Coordination of Extraordinary Disposition and Disqualified Basis Rules, 53098-53124 [2020-18544]
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Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Proposed Rules
FOR FURTHER INFORMATION CONTACT:
DEPARTMENT OF THE TREASURY
Concerning the proposed regulations,
Logan M. Kincheloe, (202) 317–6937;
concerning submission of comments or
requests for a hearing, Regina Johnson,
(202) 317–6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Internal Revenue Service
26 CFR Part 1
[REG–124737–19]
RIN 1545–BP57
Background
Coordination of Extraordinary
Disposition and Disqualified Basis
Rules
I. Overview
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations under sections
245A and 951A of the Internal Revenue
Code (the ‘‘Code’’) that coordinate the
extraordinary disposition rule under
section 245A of the Internal Revenue
Code (the ‘‘Code’’) with the disqualified
basis rule under section 951A of the
Code. This document also contains
proposed regulations under section
6038 of the Code regarding information
reporting to facilitate administration of
the proposed regulations. The proposed
regulations affect corporations that are
subject to the extraordinary disposition
rule and the disqualified basis rule.
DATES: Written or electronic comments
and requests for a public hearing must
be received by October 26, 2020.
Requests for a public hearing must be
submitted as prescribed in the
‘‘Comments and Requests for a Public
Hearing’’ section.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic
submissions via the Federal
eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–124737–19) by following the
online instructions for submitting
comments. Once submitted to the
Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The IRS
expects to have limited personnel
available to process public comments
that are submitted on paper through
mail. Until further notice, any
comments submitted on paper will be
considered to the extent practicable.
The Department of the Treasury
(Treasury Department) and the IRS will
publish for public availability any
comment submitted electronically, and
to the extent practicable on paper, to its
public docket.
Send paper submissions to:
CC:PA:LPD:PR (REG–124737–19), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044.
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SUMMARY:
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This document contains proposed
amendments to 26 CFR part 1 under
sections 245A, 951A, and 6038 (the
‘‘proposed regulations’’). Any terms
used but not defined in this preamble
have the meanings given to them in the
proposed regulations.
II. Sections 245A and 954(c)(6)
Section 245A was added to the Code
by the Tax Cuts and Jobs Act, Public
Law 115–97, 131 Stat. 2054, 2189 (2017)
(the ‘‘Act’’), which was enacted on
December 22, 2017. Section 245A
generally allows a domestic corporation
that is a United States shareholder (as
defined in section 951(b)) a 100-percent
dividends received deduction (a
‘‘section 245A deduction’’) for the
foreign-source portion of a dividend
received after December 31, 2017, from
a specified 10-percent owned foreign
corporation (an ‘‘SFC’’). Section 245A(g)
provides the Secretary with authority to
prescribe such regulations or other
guidance as may be necessary or
appropriate to carry out the provisions
of section 245A.
Section 954(c)(6) was added to the
Code by the Tax Increase Prevention
and Reconciliation Act of 2005, Public
Law 109–222, 120 Stat. 345 (2006).
Section 954(c)(6) generally provides
that, for certain taxable years, dividends
received or accrued by a controlled
foreign corporation (as defined in
section 957) (a ‘‘CFC’’) from another
CFC that is a related person generally
are excluded from the foreign personal
holding company income (as defined in
section 954(c)) (‘‘FPHCI’’) of the
distributee CFC. Section 954(c)(6)(A)
provides the Secretary with the
authority to prescribe regulations as
may be necessary or appropriate to carry
out section 954(c)(6), including
regulations as may be necessary or
appropriate to prevent the abuse of its
purposes. Section 954(c)(6) currently
applies to taxable years of foreign
corporations beginning before January 1,
2021, and to taxable years of United
States shareholders with or within
which those taxable years of the foreign
corporations end.
On June 18, 2019, the Department of
the Treasury (‘‘Treasury Department’’)
and the IRS published temporary
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regulations (TD 9865, 84 FR 28398) and
cross-referenced proposed regulations
(REG–106282–18, 84 FR 28426)
(together the ‘‘2019 section 245A
regulations’’) under sections 245A, 954,
and 6038. The 2019 proposed
regulations are finalized, and the
temporary regulations are removed, in
the Final Rules section of this issue of
the Federal Register (the proposed
regulations as finalized, the ‘‘final
regulations’’). The final regulations
include rules that limit the amount
eligible for the section 245A deduction
and the amount eligible for the section
954(c)(6) exception by 50 percent of the
extraordinary disposition amount or
tiered extraordinary disposition amount,
respectively (together, the
‘‘extraordinary disposition rule’’). See
§ 1.245A–5(b) and (d). In general, an
extraordinary disposition amount is an
amount of earnings and profits (‘‘E&P’’)
distributed by an SFC that is attributable
to an extraordinary disposition, which
includes certain non-ordinary course
asset sales between related parties
during the selling SFC’s disqualified
period. In general, a tiered extraordinary
disposition amount is a dividend
received by an upper-tier CFC from a
lower-tier CFC that would be an
extraordinary disposition amount if
received by a section 245A shareholder
of the lower-tier CFC. The disqualified
period is defined with respect to an SFC
as the period beginning on January 1,
2018, and ending as of the close of the
taxable year of the SFC, if any, that
begins before January 1, 2018, and ends
after December 31, 2017. See § 1.245A–
5(c). The purpose of the extraordinary
disposition rule is to prevent taxpayers
from obtaining the benefits of the
section 245A deduction or the section
954(c)(6) exception for E&P that were
generated in certain non-ordinary
course transactions occurring during the
disqualified period and that were not
subject to current U.S. tax solely
because the transactions occurred
during the disqualified period; these
E&P are generally not intended to
qualify for the section 245A deduction
or the section 954(c)(6) exception. See
84 FR 28401.
III. Section 951A
Section 951A, added to the Code by
the Act, requires a United States
shareholder of any CFC for any taxable
year to include in gross income the
United States shareholder’s global
intangible low-taxed income (‘‘GILTI
inclusion amount’’) for that year. On
October 10, 2018, the Treasury
Department and the IRS published in
the Federal Register proposed
regulations (REG–104390–18, 83 FR
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51072) implementing section 951A. On
June 21, 2019, the Treasury Department
and the IRS published in the Federal
Register final regulations (‘‘GILTI final
regulations’’) (TD 9866, 84 FR 29288)
that adopted, with revisions, the
proposed regulations under section
951A.
The GILTI final regulations include a
rule providing that a deduction or loss
attributable to basis created by reason of
a transfer of property from a CFC to a
related person during the disqualified
period (‘‘disqualified basis’’) is allocated
and apportioned solely to residual CFC
gross income (the ‘‘disqualified basis
rule’’). See § 1.951A–2(c)(5)(i).1 Residual
CFC gross income is defined as gross
income other than gross tested income,
subpart F income, or income effectively
connected with the conduct of a trade
or business in the United States. See
§ 1.951A–2(c)(5)(iii)(B). The disqualified
basis rule also provides that any
depreciation, amortization, or cost
recovery allowances attributable to
disqualified basis are not properly
allocable to property produced, or
acquired for resale, under section 263,
263A, or 471. See § 1.951A–2(c)(5)(i).
The purpose of the disqualified basis
rule is to prevent taxpayers from
obtaining the benefits of tax basis in the
transferred asset (for example,
depreciation or amortization deductions
over time that reduce a CFC’s tested
income or increase a CFC’s tested loss)
that was created through related-party
transactions effectuated at no U.S. tax
cost solely because they occurred during
the disqualified period. See 84 FR
29299. Thus, the rule creates symmetry
between the categorization of non-taxed
income created in the transaction
generating disqualified basis during the
disqualified period and the
categorization of deductions generated
after the disqualified period attributable
to that disqualified basis. See id.
Further, recently proposed regulations
under section 951A treat a deduction
related to certain payments by a CFC to
a related recipient CFC during the
disqualified period in a manner similar
to the treatment of disqualified basis
under the GILTI final regulations (the
‘‘disqualified payment rule’’). See REG–
106013–19, 85 FR 19858.
1 Although the extraordinary disposition rule and
the disqualified basis rule define ‘‘disqualified
period’’ using different terminology, in application,
a CFC that has a disqualified period under either
rule has a disqualified period under the other rule.
Compare § 1.245A–5(c)(3)(iii) with § 1.951A–
3(h)(2)(ii)(C)(1). For this reason, references to a
‘‘disqualified period’’ in this preamble refer to the
unified concept of a disqualified period under both
the extraordinary disposition rule and the
disqualified basis rule.
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Explanation of Provisions
I. Overview
In certain cases, the extraordinary
disposition rule and the disqualified
basis rule, when applied together, may
give rise to excess taxation as to a
section 245A shareholder (or as to the
section 245A shareholder and a related
party). For example, consider a case in
which a CFC that is wholly owned by
a section 245A shareholder sells an item
of specified property during the
disqualified period to another CFC that
is wholly owned by the section 245A
shareholder. In this case, there is a
single amount of gain (the gain that the
transferor CFC recognizes upon the
sale), which gives rise to both
extraordinary disposition E&P of the
transferor CFC (the E&P generated upon
the sale) and disqualified basis in the
item of specified property held by the
transferee CFC (the basis step-up in the
item of specified property resulting from
the sale). The gain will in effect be
subject to U.S. tax as to the section 245A
shareholder when the extraordinary
disposition E&P are distributed as a
dividend by the transferor CFC. In
addition, an amount (such as an amount
of future gross tested income of the
transferee CFC) equal to the gain might
be indirectly taxed as to the section
245A shareholder as a result of not
being offset or reduced by deductions or
losses attributable to the disqualified
basis (because, but for the disqualified
basis rule, such deductions or losses
would have offset or reduced the
amount and sheltered it from U.S. tax).
Moreover, the disqualified basis rule
may in certain cases have the effect of
reducing, in an amount equal to the
gain, E&P of the transferee CFC that
would otherwise have been eligible for
the section 245A deduction when
distributed as a dividend to the section
245A shareholder. This could occur
because, in general, deductions or losses
that are subject to the disqualified basis
rule nevertheless reduce E&P.
The preamble to the 2019 section
245A regulations requested comments
on whether and how to coordinate the
extraordinary disposition rule and the
disqualified basis rule. See 84 FR 28402.
One comment was received, which
recommended these rules be
coordinated and suggested two
approaches to that effect.
The first approach would permit
taxpayers to effectively unwind the tax
effect of an extraordinary disposition.
Under this approach, a section 245A
shareholder’s extraordinary disposition
account would be eliminated if, with
respect to each item of specified
property taken into account in
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determining the initial balance of the
account, an election were made
pursuant to § 1.951A–3(h)(2)(ii)(B)(3) to
reduce the item’s adjusted basis (and
thus eliminate the item’s disqualified
basis), and provided that certain other
requirements are met (for example, the
person to which the item of specified
property was transferred in the
extraordinary disposition was a CFC,
which remains a CFC for at least five
years after the extraordinary
disposition). The proposed regulations
do not adopt this approach because the
Treasury Department and the IRS have
determined that it could give rise to
inappropriate results, such as the
elimination of an extraordinary
disposition account in cases in which it
is unlikely that the extraordinary
disposition rule and the disqualified
basis rule, when applied together,
would result in excess taxation. In
addition, the approach could be difficult
to administer. For example, after the
extraordinary disposition, the CFC to
which the specified property was
transferred might be transferred outside
the U.S. taxing jurisdiction but remain
a CFC due to the Act’s repeal of section
958(b)(4), with the result that in effect
there is no or little U.S. tax cost to the
CFC having reduced the adjusted basis
(and eliminated the disqualified basis)
of the item of specified property.
Furthermore, because the extraordinary
disposition account with respect to the
transferor CFC would have been
eliminated, the E&P attributable to the
extraordinary disposition could reduce
gain that would otherwise be recognized
on the disposition of stock of the
transferor CFC as a result of the section
245A deduction. Moreover, there would
be additional administrative and
compliance burdens if the regulations
adopted an approach pursuant to which
an extraordinary disposition account is
tentatively eliminated when elections
are made pursuant to § 1.951A–3(h)(3)
to reduce adjusted bases (and eliminate
disqualified basis), but then the
extraordinary disposition account is
retroactively restored if the transferee
CFC ceases to be a CFC or becomes a
CFC only by reason of the repeal of
section 958(b)(4).
The second approach recommended
by the comment would adjust
disqualified basis of an item of specified
property to the extent that gain to which
the disqualified basis is attributable is in
effect subject to U.S. tax by reason of the
extraordinary disposition rule.
Similarly, an extraordinary disposition
account of a section 245A shareholder
would be adjusted to the extent that,
with respect to disqualified basis
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attributable to gain to which the
extraordinary disposition account is
also attributable, the disqualified basis
gives rise to deductions or losses that
are allocated and apportioned to
residual CFC gross income of a CFC by
reason of the disqualified basis rule.
As discussed in parts II through IV of
this Explanation of Provisions, the
proposed regulations adopt a
coordination mechanism that is broadly
consistent with the second approach
recommended by the comment. The
coordination mechanism involves two
operative rules, one that reduces
disqualified basis in certain cases (the
‘‘DQB reduction rule’’), and another that
reduces an extraordinary disposition
account in certain cases (the ‘‘EDA
reduction rule’’).
In addition, to reduce burden and
facilitate compliance, the proposed
regulations provide two versions of both
the DQB reduction rule and the EDA
reduction rule, similar to the approach
taken in §§ 1.1248–2 and 1.1248–3
(providing rules for determining
earnings and profits attributable to a
block of stock in simple and complex
cases). See proposed §§ 1.245A–7 and
1.245A–8. These versions achieve the
same results. The first version (proposed
§ 1.245A–7) may be applied to simple
cases, and the second version (proposed
§ 1.245A–8) applies to complex cases.
The version for simple cases may be
applied when two conditions are
satisfied, because those conditions
eliminate the need for certain additional
rules under the version for complex
cases. See proposed § 1.245A–6(b). The
first condition provides requirements
related to the seller SFC with respect to
which there is an extraordinary
disposition account. See proposed
§ 1.245A–6(b)(1). The second condition
provides requirements related to an item
of specified property for which an
extraordinary disposition occurred and
the buyer CFC holding the item. See
proposed § 1.245A–6(b)(2). As an
example, the version for simple cases
generally applies if (i) the seller SFC is
wholly-owned (directly or indirectly,
within the meaning of section 958(a)) by
the section 245A shareholder at the time
of the extraordinary disposition and
remains wholly-owned by the section
245A shareholder, (ii) the seller SFC
does not succeed to E&P of another SFC
with respect to which there is an
extraordinary disposition account, (iii)
the items of specified property for
which an extraordinary disposition
occurred are acquired by a buyer CFC
wholly-owned by the section 245A
shareholder and certain related parties
and the buyer CFC remains whollyowned by the section 245A shareholder
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and certain related parties, and (iv) the
buyer CFC retains the items of specified
property it acquires in the extraordinary
disposition and does not acquire items
of specified property with disqualified
basis that were transferred in another
extraordinary disposition. See proposed
§ 1.245A–6(b)(1) and (2).
The determination as to whether the
version for simple cases is available is
made with respect to a taxable year of
a section 245A shareholder. If the
conditions for applying the version for
simple cases are not satisfied for a
taxable year, then the version for
complex cases must be applied
beginning with that taxable year and all
subsequent taxable years. In addition, if
the conditions for applying the version
for simple cases are satisfied for a
taxable year but the section 245A
shareholder chooses not to apply the
version for simple cases for that taxable
year, then the version for complex cases
applies to that taxable year. However,
for a subsequent taxable year, the
section 245A shareholder may apply the
version for simple cases, provided that
the conditions for applying the version
for simple cases are satisfied for that
taxable year and have been satisfied for
all earlier taxable years.
Further, for purposes of determining
whether the conditions for applying the
version for simple cases are satisfied,
any requirement that references a
section 245A shareholder, an SFC, or a
CFC does not include a successor of the
section 245A shareholder, the SFC, or
the CFC, respectively. See proposed
§ 1.245A–6(b) (last sentence). As a
result, the version of the rules for simple
cases is not available if the section 245A
shareholder’s extraordinary disposition
account with respect to an SFC has been
adjusted pursuant to the successor rules
of § 1.245A–5(c)(4). Thus, for example,
the version of the rules for simple cases
is not available if the assets of the
section 245A shareholder are acquired
by another domestic corporation, or if
the assets of the seller SFC are acquired
by another SFC, in each case, in a
transaction described in section 381 and
subject to § 1.245A–5(c)(4)(i) or (ii),
respectively.
Section II of this Explanation of
Provisions discusses the versions of the
DQB reduction rule and the EDA
reduction rule that apply for simple
cases. Section III of this Explanation of
Provisions then discusses the versions
of those rules for complex cases. Section
IV of this Explanation of Provisions
discusses other rules applicable to both
simple and complex cases. Section V of
this Explanation of Provisions discusses
applicability dates, and Section VI of
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this Explanation of Provisions requests
comments.
II. Rules for Simple Cases
A. The DQB Reduction Rule
1. In General
The DQB reduction rule provides that
when an extraordinary disposition
account of a section 245A shareholder
gives rise to an extraordinary
disposition amount or tiered
extraordinary disposition amount, the
disqualified bases of certain items of
specified property are reduced by the
same amount solely for purposes of
§ 1.951A–2(c)(5). See proposed
§ 1.245A–7(b)(1). This rule is intended
to ensure that as the extraordinary
disposition rule applies to cause gain to
which extraordinary disposition E&P are
attributable to in effect be subject to U.S.
tax, the disqualified basis rule generally
does not apply to the basis of an item
of specified property attributable to that
gain (because that basis is no longer
generated at no U.S. tax cost) and,
accordingly, items of deduction or loss
attributable to that basis become eligible
to offset income subject to U.S. tax.
More specifically, for a taxable year of
a section 245A shareholder, the
disqualified bases of items of specified
property that ‘‘correspond’’ to the
section 245A shareholder’s
extraordinary disposition account are
generally reduced by the sum of the
extraordinary disposition amounts or
tiered extraordinary disposition
amounts for the taxable year. See
proposed § 1.245A–7(b)(1); see also
proposed § 1.245A–9(b)(1) (general rule
providing that an item of specified
property corresponds to an
extraordinary disposition account if
gain was recognized on the
extraordinary disposition of the item
and was taken into account in
determining the initial balance of the
account). This correspondence
requirement ensures that the rule only
reduces disqualified basis of an item of
specified property that is attributable to
gain that was taken into account in
determining the initial balance of the
account, and thus the rule does not
reduce disqualified basis of an item of
specified property that is attributable to
other gain (for example, disqualified
basis of an item of specified property
that corresponds to an extraordinary
disposition account of another section
245A shareholder or that does not
correspond to an extraordinary
disposition account).
The amount of the reduction under
the DQB reduction rule is allocated pro
rata across the disqualified basis of each
item of specified property that
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corresponds to the section 245A
shareholder’s extraordinary disposition
account, based on the item’s
disqualified basis relative to the
aggregate disqualified bases of the items.
See proposed § 1.245A–7(b)(1). The
Treasury Department and the IRS have
determined that a pro rata approach is
appropriate because the initial balance
of the extraordinary disposition account
reflects an aggregate of the gain of each
item of specified property that
corresponds to the account (reduced by
losses with respect to certain items of
specified property). In addition,
alternative approaches would be unduly
complex, such as a stacking approach
pursuant to which a reduction is
applied first with respect to disqualified
basis of a particular item of specified
property, then with respect to another
item of specified property, and so on.
2. Timing Rules for Determining and
Reducing Disqualified Basis
For purposes of applying the DQB
reduction rule for a taxable year of a
section 245A shareholder, disqualified
basis of an item of specified property is
determined as of the beginning of the
taxable year of the CFC holding the item
that includes the date on which the
section 245A shareholder’s taxable year
ends (and, to avoid circularity issues,
without regard to any reductions to
disqualified basis of the item of
specified property pursuant to the DQB
reduction rule for such taxable year of
the CFC). See proposed § 1.245A–
9(b)(2)(i). Then, disqualified basis of the
item of specified property is reduced as
of the beginning of the taxable year of
the CFC. See proposed § 1.245A–
9(b)(2)(ii). Thus, for example,
disqualified basis of an item of specified
property is reduced before any
depreciation, amortization, or other cost
recovery deduction allowances
attributable to the basis of the item are
determined for the CFC’s taxable year.
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B. The EDA Reduction Rule
1. In General
The EDA reduction rule provides that
when items of deduction or loss
attributable to disqualified basis of an
item of specified property are allocated
and apportioned to residual CFC gross
income of a CFC and have the effect of
reducing certain E&P of the CFC that
could otherwise potentially qualify for
the section 245A deduction when
distributed, the extraordinary
disposition account to which the
specified property corresponds is
reduced by up to the same amount. See
proposed § 1.245A–7(c)(1). This rule is
generally intended to ensure that as the
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application of the disqualified basis rule
results in income of the CFC being
indirectly taxed to a section 245A
shareholder (or a related party that is a
domestic corporation, a ‘‘domestic
affiliate’’) and a reduction in the E&P of
the CFC available to be distributed to
the section 245A shareholder and any
domestic affiliates as a dividend to
which the section 245A deduction
could be available if distributed, the
extraordinary disposition rule no longer
applies to E&P attributable to gain to
which the disqualified basis is also
attributable. Requiring reduction in the
capacity to pay dividends for which the
section 245A deduction could be
available if the E&P were distributed
ensures that the EDA reduction rule
applies only once the disqualified basis
rule has resulted in a tax detriment to
the section 245A shareholder (or a
domestic affiliate). To the extent that
there has not been a reduction in the
CFC’s capacity to pay dividends for
which the section 245A deduction
could be available if the E&P were
distributed, the disqualified basis rule
might generally not give rise to a tax
detriment to the section 245A
shareholder (or a domestic affiliate).
This is because the section 245A
shareholder’s (or domestic affiliate’s)
basis in its stock of the CFC is generally
increased under section 961 by the
amount of the income indirectly taxed
to the section 245A shareholder (or a
domestic affiliate). Such basis increase
is, for example, available to reduce gain
that would otherwise be recognized on
a disposition of stock of the CFC
(including gain that would be taxed at
the full corporate tax rate even though,
for instance, the basis increase is
attributable to an inclusion under
section 951A that in effect is taxed at a
preferential rate).
More specifically, for a taxable year of
a CFC, a section 245A shareholder’s
extraordinary disposition account is
generally reduced by the lesser of two
amounts. See proposed § 1.245A–
7(c)(1). The first amount is intended to
approximate in an administrable
manner the extent to which the
disqualified basis rule (by reason of the
allocation and apportionment of items
of deduction or loss to residual CFC
gross income of the CFC) reduced the
E&P of the CFC available to be
distributed to the section 245A
shareholder and any domestic affiliates
as a dividend to which the section 245A
deduction could be available. See
proposed § 1.245A–7(c)(1)(i). In order to
reduce administrative and compliance
burdens, the proposed regulations
disregard the holding period
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requirement of section 246(c) for
purposes of determining if a section
245A deduction would be available if
E&P were distributed. To compute the
first amount, the CFC’s E&P at the end
of the taxable year are determined,
taking into account distributions during
the taxable year. Then, those E&P are
adjusted, including by generally
increasing the E&P by items of
deduction or loss that are or have been
allocated to residual CFC gross income
of the CFC solely by reason of the
disqualified basis rule (‘‘adjusted
earnings’’). See proposed § 1.245A–
7(c)(3). Lastly, the adjusted earnings are
reduced by the sum of the previously
taxed earnings and profits accounts with
respect to the CFC under section 959
(taking into account any adjustments to
the accounts for the taxable year) in
order to reflect that an amount equal to
such sum would not have been eligible
for the section 245A deduction were it
distributed by the CFC to the section
245A shareholder and any domestic
affiliates. See proposed § 1.245A–
7(c)(1)(i).
The second amount necessary to
determine the reduction in a section
245A shareholder’s extraordinary
disposition account is the balance of the
section 245A shareholder’s residual
gross income account (‘‘RGI account’’)
with respect to the CFC. See proposed
§ 1.245A–7(c)(1)(ii). The balance of the
RGI account generally reflects items of
deduction or loss allocated and
apportioned to residual CFC gross
income of the CFC solely by reason of
the disqualified basis rule, to the extent
that the allocation and apportionment is
likely to increase income of the CFC that
is subject to U.S. taxation at the level of
the section 245A shareholder and any
domestic affiliates pursuant to section
951 or 951A. See proposed § 1.245A–
7(c)(4)(i). Tracking such items of
deduction or loss through an account
mechanism allows for a reduction
under, and facilitates compliance with,
the EDA reduction rule in certain
cases—for example, a case in which a
CFC does not have any adjusted
earnings for its taxable year in which
items of deduction or loss are allocated
and apportioned to residual CFC gross
income (such that there cannot be a
reduction under the EDA reduction rule
to the section 245A shareholder’s
extraordinary disposition account that
year) but in a later taxable year has
sufficient adjusted earnings to allow for
a reduction.
2. Timing Rules for Reducing an
Extraordinary Disposition Account
A reduction to an extraordinary
disposition account of a section 245A
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shareholder by reason of the application
of the EDA reduction rule with respect
to a taxable year of the CFC occurs as
of the end of the taxable year of the
section 245A shareholder that includes
the date on which the CFC’s taxable
year ends (and, for example, after the
determination of any extraordinary
disposition amounts or tiered
extraordinary disposition amounts for
the taxable year). See proposed
§ 1.245A–9(b)(3). Thus, a reduction to a
section 245A shareholder’s
extraordinary disposition account under
the EDA reduction rule occurs after the
application of the DQB reduction rule
for the taxable year of the section 245A
shareholder. See id. Absent such an
approach, there could be circularity
issues because the computation of a
reduction under one rule might depend
on an amount that is potentially affected
by the other rule, and it would be
unclear which rule applies first.
Applying the EDA reduction rule at the
end of a taxable year also ensures that
it applies after the full effect of the
disqualified basis rule has been taken
into account for the year.
III. Rules for Complex Cases
A. The DQB Reduction Rule
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1. In General
The version of the DQB reduction rule
for complex cases uses the same
architecture as the version of the rule for
simple cases but provides additional
rules to address scenarios in which the
conditions provided in proposed
§ 1.245A–6(b)(1) and (2) are not
satisfied. See proposed § 1.245A–8. For
example, the version for complex cases
addresses scenarios in which, after the
extraordinary disposition of an item of
specified property, the item is
transferred to another person (whether
the transfer is taxable or non-taxable).
See proposed § 1.245A–6(b)(2).
2. Ownership Requirement
To address the possibility that an item
of specified property may have been
transferred after the extraordinary
disposition (with the result that the
section 245A shareholder or a related
party may not directly or indirectly own
an interest in the item), the version of
the DQB reduction rule for complex
cases provides that an ownership
requirement must be satisfied for
disqualified basis of an item of specified
property to be eligible for relief under
the DQB reduction rule. See proposed
§ 1.245A–8(b)(1) and (3). The ownership
requirement is intended to ensure that
the DQB reduction rule applies with
respect to an item of specified property
only if it is likely that the section 245A
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shareholder (or the section 245A
shareholder and a related party) would
be meaningfully affected by the
application of the disqualified basis rule
as to the item of specified property,
such that, absent the DQB reduction
rule, the extraordinary disposition rule
and the disqualified basis rule would,
when applied together, result in
meaningful excess taxation as to the
section 245A shareholder (or the section
245A shareholder and a related party).
In addition, the ownership requirement
is intended to ensure that the DQB
reduction rule takes into account only
disqualified bases of items of specified
property for which the section 245A
shareholder can reasonably be expected
to have or obtain the necessary
information to accurately apply the DQB
reduction rule.
The ownership requirement is
satisfied with respect to an item of
specified property if, on one or more
days during the taxable year of the
section 245A shareholder, the item is
held by the section 245A shareholder, a
related party, or a specified entity in
which the section 245A shareholder or
a related party owns directly or
indirectly at least a 10-percent interest.
See proposed § 1.245A–8(b)(3). As a
result, the DQB reduction rule can apply
to, for example, an item of specified
property that is sold at a loss by a CFC
of the section 245A shareholder to a
third party on any day that falls within
the taxable year of the section 245A
shareholder, such that a reduced portion
of the CFC’s loss will be attributable to
disqualified basis and thus subject to
the disqualified basis rule for the CFC’s
taxable year. As an additional example,
the DQB rule can also apply to an item
of specified property that is held by a
CFC of the section 245A shareholder all
the stock of which is sold by the section
245A shareholder to a third party on
any day that falls within the taxable
year of the section 245A shareholder,
such that a reduced portion of the CFC’s
amortization deductions with respect to
the specified property for its taxable
year that includes the sale and its
subsequent taxable years will be subject
to the disqualified basis rule.
3. Basis Benefit Amounts
i. In General
In certain cases in which an item of
specified property with disqualified
basis is transferred after the
extraordinary disposition of the item,
the extraordinary disposition rule and
the disqualified basis rule, when
applied together, do not give rise to
excess taxation as to a section 245A
shareholder (or as to the section 245A
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shareholder and a related party). This
may occur, for example, if the section
245A shareholder ‘‘benefits’’ from the
disqualified basis of the item of
specified property pursuant to a
transaction that is not subject to the
disqualified basis rule, such as through
a sale of the item by a CFC of the section
245A shareholder to an unrelated
person at a gain (with the result that, but
for the use of the disqualified basis, the
CFC would have had a greater amount
of gain that would have been taken into
account in computing the CFC’s tested
income). In such a case, the DQB
reduction rule need not apply to an
amount of the section 245A
shareholder’s extraordinary disposition
account equal to the amount of the
disqualified basis benefit. See proposed
§ 1.245A–10(c)(2) (Example 2).
To address these situations, the
proposed regulations provide that, for a
taxable year of a section 245A
shareholder, the amount of the
reduction to disqualified bases under
the DQB reduction rule is equal to the
sum of the extraordinary disposition
amounts or tiered extraordinary
disposition amounts for the taxable
year, less the balance of the section
245A shareholder’s ‘‘basis benefit
account’’ with respect to the
extraordinary disposition account. See
proposed § 1.245A–8(b)(1). A basis
benefit account with respect to an
extraordinary disposition account
generally reflects the extent to which
the disqualified basis of one or more
items of specified property that
correspond to the extraordinary
disposition account has been used to
offset or reduce income subject to U.S.
tax (the use of disqualified basis to such
an extent, a ‘‘basis benefit amount’’). See
proposed § 1.245A–8(b)(4)(ii).
For these purposes, the use of
disqualified basis by a U.S. tax resident
to offset or reduce taxable income, or
the use of disqualified basis by a foreign
person (including a CFC) to offset or
reduce income effectively connected
with a trade or business in the United
States (‘‘ECTI’’), is always considered to
offset or reduce income subject to U.S.
tax. See proposed § 1.245A–8(b)(4)(ii).
As an example, in the case of an item
of specified property that is held by a
U.S. tax resident and that has
disqualified basis by reason of the
application of § 1.951A–
3(h)(2)(ii)(B)(1)(ii) to a previous transfer
of the item of specified property by a
related CFC to the U.S. tax resident,
there is a basis benefit amount equal to
the portion of the disqualified basis that
gives rise to an item of depreciation or
amortization of the U.S. tax resident for
a taxable year of the U.S. tax resident.
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However, the use of disqualified basis
by a CFC to offset or reduce income
taken into account in computing subpart
F income, tested income, or tested loss
is considered to offset or reduce income
subject to U.S. tax only if the CFC is
described in § 1.267A–5(a)(17) and thus
a meaningful portion of the CFC’s
income is indirectly subject to current
U.S. tax. See id.
