Limitation on Deduction for Dividends Received From Certain Foreign Corporations and Amounts Eligible for Section 954 Look-Through Exception, 28398-28424 [2019-12442]

Download as PDF 28398 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9865] RIN 1545–BO64 Limitation on Deduction for Dividends Received From Certain Foreign Corporations and Amounts Eligible for Section 954 Look-Through Exception Internal Revenue Service (IRS), Treasury. ACTION: Final temporary regulations. AGENCY: SUMMARY: This document contains temporary regulations under section 245A of the Internal Revenue Code (the ‘‘Code’’) that limit the dividends received deduction available for certain dividends received from current or former controlled foreign corporations. This document also contains temporary regulations that limit the applicability of the exception to foreign personal holding company income for certain dividends received by upper-tier controlled foreign corporations from lower-tier controlled foreign corporations and temporary regulations under section 6038 to facilitate administration of certain rules in the temporary regulations. The temporary regulations affect certain U.S. persons that are domestic corporations that receive certain dividends from current or former controlled foreign corporations or are United States shareholders of upper-tier controlled foreign corporations that receive certain dividends from lower-tier controlled foreign corporations. The text of the temporary regulations also serves as the text of the proposed regulations set forth in a notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register. DATES: Effective date: These regulations are effective on June 18, 2019. Applicability dates: For dates of applicability, see §§ 1.245A–5T(k), 1.954(c)(6)–1T(b), and 1.6038–2T(m). FOR FURTHER INFORMATION CONTACT: Logan M. Kincheloe at (202) 317–6937 (not a toll-free number). SUPPLEMENTARY INFORMATION: jbell on DSK3GLQ082PROD with RULES2 Background I. In General This document contains amendments to 26 CFR part 1 under sections 245A, 954(c)(6), and 6038 (the ‘‘temporary regulations’’). Any terms used but not defined in this preamble have the VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 meanings given them in the temporary regulations. Added to the Code by section 14101(a) of the Tax Cuts and Jobs Act (the ‘‘Act’’), section 245A generally allows a domestic corporation a 100-percent dividends received deduction (the ‘‘section 245A deduction’’) for the foreign-source portion of a dividend received after December 31, 2017, from a specified 10 percent-owned foreign corporation (an ‘‘SFC’’). Section 954, which predates the Act and remains in effect, generally provides that a dividend received by a controlled foreign corporation (a ‘‘CFC’’), as defined in section 957, is included in the CFC’s foreign personal holding company income (‘‘FPHCI’’), as defined in section 954(c). Pursuant to section 954(c)(6), however, a dividend received by a CFC from a related CFC is not included in the CFC’s FPHCI if certain requirements are satisfied (the ‘‘section 954(c)(6) exception’’). The temporary regulations limit the availability of the section 245A deduction and the section 954(c)(6) exception in specific and narrow cases where the deduction or exception, respectively, effectively eliminates subpart F income or income subject to tax under section 951A from the U.S. tax system. Specifically, the temporary regulations address transactions that have the effect of avoiding tax under section 965, 951A, or 951 by inappropriately converting income that should have been subject to U.S. tax into nontaxed income. The temporary regulations also include rules under section 6038 to facilitate administration of certain rules in the temporary regulations. The temporary regulations do not include general rules relating to dividends eligible for the section 245A deduction; those rules will be included in separate guidance. II. Scope of Participation Exemption In order to transition to the new participation exemption system provided under section 245A and certain other provisions of the Act, the Act imposed a tax on certain earnings and profits of a U.S.-owned foreign corporation that had not previously been subject to U.S. tax. See section 965. Section 965 was designed to ensure that previously untaxed foreign income of the foreign corporation that accrued before the advent of the participation exemption system generally is subject to U.S. tax (although at a reduced rate). This transition tax applied to the last taxable year of the foreign corporation beginning before January 1, 2018, and generally increased the subpart F income of the foreign corporation by the amount of its previously untaxed PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 earnings as of no later than December 31, 2017. The Act’s legislative history indicates congressional concern that the new participation exemption could heighten the incentive to shift profits to lowtaxed foreign jurisdictions or tax havens absent base erosion protections. See Senate Committee on the Budget, 115th Cong., Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 365 (Comm. Print 2017) (‘‘Senate Explanation’’). For example, without appropriate limits, domestic corporations might be incentivized to shift income to low-taxed foreign affiliates, ‘‘where the income could potentially be distributed back to the [domestic] corporation with no U.S. tax imposed.’’ See id. This risk of base erosion is acute with respect to certain types of income, such as passive or mobile income and income derived from intangible property, which historically have posed transfer pricing challenges. To prevent base erosion, the Act retained the subpart F regime (section 951 et. seq.) and enacted a new regime under section 951A for global intangible lowed-taxed income (the ‘‘GILTI regime’’), both of which subject certain foreign income of a CFC to current U.S. taxation in the hands of the CFC’s United States shareholders (within the meaning of section 951(b)) (each shareholder, a ‘‘U.S. shareholder’’). In order to avoid double taxation when a CFC distributes earnings and profits that have been taxed on a current basis to a U.S. shareholder, the earnings and profits are designated as ‘‘previously taxed earnings and profits’’ (also known as ‘‘PTEP’’) under section 959. Section 959 generally provides that PTEP are not subject to U.S. tax when distributed to a U.S. shareholder. The subpart F regime, which was established under the Revenue Act of 1962, Public Law 87–834, sec. 12, 76 Stat. at 1006, subjects certain income earned by a CFC to U.S. taxation in the hands of the CFC’s U.S. shareholders on a current basis at the full ordinary tax rate, regardless of whether the CFC distributes the earnings attributable to such income. H.R. Rep. No. 1447 at 58 (1962). In general, the subpart F regime applies to certain passive or highly mobile income in order to address base erosion concerns. Thus, for example, section 954(c) provides that subpart F income includes FPHCI. FPHCI includes certain types of passive or mobile income that are relatively easy to situate in tax-advantaged jurisdictions, such as dividends, interest, rents, and royalties. The GILTI regime generally subjects a CFC’s U.S. shareholders to current E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations taxation on intangible income earned by the CFC in a manner similar to the treatment of a CFC’s subpart F income. See section 951A; see also Senate Explanation at 366 (explaining that such income is often associated with profit shifting). Intangible income is determined for this purpose on an aggregate basis at the U.S. shareholder level and is based on a formulaic approach under which a ‘‘normal return’’ equal to 10 percent of the basis of certain tangible assets is calculated and then each dollar of income above the ‘‘normal return’’ is effectively treated as intangible income (regardless of whether such income is actually attributable to intangible property). See Senate Explanation at 366. However, for purposes of this determination, certain income of the CFC—such as income taxed under another Code provision (for example, under the rules for subpart F income in sections 951 through 964 or under section 882 in the case of income effectively connected with the conduct of a U.S. trade or business), immobile income (such as foreign oil and gas extraction income), or highly taxed income that is excluded from subpart F income by reason of the high-tax exception of section 954(b)(4)—is not taken into account. See also id. (‘‘[C]ertain items of income earned by CFCs should be excluded from the GILTI, either because they should be exempt from U.S. tax—as they are generally not the type of income that is the source of base erosion concerns—or are already taxed currently by the United States’’). The CFC’s U.S. shareholders are subject to current U.S. tax on the CFC’s income in excess of the CFC’s normal return, potentially at a reduced rate through a deduction under section 250, at the corporate U.S. shareholder level. The differing treatment under the GILTI regime with respect to excess returns (taxed currently, though potentially at a reduced rate) versus normal returns (exempt from tax) generally has the effect of differentiating between income that poses base erosion concerns and income that does not pose such concerns. The GILTI regime applies in the first taxable year of a CFC beginning on or after January 1, 2018. Section 245A applies to distributions made by SFCs (which include CFCs) on or after that date. The rules under section 959 generally treat PTEP (including PTEP that arise by reason of the subpart F regime, the GILTI regime, or the transition tax under section 965) as being distributed before non-previously taxed earnings and profits and also prevent section 245A VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 from applying to PTEP. See section 959(c) (providing ordering rules that treat PTEP as being distributed first) and section 959(d) (providing that a distribution of PTEP to a U.S shareholder is not treated as a dividend). Thus, both the interaction of the definitions of subpart F income and tested income with the ordering rules for distributions of PTEP and the overall structure of the international provisions of the Act contemplate that only residual earnings remaining after the potential application of sections 951(a), 951A, and 965 generally are eligible for the section 245A deduction. That is, section 245A(a) applies only to certain ‘‘dividends’’ received from foreign corporations. Therefore, sections 951(a), 951A, and 965 generally have priority over section 245A because, when they apply to a foreign corporation’s earnings, distributions of those earnings do not qualify as dividends under section 959(d), and, therefore, section 245A does not apply. The statutory text of the participation exemption system under section 245A, the GILTI regime, the subpart F regime, and the PTEP rules collectively operate as a comprehensive framework with respect to a CFC’s foreign earnings after the application of the transition tax under section 965. A central feature of this regime is that income derived by CFCs is eligible for the section 245A deduction only if the earnings being distributed have not been first subject to the subpart F or GILTI regimes. The scope of the section 245A deduction (and the authority set forth in section 245A(g)) is thus informed not only by the text of section 245A in isolation, but also by the role of section 245A in the overall structure of the international provisions and its interaction with the subpart F and GILTI provisions. Section 245A(g) provides that the Secretary shall issue such regulations as are necessary or appropriate to carry out the provisions of section 245A. III. Scope of Section 954(c)(6) Section 954(c)(6) was enacted by the Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109–222. In general, and subject to certain limitations, the section 954(c)(6) exception is intended to facilitate intragroup foreign-to-foreign funds flows by providing that dividends, interest, rents, and royalties received or accrued by a CFC from another related CFC are not treated as FPHCI to the extent attributable or properly allocable to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 28399 United States. See H.R. Rep. No. 109– 304 at 45 (2005). Section 954(c)(6)(A) also provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provision, including regulations to prevent the abuse of the purposes of the provision. As most recently extended by the Consolidated Appropriations Act of 2016, Public Law 114–113, section 954(c)(6) applies to taxable years of foreign corporations beginning after December 31, 2005, and before January 1, 2020, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end. Notice 2007–9, 2007–5 I.R.B. 401, provides guidance under section 954(c)(6). The notice describes additional guidance that the Treasury Department and the IRS intend to issue regarding the application of section 954(c)(6), including certain anti-abuse rules. Explanation of Provisions I. Overview The transition tax, the subpart F and GILTI regimes, and the participation exemption under section 245A together form a comprehensive and closely integrated set of tax rules with respect to the earnings of foreign corporations with requisite levels of U.S. ownership. These related provisions must be read and interpreted together in order to ensure that each provision functions as part of a coherent whole, as intended. Although the section 245A deduction is generally available for untaxed foreignsource earnings, read collectively this integrated set of statutory rules can be reasonably understood to require that the deduction not apply to earnings and profits attributable to income of a type that is properly subject to the subpart F or GILTI regimes, which address base erosion-type income. Otherwise, as explained in Part II of this Explanation of Provisions, the section 245A deduction could undermine the antibase erosion measures that Congress intended to prevent income shifting. Accordingly, and consistent with the coherent functioning of the interlocking statutory scheme for taxation of CFC earnings, the section 245A deduction generally will not apply to distributions of earnings and profits that are attributable to subpart F income or tested income. The interpretation reflected in these rules ensures that these provisions will operate compatibly with, not contradictorily to, each other. Section 245A is designed to operate residually, such that the section 245A E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28400 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations deduction generally applies to any earnings of a CFC to the extent that they are not first subject to the subpart F regime, the GILTI regime, or the exclusions provided in section 245A(c)(3) (and were not subject to section 965). That is, the text of the subpart F and GILTI rules explicitly defines the types of income to which they apply, and section 245A applies to any remaining untaxed foreign earnings. Under ordinary circumstances, this formulation works appropriately, as earnings are first subject to the subpart F or GILTI regimes before the determination of dividends to which section 245A could potentially apply. However, in certain atypical circumstances, a literal application of section 245A (read in isolation) could result in the section 245A deduction applying to earnings and profits of a CFC attributable to the types of income addressed by the subpart F or GILTI regimes—the specific types of earnings that Congress described as presenting base erosion concerns. These circumstances arise when a CFC’s fiscal year results in a mismatch between the effective date for GILTI and the final measurement date under section 965 or involve unanticipated interactions between section 245A and the rules for allocating subpart F income and GILTI when there is a change in ownership of a CFC. Moreover, the Treasury Department and the IRS are aware that some taxpayers are undertaking transactions with a view to eliminating current or future taxation of all foreign earnings of a CFC, including earnings attributable to base erosion-type income, by structuring into these situations. These transactions have the potential to substantially undermine the anti-base erosion framework for post-2017 foreign earnings. Based on the structure and history of the international provisions of the Code, including changes made by the Act, the Treasury Department and the IRS have concluded that section 245A was not intended to eliminate taxation with respect to the foreign earnings of a CFC that are attributable to income of a type that is subject to taxation under the subpart F or GILTI regimes. In these cases where the literal effect of section 245A would reverse the intended effect of the subpart F and GILTI regimes, this conflict is best resolved, and the structure of the statutory scheme is best preserved, by limiting section 245A’s effect. The Treasury Department and the IRS do not believe Congress intended section 245A to defeat the purposes of subpart F and GILTI regimes in these instances. Accordingly, given the VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 authority in section 245A(g) directing the Secretary to issue such regulations as are necessary or appropriate to carry out the provisions of section 245A, and the authority under section 7805(a) to issue rules and regulations made necessary by reason of changes in the tax laws, the temporary regulations under section 245A are designed to ensure that the section 245A deduction operates properly within the context of a closely coordinated set of rules and, as a result, is not available to eliminate the taxation of subpart F income and tested income in these limited circumstances. However, consistent with the broad application of section 245A, the temporary regulations apply only to certain well-defined circumstances in which subpart F or tested income earned by a CFC would otherwise escape taxation to its U.S. shareholders as a result of the unanticipated interaction of section 245A and certain rules applicable to the inclusion of subpart F income and GILTI under sections 951(a) and 951A, respectively. To prevent the avoidance of U.S. tax in these specific and narrow circumstances, the temporary regulations limit the section 245A deduction only with respect to certain dividends received by a domestic corporation in connection with specific transactions that facilitate the avoidance of taxation of subpart F income or tested income and that, in many cases, may have been entered into with a purpose of avoiding the consequences of the new international tax regime as adopted by Congress in the Act. This limited denial ensures that the section 245A deduction will continue to apply to earnings and profits that are attributable to all other classes of income to which Congress intended them to apply. The Treasury Department and the IRS emphasize, however, that when the requirements of section 245A as properly construed are satisfied, it would not be permissible under the statute for the section 245A deduction to be denied for these other classes of income—even if, for example, taxpayers choose to generate such income to avail themselves of the benefits of the deduction. The Treasury Department and the IRS furthermore do not believe it would be permissible to modify the definition of subpart F income or tested income, or to recharacterize income as subpart F income or tested income, under the authority of section 245A(g). Similar to section 245A, the exemption from subpart F income under section 954(c)(6) can be used in the context of certain transactions to avoid taxation of income that would otherwise be taxed under the subpart F or GILTI PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 regimes. Such transactions are not dependent upon the availability of section 245A at the level of the United States shareholder. This type of concern was first generally described in Notice 2007–9, but has been exacerbated by the enactment of section 951A as part of the Act because (1) dividends qualifying for section 954(c)(6) generally are not treated as tested income pursuant to section 951A(c)(2)(A)(i)(IV); and (2) the same structured transactions used to avoid subpart F inclusions can also be used to avoid GILTI inclusions. Given the authority in section 954(c)(6)(A) for the Treasury Department and the IRS to issue regulations preventing the abuse of section 954(c)(6), the temporary regulations under section 954(c)(6) are designed to ensure that the section 954(c)(6) exception is not used to erode the U.S. tax base through certain transactions preventing the taxation of income that would otherwise be taxed under the subpart F or GILTI regimes. Consistent with the temporary regulations issued under section 245A, these rules are targeted to ensure that the section 954(c)(6) exception is not available for this limited category of earnings. II. Limitation of Amounts Eligible for Section 245A Deduction A. Scope In the case of a dividend received by a domestic corporation from an SFC, the temporary regulations limit the amount of the section 245A deduction to the portion of a dividend not constituting an ‘‘ineligible amount.’’ See § 1.245A– 5T(b). In general, the ineligible amount is the sum of (i) 50 percent of the portion of a dividend attributable to certain earnings and profits resulting from transactions between related parties during a period after the measurement date under section 965(a)(2) and in which the SFC was a CFC but during which section 951A did not apply to it (referred to as the ‘‘extraordinary disposition amount’’) and (ii) the portion of a dividend attributable to certain earnings and profits generated during any taxable year ending after December 31, 2017, in which the domestic corporation reduces its ownership of the CFC (referred to as the ‘‘extraordinary reduction amount’’). B. Extraordinary Disposition Amount Under the Act, there may be a gap between when section 951A first applies to the U.S. shareholders of a CFC (as of its first taxable year beginning after December 31, 2017) and the last date on which the earnings and profits of the CFC are measured for purposes of E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations section 965, which, under section 965(a), is December 31, 2017 (such period, the ‘‘disqualified period’’). For example, a fiscal year CFC with a taxable year ending November 30 would have a disqualified period from January 1, 2018, the day after its final E&P measurement date under section 965, to November 30, 2018, the last date before section 951A applies with respect to its income. The Treasury Department and the IRS are aware that during the disqualified period, CFCs may have engaged in certain transactions with related parties with a goal of creating stepped-up basis for the buyer, while generating earnings and profits for the seller CFC that are not subject to any current tax and may be eligible for the section 245A deduction. Because the transactions generally are structured to avoid creating subpart F income and occur during the disqualified period, the income from these transactions generally is not subject to U.S. tax under the transition tax under section 965, the subpart F regime, or the GILTI regime. Such earnings and profits could, for example, reduce taxable gain that would otherwise be recognized on the subsequent disposition of stock of the CFC, thus potentially allowing the CFC and its future earnings to be removed from the U.S. tax system without the imposition of any U.S. tax. The Treasury Department and the IRS have determined that it would be inconsistent with the closely interdependent set of international tax rules implemented by the Act, specifically the transition tax, the GILTI regime, and the participation exemption, for the earnings and profits resulting from these transactions to be eligible for a section 245A deduction even if the other requirements of section 245A are otherwise satisfied. Thus, the temporary regulations limit the amount of the section 245A deduction allowed to a section 245A shareholder (as defined in § 1.245A–5T(i)(21)) with respect to a dividend received from an SFC. Specifically, the deduction is limited to 50 percent of the extraordinary disposition amount, which is the portion of a dividend received by a section 245A shareholder from an SFC that is paid out of the section 245A shareholder’s ‘‘extraordinary disposition account.’’ See § 1.245A–5T(b)(2) and (c)(1). In general, this account represents the shareholder’s pro rata share of the SFC’s ‘‘extraordinary disposition E&P,’’ reduced by the section 245A shareholder’s prior extraordinary disposition amounts, if any. See § 1.245A–5T(c)((3)(i)(C)(1)). VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 Extraordinary disposition E&P is an amount equal to the earnings of an SFC arising from gain recognized by reason of one or more ‘‘extraordinary dispositions.’’ See § 1.245A– 5T(c)(3)(i)(C). The section 245A deduction is limited to 50 percent of the extraordinary disposition amount to reflect the fact that taxpayers generally would have been eligible for a deduction under either (i) section 250(a)(1)(B) had section 951A applied to the SFC during the disqualified period or (ii) section 965(c) had the net gain been subject to the transition tax under section 965. For a disposition by an SFC to be an extraordinary disposition, the disposition must (i) be of specified property (defined in § 1.245A– 5T(c)(3)(iv) as any property other than property that produces gross income described in section 951A(c)(2)(A)(i)(I) through (V)), (ii) occur during the SFC’s disqualified period (as defined in § 1.245A–5T(c)(3)(iii)) and when the SFC was a CFC, (iii) be outside of the ordinary course of the SFC’s activities, and (iv) be to a related party. See § 1.245A–5T(c)(3)(ii). For these purposes, a disposition by an SFC includes certain indirect dispositions by the SFC through a partnership or other pass-through entities (including through ownership structures involving tiered pass-through entities). See id. In addition, pursuant to an exception intended to limit compliance and administrative burdens, no dispositions by an SFC are considered to be an extraordinary disposition if they do not exceed a threshold of the lesser of $50 million or 5 percent of the gross value of the SFC’s property. See § 1.245A– 5T(c)(3)(ii)(E). The temporary regulations provide a facts-and-circumstances rule for determining whether a disposition occurs outside of the ordinary course of an SFC’s activities. The temporary regulations also provide a per se rule that a disposition is treated as outside of the ordinary course of an SFC’s activities if the disposition is undertaken with a principal purpose of generating earnings and profits during the disqualified period or if the disposition is of intangible property, within the meaning of section 367(d)(4). See id. The temporary regulations include this latter rule because the disposition of intangible property is not an ordinary course transaction (relative to, for example, a routine sale of raw materials from one SFC to another for manufacturing); moreover, during the disqualified period taxpayers may have had a particularly strong incentive to dispose of intangible property (which PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 28401 often has low basis) to generate significant amounts of earnings and profits to the seller (without being subject to current tax) that may be eligible for the section 245A deduction. As described, the Treasury Department and the IRS have determined that the extraordinary disposition rules should not apply to all earnings and profits generated by a CFC during the disqualified period. Rather, the temporary regulations focus on a narrowly and objectively defined class of earnings and profits in circumstances that are inconsistent with the international tax regime adopted by the Act. The Treasury Department and the IRS request comments on whether there should be any further refining of these rules. The temporary regulations provide shareholder account rules to ensure that a section 245A shareholder’s extraordinary disposition account is properly tracked and reduced in appropriate cases (for example, for prior extraordinary disposition amounts). See § 1.245A–5T(c)(3)(i). These shareholder account rules also contain successor rules for a section 245A shareholder that acquires stock of an SFC from another section 245A shareholder with respect to which there is an extraordinary disposition account and for certain section 381 transactions and distributions involving section 355 (or so much as section 356 as relates to section 355). See § 1.245A–5T(c)(4). To address cases in which the section 245A deduction might be available for an SFC held through a pass-through entity or foreign corporation, the temporary regulations provide that a section 245A shareholder is treated as owning a pro rata share of stock of an SFC that is owned by a partnership, trust, or estate (domestic or foreign), or a foreign corporation in which the section 245A shareholder owns an interest or stock, as applicable. See § 1.245A–5T(g)(3)(i) (providing rules for stock ownership and transfers). The Treasury Department and the IRS request comments as to how the extraordinary disposition account rules should apply in circumstances in which an SFC is transferred to a partnership, including the extent to which principles similar to section 704(c)(1)(B) apply to prevent the use of partnerships to circumvent the purposes of the temporary regulations, such as where an SFC is subsequently transferred to a non-contributing partner. As a general matter, the Treasury Department and the IRS believe that § 1.701–2(b), as well as the judicial doctrines of economic substance, substance over form, and step transaction, prevent taxpayers from E:\FR\FM\18JNR2.SGM 18JNR2 28402 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 forming or availing of partnerships with a principal purpose of avoiding the application of these rules. The treatment of partnerships under section 245A will be addressed in separate guidance; and it is anticipated that this guidance will provide rules ensuring that partnerships may not be formed or availed of to avoid the purposes of the temporary regulations. The Treasury Department and the IRS further request comments on the treatment of consolidated groups under the temporary regulations, including for purposes of maintaining extraordinary disposition accounts. The Treasury Department and the IRS believe that consolidated groups generally should be treated in the same manner as a single taxpayer for the purposes of § 1.245A– 5T(c). Subject to any comments received, it is expected that future rules will provide that consolidated groups generally should not be advantaged or disadvantaged as a result of owning directly or indirectly stock of an SFC through multiple members relative to a standalone corporation owning the same stock. The Treasury Department and the IRS also request comments on whether and how the rules applicable to disqualified basis in proposed § 1.951A–2(c)(5) should be coordinated with § 1.245A– 5T(c). In this regard, proposed § 1.951A–2(c)(5) provides rules for the allocation and apportionment of deductions and losses attributable to disqualified basis, which is asset basis created in certain disqualified transfers during the disqualified period. These deductions and losses are allocated and apportioned solely to gross income that is not tested income, subpart F income, or effectively connected income (defined as ‘‘residual CFC gross income’’), thereby ensuring that such ‘‘costless’’ tax basis does not inappropriately reduce future tax liability. Thus, the Treasury Department and the IRS are considering the extent to which it would be appropriate to coordinate the two sets of rules, taking into account the ability of the IRS to administer and taxpayers to comply with such rules, and request comments on this issue. C. Extraordinary Reduction Amount The Treasury Department and the IRS are aware that certain transactions in which a section 245A shareholder of a CFC transfers stock of the CFC, or certain transactions in which the shareholder’s ownership of the CFC is diluted, could give rise to results that would be inconsistent with the integrated structure of the U.S. tax system for the taxation of CFC earnings, VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 including section 245A, the subpart F regime, and the GILTI regime. In these cases, absent proper limitation, the section 245A deduction might be allowed inappropriately with respect to a CFC’s current year income that, but for the ownership changes, would have been subject to tax under the subpart F or GILTI regimes. Unlike the transactions described in Part II.B of this Explanation of Provisions, the transactions giving rise to these results can occur in any taxable year ending after the Act (and particularly section 245A) is in effect. These results could arise, for example, as a consequence of the application of section 951(a)(2)(B). Section 951(a)(2)(B), a longstanding provision in the subpart F regime, prevents double taxation of the same earnings by reducing a U.S. shareholder’s pro rata share of subpart F income (or, following the Act, tested income as defined in section 951A(c)(2)(A)) of a CFC by dividends received by another person with respect to the same share of stock. However, if section 245A were to apply without limitation to dividends from a CFC that reduce another U.S. shareholder’s pro rata share of subpart F income or tested income of the CFC under section 951(a)(2)(B), earnings that would otherwise be subject to the subpart F or GILTI regimes would escape U.S. taxation to the extent of the reduction. For example, in the case of a transfer of CFC stock from one section 245A shareholder (the transferor) to another section 245A shareholder (the transferee), a dividend (including by reason of section 1248) from the CFC to the transferor during the tax year of the transfer might both (i) be excluded from the transferor’s income by reason of the section 245A deduction and (ii) reduce the transferee’s pro rata share of subpart F income or tested income of the CFC by reason of section 951(a)(2)(B). The Treasury Department and the IRS have determined that it would be inconsistent with the residual definition of section 245A eligible earnings and the interaction of section 245A and the subpart F and GILTI regimes, which form an integrated set of rules to tax post-2017 foreign earnings, to allow a section 245A deduction for a dividend paid out of earnings and profits attributable to subpart F income or tested income where such dividends, by operation of section 951(a)(2)(B), and could result in double non-taxation of such income. Such a result would also be contrary to the legislative intent underlying the interaction of these provisions. See Senate Explanation at 365 (noting, in the absence of rules such PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 as the new GILTI regime, the incentive to shift income to low-taxed foreign affiliates, ‘‘where the income could potentially be distributed back to the [domestic] corporation with no U.S. tax imposed.’’). Similar results can arise in other cases where the stock of a CFC is transferred during a CFC’s tax year by a U.S. shareholder to a foreign person where, after the transfer, the CFC remains a CFC but has no U.S. shareholder that owns (within the meaning of section 958(a)) stock of the CFC. Before the Act, section 958(b)(4) prevented certain attribution of stock under section 318 from a foreign person to a U.S. person. However, the Act repealed section 958(b)(4) such that a foreign corporation may be treated as a CFC despite having no direct or indirect U.S. shareholder that owns (within the meaning of section 958(a)) stock of the CFC and that accordingly can recognize an income inclusion under section 951 or 951A. In general, a U.S. shareholder that owns stock in a CFC on the last day within the foreign corporation’s year that it is a CFC is taxable on its pro rata share of the CFC’s subpart F income or tested income for purposes of the GILTI regime. However, by reason of the Act’s repeal of section 958(b)(4), a U.S. shareholder may transfer a CFC to a person that will not be taxed with respect to an inclusion under the subpart F or GILTI regimes without itself being subject to such an inclusion. Absent any specific limitation in these circumstances, any earnings and profits of the CFC distributed as a dividend (including by reason of section 1248) to the transferor U.S. shareholder during the CFC’s taxable year might be eligible for the section 245A deduction. However, had the transfer not occurred (or had the CFC ceased to be a CFC as a result of the transfer), the earnings and profits may have been subject to tax under the subpart F or GILTI regimes and, therefore, would not have been eligible for the section 245A deduction. In the circumstances described in this section, a broad application of section 245A would present taxpayers with a planning opportunity to completely avoid the application of the subpart F and GILTI regimes on an annual basis. The Treasury Department and the IRS have determined that this result would undermine the integrated provisions constituting the Act’s framework for taxing post-2017 CFC earnings and would contravene legislative intent. To address this concern, the temporary regulations limit the amount of the section 245A deduction allowed to a ‘‘controlling section 245A shareholder’’ with respect to a dividend from a CFC E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations to the portion of the dividend that is paid out of earnings other than the ‘‘extraordinary reduction amount.’’ See § 1.245A–5T(b)(1) and (e). A controlling section 245A shareholder of a CFC is a section 245A shareholder of the CFC that, taking into account ownership of the CFC by certain other persons (such as related persons), owns more than 50 percent of the stock of the CFC. See § 1.245A–5T(i)(2). For purposes of applying these rules, a controlling section 245A shareholder also includes any other shareholder who would not otherwise be a controlling section 245A shareholder but acts in concert with the controlling section 245A shareholder. This includes shareholders that sell their shares of the same CFC to the same buyer or buyers (or a related party with respect to the buyer or buyers) as part of the same plan as the controlling section 245A shareholder’s extraordinary reduction. Under the temporary regulations, for an extraordinary reduction amount to exist with respect to a controlling section 245A shareholder of a CFC, an ‘‘extraordinary reduction’’ must occur during the CFC’s taxable year with respect to the shareholder’s ownership of the CFC. See § 1.245A–5T(e). An extraordinary reduction generally occurs when either (i) the controlling section 245A shareholder transfers more than 10 percent of its stock of the CFC (for example, an extraordinary reduction occurs if the shareholder owns 90 percent of the stock of the CFC and it transfers stock representing more than nine percent of the stock of the CFC) or (ii) there is a greater than ten percent change in the controlling section 245A shareholder’s overall ownership of the CFC (for example, if the shareholder owns 90 percent of the stock of the CFC and, as a result of an issuance to a foreign person, the shareholder’s ownership of the CFC is reduced such that it no longer owns at least 81 percent of the stock of the CFC). See § 1.245A– 5T(e)(2)(i)(A). The temporary regulations include the first prong because if, for example, a section 245A shareholder of a CFC were to transfer shares of stock of the CFC to another section 245A shareholder of the CFC and the other shareholder were to transfer an equal number of similar shares to the first shareholder, neither of the shareholders’ overall ownership of the CFC would change, but the amount taken into account by each of the shareholders by reason of section 951(a)(2)(B) might be reduced as a result of dividends paid with respect to shares transferred by the other. An extraordinary reduction amount is earnings and profits representing the VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 amount of dividends paid by the corporation that are attributable to subpart F income or tested income with respect to a CFC, to the extent such subpart F income or tested income (i) would have been taken into account by the controlling section 245A shareholder under section 951 or 951A had the extraordinary reduction not occurred and (ii) is not taken into account by a domestic corporation or a citizen or resident of the United States (that is, a person described in section 7701(a)(30)(A) or (C)). See § 1.245A– 5T(e)(1) and (2). The limitation of the section 245A deduction in the case of an extraordinary reduction will generally result in a dividend being included in the income of the controlling section 245A shareholder and not offset by a section 245A deduction. In cases where the CFC has tested income during its taxable year that would have been subject to the GILTI regime but for the extraordinary reduction, a controlling section 245A shareholder might prefer to have an income inclusion under section 951A, potentially benefitting from the deduction available under section 250. Therefore, the temporary regulations provide an election under which a controlling section 245A shareholder is not required to reduce its section 245A deduction if it elects (and, in some cases, certain other United States persons also agree) to close the CFC’s taxable year for all purposes of the Code on the date of the extraordinary reduction. See § 1.245A– 5T(e)(3)(i). The closing of the taxable year of the CFC results in all U.S. shareholders that own (within the meaning of section 958(a)) stock of the CFC on such date taking into account their pro rata share of subpart F income or tested income earned by the CFC as of that date. In addition, pursuant to an exception intended to limit compliance and administrative burdens, for a taxable year in which an extraordinary reduction occurs, no amount is considered an extraordinary reduction amount if the sum of the CFC’s subpart F income and tested income for the taxable year does not exceed the lesser of $50 million or 5 percent of the CFC’s total income for the year. See § 1.245A– 5T(e)(3)(ii). D. Coordination Rules To address cases in which a dividend could qualify as either a hybrid dividend under the rules of section 245A(e) or an ineligible amount under the temporary regulations, the temporary regulations provide a coordination rule pursuant to which a PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 28403 dividend is first subject to the hybrid dividend rules of section 245A(e) and then, to the extent not a hybrid dividend, is subject to the temporary regulations. See § 1.245A–5T(g)(3)(iv). In future guidance relating to proposed regulations under section 245A(e) and certain other sections (83 FR 67612), the Treasury Department and the IRS anticipate modifying those regulations to reflect this coordination rule. In addition, to address cases in which a dividend might be either an extraordinary disposition amount under § 1.245A–5T(c) or an extraordinary reduction amount under § 1.245A– 5T(e), the temporary regulations provide a coordination rule pursuant to which a dividend is first subject to the rules of § 1.245A–5T(e) and then, to the extent not an extraordinary reduction amount, is subject to the rules of § 1.245A–5T(c). See § 1.245A–5T(g)(5). Because of this ordering rule, the extraordinary disposition amount with respect to a dividend will not exceed the amount by which the dividend exceeds the extraordinary reduction amount with respect to the dividend. E. Transactions Described in Section 964(e)(4) The rules in these temporary regulations for determining eligibility for the section 245A deduction also apply to deemed dividends arising by reason of section 964(e)(4), which the Act added to the Code. Section 964(e)(4) provides in certain cases that a sale by a CFC of stock of another foreign corporation is treated as a dividend from the target foreign corporation to the selling CFC that is, in turn, treated as subpart F income of the selling CFC and included in the gross income of the U.S. shareholders of the selling CFC. Pursuant to section 964(e)(4)(A)(iii), the section 245A deduction is allowed to any U.S. shareholder with respect to such subpart F income included in gross income in the same manner as if such subpart F income were a dividend received by the shareholder from the selling CFC. Thus, section 964(e)(4) presents the same concerns as direct dividends; absent a rule to the contrary, taxpayers might use section 964(e)(4) to avoid the results applicable to actual distributions from an upper-tier CFC to a U.S. shareholder or to constructive dividends under section 1248 that are addressed elsewhere by these temporary regulations. Therefore, the rules in these temporary regulations for determining eligibility for the section 245A deduction also apply to deemed dividends arising by reason of section 964(e)(4). Moreover, all U.S. shareholders of the selling CFC are E:\FR\FM\18JNR2.SGM 18JNR2 28404 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations deemed to act in concert for purposes of the temporary regulations with respect to transactions described in section 964(e)(4). jbell on DSK3GLQ082PROD with RULES2 III. Limitation of Amount Eligible for Section 954(c)(6) Exception With Respect to Certain Dividends A. In General As described in Part I of this Explanation of Provisions, the section 954(c)(6) exception may cause dividends from one CFC to another to result in tax consequences similar to, but not dependent upon, those that can be effectuated using section 245A in conjunction with the disqualified period, section 951(a)(2)(B), or the repeal of section 958(b)(4). To protect against avoidance of the rules for extraordinary dispositions (described in Part II.B of this Explanations of Provisions), the temporary regulations rely on authority under section 954(c)(6)(A) to prevent the section 954(c)(6) exception from applying in cases where a dividend from a lower-tier CFC to an upper-tier CFC would be an extraordinary disposition amount if distributed directly to the section 245A shareholders of the lower-tier CFC. See § 1.245A–5T(d). In these cases, the section 954(c)(6) exception applies only to the extent that the amount of the dividend exceeds the sum of each section 245A shareholder’s extraordinary disposition account with respect to the lower-tier CFC, divided by the aggregate ownership of all U.S. tax residents of the upper-tier CFC that have section 951(a) inclusions and multiplied by 50 percent. The amount is divided by the aggregate ownership of these U.S. tax residents to take into account the fact that the U.S. tax residents (including individuals) will include in gross income a pro rata share of the portion of the dividend not eligible for the section 954(c)(6) exception. The amount is multiplied by 50 percent in order to provide similar treatment for a dividend received by a section 245A shareholder from a CFC and a dividend received by an upper-tier CFC from a lower-tier CFC. In both cases, the 50 percent reduction of the section 245A deduction approximates the reduced tax rate by reason of the deduction provided under section 250(a)(1)(B) with respect to section 951A inclusions or section 965(c) with respect to the transition tax. Unlike the disallowance of the section 245A deduction under § 1.245A–5T(b) with respect to an extraordinary disposition amount, which applies only to corporate U.S. shareholders, the limitation to the application of the VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 section 954(c)(6) exception with respect to a dividend received by an upper-tier CFC can result in a subpart F inclusion to any U.S. shareholder, including individuals. In addition, the temporary regulations limit the section 954(c)(6) exception in these cases, rather than limiting the application of section 245A only when the lower-tier CFC earnings and profits are distributed through intervening CFCs to a section 245A shareholder. This approach prevents deferral of tax with respect to the applicable subpart F income or tested income and minimizes the administrative and compliance burdens that would be created by continuing to track the relevant earnings at the uppertier CFC. Similarly, to prevent these inappropriate uses of the section 954(c)(6) exception to avoid the rules for extraordinary reductions (described in Part II.C of this Explanation of Provisions), the temporary regulations apply to limit the amount of any distribution from that CFC out of earnings and profits attributable to subpart F income or tested income that can qualify for the section 954(c)(6) exception in a taxable year in which an extraordinary reduction occurs with respect to the stock of a CFC. Similar to the rules relating to extraordinary disposition amounts, the limitation to the section 954(c)(6) exception with respect to a dividend received by an upper-tier CFC can result in a subpart F inclusion to any U.S. shareholder, including individuals. To the extent a CFC-to-CFC dividend otherwise satisfies the requirements of section 954(c)(6), it is eligible for the section 954(c)(6) exception only to the extent it exceeds the distributing lower-tier CFC’s ‘‘tiered extraordinary reduction amount,’’ taking into account certain prior inclusions under section 951(a). See § 1.245A– 5T(f)(1). Such amount is equal to the upper-tier CFC’s ownership percentage in the lower-tier CFC multiplied by the lower-tier CFC’s subpart F income and tested income for the taxable year, with the resulting product reduced by four amounts. The first amount is the pro rata share of the lower-tier CFC’s subpart F income and tested income for the taxable year that is taken into account by U.S. tax residents and attributable to the shares of the lowertier CFC owned by the upper-tier CFC. The second amount is the amount included in an upper-tier CFC’s subpart F income resulting from prior dividends paid by the lower-tier CFC giving rise to tiered extraordinary reduction amounts or the application of section 245A(e). The third amount is for certain prior PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 extraordinary reduction amounts with respect to the lower-tier CFC arising in cases in which the lower-tier CFC was a first-tier CFC at some point in the taxable year and paid a dividend to one or more controlling section 245A shareholders at that time. The fourth amount is for subpart F income and tested income taken into account by a U.S. tax resident as a result of an issuance of stock directly by the lowertier CFC during the taxable year. See § 1.245A–5T(f)(2). Comments are requested as to whether a lower-tier CFC’s tiered extraordinary reduction amount should be reduced for a pro rata portion of a dividend paid on stock of the lower-tier CFC that was held by nonU.S. shareholders before and after an extraordinary reduction. For purposes of applying § 1.245A–5T(f)(1) and (2) in taxable years of a lower-tier CFC beginning on or after January 1, 2018, and ending before June 14, 2019, a transition rule is provided such that the tiered extraordinary reduction amount of a lower-tier CFC is determined by treating the lower-tier CFC’s subpart F income for the taxable year as if it were neither subpart F income nor tested income. See § 1.245A–5T(f)(3). The rule in § 1.245A–5T(f)(1) applies to both actual distributions and deemed distributions that occur by reason of stock dispositions subject to section 964(e)(1) but not section 964(e)(4). Dispositions subject to section 964(e)(1) but not section 964(e)(4) are treated as dividends from the target foreign corporation (or other entity whose earnings and profits gave rise to a dividend under section 964(e)(1)) to the selling CFC and, thus, must be tested for eligibility under section 954(c)(6). Additionally, ordering and coordination rules apply with respect to the rules relating to the availability of the section 954(c)(6) exception and generally mirror the rules for the section 245A deduction by giving priority to § 1.245A–5T(f) over § 1.245A–5T(d). See § 1.245A– 5T(g)(4)(ii). As in the rules relating to extraordinary reduction amounts, a controlling section 245A shareholder of a lower-tier CFC may elect to close the taxable year of the CFC in cases where an extraordinary reduction occurs and the CFC would have a tiered extraordinary reduction amount. See § 1.245A–5T(e). Finally, the Treasury Department and the IRS are studying whether § 1.245A– 5T(f), or a similar rule, should also apply to dividends received by an upper-tier CFC from a lower-tier CFC where such CFCs are owned by individuals and there may be a reduction in the individuals’ ownership of the lower-tier CFC. Individuals are E:\FR\FM\18JNR2.SGM 18JNR2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 not eligible to claim deductions under section 245A and, therefore, dividends subject to section 954(c)(6) do not present the risk of permanently eliminating items of subpart F income, investments in United States property taxed under section 951(a)(1)(B), or tested income from the U.S. tax base. At the same time, section 954(c)(6) dividends might result in a reduction of a U.S. shareholder’s pro rata share of a CFC’s subpart F income or tested income, thereby resulting in deferred taxation of items that otherwise would have been taxed currently. Therefore, comments are requested as to whether § 1.245A–5T(f), or a similar rule, should be extended to CFCs owned by individuals. B. Dividends Received by CFCs Ineligible for Section 245A Deduction Section 245A(a), by its terms, applies only to certain dividends received by ‘‘a domestic corporation.’’ Section 1.952–2, however, which sets forth rules for determining gross income and taxable income of a foreign corporation, provides that for these purposes a foreign corporation is treated as a domestic corporation. See § 1.952– 2(a)(1) and (b)(1). Accordingly, questions have arisen as to whether § 1.952–2 could be interpreted such that a foreign corporation could claim a section 245A deduction despite the statutory restriction in section 245A(a) expressly limiting the deduction to domestic corporations. See H.R. Rep. No. 115–466, at 599, fn. 1486 (2017). The Treasury Department and the IRS intend to address issues related to the application of § 1.952–2, taking into account various comments received in connection with the Act, including in connection with the proposed section 951A regulations, in a future guidance project. This guidance will clarify that, in general, any provision that is expressly limited in its application to domestic corporations does not apply to CFCs by reason of § 1.952–2. The Treasury Department and the IRS continue to study whether, and to what extent, proposed regulations should be issued that provide that dividends received by a CFC are eligible for a section 245A deduction. The Treasury Department and the IRS have determined, however, that in no case would any person, including a foreign corporation, be allowed a section 245A deduction directly or indirectly for the portion of a dividend paid to a CFC that is not eligible for the section 954(c)(6) exception as a result of these temporary regulations. Permitting the deduction in such a case would undermine the application of the rule that reduces the VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 amount of the dividend eligible for the section 954(c)(6) exception (discussed in Part III.A of this Explanation of Provisions). IV. Information Reporting Under Section 6038 Under section 6038(a)(1), U.S. persons that control foreign business entities must file certain information returns with respect to those entities, which includes information listed 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.’’ The temporary regulations provide that ineligible amounts, tiered extraordinary disposition amounts, and tiered extraordinary reduction amounts must be reported on the appropriate information reporting form in accordance with section 6038. See § 1.6038–2T(f)(16). Because transactions subject to these temporary regulations may have occurred in taxable years for which returns have been filed before the issuance of these regulations, or for which returns will be filed before revision of forms and instructions for reporting the information required by § 1.6038–2T(f)(16), the temporary regulations provide a transition rule. The transition rule mandates that taxpayers report the required information on the first return filed following the issuance of revised forms, instructions, or other guidance with respect to reporting such information. The transition rule also requires a corporation to report the information with respect to a predecessor corporation (such as a lower-tier foreign corporation that distributes its assets to the corporation in a liquidation described in section 332) to ensure that all of the amounts are properly reported notwithstanding any intervening transactions. V. Applicability Dates Consistent with the applicability date of section 245A, and pursuant to section 7805(b)(2), the rules in the temporary regulations relating to eligibility of distributions for the section 245A deduction apply to distributions occurring after December 31, 2017. Pursuant to section 7805(b)(1) and (2), the rules in the temporary regulations relating to the eligibility of dividends for the section 954(c)(6) exception also apply to distributions occurring after December 31, 2017, subject to the transition rule in § 1.245A–5T(f)(3) for determining tiered extraordinary reduction amounts. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 28405 VI. Good Cause The Treasury Department and the IRS are issuing these temporary regulations without prior notice and the opportunity for public comment pursuant to section 553(b)(3)(B) of the Administrative Procedure Act (the ‘‘APA’’), which provides that advance notice and the opportunity for public comment are not required with respect to a rulemaking when an ‘‘agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.’’ Under the ‘‘public interest’’ prong of 5 U.S.C. 553(b)(3)(B), the good cause exception appropriately applies where notice-andcomment would harm, defeat, or frustrate the public interest, rather than serving it. The Treasury Department and the IRS are similarly utilizing the good cause exception in section 553(d)(3) of the APA to issue these temporary regulations with an immediate effective date, rather than an effective date no earlier than 30 days after the date of publication. Among the circumstances in which the good cause exception may be invoked for impracticability or to serve the public interest are situations where the timing and disclosure requirements of the usual procedures would defeat the purpose of the proposal, including if announcement of a proposed rule would enable or increase the sort of financial manipulation the rule sought to prevent. Good cause may also apply where a delayed effective date would have a significant deleterious effect upon the parties to which the regulation applies. Additionally, the good cause exception may apply when the regulations are by their nature short term and there is an opportunity to comment before final rules are introduced. Finally, good cause is supported where regulations are required to be issued and effective by a certain statutory deadline, and in light of the circumstances affecting the agency and its functions leading up to that statutory deadline, the agency is unable during that timeframe to conduct a timely and fulsome notice-andcomment process. Here, these rationales, separately and in combination, provide good cause for the Treasury Department and the IRS’s decision to bypass the notice-andcomment and delayed effective date requirements with respect to these temporary regulations. Each rationale is discussed below in turn. E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28406 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations First, good cause exists with respect to these temporary regulations because any period for notice and comment, as well as a delayed effective date, would provide taxpayers with the opportunity to engage in the transactions to which these rules relate with confidence that they achieve the intended tax avoidance results absent the applicability of the regulations. The Treasury Department and the IRS are aware that taxpayers have considered engaging in the transactions described in these temporary regulations, but some may have been deterred from doing so because of uncertainty about the operation and interaction of the various provisions of the Act. By limiting the deduction under section 245A for these transactions, these temporary regulations remove that uncertainty and—if subjected to notice-andcomment and a delayed effective date— could embolden some taxpayers to engage in aggressive tax planning to take advantage of the unintended interactions among the Act’s provisions, with the comfort that their actions were not subject to the rules of the temporary regulations during the period of notice and comment and before the regulations’ effective date. This concern applies with respect to both the extraordinary disposition and extraordinary reduction rules for an ongoing period. For the extraordinary reduction rules, both the extraordinary reduction and the associated use of section 245A can occur at any time going forward, and although the gap period for entering into extraordinary dispositions has closed, the ability to utilize the section 245A deduction for earnings generated in the extraordinary disposition would apply indefinitely absent these temporary regulations. For example, a taxpayer who became aware of the tax effects achievable using the transactions described in these temporary regulations could, with confidence, utilize extraordinary disposition E&P or engage in an extraordinary reduction to exit the U.S. taxing jurisdiction without paying any tax during a period of notice and comment and delayed effectiveness. The proliferation of these types of transactions would cause the regulations to exacerbate the very financial manipulation that they are intended to prevent, and accordingly, this rationale supports a finding of good cause for dispensing with prepromulgation notice and public comment, as well as foregoing a delayed effective date, for these temporary regulations pursuant to 5 U.S.C. 553(b) and (d). VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 The second reason for a finding of good cause arises from the fact that these temporary regulations, as applied retroactively, will affect taxable years of certain taxpayers ending in 2018. As a result, these regulations can apply to taxable years for which tax returns have been or may be due during a period of comment and delayed effectiveness. Deferring the effectiveness of the temporary regulations until after such a period could increase taxpayer compliance costs because certain taxpayers would only be able to come into compliance with the regulations by amending and refiling returns and paying additional taxes owed with interest. Third, good cause is supported where a regulation is temporary, with public comment permitted and meaningfully considered before finalization of the temporary rule. In this regard, the temporary regulations have a fixed expiration date and are cross-referenced in a notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register. Comments are requested on all aspects of these rules, and specific comment requests contained in this preamble are incorporated by reference into the crossreferenced notice of proposed rulemaking. The Treasury Department and the IRS will consider all written comments properly and timely submitted when finalizing these temporary regulations. Finally, these temporary regulations are part of an effort to implement the provisions of the Act, which effected sweeping and complex statutory changes to the international tax regime. In conjunction with developing and issuing these temporary regulations, the Treasury Department and the IRS have also been tasked with issuing regulations implementing the numerous provisions enacted or modified by the Act, along with attendant changes to forms and other sub-regulatory guidance and attention to the orderly administration of the U.S. tax system. Good cause exists for the issuance of temporary regulations relating to the transactions affected by these temporary regulations partially because of the statutory deadline in section 7805(b)(2), which provides (among other rules) that a regulation may be applied retroactively if it is issued within 18 months of the date of enactment of the statutory provision to which it relates. The rules in these temporary regulations relate to sections 245A, 951A, and 965, which were enacted as part of the Act on December 22, 2017. Thus, to qualify for retroactivity under section 7805(b)(2), a regulation retroactive to PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 the enactment of these provisions must be effective no later than June 22, 2019. These temporary regulations need to apply retroactively from the date of the underlying statutory provisions to ensure that the international tax regime enacted by Congress in the Act, and its interaction with existing tax rules, functions correctly for all affected periods. Retroactivity is also required to prevent treating taxpayers comparatively advantageously if they have engaged in the types of transactions described in these temporary regulations prior to the issuance date of these temporary regulations. The discussion of good cause with respect to the temporary regulations in this Part VI is consistent with the Policy Statement on the Tax Regulatory Process issued on March 5, 2019, by the Treasury Department and the IRS (the ‘‘Statement’’). The Statement emphasized the Treasury Department and the IRS’s obligation under the APA to issue interim final regulations without prior notice and comment only in conjunction with ‘‘a statement of good cause explaining the basis for that finding.’’ The Statement further explains that good cause for interim final regulations may exist, for example, where ‘‘such regulations may be necessary and appropriate to stop abusive practices or to immediately resolve an injurious inconsistency between existing regulations and a new statute or judicial decision.’’ As the discussion in this Part VI illustrates, this is the case with respect to these temporary regulations. Special Analyses I. 