Ownership Attribution Under Section 958 Including for Purposes of Determining Status as Controlled Foreign Corporation or United States Shareholder, 52398-52410 [2019-20567]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 191 (Wednesday, October 2, 2019)]
[Proposed Rules]
[Pages 52398-52410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20567]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-104223-18]
RIN 1545-B052


Ownership Attribution Under Section 958 Including for Purposes of 
Determining Status as Controlled Foreign Corporation or United States 
Shareholder

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the 
modification of section 958(b) of the Internal Revenue Code (``Code'') 
by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. 
The proposed regulations affect United States persons that have 
ownership interests in or that make or receive payments to or from 
certain foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 2, 2019.

ADDRESSES: Send electronic submissions via the Federal eRulemaking 
Portal at www.regulations.gov (indicate IRS and REG-104223-18) by 
following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (the ``Treasury 
Department'') and the IRS will publish for public availability any 
comment received to its public docket, whether submitted electronically 
or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG-
104223-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben 
Franklin Station, Washington, DC 20044. Submissions may be hand 
delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. 
to CC:PA:LPD:PR (REG-104223-18), Courier's Desk, Internal Revenue 
Service, 1111 Constitution Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jorge M. Oben, (202) 317-6934; concerning submissions of comments and 
requests for a public hearing, Regina Johnson at (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: 

[[Page 52399]]

Background

    Section 958 provides rules for determining direct, indirect, and 
constructive stock ownership. Under section 958(a)(1), stock is 
considered owned by a person if it is owned directly or is owned 
indirectly through certain foreign entities under section 958(a)(2). 
Under section 958(b), section 318 applies, with certain modifications, 
to the extent that the effect is to treat any United States person as a 
United States shareholder within the meaning of section 951(b) (``U.S. 
shareholder'') of a foreign corporation, to treat a person as a related 
person within the meaning of section 954(d)(3), to treat the stock of a 
domestic corporation as owned by a U.S. shareholder of a controlled 
foreign corporation (``CFC'') for purposes of section 956(c)(2), or to 
treat a foreign corporation as a CFC under section 957.
    Section 318 provides rules that attribute the ownership of stock to 
certain family members, between certain entities and their owners, and 
to holders of options to acquire stock. Section 318(a)(1) provides 
rules attributing stock ownership among members of a family. Section 
318(a)(2) provides rules attributing stock ownership from partnerships, 
estates, trusts, and corporations to partners, beneficiaries, owners, 
and shareholders (so-called ``upward attribution''). Section 318(a)(3) 
generally attributes stock owned by a person to a partnership, estate, 
trust, or corporation in which the person has an interest (so-called 
``downward attribution''). In particular, section 318(a)(3)(A) provides 
that stock owned, directly or indirectly, by or for a partner or a 
beneficiary of an estate is considered as owned by the partnership or 
estate. This provision applies to all partners and beneficiaries 
without regard to the size of their interest in the partnership or 
estate. Section 318(a)(3)(B) similarly provides, subject to certain 
exceptions, that stock owned, directly or indirectly, by or for a 
beneficiary of a trust (or a person who is considered an owner of a 
trust) is considered owned by the trust. Section 318(a)(3)(C) provides 
that stock in one corporation owned, directly or indirectly, by or for 
a shareholder in a second corporation is considered owned by the second 
corporation if 50 percent or more in value of the stock in the second 
corporation is owned, directly or indirectly, by such shareholder.
    As in effect before repeal, section 958(b)(4) provided that 
subparagraphs (A), (B), and (C) of section 318(a)(3) (providing for 
downward attribution) were not to be applied so as to consider a United 
States person as owning stock owned by a person who is not a United 
States person (a ``foreign person''). Effective for the last taxable 
year of foreign corporations beginning before January 1, 2018, and each 
subsequent year of the foreign corporations, and for the taxable years 
of U.S. shareholders in which or with which such taxable years of the 
foreign corporations end, section 958(b)(4) was repealed by section 
14213 of the Tax Cuts and Jobs Act, Public Law 115-97 (2017) (the 
``Act''). As a result of this repeal, stock of a foreign corporation 
owned by a foreign person can be attributed to a United States person 
under section 318(a)(3) for purposes of determining whether a United 
States person is a U.S. shareholder of the foreign corporation and, 
therefore, whether the foreign corporation is a CFC. In other words, as 
a result of the repeal of section 958(b)(4), section 958(b) now 
provides for downward attribution from a foreign person to a United 
States person in circumstances in which section 958(b), before the Act, 
did not so provide. As a result, United States persons that were not 
previously treated as U.S. shareholders may be treated as U.S. 
shareholders, and foreign corporations that were not previously treated 
as CFCs may be treated as CFCs.
    The legislative history to the Act indicates that the repeal of 
section 958(b)(4) was intended ``to render ineffective certain 
transactions that are used to [sic] as a means of avoiding the subpart 
F provisions.'' See H.R. Rep. No. 115-466, at 633 (2017) (Conf. Rep.). 
It further provides:

    One such transaction involves effectuating ``de-control'' of a 
foreign subsidiary, by taking advantage of the section 958(b)(4) 
rule that effectively turns off the constructive stock ownership 
rules of 318(a)(3) when to do otherwise would result in a U.S. 
person being treated as owning stock owned by a foreign person. Such 
a transaction converts former CFCs to non-CFCs, despite continuous 
ownership by U.S. shareholders.

    Id. at 633-34.

Explanation of Provisions

I. Changes in Connection With Repeal of Section 958(b)(4)

    This notice of proposed rulemaking proposes changes that are 
generally intended to ensure that the operation of certain rules is 
consistent with their application before the Act's repeal of section 
958(b)(4), as further explained in this Part I. Other guidance that 
provides relief concerning the effect of the repeal of section 
958(b)(4) on the application of subpart F more generally is provided 
separately.
A. Section 267: Deduction for Certain Payments to Foreign Related 
Persons
    Section 267(a)(2) provides a matching rule that governs the time at 
which an otherwise deductible amount owed to a related person may be 
deducted. Specifically, section 267(a)(2) provides that, in the case of 
certain interest and expenses paid by the taxpayer to a related person, 
if an amount is not includible in the payee's gross income until it is 
paid, the amount generally is not allowable as a deduction to the 
taxpayer until the amount is includible in the gross income of the 
payee.
    Section 267(a)(3)(A) provides that the Secretary shall by 
regulations apply the matching principle in section 267(a)(2) in cases 
in which the payee is a foreign person. Section 1.267(a)-3(b) generally 
requires a taxpayer to use the cash method of accounting for deductions 
of amounts owed to a related foreign person. An exemption is provided 
in Sec.  1.267(a)-3(c)(2) for any amount, other than interest, that is 
income of a related foreign person with respect to which the related 
foreign person is exempt from U.S. tax on the amount owed pursuant to a 
treaty obligation of the United States.
    Section 841(b) of Public Law 108-357 (2004) added section 
267(a)(3)(B) to the Code, effective for payments accrued on or after 
October 22, 2004. Section 267(a)(3)(B)(i) provides that, 
notwithstanding section 267(a)(3)(A), in the case of any item payable 
to a CFC, a deduction is allowable to the payor with respect to the 
amount for any taxable year before the year in which paid only to the 
extent that an amount attributable to the item is includible during 
such prior taxable year in the gross income of a United States person 
who owns (within the meaning of section 958(a)) stock in such 
corporation. Section 267(a)(3)(B)(ii) grants the Secretary the 
authority to issue regulations exempting transactions from section 
267(a)(3)(B)(i).
    For amounts accrued on or after October 22, 2004, a taxpayer that 
owes an amount to a CFC cannot rely on the exemption in Sec.  1.267(a)-
3(c)(2) to generally deduct the amount when accrued, and instead can 
deduct the amount prior to the year the amount is paid only to the 
extent that an amount attributable to the item is includible in gross 
income of a U.S. shareholder that owns (within the meaning of section 
958(a)) stock in the CFC. After the repeal of section 958(b)(4), a CFC 
may not have any U.S. shareholders that own stock within the meaning of 
section 958(a) (``section 958(a) U.S. shareholders''). Because the 
repeal of

[[Page 52400]]

