1,500x 
exceeds $1,200x, which is 10 times FS's tested income of $120x. 
Under paragraph (d)(3)(ii) of this section, Individual A's and P 
Corp's pro rata share of FS's qualified business asset investment is 
the sum of their pro rata share determined under paragraph (d)(3)(i) 
of this section without regard to the excess QBAI plus their pro 
rata share with respect to the excess QBAI but without regard to 
tested income allocated to preferred stock under paragraph (d)(2) of 
this section. Without regard to the excess QBAI of $300x, Individual 
A's pro rata share of FS's qualified business asset investment is 
$120x ($1,200x x $12x/$120x), and P Corp's pro rata share of FS's 
qualified business asset investment is $1,080x ($1,200x x $108x/
$120x). Solely with respect to the excess QBAI and without regard to 
tested income allocated to the preferred stock under paragraph 
(d)(2) of this section, Individual A's pro rata share of FS's 
qualified business asset investment is $0 ($300x x $0/$108x), and P 
Corp's pro rata share of FS's qualified business asset investment is 
$300x ($300x x $108x/$108x). Thus, Individual A's pro rata share of 
FS's qualified business asset investment is $120x ($120x + $0), and 
P Corp's pro rata share of FS's qualified business asset investment 
is $1,380x ($1,080x + $300x).

    (4) Tested loss--(i) In general. A United States shareholder's pro 
rata share of the tested loss of each tested loss CFC for a U.S. 
shareholder inclusion year is determined under section 951(a)(2) and 
Sec.  1.951-1(b) and (e) with the following modifications--
    (A) ``Tested loss'' is substituted for ``subpart F income'' each 
place it appears;
    (B) For purposes of the hypothetical distribution described in 
section

[[Page 51095]]

951(a)(2)(A) and Sec.  1.951-1(e)(1)(i), the amount of current earnings 
and profits of a controlled foreign corporation for a CFC inclusion 
year is treated as being equal to the tested loss of the tested loss 
CFC for the CFC inclusion year;
    (C) Except as provided in paragraphs (d)(4)(ii) and (iii) of this 
section, the hypothetical distribution described in section 
951(a)(2)(A) and Sec.  1.951-1(e)(1)(i) is treated as made solely with 
respect to the common stock of the tested loss CFC; and
    (D) The amount of the dividend received by any other person for 
purposes of section 951(a)(2)(B) and Sec.  1.951-1(b)(1)(ii) is treated 
as being equal to the amount of the tested loss of the tested loss CFC 
for the CFC inclusion year (regardless of whether, or the extent to 
which, the other person actually receives a dividend).
    (ii) Special rule in case of accrued but unpaid dividends. If a 
tested loss CFC's earnings and profits that have accumulated since the 
issuance of preferred shares are reduced below the amount necessary to 
satisfy any accrued but unpaid dividends with respect to such preferred 
shares, then the amount by which the tested loss reduces the earnings 
below the amount necessary to satisfy the accrued but unpaid dividends 
is distributed in the hypothetical distribution described in section 
951(a)(2)(A) and Sec.  1.951-1(e)(1)(i) with respect to the preferred 
stock of the tested loss CFC and the remainder of the tested loss is 
distributed with respect to the common stock of the tested loss CFC.
    (iii) Special rule for stock with no liquidation value. If a tested 
loss CFC's common stock has a liquidation value of zero and there is at 
least one other class of equity with a liquidation preference relative 
to the common stock, then the tested loss is distributed in the 
hypothetical distribution described in section 951(a)(2)(A) and Sec.  
1.951-1(e)(1)(i) with respect to the most junior class of equity with a 
positive liquidation value to the extent of such liquidation value. 
Thereafter, tested loss is distributed with respect to the next most 
junior class of equity to the extent of its liquidation value and so 
on. All determinations of liquidation value are to be made as of the 
beginning of the CFC inclusion year of the tested loss CFC.
    (iv) Examples.The following examples illustrate the application of 
this paragraph (d)(4). See also Sec.  1.951-1(e)(7), Example 7 
(illustrating a United States shareholder's pro rata share of subpart F 
income and tested loss).

    (A) Example-- (1) Facts. FS, a controlled foreign corporation, 
has outstanding 70 shares of common stock and 30 shares of 4% 
nonparticipating, cumulative preferred stock with a par value of 
$10x per share. P Corp, a domestic corporation and a United States 
shareholder of FS, owns all of the common shares. Individual A, a 
United States citizen and a United States shareholder, owns all of 
the preferred shares. FS, Individual A, and P Corp all use the 
calendar year as their taxable year. Individual A and P Corp are 
shareholders of FS for all of Year 5. At the beginning of Year 5, FS 
had earnings and profits of $120x, which accumulated after the 
issuance of the preferred stock. At the end of Year 5, the accrued 
but unpaid dividends with respect to the preferred stock are $36x. 
For Year 5, FS has a $100x tested loss, and no other items of 
income, gain, deduction or loss. At the end of Year 5, FS has 
earnings and profits of $20x.
    (2) Analysis. FS is a tested loss CFC for Year 5. Before taking 
into account the tested loss in Year 5, FS had sufficient earnings 
and profits to satisfy the accrued but unpaid dividends of $36x. The 
amount of the reduction in earnings below the amount necessary to 
satisfy the accrued but unpaid dividends attributable to the tested 
loss is $16x ($36x-($120x-$100x)). Accordingly, under paragraph 
(d)(4)(ii) of this section, Individual A's pro rata share of the 
Year 5 tested loss is $16x, and P Corp's pro rata share of the 
tested loss is $84x ($100x-$16x).
    (B) Example 2--(1) Facts. FS, a controlled foreign corporation, 
has outstanding 100 shares of common stock and 50 shares of 4% 
nonparticipating, cumulative preferred stock with a par value of 
$100x per share. P Corp, a domestic corporation and a United States 
shareholder of FS, owns all of the common shares. Individual A, a 
United States citizen and a United States shareholder, owns all of 
the preferred shares. FS, Individual A, and P Corp all use the 
calendar year as their taxable year. Individual A and P Corp are 
shareholders of FS for all of Year 1 and Year 2. At the beginning of 
Year 1, the common stock had no liquidation value and the preferred 
stock had a liquidation value of $5,000x and no accrued but unpaid 
dividends. In Year 1, FS has a tested loss of $1,000x and no other 
items of income, gain, deduction, or loss. In Year 2, FS has tested 
income of $3,000x and no other items of income, gain, deduction, or 
loss and paid no dividends. FS has earnings and profits of $3,000x 
for Year 2. At the end of Year 2, FS has accrued but unpaid 
dividends of $400x with respect to the preferred stock ($5000x x 
0.04 for Year 1 and $5000x x 0.04 for Year 2). (2) Analysis--(i) 
Year 1. FS is a tested loss CFC in Year 1. The common stock of FS 
has liquidation value of zero and the preferred stock has a 
liquidation preference relative to the common stock. The tested loss 
($1,000x) does not exceed the liquidation value of the preferred 
stock ($5,000x). Accordingly, under paragraph (d)(4)(iii) of this 
section, the tested loss is distributed with respect to the 
preferred stock in the hypothetical distribution described in 
section 951(a)(2)(A) and Sec.  1.951-1(e). Individual A's pro rata 
share of the tested loss is $1,000x, and P Corp's pro rata share of 
the tested loss is $0.
    (ii) Year 2. FS is a tested income CFC in Year 2. Because 
$1,000x of tested loss was allocated to the preferred stock in Year 
1 under paragraph (d)(4)(iii) of this section, the first $1,000x of 
tested income in Year 2 is allocated to the preferred stock under 
paragraph (d)(2)(ii) of this section. P Corp's and Individual A's 
pro rata shares of the remaining $2,000x of tested income are 
determined under the general rule of paragraph (d)(2)(i) of this 
section, except that for purposes of the hypothetical distribution 
the amount of FS's current earnings and profits is reduced by the 
tested income allocated under paragraph (d)(2)(ii) of this section 
to $2,000x ($3,000x-$1,000x). Accordingly, under paragraph (d)(2)(i) 
of this section, the amount of FS's current earnings and profits 
distributed in the hypothetical distribution with respect to 
Individual A's preferred stock is $400x ($400x of accrued but unpaid 
dividends) and with respect to P Corp's common stock is $1,600x 
($2,000x-$400x). Individual A's pro rata share of the tested income 
is $1,400x ($1,000x + $400x), and P Corp's pro rata share of the 
tested income is $1,600x.

    (5) Tested interest expense. A United States shareholder's pro rata 
share of tested interest expense of a controlled foreign corporation 
for a U.S. shareholder inclusion year is equal to the amount by which 
the tested interest expense reduces the shareholder's pro rata share of 
tested income of the controlled foreign corporation for the U.S. 
shareholder inclusion year, increases the shareholder's pro rata share 
of tested loss of the controlled foreign corporation for the U.S. 
shareholder inclusion year, or both.
    (6) Tested interest income. A United States shareholder's pro rata 
share of tested interest income of a controlled foreign corporation for 
a U.S. shareholder inclusion year is equal to the amount by which the 
tested interest income increases the shareholder's pro rata share of 
tested income of the controlled foreign corporation for the U.S. 
shareholder inclusion year, reduces the shareholder's pro rata share of 
tested loss of the controlled foreign corporation for the U.S. 
shareholder inclusion year, or both.
    (e) Definitions. This paragraph (e) provides additional definitions 
that apply for purposes of the section 951A regulations. Other 
definitions relevant to the section 951A regulations are included in 
Sec. Sec.  1.951A-2 through 1.951A-6.
    (1) CFC inclusion date. The term CFC inclusion date means the last 
day of a CFC inclusion year on which a foreign corporation is a 
controlled foreign corporation.
    (2) CFC inclusion year. The term CFC inclusion year means any 
taxable year of a foreign corporation beginning after December 31, 
2017, at any time during which the corporation is a controlled foreign 
corporation.

[[Page 51096]]

    (3) Section 958(a) stock. The term section 958(a) stock means stock 
of a controlled foreign corporation owned (directly or indirectly) by a 
United States shareholder within the meaning of section 958(a).
    (4) U.S. shareholder inclusion year. The term U.S. shareholder 
inclusion year means a taxable year of a United States shareholder that 
includes a CFC inclusion date of a controlled foreign corporation of 
the United States shareholder.
0
Par. 5. Section 1.951A-2 is added to read as follows:


Sec.  1.951A-2  Tested income and tested loss.

    (a) Scope. This section provides general rules for determining the 
tested income or tested loss of a controlled foreign corporation for 
purposes of determining a United States shareholder's net CFC tested 
income under Sec.  1.951A-1(c)(2). Paragraph (b) of this section 
provides definitions related to tested income and tested loss. 
Paragraph (c) of this section provides rules for determining the gross 
tested income of a controlled foreign corporation and the deductions 
that are properly allocable to gross tested income.
    (b) Definitions related to tested income and tested loss--(1) 
Tested income and tested income CFC. The term tested income means the 
excess (if any) of a controlled foreign corporation's gross tested 
income for a CFC inclusion year, over the allowable deductions 
(including taxes) properly allocable to the gross tested income for the 
CFC inclusion year (a controlled foreign corporation with tested income 
for a CFC inclusion year, a tested income CFC).
    (2) Tested loss and tested loss CFC. The term tested loss means the 
excess (if any) of a controlled foreign corporation's allowable 
deductions (including taxes) properly allocable to gross tested income 
(or that would be allocable to gross tested income if there were gross 
tested income) for a CFC inclusion year, over the gross tested income 
of the controlled foreign corporation for the CFC inclusion year (a 
controlled foreign corporation without tested income for a CFC 
inclusion year, a tested loss CFC).
    (c) Rules relating to the determination of tested income and tested 
loss--(1) Definition of gross tested income. The term gross tested 
income means the gross income of a controlled foreign corporation for a 
CFC inclusion year determined without regard to--
    (i) Items of income described in section 952(b),
    (ii) Gross income taken into account in determining the subpart F 
income of the corporation,
    (iii) Gross income excluded from the foreign base company income 
(as defined in section 954) or the insurance income (as defined in 
section 953) of the corporation solely by reason of an election made 
under section 954(b)(4) and Sec.  1.954-1(d)(5),
    (iv) Dividends received by the corporation from related persons (as 
defined in section 954(d)(3)), and
    (v) Foreign oil and gas extraction income (as defined in section 
907(c)(1)) of the corporation.
    (2) Determination of gross income and allowable deductions. For 
purposes of determining tested income and tested loss, the gross income 
and allowable deductions of a controlled foreign corporation for a CFC 
inclusion year are determined under the rules of Sec.  1.952-2 for 
determining the subpart F income of a controlled foreign corporation.
    (3) Allocation of deductions to gross tested income. Any deductions 
of a controlled foreign corporation allowable under paragraph (c)(2) of 
this section are allocated and apportioned to gross tested income under 
the principles of section 954(b)(5) and Sec.  1.954-1(c), by treating 
gross tested income that falls within a single separate category (as 
defined in Sec.  1.904-5(a)(1)) as a single item of gross income, in 
addition to the items set forth in Sec.  1.954-1(c)(1)(iii).
    (4) Nonapplication of section 952(c)--(i) In general. The gross 
tested income and allowable deductions properly allocable to gross 
tested income of a controlled foreign corporation for a CFC inclusion 
year are determined without regard to the application of section 
952(c).
    (ii) Example. The following example illustrates the application of 
this paragraph (c)(4).

    (A) Example--(1) Facts. A Corp, a domestic corporation, owns 
100% of the single class of stock of FS, a controlled foreign 
corporation. Both A Corp and FS use the calendar year as their 
taxable year. In Year 1, FS has foreign base company income of 
$100x, a loss in foreign oil and gas extraction income of $100x, and 
earnings and profits of $0. FS has no other income. In Year 2, FS 
has gross income of $100x and earnings and profits of $100x. Without 
regard to section 952(c)(2), in Year 2 FS has no income described in 
any of the categories of income excluded from gross tested income in 
paragraphs (c)(1)(i) through (v) of this section. FS has no 
allowable deductions properly allocable to gross tested income for 
Year 2. (2) Analysis. As a result of the earnings and profits 
limitation of section 952(c)(1), FS has no subpart F income in Year 
1, and A Corp has no inclusion with respect to FS under section 
951(a)(1)(A). Under paragraph (c)(4)(i) of this section, the gross 
tested income of FS is determined without regard to section 
952(c)(1). Therefore, in determining the gross tested income of FS 
in Year 1, the $100x foreign base company income of FS in Year 1 is 
excluded under paragraph (c)(1)(ii) of this section, and FS has no 
gross tested income in Year 1. In Year 2, under section 952(c)(2), 
FS's earnings and profits ($100x) in excess of its subpart F income 
($0) are treated as subpart F income. Therefore, FS has subpart F 
income of $100x in Year 2, and A Corp has an inclusion of $100x with 
respect to FS under section 951(a)(1)(A). Under paragraph (c)(4)(i) 
of this section, the gross tested income of FS is determined without 
regard to section 952(c)(2). Accordingly, FS's income in Year 2 is 
not subpart F income described in paragraph (c)(1)(ii) of this 
section, and FS has $100x of gross tested income in Year 2.

    (5) Disregard of basis in property related to certain transfers 
during the disqualified period--(i) In general. Any deduction or loss 
attributable to disqualified basis of any specified property allocated 
and apportioned to gross tested income under paragraph (c)(3) of this 
section is disregarded for purposes of determining tested income or 
tested loss of a controlled foreign corporation. For purposes of this 
paragraph (c)(5), in the case that a deduction or loss arises with 
respect to specified property with disqualified basis and adjusted 
basis other than disqualified basis, the deduction or loss is treated 
as attributable to the disqualified basis in the same proportion that 
the disqualified basis bears to the total adjusted basis of the 
property.
    (ii) Definition of specified property. The term specified property 
means property that is of a type with respect to which a deduction is 
allowable under section 167 or 197.
    (iii) Definition of disqualified basis. Solely for purposes of 
paragraph (c)(5)(i) of this section, the term disqualified basis has 
the meaning set forth in Sec.  1.951A-3(h)(2)(ii) (including with 
respect to property owned by a partnership by reason of Sec.  1.951A-
3(g)(3)), except that, in applying the provisions of Sec.  1.951A-
3(h)(2) to determine the disqualified basis, the term ``specified 
property'' is substituted for ``specified tangible property'' and the 
term ``controlled foreign corporation'' is substituted for ``tested 
income CFC'' each place they appear.