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. These temporary regulations have been designated by the Office of Management and Budget’s 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 E:\FR\FM\18JNR2.SGM 18JNR2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant and subject to review under Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by the Office of Management and Budget. A. Background The Tax Cuts and Jobs Act (the Act) transitioned the United States from a primarily deferral-based international tax system (subject to the immediate taxation of generally mobile or passive income under the subpart F regime) to a participation exemption system coupled with immediate taxation of certain offshore earnings (in some cases, at a reduced rate of tax).1 This transition was effected through several interlocking provisions of the Code— sections 245A, 951A, and 965. All three provisions have different effective dates and thus the Act created periods in which some but not all of them apply. The new system also operates alongside the pre-Act subpart F regime that taxes certain offshore earnings using a longstanding rule for attributing pro rata shares of a foreign corporation’s earnings to its U.S. shareholders. jbell on DSK3GLQ082PROD with RULES2 1. Background: Section 245A— Dividends Received Deduction The Act included section 245A, which provides a participation exemption system for repatriation of certain offshore earnings. Prior to the Act, dividends paid by foreign corporations to their U.S. shareholders were generally taxable. Section 245A(a) reverses this result in the case of corporate U.S. shareholders by providing, subject to certain exceptions, a 100-percent deduction for any dividend received by a corporate U.S. shareholder from a specified 10-percent owned foreign corporation.2 A 100percent deduction for dividends essentially means that this income is not 1 A deferral-based system is a system in which taxable foreign-source income generally is taxed only when it is repatriated to the United States. A participation exemption system is one in which foreign-source income is generally not taxed by the resident country (in this case, the United States). As explained further below, in the United States the participation exemption system is coupled with immediate taxation of certain types of earnings to avoid erosion of the U.S. tax base. These taxed foreign earnings can then be repatriated to the United States without further tax. 2 A specified 10-percent owned foreign corporation is any foreign corporation, other than a passive foreign investment corporation with respect to a shareholder that is not also a CFC, with at least one corporate U.S. shareholder. Section 245A(b). VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 taxed in the United States at the corporate level. The existing rules in sections 951(a) and 959 continue to apply, meaning that generally only earnings associated with income that is not taxed under the subpart F regime (or under the GILTI regime, discussed below) can, upon distribution, give rise to a dividend eligible for the section 245A deduction. Because subpart F (and GILTI) taxation is not reduced by distributions made during the year (except in the case of certain transfers of stock of a CFC during a taxable year), any distribution of earnings and profits that is taxed under the subpart F regime (or GILTI regime) is a distribution of PTEP (that is, a distribution of previously taxed earnings and profits) that is not treated as a dividend by reason of section 959(d), and thus cannot qualify for section 245A. Section 245A applies to distributions made after December 31, 2017. Because the pre-Act international tax regime imposed U.S. tax on most nonmobile, non-passive earnings and profits only when those earnings were repatriated, a significant amount of untaxed earnings and profits had been accumulated offshore when the Act was passed. The enactment of section 245A by the Act thus presented a potential windfall, allowing taxpayers who had held earnings and profits offshore to distribute all of those earnings back to the United States tax-free. Congress did not intend for section 245A to apply to such pre-Act earnings, and thus included a so-called transition tax (section 965) ‘‘[t]o avoid a potential windfall for corporations that deferred income, and to ensure that all distributions from foreign subsidiaries are treated in the same manner under the participation exemption system.’’ H. Rep. No. 115–409 at 375. 2. Background: Section 965—Transition Tax Section 965 imposed a transition tax on the post-1986 earnings and profits of foreign corporations that had gone untaxed under the pre-Act international tax regime and would not be subject to the GILTI regime because the income was earned in a year prior to that regime being in effect. Absent section 965, such earnings and profits would have been eligible for tax-free distribution under section 245A. Specifically, section 965(a) increases certain foreign corporations’ subpart F income for their last taxable year beginning before January 1, 2018, by the amount of their non-previously taxed earnings and profits computed as of no later than December 31, 2017. This has the effect of subjecting all offshore post-1986 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 28407 untaxed earnings of most U.S. shareholders as of no later than December 31, 2017, to U.S. tax (albeit at a reduced rate by reason of section 965(c)), turning all such earnings into PTEP under section 959. As a result, none of those earnings and profits are eligible for the section 245A deduction, and such earnings and profits, once taxed under section 965, are instead treated in the same way as if they had been taxed under the pre-Act subpart F regime. For a calendar year CFC, the transition tax generally provides a mechanism for ensuring that only earnings and profits subject to the new international tax system can qualify for the dividends received deduction under section 245A. This appears to be the intended purpose of section 965(a), as the legislative history of the Act provides that ‘‘[t]he [transition tax applies in] the last taxable year of a deferred foreign income corporation that begins before January 1, 2018, which is that foreign corporation’s last taxable year before the transition to the new corporate tax regime elsewhere in the bill goes into effect.’’ H. Rep. 115–466 at 613. This is not the case, however, for fiscal year CFCs (i.e., CFCs with a taxable year other than the calendar year) as there is a gap period with respect to such entities during which certain of their earnings may escape taxation. 3. Background: Section 951A—GILTI Regime By subjecting post-1986 earnings and profits to a transition tax, section 965 was generally intended to ensure that only earnings first subjected to the antibase erosion provisions of the Act could qualify for section 245A. While the Act preserved the existing subpart F regime, legislative history shows congressional concern that the participation exemption system could heighten the incentive to shift profits to low-taxed foreign jurisdictions or tax havens after the Act. See Senate Explanation at 365. For example, Congress expressed concern that a domestic corporation might allocate income susceptible to base erosion to certain foreign affiliates ‘‘where the income could potentially be distributed back to the [domestic] corporation with no U.S. tax imposed.’’ See id. As a result of these concerns, the Act added another, complementary regime to address the additional base erosion incentives engendered by the participation exemption. This regime taxes a U.S. shareholder on its global intangible low-taxed income, or GILTI, with respect to its CFCs at a reduced E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28408 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations rate (by reason of section 250) under new section 951A. Section 951A(a) generally subjects a U.S. shareholder to current taxation each year on its GILTI with respect to its CFCs. The GILTI of a U.S. shareholder is generally defined as its pro rata share of its CFCs’ taxable income for the year in excess of a normal return—a formulaic amount equal to 10 percent of the tax basis of the CFCs’ tangible assets. See section 951A(b), (c), (d). For purposes of this determination, specific types of income of a CFC, including income taxed under another Code provision (including the subpart F regime), certain immobile income, or certain highly taxed income, are not taken into account. See Senate Explanation at 366 (explaining that such income is either already taxed or does not present base erosion concerns). The GILTI regime applies in the first taxable year of a CFC beginning after December 31, 2017. Thus, in the case of calendar year CFCs, the application of the GILTI regime generally must be taken into account with respect to all new earnings and profits of a CFC earned immediately after section 965 has caused all of the CFC’s pre-Act earnings to be taxed. See Public Law 115–97, sec. 14201(d). As is the case with respect to the subpart F regime, the tax base subject to the GILTI regime is not reduced by distributions made by a CFC during a taxable year (except in the case of certain transfers of stock of a CFC during a taxable year), and section 951A(f)(1)(A) provides that an income inclusion under the GILTI regime is treated in the same manner as an inclusion of subpart F income under the subpart F regime for purposes of section 959. These rules cause a CFC’s earnings attributable to GILTI to be taxed under the GILTI regime in section 951A regardless of whether those earnings and profits are distributed before the end of the CFC’s year, thus converting such earnings into PTEP and turning distributions (including those made before the end of the year in which the earnings and profits were earned) by the CFC into PTEP distributions that do not constitute dividends eligible for section 245A. Section 959(c), (d). Section 951(a)(2) also applies for purposes of determining a U.S. shareholder’s pro rata share of its CFCs’ income and other relevant items for purposes of section 951A. Section 951A(e). stock of a calendar year CFC throughout the CFC’s entire taxable year. Deviations from that condition, however, potentially allow taxpayers to avoid tax by claiming a section 245A deduction in situations where otherwise identical income would be subject to U.S. tax. This circumstance is inconsistent with the purposes of the new international tax regime enacted by Congress.3 These temporary regulations are needed to limit section 245A to its intended scope and, thereby, prevent the provision from converting income that should be subject to U.S. tax into non-taxable dividends. There are two situations in which deviations from the condition described in this section can give rise to these results. These are where (1) a U.S. corporation is the shareholder of a fiscal year CFC during 2018 and (2) a CFC pays a dividend and experiences a direct or indirect change in ownership during a taxable year. The differing application of the GILTI regime with respect to fiscal year and calendar year CFCs creates one scenario where the interaction of section 245A with other new international tax provisions might be used to avoid tax. For a calendar year CFC, any earnings and profits accumulated as of no later than December 31, 2017, that had not been taxed under the subpart F regime generally were taxed under section 965 in the CFC’s 2017 taxable year, turning such earnings and profits into PTEP. Then, starting in the calendar year CFC’s taxable year beginning on January 1, 2018, the CFC’s income became subject to the complementary subpart F and new GILTI regimes, and any income taxed under those provisions now also becomes PTEP. Concurrent with the applicability date of the GILTI regime, section 245A applies to dividends distributed after December 31, 2017, out of earnings that have not been taxed under the subpart F and GILTI regimes. These interlocking provisions create a cohesive regime in which the section 245A deduction applies only for distributions of post-2017 earnings and profits that are properly not taxed as the subpart F income or GILTI regimes. Operating in tandem, these provisions address Congress’s concerns with section 245A by applying that provision (1) without granting windfalls for taxpayers that had historically kept earnings and profits offshore (by taxing B. Need for the Temporary Regulations Sections 245A, 965, and 951A generally act to tax foreign source income equivalently across taxpayers and sources so long as a U.S. shareholder owns the same amount of 3 The discussion herein assumes that the transactions at issue would otherwise withstand scrutiny under section 7701(o) (i.e., the economic substance doctrine) and related judicial doctrines. Taxpayers should draw no inferences from this assumption, however, as the IRS may challenge such transactions on these and other grounds. VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 all such earnings and profits under section 965 immediately before section 245A applies) and (2) without allowing a section 245A deduction for income susceptible to a heightened risk of base erosion. As a result of these provisions, only post-2017 earnings and profits that are not subject to the subpart F or GILTI regimes can qualify for a dividends received deduction under section 245A upon distribution from a calendar year CFC. Such earnings and profits are generally the normal return on a CFC’s property (i.e., 10 percent of tax basis in tangible property), certain immobile income, or certain highly-taxed income that Congress believed would not raise windfall or base erosion concerns. By contrast, the provisions that apply harmoniously to a calendar year CFC fail to form a cohesive regime when applied to a fiscal year CFC for its first taxable year that ends in 2018. Consider a CFC with a taxable year ending November 30. This CFC’s income is still subject to the subpart F regime for all relevant taxable years. Section 965 also applies to the CFC’s historical earnings and profits as of no later than December 31, 2017, and section 245A applies to distributions made by the CFC after December 31, 2017. However, the GILTI regime does not begin to apply to the CFC’s income until the first taxable year of the CFC beginning after December 31, 2017, and thus does not first apply until the CFC’s taxable year that begins on December 1, 2018. As a result of the gap in these effective dates, (1) the ordinary earnings of the CFC during the gap period avoid tax (which is a direct outgrowth of the effective dates); and (2) assets can be transferred between related parties in non-ordinary course transactions during that time period in such a way that current and future earnings and profits associated with the built-in gain in those assets can permanently avoid taxation by the United States because they are not subject to the GILTI regime and are not subject to the transition tax under section 965. Such earnings and profits might nevertheless be eligible to be distributed tax-free under section 245A. Such income, however, is economically identical to income earned by a calendar year CFC. Absent the temporary regulations, similar income from CFCs that differ only in their taxable year would be subject to different taxation. This difference between calendar year and fiscal year CFCs is significant and presents the potential for substantial tax avoidance when utilized to artificially generate earnings and profits in nonordinary course transactions between related parties. E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations These temporary regulations refer to the portion of a dividend attributable to earnings and profits arising from such a transaction during this period as an ‘‘extraordinary disposition amount.’’ An extraordinary disposition amount consists of certain earnings and profits resulting from transactions between related parties during the disqualified period. See the Explanation of Provisions section of this preamble for definitions of all relevant terms and conditions. Although the period during which extraordinary dispositions may have occurred has passed, the regulations will potentially apply to any distributions of the associated earnings and profits after 2017. The second issue occurs because the application of the allocation rules under sections 951(a) and 951A (which determine a U.S. shareholder’s pro rata share of a CFC’s subpart F income or tested income for GILTI purposes) together with section 245A creates situations in which earnings and profits may not be properly subject to the new international tax regime that Congress enacted to prevent the inappropriate application of the section 245A deduction. For example, this situation may arise because of the ‘‘dividend offset’’ rule in section 951(a)(2)(B), which, subject to certain limitations, reduces a U.S. shareholder’s pro rata share of subpart F income or tested income for dividends paid to another owner of the same stock of the CFC during the taxable year (such reduction being a rough approximation of the portion of subpart F income and tested income for the year that is properly attributable to the other owner). In order to illustrate this concern, consider the following example. A corporate U.S. shareholder generally is taxed with respect to a CFC’s subpart F income as of the end of the CFC’s taxable year. Suppose, however, that the U.S. shareholder received a dividend from the CFC in an amount equal to its subpart F income and thereafter transferred ownership of the CFC to a new U.S. shareholder shortly before the end of the CFC’s taxable year. If a section 245A deduction applied to the dividend, the corporate U.S. shareholder would not be taxed on the distribution. Furthermore, the second U.S. shareholder’s subpart F inclusion for the CFC’s taxable year may be reduced to approximately zero as a result of the dividend offset rule. As a consequence, absent the application of these temporary regulations, income that should have been subject to U.S. taxation under the subpart F regime could escape taxation altogether. VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 In contrast to the first issue, this second issue implicates the interlocking provisions of the international tax regime on an ongoing basis. As described in Part II.C of the Explanation of Provisions section of this preamble, section 245A could facilitate the avoidance of the subpart F and GILTI regimes by allowing a U.S. shareholder to transfer, before the end of a CFC’s taxable year, stock of the CFC to a new shareholder who will not be taxed on the CFC’s subpart F income or tested income. As a consequence of the repeal of section 958(b)(4), this new shareholder might be a foreign person who is not taxable with respect to the CFC’s subpart F income or tested income. Alternatively, the new shareholder may not be taxable with respect to these amounts as a result of the dividend offset rule of section 951(a)(2)(B), notwithstanding the fact that if the prior owner of the stock is a corporate U.S. shareholder, the section 245A deduction may apply to dividends received by such prior owner. In these cases, current year subpart F income and GILTI could escape taxation altogether, a result that would undermine the post-Act system for taxing foreign earnings. These temporary regulations refer to earnings and profits representing the portion of a dividend of a CFC attributable to subpart F income or tested income of the CFC that, absent a transfer of stock of the CFC pursuant to an extraordinary reduction, would have been subject to the subpart F or GILTI regimes as an ‘‘extraordinary reduction amount.’’ An extraordinary reduction amount consists of certain earnings and profits generated during a CFC’s taxable year beginning after 2017 in which a domestic corporate U.S. shareholder reduces its ownership of the CFC by certain threshold amounts (e.g., a decrease in ownership of more than 10 percent). For this purpose, ‘‘certain earnings and profits’’ refers to income generally subject to inclusion under the subpart F or GILTI regimes. See the Explanation of Provisions section of this preamble for definitions of all relevant terms and conditions. Results similar to the ones described in this section for extraordinary disposition amounts and extraordinary reduction amounts can be achieved using the exemption from subpart F income under section 954(c)(6) and lower-tier CFC dividends to upper-tier CFCs. Accordingly, the temporary regulations limit the application of the section 954(c)(6) exception in order to prevent similar results in circumstances in which a lower-tier CFC pays a PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 28409 dividend to another CFC, instead of directly to a U.S. shareholder. C. Overview of the Temporary Regulations The Treasury Department and the IRS have determined that it is appropriate to limit the section 245A deduction to distributions of earnings and profits that are attributable to certain normal return, high-taxed, or immobile income, which will ensure that similar income is taxed similarly. The temporary regulations do not permit section 245A deductions for the portions of dividends made by CFCs that are attributable to ineligible amounts, which comprise extraordinary reduction amounts and 50percent of any extraordinary disposition amounts. To accomplish this, the temporary regulations disallow a deduction for transactions that have the effect of avoiding tax under section 951, 951A, or 965. The extraordinary disposition rules accomplish this by denying the deduction under section 245A for a narrowly and objectively defined class of earnings and profits generated by transactions undertaken in the disqualified period in circumstances that raise abuse concerns. The extraordinary reduction rules accomplish this by denying the deduction under section 245A for certain earnings distributed in the same year as reductions in ownership of CFC stock by a controlling section 245A shareholder. The temporary regulations contain similar rules with respect to section 954(c)(6). D. Economic Analysis of the Temporary Regulations 1. Baseline The Treasury Department and the IRS have assessed the benefits and costs of the temporary regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these temporary regulations. 2. Summary of Economic Effects To assess the economic effects of these regulations, the Treasury Department and the IRS considered the economic effects of disallowing the 245A deduction for (i) extraordinary disposition amounts and (ii) extraordinary reduction amounts. The disallowance of the dividends received deduction for extraordinary disposition amounts applies, in plain language, only to earnings and profits accrued prior to issuance of the temporary regulations. Thus, no substantive economic activities can be affected by this disallowance and the E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28410 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations economic decisions affected are only those associated with taxpayers’ financing of their tax liability. The Treasury Department and the IRS’s analysis therefore focuses on those provisions of the temporary regulations that disallow the dividends received deduction for extraordinary reduction amounts. Absent the temporary regulations, U.S. taxation of income of a CFC that would otherwise be subject to the subpart F or GILTI regime could be avoided by a transfer of ownership of the CFC to other entities in such a way that the income of the CFC would not be subject to U.S. tax. Thus, the economic effects stem from those transfers that would give rise to an extraordinary reduction amount (‘‘ER transfers’’) and that would not be undertaken as a result of the temporary regulations. The Treasury Department and the IRS project that a substantial portion of these ER transfers would have been undertaken for tax avoidance purposes only and would have negative effects on economic performance (giving rise to a positive economic effect from the temporary regulations) but that those effects would be minor because the transfers would take place among related parties and over short time frames. Thus, there would be only negligible losses in economic performance due to inefficient changes in management, risk-bearing, or other economic activity. Instead, the primary economic losses due to these transfers (and thus gains from the temporary regulations) are likely to consist of resources that would be expended in carrying out such tax planning activities. The Treasury Department and the IRS project that these saved resource costs would be small. The Treasury Department and the IRS considered that at least some ER transfers that would not be pursued as a result of the temporary regulations would have provided positive economic benefits, such as through more efficient risk-bearing or other managerial control benefits. The Treasury Department and the IRS project that the aggregate value of these foregone benefits will be minimal because the transfers for which a deduction is disallowed and that are likely not to be undertaken as a result of the temporary regulations are not generally associated with productive economic activities. In this regard, the Treasury Department and the IRS expect that economically-motivated transfers of CFCs should not be inhibited by the temporary regulations because the temporary regulations, taking into account the election to close a CFC’s taxable year, often will result in the same or similar tax liability to a seller VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 as if the transfer had not occurred. Thus, the temporary regulations should not discourage economically-motivated transfers of CFCs. If anything, the temporary regulations will discourage transfers of CFCs that would not have occurred absent the tax results the temporary regulations seek to prevent. These transfers, which would be motivated by tax avoidance, likely would not be economically productive. The temporary regulations will require taxpayers to compute, track, and report information relevant for determination of extraordinary dispositions and extraordinary reductions. The compliance burden component of the Treasury Department and the IRS’s estimate of the economic effects of the temporary regulations reflects only those record-keeping and related compliance activities that would not have been undertaken in the absence of the temporary regulations. The Treasury Department and the IRS project that these additional costs, relative to the baseline, will be modest. In general, with respect to the initial year of an extraordinary disposition or any extraordinary reduction, taxpayers are already required to keep track of the required information for other purposes. For example, to the extent that a U.S. taxpayer sells stock in its CFC, earns income in its CFC, or receives a dividend from a CFC, the taxpayer would otherwise record the information needed to determine eligibility for the section 245A deduction under the temporary regulations. Additionally, once calculated the costs to track amounts related to extraordinary dispositions in future years are expected to be minimal. For all of these reasons, the Treasury Department and the IRS expect the non-revenue economic effects of these temporary regulations to be small.4 The Treasury Department and the IRS have not undertaken a quantitative estimate of the economic benefits arising from avoided transactions that constitute extraordinary reductions. Any such estimates would be highly uncertain because these tax provisions are new and because the transfers would be between related parties and primarily of short duration, both of which factors make estimation difficult. The tax planning costs of effecting these transfers are also highly uncertain because these specific tax planning efforts are new. While it is not currently feasible for the Treasury Department and the IRS to 4 This claim refers solely to the economic benefit arising from this provision and does not refer to any estimate of the tax revenue effects of the provision. PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 quantify these economic effects, part I.D.3 of these Special Analyses explains the rationale behind the provisions of these temporary regulations and provides a qualitative assessment of the alternatives considered. The Treasury Department and the IRS solicit comments on this assessment of the economic effects of the temporary regulations. 3. Analysis of Specific Provisions i. Ordering of Distributions of Earnings and Profits With Respect to Extraordinary Disposition Amounts a. Background and Alternatives Considered Any transaction that gave rise to an extraordinary disposition has already taken place because the disqualified period has closed for all taxpayers. Thus, the temporary regulations should have no economic effect with respect to these transactions. Nevertheless, the denial of a section 245A deduction with respect to the related extraordinary disposition E&P may in some cases lead CFCs to retain earnings rather than distribute them in order to defer the associated U.S. tax. The undistributed earnings in this case may lead to a socalled ‘‘lockout effect’’ pursuant to which some portion of the offshore capital remains in less productive ventures than would otherwise be the case had the earnings and profits been eligible for a section 245A deduction. The temporary regulations address this potential concern by providing an ordering rule such that extraordinary distribution E&P generally are the last earnings and profits deemed distributed by a CFC. As a result, CFCs generally may distribute all other earnings and profits that are eligible for a section 245A deduction before extraordinary disposition E&P for which a section 245A deduction is not allowed. This rule will generally minimize the capital allocation inefficiencies stemming from a potential lockout effect by deferring the application of the temporary regulations to the latest extent possible. Moreover, the Treasury Department and the IRS expect that the extraordinary disposition E&P will not often be associated with liquid assets, such as cash. An extraordinary disposition requires a non-ordinary course transaction among related parties. The Treasury Department and the IRS are aware that transactions giving rise to an extraordinary disposition typically involve the issuance of related party debt or stock. These instruments are not the sort of assets that implicate lockout effect concerns because they would E:\FR\FM\18JNR2.SGM 18JNR2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations rarely be used as consideration for making a payment to a third party. The Treasury Department and the IRS considered as an alternative not providing an ordering rule. For the reasons mentioned above, this alternative was not adopted. In particular, the lack of an ordering rule would have inhibited taxpayers from accessing future offshore earnings that had been appropriately subject to tax under Act, which would have frustrated the congressional purpose underlying the participation exemption. By essentially reviving the lockout effect that had motivated certain international aspects of the Act, this alternative approach may have trapped capital in suboptimal offshore uses. jbell on DSK3GLQ082PROD with RULES2 b. Affected Taxpayers The taxpayers potentially affected by this aspect of the temporary regulations are direct or indirect U.S. shareholders of certain foreign corporations that are eligible for the section 245A deduction or the section 954(c)(6) exception with respect to distributions from the foreign corporation, and the foreign corporation uses a fiscal year, as opposed to the calendar year, as its taxable year. The foreign corporation must have engaged in a sale of property to a related party (1) during the period between January 1, 2018, and the end of the foreign corporation’s last taxable year beginning before 2018, (2) outside the ordinary course of the foreign corporation’s activities, and (3) generally, while the corporation was a CFC. Additionally, the property sold must give rise to tested income and the value of the property sold must exceed the lesser of $50 million or 5 percent of the total value of the property of the foreign corporation. The Treasury Department and the IRS have not estimated how many taxpayers are likely to be affected by these regulations because data on the taxpayers that may have engaged in these particular transactions is not readily available. However, based on tabulations of the 2014 Statistics of Income Study file the Treasury Department and the IRS estimate that there are approximately 5,000 domestic corporations with at least one fiscal year CFC. The actual number of affected taxpayers is smaller than the number of domestic corporations with at least one fiscal year CFC, because a domestic corporation will not be affected unless its fiscal year CFC engages in a nonroutine sale with a related party that is of sufficient magnitude that the temporary regulations to apply. VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 ii. Definition of Extraordinary Reduction a. Background and Alternatives Considered The temporary regulations limit the amount of the 245A deduction whenever there is an ‘‘extraordinary reduction.’’ The temporary regulations generally define an extraordinary reduction, subject to certain conditions, as when either the controlling section 245A shareholder transfers more than 10 percent of its stock of the CFC or there is a greater than 10 percent change in the controlling section 245A shareholder’s overall ownership of the CFC. The Treasury Department and the IRS, in defining an extraordinary reduction, considered other percentage thresholds. They expect that the ownership change threshold provides an effective balance of compliance costs for taxpayers, effective administration of section 245A, and revenue considerations. The Treasury Department and the IRS do not have appropriate data or models to precisely compute an optimal percentage threshold. The Treasury Department and the IRS solicit comments on the economic and revenue consequences of the ownership change threshold and alternative thresholds. The Treasury Department and the IRS particularly solicit comments that provide data, models, or analysis suitable for evaluating alternative thresholds. b. Affected Taxpayers The taxpayers potentially affected by this aspect of the temporary regulations are U.S. shareholders that own directly or indirectly stock of a CFC that has a controlling U.S. shareholder that owns 50 percent or more of the stock of the CFC. Additionally, during the taxable year, the controlling U.S. shareholder generally must directly or indirectly sell stock in the CFC that exceeds 10 percent of the controlling U.S. shareholder’s interest in the CFC and 5 percent of the total value of the stock of the CFC. Furthermore, in the year of the ownership reduction, the subpart F income and tested income of the CFC must exceed the lesser of $50 million or 5 percent of the CFC’s total income for the year. The Treasury Department and the IRS have not estimated how many taxpayers are likely to be affected by these regulations because data on the taxpayers that may have engaged or would engage in these particular transactions is not readily available. However, based on 2014 Statistics of Income tax data, the Treasury Department and the IRS estimate that PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 28411 there are approximately 15,000 domestic corporations with CFCs. The Treasury Department and the IRS project that the actual number of affected taxpayers is likely much smaller than the number of domestic corporations with CFCs, given that the controlling U.S. shareholder must engage in a sale of stock of a CFC in a year in which the CFC pays a dividend in order for the temporary regulations to apply. iii. Election To Avoid Taxable Dividend by Closing the CFC’s Taxable Year a. Background and Alternatives Considered The Treasury Department and the IRS provide taxpayers with an election to avoid having a taxable dividend with respect to an extraordinary reduction amount by closing the taxable year of the CFC for all purposes of the Code on the date of the extraordinary reduction. Such an election would subject the earnings and profits that, absent the election, would give rise to an extraordinary reduction amount instead to taxation under the subpart F or GILTI regimes, and therefore, exemption under section 245A for any remaining earnings is appropriate. By providing this election, the Treasury Department and the IRS allow taxpayers to choose the tax treatment that would have been imposed in the absence of the interactions among provisions. In addition to ensuring that similar income is taxed similarly, this election increases the choices available to taxpayers, thus increasing flexibility and thereby minimizing the burden imposed by these regulations. To the extent taxpayers choose this election, tax burdens could be reduced relative to tax burdens under the temporary regulations in the absence of the election, because denying the section 245A deduction could result in higher tax (i.e., at ordinary corporate rates) than imposition of a reduced tax under the GILTI regime. The Treasury Department and the IRS chose to allow such election because if the election were not allowed, some taxpayers would be taxed more heavily than the Treasury Department and the IRS have determined is intended under the Act. b. Affected Taxpayers The taxpayers potentially affected by this aspect of the temporary regulations are described in Part I.D.3.ii.b of this Special Analyses. II. Paperwork Reduction Act The collections of information in the temporary regulations are in §§ 1.245A– 5T(e)(3) and 1.6038–2T(f)(16). E:\FR\FM\18JNR2.SGM 18JNR2 28412 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations The collection of information in § 1.245A–5T(e)(3) is elective for a domestic corporation that is a controlling U.S. shareholder of a CFC receiving a dividend from the CFC and wants to elect to have none of the dividend considered an extraordinary reduction amount by closing the CFC’s tax year. The collection of information is satisfied by timely filing of the ‘‘Elective Section 245A Year-Closing Statement’’ with the domestic corporation’s original Form 1120, U.S. Corporation Income Tax Return, for the taxable year in which the dividend is received. For purposes of the Paperwork Reduction Act, the reporting burden associated with § 1.245A–5T will be reflected in the Paperwork Reduction Act submission associated with Form 1120 (OMB control no. 1545–0123). The collection of information in § 1.6038–2T(f)(16) is mandatory for every U.S. person that controls a foreign corporation that has paid a dividend for which a deduction under section 245A was limited by an ineligible amount under § 1.245A–5T(b) or paid a dividend for which the section 954(c)(6) exception was limited by a tiered extraordinary disposition amount or tiered extraordinary reduction amount under § 1.245A–5T(d) and (f), respectively, during an annual accounting period and files Form 5471 for that period (OMB control number 1545–0123 in the case of business taxpayers, formerly, OMB control number 1545–0704). The collection of information in § 1.6038–2T(f)(16) is satisfied by providing information about the ineligible amount, tiered extraordinary disposition amount, or tiered extraordinary reduction amount for the corporation’s accounting period as Form 5471 and its instructions may prescribe. For purposes of the Paperwork Reduction Act, the reporting burden associated with § 1.6038– 2T(f)(16) will be reflected in the applicable Paperwork Reduction Act submission, associated with Form 5471. As provided below, the estimated number of respondents for the reporting burden associated with § 1.6038– 2T(f)(16) is 12,000–18,000, based on estimates provided by the Research, Applied Analytics and Statistics Division of the IRS. The related new or revised tax form is as follows: New Revision of existing form Number of respondents (estimate) ✓ 12,000–18,000 Schedule to Form 5471 ............................................................................................................... jbell on DSK3GLQ082PROD with RULES2 The current status of the Paperwork Reduction Act submissions related to the new revised Form 5471 as a result of the information collections in the temporary regulations is provided in the accompanying table. The reporting burdens associated with the information collections in §§ 1.245A–5T–(e)(3) and 1.6038–2T(f)(16) are included in the aggregated burden estimates for OMB control number 1545–0123, which represents a total estimated burden time for all forms and schedules for corporations of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017). The overall burden estimates provided in 1545– 0123 are aggregate amounts that relate to the entire package of forms associated with the OMB control number and will in the future include but not isolate the estimated burden of the tax forms that will be revised as a result of the information collections in the proposed regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the temporary regulations. The Treasury Department and the IRS urge readers to recognize that these numbers are duplicates of estimates provided for informational purposes in other proposed and final regulatory actions and to guard against overcounting the burden that international tax provisions imposed prior to the Act. In September 2018, the IRS released and invited comment on drafts of new revised Form 5471 in order to give members of the public the opportunity to benefit from certain specific provisions made to the Code. The IRS received no comments on the draft revised Form 5471 on the portions of the form that relate to section 245A during the comment period. Consequently, the IRS made the form available in December 2018 for use by the public. The IRS is contemplating making additional changes to Form 5471 to implement these temporary regulations. No burden estimates specific to the temporary regulations are currently Information collection Type of filer Form 5471 ............................... Business (NEW Model) .......... available. The Treasury Department and the IRS have not identified any burden estimates, including those for new information collections, related to the requirements under the temporary regulations. Those estimates would capture both changes made by the Act and those that arise out of discretionary authority exercised in the temporary regulations. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the temporary regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. Proposed revisions to these forms that reflect the information collections contained in these temporary regulations will be made available for public comment at www.irs.gov/ draftforms and will not be finalized until after approved by OMB under the PRA. OMB No.(s) 1545–0123 Status Approved by OMB on 12/21/2018. Link: https://www.federalregister.gov/documents/2018/12/21/2018-27735/agency-information-collection-activitiessubmission-for-omb-review-comment-request-multiple-irs. III. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in E:\FR\FM\18JNR2.SGM 18JNR2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2019, that threshold is approximately $154 million. These temporary regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. IV. 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. These temporary regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Drafting Information The principal author of the temporary regulations is Logan M. Kincheloe, Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding a sectional authority for § 1.245A–5 to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.245A–5 also issued under 26 U.S.C. 245A(g), 951A(a), 954(c)(6)(A), and 965(o). * * * * * Par. 2. Reserved sections 1.245A–1 through 4 and § 1.245A–5T are added to read as follows: jbell on DSK3GLQ082PROD with RULES2 ■ Sec. 1.245A–1 [Reserved]. 1.245A–2 [Reserved]. 1.245A–3 [Reserved]. 1.245A–4 [Reserved]. 1.245A–5T Limitation of section 245A deduction and section 954(c)(6) exception (temporary). VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 § 1.245A–5T Limitation of section 245A deduction and section 954(c)(6) exception (temporary). (a) Overview. This section provides rules that limit a deduction under section 245A(a) to the portion of a dividend that exceeds the ineligible amount of such dividend or the applicability of section 954(c)(6) when a portion of a dividend is paid out of an extraordinary disposition account or when an extraordinary reduction occurs. Paragraph (b) of this section provides rules regarding ineligible amounts. Paragraph (c) of this section provides rules for determining ineligible amounts attributable to an extraordinary disposition. Paragraph (d) of this section provides rules that limit the application of section 954(c)(6) when one or more section 245A shareholders of a lowertier CFC have an extraordinary disposition account. Paragraph (e) of this section provides rules for determining ineligible amounts attributable to an extraordinary reduction. Paragraph (f) of this section provides rules that limit the application of section 954(c)(6) when a lower-tier CFC has an extraordinary reduction amount. Paragraph (g) of this section provides special rules for purposes of applying this section. Paragraph (h) of this section provides an anti-abuse rule. Paragraph (i) of this section provides definitions. Paragraph (j) of this section provides examples illustrating the application of this section. Paragraph (k) of this section provides the applicability date of this section. Paragraph (l) of this section provides the expiration date of this section. (b) Limitation of deduction under section 245A—(1) In general. A section 245A shareholder is allowed a section 245A deduction for any dividend received from an SFC (provided all other applicable requirements are satisfied) only to the extent that the dividend exceeds the ineligible amount of the dividend. See paragraphs (j)(2), (4), and (5) of this section for examples illustrating the application of this paragraph (b)(1). (2) Definition of ineligible amount. The term ineligible amount means, with respect to a dividend received by a section 245A shareholder from an SFC, an amount equal to the sum of— (i) 50 percent of the extraordinary disposition amount (as determined under paragraph (c) of this section), and (ii) The extraordinary reduction amount (as determined under paragraph (e) of this section). (c) Rules for determining extraordinary disposition amount—(1) Definition of extraordinary disposition amount. The term extraordinary PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 28413 disposition amount means the portion of a dividend received by a section 245A shareholder from an SFC that is paid out of the extraordinary disposition account with respect to the section 245A shareholder. See paragraph (j)(2) of this section for an example illustrating the application of this paragraph (c). (2) Determination of portion of dividend paid out of extraordinary disposition account—(i) In general. For purposes of determining the portion of a dividend received by a section 245A shareholder from an SFC that is paid out of the extraordinary disposition account with respect to the section 245A shareholder, the following rules apply— (A) The dividend is first considered paid out of non-extraordinary disposition E&P with respect to the section 245A shareholder; and (B) The dividend is next considered paid out of the extraordinary disposition account to the extent of the section 245A shareholder’s extraordinary disposition account balance. (ii) Definition of non-extraordinary disposition E&P. The term nonextraordinary disposition E&P means, with respect to a section 245A shareholder and an SFC, an amount of earnings and profits of the SFC equal to the excess, if any, of— (A) The product of— (1) The amount of the SFC’s earnings and profits described in section 959(c)(3), determined as of the end of the SFC’s taxable year (for this purpose, without regard to distributions during the taxable year other than as provided in this paragraph (c)(2)(ii)(A)(1)), but, if during the taxable year the SFC pays more than one dividend, reduced (but not below zero) by the amounts of any dividends paid by the SFC earlier in the taxable year; and (2) The percentage of the stock (by value) of the SFC that the section 245A shareholder owns directly or indirectly immediately after the distribution (taking into account all transactions related to the distribution); over (B) The balance of the section 245A shareholder’s extraordinary disposition account with respect to the SFC, determined immediately before the distribution. (3) Definitions with respect to extraordinary disposition accounts—(i) Extraordinary disposition account—(A) In general. The term extraordinary disposition account means, with respect to a section 245A shareholder of an SFC, an account the balance of which is equal to the product of the extraordinary disposition ownership percentage and the extraordinary disposition E&P, reduced (but not below zero) by the E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28414 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations prior extraordinary disposition amount, and adjusted under paragraph (c)(4) of this section, as applicable. (B) Extraordinary disposition ownership percentage. The term extraordinary disposition ownership percentage means the percentage of stock (by value) of a SFC that a section 245A shareholder owns directly or indirectly at the beginning of the disqualified period or, if later, on the first day during the disqualified period on which the SFC is a CFC, regardless of whether the section 245A shareholder owns directly or indirectly such stock of the SFC on the date of an extraordinary disposition giving rise to extraordinary disposition E&P; if not, see paragraph (c)(4) of this section. (C) Extraordinary disposition E&P. The term extraordinary disposition E&P means an amount of earnings and profits of an SFC equal the sum of the net gain recognized by the SFC with respect to specified property in each extraordinary disposition. In the case of an extraordinary disposition with respect to the SFC arising as a result of a disposition of specified property by a specified entity (other than a foreign corporation), an interest of which is owned directly or indirectly (through one or more other specified entities that are not foreign corporations) by the SFC, the net gain taken into account for purposes of the preceding sentence is the SFC’s distributive share of the net gain recognized by the specified entity with respect to the specified property. (D) Prior extraordinary disposition amount—(1) General rule. The term prior extraordinary disposition amount means, with respect to an SFC and a section 245A shareholder, the sum of the extraordinary disposition amount of each prior dividend received by the section 245A shareholder from the SFC by reason of paragraph (c) of this section and 200 percent of the sum of the amounts included in the section 245A shareholder’s gross income under section 951(a) by reason of paragraph (d) of this section (in the case in which the SFC is, or has been, a lower-tier CFC). A section 245A shareholder’s prior extraordinary disposition amount also includes— (i) A prior dividend received by the section 245A shareholder from the SFC to the extent not an extraordinary reduction amount and to the extent the dividend was not eligible for the section 245A deduction by reason of section 245A(e) or the holding period requirement of section 246 not being satisfied but would have been an extraordinary disposition amount had paragraph (c) of this section applied to the dividend; VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 (ii) The portion of a prior dividend (to the extent not a tiered extraordinary disposition amount by reason of paragraph (d) of this section) received by an upper-tier CFC from the SFC that by reason of section 245A(e) was included in the upper-tier CFC’s foreign personal holding company income and was included in gross income by the section 245A shareholder under section 951(a) but would have been a tiered extraordinary disposition amount by reason of paragraph (d) of this section had paragraph (d) applied to the dividend; (iii) If a prior dividend received by an upper-tier CFC from a lower-tier CFC gives rise to a tiered extraordinary disposition amount with respect to the section 245A shareholder by reason of paragraph (d) of this section, the qualified portion. (2) Definition of qualified portion—(i) In general. The term qualified portion means, with respect to a tiered extraordinary disposition amount of a section 245A shareholder and a lowertier CFC, 200 percent of the portion of the disqualified amount with respect to the tiered extraordinary disposition amount equal to the sum of the amounts included in gross income by each U.S. tax resident under section 951(a) in the taxable year in which the tiered extraordinary disposition amount arose with respect to the lower-tier CFC by reason of paragraph (d) of this section. For purposes of the preceding sentence, the reference to a U.S. tax resident does not include any section 245A shareholder with a tiered extraordinary disposition amount with respect to the lower-tier CFC. (ii) Determining a qualified portion if multiple section 245A shareholders have tiered extraordinary disposition amounts. For the purposes of applying paragraph (c)(3)(i)(D)(2)(i) of this section, if more than one section 245A shareholder has a tiered extraordinary disposition amount with respect to a dividend received by an upper-tier CFC from a lower-tier CFC, then the qualified portion with respect to each section 245A shareholder is equal to the amount described in paragraph (c)(3)(i)(D)(2)(i) of this section, without regard to this paragraph (c)(3)(i)(D)(2)(ii), multiplied by a fraction, the numerator of which is the section 245A shareholder’s tiered extraordinary disposition amount with respect to the lower-tier CFC and the denominator of which is the sum of the tiered extraordinary disposition amounts with respect to each section 245A shareholder and the lower-tier CFC. (ii) Extraordinary disposition—(A) In general. Except as provided in PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 paragraph (c)(3)(ii)(E) of this section, the term extraordinary disposition means, with respect to an SFC, any disposition of specified property by the SFC on a date on which it was a CFC and during the SFC’s disqualified period to a related party if the disposition occurs outside of the ordinary course of the SFC’s activities. An extraordinary disposition also includes a disposition during the disqualified period on a date on which the SFC is not a CFC if there is a plan, agreement, or understanding involving a section 245A shareholder to cause the SFC to recognize gain that would give rise to an extraordinary disposition if the SFC were a CFC. (B) Facts and circumstances. A determination as to whether a disposition is undertaken outside of the ordinary course of an SFC’s activities is made on the basis of facts and circumstances, taking into account whether the transaction is consistent with the SFC’s past activities, including with respect to quantity and frequency. In addition, a disposition of specified property by an SFC to a related party may be considered outside of the ordinary course of the SFC’s activities notwithstanding that the SFC regularly disposes of property of the same type of, or similar to, the specified property to persons that are not related parties. (C) Per se rules. A disposition is treated as occurring outside of the ordinary course of an SFC’s activities if the disposition is undertaken with a principal purpose of generating earnings and profits during the disqualified period or if the disposition is of intangible property, as defined in section 367(d)(4). (D) Treatment of dispositions by certain specified entities. For purposes of paragraph (c)(3)(ii)(A) of this section, an extraordinary disposition with respect to an SFC includes a disposition by a specified entity other than a foreign corporation, provided that immediately before or immediately after the disposition the specified entity is a related party with respect to the SFC, the SFC directly or indirectly (through one or more other specified entities other than foreign corporations) owns an interest in the specified entity, and the disposition would have otherwise qualified as an extraordinary disposition had the specified entity been a foreign corporation. (E) De minimis exception to extraordinary disposition. If the sum of the net gain recognized by an SFC with respect to specified property in all dispositions otherwise described in paragraph (c)(3)(ii)(A) of this section does not exceed the lesser of $50 million or 5 percent of the gross value E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations of all of the SFC’s property held immediately before the beginning of its disqualified period, then no disposition of specified property by the SFC is an extraordinary disposition. (iii) Disqualified period. The term disqualified period means, with respect to an SFC that is a CFC on any day during the taxable year that includes January 1, 2018, the period beginning on January 1, 2018, and ending as of the close of the taxable year of the SFC, if any, that begins before January 1, 2018, and ends after December 31, 2017. (iv) Specified property. The term specified property means any property if gain recognized with respect to such property during the disqualified period is not described in section 951A(c)(2)(A)(i)(I) through (V). If only a portion of the gain recognized with respect to property during the disqualified period is gain that is not described in section 951A(c)(2)(A)(i)(I) through (V), then a portion of the property is treated as specified property in an amount that bears the same ratio to the value of the property as the amount of gain not described in section 951A(c)(2)(A)(i)(I) through (V) bears to the total amount of gain recognized with respect to such property during the disqualified period. (4) Successor rules for extraordinary disposition accounts. This paragraph (c)(4) applies with respect to an extraordinary disposition account upon certain direct or indirect transfers of stock of an SFC by a section 245A shareholder. (i) Another section 245A shareholder succeeds to all or portion of account. Except for a transfer described in § 1.1248–8(a)(1), paragraphs (c)(4)(i)(A) through (C) of this section apply when a section 245A shareholder of an SFC (the transferor) transfers directly or indirectly a share of stock (or a portion of a share of stock) of the SFC that it owns directly or indirectly (the share or portion thereof, a transferred share). (A) If immediately after the transfer (taking into account all transactions related to the transfer) another person is a section 245A shareholder of the SFC, then such other person’s extraordinary disposition account with respect to the SFC is increased by the person’s proportionate share of the amount allocated to the transferred share. (B) For purposes of paragraph (c)(4)(i)(A) of this section, the amount allocated to a transferred share is equal to the product of— (1) The balance of the transferor’s extraordinary disposition account with respect to the SFC, determined after any reduction pursuant to paragraph (c)(3) of this section by reason of dividends VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 and before the application of this paragraph (c)(4)(i)(B); and (2) A fraction, the numerator of which is the value of the transferred share and the denominator of which is the value of all of the stock of the SFC that the transferor owns directly or indirectly immediately before the transfer. (C) For purposes of paragraph (c)(4)(i)(A) of this section, a person’s proportionate share of the amount allocated to a transferred share under paragraph (c)(4)(i)(B) of this section is equal to the product of— (1) The amount allocated to the share; and (2) The percentage (expressed as a decimal) of the share (by value) that the person owns directly or indirectly immediately after the transfer (taking into account all transactions related to the transfer). (D) The transferor’s extraordinary disposition account with respect to the SFC is decreased by the amount by which another person’s extraordinary disposition account with respect to the SFC is increased pursuant to paragraph (c)(4)(i)(A) of this section. (E) If a principal purpose of the transfer is to shift, or to avoid, an amount in the transferor’s extraordinary disposition account with respect to the SFC to another person, then for purposes of this section, the transfer may be disregarded or other appropriate adjustments may be made. (ii) Certain section 381 transactions. If assets of an SFC (the acquired corporation) are acquired by another SFC (the acquiring corporation) pursuant to a transaction described in section 381(a) in which the acquired corporation is the transferor corporation for purposes of section 381, then a section 245A shareholder’s extraordinary disposition account with respect to the acquiring corporation is increased by the balance of its extraordinary disposition account with respect to the acquired corporation, determined after any reduction pursuant to paragraph (c)(3) of this section by reason of dividends and before the application of this paragraph (c)(4)(ii). (iii) Certain distributions involving section 355 or 356. If, pursuant to a reorganization described in section 368(a)(1)(D) involving a distribution under section 355 (or so much of section 356 as it relates to section 355) by an SFC (the distributing corporation) of stock of another SFC (the controlled corporation), earnings and profits of the distributing corporation are allocated between the distributing corporation and the controlled corporation, then a section 245A shareholder’s extraordinary disposition account with PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 28415 respect to the distributing corporation is allocated on a similar basis between the distributing corporation and the controlled corporation. (iv) Certain transfers of stock of lowertier CFCs by upper-tier CFCs. If an upper-tier CFC directly or indirectly transfers stock of a lower-tier CFC and if as a result of the transfer a section 245A shareholder ceases to be a section 245A shareholder with respect to the lower-tier CFC, then the section 245A shareholder’s extraordinary disposition account with respect to the upper-tier CFC is increased by the balance of the section 245A shareholder’s extraordinary disposition account with respect to the lower-tier CFC, determined after any reduction pursuant to paragraph (c)(3) of this section by reason of dividends and after application of paragraph (c)(4)(i) of this section, if applicable. If a section 245A shareholder ceases to be a section 245A shareholder with respect to a lower-tier CFC by reason of a direct or indirect transfer of stock of the lower-tier CFC by multiple upper-tier CFCs that occur pursuant to a plan (or series of related transactions), then the balance of the section 245A shareholder’s extraordinary disposition account is allocated among the upper-tier CFCs. The portion of the balance of the account allocated to each upper-tier CFC is equal to the balance of the account multiplied by a fraction, the numerator of which is the value of the stock of the lower-tier CFC transferred directly or indirectly by the upper-tier CFC, and the denominator of which is the sum of the value of the stock of the lower-tier CFC transferred directly or indirectly by all upper-tier CFCs. (d) Limitation of amount eligible for section 954(c)(6) when there is an extraordinary disposition account with respect to a lower-tier CFC—(1) In general. If an upper-tier CFC receives a dividend from a lower-tier CFC, the dividend is eligible for the exception to foreign personal holding company income under section 954(c)(6) only to the extent that the amount that would be eligible for the section 954(c)(6) exception (determined without regard to this paragraph (d)) exceeds the disqualified amount, which is 50 percent of the quotient of the following— (i) The sum of each section 245A shareholder’s tiered extraordinary disposition amount with respect to the lower-tier CFC; and (ii) The percentage (expressed as a decimal) of stock of the upper-tier CFC (by value) owned, in the aggregate, by U.S. tax residents that include in gross income their pro rata share of the upper- E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28416 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations tier CFC’s subpart F income under section 951(a) on the last day of the upper-tier CFC’s taxable year. If a U.S. tax resident is a direct or indirect partner in a domestic partnership that is a United States shareholder of the upper-tier CFC, the amount of stock owned by the U.S. tax resident for purposes of the preceding sentence is determined under the principles of paragraph (g)(3) of this section. (2) Definition of tiered extraordinary disposition amount—(i) In general. The term tiered extraordinary disposition amount means, with respect to a dividend received by an upper-tier CFC from a lower-tier CFC and a section 245A shareholder, the portion of the dividend that would be an extraordinary disposition amount if the section 245A shareholder received as a dividend its pro rata share of the dividend from the lower-tier CFC. The preceding sentence does not apply to an amount treated as a dividend received by an upper-tier CFC from a lower-tier CFC by reason of section 964(e)(4) (in such case, see paragraphs (b)(1) and (g)(2) of this section). (ii) Section 245A shareholder’s pro rata share of a dividend received by an upper-tier CFC. For the purposes of paragraph (d)(2)(i) of this section, a section 245A shareholder’s pro rata share of the amount of a dividend received by an upper-tier CFC from a lower-tier CFC equals the amount by which the dividend would increase the section 245A shareholder’s pro rata share of the upper-tier CFC’s subpart F income under section 951(a)(2) and § 1.951–1(b) and (e) if the dividend were included in the upper-tier CFC’s foreign personal holding company income under section 951(a)(1), determined without regard to section 952(c) and as if the upper-tier CFC had no deductions properly allocable to the dividend under section 954(b)(5). (e) Extraordinary reduction amount— (1) In general. Except as provided in paragraph (e)(3) of this section, the term extraordinary reduction amount means, with respect to a dividend received by a controlling section 245A shareholder from a CFC during a