section 958(b)(4) is effective for the last taxable year of foreign 
corporations beginning before January 1, 2018, and each subsequent 
taxable year of the foreign corporations, and for the taxable year of 
U.S. shareholders in which or with which such taxable year of the 
foreign corporations end, a taxpayer may have, in 2017, deducted an 
amount accrued in 2017 that, due to the repeal of section 958(b)(4), 
would no longer be allowable in 2017.
    The purpose of the matching principle in section 267(a)(2) is to 
align the timing of a deduction with the inclusion of the item in 
income. If an amount is owed to a CFC that has no section 958(a) U.S. 
shareholders that would include an amount attributable to the item in 
income, and the CFC is exempt from U.S. tax on the amount owed due to a 
treaty, it is unnecessary to not allow a taxpayer to take the deduction 
when the amount is accrued. Accordingly, the proposed regulations 
provide that an amount (other than interest) that is income of a 
related foreign person with respect to which the related foreign person 
is exempt from U.S. taxation on the amount owed pursuant to a treaty 
obligation of the United States is exempt from the application of 
section 267(a)(3)(B)(i) if the related foreign person is a CFC that 
does not have any section 958(a) U.S. shareholders. Proposed Sec.  
1.267(a)-3(c)(4).
    These proposed regulations also amend Sec.  1.267(a)-3(c)(2) and 
remove the rules currently in Sec.  1.267(a)-3(c)(4), in order to 
reflect the changes to section 267 in Public Law 108-357. The Treasury 
Department and the IRS intend to update other provisions in Sec.  
1.267(a)-3 to take into account the changes made to section 267(a)(3) 
by Public Law 108-357 in future guidance.
B. Section 332: Liquidation of Applicable Holding Company
    Section 332(a) provides a general rule that no gain or loss is 
recognized on the receipt by a corporation of property distributed in 
complete liquidation of another corporation. Section 332(d) was enacted 
to disallow the nonrecognition of gain to a foreign corporation through 
the complete liquidation of certain domestic holding companies, which 
could avoid the imposition of withholding tax that would otherwise 
apply to a section 301 distribution from these holding companies. See 
H.R. Rep. No. 108-755, at 761-62 (2004) (Conf. Rep.). Section 332(d)(1) 
provides an exception to sections 332(a) and 331 for certain 
distributions by domestic corporations to foreign corporations. Section 
332(d)(1) results in the recognition by a foreign corporation of income 
from the liquidation of certain domestic holding companies by treating 
the liquidating distribution as a distribution under section 301. 
Specifically, section 332(d)(1) provides that section 301, and not 
section 332(a) nor 331, applies to a distribution to a foreign 
corporation in complete liquidation of an applicable holding company 
(as defined in section 332(d)(2)). Section 332(d)(3) provides that, 
notwithstanding section 332(d)(1), exchange treatment under section 331 
applies if the distributee of a distribution in complete liquidation of 
an applicable holding company is a CFC. In such a case, the gain on the 
distribution could be foreign personal holding company income 
(``FPHCI'') under section 954(c)(1)(B), and before the Act, CFCs 
generally had U.S. shareholders that would be subject to tax on their 
pro rata share of such gain under section 951(a).
    Section 332(d)(4) grants the Secretary the authority to issue 
regulations as appropriate to prevent the abuse of section 332(d). The 
repeal of section 958(b)(4) broadened the application of section 
332(d)(3) to foreign corporations that are CFCs because of downward 
attribution from a foreign person. This result could lead to 
inappropriate results because any gain recognized on an exchange of 
stock of an applicable holding company under section 331 by a foreign 
corporation that is a CFC due to downward attribution from a foreign 
person could avoid U.S. tax if the CFC does not have U.S. shareholders 
that have current income inclusions under section 951(a). Therefore, in 
accordance with the regulatory authority provided in section 332(d)(4), 
the proposed regulations modify the definition of a CFC (so as to use 
the definition of a CFC in effect immediately before the repeal of 
section 958(b)(4)) for purposes of applying section 332(d)(3). See 
proposed Sec.  1.332-8(a). The Treasury Department and the IRS request 
comments on these proposed changes to the definition of a CFC for the 
purposes of applying section 332(d)(3).
C. Section 367(a): Triggering Events Exception for Other Dispositions 
or Events Under Sec.  1.367(a)-8(k)(14)
    Section 367(a)(1) provides that if, in connection with an exchange 
described in section 332, 351, 354, 356, or 361, a United States person 
transfers property to a foreign corporation, the foreign corporation is 
not treated as a corporation for purposes of determining the extent to 
which gain is recognized on the transfer. Section 367(a)(1) does not 
apply, however, to certain transfers of stock or securities of a 
foreign corporation (including an indirect stock transfer) by a United 
States person (``U.S. transferor'') if the U.S. transferor enters into 
a gain recognition agreement (``GRA'') with respect to the transferred 
stock or securities. See Sec.  1.367(a)-3(b)(1). In general, a U.S. 
transferor subject to a GRA must recognize gain if a triggering event 
(as defined in Sec.  1.367(a)-8(j)) occurs during the term of a GRA. 
See Sec.  1.367(a)-8(j). Section 1.367(a)-8(k) provides several 
exceptions for certain dispositions that constitute nonrecognition 
transactions if, immediately after the disposition, the U.S. transferor 
meets certain requirements. In particular, Sec.  1.367(a)-8(k)(14) 
generally provides that a disposition or other event is not a 
triggering event if the disposition or other event qualifies as a 
nonrecognition transaction, and, immediately after the disposition or 
other event, the U.S. transferor retains a direct or indirect interest 
in the transferred stock or securities or, as applicable, in 
substantially all of the assets of the transferred corporation. The 
rule further provides that if a foreign corporation acquires the 
transferred stock or securities or, as applicable, substantially all 
the assets of the transferred corporation, the exception applies only 
if the U.S. transferor owns at least five percent (applying the 
attribution rules of section 318, as modified by section 958(b)) of the 
total voting power and the total value of the outstanding stock of such 
foreign corporation. This five-percent ownership condition is intended 
to limit the application of the general exception to transactions in 
which the U.S. transferor retains at least a minimal interest in the 
transferred stock or securities (or substantially all the assets of the 
transferred corporation). See TD 9446, 74 FR 6952, 6953 (February 11, 
2009).
    The exception described in the preceding paragraph was added when 
section 958(b)(4) did not allow for downward attribution from foreign 
persons. A U.S. transferor that would not have been eligible for the 
exception because it held a less than five percent interest in the 
transferred stock or securities (or substantially all the assets of the 
transferred corporation) could now be eligible for the exception if the 
U.S. transferor holds at least five percent due to downward attribution 
of stock owned by a foreign person. A U.S. transferor's constructive 
ownership interest should not include an interest that is treated as 
owned as a result of downward attribution from a foreign person as it 
would inappropriately treat

[[Page 52401]]

the U.S. transferor as owning an interest it would not have owned under 
the rules in effect when Sec.  1.367(a)-8(k)(14) was added. Therefore, 
in accordance with the regulatory authority provided in section 367(a), 
the proposed regulations revise Sec.  1.367(a)-8(k)(14) to apply 
section 958(b) without regard to the repeal of section 958(b)(4). See 
proposed Sec.  1.367(a)-8(k)(14)(ii). The Treasury Department and the 
IRS request comments on these proposed revisions to Sec.  1.367(a)-
8(k)(14).
D. Section 672: CFC's Ownership of a Trust
    Section 672(f)(1) generally provides that the grantor trust rules 
in sections 671 through 679 apply only to the extent they result in 
income being currently taken into account (either directly or through 
one or more entities) by a citizen or resident of the United States or 
a domestic corporation. To the extent that a trust or a portion thereof 
is not taxed as a grantor trust, the trust and its beneficiaries are 
taxable in accordance with the rules of sections 641 through 669. In 
the case of a foreign nongrantor trust, accumulation distributions are 
not only taxable to U.S. beneficiaries, but also subject to the 
``throwback rules'' of sections 665 through 668.
    Section 672(f)(3)(A) provides special rules, however, for a trust 
that is treated as owned by a CFC. Except as otherwise provided by 
regulations, CFCs are treated as domestic corporations for purposes of 
section 672(f)(1). Section 672(f)(3)(A). Before the repeal of section 
958(b)(4), the portion of a trust's income that was treated as owned by 
a CFC would generally have been taxable currently to the U.S. 
shareholders to the extent the trust's income constituted subpart F 
income of the CFC.
    After the repeal of section 958(b)(4), however, a CFC may have no 
U.S. shareholders that would be subject to tax on their pro rata share 
of its subpart F income under section 951(a). A CFC could be formed to 
facilitate tax-free accumulation of income in a trust for the benefit 
of United States persons and result in tax-free distributions from the 
trust to the U.S. beneficiaries. In such a case, none of the income or 
gain of the grantor trust would be taken into account by U.S. 
shareholders, despite constituting subpart F income, while 
distributions of income from the trust to its U.S. beneficiaries would 
not be subject to tax, and the throwback rules would be avoided 
entirely.
    Therefore, the proposed regulations, in accordance with the 
regulatory authority provided in section 672(f)(3), provide that the 
only CFCs taken into account for purposes of section 672(f) are those 
that are CFCs without regard to downward attribution from foreign 
persons. See proposed Sec.  1.672(f)-2(a). A reference to foreign 
personal holding companies in Sec.  1.672(f)-2(a) is also deleted, 
consistent with the repeal of the foreign personal holding company 
regime by section 413(a) of the American Jobs Creation Act of 2004, 
Public Law 108-357. Id. The Treasury Department and the IRS request 
comments on these proposed revisions to Sec.  1.672(f)-2(a).
E. Section 706: Taxable Year of Partnership
    Section 706 provides rules for determining the taxable year of a 
partnership and its partners. Section 1.706-1(b)(6)(i) provides that in 
determining the taxable year of a partnership under section 706(b) and 
the regulations thereunder, any interest held by a disregarded foreign 
partner is not taken into account. A foreign partner is a disregarded 
foreign partner unless the foreign partner is allocated any gross 
income of the partnership that was effectively connected (or treated as 
effectively connected) with the conduct of a trade or business within 
the United States (``effectively connected income'') during the 
partnership's taxable year immediately preceding the current taxable 
year (or, if such partner was not a partner during the partnership's 
immediately preceding taxable year, the partnership reasonably believes 
that the partner will be allocated any such income during the current 
taxable year) and taxation of that income is not otherwise precluded 
under any U.S. income tax treaty. For purposes of these rules, Sec.  
1.706-1(b)(6)(ii) defines a foreign partner as a partner that is not a 
United States person (as defined in section 7701(a)(30)), but provides 
that CFCs are not treated as foreign partners. When Sec.  1.706-
1(b)(6)(ii) was added, CFCs were not treated as foreign partners for 
purposes of determining a partnership's taxable year under section 706 
because the U.S. owners of such entities were subject to U.S. federal 
income taxation on a current basis with respect to certain income 
earned by these entities. See 66 FR 3920, 3921 (January 17, 2001). As a 
result of the repeal of section 958(b)(4), a foreign corporation that 
is a CFC solely by reason of downward attribution from a foreign person 
may now be taken into account for purposes of determining the taxable 
year of such partnership. This would include a foreign corporation that 
is a CFC even if the CFC does not have a U.S. shareholder who owns 
stock of the foreign corporation within the meaning of section 958(a) 
and is required to include amounts in income under section 951(a). 
Accordingly, the proposed regulations exclude from the definition of 
foreign partner only CFCs with respect to which a U.S. shareholder owns 
stock within the meaning of section 958(a) for purposes of determining 
a partnership taxable year. See proposed Sec.  1.706-1(b)(6)(ii). As in 
proposed Sec.  1.672(f)-2(a), discussed in Part I.D of this Explanation 
of Provisions, the reference to foreign personal holding companies is 
also deleted. See id. The Treasury Department and the IRS request 
comments on these proposed revisions to Sec.  1.706-1(b)(6)(ii).
F. Section 863: Space and Ocean Income and International Communications 
Income of a CFC
    Section 863 and the regulations thereunder provide rules for 
determining the source of certain items of gross income, including 
gross income from space and ocean activities and international 
communications income. Section 863(d)(1) provides that, except as 
provided in regulations, any income derived from a space or ocean 
activity (``space and ocean income'') by a United States person is 
sourced in the United States (``U.S. source income'') and that any 
space and ocean income derived by a foreign person is sourced outside 
the United States (``foreign source income''). Regulations under 
section 863(d) include an exception from the statutory provision 
regarding space and ocean income derived by a foreign person if the 
foreign person is a CFC. Specifically, space and ocean income derived 
by a CFC is treated as U.S. source income, except to the extent that 
the income, based on all the facts and circumstances, is attributable 
to functions performed, resources employed, or risks assumed in a 
foreign country. See Sec.  1.863-8(b)(2)(ii).
    In the case of any United States person, 50 percent of any 
international communications income (as defined in section 863(e)(2)) 
is treated as U.S. source income and 50 percent of such income is 
treated as foreign source income. Section 863(e)(1)(A). Subject to 
certain exceptions, including exceptions set forth in regulations, 
international communications income derived by a foreign person is 
treated as foreign source income. Section 863(e)(1)(B)(i). Regulations 
under section 863(e) provide that international communications income 
derived by a CFC is treated as one-half U.S. source income and one-half 
foreign source income. See Sec.  1.863-9(b)(2)(ii).