Disqualified basis can be used to
reduce or offset income subject to U.S.
tax regardless of whether the
disqualified basis is reduced or
eliminated under § 1.951A–
3(h)(2)(ii)(B)(1). For example, in a case
in which a CFC sells an item of
specified property with disqualified
basis to a related CFC, the rule of
§ 1.951A–3(h)(2)(ii)(B)(1) generally does
not prevent the disqualified basis from
reducing or offsetting income subject to
U.S. tax (for instance, income from the
sale that but for the use of the
disqualified basis would have been
taken into account in computing the
seller CFC’s tested income), even though
the buyer CFC succeeds to the
disqualified basis under the rule. Thus,
the proposed regulations provide that a
basis benefit amount can be created
from the use of disqualified basis
regardless of whether the disqualified
basis is reduced or eliminated as a
result. See proposed § 1.245A–
8(b)(4)(ii)(B); see also proposed
§ 1.245A–8(b)(4)(iii)(B) (anti-duplication
rule to address cases in which
disqualified basis gives rise a basis
benefit amount but is not eliminated or
reduced).
Further, the proposed regulations
provide certain timing rules regarding
when the use of disqualified basis gives
rise to a basis benefit amount. See
proposed § 1.245A–8(b)(4)(ii)(C). For
example, if an item of deduction or loss
arising from the use of disqualified basis
is deferred under section 267(a)(2), then
the determination of whether a basis
benefit amount arises is made when, in
a later taxable year, the deduction or
loss is no longer deferred. Similarly, if
an item of deduction or loss arising from
the use of disqualified basis of an item
of specified property is disallowed
under section 267(a)(1), then a basis
benefit amount would arise when and to
the extent that gain is reduced on the
sale of that specified property (or other
property with basis determined by
reference to that specified property)
under section 267(d) in the hands of
certain persons whose income is
directly or indirectly subject to U.S. tax.
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ii. Adjustments to a Basis Benefit
Account
A basis benefit account is adjusted at
the end of each taxable year of a section
245A shareholder. See proposed
§ 1.245A–8(b)(4)(i). Generally, the basis
benefit account is increased by a basis
benefit amount with respect to an item
of specified property that corresponds to
the extraordinary disposition account,
provided that the basis benefit amount
is assigned to the taxable year of the
section 245A shareholder. See proposed
§ 1.245A–8(b)(4)(i)(A). However, in the
case in which the extraordinary
disposition ownership percentage with
respect to the extraordinary disposition
account is less than 100 percent (such
that the initial balance of the
extraordinary disposition account
reflects only a portion of the gain from
the extraordinary disposition of the item
of specified property), only the same
ratable portion of the basis benefit
amount may increase the basis benefit
account. See id.
A basis benefit amount with respect to
an item of specified property is assigned
to a taxable year of a section 245A
shareholder if two conditions are
satisfied. See proposed § 1.245A–
8(b)(4)(iii). First, the ownership
requirement described in part III.A.2 of
this Explanation of Provisions must be
satisfied with respect to the item of
specified property. As a result of this
first condition, a basis benefit amount is
assigned to a taxable year of a section
245A shareholder (and thus only limits
a potential reduction under the DQB
reduction rule) only if the use of the
disqualified basis giving rise to the basis
benefit amount provides a meaningful
benefit to the section 245A shareholder
or a related party. This first condition is
also intended to ensure that the section
245A shareholder can reasonably be
expected to obtain information about
the item of specified property necessary
to accurately calculate and reflect the
basis benefit amount. Second, the use of
the disqualified basis must occur in the
section 245A shareholder’s taxable year
(in a case in which the section 245A
shareholder is the person that uses the
disqualified basis) or a taxable year of a
person ending with or within—or in
certain cases, beginning with or
within—the taxable year of the section
245A shareholder (in a case in which
the section 245A shareholder is not the
person that uses the disqualified basis).
As a result of these assignment rules, in
a case in which a CFC of a section 245A
shareholder holds an item of specified
property and the CFC sells the item of
specified property (or the section 245A
shareholder sells all of the stock of the
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53103
CFC) to a third party on a day that falls
within the taxable year of the section
245A shareholder, a use by the CFC of
disqualified basis of the specified
property to generate a basis benefit
amount on a day that falls within the
same taxable year of the section 245A
shareholder is generally assigned to
such taxable year of the section 245A
shareholder.
Further, at the end of each taxable
year of a section 245A shareholder, the
balance of a basis benefit account is
decreased to the extent that the basis
benefit account limits a reduction under
the DQB reduction rule. See proposed
§ 1.245A–8(b)(4)(i)(B).
4. Timing Rules for Determining and
Reducing Disqualified Basis
To address the possibility that an item
of specified property may be held by a
person other than a CFC, the timing
rules for purposes of the version of the
DQB reduction rule for complex cases
provide that disqualified basis of an
item of specified property is generally
determined and reduced as of the
beginning of the taxable year of the
‘‘specified property owner’’ of the item.
See proposed § 1.245A–9(b)(2)(i) and
(ii). The specified property owner of an
item of specified property is generally
the person that held the item of
specified property on at least one day
during the taxable year of the person
that includes the date on which the
section 245A shareholder’s taxable year
ends. See proposed § 1.245A–9(b)(2)(iii).
In addition, to address cases in which,
absent a special rule, two or more
persons might be considered the
specified property owner, a special rule
provides that in such cases the specified
property owner is the person that held
the item of specified property on the
earliest date that falls within the section
245A shareholder’s taxable year. See
§ 1.245A–9(b)(2)(iii) (last sentence).
Thus, for example, if a CFC (‘‘CFC1’’)
transfers an item of specified property to
another CFC (‘‘CFC2’’) on a date that
falls within the taxable year of a section
245A shareholder and the taxable year
of each of CFC1 and CFC2 includes the
day of the close of the taxable year of
the section 245A shareholder, then
CFC1 (and not CFC2) would be the
specified property owner for purposes
of applying the DQB reduction rule for
the taxable year of the section 245A
shareholder.
B. The EDA Reduction Rule
1. In General
The version of the EDA reduction rule
for complex cases uses the same
architecture as the version of the rule for
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simple cases but provides additional
rules to address scenarios in which the
conditions provided in § 1.245A–6(b)
are not satisfied. See proposed
§ 1.245A–8. For example, the version for
complex cases addresses scenarios in
which the CFC that holds an item of
specified property that corresponds to
an extraordinary disposition account of
a section 245A shareholder is not
wholly-owned by the section 245A
shareholder and any domestic affiliates,
or the CFC also holds an item of
specified property that corresponds to
another extraordinary disposition
account. See proposed § 1.245A–6(b)(2).
2. Computing the Reduction in Certain
Dividend-Paying Capacity of a CFC
As discussed in II.B.1 of this
Explanation of Provisions, the EDA
reduction rule depends in part on the
extent to which the disqualified basis
rule has, as to a CFC that holds items
of specified property that correspond to
an extraordinary disposition account of
a section 245A shareholder with respect
to an SFC, reduced E&P of the CFC
available to be distributed to the section
245A shareholder and any domestic
affiliates as a dividend to which the
section 245A deduction could be
available. The EDA reduction rule for
complex cases provides several
additional rules for purposes of
measuring this reduction to the CFC’s
capacity to pay dividends eligible for
the section 245A deduction, to address
the possibility that the section 245A
shareholder and any domestic affiliates
may not own all of the stock of the CFC
(including because the section 245A
shareholder or a domestic affiliate
disposed of stock of the CFC during the
CFC’s taxable year) as well as other
issues.
First, the version for complex cases
provides an ownership requirement
pursuant to which, for the section 245A
shareholder’s extraordinary disposition
account to be reduced by reason of the
application of the EDA reduction rule
with respect to a taxable year of the
CFC, the section 245A shareholder (or a
domestic affiliate) must, on the last day
of the CFC’s taxable year, be a United
States shareholder with respect to the
CFC. See proposed § 1.245A–8(c)(1) and
(3). The ownership requirement is
measured on the last day of a CFC’s
taxable year because the EDA reduction
rule depends on a section 245A
shareholder’s portion of the CFC’s
adjusted earnings, which are measured
on an annual basis.
Second, the version for complex cases
provides special rules for deficits of the
CFC subject to § 1.381(c)(2)–1(a)(5). See
proposed § 1.245A–8(c)(3). These rules
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generally provide that the CFC’s
adjusted earnings are determined by not
taking into account these deficits in
determining E&P because, in general,
the deficits do not affect or limit the
CFC’s ability to distribute its other E&P
as a dividend. In addition, for purposes
of determining a CFC’s adjusted
earnings, the CFC’s E&P are reduced by
the amount of items of deduction or loss
that are attributable to disqualified basis
and that give or have given rise to a
deficit subject to § 1.381(c)(2)–1(a)(5).
This is because the application of the
disqualified basis rule to these items has
not affected or limited the CFC’s ability
to distribute certain earnings as a
dividend and reducing the CFC’s E&P
by the amount of the items generally
ensures that the application of the
disqualified basis rule to these items
does not give rise to relief under the
EDA reduction rule. A CFC could have
a deficit subject to § 1.381(c)(2)–1(a)(5)
and comprised of items of deduction or
loss attributable to disqualified basis if,
for example, the CFC acquired in a
transaction subject to section 381 the
assets of another CFC that held items of
specified property with disqualified
basis.
Third, the version for complex cases
provides a rule that allocates the CFC’s
adjusted earnings to the section 245A
shareholder, based on the percentage of
stock of the CFC that the section 245A
shareholder and any domestic affiliates
own. See proposed § 1.245A–
8(c)(1)(i)(A). This allocation serves as a
proxy for measuring the portion of the
adjusted earnings of the CFC that the
section 245A shareholder and any
domestic affiliates would receive if the
CFC were to distribute all of its adjusted
earnings to its shareholders. The
adjusted earnings as so allocated to a
section 245A shareholder are further
adjusted to reflect certain previously
taxed earnings and profits accounts with
respect to the CFC, certain hybrid
deduction accounts with respect to
shares of stock of the CFC, and the
balance of any extraordinary disposition
accounts with respect to the CFC (other
than, in general and as illustrated in
part III.B.6 of this Explanation of
Provisions, the portion of the balance of
an extraordinary disposition account
with respect to the CFC that, by reason
of a merger or similar transaction of the
SFC into the CFC or vice versa, is
attributable to an extraordinary
disposition account with respect to the
SFC). The end result is intended to
measure the extent to which the
disqualified basis rule has reduced E&P
of the CFC available to be distributed to
the section 245A shareholder and any
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domestic affiliates as a dividend to
which the section 245A deduction
could be available.
3. Computing the Increase to an RGI
Account
As discussed in part II.B.1 of this
Explanation of Provisions, the EDA
reduction rule depends in part on the
balance of a section 245A shareholder’s
RGI account with respect to a CFC. The
EDA reduction rule for complex cases
provides several additional rules for
purposes of computing an increase to a
section 245A shareholder’s RGI account
with respect to a CFC. See proposed
§ 1.245A–8(c)(4).
First, to address the possibility that
the CFC may hold multiple items of
specified property, some of which
correspond to an extraordinary
disposition account of the section 245A
shareholder and others of which
correspond to another extraordinary
disposition account (or to no
extraordinary disposition account), the
rule for complex cases provides that the
section 245A shareholder’s RGI account
can be increased only by items of
deduction or loss (to which the
disqualified basis rule applies) that are
attributable to disqualified basis of an
item of specified property that
corresponds to the section 245A
shareholder’s extraordinary disposition
account. See proposed § 1.245A–
8(c)(4)(i)(A)(1)(i). In addition, in cases in
which the section 245A shareholder
owned less than all of the stock of the
SFC when the SFC undertook an
extraordinary disposition (such that the
extraordinary disposition ownership
percentage as to the section 245A
shareholder’s extraordinary disposition
account with respect to the SFC is less
than 100 percent), the section 245A
shareholder’s RGI account can be
increased by only the same ratable
portion of the items of deduction or
loss. See proposed § 1.245A–
8(c)(4)(i)(A)(2)(ii). These rules ensure
that a reduction under the EDA
reduction rule to the section 245A
shareholder’s extraordinary disposition
account can occur only by reason of the
application of the disqualified basis rule
to the portion of disqualified basis of an
item of specified property that is
attributable to gain to which the
extraordinary disposition account is
also attributable.
Further, to address the possibility that
the section 245A shareholder and any
domestic affiliates may not own all of
the stock of the CFC holding items of
specified property that correspond to an
extraordinary disposition account of the
section 245A shareholder, a limit
applies regarding the extent to which an
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item of deduction or loss (or portion
thereof) may increase the section 245A
shareholder’s RGI account. See
proposed § 1.245A–8(c)(4)(i)(A)(2). The
limit is generally based on the portion
of the CFC’s subpart F income or tested
income taken into account by the
section 245A shareholders and any
domestic affiliates under section 951 or
951A. See proposed § 1.245A–
8(c)(4)(i)(A)(2)(i). This limit ensures that
a reduction under the EDA reduction
rule to the section 245A shareholder’s
extraordinary disposition account can
occur only to the extent that the
application of the disqualified basis rule
has likely increased income of the CFC
that is subject to U.S. taxation at the
level of the section 245A shareholder
and any domestic affiliates.
4. Allocating Certain Reductions Among
Extraordinary Disposition Accounts
Because a reduction under the EDA
reduction rule to an extraordinary
disposition account may be a function
of certain adjusted earnings of a CFC
(that is, an amount that is not with
respect to the extraordinary disposition
account), absent a special rule in certain
complex cases, the adjusted earnings
could give rise to a reduction to two or
more extraordinary disposition accounts
that, in aggregate, exceeds the adjusted
earnings. This could occur, for example,
in a case in which a section 245A
shareholder has two extraordinary
disposition accounts (that is, an
extraordinary disposition account with
respect to two SFCs) and owns all the
stock of a CFC, which, in turn, owns the
items of specified property that
correspond to each of the extraordinary
disposition accounts. In that case the
aggregate amount of reductions to the
extraordinary disposition accounts
could exceed the extent to which the
application of the disqualified basis rule
has, as measured by certain adjusted
earnings of the CFC allocated to the
section 245A shareholder, reduced the
earnings of the CFC available to be
distributed to the section 245A
shareholder as a dividend to which the
section 245A deduction could apply. To
address these cases, the proposed
regulations provide a rule that limits the
aggregate reductions to extraordinary
disposition accounts by reason of the
application of the EDA reduction rule
with respect to a taxable year of a CFC
to certain adjusted earnings of the CFC.
See proposed § 1.245A–8(c)(6). The
proposed regulations also provide an
example illustrating this rule. See
proposed § 1.245A–10(c)(3)(iv).
Finally, the proposed regulations
provide a rule that prevents an
extraordinary disposition account from
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being reduced below the balance of the
basis benefit account that relates to the
extraordinary disposition account. See
proposed § 1.245A–8(c)(7). This
limitation may occur if extraordinary
disposition E&P (and therefore the
initial balance of the extraordinary
disposition account) reflect losses
recognized with respect to one or more
items of specified property transferred
in the extraordinary disposition.
5. Certain Items of Property Treated as
Items of Specified Property That
Correspond to an Extraordinary
Disposition Account
In certain complex cases, an item of
property may have disqualified basis
even though the item itself was not
transferred as part of an extraordinary
disposition. For example, a share of
stock may have disqualified basis if the
share was received in exchange for an
item of specified property with
disqualified basis in a transaction to
which section 351 applies. See
§ 1.951A–3(h)(2)(ii)(B)(2)(ii). Absent
special rules, the share of stock would
not correspond to an extraordinary
disposition account of a section 245A
shareholder and thus, for example, the
disqualified basis of the share of stock
could not be reduced under the DQB
reduction rule.
The proposed regulations provide
special rules to address this and similar
issues. For instance, the proposed
regulations provide that certain items of
property that have disqualified basis by
reason of § 1.951A–3(h)(2)(ii)(B)(2)(i)
(increase corresponding to adjustments
in other property), (ii) (exchanged basis
property), or (iii) (increase by reason of
section 732(d)) are generally treated as
items of specified property that
correspond to an extraordinary
disposition account of a section 245A
shareholder. See proposed § 1.245A–
8(d). As a result, the disqualified basis
of such items of property may be
reduced under the DQB reduction rule,
and items of deduction and loss
attributable to such disqualified basis
and allocated and apportioned to
residual CFC gross income of a CFC may
give rise to a reduction to an
extraordinary disposition account under
the EDA reduction rule.
The proposed regulations also include
an anti-duplication rule to ensure that
disqualified basis of an item of specified
property, as well as disqualified basis of
another item of property attributable to
that disqualified basis (‘‘duplicate
DQB’’), are not both taken into account
for purposes of the DQB reduction rule,
as taking into account both amounts of
disqualified basis could inappropriately
limit the reductions under the DQB
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53105
reduction rule. See proposed § 1.245A–
8(b)(5)(i)(A). In addition, to the extent
that, pursuant to the anti-duplication
rule, duplicate DQB is not taken into
account for purposes of the DQB
reduction, the duplicate DQB is
generally reduced to the same extent
that the disqualified basis of the item of
specified property to which the
duplicate DQB is attributable is
reduced. See proposed §§ 1.245A–
8(b)(5)(i)(B) and 1.245A–10(c)(5)
(Example 5).
As an example of the application of
these special rules, consider a case in
which a single item of specified
property (‘‘Item A’’) corresponds to an
extraordinary disposition account of a
section 245A shareholder, and Item A is
transferred, in a transaction to which
section 351 applies, in exchange for a
share of stock (‘‘Item B’’). In addition,
assume that the extraordinary
disposition account gives rise to a $10x
extraordinary disposition amount and
that, at that time, Item A has $10x of
disqualified basis and Item B also has
$10x of disqualified basis (all of which
is attributable to the disqualified basis
of Item A). Here, Item B is considered
an item of specified property that
corresponds to the extraordinarily
disposition account, but generally only
the disqualified basis of Item A is taken
into account for purposes of the DQB
reduction rule, with the result that the
entire $10x reduction under the DQB
reduction rule is allocated to Item A
(such that Item A’s disqualified basis is
reduced by $10x). However, pursuant to
the special rule of proposed § 1.245A–
8(b)(5)(i)(B), Item B’s disqualified basis
is then reduced by the same amount.
6. Extraordinary Disposition Account
Adjusted Pursuant to Successor Rules
Under § 1.245A–5(c)(4)
In certain complex cases, an
extraordinary disposition account of a
section 245A shareholder may be
adjusted pursuant to the rules of
§ 1.245A–5(c)(4), with the result, for
example, that another section 245A
shareholder succeeds to a portion of the
extraordinary disposition account or a
portion of the extraordinary disposition
account is attributed to another
extraordinary disposition account. The
proposed regulations provide two sets of
special rules to address these cases.
First, in cases in which a portion of
an extraordinary disposition account is
attributed (the ‘‘attributed account’’) to
another extraordinary disposition
account (the ‘‘successor account’’), the
proposed regulations ensure that the
disqualified bases of the items of
specified property that correspond to
the attributed account are eligible to be
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reduced under the DQB reduction rule
by reason of an amount in the successor
account that gives rise to an
extraordinary deposition amount or
tiered extraordinary disposition amount,
to the extent attributable to the
attributed account. See proposed
§ 1.245A–8(e)(1). This rule also ensures
that the successor account, to the extent
attributable to the attributed account,
may be reduced under the EDA
reduction rule by reason of an allocation
and apportionment of an item of
deduction or loss attributable to
disqualified basis of an item of specified
property that corresponds to the
attributed account. See id. This rule
ensures these results by treating the
attributed account and successor
account as separate extraordinary
disposition accounts for purposes of the
proposed regulations. See id.
As an example of this rule, consider
a case in which US1, a domestic
corporation, owns all of the stock of
CFC1, a CFC as to which US1 has an
extraordinary disposition account with
a $40x balance (the ‘‘CFC1 EDA’’), and
CFC2, a CFC as to which US1 has an
extraordinary disposition account with
a $60x balance (the ‘‘CFC2 EDA’’). If
CFC1 were to merge into CFC2 and thus
under the rules of § 1.245A–5(c)(4) the
$40x balance of the CFC1 EDA were
attributed to the CFC2 EDA (such that
the balance of the CFC2 EDA would
become $100x), then $40x of the $100x
balance of the CFC2 EDA would be
treated for purposes of the proposed
regulations as an extraordinary
disposition account with respect to
CFC1 (the CFC2 EDA to such extent, the
‘‘deemed CFC1 EDA’’), even though
CFC1 would no longer be in existence.
As a result, after the merger, the deemed
CFC1 EDA would, by reason of the
application of the EDA reduction rule to
a taxable year of CFC2, generally be
reduced by the lesser of (i) the adjusted
earnings of CFC2, less the balance of (a)
the previously taxed earnings and
profits accounts with respect to CFC2,
(b) the hybrid deduction accounts with
respect to shares of stock of the CFC2,
(c) the balance of the CFC2 EDA (but not
including the portion of the balance of
the CFC2 EDA that is treated as the
deemed CFC1 EDA), to the extent taken
into account as described in proposed
§ 1.245A–8(c)(1)(i)(B)(3), and (d) the
balance of the deemed CFC1 EDA, to the
extent taken into account as described
in proposed § 1.245A–8(c)(1)(i)(B)(3);
and (ii) the balance of the RGI account
(if any) with respect to CFC2 that relates
to the deemed CFC1 EDA.
Second, special rules address the
extraordinary disposition ownership
percentage. As discussed in parts
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III.A.3.i and III.B.3 of this Explanation
of Provisions, the DQB reduction rule
and the EDA reduction rule take into
account the extraordinary disposition
ownership percentage as to a section
245A shareholder’s extraordinary
disposition account, which generally
represents the portion of gain on the
extraordinary disposition of an item of
specified property that is reflected in
the initial balance of the extraordinary
disposition account. Special rules
ensure, after an extraordinary
disposition account is adjusted pursuant
to § 1.245A–5(c)(4), the extraordinary
disposition ownership percentage
continues to accurately reflect the
portion of gain that is reflected in the
(adjusted) balance of the extraordinary
disposition account. See proposed
§ 1.245A–8(e)(1) and (2).
As an example of the application of
these special rules regarding the
extraordinary disposition ownership
percentage, consider a case which the
extraordinary disposition ownership
percentage as to a section 245A
shareholder’s extraordinary disposition
account with respect to an SFC (‘‘EDA
1’’) is 80 percent, and by reason of
§ 1.245A–5(c)(4)(i) another section 245A
shareholder (that did not previously
have an extraordinary disposition
account with respect to the SFC)
succeeds to a portion of EDA 1 equal to
40 percent of the balance of EDA 1 (the
portion of EDA 1 to which the other
section 245A shareholder succeeds,
‘‘EDA 2’’). Here, the extraordinary
disposition ownership percentage as to
EDA 1 is thereafter 48 percent for
purposes of the proposed regulations
(80%, less 80% multiplied by 40%), and
the extraordinary disposition ownership
percentage as to EDA 2 is 32 percent for
purposes of the proposed regulations
(80% multiplied by 40%). As an
additional example, if in the example in
the previous sentence the other section
245A shareholder instead had an
extraordinary disposition account with
respect to the SFC and the extraordinary
disposition ownership percentage as to
such extraordinary disposition account
was 20 percent (‘‘EDA 2’’), then,
pursuant to proposed § 1.245A–8(e)(1),
the extraordinary disposition ownership
percentage as to EDA 2 would become
52 percent for purposes of the proposed
regulations (20%, plus the product of
80% and 40%).
IV. Other Rules
A. Coordination With Disqualified
Payment Rule
The coordination mechanism of the
proposed regulations also applies to
cases in which a prepayment during the
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disqualified period gives rise to
extraordinary disposition E&P of an SFC
under the anti-avoidance rule of
§ 1.245A–5(h) and items of deduction or
loss of a CFC are allocated and
apportioned to residual CFC gross
income under the disqualified payment
rule. See proposed § 1.245A–5(j)(8)
(Example 7). The coordination
mechanism generally applies in the
same manner as if the disqualified
payment had given rise to disqualified
basis of an item of specified property
that corresponds to the extraordinary
disposition account. See id.
B. Currency Translation Rules
Accounts created under the proposed
regulations are maintained in the
functional currency of the items to
which they relate. See proposed
§ 1.245A–9(b)(4). Therefore, a basis
benefit account is maintained in the
same functional currency as the
extraordinary disposition account to
which it relates. Similarly, an RGI
account is maintained in the functional
currency of the CFC whose allocations
to residual CFC gross income are being
measured and tracked by that account.
The application of the DQB reduction
rule and the EDA reduction rule may
also require currency translation
because these rules require amounts
determined in the functional currency
of one person to be applied to reduce
attributes of another person that may
have a different functional currency. In
this regard, the proposed regulations
provide that the disqualified basis of,
and a basis benefit amount with respect
to, an item of specified property that
corresponds to an extraordinary
disposition account are translated into
the functional currency in which the
extraordinary disposition account is
maintained, using the spot rate on the
date the extraordinary disposition
occurred. See proposed § 1.245A–
9(b)(4). Moreover, proposed § 1.245A–
9(b)(4) provides that a reduction in
disqualified basis of an item of specified
property under the DQB reduction rule
is translated into the functional
currency in which the disqualified basis
of the item of specified property is
maintained, and reductions in an
extraordinary disposition account are
translated into the functional currency
in which the extraordinary disposition
account is maintained, in each case
using the spot rate on the date the
associated extraordinary disposition
occurred.
C. Anti-Avoidance Rule
Proposed § 1.245A–9(b)(5) contains an
anti-avoidance rule providing that
appropriate adjustments are made if a
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transaction or arrangement is engaged in
with a principal purpose of avoiding the
purposes of these proposed regulations.
As an example, the anti-avoidance rule
applies if a section 245A shareholder
causes its taxable year to end on a
particular date with a principal purpose
of avoiding a basis benefit amount from
being assigned to that taxable year.
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D. Existing Election To Eliminate
Disqualified Basis
Taxpayers may have elected to reduce
an item of specified property’s adjusted
basis (and thus eliminate the item’s
disqualified basis) pursuant to
§ 1.951A–3(h)(2)(ii)(B)(3) (a ‘‘basis
elimination election’’) before the
proposed regulations were issued. In
certain cases, the proposed regulations
once finalized may provide more
favorable outcomes for taxpayers than a
basis elimination election. Therefore,
the proposed regulations permit
taxpayers to revoke a basis elimination
election during a transition period,
which under the proposed regulations is
90 days after the proposed regulations
are finalized. See proposed § 1.245A–
9(c)(1). This transition period is
intended to provide a taxpayer
sufficient time to consider whether it
would prefer a basis elimination
election or to apply the rules of the
proposed regulations. The proposed
regulations set forth the procedures for
revoking a basis elimination election.
See proposed § 1.245A–9(c)(1) and (2).
These procedures require a taxpayer to
file a revocation statement, as well as
amended returns reflecting the
revocation of the election. See id.
V. Applicability Dates
The proposed regulations are
proposed to apply to taxable years of
foreign corporations beginning on or
after the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register (the ‘‘finalization date’’), and to
taxable years of a U.S. person in which
or with which such taxable years of
foreign corporations end. See proposed
§ 1.245A–11(a). For taxable years
beginning before the finalization date, a
taxpayer may apply the rules set forth
in the final regulations, provided that
the taxpayer and all related parties
consistently apply the rules to those
taxable years. See proposed § 1.245A–
11(b); see also section 7805(b)(7).
VI. Comment Requests
The Treasury Department and the IRS
request comments on all aspects of the
proposed regulations. In addition,
comments are specifically requested on
the issues discussed below.
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A. The DQB Reduction Rule
The DQB reduction rule applies only
if a distribution gives rise to an
extraordinary disposition amount or a
tiered extraordinary disposition amount.
The Treasury Department and the IRS
are considering whether the DQB
reduction rule should apply by reason
of a prior extraordinary disposition
amount described in § 1.245A–
5(c)(3)(D)(i) through (iv), such that
disqualified basis of an item of specified
property would be reduced to the same
extent a reduction would occur under
the DQB reduction rule were the prior
extraordinary disposition amount an
extraordinary disposition amount or
tiered extraordinary disposition amount.
For example, an investment in United
States property subject to sections
951(a)(1)(B) and 956(a) and § 1.956–
1(a)(2) may give rise to a prior
extraordinary disposition amount under
§ 1.245A–5(c)(3)(i)(D)(1)(iv). As an
additional example, prior dividends that
would have been subject to § 1.245A–
5(c) but failed to qualify for the section
245A deduction because they did not
satisfy the requirement that the
recipient domestic corporation be a
United States shareholder with respect
to the distributing may give rise to a
prior extraordinary disposition amount
under § 1.245A–5(c)(3)(i)(D)(1)(i). The
Treasury Department and the IRS are
studying whether applying the DQB
reduction rule would be appropriate
with respect to any of these prior
extraordinary disposition amounts,
including whether it would be
necessary to prevent meaningful excess
taxation or give rise to undue
complexity. The Treasury Department
and the IRS welcome comments on the
matter.
RGI account rules) should take into
account this benefit derived from
disqualified basis, and request
comments on the matter.
B. The EDA Reduction Rule
Pursuant to section 952(c)(1)(A), the
subpart F income of a CFC for any
taxable year cannot exceed the CFC’s
E&P for the taxable year. In addition,
any amount excluded from subpart F
income under section 952(c)(1)(A) is
recaptured under section 952(c)(2) in
future taxable years to the extent the
CFC would otherwise have E&P in
excess of subpart F income. Although
the disqualified basis rule prevents
deductions or losses attributable to
disqualified basis from reducing subpart
F income, tested income, or ECTI, those
deductions or losses still reduce E&P
and may be used by a CFC to avoid
current inclusions of subpart F income
under section 952(c)(1)(A). The
Treasury Department and the IRS are
studying the extent to which the EDA
reduction rule (for example, under the
A. Background and Overview of the
Proposed Regulations
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Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. The
Executive Order 13771 designation for
any final rule resulting from these
proposed regulations will be informed
by comments received. The preliminary
Executive Order 13771 designation for
this proposed rule is regulatory.
The proposed regulations have been
designated by the Office of Management
and Budget’s Office of Information and
Regulatory Affairs (OIRA) as subject to
review under Executive Order 12866
pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget (OMB)
regarding review of tax regulations.
OIRA has determined that the proposed
rulemaking is significant and subject to
review under Executive Order 12866
and section 1(b) of the Memorandum of
Agreement. Accordingly, the proposed
regulations have been reviewed by
OMB.
The Tax Cuts and Jobs Act (‘‘the Act’’)
enacted section 245A, which generally
allows U.S. corporations a 100-percent
deduction (the ‘‘section 245A
deduction’’) for certain dividends
received from 10-percent owned foreign
corporations (‘‘SFCs’’). As a result of
this deduction, certain types of foreignsource income earned by foreign
corporations may not be subject to U.S.
tax at the U.S. shareholder level. Section
245A applies only to dividends paid
after December 31, 2017.
The Act also enacted section 951A,
which subjects U.S. shareholders of
controlled foreign corporations
(‘‘CFCs’’) to current taxation under
section 951A on their global intangible
low-taxed income (‘‘GILTI’’). Generally,
the U.S. shareholder calculates its GILTI
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by subtracting a routine return on
tangible assets from ‘‘tested income,’’
which is essentially the income of the
U.S. shareholder’s CFCs (other than
subpart F income, income effectively
connected with the conduct of a U.S.
trade or business (‘‘ECTI’’), and certain
other excluded items of income).
Section 951A applies for CFC tax years
beginning after December 31, 2017,
meaning that tested income of a fiscal
year CFC is not subject to the GILTI
regime until potentially as late as
December 1, 2018.