taxable year of the CFC ending after December 31, 2017, in which an extraordinary reduction occurs with respect to the controlling section 245A shareholder’s ownership of the CFC, the lesser of the amounts described in paragraph (e)(1)(i) or (ii) of this section. See paragraphs (j)(4) through (6) of this section for examples illustrating the application of this paragraph (e). (i) The amount of the dividend. (ii) The amount equal to the sum of the controlling section 245A VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 shareholder’s pre-reduction pro rata share of the CFC’s subpart F income (as defined in section 952(a)) and tested income (as defined in section 951A(c)(2)(A)) for the taxable year, reduced, but not below zero, by the prior extraordinary reduction amount. (2) Rules regarding extraordinary reduction amounts—(i) Extraordinary reduction—(A) In general. Except as provided in paragraph (e)(2)(i)(C) of this section, an extraordinary reduction occurs, with respect to a controlling section 245A shareholder’s ownership of a CFC during a taxable year of the CFC, if either of the conditions described in paragraph (e)(2)(i)(A)(1) or (2) of this section is satisfied. See paragraphs (j)(4) and (5) of this section for examples illustrating an extraordinary reduction. (1) The condition of this paragraph (e)(2)(i)(A)(1) requires that during the taxable year, the controlling section 245A shareholder transfers directly or indirectly (other than by reason of a transfer occurring pursuant to an exchange described in section 368(a)(1)(E) or (F)), in the aggregate, more than 10 percent (by value) of the stock of the CFC that the section 245A shareholder owns directly or indirectly as of the beginning of the taxable year of the CFC, provided the stock transferred, in the aggregate, represents at least 5 percent (by value) of the outstanding stock of the CFC as of the beginning of the taxable year of the CFC; or (2) The condition of this paragraph (e)(2)(i)(A)(2) requires that, as a result of one or more transactions occurring during the taxable year, the percentage of stock (by value) of the CFC that the controlling section 245A shareholder owns directly or indirectly as of the close of the last day of the taxable year of the CFC is less than 90 percent of the percentage of stock (by value) that the controlling section 245A shareholder owns directly or indirectly on either of the dates described in paragraphs (e)(2)(i)(B)(1) and (2) of this section (such percentage, the initial percentage), provided the difference between the initial percentage and percentage at the end of the year is at least five percentage points. (B) Dates for purposes of the initial percentage. For purposes of paragraph (e)(2)(i)(A)(2) of this section, the dates described in paragraphs (e)(2)(i)(B)(1) and (2) of this section are— (1) The day of the taxable year on which the controlling section 245A shareholder owns directly or indirectly its highest percentage of stock (by value) of the CFC; and PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 (2) The day immediately before the first day on which stock was transferred directly or indirectly in the preceding taxable year in a transaction (or a series of transactions) occurring pursuant to a plan to reduce the percentage of stock (by value) of the CFC that the controlling section 245A shareholder owns directly or indirectly. (C) Transactions pursuant to which CFC’s taxable year ends. A controlling section 245A shareholder’s direct or indirect transfer of stock of a CFC that but for this paragraph (e)(2)(i)(B) would give rise to an extraordinary reduction under paragraph (e)(2)(i)(A) of this section does not give rise to an extraordinary reduction if the taxable year of the CFC ends immediately after the transfer, provided that the controlling section 245A shareholder directly or indirectly owns the stock on the last day of such year. Thus, for example, if a controlling section 245A shareholder exchanges all the stock of a CFC pursuant to a complete liquidation of the CFC, the exchange does not give rise to an extraordinary reduction. (ii) Rules for determining prereduction pro rata share—(A) In general. Except as provided in paragraph (e)(2)(ii)(B) of this section, the term pre-reduction pro rata share means, with respect to a controlling section 245A shareholder and the subpart F income or tested income of a CFC, the controlling section 245A shareholder’s pro rata share of the CFC’s subpart F income or tested income under section 951(a)(2) and § 1.951–1(b) and (e) or section 951A(e)(1) and § 1.951A–1(d)(1), respectively, determined based on the controlling section 245A shareholder’s direct or indirect ownership of stock of the CFC immediately before the extraordinary reduction (or, if the extraordinary reduction occurs by reason of multiple transactions, immediately before the first transaction) and without regard to section 951(a)(2)(B) and § 1.951– 1(b)(1)(ii), but only to the extent that such subpart F income or tested income is not included in the controlling section 245A shareholder’s pro rata share of the CFC’s subpart F income or tested income under section 951(a)(2) and § 1.951–1(b) and (e) or section 951A(e)(1) and § 1.951A–1(d)(1), respectively. (B) Decrease in section 245A shareholder’s pre-reduction pro rata share for amounts taken into account by U.S. tax resident. A controlling section 245A shareholder’s pre-reduction pro rata share of subpart F income or tested income of a CFC for a taxable year is reduced by an amount equal to the sum of the amounts by which each U.S. tax E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations resident’s pro rata share of the subpart F income or tested income is increased as a result of a transfer directly or indirectly of stock of the CFC by the controlling section 245A shareholder or an issuance of stock by the CFC (such an amount with respect to a U.S. tax resident, a specified amount), in either case, during the taxable year in which the extraordinary reduction occurs. For purposes of this paragraph (e)(2)(ii)(B), if there are extraordinary reductions with respect to more than one controlling section 245A shareholder during the CFC’s taxable year, then a U.S. tax resident’s specified amount attributable to an acquisition of stock from the CFC is prorated with respect to each controlling section 245A shareholder based on its relative decrease in ownership of the CFC. See paragraph (j)(5) of this section for an example illustrating a decrease in a section 245A shareholder’s prereduction pro rata share for amounts taken into account by a U.S. tax resident. (C) Prior extraordinary reduction amount. The term prior extraordinary reduction amount means, with respect to a CFC and section 245A shareholder and a taxable year of the CFC in which an extraordinary reduction occurs, the sum of the extraordinary reduction amount of each prior dividend received by the section 245A shareholder from the CFC during the taxable year. A section 245A shareholder’s prior extraordinary reduction amount also includes— (1) A prior dividend received by the section 245A shareholder from the CFC during the taxable year to the extent the dividend was not eligible for the section 245A deduction by reason of section 245A(e) or the holding period requirement of section 246 not being satisfied but would have been an extraordinary reduction amount had this paragraph (e) applied to the dividend; (2) If the CFC is a lower-tier CFC for a portion of the taxable year during which the lower-tier CFC pays any dividend to an upper tier-CFC, the portion of a prior dividend received by an upper-tier CFC from the lower-tier CFC during the taxable year of the lower-tier CFC that, by reason of section 245A(e), was included in the upper-tier CFC’s foreign personal holding company income and that by reason of section 951(a) was included in income of the section 245A shareholder, and that would have given rise to a tiered extraordinary reduction amount by reason of paragraph (f) of this section had paragraph (f) applied to the dividend of which the section 245A VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 shareholder would have included a pro rata share of the tiered extraordinary reduction amount in income by reason of section 951(a); and (3) If the CFC is a lower-tier CFC for a portion of the taxable year during which the lower-tier CFC pays any dividend to an upper-tier CFC, the sum of the portion of the tiered extraordinary reduction amount of each prior dividend received by an upper-tier CFC from the lower-tier CFC during the taxable year that is included in income of the section 245A shareholder by reason of section 951(a). (3) Exceptions—(i) Elective exception to close CFC’s taxable year—(A) In general. For a taxable year of a CFC in which an extraordinary reduction occurs with respect to a controlling section 245A shareholder and for which, absent this paragraph (e)(3), there would be an extraordinary reduction amount or tiered extraordinary reduction amount greater than zero, no amount is considered an extraordinary reduction amount or tiered extraordinary reduction amount with respect to the controlling section 245A shareholder if each controlling section 245A shareholder elects, pursuant to this paragraph (e)(3), to close the CFC’s taxable year for all purposes of the Internal Revenue Code (and, therefore, as to all shareholders of the CFC) as of the end of the date on which the extraordinary reduction occurs, or, if the extraordinary reduction occurs by reason of multiple transactions, as of the end of each date on which a transaction forming a part of the extraordinary reduction occurs. For purposes of applying this paragraph (e)(3), a controlling section 245A shareholder that has an extraordinary reduction (or a transaction forming a part thereof) with respect to a CFC is treated as owning the same amount of stock it owned in the CFC immediately before the extraordinary reduction (or a transaction forming a part thereof) on the end of the date on which the extraordinary reduction occurs (or such transaction forming a part thereof occurs). To the extent that stock of a CFC is treated as owned by a controlling section 245A shareholder as of the close of the CFC’s taxable year pursuant to the preceding sentence, such stock is treated as not being owned by any other person as of the close of the CFC’s taxable year. If each controlling section 245A shareholder elects to close the CFC’s taxable year, that closing will be treated as a change in accounting period for the purposes of § 1.964–1(c). (B) Allocation of foreign taxes. If an election is made pursuant to this paragraph (e)(3) to close a CFC’s taxable PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 28417 year and the CFC’s taxable year under foreign law (if any) does not close at the end of the date on which the CFC’s taxable year closes as a result of the election, foreign taxes paid or accrued with respect to such foreign taxable year are allocated between the period of the foreign taxable year that ends with, and the period of the foreign taxable year that begins after, the date on which the CFC’s taxable year closes as a result of the election. If there is more than one date on which the CFC’s taxable year closes as a result of the election, foreign taxes paid or accrued with respect to the foreign taxable year are allocated to all such periods. The allocation is made based on the respective portions of the taxable income of the CFC (as determined under foreign law) for the foreign taxable year that are attributable under the principles of § 1.1502–76(b) to the periods during the foreign taxable year. Foreign taxes allocated to a period under this paragraph (e)(3)(i)(B) are treated as paid or accrued by the CFC as of the close of that period. (C) Time and manner of making election—(1) General rule. An election pursuant to this paragraph (e)(3) is made and effective if the statement required by paragraph (e)(3)(iv) of this section is timely filed (including extensions) by each controlling section 245A shareholder making the election with its original U.S. tax return for the taxable year in which the extraordinary reduction occurs. Before the filing of the statement described in paragraph (e)(3)(iv) of this section, each controlling section 245A shareholder and each U.S. tax resident that on the end of the date on which the extraordinary reduction occurs (or, if the extraordinary reduction occurs by reason of multiple transactions, each U.S. tax resident that on the end of each date on which a transaction forming a part of the extraordinary reduction occurs) owns directly or indirectly stock of the CFC and is a United States shareholder with respect to the CFC must enter into a written, binding agreement agreeing that each controlling section 245A shareholder will elect to close the taxable year of the CFC. If a controlling section 245A shareholder is a member of a consolidated group (within the meaning of § 1.1502–1(h)) and participates in the extraordinary reduction, the agent for such group (within the meaning of § 1.1502– 77(c)(1)) must file the election described in this paragraph (e)(3) on behalf of such member. (2) Transition rule. In the case of an extraordinary reduction occurring before the date these regulations are filed as final regulations in the Federal E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28418 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations Register, the statement required by paragraph (e)(3)(iv) of this section is considered timely filed if it is attached by each controlling section 245A shareholder to an original or amended return for the taxable year in which the extraordinary reduction occurs. (D) Form and content of statement. The statement required by paragraph (e)(3)(iii) of this section is to be titled ‘‘Elective Section 245A Year-Closing Statement.’’ The statement must— (1) Identify (by name and tax identification number, if any) each controlling section 245A shareholder, each U.S tax resident described in paragraph (e)(3)(iii) of this section, and the CFC; (2) State the date of the extraordinary reduction (or, if the extraordinary reduction includes transactions on more than one date, the dates of all such transactions) to which the election applies; (3) State the filing controlling section 245A shareholder’s pro rata share of the subpart F income, tested income, and foreign taxes described in section 960 with respect to the stock of the CFC subject to the extraordinary reduction, and the amount of earnings and profits attributable to such stock within the meaning of section 1248, as of the date of the extraordinary reduction; (4) State that each controlling section 245A shareholder and each U.S. tax resident described in paragraph (e)(3)(iii) of this section have entered into a written, binding agreement to elect to close the CFC’s taxable year in accordance with paragraph (e)(3)(iii) of this section; and (5) Be filed in the manner prescribed by forms, publications, or other guidance published in the Internal Revenue Bulletin. (E) Consistency requirements. If multiple extraordinary reductions occur with respect to one or more controlling section 245A shareholders’ ownership in a single CFC during one or more taxable years of the CFC, then to the extent those extraordinary reductions occur pursuant to a plan or series of related transactions, the election described in this paragraph (e)(3) section may be made only if it is made for all such extraordinary reductions with respect to the CFC. Furthermore, if an extraordinary reduction occurs with respect to a controlling section 245A shareholder’s ownership in multiple CFCs, then, to the extent those extraordinary reductions occur pursuant to a plan or series of related transactions, the election described in this paragraph (e)(3) may be made only if it is made for all such extraordinary reductions with respect to all of the VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 CFCs that have the same or related (within the meaning of section 267(b) or 707(b)) controlling section 245A shareholders. (ii) De minimis subpart F income and tested income. For a taxable year of a CFC in which an extraordinary reduction occurs, no amount is considered an extraordinary reduction amount with respect to a controlling section 245A shareholder of the CFC if the sum of the CFC’s subpart F income and tested income (as defined in section 951A(c)(2)(A)) for the taxable year does not exceed the lesser of $50 million or 5 percent of the CFC’s total income for the taxable year. (f) Limitation of amount eligible for section 954(c)(6) where extraordinary reduction occurs with respect to lowertier CFCs—(1) In general. If an extraordinary reduction occurs with respect to a lower-tier CFC and an upper-tier CFC receives a dividend from the lower-tier CFC in the taxable year in which the extraordinary reduction occurs, then the amount of the dividend that would otherwise be eligible for the exception to foreign personal holding company income under section 954(c)(6) (determined without regard to this paragraph (f)) is eligible for such exception only to the extent the dividend exceeds the tiered extraordinary reduction amount. The preceding sentence does not apply to an amount treated as a dividend received by an upper-tier CFC by reason of section 964(e)(4) (in this case, see paragraphs (b) and (g)(2) of this section). See paragraph (j)(7) of this section for an example illustrating the application of this paragraph (f)(1). (2) Definition of tiered extraordinary reduction amount. The term tiered extraordinary reduction amount means, with respect to the portion of a dividend received by an upper-tier CFC from a lower-tier CFC during a taxable year of the lower-tier CFC that would be eligible for the exception to foreign personal holding company income under section 954(c)(6) (determined without regard to this paragraph (f)), the amount of such dividend equal to the excess, if any, of— (i) The product of— (A) The sum of the amount of the subpart F income and tested income of the lower-tier CFC for the taxable year; and (B) The percentage (by value) of stock of the lower-tier CFC owned (within the meaning of section 958(a)(2)) by the upper-tier CFC immediately before the extraordinary reduction (or the first transaction forming a part thereof); over (ii) The following amounts— PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 (A) The sum of each U.S. tax resident’s pro rata share of the lower-tier CFC’s subpart F income and tested income under section 951(a) or 951A(a), respectively, that is attributable to shares of the lower-tier CFC owned (within the meaning of section 958(a)(2)) by the upper-tier CFC immediately prior to the extraordinary reduction (or the first transaction forming a part thereof), computed without the application of this paragraph (f); (B) The sum of each prior tiered extraordinary reduction amount and sum of each amount included in an upper-tier CFC’s subpart F income by reason of section 245A(e) with respect to prior dividends from the lower-tier CFC during the taxable year; (C) The sum of the prior extraordinary reduction amounts (but, for this purpose, computed without regard to amounts described in paragraphs (e)(2)(ii)(C)(2) and (3) of this section) of each controlling section 245A shareholder with respect to shares of the lower-tier CFC that were owned by such controlling section 245A shareholder (including indirectly through a specified entity other than a foreign corporation) for a portion of the taxable year but are owned by an upper-tier CFC (including indirectly through a specified entity other than a foreign corporation) at the time of the distribution of the dividend; and (D) The product of the amount described in paragraph (f)(2)(i)(B) of this section and the sum of the amounts of each U.S. tax resident’s pro rata share of subpart F income and tested income for the taxable year under section 951(a) or 951A(a), respectively, attributable to shares of the lower-tier CFC directly or indirectly acquired by the U.S. tax resident from the lower-tier CFC during the taxable year. (3) Transition rule for computing tiered extraordinary reduction amount. Solely for purposes of applying this paragraph (f) in taxable years of a lowertier CFC beginning on or after January 1, 2018, and ending before June 14, 2019, a tiered extraordinary reduction amount is determined by treating the lower-tier CFC’s subpart F income for the taxable year as if it were neither subpart F income nor tested income. (g) Special rules. The following rules apply for purposes of this section. (1) Source of dividends. A dividend received by any person is considered received directly by such person from the foreign corporation whose earnings and profits give rise to the dividend. Therefore, for example, if a section 245A shareholder sells or exchanges stock of an upper-tier CFC and the gain E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations recognized on the sale or exchange is included in the gross income of the section 245A shareholder as a dividend under section 1248(a), then, to the extent the dividend is attributable under section 1248(c)(2) to the earnings and profits of a lower-tier CFC owned, within the meaning of section 958(a)(2), by the section 245A shareholder through the upper-tier CFC, the dividend is considered received directly by the section 245A shareholder from the lower-tier CFC. (2) Certain section 964(e) inclusions treated as dividends. An amount included in the gross income of a section 245A shareholder under section 951(a)(1)(A) by reason of section 964(e)(4) is considered a dividend received by the section 245A shareholder directly from the foreign corporation whose earnings and profits give rise to the amount described in section 964(e)(1). Therefore, for example, if an upper-tier CFC sells or exchanges stock of a lower-tier CFC, and, as a result of the sale or exchange, a section 245A shareholder with respect to the upper-tier CFC includes an amount in gross income under section 951(a)(1)(A) by reason of section 964(e)(4), then the inclusion is treated as a dividend received directly by the section 245A shareholder from the lower-tier CFC whose earnings and profits give rise to the dividend, and the section 245A shareholder is not allowed a section 245A deduction for the dividend to the extent of the ineligible amount of such dividend. (3) Rules regarding stock ownership and stock transfers—(i) Determining indirect ownership of stock of an SFC or a CFC. For purposes of this section, if a person owns an interest in, or stock of, a specified entity, including through a chain of ownership of one or more other specified entities, then the person is considered to own indirectly a pro rata share of stock of an SFC or a CFC owned by the specified entity. To determine a person’s pro rata share of stock owned by a specified entity, the principles of section 958(a) apply without regard to whether the specified entity is foreign or domestic. (ii) Determining indirect transfers for stock owned indirectly. If, under paragraph (g)(3)(i) of this section, a person is considered to own indirectly stock of an SFC or CFC that is owned by a specified entity, then the following rules apply in determining if the person transfers stock of the SFC or CFC— (A) To the extent the specified entity transfers stock that is considered owned indirectly by the person immediately before the transfer, the person is VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 considered to transfer indirectly such stock; (B) If the person transfers an interest in, or stock of, the specified entity, then the person is considered to transfer indirectly the stock of the SFC or CFC attributable to the interest in, or the stock of, the specified entity that is transferred; and (C) In the case in which the person owns the specified entity through a chain of ownership of one or more other specified entities, if there is a transfer of an interest in, or stock of, another specified entity in the chain of ownership, then the person is considered to transfer indirectly the stock of the SFC or CFC attributable to the interest in, or the stock of, the other specified entity transferred. (iii) Definition of specified entity. The term specified entity means any partnership, trust, or estate (in each case, domestic or foreign), or any foreign corporation. (4) Coordination rules—(i) General rule. A dividend is first subject to section 245A(e). To the extent the dividend is not a hybrid dividend or tiered hybrid dividend under section 245A(e), the dividend is subject to paragraph (e) or (f) of this section, as applicable, and then, to the extent the dividend is not subject to paragraph (e) or (f) of this section, it is subject to paragraph (c) or (d) of this section, as applicable. (ii) Coordination rule for paragraphs (c) and (d) and (e) and (f) of this section, respectively. If an SFC or CFC pays a dividend (or simultaneous dividends), a portion of which may be subject to paragraph (c) or (e) of this section and a portion of which may be subject to paragraph (d) or (f) of this section, the rules of this section apply by treating the portion of the dividend or dividends that may be subject to paragraph (c) or (e) of this section as if it occurred immediately before the portion of the dividend or dividends that may be subject to paragraph (d) or (f) of this section. For example, if a dividend arising under section 964(e)(4) occurs at the same time as a dividend that would be eligible for the exception to foreign personal holding company income under section 954(c)(6) but for the potential application of paragraph (d) this section, then the tiered extraordinary disposition amount with respect to the other dividend is determined as if the dividend arising under section 964(e)(4) occurs immediately prior to the other dividend. (5) Ordering rule for multiple dividends made by an SFC or a CFC during a taxable year. If an SFC or a CFC pays dividends on more than one PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 28419 date during its taxable year or at different times on the same date, this section applies based on the order in which the dividends are paid. (6) Partner’s distributive share of a domestic partnership’s pro rata share of subpart F income. If a section 245A shareholder or a U.S. tax resident is a direct or indirect partner in a domestic partnership that is a United States shareholder with respect to a CFC and includes in gross income its pro rata share of the CFC’s subpart F income under section 951(a), then, solely for purposes of this section, a reference to the section 245A shareholder’s or U.S. tax resident’s pro rata share of the CFC’s subpart F income included in gross income under section 951(a) includes such person’s distributive share of the domestic partnership’s pro rata share of the CFC’s subpart F income. A person is an indirect partner with respect to a domestic partnership if the person indirectly owns the domestic partnership through one or more specified entities (other than a foreign corporation). (h) Anti-abuse rule. The Commissioner may make appropriate adjustments to any amounts determined under this section if a transaction is engaged in with a principal purpose of avoiding the purposes of this section. (i) Definitions. The following definitions apply for purposes of this section. (1) Controlled foreign corporation. The term controlled foreign corporation (or CFC) has the meaning provided in section 957. (2) Controlling section 245A shareholder. The term controlling section 245A shareholder means, with respect to a CFC, any section 245A shareholder that owns directly or indirectly more than 50 percent (by vote or value) of the stock of the CFC. For purposes of determining whether a section 245A shareholder is a controlling section 245A shareholder with respect to a CFC, all stock of the CFC owned by a related party with respect to the section 245A shareholder or by other persons acting in concert with the section 245A shareholder to undertake an extraordinary reduction is considered owned by the section 245A shareholder. If section 964(e)(4) applies to a sale or exchange of a lower-tier CFC with respect to a controlling section 245A shareholder, all United States shareholders of the CFC are considered to act in concert with regard to the sale or exchange. In addition, if all persons selling stock in a CFC, held directly, sell such stock to the same buyer or buyers (or a related party with respect to the buyer or buyers) as part of the same E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28420 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations plan, all sellers will be considered to act in concert with regard to the sale or exchange. (3) Disqualified amount. The term disqualified amount has the meaning set forth in paragraph (d)(1) of this section. (4) Disqualified period. The term disqualified period has the meaning set forth in paragraph (c)(3)(iii) of this section. (5) Extraordinary disposition. The term extraordinary disposition has the meaning set forth in paragraph (c)(3)(ii) of this section. (6) Extraordinary disposition account. The term extraordinary disposition amount has the meaning set forth in paragraph (c)(3)(i) of this section. (7) Extraordinary disposition amount. The term extraordinary disposition amount has the meaning set forth in paragraph (c)(1) of this section. (8) Extraordinary disposition E&P. The term extraordinary E&P has the meaning set forth in paragraph (c)(3)(i)(C) of this section. (9) Extraordinary disposition ownership percentage. The term extraordinary disposition ownership percentage has the meaning set forth in paragraph (c)(3)(i)(B) of this section. (10) Extraordinary reduction. The term extraordinary reduction has the meaning set forth in paragraph (e)(2)(i)(A) of this section. (11) Extraordinary reduction amount. The term extraordinary reduction amount has the meaning set forth in paragraph (e)(1) of this section. (12) Ineligible amount. The term ineligible amount has the meaning set forth in paragraph (b)(2) of this section. (13) Lower-tier CFC. The term lowertier CFC means a CFC whose stock is owned (within the meaning of section 958(a)(2)), in whole or in part, by another CFC. (14) Non-extraordinary disposition E&P. The term non-extraordinary disposition E&P has the meaning set forth in paragraph (c)(2)(ii) of this section. (15) Pre-reduction pro rata share. The term pre-reduction pro rata share has the meaning set forth in paragraph (e)(2)(ii) of this section. (16) Prior extraordinary disposition amount. The term prior extraordinary disposition amount has the meaning set forth in paragraph (c)(3)(i)(D) of this section. (17) Prior extraordinary reduction amount. The term prior extraordinary reduction amount has the meaning set forth in paragraph (e)(2)(ii)(C) of this section. (18) Qualified portion. The term qualified portion has the meaning set forth in paragraph (c)(3)(i)(D)(2)(i) of this section. VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 (19) Related party. The term related party means, with respect to a person, another person bearing a relationship described in section 267(b) or 707(b) to the person, in which case such persons are related. (20) Section 245A deduction. The term section 245A deduction means, with respect to a dividend received by a section 245A shareholder from an SFC, the amount of the deduction allowed to the section 245A shareholder by reason of the dividend. (21) Section 245A shareholder. The term section 245A shareholder means a domestic corporation that is a United States shareholder with respect to an SFC that owns directly or indirectly stock of the SFC. (22) Specified 10-percent owned foreign corporation (SFC). The term specified 10-percent owned foreign corporation (or SFC) has the meaning provided in section 245A(b)(1). (23) Specified entity. The term specified entity has the meaning set forth in paragraph (g)(3)(iii) of this section. (24) Specified property. The term specified property has the meaning set forth in paragraph (c)(3)(iv) of this section. (25) Tiered extraordinary disposition amount. The term tiered extraordinary disposition amount has the meaning set forth in paragraph (d)(2)(i) of this section. (26) Tiered extraordinary reduction amount. The term tiered extraordinary reduction amount has the meaning set forth in paragraph (f)(2) of this section. (27) United States shareholder. The term United States shareholder has the meaning provided in section 951(b). (28) Upper-tier CFC. The term uppertier CFC means a CFC that owns (within the meaning of section 958(a)(2)) stock in another CFC. (29) U.S. tax resident. The term U.S. tax resident means a United States person described in section 7701(a)(30)(A) or (C). (j) Examples. The application of this section is illustrated by the examples in this paragraph (j). (1) Facts. Except as otherwise stated, the following facts are assumed for purposes of the examples: (i) US1 and US2 are domestic corporations, each with a calendar taxable year, and are not related parties with respect to each other. (ii) CFC1 and CFC2 are foreign corporations that are SFCs and CFCs. (iii) Each entity uses the U.S. dollar as its functional currency. (iv) Year 2 begins on or after January 1, 2018, and has 365 days. (v) Absent application of this section, the dividends received by US1 and US2 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 from CFC1 meet the requirements to qualify for the section 245A deduction. (vi) The de minimis rules in paragraphs (c)(3)(ii)(E) and (e)(3)(ii) of this section do not apply. (2) Example 1. Extraordinary disposition— (i) Facts. US1 and US2 own 60% and 40%, respectively, of the single class of stock of CFC1. CFC1 owns all of the single class of stock of CFC2. CFC1 and CFC2 use the taxable year ending November 30 as their taxable year. On November 1, 2018, CFC1 sells specified property to CFC2 in exchange for $200x of cash (the ‘‘Property Transfer’’). The Property Transfer is outside of CFC1’s ordinary course of activities. The transferred property has a basis of $100x in the hands of CFC1. CFC1 recognizes $100x of gain as a result of the Property Transfer ($200x¥$100x). On December 1, 2018, CFC1 distributes $80x pro rata to US1 ($48x) and US2 ($32x), all of which is a dividend within the meaning of section 316 and treated as a distribution out of earnings described in section 959(c)(3). No other distributions are made by CFC1 to either US1 or US2 in CFC1’s taxable year ending November 30, 2019. For its taxable year ending on November 30, 2019, CFC1 has $110x of earnings and profits described in section 959(c)(3), without regard to any distributions during the taxable year. (ii) Analysis—(A) Identification of extraordinary disposition. Because CFC1 is a CFC and uses the taxable year ending on November 30, under paragraph (c)(3)(iii) of this section, it has a disqualified period beginning on January 1, 2018, and ending on November 30, 2018. In addition, under paragraph (c)(3)(ii) of this section, the Property Transfer is an extraordinary disposition because it (i) is a disposition of specified property by CFC1 on a date on which it was a CFC and during CFC1’s disqualified period, (ii) is to CFC2, a related party with respect to CFC1, (iii) occurs outside of the ordinary course of CFC1’s activities, and (iv) is not subject to the de minimis rule in paragraph (c)(3)(ii)(E) of this section. (B) Determination of section 245A shareholders and their extraordinary disposition accounts. Because CFC1 undertook an extraordinary disposition, under paragraph (c)(3)(i) of this section, a portion of CFC1’s earnings and profits are extraordinary disposition E&P and, therefore, give rise to an extraordinary disposition account with respect to each of CFC1’s section 245A shareholders. Under paragraph (i)(21) of this section, US1 and US2 are both section 245A shareholders with respect to CFC1. The amount of the extraordinary disposition account with respect to US1 is $60x, which is equal to the product of the extraordinary disposition E&P (the amount of the net gain recognized by CFC1 as a result of the Property Transfer ($100x)) and the extraordinary disposition ownership percentage (the percentage of the stock of CFC1 owned directly or indirectly by US1 on January 1, 2018 (60%)), reduced by the prior extraordinary disposition amount ($0). See paragraph (c)(3)(i) of this section. Similarly, the amount of the extraordinary disposition E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations account with respect to US2 is $40x, which is equal to the product of the extraordinary disposition E&P (the net gain recognized by CFC1 as a result of the Property Transfer ($100x)) and extraordinary disposition ownership percentage (the percentage of the stock of CFC1 owned directly or indirectly by US2 on January 1, 2018 (40%)), reduced by the prior extraordinary disposition amount ($0). (C) Determination of extraordinary disposition amount with respect to US1. The dividend of $48x paid to US1 on December 1, 2018, is an extraordinary disposition amount to the extent the dividend is paid out of the extraordinary disposition account with respect to US1. See paragraph (c)(1) of this section. Under paragraph (c)(2)(i) of this section, the dividend is first considered paid out of non-extraordinary disposition E&P with respect to US1, to the extent thereof. With respect to US1, $6x of CFC1’s earnings and profits is non-extraordinary disposition E&P, calculated as the excess of $66x (the product of $110x of earnings and profits described in section 959(c)(3), without regard to the $80x distribution, and 60%) over $60x (the balance of US1’s extraordinary disposition account with respect to CFC1, immediately before the distribution). See paragraph (c)(2)(ii) of this section. Thus, $6x of the dividend is considered paid out of non-extraordinary disposition E&P with respect to US1. Under paragraph (c)(2)(i)(B) of this section, the remaining $42x of the dividend is next considered paid out of US1’s extraordinary disposition account with respect to CFC1, to the extent thereof. Accordingly, $42x of the dividend is considered paid out of the extraordinary disposition account with respect to CFC1 and gives rise to $42x of an extraordinary disposition amount. As a result, US1’s prior extraordinary disposition amount is increased by $42x under paragraph (c)(3)(i)(D) of this section, and US1’s extraordinary disposition account is reduced to $18x ($60¥$42x) under paragraph (c)(3)(i)(A) of this section. (D) Determination of extraordinary disposition amount with respect to US2. The dividend of $32x paid to US2, on December 1, 2018, is an extraordinary disposition amount to the extent the dividend is paid out of extraordinary disposition E&P with respect to US2. See paragraph (c)(1) of this section. Under paragraph (c)(2)(i) of this section, the dividend is first considered paid out of nonextraordinary disposition E&P with respect to US2, to the extent thereof. With respect to US2, $4x of CFC1’s earnings and profits is non-extraordinary disposition E&P, calculated as the excess of $44x (the product of $110x of earnings and profits described in section 959(c)(3), without regard to the $80x distribution, and 40%) over $40x (the balance of US2’s extraordinary disposition account with respect to CFC1, immediately before the distribution). See paragraph (c)(2)(ii) of this section. Thus, $4x of the dividend is considered paid out of nonextraordinary disposition E&P with respect to US2. Under paragraph (c)(2)(i)(B) of this section, the remaining $28x of the dividend is next considered paid out of US2’s extraordinary disposition account with VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 respect to CFC1, to the extent thereof. Accordingly, $28x of the dividend is considered paid out of the extraordinary disposition account with respect to US2 and gives rise to $28x of an extraordinary disposition amount. As a result, US2’s prior extraordinary disposition amount is increased by $28x under paragraph (c)(3)(i)(D) of this section, and US2’s extraordinary disposition account is reduced to $12x ($40¥$28x) under paragraph (c)(3)(i)(A) of this section. (E) Determination of ineligible amount with respect to US1 and US2. Under paragraph (b)(2) of this section, with respect to US1 and the dividend of $48x, the ineligible amount is $21x, the sum of 50 percent of the extraordinary disposition amount ($42x) and extraordinary reduction amount ($0). Therefore, with respect to the dividend received by US1 of $48x, $27x is eligible for a section 245A deduction. With respect to US2 and the dividend of $32x, the ineligible amount is $14x, the sum of 50% of the extraordinary disposition amount ($28x) and extraordinary reduction amount ($0). Therefore, with respect to the dividend received by US2 of $32x, $18x is eligible for a section 245A deduction. (3) Example 2. Application of section 954(c)(6) exception with extraordinary disposition account—(i) Facts. The facts are the same as in paragraph (j)(2)(i) of this section (the facts in Example 1) except that the Property Transfer is a sale by CFC2 to CFC1 instead of a sale by CFC1 to CFC2, the $80x distribution is by CFC2 to CFC1 in a separate transaction that is unrelated to the Property Transfer, and the description of the earnings and profits of CFC1 is applied to CFC2. Additionally, absent the application of this section, section 954(c)(6) would apply to the distribution by CFC2 to CFC1. Under section 951(a)(2) and § 1.951–1(b) and (e), US1’s pro rata share of any subpart F income of CFC1 is 60% and US2’s pro rata share of any subpart F income of CFC2 is 40%. (ii) Analysis—(A) Identification of extraordinary disposition. The Property Transfer is an extraordinary disposition under the same analysis as provided in paragraph (j)(2)(ii)(A) of this section (the analysis in Example 1). (B) Determination of section 245A shareholders and their extraordinary disposition accounts. Both US1 and US2 are section 245A shareholders with respect to CFC2, US1 has an extraordinary disposition account of $60x with respect to CFC2, and US2 has an extraordinary disposition account of $40x with respect to CFC2 under the same analysis as provided in paragraph (j)(2)(ii)(B) of this section (the analysis in Example 1). (C) Determination of tiered extraordinary disposition amount—(1) In general. US1 and US2 each have a tiered extraordinary disposition amount with respect to the $80x dividend paid by CFC2 to CFC1 to the extent that US1 and US2 would have an extraordinary disposition amount if each had received as a dividend its pro rata share of the dividend from CFC2. See paragraph (d)(2)(i) of this section. Under paragraph (d)(2)(ii) of this section, US1’s pro rata share of the dividend is $48x (60% ¥ $80x), that is, the increase to US1’s pro rata share of the PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 28421 subpart F income if the dividend were included in CFC1’s foreign personal holding company income, without regard to section 952(c) and the allocation of expenses. Similarly, US2’s pro rata share of the dividend is $32x (40% ¥ $80x). (2) Determination of tiered extraordinary disposition amount with respect to US1. The extraordinary disposition amount with respect to US1 is $42x, under the same analysis provided in paragraph (j)(2)(ii)(C) of this section (the analysis in Example 1). Accordingly, the tiered extraordinary disposition amount with respect to US1 is $42x. (3) Determination of extraordinary disposition amount with respect to US2. The extraordinary disposition amount with respect to US2 is $28x, under the same analysis provided in paragraph (j)(2)(ii)(D) of this section (the analysis in Example 1). Accordingly, the tiered extraordinary disposition amount with respect to US2 is $28x. (D) Limitation of section 954(c)(6) exception. The sum of US1 and US2’s tiered extraordinary disposition amounts is $70x ($42x + $28x). The portion of the stock of CFC1 (by value) owned (within the meaning of section 958(a)) by U.S. tax residents on the last day of CFC1’s taxable year is 100%. Under paragraph (d)(1) of this section, the disqualified amount with respect to the dividend is $35x (50% × ($70x/100%)). Accordingly, the portion of the $80x dividend from CFC2 to CFC1 that is eligible for the exception to foreign personal holding company income under section 954(c)(6) is $45x ($80x ¥$35x). Under section 951(a)(2) and § 1.951–1(b) and (e), US1 includes $21x (60% × $35x) and US2 includes $14x (60% × $35x) in income under section 951(a). (E) Changes in extraordinary disposition account of US1. Under paragraph (c)(3)(i)(D)(1) of this section, US1’s prior extraordinary disposition amount with respect to CFC2 is increased by $42x, or 200% of $21x, the amount US1 included in income under section 951(a) with respect to CFC1. Under paragraph (c)(3)(i)(D)(1)(iii) of this section, US1 has no qualified portion because all of the owners of CFC2 are section 245A shareholders with a tiered extraordinary disposition amount with respect to CFC2. As a result, US1’s extraordinary disposition account is reduced to $18x ($60x¥$42x) under paragraph (c)(3)(i)(A) of this section. (F) Changes in extraordinary disposition account of US2. Under paragraph (c)(3)(i)(D)(1) of this section, US2’s prior extraordinary disposition amount with respect to CFC2 is increased by $28x, or 200% of $14x, the amount US2 included in income under section 951(a) with respect to CFC1. Under paragraph (c)(3)(i)(D)(1)(iii) of this section, US2 has no qualified portion because all of the owners of CFC2 are section 245A shareholders with a tiered extraordinary disposition amount with respect to CFC2. As a result, US2’s extraordinary disposition account is reduced to $12x ($40x¥$28x) under paragraph (c)(3)(i)(A) of this section. (4) Example 3. Extraordinary reduction— (i) Facts. At the beginning of CFC1’s taxable E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 28422 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations year ending on December 31, Year 2, US1 owns all of the single class of stock of CFC1, and no person transferred any CFC1 stock directly or indirectly in Year 1 pursuant to a plan to reduce the percentage of stock (by value) of CFC1 owned by US1. Also as of the beginning of Year 2, CFC1 has no earnings and profits described in section 959(c)(1) or (2), and US1 does not have an extraordinary disposition account with respect to CFC1. As of the end of Year 2, CFC1 has $160x of tested income and no other income. CFC1 has $160x of earnings and profits for Year 2. On October 19, Year 2, US1 sells all of its CFC1 stock to US2 for $100x in a transaction (the ‘‘Stock Sale’’) in which US1 recognizes $90x of gain. Under section 1248(a), the entire $90x of gain is included in US1’s gross income as a dividend and, pursuant to section 1248(j), the $90x is treated as a dividend for purposes of applying section 245A. At the end of Year 2, under section 951A, US2 takes into account $70x of tested income, calculated as $160x (100% of the $160x of tested income) less $90x, the amount described in section 951(a)(2)(B). The amount described in section 951(a)(2)(B) is the lesser of $90x, the amount of dividends received by US1 with respect to the transferred stock, and $128x, the amount of tested income attributable to the transferred stock ($160x) multiplied by 292/365 (the ratio of the number of days in Year 2 that US2 did not own the transferred stock to the total number of days in Year 2). US1 does not make an election pursuant to paragraph (e)(3)(i) of this section. (ii) Analysis—(A) Determination of controlling section 245A shareholder and extraordinary reduction of ownership. Under paragraph (i)(2) of this section, US1 is a controlling section 245A shareholder with respect to CFC1. In addition, the Stock Sale results in an extraordinary reduction with respect to US1’s ownership of CFC1. See paragraph (e)(2)(i) of this section. The extraordinary reduction occurs because during Year 2, US1 transferred 100% of the CFC1 stock it owned at the beginning of the year and such amount is more than 5% of the total value of the stock of CFC1 at the beginning of Year 2; it also occurs because on the last day of the year the percentage of stock (by value) of CFC1 that US1 owns directly or indirectly (0%) (the end of year percentage) is less than 90% of the stock (by value) of CFC1 that US1 owns directly or indirectly on the day of the taxable year when it owned the highest percentage of CFC1 stock by value (100%) (the initial percentage), no transactions occurred in the preceding year pursuant to a plan to reduce the percentage of CFC1 stock owned by US1, and the difference between the initial percentage and the end of year percentage (100 percentage points) is at least 5 percentage points. (B) Determination of extraordinary reduction amount. Under paragraph (e)(1) of this section, the entire $90x dividend to US1 is an extraordinary reduction amount with respect to US1 because the dividend is at least equal to US1’s pre-reduction pro rata share of CFC1’s Year 2 tested income described in paragraph (e)(2)(ii)(A) of this section ($160x), reduced by the amount of VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 tested income taken into account by US2, a U.S. tax resident, under paragraphs (e)(2)(ii)(B) and (i)(29) of this section ($70x). (C) Determination of ineligible amount. Under paragraph (b)(2) of this section, with respect to US1 and the dividend of $90x, the ineligible amount is $90x, the sum of 50% of the extraordinary disposition amount ($0) and extraordinary reduction amount ($90x). Therefore, with respect to the dividend received of $90x, no portion is eligible for the dividends received deduction allowed under section 245A(a). (iii) Alternative facts—election to close CFC’s taxable year. The facts are the same as in paragraph (j)(4)(i) of this section (the facts of this Example 3), except that, pursuant to paragraph (e)(3)(i) of this section, US1 elects to close CFC1’s Year 2 taxable year for all purposes of the Internal Revenue Code as of the end of October 19, Year 2, the date on which the Stock Sale occurs; in addition, US1 and US2 enter into a written, binding agreement that US1 will elect to close CFC1’s Year 2 taxable year. Accordingly, under section 951A(a), US1 takes into account 100% of CFC1’s tested income for the taxable year beginning January 1, Year 2, and ending October 19, Year 2, and US2 takes into account 100% of CFC1’s tested income for the taxable year beginning October 20, Year 2, and ending December 31, Year 2. Under paragraph (e)(3)(i)(A) of this section, no amount is considered an extraordinary reduction amount with respect to US1. (5) Example 4. Extraordinary reduction; decrease in section 245A shareholder’s prereduction pro rata share for amounts taken into account by U.S. tax residents—(i) Facts. At the beginning of CFC1’s taxable year ending December 31, Year 2, US1 owns all of the single class of stock of CFC1, and no person transferred any CFC1 stock directly or indirectly in Year 1 pursuant to a plan to reduce the percentage of stock (by value) of CFC1 owned by US1. CFC1 generates $120x of subpart F income during its taxable year ending on December 31, Year 2. On October 1, Year 2, CFC1 distributes a $120x dividend to US1. On October 19, Year 2, US1 sells 100% of its stock of CFC1 to PRS, a domestic partnership, in a transaction in which no gain or loss is realized (the ‘‘Stock Sale’’). PRS is owned 50% each by A, an individual who is a citizen of the United States, and B, a foreign individual who is not a U.S. tax resident. On December 1, Year 2, US2 and FP, a foreign corporation, contribute property to CFC1; in exchange, each of US2 and FP receives 25% of the stock of CFC1. PRS owns the remaining 50% of the stock of CFC1. US1 does not make an election pursuant to paragraph (e)(3)(i) of this section. (ii) Analysis—(A) Determination of controlling section 245A shareholder and extraordinary reduction. Under paragraph (i)(2) of this section, US1 is a controlling section 245A shareholder with respect to CFC1. In addition, the Stock Sale results in an extraordinary reduction with respect to US1’s ownership of CFC1. See paragraph (e)(2)(i) of this section. The extraordinary reduction occurs because during Year 2, US1 transferred 100% of the CFC1 stock it owns on the first day of Year 2, and that amount is more than 5% of the total value of the PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 stock of CFC1 at the beginning of Year 2; it also occurs because on the last day of Year 2 the percentage of stock (by value) of CFC1 that US1 owns directly or indirectly (0%) (the end of year percentage) is less than 90% of the highest percentage of stock (by value) of CFC1 that US1 owns directly or indirectly on the day of the taxable year when it owned the highest percentage of CFC1 stock by value (100%) (the initial percentage), no transactions occurred in the preceding year pursuant to a plan to reduce the percentage of CFC1 stock owned by US1, and the difference between the initial percentage and the end of year percentage (100 percentage points) is at least 5 percentage points. (B) Determination of pre-reduction pro rata share. Before the extraordinary reduction, US1 owned 100% of the stock of CFC1. Thus, under paragraph (e)(2)(ii)(A) of this section, the tentative amount of US1’s pre-reduction pro rata share of CFC1’s subpart F income is $120x. A and US2 are U.S. tax residents pursuant to paragraph (i)(29) of this section because they are United States persons described in section 7701(a)(30)(A) or (C). Thus, US1’s pre-reduction pro rata share amount is subject to the reduction described in paragraph (e)(2)(ii)(B) of this section because U.S. tax residents directly or indirectly acquire stock of CFC1 from US1 or CFC1 during the taxable year in which the extraordinary reduction occurs. With respect to US1’s pre-reduction pro rata share of CFC1’s subpart F income, the reduction equals the amount of subpart F income of CFC1 taken into account under section 951(a) by these U.S. tax residents. (C) Determination of decrease in prereduction pro rata share for amounts taken into account by U.S. tax resident. On December 31, Year 2, both PRS and US2 will be United States shareholders with respect to CFC1 and will include in gross income their pro rata share of CFC1’s subpart F income under section 951(a). With respect to US2, this amount will be $30x, which is equal to 25% of CFC1’s subpart F income for the taxable year. With respect to PRS, its pro rata share of $60x under section 951(a)(2)(A) (50% of $120x) will be reduced under section 951(a)(2)(B) by $48x. The section 951(a)(2)(B) reduction is equal to the lesser of the $120x dividend paid with respect to those shares to US1 or $48x (50% × $120x × 292/365, the period during the taxable year that PRS did not own CFC1 stock). Thus, PRS includes $12x in gross income pursuant to section 951(a). Of this amount, $6x is allocated to A (as a 50% partner of PRS) and, therefore, treated as taken into account by A under paragraphs (e)(2)(ii)(B) and (g)(6) of this section. Thus, A and US2 take into account a total of $36x of CFC1’s subpart F income under section 951(a). This amount reduces US1’s pre-reduction pro rata share of CFC1’s subpart F income to $84x ($120x¥$36x) under paragraph (e)(2)(ii)(B) of this section. CFC1 did not generate tested income during the taxable year and, therefore, no amount is taken into account under section 951A with respect to CFC1, and US1 has no prereduction pro rata share with respect to tested income of CFC1. (D) Determination of extraordinary reduction amount. Under paragraph (e)(1) of E:\FR\FM\18JNR2.SGM 18JNR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations this section, the extraordinary reduction amount equals $84x, which is the lesser of the amount of the dividend received by US1 from CFC1 during Year 2 ($120x) and the sum of US1’s pre-reduction pro rata share of CFC1’s subpart F income ($84x) and tested income ($0). (E) Determination of ineligible amount. Under paragraph (b)(2) of this section, with respect to US1 and the dividend of $120x, the ineligible amount is $84x, the sum of 50% of the extraordinary disposition amount ($0) and extraordinary reduction amount ($84x). Therefore, with respect to the dividend received by US1 from CFC1, $36x ($120x¥$84x) is eligible for a section 245A deduction. (6) Example 5. Controlling section 245A shareholder—(i) Facts. US1 and US2 own 30% and 25% of the stock of CFC1, respectively. FP, a foreign corporation that is not a CFC, owns all of the stock of US1 and US2. FP owns the remaining 45% of the stock of CFC1. On September 30, Year 2, US1 sells all of its stock of CFC1 to US3, a domestic corporation that is not a related party with respect to FP, US1, or US2. No person transferred any stock of CFC1 directly or indirectly in Year 1 pursuant to a plan to reduce the percentage of stock (by value) of CFC1 owned by US1. (ii) Analysis. Under paragraph (i)(21) of this section, US1 is a section 245A shareholder with respect to CFC1, an SFC. Because US1 owns, together with US2 and FP (related persons with respect to US1), more than 50% of the stock of CFC1, US1 is a controlling section 245A shareholder of CFC1. The sale of US1’s CFC1 stock results in an extraordinary reduction occurring with respect to US1’s ownership of CFC1. The extraordinary reduction occurs because during Year 2, US1 transferred 100% of the stock of CFC1 that it owned at the beginning of the year and that amount is more than 5% of the total value of the stock of CFC1 at the beginning of Year 2; it also occurs because on the last day of the year the percentage of stock (by value) of CFC1 that US1 directly or indirectly owns (0%) (the end of year percentage) is less than 90% of the stock (by value) of CFC1 that US1 directly or indirectly owned on the day of the taxable year when it owned the highest percentage of CFC1 stock by value (30%) (the initial percentage), no transactions occurred in the preceding year pursuant to a plan to reduce the percentage of CFC1 stock owned by US1, and the difference between the initial percentage and end of year percentage (30 percentage points) is at least 5 percentage points. (7) Example 6. Limitation of section 954(c)(6) exception with respect to an extraordinary reduction. (i) Facts. At the beginning of CFC1 and CFC2’s taxable year ending on December 31, Year 2, US1 and A, an individual who is a citizen of the United States, own 80% and 20% of the single class of stock of CFC1, respectively. CFC1 owns 100% of the stock of CFC2. Both US1 and A are United States shareholders with respect to CFC1 and CFC2, and US1 and A are not related parties with respect to each other. No person transferred CFC2 stock directly or indirectly in Year 2 pursuant to a plan to reduce the percentage of stock (by value) of VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 CFC2 owned by US1, and US1 does not have an extraordinary disposition account with respect to CFC2. At the end of Year 2, and without regard to any distributions during Year 2, CFC2 had $150x of tested income and no other income, and CFC1 had no income or expenses. On June 30, Year 2, CFC2 distributed $150x as a dividend to CFC1, which would qualify for the exception from foreign personal holding company income under section 954(c)(6) but for the application of this section. On August 7, Year 2, CFC1 sells all of its CFC2 stock to US2 for $100x in a transaction (the ‘‘Stock Sale’’) in which CFC1 realizes no gain or loss. At the end of Year 2, under section 951A, US2 takes into account $60x of tested income, calculated as $150x (100% of the $150x of tested income) less $90x, the amount described in section 951(a)(2)(B). The amount described in section 951(a)(2)(B) is the lesser of $150x, the amount of dividends received by CFC1 during Year 2 with respect to the transferred stock, and $90x, the amount of tested income attributable to the transferred stock ($150x) multiplied by 219/365 (the ratio of the number of days in Year 2 that US2 did not own the transferred stock to the total number of days in Year 2). US1 does not make an election pursuant to paragraph (e)(3)(i) of this section. (ii) Analysis—(A) Determination of controlling section 245A shareholder and extraordinary reduction of ownership. Under paragraph (i)(2) of this section, US1 is a controlling section 245A shareholder with respect to CFC2, but A is not. In addition, the Stock Sale results in an extraordinary reduction with respect to US1’s ownership of CFC2. See paragraph (e)(2)(i) of this section. The extraordinary reduction occurs because during Year 2, US1 transferred indirectly 100% of the CFC2 stock it owned at the beginning of the year and such amount is more than 5% of the total value of the stock of CFC2 at the beginning of Year 2; it also occurs because on the last day of the year the percentage of stock (by value) of CFC2 that US1 owns directly or indirectly (0%) (the end of year percentage) is less than 90% of the stock (by value) of CFC2 that US1 owns directly or indirectly on the day of the taxable year when it owned the highest percentage of CFC2 stock by value (80%) (the initial percentage), no transactions occurred in the preceding year pursuant to a plan to reduce the percentage of CFC2 stock owned by US1, and the difference between the initial percentage and the end of year percentage (80 percentage points) is at least 5 percentage points. Because there is an extraordinary reduction with respect to CFC2 in Year 2 and CFC1 received a dividend from CFC2 in Year 2, under paragraph (f)(1) of this section, it is necessary to determine the limitation on the amount of the dividend eligible for the exception under section 954(c)(6). (B) Determination of tiered extraordinary reduction amount. The limitation on the amount of the dividend eligible for the exception under section 954(c)(6) is based on the tiered extraordinary reduction amount. The sum of the amount of subpart F income and tested income of CFC2 for Year 2 is $150x, and immediately before the PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 28423 extraordinary reduction, CFC1 held 100% of the stock of CFC2. Additionally, US2 is a U.S. tax resident as defined in paragraph (i)(29) of this section because it is a United States person described in section 7701(a)(30)(A) or (C), and US2 has a pro rata share of $60x of tested income under section 951A with respect to CFC2. Accordingly, under paragraph (f)(2) of this section, the tiered extraordinary reduction amount is $90x (($150x × 100%)¥$60x). (C) Limitation of section 954(c)(6) exception. Under paragraph (f)(1) of this section, the portion of the $150x dividend from CFC2 to CFC1 that is eligible for the exception to foreign personal holding company income under section 954(c)(6) is $60x ($150x¥$90x). To the extent that the $90x that does not qualify for the exception gives rise to additional subpart F income to CFC1, both US1 and A will take into account their pro rata share of that subpart F income under section 951(a)(2) and § 1.951–1(b) and (e). (k) Applicability date. This section applies to distributions occurring after December 31, 2017. (l) Expiration date. The applicability of this section expires June 14, 2022. ■ Par. 3. Section 1.954(c)(6)–1T is added to read as follows: § 1.954(c)(6)–1T Certain cases in which section 954(c)(6) exception not available (temporary). (a) Cross-references to other rules. For a non-exclusive list of rules that limit the applicability of the exception to foreign personal holding company income under section 954(c)(6), see— (1) Section 1.245A–5T(d) (rules regarding the application of section 954(c)(6) to extraordinary disposition amounts); (2) Section 1.245A–5T(f) (rules regarding the application of section 954(c)(6) to tiered extraordinary reduction amounts) (3) Section 1.245A(e)–1(c) (rules regarding tiered hybrid dividends); (4) Section 1.367(b)–4(e)(4) (rules regarding income inclusion and gain recognition in certain exchanges following an inversion transaction); (5) Section 964(e)(4)(A) (rules regarding certain gain from the sale or exchange of stock that is recharacterized as a dividend); and (6) Section 1.7701(l)–4(e) (rules regarding recharacterization of certain transactions following an inversion transaction). (b) Applicability date. This section applies on or after June 14, 2019. (c) Expiration date. The applicability of this section expires June 14, 2022. ■ Par. 4. Section 1.6038–2T is added to read as follows: E:\FR\FM\18JNR2.SGM 18JNR2 28424 Federal Register / Vol. 84, No. 117 / Tuesday, June 18, 2019 / Rules and Regulations § 1.6038–2T Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations beginning after December 31, 1962 (temporary). jbell on DSK3GLQ082PROD with RULES2 (a) through (e) [Reserved]. (f)(1) through (15) [Reserved]. (16) Dividends for which section 245A deduction or section 954(c)(6) exception is limited—(i) General rule. If for the annual accounting period, the corporation distributes or receives a dividend that gives rise to an ineligible amount (as defined in § 1.245A– 5T((i)(12)), a tiered extraordinary disposition amount (as defined in § 1.245A–5T(i)(25)), or a tiered extraordinary reduction amount (as defined in § 1.245A–5T(i)(26)), then Form 5471 (or a successor form) must contain such information about the ineligible amount, tiered extraordinary VerDate Sep<11>2014 17:50 Jun 17, 2019 Jkt 247001 disposition amount, or tiered extraordinary reduction amount, as applicable, in the form and manner and to the extent prescribed by the form, instructions to the form, publication, or other guidance published in the Internal Revenue Bulletin. (ii) Transition rule. If the corporation (or predecessor corporation) distributed or received a dividend that gave rise to an ineligible amount, a tiered extraordinary disposition amount, or a tiered extraordinary reduction amount in an annual accounting period for which the Form 5471 (or successor form) has been filed before the date of publication of these Temporary regulations, the corporation must provide the information described in paragraph (f)(16)(i) of this section on the first Form 5471 (or successor form) filed by the corporation after the issuance of PO 00000 Frm 00028 Fmt 4701 Sfmt 9990 guidance setting forth the form and manner of reporting such information. (g) through (l) [Reserved]. (m)(1) [Reserved]. (2) Special rule for paragraph (f)(16). Paragraph (f)(16) of this section applies with respect to information for annual accounting periods in which a dividend subject to § 1.245A–5T is paid. (n) Expiration date. The applicability of paragraphs (f)(16) and (m) of this section expires June 14, 2022. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. Approved: June 4, 2019. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2019–12442 Filed 6–14–19; 4:15 pm] BILLING CODE 4830–01–P E:\FR\FM\18JNR2.SGM 18JNR2