[[Page 52402]]

    The status of the recipient of space and ocean income and 
international communications income as a CFC solely by reason of the 
repeal of section 958(b)(4) should not cause all or part of such income 
to be U.S. source income if it would not have been treated as such 
otherwise. Accordingly, in accordance with the regulatory authority 
provided in section 863(d)(1) and (e)(1)(B)(i), and consistent with the 
temporary relief announced in section 5.01 of Notice 2018-13, 2018-6 
I.R.B. 341, these proposed regulations provide that whether a foreign 
corporation is a CFC for purposes of the rules under sections 863(d) 
and (e) treating space and ocean income and international 
communications income as U.S. source income in whole or in part is 
determined without regard to downward attribution from a foreign 
person. See proposed Sec. Sec.  1.863-8(b)(2)(ii) and 1.863-
9(b)(2)(ii).
G. Section 904: Look-Through Rules and Active Rents and Royalties 
Exception to Categorization as Passive Category Income
    In general, section 904(a) limits the amount of foreign income 
taxes that a taxpayer, including a U.S. shareholder, may claim as a 
credit against its U.S. income tax based on the taxpayer's foreign 
source income. Section 904(d) further limits the credit by category of 
foreign source income, with general category and passive category being 
two common categories of income. Passive category income includes 
passive income, which means income that would be FPHCI if the recipient 
were a CFC. This generally includes dividends, interest, rents, and 
royalties. See section 904(d)(2)(B)(i) and 954(c)(1)(A). However, if 
such amounts are received or accrued by a U.S. shareholder of a CFC 
from the CFC, the amounts are treated as passive category income only 
to the extent they are allocable to passive category income of the CFC 
(the ``CFC look-through rule''). See section 904(d)(3). Application of 
the CFC look-through rule requires determining the category of income 
of the CFC to which the dividends, interest, rents, or royalties paid 
to the U.S. shareholder (or other related look-through entity) are 
allocable.
    Rents and royalties received by a CFC are generally passive 
category income unless the income is derived in the active conduct of a 
trade or business (the ``section 904 active rents and royalties 
exception''), taking into account activities of affiliated group 
members. See Sec.  1.904-4(b)(2)(iii). The section 904 active rents and 
royalties exception applies both for determining the category to which 
a U.S. shareholder's inclusion under section 951(a) attributable to the 
receipt of rents and royalties by a CFC is assigned under section 
904(d)(3)(B), and for purposes of applying the CFC look-through rule to 
determine the category to which dividends, interest, rents, and 
royalties paid or accrued by the CFC are allocable under section 
904(d)(3)(C) and (D).
    Financial services income received by certain CFCs or a domestic 
corporation is treated as general category income (the ``financial 
services income rule''). See section 904(d)(2)(C)(i). In determining 
whether income is financial services income for purposes of section 
904, the activities of affiliated group members, including CFCs, are 
taken into account to determine whether such entities are financial 
services entities (the ``financial services entity requirement''). See 
section 904(d)(2)(C)(ii) and Sec.  1.904-4(e)(3)(ii).
    The formulation of the CFC look-through rule and the affiliated 
group rules in both the section 904 active rents and royalties 
exception and the financial services income rules was premised on the 
assumption that income of CFCs (including affiliated group members 
meeting the active conduct requirement or the financial services entity 
requirement) would be subject to U.S. tax under section 951(a) or on a 
distribution of earnings and profits generated by such income, and that 
foreign corporations to which the rules applied would be directly or 
indirectly controlled by United States persons able to obtain 
information concerning their activities, income, and expenses. See H.R. 
Rep. No. 99-841, Volume II, at 566 and 573-574 (1986) (Conf. Rep.); see 
also T.D. 8412, 57 FR 20639, 20640 (May 14, 1992); id. at 20641; and 66 
FR 319, 321 (January 3, 2001). Treating foreign corporations as CFCs or 
United States persons as U.S. shareholders by reason of downward 
attribution from foreign persons for purposes of the CFC look-through 
rule and the affiliated group rules would be inconsistent with the 
intended scope of the rules. Before the repeal of section 958(b)(4), a 
U.S. shareholder of a foreign corporation in which U.S. shareholders 
held directly or indirectly at least 10 percent, but not more than 50 
percent, of the voting stock or value, would be eligible to treat 
dividends, but not interest, rents, and royalties, as other than 
passive category income. See section 904(d)(4). Similarly, under the 
affiliated group rules, neither the active conduct requirement in the 
section 904 active rents and royalties exception nor the financial 
services entity requirement in the financial services income rule could 
be satisfied by a foreign corporation that would be a CFC only by 
reason of downward attribution from a foreign person.
    Accordingly, in accordance with the regulatory authority provided 
in section 904(d)(7), the regulations under section 904 are revised to 
limit the application of the affiliated group rules in the section 904 
active rents and royalties exception and the financial services income 
rule, as well as the CFC look-through rule, to foreign corporations 
that are CFCs without regard to downward attribution from foreign 
persons. Further, the CFC look-through rule, as proposed to be revised 
at 83 FR 63200 (December 7, 2018), is further revised to apply only to 
U.S. shareholders that are U.S. shareholders without regard to downward 
attribution from foreign persons. See proposed Sec.  1.904-5(a)(4)(i) 
and (vi) (providing definitions that apply for purposes of Sec. Sec.  
1.904-4 and 1.904-5, pursuant to Sec. Sec.  1.904-4(a) and 1.904-
5(a)(4) as proposed to be revised at 83 FR 63200 (December 7, 2018)). 
The Treasury Department and the IRS request comments on these proposed 
revisions to the regulations under section 904.
H. Section 958: Rules for Determining Stock Ownership
    To ensure that the regulations under section 958 are consistent 
with the amended statute, this notice of proposed rulemaking removes 
the rule in Sec.  1.958-2(d)(2) that corresponds to section 958(b)(4). 
It also revises Example 4 in Sec.  1.958-2(g) to illustrate the 
application of the ownership attribution rules in section 958 in the 
absence of section 958(b)(4).
I. Section 1297: PFIC Asset Test
    Section 1297(e) provides the rules used to measure a foreign 
corporation's assets for purposes of determining whether it meets the 
asset test in section 1297(a)(2) and is a passive foreign investment 
company (``PFIC''). If the foreign corporation is a CFC and is not a 
publicly traded corporation, when determining whether the average 
percentage of assets of the corporation that produce passive income is 
at least 50 percent, adjusted basis (rather than value) of the assets 
must be used. Section 1297(e)(2). Accordingly, shareholders of a 
foreign corporation that became a CFC as a result of the repeal of 
section 958(b)(4) will have to determine whether the average percentage 
of assets that produce passive income is at least 50 percent using 
adjusted basis.
    The legislative history to section 1297(e) indicates that the 
adjusted basis