    (iv) Example-- (A) Facts. USP, a domestic corporation, owns all 
of the stock of CFC1 and CFC2, each a controlled foreign 
corporation. Both USP and CFC1 use the calendar year as their 
taxable year. CFC2 uses a taxable year ending November 30. On 
November 1, 2018, before the start of its first CFC inclusion year, 
CFC2 sells intangible property to CFC1 that is amortizable under

[[Page 51097]]

section 197 in exchange for $100x of cash. The intangible property 
has a basis of $20x in the hands of CFC2, and CFC2 recognizes $80x 
of gain as a result of the sale ($100x-$20x). CFC2's gain is not 
subject to U.S. tax or taken into account in determining USP's 
inclusion under section 951(a)(1)(A).
    (B) Analysis. The sale by CFC1 is a disqualified transfer 
(within the meaning of Sec.  1.951A-3(h)(2)(ii)(C), as modified by 
paragraph (c)(5)(iii) of this section) because it is a transfer of 
specified property, CFC2 and CFC1 are related persons, and the 
transfer occurs during the disqualified period (within the meaning 
of Sec.  1.951A-3(h)(2)(ii)(D)). The disqualified basis is $80x, the 
excess of CFC1's adjusted basis in the property immediately after 
the disqualified transfer ($100x), over the sum of CFC2's basis in 
the property immediately before the transfer ($20x) and the 
qualified gain amount (as defined in Sec.  1.951A-3(h)(2)(ii)(B)) 
($0). Accordingly, under paragraph (c)(5)(i) of this section, any 
deduction or loss attributable to the disqualified basis is 
disregarded for purposes of determining the tested income or tested 
loss of any CFC for any CFC inclusion year.

0
Par. 6. Section 1.951A-3 is added to read as follows:


Sec.  1.951A-3  Qualified business asset investment.

    (a) Scope. This section provides general rules for determining the 
qualified business asset investment of a controlled foreign corporation 
for purposes of determining a United States shareholder's deemed 
tangible income return under Sec.  1.951A-1(c)(3)(ii). Paragraph (b) of 
this section defines qualified business asset investment. Paragraph (c) 
of this section defines tangible property and specified tangible 
property. Paragraph (d) of this section provides rules and examples for 
determining the portion of property that is specified tangible property 
when the property is used in the production of both gross tested income 
and gross income that is not gross tested income. Paragraph (e) of this 
section provides rules for determining the adjusted basis of specified 
tangible property. Paragraph (f) of this section provides rules for 
determining qualified business asset investment of a tested income CFC 
with a short taxable year. Paragraph (g) of this section provides rules 
and examples for increasing the qualified business asset investment of 
a tested income CFC by reason of property owned through a partnership. 
Paragraph (h) of this section provides anti-abuse rules that disregard 
the basis of specified tangible property transferred in certain 
transactions when determining the qualified business asset investment 
of a tested income CFC.
    (b) Definition of qualified business asset investment. The term 
qualified business asset investment means the average of a tested 
income CFC's aggregate adjusted bases as of the close of each quarter 
of a CFC inclusion year in specified tangible property that is used in 
a trade or business of the tested income CFC and is of a type with 
respect to which a deduction is allowable under section 167. A tested 
loss CFC has no qualified business asset investment. See paragraph (f) 
of this section for rules relating to the qualified business asset 
investment of a tested income CFC with a short taxable year.
    (c) Specified tangible property--(1) In general. The term specified 
tangible property means, subject to paragraph (d) of this section, 
tangible property used in the production of gross tested income. None 
of the tangible property of a tested loss CFC is specified tangible 
property.
    (2) Tangible property. The term tangible property means property 
for which the depreciation deduction provided by section 167(a) is 
eligible to be determined under section 168 without regard to section 
168(f)(1), (2), or (5) and the date placed in service.
    (d) Dual use property--(1) In general. In the case of tangible 
property of a tested income CFC that is used in both the production of 
gross tested income and the production of gross income that is not 
gross tested income in a CFC inclusion year, the portion of the 
adjusted basis in the property treated as adjusted basis in specified 
tangible property for the CFC inclusion year is determined by 
multiplying the average of the tested income CFC's adjusted basis in 
the property by the dual use ratio with respect to the property for the 
CFC inclusion year.
    (2) Dual use ratio. The term dual use ratio means, with respect to 
specified tangible property:
    (i) In the case of specified tangible property that produces 
directly identifiable income for a CFC inclusion year, the ratio of the 
gross tested income produced by the property for the CFC inclusion year 
to the total amount of gross income produced by the property for the 
CFC inclusion year.
    (ii) In the case of specified tangible property that does not 
produce directly identifiable income for a CFC inclusion year, the 
ratio of the gross tested income of the tested income CFC for the CFC 
inclusion year to the total amount of gross income of the tested income 
CFC for the CFC inclusion year.
    (3) Example. The following example illustrates the application of 
this paragraph (d).

    (i) Example-- (A) Facts. FS is a tested income CFC. FS owns a 
machine that only packages Product A. In Year 1, FS sells Product A 
to related and unrelated resellers and earns $1,000x of gross 
income. For Year 1, sales of Product A produce gross tested income 
of $750x and foreign base company sales income (as defined in 
section 954(d)) of $250x. The average adjusted basis of the machine 
for Year 1 in the hands of FS is $4,000x. FS also owns an office 
building for its administrative functions with an average adjusted 
basis for Year 1 of $10,000x. The office building does not produce 
directly identifiable income. FS has no other specified tangible 
property. For year 1, FS also earns $1,250x of gross tested income 
and $2,750x of foreign base company sales income from sales of 
Product B. Neither the machine nor the office building is used in 
the production of income related to Product B. For Year 1, FS's 
gross tested income is $2,000x and its total gross income is 
$5,000x.
    (B) Analysis. The machine and office building are both property 
for which the depreciation deduction provided by section 167(a) is 
eligible to be determined under section 168. Therefore, under 
paragraph (c)(2) of this section, the machine and office building 
are tangible property. Under paragraph (d)(1) of this section, the 
portion of the basis in the machine treated as basis in specified 
tangible property is equal to FS's average basis in the machine for 
the year ($4,000x), multiplied by the dual use ratio under paragraph 
(d)(2)(i) of this section (75%), which is the proportion that the 
gross tested income produced by the property ($750x) bears to the 
total gross income produced by the property ($1,000x). Accordingly, 
$3,000x ($4,000x x 75%) of FS's adjusted basis in the machine is 
taken into account in determining the average of FS's aggregate 
adjusted bases described in paragraph (b) of this section. Under 
paragraph (d)(1) of this section, the portion of the basis in the 
office building treated as basis in specified tangible property is 
equal to FS's average basis in the office building for the year 
($10,000x), multiplied by the dual use ratio under paragraph 
(d)(2)(ii) of this section (40%), which is the ratio of FS's gross 
tested income for Year 1 ($2,000x) to FS's total gross income for 
Year 1 ($5,000x). Accordingly, $4,000x ($10,000x x 40%) of FS's 
adjusted basis in the office building is taken into account in 
determining the average of FS's aggregate adjusted bases described 
in paragraph (b) of this section.

    (e) Determination of adjusted basis of specified tangible 
property--(1) In general. The adjusted basis in specified tangible 
property is determined by using the alternative depreciation system 
under section 168(g), and by allocating the depreciation deduction with 
respect to such property for the CFC inclusion year ratably to each day 
during the period in the taxable year to which such depreciation 
relates.
    (2) Effect of change in law. The determination of adjusted basis 
for purposes of paragraph (b) of this section is made without regard to 
any provision of law enacted after December 22, 2017, unless such later 
enacted law specifically and directly amends the

[[Page 51098]]

definition of qualified business asset investment under section 951A.
    (3) Specified tangible property placed in service before enactment 
of section 951A. The adjusted basis in property placed in service 
before December 22, 2017, is determined using the alternative 
depreciation system under section 168(g), as if this system had applied 
from the date that the property was placed in service.
    (f) Special rules for short taxable years--(1) In general. In the 
case of a tested income CFC that has a CFC inclusion year that is less 
than twelve months (a short taxable year), the rules for determining 
the qualified business asset investment of the tested income CFC under 
this section are modified as provided in paragraphs (f)(2) and (3) of 
this section with respect to the CFC inclusion year.
    (2) Determination of quarter closes. For purposes of determining 
quarter closes, in determining the qualified business asset investment 
of a tested income CFC for a short taxable year, the quarters of the 
tested income CFC for purposes of this section are the full quarters 
beginning and ending within the short taxable year (if any), 
determining quarter length as if the tested income CFC did not have a 
short taxable year, plus one or more short quarters (if any).
    (3) Reduction of qualified business asset investment. The qualified 
business asset investment of a tested income CFC for a short taxable 
year is the sum of--
    (i) The sum of the tested income CFC's aggregate adjusted bases in 
specified tangible property as of the close of each full quarter (if 
any) in the CFC inclusion year divided by four, plus
    (ii) The tested income CFC's aggregate adjusted bases in specified 
tangible property as of the close of each short quarter (if any) in the 
CFC inclusion year multiplied by the sum of the number of days in each 
short quarter divided by 365.
    (4) Example. The following example illustrates the application of 
this paragraph (f).

    (i) Example-- (A) Facts. USP1, a domestic corporation, owns all 
of the stock of FS, a controlled foreign corporation. USP1 owns FS 
from the beginning of Year 1. On July 15, Year 1, USP1 sells FS to 
USP2, an unrelated person. USP2 makes a section 338(g) election with 
respect to the purchase of FS, as a result of which FS's taxable 
year is treated as ending on July 15. USP1, USP2, and FS all use the 
calendar year as their taxable year. FS's aggregate adjusted bases 
in specified tangible property are $250x as of March 31, $300x as of 
June 30, $275x as of July 15, $500x as of September 30, and $450x as 
of December 31.
    (B) Analysis--(1) Determination of short taxable years and 
quarters. FS has two short taxable years in Year 1. The first short 
taxable year is from January 1 to July 15, with two full quarters 
(January 1-March 31 and April 1-June 30) and one short quarter (July 
1-July 15). The second taxable year is from July 16 to December 31, 
with one short quarter (July 16-September 30) and one full quarter 
(October 1-December 31).
    (2) Calculation of qualified business asset investment for the 
first short taxable year. Under paragraph (f)(2) of this section, 
for the first short taxable year in Year 1, FS has three quarter 
closes (March 31, June 30, and July 15). Under paragraph (f)(3) of 
this section, the qualified business asset investment of FS for the 
first short taxable year is $148.80x, the sum of $137.50x (($250x + 
$300x)/4) attributable to the two full quarters and $11.30x ($275x x 
15/365) attributable to the short quarter.
    (3) Calculation of qualified business asset investment for the 
second short taxable year. Under paragraph (f)(2) of this section, 
for the second short taxable year in Year 1, FS has two quarter 
closes (September 30 and December 31). Under paragraph (f)(3) of 
this section, the qualified business asset investment of FS for the 
second short taxable year is $217.98x, the sum of $112.50x ($450x/4) 
attributable to the one full quarter and $105.48x ($500x x 77/365) 
attributable to the short quarter.

    (g) Partnership property--(1) In general. For purposes of paragraph 
(b) of this section, if a tested income CFC holds an interest in one or 
more partnerships as of the close of the CFC inclusion year, the 
qualified business asset investment of the tested income CFC for the 
CFC inclusion year is increased by the sum of the tested income CFC's 
partnership QBAI with respect to each partnership for the CFC inclusion 
year. A tested loss CFC has no partnership QBAI for a CFC inclusion 
year.
    (2) Definitions related to partnership QBAI--(i) In general. The 
term partnership QBAI means the sum of the tested income CFC's share of 
the partnership's adjusted basis in partnership specified tangible 
property as of the close of a partnership taxable year that ends with 
or within a CFC inclusion year. A tested income CFC's share of the 
partnership's adjusted basis in partnership specified tangible property 
is determined separately with respect to each partnership specified 
tangible property of the partnership by multiplying the partnership's 
adjusted basis in the property by the partnership QBAI ratio with 
respect to the property. If the partnership's taxable year is less than 
twelve months, the principles of paragraph (f) of this section apply in 
determining a tested income CFC's partnership QBAI with respect to the 
partnership.
    (ii) Partnership QBAI ratio. The term partnership QBAI ratio means, 
with respect to partnership specified tangible property:
    (A) In the case of partnership specified tangible property that 
produces directly identifiable income for a partnership taxable year, 
the ratio of the tested income CFC's distributive share of the gross 
income produced by the property for the partnership taxable year that 
is included in the gross tested income of the tested income CFC for the 
CFC inclusion year to the total gross income produced by the property 
for the partnership taxable year.
    (B) In the case of partnership specified tangible property that 
does not produce directly identifiable income for a partnership taxable 
year, the ratio of the tested income CFC's distributive share of the 
gross income of the partnership for the partnership taxable year that 
is included in the gross tested income of the tested income CFC for the 
CFC inclusion year to the total amount of gross income of the 
partnership for the partnership taxable year.
    (iii) Partnership specified tangible property. The term partnership 
specified tangible property means tangible property (as defined in 
paragraph (c)(2) of this section) of a partnership that is--
    (A) Used in the trade or business of the partnership,
    (B) Of a type with respect to which a deduction is allowable under 
section 167, and
    (C) Used in the production of tested income.
    (3) Determination of adjusted basis. For purposes of this paragraph 
(g), a partnership's adjusted basis in partnership specified tangible 
property is determined based on the average of the partnership's 
adjusted basis in the property as of the close of each quarter in the 
partnership taxable year. The principles of paragraphs (e) and (h) of 
this section apply for purposes of determining a partnership's adjusted 
basis in partnership specified tangible property and the portion of 
such adjusted basis taken into account in determining a tested income 
CFC's partnership QBAI.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (g).

    (i) Example 1-- (A) Facts. FC, a tested income CFC, is a partner 
in PRS. Both FC and PRS use the calendar year as their taxable year. 
PRS owns two assets, Asset A and Asset B, both of which are tangible 
property used in PRS's trade or business that it depreciates under 
section 168. The average of PRS's adjusted basis as of the close of 
each quarter of PRS's taxable year in Asset A is $100x and the 
average of PRS's adjusted basis as of the end of each quarter of 
PRS's taxable year in

[[Page 51099]]

Asset B is $50x. Asset A produces $10x of directly identifiable 
gross income in Year 1, and Asset B produces $50x of directly 
identifiable gross income in Year 1. FC's distributive share of the 
gross income from Asset A is $8x and its distributive share of the 
gross income from Asset B is $10x. FC's entire distributive share of 
income from Asset A and Asset B is included in FC's gross tested 
income for Year 1. PRS partners' distributive shares satisfy the 
requirements of section 704.
    (B) Analysis. Each of Asset A and Asset B is partnership 
specified tangible property because each is tangible property, of a 
type with respect to which a deduction is allowable under section 
167, used in PRS's trade or business, and used in the production of 
tested income. FC's partnership QBAI ratio for Asset A is 80%, the 
ratio of FC's distributive share of the gross income from Asset A 
for Year 1 that is included in FC's gross tested income ($8x) to the 
total gross income produced by Asset A for Year 1 ($10x). FC's 
partnership QBAI ratio for Asset B is 20%, the ratio of FC's 
distributive share of the gross income from Asset B for Year 1 that 
is included in FC's gross tested income ($10x) to the total gross 
income produced by Asset B for Year 1 ($50x). FC's share of the 
average of PRS's adjusted basis of Asset A is $80x, PRS's adjusted 
basis in Asset A of $100x multiplied by FC's partnership QBAI ratio 
for Asset A of 80%. FC's share of the average of PRS's adjusted 
basis of Asset B is $10x, PRS's adjusted basis in Asset B of $50x 
multiplied by FC's partnership QBAI ratio for Asset B of 20%. 
Therefore, FC's partnership QBAI with respect to PRS is $90x ($80x + 
$10x). Accordingly, under paragraph (g)(1) of this section, FC 
increases its qualified business asset investment for Year 1 by 
$90x.
    (ii) Example 2-- (A) Facts. FC, a tested income CFC, owns a 50% 
interest in PRS. PRS owns Asset A, which is specified tangible 
property. The average of PRS's adjusted basis as of the close of 
each quarter of PRS's taxable year in Asset A is $100x. FC has the 
same taxable year as PRS. Asset A produces $20x of directly 
identifiable gross income in Year 1, and PRS has $22x of expenses in 
Year 1 that are properly allocable to such income. Therefore, FC's 
allocation of net income or loss from PRS is $1x loss, which is 
comprised of FC's distributive share of the gross income from Asset 
A of $10x, all of which is included in FC's gross tested income for 
Year 1, and FC's distributive share of the expenses related to Asset 
A of $11x, all of which is taken into account in determining its 
tested income under Sec.  1.951-2(c). PRS has no other income or 
loss in Year 1. FC also has $8x of gross tested income from other 
sources in Year 1, and no deductions properly allocable to such 
income. PRS partners' distributive shares satisfy the requirements 
of section 704.
    (B) Analysis. FC's partnership QBAI ratio for Asset A is 50%, 
the ratio of FC's distributive share of the gross income from Asset 
A for Year 1 that is included in FC's gross tested income ($10x) to 
the total gross income produced by Asset A for Year 1 ($20x). FC's 
share of the average of PRS's adjusted basis in Asset A is $50x, 
PRS's adjusted basis in Asset A of $100x multiplied by FC's 
partnership QBAI ratio for Asset A of 50%. FC increases its 
qualified business asset investment by $50x, notwithstanding that FC 
would not be a tested income CFC but for its $8x of gross tested 
income from other sources.