The Act also enacted section 965,
which imposed a new tax on the post1986 earnings and profits of foreign
corporations that had gone untaxed
under the pre-Act international tax
regime, measured as of no later than
December 31, 2017. By subjecting post1986 earnings and profits to a transition
tax, section 965 generally ensured for
calendar-year CFCs that only earnings
first subjected to the anti-base erosion
provisions of the Act could qualify for
the section 245A deduction.
The difference in the dates for which
sections 965 and 951A apply provides
the context for the proposed regulations.
For a CFC with a calendar taxable year,
section 951A first applies on January 1,
2018, immediately after the final
measurement date for section 965.
However, a fiscal year CFC has a period
from January 1, 2018, until the
beginning of its first taxable year in
2018 (the ‘‘disqualified period’’) in
which it could engage in transactions
that generate income subject to neither
section 965 nor 951A. These
transactions could be used to create two
types of tax benefits. First, earnings
generated from transactions during the
disqualified period could support taxfree distributions of cash or other assets
to the United States using the section
245A deduction. Second, assets
transferred to related CFCs during the
disqualified period would have fair
market value tax basis in the hands of
the transferee, generating future
depreciation deductions or other losses
against U.S. taxable income such as
GILTI. In many cases, these two benefits
arise from the same transaction
undertaken during the disqualified
period because a transfer of low-basis
assets can generate earnings eligible for
the section 245A deduction for the
seller and allow the buyer to take the
assets with fair market value basis that
generates future depreciation
deductions (on assets that otherwise
may have had no or low basis in the
hands of the seller).
To address the earnings and profits
created in these transactions, temporary
and proposed regulations were
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published under section 245A on June
18, 2019 (the ‘‘2019 section 245A
regulations’’) that limit the ability to
obtain the section 245A deduction for
certain earnings and profits generated
during the disqualified period. The 2019
section 245A regulations are being
finalized with certain changes alongside
the issuance of the proposed
regulations. To address the fair market
value basis generated in these
transactions, final regulations were
published under section 951A (‘‘GILTI
final regulations’’) on June 21, 2019, that
allocate depreciation or amortization
deductions resulting from basis
generated in certain disqualified period
transactions to income not subject to
U.S. tax.
The 2019 section 245A regulations, as
finalized, contain § 1.245A–5, which
generally denies the section 245A
deduction for 50 percent of the earnings
generated from an SFC’s disposition of
property to a related party during the
disqualified period. This denial applies
if (i) the disposition was outside the
SFC’s ordinary course of business and
(ii) the disposition generated earnings
that would have been subject to tax
under section 951A had the disposition
not occurred during the disqualified
period (an ‘‘extraordinary disposition’’).
Section 1.245A–5 establishes an
extraordinary disposition account for
taxpayers to track the amount of
earnings and profits generated from
extraordinary dispositions. The section
245A deduction is limited for dividends
out of that account.
Section 1.951A–2(c)(5) of the GILTI
final regulations focuses on the
consequences to the transferee in
transactions that were generally
extraordinary dispositions. It requires
that deductions or losses attributable to
the basis of an asset resulting from
certain transfers during the disqualified
period (‘‘disqualified basis’’) be
allocated and apportioned to ‘‘residual
CFC gross income’’ (that is, income
other than tested income, subpart F
income, or ECTI). As a result, the
deductions or losses attributable to
disqualified basis cannot reduce the
CFC’s income subject to U.S. tax.
Instead, the deductions and losses
reduce the untaxed earnings and profits
of the CFC, including those earnings
and profits that would otherwise be
eligible for a section 245A deduction
when distributed to a U.S. shareholder.
The 2019 section 245A regulations
requested comments regarding options
for coordinating § 1.245A–5 with
§ 1.951A–2(c)(5). After carefully
considering the comments on this topic,
the Treasury Department and the IRS
are providing the proposed regulations,
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which coordinate § 1.245A–5 with
§ 1.951A–2(c)(5).
Generally, the proposed regulations
provide relief from either § 1.245A–5 or
§ 1.951A–2(c)(5) to the extent that the
other rule results in U.S. taxation on the
same underlying transaction. Thus, to
the extent that the section 245A
deduction is limited with respect to
distributions out of an extraordinary
disposition account, a corresponding
amount of disqualified basis attributable
to the property that generated that
extraordinary disposition account
through an extraordinary disposition is
converted to basis that is not subject to
§ 1.951A–2(c)(5). The Treasury
Department and the IRS project that this
situation is likely to be relatively rare in
the near future, because of the rule in
§ 1.245A–5(c)(2)(i) specifying that
distributions out of the extraordinary
disposition account are made after all
other E&P have been distributed. In the
reverse scenario, to the extent that
§ 1.951A–2(c)(5) allocates a CFC’s
deductions or losses from property
acquired during the disqualified period
to residual CFC gross income and
thereby causes an increase to the CFC’s
tested income, subpart F income, or
ECTI while reducing its untaxed E&P,
the extraordinary disposition account of
the U.S. shareholder created from the
transfer of that property during the
disqualified period is reduced by a
corresponding amount.
B. Need for the Proposed Regulations
The existence of two separate sets of
rules governing the same types of
income or transactions suggests that
taxpayers would benefit from their
coordination, and comments have
requested this coordination. The
proposed regulations respond to these
comments and help to ensure proper
functioning of the regulations governing
the Act.
C. Economic Analysis of the Proposed
Regulations
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the proposed regulations relative to a
no-action baseline reflecting anticipated
Federal income tax-related behavior in
the absence of these proposed
regulations. Under the baseline,
§§ 1.245A–5 and 1.951A–2(c)(5) can
both apply as a result of the same
transaction.
2. Economic Effects
i. Summary
The proposed regulations coordinate
the treatment of extraordinary
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disposition accounts and disqualified
basis. An example of how they do so is
presented in part I.C.2.ii of this Special
Analyses. Both extraordinary
disposition accounts and disqualified
basis were created during the
disqualified period, which ended before
the issuance of the proposed
regulations; thus, the proposed
regulations will not further economic
activity. Thus, these provisions will
largely not give rise to economic effects.
The Treasury Department and the IRS
have, however, identified some
circumstances under which the
proposed regulations may affect
business activity relative to the noaction baseline. In particular, the
proposed regulations may affect the
extent to which the basis of certain
assets transferred during the
disqualified period can reduce
potentially taxable income. This means
that for affected taxpayers who
distribute dividends subject to the
extraordinary disposition rule and
thereby correspondingly reduce
disqualified basis under the proposed
regulations, the amount of deduction or
loss allowed against potentially taxable
income is generally higher under the
proposed regulations than under the noaction baseline. This outcome leads to a
lower effective tax rate for affected
taxpayers on future income under the
proposed regulations than under the noaction baseline.
The lower tax rate under the proposed
regulations may lead to an increase in
economic activity for affected taxpayers
relative to the no-action baseline. This
incentive for additional economic
activity, relative to the no-action
baseline, will generally persist for as
long as the difference in effective tax
rates exists (described in part I.C.2.ii of
this Special Analyses).2 The Treasury
Department and the IRS project that the
fact pattern leading to this situation will
likely be relatively rare, however,
because it relies on taxpayers
distributing income from their
extraordinary disposition accounts
during the useful life of the asset, which
is likely to be uncommon because of the
ordering rule that requires that earnings
from extraordinary disposition accounts
be distributed after all other earnings
and profits.
The Treasury Department and the IRS
have not undertaken quantitative
estimates of this economic effect. Data
2 The potential discrepancy in effective tax rates
can exist for a period up to the remaining useful
life of a depreciable or amortizable asset with
(formerly) disqualified basis starting from the year
that an amount is distributed out of an
extraordinary disposition account and reduces that
disqualified basis.
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or models are not readily available to
indicate (i) the amounts of potentially
disqualified basis (which depends on
the volume, value, and basis of assets
transferred during the disqualified
period; see related discussion in part
I.C.2.iii of this Special Analyses) held
by taxpayers and the amount of any
corresponding extraordinary disposition
accounts; (ii) differences in effective tax
rates for affected taxpayers (taxpayers
that have disqualified basis and a
corresponding extraordinary disposition
account) between the proposed
regulations and the no-action baseline;
(iii) the amount and period of the
depreciation deductions related to the
potentially disqualified basis to which
the previous item applies; and (iv) the
amount of additional economic activity
that might be undertaken by these
affected taxpayers as a result of the
difference in effective tax rates. The
combined effect of these four items
gives rise to any potential economic
effects of the proposed regulations.
The Treasury Department and the IRS
also considered the effect of the
regulations on compliance costs relative
to the no-action baseline. The
compliance costs arising from the
proposed regulations stem only from
those record-keeping, reporting, and
related compliance activities that would
not have been undertaken in the
absence of the proposed regulations.
However, because the final regulations
in §§ 1.245A–5 and 1.951A–2(c)(5)
already require collection of most of the
information and record keeping
necessary to implement these
coordination rules, the Treasury
Department and the IRS project that any
additional costs of the proposed
regulations, relative to the no-action
baseline, will be modest. For example,
to the extent that a U.S. taxpayer
distributes a taxable dividend from its
extraordinary disposition account, that
taxpayer will already know the value of
that dividend as well as the amount of
disqualified basis generated in the
transaction that created the
extraordinary disposition account, such
that any added burden generally lies
only in identifying and reducing the
corresponding disqualified basis by the
amount of the dividend, as well as
reporting such amounts to the extent
required by the IRS.
Although the Treasury Department
and the IRS have not undertaken
quantitative estimates of the proposed
regulations, it is projected that the
proposed regulations could modestly
enhance U.S. economic performance
relative to the no-action baseline. The
treatment of disqualified basis and the
reduction in effective tax rates that it
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53109
engenders for affected taxpayers will
enhance economic activity.
The Treasury Department and the IRS
solicit comments on the economic
effects of the proposed regulations and
particularly solicit data, models, or
other evidence that could enhance the
rigor of the analysis underlying the final
regulations.
ii. Example
The potential difference in effective
tax rates between the proposed
regulations and the no-action baseline
can be illustrated by an example.
Suppose CFC A (a wholly-owned
foreign subsidiary of a U.S. parent) has
$0 E&P and transfers assets worth $100x
to CFC B (also a wholly-owned foreign
subsidiary of the same U.S. parent)
during the disqualified period in a
transaction that is an extraordinary
disposition, and suppose the transferred
assets have basis of $0 immediately
before the transfer. CFC A obtains $100x
of earnings and profits of which,
because of the final regulations under
section 245A, only 50 percent qualifies
for the section 245A deduction (if
distributed to the U.S. parent as a
dividend). Also, as a result of the sale
of the asset during the disqualified
period, CFC B obtains $100x of basis in
the asset which, because of § 1.951A–
2(c)(5), cannot be used to offset subpart
F income, tested income for GILTI
purposes, or ECTI as it is amortized or
depreciated. Additionally, the
amortization or depreciation deductions
on this $100x of disqualified basis
reduce CFC B’s earnings that otherwise
may have qualified for the section 245A
deduction.
Thus, over the life of the amortization
or depreciation of the asset with $100x
basis, CFC B could, absent the proposed
regulations, have $100x more tested
income (potentially taxed at an effective
rate of 10.5%, or $10.50x tax) than it
would have had if the $100x of
amortization or depreciation had been
allowed to reduce tested income
(assuming that CFC B has at least $100x
of gross tested income in that period
and neither it nor its U.S parent has any
other attributes that can reduce GILTI).
The amortization or depreciation
deductions would also reduce CFC B’s
untaxed earnings and profits by $100x,
potentially eliminating the ability to
distribute $100x tax-free under section
245A.
Suppose that, in the same taxable year
as the extraordinary disposition to CFC
B, CFC A makes a dividend distribution
to the U.S. parent of $100x out of the
extraordinary disposition account. The
section 245A deduction is limited to 50
percent of the earnings distributed
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(under § 1.245A–5) and hence the U.S.
parent pays $10.50x of tax (assuming
CFC A’s earnings and profits are solely
attributable to the extraordinary
disposition transaction). U.S. parent’s
extraordinary disposition account with
respect to CFC A is reduced by $100x
and subsequent income earned by CFC
A can be repatriated tax free.
Under the proposed regulations, once
CFC A makes that distribution of $100x
out of its extraordinary disposition
account subject to a $10.50x tax, the
$100x of basis that CFC B has in the
asset transferred during the disqualified
period is no longer disqualified basis
and can give rise to amortization or
depreciation deductions that offset CFC
B’s gross tested income, potentially
eliminating $10.50x tax on CFC B’s
tested income. This lowers the effective
tax rate on CFC B’s future income and
may spur additional economic activity.
iii. Profile of Affected Taxpayers
The taxpayers potentially affected by
the proposed regulations are direct or
indirect U.S. shareholders of at least two
related foreign corporations, one that
has an extraordinary disposition
account and the other that has assets
with disqualified basis corresponding to
the extraordinary disposition account.
This means that the foreign corporation
with the extraordinary disposition
account has a fiscal year and engaged in
a disposition of property (i) during the
period between January 1, 2018, and the
end of the transferor foreign
corporation’s last taxable year beginning
before January 1, 2018; (ii) outside the
ordinary course of the foreign
corporation’s activities; and (iii)
generally, while the corporation was a
CFC.
The Treasury Department and the IRS
have not estimated how many taxpayers
are likely to be affected by the proposed
regulations because data on the
taxpayers that may have engaged in
these particular transactions are not
readily available. Based on tabulations
of the 2014 Statistics of Income Study
file, the Treasury Department and the
IRS estimate that there are
approximately 5,000 domestic
corporations with at least one fiscal year
CFC. However, the number of
potentially affected taxpayers is likely
substantially smaller than the number of
domestic corporations with at least one
fiscal year CFC because a domestic
corporation will not be affected unless
it has a fiscal year CFC that engaged in
a non-routine sale with a related party
during the disqualified period that
created an extraordinary disposition
account and disqualified basis under
§§ 1.245A–5 and 1.951A–2(c)(5), and
the domestic corporation must then
incur the type of cost (limitation of the
section 245A deduction or allocation of
deductions or losses to residual CFC
gross income and reduction in untaxed
Schedule to Form 5471 ...............................................................
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The collection of information in
§ 1.6038–2(f)(18) is mandatory for every
U.S. shareholder of a CFC that applies
the rules of proposed §§ 1.245A–6
through 1.245A–11 during an annual
accounting period and files Form 5471
for that period (OMB control number
1545–0123). The collection of
information in § 1.6038–2(f)(18) is
satisfied by providing information about
the reduction to an extraordinary
The current status of the Paperwork
Reduction Act submissions related to
the new revised Form 5471 as a result
of the information collections in the
proposed regulations is provided in the
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The collections of information in the
proposed regulations are in § 1.6038–
2(f)(17) and (18).
The collection of information in
§ 1.6038–2(f)(17) is mandatory for every
U.S. shareholder of a CFC that holds an
item of property that has disqualified
basis within the meaning of § 1.951A–
3(h)(2) during an annual accounting
period and files Form 5471 for that
period (OMB control number 1545–
0123). The collection of information in
§ 1.6038–2(f)(17) is satisfied by
providing information about the items
of property with disqualified basis held
by the CFC during the CFC’s accounting
period as Form 5471 and its instructions
may prescribe. For purposes of the
Paperwork Reduction Act, the reporting
burden associated with § 1.6038–2(f)(17)
will be reflected in the applicable
Paperwork Reduction Act submission
associated with Form 5471. As provided
below, the estimated number of
respondents for the reporting burden
associated with § 1.6038–2(f)(17) is
7,500–8,500, based on estimates
provided by the Research, Applied
Analytics and Statistics Division of the
IRS.
The related new or revised tax form
is as follows:
Revision of
existing form
Number of
respondents
(estimate)
........................................
✓
7,500–8,500
in the applicable Paperwork Reduction
Act submission associated with Form
5471. As provided below, the estimated
number of respondents for the reporting
burden associated with § 1.6038–2(f)(18)
is 7,500–8,500, based on estimates
provided by the Research, Applied
Analytics and Statistics Division of the
IRS.
The related new or revised tax form
is as follows:
New
Revision of
existing form
Number of
respondents
(estimate)
........................................
✓
7,500–8,500
accompanying table. The reporting
burdens associated with the information
collections in § 1.6038–2(f)(17) and (18)
are included in the aggregated burden
estimates for OMB control number
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II. Paperwork Reduction Act
New
disposition account made pursuant to
proposed § 1.245A–7(b) or § 1.245A–
8(b) and reductions to an item of
specified property’s disqualified basis
pursuant to proposed § 1.245A–7(c) or
§ 1.245A–8(c) during the corporation’s
accounting period as Form 5471 and its
instructions may prescribe. For
purposes of the Paperwork Reduction
Act, the reporting burden associated
with § 1.6038–2(f)(18) will be reflected
Schedule to Form 5471 ...............................................................
earnings) that causes the proposed
regulations to apply.
Fmt 4701
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1545–0123, which represents a total
estimated burden time for all forms and
schedules for corporations of 3.157
billion hours and total estimated
monetized costs of $58.148 billion
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($2017). The overall burden estimates
provided in 1545–0123 are aggregate
amounts that relate to the entire package
of forms associated with the OMB
control number and will in the future
include but not isolate the estimated
burden of the tax forms that will be
revised as a result of the information
collections in the proposed regulations.
These numbers are therefore unrelated
to the future calculations needed to
assess the burden imposed by the
temporary regulations. The Treasury
Department and the IRS urge readers to
recognize that these numbers are
Information
collection
Form 5471 ..............
Type of filer
duplicates of estimates provided for
informational purposes in other
proposed and final regulatory actions
and to guard against over-counting the
burden that international tax provisions
imposed before the Act.
No burden estimates specific to the
proposed regulations are currently
available. The Treasury Department and
the IRS have not identified any burden
estimates, including those for new
information collections, related to the
requirements under the proposed
regulations. The Treasury Department
and the IRS request comments on all
OMB No.(s)
Business (new
model).
1545–0123
53111
aspects of information collection
burdens related to the proposed
regulations, including estimates for how
much time it would take to comply with
the paperwork burdens described above
for each relevant form and ways for the
IRS to minimize the paperwork burden.
Proposed revisions to these forms that
reflect the information collections
contained in these proposed regulations
will be made available for public
comment at www.irs.gov/draftforms and
will not be finalized until after
approved by OMB under the PRA.
Status
Published in the Federal Register on 9/30/19.
Public Comment period closed on 11/29/19.
Approved by OMB through 1/31/2021.
https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-for-forms-10651066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s
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III. Regulatory Flexibility Act
It is hereby certified that this
rulemaking will not have a significant
economic impact on a substantial
number of small entities within the
meaning of section 601(6) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6). The small entities that are
subject to § 1.245A–5 are small entities
that are U.S. shareholders of certain
foreign corporations that are otherwise
eligible for the section 245A deduction
on distributions from the foreign
corporation. The small entities that are
subject to § 1.951A–2(c)(5) are U.S.
shareholders of certain foreign
corporations that are subject to tax
under section 951 with respect to
subpart F income of those foreign
corporations or section 951A with
respect to tested income of those foreign
corporations.
The taxpayers potentially affected by
these proposed regulations are U.S.
shareholders of at least two related
foreign corporations, one that has an
extraordinary disposition account and
the other that has assets with
disqualified basis corresponding to the
extraordinary disposition account. This
means that the foreign corporation with
the extraordinary disposition account
has or had a fiscal year and engaged in
a disposition of property (i) during the
period between January 1, 2018, and the
end of the transferor foreign
corporation’s last taxable year beginning
before 2018; (ii) outside the ordinary
course of the foreign corporation’s
activities; and (iii) generally, while the
corporation was a CFC.
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The Treasury Department and the IRS
have not estimated how many taxpayers
are likely to be affected by these
regulations because data on the
taxpayers that may have engaged in
these particular transactions are not
readily available. Based on tabulations
of the 2014 Statistics of Income Study
file the Treasury Department and the
IRS estimate that there are
approximately 5,000 domestic
corporations with at least one fiscal year
CFC. Previous estimates suggest that
approximately half of domestic
corporations with CFCs have less than
$25 million in gross receipts. However,
the number of potentially affected
taxpayers is smaller than the number of
domestic corporations with at least one
fiscal year CFC because a domestic
corporation will not be affected unless
its fiscal year CFC engages in a nonroutine sale with a related party that
creates an extraordinary disposition
account and disqualified basis, and the
domestic corporation must then incur
the type of cost (limitation of the section
245A deduction or allocation of
deductions or losses to residual CFC
gross income and reduction in untaxed
earnings) that causes these proposed
regulations to apply. There are several
industries that may be identified as
small even through their annual receipts
are above $25 million or because they
have fewer employees than the SBA
Size Standard for that industry. The
Treasury Department and the IRS do not
have more precise data indicating the
number of small entities that will be
potentially affected by the regulations.
The rule may affect a substantial
PO 00000
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Fmt 4701
Sfmt 4702
number of small entities, but data are
not readily available to assess how
many entities will be affected.
Nevertheless, for the reasons described
below, the Treasury Department and the
IRS have determined that the
regulations will not have a significant
economic impact on small entities.
The Treasury Department and the IRS
have concluded that there is no
significant economic impact on such
entities as a result of the proposed
regulations. To make this determination,
the Treasury Department and the IRS
calculated the ratio of estimated global
intangible lowed-taxed income
(‘‘GILTI’’) and subpart F income tax
attributable to these businesses to
aggregate total sales data. Bureau of
Economic Analysis data on the activities
of multinational enterprises report total
sales of all foreign affiliates of U.S.
parents of $7,183 billion in 2017
(accessed at this web address in
December, 2018: https://apps.bea.gov/
iTable/iTable.cfm?ReqID=2&step=1).
Projections for GILTI and Subpart F tax
revenues average $20 billion per year
over the ten-year budget window (see
Joint Committee on Taxation, Estimated
Budget Effects of the Conference
Agreement for H.R. 1, The ‘‘Tax Cuts
and Jobs Act, JCX–67–17, December 18,
2017), resulting in a less than 1 percent
share of GILTI and Subpart F tax in total
sales of U.S.—parented affiliates.
Compliance costs for these regulations
will be a small fraction of the revenue
amounts. Thus, any tax regulation that
affects the proceeds from GILTI and
subpart F income would have an
economic impact of less than 3 to 5
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percent of ‘‘receipts’’ (as that term is
defined in 13 CFR 121.104, the
provision for calculating small business
receipts, to mean sales and any other
measure of gross income), an economic
impact that the Treasury Department
and IRS regard as the threshold for
significant under the Regulatory
Flexibility Act. This calculated
percentage is furthermore an upper
bound on the true expected effect of the
proposed regulations because not all the
GILTI and subpart F income estimated
to be attributable to small entities will
be affected by the proposed regulations.
For example, GILTI and subpart F
income that is not attributable to a CFC
that holds property with disqualified
basis (or property that would otherwise
have disqualified basis in the absence of
these regulations) is not affected by
these proposed regulations.
Consequently, the Treasury Department
and the IRS have determined that these
proposed regulations will not have a
significant economic impact on a
substantial number of small entities.
Pursuant to section 7805(f) of the Code,
these proposed regulations have been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on the
impact on small businesses.
Comments and Requests for Public
Hearing
Before these proposed amendments to
the regulations are adopted as final
regulations, consideration will be given
to comments that are submitted timely
to the IRS as prescribed in the preamble
under the ADDRESSES section. The
Treasury Department and the IRS
request comments on all aspects of the
proposed regulations. Any electronic
comments submitted, and to the extent
practicable any paper comments
submitted, will be made available at
www.regulations.gov or upon request.
A public hearing will be scheduled if
requested in writing by any person who
timely submits electronic or written
comments. Requests for a public hearing
are also encouraged to be made
electronically. If a public hearing is
scheduled, notice of the date and time
for the public hearing will be published
in the Federal Register. Announcement
2020–4, 2020–17 IRB 1, provides that
until further notice, public hearings
conducted by the IRS will be held
telephonically. Any telephonic hearing
will be made accessible to people with
disabilities.
Drafting Information
The principal authors of the proposed
regulations are Logan M. Kincheloe and
Shane M. McCarrick, Office of Associate
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17:42 Aug 26, 2020
Jkt 250001
Chief Counsel (International). However,
other personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order for §§ 1.245A–6
through 1.245A–11 to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Sections 1.245A–6 through 1.245A–11 also
issued under 26 U.S.C. 245A(g), 882(c)(1)(A),
951A, 954(b)(5), 954(c)(6), and 965(o).
*
*
*
*
*
■ Par. 2. Section 1.245A–5 is amended
by:
■ 1. In the first sentence of paragraph
(c)(3)(i)(A), adding immediately after the
language ‘‘by the prior extraordinary
disposition amount’’ the language ‘‘and
as provided in § 1.245A–7 or § 1.245A–
8.’’
■ 2. Revising paragraph (j)(8)(ii).
The revision reads as follows:
disposition E&P for purposes of this
section and, therefore, US1 has an
extraordinary disposition account with
respect to CFC1 of $100x. In addition,
the prepaid royalty gives rise to a
disqualified payment (as defined in
§ 1.951A–2(c)(6)(ii)(A)) of $100x. As a
result, § 1.245A–7(b) or § 1.245A–8(b),
as applicable, applies to reduce the
disqualified payment in the same
manner as if the disqualified payment
were disqualified basis, and § 1.245A–
7(c) or § 1.245A–8(c), as applicable,
applies to reduce the extraordinary
disposition account in the same manner
as if the deductions directly or
indirectly related to the disqualified
payment were deductions attributable to
disqualified basis of an item of specified
property that corresponds to the
extraordinary disposition account.
*
*
*
*
*
■ Par. 3. Sections 1.245A–6 through
1.245A–11 are added to read as follows:
Sec.
*
*
*
*
*
1.245A–6 Coordination of extraordinary
disposition and disqualified basis rules.
1.245A–7 Coordination rules for simple
cases.
1.245A–8 Coordination rules for complex
cases.
1.245A–9 Other rules and definitions.
1.245A–10 Examples.
1.245A–11 Applicability dates.
*
*
*
*
*
§ 1.245A–5 Limitation of section 245A
deduction and section 954(c)(6) exception.
§ 1.245A–6 Coordination of extraordinary
disposition and disqualified basis rules.
*
(a) Scope. This section and
§§ 1.245A–7 through 1.245A–11
coordinate the application of the
extraordinary disposition rules of
§ 1.245A–5(c) and (d) and the
disqualified basis rule of § 1.951A–
2(c)(5). Section 1.245A–7 provides
coordination rules for simple cases, and
§ 1.245A–8 provides coordination rules
for complex cases. Section 1.245A–9
provides definitions and other rules,
including rules of general applicability
for purposes of this section and
§§ 1.245A–7 through 1.245A–11.
Section 1.245A–10 provides examples
illustrating the application of this
section and §§ 1.245A–7 through
1.245A–9. Section 1.245A–11 provides
applicability dates.
(b) Conditions to apply coordination
rules for simple cases. For a taxable year
of a section 245A shareholder for which
the conditions described in paragraphs
(b)(1) and (2) of this section are
satisfied, the section 245A shareholder
may apply the coordination rules of
§ 1.245A–7 (rules for simple cases) to an
extraordinary disposition account of the
section 245A shareholder with respect
to an SFC and disqualified basis of an
*
*
*
*
(j) * * *
(8) * * *
(ii) Analysis. Because the royalty
prepayment was carried out with a
principal purpose of avoiding the
purposes of this section, appropriate
adjustments are required to be made
under the anti-abuse rule in paragraph
(h) of this section. CFC1 is a CFC that
has a November 30 taxable year, so
under paragraph (c)(3)(iii) of this
section, CFC1 has a disqualified period
beginning on January 1, 2018, and
ending on November 30, 2018. In
addition, even though the intangible
property licensed by CFC1 to CFC2 is
specified property, CFC2’s prepayment
of the royalty would not be treated as a
disposition of the specified property by
CFC1 and, therefore, would not
constitute an extraordinary disposition
(and thus would not give rise to
extraordinary disposition E&P), absent
the application of the anti-abuse rule of
paragraph (h) of this section. Pursuant
to paragraph (h) of this section, the
earnings and profits of CFC1 generated
as a result of the $100x of prepaid
royalty are treated as extraordinary
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item of specified property that
corresponds to the extraordinary
disposition account (as determined
pursuant to § 1.245A–9(b)(1)). If the
conditions are not satisfied, then the
coordination rules of § 1.245A–8 (rules
for complex cases) apply beginning with
the first day of the first taxable year of
the section 245A shareholder for which
the conditions are not satisfied and all
taxable years thereafter. If the
conditions are satisfied for a taxable
year of the section 245A shareholder but
the section 245A shareholder chooses
not to apply the coordination rules of
§ 1.245A–7 for that taxable year, then
the coordination rules of § 1.245A–8
apply to that taxable year (though, for a
subsequent taxable year, the section
245A shareholder may apply the
coordination rules of § 1.245A–7,
provided that the conditions described
in paragraphs (b)(1) and (2) of this
section are satisfied for such subsequent
taxable year and have been satisfied for
all earlier taxable years). For purposes of
applying paragraphs (b)(1) and (2) of
this section, a reference to a section
245A shareholder, an SFC, or a CFC
does not include a successor of the
section 245A shareholder, the SFC, or
the CFC, respectively.
(1) Requirements related to the SFC.
The condition of this paragraph (b)(1) is
satisfied for a taxable year of the section
245A shareholder if the following
requirements are satisfied:
(i) On January 1, 2018, the section
245A shareholder owns (within the
meaning of section 958(a)) all of the
stock (by vote and value) of the SFC.
(ii) On each day of the taxable year of
the section 245A shareholder, the
section 245A shareholder owns (within
the meaning of section 958(a)) all of the
stock (by vote and value) of the SFC.
(iii) On no day during the taxable year
of the section 245A shareholder was the
SFC a distributing or controlled
corporation in a transaction described in
a section 355, or did the SFC acquire the
assets of a corporation as to which there
is an extraordinary disposition account
pursuant to a transaction described in
section 381 (that is, taking into account
the requirements of this paragraph (b)(1)
and paragraph (b)(2) of this section, the
section 245A shareholder’s
extraordinary disposition account with
respect to the SFC has not been not been
adjusted pursuant to the rules of
§ 1.245A–5(c)(4)).
(2) Requirements related to an item of
specified property that corresponds to
an extraordinary disposition account
and a CFC holding the item. The
condition of this paragraph (b)(2) is
satisfied for a taxable year of a section
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245A shareholder if the following
requirements are satisfied:
(i) For each item of specified property
with disqualified basis that corresponds
to the extraordinary disposition
account, the item of specified property
is held by a CFC immediately after the
extraordinary disposition of the item of
specified property.
(ii) For each CFC described in
paragraph (b)(2)(i) of this section—
(A) All of the stock (by vote and
value) of the CFC is owned (within the
meaning of section 958(a)) by the
section 245A shareholder and any
domestic affiliates of the section 245A
shareholder immediately after the
extraordinary disposition described in
paragraph (b)(2)(i) of this section;
(B) For each taxable year of the CFC
that ends with or within the taxable year
of the section 245A shareholder, there is
no extraordinary disposition account
with respect to the CFC, and the sum of
the balance of the hybrid deduction
accounts (as described in § 1.245A(e)–
1(d)(1)) with respect to shares of stock
of the CFC is zero (determined as of the
end of the taxable year of the CFC and
taking into account any adjustments to
the accounts for the taxable year); and
(C) On each day of each taxable year
of the CFC that ends with or within the
taxable year of the section 245A
shareholder, and on each day of each
taxable year of the CFC that begins with
or within the taxable year of the section
245A shareholder—
(1) The CFC holds the item of
specified property described in
paragraph (b)(1)(i) of this section;
(2) The section 245A shareholder and
any domestic affiliates own (within the
meaning of section 958(a)) all of the
stock (by vote and value) of the CFC;
(3) The CFC does not hold any item
of specified property with disqualified
basis other than an item of specified
property that corresponds to the
extraordinary disposition account;
(4) The CFC does not own an interest
in a partnership, trust, or estate (directly
or indirectly through one or more other
partnerships, trusts, or estates) that
holds an item of specified property with
disqualified basis; and
(5) The CFC is not engaged in the
conduct of a trade or business in the
United States and therefore does not
have ECTI, and the CFC does not have
any deficit in earnings and profits
subject to § 1.381(c)(2)-1(a)(5).