[[Page 52403]]

requirement for CFCs exists because ``measurement by adjusted basis is 
well established in the case of controlled foreign corporations' 
investments of earnings in U.S. property, and is highly appropriate to 
the task of measuring the earnings of a controlled foreign corporation 
that are invested in excess passive assets.'' H.R. Rep. No. 103-111, at 
692 (1993). However, the rule imposes a burden on taxpayers that own 
stock in foreign corporations that became CFCs solely by reason of the 
repeal of section 958(b)(4), which may not otherwise be required to 
account for the basis in assets under U.S. federal income tax rules. 
Section 1298(g) grants the Secretary the authority to issue regulations 
that are necessary and appropriate to carry out the purposes of 
sections 1291 through 1298. In accordance with this authority, the 
proposed regulations modify the definition of a CFC for purposes of 
section 1297(e) to disregard downward attribution from foreign persons. 
See proposed Sec.  1.1297-1(d)(1)(iii)(A).
J. Section 6049: Chapter 61 Reporting Provisions
    Generally, under chapter 61 of subtitle F of the Code, a payor must 
report to the IRS (using the appropriate Form 1099) certain payments or 
transactions with respect to United States persons that are not exempt 
recipients. The regulations under chapter 61 generally provide that the 
scope of payments or transactions subject to reporting under chapter 61 
depends, in part, on whether or not the payor is a U.S. payor (as 
defined in Sec.  1.6049-5(c)(5)), which generally includes United 
States persons and their foreign branches, as well as CFCs.
    Foreign corporations that became CFCs solely as a result of the 
repeal of section 958(b)(4) could be subject to an increased burden 
from the reporting requirements under chapter 61 (and the backup 
withholding rules under section 3406). To mitigate the increased Form 
1099 reporting by foreign corporations that may have no direct or 
indirect owners that are United States persons, in accordance with the 
regulatory authority provided in section 6049(a), proposed Sec.  
1.6049-5(c)(5)(i)(C) provides that a U.S. payor includes only a CFC 
that is a CFC without regard to downward attribution from a foreign 
person.

II. Applicability Dates

    These regulations are generally proposed to apply on or after 
October 1, 2019. See section 7805(b)(1)(B). For taxable years before 
taxable years covered by the regulations, a taxpayer may generally 
apply the rules set forth in the final regulations to the last taxable 
year of a foreign corporation beginning before January 1, 2018, and 
each subsequent taxable year of the foreign corporation, and to taxable 
years of U.S. shareholders in which or with which such taxable years of 
the foreign corporation end, provided that the taxpayer and United 
States persons that are related (within the meaning of section 267 or 
707) to the taxpayer consistently apply the relevant rule with respect 
to all foreign corporations. See section 7805(b)(7). Moreover, although 
proposed Sec.  1.958-2 is proposed to apply to taxable years of foreign 
corporations ending on or after October 1, 2019, and taxable years of 
U.S. shareholders in which or with which such taxable years of foreign 
corporations end, the same result as the proposed revisions applies 
before such date due to the effective date of the repeal of section 
958(b)(4).
    A taxpayer may rely on the proposed regulations with respect to any 
period before the date that these regulations are published as final 
regulations in the Federal Register.

Statement of Availability of IRS Documents

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

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. The 
Treasury Department requests comment and any potential data regarding 
the expected impacts of this proposed regulation.
    This regulation is subject to review under section 6(b) of 
Executive Order 12866 pursuant to the April 11, 2018, Memorandum of 
Agreement (``April 11, 2018 MOA'') between the Treasury Department and 
the Office of Management and Budget (``OMB'') regarding review of tax 
regulations. The Acting Administrator of the Office of Information and 
Regulatory Affairs (``OIRA''), OMB, has waived review of this proposed 
rule in accordance with section 6(a)(3)(A) of Executive Order 12866. 
OIRA will subsequently make a significance determination of the final 
rule under the terms of item 1 of the April 11, 2018 MOA between the 
Treasury Department and OMB regarding review of tax regulations.
A. Background
    Section 14213 of the Act repealed section 958(b)(4), effective 
beginning with the last taxable year of a foreign corporation that 
begins before January 1, 2018 (and taxable years of U.S. shareholders 
in which or with which such taxable years of foreign corporations end). 
The repeal of section 958(b)(4) by the Act modified the constructive 
ownership rules that determine whether a foreign corporation is a CFC 
and whether a U.S. person is a U.S. shareholder of a CFC. Under section 
318(a)(3), stock owned by a person is attributed downward to (that is, 
considered to be owned by) a partnership, estate, trust, or corporation 
in which the person owns an interest. Prior to repeal, section 
958(b)(4) limited the application of section 318(a)(3) for purposes of 
determining whether a foreign corporation is a CFC and whether a U.S. 
person is a U.S. shareholder by providing that downward attribution 
under section 318(a)(3) was not applied so as to consider a U.S. person 
as owning the stock owned by a foreign person. After the repeal of 
section 958(b)(4), such stock owned by a foreign person can be 
attributed downward to a U.S. person, for example, to a U.S. subsidiary 
of a foreign parent. As a result, additional foreign corporations are 
now CFCs, and U.S. persons are now U.S. shareholders of CFCs, even in 
cases where the foreign corporation has no or little U.S ownership.
B. The Need for Proposed Regulations
    The legislative history to the Act states that the repeal of 
section 958(b)(4) was intended ``to render ineffective certain 
transactions that are used to [sic] as a means of avoiding the subpart 
F provisions.'' See H.R. 115-466, at 633 (2017). As a consequence of 
this repeal, many foreign entities that are part of multinational 
groups with U.S. subsidiaries are now considered CFCs even in cases 
where there is no avoidance of tax under subpart F.

[[Page 52404]]

    The treatment of a foreign corporation as a CFC, or a U.S. person 
as a U.S. shareholder, has consequences outside of subpart F because 
many statutes and regulations outside of subpart F have rules that turn 
on the status of a foreign corporation as a CFC or the status of a U.S. 
person as a U.S. shareholder.
    These proposed regulations propose changes that are generally 
intended to ensure that, in appropriate circumstances, the operation of 
certain rules is consistent with their application before the repeal of 
section 958(b)(4). This creates continuity and gives taxpayers tax 
certainty, which allows them to make economically efficient decisions. 
By restoring the pre-Act rule for certain provisions, the proposed 
regulations both alleviate certain burdens of CFC status resulting from 
the section 958(b)(4) repeal unrelated to the aforementioned intended 
purposes of the repeal and neutralize possible incentives to unfairly 
exploit the section 958(b)(4) repeal.
C. Baseline
    The economic analysis that follows compares the proposed 
regulations to a no-action baseline reflecting anticipated Federal 
income tax-related behavior in the absence of the proposed regulations. 
A no-action baseline reflects the current environment including the 
existing international tax regulations, prior to any amendment by the 
proposed regulations.
D. Cost and Benefits of the Proposed Regulations and Potential 
Alternatives
    As described in Part I.A of this Special Analyses, the repeal of 
section 958(b)(4) causes stock owned by a foreign parent to be 
attributed to its U.S. subsidiaries, which can cause a foreign 
subsidiary of a foreign parent to be designated as a CFC, even in 
instances where there is little or no U.S. ownership in the foreign 
multinational group. The Treasury Department and the IRS estimate the 
number of U.S. subsidiaries owned 50 percent or more by a foreign 
corporation to be roughly 75,000 based on 2016 Treasury tax files data. 
To the extent that these foreign corporations have foreign 
subsidiaries, they are potentially affected by the proposed 
regulations. Unfortunately, however, data do not exist regarding the 
number of such foreign subsidiaries. The costs and benefits of these 
proposed regulations are discussed further in this Part I.D.
1. Benefits
    Restoring continuity with pre-repeal rules in appropriate cases is 
beneficial in two primary ways. First, it reinstates expected reporting 
burdens and tax costs for businesses that would otherwise experience 
unintended and unanticipated increases in these costs due to the 
unexpected switch to CFC designation described in Part I.A of this 
Special Analyses. Unanticipated increases in costs can be detrimental 
to normal business operations and can put affected groups at a 
disadvantage relative to competitors who did not experience such 
changes. Regulations designed to maintain continuity of normal business 
operations are appropriate and will promote a positive business 
environment relative to the no action baseline.
    One of the provisions in these proposed regulations that alleviates 
burden is the provision under section 863 on income from space and 
ocean activities and international communications income. In this case 
(as well as in all other aspects of these proposed regulations), the 
proposed regulations prevent unintended disruption in business activity 
by determining CFC status as if section 958(b)(4) had not been 
repealed. In the absence of these proposed regulations, foreign-
parented multinational groups in the space, ocean, and international 
communications industries that have U.S. subsidiaries could potentially 
have their foreign subsidiaries designated as CFCs. The designation of 
the foreign subsidiaries of the foreign-parented multinational groups 
as CFCs would result in all (in the case of space and ocean income) or 
half (in the case of international communications income) of the 
foreign subsidiary's space and ocean income or international 
communications income being treated as U.S. source income where the 
CFCs are controlled directly or indirectly by foreign persons. Comments 
received suggested that such treatment would render companies' business 
models untenable. Accordingly, the proposed regulations provide that 
for purposes of the treatment of space and ocean income and 
international communications income as U.S. source income, the 
determination of whether a foreign corporation is a CFC is made without 
regard to downward attribution from a foreign person. See Part I.F of 
the Explanation of Provisions for further explanation of this 
provision.
    Another example of reduced burden under this rule relates to the 
timing of certain transactions. As explained in Part I.A of the 
Explanation of Provisions, section 267(a)(2) provides a rule for 
determining the time at which an otherwise deductible amount owed to a 
related person may be deducted. In general, if a payee is on the cash 
method of accounting, the payor is not allowed a deduction until the 
amount is actually paid, even if the payor uses the accrual method of 
accounting. The current regulations include an exemption that allows an 
accrual-based payor to deduct certain treaty-exempt amounts before they 
are actually paid to a related foreign person. However, this exemption 
is not allowed if the related foreign person is a CFC. Instead, with 
respect to an amount owed to a CFC, the payor may only take a deduction 
in an earlier year to the extent that an amount attributable to the 
item is includible during such prior taxable year in the gross income 
of a U.S. person who owns stock in the CFC. However, after the repeal 
of section 958(b)(4), a CFC may not have any U.S. shareholders that 
would have an income inclusion under subpart F. In this situation, the 
payor would be unable to deduct the amount until it is actually paid.
    Because of the effective date of the repeal of section 958(b)(4), a 
foreign corporation that was not a CFC under prior law could now become 
a CFC beginning as early as January 1, 2017 (even though the Act was 
not enacted until December 22, 2017). Accordingly, a taxpayer may have 
deducted an amount accrued in 2017 that, due to the repeal of section 
958(b)(4), would no longer be allowable in 2017. Furthermore, due to 
the reduction of the corporate tax rate in the Act, a deduction allowed 
on a company's 2017 tax return at the then statutory rate of 35 percent 
would be valued at 21 percent if the taxpayer were forced to move the 
deduction to 2018 or 2019. The repeal of section 958(b)(4) in this 
situation may result in an inadvertent deferral of certain deductions 
with permanent tax effect and correspondingly create unnecessary 
required adjustments to the income tax provisions in companies' 
financial accounting statements. The proposed guidance removes 
inconsistent annual treatment of deductions for certain treaty-exempt 
payments in the year the amounts are accrued when the amounts are owed 
to related foreign corporations that do not have any direct or indirect 
U.S. shareholders.
    The second benefit of restoring pre-Act treatment is that doing so 
can neutralize unanticipated incentives for tax minimization resulting 
from the repeal. That is, CFC status can both increase burdens and 
offer benefits, but the unintended increase in CFC designations and the 
ease with which taxpayers can create a CFC could incentivize taxpayers 
to take advantage of potential benefits arising from CFC status. For 
example, Part I.B of the