Agencies

[Federal Register Volume 84, Number 117 (Tuesday, June 18, 2019)]
[Rules and Regulations]
[Pages 28398-28424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12442]



[[Page 28397]]

Vol. 84

Tuesday,

No. 117

June 18, 2019

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Limitation on Deduction for Dividends Received From Certain Foreign 
Corporations and Amounts Eligible for Section 954 Look-Through 
Exception; Final Rule

Federal Register / Vol. 84 , No. 117 / Tuesday, June 18, 2019 / Rules 
and Regulations

[[Page 28398]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9865]
RIN 1545-BO64


Limitation on Deduction for Dividends Received From Certain 
Foreign Corporations and Amounts Eligible for Section 954 Look-Through 
Exception

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final temporary regulations.

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SUMMARY: This document contains temporary regulations under section 
245A of the Internal Revenue Code (the ``Code'') that limit the 
dividends received deduction available for certain dividends received 
from current or former controlled foreign corporations. This document 
also contains temporary regulations that limit the applicability of the 
exception to foreign personal holding company income for certain 
dividends received by upper-tier controlled foreign corporations from 
lower-tier controlled foreign corporations and temporary regulations 
under section 6038 to facilitate administration of certain rules in the 
temporary regulations. The temporary regulations affect certain U.S. 
persons that are domestic corporations that receive certain dividends 
from current or former controlled foreign corporations or are United 
States shareholders of upper-tier controlled foreign corporations that 
receive certain dividends from lower-tier controlled foreign 
corporations. The text of the temporary regulations also serves as the 
text of the proposed regulations set forth in a notice of proposed 
rulemaking published in the Proposed Rules section of this issue of the 
Federal Register.

DATES: 
    Effective date: These regulations are effective on June 18, 2019.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.245A-5T(k), 1.954(c)(6)-1T(b), and 1.6038-2T(m).

FOR FURTHER INFORMATION CONTACT: Logan M. Kincheloe at (202) 317-6937 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

I. In General

    This document contains amendments to 26 CFR part 1 under sections 
245A, 954(c)(6), and 6038 (the ``temporary regulations''). Any terms 
used but not defined in this preamble have the meanings given them in 
the temporary regulations. Added to the Code by section 14101(a) of the 
Tax Cuts and Jobs Act (the ``Act''), section 245A generally allows a 
domestic corporation a 100-percent dividends received deduction (the 
``section 245A deduction'') for the foreign-source portion of a 
dividend received after December 31, 2017, from a specified 10 percent-
owned foreign corporation (an ``SFC''). Section 954, which predates the 
Act and remains in effect, generally provides that a dividend received 
by a controlled foreign corporation (a ``CFC''), as defined in section 
957, is included in the CFC's foreign personal holding company income 
(``FPHCI''), as defined in section 954(c). Pursuant to section 
954(c)(6), however, a dividend received by a CFC from a related CFC is 
not included in the CFC's FPHCI if certain requirements are satisfied 
(the ``section 954(c)(6) exception'').
    The temporary regulations limit the availability of the section 
245A deduction and the section 954(c)(6) exception in specific and 
narrow cases where the deduction or exception, respectively, 
effectively eliminates subpart F income or income subject to tax under 
section 951A from the U.S. tax system. Specifically, the temporary 
regulations address transactions that have the effect of avoiding tax 
under section 965, 951A, or 951 by inappropriately converting income 
that should have been subject to U.S. tax into nontaxed income. The 
temporary regulations also include rules under section 6038 to 
facilitate administration of certain rules in the temporary 
regulations. The temporary regulations do not include general rules 
relating to dividends eligible for the section 245A deduction; those 
rules will be included in separate guidance.

II. Scope of Participation Exemption

    In order to transition to the new participation exemption system 
provided under section 245A and certain other provisions of the Act, 
the Act imposed a tax on certain earnings and profits of a U.S.-owned 
foreign corporation that had not previously been subject to U.S. tax. 
See section 965. Section 965 was designed to ensure that previously 
untaxed foreign income of the foreign corporation that accrued before 
the advent of the participation exemption system generally is subject 
to U.S. tax (although at a reduced rate). This transition tax applied 
to the last taxable year of the foreign corporation beginning before 
January 1, 2018, and generally increased the subpart F income of the 
foreign corporation by the amount of its previously untaxed earnings as 
of no later than December 31, 2017.
    The Act's legislative history indicates congressional concern that 
the new participation exemption could heighten the incentive to shift 
profits to low-taxed foreign jurisdictions or tax havens absent base 
erosion protections. See Senate Committee on the Budget, 115th Cong., 
Reconciliation Recommendations Pursuant to H. Con. Res. 71, at 365 
(Comm. Print 2017) (``Senate Explanation''). For example, without 
appropriate limits, domestic corporations might be incentivized to 
shift income to low-taxed foreign affiliates, ``where the income could 
potentially be distributed back to the [domestic] corporation with no 
U.S. tax imposed.'' See id.
    This risk of base erosion is acute with respect to certain types of 
income, such as passive or mobile income and income derived from 
intangible property, which historically have posed transfer pricing 
challenges. To prevent base erosion, the Act retained the subpart F 
regime (section 951 et. seq.) and enacted a new regime under section 
951A for global intangible lowed-taxed income (the ``GILTI regime''), 
both of which subject certain foreign income of a CFC to current U.S. 
taxation in the hands of the CFC's United States shareholders (within 
the meaning of section 951(b)) (each shareholder, a ``U.S. 
shareholder''). In order to avoid double taxation when a CFC 
distributes earnings and profits that have been taxed on a current 
basis to a U.S. shareholder, the earnings and profits are designated as 
``previously taxed earnings and profits'' (also known as ``PTEP'') 
under section 959. Section 959 generally provides that PTEP are not 
subject to U.S. tax when distributed to a U.S. shareholder.
    The subpart F regime, which was established under the Revenue Act 
of 1962, Public Law 87-834, sec. 12, 76 Stat. at 1006, subjects certain 
income earned by a CFC to U.S. taxation in the hands of the CFC's U.S. 
shareholders on a current basis at the full ordinary tax rate, 
regardless of whether the CFC distributes the earnings attributable to 
such income. H.R. Rep. No. 1447 at 58 (1962). In general, the subpart F 
regime applies to certain passive or highly mobile income in order to 
address base erosion concerns. Thus, for example, section 954(c) 
provides that subpart F income includes FPHCI. FPHCI includes certain 
types of passive or mobile income that are relatively easy to situate 
in tax-advantaged jurisdictions, such as dividends, interest, rents, 
and royalties.
    The GILTI regime generally subjects a CFC's U.S. shareholders to 
current

[[Page 28399]]

taxation on intangible income earned by the CFC in a manner similar to 
the treatment of a CFC's subpart F income. See section 951A; see also 
Senate Explanation at 366 (explaining that such income is often 
associated with profit shifting). Intangible income is determined for 
this purpose on an aggregate basis at the U.S. shareholder level and is 
based on a formulaic approach under which a ``normal return'' equal to 
10 percent of the basis of certain tangible assets is calculated and 
then each dollar of income above the ``normal return'' is effectively 
treated as intangible income (regardless of whether such income is 
actually attributable to intangible property). See Senate Explanation 
at 366. However, for purposes of this determination, certain income of 
the CFC--such as income taxed under another Code provision (for 
example, under the rules for subpart F income in sections 951 through 
964 or under section 882 in the case of income effectively connected 
with the conduct of a U.S. trade or business), immobile income (such as 
foreign oil and gas extraction income), or highly taxed income that is 
excluded from subpart F income by reason of the high-tax exception of 
section 954(b)(4)--is not taken into account. See also id. (``[C]ertain 
items of income earned by CFCs should be excluded from the GILTI, 
either because they should be exempt from U.S. tax--as they are 
generally not the type of income that is the source of base erosion 
concerns--or are already taxed currently by the United States''). The 
CFC's U.S. shareholders are subject to current U.S. tax on the CFC's 
income in excess of the CFC's normal return, potentially at a reduced 
rate through a deduction under section 250, at the corporate U.S. 
shareholder level. The differing treatment under the GILTI regime with 
respect to excess returns (taxed currently, though potentially at a 
reduced rate) versus normal returns (exempt from tax) generally has the 
effect of differentiating between income that poses base erosion 
concerns and income that does not pose such concerns. The GILTI regime 
applies in the first taxable year of a CFC beginning on or after 
January 1, 2018. Section 245A applies to distributions made by SFCs 
(which include CFCs) on or after that date.
    The rules under section 959 generally treat PTEP (including PTEP 
that arise by reason of the subpart F regime, the GILTI regime, or the 
transition tax under section 965) as being distributed before non-
previously taxed earnings and profits and also prevent section 245A 
from applying to PTEP. See section 959(c) (providing ordering rules 
that treat PTEP as being distributed first) and section 959(d) 
(providing that a distribution of PTEP to a U.S shareholder is not 
treated as a dividend). Thus, both the interaction of the definitions 
of subpart F income and tested income with the ordering rules for 
distributions of PTEP and the overall structure of the international 
provisions of the Act contemplate that only residual earnings remaining 
after the potential application of sections 951(a), 951A, and 965 
generally are eligible for the section 245A deduction. That is, section 
245A(a) applies only to certain ``dividends'' received from foreign 
corporations. Therefore, sections 951(a), 951A, and 965 generally have 
priority over section 245A because, when they apply to a foreign 
corporation's earnings, distributions of those earnings do not qualify 
as dividends under section 959(d), and, therefore, section 245A does 
not apply.
    The statutory text of the participation exemption system under 
section 245A, the GILTI regime, the subpart F regime, and the PTEP 
rules collectively operate as a comprehensive framework with respect to 
a CFC's foreign earnings after the application of the transition tax 
under section 965. A central feature of this regime is that income 
derived by CFCs is eligible for the section 245A deduction only if the 
earnings being distributed have not been first subject to the subpart F 
or GILTI regimes. The scope of the section 245A deduction (and the 
authority set forth in section 245A(g)) is thus informed not only by 
the text of section 245A in isolation, but also by the role of section 
245A in the overall structure of the international provisions and its 
interaction with the subpart F and GILTI provisions.
    Section 245A(g) provides that the Secretary shall issue such 
regulations as are necessary or appropriate to carry out the provisions 
of section 245A.