§ 1.245A–7
cases.
Coordination rules for simple
(a) Scope. This section applies for a
taxable year of a section 245A
shareholder for which the conditions of
§ 1.245A–6(b)(1) and (2) are satisfied
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and for which the section 245A
shareholder chooses to apply this
section (in lieu of § 1.245A–8).
(b) Reduction of disqualified basis by
reason of an extraordinary disposition
amount or tiered extraordinary
disposition amount—(1) In general. If,
for a taxable year of a section 245A
shareholder, an extraordinary
disposition account of the section 245A
shareholder gives rise to one or more
extraordinary disposition amounts or
tiered extraordinary disposition
amounts, then, with respect to an item
of specified property that corresponds to
the extraordinary disposition account,
the disqualified basis of the item of
specified property is, solely for
purposes of § 1.951A–2(c)(5), reduced
(but not below zero) by an amount
(determined in the functional currency
in which the extraordinary disposition
account is maintained) equal to the
product of—
(i) The sum of the extraordinary
disposition amounts and the tiered
extraordinary disposition amounts; and
(ii) A fraction, the numerator of which
is the disqualified basis of the item of
specified property, and the denominator
of which is the sum of the disqualified
basis of each item of specified property
that corresponds to the extraordinary
disposition account.
(2) Timing rules regarding
disqualified basis. See § 1.245A–9(b)(2)
for timing rules regarding the
determination of, and reduction to,
disqualified basis of an item of specified
property.
(c) Reduction of extraordinary
disposition account by reason of the
allocation and apportionment of
deductions or losses attributable to
disqualified basis—(1) In general. If, for
a taxable year of a CFC, the CFC holds
one or more items of specified property
that correspond to an extraordinary
disposition account of a section 245A
shareholder with respect to an SFC,
then the extraordinary disposition
account is reduced (but not below zero)
by the lesser of the amounts described
in paragraphs (c)(1)(i) and (ii) of this
section (each determined in the
functional currency of the CFC).
(i) The excess (if any) of the adjusted
earnings of the CFC for the taxable year
of the CFC, over the sum of the
previously taxed earnings and profits
accounts with respect to the CFC for
purposes of section 959 (determined as
of the end of the taxable year of the CFC
and taking into account any adjustments
to the accounts for the taxable year).
(ii) The balance of the section 245A
shareholder’s RGI account with respect
to the CFC (determined as of the end of
the taxable year of the CFC, but without
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regard to the application of paragraph
(c)(4)(ii) of this section for the taxable
year).
(2) Timing of reduction to
extraordinary disposition account. See
§ 1.245A–9(b)(3) for timing rules
regarding the reduction to an
extraordinary disposition account.
(3) Adjusted earnings. The term
adjusted earnings means, with respect
to a CFC and a taxable year of the CFC,
the earnings and profits of the CFC,
determined as of the end of the CFC’s
taxable year (taking into account all
distributions during the taxable year),
and with the adjustments described in
paragraphs (c)(3)(i) through (iii) of this
section.
(i) The earnings and profits are
increased by the amount of any
deduction or loss that is or was
allocated and apportioned to residual
CFC gross income of the CFC solely by
reason of § 1.951A–2(c)(5)(i).
(ii) The earnings and profits are
decreased by the amount by which an
RGI account with respect to the CFC has
been decreased pursuant to paragraph
(c)(4)(ii) of this section for a prior
taxable year of the CFC.
(iii) The earnings and profits are
determined without regard to income
described in section 245(a)(5)(A) or
dividends described in section
245(a)(5)(B) (determined without regard
to section 245(a)(12)).
(4) RGI account. For a taxable year of
a CFC, the following rules apply to
determine the balance of a section 245A
shareholder’s RGI account with respect
to the CFC:
(i) The balance of the RGI account is
increased by the sum of the amounts of
deductions and losses of the CFC that,
but for § 1.951A–2(c)(5)(i), would have
decreased one or more categories of the
CFC’s positive subpart F income or the
CFC’s tested income, or increased or
given rise to a tested loss or one or more
qualified deficits of the CFC.
(ii) The balance of the RGI account is
decreased to the extent that, by reason
of the application of paragraph (c)(1) of
this section with respect to the taxable
year of the CFC, there is a reduction to
the extraordinary disposition account of
the section 245A shareholder.
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§ 1.245A–8
cases.
Coordination rules for complex
(a) Scope. This section applies
beginning with the first day of the first
taxable year of a section 245A
shareholder for which § 1.245A–7 does
not apply and for all taxable years
thereafter, or for a taxable year of a
section 245A shareholder for which the
section 245A shareholder chooses not to
apply § 1.245A–7.
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(b) Reduction of disqualified basis by
reason of an extraordinary disposition
amount or tiered extraordinary
disposition amount—(1) In general. If,
for a taxable year of a section 245A
shareholder, an extraordinary
disposition account of the section 245A
shareholder gives rise to one or more
extraordinary disposition amounts or
tiered extraordinary disposition
amounts, then, with respect to an item
of specified property that corresponds to
the extraordinary disposition account
and for which the ownership
requirement of paragraph (b)(3)(i) of this
section is satisfied for the taxable year
of the section 245A shareholder, solely
for purposes of § 1.951A–2(c)(5), the
disqualified basis of the item of
specified property is reduced (but not
below zero) by an amount (determined
in the functional currency in which the
extraordinary disposition account is
maintained) equal to the product of—
(i) The excess (if any) of—
(A) The sum of the extraordinary
disposition amounts and the tiered
extraordinary disposition amounts; over
(B) The basis benefit account with
respect to the extraordinary disposition
account (determined as of the end of the
taxable year of the section 245A
shareholder, and without regard to the
application of paragraph (b)(4)(i)(B) of
this section for the taxable year); and
(ii) A fraction, the numerator of which
is the disqualified basis of the item of
specified property, and the denominator
of which is the sum of the disqualified
basis of each item of specified property
that corresponds to the extraordinary
disposition account and for which the
ownership requirement of paragraph
(b)(3)(i) of this section is satisfied for the
taxable year of the section 245A
shareholder.
(2) Timing rules regarding
disqualified basis. See § 1.245A–9(b)(2)
for timing rules regarding the
determination of, and reduction to,
disqualified basis of an item of specified
property.
(3) Ownership requirement with
respect to an item of specified
property—(i) In general. For a taxable
year of a section 245A shareholder, the
ownership requirement of this
paragraph (b)(3)(i) is satisfied with
respect to an item of specified property
if, on at least one day that falls within
the taxable year, the item of specified
property is held by—
(A) The section 245A shareholder;
(B) A person (other than the section
245A shareholder) that, on at least one
day that falls within the section 245A
shareholder’s taxable year, is a related
party with respect to the section 245A
shareholder (such a person, a qualified
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related party with respect to the section
245A shareholder for the taxable year of
the section 245A shareholder); or
(C) A specified entity at least ten
percent of the interests of which are, on
at least one day that falls within the
section 245A shareholder’s taxable year,
owned directly or indirectly through
one or more other specified entities by
the section 245A shareholder or a
qualified related party.
(ii) Rules for determining an interest
in a specified entity. For purposes of
paragraph (b)(3)(i)(C) of this section, the
phrase ‘‘at least 10 percent of the
interests’’ means—
(A) If the specified entity is a foreign
corporation, at least 10 percent of the
stock (by vote or value) of the foreign
corporation;
(B) If the specified entity is a
partnership, at least 10 percent of the
interests in the capital or profits of the
partnership; or
(C) If the specified entity is not a
foreign corporation or a partnership, at
least 10 percent of the value of the
interests in the specified entity.
(4) Basis benefit account—(i) General
rules. The term basis benefit account
means, with respect to an extraordinary
disposition account of a section 245A
shareholder, an account of the section
245A shareholder (the initial balance of
which is zero), adjusted pursuant to the
rules of paragraphs (b)(4)(i)(A) and (B)
of this section on the last day of each
taxable year of the section 245A
shareholder. The basis benefit account
must be maintained in the same
functional currency as the extraordinary
disposition account.
(A) The balance of the basis benefit
account is increased to the extent that
a basis benefit amount with respect to
an item of specified property that
corresponds to the section 245A
shareholder’s extraordinary disposition
account is assigned to the taxable year
of the section 245A shareholder.
However, if the extraordinary
disposition ownership percentage
applicable to the section 245A
shareholder’s extraordinary disposition
account is less than 100 percent, then,
the basis benefit account is instead
increased by the amount equal to the
basis benefit amount multiplied by the
extraordinary disposition ownership
percentage.
(B) The balance of the basis benefit
account is decreased to the extent that,
for a taxable year that includes the date
on which the section 245A
shareholder’s taxable year ends,
disqualified basis of an item of specified
property would have been reduced
pursuant to paragraph (b)(1) of this
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section but for an amount in the basis
benefit account.
(ii) Rules for determining a basis
benefit amount—(A) In general. The
term basis benefit amount means, with
respect to an item of specified property
that has disqualified basis, the portion
of disqualified basis that, for a taxable
year, is directly (or indirectly through
one or more specified entities that are
not corporations) taken into account for
U.S. tax purposes by a U.S. tax resident,
a CFC described in § 1.267A–5(a)(17), or
a specified foreign person and—
(1) Reduces the amount of the U.S. tax
resident’s taxable income, one or more
categories of the CFC’s positive subpart
F income, the CFC’s tested income, or
the specified foreign person’s ECTI, as
applicable; or
(2) Prevents a decrease or offset of the
amount of the CFC’s tested loss or
qualified deficits.
(B) Rules for determining whether
disqualified basis of an item of specified
property is taken into account. For
purposes of paragraph (b)(4)(ii)(A) of
this section, disqualified basis of an
item of specified property is taken into
account for U.S. tax purposes without
regard to whether the disqualified basis
is reduced or eliminated under
§ 1.951A–3(h)(2)(ii)(B)(1).
(C) Timing rules when disqualified
basis gives rise to a deferred or
disallowed loss. To the extent
disqualified basis of an item of specified
property gives rise to a deduction or loss
during a taxable year that is deferred,
then the determination of whether the
item of deduction or loss gives rise to a
basis benefit amount under paragraph
(b)(4)(ii)(A) of this section is made when
the item of deduction or loss is no
longer deferred. In addition, to the
extent disqualified basis of an item of
specified property gives rise to a
deduction or loss during a taxable year
that is disallowed under section
267(a)(1), then a basis benefit amount is
treated as occurring in the taxable year
when and to the extent that gain is
reduced pursuant to section 267(d), and
provided that the gain is described in
paragraph (b)(4)(ii)(A) of this section.
(iii) Rules for assigning a basis benefit
amount to a taxable year of a section
245A shareholder—(A) In general. For
purposes of applying paragraph
(b)(4)(i)(A) of this section with respect
to a section 245A shareholder, a basis
benefit amount with respect to an item
of specified property is assigned to a
taxable year of the section 245A
shareholder if—
(1) With respect to the item of
specified property, the ownership
requirement of paragraph (b)(3)(i) of this
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section is satisfied for the taxable year
of the section 245A shareholder; and
(2) The basis benefit amount occurs
during the taxable year of the section
245A shareholder, or a taxable year of
a U.S. tax resident (other than the
section 245A shareholder), a CFC
described in § 1.267A–5(a)(17), or a
specified foreign person, as applicable,
that—
(i) Ends with or within the taxable
year of the section 245A shareholder; or
(ii) Begins with or within the taxable
year of the section 245A shareholder,
but only in a case in which but for this
paragraph (b)(4)(iii)(A)(2)(ii) the basis
benefit amount would not be assigned to
a taxable year of the section 245A
shareholder.
(B) Anti-duplication rule. For
purposes of paragraph (b)(4)(i)(A) of this
section, to the extent that disqualified
basis of an item of specified property
gives rise to a basis benefit amount that
is assigned to a taxable year of a section
245A shareholder under paragraph
(b)(4)(iii)(A) of this section, and
thereafter such disqualified basis gives
rise to an additional basis benefit
amount, the additional basis benefit
amount cannot be assigned to another
taxable year of any section 245A
shareholder. Thus, for example, if the
entire amount of disqualified basis of an
item of specified property gives rise to
a basis benefit amount for a particular
taxable year of a CFC and is assigned to
a taxable year of a section 245A
shareholder but, pursuant to § 1.951A–
3(h)(2)(ii)(B)(1)(ii), the disqualified basis
is not reduced or eliminated in such
taxable year of the CFC (because, for
example, the buyer is a CFC that is a
related party) and, as a result, the
disqualified basis thereafter gives rise to
an additional basis benefit amount, then
no portion of the additional basis
benefit amount is assigned to a taxable
year of any section 245A shareholder.
(iv) Successor rules for basis benefit
accounts. To the extent that an
extraordinary disposition account of a
section 245A shareholder is adjusted
pursuant to § 1.245A–5(c)(4), a basis
benefit account with respect to the
extraordinary disposition account is
adjusted in a similar manner.
(5) Special rules regarding duplicate
DQB of an item of exchanged basis
property—(i) Adjustments to certain
rules in applying paragraph (b)(1) of
this section. For purposes of paragraph
(b)(1) of this section for a taxable year
of a section 245A shareholder, the
following rules apply with respect to
duplicate DQB of an item of exchanged
basis property:
(A) Duplicate DQB of the item of
exchanged basis property with respect
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53115
to an item of specified property to
which the item of exchanged property
relates is not taken into account for
purposes of paragraph (b)(1) of this
section if the disqualified basis of the
item of specified property is taken into
account for purposes of paragraph (b)(1)
of this section. Thus, for example, if for
a taxable year of a section 245A
shareholder the ownership requirement
of paragraph (b)(3) of this section is
satisfied with respect to an item of
specified property and an item of
exchanged basis property that relates to
the item of specified property, all of the
disqualified basis of which is duplicate
DQB with respect to the item of
specified property, then only the
disqualified basis of the item of
specified property is taken into account
for purposes of, and is subject to
reduction under, paragraph (b)(1) of this
section.
(B) If, pursuant to paragraph
(b)(5)(i)(A) of this section, duplicate
DQB of an item of exchanged basis
property with respect to an item of
specified property is not taken into
account for purposes of paragraph (b)(1)
of this section, then, solely for purposes
of § 1.951A–2(c)(5), the duplicate DQB
of the item of exchanged basis property
is reduced (in the same manner as it
would be if the disqualified basis were
taken into account for purposes of
paragraph (b)(1) of this section) by the
product of the amounts described in
paragraphs (b)(5)(i)(B)(1) and (2) of this
section.
(1) The reduction, under paragraph
(b)(1) of this section for the taxable year
of the section 245A shareholder, to the
disqualified basis of the item of
specified property to which the item of
exchanged basis property relates.
(2) A fraction, the numerator of which
is the duplicate DQB of the item of
exchanged basis property with respect
to the item of specified property, and
the denominator of which is the sum of
the amounts of duplicate DQB with
respect to the item of specified property
of each item of exchanged basis
property that relates to the item of
specified property and for which the
ownership requirement of paragraph
(b)(3)(i) of this section is satisfied for the
taxable year of the section 245A
shareholder. For purposes of
determining this fraction, duplicate
DQB of an item of exchanged basis
property is determined pursuant to the
rules of paragraph (b)(2)(i) of this
section (by replacing the term
‘‘paragraph (b)(1)’’ in that paragraph
with the term ‘‘paragraph (b)(5)(i)(B)’’).
In addition, duplicate DQB of an item of
exchanged basis property is excluded
from the denominator of the fraction to
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the extent the duplicate DQB is
attributable to duplicate DQB of another
item of exchanged basis property that is
included in the denominator of the
fraction.
(ii) Adjustments to certain rules in
applying paragraph (b)(4) of this
section. For purposes of paragraph
(b)(4)(i)(A) of this section, to the extent
that disqualified basis of an item of
specified property gives rise to a basis
benefit amount that is assigned to a
taxable year of a section 245A
shareholder under paragraph
(b)(4)(iii)(A) of this section, and
thereafter duplicate DQB attributable to
such disqualified basis of the item of
specified property gives rise to an
additional basis benefit amount, the
additional basis benefit amount cannot
be assigned to another taxable year of
any section 245A shareholder.
Similarly, for purposes of paragraph
(b)(4)(i)(A) of this section, to the extent
that duplicate DQB attributable to
disqualified basis of an item of specified
property gives rise to a basis benefit
amount that is assigned to a taxable year
of a section 245A shareholder under
paragraph (b)(4)(iii)(A) of this section,
and thereafter such disqualified basis of
the item of specified property (or
duplicate DQB attributable to such
disqualified basis of the item of
specified property) gives rise to an
additional basis benefit amount, the
additional basis benefit amount cannot
be assigned to another taxable year of
any section 245A shareholder.
(c) Reduction of extraordinary
disposition account by reason of the
allocation and apportionment of
deductions or losses attributable to
disqualified basis—(1) In general. For a
taxable year of a CFC, if there is an RGI
account with respect to the CFC that
relates to an extraordinary disposition
account of a section 245A shareholder
with respect to an SFC, and the section
245A shareholder satisfies the
ownership requirement of paragraph
(c)(5) of this section for the taxable year
of the CFC, then, subject to the
limitations in paragraphs (c)(6) and (7)
of this section, the extraordinary
disposition account is reduced (but not
below zero) by the lesser of the
following amounts (each determined in
the functional currency of the CFC)—
(i) The excess (if any) of—
(A) The product of—
(1) The adjusted earnings of the CFC
for the taxable year of the CFC; and
(2) The percentage of stock of the CFC
(by value) that, in aggregate, is owned
directly or indirectly through one or
more specified entities by the section
245A shareholder and any domestic
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affiliates on the last day of the taxable
year of the CFC; over
(B) The sum of—
(1) The sum of the balance of the
section 245A shareholder’s and any
domestic affiliates’ previously taxed
earnings and profits accounts with
respect to the CFC for purposes of
section 959 (determined as of the end of
the taxable year of the CFC and taking
into account any adjustments to the
accounts for the taxable year);
(2) The sum of the balance of the
hybrid deduction accounts (as described
in § 1.245A(e)–1(d)(1)) with respect to
shares of stock of the CFC that the
section 245A shareholder and any
domestic affiliates own (within the
meaning of section 958(a), and
determined by treating a domestic
partnership as foreign) as of the end of
the taxable year of the CFC and taking
into account any adjustments to the
accounts for the taxable year; and
(3) The sum of the balance of the
section 245A shareholder’s and any
domestic affiliates’ extraordinary
disposition accounts with respect to the
CFC (determined as of the end of the
taxable year of the CFC and taking into
account any adjustments to the accounts
for the taxable year). However, if the
section 245A shareholder or a domestic
affiliate has an RGI account with respect
to the CFC that relates to an
extraordinary disposition account with
respect to the CFC, then only the excess,
if any, of the balance of the
extraordinary disposition account over
the balance of the RGI account that
relates to the extraordinary disposition
account (determined as of the end of the
taxable year of the CFC, but without
regard to the application of paragraph
(c)(4)(i)(B) of this section for the taxable
year) is taken into account for purposes
of this paragraph (c)(1)(i)(B)(3). In
addition, for purposes of this paragraph
(c)(1)(i)(B)(3), an extraordinary
disposition account that but for
paragraph (e)(1) of this section would be
with respect to the CFC for purposes of
this section is treated as an
extraordinary disposition account with
respect to the CFC and thus is taken into
account for purposes of this paragraph
(c)(1)(i)(B)(3).
(ii) The balance of the RGI account
with respect to the CFC that relates to
the section 245A shareholder’s
extraordinary disposition account with
respect to the SFC (determined as of the
end of the taxable year of the CFC, but
without regard to the application of
paragraph (c)(4)(i)(B) of this section for
the taxable year).
(2) Timing of reduction to
extraordinary disposition account. See
§ 1.245A–9(b)(3) for timing rules
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regarding the reduction to an
extraordinary disposition account.
(3) Adjusted earnings. The term
adjusted earnings means, with respect
to a CFC and a taxable year of the CFC,
the earnings and profits of the CFC,
determined as of the end of the CFC’s
taxable year (taking into account all
distributions during the taxable year,
and not taking into account any deficit
in earnings and profits subject to
§ 1.381(c)(2)–1(a)(5)) and with the
adjustments described in paragraphs
(c)(3)(i) through (iv) of this section.
(i) The earnings and profits are
increased by the amount of any
deduction or loss that—
(A) Is or was attributable to
disqualified basis of an item of specified
property, but only to the extent that gain
recognized on the extraordinary
disposition of the item of specified
property was included in the initial
balance of an extraordinary disposition
account;
(B) Is or was allocated and
apportioned to residual CFC gross
income of the CFC (or a predecessor)
solely by reason of § 1.951A–2(c)(5)(i);
and
(C) Does not or has not given rise to
or increased a deficit in earnings and
profits subject to § 1.381(c)(2)–1(a)(5),
determined as of the end of the taxable
year of the CFC.
(ii) The earnings and profits are
decreased by the amount by which any
RGI account with respect to the CFC has
been decreased pursuant to paragraph
(c)(4)(i)(B) of this section for a prior
taxable year of the CFC.
(iii) The earnings and profits are
determined without regard to earnings
attributable to income described in
section 245(a)(5)(A) or dividends
described in section 245(a)(5)(B)
(determined without regard to section
245(a)(12)).
(iv) The earnings and profits are
decreased by the amount of any
deduction or loss that, but for paragraph
(c)(3)(i)(C) of this section, would be
described in paragraph (c)(3)(i) of this
section.
(4) RGI account—(i) In general. For a
taxable year of a CFC, the following
rules apply to determine the balance of
a section 245A shareholder’s RGI
account that is with respect to the CFC
and that relates to an extraordinary
disposition account of the section 245A
shareholder with respect to an SFC:
(A) The balance of the RGI account is
increased by the product of the amounts
described in paragraphs (c)(4)(i)(A)(1)
and (2) of this section for a taxable year
of the CFC.
(1) The sum of the amounts of
deductions and losses of the CFC that—
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(i) Are attributable to disqualified
basis of one or more items of specified
property that correspond to the
extraordinary disposition account; and
(ii) But for § 1.951A–2(c)(5)(i), would
have decreased one or more categories
of the CFC’s positive subpart F income,
the CFC’s tested income, or the CFC’s
ECTI, or increased or given rise to a
tested loss or one or more qualified
deficits of the CFC.
(2) The lesser of—
(i) A fraction (expressed as a
percentage), the numerator of which is
the sum of the portions of the CFC’s
subpart F income and tested income or
tested loss (expressed as a positive
number) taken into account under
sections 951(a)(1)(A) and 951A(a) (as
determined under the rules of §§ 1.951–
1(b) and (e) and 1.951A–1(d)) by the
section 245A shareholder and any
domestic affiliates of the section 245A
shareholder and the section 245A
shareholder’s and any domestic
affiliates’ pro rata shares of the CFC’s
qualified deficits (expressed as a
positive number), and the denominator
of which is the sum of the CFC’s subpart
F income, tested income or tested loss
(expressed as a positive number), and
qualified deficits (expressed as a
positive number), but for purposes of
this paragraph (c)(4)(i)(A)(2)(i) treating
ECTI (expressed as a positive number)
as if it were subpart F income; and
(ii) The extraordinary disposition
ownership percentage applicable as to
the section 245A shareholder’s
extraordinary disposition account.
(B) The balance of the RGI account is
decreased to the extent that, by reason
of the application of paragraph (c)(1) of
this section with respect to the taxable
year of the CFC, there is a reduction to
the extraordinary disposition account of
the section 245A shareholder.
(ii) Successor rules for RGI accounts.
To the extent that an extraordinary
disposition account of a section 245A
shareholder is adjusted pursuant to
§ 1.245A–5(c)(4), an RGI account of a
CFC with respect to the extraordinary
disposition account is adjusted in a
similar manner.
(5) Ownership requirement with
respect to a CFC. For a taxable year of
a CFC, a section 245A shareholder
satisfies the ownership requirement of
this paragraph (c)(5) if, on the last day
of the CFC’s taxable year, the section
245A shareholder or a domestic affiliate
is a United States shareholder with
respect to the CFC.
(6) Allocation of reductions among
multiple extraordinary disposition
accounts. This paragraph (c)(6) applies
if, by reason of the application of
paragraph (c)(1) of this section with
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respect to a taxable year of a CFC (and
but for the application of this paragraph
(c)(6) and paragraph (c)(7) of this
section), the sum of the reductions
under paragraph (c)(1) of this section to
two or more extraordinary disposition
accounts of a section 245A shareholder
or a domestic affiliate of the section
245A shareholder would exceed the
amount described in paragraph
(c)(1)(i)(A) of this section (the amount of
such excess, the excess amount). When
this paragraph (c)(6) applies, the
reduction to each extraordinary
disposition account described in the
previous sentence is equal to the
reduction that would occur but for this
paragraph (c)(6) and paragraph (c)(7) of
this section, less the product of the
excess amount and a fraction, the
numerator of which is the balance of the
extraordinary disposition account, and
the denominator of which is the sum of
the balances of all of the extraordinary
dispositions accounts described in the
previous sentence. For purposes of
determining this fraction, the balance of
an extraordinary disposition account is
determined as of the end of the taxable
year of the section 245A shareholder or
the domestic affiliate, as applicable, that
includes the date on which the CFC’s
taxable year ends (and after the
determination of any extraordinary
disposition amounts or tiered
extraordinary disposition amounts for
the taxable year of the section 245A
shareholder or the domestic affiliate, as
applicable, and adjustments to the
extraordinary disposition account for
prior extraordinary disposition
amounts).
(7) Extraordinary disposition account
not reduced below balance of basis
benefit account. An extraordinary
disposition account of a section 245A
shareholder cannot be reduced pursuant
to paragraph (c)(1) of this section below
the balance of the basis benefit account
with respect to the extraordinary
disposition account (determined when a
reduction to the extraordinary
disposition account would occur under
paragraph (c)(1) of this section).
(d) Special rules for determining when
specified property corresponds to an
extraordinary disposition account—(1)
Substituted property—(i) Treatment as
specified property that corresponds to
an extraordinary disposition account.
For purposes of this section, an item of
substituted property is treated as an
item of specified property that
corresponds to an extraordinary
disposition account to which the related
item of specified property (that is, the
item of specified property to which the
item of substituted property relates, as
described in paragraph (d)(1)(ii) of this
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section) corresponds. In addition, in a
case in which an item of substituted
property relates to an item of specified
property that corresponds to a particular
extraordinary disposition account and
an item of specified property that
corresponds to another extraordinary
disposition account (such that, pursuant
to this paragraph (d)(1)(i), the item of
substituted property is treated as
corresponding to multiple extraordinary
disposition accounts), only the
disqualified basis of the item of
substituted property attributable to the
first item of specified property is taken
into account for purposes of applying
this section as to the first extraordinary
disposition account, and, similarly, only
the disqualified basis of the item of
substituted property attributable to the
second item of specified property is
taken into account for purposes of
applying this section as to the second
extraordinary disposition account.
(ii) Definition of substituted property.
The term substituted property means an
item of property the disqualified basis of
which is, pursuant to § 1.951A–
3(h)(2)(ii)(B)(2)(i) or (iii), increased by
reason of a reduction under § 1.951A–
3(h)(2)(ii)(B)(1) in disqualified basis of
an item of specified property. An item
of substituted property relates to an item
of specified property if the disqualified
basis of the item of substituted property
was increased by reason of a reduction
in disqualified basis of the item of
specified property.
(2) Exchanged basis property—(i)
Treatment as specified property that
corresponds to an extraordinary
disposition account for certain
purposes. For purposes of this section,
an item of exchanged basis property is
treated as an item of specified property
that corresponds to an extraordinary
disposition account to which the related
item of specified property (that is, the
item of specified property to which the
item of exchanged basis property
relates) corresponds.
(ii) Definition of exchanged basis
property. The term exchanged basis
property means an item of property the
disqualified basis of which, pursuant to
§ 1.951A–3(h)(2)(ii)(B)(2)(ii), includes
disqualified basis of an item of specified
property. An item of exchanged basis
property relates to an item of specified
property if the disqualified basis of the
item of exchanged basis property
includes disqualified basis of the item of
specified property.
(iii) Definition of duplicate DQB—(A)
In general. The term duplicate DQB
means, with respect to an item of
exchanged basis property and the item
of specified property to which the
exchanged basis property relates, the
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disqualified basis of the item of
exchanged basis property that includes
or is attributable to disqualified basis of
the item of specified property.
(B) Certain nonrecognition transfers
involving stock or a partnership interest.
To the extent that an item of exchanged
basis property that is stock or an interest
in a partnership (lower-tier item)
includes disqualified basis of an item of
specified property to which the lowertier item relates (contributed item), and
another item of exchanged basis
property that is stock or a partnership
interest (upper-tier item) includes
disqualified basis of the lower-tier item
that is attributable to disqualified basis
of the contributed item, the disqualified
basis of the upper-tier item is
attributable to disqualified basis of the
contributed item and the upper-tier item
is an item of exchanged basis property
that relates to the contributed item. The
principles of the preceding sentence
apply each time disqualified basis of an
item of exchanged basis property that is
stock or an interest in a partnership is
included in disqualified basis of another
item of exchanged basis property that is
stock or an interest in a partnership.
(C) Multiple nonrecognition transfers
of an item of specified property. To the
extent that multiple items of exchanged
basis property that are stock or interests
in a partnership include disqualified
basis of the same item of specified
property (contributed item) to which the
items of exchanged basis property
relate, and the issuer of one of the items
of exchanged basis property (upper-tier
successor item) receives the other item
of exchanged basis property (lower-tier
successor item) in exchange for the
contributed property, the disqualified
basis of the upper-tier successor item is
attributable to disqualified basis of the
lower-tier successor item and the uppertier successor item is an item of
exchanged basis property that relates to
the lower-tier successor item. The
principles of the preceding sentence
apply each time disqualified basis of an
item of specified property to which an
item of exchanged basis property that is
stock or an interest in partnership
relates is included in disqualified basis
of another item of exchanged basis
property that is stock or an interest in
a partnership.
(e) Special rules when extraordinary
disposition accounts are adjusted
pursuant to § 1.245A–5(c)(4)—(1)
Extraordinary disposition account with
respect to multiple SFCs. This
paragraph (e)(1) applies if, pursuant to
§ 1.245A–5(c)(4)(ii) or (iii) (the
transaction or transactions by reason of
which § 1.245A–5(c)(4)(ii) or (iii)
applies, the adjustment transaction), an
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extraordinary disposition account of a
section 245A shareholder with respect
to an SFC (such extraordinary
disposition account, the transferor ED
account; and such SFC, the transferor
SFC) gives rise to an increase in the
balance of an extraordinary disposition
account with respect to another SFC
(such extraordinary disposition account,
the transferee ED account; such SFC,
the transferee SFC; and such increase,
the adjustment amount). When this
paragraph (e)(1) applies, the following
rules apply for purposes of this section:
(i) A ratable portion of the transferee
ED account is treated as retaining its
status as an extraordinary disposition
account with respect to the transferor
SFC and is not treated as an
extraordinary disposition account with
respect to the transferee SFC (the
transferee ED account to such extent,
the deemed transferor ED account),
based on the adjustment amount relative
to the balance of the transferee ED
account (without regard to this
paragraph (e)(1)) immediately after the
adjustment transaction. Thus, for
example, whether or not the transferor
SFC is in existence immediately after
the transaction, the items of specified
property that correspond to the deemed
transferor ED account are the same as
the items of specified property that
correspond to the transferor ED account.