[[Page 52405]]

Explanation of Provisions describes a proposed revision that is 
intended to prevent taxpayers from using the special rule for CFCs in 
section 332(d)(3) to inappropriately avoid U.S. tax on a liquidating 
distribution. In addition, Part I.D of the Explanation of Provisions 
describes a proposed revision that is intended to prevent taxpayers 
from using a CFC that has no direct or indirect U.S. shareholders to 
take advantage of the special rule relating to CFCs that are grantors 
of a trust, facilitating tax-free distributions from the trust to U.S. 
beneficiaries despite no income inclusion by the shareholders of the 
CFC. Because these benefits were not intended for CFCs without direct 
or indirect U.S. shareholders, the anti-abuse aspects of these proposed 
regulations are designed to remove such incentives for taxpayers with 
those CFCs. Such regulations are beneficial because they promote an 
environment in which business operations are undertaken based on sound 
economic principles rather than for tax-motivated reasons.
2. Costs
    The proposed regulations restore pre-section 958(b)(4) repeal CFC 
designation by determining CFC designation in limited situations as if 
section 958(b)(4) had not been repealed, essentially restoring the pre-
repeal ``status quo'' in these situations. The proposed regulations do 
not impose any new systems, methods, structures, reporting, or other 
potentially burdensome rules that could increase compliance costs. In 
fact, as described above, they reduce costs or burdens that would ensue 
in the absence of the proposed regulations. Hence, in restoring the 
status quo in appropriate circumstances, the proposed regulations are 
not expected to impose new costs.

II. Regulatory Flexibility Act

    It is hereby certified that these proposed regulations will not 
have a significant economic impact on a substantial number of small 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). The proposed regulations 
generally affect CFCs and U.S. shareholders of CFCs. As an initial 
matter, CFCs, as foreign corporations, are not considered small 
entities. Nor are U.S. taxpayers considered small entities to the 
extent the taxpayers are natural persons or entities other than small 
entities. Thus, the proposed regulations generally only affect small 
entities if a U.S. taxpayer that is a U.S. shareholder of a CFC is a 
small entity.
    Businesses that are U.S. shareholders of CFCs are generally not 
small businesses because the ownership of sufficient stock of a CFC in 
order to be a U.S. shareholder generally entails significant resources 
and investment. Therefore, the Treasury Department and the IRS have 
determined that the proposed regulations would not affect a substantial 
number of domestic small business entities. Moreover, the proposed 
regulations do not impose any new costs on taxpayers. Consequently, the 
Treasury Department and the IRS have determined that the proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities. Therefore, a Regulatory 
Flexibility Analysis under the Regulatory Flexibility Act is not 
required.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business. The 
Treasury Department and the IRS request comments on the impact of these 
proposed regulations on small business entities.

Comments and Requests for a Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations. The Treasury Department and the IRS also 
request comments on whether any other rules should be modified in light 
of the repeal of section 958(b)(4).
    All comments will be available at www.regulations.gov or upon 
request. A public hearing will be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal authors of the proposed regulations are Karen J. Cate 
and Jorge M. Oben of the Office of Associate Chief Counsel 
(International). However, other personnel from the Treasury Department 
and the IRS participated in the development of the proposed 
regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
the entry for Sec.  1.267(a)-3 and adding entries for Sec. Sec.  1.332-
8 and 1.1297-1 in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.267(a)-3 also issued under 26 U.S.C. 267(a)(3)(A) and 
(a)(3)(B)(ii).
* * * * *
    Section 1.332-8 also issued under 26 U.S.C. 332(d)(4).
* * * * *
    Section 1.1297-1 also issued under 26 U.S.C. 1298(g).
* * * * *

0
Par. 2. Section 1.267(a)-3 is amended by:
0
1. Removing the language ``or (a)(3)'' from paragraph (c)(2).
0
2. Revising paragraph (c)(4).
0
3. In paragraph (d), revising the second sentence and adding five 
sentences at the end of the paragraph.
    The revisions and addition read as follows:


Sec.  1.267(a)-3  Deduction of amounts owed to related foreign persons.

* * * * *
    (c) * * *
    (4) Certain amounts owed to certain controlled foreign 
corporations. An amount (other than interest) that is income of a 
related foreign person with respect to which the related foreign person 
is exempt from United States taxation on the amount owed pursuant to a 
treaty obligation of the United States (such as under an article 
relating to the taxation of business profits) is exempt from the 
application of section 267(a)(3)(B)(i) if the related foreign person is 
a controlled foreign corporation that does not have any United States 
shareholders (as defined in section 951(b)) that own (within the 
meaning of section 958(a)) stock of the controlled foreign corporation.
* * * * *
    (d) * * * Except as otherwise provided in this paragraph (d), the 
regulations in this section issued under section 267 apply to all other 
deductible amounts that are incurred after July 31, 1989, but do not 
apply to amounts that are incurred pursuant to a contract that

[[Page 52406]]

was binding on September 29, 1983, and at all times thereafter (unless 
the contract was renegotiated, extended, renewed, or revised after that 
date). Paragraph (c)(2) of this section applies to payments accrued on 
or after October 22, 2004. For payments accrued before October 22, 
2004, see Sec.  1.267(a)-3(c)(2), as contained in 26 CFR part 1, 
revised as of April 1, 2004. Paragraph (c)(4) of this section applies 
to payments accrued on or after October 1, 2019. For payments accrued 
before October 1, 2019, a taxpayer may apply paragraph (c)(4) of this 
section for payments accrued during the last taxable year of a foreign 
corporation beginning before January 1, 2018, and each subsequent 
taxable year of the foreign corporation, provided that the taxpayer and 
United States persons that are related (within the meaning of section 
267 or 707) to the taxpayer consistently apply such paragraph with 
respect to all foreign corporations. For payments accrued before 
October 22, 2004, see Sec.  1.267(a)-3(c)(4), as contained in 26 CFR 
part 1, revised as of April 1, 2004.
0
Par. 3. Section 1.332-8 is added to read as follows:


Sec.  1.332-8  Recognition of gain on liquidation of certain holding 
companies.

    (a) Definition of controlled foreign corporation. For purposes of 
section 332(d)(3), a controlled foreign corporation has the meaning 
provided in section 957, determined without applying subparagraphs (A), 
(B), and (C) of section 318(a)(3) so as to consider a United States 
person as owning stock which is owned by a person who is not a United 
States person.
    (b) Applicability date. This section applies to distributions in 
complete liquidation occurring on or after October 1, 2019, and to 
distributions in complete liquidation occurring before October 1, 2019, 
that result from an entity classification election made under Sec.  
301.7701-3 of this chapter that is filed on or after October 1, 2019. 
For distributions in complete liquidation occurring before October 1, 
2019, other than distributions in complete liquidation occurring before 
October 1, 2019, that result from an entity classification election 
made under Sec.  301.7701-3 of this chapter that is filed on or after 
October 1, 2019, a taxpayer may apply this section to distributions in 
complete liquidation occurring during the last taxable year of a 
distributee foreign corporation beginning before January 1, 2018, and 
each subsequent taxable year of the foreign corporation, provided that 
the taxpayer and United States persons that are related (within the 
meaning of section 267 or 707) to the taxpayer consistently apply this 
section with respect to all foreign corporations.
0
Par. 4. Section 1.367(a)-8 is amended by:
0
1. Revising the second sentence of paragraph (k)(14)(ii).
0
2. In paragraph (p)(3), designating Examples 1 through 3 as paragraphs 
(p)(3)(i) through (iii), respectively.
0
3. In newly redesignated paragraphs (p)(3)(i) through (iii), 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
              Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(p)(3)(i)(i) and (ii).....................  (p)(3)(i)(A) and (B).
(p)(3)(ii)(i) and (ii)....................  (p)(3)(ii)(A) and (B).
(p)(3)(iii)(i) and (ii)...................  (p)(3)(iii)(A) and (B).
------------------------------------------------------------------------