III. Scope of Section 954(c)(6)

    Section 954(c)(6) was enacted by the Tax Increase Prevention and 
Reconciliation Act of 2005, Public Law 109-222. In general, and subject 
to certain limitations, the section 954(c)(6) exception is intended to 
facilitate intragroup foreign-to-foreign funds flows by providing that 
dividends, interest, rents, and royalties received or accrued by a CFC 
from another related CFC are not treated as FPHCI to the extent 
attributable or properly allocable to income of the related person 
which is neither subpart F income nor income treated as effectively 
connected with the conduct of a trade or business in the United States. 
See H.R. Rep. No. 109-304 at 45 (2005). Section 954(c)(6)(A) also 
provides that the Secretary shall prescribe such regulations as may be 
necessary or appropriate to carry out the provision, including 
regulations to prevent the abuse of the purposes of the provision. As 
most recently extended by the Consolidated Appropriations Act of 2016, 
Public Law 114-113, section 954(c)(6) applies to taxable years of 
foreign corporations beginning after December 31, 2005, and before 
January 1, 2020, and to taxable years of U.S. shareholders with or 
within which such taxable years of foreign corporations end.
    Notice 2007-9, 2007-5 I.R.B. 401, provides guidance under section 
954(c)(6). The notice describes additional guidance that the Treasury 
Department and the IRS intend to issue regarding the application of 
section 954(c)(6), including certain anti-abuse rules.

Explanation of Provisions

I. Overview

    The transition tax, the subpart F and GILTI regimes, and the 
participation exemption under section 245A together form a 
comprehensive and closely integrated set of tax rules with respect to 
the earnings of foreign corporations with requisite levels of U.S. 
ownership. These related provisions must be read and interpreted 
together in order to ensure that each provision functions as part of a 
coherent whole, as intended. Although the section 245A deduction is 
generally available for untaxed foreign-source earnings, read 
collectively this integrated set of statutory rules can be reasonably 
understood to require that the deduction not apply to earnings and 
profits attributable to income of a type that is properly subject to 
the subpart F or GILTI regimes, which address base erosion-type income. 
Otherwise, as explained in Part II of this Explanation of Provisions, 
the section 245A deduction could undermine the anti-base erosion 
measures that Congress intended to prevent income shifting. 
Accordingly, and consistent with the coherent functioning of the 
interlocking statutory scheme for taxation of CFC earnings, the section 
245A deduction generally will not apply to distributions of earnings 
and profits that are attributable to subpart F income or tested income. 
The interpretation reflected in these rules ensures that these 
provisions will operate compatibly with, not contradictorily to, each 
other.
    Section 245A is designed to operate residually, such that the 
section 245A

[[Page 28400]]

deduction generally applies to any earnings of a CFC to the extent that 
they are not first subject to the subpart F regime, the GILTI regime, 
or the exclusions provided in section 245A(c)(3) (and were not subject 
to section 965). That is, the text of the subpart F and GILTI rules 
explicitly defines the types of income to which they apply, and section 
245A applies to any remaining untaxed foreign earnings. Under ordinary 
circumstances, this formulation works appropriately, as earnings are 
first subject to the subpart F or GILTI regimes before the 
determination of dividends to which section 245A could potentially 
apply. However, in certain atypical circumstances, a literal 
application of section 245A (read in isolation) could result in the 
section 245A deduction applying to earnings and profits of a CFC 
attributable to the types of income addressed by the subpart F or GILTI 
regimes--the specific types of earnings that Congress described as 
presenting base erosion concerns. These circumstances arise when a 
CFC's fiscal year results in a mismatch between the effective date for 
GILTI and the final measurement date under section 965 or involve 
unanticipated interactions between section 245A and the rules for 
allocating subpart F income and GILTI when there is a change in 
ownership of a CFC. Moreover, the Treasury Department and the IRS are 
aware that some taxpayers are undertaking transactions with a view to 
eliminating current or future taxation of all foreign earnings of a 
CFC, including earnings attributable to base erosion-type income, by 
structuring into these situations. These transactions have the 
potential to substantially undermine the anti-base erosion framework 
for post-2017 foreign earnings.
    Based on the structure and history of the international provisions 
of the Code, including changes made by the Act, the Treasury Department 
and the IRS have concluded that section 245A was not intended to 
eliminate taxation with respect to the foreign earnings of a CFC that 
are attributable to income of a type that is subject to taxation under 
the subpart F or GILTI regimes. In these cases where the literal effect 
of section 245A would reverse the intended effect of the subpart F and 
GILTI regimes, this conflict is best resolved, and the structure of the 
statutory scheme is best preserved, by limiting section 245A's effect. 
The Treasury Department and the IRS do not believe Congress intended 
section 245A to defeat the purposes of subpart F and GILTI regimes in 
these instances. Accordingly, given the authority in section 245A(g) 
directing the Secretary to issue such regulations as are necessary or 
appropriate to carry out the provisions of section 245A, and the 
authority under section 7805(a) to issue rules and regulations made 
necessary by reason of changes in the tax laws, the temporary 
regulations under section 245A are designed to ensure that the section 
245A deduction operates properly within the context of a closely 
coordinated set of rules and, as a result, is not available to 
eliminate the taxation of subpart F income and tested income in these 
limited circumstances. However, consistent with the broad application 
of section 245A, the temporary regulations apply only to certain well-
defined circumstances in which subpart F or tested income earned by a 
CFC would otherwise escape taxation to its U.S. shareholders as a 
result of the unanticipated interaction of section 245A and certain 
rules applicable to the inclusion of subpart F income and GILTI under 
sections 951(a) and 951A, respectively.
    To prevent the avoidance of U.S. tax in these specific and narrow 
circumstances, the temporary regulations limit the section 245A 
deduction only with respect to certain dividends received by a domestic 
corporation in connection with specific transactions that facilitate 
the avoidance of taxation of subpart F income or tested income and 
that, in many cases, may have been entered into with a purpose of 
avoiding the consequences of the new international tax regime as 
adopted by Congress in the Act. This limited denial ensures that the 
section 245A deduction will continue to apply to earnings and profits 
that are attributable to all other classes of income to which Congress 
intended them to apply. The Treasury Department and the IRS emphasize, 
however, that when the requirements of section 245A as properly 
construed are satisfied, it would not be permissible under the statute 
for the section 245A deduction to be denied for these other classes of 
income--even if, for example, taxpayers choose to generate such income 
to avail themselves of the benefits of the deduction. The Treasury 
Department and the IRS furthermore do not believe it would be 
permissible to modify the definition of subpart F income or tested 
income, or to recharacterize income as subpart F income or tested 
income, under the authority of section 245A(g).
    Similar to section 245A, the exemption from subpart F income under 
section 954(c)(6) can be used in the context of certain transactions to 
avoid taxation of income that would otherwise be taxed under the 
subpart F or GILTI regimes. Such transactions are not dependent upon 
the availability of section 245A at the level of the United States 
shareholder. This type of concern was first generally described in 
Notice 2007-9, but has been exacerbated by the enactment of section 
951A as part of the Act because (1) dividends qualifying for section 
954(c)(6) generally are not treated as tested income pursuant to 
section 951A(c)(2)(A)(i)(IV); and (2) the same structured transactions 
used to avoid subpart F inclusions can also be used to avoid GILTI 
inclusions. Given the authority in section 954(c)(6)(A) for the 
Treasury Department and the IRS to issue regulations preventing the 
abuse of section 954(c)(6), the temporary regulations under section 
954(c)(6) are designed to ensure that the section 954(c)(6) exception 
is not used to erode the U.S. tax base through certain transactions 
preventing the taxation of income that would otherwise be taxed under 
the subpart F or GILTI regimes. Consistent with the temporary 
regulations issued under section 245A, these rules are targeted to 
ensure that the section 954(c)(6) exception is not available for this 
limited category of earnings.

II. Limitation of Amounts Eligible for Section 245A Deduction

A. Scope

    In the case of a dividend received by a domestic corporation from 
an SFC, the temporary regulations limit the amount of the section 245A 
deduction to the portion of a dividend not constituting an ``ineligible 
amount.'' See Sec.  1.245A-5T(b). In general, the ineligible amount is 
the sum of (i) 50 percent of the portion of a dividend attributable to 
certain earnings and profits resulting from transactions between 
related parties during a period after the measurement date under 
section 965(a)(2) and in which the SFC was a CFC but during which 
section 951A did not apply to it (referred to as the ``extraordinary 
disposition amount'') and (ii) the portion of a dividend attributable 
to certain earnings and profits generated during any taxable year 
ending after December 31, 2017, in which the domestic corporation 
reduces its ownership of the CFC (referred to as the ``extraordinary 
reduction amount'').

B. Extraordinary Disposition Amount

    Under the Act, there may be a gap between when section 951A first 
applies to the U.S. shareholders of a CFC (as of its first taxable year 
beginning after December 31, 2017) and the last date on which the 
earnings and profits of the CFC are measured for purposes of

[[Page 28401]]

section 965, which, under section 965(a), is December 31, 2017 (such 
period, the ``disqualified period''). For example, a fiscal year CFC 
with a taxable year ending November 30 would have a disqualified period 
from January 1, 2018, the day after its final E&P measurement date 
under section 965, to November 30, 2018, the last date before section 
951A applies with respect to its income. The Treasury Department and 
the IRS are aware that during the disqualified period, CFCs may have 
engaged in certain transactions with related parties with a goal of 
creating stepped-up basis for the buyer, while generating earnings and 
profits for the seller CFC that are not subject to any current tax and 
may be eligible for the section 245A deduction. Because the 
transactions generally are structured to avoid creating subpart F 
income and occur during the disqualified period, the income from these 
transactions generally is not subject to U.S. tax under the transition 
tax under section 965, the subpart F regime, or the GILTI regime. Such 
earnings and profits could, for example, reduce taxable gain that would 
otherwise be recognized on the subsequent disposition of stock of the 
CFC, thus potentially allowing the CFC and its future earnings to be 
removed from the U.S. tax system without the imposition of any U.S. 
tax.
    The Treasury Department and the IRS have determined that it would 
be inconsistent with the closely interdependent set of international 
tax rules implemented by the Act, specifically the transition tax, the 
GILTI regime, and the participation exemption, for the earnings and 
profits resulting from these transactions to be eligible for a section 
245A deduction even if the other requirements of section 245A are 
otherwise satisfied. Thus, the temporary regulations limit the amount 
of the section 245A deduction allowed to a section 245A shareholder (as 
defined in Sec.  1.245A-5T(i)(21)) with respect to a dividend received 
from an SFC. Specifically, the deduction is limited to 50 percent of 
the extraordinary disposition amount, which is the portion of a 
dividend received by a section 245A shareholder from an SFC that is 
paid out of the section 245A shareholder's ``extraordinary disposition 
account.'' See Sec.  1.245A-5T(b)(2) and (c)(1). In general, this 
account represents the shareholder's pro rata share of the SFC's 
``extraordinary disposition E&P,'' reduced by the section 245A 
shareholder's prior extraordinary disposition amounts, if any. See 
Sec.  1.245A-5T(c)((3)(i)(C)(1)). Extraordinary disposition E&P is an 
amount equal to the earnings of an SFC arising from gain recognized by 
reason of one or more ``extraordinary dispositions.'' See Sec.  1.245A-
5T(c)(3)(i)(C).
    The section 245A deduction is limited to 50 percent of the 
extraordinary disposition amount to reflect the fact that taxpayers 
generally would have been eligible for a deduction under either (i) 
section 250(a)(1)(B) had section 951A applied to the SFC during the 
disqualified period or (ii) section 965(c) had the net gain been 
subject to the transition tax under section 965.
    For a disposition by an SFC to be an extraordinary disposition, the 
disposition must (i) be of specified property (defined in Sec.  1.245A-
5T(c)(3)(iv) as any property other than property that produces gross 
income described in section 951A(c)(2)(A)(i)(I) through (V)), (ii) 
occur during the SFC's disqualified period (as defined in Sec.  1.245A-
5T(c)(3)(iii)) and when the SFC was a CFC, (iii) be outside of the 
ordinary course of the SFC's activities, and (iv) be to a related 
party. See Sec.  1.245A-5T(c)(3)(ii). For these purposes, a disposition 
by an SFC includes certain indirect dispositions by the SFC through a 
partnership or other pass-through entities (including through ownership 
structures involving tiered pass-through entities). See id.
    In addition, pursuant to an exception intended to limit compliance 
and administrative burdens, no dispositions by an SFC are considered to 
be an extraordinary disposition if they do not exceed a threshold of 
the lesser of $50 million or 5 percent of the gross value of the SFC's 
property. See Sec.  1.245A-5T(c)(3)(ii)(E).
    The temporary regulations provide a facts-and-circumstances rule 
for determining whether a disposition occurs outside of the ordinary 
course of an SFC's activities. The temporary regulations also provide a 
per se rule that a disposition is treated as outside of the ordinary 
course of an SFC's activities if the disposition is undertaken with a 
principal purpose of generating earnings and profits during the 
disqualified period or if the disposition is of intangible property, 
within the meaning of section 367(d)(4). See id. The temporary 
regulations include this latter rule because the disposition of 
intangible property is not an ordinary course transaction (relative to, 
for example, a routine sale of raw materials from one SFC to another 
for manufacturing); moreover, during the disqualified period taxpayers 
may have had a particularly strong incentive to dispose of intangible 
property (which often has low basis) to generate significant amounts of 
earnings and profits to the seller (without being subject to current 
tax) that may be eligible for the section 245A deduction.
    As described, the Treasury Department and the IRS have determined 
that the extraordinary disposition rules should not apply to all 
earnings and profits generated by a CFC during the disqualified period. 
Rather, the temporary regulations focus on a narrowly and objectively 
defined class of earnings and profits in circumstances that are 
inconsistent with the international tax regime adopted by the Act. The 
Treasury Department and the IRS request comments on whether there 
should be any further refining of these rules.
    The temporary regulations provide shareholder account rules to 
ensure that a section 245A shareholder's extraordinary disposition 
account is properly tracked and reduced in appropriate cases (for 
example, for prior extraordinary disposition amounts). See Sec.  
1.245A-5T(c)(3)(i). These shareholder account rules also contain 
successor rules for a section 245A shareholder that acquires stock of 
an SFC from another section 245A shareholder with respect to which 
there is an extraordinary disposition account and for certain section 
381 transactions and distributions involving section 355 (or so much as 
section 356 as relates to section 355). See Sec.  1.245A-5T(c)(4).
    To address cases in which the section 245A deduction might be 
available for an SFC held through a pass-through entity or foreign 
corporation, the temporary regulations provide that a section 245A 
shareholder is treated as owning a pro rata share of stock of an SFC 
that is owned by a partnership, trust, or estate (domestic or foreign), 
or a foreign corporation in which the section 245A shareholder owns an 
interest or stock, as applicable. See Sec.  1.245A-5T(g)(3)(i) 
(providing rules for stock ownership and transfers).
    The Treasury Department and the IRS request comments as to how the 
extraordinary disposition account rules should apply in circumstances 
in which an SFC is transferred to a partnership, including the extent 
to which principles similar to section 704(c)(1)(B) apply to prevent 
the use of partnerships to circumvent the purposes of the temporary 
regulations, such as where an SFC is subsequently transferred to a non-
contributing partner. As a general matter, the Treasury Department and 
the IRS believe that Sec.  1.701-2(b), as well as the judicial 
doctrines of economic substance, substance over form, and step 
transaction, prevent taxpayers from

[[Page 28402]]

forming or availing of partnerships with a principal purpose of 
avoiding the application of these rules. The treatment of partnerships 
under section 245A will be addressed in separate guidance; and it is 
anticipated that this guidance will provide rules ensuring that 
partnerships may not be formed or availed of to avoid the purposes of 
the temporary regulations.
    The Treasury Department and the IRS further request comments on the 
treatment of consolidated groups under the temporary regulations, 
including for purposes of maintaining extraordinary disposition 
accounts. The Treasury Department and the IRS believe that consolidated 
groups generally should be treated in the same manner as a single 
taxpayer for the purposes of Sec.  1.245A-5T(c). Subject to any 
comments received, it is expected that future rules will provide that 
consolidated groups generally should not be advantaged or disadvantaged 
as a result of owning directly or indirectly stock of an SFC through 
multiple members relative to a standalone corporation owning the same 
stock.
    The Treasury Department and the IRS also request comments on 
whether and how the rules applicable to disqualified basis in proposed 
Sec.  1.951A-2(c)(5) should be coordinated with Sec.  1.245A-5T(c). In 
this regard, proposed Sec.  1.951A-2(c)(5) provides rules for the 
allocation and apportionment of deductions and losses attributable to 
disqualified basis, which is asset basis created in certain 
disqualified transfers during the disqualified period. These deductions 
and losses are allocated and apportioned solely to gross income that is 
not tested income, subpart F income, or effectively connected income 
(defined as ``residual CFC gross income''), thereby ensuring that such 
``costless'' tax basis does not inappropriately reduce future tax 
liability. Thus, the Treasury Department and the IRS are considering 
the extent to which it would be appropriate to coordinate the two sets 
of rules, taking into account the ability of the IRS to administer and 
taxpayers to comply with such rules, and request comments on this 
issue.

C. Extraordinary Reduction Amount

    The Treasury Department and the IRS are aware that certain 
transactions in which a section 245A shareholder of a CFC transfers 
stock of the CFC, or certain transactions in which the shareholder's 
ownership of the CFC is diluted, could give rise to results that would 
be inconsistent with the integrated structure of the U.S. tax system 
for the taxation of CFC earnings, including section 245A, the subpart F 
regime, and the GILTI regime. In these cases, absent proper limitation, 
the section 245A deduction might be allowed inappropriately with 
respect to a CFC's current year income that, but for the ownership 
changes, would have been subject to tax under the subpart F or GILTI 
regimes. Unlike the transactions described in Part II.B of this 
Explanation of Provisions, the transactions giving rise to these 
results can occur in any taxable year ending after the Act (and 
particularly section 245A) is in effect.
    These results could arise, for example, as a consequence of the 
application of section 951(a)(2)(B). Section 951(a)(2)(B), a 
longstanding provision in the subpart F regime, prevents double 
taxation of the same earnings by reducing a U.S. shareholder's pro rata 
share of subpart F income (or, following the Act, tested income as 
defined in section 951A(c)(2)(A)) of a CFC by dividends received by 
another person with respect to the same share of stock. However, if 
section 245A were to apply without limitation to dividends from a CFC 
that reduce another U.S. shareholder's pro rata share of subpart F 
income or tested income of the CFC under section 951(a)(2)(B), earnings 
that would otherwise be subject to the subpart F or GILTI regimes would 
escape U.S. taxation to the extent of the reduction. For example, in 
the case of a transfer of CFC stock from one section 245A shareholder 
(the transferor) to another section 245A shareholder (the transferee), 
a dividend (including by reason of section 1248) from the CFC to the 
transferor during the tax year of the transfer might both (i) be 
excluded from the transferor's income by reason of the section 245A 
deduction and (ii) reduce the transferee's pro rata share of subpart F 
income or tested income of the CFC by reason of section 951(a)(2)(B). 
The Treasury Department and the IRS have determined that it would be 
inconsistent with the residual definition of section 245A eligible 
earnings and the interaction of section 245A and the subpart F and 
GILTI regimes, which form an integrated set of rules to tax post-2017 
foreign earnings, to allow a section 245A deduction for a dividend paid 
out of earnings and profits attributable to subpart F income or tested 
income where such dividends, by operation of section 951(a)(2)(B), and 
could result in double non-taxation of such income. Such a result would 
also be contrary to the legislative intent underlying the interaction 
of these provisions. See Senate Explanation at 365 (noting, in the 
absence of rules such as the new GILTI regime, the incentive to shift 
income to low-taxed foreign affiliates, ``where the income could 
potentially be distributed back to the [domestic] corporation with no 
U.S. tax imposed.'').
    Similar results can arise in other cases where the stock of a CFC 
is transferred during a CFC's tax year by a U.S. shareholder to a 
foreign person where, after the transfer, the CFC remains a CFC but has 
no U.S. shareholder that owns (within the meaning of section 958(a)) 
stock of the CFC. Before the Act, section 958(b)(4) prevented certain 
attribution of stock under section 318 from a foreign person to a U.S. 
person. However, the Act repealed section 958(b)(4) such that a foreign 
corporation may be treated as a CFC despite having no direct or 
indirect U.S. shareholder that owns (within the meaning of section 
958(a)) stock of the CFC and that accordingly can recognize an income 
inclusion under section 951 or 951A. In general, a U.S. shareholder 
that owns stock in a CFC on the last day within the foreign 
corporation's year that it is a CFC is taxable on its pro rata share of 
the CFC's subpart F income or tested income for purposes of the GILTI 
regime. However, by reason of the Act's repeal of section 958(b)(4), a 
U.S. shareholder may transfer a CFC to a person that will not be taxed 
with respect to an inclusion under the subpart F or GILTI regimes 
without itself being subject to such an inclusion. Absent any specific 
limitation in these circumstances, any earnings and profits of the CFC 
distributed as a dividend (including by reason of section 1248) to the 
transferor U.S. shareholder during the CFC's taxable year might be 
eligible for the section 245A deduction. However, had the transfer not 
occurred (or had the CFC ceased to be a CFC as a result of the 
transfer), the earnings and profits may have been subject to tax under 
the subpart F or GILTI regimes and, therefore, would not have been 
eligible for the section 245A deduction.
    In the circumstances described in this section, a broad application 
of section 245A would present taxpayers with a planning opportunity to 
completely avoid the application of the subpart F and GILTI regimes on 
an annual basis. The Treasury Department and the IRS have determined 
that this result would undermine the integrated provisions constituting 
the Act's framework for taxing post-2017 CFC earnings and would 
contravene legislative intent. To address this concern, the temporary 
regulations limit the amount of the section 245A deduction allowed to a 
``controlling section 245A shareholder'' with respect to a dividend 
from a CFC

[[Page 28403]]

to the portion of the dividend that is paid out of earnings other than 
the ``extraordinary reduction amount.'' See Sec.  1.245A-5T(b)(1) and 
(e). A controlling section 245A shareholder of a CFC is a section 245A 
shareholder of the CFC that, taking into account ownership of the CFC 
by certain other persons (such as related persons), owns more than 50 
percent of the stock of the CFC. See Sec.  1.245A-5T(i)(2). For 
purposes of applying these rules, a controlling section 245A 
shareholder also includes any other shareholder who would not otherwise 
be a controlling section 245A shareholder but acts in concert with the 
controlling section 245A shareholder. This includes shareholders that 
sell their shares of the same CFC to the same buyer or buyers (or a 
related party with respect to the buyer or buyers) as part of the same 
plan as the controlling section 245A shareholder's extraordinary 
reduction.
    Under the temporary regulations, for an extraordinary reduction 
amount to exist with respect to a controlling section 245A shareholder 
of a CFC, an ``extraordinary reduction'' must occur during the CFC's 
taxable year with respect to the shareholder's ownership of the CFC. 
See Sec.  1.245A-5T(e). An extraordinary reduction generally occurs 
when either (i) the controlling section 245A shareholder transfers more 
than 10 percent of its stock of the CFC (for example, an extraordinary 
reduction occurs if the shareholder owns 90 percent of the stock of the 
CFC and it transfers stock representing more than nine percent of the 
stock of the CFC) or (ii) there is a greater than ten percent change in 
the controlling section 245A shareholder's overall ownership of the CFC 
(for example, if the shareholder owns 90 percent of the stock of the 
CFC and, as a result of an issuance to a foreign person, the 
shareholder's ownership of the CFC is reduced such that it no longer 
owns at least 81 percent of the stock of the CFC). See Sec.  1.245A-
5T(e)(2)(i)(A). The temporary regulations include the first prong 
because if, for example, a section 245A shareholder of a CFC were to 
transfer shares of stock of the CFC to another section 245A shareholder 
of the CFC and the other shareholder were to transfer an equal number 
of similar shares to the first shareholder, neither of the 
shareholders' overall ownership of the CFC would change, but the amount 
taken into account by each of the shareholders by reason of section 
951(a)(2)(B) might be reduced as a result of dividends paid with 
respect to shares transferred by the other.
    An extraordinary reduction amount is earnings and profits 
representing the amount of dividends paid by the corporation that are 
attributable to subpart F income or tested income with respect to a 
CFC, to the extent such subpart F income or tested income (i) would 
have been taken into account by the controlling section 245A 
shareholder under section 951 or 951A had the extraordinary reduction 
not occurred and (ii) is not taken into account by a domestic 
corporation or a citizen or resident of the United States (that is, a 
person described in section 7701(a)(30)(A) or (C)). See Sec.  1.245A-
5T(e)(1) and (2).
    The limitation of the section 245A deduction in the case of an 
extraordinary reduction will generally result in a dividend being 
included in the income of the controlling section 245A shareholder and 
not offset by a section 245A deduction. In cases where the CFC has 
tested income during its taxable year that would have been subject to 
the GILTI regime but for the extraordinary reduction, a controlling 
section 245A shareholder might prefer to have an income inclusion under 
section 951A, potentially benefitting from the deduction available 
under section 250. Therefore, the temporary regulations provide an 
election under which a controlling section 245A shareholder is not 
required to reduce its section 245A deduction if it elects (and, in 
some cases, certain other United States persons also agree) to close 
the CFC's taxable year for all purposes of the Code on the date of the 
extraordinary reduction. See Sec.  1.245A-5T(e)(3)(i). The closing of 
the taxable year of the CFC results in all U.S. shareholders that own 
(within the meaning of section 958(a)) stock of the CFC on such date 
taking into account their pro rata share of subpart F income or tested 
income earned by the CFC as of that date.
    In addition, pursuant to an exception intended to limit compliance 
and administrative burdens, for a taxable year in which an 
extraordinary reduction occurs, no amount is considered an 
extraordinary reduction amount if the sum of the CFC's subpart F income 
and tested income for the taxable year does not exceed the lesser of 
$50 million or 5 percent of the CFC's total income for the year. See 
Sec.  1.245A-5T(e)(3)(ii).

D. Coordination Rules

    To address cases in which a dividend could qualify as either a 
hybrid dividend under the rules of section 245A(e) or an ineligible 
amount under the temporary regulations, the temporary regulations 
provide a coordination rule pursuant to which a dividend is first 
subject to the hybrid dividend rules of section 245A(e) and then, to 
the extent not a hybrid dividend, is subject to the temporary 
regulations. See Sec.  1.245A-5T(g)(3)(iv). In future guidance relating 
to proposed regulations under section 245A(e) and certain other 
sections (83 FR 67612), the Treasury Department and the IRS anticipate 
modifying those regulations to reflect this coordination rule.
    In addition, to address cases in which a dividend might be either 
an extraordinary disposition amount under Sec.  1.245A-5T(c) or an 
extraordinary reduction amount under Sec.  1.245A-5T(e), the temporary 
regulations provide a coordination rule pursuant to which a dividend is 
first subject to the rules of Sec.  1.245A-5T(e) and then, to the 
extent not an extraordinary reduction amount, is subject to the rules 
of Sec.  1.245A-5T(c). See Sec.  1.245A-5T(g)(5). Because of this 
ordering rule, the extraordinary disposition amount with respect to a 
dividend will not exceed the amount by which the dividend exceeds the 
extraordinary reduction amount with respect to the dividend.

E. Transactions Described in Section 964(e)(4)

    The rules in these temporary regulations for determining 
eligibility for the section 245A deduction also apply to deemed 
dividends arising by reason of section 964(e)(4), which the Act added 
to the Code. Section 964(e)(4) provides in certain cases that a sale by 
a CFC of stock of another foreign corporation is treated as a dividend 
from the target foreign corporation to the selling CFC that is, in 
turn, treated as subpart F income of the selling CFC and included in 
the gross income of the U.S. shareholders of the selling CFC. Pursuant 
to section 964(e)(4)(A)(iii), the section 245A deduction is allowed to 
any U.S. shareholder with respect to such subpart F income included in 
gross income in the same manner as if such subpart F income were a 
dividend received by the shareholder from the selling CFC. Thus, 
section 964(e)(4) presents the same concerns as direct dividends; 
absent a rule to the contrary, taxpayers might use section 964(e)(4) to 
avoid the results applicable to actual distributions from an upper-tier 
CFC to a U.S. shareholder or to constructive dividends under section 
1248 that are addressed elsewhere by these temporary regulations. 
Therefore, the rules in these temporary regulations for determining 
eligibility for the section 245A deduction also apply to deemed 
dividends arising by reason of section 964(e)(4). Moreover, all U.S. 
shareholders of the selling CFC are

[[Page 28404]]

deemed to act in concert for purposes of the temporary regulations with 
respect to transactions described in section 964(e)(4).

III. Limitation of Amount Eligible for Section 954(c)(6) Exception With 
Respect to Certain Dividends

A. In General

    As described in Part I of this Explanation of Provisions, the 
section 954(c)(6) exception may cause dividends from one CFC to another 
to result in tax consequences similar to, but not dependent upon, those 
that can be effectuated using section 245A in conjunction with the 
disqualified period, section 951(a)(2)(B), or the repeal of section 
958(b)(4).
    To protect against avoidance of the rules for extraordinary 
dispositions (described in Part II.B of this Explanations of 
Provisions), the temporary regulations rely on authority under section 
954(c)(6)(A) to prevent the section 954(c)(6) exception from applying 
in cases where a dividend from a lower-tier CFC to an upper-tier CFC 
would be an extraordinary disposition amount if distributed directly to 
the section 245A shareholders of the lower-tier CFC. See Sec.  1.245A-
5T(d). In these cases, the section 954(c)(6) exception applies only to 
the extent that the amount of the dividend exceeds the sum of each 
section 245A shareholder's extraordinary disposition account with 
respect to the lower-tier CFC, divided by the aggregate ownership of 
all U.S. tax residents of the upper-tier CFC that have section 951(a) 
inclusions and multiplied by 50 percent. The amount is divided by the 
aggregate ownership of these U.S. tax residents to take into account 
the fact that the U.S. tax residents (including individuals) will 
include in gross income a pro rata share of the portion of the dividend 
not eligible for the section 954(c)(6) exception. The amount is 
multiplied by 50 percent in order to provide similar treatment for a 
dividend received by a section 245A shareholder from a CFC and a 
dividend received by an upper-tier CFC from a lower-tier CFC. In both 
cases, the 50 percent reduction of the section 245A deduction 
approximates the reduced tax rate by reason of the deduction provided 
under section 250(a)(1)(B) with respect to section 951A inclusions or 
section 965(c) with respect to the transition tax.
    Unlike the disallowance of the section 245A deduction under Sec.  
1.245A-5T(b) with respect to an extraordinary disposition amount, which 
applies only to corporate U.S. shareholders, the limitation to the 
application of the section 954(c)(6) exception with respect to a 
dividend received by an upper-tier CFC can result in a subpart F 
inclusion to any U.S. shareholder, including individuals. In addition, 
the temporary regulations limit the section 954(c)(6) exception in 
these cases, rather than limiting the application of section 245A only 
when the lower-tier CFC earnings and profits are distributed through 
intervening CFCs to a section 245A shareholder. This approach prevents 
deferral of tax with respect to the applicable subpart F income or 
tested income and minimizes the administrative and compliance burdens 
that would be created by continuing to track the relevant earnings at 
the upper-tier CFC.
    Similarly, to prevent these inappropriate uses of the section 
954(c)(6) exception to avoid the rules for extraordinary reductions 
(described in Part II.C of this Explanation of Provisions), the 
temporary regulations apply to limit the amount of any distribution 
from that CFC out of earnings and profits attributable to subpart F 
income or tested income that can qualify for the section 954(c)(6) 
exception in a taxable year in which an extraordinary reduction occurs 
with respect to the stock of a CFC. Similar to the rules relating to 
extraordinary disposition amounts, the limitation to the section 
954(c)(6) exception with respect to a dividend received by an upper-
tier CFC can result in a subpart F inclusion to any U.S. shareholder, 
including individuals. To the extent a CFC-to-CFC dividend otherwise 
satisfies the requirements of section 954(c)(6), it is eligible for the 
section 954(c)(6) exception only to the extent it exceeds the 
distributing lower-tier CFC's ``tiered extraordinary reduction 
amount,'' taking into account certain prior inclusions under section 
951(a). See Sec.  1.245A-5T(f)(1). Such amount is equal to the upper-
tier CFC's ownership percentage in the lower-tier CFC multiplied by the 
lower-tier CFC's subpart F income and tested income for the taxable 
year, with the resulting product reduced by four amounts. The first 
amount is the pro rata share of the lower-tier CFC's subpart F income 
and tested income for the taxable year that is taken into account by 
U.S. tax residents and attributable to the shares of the lower-tier CFC 
owned by the upper-tier CFC. The second amount is the amount included 
in an upper-tier CFC's subpart F income resulting from prior dividends 
paid by the lower-tier CFC giving rise to tiered extraordinary 
reduction amounts or the application of section 245A(e). The third 
amount is for certain prior extraordinary reduction amounts with 
respect to the lower-tier CFC arising in cases in which the lower-tier 
CFC was a first-tier CFC at some point in the taxable year and paid a 
dividend to one or more controlling section 245A shareholders at that 
time. The fourth amount is for subpart F income and tested income taken 
into account by a U.S. tax resident as a result of an issuance of stock 
directly by the lower-tier CFC during the taxable year. See Sec.  
1.245A-5T(f)(2). Comments are requested as to whether a lower-tier 
CFC's tiered extraordinary reduction amount should be reduced for a pro 
rata portion of a dividend paid on stock of the lower-tier CFC that was 
held by non-U.S. shareholders before and after an extraordinary 
reduction. For purposes of applying Sec.  1.245A-5T(f)(1) and (2) in 
taxable years of a lower-tier CFC beginning on or after January 1, 
2018, and ending before June 14, 2019, a transition rule is provided 
such that the tiered extraordinary reduction amount of a lower-tier CFC 
is determined by treating the lower-tier CFC's subpart F income for the 
taxable year as if it were neither subpart F income nor tested income. 
See Sec.  1.245A-5T(f)(3).
    The rule in Sec.  1.245A-5T(f)(1) applies to both actual 
distributions and deemed distributions that occur by reason of stock 
dispositions subject to section 964(e)(1) but not section 964(e)(4). 
Dispositions subject to section 964(e)(1) but not section 964(e)(4) are 
treated as dividends from the target foreign corporation (or other 
entity whose earnings and profits gave rise to a dividend under section 
964(e)(1)) to the selling CFC and, thus, must be tested for eligibility 
under section 954(c)(6). Additionally, ordering and coordination rules 
apply with respect to the rules relating to the availability of the 
section 954(c)(6) exception and generally mirror the rules for the 
section 245A deduction by giving priority to Sec.  1.245A-5T(f) over 
Sec.  1.245A-5T(d). See Sec.  1.245A-5T(g)(4)(ii). As in the rules 
relating to extraordinary reduction amounts, a controlling section 245A 
shareholder of a lower-tier CFC may elect to close the taxable year of 
the CFC in cases where an extraordinary reduction occurs and the CFC 
would have a tiered extraordinary reduction amount. See Sec.  1.245A-
5T(e).
    Finally, the Treasury Department and the IRS are studying whether 
Sec.  1.245A-5T(f), or a similar rule, should also apply to dividends 
received by an upper-tier CFC from a lower-tier CFC where such CFCs are 
owned by individuals and there may be a reduction in the individuals' 
ownership of the lower-tier CFC. Individuals are

[[Page 28405]]

not eligible to claim deductions under section 245A and, therefore, 
dividends subject to section 954(c)(6) do not present the risk of 
permanently eliminating items of subpart F income, investments in 
United States property taxed under section 951(a)(1)(B), or tested 
income from the U.S. tax base. At the same time, section 954(c)(6) 
dividends might result in a reduction of a U.S. shareholder's pro rata 
share of a CFC's subpart F income or tested income, thereby resulting 
in deferred taxation of items that otherwise would have been taxed 
currently. Therefore, comments are requested as to whether Sec.  
1.245A-5T(f), or a similar rule, should be extended to CFCs owned by 
individuals.

B. Dividends Received by CFCs Ineligible for Section 245A Deduction

    Section 245A(a), by its terms, applies only to certain dividends 
received by ``a domestic corporation.'' Section 1.952-2, however, which 
sets forth rules for determining gross income and taxable income of a 
foreign corporation, provides that for these purposes a foreign 
corporation is treated as a domestic corporation. See Sec.  1.952-
2(a)(1) and (b)(1). Accordingly, questions have arisen as to whether 
Sec.  1.952-2 could be interpreted such that a foreign corporation 
could claim a section 245A deduction despite the statutory restriction 
in section 245A(a) expressly limiting the deduction to domestic 
corporations. See H.R. Rep. No. 115-466, at 599, fn. 1486 (2017).
    The Treasury Department and the IRS intend to address issues 
related to the application of Sec.  1.952-2, taking into account 
various comments received in connection with the Act, including in 
connection with the proposed section 951A regulations, in a future 
guidance project. This guidance will clarify that, in general, any 
provision that is expressly limited in its application to domestic 
corporations does not apply to CFCs by reason of Sec.  1.952-2. The 
Treasury Department and the IRS continue to study whether, and to what 
extent, proposed regulations should be issued that provide that 
dividends received by a CFC are eligible for a section 245A deduction. 
The Treasury Department and the IRS have determined, however, that in 
no case would any person, including a foreign corporation, be allowed a 
section 245A deduction directly or indirectly for the portion of a 
dividend paid to a CFC that is not eligible for the section 954(c)(6) 
exception as a result of these temporary regulations. Permitting the 
deduction in such a case would undermine the application of the rule 
that reduces the amount of the dividend eligible for the section 
954(c)(6) exception (discussed in Part III.A of this Explanation of 
Provisions).

IV. Information Reporting Under Section 6038

    Under section 6038(a)(1), U.S. persons that control foreign 
business entities must file certain information returns with respect to 
those entities, which includes information listed 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.'' The temporary regulations provide that ineligible 
amounts, tiered extraordinary disposition amounts, and tiered 
extraordinary reduction amounts must be reported on the appropriate 
information reporting form in accordance with section 6038. See Sec.  
1.6038-2T(f)(16). Because transactions subject to these temporary 
regulations may have occurred in taxable years for which returns have 
been filed before the issuance of these regulations, or for which 
returns will be filed before revision of forms and instructions for 
reporting the information required by Sec.  1.6038-2T(f)(16), the 
temporary regulations provide a transition rule. The transition rule 
mandates that taxpayers report the required information on the first 
return filed following the issuance of revised forms, instructions, or 
other guidance with respect to reporting such information. The 
transition rule also requires a corporation to report the information 
with respect to a predecessor corporation (such as a lower-tier foreign 
corporation that distributes its assets to the corporation in a 
liquidation described in section 332) to ensure that all of the amounts 
are properly reported notwithstanding any intervening transactions.