As an additional example, whether or
not the transferor SFC is in existence
immediately after the transaction the
extraordinary disposition ownership
percentage with respect to the deemed
transferor ED account is the same as the
extraordinary disposition ownership
percentage with respect to the transferor
ED account (except to the extent the
extraordinary disposition ownership
percentage is adjusted pursuant to the
rules of paragraph (e)(2) of this section).
(ii) In the case of an amount (such as
an extraordinary disposition amount or
tiered extraordinary disposition
amount) determined by reference to the
transferee ED account (without regard to
this paragraph (e)(1)), the portion of the
amount that is considered attributable to
the deemed transferor ED account (and
not the transferee ED account) is equal
to the product of such amount and a
fraction, the numerator of which is the
balance of the deemed transferor ED
account, and the denominator of which
is the balance of the transferee ED
account (determined without regard to
this paragraph (e)(1)). Thus, for
example, if after an adjustment
transaction the transferee ED account
(without regard to this paragraph (e)(1))
gives rise to an extraordinary
disposition amount, and if the fraction
(expressed as a percentage) is 40, then,
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for purposes of this section, 40 percent
of the extraordinary disposition amount
is treated as attributable to the deemed
transferor ED account and the remaining
60 percent of the extraordinary
disposition amount is attributable to the
transferee ED account, and the balance
of each of the deemed transferor ED
account and the transferee ED account
is correspondingly reduced.
(2) Extraordinary disposition accounts
with respect to a single SFC. If an
extraordinary disposition account of a
section 245A shareholder with respect
to an SFC is reduced by reason of
§ 1.245A–5(c)(4), then, except as
provided in paragraph (e)(1) of this
section, for purposes of this section, the
extraordinary disposition ownership
percentage as to the extraordinary
disposition account (as well as the
extraordinary disposition ownership
percentage as to any extraordinary
disposition account with respect to the
SFC that is increased by reason of the
reduction) is adjusted in a similar
manner.
§ 1.245A–9
Other rules and definitions.
(a) In general. This section provides
rules of general applicability for
purposes of §§ 1.245A–6 through
1.245A–10, a transition rule to revoke
an election to eliminate disqualified
basis, and definitions.
(b) Rules of general applicability—(1)
Correspondence. An item of specified
property corresponds to a section 245A
shareholder’s extraordinary disposition
account if gain was recognized on the
extraordinary disposition of the item
and the gain was taken into account in
determining the initial balance of the
account. See § 1.245A–8(d) for
additional rules regarding when an item
of property is treated as corresponding
to an extraordinary disposition account
in certain complex cases.
(2) Timing rules related to
disqualified basis for purposes of
applying §§ 1.245A–7(b) and 1.245A–
8(b)—(i) Determination of disqualified
basis. For purposes of determining the
fraction described in § 1.245A–7(b)(1)(ii)
or § 1.245A–8(b)(1)(ii) when applying
§ 1.245A–7(b)(1) or § 1.245A–8(b)(1)(ii),
respectively, for a taxable year of a
section 245A shareholder, disqualified
basis of an item of specified property is
determined as of the beginning of the
taxable year of the CFC that holds the
item of specified property (in a case in
which § 1.245A–7(b) applies) or the
specified property owner (in a case in
which § 1.245A–8(b) applies), in either
case, that includes the date on which
the section 245A shareholder’s taxable
year ends (and without regard to any
reductions to the disqualified basis of
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the item of specified property pursuant
to § 1.245A–7(b)(1) or § 1.245A–8(b)(1)
for such taxable year of the CFC or the
specified property owner, as
applicable). However, if disqualified
basis of the item of specified property
arose as a result of an extraordinary
disposition that occurred after the
beginning of the taxable year of the CFC
or the specified property owner
described in the preceding sentence,
then the disqualified basis of the item of
specified property is determined as of
the date on which the extraordinary
disposition occurred (and without
regard to any reductions to the
disqualified basis of the item of
specified property pursuant to
paragraph (b)(1) of this section for such
taxable year of the CFC or the specified
property owner).
(ii) Reduction to disqualified basis of
an item of specified property. The
reduction to disqualified basis of an
item of specified property pursuant to
§ 1.245A–7(b)(1) or § 1.245A–8(b)(1)
occurs on the date described in
paragraph (b)(2)(i) of this section.
(iii) Definition of specified property
owner. For purposes of applying
§ 1.245A–8(b)(1) and paragraphs (b)(2)(i)
and (ii) of this section for a taxable year
of a section 245A shareholder, the term
specified property owner means, with
respect to an item of specified property,
the person that, on at least one day of
the taxable year of the person that
includes the date on which the section
245A shareholder’s taxable year ends,
held the item of specified property.
However, if, but for this sentence, there
would be more than one specified
property owner with respect to the item
of specified property, then the specified
property owner is the person that held
the item of specified property on the
earliest date that falls within the section
245A shareholder’s taxable year.
(3) Timing rules for reducing an
extraordinary disposition account under
§§ 1.245A–7(c) and 1.245A–8(c). For
purposes of § 1.245A–7(c)(1) or
§ 1.245A–8(c)(1), as applicable, with
respect to a taxable year of a CFC, the
reduction to an extraordinary
disposition account pursuant to
§ 1.245A–7(c)(1) or § 1.245A–8(c)(1)
occurs as of the end of the taxable year
of the section 245A shareholder that
includes the date on which the CFC’s
taxable year ends (and after the
determination of any extraordinary
disposition amounts or tiered
extraordinary amounts, adjustments to
the extraordinary disposition account
for prior extraordinary disposition
amounts, and the application of
§ 1.245A–7(b) or § 1.245A–8(b), as
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applicable, each for the taxable year of
the section 245A shareholder).
(4) Currency translation. For purposes
of applying §§ 1.245A–7(b) and 1.245A–
8(b), the disqualified basis of (and, if
applicable, a basis benefit amount with
respect to) an item of specified property
that corresponds to an extraordinary
disposition account are translated (if
necessary) into the functional currency
in which the extraordinary disposition
account is maintained, using the spot
rate on the date the extraordinary
disposition occurred. A reduction in
disqualified basis of an item of specified
property determined under § 1.245A–
7(b)(1) or § 1.245A–8(b)(1) is translated
(if necessary) into the functional
currency in which the disqualified basis
of the item of specified property is
maintained, and a reduction in an
extraordinary disposition account
determined under § 1.245A–7(c) or
§ 1.245A–8(c) section is translated (if
necessary) into the functional currency
in which the extraordinary disposition
account is maintained, in each case
using the spot rate described in the
preceding sentence.
(5) Anti-avoidance rule. Appropriate
adjustments are made pursuant to this
paragraph (b)(5), including adjustments
that would disregard a transaction or
arrangement in whole or in part, to any
amounts determined under (or subject
to application of) this section if a
transaction or arrangement is engaged in
with a principal purpose of avoiding the
purposes of §§ 1.245A–6 through
1.245A–10.
(c) Transition rule to revoke election
to eliminate disqualified basis—(1) In
general. This paragraph (c)(1) applies to
an election that is filed, pursuant to
§ 1.951A–3(h)(2)(ii)(B)(3), to eliminate
the disqualified basis of an item of
specified property. An election to which
this paragraph (c)(1) applies may be
revoked if, on or before [date 90 days
after a Treasury decision adopting these
rules as final regulations is published in
the Federal Register]—
(i) All controlling domestic
shareholders (as defined in § 1.964–
1(c)(5)) of the CFC (or, in the case of an
election made by a partnership, the
partnership) each attach a revocation
statement (in the manner described in
paragraph (c)(2) of this section) to an
amended return, for the taxable year to
which the election applies, that revokes
the election (or, in the case of a
partnership subject to subchapter C of
chapter 63 of the Internal Revenue
Code, requests administrative
adjustment under section 6227); and
(ii) The controlling domestic
shareholders (or the partnership) each
file an amended tax return, for any other
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53119
taxable years reflecting the election to
eliminate the disqualified basis, that
reflects the election having been
revoked (or, in the case of a partnership
subject to subchapter C of chapter 63,
requests administrative adjustment
under section 6227).
(2) Revocation statement. Except as
otherwise provided in publications,
forms, instructions, or other guidance, a
revocation statement attached by a
person to an amended tax return must
include the person’s name, taxpayer
identification number, and a statement
that the revocation statement is filed
pursuant to paragraph (c)(1) of this
section to revoke an election pursuant to
§ 1.951A–3(h)(2)(ii)(B)(3). In addition,
the revocation statement must be filed
in the manner prescribed in
publications, forms, instructions, or
other guidance.
(d) Definitions. In addition to the
definitions in § 1.245A–5, the following
definitions apply for purposes of
§§ 1.245A–6 through 1.245A–11.
(1) The term adjusted earnings has the
meaning provided in § 1.245A–7(c)(3) or
§ 1.245A–8(c)(3), as applicable.
(2) The term basis benefit account has
the meaning provided in § 1.245A–
8(b)(4)(i).
(3) The term basis benefit amount has
the meaning provided in § 1.245A–
8(b)(4)(ii).
(4) The term disqualified basis has the
meaning provided in § 1.951A–
3(h)(2)(ii).
(5) The term domestic affiliate means,
with respect to a section 245A
shareholder, a domestic corporation that
is a related party with respect to the
section 245A shareholder. See also
§ 1.245A–5(i)(19) (defining related
party).
(6) The term duplicate DQB has the
meaning provided in § 1.245A–
8(d)(2)(iii).
(7) The term ECTI means, with respect
to a taxable year of a specified foreign
person, the taxable income (or loss) of
the specified foreign person determined
by taking into account only items of
income and gain that are, or are treated
as, effectively connected with the
conduct of a trade or business in the
United States (as described in § 1.882–
4(a)(1)) and are not exempt from U.S.
tax pursuant to a treaty obligation of the
United States, and items of deduction
and loss that are allocated and
apportioned to such items of income
and gain.
(8) The term exchanged basis property
has the meaning provided in § 1.245A–
8(d)(2)(ii).
(9) The term qualified deficit has the
meaning provided in section
952(c)(1)(B)(ii).
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(10) The term qualified related party
has the meaning provided in § 1.245A–
8(b)(3)(ii).
(11) The term RGI account means,
with respect to a CFC and an
extraordinary disposition account of a
section 245A shareholder with respect
to an SFC, an account of the section
245A shareholder with respect to an
SFC (the initial balance of which is
zero), adjusted at the end of each taxable
year of the CFC pursuant to the rules of
§ 1.245A–7(c)(4) or § 1.245A–8(c)(4), as
applicable. The RGI account must be
maintained in the functional currency of
the CFC.
(12) The term specified foreign person
means a nonresident alien individual
(as defined in section 7701(b) and the
regulations under section 7701(b)) or a
foreign corporation (including a CFC)
that conducts, or is treated as
conducting, a trade or business in the
United States (as described in § 1.882–
4(a)(1)).
(13) The term specified property
owner has the meaning provided in
§ 1.245A–8(b)(2)(iii).
(14) The term subpart F income has
the meaning provided in section 952(a).
(15) The term substituted property has
the meaning provided in § 1.245A–
8(d)(1)(ii).
(16) The term tested income has the
meaning provided in section
951A(c)(2)(A).
(17) The term tested loss has the
meaning provided in section
951A(c)(2)(B).
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§ 1.245A–10
Examples.
(a) Scope. This section provides
examples illustrating the application of
§§ 1.245A–6 through 1.245A–9.
(b) Presumed facts. For purposes of
the examples in the section, except as
otherwise stated, the following facts are
presumed:
(1) US1 and US2 are both domestic
corporations that have calendar taxable
years.
(2) CFC1, CFC2, CFC3, and CFC4 are
all SFCs and CFCs that have taxable
years ending November 30.
(3) Each entity uses the U.S. dollar as
its functional currency.
(4) There are no items of deduction or
loss attributable to an item of specified
property.
(5) Absent the application of
§ 1.245A–5, any dividends received by
US1 from CFC1 would meet the
requirements to qualify for the section
245A deduction.
(6) All dispositions of items of
specified property by an SFC during a
disqualified period of the SFC to a
related party give rise to an
extraordinary disposition.
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(7) None of the CFCs have a deficit
subject to § 1.381(c)(2)–1(a)(5), and none
of the CFCs are engaged in the conduct
of a trade or business in the United
States (and therefore none of the CFCs
have ECTI).
(8) There is no previously taxed
earnings and profits account with
respect to any CFC for purposes of
section 959. In addition, each hybrid
deduction account with respect to a
share of stock of a CFC has a zero
balance at all times. Further, there is no
extraordinary disposition account with
respect to any CFC.
(9) Under § 1.245A–11(b), taxpayers
choose to apply §§ 1.245A–6 through
1.245A–11 to the relevant taxable years.
(c) Examples—(1) Example 1. Reduction of
disqualified basis under rule for simple cases
by reason of dividend paid out of
extraordinary disposition account—(i) Facts.
US1 owns 100% of the single class of stock
of CFC1 and CFC2. On November 30, 2018,
in a transaction that is an extraordinary
disposition, CFC1 sells two items of specified
property, Item 1 and Item 2, to CFC2 in
exchange for $150x of cash (the ‘‘Disqualified
Transfer’’). Item 1 is sold for $90x and Item
2 is sold for $60x. Item 1 and Item 2 each
has a basis of $0 in the hands of CFC1
immediately before the Disqualified Transfer,
and therefore CFC1 recognizes $150x of gain
as a result of the Disqualified Transfer
($150x¥$0). After the Disqualified Transfer,
CFC2’s only assets are Item 1 and Item 2. On
November 30, 2018, and thus during US1’s
taxable year ending December 31, 2018, CFC1
distributes $150x of cash to US1, and all of
the distribution is characterized as a
dividend under section 301(c)(1) and treated
as a distribution out of earnings and profits
described in section 959(c)(3). For CFC1’s
taxable year ending on November 30, 2018,
CFC1 has $160x of earnings and profits
described in section 959(c)(3), without regard
to any distributions during the taxable year.
CFC2 continues to hold Item 1 and Item 2.
Lastly, because the conditions of § 1.245A–
6(b)(1) and (2) are satisfied for US1’s 2018
taxable year, US1 chooses to apply § 1.245A–
7 (rules for simple cases) in lieu of § 1.245A–
8 (rules for complex cases) for that taxable
year.
(ii) Analysis—(A) Application of
§§ 1.245A–5 and 1.951A–2 as a result of the
Disqualified Transfer. As a result of the
Disqualified Transfer, under § 1.951A–
2(c)(5), Item 1 has disqualified basis of $90x,
and Item 2 has disqualified basis of $60x. In
addition, as a result of the Disqualified
Transfer, under § 1.245A–5(c)(3)(i)(A), US1
has an extraordinary disposition account
with respect to CFC1 with an initial balance
of $150x. Under § 1.245A–5(c)(2)(i), $10x of
the dividend is considered paid out of nonextraordinary disposition E&P of CFC1 with
respect to US1, and $140x of the dividend is
considered paid out of US1’s extraordinary
disposition account with respect to CFC1 to
the extent of the balance of the extraordinary
disposition account ($150x). Thus, the
dividend of $150x is an extraordinary
disposition amount, within the meaning of
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§ 1.245A–5(c)(1), to the extent of $140x. As
a result, the balance of the extraordinary
disposition account is reduced to $10x
($150x¥$140x).
(B) Correspondence requirement. Under
§ 1.245A–9(b)(1), each of Item 1 and Item 2
corresponds to US1’s extraordinary
disposition account with respect to CFC1,
because as a result of the Disqualified
Transfer CFC1 recognized gain with respect
to Item 1 and Item 2, and the gain was taken
into account in determining the initial
balance of US1’s extraordinary disposition
account with respect to CFC1.
(C) Reduction of disqualified basis of Item
1. Because Item 1 corresponds to US1’s
extraordinary disposition account, the
disqualified basis of Item 1 is reduced
pursuant to § 1.245A–7(b)(1) by reason of
US1’s $140x extraordinary disposition
amount for US1’s 2018 taxable year.
Paragraphs (c)(2)(ii)(C)(1) through (3) of this
section describe the determinations pursuant
to § 1.245A–7(b)(1).
(1) To determine the reduction to the
disqualified basis of Item 1, the disqualified
basis of Item 1, as well as the disqualified
basis of Item 2, must be determined as of the
date described in § 1.245A–9(b)(2)(i) (and
before the application of § 1.245A–7(b)(1)).
See § 1.245A–7(b)(1)(ii). For each of Item 1
and Item 2, that date is December 1, 2018.
December 1, 2018, is the first day of the
taxable year of CFC2 (the CFC that holds Item
1 and Item 2) beginning on December 1,
2018, which is the taxable year of CFC2 that
includes December 31, 2018, the date on
which US1’s 2018 taxable year ends. See
§ 1.245A–9(b)(2)(i).
(2) Pursuant to § 1.245A–7(b)(1), the
disqualified basis of Item 1 is reduced by
$84x, computed as the product of—
(i) $140x, the extraordinary disposition
amount; and
(ii) A fraction, the numerator of which is
$90x (the disqualified basis of Item 1 on
December 1, 2018, and before the application
of § 1.245A–7(b)(1)), and the denominator of
which is $150x (the disqualified basis of Item
1, $90x, plus the disqualified basis of Item 2,
$60x, in each case determined on December
1, 2018, and before the application of
§ 1.245A–7(b)(1)). See § 1.245A–7(b)(1).
(3) The $84x reduction to the disqualified
basis of Item 1 occurs on December 1, 2018,
the date on which the disqualified basis of
Item 1 is determined for purposes of
determining the reduction pursuant to
§ 1.245A–7(b)(1). See § 1.245A–9(b)(2)(ii).
(D) Reduction of disqualified basis of Item
2. For reasons similar to those described in
paragraph (c)(2)(ii)(C) of this section, on
December 1, 2018, the disqualified basis of
Item 2 is reduced by $56x, the amount equal
to the product of $140x, the extraordinary
disposition amount, and a fraction, the
numerator of which is $60x (the disqualified
basis of Item 2 on December 1, 2018, and
before the application of § 1.245A–7(b)(1)),
and the denominator of which is $150x (the
disqualified basis of Item 1, $90x, plus the
disqualified basis of Item 2, $60x, in each
case determined on December 1, 2018, and
before the application of § 1.245A–7(b)(1)).
(2) Example 2. Basis benefit amount and
impact on reduction to disqualified basis
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under rule for complex cases—(i) Facts. The
facts are the same as in paragraph (c)(1)(i) of
this section (Example 1) (and the results are
the same as in paragraph (c)(1)(ii)(A) of this
section), except that, on December 1, 2018,
CFC2 sells Item 1 for $90x of cash to an
individual that is not a related party with
respect to US1 or CFC2 (such transaction, the
‘‘Sale,’’ and such individual, ‘‘Individual
A’’). At the time of the Sale, CFC2’s basis in
Item 1 is $90x (all of which is disqualified
basis, as described in § 1.951A–3(h)(2)(ii)(A)).
CFC2 takes into the account the disqualified
basis of Item 1 for purposes of determining
the amount of gain recognized on the Sale,
which is $0 ($90x¥$90x); but for the
disqualified basis, CFC2 would have had
$90x of gain that would have been taken into
account in computing its tested income. As
a result of the Sale, the condition of
§ 1.245A–6(b)(2) is not satisfied, because on
at least one day of CFC2’s taxable year
beginning on December 1, 2018 (which
begins within US1’s 2018 taxable year) CFC2
does not hold Item 1. See § 1.245A–
6(b)(2)(ii)(C)(1). US1 therefore applies
§ 1.245A–8 (rules for complex cases) for its
2018 taxable year. See § 1.245A–6(b).
(ii) Analysis—(A) Ownership requirement.
With respect to each of Item 1 and Item 2,
the ownership requirement of § 1.245A–
8(b)(3)(i) is satisfied for US1’s 2018 taxable
year. This is because on at least one day that
falls within US1’s 2018 taxable year, each of
Item 1 and Item 2 is held by CFC2, and US1
directly owns all of the stock of CFC2
throughout such taxable year (and thus, for
purposes of applying § 1.245A–8(b)(3)(i), US1
owns at least 10% of the interests of CFC2
on at least one day that falls within such
taxable year). See § 1.245A–8(b)(3).
(B) Basis benefit amount with respect to
Item 1 as a result of the Sale. Under
§ 1.245A–8(b)(4)(i), US1 has a basis benefit
account with respect to its extraordinary
disposition account with respect to CFC1. As
described in paragraphs (c)(2)(ii)(B)(1)
through (3) of this section, the balance of the
basis benefit account (which is initially zero)
is, on December 31, 2018, increased by $90x,
the basis benefit amount with respect to Item
1 and assigned to US1’s 2018 taxable year.
(1) By reason of the Sale, for CFC2’s taxable
year beginning December 1, 2018, and ending
November 30, 2019, the entire $90x of
disqualified basis of Item 1 is taken into
account for U.S. tax purposes by CFC2 and,
as a result, reduces CFC2’s tested income or
increases CFC2’s tested loss. Accordingly, for
such taxable year, there is a $90x basis
benefit amount with respect to Item 1. See
§ 1.245A–8(b)(4)(ii)(A). The result would be
the same if the Sale were to a related person
and thus, pursuant to § 1.951A–
3(h)(2)(ii)(B)(1)(ii), no portion of the $90x of
disqualified basis were eliminated or reduced
by reason of the Sale. See § 1.245A–
8(b)(4)(ii)(B).
(2) The $90x basis benefit amount with
respect to Item 1 is assigned to US1’s 2018
taxable year. This is because the ownership
requirement of § 1.245A–8(b)(3)(i) is satisfied
with respect to Item 1 for US1’s 2018 taxable
year, and the basis benefit amount occurs in
CFC2’s taxable year beginning December 1,
2018, a taxable year of CFC2 that begins
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within US1’s 2018 taxable year (and, but for
§ 1.245A–8(b)(4)(iii)(A)(2)(ii), the basis
benefit amount would not be assigned to a
taxable year of US1, such as the taxable year
of US1 beginning January 1, 2019, given that,
as result of the Sale, the ownership
requirement of § 1.245A–8(b)(3)(i) would not
be satisfied with respect to Item 1 for such
taxable year). See § 1.245A–8(b)(4)(iii)(A).
(3) On December 31, 2018 (the last day of
US1’s 2018 taxable year), US1’s basis benefit
account with respect to its extraordinary
disposition account with respect to CFC1 is
increased by $90x, the $90x basis benefit
amount with respect to Item 1 and assigned
to US1’s 2018 taxable year. The basis benefit
account is increased by such amount because
Item 1 corresponds to US1’s extraordinary
disposition account with respect to CFC1,
and the extraordinary disposition ownership
percentage applicable to such extraordinary
disposition account is 100. See § 1.245A–
8(b)(4)(i)(A).
(C) Basis benefit amount limitation on
reduction to disqualified basis. By reason of
US1’s $140x extraordinary disposition
amount for US1’s 2018 taxable year, the
disqualified basis of Item 1 is reduced by
$30x, and the disqualified basis of Item 2 is
reduced by $20x, pursuant to § 1.245A–
8(b)(1). See § 1.245A–8(b). Paragraphs
(c)(2)(ii)(C)(1) through (4) of this section
describe the determinations pursuant to
§ 1.245A–8(b)(1).
(1) For purposes of determining the
reduction to the disqualified bases of Item 1
and Item 2, the disqualified bases of the
Items are determined on December 1, 2018
(and before the application of § 1.245A–
8(b)(1)). See § 1.245A–8(b)(1)(ii). The
disqualified bases of the Items are
determined on December 1, 2018, because
that date is the first day of the taxable year
of CFC2 beginning on December 1, 2018,
which is the taxable year of CFC2 (the
specified property owner of each of Item 1
and Item 2) that includes December 31, 2018,
the date on which US1’s 2018 taxable year
ends. See § 1.245A–8(b)(2)(i). For purposes of
applying §§ 1.245A–8(b)(1) and § 1.245A–
9(b)(2) for US1’s 2018 taxable year, CFC2 is
the specified property owner of each of Item
1 and Item 2 because, on at least one day of
CFC2’s taxable year that includes the date on
which US1’s 2018 taxable year ends (that is,
on at least one day of CFC2’s taxable year
beginning December 1, 2018), CFC2 held the
Item. See § 1.245A–9(b)(2)(iii). CFC2 is the
specified property owner of Item 1 even
though Individual A also held Item 1 during
Individual A’s taxable year that includes the
date on which US1’s 2018 taxable year ends
because CFC2 held Item 1 on an earlier date
than Individual A. See § 1.245A–9(b)(2)(iii).
(2) Pursuant to § 1.245A–8(b)(1), the
disqualified basis of Item 1 is reduced by
$30x, computed as the product of—
(i) $50x, the excess of the extraordinary
disposition amount ($140x) over the balance
of the basis benefit account with respect to
US1’s extraordinary disposition with respect
to CFC1 ($90x); and
(ii) A fraction, the numerator of which is
$90x (the disqualified basis of Item 1 on
December 1, 2018, and before the application
of § 1.245A–8(b)(1)), and the denominator of
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which is $150x (the disqualified basis of Item
1, $90x, plus the disqualified basis of Item 2,
$60x, in each case determined on December
1, 2018, and before the application of
§ 1.245A–8(b)(1)). See paragraph § 1.245A–
8(b)(1).
(3) Pursuant to § 1.245A–8(b)(1), the
disqualified basis of Item 2 is reduced by
$20x, computed as the product of—
(i) $50x, the excess of the extraordinary
disposition amount ($140x) over the balance
of the basis benefit account with respect to
US1’s extraordinary disposition with respect
to CFC1 ($90x); and
(ii) A fraction, the numerator of which is
$60x (the disqualified basis of Item 2 on
December 1, 2018, and before the application
of paragraph (b)(1) of this section), and the
denominator of which is $150x (the
disqualified basis of Item 1, $90x, plus the
disqualified basis of Item 2, $60x, in each
case determined on December 1, 2018, and
before the application of § 1.245A–8(b)(1)).
See § 1.245A–8(b)(1).
(4) The $30x and $20x reductions to the
disqualified bases of Item 1 and Item 2,
respectively, occur on December 1, 2018, the
date on which the disqualified bases of the
Items are determined for purposes of
determining the reductions pursuant to
§ 1.245A–8(b)(1). See § 1.245A–9(b)(2)(ii).
(D) Reduction of basis benefit account. The
balance of the basis benefit account with
respect to US1’s extraordinary disposition
account with respect to CFC1 is decreased by
$90x, the amount by which, for CFC2’s
taxable year beginning December 1, 2018, the
disqualified bases of Item 1 and Item 2 would
have been reduced pursuant to § 1.245A–
8(b)(1) but for the $90x balance of the basis
benefit account. See § 1.245A–8(b)(4)(i)(B).
The reduction to the balance of the basis
benefit account occurs on December 31,
2018, and after the completion of all other
computations pursuant to § 1.245A–8(b). See
§ 1.245A–8(b)(4)(i)(B).
(3) Example 3. Reduction in balance of
extraordinary disposition account under
rules for simple cases by reason of allocation
and apportionment of deductions to residual
CFC gross income—(i) Facts. The facts are the
same as in paragraph (c)(1)(i) of this section
(Example 1) (and the results are the same as
in paragraph (c)(1)(ii)(A) of this section),
except that CFC1 does not make a
distribution to US1. In addition, during
CFC2’s taxable year beginning December 1,
2018, and ending November 30, 2019, the
disqualified basis of Item 1 gives rise to a $6x
amortization deduction, and the disqualified
basis of Item 2 gives rise to a $4x
amortization deduction, and each of the
amortization deductions is allocated and
apportioned to residual CFC gross income of
CFC2 solely by reason of § 1.951A–2(c)(5)
(though, but for § 1.951A–2(c)(5), would have
been allocated and apportioned to gross
tested income of CFC2). Further, as of the
end of CFC2’s taxable year ending November
30, 2019, CFC2 has $15x of earnings and
profits. Lastly, because the conditions of
§ 1.245A–6(b)(1) and (2) are satisfied for
US1’s 2018 taxable year, US1 chooses to
apply § 1.245A–7 (rules for simple cases) in
lieu of § 1.245A–8 (rules for complex cases)
for that taxable year.
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(ii) Analysis. Pursuant to § 1.245A–7(c)(1),
US1’s extraordinary disposition account with
respect to CFC1 is reduced by the lesser of
the amount described in § 1.245A–7(c)(1)(i)
with respect to US1, and the RGI account of
US1 with respect to CFC2 that relates to its
extraordinary disposition account with
respect to CFC1. See § 1.245A–7(c)(1).
Paragraphs (c)(3)(ii)(A) through (D) of this
section describe the determinations pursuant
to § 1.245A–8(c)(1).
(A) Computation of adjusted earnings of
CFC2, and amount described in § 1.245A–
7(c)(1)(i) with respect to US1. To determine
the amount described in § 1.245A–7(c)(1)(i)
with respect to US1, the adjusted earnings of
CFC2 must be computed for CFC2’s taxable
year ending November 30, 2019. See
§ 1.245A–7(c)(1)(i). Paragraphs (c)(3)(ii)(A)(1)
and (2) of this section describe these
determinations.
(1) The adjusted earnings of CFC2 for its
taxable year ending November 30, 2019, is
$25x, computed as $15x (CFC2’s earnings
and profits as of November 30, 2019, the last
day of that taxable year), plus $10x (the sum
of the $6x and $4x amortization deductions
of CFC2 for that taxable year, which is the
amount of all deductions or losses of CFC2
that is or was attributable to disqualified
basis of items of specified property and
allocated and apportioned to residual CFC
gross income of CFC2 solely by reason of
§ 1.951A–2(c)(5)(i)). See § 1.245A–7(c)(3).
(2) For CFC2’s taxable year ending
November 30, 2019, the amount described in
§ 1.245A–7(c)(1)(i) with respect to US1 is
$25x, computed as the excess of $25x (the
adjusted earnings) over $0 (the sum of the
balance of the previously taxed earnings and
profits accounts with respect to CFC2).
(B) Increase to balance of RGI account.
Under § 1.245A–9(d)(11), US1 has an RGI
account with respect to CFC2 that relates to
its extraordinary disposition account with
respect to CFC1. On November 30, 2019 (the
last day of CFC2’s taxable year), the balance
of the RGI account (which is initially zero)
is increased by $10x, the sum of the $6x and
$4x amortization deductions of CFC2 for its
taxable year ending November 30, 2019. See
§ 1.245A–7(c)(4)(i). Each of the amortization
deductions is taken into account for this
purpose because, but for § 1.951A–2(c)(5)(i),
the deduction would have decreased CFC2’s
tested income or increased or given rise to a
tested loss of CFC2. See § 1.245A–7(c)(4)(i).
(C) Reduction in balance of extraordinary
disposition account. Pursuant to § 1.245A–
7(c)(1), US1’s extraordinary disposition
account with respect to CFC1 is reduced by
$10x, the lesser of the amount described in
§ 1.245A–7(c)(1)(i) with respect to US1 for
CFC2’s taxable year ending November 30,
2019 ($25x), and the balance of US1’s RGI
account with respect to CFC2 that relates to
its extraordinary disposition account with
respect to CFC1 ($10x, determined as of
November 30, 2019, but without regard to the
application of § 1.245A–7(c)(4)(ii) for the
taxable year of CFC2 ending on that date).