0
4. In each newly redesignated paragraph listed in the first column, 
removing the language in the second column and adding in its place the 
language in the third column:

------------------------------------------------------------------------
            Paragraph                   Remove                Add
------------------------------------------------------------------------
(p)(3)(i)(B)....................  this Example 1....  In paragraph
                                                       (p)(3)(i)(A) of
                                                       this section (the
                                                       facts of this
                                                       Example 1).
(p)(3)(ii)(B)...................  this Example 2....  In paragraph
                                                       (p)(3)(ii)(A) of
                                                       this section (the
                                                       facts of this
                                                       Example 1).
------------------------------------------------------------------------

0
5. In paragraph (q)(2):
0
a. Removing the language ``at least 5% (applying the attribution rules 
of section 318, as modified by section 958(b))'' each place that it 
appears and adding ``at least 5% (determined as provided in paragraph 
(k)(14)(ii) of this section)'' in its place.
0
b. Designating Examples 1 through 25 as paragraphs (q)(2)(i) through 
(xxv), respectively.
0
6. In newly redesignated paragraphs (q)(2)(i) through (xxv), 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
             Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(q)(2)(i)(i) and (ii)..................  (q)(2)(i)(A) and (B).
(q)(2)(ii)(i) and (ii).................  (q)(2)(ii)(A) and (B).
(q)(2)(ii)(B)(A) and (B)...............  (q)(2)(ii)(B)(1) and (2).
(q)(2)(iii)(i) and (ii)................  (q)(2)(iii)(A) and (B).
(q)(2)(iv)(i) and (ii).................  (q)(2)(iv)(A) and (B).
(q)(2)(iv)(B)(A) and (B)...............  (q)(2)(iv)(B)(1) and (2).
(q)(2)(iv)(B)(2)(1) through (3)........  (q)(2)(iv)(B)(2)(i) through
                                          (iii).
(q)(2)(v)(i) and (ii)..................  (q)(2)(v)(A) and (B).
(q)(2)(vi)(i) through (iii)............  (q)(2)(vi)(A) through (C).
(q)(2)(vi)(B)(A) and (B)...............  (q)(2)(vi)(B)(1) and (2).
(q)(2)(vi)(B)(2)(1) through (3)........  (q)(2)(vi)(B)(2)(i) through
                                          (iii).
(q)(2)(vii)(i) and (ii)................  (q)(2)(vii)(A) and (B).
(q)(2)(viii)(i) and (ii)...............  (q)(2)(viii)(A) and (B).
(q)(2)(ix)(i) and (ii).................  (q)(2)(ix)(A) and (B).
(q)(2)(x)(i) and (ii)..................  (q)(2)(x)(A) and (B).
(q)(2)(x)(B)(A) through (C)............  (q)(2)(x)(B)(1) through (3).
(q)(2)(xi)(i) through (iii)............  (q)(2)(xi)(A) through (C).
(q)(2)(xii)(i) and (ii)................  (q)(2)(xii)(A) and (B).
(q)(2)(xii)(B)(A) through (C)..........  (q)(2)(xii)(B)(1) through (3).
(q)(2)(xiii)(i) and (ii)...............  (q)(2)(xiii)(A) and (B).
(q)(2)(xiv)(i) and (ii)................  (q)(2)(xiv)(A) and (B).

[[Page 52407]]

 
(q)(2)(xiv)(B)(A) and (B)..............  (q)(2)(xiv)(B)(1) and (2).
(q)(2)(xv)(i) and (ii).................  (q)(2)(xv)(A) and (B).
(q)(2)(xvi)(i) and (ii)................  (q)(2)(xvi)(A) and (B).
(q)(2)(xvii)(i) and (ii)...............  (q)(2)(xvii)(A) and (B).
(q)(2)(xvii)(B)(A) through (C).........  (q)(2)(xvii)(B)(1) through (3).
(q)(2)(xvii)(B)(3)(1) through (3)......  (q)(2)(xvii)(B)(3)(i) through
                                          (iii).
(q)(2)(xviii)(i) and (ii)..............  (q)(2)(xviii)(A) and (B).
(q)(2)(xix)(i) and (ii)................  (q)(2)(xix)(A) and (B).
(q)(2)(xx)(i) through (vi).............  (q)(2)(xx)(A) through (F).
(q)(2)(xx)(B)(A) and (B)...............  (q)(2)(xx)(B)(1) and (2).
(q)(2)(xx)(B)(1)(1) and (2)............  (q)(2)(xx)(B)(1)(i) and (ii).
(q)(2)(xxi)(i) and (ii)................  (q)(2)(xxi)(A) and (B).
(q)(2)(xxi)(B)(A) through (C)..........  (q)(2)(xxi)(B)(1) through (3).
(q)(2)(xxii)(i) through (iii)..........  (q)(2)(xxii)(A) through (C).
(q)(2)(xxii)(B)(A) through (C).........  (q)(2)(xxii)(B)(1) through (3).
(q)(2)(xxii)(C)(A) through (C).........  (q)(2)(xxii)(C)(1) through (3).
(q)(2)(xxiii)(i) through (iv)..........  (q)(2)(xxiii)(A) through (D).
(q)(2)(xxiii)(B)(A) through (D)........  (q)(2)(xxiii)(B)(1) through
                                          (4).
(q)(2)(xxiii)(C)(A) and (B)............  (q)(2)(xxiii)(C)(1) and (2).
(q)(2)(xxiv)(i) and (ii)...............  (q)(2)(xxiv)(A) and (B).
(q)(2)(xxv)(i) and (ii)................  (q)(2)(xxv)(A) and (B).
------------------------------------------------------------------------

0
7. In each newly redesignated paragraph listed in the first column, 
removing the language in the second column and adding in its place the 
language in the third column:

------------------------------------------------------------------------
            Paragraph                   Remove                Add
------------------------------------------------------------------------
(q)(2)(ii)(B)(2)................  paragraph (ii)(A)   paragraph
                                   of this Example 2.  (q)(2)(ii)(B)(1)
                                                       of this section
                                                       (paragraph (1) in
                                                       the results in
                                                       this Example 2).
(q)(2)(iv)(B)(2)(i).............  paragraph (ii)(A)   paragraph
                                   of this Example 4.  (q)(2)(iv)(B)(1)
                                                       of this section
                                                       (paragraph (1) in
                                                       the results in
                                                       this Example 4).
(q)(2)(vi)(B)(1)................  paragraph (ii)(B)   paragraph
                                   of this Example 6.  (q)(2)(vi)(B)(2)
                                                       of this section
                                                       (paragraph (2) in
                                                       the results in
                                                       this Example 6).
(q)(2)(vi)(C)...................  paragraph (i) of    paragraph
                                   this Example 6.     (q)(2)(vi)(A) of
                                                       this section (the
                                                       facts in this
                                                       Example 6).
(q)(2)(xi)(C)...................  paragraph (i) of    paragraph
                                   this Example 11.    (q)(2)(xi)(A) of
                                                       this section (the
                                                       facts in this
                                                       Example 11).
(q)(2)(xx)(C)...................  paragraph (i) of    paragraph
                                   this Example 20.    (q)(2)(xx)(A) of
                                                       this section (the
                                                       facts in this
                                                       Example 20).
(q)(2)(xx)(C)...................  paragraph (ii) of   paragraph
                                   this Example 20.    (q)(2)(xx)(B) of
                                                       this section (the
                                                       results in this
                                                       Example 20).
(q)(2)(xx)(D)...................  paragraph (i) of    paragraph
                                   this Example 20.    (q)(2)(xx)(A) of
                                                       this section (the
                                                       facts in this
                                                       Example 20).
(q)(2)(xx)(D)...................  paragraph (ii) of   paragraph
                                   this Example 20.    (q)(2)(xx)(B) of
                                                       this section (the
                                                       facts in this
                                                       Example 20).
(q)(2)(xx)(E)...................  paragraph (i) of    paragraph
                                   this Example 20.    (q)(2)(xx)(A) of
                                                       this section (the
                                                       facts in this
                                                       Example 20).
(q)(2)(xx)(F)...................  paragraph (i) of    paragraph
                                   this Example 20.    (q)(2)(xx)(A) of
                                                       this section (the
                                                       facts in this
                                                       Example 20).
(q)(2)(xxii)(C) introductory      in paragraph (i)    paragraph
 text.                             of this Example     (q)(2)(xxii)(A)
                                   22.                 of this section
                                                       (the facts in
                                                       this Example 22).
(q)(2)(xxiii)(C) introductory     paragraph (i) of    paragraph
 text.                             this Example 23.    (q)(2)(xxiii)(A)
                                                       of this section
                                                       (the facts in
                                                       this Example 23).
(q)(2)(xxiii)(C) introductory     paragraph (ii) of   paragraph
 text.                             this Example 23.    (q)(2)(xxiii)(B)
                                                       of this section
                                                       (the results in
                                                       this Example 23).
(q)(2)(xxiii)(D)................  paragraph (i) of    paragraph
                                   this Example 23.    (q)(2)(xxiii)(A)
                                                       of this section
                                                       (the facts in
                                                       this Example 23).
(q)(2)(xxiv)(A).................  in paragraph (i)    paragraph
                                   of Example 6.       (q)(2)(vi)(A) of
                                                       this section (the
                                                       facts in Example
                                                       6).
------------------------------------------------------------------------

0
8. Amend each paragraph listed in the first column, by removing the 
language in the second column and adding in its place the language in 
the third column:

------------------------------------------------------------------------
            Paragraph                   Remove                Add
------------------------------------------------------------------------
(c)(1)(ii)......................  (q)(2) of this      (q)(2)(vi) of this
                                   section, Example    section.
                                   6.
(c)(4)(iv)......................  paragraph (q)(2)    paragraphs
                                   of this section,    (q)(2)(i), (ii),
                                   Examples 1, 2, 3,   (iii), and (v) of
                                   and 5.              this section.