V. Applicability Dates

    Consistent with the applicability date of section 245A, and 
pursuant to section 7805(b)(2), the rules in the temporary regulations 
relating to eligibility of distributions for the section 245A deduction 
apply to distributions occurring after December 31, 2017.
    Pursuant to section 7805(b)(1) and (2), the rules in the temporary 
regulations relating to the eligibility of dividends for the section 
954(c)(6) exception also apply to distributions occurring after 
December 31, 2017, subject to the transition rule in Sec.  1.245A-
5T(f)(3) for determining tiered extraordinary reduction amounts.

VI. Good Cause

    The Treasury Department and the IRS are issuing these temporary 
regulations without prior notice and the opportunity for public comment 
pursuant to section 553(b)(3)(B) of the Administrative Procedure Act 
(the ``APA''), which provides that advance notice and the opportunity 
for public comment are not required with respect to a rulemaking when 
an ``agency for good cause finds (and incorporates the finding and a 
brief statement of reasons therefor in the rules issued) that notice 
and public procedure thereon are impracticable, unnecessary, or 
contrary to the public interest.'' Under the ``public interest'' prong 
of 5 U.S.C. 553(b)(3)(B), the good cause exception appropriately 
applies where notice-and-comment would harm, defeat, or frustrate the 
public interest, rather than serving it. The Treasury Department and 
the IRS are similarly utilizing the good cause exception in section 
553(d)(3) of the APA to issue these temporary regulations with an 
immediate effective date, rather than an effective date no earlier than 
30 days after the date of publication.
    Among the circumstances in which the good cause exception may be 
invoked for impracticability or to serve the public interest are 
situations where the timing and disclosure requirements of the usual 
procedures would defeat the purpose of the proposal, including if 
announcement of a proposed rule would enable or increase the sort of 
financial manipulation the rule sought to prevent. Good cause may also 
apply where a delayed effective date would have a significant 
deleterious effect upon the parties to which the regulation applies. 
Additionally, the good cause exception may apply when the regulations 
are by their nature short term and there is an opportunity to comment 
before final rules are introduced. Finally, good cause is supported 
where regulations are required to be issued and effective by a certain 
statutory deadline, and in light of the circumstances affecting the 
agency and its functions leading up to that statutory deadline, the 
agency is unable during that timeframe to conduct a timely and fulsome 
notice-and-comment process. Here, these rationales, separately and in 
combination, provide good cause for the Treasury Department and the 
IRS's decision to bypass the notice-and-comment and delayed effective 
date requirements with respect to these temporary regulations. Each 
rationale is discussed below in turn.

[[Page 28406]]

    First, good cause exists with respect to these temporary 
regulations because any period for notice and comment, as well as a 
delayed effective date, would provide taxpayers with the opportunity to 
engage in the transactions to which these rules relate with confidence 
that they achieve the intended tax avoidance results absent the 
applicability of the regulations. The Treasury Department and the IRS 
are aware that taxpayers have considered engaging in the transactions 
described in these temporary regulations, but some may have been 
deterred from doing so because of uncertainty about the operation and 
interaction of the various provisions of the Act. By limiting the 
deduction under section 245A for these transactions, these temporary 
regulations remove that uncertainty and--if subjected to notice-and-
comment and a delayed effective date--could embolden some taxpayers to 
engage in aggressive tax planning to take advantage of the unintended 
interactions among the Act's provisions, with the comfort that their 
actions were not subject to the rules of the temporary regulations 
during the period of notice and comment and before the regulations' 
effective date. This concern applies with respect to both the 
extraordinary disposition and extraordinary reduction rules for an 
ongoing period. For the extraordinary reduction rules, both the 
extraordinary reduction and the associated use of section 245A can 
occur at any time going forward, and although the gap period for 
entering into extraordinary dispositions has closed, the ability to 
utilize the section 245A deduction for earnings generated in the 
extraordinary disposition would apply indefinitely absent these 
temporary regulations.
    For example, a taxpayer who became aware of the tax effects 
achievable using the transactions described in these temporary 
regulations could, with confidence, utilize extraordinary disposition 
E&P or engage in an extraordinary reduction to exit the U.S. taxing 
jurisdiction without paying any tax during a period of notice and 
comment and delayed effectiveness. The proliferation of these types of 
transactions would cause the regulations to exacerbate the very 
financial manipulation that they are intended to prevent, and 
accordingly, this rationale supports a finding of good cause for 
dispensing with pre-promulgation notice and public comment, as well as 
foregoing a delayed effective date, for these temporary regulations 
pursuant to 5 U.S.C. 553(b) and (d).
    The second reason for a finding of good cause arises from the fact 
that these temporary regulations, as applied retroactively, will affect 
taxable years of certain taxpayers ending in 2018. As a result, these 
regulations can apply to taxable years for which tax returns have been 
or may be due during a period of comment and delayed effectiveness. 
Deferring the effectiveness of the temporary regulations until after 
such a period could increase taxpayer compliance costs because certain 
taxpayers would only be able to come into compliance with the 
regulations by amending and refiling returns and paying additional 
taxes owed with interest.
    Third, good cause is supported where a regulation is temporary, 
with public comment permitted and meaningfully considered before 
finalization of the temporary rule. In this regard, the temporary 
regulations have a fixed expiration date and are cross-referenced in a 
notice of proposed rulemaking published in the Proposed Rules section 
of this issue of the Federal Register. Comments are requested on all 
aspects of these rules, and specific comment requests contained in this 
preamble are incorporated by reference into the cross-referenced notice 
of proposed rulemaking. The Treasury Department and the IRS will 
consider all written comments properly and timely submitted when 
finalizing these temporary regulations.
    Finally, these temporary regulations are part of an effort to 
implement the provisions of the Act, which effected sweeping and 
complex statutory changes to the international tax regime. In 
conjunction with developing and issuing these temporary regulations, 
the Treasury Department and the IRS have also been tasked with issuing 
regulations implementing the numerous provisions enacted or modified by 
the Act, along with attendant changes to forms and other sub-regulatory 
guidance and attention to the orderly administration of the U.S. tax 
system.
    Good cause exists for the issuance of temporary regulations 
relating to the transactions affected by these temporary regulations 
partially because of the statutory deadline in section 7805(b)(2), 
which provides (among other rules) that a regulation may be applied 
retroactively if it is issued within 18 months of the date of enactment 
of the statutory provision to which it relates. The rules in these 
temporary regulations relate to sections 245A, 951A, and 965, which 
were enacted as part of the Act on December 22, 2017. Thus, to qualify 
for retroactivity under section 7805(b)(2), a regulation retroactive to 
the enactment of these provisions must be effective no later than June 
22, 2019. These temporary regulations need to apply retroactively from 
the date of the underlying statutory provisions to ensure that the 
international tax regime enacted by Congress in the Act, and its 
interaction with existing tax rules, functions correctly for all 
affected periods. Retroactivity is also required to prevent treating 
taxpayers comparatively advantageously if they have engaged in the 
types of transactions described in these temporary regulations prior to 
the issuance date of these temporary regulations.
    The discussion of good cause with respect to the temporary 
regulations in this Part VI is consistent with the Policy Statement on 
the Tax Regulatory Process issued on March 5, 2019, by the Treasury 
Department and the IRS (the ``Statement''). The Statement emphasized 
the Treasury Department and the IRS's obligation under the APA to issue 
interim final regulations without prior notice and comment only in 
conjunction with ``a statement of good cause explaining the basis for 
that finding.'' The Statement further explains that good cause for 
interim final regulations may exist, for example, where ``such 
regulations may be necessary and appropriate to stop abusive practices 
or to immediately resolve an injurious inconsistency between existing 
regulations and a new statute or judicial decision.'' As the discussion 
in this Part VI illustrates, this is the case with respect to these 
temporary regulations.

Special Analyses

I. 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.
    These temporary regulations have been designated by the Office of 
Management and Budget's 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

[[Page 28407]]

and the Office of Management and Budget regarding review of tax 
regulations. OIRA has determined that the proposed rulemaking is 
significant and subject to review under Executive Order 12866 and 
section 1(b) of the Memorandum of Agreement. Accordingly, the proposed 
regulations have been reviewed by the Office of Management and Budget.

A. Background

    The Tax Cuts and Jobs Act (the Act) transitioned the United States 
from a primarily deferral-based international tax system (subject to 
the immediate taxation of generally mobile or passive income under the 
subpart F regime) to a participation exemption system coupled with 
immediate taxation of certain offshore earnings (in some cases, at a 
reduced rate of tax).\1\ This transition was effected through several 
interlocking provisions of the Code--sections 245A, 951A, and 965. All 
three provisions have different effective dates and thus the Act 
created periods in which some but not all of them apply. The new system 
also operates alongside the pre-Act subpart F regime that taxes certain 
offshore earnings using a longstanding rule for attributing pro rata 
shares of a foreign corporation's earnings to its U.S. shareholders.
---------------------------------------------------------------------------

    \1\ A deferral-based system is a system in which taxable 
foreign-source income generally is taxed only when it is repatriated 
to the United States. A participation exemption system is one in 
which foreign-source income is generally not taxed by the resident 
country (in this case, the United States). As explained further 
below, in the United States the participation exemption system is 
coupled with immediate taxation of certain types of earnings to 
avoid erosion of the U.S. tax base. These taxed foreign earnings can 
then be repatriated to the United States without further tax.
---------------------------------------------------------------------------

1. Background: Section 245A--Dividends Received Deduction
    The Act included section 245A, which provides a participation 
exemption system for repatriation of certain offshore earnings. Prior 
to the Act, dividends paid by foreign corporations to their U.S. 
shareholders were generally taxable. Section 245A(a) reverses this 
result in the case of corporate U.S. shareholders by providing, subject 
to certain exceptions, a 100-percent deduction for any dividend 
received by a corporate U.S. shareholder from a specified 10-percent 
owned foreign corporation.\2\ A 100-percent deduction for dividends 
essentially means that this income is not taxed in the United States at 
the corporate level. The existing rules in sections 951(a) and 959 
continue to apply, meaning that generally only earnings associated with 
income that is not taxed under the subpart F regime (or under the GILTI 
regime, discussed below) can, upon distribution, give rise to a 
dividend eligible for the section 245A deduction. Because subpart F 
(and GILTI) taxation is not reduced by distributions made during the 
year (except in the case of certain transfers of stock of a CFC during 
a taxable year), any distribution of earnings and profits that is taxed 
under the subpart F regime (or GILTI regime) is a distribution of PTEP 
(that is, a distribution of previously taxed earnings and profits) that 
is not treated as a dividend by reason of section 959(d), and thus 
cannot qualify for section 245A. Section 245A applies to distributions 
made after December 31, 2017.
---------------------------------------------------------------------------

    \2\ A specified 10-percent owned foreign corporation is any 
foreign corporation, other than a passive foreign investment 
corporation with respect to a shareholder that is not also a CFC, 
with at least one corporate U.S. shareholder. Section 245A(b).
---------------------------------------------------------------------------

    Because the pre-Act international tax regime imposed U.S. tax on 
most non-mobile, non-passive earnings and profits only when those 
earnings were repatriated, a significant amount of untaxed earnings and 
profits had been accumulated offshore when the Act was passed. The 
enactment of section 245A by the Act thus presented a potential 
windfall, allowing taxpayers who had held earnings and profits offshore 
to distribute all of those earnings back to the United States tax-free. 
Congress did not intend for section 245A to apply to such pre-Act 
earnings, and thus included a so-called transition tax (section 965) 
``[t]o avoid a potential windfall for corporations that deferred 
income, and to ensure that all distributions from foreign subsidiaries 
are treated in the same manner under the participation exemption 
system.'' H. Rep. No. 115-409 at 375.
2. Background: Section 965--Transition Tax
    Section 965 imposed a transition tax on the post-1986 earnings and 
profits of foreign corporations that had gone untaxed under the pre-Act 
international tax regime and would not be subject to the GILTI regime 
because the income was earned in a year prior to that regime being in 
effect. Absent section 965, such earnings and profits would have been 
eligible for tax-free distribution under section 245A. Specifically, 
section 965(a) increases certain foreign corporations' subpart F income 
for their last taxable year beginning before January 1, 2018, by the 
amount of their non-previously taxed earnings and profits computed as 
of no later than December 31, 2017. This has the effect of subjecting 
all offshore post-1986 untaxed earnings of most U.S. shareholders as of 
no later than December 31, 2017, to U.S. tax (albeit at a reduced rate 
by reason of section 965(c)), turning all such earnings into PTEP under 
section 959. As a result, none of those earnings and profits are 
eligible for the section 245A deduction, and such earnings and profits, 
once taxed under section 965, are instead treated in the same way as if 
they had been taxed under the pre-Act subpart F regime.
    For a calendar year CFC, the transition tax generally provides a 
mechanism for ensuring that only earnings and profits subject to the 
new international tax system can qualify for the dividends received 
deduction under section 245A. This appears to be the intended purpose 
of section 965(a), as the legislative history of the Act provides that 
``[t]he [transition tax applies in] the last taxable year of a deferred 
foreign income corporation that begins before January 1, 2018, which is 
that foreign corporation's last taxable year before the transition to 
the new corporate tax regime elsewhere in the bill goes into effect.'' 
H. Rep. 115-466 at 613. This is not the case, however, for fiscal year 
CFCs (i.e., CFCs with a taxable year other than the calendar year) as 
there is a gap period with respect to such entities during which 
certain of their earnings may escape taxation.
3. Background: Section 951A--GILTI Regime
    By subjecting post-1986 earnings and profits to a transition tax, 
section 965 was generally intended to ensure that only earnings first 
subjected to the anti-base erosion provisions of the Act could qualify 
for section 245A. While the Act preserved the existing subpart F 
regime, legislative history shows congressional concern that the 
participation exemption system could heighten the incentive to shift 
profits to low-taxed foreign jurisdictions or tax havens after the Act. 
See Senate Explanation at 365. For example, Congress expressed concern 
that a domestic corporation might allocate income susceptible to base 
erosion to certain foreign affiliates ``where the income could 
potentially be distributed back to the [domestic] corporation with no 
U.S. tax imposed.'' See id. As a result of these concerns, the Act 
added another, complementary regime to address the additional base 
erosion incentives engendered by the participation exemption. This 
regime taxes a U.S. shareholder on its global intangible low-taxed 
income, or GILTI, with respect to its CFCs at a reduced

[[Page 28408]]

rate (by reason of section 250) under new section 951A.
    Section 951A(a) generally subjects a U.S. shareholder to current 
taxation each year on its GILTI with respect to its CFCs. The GILTI of 
a U.S. shareholder is generally defined as its pro rata share of its 
CFCs' taxable income for the year in excess of a normal return--a 
formulaic amount equal to 10 percent of the tax basis of the CFCs' 
tangible assets. See section 951A(b), (c), (d). For purposes of this 
determination, specific types of income of a CFC, including income 
taxed under another Code provision (including the subpart F regime), 
certain immobile income, or certain highly taxed income, are not taken 
into account. See Senate Explanation at 366 (explaining that such 
income is either already taxed or does not present base erosion 
concerns). The GILTI regime applies in the first taxable year of a CFC 
beginning after December 31, 2017. Thus, in the case of calendar year 
CFCs, the application of the GILTI regime generally must be taken into 
account with respect to all new earnings and profits of a CFC earned 
immediately after section 965 has caused all of the CFC's pre-Act 
earnings to be taxed. See Public Law 115-97, sec. 14201(d).
    As is the case with respect to the subpart F regime, the tax base 
subject to the GILTI regime is not reduced by distributions made by a 
CFC during a taxable year (except in the case of certain transfers of 
stock of a CFC during a taxable year), and section 951A(f)(1)(A) 
provides that an income inclusion under the GILTI regime is treated in 
the same manner as an inclusion of subpart F income under the subpart F 
regime for purposes of section 959. These rules cause a CFC's earnings 
attributable to GILTI to be taxed under the GILTI regime in section 
951A regardless of whether those earnings and profits are distributed 
before the end of the CFC's year, thus converting such earnings into 
PTEP and turning distributions (including those made before the end of 
the year in which the earnings and profits were earned) by the CFC into 
PTEP distributions that do not constitute dividends eligible for 
section 245A. Section 959(c), (d). Section 951(a)(2) also applies for 
purposes of determining a U.S. shareholder's pro rata share of its 
CFCs' income and other relevant items for purposes of section 951A. 
Section 951A(e).

B. Need for the Temporary Regulations

    Sections 245A, 965, and 951A generally act to tax foreign source 
income equivalently across taxpayers and sources so long as a U.S. 
shareholder owns the same amount of stock of a calendar year CFC 
throughout the CFC's entire taxable year. Deviations from that 
condition, however, potentially allow taxpayers to avoid tax by 
claiming a section 245A deduction in situations where otherwise 
identical income would be subject to U.S. tax. This circumstance is 
inconsistent with the purposes of the new international tax regime 
enacted by Congress.\3\ These temporary regulations are needed to limit 
section 245A to its intended scope and, thereby, prevent the provision 
from converting income that should be subject to U.S. tax into non-
taxable dividends.
---------------------------------------------------------------------------

    \3\ The discussion herein assumes that the transactions at issue 
would otherwise withstand scrutiny under section 7701(o) (i.e., the 
economic substance doctrine) and related judicial doctrines. 
Taxpayers should draw no inferences from this assumption, however, 
as the IRS may challenge such transactions on these and other 
grounds.
---------------------------------------------------------------------------

    There are two situations in which deviations from the condition 
described in this section can give rise to these results. These are 
where (1) a U.S. corporation is the shareholder of a fiscal year CFC 
during 2018 and (2) a CFC pays a dividend and experiences a direct or 
indirect change in ownership during a taxable year.
    The differing application of the GILTI regime with respect to 
fiscal year and calendar year CFCs creates one scenario where the 
interaction of section 245A with other new international tax provisions 
might be used to avoid tax. For a calendar year CFC, any earnings and 
profits accumulated as of no later than December 31, 2017, that had not 
been taxed under the subpart F regime generally were taxed under 
section 965 in the CFC's 2017 taxable year, turning such earnings and 
profits into PTEP. Then, starting in the calendar year CFC's taxable 
year beginning on January 1, 2018, the CFC's income became subject to 
the complementary subpart F and new GILTI regimes, and any income taxed 
under those provisions now also becomes PTEP. Concurrent with the 
applicability date of the GILTI regime, section 245A applies to 
dividends distributed after December 31, 2017, out of earnings that 
have not been taxed under the subpart F and GILTI regimes. These 
interlocking provisions create a cohesive regime in which the section 
245A deduction applies only for distributions of post-2017 earnings and 
profits that are properly not taxed as the subpart F income or GILTI 
regimes. Operating in tandem, these provisions address Congress's 
concerns with section 245A by applying that provision (1) without 
granting windfalls for taxpayers that had historically kept earnings 
and profits offshore (by taxing all such earnings and profits under 
section 965 immediately before section 245A applies) and (2) without 
allowing a section 245A deduction for income susceptible to a 
heightened risk of base erosion. As a result of these provisions, only 
post-2017 earnings and profits that are not subject to the subpart F or 
GILTI regimes can qualify for a dividends received deduction under 
section 245A upon distribution from a calendar year CFC. Such earnings 
and profits are generally the normal return on a CFC's property (i.e., 
10 percent of tax basis in tangible property), certain immobile income, 
or certain highly-taxed income that Congress believed would not raise 
windfall or base erosion concerns.
    By contrast, the provisions that apply harmoniously to a calendar 
year CFC fail to form a cohesive regime when applied to a fiscal year 
CFC for its first taxable year that ends in 2018. Consider a CFC with a 
taxable year ending November 30. This CFC's income is still subject to 
the subpart F regime for all relevant taxable years. Section 965 also 
applies to the CFC's historical earnings and profits as of no later 
than December 31, 2017, and section 245A applies to distributions made 
by the CFC after December 31, 2017. However, the GILTI regime does not 
begin to apply to the CFC's income until the first taxable year of the 
CFC beginning after December 31, 2017, and thus does not first apply 
until the CFC's taxable year that begins on December 1, 2018. As a 
result of the gap in these effective dates, (1) the ordinary earnings 
of the CFC during the gap period avoid tax (which is a direct outgrowth 
of the effective dates); and (2) assets can be transferred between 
related parties in non-ordinary course transactions during that time 
period in such a way that current and future earnings and profits 
associated with the built-in gain in those assets can permanently avoid 
taxation by the United States because they are not subject to the GILTI 
regime and are not subject to the transition tax under section 965. 
Such earnings and profits might nevertheless be eligible to be 
distributed tax-free under section 245A. Such income, however, is 
economically identical to income earned by a calendar year CFC. Absent 
the temporary regulations, similar income from CFCs that differ only in 
their taxable year would be subject to different taxation. This 
difference between calendar year and fiscal year CFCs is significant 
and presents the potential for substantial tax avoidance when utilized 
to artificially generate earnings and profits in non-ordinary course 
transactions between related parties.

[[Page 28409]]

    These temporary regulations refer to the portion of a dividend 
attributable to earnings and profits arising from such a transaction 
during this period as an ``extraordinary disposition amount.'' An 
extraordinary disposition amount consists of certain earnings and 
profits resulting from transactions between related parties during the 
disqualified period. See the Explanation of Provisions section of this 
preamble for definitions of all relevant terms and conditions. Although 
the period during which extraordinary dispositions may have occurred 
has passed, the regulations will potentially apply to any distributions 
of the associated earnings and profits after 2017.
    The second issue occurs because the application of the allocation 
rules under sections 951(a) and 951A (which determine a U.S. 
shareholder's pro rata share of a CFC's subpart F income or tested 
income for GILTI purposes) together with section 245A creates 
situations in which earnings and profits may not be properly subject to 
the new international tax regime that Congress enacted to prevent the 
inappropriate application of the section 245A deduction. For example, 
this situation may arise because of the ``dividend offset'' rule in 
section 951(a)(2)(B), which, subject to certain limitations, reduces a 
U.S. shareholder's pro rata share of subpart F income or tested income 
for dividends paid to another owner of the same stock of the CFC during 
the taxable year (such reduction being a rough approximation of the 
portion of subpart F income and tested income for the year that is 
properly attributable to the other owner).
    In order to illustrate this concern, consider the following 
example. A corporate U.S. shareholder generally is taxed with respect 
to a CFC's subpart F income as of the end of the CFC's taxable year. 
Suppose, however, that the U.S. shareholder received a dividend from 
the CFC in an amount equal to its subpart F income and thereafter 
transferred ownership of the CFC to a new U.S. shareholder shortly 
before the end of the CFC's taxable year. If a section 245A deduction 
applied to the dividend, the corporate U.S. shareholder would not be 
taxed on the distribution. Furthermore, the second U.S. shareholder's 
subpart F inclusion for the CFC's taxable year may be reduced to 
approximately zero as a result of the dividend offset rule. As a 
consequence, absent the application of these temporary regulations, 
income that should have been subject to U.S. taxation under the subpart 
F regime could escape taxation altogether.
    In contrast to the first issue, this second issue implicates the 
interlocking provisions of the international tax regime on an ongoing 
basis. As described in Part II.C of the Explanation of Provisions 
section of this preamble, section 245A could facilitate the avoidance 
of the subpart F and GILTI regimes by allowing a U.S. shareholder to 
transfer, before the end of a CFC's taxable year, stock of the CFC to a 
new shareholder who will not be taxed on the CFC's subpart F income or 
tested income. As a consequence of the repeal of section 958(b)(4), 
this new shareholder might be a foreign person who is not taxable with 
respect to the CFC's subpart F income or tested income. Alternatively, 
the new shareholder may not be taxable with respect to these amounts as 
a result of the dividend offset rule of section 951(a)(2)(B), 
notwithstanding the fact that if the prior owner of the stock is a 
corporate U.S. shareholder, the section 245A deduction may apply to 
dividends received by such prior owner. In these cases, current year 
subpart F income and GILTI could escape taxation altogether, a result 
that would undermine the post-Act system for taxing foreign earnings. 
These temporary regulations refer to earnings and profits representing 
the portion of a dividend of a CFC attributable to subpart F income or 
tested income of the CFC that, absent a transfer of stock of the CFC 
pursuant to an extraordinary reduction, would have been subject to the 
subpart F or GILTI regimes as an ``extraordinary reduction amount.'' An 
extraordinary reduction amount consists of certain earnings and profits 
generated during a CFC's taxable year beginning after 2017 in which a 
domestic corporate U.S. shareholder reduces its ownership of the CFC by 
certain threshold amounts (e.g., a decrease in ownership of more than 
10 percent). For this purpose, ``certain earnings and profits'' refers 
to income generally subject to inclusion under the subpart F or GILTI 
regimes. See the Explanation of Provisions section of this preamble for 
definitions of all relevant terms and conditions.
    Results similar to the ones described in this section for 
extraordinary disposition amounts and extraordinary reduction amounts 
can be achieved using the exemption from subpart F income under section 
954(c)(6) and lower-tier CFC dividends to upper-tier CFCs. Accordingly, 
the temporary regulations limit the application of the section 
954(c)(6) exception in order to prevent similar results in 
circumstances in which a lower-tier CFC pays a dividend to another CFC, 
instead of directly to a U.S. shareholder.

C. Overview of the Temporary Regulations

    The Treasury Department and the IRS have determined that it is 
appropriate to limit the section 245A deduction to distributions of 
earnings and profits that are attributable to certain normal return, 
high-taxed, or immobile income, which will ensure that similar income 
is taxed similarly. The temporary regulations do not permit section 
245A deductions for the portions of dividends made by CFCs that are 
attributable to ineligible amounts, which comprise extraordinary 
reduction amounts and 50percent of any extraordinary disposition 
amounts.
    To accomplish this, the temporary regulations disallow a deduction 
for transactions that have the effect of avoiding tax under section 
951, 951A, or 965. The extraordinary disposition rules accomplish this 
by denying the deduction under section 245A for a narrowly and 
objectively defined class of earnings and profits generated by 
transactions undertaken in the disqualified period in circumstances 
that raise abuse concerns. The extraordinary reduction rules accomplish 
this by denying the deduction under section 245A for certain earnings 
distributed in the same year as reductions in ownership of CFC stock by 
a controlling section 245A shareholder. The temporary regulations 
contain similar rules with respect to section 954(c)(6).

D. Economic Analysis of the Temporary Regulations

1. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the temporary regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these temporary regulations.
2. Summary of Economic Effects
    To assess the economic effects of these regulations, the Treasury 
Department and the IRS considered the economic effects of disallowing 
the 245A deduction for (i) extraordinary disposition amounts and (ii) 
extraordinary reduction amounts.
    The disallowance of the dividends received deduction for 
extraordinary disposition amounts applies, in plain language, only to 
earnings and profits accrued prior to issuance of the temporary 
regulations. Thus, no substantive economic activities can be affected 
by this disallowance and the

[[Page 28410]]

economic decisions affected are only those associated with taxpayers' 
financing of their tax liability.
    The Treasury Department and the IRS's analysis therefore focuses on 
those provisions of the temporary regulations that disallow the 
dividends received deduction for extraordinary reduction amounts. 
Absent the temporary regulations, U.S. taxation of income of a CFC that 
would otherwise be subject to the subpart F or GILTI regime could be 
avoided by a transfer of ownership of the CFC to other entities in such 
a way that the income of the CFC would not be subject to U.S. tax. 
Thus, the economic effects stem from those transfers that would give 
rise to an extraordinary reduction amount (``ER transfers'') and that 
would not be undertaken as a result of the temporary regulations. The 
Treasury Department and the IRS project that a substantial portion of 
these ER transfers would have been undertaken for tax avoidance 
purposes only and would have negative effects on economic performance 
(giving rise to a positive economic effect from the temporary 
regulations) but that those effects would be minor because the 
transfers would take place among related parties and over short time 
frames. Thus, there would be only negligible losses in economic 
performance due to inefficient changes in management, risk-bearing, or 
other economic activity. Instead, the primary economic losses due to 
these transfers (and thus gains from the temporary regulations) are 
likely to consist of resources that would be expended in carrying out 
such tax planning activities. The Treasury Department and the IRS 
project that these saved resource costs would be small.
    The Treasury Department and the IRS considered that at least some 
ER transfers that would not be pursued as a result of the temporary 
regulations would have provided positive economic benefits, such as 
through more efficient risk-bearing or other managerial control 
benefits. The Treasury Department and the IRS project that the 
aggregate value of these foregone benefits will be minimal because the 
transfers for which a deduction is disallowed and that are likely not 
to be undertaken as a result of the temporary regulations are not 
generally associated with productive economic activities. In this 
regard, the Treasury Department and the IRS expect that economically-
motivated transfers of CFCs should not be inhibited by the temporary 
regulations because the temporary regulations, taking into account the 
election to close a CFC's taxable year, often will result in the same 
or similar tax liability to a seller as if the transfer had not 
occurred. Thus, the temporary regulations should not discourage 
economically-motivated transfers of CFCs. If anything, the temporary 
regulations will discourage transfers of CFCs that would not have 
occurred absent the tax results the temporary regulations seek to 
prevent. These transfers, which would be motivated by tax avoidance, 
likely would not be economically productive.
    The temporary regulations will require taxpayers to compute, track, 
and report information relevant for determination of extraordinary 
dispositions and extraordinary reductions. The compliance burden 
component of the Treasury Department and the IRS's estimate of the 
economic effects of the temporary regulations reflects only those 
record-keeping and related compliance activities that would not have 
been undertaken in the absence of the temporary regulations. The 
Treasury Department and the IRS project that these additional costs, 
relative to the baseline, will be modest. In general, with respect to 
the initial year of an extraordinary disposition or any extraordinary 
reduction, taxpayers are already required to keep track of the required 
information for other purposes. For example, to the extent that a U.S. 
taxpayer sells stock in its CFC, earns income in its CFC, or receives a 
dividend from a CFC, the taxpayer would otherwise record the 
information needed to determine eligibility for the section 245A 
deduction under the temporary regulations. Additionally, once 
calculated the costs to track amounts related to extraordinary 
dispositions in future years are expected to be minimal. For all of 
these reasons, the Treasury Department and the IRS expect the non-
revenue economic effects of these temporary regulations to be small.\4\
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    \4\ This claim refers solely to the economic benefit arising 
from this provision and does not refer to any estimate of the tax 
revenue effects of the provision.
---------------------------------------------------------------------------

    The Treasury Department and the IRS have not undertaken a 
quantitative estimate of the economic benefits arising from avoided 
transactions that constitute extraordinary reductions. Any such 
estimates would be highly uncertain because these tax provisions are 
new and because the transfers would be between related parties and 
primarily of short duration, both of which factors make estimation 
difficult. The tax planning costs of effecting these transfers are also 
highly uncertain because these specific tax planning efforts are new.
    While it is not currently feasible for the Treasury Department and 
the IRS to quantify these economic effects, part I.D.3 of these Special 
Analyses explains the rationale behind the provisions of these 
temporary regulations and provides a qualitative assessment of the 
alternatives considered.
    The Treasury Department and the IRS solicit comments on this 
assessment of the economic effects of the temporary regulations.
3. Analysis of Specific Provisions
i. Ordering of Distributions of Earnings and Profits With Respect to 
Extraordinary Disposition Amounts
a. Background and Alternatives Considered
    Any transaction that gave rise to an extraordinary disposition has 
already taken place because the disqualified period has closed for all 
taxpayers. Thus, the temporary regulations should have no economic 
effect with respect to these transactions. Nevertheless, the denial of 
a section 245A deduction with respect to the related extraordinary 
disposition E&P may in some cases lead CFCs to retain earnings rather 
than distribute them in order to defer the associated U.S. tax. The 
undistributed earnings in this case may lead to a so-called ``lockout 
effect'' pursuant to which some portion of the offshore capital remains 
in less productive ventures than would otherwise be the case had the 
earnings and profits been eligible for a section 245A deduction.
    The temporary regulations address this potential concern by 
providing an ordering rule such that extraordinary distribution E&P 
generally are the last earnings and profits deemed distributed by a 
CFC. As a result, CFCs generally may distribute all other earnings and 
profits that are eligible for a section 245A deduction before 
extraordinary disposition E&P for which a section 245A deduction is not 
allowed. This rule will generally minimize the capital allocation 
inefficiencies stemming from a potential lockout effect by deferring 
the application of the temporary regulations to the latest extent 
possible. Moreover, the Treasury Department and the IRS expect that the 
extraordinary disposition E&P will not often be associated with liquid 
assets, such as cash. An extraordinary disposition requires a non-
ordinary course transaction among related parties. The Treasury 
Department and the IRS are aware that transactions giving rise to an 
extraordinary disposition typically involve the issuance of related 
party debt or stock. These instruments are not the sort of assets that 
implicate lockout effect concerns because they would

[[Page 28411]]

rarely be used as consideration for making a payment to a third party.
    The Treasury Department and the IRS considered as an alternative 
not providing an ordering rule. For the reasons mentioned above, this 
alternative was not adopted. In particular, the lack of an ordering 
rule would have inhibited taxpayers from accessing future offshore 
earnings that had been appropriately subject to tax under Act, which 
would have frustrated the congressional purpose underlying the 
participation exemption. By essentially reviving the lockout effect 
that had motivated certain international aspects of the Act, this 
alternative approach may have trapped capital in suboptimal offshore 
uses.
b. Affected Taxpayers
    The taxpayers potentially affected by this aspect of the temporary 
regulations are direct or indirect U.S. shareholders of certain foreign 
corporations that are eligible for the section 245A deduction or the 
section 954(c)(6) exception with respect to distributions from the 
foreign corporation, and the foreign corporation uses a fiscal year, as 
opposed to the calendar year, as its taxable year. The foreign 
corporation must have engaged in a sale of property to a related party 
(1) during the period between January 1, 2018, and the end of the 
foreign corporation's last taxable year beginning before 2018, (2) 
outside the ordinary course of the foreign corporation's activities, 
and (3) generally, while the corporation was a CFC. Additionally, the 
property sold must give rise to tested income and the value of the 
property sold must exceed the lesser of $50 million or 5 percent of the 
total value of the property of the foreign corporation.
    The Treasury Department and the IRS have not estimated how many 
taxpayers are likely to be affected by these regulations because data 
on the taxpayers that may have engaged in these particular transactions 
is not readily available. However, based on tabulations of the 2014 
Statistics of Income Study file the Treasury Department and the IRS 
estimate that there are approximately 5,000 domestic corporations with 
at least one fiscal year CFC. The actual number of affected taxpayers 
is smaller than the number of domestic corporations with at least one 
fiscal year CFC, because a domestic corporation will not be affected 
unless its fiscal year CFC engages in a non-routine sale with a related 
party that is of sufficient magnitude that the temporary regulations to 
apply.
ii. Definition of Extraordinary Reduction
a. Background and Alternatives Considered
    The temporary regulations limit the amount of the 245A deduction 
whenever there is an ``extraordinary reduction.'' The temporary 
regulations generally define an extraordinary reduction, subject to 
certain conditions, as when either the controlling section 245A 
shareholder transfers more than 10 percent of its stock of the CFC or 
there is a greater than 10 percent change in the controlling section 
245A shareholder's overall ownership of the CFC.
    The Treasury Department and the IRS, in defining an extraordinary 
reduction, considered other percentage thresholds. They expect that the 
ownership change threshold provides an effective balance of compliance 
costs for taxpayers, effective administration of section 245A, and 
revenue considerations. The Treasury Department and the IRS do not have 
appropriate data or models to precisely compute an optimal percentage 
threshold. The Treasury Department and the IRS solicit comments on the 
economic and revenue consequences of the ownership change threshold and 
alternative thresholds. The Treasury Department and the IRS 
particularly solicit comments that provide data, models, or analysis 
suitable for evaluating alternative thresholds.
b. Affected Taxpayers
    The taxpayers potentially affected by this aspect of the temporary 
regulations are U.S. shareholders that own directly or indirectly stock 
of a CFC that has a controlling U.S. shareholder that owns 50 percent 
or more of the stock of the CFC. Additionally, during the taxable year, 
the controlling U.S. shareholder generally must directly or indirectly 
sell stock in the CFC that exceeds 10 percent of the controlling U.S. 
shareholder's interest in the CFC and 5 percent of the total value of 
the stock of the CFC. Furthermore, in the year of the ownership 
reduction, the subpart F income and tested income of the CFC must 
exceed the lesser of $50 million or 5 percent of the CFC's total income 
for the year.
    The Treasury Department and the IRS have not estimated how many 
taxpayers are likely to be affected by these regulations because data 
on the taxpayers that may have engaged or would engage in these 
particular transactions is not readily available. However, based on 
2014 Statistics of Income tax data, the Treasury Department and the IRS 
estimate that there are approximately 15,000 domestic corporations with 
CFCs. The Treasury Department and the IRS project that the actual 
number of affected taxpayers is likely much smaller than the number of 
domestic corporations with CFCs, given that the controlling U.S. 
shareholder must engage in a sale of stock of a CFC in a year in which 
the CFC pays a dividend in order for the temporary regulations to 
apply.
iii. Election To Avoid Taxable Dividend by Closing the CFC's Taxable 
Year
a. Background and Alternatives Considered
    The Treasury Department and the IRS provide taxpayers with an 
election to avoid having a taxable dividend with respect to an 
extraordinary reduction amount by closing the taxable year of the CFC 
for all purposes of the Code on the date of the extraordinary 
reduction. Such an election would subject the earnings and profits 
that, absent the election, would give rise to an extraordinary 
reduction amount instead to taxation under the subpart F or GILTI 
regimes, and therefore, exemption under section 245A for any remaining 
earnings is appropriate. By providing this election, the Treasury 
Department and the IRS allow taxpayers to choose the tax treatment that 
would have been imposed in the absence of the interactions among 
provisions.
    In addition to ensuring that similar income is taxed similarly, 
this election increases the choices available to taxpayers, thus 
increasing flexibility and thereby minimizing the burden imposed by 
these regulations. To the extent taxpayers choose this election, tax 
burdens could be reduced relative to tax burdens under the temporary 
regulations in the absence of the election, because denying the section 
245A deduction could result in higher tax (i.e., at ordinary corporate 
rates) than imposition of a reduced tax under the GILTI regime. The 
Treasury Department and the IRS chose to allow such election because if 
the election were not allowed, some taxpayers would be taxed more 
heavily than the Treasury Department and the IRS have determined is 
intended under the Act.
b. Affected Taxpayers
    The taxpayers potentially affected by this aspect of the temporary 
regulations are described in Part I.D.3.ii.b of this Special Analyses.

II. Paperwork Reduction Act

    The collections of information in the temporary regulations are in 
Sec. Sec.  1.245A-5T(e)(3) and 1.6038-2T(f)(16).

[[Page 28412]]

    The collection of information in Sec.  1.245A-5T(e)(3) is elective 
for a domestic corporation that is a controlling U.S. shareholder of a 
CFC receiving a dividend from the CFC and wants to elect to have none 
of the dividend considered an extraordinary reduction amount by closing 
the CFC's tax year. The collection of information is satisfied by 
timely filing of the ``Elective Section 245A Year-Closing Statement'' 
with the domestic corporation's original Form 1120, U.S. Corporation 
Income Tax Return, for the taxable year in which the dividend is 
received. For purposes of the Paperwork Reduction Act, the reporting 
burden associated with Sec.  1.245A-5T will be reflected in the 
Paperwork Reduction Act submission associated with Form 1120 (OMB 
control no. 1545-0123).
    The collection of information in Sec.  1.6038-2T(f)(16) is 
mandatory for every U.S. person that controls a foreign corporation 
that has paid a dividend for which a deduction under section 245A was 
limited by an ineligible amount under Sec.  1.245A-5T(b) or paid a 
dividend for which the section 954(c)(6) exception was limited by a 
tiered extraordinary disposition amount or tiered extraordinary 
reduction amount under Sec.  1.245A-5T(d) and (f), respectively, during 
an annual accounting period and files Form 5471 for that period (OMB 
control number 1545-0123 in the case of business taxpayers, formerly, 
OMB control number 1545-0704). The collection of information in Sec.  
1.6038-2T(f)(16) is satisfied by providing information about the 
ineligible amount, tiered extraordinary disposition amount, or tiered 
extraordinary reduction amount for the corporation's accounting period 
as Form 5471 and its instructions may prescribe. For purposes of the 
Paperwork Reduction Act, the reporting burden associated with Sec.  
1.6038-2T(f)(16) will be reflected in the applicable Paperwork 
Reduction Act submission, associated with Form 5471. As provided below, 
the estimated number of respondents for the reporting burden associated 
with Sec.  1.6038-2T(f)(16) is 12,000-18,000, based on estimates 
provided by the Research, Applied Analytics and Statistics Division of 
the IRS.
    The related new or revised tax form is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                     Number of
                                                             New                   Revision of      respondents
                                                                                  existing form     (estimate)
----------------------------------------------------------------------------------------------------------------
Schedule to Form 5471.......................  .................................         [check]    12,000-18,000
----------------------------------------------------------------------------------------------------------------

    The current status of the Paperwork Reduction Act submissions 
related to the new revised Form 5471 as a result of the information 
collections in the temporary regulations is provided in the 
accompanying table. The reporting burdens associated with the 
information collections in Sec. Sec.  1.245A-5T-(e)(3) and 1.6038-
2T(f)(16) are included in the aggregated burden estimates for OMB 
control number 1545-0123, which represents a total estimated burden 
time for all forms and schedules for corporations of 3.157 billion 
hours and total estimated monetized costs of $58.148 billion ($2017). 
The overall burden estimates provided in 1545-0123 are aggregate 
amounts that relate to the entire package of forms associated with the 
OMB control number and will in the future include but not isolate the 
estimated burden of the tax forms that will be revised as a result of 
the information collections in the proposed regulations. These numbers 
are therefore unrelated to the future calculations needed to assess the 
burden imposed by the temporary regulations. The Treasury Department 
and the IRS urge readers to recognize that these numbers are duplicates 
of estimates provided for informational purposes in other proposed and 
final regulatory actions and to guard against over-counting the burden 
that international tax provisions imposed prior to the Act.
    In September 2018, the IRS released and invited comment on drafts 
of new revised Form 5471 in order to give members of the public the 
opportunity to benefit from certain specific provisions made to the 
Code. The IRS received no comments on the draft revised Form 5471 on 
the portions of the form that relate to section 245A during the comment 
period. Consequently, the IRS made the form available in December 2018 
for use by the public. The IRS is contemplating making additional 
changes to Form 5471 to implement these temporary regulations.
    No burden estimates specific to the temporary regulations are 
currently available. The Treasury Department and the IRS have not 
identified any burden estimates, including those for new information 
collections, related to the requirements under the temporary 
regulations. Those estimates would capture both changes made by the Act 
and those that arise out of discretionary authority exercised in the 
temporary regulations. The Treasury Department and the IRS request 
comments on all aspects of information collection burdens related to 
the temporary regulations, including estimates for how much time it 
would take to comply with the paperwork burdens described above for 
each relevant form and ways for the IRS to minimize the paperwork 
burden. Proposed revisions to these forms that reflect the information 
collections contained in these temporary regulations will be made 
available for public comment at www.irs.gov/draftforms and will not be 
finalized until after approved by OMB under the PRA.