    (h) Anti-abuse rules for certain transfers of property--(1) 
Disregard of basis in specified tangible property held temporarily. If 
a tested income CFC (acquiring CFC) acquires specified tangible 
property (as defined in paragraph (c)(1) of this section) with a 
principal purpose of reducing the GILTI inclusion amount of a United 
States shareholder for any U.S. shareholder inclusion year, and the 
tested income CFC holds the property temporarily but over at least the 
close of one quarter, the specified tangible property is disregarded in 
determining the acquiring CFC's average adjusted basis in specified 
tangible property for purposes of determining the acquiring CFC's 
qualified business asset investment for any CFC inclusion year during 
which the tested income CFC held the property. For purposes of this 
paragraph (h)(1), specified tangible property held by the tested income 
CFC for less than a twelve month period that includes at least the 
close of one quarter during the taxable year of a tested income CFC is 
treated as temporarily held and acquired with a principal purpose of 
reducing the GILTI inclusion amount of a United States shareholder for 
a U.S. shareholder inclusion year if such acquisition would, but for 
this paragraph (h)(1), reduce the GILTI inclusion amount of a United 
States shareholder for a U.S. shareholder inclusion year.
    (2) Disregard of basis in specified tangible property related to 
transfers during the disqualified period--(i) In general. For purposes 
of determining the qualified business asset investment of a tested 
income CFC for a CFC inclusion year, in applying the alternative 
depreciation system under section 168(g) to determine the tested income 
CFC's adjusted basis in specified tangible property, any disqualified 
basis with respect to the specified tangible property is not taken into 
account.
    (ii) Determination of disqualified basis--(A) In general. The term 
disqualified basis means, with respect to specified tangible property, 
the excess (if any) of the property's adjusted basis immediately after 
a disqualified transfer, over the sum of the property's adjusted basis 
immediately before the disqualified transfer and the qualified gain 
amount with respect to the disqualified transfer. Disqualified basis 
may be reduced or eliminated through depreciation, amortization, sales 
or exchanges, section 362(e), and other methods. In such circumstances, 
in the case of specified tangible property with disqualified basis and 
adjusted basis other than disqualified basis, the disqualified basis is 
reduced or eliminated in the same proportion that the disqualified 
basis bears to the total adjusted basis of the property.
    (B) Definition of qualified gain amount. The term qualified gain 
amount means, with respect to a disqualified transfer, the sum of the 
following amounts:
    (1) The amount of gain recognized by a controlled foreign 
corporation (transferor CFC) on the disqualified transfer of the 
specified tangible property that is subject to U.S. federal income tax 
under section 882 (except to the extent the gain is subject to a 
reduced rate of tax, or is exempt from tax, pursuant to an applicable 
treaty obligation of the United States); and
    (2) Any United States shareholder's pro rata share of the gain 
recognized by the transferor CFC on the disqualified transfer of the 
specified tangible property (determined without regard to properly 
allocable deductions) taken into account in determining the United 
States shareholder's inclusion under section 951(a)(1)(A), excluding 
any amount that is described in paragraph (h)(2)(ii)(B)(1) of this 
section.
    (C) Definition of disqualified transfer. The term disqualified 
transfer means a transfer of specified tangible property during a 
transferor CFC's disqualified period by the transferor CFC to a related 
person in which gain was recognized, in whole or in part, by the 
transferor CFC, regardless of whether the property was specified 
tangible property in the hands of the transferor CFC. For purposes of 
the preceding sentence, a transfer includes any disposition, sale or 
exchange, contribution, or distribution of the specified tangible 
property, and includes an indirect transfer (for example, a transfer of 
an interest in a partnership is treated as a transfer of the assets of 
the partnership and transfer by or to a partnership is treated as a 
transfer by or to its partners).
    (D) Definition of disqualified period. The term disqualified period 
means, with respect to a transferor CFC, the period beginning on 
January 1, 2018, and ending as of the close of the transferor CFC's 
last taxable year that is not a CFC inclusion year. A transferor CFC 
that has a CFC inclusion year beginning January 1, 2018, has no 
disqualified period.
    (E) Related person. For purposes of this paragraph (h)(2), a person 
is related to a controlled foreign corporation if the

[[Page 51100]]

person bears a relationship to the controlled foreign corporation 
described in section 267(b) or 707(b) immediately before or immediately 
after the transfer.
    (iii) Examples. The following examples illustrate the application 
of this paragraph (h)(2).
    (A) Example 1-- (1) Facts. USP, a domestic corporation, owns all 
of the stock of CFC1 and CFC2, each a controlled foreign 
corporation. Both USP and CFC1 use the calendar year as their 
taxable year. CFC2 uses a taxable year ending November 30. On 
November 1, 2018, before the start of its first CFC inclusion year, 
CFC2 sells specified tangible property that has a basis of $10x in 
the hands of CFC2 to CFC1 in exchange for $100x of cash. CFC2 
recognizes $90x of gain as a result of the sale ($100x-$10x), $30x 
of which is foreign base company income (within the meaning of 
section 954). USP includes in gross income under section 
951(a)(1)(A) its pro rata share of the subpart F income of $30x. 
CFC2's gain is not otherwise subject to U.S. tax or taken into 
account in determining USP's inclusion under section 951(a)(1)(A).
    (2) Analysis. The transfer is a disqualified transfer because it 
is a transfer of specified tangible property; CFC1 and CFC2 are 
related persons; and the transfer occurs during the disqualified 
period, the period that begins on January 1, 2018, and ends the last 
day before the first CFC inclusion year of CFC2 (November 30, 2018). 
The disqualified basis is $60x, the excess of CFC1's adjusted basis 
in the property immediately after the disqualified transfer ($100x), 
over the sum of CFC2's basis in the property immediately before the 
transfer ($10x) and USP's pro rata share of the gain recognized by 
CFC1 on the transfer of the property taken into account by USP under 
section 951(a)(1)(A) ($30x). Accordingly, under paragraph (h)(2)(i) 
of this section, for purposes of determining the qualified business 
asset investment of any tested income CFC for any CFC inclusion 
year, in applying section 168(g) to determine the CFC's basis in the 
specified tangible property, the $60x disqualified basis of the 
property is not taken into account.
    (B) Example 2-- (1) Facts. The facts are the same as in 
paragraph (1) of Example 1, except that CFC2 uses the calendar year 
as its taxable year.
    (2) Analysis. Because CFC2 has a taxable year beginning January 
1, 2018, CFC2 has no disqualified period. Accordingly, the property 
was not transferred during a disqualified period of CFC2, and there 
is no disqualified basis with respect to the property.

0
Par. 7 Section 1.951A-4 is added to read as follows:


Sec.  1.951A-4  Tested interest expense and tested interest income.

    (a) Scope. This section provides general rules for determining the 
tested interest expense and tested interest income of a controlled 
foreign corporation for purposes of determining a United States 
shareholder's specified interest expense under Sec.  1.951A-
1(c)(3)(iii). Paragraph (b) of this section provides the definitions 
related to tested interest expense and tested interest income. 
Paragraph (c) of this section provides examples illustrating these 
definitions and the application of Sec.  1.951A-1(c)(3)(iii). The 
amount of specified interest expense determined under Sec.  1.951A-
1(c)(3)(iii) and this section is the amount of interest expense 
described in section 951A(b)(2)(B).
    (b) Definitions related to specified interest expense--(1) Tested 
interest expense--(i) In general. The term tested interest expense 
means interest expense paid or accrued by a controlled foreign 
corporation taken into account in determining the tested income or 
tested loss of the controlled foreign corporation for the CFC inclusion 
year under Sec.  1.951A-2(c), reduced by the qualified interest expense 
of the controlled foreign corporation.
    (ii) Interest expense. The term interest expense means any expense 
or loss that is treated as interest expense by reason of the Internal 
Revenue Code or the regulations thereunder, and any other expense or 
loss incurred in a transaction or series of integrated or related 
transactions in which the use of funds is secured for a period of time 
if such expense or loss is predominately incurred in consideration of 
the time value of money.
    (iii) Qualified interest expense. The term qualified interest 
expense means, with respect to a qualified CFC, the interest expense 
paid or accrued by the qualified CFC taken into account in determining 
the tested income or tested loss of the qualified CFC for the CFC 
inclusion year, multiplied by the fraction (not to exceed one) 
described in paragraph (b)(1)(iii)(A) of this section, and then reduced 
(but not to less than zero) by the amount described in paragraph 
(b)(1)(iii)(B) of this section.
    (A) The numerator of the fraction described in this paragraph 
(b)(1)(iii)(A) is the average of the aggregate adjusted bases as of the 
close of each quarter of obligations or financial instruments held by 
the qualified CFC that give rise to income excluded from foreign 
personal holding company income (as defined in section 954(c)(1)) by 
reason of section 954(h) or (i), and the denominator is the average of 
the aggregate adjusted bases as of the close of each quarter of all 
assets held by the qualified CFC. For purposes of this paragraph 
(b)(1)(iii)(A), the basis of the stock of another qualified CFC held by 
a qualified CFC is treated as basis of an obligation or financial 
instrument giving rise to income excluded from foreign personal holding 
company income by reason of section 954(h) or (i) in an amount equal to 
the basis of the stock multiplied by the fraction described in this 
paragraph (b)(1)(iii)(A) determined with respect to the assets of such 
other qualified CFC.
    (B) The amount described in this paragraph (b)(1)(iii)(B) is the 
amount of interest income of the qualified CFC for the CFC inclusion 
year that is excluded from foreign personal holding company income (as 
defined in section 954(c)(1)) by reason of section 954(c)(3) or (6).
    (iv) Qualified CFC. The term qualified CFC means an eligible 
controlled foreign corporation (within the meaning of section 
954(h)(2)) or a qualifying insurance company (within the meaning of 
section 953(e)(3)).
    (2) Tested interest income--(i) In general. The term tested 
interest income means interest income included in the gross tested 
income of a controlled foreign corporation for the CFC inclusion year, 
reduced by qualified interest income of the controlled foreign 
corporation.
    (ii) Interest income. The term interest income means any income or 
gain that is treated as interest income by reason of the Internal 
Revenue Code or the regulations thereunder, and any other income or 
gain recognized in a transaction or series of integrated or related 
transactions in which the forbearance of funds is secured for a period 
of time if such income or gain is predominately derived from 
consideration of the time value of money.
    (iii) Qualified interest income. The term qualified interest income 
means, with respect to a qualified CFC, interest income of the 
qualified CFC included in the gross tested income of the qualified CFC 
for the CFC inclusion year that is excluded from foreign personal 
holding company income (as defined in section 954(c)(1)) by reason of 
section 954(h) or (i).
    (c) Examples. The following examples illustrate the application of 
this section.

    (1) Example 1: Wholly-owned CFCs-- (i) Facts. A Corp, a domestic 
corporation, owns 100% of the single class of stock of each of FS1 
and FS2, each a controlled foreign corporation. A Corp, FS1, and FS2 
all use the calendar year as their taxable year. In Year 1, FS1 pays 
$100x of interest to FS2. Also, in Year 1, FS2 pays $100x of 
interest to a bank that is not related to A Corp, FS1, or FS2. The 
interest paid by each of FS1 and FS2 is taken into account in 
determining the tested income and tested loss of FS1 and FS2 under 
Sec.  1.951A-2(c), and the interest received by FS2 is not foreign 
personal holding company income (as defined in section 954(c)(1)) by 
reason of section 954(c)(6) and thus is included in gross tested 
income. For Year 1, taking into account

[[Page 51101]]

interest income and expense, FS1 has $500x of tested income and FS2 
has $400x of tested loss. Neither FS1 nor FS2 is a qualified CFC.
    (ii) Analysis--(A) CFC-level determination; tested interest 
expense and tested interest income. FS1 has $100x of tested interest 
expense for Year 1. FS2 has $100x of tested interest expense and 
$100x of tested interest income for Year 1.
    (B) United States shareholder-level determination; pro rata 
share and specified interest expense. Under Sec.  1.951A-1(d)(5) and 
(6), A Corp's pro rata share of FS1's tested interest expense is 
$100x, its pro rata share of FS2's tested interest expense is $100x, 
and its pro rata share of FS2's tested interest income is $100x. For 
Year 1, A Corp's aggregate pro rata share of tested interest expense 
is $200x and its aggregate pro rata share of tested interest income 
is $100x. Accordingly, under Sec.  1.951A-1(c)(3)(iii), A Corp's 
specified interest expense is $100x ($200x-$100x) for Year 1.
    (2) Example 2: Less than wholly-owned CFCs-- (i) Facts. The 
facts are the same as in paragraph (i) of Example 1, except that A 
Corp owns 50% of the single class of stock of FS1 and 80% of the 
single class of stock of FS2.
    (ii) Analysis. (A) CFC-level determination; tested interest 
expense and tested interest income. The analysis is the same as in 
paragraph (ii)(A) of Example 1.
    (B) United States shareholder-level determination; pro rata 
share and specified interest expense. Under Sec.  1.951A-1(d)(5) and 
(6), A Corp's pro rata share of FS1's tested interest expense is 
$50x ($100x x 0.50), its pro rata share of FS2's tested interest 
expense is $80x ($100x x 0.80), and its pro rata share of FS2's 
tested interest income is $80x ($100x x 0.80). For Year 1, A Corp's 
aggregate pro rata share of the tested interest expense is $130x and 
its aggregate pro rata share of the tested interest income is $80x. 
Accordingly, under Sec.  1.951A-1(c)(3)(iii), A Corp's specified 
interest expense is $50x ($130x - $80x) for Year 1.
    (3) Example 3: Qualified CFC--(i) Facts. B Corp, a domestic 
corporation, owns 100% of the single class of stock of each of FS1 
and FS2, each a controlled foreign corporation. B Corp, FS1, and FS2 
all use the calendar year as their taxable year. FS2 is an eligible 
controlled foreign corporation within the meaning of section 
954(h)(2). In Year 1, FS1 pays $100x of interest to FS2, which 
interest income is excluded from the foreign personal holding 
company income (as defined in section 954(c)(1)) of FS2 by reason of 
section 954(c)(6). Also, in Year 1, FS2 pays $250x of interest to a 
bank, and receives an additional $300x of interest from customers 
that are not related to FS2, which interest income is excluded from 
foreign personal holding company income by reason of section 954(h). 
The interest paid by each of FS1 and FS2 is taken into account in 
determining the tested income and tested loss of FS1 and FS2, and 
the interest received by FS2 is included in gross tested income. FS1 
is not a qualified CFC. FS2 does not own stock in any qualified CFC. 
FS2's average adjusted bases in obligations or financial instruments 
that give rise to income excluded from foreign personal holding 
company income by reason of section 954(h) is $8,000x, and FS2's 
average adjusted bases in all its assets is $10,000x.
    (ii) Analysis--(A) CFC-level determination; tested interest 
expense and tested interest income. FS1 has $100x of tested interest 
expense for Year 1. FS2 is a qualified CFC because it is an eligible 
controlled foreign corporation within the meaning of section 
954(h)(2). As a result, in determining the tested interest income 
and tested interest expense of FS2, the qualified interest income 
and qualified interest expense of FS2 are excluded. FS2 has 
qualified interest income of $300x, the amount of FS2's interest 
income that is excluded from foreign personal holding company income 
by reason of section 954(h). In addition, FS2 has qualified interest 
expense of $100x, the amount of FS2's interest expense taken into 
account in determining FS2's tested income or tested loss under 
Sec.  1.951A-2(c) ($250x), multiplied by a fraction, the numerator 
of which is FS2's average adjusted bases in obligations or financial 
instruments that give rise to income excluded from foreign personal 
holding company income by reason of section 954(h) ($8,000x), and 
the denominator of which is F2's average adjusted bases in all its 
assets ($10,000x), and then reduced by the amount of the interest 
income received from FS1 excluded from foreign personal holding 
company income by reason of section 954(c)(6) ($100x). Therefore, 
for Year 1, FS2 has tested interest income of $100x ($400x - $300x) 
and tested interest expense of $150x ($250x - $100x).
    (B) United States shareholder-level determination; pro rata 
share and specified interest expense. Under Sec.  1.951A-1(d)(5) and 
(6), B Corp's pro rata share of FS1's tested interest expense is 
$100x, its pro rata share of FS2's tested interest expense is $150x, 
and its pro rata share of FS2's tested interest income is $100x. For 
Year 1, B Corp's aggregate pro rata share of tested interest expense 
is $250x ($100x + $150x) and its aggregate pro rata share of tested 
interest income is $100x ($0 + $100x). Accordingly, under Sec.  
1.951A-1(c)(3)(iii), B Corp's specified interest expense is $150x 
($250x - $100x) for Year 1.