See § 1.245A–7(c)(1). The $10x reduction in
the balance of US1’s extraordinary
disposition account occurs on December 31,
2019, the last day of US1’s taxable year that
includes November 30, 2019 (the last day of
CFC2’s taxable year). See § 1.245A–9(c)(3).
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(D) Reduction in balance of RGI account.
On November 30, 2019 (the last day of
CFC2’s taxable year), the balance of US1’s
RGI account with respect to CFC2 that relates
to its extraordinary disposition account with
respect to CFC1 is decreased by $10x, the
amount of the reduction, pursuant to
§ 1.245A–7(c)(1) section and by reason of the
RGI account, to US1’s extraordinary
disposition account with respect to CFC1.
See § 1.245A–7(c)(4)(ii). Therefore, following
that reduction, the balance of the RGI
account is zero ($10x¥$10x).
(iii) Alternative facts in which the
reduction is limited by earnings and profits.
The facts are the same as in paragraph
(c)(3)(i) of this section (Example 3), except
that CFC2 has a $5x deficit in its earnings
and profits as of the end of its taxable year
ending November 30, 2019. In this case—
(A) The adjusted earnings of CFC2 for its
taxable year ending November 30, 2019, is
$5x, computed as ¥$5x (CFC2’s deficit in
earnings and profits as of November 30,
2019) plus $10x (the sum of the $6x and $4x
amortization deductions of CFC2), see
§ 1.245A–7(c)(3);
(B) The amount described in § 1.245A–
7(c)(1)(i) with respect to US1 for CFC’s
taxable year ending November 30, 2019, is
$5x, computed as the excess of $5x (the
adjusted earnings) over $0 (the sum of the
balance of the previously taxed earnings and
profits accounts with respect to CFC2), see
§ 1.245A–7(c)(1)(i);
(C) On December 31, 2019, US1’s
extraordinary disposition account with
respect to CFC1 is reduced by $5x, the lesser
of the amount described in § 1.245A–
7(c)(1)(i) with respect to US1 for CFC2’s
taxable year ending November 30, 2019 ($5x),
and the balance of US1’s RGI account with
respect to CFC2 that relates to its
extraordinary disposition account with
respect to CFC1 ($10x, determined as of
November 30, 2019, but without regard to the
application of § 1.245A–8(c)(4)(i)(B) for the
taxable year of CFC2 ending on that date), see
§§ 1.245A–7(c)(1) and 1.245A–9(c)(3); and
(D) On November 30, 2019 (the last day of
CFC2’s taxable year), the balance of US1’s
RGI account with respect to CFC2 is
decreased by $5x (the amount of the
reduction, pursuant to § 1.245A–7(c)(1) and
by reason of the RGI account, to US1’s
extraordinary disposition account with
respect to CFC1) and, therefore, following
such reduction, the balance of the RGI
account is $5x ($10x¥$5x), see § 1.245A–
7(c)(4)(ii).
(4) Example 4. Reduction to extraordinary
disposition accounts limited by § 1.245A–
8(c)(6)—(i) Facts. The facts are the same as
in paragraph (c)(3)(iii) of this section
(Example 3, alternative facts in which the
reduction is limited by earnings and profits)
(and the results are the same as in paragraph
(c)(1)(ii)(A) of this section), except that US1
also owns 100% of the stock of US2, which
owns 100% of the stock of CFC3, and on
November 30, 2018, in a transaction that was
an extraordinary disposition, CFC3 sold an
item of specified property (‘‘Item 3’’) to CFC2
in exchange for $200x of cash. Item 3 had a
basis of $0 in the hands of CFC3 immediately
before the sale and, therefore, CFC3
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recognized $200x of gain as a result of the
sale ($200x¥$0), Item 3 has $200x of
disqualified basis under § 1.951A–2(c)(5),
and US2 has an extraordinary disposition
account with respect to CFC3 with an initial
balance of $200x under § 1.245A–
5(c)(3)(i)(A). Moreover, during CFC2’s taxable
year beginning December 1, 2018, and ending
November 30, 2019, the disqualified basis of
Item 3 gives rise to a $20x amortization
deduction, which is allocated and
apportioned to residual CFC gross income of
CFC2 solely by reason of § 1.951A–2(c)(5)
(though, but for § 1.951A–2(c)(5), would have
been allocated and apportioned to gross
tested income of CFC2). Further, as of the
end of US1’s 2018 taxable year, the balance
of US1’s basis benefit account with respect to
its extraordinary disposition account with
respect to CFC1 is $0; similarly, as of the end
of US2’s 2018 taxable year, the balance of
US2’s basis benefit account with respect to
its extraordinary disposition account with
respect to CFC2 is $0. Because CFC2 holds
items of specified property that correspond to
more than one extraordinary disposition
account (that is, Item 1 and Item 2
correspond to US1’s extraordinary
disposition account with respect to CFC2,
and Item 3 corresponds to US2’s
extraordinary disposition account with
respect to CFC2), the condition of § 1.245A–
6(b)(2) is not satisfied. See § 1.245A–
6(b)(2)(ii)(C)(3). US1 and US2 therefore apply
§ 1.245A–8 (rules for complex cases) for their
2018 taxable years.
(ii) Analysis. Pursuant to § 1.245A–8(c)(1),
US1’s extraordinary disposition account with
respect to CFC1 is, subject to the limitation
in § 1.245A–8(c)(6), reduced by the lesser of
the amount described in § 1.245A–8(c)(1)(i)
with respect to US1, and the RGI account of
US1 with respect to CFC2 that relates to its
extraordinary disposition account with
respect to CFC1. See § 1.245A–8(c)(1).
Similarly, US2’s extraordinary disposition
account with respect to CFC3 is, subject to
the limitation in § 1.245A–8(c)(6), reduced by
the lesser of the amount described in
§ 1.245A–8(c)(1)(i) with respect to US2, and
the RGI account of US2 with respect to CFC2
that relates to its extraordinary disposition
account with respect to CFC3. See § 1.245A–
8(c)(1). Paragraphs (c)(4)(ii)(A) through (F) of
this section describe the determinations
pursuant to § 1.245A–8(c)(1).
(A) Ownership requirement. Each of US1
and US2 satisfy the ownership requirement
of § 1.245A–8(c)(5) for CFC2’s taxable year
ending November 30, 2019, because on the
last day of that taxable year each is a United
States shareholder with respect to CFC2. See
§ 1.245A–8(c)(5).
(B) Computation of adjusted earnings of
CFC2, and amount described in § 1.245A–
8(c)(1)(i) with respect to US1 and US2. The
adjusted earnings of CFC2 for its taxable year
ending November 30, 2019, is $25x,
computed as ¥$5x (CFC2’s deficit in
earnings and profits as of November 30,
2019), plus $30x (the sum of the $6x, $4x,
and $20x amortization deductions of CFC2).
See § 1.245A–8(c)(3). For CFC2’s taxable year
ending November 30, 2019, the amount
described in § 1.245A–8(c)(1)(i) with respect
to US1 is $25x, computed as the excess of the
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product of $25x (the adjusted earnings) and
100% (the percentage of the stock of CFC2
that US1 and its domestic affiliate, US2,
own), over $0 (the sum of the balance of
certain previously taxed earnings and profits
accounts and hybrid deduction accounts).
See § 1.245A–8(c)(1)(i). Similarly, for CFC2’s
taxable year ending November 30, 2019, the
amount described in § 1.245A–8(c)(1)(i) with
respect to US2 is $25x, computed as the
excess of the product of $25x (the adjusted
earnings) and 100% (the percentage of the
stock of CFC2 that US2 and its domestic
affiliate, US1, own), over $0 (the sum of the
balance of certain previously taxed earnings
and profits accounts and hybrid deduction
accounts). See § 1.245A–8(c)(1)(i).
(C) Increase to balance of RGI account. As
described in paragraph (c)(3)(ii)(B) of this
section, US1 has an RGI account with respect
to CFC2 that relates to its extraordinary
disposition account with respect to CFC1,
and the balance of the RGI account is $10x
on November 30, 2019 (the last day of CFC2’s
taxable year). Similarly, US2 has an RGI
account with respect to CFC2 that relates to
its extraordinary disposition account with
respect to CFC3, and the balance of the RGI
account is $20x on November 30, 2019
(reflecting a $20x increase to the balance of
the account for the $20x amortization
deduction of CFC2 for its taxable year ending
November 30, 2019). See § 1.245A–8(c)(4)(i).
(D) Reduction in balance of extraordinary
disposition accounts but for § 1.245A–8(c)(6).
But for the application of § 1.245A–8(c)(6),
US1’s extraordinary disposition account with
respect to CFC2 would be reduced by $10x,
which is the lesser of $25x, the amount
described in § 1.245A–8(c)(1)(i) with respect
to US1 for CFC2’s taxable year ending
November 30, 2019, and $10x, the balance of
the RGI account of US1 with respect to CFC2
that relates to its extraordinary disposition
account with respect to CFC1 (determined as
of November 30, 2019, but without regard to
the application of § 1.245A–8(c)(4)(i)(B) for
the taxable year of CFC2 ending on that date).
See § 1.245A–8(c)(1)(i) and (ii). Similarly, but
for the application of § 1.245A–8(c)(6), US2’s
extraordinary disposition account with
respect to CFC3 would be reduced by $20x,
which is the lesser of $25x, the amount
described in § 1.245A–8(c)(1)(i) with respect
to US2 for CFC2’s taxable year ending
November 30, 2019, and $20x, the balance of
the RGI account of US2 with respect to CFC2
that relates to its extraordinary disposition
account with respect to CFC3 (determined as
of November 30, 2019, but without regard to
the application of § 1.245A–8(c)(4)(i)(B) for
the taxable year of CFC2 ending on that date).
See § 1.245A–8(c)(1)(i) and (ii).
(E) Application of limitation of § 1.245A–
8(c)(6). As described in paragraph (c)(4)(ii)(D)
of this section, but for the application of
§ 1.245A–8(c)(6), there would be a total of
$30x of reductions to US1’s extraordinary
disposition account with respect to CFC1,
and US2’s extraordinary disposition account
with respect to CFC3, by reason of the
application of § 1.245A–8(c)(1) with respect
to CFC2’s taxable year ending November 30,
2019. Because that $30x exceeds the amount
described in § 1.245A–8(c)(1)(i) with respect
to US1 and US2 ($25x)—
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(1) US1’s extraordinary disposition account
with respect to CFC1 is reduced by $7.86x,
computed as $10x (the reduction that would
occur but for § 1.245A–8(c)(6)) less the
product of $5x (the excess amount, computed
as $30x, the total reductions that would
occur but for the application of § 1.245A–
8(c)(6), less $25x, the amount described in
§ 1.245A–8(c)(1)(i)) and a fraction, the
numerator of which is $150x (the balance of
US1’s extraordinary disposition account with
respect to CFC1) and the denominator of
which is $350x ($150x, the balance of US1’s
extraordinary disposition account with
respect to CFC1, plus $200x, the balance of
US2’s extraordinary disposition account with
respect to CFC3), see § 1.245A–8(c)(6); and
(2) US2’s extraordinary disposition account
with respect to CFC3 is reduced by $17.14x,
computed as $20x (the reduction that would
occur but for § 1.245A–8(c)(6)) less the
product of $5x (the excess amount, computed
as $30x, the total reductions that would
occur but for the application of § 1.245A–
8(c)(6), less $25x, the amount described in
§ 1.245A–8(c)(1)(i)) and a fraction, the
numerator of which is $200x (the balance of
US2’s extraordinary disposition account with
respect to CFC3) and the denominator of
which is $350x ($150x, the balance of US1’s
extraordinary disposition account with
respect to CFC1, plus $200x, the balance of
US2’s extraordinary disposition account with
respect to CFC3), see § 1.245A–8(c)(6) of this
section.
(F) Reduction in balance of RGI accounts.
On November 30, 2019 (the last day of
CFC2’s taxable year)—
(1) The balance of US1’s RGI account with
respect to CFC2 that relates to its
extraordinary disposition account with
respect to CFC1 is decreased by $7.86x (the
amount of the reduction, pursuant to
§ 1.245A–8(c)(1) and by reason of the RGI
account, to US1’s extraordinary disposition
account with respect to CFC1) and, thus,
following that reduction, the balance of the
RGI account is $2.14x ($10x¥$7.86x), see
§ 1.245A–8(c)(4)(i)(B); and
(2) The balance of US2’s RGI account with
respect to CFC2 that relates to its
extraordinary disposition account with
respect to CFC3 is decreased by $17.14x (the
amount of the reduction, pursuant to
§ 1.245A–8(c)(1) and by reason of the RGI
account, to US2’s extraordinary disposition
account with respect to CFC3) and, thus,
following that reduction, the balance of the
RGI account is $2.86x ($20x¥$17.14x), see
§ 1.245A–8(c)(4)(i)(B).
(5) Example 5. Computation of duplicate
DQB—(i) Facts. The facts are the same as in
paragraph (c)(1)(i) of this section (Example 1)
(and the results are the same as in paragraph
(c)(1)(ii)(A) of this section), except that CFC1
does not make any distribution to US1, and
on November 30, 2018, immediately after the
Disqualified Transfer, CFC2 transfers Item 1
to newly-formed CFC3 solely in exchange for
the sole share of stock of CFC3 (the
contribution, ‘‘Contribution 1,’’ and the share
of stock of CFC3, the ‘‘CFC3 Share’’) and,
immediately after Contribution 1, CFC3
transfers Item 1 to newly-formed CFC4 solely
in exchange for the sole share of stock of
CFC4 (the contribution, ‘‘Contribution 2,’’
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Frm 00026
Fmt 4701
Sfmt 4702
53123
and the share of stock of CFC4, the ‘‘CFC4
Share’’). Pursuant to section 358(a)(1), CFC2’s
basis in its share of stock of CFC3 is $90x,
and CFC3’s basis in its share of stock of CFC4
is $90x basis. As a result of Contribution 1,
the condition of § 1.245A–6(b)(2) is not
satisfied, because on at least one day of
CFC2’s taxable year ending on November 30,
2018 (which ends within US1’s 2018 taxable
year), CFC2 does not hold Item 1. See
§ 1.245A–6(b)(2)(ii)(C)(1). US1 therefore
applies § 1.245A–8 (rules for complex cases)
for its 2018 taxable year. See § 1.245A–6(b).
(ii) Analysis—(A) Application of
exchanged basis rule under section 951A to
Contribution 1 and Contribution 2. As a
result of Contribution 1, pursuant to
§ 1.951A–3(h)(2)(ii)(B)(2)(ii), the disqualified
basis of CFC3 Share includes the disqualified
basis of Item 1 ($90x), and therefore the
disqualified basis of CFC3 Share is $90x.
Similarly, as a result of Contribution 2,
pursuant to § 1.951A–3(h)(2)(ii)(B)(2)(ii), the
disqualified basis of CFC4 Share also
includes the disqualified basis of Item 1
($90x), and therefore the disqualified basis of
CFC4 Share is $90x.
(B) Determination of duplicate DQB of
CFC3 Share as a result of Contribution 1.
Because the disqualified basis of CFC3 Share
includes the disqualified basis of Item 1,
CFC3 Share is an item of exchanged basis
property that relates to Item 1. See § 1.245A–
8(d)(2)(ii). In addition, because CFC3 Share is
an item of exchanged basis property that
relates to Item 1 (which corresponds to US1’s
extraordinary disposition account with
respect to CFC1), CFC3 Share is, for purposes
of § 1.245A–8, treated as an item of specified
property that corresponds to US1’s
extraordinary disposition account with
respect to CFC1. See § 1.245A–8(d)(2)(i).
Further, the duplicate DQB of CFC3 Share as
to Item 1 is $90x, the portion of the
disqualified basis of CFC3 Share that
includes Item 1’s disqualified basis of $90x.
See § 1.245A–8(d)(2)(iii)(A).
(C) Determination of duplicate DQB of
CFC4 Share as a result of Contribution 2. For
reasons similar to those described in
paragraph (c)(5)(ii)(B) of this section, CFC4
Share is an item of exchanged basis property
that relates to Item 1, CFC4 is treated for
purposes of § 1.245A–8 as an item of
specified property that corresponds to US1’s
extraordinary disposition account with
respect to CFC1, and the duplicate DQB of
CFC4 Share as to Item 1 is $90x.
(D) Determination of duplicate DQB of
CFC3 Share as a result of Contribution 2.
Because the disqualified basis of CFC3 Share
and the disqualified basis of CFC4 Share each
includes $90x of the disqualified basis of
Item 1 and CFC3 receives the CFC4 Share in
Contribution 2, the $90x of disqualified basis
of CFC3 Share is attributable to the $90x of
disqualified basis of CFC4 Share, and CFC3
Share is an item of exchanged basis property
that relates to CFC4 Share. See § 1.245A–
8(d)(2)(i) and (d)(2)(iii)(C). In addition, the
duplicate DQB of CFC3 Share as to CFC4
Share is $90x. See § 1.245A–8(d)(2)(iii)(A).
(E) Application of duplicate basis rules in
§ 1.245A–8(b)(5). For purposes of computing
the fraction described in § 1.245A–8(b)(1)(ii),
if US1’s extraordinary disposition account
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with respect to CFC1 were to give rise to an
extraordinary disposition amount or a tiered
extraordinary disposition amount during
US1’s 2018 taxable year, then the duplicate
DQB of CFC3 Share and the duplicate DQB
of CFC4 Share would not be taken into
account, because the disqualified basis of
Item 1 (an item of specified property that
corresponds to US1’s extraordinary
disposition account and as to which each of
CFC3 Share and CFC4 share relates) would
be taken into account. See § 1.245A–
8(b)(1)(ii) and (b)(5)(i)(A). Accordingly, in
such a case, for US1’s 2018 taxable year, the
numerator of the fraction described in
§ 1.245A–8(b)(1)(ii) would reflect only the
disqualified basis of Item 1 or Item 2, as
applicable, and the denominator would
reflect only the sum of the disqualified basis
of each of Item 1 and Item 2. See § 1.245A–
8(b)(1)(ii) and (b)(5)(i)(A). Furthermore, to the
extent there were to be a reduction under
§ 1.245A–8(b)(1) to the disqualified basis of
Item 1, then the duplicate DQB of CFC4
Share would be reduced (but not below zero)
by the product of the reduction to the
disqualified basis of Item 1 and a fraction, the
numerator of which would be $90x (the
duplicate DQB of CFC4 Share), and the
denominator of which would also be $90x
(the duplicate DQB of CFC4 Share). See
§ 1.245A–8(b)(5)(i)(B). The $90x of duplicate
DQB of CFC3 Share would be excluded from
the denominator of the fraction described in
the previous sentence because it is
attributable to the $90x of duplicate DQB of
CFC4 Share. See § 1.245A–8(b)(5)(i)(B)(2)
(last sentence). For reasons similar to those
described in this paragraph (c)(4)(ii)(E) with
respect to the application of § 1.245A–
8(b)(5)(i)(B) to CFC4 Share, the duplicate
DQB of CFC3 Share would be reduced (but
not below zero) by the product of the
reduction to the disqualified basis of Item 1
and a fraction, the numerator of which would
be $90x, and the denominator of which
would also be $90x.
khammond on DSKJM1Z7X2PROD with PROPOSALS2
§ 1.245A–11
Applicability dates.
(a) In general. Sections 1.245A–6
through 1.245A–11 apply to taxable
years of a foreign corporation beginning
on or after [date a Treasury decision
adopting these rules as final regulations
is published in the Federal Register]
and to taxable years of section 245A
shareholders in which or with which
such taxable years end.
(b) Exception. Notwithstanding
paragraph (a) of this section, a taxpayer
may choose to apply §§ 1.245A–6
through 1.245A–11 for taxable years of
a foreign corporation beginning before
[date a Treasury decision adopting these
rules as final regulations is published in
the Federal Register] and to taxable
years of section 245A shareholders in
which or with which such taxable years
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17:42 Aug 26, 2020
Jkt 250001
end, provided that the taxpayer and all
persons bearing a relationship to the
taxpayer described in section 267(b) or
707(b) apply §§ 1.245A–6 through
1.245A–11, in their entirety, and
§ 1.6038–2(f)(18) for all such taxable
years.
■ Par. 4. Section 1.951A–2, as proposed
to be amended at 85 FR 19858 (April 8,
2020), is further amended by:
■ 1. Redesignating paragraph (c)(5)(iv)
as paragraph (c)(5)(v).
■ 2. Adding new paragraph (c)(5)(iv).
■ 3. In newly redesignated paragraph
(c)(5)(v)(B)(1), removing the language
‘‘(c)(5)(iv)(A)(1)’’ and adding the
language ‘‘(c)(5)(v)(A)(1)’’ in its place.
■ 4. In newly redesignated paragraph
(c)(5)(v)(C)(1), removing the language
‘‘(c)(5)(iv)(B)(1)’’ and adding the
language ‘‘(c)(5)(v)(B)(1)’’ in its place.
■ 5. Redesignating paragraph (c)(6)(iv)
as paragraph (c)(6)(v).
■ 6. Adding new paragraph (c)(6)(iv).
■ 7. In newly redesignated paragraph
(c)(6)(v)(B)(1), removing the language
‘‘(c)(6)(iv)(A)(1) and adding the language
‘‘(c)(6)(v)(A)(1)’’ in its place.
The additions read as follows:
§ 1.951A–2
Tested income and tested loss.
*
*
*
*
*
(c) * * *
(5) * * *
(iv) Reductions to disqualified basis
pursuant to coordination rules. See
§ 1.245A–7(b) or § 1.245A–8(b), as
applicable, for reductions to
disqualified basis resulting from the
application of § 1.245A–5.
*
*
*
*
*
(6) * * *
(iv) Reductions to disqualified
payments pursuant to coordination
rules. See § 1.245A–5(j)(8) and
§ 1.245A–7(b) or § 1.245A–8(b), as
applicable, for reductions to
disqualified payments resulting from
the application of § 1.245A–5.
*
*
*
*
*
■ Par. 5. Section 1.6038–2, as proposed
to be amended at 85 FR 44650 (July 23,
2020), is further amended by adding
paragraphs (f)(17) and(18) and (m)(5) to
read as follows:
§ 1.6038–2 Information returns required of
United States persons with respect to
annual accounting periods of certain
foreign corporations.
*
*
*
*
*
(f) * * *
(17) Reporting of disqualified basis
and disqualified payments. If for the
PO 00000
Frm 00027
Fmt 4701
Sfmt 9990
annual accounting period of a
corporation it holds an item of property
having disqualified basis within the
meaning of § 1.951A–3(h)(2)(ii) or
§ 1.951A–2(c)(5), or incurs an item of
deduction or loss related to a
disqualified payment (within the
meaning of § 1.951A–2(c)(6)(ii)(A)), then
Form 5471 (or successor form) must
contain such information about the
disqualified basis, or such information
relating to the disqualified payment, in
the form and manner and to the extent
prescribed by the form, instructions to
the form, publication, or other guidance
published in the Internal Revenue
Bulletin.
(18) Adjustments to extraordinary
disposition accounts and disqualified
basis If for the annual accounting period
a section 245A shareholder of the
corporation reduces its extraordinary
disposition account pursuant to
§ 1.245A–7(c) or § 1.245A–8(c), as
applicable, or the corporation reduces
the disqualified basis in an item of
specified property pursuant to
§ 1.245A–7(b) or § 1.245A–8(b), as
applicable, then Form 5471 (or a
successor form) must contain such
information about the reduction to the
extraordinary disposition account or
disqualified basis, as applicable, in the
form and manner and to the extent
prescribed by the form, instructions to
the form, publication, or other guidance
published in the Internal Revenue
Bulletin.
*
*
*
*
*
(m) * * *
(5) Special rule for paragraphs (f)(17)
and (18) of this section. Paragraphs
(f)(17) and (18) of this section apply
with respect to information for annual
accounting periods beginning after [date
a Treasury decision adopting these rules
as final regulations is published in the
Federal Register]. In addition, as
provided in § 1.245A–11(b), paragraph
(f)(18) of this section applies with
respect to information for an annual
accounting period that includes a
taxable year for which a taxpayer has
chosen to apply §§ 1.245A–6 through
1.245A–11 pursuant to § 1.245A–11(b).
*
*
*
*
*
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2020–18544 Filed 8–21–20; 4:15 pm]
BILLING CODE 4830–01–P
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]]>Agencies
[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Proposed Rules]
[Pages 53098-53124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18544]
Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 /
Proposed Rules
[[Page 53098]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-124737-19]
RIN 1545-BP57
Coordination of Extraordinary Disposition and Disqualified Basis
Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations under sections
245A and 951A of the Internal Revenue Code (the ``Code'') that
coordinate the extraordinary disposition rule under section 245A of the
Internal Revenue Code (the ``Code'') with the disqualified basis rule
under section 951A of the Code. This document also contains proposed
regulations under section 6038 of the Code regarding information
reporting to facilitate administration of the proposed regulations. The
proposed regulations affect corporations that are subject to the
extraordinary disposition rule and the disqualified basis rule.
DATES: Written or electronic comments and requests for a public hearing
must be received by October 26, 2020. Requests for a public hearing
must be submitted as prescribed in the ``Comments and Requests for a
Public Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124737-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable on
paper, to its public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-124737-19), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Logan M. Kincheloe, (202) 317-6937; concerning submission of comments
or requests for a hearing, Regina Johnson, (202) 317-6901 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Overview
This document contains proposed amendments to 26 CFR part 1 under
sections 245A, 951A, and 6038 (the ``proposed regulations''). Any terms
used but not defined in this preamble have the meanings given to them
in the proposed regulations.
II. Sections 245A and 954(c)(6)
Section 245A was added to the Code by the Tax Cuts and Jobs Act,
Public Law 115-97, 131 Stat. 2054, 2189 (2017) (the ``Act''), which was
enacted on December 22, 2017. Section 245A generally allows a domestic
corporation that is a United States shareholder (as defined in section
951(b)) a 100-percent dividends received deduction (a ``section 245A
deduction'') for the foreign-source portion of a dividend received
after December 31, 2017, from a specified 10-percent owned foreign
corporation (an ``SFC''). Section 245A(g) provides the Secretary with
authority to prescribe such regulations or other guidance as may be
necessary or appropriate to carry out the provisions of section 245A.
Section 954(c)(6) was added to the Code by the Tax Increase
Prevention and Reconciliation Act of 2005, Public Law 109-222, 120
Stat. 345 (2006). Section 954(c)(6) generally provides that, for
certain taxable years, dividends received or accrued by a controlled
foreign corporation (as defined in section 957) (a ``CFC'') from
another CFC that is a related person generally are excluded from the
foreign personal holding company income (as defined in section 954(c))
(``FPHCI'') of the distributee CFC. Section 954(c)(6)(A) provides the
Secretary with the authority to prescribe regulations as may be
necessary or appropriate to carry out section 954(c)(6), including
regulations as may be necessary or appropriate to prevent the abuse of
its purposes. Section 954(c)(6) currently applies to taxable years of
foreign corporations beginning before January 1, 2021, and to taxable
years of United States shareholders with or within which those taxable
years of the foreign corporations end.
On June 18, 2019, the Department of the Treasury (``Treasury
Department'') and the IRS published temporary regulations (TD 9865, 84
FR 28398) and cross-referenced proposed regulations (REG-106282-18, 84
FR 28426) (together the ``2019 section 245A regulations'') under
sections 245A, 954, and 6038. The 2019 proposed regulations are
finalized, and the temporary regulations are removed, in the Final
Rules section of this issue of the Federal Register (the proposed
regulations as finalized, the ``final regulations''). The final
regulations include rules that limit the amount eligible for the
section 245A deduction and the amount eligible for the section
954(c)(6) exception by 50 percent of the extraordinary disposition
amount or tiered extraordinary disposition amount, respectively
(together, the ``extraordinary disposition rule''). See Sec. 1.245A-
5(b) and (d). In general, an extraordinary disposition amount is an
amount of earnings and profits (``E&P'') distributed by an SFC that is
attributable to an extraordinary disposition, which includes certain
non-ordinary course asset sales between related parties during the
selling SFC's disqualified period. In general, a tiered extraordinary
disposition amount is a dividend received by an upper-tier CFC from a
lower-tier CFC that would be an extraordinary disposition amount if
received by a section 245A shareholder of the lower-tier CFC. The
disqualified period is defined with respect to an SFC as the period
beginning on January 1, 2018, and ending as of the close of the taxable
year of the SFC, if any, that begins before January 1, 2018, and ends
after December 31, 2017. See Sec. 1.245A-5(c). The purpose of the
extraordinary disposition rule is to prevent taxpayers from obtaining
the benefits of the section 245A deduction or the section 954(c)(6)
exception for E&P that were generated in certain non-ordinary course
transactions occurring during the disqualified period and that were not
subject to current U.S. tax solely because the transactions occurred
during the disqualified period; these E&P are generally not intended to
qualify for the section 245A deduction or the section 954(c)(6)
exception. See 84 FR 28401.
III. Section 951A
Section 951A, added to the Code by the Act, requires a United
States shareholder of any CFC for any taxable year to include in gross
income the United States shareholder's global intangible low-taxed
income (``GILTI inclusion amount'') for that year. On October 10, 2018,
the Treasury Department and the IRS published in the Federal Register
proposed regulations (REG-104390-18, 83 FR
[[Page 53099]]
51072) implementing section 951A. On June 21, 2019, the Treasury
Department and the IRS published in the Federal Register final
regulations (``GILTI final regulations'') (TD 9866, 84 FR 29288) that
adopted, with revisions, the proposed regulations under section 951A.
The GILTI final regulations include a rule providing that a
deduction or loss attributable to basis created by reason of a transfer
of property from a CFC to a related person during the disqualified
period (``disqualified basis'') is allocated and apportioned solely to
residual CFC gross income (the ``disqualified basis rule''). See Sec.
1.951A-2(c)(5)(i).\1\ Residual CFC gross income is defined as gross
income other than gross tested income, subpart F income, or income
effectively connected with the conduct of a trade or business in the
United States. See Sec. 1.951A-2(c)(5)(iii)(B). The disqualified basis
rule also provides that any depreciation, amortization, or cost
recovery allowances attributable to disqualified basis are not properly
allocable to property produced, or acquired for resale, under section
263, 263A, or 471. See Sec. 1.951A-2(c)(5)(i). The purpose of the
disqualified basis rule is to prevent taxpayers from obtaining the
benefits of tax basis in the transferred asset (for example,
depreciation or amortization deductions over time that reduce a CFC's
tested income or increase a CFC's tested loss) that was created through
related-party transactions effectuated at no U.S. tax cost solely
because they occurred during the disqualified period. See 84 FR 29299.
Thus, the rule creates symmetry between the categorization of non-taxed
income created in the transaction generating disqualified basis during
the disqualified period and the categorization of deductions generated
after the disqualified period attributable to that disqualified basis.
See id.
---------------------------------------------------------------------------
\1\ Although the extraordinary disposition rule and the
disqualified basis rule define ``disqualified period'' using
different terminology, in application, a CFC that has a disqualified
period under either rule has a disqualified period under the other
rule. Compare Sec. 1.245A-5(c)(3)(iii) with Sec. 1.951A-
3(h)(2)(ii)(C)(1). For this reason, references to a ``disqualified
period'' in this preamble refer to the unified concept of a
disqualified period under both the extraordinary disposition rule
and the disqualified basis rule.