----------------------------------------------------------------------------------------------------------------
        Information collection                Type of filer          OMB No.(s)                Status
----------------------------------------------------------------------------------------------------------------
Form 5471.............................  Business (NEW Model).....       1545-0123  Approved by OMB on 12/21/
                                                                                    2018.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/12/21/2018-27735/agency-information-collection-activities-submission-for-omb-review-comment-request-multiple-irs.
----------------------------------------------------------------------------------------------------------------

III. 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

[[Page 28413]]

the aggregate, or by the private sector, of $100 million in 1995 
dollars, updated annually for inflation. In 2019, that threshold is 
approximately $154 million. These temporary regulations do not include 
any Federal mandate that may result in expenditures by state, local, or 
tribal governments, or by the private sector in excess of that 
threshold.

IV. 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. These temporary regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding a 
sectional authority for Sec.  1.245A-5 to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.245A-5 also issued under 26 U.S.C. 245A(g), 951A(a), 
954(c)(6)(A), and 965(o).
* * * * *

0
Par. 2. Reserved sections 1.245A-1 through 4 and Sec.  1.245A-5T are 
added to read as follows:

Sec.
1.245A-1 [Reserved].
1.245A-2 [Reserved].
1.245A-3 [Reserved].
1.245A-4 [Reserved].
1.245A-5T Limitation of section 245A deduction and section 954(c)(6) 
exception (temporary).


Sec.  1.245A-5T  Limitation of section 245A deduction and section 
954(c)(6) exception (temporary).

    (a) Overview. This section provides rules that limit a deduction 
under section 245A(a) to the portion of a dividend that exceeds the 
ineligible amount of such dividend or the applicability of section 
954(c)(6) when a portion of a dividend is paid out of an extraordinary 
disposition account or when an extraordinary reduction occurs. 
Paragraph (b) of this section provides rules regarding ineligible 
amounts. Paragraph (c) of this section provides rules for determining 
ineligible amounts attributable to an extraordinary disposition. 
Paragraph (d) of this section provides rules that limit the application 
of section 954(c)(6) when one or more section 245A shareholders of a 
lower-tier CFC have an extraordinary disposition account. Paragraph (e) 
of this section provides rules for determining ineligible amounts 
attributable to an extraordinary reduction. Paragraph (f) of this 
section provides rules that limit the application of section 954(c)(6) 
when a lower-tier CFC has an extraordinary reduction amount. Paragraph 
(g) of this section provides special rules for purposes of applying 
this section. Paragraph (h) of this section provides an anti-abuse 
rule. Paragraph (i) of this section provides definitions. Paragraph (j) 
of this section provides examples illustrating the application of this 
section. Paragraph (k) of this section provides the applicability date 
of this section. Paragraph (l) of this section provides the expiration 
date of this section.
    (b) Limitation of deduction under section 245A--(1) In general. A 
section 245A shareholder is allowed a section 245A deduction for any 
dividend received from an SFC (provided all other applicable 
requirements are satisfied) only to the extent that the dividend 
exceeds the ineligible amount of the dividend. See paragraphs (j)(2), 
(4), and (5) of this section for examples illustrating the application 
of this paragraph (b)(1).
    (2) Definition of ineligible amount. The term ineligible amount 
means, with respect to a dividend received by a section 245A 
shareholder from an SFC, an amount equal to the sum of--
    (i) 50 percent of the extraordinary disposition amount (as 
determined under paragraph (c) of this section), and
    (ii) The extraordinary reduction amount (as determined under 
paragraph (e) of this section).
    (c) Rules for determining extraordinary disposition amount--(1) 
Definition of extraordinary disposition amount. The term extraordinary 
disposition amount means the portion of a dividend received by a 
section 245A shareholder from an SFC that is paid out of the 
extraordinary disposition account with respect to the section 245A 
shareholder. See paragraph (j)(2) of this section for an example 
illustrating the application of this paragraph (c).
    (2) Determination of portion of dividend paid out of extraordinary 
disposition account--(i) In general. For purposes of determining the 
portion of a dividend received by a section 245A shareholder from an 
SFC that is paid out of the extraordinary disposition account with 
respect to the section 245A shareholder, the following rules apply--
    (A) The dividend is first considered paid out of non-extraordinary 
disposition E&P with respect to the section 245A shareholder; and
    (B) The dividend is next considered paid out of the extraordinary 
disposition account to the extent of the section 245A shareholder's 
extraordinary disposition account balance.
    (ii) Definition of non-extraordinary disposition E&P. The term non-
extraordinary disposition E&P means, with respect to a section 245A 
shareholder and an SFC, an amount of earnings and profits of the SFC 
equal to the excess, if any, of--
    (A) The product of--
    (1) The amount of the SFC's earnings and profits described in 
section 959(c)(3), determined as of the end of the SFC's taxable year 
(for this purpose, without regard to distributions during the taxable 
year other than as provided in this paragraph (c)(2)(ii)(A)(1)), but, 
if during the taxable year the SFC pays more than one dividend, reduced 
(but not below zero) by the amounts of any dividends paid by the SFC 
earlier in the taxable year; and
    (2) The percentage of the stock (by value) of the SFC that the 
section 245A shareholder owns directly or indirectly immediately after 
the distribution (taking into account all transactions related to the 
distribution); over
    (B) The balance of the section 245A shareholder's extraordinary 
disposition account with respect to the SFC, determined immediately 
before the distribution.
    (3) Definitions with respect to extraordinary disposition 
accounts--(i) Extraordinary disposition account--(A) In general. The 
term extraordinary disposition account means, with respect to a section 
245A shareholder of an SFC, an account the balance of which is equal to 
the product of the extraordinary disposition ownership percentage and 
the extraordinary disposition E&P, reduced (but not below zero) by the

[[Page 28414]]

prior extraordinary disposition amount, and adjusted under paragraph 
(c)(4) of this section, as applicable.
    (B) Extraordinary disposition ownership percentage. The term 
extraordinary disposition ownership percentage means the percentage of 
stock (by value) of a SFC that a section 245A shareholder owns directly 
or indirectly at the beginning of the disqualified period or, if later, 
on the first day during the disqualified period on which the SFC is a 
CFC, regardless of whether the section 245A shareholder owns directly 
or indirectly such stock of the SFC on the date of an extraordinary 
disposition giving rise to extraordinary disposition E&P; if not, see 
paragraph (c)(4) of this section.
    (C) Extraordinary disposition E&P. The term extraordinary 
disposition E&P means an amount of earnings and profits of an SFC equal 
the sum of the net gain recognized by the SFC with respect to specified 
property in each extraordinary disposition. In the case of an 
extraordinary disposition with respect to the SFC arising as a result 
of a disposition of specified property by a specified entity (other 
than a foreign corporation), an interest of which is owned directly or 
indirectly (through one or more other specified entities that are not 
foreign corporations) by the SFC, the net gain taken into account for 
purposes of the preceding sentence is the SFC's distributive share of 
the net gain recognized by the specified entity with respect to the 
specified property.
    (D) Prior extraordinary disposition amount--(1) General rule. The 
term prior extraordinary disposition amount means, with respect to an 
SFC and a section 245A shareholder, the sum of the extraordinary 
disposition amount of each prior dividend received by the section 245A 
shareholder from the SFC by reason of paragraph (c) of this section and 
200 percent of the sum of the amounts included in the section 245A 
shareholder's gross income under section 951(a) by reason of paragraph 
(d) of this section (in the case in which the SFC is, or has been, a 
lower-tier CFC). A section 245A shareholder's prior extraordinary 
disposition amount also includes--
    (i) A prior dividend received by the section 245A shareholder from 
the SFC to the extent not an extraordinary reduction amount and to the 
extent the dividend was not eligible for the section 245A deduction by 
reason of section 245A(e) or the holding period requirement of section 
246 not being satisfied but would have been an extraordinary 
disposition amount had paragraph (c) of this section applied to the 
dividend;
    (ii) The portion of a prior dividend (to the extent not a tiered 
extraordinary disposition amount by reason of paragraph (d) of this 
section) received by an upper-tier CFC from the SFC that by reason of 
section 245A(e) was included in the upper-tier CFC's foreign personal 
holding company income and was included in gross income by the section 
245A shareholder under section 951(a) but would have been a tiered 
extraordinary disposition amount by reason of paragraph (d) of this 
section had paragraph (d) applied to the dividend;
    (iii) If a prior dividend received by an upper-tier CFC from a 
lower-tier CFC gives rise to a tiered extraordinary disposition amount 
with respect to the section 245A shareholder by reason of paragraph (d) 
of this section, the qualified portion.
    (2) Definition of qualified portion--(i) In general. The term 
qualified portion means, with respect to a tiered extraordinary 
disposition amount of a section 245A shareholder and a lower-tier CFC, 
200 percent of the portion of the disqualified amount with respect to 
the tiered extraordinary disposition amount equal to the sum of the 
amounts included in gross income by each U.S. tax resident under 
section 951(a) in the taxable year in which the tiered extraordinary 
disposition amount arose with respect to the lower-tier CFC by reason 
of paragraph (d) of this section. For purposes of the preceding 
sentence, the reference to a U.S. tax resident does not include any 
section 245A shareholder with a tiered extraordinary disposition amount 
with respect to the lower-tier CFC.
    (ii) Determining a qualified portion if multiple section 245A 
shareholders have tiered extraordinary disposition amounts. For the 
purposes of applying paragraph (c)(3)(i)(D)(2)(i) of this section, if 
more than one section 245A shareholder has a tiered extraordinary 
disposition amount with respect to a dividend received by an upper-tier 
CFC from a lower-tier CFC, then the qualified portion with respect to 
each section 245A shareholder is equal to the amount described in 
paragraph (c)(3)(i)(D)(2)(i) of this section, without regard to this 
paragraph (c)(3)(i)(D)(2)(ii), multiplied by a fraction, the numerator 
of which is the section 245A shareholder's tiered extraordinary 
disposition amount with respect to the lower-tier CFC and the 
denominator of which is the sum of the tiered extraordinary disposition 
amounts with respect to each section 245A shareholder and the lower-
tier CFC.
    (ii) Extraordinary disposition--(A) In general. Except as provided 
in paragraph (c)(3)(ii)(E) of this section, the term extraordinary 
disposition means, with respect to an SFC, any disposition of specified 
property by the SFC on a date on which it was a CFC and during the 
SFC's disqualified period to a related party if the disposition occurs 
outside of the ordinary course of the SFC's activities. An 
extraordinary disposition also includes a disposition during the 
disqualified period on a date on which the SFC is not a CFC if there is 
a plan, agreement, or understanding involving a section 245A 
shareholder to cause the SFC to recognize gain that would give rise to 
an extraordinary disposition if the SFC were a CFC.
    (B) Facts and circumstances. A determination as to whether a 
disposition is undertaken outside of the ordinary course of an SFC's 
activities is made on the basis of facts and circumstances, taking into 
account whether the transaction is consistent with the SFC's past 
activities, including with respect to quantity and frequency. In 
addition, a disposition of specified property by an SFC to a related 
party may be considered outside of the ordinary course of the SFC's 
activities notwithstanding that the SFC regularly disposes of property 
of the same type of, or similar to, the specified property to persons 
that are not related parties.
    (C) Per se rules. A disposition is treated as occurring outside of 
the ordinary course of an SFC's activities if the disposition is 
undertaken with a principal purpose of generating earnings and profits 
during the disqualified period or if the disposition is of intangible 
property, as defined in section 367(d)(4).
    (D) Treatment of dispositions by certain specified entities. For 
purposes of paragraph (c)(3)(ii)(A) of this section, an extraordinary 
disposition with respect to an SFC includes a disposition by a 
specified entity other than a foreign corporation, provided that 
immediately before or immediately after the disposition the specified 
entity is a related party with respect to the SFC, the SFC directly or 
indirectly (through one or more other specified entities other than 
foreign corporations) owns an interest in the specified entity, and the 
disposition would have otherwise qualified as an extraordinary 
disposition had the specified entity been a foreign corporation.
    (E) De minimis exception to extraordinary disposition. If the sum 
of the net gain recognized by an SFC with respect to specified property 
in all dispositions otherwise described in paragraph (c)(3)(ii)(A) of 
this section does not exceed the lesser of $50 million or 5 percent of 
the gross value

[[Page 28415]]

of all of the SFC's property held immediately before the beginning of 
its disqualified period, then no disposition of specified property by 
the SFC is an extraordinary disposition.
    (iii) Disqualified period. The term disqualified period means, with 
respect to an SFC that is a CFC on any day during the taxable year that 
includes January 1, 2018, the period beginning on January 1, 2018, and 
ending as of the close of the taxable year of the SFC, if any, that 
begins before January 1, 2018, and ends after December 31, 2017.
    (iv) Specified property. The term specified property means any 
property if gain recognized with respect to such property during the 
disqualified period is not described in section 951A(c)(2)(A)(i)(I) 
through (V). If only a portion of the gain recognized with respect to 
property during the disqualified period is gain that is not described 
in section 951A(c)(2)(A)(i)(I) through (V), then a portion of the 
property is treated as specified property in an amount that bears the 
same ratio to the value of the property as the amount of gain not 
described in section 951A(c)(2)(A)(i)(I) through (V) bears to the total 
amount of gain recognized with respect to such property during the 
disqualified period.
    (4) Successor rules for extraordinary disposition accounts. This 
paragraph (c)(4) applies with respect to an extraordinary disposition 
account upon certain direct or indirect transfers of stock of an SFC by 
a section 245A shareholder.
    (i) Another section 245A shareholder succeeds to all or portion of 
account. Except for a transfer described in Sec.  1.1248-8(a)(1), 
paragraphs (c)(4)(i)(A) through (C) of this section apply when a 
section 245A shareholder of an SFC (the transferor) transfers directly 
or indirectly a share of stock (or a portion of a share of stock) of 
the SFC that it owns directly or indirectly (the share or portion 
thereof, a transferred share).
    (A) If immediately after the transfer (taking into account all 
transactions related to the transfer) another person is a section 245A 
shareholder of the SFC, then such other person's extraordinary 
disposition account with respect to the SFC is increased by the 
person's proportionate share of the amount allocated to the transferred 
share.
    (B) For purposes of paragraph (c)(4)(i)(A) of this section, the 
amount allocated to a transferred share is equal to the product of--
    (1) The balance of the transferor's extraordinary disposition 
account with respect to the SFC, determined after any reduction 
pursuant to paragraph (c)(3) of this section by reason of dividends and 
before the application of this paragraph (c)(4)(i)(B); and
    (2) A fraction, the numerator of which is the value of the 
transferred share and the denominator of which is the value of all of 
the stock of the SFC that the transferor owns directly or indirectly 
immediately before the transfer.
    (C) For purposes of paragraph (c)(4)(i)(A) of this section, a 
person's proportionate share of the amount allocated to a transferred 
share under paragraph (c)(4)(i)(B) of this section is equal to the 
product of--
    (1) The amount allocated to the share; and
    (2) The percentage (expressed as a decimal) of the share (by value) 
that the person owns directly or indirectly immediately after the 
transfer (taking into account all transactions related to the 
transfer).
    (D) The transferor's extraordinary disposition account with respect 
to the SFC is decreased by the amount by which another person's 
extraordinary disposition account with respect to the SFC is increased 
pursuant to paragraph (c)(4)(i)(A) of this section.
    (E) If a principal purpose of the transfer is to shift, or to 
avoid, an amount in the transferor's extraordinary disposition account 
with respect to the SFC to another person, then for purposes of this 
section, the transfer may be disregarded or other appropriate 
adjustments may be made.
    (ii) Certain section 381 transactions. If assets of an SFC (the 
acquired corporation) are acquired by another SFC (the acquiring 
corporation) pursuant to a transaction described in section 381(a) in 
which the acquired corporation is the transferor corporation for 
purposes of section 381, then a section 245A shareholder's 
extraordinary disposition account with respect to the acquiring 
corporation is increased by the balance of its extraordinary 
disposition account with respect to the acquired corporation, 
determined after any reduction pursuant to paragraph (c)(3) of this 
section by reason of dividends and before the application of this 
paragraph (c)(4)(ii).
    (iii) Certain distributions involving section 355 or 356. If, 
pursuant to a reorganization described in section 368(a)(1)(D) 
involving a distribution under section 355 (or so much of section 356 
as it relates to section 355) by an SFC (the distributing corporation) 
of stock of another SFC (the controlled corporation), earnings and 
profits of the distributing corporation are allocated between the 
distributing corporation and the controlled corporation, then a section 
245A shareholder's extraordinary disposition account with respect to 
the distributing corporation is allocated on a similar basis between 
the distributing corporation and the controlled corporation.
    (iv) Certain transfers of stock of lower-tier CFCs by upper-tier 
CFCs. If an upper-tier CFC directly or indirectly transfers stock of a 
lower-tier CFC and if as a result of the transfer a section 245A 
shareholder ceases to be a section 245A shareholder with respect to the 
lower-tier CFC, then the section 245A shareholder's extraordinary 
disposition account with respect to the upper-tier CFC is increased by 
the balance of the section 245A shareholder's extraordinary disposition 
account with respect to the lower-tier CFC, determined after any 
reduction pursuant to paragraph (c)(3) of this section by reason of 
dividends and after application of paragraph (c)(4)(i) of this section, 
if applicable. If a section 245A shareholder ceases to be a section 
245A shareholder with respect to a lower-tier CFC by reason of a direct 
or indirect transfer of stock of the lower-tier CFC by multiple upper-
tier CFCs that occur pursuant to a plan (or series of related 
transactions), then the balance of the section 245A shareholder's 
extraordinary disposition account is allocated among the upper-tier 
CFCs. The portion of the balance of the account allocated to each 
upper-tier CFC is equal to the balance of the account multiplied by a 
fraction, the numerator of which is the value of the stock of the 
lower-tier CFC transferred directly or indirectly by the upper-tier 
CFC, and the denominator of which is the sum of the value of the stock 
of the lower-tier CFC transferred directly or indirectly by all upper-
tier CFCs.
    (d) Limitation of amount eligible for section 954(c)(6) when there 
is an extraordinary disposition account with respect to a lower-tier 
CFC--(1) In general. If an upper-tier CFC receives a dividend from a 
lower-tier CFC, the dividend is eligible for the exception to foreign 
personal holding company income under section 954(c)(6) only to the 
extent that the amount that would be eligible for the section 954(c)(6) 
exception (determined without regard to this paragraph (d)) exceeds the 
disqualified amount, which is 50 percent of the quotient of the 
following--
    (i) The sum of each section 245A shareholder's tiered extraordinary 
disposition amount with respect to the lower-tier CFC; and
    (ii) The percentage (expressed as a decimal) of stock of the upper-
tier CFC (by value) owned, in the aggregate, by U.S. tax residents that 
include in gross income their pro rata share of the upper-

[[Page 28416]]

tier CFC's subpart F income under section 951(a) on the last day of the 
upper-tier CFC's taxable year. If a U.S. tax resident is a direct or 
indirect partner in a domestic partnership that is a United States 
shareholder of the upper-tier CFC, the amount of stock owned by the 
U.S. tax resident for purposes of the preceding sentence is determined 
under the principles of paragraph (g)(3) of this section.
    (2) Definition of tiered extraordinary disposition amount--(i) In 
general. The term tiered extraordinary disposition amount means, with 
respect to a dividend received by an upper-tier CFC from a lower-tier 
CFC and a section 245A shareholder, the portion of the dividend that 
would be an extraordinary disposition amount if the section 245A 
shareholder received as a dividend its pro rata share of the dividend 
from the lower-tier CFC. The preceding sentence does not apply to an 
amount treated as a dividend received by an upper-tier CFC from a 
lower-tier CFC by reason of section 964(e)(4) (in such case, see 
paragraphs (b)(1) and (g)(2) of this section).
    (ii) Section 245A shareholder's pro rata share of a dividend 
received by an upper-tier CFC. For the purposes of paragraph (d)(2)(i) 
of this section, a section 245A shareholder's pro rata share of the 
amount of a dividend received by an upper-tier CFC from a lower-tier 
CFC equals the amount by which the dividend would increase the section 
245A shareholder's pro rata share of the upper-tier CFC's subpart F 
income under section 951(a)(2) and Sec.  1.951-1(b) and (e) if the 
dividend were included in the upper-tier CFC's foreign personal holding 
company income under section 951(a)(1), determined without regard to 
section 952(c) and as if the upper-tier CFC had no deductions properly 
allocable to the dividend under section 954(b)(5).
    (e) Extraordinary reduction amount--(1) In general. Except as 
provided in paragraph (e)(3) of this section, the term extraordinary 
reduction amount means, with respect to a dividend received by a 
controlling section 245A shareholder from a CFC during a taxable year 
of the CFC ending after December 31, 2017, in which an extraordinary 
reduction occurs with respect to the controlling section 245A 
shareholder's ownership of the CFC, the lesser of the amounts described 
in paragraph (e)(1)(i) or (ii) of this section. See paragraphs (j)(4) 
through (6) of this section for examples illustrating the application 
of this paragraph (e).
    (i) The amount of the dividend.
    (ii) The amount equal to the sum of the controlling section 245A 
shareholder's pre-reduction pro rata share of the CFC's subpart F 
income (as defined in section 952(a)) and tested income (as defined in 
section 951A(c)(2)(A)) for the taxable year, reduced, but not below 
zero, by the prior extraordinary reduction amount.
    (2) Rules regarding extraordinary reduction amounts--(i) 
Extraordinary reduction--(A) In general. Except as provided in 
paragraph (e)(2)(i)(C) of this section, an extraordinary reduction 
occurs, with respect to a controlling section 245A shareholder's 
ownership of a CFC during a taxable year of the CFC, if either of the 
conditions described in paragraph (e)(2)(i)(A)(1) or (2) of this 
section is satisfied. See paragraphs (j)(4) and (5) of this section for 
examples illustrating an extraordinary reduction.
    (1) The condition of this paragraph (e)(2)(i)(A)(1) requires that 
during the taxable year, the controlling section 245A shareholder 
transfers directly or indirectly (other than by reason of a transfer 
occurring pursuant to an exchange described in section 368(a)(1)(E) or 
(F)), in the aggregate, more than 10 percent (by value) of the stock of 
the CFC that the section 245A shareholder owns directly or indirectly 
as of the beginning of the taxable year of the CFC, provided the stock 
transferred, in the aggregate, represents at least 5 percent (by value) 
of the outstanding stock of the CFC as of the beginning of the taxable 
year of the CFC; or
    (2) The condition of this paragraph (e)(2)(i)(A)(2) requires that, 
as a result of one or more transactions occurring during the taxable 
year, the percentage of stock (by value) of the CFC that the 
controlling section 245A shareholder owns directly or indirectly as of 
the close of the last day of the taxable year of the CFC is less than 
90 percent of the percentage of stock (by value) that the controlling 
section 245A shareholder owns directly or indirectly on either of the 
dates described in paragraphs (e)(2)(i)(B)(1) and (2) of this section 
(such percentage, the initial percentage), provided the difference 
between the initial percentage and percentage at the end of the year is 
at least five percentage points.
    (B) Dates for purposes of the initial percentage. For purposes of 
paragraph (e)(2)(i)(A)(2) of this section, the dates described in 
paragraphs (e)(2)(i)(B)(1) and (2) of this section are--
    (1) The day of the taxable year on which the controlling section 
245A shareholder owns directly or indirectly its highest percentage of 
stock (by value) of the CFC; and
    (2) The day immediately before the first day on which stock was 
transferred directly or indirectly in the preceding taxable year in a 
transaction (or a series of transactions) occurring pursuant to a plan 
to reduce the percentage of stock (by value) of the CFC that the 
controlling section 245A shareholder owns directly or indirectly.
    (C) Transactions pursuant to which CFC's taxable year ends. A 
controlling section 245A shareholder's direct or indirect transfer of 
stock of a CFC that but for this paragraph (e)(2)(i)(B) would give rise 
to an extraordinary reduction under paragraph (e)(2)(i)(A) of this 
section does not give rise to an extraordinary reduction if the taxable 
year of the CFC ends immediately after the transfer, provided that the 
controlling section 245A shareholder directly or indirectly owns the 
stock on the last day of such year. Thus, for example, if a controlling 
section 245A shareholder exchanges all the stock of a CFC pursuant to a 
complete liquidation of the CFC, the exchange does not give rise to an 
extraordinary reduction.
    (ii) Rules for determining pre-reduction pro rata share--(A) In 
general. Except as provided in paragraph (e)(2)(ii)(B) of this section, 
the term pre-reduction pro rata share means, with respect to a 
controlling section 245A shareholder and the subpart F income or tested 
income of a CFC, the controlling section 245A shareholder's pro rata 
share of the CFC's subpart F income or tested income under section 
951(a)(2) and Sec.  1.951-1(b) and (e) or section 951A(e)(1) and Sec.  
1.951A-1(d)(1), respectively, determined based on the controlling 
section 245A shareholder's direct or indirect ownership of stock of the 
CFC immediately before the extraordinary reduction (or, if the 
extraordinary reduction occurs by reason of multiple transactions, 
immediately before the first transaction) and without regard to section 
951(a)(2)(B) and Sec.  1.951-1(b)(1)(ii), but only to the extent that 
such subpart F income or tested income is not included in the 
controlling section 245A shareholder's pro rata share of the CFC's 
subpart F income or tested income under section 951(a)(2) and Sec.  
1.951-1(b) and (e) or section 951A(e)(1) and Sec.  1.951A-1(d)(1), 
respectively.
    (B) Decrease in section 245A shareholder's pre-reduction pro rata 
share for amounts taken into account by U.S. tax resident. A 
controlling section 245A shareholder's pre-reduction pro rata share of 
subpart F income or tested income of a CFC for a taxable year is 
reduced by an amount equal to the sum of the amounts by which each U.S. 
tax

[[Page 28417]]

resident's pro rata share of the subpart F income or tested income is 
increased as a result of a transfer directly or indirectly of stock of 
the CFC by the controlling section 245A shareholder or an issuance of 
stock by the CFC (such an amount with respect to a U.S. tax resident, a 
specified amount), in either case, during the taxable year in which the 
extraordinary reduction occurs. For purposes of this paragraph 
(e)(2)(ii)(B), if there are extraordinary reductions with respect to 
more than one controlling section 245A shareholder during the CFC's 
taxable year, then a U.S. tax resident's specified amount attributable 
to an acquisition of stock from the CFC is prorated with respect to 
each controlling section 245A shareholder based on its relative 
decrease in ownership of the CFC. See paragraph (j)(5) of this section 
for an example illustrating a decrease in a section 245A shareholder's 
pre-reduction pro rata share for amounts taken into account by a U.S. 
tax resident.
    (C) Prior extraordinary reduction amount. The term prior 
extraordinary reduction amount means, with respect to a CFC and section 
245A shareholder and a taxable year of the CFC in which an 
extraordinary reduction occurs, the sum of the extraordinary reduction 
amount of each prior dividend received by the section 245A shareholder 
from the CFC during the taxable year. A section 245A shareholder's 
prior extraordinary reduction amount also includes--
    (1) A prior dividend received by the section 245A shareholder from 
the CFC during the taxable year to the extent the dividend was not 
eligible for the section 245A deduction by reason of section 245A(e) or 
the holding period requirement of section 246 not being satisfied but 
would have been an extraordinary reduction amount had this paragraph 
(e) applied to the dividend;
    (2) If the CFC is a lower-tier CFC for a portion of the taxable 
year during which the lower-tier CFC pays any dividend to an upper 
tier-CFC, the portion of a prior dividend received by an upper-tier CFC 
from the lower-tier CFC during the taxable year of the lower-tier CFC 
that, by reason of section 245A(e), was included in the upper-tier 
CFC's foreign personal holding company income and that by reason of 
section 951(a) was included in income of the section 245A shareholder, 
and that would have given rise to a tiered extraordinary reduction 
amount by reason of paragraph (f) of this section had paragraph (f) 
applied to the dividend of which the section 245A shareholder would 
have included a pro rata share of the tiered extraordinary reduction 
amount in income by reason of section 951(a); and
    (3) If the CFC is a lower-tier CFC for a portion of the taxable 
year during which the lower-tier CFC pays any dividend to an upper-tier 
CFC, the sum of the portion of the tiered extraordinary reduction 
amount of each prior dividend received by an upper-tier CFC from the 
lower-tier CFC during the taxable year that is included in income of 
the section 245A shareholder by reason of section 951(a).
    (3) Exceptions--(i) Elective exception to close CFC's taxable 
year--(A) In general. For a taxable year of a CFC in which an 
extraordinary reduction occurs with respect to a controlling section 
245A shareholder and for which, absent this paragraph (e)(3), there 
would be an extraordinary reduction amount or tiered extraordinary 
reduction amount greater than zero, no amount is considered an 
extraordinary reduction amount or tiered extraordinary reduction amount 
with respect to the controlling section 245A shareholder if each 
controlling section 245A shareholder elects, pursuant to this paragraph 
(e)(3), to close the CFC's taxable year for all purposes of the 
Internal Revenue Code (and, therefore, as to all shareholders of the 
CFC) as of the end of the date on which the extraordinary reduction 
occurs, or, if the extraordinary reduction occurs by reason of multiple 
transactions, as of the end of each date on which a transaction forming 
a part of the extraordinary reduction occurs. For purposes of applying 
this paragraph (e)(3), a controlling section 245A shareholder that has 
an extraordinary reduction (or a transaction forming a part thereof) 
with respect to a CFC is treated as owning the same amount of stock it 
owned in the CFC immediately before the extraordinary reduction (or a 
transaction forming a part thereof) on the end of the date on which the 
extraordinary reduction occurs (or such transaction forming a part 
thereof occurs). To the extent that stock of a CFC is treated as owned 
by a controlling section 245A shareholder as of the close of the CFC's 
taxable year pursuant to the preceding sentence, such stock is treated 
as not being owned by any other person as of the close of the CFC's 
taxable year. If each controlling section 245A shareholder elects to 
close the CFC's taxable year, that closing will be treated as a change 
in accounting period for the purposes of Sec.  1.964-1(c).
    (B) Allocation of foreign taxes. If an election is made pursuant to 
this paragraph (e)(3) to close a CFC's taxable year and the CFC's 
taxable year under foreign law (if any) does not close at the end of 
the date on which the CFC's taxable year closes as a result of the 
election, foreign taxes paid or accrued with respect to such foreign 
taxable year are allocated between the period of the foreign taxable 
year that ends with, and the period of the foreign taxable year that 
begins after, the date on which the CFC's taxable year closes as a 
result of the election. If there is more than one date on which the 
CFC's taxable year closes as a result of the election, foreign taxes 
paid or accrued with respect to the foreign taxable year are allocated 
to all such periods. The allocation is made based on the respective 
portions of the taxable income of the CFC (as determined under foreign 
law) for the foreign taxable year that are attributable under the 
principles of Sec.  1.1502-76(b) to the periods during the foreign 
taxable year. Foreign taxes allocated to a period under this paragraph 
(e)(3)(i)(B) are treated as paid or accrued by the CFC as of the close 
of that period.
    (C) Time and manner of making election--(1) General rule. An 
election pursuant to this paragraph (e)(3) is made and effective if the 
statement required by paragraph (e)(3)(iv) of this section is timely 
filed (including extensions) by each controlling section 245A 
shareholder making the election with its original U.S. tax return for 
the taxable year in which the extraordinary reduction occurs. Before 
the filing of the statement described in paragraph (e)(3)(iv) of this 
section, each controlling section 245A shareholder and each U.S. tax 
resident that on the end of the date on which the extraordinary 
reduction occurs (or, if the extraordinary reduction occurs by reason 
of multiple transactions, each U.S. tax resident that on the end of 
each date on which a transaction forming a part of the extraordinary 
reduction occurs) owns directly or indirectly stock of the CFC and is a 
United States shareholder with respect to the CFC must enter into a 
written, binding agreement agreeing that each controlling section 245A 
shareholder will elect to close the taxable year of the CFC. If a 
controlling section 245A shareholder is a member of a consolidated 
group (within the meaning of Sec.  1.1502-1(h)) and participates in the 
extraordinary reduction, the agent for such group (within the meaning 
of Sec.  1.1502-77(c)(1)) must file the election described in this 
paragraph (e)(3) on behalf of such member.
    (2) Transition rule. In the case of an extraordinary reduction 
occurring before the date these regulations are filed as final 
regulations in the Federal

[[Page 28418]]

Register, the statement required by paragraph (e)(3)(iv) of this 
section is considered timely filed if it is attached by each 
controlling section 245A shareholder to an original or amended return 
for the taxable year in which the extraordinary reduction occurs.
    (D) Form and content of statement. The statement required by 
paragraph (e)(3)(iii) of this section is to be titled ``Elective 
Section 245A Year-Closing Statement.'' The statement must--
    (1) Identify (by name and tax identification number, if any) each 
controlling section 245A shareholder, each U.S tax resident described 
in paragraph (e)(3)(iii) of this section, and the CFC;
    (2) State the date of the extraordinary reduction (or, if the 
extraordinary reduction includes transactions on more than one date, 
the dates of all such transactions) to which the election applies;
    (3) State the filing controlling section 245A shareholder's pro 
rata share of the subpart F income, tested income, and foreign taxes 
described in section 960 with respect to the stock of the CFC subject 
to the extraordinary reduction, and the amount of earnings and profits 
attributable to such stock within the meaning of section 1248, as of 
the date of the extraordinary reduction;
    (4) State that each controlling section 245A shareholder and each 
U.S. tax resident described in paragraph (e)(3)(iii) of this section 
have entered into a written, binding agreement to elect to close the 
CFC's taxable year in accordance with paragraph (e)(3)(iii) of this 
section; and
    (5) Be filed in the manner prescribed by forms, publications, or 
other guidance published in the Internal Revenue Bulletin.
    (E) Consistency requirements. If multiple extraordinary reductions 
occur with respect to one or more controlling section 245A 
shareholders' ownership in a single CFC during one or more taxable 
years of the CFC, then to the extent those extraordinary reductions 
occur pursuant to a plan or series of related transactions, the 
election described in this paragraph (e)(3) section may be made only if 
it is made for all such extraordinary reductions with respect to the 
CFC. Furthermore, if an extraordinary reduction occurs with respect to 
a controlling section 245A shareholder's ownership in multiple CFCs, 
then, to the extent those extraordinary reductions occur pursuant to a 
plan or series of related transactions, the election described in this 
paragraph (e)(3) may be made only if it is made for all such 
extraordinary reductions with respect to all of the CFCs that have the 
same or related (within the meaning of section 267(b) or 707(b)) 
controlling section 245A shareholders.
    (ii) De minimis subpart F income and tested income. For a taxable 
year of a CFC in which an extraordinary reduction occurs, no amount is 
considered an extraordinary reduction amount with respect to a 
controlling section 245A shareholder of the CFC if the sum of the CFC's 
subpart F income and tested income (as defined in section 
951A(c)(2)(A)) for the taxable year does not exceed the lesser of $50 
million or 5 percent of the CFC's total income for the taxable year.
    (f) Limitation of amount eligible for section 954(c)(6) where 
extraordinary reduction occurs with respect to lower-tier CFCs--(1) In 
general. If an extraordinary reduction occurs with respect to a lower-
tier CFC and an upper-tier CFC receives a dividend from the lower-tier 
CFC in the taxable year in which the extraordinary reduction occurs, 
then the amount of the dividend that would otherwise be eligible for 
the exception to foreign personal holding company income under section 
954(c)(6) (determined without regard to this paragraph (f)) is eligible 
for such exception only to the extent the dividend exceeds the tiered 
extraordinary reduction amount. The preceding sentence does not apply 
to an amount treated as a dividend received by an upper-tier CFC by 
reason of section 964(e)(4) (in this case, see paragraphs (b) and 
(g)(2) of this section). See paragraph (j)(7) of this section for an 
example illustrating the application of this paragraph (f)(1).
    (2) Definition of tiered extraordinary reduction amount. The term 
tiered extraordinary reduction amount means, with respect to the 
portion of a dividend received by an upper-tier CFC from a lower-tier 
CFC during a taxable year of the lower-tier CFC that would be eligible 
for the exception to foreign personal holding company income under 
section 954(c)(6) (determined without regard to this paragraph (f)), 
the amount of such dividend equal to the excess, if any, of--
    (i) The product of--
    (A) The sum of the amount of the subpart F income and tested income 
of the lower-tier CFC for the taxable year; and
    (B) The percentage (by value) of stock of the lower-tier CFC owned 
(within the meaning of section 958(a)(2)) by the upper-tier CFC 
immediately before the extraordinary reduction (or the first 
transaction forming a part thereof); over
    (ii) The following amounts--
    (A) The sum of each U.S. tax resident's pro rata share of the 
lower-tier CFC's subpart F income and tested income under section 
951(a) or 951A(a), respectively, that is attributable to shares of the 
lower-tier CFC owned (within the meaning of section 958(a)(2)) by the 
upper-tier CFC immediately prior to the extraordinary reduction (or the 
first transaction forming a part thereof), computed without the 
application of this paragraph (f);
    (B) The sum of each prior tiered extraordinary reduction amount and 
sum of each amount included in an upper-tier CFC's subpart F income by 
reason of section 245A(e) with respect to prior dividends from the 
lower-tier CFC during the taxable year;
    (C) The sum of the prior extraordinary reduction amounts (but, for 
this purpose, computed without regard to amounts described in 
paragraphs (e)(2)(ii)(C)(2) and (3) of this section) of each 
controlling section 245A shareholder with respect to shares of the 
lower-tier CFC that were owned by such controlling section 245A 
shareholder (including indirectly through a specified entity other than 
a foreign corporation) for a portion of the taxable year but are owned 
by an upper-tier CFC (including indirectly through a specified entity 
other than a foreign corporation) at the time of the distribution of 
the dividend; and
    (D) The product of the amount described in paragraph (f)(2)(i)(B) 
of this section and the sum of the amounts of each U.S. tax resident's 
pro rata share of subpart F income and tested income for the taxable 
year under section 951(a) or 951A(a), respectively, attributable to 
shares of the lower-tier CFC directly or indirectly acquired by the 
U.S. tax resident from the lower-tier CFC during the taxable year.
    (3) Transition rule for computing tiered extraordinary reduction 
amount. Solely for purposes of applying this paragraph (f) in taxable 
years of a lower-tier CFC beginning on or after January 1, 2018, and 
ending before June 14, 2019, a tiered extraordinary reduction amount is 
determined by treating the lower-tier CFC's subpart F income for the 
taxable year as if it were neither subpart F income nor tested income.
    (g) Special rules. The following rules apply for purposes of this 
section.
    (1) Source of dividends. A dividend received by any person is 
considered received directly by such person from the foreign 
corporation whose earnings and profits give rise to the dividend. 
Therefore, for example, if a section 245A shareholder sells or 
exchanges stock of an upper-tier CFC and the gain