0
Par. 8. Section 1.951A-5 is added to read as follows:


Sec.  1.951A-5  Domestic partnerships and their partners.

    (a) Scope. This section provides rules regarding the application of 
section 951A and the section 951A regulations to domestic partnerships 
that own (within the meaning of section 958(a)) stock in one or more 
controlled foreign corporations and to partners of such domestic 
partnerships, including United States persons (within the meaning of 
section 957(c)). Paragraph (b) of this section provides rules for the 
determination of the GILTI inclusion amount of a domestic partnership 
and the distributive share of such amount of a partner that is not a 
United States shareholder with respect to one or more controlled 
foreign corporations owned by the domestic partnership. Paragraph (c) 
of this section provides rules for the determination of the GILTI 
inclusion amount of a partner that is a United States shareholder with 
respect to one or more controlled foreign corporations owned by a 
domestic partnership. Paragraph (d) of this section provides rules for 
tiered domestic partnerships. Paragraph (e) of this section provides 
the definitions of CFC tested item, partnership CFC, U.S. shareholder 
partner, and U.S. shareholder partnership. Paragraph (f) of this 
section requires a domestic partnership to provide certain information 
to each partner necessary for the partner to determine its GILTI 
inclusion amount or its distributive share of the partnership's GILTI 
inclusion amount. Paragraph (g) of this section provides examples 
illustrating the rules of this section. For rules regarding the 
treatment of certain controlled domestic partnerships owned through one 
or more foreign corporations as foreign partnerships for purposes of 
sections 951 through 964, including section 951A and the section 951A 
regulations, see Sec.  1.951-1(h).
    (b) In general--(1) Determination of GILTI inclusion amount of a 
U.S. shareholder partnership. A U.S. shareholder partnership determines 
its GILTI inclusion amount for its U.S. shareholder inclusion year 
under the general rules applicable to United States shareholders in 
section 951A and the section 951A regulations.
    (2) Determination of distributive share of U.S. shareholder 
partnership's GILTI inclusion amount of a partner other than a U.S. 
shareholder partner. Each partner of a U.S. shareholder partnership 
that is not a U.S. shareholder partner takes into account its 
distributive share of the U.S. shareholder partnership's GILTI 
inclusion amount (if any) for the U.S. shareholder inclusion year in 
accordance with section 702 and Sec.  1.702-1(a)(8)(ii).
    (c) Determination of GILTI inclusion amount of a U.S. shareholder 
partner. For purposes of section 951A and the section 951A regulations, 
section 958(a) stock of a partnership CFC owned by a U.S. shareholder 
partnership is treated as section 958(a) stock owned proportionately by 
each U.S. shareholder partner that is a United States shareholder of 
the partnership CFC in the same manner as if the U.S. shareholder 
partnership were a foreign partnership under section 958(a)(2) and 
Sec.  1.958-1(b). Accordingly, for purposes of determining a U.S. 
shareholder partner's GILTI inclusion amount, the U.S. shareholder 
partner determines its pro rata share of any CFC tested item of

[[Page 51102]]

a partnership CFC based on the section 958(a) stock owned by the U.S. 
shareholder partner by reason of this paragraph (c). In addition, a 
U.S. shareholder partner's distributive share of the GILTI inclusion 
amount of a U.S. shareholder partnership is determined without regard 
to the partnership's pro rata share of any CFC tested item of a 
partnership CFC with respect to which the U.S. shareholder partner is a 
United States shareholder.
    (d) Tiered U.S. shareholder partnerships. In the case of tiered 
U.S. shareholder partnerships, section 958(a) stock of a partnership 
CFC treated as owned under paragraph (c) of this section by a U.S. 
shareholder partner that is also a U.S. shareholder partnership is 
treated as section 958(a) stock owned by the U.S. shareholder 
partnership for purposes of applying paragraph (c) of this section to a 
U.S. shareholder partner of such U.S. shareholder partnership.
    (e) Definitions. The following definitions apply for purposes of 
this section:
    (1) CFC tested item. The term CFC tested item has the meaning set 
forth in Sec.  1.951A-1(d)(1).
    (2) Partnership CFC. The term partnership CFC means, with respect 
to a U.S. shareholder partnership, a controlled foreign corporation 
stock of which is owned (within the meaning of section 958(a)) by the 
U.S. shareholder partnership.
    (3) U.S. shareholder partner. The term U.S. shareholder partner 
means, with respect to a U.S. shareholder partnership and a partnership 
CFC of the U.S. shareholder partnership, a United States person that is 
a partner in the U.S. shareholder partnership and that is also a United 
States shareholder (as defined in section 951(b)) of the partnership 
CFC.
    (4) U.S. shareholder partnership. The term U.S. shareholder 
partnership means a domestic partnership (within the meaning of section 
7701(a)(4)) that is a United States shareholder of one or more 
controlled foreign corporations.
    (f) Reporting requirement. A U.S. shareholder partnership must 
furnish to each partner on or with such partner's Schedule K-1 (Form 
1065 or successor form) for each U.S. shareholder inclusion year of the 
partnership the partner's distributive share of the partnership's GILTI 
inclusion amount (if any) and, with respect to a U.S. shareholder 
partner, the partner's proportionate share of the partnership's pro 
rata share (if any) of each CFC tested item of each partnership CFC of 
the partnership and any other information required in the form or 
instructions. See section 6031(b).
    (g) Examples. The following examples illustrate the rules of this 
section. None of the persons in the following examples own an interest 
in any controlled foreign corporation other than as described.

    (1) Example 1: Domestic partnership with partners that are not 
United States shareholders-- (i) Facts. Eleven U.S. citizens 
(``individuals'') each own a 9% interest of PRS, a domestic 
partnership. The remaining 1% interest of PRS is owned by X Corp, a 
domestic corporation. None of the individuals or X Corp are related. 
PRS owns 100% of the single class of stock of FC, a controlled 
foreign corporation. The individuals, X Corp, PRS, and FC all use 
the calendar year as their taxable year. In Year 1, FC has $130x of 
tested income and $50x of qualified business asset investment.
    (ii) Analysis--(A) Partnership-level calculation. PRS is a U.S. 
shareholder partnership with respect to FC. Under paragraph (b)(1) 
of this section, PRS determines its GILTI inclusion amount for Year 
1. PRS's pro rata share of FC's tested income is $130x. PRS's pro 
rata share of FC's qualified business asset investment is $50x. 
PRS's net CFC tested income is $130x. PRS's net deemed tangible 
income return is $5x ($50x x 0.10). PRS's GILTI inclusion amount for 
Year 1 is $125x ($130x - $5x).
    (B) Partner-level calculation. Neither X Corp nor the 
individuals are U.S. shareholder partners with respect to FC. 
Accordingly, under paragraph (b)(2) of this section, each of the 
individuals and X Corp includes its distributive share of PRS's 
GILTI inclusion amount ($11.25x each for the individuals and $1.25x 
for X Corp) in gross income for Year 1.
     (2) Example 2: Domestic partnership with partners that are 
United States shareholders; multiple partnership CFCs--
    (i) Facts. X Corp and Y Corp are domestic corporations that own 
40% and 60%, respectively, of PRS, a domestic partnership. PRS owns 
100% of the single class of stock of FC1 and of FC2, each a 
controlled foreign corporation. X Corp, Y Corp, PRS, FC1, and FC2 
all use the calendar year as their taxable year. In Year 1, FC1 has 
$130x of tested income and $50x of qualified business asset 
investment, and FC2 has $30x of tested loss.
    (ii) Analysis--(A) Partnership-level calculation. PRS is a U.S. 
shareholder partnership with respect to each of FC1 and FC2. Under 
paragraph (b)(1) of this section, PRS determines its GILTI inclusion 
amount for Year 1. PRS's pro rata share of FC1's tested income is 
$130x and of FC2's tested loss is $30x. PRS's pro rata share of 
FC1's qualified business asset investment is $50x. PRS's net CFC 
tested income is $100x ($130x - $30x). PRS's net deemed tangible 
income return is $5x ($50x x 0.10). PRS's GILTI inclusion amount for 
Year 1 is $95x ($100x - $5x).
    (B) Partner-level calculation. X Corp and Y Corp are U.S. 
shareholder partners with respect to FC1 and FC2. Accordingly, under 
paragraph (c) of this section, X Corp and Y Corp are treated as 
owning section 958(a) stock of FC1 and FC2 proportionately as if PRS 
were a foreign partnership. Thus, X Corp's pro rata share of FC1's 
tested income is $52x ($130x x 0.40), and its pro rata share of 
FC2's tested loss is $12x ($30x x 0.40). X Corp's pro rata share of 
FC1's qualified business asset investment is $20x ($50x x 0.40). 
Accordingly, X Corp's net CFC tested income is $40x ($52x - $12x), 
and its net deemed tangible income return is $2x ($20x x 0.10). X 
Corp's GILTI inclusion amount for Year 1 is $38x ($40x - $2x). Y 
Corp's pro rata share of FC1's tested income is $78x ($130x x 0.60), 
and its pro rata share of FC2's tested loss is $18x ($30x x 0.60). Y 
Corp's pro rata share of FC1's qualified business asset investment 
is $30x ($50x x 0.60). Accordingly, Y Corp's net CFC tested income 
is $60x ($78x - $18x), and its net deemed tangible income return is 
$3x ($30x x 0.10). Y Corp's GILTI inclusion amount for Year 1 is 
$57x ($60x - $3x). Because X Corp and Y Corp are both U.S. 
shareholder partners with respect to FC1 and FC2, the only 
partnership CFCs of PRS, X Corp and Y Corp each includes its 
proportionate share of PRS's share of each CFC tested item of FC1 
and FC2 under paragraph (c) of this section rather than including a 
distributive share of the GILTI inclusion amount of PRS.
    (3) Example 3: Domestic partnership with partners that are 
United States shareholders with respect to some, but not all, of the 
controlled foreign corporations owned by the domestic partnership-- 
(i) Facts. X Corp and Y Corp are domestic corporations that own 40% 
and 60%, respectively, of PRS, a domestic partnership. PRS owns 20% 
of the single class of stock of FC1 and 10% of the single class of 
stock of FC2. In addition, Y Corp owns 100% of the single class of 
stock of FC3. FC1, FC2, and FC3 are controlled foreign corporations. 
X Corp, Y Corp, PRS, FC1, FC2, and FC3 all use the calendar year as 
their taxable year. In Year 1, FC1 has $100x of tested income, FC2 
has $80x of tested income, and FC3 has $10x of tested loss.
    (ii) Analysis. (A) Partnership-level calculation. PRS is a U.S. 
shareholder partnership with respect to each of FC1 and FC2. Under 
paragraph (b)(1) of this section, PRS determines its GILTI inclusion 
amount for Year 1. PRS's pro rata share of FC1's tested income is 
$20x ($100x x 0.20) and of FC2's tested income is $8x ($80x x 0.10). 
PRS's net CFC tested income is $28x ($20x + $8x). PRS has no net 
deemed tangible income return. PRS's GILTI inclusion amount for Year 
1 is $28x.
    (B) Partner-level calculation--(1) X Corp. X Corp is not a U.S. 
shareholder partner with respect to either FC1 or FC2 because X Corp 
owns (within the meaning of section 958) less than 10% of each of 
FC1 (40% x 20% = 8%) and FC2 (40% x 10% = 4%). Accordingly, under 
paragraph (b)(2) of this section, X Corp includes in income its 
distributive share, or $11.20x ($28x x 0.40), of PRS's GILTI 
inclusion amount in Year 1.
    (2) Y Corp. Y Corp is a United States shareholder of FC3. Y Corp 
is also a U.S. shareholder partner with respect to FC1, because it 
owns (within the meaning of section 958) at least 10% (60% x 20% = 
12%) of the stock of FC1, but not with respect to

[[Page 51103]]