[[Page 52408]]

 
(j)(1)..........................  (q)(2) of this      (q)(2)(ii) of this
                                   section, Example    section.
                                   2.
(k)(1) introductory language....  (q)(2) of this      (q)(2)(iv) of this
                                   section, Example    section.
                                   4.
(k)(1)(ii)......................  (q)(2) of this      (q)(2)(iii) of
                                   section, Example    this section.
                                   3.
(k)(1)(iii).....................  (q)(2) of this      (q)(2)(xi) of this
                                   section, Example    section.
                                   11.
(k)(6)(i).......................  (q)(2) of this      (q)(2)(v) of this
                                   section, Example    section.
                                   5.
(k)(6)(i).......................  (q)(2) of this      (q)(2)(vi) of this
                                   section, Example    section.
                                   6.
(k)(6)(ii)......................  (q)(2) of this      (q)(2)(vii) of
                                   section, Example    this section.
                                   7.
(k)(6)(iii).....................  (q)(2) of this      (q)(2)(viii) of
                                   section, Example    this section.
                                   8.
(k)(8)..........................  (q)(2) of this      (q)(2)(ix) of this
                                   section, Example    section.
                                   9.
(k)(12)(i)......................  (q)(2) of this      (q)(2)(xx) of this
                                   section, Example    section.
                                   20.
(k)(14) introductory language...  paragraph (q)(2),   paragraphs
                                   Examples 4, 6,      (q)(2)(iv), (vi),
                                   10, 12, 17, 21,     (x), (xii),
                                   and 23 of this      (xvii), (xxi),
                                   section.            and (xxiii) of
                                                       this section.
(m)(1)..........................  (q)(2) of this      (q)(2)(xiii) of
                                   section, Example    this section.
                                   13.
(n)(1)..........................  (q)(2) of this      (q)(2)(xiv) of
                                   section, Example    this section.
                                   14.
(o)(1)(ii)......................  (q)(2) of this      (q)(2)(xv) of this
                                   section, Example    section.
                                   15.
(o)(1)(iii) introductory          (q)(2) of this      (q)(2)(xvi) of
 language.                         section, Example    this section.
                                   16.
(o)(5)(i)(A)....................  (q)(2) of this      (q)(2)(xviii) of
                                   section, Example    this section.
                                   18.
(o)(5)(i)(B)....................  (q)(2) of this      (q)(2)(ixx) of
                                   section, Example    this section.
                                   19.
(o)(5)(i)(C)....................  (q)(2) of this      (q)(2)(xxii) of
                                   section, Example    this section.
                                   22.
(o)(5)(i)(D)....................  (q)(2) of this      (q)(2)(xxii) of
                                   section, Example    this section.
                                   22.
(o)(6)..........................  (q)(2) of this      (q)(2)(xx) of this
                                   section, Example    section.
                                   20.
(r)(2)(i).......................  paragraph (q)(2)    paragraphs
                                   of this section,    (q)(2)(xxiv) and
                                   Examples 24 and     (xxv) of this
                                   25.                 section.
------------------------------------------------------------------------

0
9. Revising the heading of paragraph (r).
0
10. Adding two sentences at the end of paragraph (r)(1)(i).
    The revision and addition read as follows:


Sec.  1.367(a)-8  Gain recognition agreement requirements.

* * * * *
    (k) * * *
    (14) * * *
    (ii) * * * If, as a result of the disposition or other event, a 
foreign corporation acquires the transferred stock or securities or, as 
applicable, substantially all the assets of the transferred 
corporation, the condition of this paragraph (k)(14)(ii) is satisfied 
only if the U.S. transferor owns at least five percent (applying the 
attribution rules of section 318, as modified by section 958(b), 
without applying subparagraphs (A), (B), and (C) of section 318(a)(3) 
so as to consider the U.S. transferor as owning stock which is owned by 
a person who is not a United States person) of the total voting power 
and the total value of the outstanding stock of such foreign 
corporation.
* * * * *
    (r) Applicability dates. (1) * * *
    (i) * * * Paragraph (k)(14)(ii) of this section applies to 
transfers occurring on or after October 1, 2019, and to transfers 
occurring before October 1, 2019, that result from an entity 
classification election made under Sec.  301.7701-3 of this chapter 
that is filed on or after October 1, 2019. For transfers occurring 
before October 1, 2019, other than transfers occurring before October 
1, 2019, that result from an entity classification election made under 
Sec.  301.7701-3 of this chapter that is filed on or after October 1, 
2019, a taxpayer may apply paragraph (k)(14)(ii) of this section to 
transfers occurring during the last taxable year of a transferee 
foreign corporation beginning before January 1, 2018, and each 
subsequent taxable year of the foreign corporation, provided that the 
taxpayer and United States persons that are related (within the meaning 
of section 267 or 707) to the taxpayer consistently apply such 
paragraph with respect to all foreign corporations.
* * * * *
0
Par. 5. Section 1.672(f)-2 is amended by revising paragraphs (a) and 
(e) to read as follows:


Sec.  1.672(f)-2  Certain foreign corporations.

    (a) Application of general rule in this section. Subject to the 
provisions of paragraph (b) of this section, if the owner of any 
portion of a trust upon application of the grantor trust rules without 
regard to section 672(f) is a controlled foreign corporation or a 
passive foreign investment company (as defined in section 1297), the 
corporation will be treated as a domestic corporation for purposes of 
applying the rules of Sec.  1.672(f)-1. For purposes of this section, 
the only controlled foreign corporations taken into account are those 
that are controlled foreign corporations within the meaning provided in 
section 957, determined without applying subparagraphs (A), (B), and 
(C) of section 318(a)(3) so as to consider a United States person as 
owning stock which is owned by a person who is not a United States 
person.
* * * * *
    (e) Applicability dates. Except as provided in this paragraph (e), 
the rules of this section apply to taxable years of shareholders of 
controlled foreign corporations and passive foreign investment 
companies beginning after August 10, 1999, and taxable years of 
controlled foreign corporations and passive foreign investment 
companies ending with or within such taxable years of the shareholders. 
The provisions in paragraph (a) of this section relating to the 
controlled foreign corporations taken into account for purposes of this 
section apply to taxable years of foreign corporations ending on or 
after October 1, 2019, and taxable years of United States shareholders 
in which or with which such taxable years of foreign corporations end. 
For taxable years of foreign corporations ending before October 1, 
2019, and taxable years of United States shareholders in which or with 
which such taxable years of foreign corporations end, a taxpayer may 
apply such provisions to the last taxable year of a foreign corporation 
beginning before January 1, 2018, and each subsequent taxable year of 
the foreign corporation, and to taxable years of United States 
shareholders in which or with which such taxable years of the foreign 
corporation end, provided that the taxpayer and United States persons 
that are related (within the meaning of section 267 or 707) to the 
taxpayer consistently apply such provisions with respect to all foreign 
corporations.
0
Par. 6. Section 1.706-1 is amended by:
0
1. Revising paragraph (b)(6)(ii).
0
2. Revising the heading for paragraph (b)(6)(v).

[[Page 52409]]

0
3. In paragraph (b)(6)(v)(A), revising the first sentence and adding 
two sentences after the first sentence.
    The revisions and addition read as follows:


Sec.  1.706-1  Taxable years of partner and partnership.

* * * * *
    (b) * * *
    (6) * * *
    (ii) Definition of foreign partner. For purposes of this paragraph 
(b)(6), a foreign partner is any partner that is not a United States 
person (as defined in section 7701(a)(30)), except that a partner that 
is a controlled foreign corporation (within the meaning of section 
957(a)) in which a United States shareholder (as defined in section 
951(b)) owns (within the meaning of section 958(a)) stock is not 
treated as a foreign partner.
* * * * *
    (v) Applicability dates. (A) * * * The provisions of this paragraph 
(b)(6) (other than paragraph (b)(6)(iii) of this section and paragraph 
(b)(6)(ii) of this section to the extent described in the next 
sentence) apply to partnership taxable years, other than those of an 
existing partnership, that begin on or after July 23, 2002. The 
provisions in paragraph (b)(6)(ii) of this section relating to 
controlled foreign corporations apply to taxable years of foreign 
corporations ending on or after October 1, 2019, and taxable years of 
United States shareholders in which or with which such taxable years of 
foreign corporations end. For taxable years of foreign corporations 
ending before October 1, 2019, and taxable years of United States 
shareholders in which or with which such taxable years of foreign 
corporations end, a taxpayer may apply such provisions to the last 
taxable year of a foreign corporation beginning before January 1, 2018, 
and each subsequent taxable year of the foreign corporation, and to 
taxable years of United States shareholders in which or with which such 
taxable years of the foreign corporation end, provided that the 
taxpayer and United States persons that are related (within the meaning 
of section 267 or 707) to the taxpayer consistently apply such 
provisions with respect to all foreign corporations. * * *
* * * * *
0
Par. 7. Section 1.863-8 is amended by:
0
1. In paragraph (b)(2)(ii), revising the first sentence and adding a 
sentence at the end of the paragraph.
0
2. Revising paragraph (h).
    The revisions and addition read as follows:


Sec.  1.863-8  Source of income derived from space and ocean activity 
under section 863(d).