[[Page 28419]]

recognized on the sale or exchange is included in the gross income of 
the section 245A shareholder as a dividend under section 1248(a), then, 
to the extent the dividend is attributable under section 1248(c)(2) to 
the earnings and profits of a lower-tier CFC owned, within the meaning 
of section 958(a)(2), by the section 245A shareholder through the 
upper-tier CFC, the dividend is considered received directly by the 
section 245A shareholder from the lower-tier CFC.
    (2) Certain section 964(e) inclusions treated as dividends. An 
amount included in the gross income of a section 245A shareholder under 
section 951(a)(1)(A) by reason of section 964(e)(4) is considered a 
dividend received by the section 245A shareholder directly from the 
foreign corporation whose earnings and profits give rise to the amount 
described in section 964(e)(1). Therefore, for example, if an upper-
tier CFC sells or exchanges stock of a lower-tier CFC, and, as a result 
of the sale or exchange, a section 245A shareholder with respect to the 
upper-tier CFC includes an amount in gross income under section 
951(a)(1)(A) by reason of section 964(e)(4), then the inclusion is 
treated as a dividend received directly by the section 245A shareholder 
from the lower-tier CFC whose earnings and profits give rise to the 
dividend, and the section 245A shareholder is not allowed a section 
245A deduction for the dividend to the extent of the ineligible amount 
of such dividend.
    (3) Rules regarding stock ownership and stock transfers--(i) 
Determining indirect ownership of stock of an SFC or a CFC. For 
purposes of this section, if a person owns an interest in, or stock of, 
a specified entity, including through a chain of ownership of one or 
more other specified entities, then the person is considered to own 
indirectly a pro rata share of stock of an SFC or a CFC owned by the 
specified entity. To determine a person's pro rata share of stock owned 
by a specified entity, the principles of section 958(a) apply without 
regard to whether the specified entity is foreign or domestic.
    (ii) Determining indirect transfers for stock owned indirectly. If, 
under paragraph (g)(3)(i) of this section, a person is considered to 
own indirectly stock of an SFC or CFC that is owned by a specified 
entity, then the following rules apply in determining if the person 
transfers stock of the SFC or CFC--
    (A) To the extent the specified entity transfers stock that is 
considered owned indirectly by the person immediately before the 
transfer, the person is considered to transfer indirectly such stock;
    (B) If the person transfers an interest in, or stock of, the 
specified entity, then the person is considered to transfer indirectly 
the stock of the SFC or CFC attributable to the interest in, or the 
stock of, the specified entity that is transferred; and
    (C) In the case in which the person owns the specified entity 
through a chain of ownership of one or more other specified entities, 
if there is a transfer of an interest in, or stock of, another 
specified entity in the chain of ownership, then the person is 
considered to transfer indirectly the stock of the SFC or CFC 
attributable to the interest in, or the stock of, the other specified 
entity transferred.
    (iii) Definition of specified entity. The term specified entity 
means any partnership, trust, or estate (in each case, domestic or 
foreign), or any foreign corporation.
    (4) Coordination rules--(i) General rule. A dividend is first 
subject to section 245A(e). To the extent the dividend is not a hybrid 
dividend or tiered hybrid dividend under section 245A(e), the dividend 
is subject to paragraph (e) or (f) of this section, as applicable, and 
then, to the extent the dividend is not subject to paragraph (e) or (f) 
of this section, it is subject to paragraph (c) or (d) of this section, 
as applicable.
    (ii) Coordination rule for paragraphs (c) and (d) and (e) and (f) 
of this section, respectively. If an SFC or CFC pays a dividend (or 
simultaneous dividends), a portion of which may be subject to paragraph 
(c) or (e) of this section and a portion of which may be subject to 
paragraph (d) or (f) of this section, the rules of this section apply 
by treating the portion of the dividend or dividends that may be 
subject to paragraph (c) or (e) of this section as if it occurred 
immediately before the portion of the dividend or dividends that may be 
subject to paragraph (d) or (f) of this section. For example, if a 
dividend arising under section 964(e)(4) occurs at the same time as a 
dividend that would be eligible for the exception to foreign personal 
holding company income under section 954(c)(6) but for the potential 
application of paragraph (d) this section, then the tiered 
extraordinary disposition amount with respect to the other dividend is 
determined as if the dividend arising under section 964(e)(4) occurs 
immediately prior to the other dividend.
    (5) Ordering rule for multiple dividends made by an SFC or a CFC 
during a taxable year. If an SFC or a CFC pays dividends on more than 
one date during its taxable year or at different times on the same 
date, this section applies based on the order in which the dividends 
are paid.
    (6) Partner's distributive share of a domestic partnership's pro 
rata share of subpart F income. If a section 245A shareholder or a U.S. 
tax resident is a direct or indirect partner in a domestic partnership 
that is a United States shareholder with respect to a CFC and includes 
in gross income its pro rata share of the CFC's subpart F income under 
section 951(a), then, solely for purposes of this section, a reference 
to the section 245A shareholder's or U.S. tax resident's pro rata share 
of the CFC's subpart F income included in gross income under section 
951(a) includes such person's distributive share of the domestic 
partnership's pro rata share of the CFC's subpart F income. A person is 
an indirect partner with respect to a domestic partnership if the 
person indirectly owns the domestic partnership through one or more 
specified entities (other than a foreign corporation).
    (h) Anti-abuse rule. The Commissioner may make appropriate 
adjustments to any amounts determined under this section if a 
transaction is engaged in with a principal purpose of avoiding the 
purposes of this section.
    (i) Definitions. The following definitions apply for purposes of 
this section.
    (1) Controlled foreign corporation. The term controlled foreign 
corporation (or CFC) has the meaning provided in section 957.
    (2) Controlling section 245A shareholder. The term controlling 
section 245A shareholder means, with respect to a CFC, any section 245A 
shareholder that owns directly or indirectly more than 50 percent (by 
vote or value) of the stock of the CFC. For purposes of determining 
whether a section 245A shareholder is a controlling section 245A 
shareholder with respect to a CFC, all stock of the CFC owned by a 
related party with respect to the section 245A shareholder or by other 
persons acting in concert with the section 245A shareholder to 
undertake an extraordinary reduction is considered owned by the section 
245A shareholder. If section 964(e)(4) applies to a sale or exchange of 
a lower-tier CFC with respect to a controlling section 245A 
shareholder, all United States shareholders of the CFC are considered 
to act in concert with regard to the sale or exchange. In addition, if 
all persons selling stock in a CFC, held directly, sell such stock to 
the same buyer or buyers (or a related party with respect to the buyer 
or buyers) as part of the same

[[Page 28420]]

plan, all sellers will be considered to act in concert with regard to 
the sale or exchange.
    (3) Disqualified amount. The term disqualified amount has the 
meaning set forth in paragraph (d)(1) of this section.
    (4) Disqualified period. The term disqualified period has the 
meaning set forth in paragraph (c)(3)(iii) of this section.
    (5) Extraordinary disposition. The term extraordinary disposition 
has the meaning set forth in paragraph (c)(3)(ii) of this section.
    (6) Extraordinary disposition account. The term extraordinary 
disposition amount has the meaning set forth in paragraph (c)(3)(i) of 
this section.
    (7) Extraordinary disposition amount. The term extraordinary 
disposition amount has the meaning set forth in paragraph (c)(1) of 
this section.
    (8) Extraordinary disposition E&P. The term extraordinary E&P has 
the meaning set forth in paragraph (c)(3)(i)(C) of this section.
    (9) Extraordinary disposition ownership percentage. The term 
extraordinary disposition ownership percentage has the meaning set 
forth in paragraph (c)(3)(i)(B) of this section.
    (10) Extraordinary reduction. The term extraordinary reduction has 
the meaning set forth in paragraph (e)(2)(i)(A) of this section.
    (11) Extraordinary reduction amount. The term extraordinary 
reduction amount has the meaning set forth in paragraph (e)(1) of this 
section.
    (12) Ineligible amount. The term ineligible amount has the meaning 
set forth in paragraph (b)(2) of this section.
    (13) Lower-tier CFC. The term lower-tier CFC means a CFC whose 
stock is owned (within the meaning of section 958(a)(2)), in whole or 
in part, by another CFC.
    (14) Non-extraordinary disposition E&P. The term non-extraordinary 
disposition E&P has the meaning set forth in paragraph (c)(2)(ii) of 
this section.
    (15) Pre-reduction pro rata share. The term pre-reduction pro rata 
share has the meaning set forth in paragraph (e)(2)(ii) of this 
section.
    (16) Prior extraordinary disposition amount. The term prior 
extraordinary disposition amount has the meaning set forth in paragraph 
(c)(3)(i)(D) of this section.
    (17) Prior extraordinary reduction amount. The term prior 
extraordinary reduction amount has the meaning set forth in paragraph 
(e)(2)(ii)(C) of this section.
    (18) Qualified portion. The term qualified portion has the meaning 
set forth in paragraph (c)(3)(i)(D)(2)(i) of this section.
    (19) Related party. The term related party means, with respect to a 
person, another person bearing a relationship described in section 
267(b) or 707(b) to the person, in which case such persons are related.
    (20) Section 245A deduction. The term section 245A deduction means, 
with respect to a dividend received by a section 245A shareholder from 
an SFC, the amount of the deduction allowed to the section 245A 
shareholder by reason of the dividend.
    (21) Section 245A shareholder. The term section 245A shareholder 
means a domestic corporation that is a United States shareholder with 
respect to an SFC that owns directly or indirectly stock of the SFC.
    (22) Specified 10-percent owned foreign corporation (SFC). The term 
specified 10-percent owned foreign corporation (or SFC) has the meaning 
provided in section 245A(b)(1).
    (23) Specified entity. The term specified entity has the meaning 
set forth in paragraph (g)(3)(iii) of this section.
    (24) Specified property. The term specified property has the 
meaning set forth in paragraph (c)(3)(iv) of this section.
    (25) Tiered extraordinary disposition amount. The term tiered 
extraordinary disposition amount has the meaning set forth in paragraph 
(d)(2)(i) of this section.
    (26) Tiered extraordinary reduction amount. The term tiered 
extraordinary reduction amount has the meaning set forth in paragraph 
(f)(2) of this section.
    (27) United States shareholder. The term United States shareholder 
has the meaning provided in section 951(b).
    (28) Upper-tier CFC. The term upper-tier CFC means a CFC that owns 
(within the meaning of section 958(a)(2)) stock in another CFC.
    (29) U.S. tax resident. The term U.S. tax resident means a United 
States person described in section 7701(a)(30)(A) or (C).
    (j) Examples. The application of this section is illustrated by the 
examples in this paragraph (j).
    (1) Facts. Except as otherwise stated, the following facts are 
assumed for purposes of the examples:
    (i) US1 and US2 are domestic corporations, each with a calendar 
taxable year, and are not related parties with respect to each other.
    (ii) CFC1 and CFC2 are foreign corporations that are SFCs and CFCs.
    (iii) Each entity uses the U.S. dollar as its functional currency.
    (iv) Year 2 begins on or after January 1, 2018, and has 365 days.
    (v) Absent application of this section, the dividends received by 
US1 and US2 from CFC1 meet the requirements to qualify for the section 
245A deduction.
    (vi) The de minimis rules in paragraphs (c)(3)(ii)(E) and 
(e)(3)(ii) of this section do not apply.

    (2) Example 1. Extraordinary disposition--(i) Facts. US1 and US2 
own 60% and 40%, respectively, of the single class of stock of CFC1. 
CFC1 owns all of the single class of stock of CFC2. CFC1 and CFC2 
use the taxable year ending November 30 as their taxable year. On 
November 1, 2018, CFC1 sells specified property to CFC2 in exchange 
for $200x of cash (the ``Property Transfer''). The Property Transfer 
is outside of CFC1's ordinary course of activities. The transferred 
property has a basis of $100x in the hands of CFC1. CFC1 recognizes 
$100x of gain as a result of the Property Transfer ($200x-$100x). On 
December 1, 2018, CFC1 distributes $80x pro rata to US1 ($48x) and 
US2 ($32x), all of which is a dividend within the meaning of section 
316 and treated as a distribution out of earnings described in 
section 959(c)(3). No other distributions are made by CFC1 to either 
US1 or US2 in CFC1's taxable year ending November 30, 2019. For its 
taxable year ending on November 30, 2019, CFC1 has $110x of earnings 
and profits described in section 959(c)(3), without regard to any 
distributions during the taxable year.
    (ii) Analysis--(A) Identification of extraordinary disposition. 
Because CFC1 is a CFC and uses the taxable year ending on November 
30, under paragraph (c)(3)(iii) of this section, it has a 
disqualified period beginning on January 1, 2018, and ending on 
November 30, 2018. In addition, under paragraph (c)(3)(ii) of this 
section, the Property Transfer is an extraordinary disposition 
because it (i) is a disposition of specified property by CFC1 on a 
date on which it was a CFC and during CFC1's disqualified period, 
(ii) is to CFC2, a related party with respect to CFC1, (iii) occurs 
outside of the ordinary course of CFC1's activities, and (iv) is not 
subject to the de minimis rule in paragraph (c)(3)(ii)(E) of this 
section.
    (B) Determination of section 245A shareholders and their 
extraordinary disposition accounts. Because CFC1 undertook an 
extraordinary disposition, under paragraph (c)(3)(i) of this 
section, a portion of CFC1's earnings and profits are extraordinary 
disposition E&P and, therefore, give rise to an extraordinary 
disposition account with respect to each of CFC1's section 245A 
shareholders. Under paragraph (i)(21) of this section, US1 and US2 
are both section 245A shareholders with respect to CFC1. The amount 
of the extraordinary disposition account with respect to US1 is 
$60x, which is equal to the product of the extraordinary disposition 
E&P (the amount of the net gain recognized by CFC1 as a result of 
the Property Transfer ($100x)) and the extraordinary disposition 
ownership percentage (the percentage of the stock of CFC1 owned 
directly or indirectly by US1 on January 1, 2018 (60%)), reduced by 
the prior extraordinary disposition amount ($0). See paragraph 
(c)(3)(i) of this section. Similarly, the amount of the 
extraordinary disposition

[[Page 28421]]

account with respect to US2 is $40x, which is equal to the product 
of the extraordinary disposition E&P (the net gain recognized by 
CFC1 as a result of the Property Transfer ($100x)) and extraordinary 
disposition ownership percentage (the percentage of the stock of 
CFC1 owned directly or indirectly by US2 on January 1, 2018 (40%)), 
reduced by the prior extraordinary disposition amount ($0).
    (C) Determination of extraordinary disposition amount with 
respect to US1. The dividend of $48x paid to US1 on December 1, 
2018, is an extraordinary disposition amount to the extent the 
dividend is paid out of the extraordinary disposition account with 
respect to US1. See paragraph (c)(1) of this section. Under 
paragraph (c)(2)(i) of this section, the dividend is first 
considered paid out of non-extraordinary disposition E&P with 
respect to US1, to the extent thereof. With respect to US1, $6x of 
CFC1's earnings and profits is non-extraordinary disposition E&P, 
calculated as the excess of $66x (the product of $110x of earnings 
and profits described in section 959(c)(3), without regard to the 
$80x distribution, and 60%) over $60x (the balance of US1's 
extraordinary disposition account with respect to CFC1, immediately 
before the distribution). See paragraph (c)(2)(ii) of this section. 
Thus, $6x of the dividend is considered paid out of non-
extraordinary disposition E&P with respect to US1. Under paragraph 
(c)(2)(i)(B) of this section, the remaining $42x of the dividend is 
next considered paid out of US1's extraordinary disposition account 
with respect to CFC1, to the extent thereof. Accordingly, $42x of 
the dividend is considered paid out of the extraordinary disposition 
account with respect to CFC1 and gives rise to $42x of an 
extraordinary disposition amount. As a result, US1's prior 
extraordinary disposition amount is increased by $42x under 
paragraph (c)(3)(i)(D) of this section, and US1's extraordinary 
disposition account is reduced to $18x ($60-$42x) under paragraph 
(c)(3)(i)(A) of this section.
    (D) Determination of extraordinary disposition amount with 
respect to US2. The dividend of $32x paid to US2, on December 1, 
2018, is an extraordinary disposition amount to the extent the 
dividend is paid out of extraordinary disposition E&P with respect 
to US2. See paragraph (c)(1) of this section. Under paragraph 
(c)(2)(i) of this section, the dividend is first considered paid out 
of non-extraordinary disposition E&P with respect to US2, to the 
extent thereof. With respect to US2, $4x of CFC1's earnings and 
profits is non-extraordinary disposition E&P, calculated as the 
excess of $44x (the product of $110x of earnings and profits 
described in section 959(c)(3), without regard to the $80x 
distribution, and 40%) over $40x (the balance of US2's extraordinary 
disposition account with respect to CFC1, immediately before the 
distribution). See paragraph (c)(2)(ii) of this section. Thus, $4x 
of the dividend is considered paid out of non-extraordinary 
disposition E&P with respect to US2. Under paragraph (c)(2)(i)(B) of 
this section, the remaining $28x of the dividend is next considered 
paid out of US2's extraordinary disposition account with respect to 
CFC1, to the extent thereof. Accordingly, $28x of the dividend is 
considered paid out of the extraordinary disposition account with 
respect to US2 and gives rise to $28x of an extraordinary 
disposition amount. As a result, US2's prior extraordinary 
disposition amount is increased by $28x under paragraph (c)(3)(i)(D) 
of this section, and US2's extraordinary disposition account is 
reduced to $12x ($40-$28x) under paragraph (c)(3)(i)(A) of this 
section.
    (E) Determination of ineligible amount with respect to US1 and 
US2. Under paragraph (b)(2) of this section, with respect to US1 and 
the dividend of $48x, the ineligible amount is $21x, the sum of 50 
percent of the extraordinary disposition amount ($42x) and 
extraordinary reduction amount ($0). Therefore, with respect to the 
dividend received by US1 of $48x, $27x is eligible for a section 
245A deduction. With respect to US2 and the dividend of $32x, the 
ineligible amount is $14x, the sum of 50% of the extraordinary 
disposition amount ($28x) and extraordinary reduction amount ($0). 
Therefore, with respect to the dividend received by US2 of $32x, 
$18x is eligible for a section 245A deduction.
    (3) Example 2. Application of section 954(c)(6) exception with 
extraordinary disposition account--(i) Facts. The facts are the same 
as in paragraph (j)(2)(i) of this section (the facts in Example 1) 
except that the Property Transfer is a sale by CFC2 to CFC1 instead 
of a sale by CFC1 to CFC2, the $80x distribution is by CFC2 to CFC1 
in a separate transaction that is unrelated to the Property 
Transfer, and the description of the earnings and profits of CFC1 is 
applied to CFC2. Additionally, absent the application of this 
section, section 954(c)(6) would apply to the distribution by CFC2 
to CFC1. Under section 951(a)(2) and Sec.  1.951-1(b) and (e), US1's 
pro rata share of any subpart F income of CFC1 is 60% and US2's pro 
rata share of any subpart F income of CFC2 is 40%.
    (ii) Analysis--(A) Identification of extraordinary disposition. 
The Property Transfer is an extraordinary disposition under the same 
analysis as provided in paragraph (j)(2)(ii)(A) of this section (the 
analysis in Example 1).
    (B) Determination of section 245A shareholders and their 
extraordinary disposition accounts. Both US1 and US2 are section 
245A shareholders with respect to CFC2, US1 has an extraordinary 
disposition account of $60x with respect to CFC2, and US2 has an 
extraordinary disposition account of $40x with respect to CFC2 under 
the same analysis as provided in paragraph (j)(2)(ii)(B) of this 
section (the analysis in Example 1).
    (C) Determination of tiered extraordinary disposition amount--
(1) In general. US1 and US2 each have a tiered extraordinary 
disposition amount with respect to the $80x dividend paid by CFC2 to 
CFC1 to the extent that US1 and US2 would have an extraordinary 
disposition amount if each had received as a dividend its pro rata 
share of the dividend from CFC2. See paragraph (d)(2)(i) of this 
section. Under paragraph (d)(2)(ii) of this section, US1's pro rata 
share of the dividend is $48x (60% - $80x), that is, the increase to 
US1's pro rata share of the subpart F income if the dividend were 
included in CFC1's foreign personal holding company income, without 
regard to section 952(c) and the allocation of expenses. Similarly, 
US2's pro rata share of the dividend is $32x (40% - $80x).
    (2) Determination of tiered extraordinary disposition amount 
with respect to US1. The extraordinary disposition amount with 
respect to US1 is $42x, under the same analysis provided in 
paragraph (j)(2)(ii)(C) of this section (the analysis in Example 1). 
Accordingly, the tiered extraordinary disposition amount with 
respect to US1 is $42x.
    (3) Determination of extraordinary disposition amount with 
respect to US2. The extraordinary disposition amount with respect to 
US2 is $28x, under the same analysis provided in paragraph 
(j)(2)(ii)(D) of this section (the analysis in Example 1). 
Accordingly, the tiered extraordinary disposition amount with 
respect to US2 is $28x.
    (D) Limitation of section 954(c)(6) exception. The sum of US1 
and US2's tiered extraordinary disposition amounts is $70x ($42x + 
$28x). The portion of the stock of CFC1 (by value) owned (within the 
meaning of section 958(a)) by U.S. tax residents on the last day of 
CFC1's taxable year is 100%. Under paragraph (d)(1) of this section, 
the disqualified amount with respect to the dividend is $35x (50% x 
($70x/100%)). Accordingly, the portion of the $80x dividend from 
CFC2 to CFC1 that is eligible for the exception to foreign personal 
holding company income under section 954(c)(6) is $45x ($80x -$35x). 
Under section 951(a)(2) and Sec.  1.951-1(b) and (e), US1 includes 
$21x (60% x $35x) and US2 includes $14x (60% x $35x) in income under 
section 951(a).
    (E) Changes in extraordinary disposition account of US1. Under 
paragraph (c)(3)(i)(D)(1) of this section, US1's prior extraordinary 
disposition amount with respect to CFC2 is increased by $42x, or 
200% of $21x, the amount US1 included in income under section 951(a) 
with respect to CFC1. Under paragraph (c)(3)(i)(D)(1)(iii) of this 
section, US1 has no qualified portion because all of the owners of 
CFC2 are section 245A shareholders with a tiered extraordinary 
disposition amount with respect to CFC2. As a result, US1's 
extraordinary disposition account is reduced to $18x ($60x-$42x) 
under paragraph (c)(3)(i)(A) of this section.
    (F) Changes in extraordinary disposition account of US2. Under 
paragraph (c)(3)(i)(D)(1) of this section, US2's prior extraordinary 
disposition amount with respect to CFC2 is increased by $28x, or 
200% of $14x, the amount US2 included in income under section 951(a) 
with respect to CFC1. Under paragraph (c)(3)(i)(D)(1)(iii) of this 
section, US2 has no qualified portion because all of the owners of 
CFC2 are section 245A shareholders with a tiered extraordinary 
disposition amount with respect to CFC2. As a result, US2's 
extraordinary disposition account is reduced to $12x ($40x-$28x) 
under paragraph (c)(3)(i)(A) of this section.
    (4) Example 3. Extraordinary reduction--(i) Facts. At the 
beginning of CFC1's taxable

[[Page 28422]]

year ending on December 31, Year 2, US1 owns all of the single class 
of stock of CFC1, and no person transferred any CFC1 stock directly 
or indirectly in Year 1 pursuant to a plan to reduce the percentage 
of stock (by value) of CFC1 owned by US1. Also as of the beginning 
of Year 2, CFC1 has no earnings and profits described in section 
959(c)(1) or (2), and US1 does not have an extraordinary disposition 
account with respect to CFC1. As of the end of Year 2, CFC1 has 
$160x of tested income and no other income. CFC1 has $160x of 
earnings and profits for Year 2. On October 19, Year 2, US1 sells 
all of its CFC1 stock to US2 for $100x in a transaction (the ``Stock 
Sale'') in which US1 recognizes $90x of gain. Under section 1248(a), 
the entire $90x of gain is included in US1's gross income as a 
dividend and, pursuant to section 1248(j), the $90x is treated as a 
dividend for purposes of applying section 245A. At the end of Year 
2, under section 951A, US2 takes into account $70x of tested income, 
calculated as $160x (100% of the $160x of tested income) less $90x, 
the amount described in section 951(a)(2)(B). The amount described 
in section 951(a)(2)(B) is the lesser of $90x, the amount of 
dividends received by US1 with respect to the transferred stock, and 
$128x, the amount of tested income attributable to the transferred 
stock ($160x) multiplied by 292/365 (the ratio of the number of days 
in Year 2 that US2 did not own the transferred stock to the total 
number of days in Year 2). US1 does not make an election pursuant to 
paragraph (e)(3)(i) of this section.
    (ii) Analysis--(A) Determination of controlling section 245A 
shareholder and extraordinary reduction of ownership. Under 
paragraph (i)(2) of this section, US1 is a controlling section 245A 
shareholder with respect to CFC1. In addition, the Stock Sale 
results in an extraordinary reduction with respect to US1's 
ownership of CFC1. See paragraph (e)(2)(i) of this section. The 
extraordinary reduction occurs because during Year 2, US1 
transferred 100% of the CFC1 stock it owned at the beginning of the 
year and such amount is more than 5% of the total value of the stock 
of CFC1 at the beginning of Year 2; it also occurs because on the 
last day of the year the percentage of stock (by value) of CFC1 that 
US1 owns directly or indirectly (0%) (the end of year percentage) is 
less than 90% of the stock (by value) of CFC1 that US1 owns directly 
or indirectly on the day of the taxable year when it owned the 
highest percentage of CFC1 stock by value (100%) (the initial 
percentage), no transactions occurred in the preceding year pursuant 
to a plan to reduce the percentage of CFC1 stock owned by US1, and 
the difference between the initial percentage and the end of year 
percentage (100 percentage points) is at least 5 percentage points.
    (B) Determination of extraordinary reduction amount. Under 
paragraph (e)(1) of this section, the entire $90x dividend to US1 is 
an extraordinary reduction amount with respect to US1 because the 
dividend is at least equal to US1's pre-reduction pro rata share of 
CFC1's Year 2 tested income described in paragraph (e)(2)(ii)(A) of 
this section ($160x), reduced by the amount of tested income taken 
into account by US2, a U.S. tax resident, under paragraphs 
(e)(2)(ii)(B) and (i)(29) of this section ($70x).
    (C) Determination of ineligible amount. Under paragraph (b)(2) 
of this section, with respect to US1 and the dividend of $90x, the 
ineligible amount is $90x, the sum of 50% of the extraordinary 
disposition amount ($0) and extraordinary reduction amount ($90x). 
Therefore, with respect to the dividend received of $90x, no portion 
is eligible for the dividends received deduction allowed under 
section 245A(a).
    (iii) Alternative facts--election to close CFC's taxable year. 
The facts are the same as in paragraph (j)(4)(i) of this section 
(the facts of this Example 3), except that, pursuant to paragraph 
(e)(3)(i) of this section, US1 elects to close CFC1's Year 2 taxable 
year for all purposes of the Internal Revenue Code as of the end of 
October 19, Year 2, the date on which the Stock Sale occurs; in 
addition, US1 and US2 enter into a written, binding agreement that 
US1 will elect to close CFC1's Year 2 taxable year. Accordingly, 
under section 951A(a), US1 takes into account 100% of CFC1's tested 
income for the taxable year beginning January 1, Year 2, and ending 
October 19, Year 2, and US2 takes into account 100% of CFC1's tested 
income for the taxable year beginning October 20, Year 2, and ending 
December 31, Year 2. Under paragraph (e)(3)(i)(A) of this section, 
no amount is considered an extraordinary reduction amount with 
respect to US1.
    (5) Example 4. Extraordinary reduction; decrease in section 245A 
shareholder's pre-reduction pro rata share for amounts taken into 
account by U.S. tax residents--(i) Facts. At the beginning of CFC1's 
taxable year ending December 31, Year 2, US1 owns all of the single 
class of stock of CFC1, and no person transferred any CFC1 stock 
directly or indirectly in Year 1 pursuant to a plan to reduce the 
percentage of stock (by value) of CFC1 owned by US1. CFC1 generates 
$120x of subpart F income during its taxable year ending on December 
31, Year 2. On October 1, Year 2, CFC1 distributes a $120x dividend 
to US1. On October 19, Year 2, US1 sells 100% of its stock of CFC1 
to PRS, a domestic partnership, in a transaction in which no gain or 
loss is realized (the ``Stock Sale''). PRS is owned 50% each by A, 
an individual who is a citizen of the United States, and B, a 
foreign individual who is not a U.S. tax resident. On December 1, 
Year 2, US2 and FP, a foreign corporation, contribute property to 
CFC1; in exchange, each of US2 and FP receives 25% of the stock of 
CFC1. PRS owns the remaining 50% of the stock of CFC1. US1 does not 
make an election pursuant to paragraph (e)(3)(i) of this section.
    (ii) Analysis--(A) Determination of controlling section 245A 
shareholder and extraordinary reduction. Under paragraph (i)(2) of 
this section, US1 is a controlling section 245A shareholder with 
respect to CFC1. In addition, the Stock Sale results in an 
extraordinary reduction with respect to US1's ownership of CFC1. See 
paragraph (e)(2)(i) of this section. The extraordinary reduction 
occurs because during Year 2, US1 transferred 100% of the CFC1 stock 
it owns on the first day of Year 2, and that amount is more than 5% 
of the total value of the stock of CFC1 at the beginning of Year 2; 
it also occurs because on the last day of Year 2 the percentage of 
stock (by value) of CFC1 that US1 owns directly or indirectly (0%) 
(the end of year percentage) is less than 90% of the highest 
percentage of stock (by value) of CFC1 that US1 owns directly or 
indirectly on the day of the taxable year when it owned the highest 
percentage of CFC1 stock by value (100%) (the initial percentage), 
no transactions occurred in the preceding year pursuant to a plan to 
reduce the percentage of CFC1 stock owned by US1, and the difference 
between the initial percentage and the end of year percentage (100 
percentage points) is at least 5 percentage points.
    (B) Determination of pre-reduction pro rata share. Before the 
extraordinary reduction, US1 owned 100% of the stock of CFC1. Thus, 
under paragraph (e)(2)(ii)(A) of this section, the tentative amount 
of US1's pre-reduction pro rata share of CFC1's subpart F income is 
$120x. A and US2 are U.S. tax residents pursuant to paragraph 
(i)(29) of this section because they are United States persons 
described in section 7701(a)(30)(A) or (C). Thus, US1's pre-
reduction pro rata share amount is subject to the reduction 
described in paragraph (e)(2)(ii)(B) of this section because U.S. 
tax residents directly or indirectly acquire stock of CFC1 from US1 
or CFC1 during the taxable year in which the extraordinary reduction 
occurs. With respect to US1's pre-reduction pro rata share of CFC1's 
subpart F income, the reduction equals the amount of subpart F 
income of CFC1 taken into account under section 951(a) by these U.S. 
tax residents.
    (C) Determination of decrease in pre-reduction pro rata share 
for amounts taken into account by U.S. tax resident. On December 31, 
Year 2, both PRS and US2 will be United States shareholders with 
respect to CFC1 and will include in gross income their pro rata 
share of CFC1's subpart F income under section 951(a). With respect 
to US2, this amount will be $30x, which is equal to 25% of CFC1's 
subpart F income for the taxable year. With respect to PRS, its pro 
rata share of $60x under section 951(a)(2)(A) (50% of $120x) will be 
reduced under section 951(a)(2)(B) by $48x. The section 951(a)(2)(B) 
reduction is equal to the lesser of the $120x dividend paid with 
respect to those shares to US1 or $48x (50% x $120x x 292/365, the 
period during the taxable year that PRS did not own CFC1 stock). 
Thus, PRS includes $12x in gross income pursuant to section 951(a). 
Of this amount, $6x is allocated to A (as a 50% partner of PRS) and, 
therefore, treated as taken into account by A under paragraphs 
(e)(2)(ii)(B) and (g)(6) of this section. Thus, A and US2 take into 
account a total of $36x of CFC1's subpart F income under section 
951(a). This amount reduces US1's pre-reduction pro rata share of 
CFC1's subpart F income to $84x ($120x-$36x) under paragraph 
(e)(2)(ii)(B) of this section. CFC1 did not generate tested income 
during the taxable year and, therefore, no amount is taken into 
account under section 951A with respect to CFC1, and US1 has no pre-
reduction pro rata share with respect to tested income of CFC1.
    (D) Determination of extraordinary reduction amount. Under 
paragraph (e)(1) of

[[Page 28423]]

this section, the extraordinary reduction amount equals $84x, which 
is the lesser of the amount of the dividend received by US1 from 
CFC1 during Year 2 ($120x) and the sum of US1's pre-reduction pro 
rata share of CFC1's subpart F income ($84x) and tested income ($0).
    (E) Determination of ineligible amount. Under paragraph (b)(2) 
of this section, with respect to US1 and the dividend of $120x, the 
ineligible amount is $84x, the sum of 50% of the extraordinary 
disposition amount ($0) and extraordinary reduction amount ($84x). 
Therefore, with respect to the dividend received by US1 from CFC1, 
$36x ($120x-$84x) is eligible for a section 245A deduction.
    (6) Example 5. Controlling section 245A shareholder--(i) Facts. 
US1 and US2 own 30% and 25% of the stock of CFC1, respectively. FP, 
a foreign corporation that is not a CFC, owns all of the stock of 
US1 and US2. FP owns the remaining 45% of the stock of CFC1. On 
September 30, Year 2, US1 sells all of its stock of CFC1 to US3, a 
domestic corporation that is not a related party with respect to FP, 
US1, or US2. No person transferred any stock of CFC1 directly or 
indirectly in Year 1 pursuant to a plan to reduce the percentage of 
stock (by value) of CFC1 owned by US1.
    (ii) Analysis. Under paragraph (i)(21) of this section, US1 is a 
section 245A shareholder with respect to CFC1, an SFC. Because US1 
owns, together with US2 and FP (related persons with respect to 
US1), more than 50% of the stock of CFC1, US1 is a controlling 
section 245A shareholder of CFC1. The sale of US1's CFC1 stock 
results in an extraordinary reduction occurring with respect to 
US1's ownership of CFC1. The extraordinary reduction occurs because 
during Year 2, US1 transferred 100% of the stock of CFC1 that it 
owned at the beginning of the year and that amount is more than 5% 
of the total value of the stock of CFC1 at the beginning of Year 2; 
it also occurs because on the last day of the year the percentage of 
stock (by value) of CFC1 that US1 directly or indirectly owns (0%) 
(the end of year percentage) is less than 90% of the stock (by 
value) of CFC1 that US1 directly or indirectly owned on the day of 
the taxable year when it owned the highest percentage of CFC1 stock 
by value (30%) (the initial percentage), no transactions occurred in 
the preceding year pursuant to a plan to reduce the percentage of 
CFC1 stock owned by US1, and the difference between the initial 
percentage and end of year percentage (30 percentage points) is at 
least 5 percentage points.
    (7) Example 6. Limitation of section 954(c)(6) exception with 
respect to an extraordinary reduction. (i) Facts. At the beginning 
of CFC1 and CFC2's taxable year ending on December 31, Year 2, US1 
and A, an individual who is a citizen of the United States, own 80% 
and 20% of the single class of stock of CFC1, respectively. CFC1 
owns 100% of the stock of CFC2. Both US1 and A are United States 
shareholders with respect to CFC1 and CFC2, and US1 and A are not 
related parties with respect to each other. No person transferred 
CFC2 stock directly or indirectly in Year 2 pursuant to a plan to 
reduce the percentage of stock (by value) of CFC2 owned by US1, and 
US1 does not have an extraordinary disposition account with respect 
to CFC2. At the end of Year 2, and without regard to any 
distributions during Year 2, CFC2 had $150x of tested income and no 
other income, and CFC1 had no income or expenses. On June 30, Year 
2, CFC2 distributed $150x as a dividend to CFC1, which would qualify 
for the exception from foreign personal holding company income under 
section 954(c)(6) but for the application of this section. On August 
7, Year 2, CFC1 sells all of its CFC2 stock to US2 for $100x in a 
transaction (the ``Stock Sale'') in which CFC1 realizes no gain or 
loss. At the end of Year 2, under section 951A, US2 takes into 
account $60x of tested income, calculated as $150x (100% of the 
$150x of tested income) less $90x, the amount described in section 
951(a)(2)(B). The amount described in section 951(a)(2)(B) is the 
lesser of $150x, the amount of dividends received by CFC1 during 
Year 2 with respect to the transferred stock, and $90x, the amount 
of tested income attributable to the transferred stock ($150x) 
multiplied by 219/365 (the ratio of the number of days in Year 2 
that US2 did not own the transferred stock to the total number of 
days in Year 2). US1 does not make an election pursuant to paragraph 
(e)(3)(i) of this section.
    (ii) Analysis--(A) Determination of controlling section 245A 
shareholder and extraordinary reduction of ownership. Under 
paragraph (i)(2) of this section, US1 is a controlling section 245A 
shareholder with respect to CFC2, but A is not. In addition, the 
Stock Sale results in an extraordinary reduction with respect to 
US1's ownership of CFC2. See paragraph (e)(2)(i) of this section. 
The extraordinary reduction occurs because during Year 2, US1 
transferred indirectly 100% of the CFC2 stock it owned at the 
beginning of the year and such amount is more than 5% of the total 
value of the stock of CFC2 at the beginning of Year 2; it also 
occurs because on the last day of the year the percentage of stock 
(by value) of CFC2 that US1 owns directly or indirectly (0%) (the 
end of year percentage) is less than 90% of the stock (by value) of 
CFC2 that US1 owns directly or indirectly on the day of the taxable 
year when it owned the highest percentage of CFC2 stock by value 
(80%) (the initial percentage), no transactions occurred in the 
preceding year pursuant to a plan to reduce the percentage of CFC2 
stock owned by US1, and the difference between the initial 
percentage and the end of year percentage (80 percentage points) is 
at least 5 percentage points. Because there is an extraordinary 
reduction with respect to CFC2 in Year 2 and CFC1 received a 
dividend from CFC2 in Year 2, under paragraph (f)(1) of this 
section, it is necessary to determine the limitation on the amount 
of the dividend eligible for the exception under section 954(c)(6).
    (B) Determination of tiered extraordinary reduction amount. The 
limitation on the amount of the dividend eligible for the exception 
under section 954(c)(6) is based on the tiered extraordinary 
reduction amount. The sum of the amount of subpart F income and 
tested income of CFC2 for Year 2 is $150x, and immediately before 
the extraordinary reduction, CFC1 held 100% of the stock of CFC2. 
Additionally, US2 is a U.S. tax resident as defined in paragraph 
(i)(29) of this section because it is a United States person 
described in section 7701(a)(30)(A) or (C), and US2 has a pro rata 
share of $60x of tested income under section 951A with respect to 
CFC2. Accordingly, under paragraph (f)(2) of this section, the 
tiered extraordinary reduction amount is $90x (($150x x 100%)-$60x).
    (C) Limitation of section 954(c)(6) exception. Under paragraph 
(f)(1) of this section, the portion of the $150x dividend from CFC2 
to CFC1 that is eligible for the exception to foreign personal 
holding company income under section 954(c)(6) is $60x ($150x-$90x). 
To the extent that the $90x that does not qualify for the exception 
gives rise to additional subpart F income to CFC1, both US1 and A 
will take into account their pro rata share of that subpart F income 
under section 951(a)(2) and Sec.  1.951-1(b) and (e).

    (k) Applicability date. This section applies to distributions 
occurring after December 31, 2017.
    (l) Expiration date. The applicability of this section expires June 
14, 2022.

0
Par. 3. Section 1.954(c)(6)-1T is added to read as follows:


Sec.  1.954(c)(6)-1T  Certain cases in which section 954(c)(6) 
exception not available (temporary).

    (a) Cross-references to other rules. For a non-exclusive list of 
rules that limit the applicability of the exception to foreign personal 
holding company income under section 954(c)(6), see--
    (1) Section 1.245A-5T(d) (rules regarding the application of 
section 954(c)(6) to extraordinary disposition amounts);
    (2) Section 1.245A-5T(f) (rules regarding the application of 
section 954(c)(6) to tiered extraordinary reduction amounts)
    (3) Section 1.245A(e)-1(c) (rules regarding tiered hybrid 
dividends);
    (4) Section 1.367(b)-4(e)(4) (rules regarding income inclusion and 
gain recognition in certain exchanges following an inversion 
transaction);
    (5) Section 964(e)(4)(A) (rules regarding certain gain from the 
sale or exchange of stock that is recharacterized as a dividend); and
    (6) Section 1.7701(l)-4(e) (rules regarding recharacterization of 
certain transactions following an inversion transaction).
    (b) Applicability date. This section applies on or after June 14, 
2019.
    (c) Expiration date. The applicability of this section expires June 
14, 2022.

0
Par. 4. Section 1.6038-2T is added to read as follows:

[[Page 28424]]

Sec.  1.6038-2T  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations beginning after December 31, 1962 (temporary).

    (a) through (e) [Reserved].
    (f)(1) through (15) [Reserved].
    (16) Dividends for which section 245A deduction or section 
954(c)(6) exception is limited--(i) General rule. If for the annual 
accounting period, the corporation distributes or receives a dividend 
that gives rise to an ineligible amount (as defined in Sec.  1.245A-
5T((i)(12)), a tiered extraordinary disposition amount (as defined in 
Sec.  1.245A-5T(i)(25)), or a tiered extraordinary reduction amount (as 
defined in Sec.  1.245A-5T(i)(26)), then Form 5471 (or a successor 
form) must contain such information about the ineligible amount, tiered 
extraordinary disposition amount, or tiered extraordinary reduction 
amount, as applicable, in the form and manner and to the extent 
prescribed by the form, instructions to the form, publication, or other 
guidance published in the Internal Revenue Bulletin.
    (ii) Transition rule. If the corporation (or predecessor 
corporation) distributed or received a dividend that gave rise to an 
ineligible amount, a tiered extraordinary disposition amount, or a 
tiered extraordinary reduction amount in an annual accounting period 
for which the Form 5471 (or successor form) has been filed before the 
date of publication of these Temporary regulations, the corporation 
must provide the information described in paragraph (f)(16)(i) of this 
section on the first Form 5471 (or successor form) filed by the 
corporation after the issuance of guidance setting forth the form and 
manner of reporting such information.
    (g) through (l) [Reserved].
    (m)(1) [Reserved].
    (2) Special rule for paragraph (f)(16). Paragraph (f)(16) of this 
section applies with respect to information for annual accounting 
periods in which a dividend subject to Sec.  1.245A-5T is paid.
    (n) Expiration date. The applicability of paragraphs (f)(16) and 
(m) of this section expires June 14, 2022.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: June 4, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-12442 Filed 6-14-19; 4:15 pm]
 BILLING CODE 4830-01-P