FC2, because Y Corp owns (within the meaning of section 958) less 
than 10% of the stock of FC2 (60% x 10% = 6%). Accordingly, under 
paragraph (c) of this section, Y Corp is treated as owning section 
958(a) stock of FC1 proportionately as if PRS were a foreign 
partnership. Thus, Y Corp's pro rata share of FC1's tested income is 
$12x ($20x x 0.60). Y Corp's pro rata share of FC3's tested loss is 
$10x ($10x x 1). Accordingly, Y Corp's net CFC tested income is $2x 
($12x - $10x) and Y Corp has no net deemed tangible income return. Y 
Corp's GILTI inclusion amount for Year 1 is $2x. In addition, under 
paragraph (c) of this section, for purposes of determining Y Corp's 
distributive share of PRS's GILTI inclusion amount, Y Corp's 
distributive share of PRS's GILTI inclusion amount is determined 
without regard to PRS's pro rata share of any item of FC1. PRS's 
GILTI inclusion amount computed solely with respect to FC2 is $8x 
($80x x 0.10). Y Corp's distributive share of PRS's GILTI inclusion 
amount is $4.80x ($8x x 0.60) in Year 1.
     (4) Example 4: Tiered domestic partnerships--(i) Facts. X Corp 
and Y Corp are domestic corporations that own, respectively, a 20% 
interest and an 80% interest in PRS1, an upper-tier domestic 
partnership. PRS1 owns a 40% interest in PRS2, a lower-tier domestic 
partnership. The remaining 60% of PRS2 is owned by Z Corp, a 
controlled foreign corporation. PRS2 is not a controlled domestic 
partnership within the meaning of Sec.  1.951-1(h)(2) (because no 
United States shareholder of Z Corp (or related persons) controls 
PRS2). PRS2 owns 80% of the single class of stock of FC, a 
controlled foreign corporation. X Corp, Y Corp, Z Corp, PRS1, PRS2, 
and FC all use the calendar year as their taxable year. In Year 1, 
FC has $100x of tested income and $50x of qualified business asset 
investment.
    (ii) Analysis. (A) Lower-tier partnership-level calculation. 
PRS2 is a U.S. shareholder partnership with respect to FC, because 
PRS2 directly owns 80% of the single class of stock of FC. Under 
paragraph (b)(1) of this section, PRS2 determines its GILTI 
inclusion amount for its taxable year. PRS2's pro rata share of FC's 
tested income is $80x ($100x x 0.80). PRS2's pro rata share of FC's 
qualified business asset investment is $40x ($50x x 0.80). PRS2's 
net CFC tested income is $80x, and its net deemed tangible income 
return is $4x ($40x x 0.10). PRS2's GILTI inclusion amount for Year 
1 is $76x ($80x - $4x).
    (B) Non-U.S. shareholder partner calculation. Z Corp is not a 
U.S. shareholder partner of FC. Therefore, under paragraph (b)(2) of 
this section, in Year 1, Z Corp includes in income Z Corp's 
distributive share of PRS2's GILTI inclusion amount, or $45.60x 
($76x x 0.60). Z Corp's gross tested income in Year 1 includes this 
amount.
    (C) Upper-tier partnership-level calculation. PRS1 is a U.S. 
shareholder partner with respect to FC because it owns (within the 
meaning of section 958) more than 10% of the stock of FC (40% x 100% 
(by reason of the application of section 958(b)(2)) = 40%). 
Accordingly, under paragraph (c) of this section, PRS1 is treated as 
owning section 958(a) stock of FC proportionately as if PRS2 were a 
foreign partnership. Thus, PRS1's pro rata share of FC's tested 
income is $32x ($100x x 0.80 x 0.40), and its pro rata share of FC's 
qualified business asset investment is $16x ($50x x 0.80 x 0.40). 
PRS1's net CFC tested income is $32x, and its net deemed tangible 
income return is $1.60x ($16x x 0.10). PRS1's GILTI inclusion amount 
for Year 1 is $30.40x ($32x - $1.60x).
    (D) Upper-tier partnership partner-level calculation--(1) 
Treatment of upper-tier partnership. For purposes of applying 
paragraph (c) of this section to determine X Corp and Y Corp's GILTI 
inclusion amount, PRS1 is treated as owning section 958(a) stock of 
FC.
    (2) X Corp. X Corp is not a U.S. shareholder partner with 
respect to FC because it owns (within the meaning of section 958) 
less than 10% (20% x 40% x 100% (by reason of the application of 
section 958(b)(2)) = 8%) of the stock of FC. Accordingly, under 
paragraph (b)(2) of this section, X Corp includes its distributive 
share of PRS1's GILTI inclusion amount in Year 1, which is $6.08x 
($30.40x x 0.20).
    (3) Y Corp. Y Corp is a U.S. shareholder partner with respect to 
FC because it owns (within the meaning of section 958) more than 10% 
(80% x 40% x 100% (by reason of the application of section 
958(b)(2)) = 32%) of the stock of FC. Accordingly, under paragraphs 
(c) and (d) of this section, Y Corp is treated as owning section 
958(a) stock of FC proportionately as if PRS1 and PRS2 were foreign 
partnerships. Thus, Y Corp's pro rata share of FC's tested income is 
$25.60x ($100x x 0.80 x 0.40 x 0.80), and its pro rata share of FC's 
qualified business asset investment is $12.80x ($50x x 0.80 x 0.40 x 
0.80). Y Corp's net CFC tested income is $25.60x, its net deemed 
tangible income return is $1.28x ($12.80x x 0.10), and its GILTI 
inclusion amount is $24.32x ($25.60x - $1.28x). Because Y Corp is a 
U.S. shareholder partner with respect to FC, the only partnership 
CFC of PRS1, Y Corp has no distributive share of the GILTI inclusion 
amount of PRS1 under paragraph (c) of this section.
    (5) Example 5: S corporation and its shareholders-- (i) Facts. 
Individual A, a U.S. citizen, and Grantor Trust, a trust all of 
which is treated under sections 671 through 679 as owned by 
Individual B, a U.S. citizen, respectively own 5% and 95% of the 
single class of stock of Corporation X, an S corporation. 
Corporation X owns 100% of the single class of stock of FC, a 
controlled foreign corporation. Individual A, Grantor Trust, 
Individual B, Corporation X, and FC all use the calendar year as 
their taxable year. In Year 1, FC has $200x of tested income and 
$100x of qualified business asset investment.
    (ii) Analysis--(A) S corporation-level calculation. An S 
corporation is treated as a partnership for purposes of sections 951 
through 965 under section 1373. Corporation X is a U.S. shareholder 
partnership with respect to FC, a partnership CFC. Accordingly, 
under paragraph (b)(1) of this section, Corporation X determines its 
GILTI inclusion amount for Year 1. Corporation X's pro rata share of 
FC's tested income is $200x, and its pro rata share of FC's 
qualified business asset investment is $100x. Corporation X's net 
CFC tested income is $200x, and its net deemed tangible income 
return is $10x ($100x x 0.10). Corporation X's GILTI inclusion 
amount for Year 1 is $190x ($200x - $10x).
    (B) S corporation shareholder-level calculation--(1) Individual 
A. Individual A is not a U.S. shareholder partner with respect to FC 
because it owns (within the meaning of section 958) less than 10% 
(5% x 100% = 5%) of the FC stock. Accordingly, under paragraph 
(b)(2) of this section, Individual A includes in gross income its 
proportionate share of Corporation X's GILTI inclusion amount, which 
is $9.50x ($190x x 0.05).
    (2) Grantor Trust. Because Individual B is treated as owning all 
of Grantor Trust under sections 671 through 679, Individual B is 
treated as if it directly owns the shares of stock in Corporation X 
owned by Grantor Trust. As a result, Individual B is treated as a 
U.S. shareholder partner with respect to FC because it owns (within 
the meaning of section 958) more than 10% (95% x 100% = 95%) of the 
FC stock. Accordingly, under paragraph (c) of this section, 
Individual B is treated as owning section 958(a) stock of FC 
proportionately as if Corporation X were a foreign partnership. 
Thus, Individual B's pro rata share of FC's tested income is $190x 
($200x x 0.95) and its pro rata share of FC's qualified business 
asset investment is $95x ($100x x 0.95). Individual B's net CFC 
tested income is $190x, and its net deemed tangible income return is 
$9.50x ($95x x 0.10). Individual B's GILTI inclusion amount for Year 
1 is $180.5x ($190x - $9.50x). Because Individual B is a U.S. 
shareholder partner with respect to FC, the only partnership CFC of 
Corporation X, Individual B has no distributive share of the GILTI 
inclusion amount of Corporation X under paragraph (c) of this 
section.
    (6) Example 6: Domestic partnership with no GILTI inclusion 
amount-- (i) Facts. X Corp is a domestic corporation that owns a 90% 
interest in PRS, a domestic partnership. The remaining 10% of PRS is 
owned by Y, a foreign individual. PRS owns 100% of the single class 
of stock of FC1, a controlled foreign corporation, and 100% of the 
single class of stock of FC2, a controlled foreign corporation. X 
Corp owns 100% of the single class of stock of FC3, a controlled 
foreign corporation. X Corp, PRS, FC1, FC2, and FC3 all use the 
calendar year as their taxable year. In Year 1, FC1 has $100x of 
tested loss and $80x of tested interest expense, FC2 has $50x of 
tested income, and FC3 has $150x of tested income and $500x of 
qualified business asset investment in Year 1.
    (ii) Analysis--(A) Partnership-level calculation. PRS is a U.S. 
shareholder partnership with respect to FC1 and FC2. Under paragraph 
(b)(1) of this section, PRS determines its GILTI inclusion amount 
for Year 1. PRS's pro rata share of FC1's tested loss is $100x, and 
PRS's pro rata share of FC2's tested income is $50x. PRS's net CFC 
tested income is $0 ($50x - 100x), and therefore PRS has no GILTI 
inclusion amount for Year 1.
    (B) Partner-level calculation. X Corp is a U.S. shareholder 
partner with respect to FC1 and FC2 because X Corp owns (within the 
meaning of section 958) at least 10% of each (90% x 100% = 90%). 
Accordingly, under

[[Page 51104]]

paragraph (c) of this section, X Corp is treated as owning section 
958(a) stock of FC1 and FC2 proportionately as if PRS were a foreign 
partnership. X Corp's pro rata share of FC1's tested loss is $90x 
($100x x 0.90), and X Corp's pro rata share of FC1's tested interest 
expense is $72x ($80 x 0.90). X Corp's pro rata share of FC2's 
tested income is $45x ($50x x 0.90). X Corp's pro rata share of 
FC3's tested income is $150x, and its pro rata share of FC3's 
qualified business asset investment is $500x. X Corp's net CFC 
tested income is $105x ($45x + $150x - $90x). X Corp's deemed 
tangible income return is $50x ($500x x 0.10), but its net deemed 
tangible income return is $0 ($50x - $72x). X Corp has a GILTI 
inclusion amount of $105x ($105x - $0) for Year 1.

0
Par. 9. Section 1.951A-6 is added to read as follows:


Sec.  1.951A-6  Treatment of GILTI inclusion amount and adjustments to 
earnings and profits and basis related to tested loss CFCs.

    (a) Scope. This section provides rules relating to the treatment of 
GILTI inclusion amounts and adjustments to earnings and profits and 
basis to account for tested losses. Paragraph (b) of this section 
provides that a GILTI inclusion amount is treated in the same manner as 
an amount included under section 951(a)(1)(A) for purposes of applying 
certain sections of the Code. Paragraph (c) of this section provides 
rules for the treatment of amounts taken into account in determining 
the net CFC tested income when applying sections 163(e)(3)(B)(i) and 
267(a)(3)(B). Paragraph (d) of this section provides rules that 
increase the earnings and profits of a tested loss CFC for purposes of 
section 952(c)(1)(A). Paragraph (e) of this section provides rules for 
certain basis adjustments to the stock of a controlled foreign 
corporation by reason of tested losses used to reduce a domestic 
corporation's net CFC tested income upon the disposition of the stock 
of the controlled foreign corporation.
    (b) Treatment as subpart F income for certain purposes--(1) In 
general. A GILTI inclusion amount is treated in the same manner as an 
amount included under section 951(a)(1)(A) for purposes of applying 
sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 
993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 1411, 6501(e)(1)(C), 
6654(d)(2)(D), and 6655(e)(4), and with respect to other sections of 
the Internal Revenue Code as provided in other guidance published in 
the Internal Revenue Bulletin.
    (2) Allocation of GILTI inclusion amount to tested income CFCs--(i) 
In general. For purposes of the sections referred to in paragraph 
(b)(1) of this section, the portion of the GILTI inclusion amount of a 
United States shareholder treated as being with respect to each 
controlled foreign corporation of the United States shareholder for the 
U.S. shareholder inclusion year is--
    (A) In the case of a tested loss CFC, zero, and
    (B) In the case of a tested income CFC, the portion of the GILTI 
inclusion amount of the United States shareholder which bears the same 
ratio to such inclusion amount as the United States shareholder's pro 
rata share of the tested income of the tested income CFC for the U.S. 
shareholder inclusion year bears to the aggregate amount of the United 
States shareholder's pro rata share of the tested income of each tested 
income CFC for the U.S. shareholder inclusion year.
    (ii) Example-- (A) Facts. USP, a domestic corporation, owns all 
of the stock of three controlled foreign corporations, CFC1, CFC2, 
and CFC3. USP, CFC1, CFC2, and CFC3 all use the calendar year as 
their taxable year. In Year 1, CFC1 has tested income of $100x, CFC2 
has tested income of $300x, and CFC3 has tested loss of $50x. 
Neither CFC1 nor CFC2 has qualified business asset investment.
    (B) Analysis. In Year 1, USP has a GILTI inclusion amount of 
$350x ($100x + $300x-$50x). The aggregate amount of USP's pro rata 
share of tested income from CFC1 and CFC2 is $400x ($100x + $300x). 
The portion of USP's GILTI inclusion amount treated as being with 
respect to CFC1 is $87.50x ($350x x $100x/$400x). The portion of 
USP's GILTI inclusion amount treated as being with respect to CFC2 
is $262.50x ($350x x $300x/$400x). The portion of USP's GILTI 
inclusion amount treated as being with respect to CFC3 is $0 because 
CFC3 is a tested loss CFC.

    (iii) Translation of portion of GILTI inclusion amount allocated to 
tested income CFC. The portion of the GILTI inclusion amount of a 
United States shareholder allocated to a tested income CFC under 
section 951A(f)(2) and paragraph (b)(2)(i) of this section is 
translated into the functional currency of the tested income CFC using 
the average exchange rate for the CFC inclusion year of the tested 
income CFC.
    (c) Treatment as an amount includible in the gross income of a 
United States person--(1) In general. For purposes of sections 
163(e)(3)(B)(i) and 267(a)(3)(B), an item (including original issue 
discount) is treated as includible in the gross income of a United 
States person to the extent that such item increases a United States 
shareholder's pro rata share of tested income of a controlled foreign 
corporation for a U.S. shareholder inclusion year, reduces the 
shareholder's pro rata share of tested loss of a controlled foreign 
corporation for the U.S. shareholder inclusion year, or both.
    (2) Special rule for a United States shareholder that is a domestic 
partnership. In the case of a United States shareholder that is a 
domestic partnership (within the meaning of section 7701(a)(4)), an 
item is described in paragraph (c)(1) of this section only to the 
extent one or more United States persons (other than domestic 
partnerships) that are direct or indirect partners of the domestic 
partnership include in gross income their distributive share of the 
GILTI inclusion amount (if any) of the domestic partnership for the 
U.S. shareholder inclusion year of the domestic partnership in which 
such item accrues or such item is taken into account under paragraph 
(c)(1) of this section by a U.S. shareholder partner (within the 
meaning of Sec.  1.951A-5(e)(3)) of the domestic partnership by reason 
of Sec.  1.951A-5(c).
    (d) Increase of earnings and profits of tested loss CFC for 
purposes of section 952(c)(1)(A). For purposes of section 952(c)(1)(A) 
with respect to a CFC inclusion year, the earnings and profits of a 
tested loss CFC are increased by an amount equal to the tested loss of 
the tested loss CFC for the CFC inclusion year.
    (e) Adjustments to basis related to net used tested loss--(1) In 
general--(i) Disposition of stock of a controlled foreign corporation. 
In the case of a disposition of section 958(a) stock of a controlled 
foreign corporation owned (directly or indirectly) by a domestic 
corporation (specified stock), the adjusted basis of the specified 
stock is reduced immediately before the disposition by the domestic 
corporation's net used tested loss amount with respect to the 
controlled foreign corporation (if any) attributable to the specified 
stock. If the reduction described in the preceding sentence exceeds the 
adjusted basis in the specified stock immediately before the 
disposition, such excess is treated as gain from the sale or exchange 
of the stock for the taxable year in which the disposition occurs.
    (ii) Disposition of stock of an upper-tier controlled foreign 
corporation. In the case of a disposition of specified stock of a 
controlled foreign corporation (upper-tier CFC) by reason of which a 
domestic corporation owns, or has owned, section 958(a) stock of any 
other controlled foreign corporation (lower-tier CFC), for purposes of 
determining the reduction under paragraph (e)(1)(i) of this section, 
the domestic corporation's net used tested loss amount (if any) with 
respect to the