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * * Space and ocean income derived by a controlled foreign 
corporation (CFC) is income from sources within the United States. * * 
* For purposes of this section, a controlled foreign corporation has 
the meaning provided in section 957, determined without applying 
subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider 
a United States person as owning stock which is owned by a person who 
is not a United States person.
* * * * *
    (h) Applicability dates. Except as provided in this paragraph (h), 
this section applies to taxable years beginning on or after December 
27, 2006. The provisions in paragraph (b)(2)(ii) of this section 
relating to the meaning of CFC apply to taxable years of foreign 
corporations ending on or after October 1, 2019. For taxable years of 
foreign corporations ending before October 1, 2019, a taxpayer may 
apply such provisions to the last taxable year of a foreign corporation 
beginning before January 1, 2018, and each subsequent taxable year of 
the foreign corporation, provided that the taxpayer and United States 
persons that are related (within the meaning of section 267 or 707) to 
the taxpayer consistently apply such provisions with respect to all 
foreign corporations.
0
Par. 8. Section 1.863-9 is amended by revising paragraphs (b)(2)(ii) 
and (l) to read as follows:


Sec.  1.863-9  Source of income derived from communications activity 
under section 863(a), (d), and (e).

* * * * *
    (b) * * *
    (2) * * *
    (ii) International communications income derived by a controlled 
foreign corporation. International communications income derived by a 
controlled foreign corporation (CFC) is one-half from sources within 
the United States and one-half from sources without the United States. 
For purposes of this section, a controlled foreign corporation has the 
meaning provided in section 957, determined without applying 
subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider 
a United States person as owning stock which is owned by a person who 
is not a United States person.
* * * * *
    (l) Applicability dates. Except as otherwise provided in this 
paragraph (l), this section applies to taxable years beginning on or 
after December 27, 2006. The provisions in paragraph (b)(2)(ii) of this 
section relating to the meaning of CFC apply to taxable years of 
foreign corporations ending on or after October 1, 2019. For taxable 
years of foreign corporations ending before October 1, 2019, a taxpayer 
may apply such provisions to the last taxable year of a foreign 
corporation beginning before January 1, 2018, and each subsequent 
taxable year of the foreign corporation, provided that the taxpayer and 
United States persons that are related (within the meaning of section 
267 or 707) to the taxpayer consistently apply such provisions with 
respect to all foreign corporations.
0
Par. 9. Section 1.904-5, as proposed to be amended at 83 FR 63200 
(December 7, 2018), is further amended by:
0
1. Revising paragraph (a)(4)(i).
0
2. Revising the first sentence of paragraph (a)(4)(vi).
0
3. Revising paragraph (o).
    The revisions read as follows:


Sec.  1.904-5  Look-through rules as applied to controlled foreign 
corporations and other entities.

    (a) * * *
    (4) * * *
    (i) The term controlled foreign corporation has the meaning given 
such term by section 957 (taking into account the special rule for 
certain captive insurance companies contained in section 953(c)), 
determined without applying subparagraphs (A), (B), and (C) of section 
318(a)(3) so as to consider a United States person as owning stock 
which is owned by a person who is not a United States person.
* * * * *
    (vi) The term United States shareholder has the meaning given such 
term by section 951(b) (taking into account the special rule for 
certain captive insurance companies contained in section 953(c)), 
determined without applying subparagraphs (A), (B), and (C) of section 
318(a)(3) so as to consider a United States person as owning stock 
which is owned by a person who is not a United States person, except 
that for purposes of this section, a United States shareholder includes 
any member of the controlled group of the United States shareholder. * 
* *
* * * * *
    (o) Applicability dates. Except as otherwise provided in this 
paragraph (o), this section applies to taxable years that both begin 
after December 31, 2017, and end on or after December 4, 2018.

[[Page 52410]]

Paragraphs (a)(4)(i) and (vi) of this section apply to taxable years of 
foreign corporations ending on or after October 1, 2019, and taxable 
years of United States persons ending on or after October 1, 2019. For 
taxable years of foreign corporations ending before October 1, 2019, 
and taxable years of United States persons ending before October 1, 
2019, a taxpayer may apply such provisions to the last taxable year of 
a foreign corporation beginning before January 1, 2018, and each 
subsequent taxable year of the foreign corporation, and to taxable 
years of United States shareholders in which or with which such taxable 
years of the foreign corporation end, provided that the taxpayer and 
United States persons that are related (within the meaning of section 
267 or 707) to the taxpayer consistently apply such provisions with 
respect to all foreign corporations.
0
Par. 10. Section 1.958-2 is amended by:
0
1. Removing and reserving paragraph (d)(2).
0
2. In paragraph (g), designating Examples 1 through 6 as paragraphs 
(g)(1) through (6), respectively.
0
3. In newly designated paragraphs (g)(1) and (2), removing the language 
``paragraph (c)(1)(iii) and (2) of this section'' and adding 
``paragraphs (c)(1)(iii) and (c)(2) of this section'' in its place.
0
4. Revising newly designated paragraph (g)(4).
0
5. Adding paragraph (h).
0
6. Removing the parenthetical authority citation at the end of the 
section.
    The revisions and addition read as follows:


Sec.  1.958-2  Constructive ownership of stock.

* * * * *
    (g) * * *

    (4) Example 4. Foreign corporation U owns 100 percent of the one 
class of stock in domestic corporation V and also 100 percent of the 
one class of stock in foreign corporation W. Because more than 50 
percent in value of the stock of V Corporation is owned by its sole 
shareholder, U Corporation, V Corporation is considered under 
paragraph (d)(1)(iii) of this section as owning the stock owned by U 
Corporation in W Corporation, and accordingly is a United States 
shareholder of W Corporation.

* * * * *
    (h) Applicability date. Paragraphs (d)(2) and (g)(4) of this 
section apply to taxable years of foreign corporations ending on or 
after October 1, 2019, and taxable years of United States shareholders 
in which or with which such taxable years of foreign corporations end. 
For taxable years of foreign corporations ending before October 1, 
2019, and taxable years of United States shareholders in which or with 
which such taxable years of foreign corporations end, a taxpayer may 
apply such provisions to the last taxable year of a foreign corporation 
beginning before January 1, 2018, and each subsequent taxable year of 
the foreign corporation, and to taxable years of United States 
shareholders in which or with which such taxable years of the foreign 
corporation end, provided that the taxpayer and United States persons 
that are related (within the meaning of section 267 or 707) to the 
taxpayer consistently apply such provisions with respect to all foreign 
corporations.
0
Par. 11. Section 1.1297-1, as proposed to be added at 84 FR 33120 (July 
11, 2019), is amended by revising paragraphs (d)(1)(iii)(A) and (g)(1) 
to read as follows:


Sec.  1.1297-1  Definition of passive foreign investment company.

* * * * *
    (d) * * *
    (1) * * *
    (A) Controlled foreign corporation. For purposes of section 
1297(e)(2)(A), the term controlled foreign corporation has the meaning 
provided in section 957, determined without applying subparagraphs (A), 
(B), and (C) of section 318(a)(3) so as to consider a United States 
person as owning stock which is owned by a person who is not a United 
States person.
* * * * *
    (g) * * *
    (1) Paragraph (d)(1)(iii)(A) of this section. Paragraph 
(d)(1)(iii)(A) of this section applies to taxable years of shareholders 
ending on or after October 1, 2019. For taxable years of shareholders 
ending before October 1, 2019, a shareholder may apply paragraph 
(d)(1)(iii)(A) of this section to the last taxable year of a foreign 
corporation beginning before January 1, 2018, and each subsequent 
taxable year of the foreign corporation, provided that the shareholder 
and United States persons that are related (within the meaning of 
section 267 or 707) to the taxpayer consistently apply such paragraph 
with respect to all foreign corporations.
* * * * *
0
Par. 12. Section 1.6049-5 is amended by revising paragraphs 
(c)(5)(i)(C) and (g) to read as follows:


Sec.  1.6049-5  Interest and original issue discount subject to 
reporting after December 31, 1982.

* * * * *
    (c) * * *
    (5) * * *
    (i) * * *
    (C) A controlled foreign corporation within the meaning of section 
957, determined without applying subparagraphs (A), (B), and (C) of 
section 318(a)(3) so as to consider a United States person as owning 
stock which is owned by a person who is not a United States person.
* * * * *
    (g) Applicability dates. Except as otherwise provided in this 
paragraph (g), this section applies to payments made on or after 
January 6, 2017. (For payments made after June 30, 2014, and before 
January 6, 2017, see this section as in effect and contained in 26 CFR 
part 1, as revised April 1, 2016. For payments made after December 31, 
2000, and before July 1, 2014, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2013.) Paragraph 
(c)(5)(i)(C) of this section applies to payments made on or after 
October 1, 2019. For payments made before October 1, 2019, a taxpayer 
may apply paragraph (c)(5)(i)(C) of this section for payments during 
the last taxable year of a foreign corporation beginning before January 
1, 2018, and each subsequent taxable year of the foreign corporation, 
provided that the taxpayer and United States persons that are related 
(within the meaning of section 267 or 707) to the taxpayer consistently 
apply such paragraph with respect to all foreign corporations.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-20567 Filed 10-1-19; 8:45 am]
 BILLING CODE 4830-01-P