---------------------------------------------------------------------------
Further, recently proposed regulations under section 951A treat a
deduction related to certain payments by a CFC to a related recipient
CFC during the disqualified period in a manner similar to the treatment
of disqualified basis under the GILTI final regulations (the
``disqualified payment rule''). See REG-106013-19, 85 FR 19858.
Explanation of Provisions
I. Overview
In certain cases, the extraordinary disposition rule and the
disqualified basis rule, when applied together, may give rise to excess
taxation as to a section 245A shareholder (or as to the section 245A
shareholder and a related party). For example, consider a case in which
a CFC that is wholly owned by a section 245A shareholder sells an item
of specified property during the disqualified period to another CFC
that is wholly owned by the section 245A shareholder. In this case,
there is a single amount of gain (the gain that the transferor CFC
recognizes upon the sale), which gives rise to both extraordinary
disposition E&P of the transferor CFC (the E&P generated upon the sale)
and disqualified basis in the item of specified property held by the
transferee CFC (the basis step-up in the item of specified property
resulting from the sale). The gain will in effect be subject to U.S.
tax as to the section 245A shareholder when the extraordinary
disposition E&P are distributed as a dividend by the transferor CFC. In
addition, an amount (such as an amount of future gross tested income of
the transferee CFC) equal to the gain might be indirectly taxed as to
the section 245A shareholder as a result of not being offset or reduced
by deductions or losses attributable to the disqualified basis
(because, but for the disqualified basis rule, such deductions or
losses would have offset or reduced the amount and sheltered it from
U.S. tax). Moreover, the disqualified basis rule may in certain cases
have the effect of reducing, in an amount equal to the gain, E&P of the
transferee CFC that would otherwise have been eligible for the section
245A deduction when distributed as a dividend to the section 245A
shareholder. This could occur because, in general, deductions or losses
that are subject to the disqualified basis rule nevertheless reduce
E&P.
The preamble to the 2019 section 245A regulations requested
comments on whether and how to coordinate the extraordinary disposition
rule and the disqualified basis rule. See 84 FR 28402. One comment was
received, which recommended these rules be coordinated and suggested
two approaches to that effect.
The first approach would permit taxpayers to effectively unwind the
tax effect of an extraordinary disposition. Under this approach, a
section 245A shareholder's extraordinary disposition account would be
eliminated if, with respect to each item of specified property taken
into account in determining the initial balance of the account, an
election were made pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(3) to reduce
the item's adjusted basis (and thus eliminate the item's disqualified
basis), and provided that certain other requirements are met (for
example, the person to which the item of specified property was
transferred in the extraordinary disposition was a CFC, which remains a
CFC for at least five years after the extraordinary disposition). The
proposed regulations do not adopt this approach because the Treasury
Department and the IRS have determined that it could give rise to
inappropriate results, such as the elimination of an extraordinary
disposition account in cases in which it is unlikely that the
extraordinary disposition rule and the disqualified basis rule, when
applied together, would result in excess taxation. In addition, the
approach could be difficult to administer. For example, after the
extraordinary disposition, the CFC to which the specified property was
transferred might be transferred outside the U.S. taxing jurisdiction
but remain a CFC due to the Act's repeal of section 958(b)(4), with the
result that in effect there is no or little U.S. tax cost to the CFC
having reduced the adjusted basis (and eliminated the disqualified
basis) of the item of specified property. Furthermore, because the
extraordinary disposition account with respect to the transferor CFC
would have been eliminated, the E&P attributable to the extraordinary
disposition could reduce gain that would otherwise be recognized on the
disposition of stock of the transferor CFC as a result of the section
245A deduction. Moreover, there would be additional administrative and
compliance burdens if the regulations adopted an approach pursuant to
which an extraordinary disposition account is tentatively eliminated
when elections are made pursuant to Sec. 1.951A-3(h)(3) to reduce
adjusted bases (and eliminate disqualified basis), but then the
extraordinary disposition account is retroactively restored if the
transferee CFC ceases to be a CFC or becomes a CFC only by reason of
the repeal of section 958(b)(4).
The second approach recommended by the comment would adjust
disqualified basis of an item of specified property to the extent that
gain to which the disqualified basis is attributable is in effect
subject to U.S. tax by reason of the extraordinary disposition rule.
Similarly, an extraordinary disposition account of a section 245A
shareholder would be adjusted to the extent that, with respect to
disqualified basis
[[Page 53100]]
attributable to gain to which the extraordinary disposition account is
also attributable, the disqualified basis gives rise to deductions or
losses that are allocated and apportioned to residual CFC gross income
of a CFC by reason of the disqualified basis rule.
As discussed in parts II through IV of this Explanation of
Provisions, the proposed regulations adopt a coordination mechanism
that is broadly consistent with the second approach recommended by the
comment. The coordination mechanism involves two operative rules, one
that reduces disqualified basis in certain cases (the ``DQB reduction
rule''), and another that reduces an extraordinary disposition account
in certain cases (the ``EDA reduction rule'').
In addition, to reduce burden and facilitate compliance, the
proposed regulations provide two versions of both the DQB reduction
rule and the EDA reduction rule, similar to the approach taken in
Sec. Sec. 1.1248-2 and 1.1248-3 (providing rules for determining
earnings and profits attributable to a block of stock in simple and
complex cases). See proposed Sec. Sec. 1.245A-7 and 1.245A-8. These
versions achieve the same results. The first version (proposed Sec.
1.245A-7) may be applied to simple cases, and the second version
(proposed Sec. 1.245A-8) applies to complex cases.
The version for simple cases may be applied when two conditions are
satisfied, because those conditions eliminate the need for certain
additional rules under the version for complex cases. See proposed
Sec. 1.245A-6(b). The first condition provides requirements related to
the seller SFC with respect to which there is an extraordinary
disposition account. See proposed Sec. 1.245A-6(b)(1). The second
condition provides requirements related to an item of specified
property for which an extraordinary disposition occurred and the buyer
CFC holding the item. See proposed Sec. 1.245A-6(b)(2). As an example,
the version for simple cases generally applies if (i) the seller SFC is
wholly-owned (directly or indirectly, within the meaning of section
958(a)) by the section 245A shareholder at the time of the
extraordinary disposition and remains wholly-owned by the section 245A
shareholder, (ii) the seller SFC does not succeed to E&P of another SFC
with respect to which there is an extraordinary disposition account,
(iii) the items of specified property for which an extraordinary
disposition occurred are acquired by a buyer CFC wholly-owned by the
section 245A shareholder and certain related parties and the buyer CFC
remains wholly-owned by the section 245A shareholder and certain
related parties, and (iv) the buyer CFC retains the items of specified
property it acquires in the extraordinary disposition and does not
acquire items of specified property with disqualified basis that were
transferred in another extraordinary disposition. See proposed Sec.
1.245A-6(b)(1) and (2).
The determination as to whether the version for simple cases is
available is made with respect to a taxable year of a section 245A
shareholder. If the conditions for applying the version for simple
cases are not satisfied for a taxable year, then the version for
complex cases must be applied beginning with that taxable year and all
subsequent taxable years. In addition, if the conditions for applying
the version for simple cases are satisfied for a taxable year but the
section 245A shareholder chooses not to apply the version for simple
cases for that taxable year, then the version for complex cases applies
to that taxable year. However, for a subsequent taxable year, the
section 245A shareholder may apply the version for simple cases,
provided that the conditions for applying the version for simple cases
are satisfied for that taxable year and have been satisfied for all
earlier taxable years.
Further, for purposes of determining whether the conditions for
applying the version for simple cases are satisfied, any requirement
that references a section 245A shareholder, an SFC, or a CFC does not
include a successor of the section 245A shareholder, the SFC, or the
CFC, respectively. See proposed Sec. 1.245A-6(b) (last sentence). As a
result, the version of the rules for simple cases is not available if
the section 245A shareholder's extraordinary disposition account with
respect to an SFC has been adjusted pursuant to the successor rules of
Sec. 1.245A-5(c)(4). Thus, for example, the version of the rules for
simple cases is not available if the assets of the section 245A
shareholder are acquired by another domestic corporation, or if the
assets of the seller SFC are acquired by another SFC, in each case, in
a transaction described in section 381 and subject to Sec. 1.245A-
5(c)(4)(i) or (ii), respectively.
Section II of this Explanation of Provisions discusses the versions
of the DQB reduction rule and the EDA reduction rule that apply for
simple cases. Section III of this Explanation of Provisions then
discusses the versions of those rules for complex cases. Section IV of
this Explanation of Provisions discusses other rules applicable to both
simple and complex cases. Section V of this Explanation of Provisions
discusses applicability dates, and Section VI of this Explanation of
Provisions requests comments.
II. Rules for Simple Cases
A. The DQB Reduction Rule
1. In General
The DQB reduction rule provides that when an extraordinary
disposition account of a section 245A shareholder gives rise to an
extraordinary disposition amount or tiered extraordinary disposition
amount, the disqualified bases of certain items of specified property
are reduced by the same amount solely for purposes of Sec. 1.951A-
2(c)(5). See proposed Sec. 1.245A-7(b)(1). This rule is intended to
ensure that as the extraordinary disposition rule applies to cause gain
to which extraordinary disposition E&P are attributable to in effect be
subject to U.S. tax, the disqualified basis rule generally does not
apply to the basis of an item of specified property attributable to
that gain (because that basis is no longer generated at no U.S. tax
cost) and, accordingly, items of deduction or loss attributable to that
basis become eligible to offset income subject to U.S. tax.
More specifically, for a taxable year of a section 245A
shareholder, the disqualified bases of items of specified property that
``correspond'' to the section 245A shareholder's extraordinary
disposition account are generally reduced by the sum of the
extraordinary disposition amounts or tiered extraordinary disposition
amounts for the taxable year. See proposed Sec. 1.245A-7(b)(1); see
also proposed Sec. 1.245A-9(b)(1) (general rule providing that an item
of specified property corresponds to an extraordinary disposition
account if gain was recognized on the extraordinary disposition of the
item and was taken into account in determining the initial balance of
the account). This correspondence requirement ensures that the rule
only reduces disqualified basis of an item of specified property that
is attributable to gain that was taken into account in determining the
initial balance of the account, and thus the rule does not reduce
disqualified basis of an item of specified property that is
attributable to other gain (for example, disqualified basis of an item
of specified property that corresponds to an extraordinary disposition
account of another section 245A shareholder or that does not correspond
to an extraordinary disposition account).
The amount of the reduction under the DQB reduction rule is
allocated pro rata across the disqualified basis of each item of
specified property that
[[Page 53101]]
corresponds to the section 245A shareholder's extraordinary disposition
account, based on the item's disqualified basis relative to the
aggregate disqualified bases of the items. See proposed Sec. 1.245A-
7(b)(1). The Treasury Department and the IRS have determined that a pro
rata approach is appropriate because the initial balance of the
extraordinary disposition account reflects an aggregate of the gain of
each item of specified property that corresponds to the account
(reduced by losses with respect to certain items of specified
property). In addition, alternative approaches would be unduly complex,
such as a stacking approach pursuant to which a reduction is applied
first with respect to disqualified basis of a particular item of
specified property, then with respect to another item of specified
property, and so on.
2. Timing Rules for Determining and Reducing Disqualified Basis
For purposes of applying the DQB reduction rule for a taxable year
of a section 245A shareholder, disqualified basis of an item of
specified property is determined as of the beginning of the taxable
year of the CFC holding the item that includes the date on which the
section 245A shareholder's taxable year ends (and, to avoid circularity
issues, without regard to any reductions to disqualified basis of the
item of specified property pursuant to the DQB reduction rule for such
taxable year of the CFC). See proposed Sec. 1.245A-9(b)(2)(i). Then,
disqualified basis of the item of specified property is reduced as of
the beginning of the taxable year of the CFC. See proposed Sec.
1.245A-9(b)(2)(ii). Thus, for example, disqualified basis of an item of
specified property is reduced before any depreciation, amortization, or
other cost recovery deduction allowances attributable to the basis of
the item are determined for the CFC's taxable year.
B. The EDA Reduction Rule
1. In General
The EDA reduction rule provides that when items of deduction or
loss attributable to disqualified basis of an item of specified
property are allocated and apportioned to residual CFC gross income of
a CFC and have the effect of reducing certain E&P of the CFC that could
otherwise potentially qualify for the section 245A deduction when
distributed, the extraordinary disposition account to which the
specified property corresponds is reduced by up to the same amount. See
proposed Sec. 1.245A-7(c)(1). This rule is generally intended to
ensure that as the application of the disqualified basis rule results
in income of the CFC being indirectly taxed to a section 245A
shareholder (or a related party that is a domestic corporation, a
``domestic affiliate'') and a reduction in the E&P of the CFC available
to be distributed to the section 245A shareholder and any domestic
affiliates as a dividend to which the section 245A deduction could be
available if distributed, the extraordinary disposition rule no longer
applies to E&P attributable to gain to which the disqualified basis is
also attributable. Requiring reduction in the capacity to pay dividends
for which the section 245A deduction could be available if the E&P were
distributed ensures that the EDA reduction rule applies only once the
disqualified basis rule has resulted in a tax detriment to the section
245A shareholder (or a domestic affiliate). To the extent that there
has not been a reduction in the CFC's capacity to pay dividends for
which the section 245A deduction could be available if the E&P were
distributed, the disqualified basis rule might generally not give rise
to a tax detriment to the section 245A shareholder (or a domestic
affiliate). This is because the section 245A shareholder's (or domestic
affiliate's) basis in its stock of the CFC is generally increased under
section 961 by the amount of the income indirectly taxed to the section
245A shareholder (or a domestic affiliate). Such basis increase is, for
example, available to reduce gain that would otherwise be recognized on
a disposition of stock of the CFC (including gain that would be taxed
at the full corporate tax rate even though, for instance, the basis
increase is attributable to an inclusion under section 951A that in
effect is taxed at a preferential rate).
More specifically, for a taxable year of a CFC, a section 245A
shareholder's extraordinary disposition account is generally reduced by
the lesser of two amounts. See proposed Sec. 1.245A-7(c)(1). The first
amount is intended to approximate in an administrable manner the extent
to which the disqualified basis rule (by reason of the allocation and
apportionment of items of deduction or loss to residual CFC gross
income of the CFC) reduced the E&P of the CFC available to be
distributed to the section 245A shareholder and any domestic affiliates
as a dividend to which the section 245A deduction could be available.
See proposed Sec. 1.245A-7(c)(1)(i). In order to reduce administrative
and compliance burdens, the proposed regulations disregard the holding
period requirement of section 246(c) for purposes of determining if a
section 245A deduction would be available if E&P were distributed. To
compute the first amount, the CFC's E&P at the end of the taxable year
are determined, taking into account distributions during the taxable
year. Then, those E&P are adjusted, including by generally increasing
the E&P by items of deduction or loss that are or have been allocated
to residual CFC gross income of the CFC solely by reason of the
disqualified basis rule (``adjusted earnings''). See proposed Sec.
1.245A-7(c)(3). Lastly, the adjusted earnings are reduced by the sum of
the previously taxed earnings and profits accounts with respect to the
CFC under section 959 (taking into account any adjustments to the
accounts for the taxable year) in order to reflect that an amount equal
to such sum would not have been eligible for the section 245A deduction
were it distributed by the CFC to the section 245A shareholder and any
domestic affiliates. See proposed Sec. 1.245A-7(c)(1)(i).
The second amount necessary to determine the reduction in a section
245A shareholder's extraordinary disposition account is the balance of
the section 245A shareholder's residual gross income account (``RGI
account'') with respect to the CFC. See proposed Sec. 1.245A-
7(c)(1)(ii). The balance of the RGI account generally reflects items of
deduction or loss allocated and apportioned to residual CFC gross
income of the CFC solely by reason of the disqualified basis rule, to
the extent that the allocation and apportionment is likely to increase
income of the CFC that is subject to U.S. taxation at the level of the
section 245A shareholder and any domestic affiliates pursuant to
section 951 or 951A. See proposed Sec. 1.245A-7(c)(4)(i). Tracking
such items of deduction or loss through an account mechanism allows for
a reduction under, and facilitates compliance with, the EDA reduction
rule in certain cases--for example, a case in which a CFC does not have
any adjusted earnings for its taxable year in which items of deduction
or loss are allocated and apportioned to residual CFC gross income
(such that there cannot be a reduction under the EDA reduction rule to
the section 245A shareholder's extraordinary disposition account that
year) but in a later taxable year has sufficient adjusted earnings to
allow for a reduction.
2. Timing Rules for Reducing an Extraordinary Disposition Account
A reduction to an extraordinary disposition account of a section
245A
[[Page 53102]]
shareholder by reason of the application of the EDA reduction rule with
respect to a taxable year of the CFC occurs as of the end of the
taxable year of the section 245A shareholder that includes the date on
which the CFC's taxable year ends (and, for example, after the
determination of any extraordinary disposition amounts or tiered
extraordinary disposition amounts for the taxable year). See proposed
Sec. 1.245A-9(b)(3). Thus, a reduction to a section 245A shareholder's
extraordinary disposition account under the EDA reduction rule occurs
after the application of the DQB reduction rule for the taxable year of
the section 245A shareholder. See id. Absent such an approach, there
could be circularity issues because the computation of a reduction
under one rule might depend on an amount that is potentially affected
by the other rule, and it would be unclear which rule applies first.
Applying the EDA reduction rule at the end of a taxable year also
ensures that it applies after the full effect of the disqualified basis
rule has been taken into account for the year.
III. Rules for Complex Cases
A. The DQB Reduction Rule
1. In General
The version of the DQB reduction rule for complex cases uses the
same architecture as the version of the rule for simple cases but
provides additional rules to address scenarios in which the conditions
provided in proposed Sec. 1.245A-6(b)(1) and (2) are not satisfied.
See proposed Sec. 1.245A-8. For example, the version for complex cases
addresses scenarios in which, after the extraordinary disposition of an
item of specified property, the item is transferred to another person
(whether the transfer is taxable or non-taxable). See proposed Sec.
1.245A-6(b)(2).
2. Ownership Requirement
To address the possibility that an item of specified property may
have been transferred after the extraordinary disposition (with the
result that the section 245A shareholder or a related party may not
directly or indirectly own an interest in the item), the version of the
DQB reduction rule for complex cases provides that an ownership
requirement must be satisfied for disqualified basis of an item of
specified property to be eligible for relief under the DQB reduction
rule. See proposed Sec. 1.245A-8(b)(1) and (3). The ownership
requirement is intended to ensure that the DQB reduction rule applies
with respect to an item of specified property only if it is likely that
the section 245A shareholder (or the section 245A shareholder and a
related party) would be meaningfully affected by the application of the
disqualified basis rule as to the item of specified property, such
that, absent the DQB reduction rule, the extraordinary disposition rule
and the disqualified basis rule would, when applied together, result in
meaningful excess taxation as to the section 245A shareholder (or the
section 245A shareholder and a related party). In addition, the
ownership requirement is intended to ensure that the DQB reduction rule
takes into account only disqualified bases of items of specified
property for which the section 245A shareholder can reasonably be
expected to have or obtain the necessary information to accurately
apply the DQB reduction rule.
The ownership requirement is satisfied with respect to an item of
specified property if, on one or more days during the taxable year of
the section 245A shareholder, the item is held by the section 245A
shareholder, a related party, or a specified entity in which the
section 245A shareholder or a related party owns directly or indirectly
at least a 10-percent interest. See proposed Sec. 1.245A-8(b)(3). As a
result, the DQB reduction rule can apply to, for example, an item of
specified property that is sold at a loss by a CFC of the section 245A
shareholder to a third party on any day that falls within the taxable
year of the section 245A shareholder, such that a reduced portion of
the CFC's loss will be attributable to disqualified basis and thus
subject to the disqualified basis rule for the CFC's taxable year. As
an additional example, the DQB rule can also apply to an item of
specified property that is held by a CFC of the section 245A
shareholder all the stock of which is sold by the section 245A
shareholder to a third party on any day that falls within the taxable
year of the section 245A shareholder, such that a reduced portion of
the CFC's amortization deductions with respect to the specified
property for its taxable year that includes the sale and its subsequent
taxable years will be subject to the disqualified basis rule.
3. Basis Benefit Amounts
i. In General
In certain cases in which an item of specified property with
disqualified basis is transferred after the extraordinary disposition
of the item, the extraordinary disposition rule and the disqualified
basis rule, when applied together, do not give rise to excess taxation
as to a section 245A shareholder (or as to the section 245A shareholder
and a related party). This may occur, for example, if the section 245A
shareholder ``benefits'' from the disqualified basis of the item of
specified property pursuant to a transaction that is not subject to the
disqualified basis rule, such as through a sale of the item by a CFC of
the section 245A shareholder to an unrelated person at a gain (with the
result that, but for the use of the disqualified basis, the CFC would
have had a greater amount of gain that would have been taken into
account in computing the CFC's tested income). In such a case, the DQB
reduction rule need not apply to an amount of the section 245A
shareholder's extraordinary disposition account equal to the amount of
the disqualified basis benefit. See proposed Sec. 1.245A-10(c)(2)
(Example 2).
To address these situations, the proposed regulations provide that,
for a taxable year of a section 245A shareholder, the amount of the
reduction to disqualified bases under the DQB reduction rule is equal
to the sum of the extraordinary disposition amounts or tiered
extraordinary disposition amounts for the taxable year, less the
balance of the section 245A shareholder's ``basis benefit account''
with respect to the extraordinary disposition account. See proposed
Sec. 1.245A-8(b)(1). A basis benefit account with respect to an
extraordinary disposition account generally reflects the extent to
which the disqualified basis of one or more items of specified property
that correspond to the extraordinary disposition account has been used
to offset or reduce income subject to U.S. tax (the use of disqualified
basis to such an extent, a ``basis benefit amount''). See proposed
Sec. 1.245A-8(b)(4)(ii).
For these purposes, the use of disqualified basis by a U.S. tax
resident to offset or reduce taxable income, or the use of disqualified
basis by a foreign person (including a CFC) to offset or reduce income
effectively connected with a trade or business in the United States
(``ECTI''), is always considered to offset or reduce income subject to
U.S. tax. See proposed Sec. 1.245A-8(b)(4)(ii). As an example, in the
case of an item of specified property that is held by a U.S. tax
resident and that has disqualified basis by reason of the application
of Sec. 1.951A-3(h)(2)(ii)(B)(1)(ii) to a previous transfer of the
item of specified property by a related CFC to the U.S. tax resident,
there is a basis benefit amount equal to the portion of the
disqualified basis that gives rise to an item of depreciation or
amortization of the U.S. tax resident for a taxable year of the U.S.
tax resident.
[[Page 53103]]
However, the use of disqualified basis by a CFC to offset or reduce
income taken into account in computing subpart F income, tested income,
or tested loss is considered to offset or reduce income subject to U.S.
tax only if the CFC is described in Sec. 1.267A-5(a)(17) and thus a
meaningful portion of the CFC's income is indirectly subject to current
U.S. tax. See id.
Disqualified basis can be used to reduce or offset income subject
to U.S. tax regardless of whether the disqualified basis is reduced or
eliminated under Sec. 1.951A-3(h)(2)(ii)(B)(1). For example, in a case
in which a CFC sells an item of specified property with disqualified
basis to a related CFC, the rule of Sec. 1.951A-3(h)(2)(ii)(B)(1)
generally does not prevent the disqualified basis from reducing or
offsetting income subject to U.S. tax (for instance, income from the
sale that but for the use of the disqualified basis would have been
taken into account in computing the seller CFC's tested income), even
though the buyer CFC succeeds to the disqualified basis under the rule.
Thus, the proposed regulations provide that a basis benefit amount can
be created from the use of disqualified basis regardless of whether the
disqualified basis is reduced or eliminated as a result. See proposed
Sec. 1.245A-8(b)(4)(ii)(B); see also proposed Sec. 1.245A-
8(b)(4)(iii)(B) (anti-duplication rule to address cases in which
disqualified basis gives rise a basis benefit amount but is not
eliminated or reduced).
Further, the proposed regulations provide certain timing rules
regarding when the use of disqualified basis gives rise to a basis
benefit amount. See proposed Sec. 1.245A-8(b)(4)(ii)(C). For example,
if an item of deduction or loss arising from the use of disqualified
basis is deferred under section 267(a)(2), then the determination of
whether a basis benefit amount arises is made when, in a later taxable
year, the deduction or loss is no longer deferred. Similarly, if an
item of deduction or loss arising from the use of disqualified basis of
an item of specified property is disallowed under section 267(a)(1),
then a basis benefit amount would arise when and to the extent that
gain is reduced on the sale of that specified property (or other
property with basis determined by reference to that specified property)
under section 267(d) in the hands of certain persons whose income is
directly or indirectly subject to U.S. tax.
ii. Adjustments to a Basis Benefit Account
A basis benefit account is adjusted at the end of each taxable year
of a section 245A shareholder. See proposed Sec. 1.245A-8(b)(4)(i).
Generally, the basis benefit account is increased by a basis benefit
amount with respect to an item of specified property that corresponds
to the extraordinary disposition account, provided that the basis
benefit amount is assigned to the taxable year of the section 245A
shareholder. See proposed Sec. 1.245A-8(b)(4)(i)(A). However, in the
case in which the extraordinary disposition ownership percentage with
respect to the extraordinary disposition account is less than 100
percent (such that the initial balance of the extraordinary disposition
account reflects only a portion of the gain from the extraordinary
disposition of the item of specified property), only the same ratable
portion of the basis benefit amount may increase the basis benefit
account. See id.
A basis benefit amount with respect to an item of specified
property is assigned to a taxable year of a section 245A shareholder if
two conditions are satisfied. See proposed Sec. 1.245A-8(b)(4)(iii).
First, the ownership requirement described in part III.A.2 of this
Explanation of Provisions must be satisfied with respect to the item of
specified property. As a result of this first condition, a basis
benefit amount is assigned to a taxable year of a section 245A
shareholder (and thus only limits a potential reduction under the DQB
reduction rule) only if the use of the disqualified basis giving rise
to the basis benefit amount provides a meaningful benefit to the
section 245A shareholder or a related party. This first condition is
also intended to ensure that the section 245A shareholder can
reasonably be expected to obtain information about the item of
specified property necessary to accurately calculate and reflect the
basis benefit amount. Second, the use of the disqualified basis must
occur in the section 245A shareholder's taxable year (in a case in
which the section 245A shareholder is the person that uses the
disqualified basis) or a taxable year of a person ending with or
within--or in certain cases, beginning with or within--the taxable year
of the section 245A shareholder (in a case in which the section 245A
shareholder is not the person that uses the disqualified basis). As a
result of these assignment rules, in a case in which a CFC of a section
245A shareholder holds an item of specified property and the CFC sells
the item of specified property (or the section 245A shareholder sells
all of the stock of the CFC) to a third party on a day that falls
within the taxable year of the section 245A shareholder, a use by the
CFC of disqualified basis of the specified property to generate a basis
benefit amount on a day that falls within the same taxable year of the
section 245A shareholder is generally assigned to such taxable year of
the section 245A shareholder.
Further, at the end of each taxable year of a section 245A
shareholder, the balance of a basis benefit account is decreased to the
extent that the basis benefit account limits a reduction under the DQB
reduction rule. See proposed Sec. 1.245A-8(b)(4)(i)(B).
4. Timing Rules for Determining and Reducing Disqualified Basis
To address the possibility that an item of specified property may
be held by a person other than a CFC, the timing rules for purposes of
the version of the DQB reduction rule for complex cases provide that
disqualified basis of an item of specified property is generally
determined and reduced as of the beginning of the taxable year of the
``specified property owner'' of the item. See proposed Sec. 1.245A-
9(b)(2)(i) and (ii). The specified property owner of an item of
specified property is generally the person that held the item of
specified property on at least one day during the taxable year of the
person that includes the date on which the section 245A shareholder's
taxable year ends. See proposed Sec. 1.245A-9(b)(2)(iii).
In addition, to address cases in which, absent a special rule, two
or more persons might be considered the specified property owner, a
special rule provides that in such cases the specified property owner
is the person that held the item of specified property on the earliest
date that falls within the section 245A shareholder's taxable year. See
Sec. 1.245A-9(b)(2)(iii) (last sentence). Thus, for example, if a CFC
(``CFC1'') transfers an item of specified property to another CFC
(``CFC2'') on a date that falls within the taxable year of a section
245A shareholder and the taxable year of each of CFC1 and CFC2 includes
the day of the close of the taxable year of the section 245A
shareholder, then CFC1 (and not CFC2) would be the specified property
owner for purposes of applying the DQB reduction rule for the taxable
year of the section 245A shareholder.
B. The EDA Reduction Rule
1. In General
The version of the EDA reduction rule for complex cases uses the
same architecture as the version of the rule for
[[Page 53104]]
simple cases but provides additional rules to address scenarios in
which the conditions provided in Sec. 1.245A-6(b) are not satisfied.
See proposed Sec. 1.245A-8. For example, the version for complex cases
addresses scenarios in which the CFC that holds an item of specified
property that corresponds to an extraordinary disposition account of a
section 245A shareholder is not wholly-owned by the section 245A
shareholder and any domestic affiliates, or the CFC also holds an item
of specified property that corresponds to another extraordinary
disposition account. See proposed Sec. 1.245A-6(b)(2).
2. Computing the Reduction in Certain Dividend-Paying Capacity of a CFC
As discussed in II.B.1 of this Explanation of Provisions, the EDA
reduction rule depends in part on the extent to which the disqualified
basis rule has, as to a CFC that holds items of specified property that
correspond to an extraordinary disposition account of a section 245A
shareholder with respect to an SFC, reduced E&P of the CFC available to
be distributed to the section 245A shareholder and any domestic
affiliates as a dividend to which the section 245A deduction could be
available. The EDA reduction rule for complex cases provides several
additional rules for purposes of measuring this reduction to the CFC's
capacity to pay dividends eligible for the section 245A deduction, to
address the possibility that the section 245A shareholder and any
domestic affiliates may not own all of the stock of the CFC (including
because the section 245A shareholder or a domestic affiliate disposed
of stock of the CFC during the CFC's taxable year) as well as other
issues.
First, the version for complex cases provides an ownership
requirement pursuant to which, for the section 245A shareholder's
extraordinary disposition account to be reduced by reason of the
application of the EDA reduction rule with respect to a taxable year of
the CFC, the section 245A shareholder (or a domestic affiliate) must,
on the last day of the CFC's taxable year, be a United States
shareholder with respect to the CFC. See proposed Sec. 1.245A-8(c)(1)
and (3). The ownership requirement is measured on the last day of a
CFC's taxable year because the EDA reduction rule depends on a section
245A shareholder's portion of the CFC's adjusted earnings, which are
measured on an annual basis.
Second, the version for complex cases provides special rules for
deficits of the CFC subject to Sec. 1.381(c)(2)-1(a)(5). See proposed
Sec. 1.245A-8(c)(3). These rules generally provide that the CFC's
adjusted earnings are determined by not taking into account these
deficits in determining E&P because, in general, the deficits do not
affect or limit the CFC's ability to distribute its other E&P as a
dividend. In addition, for purposes of determining a CFC's adjusted
earnings, the CFC's E&P are reduced by the amount of items of deduction
or loss that are attributable to disqualified basis and that give or
have given rise to a deficit subject to Sec. 1.381(c)(2)-1(a)(5). This
is because the application of the disqualified basis rule to these
items has not affected or limited the CFC's ability to distribute
certain earnings as a dividend and reducing the CFC's E&P by the amount
of the items generally ensures that the application of the disqualified
basis rule to these items does not give rise to relief under the EDA
reduction rule. A CFC could have a deficit subject to Sec.