[[Page 51105]]

upper-tier CFC attributable to the specified stock is--
    (A) Increased by the sum of the domestic corporation's net used 
tested loss amounts with respect to each lower-tier CFC attributable to 
the specified stock; and
    (B) Reduced (but not below zero) by the sum of the domestic 
corporation's net offset tested income amounts with respect to the 
upper-tier CFC and each lower-tier CFC attributable to the specified 
stock.
    (iii) Disposition of an interest in a foreign entity other than a 
controlled foreign corporation. In the case of a disposition of an 
interest in a foreign entity other than a controlled foreign 
corporation through which entity a domestic corporation owns section 
958(a) stock of a controlled foreign corporation, for purposes of 
paragraph (e)(1)(i) and (ii) of this section, the controlled foreign 
corporation is treated as a lower-tier CFC, the interest in the entity 
is treated as specified stock of a controlled foreign corporation, and 
the entity is treated as an upper-tier CFC with respect to which the 
domestic corporation has neither a net used tested loss amount nor a 
net offset tested income amount.
    (iv) Order of application of basis reductions. In the event of an 
indirect disposition described in paragraph (e)(6)(ii)(B) of this 
section, the basis reduction described in paragraph (e)(1)(i) of this 
section is deemed to occur at the lowest-tier CFC first and, 
thereafter, up the chain of ownership until adjustments are made to the 
specified stock directly owned by the person making the disposition 
described in paragraph (e)(6)(ii)(A) of this section.
    (v) No duplicative adjustments. No item is taken into account under 
this paragraph (e)(1) to adjust the basis of specified stock of a 
controlled foreign corporation to the extent that such amount has 
previously been taken into account with respect to a prior basis 
adjustment with respect to such stock under this paragraph (e)(1). 
Moreover, the basis of specified stock is not reduced to the extent a 
taxpayer can demonstrate to the satisfaction of the Secretary that such 
adjustments would duplicate prior reductions to the basis of such stock 
under section 362(e)(2).
    (2) Net used tested loss amount--(i) In general. The term net used 
tested loss amount means, with respect to a domestic corporation and a 
controlled foreign corporation, the excess (if any) of--
    (A) The aggregate of the domestic corporation's used tested loss 
amount with respect to the controlled foreign corporation for each U.S. 
shareholder inclusion year, over
    (B) The aggregate of the domestic corporation's offset tested 
income amount with respect to the controlled foreign corporation for 
each U.S. shareholder inclusion year.
    (ii) Used tested loss amount. The term used tested loss amount 
means, with respect to a domestic corporation and a tested loss CFC for 
a U.S. shareholder inclusion year--
    (A) In the case of a domestic corporation that has net CFC tested 
income for the U.S. shareholder inclusion year, the domestic 
corporation's pro rata share of the tested loss of the tested loss CFC 
for the U.S. shareholder inclusion year, or
    (B) In the case of a domestic corporation without net CFC tested 
income for the U.S. shareholder inclusion year, the amount that bears 
the same ratio to the domestic corporation's pro rata share of the 
tested loss of the tested loss CFC for the U.S. shareholder inclusion 
year as the aggregate of the domestic corporation's pro rata share of 
the tested income of each tested income CFC for the U.S. shareholder 
inclusion year bears to the aggregate of the domestic corporation's pro 
rata share of the tested loss of each tested loss CFC for the U.S. 
shareholder inclusion year.
    (3) Net offset tested income amount--(i) In general. The term net 
offset tested income amount means, with respect to a domestic 
corporation and a controlled foreign corporation, the excess (if any) 
of the amount described in paragraph (e)(2)(i)(B) of this section over 
the amount described in paragraph (e)(2)(i)(A) of this section.
    (ii) Offset tested income amount. The term offset tested income 
amount means, with respect to a domestic corporation and a tested 
income CFC for a U.S. shareholder inclusion year--
    (A) In the case of a domestic corporation that has net CFC tested 
income for the U.S. shareholder inclusion year, the amount that bears 
the same ratio to the domestic corporation's pro rata share of the 
tested income of the tested income CFC for the U.S. shareholder 
inclusion year as the aggregate of the domestic corporation's pro rata 
share of the tested loss of each tested loss CFC for the U.S. 
shareholder inclusion year bears to the aggregate of the domestic 
corporation's pro rata share of the tested income of each tested income 
CFC for the U.S. shareholder inclusion year, or
    (B) In the case of a domestic corporation without net CFC tested 
income for the U.S. shareholder inclusion year, the domestic 
corporation's pro rata share of the tested income of the tested income 
CFC for the U.S. shareholder inclusion year.
    (4) Attribution to stock--(i) In general. The portion of a domestic 
corporation's net used tested loss amount or net offset tested income 
amount with respect to a controlled foreign corporation (including a 
lower-tier CFC) attributable to specified stock for purposes of 
paragraph (e)(1) of this section is determined based on the domestic 
corporation's pro rata share of the tested loss and tested income, as 
applicable, of the controlled foreign corporation for each U.S. 
shareholder inclusion year with respect to such specified stock. See 
Sec.  1.951A-1(d)(1), (2), and (4) for rules regarding the 
determination of pro rata share amounts of tested income and tested 
loss.
    (ii) Nonrecognition transactions. In the case of specified stock 
acquired by a domestic corporation in a nonrecognition transaction (as 
defined in section 7701(a)(45)), the principles of Sec.  1.1248-8 apply 
to determine the domestic corporation's net used tested loss amount or 
net offset tested income amount with respect to a controlled foreign 
corporation attributable to specified stock. For purposes of applying 
the principles of Sec.  1.1248-8, tested income is treated as earnings 
and profits and tested loss is treated as a deficit in earnings and 
profits.
    (5) Section 381 transactions. If a controlled foreign corporation 
with respect to which a United States shareholder has a net used tested 
loss amount or net offset tested income amount is a distributor or 
transferor corporation in a transaction described in section 381(a) 
(acquired CFC) in which a controlled foreign corporation is the 
acquiring corporation (acquiring CFC), the domestic corporation's net 
used tested loss amount or net offset tested income amount with respect 
to the acquiring CFC is increased by the amount of the net used tested 
loss amount or net offset tested income amount of the acquired CFC. 
This paragraph (e)(5) does not apply to the extent that the acquiring 
CFC is an upper-tier CFC and such amounts would be taken into account 
under paragraph (e)(1)(ii) of this paragraph if the stock of the 
acquiring CFC were disposed of.
    (6) Other definitions. The following additional definitions apply 
for purposes of this paragraph (e):
    (i) Domestic corporation. The term domestic corporation means a 
domestic corporation other than a real estate investment trust (as 
defined in section 856) or a regulated investment company (as defined 
in section 851).

[[Page 51106]]

    (ii) Disposition. The term disposition means--
    (A) Any transfer of specified stock that is taxable, in whole or in 
part, including a sale or exchange, contribution, or distribution of 
the stock, including a deemed sale or exchange by reason of the 
specified stock becoming worthless within the meaning of section 
165(g), or
    (B) Any indirect disposition of specified stock of a lower-tier CFC 
as a result of a disposition described in paragraph (e)(6)(ii)(A) of 
this section of specified stock of an upper-tier CFC.
    (7) Special rule for disposition by controlled foreign corporation 
less than 100 percent owned by a single domestic corporation. In the 
case of a disposition by a controlled foreign corporation that is not 
100 percent owned, within the meaning of section 958(a), by a single 
domestic corporation, if a reduction to basis described in paragraph 
(e)(1) of this section by reason of a domestic corporation's net used 
tested loss amount results in an increase to the controlled foreign 
corporation's foreign personal holding company income (as defined in 
section 954(c)(1)), the domestic corporation's pro rata share of the 
subpart F income of the controlled foreign corporation, as otherwise 
determined under section 951(a)(2) and Sec.  1.951-1(b) and (e), is 
increased by the amount of such increase, and no other shareholder 
takes such subpart F income into account under section 951(a)(1)(A).
    (8) Special rules for members of a consolidated group. For purposes 
of the section 951A regulations, a member determines its net used 
tested loss amount and the adjustments made as a result of the amount 
under the rules provided in Sec.  1.1502-51(c).
    (9) Examples. The following examples illustrate the application of 
the rules in this paragraph (e).

    (i) Example 1-- (A) Facts. USP, a domestic corporation, owns 
100% of the single class of stock of CFC1 and CFC2. USP1, CFC1, and 
CFC2 all use the calendar year as their taxable year. In Year 1, 
CFC2 has $90x of tested loss and CFC1 has $100x of tested income. At 
the beginning of Year 2, USP sells all of the stock of CFC2 to an 
unrelated buyer for cash. USP has no used tested loss amount or 
offset tested income amount with respect to CFC2 in any year prior 
to Year 1. USP has not owned stock in any other CFC by reason of 
owning stock of CFC1 and CFC2.
    (B) Analysis. At the time of the disposition, USP has a net used 
tested loss amount of $90x with respect to CFC2 attributable to the 
CFC2 stock, which is the specified stock. Because USP does not own 
(and has not owned), within the meaning of section 958(a)(2), stock 
in any lower-tier CFCs by reason of the CFC2 stock, there is no 
adjustment to the net used tested loss amount of $90x pursuant to 
paragraph (e)(1)(ii) of this section. Accordingly, immediately 
before the disposition of the CFC2 stock, the basis of the CFC2 
stock is reduced by $90x under paragraph (e)(1)(i) of this section.
    (ii) Example 2-- (A) Facts. The facts are the same as in 
paragraph (A) of Example 1, except that USP sells only 90% of the 
shares of CFC2.
    (B) Analysis. The analysis is the same as in paragraph (B) of 
Example 1, except that USP's net used tested loss amount 
attributable to the CFC2 stock that was disposed of is only $81x 
(90% x $90x) under paragraph (e)(4)(i) of this section. Accordingly, 
immediately before the disposition of such stock, the basis in the 
CFC2 stock disposed of is reduced by $81x under paragraph (e)(1)(i) 
of this section.
    (iii) Example 3-- (A) Facts. The facts are the same as in 
paragraph (A) of Example 1, except that USP sells the CFC2 stock at 
the beginning of Year 3 and during Year 2 CFC1 has $10x of tested 
loss that offsets Year 2 tested income of CFC2.
    (B) Analysis. USP has a net used tested loss amount of $80x with 
respect to CFC2 attributable to the CFC2 stock, the amount of USP's 
used tested loss amount with respect to CFC2 attributable to the 
CFC2 stock in Year 1 of $90x reduced by USP's offset tested income 
amount with respect to CFC2 attributable to the CFC2 stock in Year 2 
of $10x. Accordingly, immediately before the disposition of the CFC2 
stock, the basis of the CFC2 stock is reduced by $80x under 
paragraph (e)(1)(i) of this section.
    (iv) Example 4-- (A) Facts. USP, a domestic corporation, owns 
100% of the single class of stock of CFC1, and CFC1 owns 100% of the 
single class of stock of CFC2. USP1, CFC1, and CFC2 all use the 
calendar year as their taxable year. In Year 1, CFC1 has $100x of 
tested loss that offsets CFC2's $100x of tested income. USP sells 
the stock of CFC1 at the beginning of Year 2. USP has no used tested 
loss amount or offset tested income amount with respect to CFC1 or 
CFC2 in any year prior to Year 1. USP has not owned stock in any 
other CFC by reason of owning stock of CFC1 and CFC2.
    (B) Analysis--(1) Direct disposition. At the time of the 
disposition, USP has a net used tested loss amount of $100x with 
respect to CFC1 attributable to the CFC1 stock. However, because USP 
owns, within the meaning of section 958(a)(2), CFC2 stock by reason 
of the CFC1 stock, USP's $100x net used tested loss amount with 
respect to CFC1 attributable to the CFC1 stock is reduced by USP's 
$100x net offset tested income amount with respect to CFC2 
attributable to the CFC1 stock. Accordingly, there is no adjustment 
to the basis of the CFC1 stock under paragraph (e)(1)(i) of this 
section.
    (2) Indirect disposition. Under paragraph (e)(6)(ii)(B) of this 
section, USP's disposition of the CFC1 stock also constitutes an 
indirect disposition of the CFC2 stock because CFC1 is an upper-tier 
CFC and CFC2 is a lower-tier CFC within the meaning of paragraph 
(e)(1)(ii) of this section. However, USP has no net used tested loss 
amount with respect to CFC2 attributable to the CFC2 stock. 
Accordingly, there is no adjustment to the basis of the CFC2 stock 
under paragraph (e)(1) of this section.
    (v) Example 5-- (A) Facts. The facts are the same as in 
paragraph (A) of Example 4, except that in Year 1 CFC2 has $100x of 
tested loss that offsets CFC1's $100x of tested income. CFC1 sells 
the stock of CFC2 at the beginning of Year 2.
    (B) Analysis. USP, a domestic corporation, owns within the 
meaning of section 958(a) stock of CFC2. Accordingly, immediately 
before the disposition, CFC1's basis in the CFC2 stock is reduced by 
USP's net used tested loss amount with respect to CFC2 attributable 
to the CFC2 stock of $100x under paragraph (e)(1)(i) of this 
section.
    (2) Indirect disposition.
    (vi) Example 6-- (A) Facts. The facts are the same as in 
paragraph (A) of Example 5, except that instead of CFC1 selling the 
stock of CFC2, USP sells the stock of CFC1.
    (B) Analysis--(1) Direct disposition. USP has no net used tested 
loss amount with respect to CFC1 attributable to the stock of CFC1. 
However, because USP owns, within the meaning of section 958(a)(2), 
stock of CFC2 by reason of owning stock of CFC1, under paragraph 
(e)(1)(ii) of this section, USP's net used tested loss amount 
attributable to the stock of CFC1 ($0) is increased by USP's net 
used tested loss amount with respect to CFC2 attributable to the 
CFC1 stock ($100x), and reduced by USP's net offset tested income 
amount with respect to CFC1 attributable to the CFC1 stock ($100x). 
Accordingly, there is no adjustment to the basis of the CFC1 stock 
under paragraph (e)(1) of this section.
    (2) Indirect disposition. Under paragraph (e)(6)(ii)(B) of this 
section, USP's disposition of CFC1 stock also constitutes an 
indirect disposition of the CFC2 stock because CFC1 is an upper-tier 
CFC and CFC2 is a lower-tier CFC within the meaning of paragraph 
(e)(1)(ii) of this section. Accordingly, immediately before the 
disposition, CFC1's basis in the CFC2 stock is reduced by USP's net 
used tested loss amount with respect to CFC2 attributable to the 
CFC2 stock of $100x under paragraph (e)(1)(i) of this section. Under 
paragraph (e)(1)(iv) of this section, the basis reduction to CFC2's 
shares is deemed to occur immediately before any reductions occur 
with respect to the stock of CFC1, of which there are none.
    (vii) Example 7-- (A) Facts. USP1, a domestic corporation, owns 
90% of the single class of stock of CFC1, and CFC1 owns 100% of the 
single class of stock of CFC2. USP1 also owns 100% of the single 
class of stock of CFC3. The remaining 10% of the stock of CFC1 is 
owned by USP2, a person unrelated to USP1. USP2 owns no other CFCs. 
USP1, USP2, CFC1, CFC2, and CFC3 all use the calendar year as their 
taxable year. In Year 1, CFC1 has no tested income or tested loss, 
CFC2 has tested loss of $100x, and CFC3 has tested income of $100x. 
CFC1 has no other earnings or income in Year 1. At the beginning of 
Year 2, CFC1 sells CFC2. Without regard to this paragraph (e), CFC1 
would recognize no gain or loss with respect to the CFC2 stock. USP1 
has not owned stock in any other controlled foreign corporation by 
reason of owning stock of CFC1, CFC2, and CFC3.

[[Page 51107]]

    (B) Analysis. At the time of the disposition, USP2 has no net 
used tested loss amount with respect to CFC2. At the time of the 
disposition, USP1 has a net used tested loss amount of $90x with 
respect to CFC2 attributable to the CFC2 stock, which is the 
specified stock. Because USP1 does not own (and has not owned), 
within the meaning of section 958(a)(2), stock in any lower-tier 
CFCs by reason of the CFC2 stock, there is no adjustment to the net 
used tested loss amount of $90x pursuant to paragraph (e)(1)(ii) of 
this section. Accordingly, immediately before the disposition of the 
CFC2 stock, the basis of the CFC2 stock is reduced by $90x under 
paragraph (e)(1)(i) of this section. As a result, CFC1 recognizes 
gain of $90x on the disposition of the CFC2 stock, which results in 
$90x of foreign personal holding company income and $90x of earnings 
and profits. Under paragraph (e)(7) of this section, USP1's pro rata 
share of the subpart F income of CFC1 is increased by $90x, and USP2 
does not take such subpart F income into account under section 
951(a)(1)(A).
     (viii) Example 8--(A) Facts. USP, a domestic corporation, owns 
100% of the single class of stock of CFC1 and CFC2, and CFC1 owns 
100% of the single class of stock of CFC3 and CFC4. USP, CFC1, CFC2, 
CFC3, and CFC4 all use the calendar year as their taxable year. In 
Year 1, CFC1 has no tested income or tested loss, CFC2 has $200x of 
tested income, and CFC3 and CFC4 each have tested loss of $100x. 
During Year 2, CFC3 liquidates into CFC1 in a nontaxable transaction 
described under section 332, and CFC1 sells the stock of CFC4 to an 
unrelated third party for cash. During Year 2, none of CFC1, CFC2, 
CFC3, or CFC4 earn tested income or tested loss. At the beginning of 
Year 3, USP sells the stock of CFC1 to an unrelated third party for 
cash. USP has not owned stock in any other CFC by reason of owning 
stock in CFC1, CFC2, CFC3, or CFC4.
    (B) Analysis. (1) CFC3's liquidation into CFC1 is not a 
disposition within the meaning of paragraph (e)(6)(ii)(A) of this 
section because CFC1 does not recognize gain or loss in whole or in 
part with respect to the stock of CFC3 under section 332. 
Furthermore, CFC1 does not inherit CFC3's net used tested loss 
amount under paragraph (e)(5) of this section because CFC1 is an 
upper-tier CFC with respect to CFC3 and would take such amounts into 
account under paragraph (e)(1)(ii) of this section at the time of a 
future disposition. That is, the CFC3 stock is section 958(a) stock 
that USP has owned by reason of its ownership of CFC1 within the 
meaning of paragraph (e)(1)(ii) of this section.
    (2) At the time of CFC1's sale of the stock of CFC4, USP has a 
$100x net used tested loss amount with respect to CFC4 attributable 
to the CFC4 stock, which is the specified stock. Because USP has not 
owned, within the meaning of section 958(a)(2), stock in any lower-
tier CFCs by reason of the CFC4 stock, there is no adjustment to the 
net used tested loss amount of $100x pursuant to paragraph 
(e)(1)(ii) of this section. Accordingly, immediately before the 
disposition of the CFC4 stock, the basis of the CFC4 stock is 
reduced by $100x under paragraph (e)(1)(i) of this section.
    (3) At the time of USP's sale of CFC1, USP has no net used 
tested loss amount with respect to CFC1 attributable to the CFC1 
stock. However, USP has owned, within the meaning of section 
958(a)(2), stock of lower-tier CFCs (CFC3 and CFC4) by reason of its 
ownership of CFC1. Thus, USP's net used tested loss amount 
attributable to the stock of CFC1 ($0) is increased by USP's net 
used tested loss amounts with respect to CFC3 and CFC4 attributable 
to the CFC1 stock ($200x). Accordingly, immediately before the 
disposition of the CFC1 stock, the basis of the CFC1 stock is 
reduced by $200x under paragraph (e)(1)(i) of this section. The rule 
prohibiting duplicative adjustments under paragraph (e)(1)(v) of 
this section does not prevent this basis reduction because the net 
used tested loss amounts with respect to the CFC3 and CFC4 stock 
were not previously taken into account to reduce the basis of CFC1 
stock.

0
Par. 10. Section 1.951A-7 is added to read as follows:


Sec.  1.951A-7  Applicability dates.

    Sections 1.951A-1 through 1.951A-6 apply to taxable years of 
foreign corporations beginning after December 31, 2017, and to taxable 
years of United States shareholders in which or with which such taxable 
years of foreign corporations end.
0
Par. 11. Section 1.1502-12 is amended by adding paragraph (s) to read 
as follows:


Sec.  1.1502-12  Separate taxable income.

* * * * *
    (s) See Sec.  1.1502-51 for rules relating to the computation of a 
member's GILTI inclusion amount under section 951A and related basis 
adjustments.
0
Par. 12. Section 1.1502-13 is amended by adding paragraph (c) to 
Example 4 in paragraph (f)(7).
    The addition reads as follows:


Sec.  1.1502-13  Intercompany transactions.

* * * * *
    (f) * * *

    (7) * * *
    Example 4. * * *
    (c) Application of Sec.  1.1502-51(c)(5) to all cash 
intercompany reorganization under section 368(a)(1)(D). The facts 
are the same as in paragraph (a) of this Example 4, except that S's 
sole asset is stock of a controlled foreign corporation, within the 
meaning of section 957, with respect to which S has a net used 
tested loss amount (within the meaning of Sec.  1.1502-51(e)(15)) of 
$15. As in paragraph (b) of this Example 4, S is treated as 
receiving additional B stock with a fair market value of $100 (in 
lieu of the $100) and, under section 358, a basis of $25 which S 
distributes to M in liquidation. Immediately after the sale, 
pursuant to Sec.  1.1502-51(c)(5), the basis in the B stock received 
by M is reduced by $15 (the amount of the net used tested loss 
amount with respect to the controlled foreign corporation) to $10. 
Following the basis reduction pursuant to Sec.  1.1502-51(c)(5), the 
B stock (with the exception of the nominal share which is still held 
by M) received by M is treated as redeemed for $100, and the 
redemption is treated under section 302(d) as a distribution to 
which section 301 applies. M's basis of $10 in the B stock is 
reduced under Sec.  1.1502-32(b)(3)(v), resulting in an excess loss 
account of $90 in the nominal share. (See Sec.  1.302-2(c).) M's 
deemed distribution of the nominal share of B stock to P under Sec.  
1.368-2(l) will result in M generating an intercompany gain under 
section 311(b) of $90, to be subsequently taken into account under 
the matching and acceleration rules.
* * * * *
0
Par. 13. Section 1.1502-32 is amended by:
0
1. Adding paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C).
0
2. Revising paragraph (j).
    The revision and additions read as follows:


Sec.  1.1502-32  Investment adjustments.

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * *
    (E) Adjustment for the offset tested income amount of a controlled 
foreign corporation in relation to section 951A. S's tax-exempt income 
for a taxable year includes the aggregate of S's offset tested income 
amounts (within the meaning of Sec.  1.1502-51(c)(3)) with respect to a 
controlled foreign corporation (within the meaning of section 957) for 
all of its U.S. shareholder inclusion years (within the meaning of 
Sec.  1.951A-1(e)(4)), to the extent such aggregate does not exceed the 
excess (if any) of--
    (1) The aggregate of S's used tested loss amounts (within the 
meaning of Sec.  1.1502-51(c)(2)) with respect to the controlled 
foreign corporation for all of its U.S. shareholder inclusion years, 
over
    (2) The aggregate of S's offset tested income amounts with respect 
to the controlled foreign corporation for all of its U.S. shareholder 
inclusion years previously treated as tax-exempt income pursuant to 
this paragraph.
    (F) Adjustment for the net offset tested income amount of a 
controlled foreign corporation in relation to section 951A. S will be 
treated as having tax-exempt income immediately prior to a transaction 
(recognition event) in which another member of the group recognizes 
income, gain, deduction, or loss with respect to a share of S's stock 
to the extent provided in this paragraph (b)(3)(ii)(F). S's tax-exempt 
income is equal to the portion of the allocable amount that would have 
been characterized as a dividend to which

[[Page 51108]]

section 245A, but not section 1059, would have applied if the allocable 
amount had been distributed by a controlled foreign corporation to the 
owner of the transferred shares immediately before the recognition 
event. For purposes of this paragraph--
    (1) The term transferred shares means the shares of a controlled 
foreign corporation that S owns within the meaning of section 958(a) or 
is considered to own by applying the rules of ownership of section 
958(b) and that are indirectly transferred as part of the recognition 
event; and
    (2) The term allocable amount means the net offset tested income 
amount (within the meaning of Sec.  1.1502-51(e)(14)) allocable to the 
transferred shares.
    (iii) * * *
    (C) Adjustment for the used tested loss amount of a controlled 
foreign corporation in relation to section 951A. S's noncapital, 
nondeductible expense includes its amount of used tested loss amount 
(within the meaning of Sec.  1.1502-51(c)(2)) with respect to a 
controlled foreign corporation (within the meaning of section 957) for 
a U.S. shareholder inclusion year (within the meaning of Sec.  1.951A-
1(e)(4)).
* * * * *
    (j) Applicability date--(1) In general. Paragraph (b)(4)(iv) of 
this section applies to any original consolidated Federal income tax 
return due (without extensions) after June 14, 2007. For original 
consolidated Federal income tax returns due (without extensions) after 
May 30, 2006, and on or before June 14, 2007, see Sec.  1.1502-32T as 
contained in 26 CFR part 1 in effect on April 1, 2007. For original 
consolidated Federal income tax returns due (without extensions) on or 
before May 30, 2006, see Sec.  1.1502-32 as contained in 26 CFR part 1 
in effect on April 1, 2006.
    (2) Adjustment for the offset tested income amount, net offset 
tested income amount, and used tested loss amount of a controlled 
foreign corporation. Paragraphs (b)(3)(ii)(E), (b)(3)(ii)(F), and 
(b)(3)(iii)(C) of this section apply to any consolidated Federal income 
tax return for a taxable year in which or with which the taxable year 
of a controlled foreign corporation beginning after December 31, 2017, 
ends.
* * * * *
0
Par. 14. Section 1.1502-51 is added to read as follows:


Sec.  1.1502-51  Consolidated section 951A.

    (a) In general. This section provides rules for applying section 
951A and Sec. Sec.  1.951A-1 through 1.951A-7 (the section 951A 
regulations) to each member of a consolidated group (each, a member) 
that is a United States shareholder of any controlled foreign 
corporation. Paragraph (b) describes the inclusion of the GILTI 
inclusion amount by a member of a consolidated group. Paragraph (c) 
modifies the rules provided in Sec.  1.951A-6(e) for adjustments to 
basis related to used tested loss amount. Paragraph (d) provides rules 
governing basis adjustments to member stock resulting from the 
application of Sec.  1.951A-6(e) and paragraph (c) of this section. 
Paragraph (e) provides definitions for purposes of this section. 
Paragraph (f) provides examples illustrating the rules of this section. 
Paragraph (g) provides an applicability date.
    (b) Calculation of the GILTI inclusion amount for a member of a 
consolidated group. Each member who is a United States shareholder of 
any controlled foreign corporation includes in gross income in the U.S. 
shareholder inclusion year the member's GILTI inclusion amount, if any, 
for the U.S. shareholder inclusion year. See section 951A(a) and Sec.  
1.951A-1(b). The GILTI inclusion amount of a member for a U.S. 
shareholder inclusion year is the excess (if any) of the member's net 
CFC tested income for the U.S. shareholder inclusion year, over the 
member's net deemed tangible income return for the U.S. shareholder 
inclusion year, determined using the definitions provided in paragraph 
(e) of this section.
    (c) Adjustments to basis related to used tested loss amount--(1) In 
general. The adjusted basis of the section 958(a) stock of a controlled 
foreign corporation that is owned (directly or indirectly) by a member 
(specified stock) or an interest in a foreign entity other than a 
controlled foreign corporation by reason of which a domestic 
corporation owns (within the meaning of section 958(a)(2)) stock of a 
controlled foreign corporation is adjusted immediately before its 
disposition pursuant to Sec.  1.951A-6(e). The amount of the adjustment 
is determined using the rules provided in paragraphs (c)(2), (3), and 
(4) of this section.
    (2) Determination of used tested loss amount. For purposes of the 
section 951A regulations and this section, the term used tested loss 
amount means, with respect to a member and a tested loss CFC for a U.S. 
shareholder inclusion year--
    (i) In the case of the consolidated group tested income equaling or 
exceeding the consolidated group tested loss for a U.S. shareholder 
inclusion year, the member's pro rata share (determined under Sec.  
1.951A-1(d)(4)) of the tested loss of the tested loss CFC for the U.S. 
shareholder inclusion year.
    (ii) In the case of the consolidated group tested income being less 
than the consolidated group tested loss for a U.S. shareholder 
inclusion year, the amount that bears the same ratio to the member's 
pro rata share (determined under Sec.  1.951A-1(d)(4)) of the tested 
loss of the tested loss CFC for the U.S. shareholder inclusion year as 
the consolidated group tested income for the U.S. shareholder inclusion 
year bears to the consolidated group tested loss for the U.S. 
shareholder inclusion year.
    (3) Determination of offset tested income amount. For purposes of 
the section 951A regulations and this section, the term offset tested 
income amount means, with respect to a member and a tested income CFC 
for a U.S. shareholder inclusion year--
    (i) In the case of the consolidated group tested income exceeding 
the consolidated group tested loss for a U.S. shareholder inclusion 
year, the amount that bears the same ratio to the member's pro rata 
share (determined under Sec.  1.951A-1(d)(2)) of the tested income of 
the tested income CFC for the U.S. shareholder inclusion year as the 
consolidated group tested loss for the U.S. shareholder inclusion year 
bears to the consolidated group tested income for the U.S. shareholder 
inclusion year.
    (ii) In the case of the consolidated group tested income equaling 
or being less than the consolidated group tested loss for a U.S. 
shareholder inclusion year, the member's pro rata share (determined 
under Sec.  1.951A-1(d)(2)) of the tested income of the tested income 
CFC for the U.S. shareholder inclusion year.
    (4) Special rule for disposition by a controlled foreign 
corporation less than 100 percent owned by a single domestic 
corporation. For purposes of determining the application of Sec.  
1.951A-6(e)(7), the amount of stock in the controlled foreign 
corporation a member owns, within the meaning of section 958(a), 
includes any stock that the member is considered as owning by applying 
the rules of ownership of section 958(b).
    (5) Special rule for intercompany nonrecognition transactions. If a 
member engages in a nonrecognition transaction (within the meaning of 
section 7701(a)(45)), with another member in which stock of a 
controlled foreign corporation that has a net used tested loss amount 
is directly transferred, the adjusted basis of the nonrecognition 
property (within the meaning of section 358) received in the 
nonrecognition transaction is

[[Page 51109]]

immediately reduced by the amount of the net used tested loss amount. 
In cases of intercompany transactions that are governed by Sec.  1.368-
2(l), the reduction in basis pursuant to this paragraph (c)(5) is made 
prior to the application of Sec.  1.1502-13(f)(3). See Sec.  1.1502-
13(f)(7), Example 4(c).
    (d) Adjustments to the basis of a member. For adjustments to the 
basis of a member related to paragraph (c) of this section, see Sec.  
1.1502-32(b)(3)(ii)(E), (b)(3)(ii)(F), and (b)(3)(iii)(C).
    (e) Definitions. The following definitions apply for purposes of 
the section--
    (1) Aggregate tested income. With respect to a member, the term 
aggregate tested income means the aggregate of the member's pro rata 
share (determined under Sec.  1.951A-1(d)(2)) of the tested income of 
each tested income CFC for a U.S. shareholder inclusion year.
    (2) Aggregate tested loss. With respect to a member, the term 
aggregate tested loss means the aggregate of the member's pro rata 
share (determined under Sec.  1.951A-1(d)(4)) of the tested loss of 
each tested loss CFC for a U.S. shareholder inclusion year.
    (3) Allocable share. The term allocable share means, with respect 
to a member that is a United States shareholder and a U.S. shareholder 
inclusion year--
    (i) With respect to consolidated group QBAI, the product of the 
consolidated group QBAI of the member's consolidated group and the 
member's GILTI allocation ratio.
    (ii) With respect to consolidated group specified interest expense, 
the product of the consolidated group specified interest expense of the 
member's consolidated group and the member's GILTI allocation ratio.
    (iii) With respect to consolidated group tested loss, the product 
of the consolidated group tested loss of the member's consolidated 
group and the member's GILTI allocation ratio.
    (4) Consolidated group QBAI. With respect to a consolidated group, 
the term consolidated group QBAI means the sum of each member's pro 
rata share (determined under Sec.  1.951A-1(d)(3)) of the qualified 
business asset investment of each tested income CFC for a U.S. 
shareholder inclusion year.
    (5) Consolidated group specified interest expense. With respect to 
a consolidated group, the term consolidated group specified interest 
expense means the excess (if any) of--
    (i) The sum of each member's pro rata share (determined under Sec.  
1.951A-1(d)(5)) of the tested interest expense of each controlled 
foreign corporation for the U.S. shareholder inclusion year, over
    (ii) The sum of each member's pro rata share (determined under 
Sec.  1.951A-1(d)(6)) of the tested interest income of each controlled 
foreign corporation for the U.S. shareholder inclusion year.
    (6) Consolidated group tested income. With respect to a 
consolidated group, the term consolidated group tested income means the 
sum of each member's aggregate tested income for a U.S. shareholder 
inclusion year.
    (7) Consolidated group tested loss. With respect to a consolidated 
group, the term consolidated group tested loss means the sum of each 
member's aggregate tested loss for a U.S. shareholder inclusion year.
    (8) Controlled foreign corporation. The term controlled foreign 
corporation means a controlled foreign corporation as defined in 
section 957.
    (9) Deemed tangible income return. With respect to a member, the 
term deemed tangible income return means 10 percent of the member's 
allocable share of the consolidated group QBAI.
    (10) GILTI allocation ratio. With respect to a member, the term 
GILTI allocation ratio means the ratio of--
    (i) The aggregate tested income of the member for a U.S. 
shareholder inclusion year, to
    (ii) The consolidated group tested income of the consolidated group 
of which the member is a member for the U.S. shareholder inclusion 
year.
    (11) GILTI inclusion amount. With respect to a member, the term 
GILTI inclusion amount has the meaning provided in paragraph (b) of 
this section.
    (12) Net CFC tested income. With respect to a member, the term net 
CFC tested income means the excess (if any) of--
    (i) The member's aggregate tested income, over
    (ii) The member's allocable share of the consolidated group tested 
loss.
    (13) Net deemed tangible income return. With respect to a member, 
the term net deemed tangible income return means the excess (if any) of 
the member's deemed tangible income return over the member's allocable 
share of the consolidated group specified interest expense.
    (14) Net offset tested income amount. The term net offset tested 
income amount means, with respect to a member and a controlled foreign 
corporation, the excess (if any) of the amount described in paragraph 
(e)(15)(ii) of this section over the amount described in paragraph 
(e)(15)(i) of this section.
    (15) Net used tested loss amount. The term net used tested loss 
amount means, with respect to a member and a controlled foreign 
corporation, the excess (if any) of --
    (i) The aggregate of the member's pro rata share of each used 
tested loss amount of the controlled foreign corporation for each U.S. 
shareholder inclusion year over
    (ii) The aggregate of the member's pro rata share of each offset 
tested income amount of the controlled foreign corporation for each 
U.S. shareholder inclusion year.
    (16) Offset tested income amount. The term offset tested income 
amount has the meaning provided in paragraph (c)(3) of this section.
    (17) Qualified business asset investment. The term qualified 
business asset investment has the meaning provided in Sec.  1.951A-
3(b).
    (18) Tested income. The term tested income has the meaning provided 
in Sec.  1.951A-2(b)(1).
    (19) Tested income CFC. The term tested income CFC has the meaning 
provided in Sec.  1.951A-2(b)(1).
    (20) Tested interest expense. The term tested interest expense has 
the meaning provided in Sec.  1.951A-4(b)(1).
    (21) Tested interest income. The term tested interest income has 
the meaning provided in Sec.  1.951A-4(b)(2).
    (22) Tested loss. The term tested loss has the meaning provided in 
Sec.  1.951A-2(b)(2).
    (23) Tested loss CFC. The term tested loss CFC has the meaning 
provided in Sec.  1.951A-2(b)(2).
    (24) United States shareholder. The term United States shareholder 
has the meaning provided in Sec.  1.951-1(g)(1).
    (25) U.S. shareholder inclusion year. The term U.S. shareholder 
inclusion year has the meaning provided in Sec.  1.951A-1(e)(4).
    (26) Used tested loss amount. The term used tested loss amount has 
the meaning provided in paragraph (c)(2) of this section.
    (f) Examples. The following examples illustrate the rules of this 
section. For purposes of the examples in this section, unless otherwise 
stated: P is the common parent of the P consolidated group; P owns all 
of the single class of stock of subsidiaries USS1, USS2, and USS3, all 
of whom are members of the P consolidated group; CFC1, CFC2, CFC3, and 
CFC4 are all controlled foreign corporations (within the meaning of 
paragraph (e)(8) of this section); and the taxable year of all persons 
is the calendar year.

    (1) Example 1: Calculation of net CFC tested income within a 
consolidated group

[[Page 51110]]

when all CFCs are wholly owned by a member-- (i) Facts. USS1 owns 
all of the single class of stock of CFC1. USS2 owns all of the 
single class of stock of each of CFC2 and CFC3. USS3 owns all of the 
single class of stock of CFC4. In Year 1, CFC1 has tested loss of 
$100, CFC2 has tested income of $200x, CFC3 has tested loss of 
$200x, and CFC4 has tested income of $600x. Neither CFC2 nor CFC4 
has qualified business asset investment in Year 1.
    (ii) Analysis--(A) Consolidated group tested income and GILTI 
allocation ratio. USS1 has no aggregate tested income; USS2's 
aggregate tested income is $200x, its pro rata share (within the 
meaning of Sec.  1.951A-1(d)(2)) of CFC2's tested income; and USS3's 
aggregate tested income is $600x, its pro rata share (within the 
meaning of Sec.  1.951A-1(d)(2)) of CFC4's tested income. Therefore, 
under paragraph (e)(6) of this section, the P consolidated group's 
consolidated group tested income is $800x ($200x + $600x). As a 
result, the GILTI allocation ratios of USS1, USS2, and USS3 are 0 
($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x), 
respectively.
    (B) Consolidated group tested loss. Under paragraph (e)(7) of 
this section, the P consolidated group's consolidated group tested 
loss is $300x ($100x + $200x), the aggregate of USS1's aggregate 
tested loss, which is equal to its pro rata share (within the 
meaning of Sec.  1.951A-1(d)(4)) of CFC1's tested loss ($100x), and 
USS2's aggregate tested loss, which is equal to its pro rata share 
(within the meaning of Sec.  1.951A-1(d)(4)) of CFC3's tested loss 
($200x). Under paragraph (e)(3)(iii) of this section, a member's 
allocable share of the consolidated group tested loss is the product 
of the consolidated group tested loss of the member's consolidated 
group and the member's GILTI allocation ratio. Therefore, the 
allocable shares of the consolidated group tested loss of USS1, 
USS2, and USS3 are $0 (0 x $300x), $75x (0.25 x $300x), and $225x 
(0.75 x $300x), respectively.
    (C) Calculation of net CFC tested income. Under paragraph 
(e)(12) of this section, a member's net CFC tested income is the 
excess (if any) of the member's aggregate tested income over the 
member's allocable share of the consolidated group tested loss. As a 
result, USS1's, USS2's, and USS3's net CFC tested income amounts are 
$0 ($0-$0), $125x ($200x-$75x), and $375x ($600x-$225x), 
respectively.
    (2) Example 2: Calculation of net CFC tested income within a 
consolidated group when ownership of a tested loss CFC is split 
between members-- (i) Facts. The facts are the same as in paragraph 
(i) of Example 1, except that USS2 and USS3 each own 50% of the 
single class of stock of CFC3.
    (ii) Analysis. As in paragraph (ii) of Example 1, USS1 has no 
aggregate tested income and a GILTI allocation ratio of 0, USS2 has 
$200x of aggregate tested income and a GILTI allocation ratio of 
0.25, and USS3 has $600x of aggregate tested income and a GILTI 
allocation ratio of 0.75. Additionally, the P consolidated group's 
consolidated group tested loss is $300x (the aggregate of USS1's 
aggregate tested loss, which is equal to its pro rata share (within 
the meaning of Sec.  1.951A-1(d)(4)) of CFC1's tested loss ($100x); 
USS2's aggregate tested loss, which is equal to its pro rata share 
(within the meaning of Sec.  1.951A-1(d)(4)) of CFC3's tested loss 
($100x); and USS3's aggregate tested loss, which is equal to its pro 
rata share (within the meaning of Sec.  1.951A-1(d)(4)) of CFC3's 
tested loss ($100x)). As a result, under paragraph (e)(12) of this 
section, as in paragraph (ii)(C) of Example 1, USS1's, USS2's, and 
USS3's net CFC tested income amounts are $0 ($0--$0), $125x ($200x--
$75x), and $375x ($600x--$225x), respectively.
    (3) Example 3: Calculation of GILTI inclusion amount-- (i) 
Facts. The facts are the same as in paragraph (i) of Example 1, 
except that CFC2 and CFC4 have qualified business asset investment 
of $500x and $2000x, respectively, for Year 1. In Year 1, CFC1 and 
CFC4 each have tested interest expense (within the meaning of Sec.  
1.951A-4(b)(1)) of $25x, and CFC1, CFC2, CFC3, and CFC4 have $0 of 
tested interest income (within the meaning of Sec.  1.951A-4(b)(2)). 
CFC1's tested loss of $100x and CFC4's tested income of $600x take 
into account the interest paid.
    (ii) Analysis--(A) GILTI allocation ratio. As in paragraph (ii) 
of Example 1, the GILTI allocation ratios of USS1, USS2, and USS3 
are 0 ($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x), 
respectively.
    (B) Consolidated group QBAI. Under paragraph (e)(4) of this 
section, the P consolidated group's consolidated group QBAI is 
$2,500x ($500x + $2,000x), the aggregate of USS2's pro rata share 
(determined under Sec.  1.951A-1(d)(3)) of the qualified business 
asset investment of CFC2 and USS3's pro rata share (determined under 
Sec.  1.951A-1(d)(3)) of the qualified business asset investment of 
CFC4. Under paragraph (e)(3)(i) of this section, a member's 
allocable share of consolidated group QBAI is the product of the 
consolidated group QBAI of the member's consolidated group and the 
member's GILTI allocation ratio. Therefore, the allocable shares of 
the consolidated group QBAI of each of USS1, USS2, and USS3 are $0 
(0 x $2,500x), $625x (0.25 x $2,500x), and $1,875x (0.75 x $2,500x), 
respectively.
    (C) Consolidated group specified interest expense--(1) Pro rata 
share of tested interest expense. USS1's pro rata share of the 
tested interest expense of CFC1 is $25x, the amount by which the 
tested interest expense increases USS1's pro rata share of CFC1's 
tested loss (from $75x to $100x) for Year 1. USS3's pro rata share 
of the tested interest expense of CFC4 is also $25x, the amount by 
which the tested interest expense decreases USS1's pro rata share of 
CFC4's tested income (from $625x to $600x). See Sec.  1.951A-
1(d)(5).
    (2) Consolidated group specified interest expense. Under 
paragraph (e)(5) of this section, the P consolidated group's 
consolidated group specified interest expense is $50x, the excess of 
the sum of each member's pro rata share of the tested interest 
expense of each controlled foreign corporation ($50x, $25x from USS1 
+ $25x from USS3), over the sum of each member's pro rata share of 
tested interest income ($0). Under paragraph (e)(3)(ii) of this 
section, a member's allocable share of consolidated group specified 
interest expense is the product of the consolidated group specified 
interest expense of the member's consolidated group and the member's 
GILTI allocation ratio. Therefore, the allocable shares of 
consolidated group specified interest expense of USS1, USS2, and 
USS3 are $0 (0 x $50x), $12.50x (0.25 x $50x), and $37.50x (0.75 x 
$50x), respectively.
    (D) Calculation of deemed tangible income return. Under 
paragraph (e)(9) of this section, a member's deemed tangible income 
return means 10 percent of the member's allocable share of the 
consolidated group QBAI. As a result, USS1's, USS2's, and USS3's 
deemed tangible income returns are $0 (0-$0), $62.50x (0.1 - $625x), 
and $187.50x (0.1 - $1,875x), respectively.
    (E) Calculation of net deemed tangible income return. Under 
paragraph (e)(13) of this section, a member's net deemed tangible 
income return means the excess (if any) of a member's deemed 
tangible income return over the member's allocable share of the 
consolidated group specified interest. As a result, USS1's, USS2's, 
and USS3's net deemed tangible income returns are $0 ($0-$0), $50x 
($62.50x-$12.50x), and $150x ($187.50x-$37.50x), respectively.
    (F) Calculation of GILTI inclusion amount. Under paragraph (b) 
of this section, a member's GILTI inclusion amount for a U.S. 
shareholder inclusion year is the excess (if any) of the member's 
net CFC tested income for the U.S. shareholder inclusion year, over 
the shareholder's net deemed tangible income return for the U.S. 
shareholder inclusion year. As described in paragraph (ii)(C) of 
Example 1, the amounts of USS1's, USS2's, and USS3's net CFC tested 
income are $0, $125x, and $375x, respectively. As described in 
paragraph (ii)(E) of this Example 3, the amounts of USS1's, USS2's, 
and USS3's net deemed tangible income return are $0, $50x, and 
$150x, respectively. As a result, under paragraph (b) of this 
section, USS1's, USS2's, and USS3's GILTI inclusion amounts are $0 
($0-$0), $75x ($125x-$50x), and $225x ($375x-$150x), respectively.
    (G) Calculation of used tested loss amount and offset tested 
income amount. As described in paragraph (ii)(A) of Example 1, P 
consolidated group's consolidated group tested income is $800x. As 
described in paragraph (ii)(B) of Example 1, P consolidated group's 
consolidated group tested loss is $300x. Therefore, the P 
consolidated group's consolidated group tested income exceeds its 
consolidated group tested loss. As a result, USS1 has a $100x used 
tested loss amount with respect to CFC1 and USS2 has a $200x used 
tested loss amount with respect to CFC3. Additionally, USS2 has a 
$75x offset tested income amount with respect to CFC2 ($200x x 
$300x/$800x) and USS3 has a $225x offset tested income amount with 
respect to CFC3 ($600x x $300x/$800x). See paragraph (c) of this 
section. P will adjust its basis in USS1 and USS2 pursuant to the 
rule in Sec.  1.1502-32(b)(3)(iii)(C).

    (g) Applicability date. This section applies to taxable years of 
foreign corporations beginning after December

[[Page 51111]]

31, 2017, and to taxable years of United States shareholders in which 
or with which such taxable years of foreign corporations end.
0
Par. 15. Section 1.6038-2 is amended by:
0
1. Revising the section heading.
0
2. Revising the first sentence in paragraph (a).
0
3. Revising paragraph (m).
    The revisions read as follows:


Sec.  1.6038-2  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations.

    (a) Requirement of return. Every U.S. person shall make a separate 
annual information return with respect to each annual accounting period 
(described in paragraph (e) of this section) of each foreign 
corporation which that person controls (as defined in paragraph (b) of 
this section) at any time during such annual accounting period. * * *
* * * * *
    (m) Applicability dates. This section applies to taxable years of 
foreign corporations beginning on or after October 3, 2018. See 26 CFR 
1.6038-2 (revised as of April 1, 2018) for rules applicable to taxable 
years of foreign corporations beginning before such date.
0
Par. 16. Section 1.6038-5 is added to read as follows:


Sec.  1.6038-5  Information returns required of certain United States 
persons to report amounts determined with respect to certain foreign 
corporations for global intangible low-taxed income (GILTI) purposes.

    (a) Requirement of return. Except as provided in paragraph (d) of 
this section, each United States person who is a United States 
shareholder (as defined in section 951(b)) of any controlled foreign 
corporation must make an annual return on Form 8992, ``U.S. Shareholder 
Calculation of Global Intangible Low-Taxed Income (GILTI),'' (or 
successor form) for each U.S. shareholder inclusion year (as defined in 
Sec.  1.951A-1(e)(4)) setting forth the information with respect to 
each such controlled foreign corporation, in such form and manner, as 
Form 8992 (or successor form) prescribes.
    (b) Time and manner for filing. Returns on Form 8992 (or successor 
form) required under paragraph (a) of this section for a taxable year 
must be filed with the United States person's income tax return on or 
before the due date (taking into account extensions) for filing that 
person's income tax return.
    (c) Failure to furnish information--(1) Penalties. If any person 
required to file Form 8992 (or successor form) under section 6038 and 
this section fails to furnish the information prescribed on Form 8992 
within the time prescribed by paragraph (b) of this section, the 
penalties imposed by section 6038(b) and (c) may apply.
    (2) Increase in penalty. If a failure described in paragraph (c)(1) 
of this section continues for more than 90 days after the date on which 
the Director of Field Operations, Area Director, or Director of 
Compliance Campus Operations mails notice of such failure to the person 
required to file Form 8992, such person shall pay a penalty of $10,000, 
in addition to the penalty imposed by section 6038(b)(1), for each 30-
day period (or a fraction of) during which such failure continues after 
such 90-day period has expired. The additional penalty imposed by 
section 6038(b)(2) and this paragraph (c)(2) shall be limited to a 
maximum of $50,000 for each failure.
    (3) Reasonable cause--(i) For purposes of section 6038(b) and (c) 
and this section, the time prescribed for furnishing information under 
paragraph (b) of this section, and the beginning of the 90-day period 
after mailing of notice by the director under paragraph (c)(2) of this 
section, shall be treated as being not earlier than the last day on 
which reasonable cause existed for failure to furnish the information.
    (ii) To show that reasonable cause existed for failure to furnish 
information as required by section 6038 and this section, the person 
required to report such information must make an affirmative showing of 
all facts alleged as reasonable cause for such failure in a written 
statement containing a declaration that it is made under the penalties 
of perjury. The statement must be filed with the director where the 
return is required to be filed. The director shall determine whether 
the failure to furnish information was due to reasonable cause, and if 
so, the period of time for which such reasonable cause existed. In the 
case of a return that has been filed as required by this section except 
for an omission of, or error with respect to, some of the information 
required, if the person who filed the return establishes to the 
satisfaction of the director that the person has substantially complied 
with this section, then the omission or error shall not constitute a 
failure under this section.
    (d) Exception from filing requirement. Any United States person 
that does not own, within the meaning of section 958(a), stock of a 
controlled foreign corporation in which the United States person is a 
United States shareholder for a taxable year is not required to file 
Form 8992. For this purpose, a U.S. shareholder partner (as defined in 
Sec.  1.951A-5(e)(3)) with respect to a partnership CFC (as defined in 
Sec.  1.951A-5(e)(2)) is treated as owning, within the meaning of 
section 958(a), stock of the partnership CFC.
    (e) Applicability date. This section applies to taxable years of 
controlled foreign corporations beginning on or after October 3, 2018.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-20304 Filed 10-3-18; 4:15 pm]
 BILLING CODE 4830-01-P