1.381(c)(2)-1(a)(5) and comprised of items of deduction or loss
attributable to disqualified basis if, for example, the CFC acquired in
a transaction subject to section 381 the assets of another CFC that
held items of specified property with disqualified basis.
Third, the version for complex cases provides a rule that allocates
the CFC's adjusted earnings to the section 245A shareholder, based on
the percentage of stock of the CFC that the section 245A shareholder
and any domestic affiliates own. See proposed Sec. 1.245A-
8(c)(1)(i)(A). This allocation serves as a proxy for measuring the
portion of the adjusted earnings of the CFC that the section 245A
shareholder and any domestic affiliates would receive if the CFC were
to distribute all of its adjusted earnings to its shareholders. The
adjusted earnings as so allocated to a section 245A shareholder are
further adjusted to reflect certain previously taxed earnings and
profits accounts with respect to the CFC, certain hybrid deduction
accounts with respect to shares of stock of the CFC, and the balance of
any extraordinary disposition accounts with respect to the CFC (other
than, in general and as illustrated in part III.B.6 of this Explanation
of Provisions, the portion of the balance of an extraordinary
disposition account with respect to the CFC that, by reason of a merger
or similar transaction of the SFC into the CFC or vice versa, is
attributable to an extraordinary disposition account with respect to
the SFC). The end result is intended to measure the extent to which the
disqualified basis rule has reduced E&P of the CFC available to be
distributed to the section 245A shareholder and any domestic affiliates
as a dividend to which the section 245A deduction could be available.
3. Computing the Increase to an RGI Account
As discussed in part II.B.1 of this Explanation of Provisions, the
EDA reduction rule depends in part on the balance of a section 245A
shareholder's RGI account with respect to a CFC. The EDA reduction rule
for complex cases provides several additional rules for purposes of
computing an increase to a section 245A shareholder's RGI account with
respect to a CFC. See proposed Sec. 1.245A-8(c)(4).
First, to address the possibility that the CFC may hold multiple
items of specified property, some of which correspond to an
extraordinary disposition account of the section 245A shareholder and
others of which correspond to another extraordinary disposition account
(or to no extraordinary disposition account), the rule for complex
cases provides that the section 245A shareholder's RGI account can be
increased only by items of deduction or loss (to which the disqualified
basis rule applies) that are attributable to disqualified basis of an
item of specified property that corresponds to the section 245A
shareholder's extraordinary disposition account. See proposed Sec.
1.245A-8(c)(4)(i)(A)(1)(i). In addition, in cases in which the section
245A shareholder owned less than all of the stock of the SFC when the
SFC undertook an extraordinary disposition (such that the extraordinary
disposition ownership percentage as to the section 245A shareholder's
extraordinary disposition account with respect to the SFC is less than
100 percent), the section 245A shareholder's RGI account can be
increased by only the same ratable portion of the items of deduction or
loss. See proposed Sec. 1.245A-8(c)(4)(i)(A)(2)(ii). These rules
ensure that a reduction under the EDA reduction rule to the section
245A shareholder's extraordinary disposition account can occur only by
reason of the application of the disqualified basis rule to the portion
of disqualified basis of an item of specified property that is
attributable to gain to which the extraordinary disposition account is
also attributable.
Further, to address the possibility that the section 245A
shareholder and any domestic affiliates may not own all of the stock of
the CFC holding items of specified property that correspond to an
extraordinary disposition account of the section 245A shareholder, a
limit applies regarding the extent to which an
[[Page 53105]]
item of deduction or loss (or portion thereof) may increase the section
245A shareholder's RGI account. See proposed Sec. 1.245A-
8(c)(4)(i)(A)(2). The limit is generally based on the portion of the
CFC's subpart F income or tested income taken into account by the
section 245A shareholders and any domestic affiliates under section 951
or 951A. See proposed Sec. 1.245A-8(c)(4)(i)(A)(2)(i). This limit
ensures that a reduction under the EDA reduction rule to the section
245A shareholder's extraordinary disposition account can occur only to
the extent that the application of the disqualified basis rule has
likely increased income of the CFC that is subject to U.S. taxation at
the level of the section 245A shareholder and any domestic affiliates.
4. Allocating Certain Reductions Among Extraordinary Disposition
Accounts
Because a reduction under the EDA reduction rule to an
extraordinary disposition account may be a function of certain adjusted
earnings of a CFC (that is, an amount that is not with respect to the
extraordinary disposition account), absent a special rule in certain
complex cases, the adjusted earnings could give rise to a reduction to
two or more extraordinary disposition accounts that, in aggregate,
exceeds the adjusted earnings. This could occur, for example, in a case
in which a section 245A shareholder has two extraordinary disposition
accounts (that is, an extraordinary disposition account with respect to
two SFCs) and owns all the stock of a CFC, which, in turn, owns the
items of specified property that correspond to each of the
extraordinary disposition accounts. In that case the aggregate amount
of reductions to the extraordinary disposition accounts could exceed
the extent to which the application of the disqualified basis rule has,
as measured by certain adjusted earnings of the CFC allocated to the
section 245A shareholder, reduced the earnings of the CFC available to
be distributed to the section 245A shareholder as a dividend to which
the section 245A deduction could apply. To address these cases, the
proposed regulations provide a rule that limits the aggregate
reductions to extraordinary disposition accounts by reason of the
application of the EDA reduction rule with respect to a taxable year of
a CFC to certain adjusted earnings of the CFC. See proposed Sec.
1.245A-8(c)(6). The proposed regulations also provide an example
illustrating this rule. See proposed Sec. 1.245A-10(c)(3)(iv).
Finally, the proposed regulations provide a rule that prevents an
extraordinary disposition account from being reduced below the balance
of the basis benefit account that relates to the extraordinary
disposition account. See proposed Sec. 1.245A-8(c)(7). This limitation
may occur if extraordinary disposition E&P (and therefore the initial
balance of the extraordinary disposition account) reflect losses
recognized with respect to one or more items of specified property
transferred in the extraordinary disposition.
5. Certain Items of Property Treated as Items of Specified Property
That Correspond to an Extraordinary Disposition Account
In certain complex cases, an item of property may have disqualified
basis even though the item itself was not transferred as part of an
extraordinary disposition. For example, a share of stock may have
disqualified basis if the share was received in exchange for an item of
specified property with disqualified basis in a transaction to which
section 351 applies. See Sec. 1.951A-3(h)(2)(ii)(B)(2)(ii). Absent
special rules, the share of stock would not correspond to an
extraordinary disposition account of a section 245A shareholder and
thus, for example, the disqualified basis of the share of stock could
not be reduced under the DQB reduction rule.
The proposed regulations provide special rules to address this and
similar issues. For instance, the proposed regulations provide that
certain items of property that have disqualified basis by reason of
Sec. 1.951A-3(h)(2)(ii)(B)(2)(i) (increase corresponding to
adjustments in other property), (ii) (exchanged basis property), or
(iii) (increase by reason of section 732(d)) are generally treated as
items of specified property that correspond to an extraordinary
disposition account of a section 245A shareholder. See proposed Sec.
1.245A-8(d). As a result, the disqualified basis of such items of
property may be reduced under the DQB reduction rule, and items of
deduction and loss attributable to such disqualified basis and
allocated and apportioned to residual CFC gross income of a CFC may
give rise to a reduction to an extraordinary disposition account under
the EDA reduction rule.
The proposed regulations also include an anti-duplication rule to
ensure that disqualified basis of an item of specified property, as
well as disqualified basis of another item of property attributable to
that disqualified basis (``duplicate DQB''), are not both taken into
account for purposes of the DQB reduction rule, as taking into account
both amounts of disqualified basis could inappropriately limit the
reductions under the DQB reduction rule. See proposed Sec. 1.245A-
8(b)(5)(i)(A). In addition, to the extent that, pursuant to the anti-
duplication rule, duplicate DQB is not taken into account for purposes
of the DQB reduction, the duplicate DQB is generally reduced to the
same extent that the disqualified basis of the item of specified
property to which the duplicate DQB is attributable is reduced. See
proposed Sec. Sec. 1.245A-8(b)(5)(i)(B) and 1.245A-10(c)(5) (Example
5).
As an example of the application of these special rules, consider a
case in which a single item of specified property (``Item A'')
corresponds to an extraordinary disposition account of a section 245A
shareholder, and Item A is transferred, in a transaction to which
section 351 applies, in exchange for a share of stock (``Item B''). In
addition, assume that the extraordinary disposition account gives rise
to a $10x extraordinary disposition amount and that, at that time, Item
A has $10x of disqualified basis and Item B also has $10x of
disqualified basis (all of which is attributable to the disqualified
basis of Item A). Here, Item B is considered an item of specified
property that corresponds to the extraordinarily disposition account,
but generally only the disqualified basis of Item A is taken into
account for purposes of the DQB reduction rule, with the result that
the entire $10x reduction under the DQB reduction rule is allocated to
Item A (such that Item A's disqualified basis is reduced by $10x).
However, pursuant to the special rule of proposed Sec. 1.245A-
8(b)(5)(i)(B), Item B's disqualified basis is then reduced by the same
amount.
6. Extraordinary Disposition Account Adjusted Pursuant to Successor
Rules Under Sec. 1.245A-5(c)(4)
In certain complex cases, an extraordinary disposition account of a
section 245A shareholder may be adjusted pursuant to the rules of Sec.
1.245A-5(c)(4), with the result, for example, that another section 245A
shareholder succeeds to a portion of the extraordinary disposition
account or a portion of the extraordinary disposition account is
attributed to another extraordinary disposition account. The proposed
regulations provide two sets of special rules to address these cases.
First, in cases in which a portion of an extraordinary disposition
account is attributed (the ``attributed account'') to another
extraordinary disposition account (the ``successor account''), the
proposed regulations ensure that the disqualified bases of the items of
specified property that correspond to the attributed account are
eligible to be
[[Page 53106]]
reduced under the DQB reduction rule by reason of an amount in the
successor account that gives rise to an extraordinary deposition amount
or tiered extraordinary disposition amount, to the extent attributable
to the attributed account. See proposed Sec. 1.245A-8(e)(1). This rule
also ensures that the successor account, to the extent attributable to
the attributed account, may be reduced under the EDA reduction rule by
reason of an allocation and apportionment of an item of deduction or
loss attributable to disqualified basis of an item of specified
property that corresponds to the attributed account. See id. This rule
ensures these results by treating the attributed account and successor
account as separate extraordinary disposition accounts for purposes of
the proposed regulations. See id.
As an example of this rule, consider a case in which US1, a
domestic corporation, owns all of the stock of CFC1, a CFC as to which
US1 has an extraordinary disposition account with a $40x balance (the
``CFC1 EDA''), and CFC2, a CFC as to which US1 has an extraordinary
disposition account with a $60x balance (the ``CFC2 EDA''). If CFC1
were to merge into CFC2 and thus under the rules of Sec. 1.245A-
5(c)(4) the $40x balance of the CFC1 EDA were attributed to the CFC2
EDA (such that the balance of the CFC2 EDA would become $100x), then
$40x of the $100x balance of the CFC2 EDA would be treated for purposes
of the proposed regulations as an extraordinary disposition account
with respect to CFC1 (the CFC2 EDA to such extent, the ``deemed CFC1
EDA''), even though CFC1 would no longer be in existence. As a result,
after the merger, the deemed CFC1 EDA would, by reason of the
application of the EDA reduction rule to a taxable year of CFC2,
generally be reduced by the lesser of (i) the adjusted earnings of
CFC2, less the balance of (a) the previously taxed earnings and profits
accounts with respect to CFC2, (b) the hybrid deduction accounts with
respect to shares of stock of the CFC2, (c) the balance of the CFC2 EDA
(but not including the portion of the balance of the CFC2 EDA that is
treated as the deemed CFC1 EDA), to the extent taken into account as
described in proposed Sec. 1.245A-8(c)(1)(i)(B)(3), and (d) the
balance of the deemed CFC1 EDA, to the extent taken into account as
described in proposed Sec. 1.245A-8(c)(1)(i)(B)(3); and (ii) the
balance of the RGI account (if any) with respect to CFC2 that relates
to the deemed CFC1 EDA.
Second, special rules address the extraordinary disposition
ownership percentage. As discussed in parts III.A.3.i and III.B.3 of
this Explanation of Provisions, the DQB reduction rule and the EDA
reduction rule take into account the extraordinary disposition
ownership percentage as to a section 245A shareholder's extraordinary
disposition account, which generally represents the portion of gain on
the extraordinary disposition of an item of specified property that is
reflected in the initial balance of the extraordinary disposition
account. Special rules ensure, after an extraordinary disposition
account is adjusted pursuant to Sec. 1.245A-5(c)(4), the extraordinary
disposition ownership percentage continues to accurately reflect the
portion of gain that is reflected in the (adjusted) balance of the
extraordinary disposition account. See proposed Sec. 1.245A-8(e)(1)
and (2).
As an example of the application of these special rules regarding
the extraordinary disposition ownership percentage, consider a case
which the extraordinary disposition ownership percentage as to a
section 245A shareholder's extraordinary disposition account with
respect to an SFC (``EDA 1'') is 80 percent, and by reason of Sec.
1.245A-5(c)(4)(i) another section 245A shareholder (that did not
previously have an extraordinary disposition account with respect to
the SFC) succeeds to a portion of EDA 1 equal to 40 percent of the
balance of EDA 1 (the portion of EDA 1 to which the other section 245A
shareholder succeeds, ``EDA 2''). Here, the extraordinary disposition
ownership percentage as to EDA 1 is thereafter 48 percent for purposes
of the proposed regulations (80%, less 80% multiplied by 40%), and the
extraordinary disposition ownership percentage as to EDA 2 is 32
percent for purposes of the proposed regulations (80% multiplied by
40%). As an additional example, if in the example in the previous
sentence the other section 245A shareholder instead had an
extraordinary disposition account with respect to the SFC and the
extraordinary disposition ownership percentage as to such extraordinary
disposition account was 20 percent (``EDA 2''), then, pursuant to
proposed Sec. 1.245A-8(e)(1), the extraordinary disposition ownership
percentage as to EDA 2 would become 52 percent for purposes of the
proposed regulations (20%, plus the product of 80% and 40%).
IV. Other Rules
A. Coordination With Disqualified Payment Rule
The coordination mechanism of the proposed regulations also applies
to cases in which a prepayment during the disqualified period gives
rise to extraordinary disposition E&P of an SFC under the anti-
avoidance rule of Sec. 1.245A-5(h) and items of deduction or loss of a
CFC are allocated and apportioned to residual CFC gross income under
the disqualified payment rule. See proposed Sec. 1.245A-5(j)(8)
(Example 7). The coordination mechanism generally applies in the same
manner as if the disqualified payment had given rise to disqualified
basis of an item of specified property that corresponds to the
extraordinary disposition account. See id.
B. Currency Translation Rules
Accounts created under the proposed regulations are maintained in
the functional currency of the items to which they relate. See proposed
Sec. 1.245A-9(b)(4). Therefore, a basis benefit account is maintained
in the same functional currency as the extraordinary disposition
account to which it relates. Similarly, an RGI account is maintained in
the functional currency of the CFC whose allocations to residual CFC
gross income are being measured and tracked by that account.
The application of the DQB reduction rule and the EDA reduction
rule may also require currency translation because these rules require
amounts determined in the functional currency of one person to be
applied to reduce attributes of another person that may have a
different functional currency. In this regard, the proposed regulations
provide that the disqualified basis of, and a basis benefit amount with
respect to, an item of specified property that corresponds to an
extraordinary disposition account are translated into the functional
currency in which the extraordinary disposition account is maintained,
using the spot rate on the date the extraordinary disposition occurred.
See proposed Sec. 1.245A-9(b)(4). Moreover, proposed Sec. 1.245A-
9(b)(4) provides that a reduction in disqualified basis of an item of
specified property under the DQB reduction rule is translated into the
functional currency in which the disqualified basis of the item of
specified property is maintained, and reductions in an extraordinary
disposition account are translated into the functional currency in
which the extraordinary disposition account is maintained, in each case
using the spot rate on the date the associated extraordinary
disposition occurred.
C. Anti-Avoidance Rule
Proposed Sec. 1.245A-9(b)(5) contains an anti-avoidance rule
providing that appropriate adjustments are made if a
[[Page 53107]]
transaction or arrangement is engaged in with a principal purpose of
avoiding the purposes of these proposed regulations. As an example, the
anti-avoidance rule applies if a section 245A shareholder causes its
taxable year to end on a particular date with a principal purpose of
avoiding a basis benefit amount from being assigned to that taxable
year.
D. Existing Election To Eliminate Disqualified Basis
Taxpayers may have elected to reduce an item of specified
property's adjusted basis (and thus eliminate the item's disqualified
basis) pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(3) (a ``basis
elimination election'') before the proposed regulations were issued. In
certain cases, the proposed regulations once finalized may provide more
favorable outcomes for taxpayers than a basis elimination election.
Therefore, the proposed regulations permit taxpayers to revoke a basis
elimination election during a transition period, which under the
proposed regulations is 90 days after the proposed regulations are
finalized. See proposed Sec. 1.245A-9(c)(1). This transition period is
intended to provide a taxpayer sufficient time to consider whether it
would prefer a basis elimination election or to apply the rules of the
proposed regulations. The proposed regulations set forth the procedures
for revoking a basis elimination election. See proposed Sec. 1.245A-
9(c)(1) and (2). These procedures require a taxpayer to file a
revocation statement, as well as amended returns reflecting the
revocation of the election. See id.
V. Applicability Dates
The proposed regulations are proposed to apply to taxable years of
foreign corporations beginning on or after the date of publication of
the Treasury decision adopting these rules as final regulations in the
Federal Register (the ``finalization date''), and to taxable years of a
U.S. person in which or with which such taxable years of foreign
corporations end. See proposed Sec. 1.245A-11(a). For taxable years
beginning before the finalization date, a taxpayer may apply the rules
set forth in the final regulations, provided that the taxpayer and all
related parties consistently apply the rules to those taxable years.
See proposed Sec. 1.245A-11(b); see also section 7805(b)(7).
VI. Comment Requests
The Treasury Department and the IRS request comments on all aspects
of the proposed regulations. In addition, comments are specifically
requested on the issues discussed below.
A. The DQB Reduction Rule
The DQB reduction rule applies only if a distribution gives rise to
an extraordinary disposition amount or a tiered extraordinary
disposition amount. The Treasury Department and the IRS are considering
whether the DQB reduction rule should apply by reason of a prior
extraordinary disposition amount described in Sec. 1.245A-
5(c)(3)(D)(i) through (iv), such that disqualified basis of an item of
specified property would be reduced to the same extent a reduction
would occur under the DQB reduction rule were the prior extraordinary
disposition amount an extraordinary disposition amount or tiered
extraordinary disposition amount. For example, an investment in United
States property subject to sections 951(a)(1)(B) and 956(a) and Sec.
1.956-1(a)(2) may give rise to a prior extraordinary disposition amount
under Sec. 1.245A-5(c)(3)(i)(D)(1)(iv). As an additional example,
prior dividends that would have been subject to Sec. 1.245A-5(c) but
failed to qualify for the section 245A deduction because they did not
satisfy the requirement that the recipient domestic corporation be a
United States shareholder with respect to the distributing may give
rise to a prior extraordinary disposition amount under Sec. 1.245A-
5(c)(3)(i)(D)(1)(i). The Treasury Department and the IRS are studying
whether applying the DQB reduction rule would be appropriate with
respect to any of these prior extraordinary disposition amounts,
including whether it would be necessary to prevent meaningful excess
taxation or give rise to undue complexity. The Treasury Department and
the IRS welcome comments on the matter.
B. The EDA Reduction Rule
Pursuant to section 952(c)(1)(A), the subpart F income of a CFC for
any taxable year cannot exceed the CFC's E&P for the taxable year. In
addition, any amount excluded from subpart F income under section
952(c)(1)(A) is recaptured under section 952(c)(2) in future taxable
years to the extent the CFC would otherwise have E&P in excess of
subpart F income. Although the disqualified basis rule prevents
deductions or losses attributable to disqualified basis from reducing
subpart F income, tested income, or ECTI, those deductions or losses
still reduce E&P and may be used by a CFC to avoid current inclusions
of subpart F income under section 952(c)(1)(A). The Treasury Department
and the IRS are studying the extent to which the EDA reduction rule
(for example, under the RGI account rules) should take into account
this benefit derived from disqualified basis, and request comments on
the matter.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 13771, 13563, and 12866 direct agencies to assess
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. The Executive Order 13771 designation for any final rule
resulting from these proposed regulations will be informed by comments
received. The preliminary Executive Order 13771 designation for this
proposed rule is regulatory.
The proposed regulations have been designated by the Office of
Management and Budget's Office of Information and Regulatory Affairs
(OIRA) as subject to review under Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11, 2018) between the Treasury
Department and the Office of Management and Budget (OMB) regarding
review of tax regulations. OIRA has determined that the proposed
rulemaking is significant and subject to review under Executive Order
12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the
proposed regulations have been reviewed by OMB.
A. Background and Overview of the Proposed Regulations
The Tax Cuts and Jobs Act (``the Act'') enacted section 245A, which
generally allows U.S. corporations a 100-percent deduction (the
``section 245A deduction'') for certain dividends received from 10-
percent owned foreign corporations (``SFCs''). As a result of this
deduction, certain types of foreign-source income earned by foreign
corporations may not be subject to U.S. tax at the U.S. shareholder
level. Section 245A applies only to dividends paid after December 31,
2017.
The Act also enacted section 951A, which subjects U.S. shareholders
of controlled foreign corporations (``CFCs'') to current taxation under
section 951A on their global intangible low-taxed income (``GILTI'').
Generally, the U.S. shareholder calculates its GILTI
[[Page 53108]]
by subtracting a routine return on tangible assets from ``tested
income,'' which is essentially the income of the U.S. shareholder's
CFCs (other than subpart F income, income effectively connected with
the conduct of a U.S. trade or business (``ECTI''), and certain other
excluded items of income). Section 951A applies for CFC tax years
beginning after December 31, 2017, meaning that tested income of a
fiscal year CFC is not subject to the GILTI regime until potentially as
late as December 1, 2018.
The Act also enacted section 965, which imposed a new tax on the
post-1986 earnings and profits of foreign corporations that had gone
untaxed under the pre-Act international tax regime, measured as of no
later than December 31, 2017. By subjecting post-1986 earnings and
profits to a transition tax, section 965 generally ensured for
calendar-year CFCs that only earnings first subjected to the anti-base
erosion provisions of the Act could qualify for the section 245A
deduction.
The difference in the dates for which sections 965 and 951A apply
provides the context for the proposed regulations. For a CFC with a
calendar taxable year, section 951A first applies on January 1, 2018,
immediately after the final measurement date for section 965. However,
a fiscal year CFC has a period from January 1, 2018, until the
beginning of its first taxable year in 2018 (the ``disqualified
period'') in which it could engage in transactions that generate income
subject to neither section 965 nor 951A. These transactions could be
used to create two types of tax benefits. First, earnings generated
from transactions during the disqualified period could support tax-free
distributions of cash or other assets to the United States using the
section 245A deduction. Second, assets transferred to related CFCs
during the disqualified period would have fair market value tax basis
in the hands of the transferee, generating future depreciation
deductions or other losses against U.S. taxable income such as GILTI.
In many cases, these two benefits arise from the same transaction
undertaken during the disqualified period because a transfer of low-
basis assets can generate earnings eligible for the section 245A
deduction for the seller and allow the buyer to take the assets with
fair market value basis that generates future depreciation deductions
(on assets that otherwise may have had no or low basis in the hands of
the seller).
To address the earnings and profits created in these transactions,
temporary and proposed regulations were published under section 245A on
June 18, 2019 (the ``2019 section 245A regulations'') that limit the
ability to obtain the section 245A deduction for certain earnings and
profits generated during the disqualified period. The 2019 section 245A
regulations are being finalized with certain changes alongside the
issuance of the proposed regulations. To address the fair market value
basis generated in these transactions, final regulations were published
under section 951A (``GILTI final regulations'') on June 21, 2019, that
allocate depreciation or amortization deductions resulting from basis
generated in certain disqualified period transactions to income not
subject to U.S. tax.
The 2019 section 245A regulations, as finalized, contain Sec.
1.245A-5, which generally denies the section 245A deduction for 50
percent of the earnings generated from an SFC's disposition of property
to a related party during the disqualified period. This denial applies
if (i) the disposition was outside the SFC's ordinary course of
business and (ii) the disposition generated earnings that would have
been subject to tax under section 951A had the disposition not occurred
during the disqualified period (an ``extraordinary disposition'').
Section 1.245A-5 establishes an extraordinary disposition account for
taxpayers to track the amount of earnings and profits generated from
extraordinary dispositions. The section 245A deduction is limited for
dividends out of that account.
Section 1.951A-2(c)(5) of the GILTI final regulations focuses on
the consequences to the transferee in transactions that were generally
extraordinary dispositions. It requires that deductions or losses
attributable to the basis of an asset resulting from certain transfers
during the disqualified period (``disqualified basis'') be allocated
and apportioned to ``residual CFC gross income'' (that is, income other
than tested income, subpart F income, or ECTI). As a result, the
deductions or losses attributable to disqualified basis cannot reduce
the CFC's income subject to U.S. tax. Instead, the deductions and
losses reduce the untaxed earnings and profits of the CFC, including
those earnings and profits that would otherwise be eligible for a
section 245A deduction when distributed to a U.S. shareholder.
The 2019 section 245A regulations requested comments regarding
options for coordinating Sec. 1.245A-5 with Sec. 1.951A-2(c)(5).
After carefully considering the comments on this topic, the Treasury
Department and the IRS are providing the proposed regulations, which
coordinate Sec. 1.245A-5 with Sec. 1.951A-2(c)(5).
Generally, the proposed regulations provide relief from either
Sec. 1.245A-5 or Sec. 1.951A-2(c)(5) to the extent that the other
rule results in U.S. taxation on the same underlying transaction. Thus,
to the extent that the section 245A deduction is limited with respect
to distributions out of an extraordinary disposition account, a
corresponding amount of disqualified basis attributable to the property
that generated that extraordinary disposition account through an
extraordinary disposition is converted to basis that is not subject to
Sec. 1.951A-2(c)(5). The Treasury Department and the IRS project that
this situation is likely to be relatively rare in the near future,
because of the rule in Sec. 1.245A-5(c)(2)(i) specifying that
distributions out of the extraordinary disposition account are made
after all other E&P have been distributed. In the reverse scenario, to
the extent that Sec. 1.951A-2(c)(5) allocates a CFC's deductions or
losses from property acquired during the disqualified period to
residual CFC gross income and thereby causes an increase to the CFC's
tested income, subpart F income, or ECTI while reducing its untaxed
E&P, the extraordinary disposition account of the U.S. shareholder
created from the transfer of that property during the disqualified
period is reduced by a corresponding amount.
B. Need for the Proposed Regulations
The existence of two separate sets of rules governing the same
types of income or transactions suggests that taxpayers would benefit
from their coordination, and comments have requested this coordination.
The proposed regulations respond to these comments and help to ensure
proper functioning of the regulations governing the Act.
C. Economic Analysis of the Proposed Regulations
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations relative to a no-action baseline
reflecting anticipated Federal income tax-related behavior in the
absence of these proposed regulations. Under the baseline, Sec. Sec.
1.245A-5 and 1.951A-2(c)(5) can both apply as a result of the same
transaction.
2. Economic Effects
i. Summary
The proposed regulations coordinate the treatment of extraordinary
[[Page 53109]]
disposition accounts and disqualified basis. An example of how they do
so is presented in part I.C.2.ii of this Special Analyses. Both
extraordinary disposition accounts and disqualified basis were created
during the disqualified period, which ended before the issuance of the
proposed regulations; thus, the proposed regulations will not further
economic activity. Thus, these provisions will largely not give rise to
economic effects.
The Treasury Department and the IRS have, however, identified some
circumstances under which the proposed regulations may affect business
activity relative to the no-action baseline. In particular, the
proposed regulations may affect the extent to which the basis of
certain assets transferred during the disqualified period can reduce
potentially taxable income. This means that for affected taxpayers who
distribute dividends subject to the extraordinary disposition rule and
thereby correspondingly reduce disqualified basis under the proposed
regulations, the amount of deduction or loss allowed against
potentially taxable income is generally higher under the proposed
regulations than under the no-action baseline. This outcome leads to a
lower effective tax rate for affected taxpayers on future income under
the proposed regulations than under the no-action baseline.
The lower tax rate under the proposed regulations may lead to an
increase in economic activity for affected taxpayers relative to the
no-action baseline. This incentive for additional economic activity,
relative to the no-action baseline, will generally persist for as long
as the difference in effective tax rates exists (described in part
I.C.2.ii of this Special Analyses).\2\ The Treasury Department and the
IRS project that the fact pattern leading to this situation will likely
be relatively rare, however, because it relies on taxpayers
distributing income from their extraordinary disposition accounts
during the useful life of the asset, which is likely to be uncommon
because of the ordering rule that requires that earnings from
extraordinary disposition accounts be distributed after all other
earnings and profits.
---------------------------------------------------------------------------
\2\ The potential discrepancy in effective tax rates can exist
for a period up to the remaining useful life of a depreciable or
amortizable asset with (formerly) disqualified basis starting from
the year that an amount is distributed out of an extraordinary
disposition account and reduces that disqualified basis.
---------------------------------------------------------------------------
The Treasury Department and the IRS have not undertaken
quantitative estimates of this economic effect. Data or models are not
readily available to indicate (i) the amounts of potentially
disqualified basis (which depends on the volume, value, and basis of
assets transferred during the disqualified period; see related
discussion in part I.C.2.iii of this Special Analyses) held by
taxpayers and the amount of any corresponding extraordinary disposition
accounts; (ii) differences in effective tax rates for affected
taxpayers (taxpayers that have disqualified basis and a corresponding
extraordinary disposition account) between the proposed regulations and
the no-action baseline; (iii) the amount and period of the depreciation
deductions related to the potentially disqualified basis to which the
previous item applies; and (iv) the amount of additional economic
activity that might be undertaken by these affected taxpayers as a
result of the difference in effective tax rates. The combined effect of
these four items gives rise to any potential economic effects of the
proposed regulations.
The Treasury Department and the IRS also considered the effect of
the regulations on compliance costs relative to the no-action baseline.
The compliance costs arising from the proposed regulations stem only
from those record-keeping, reporting, and related compliance activities
that would not have been undertaken in the absence of the proposed
regulations. However, because the final regulations in Sec. Sec.
1.245A-5 and 1.951A-2(c)(5) already require collection of most of the
information and record keeping necessary to implement these
coordination rules, the Treasury Department and the IRS project that
any additional costs of the proposed regulations, relative to the no-
action baseline, will be modest. For example, to the extent that a U.S.
taxpayer distributes a taxable dividend from its extraordinary
disposition account, that taxpayer will already know the value of that
dividend as well as the amount of disqualified basis generated in the
transaction that created the extraordinary disposition account, such
that any added burden generally lies only in identifying and reducing
the corresponding disqualified basis by the amount of the dividend, as
well as reporting such amounts to the extent required by the IRS.
Although the Treasury Department and the IRS have not undertaken
quantitative estimates of the proposed regulations, it is projected
that the proposed regulations could modestly enhance U.S. economic
performance relative to the no-action baseline. The treatment of
disqualified basis and the reduction in effective tax rates that it
engenders for affected taxpayers will enhance economic activity.
The Treasury Department and the IRS solicit comments on the
economic effects of the proposed regulations and particularly solicit
data, models, or other evidence that could enhance the rigor of the
analysis underlying the final regulations.
ii. Example
The potential difference in effective tax rates between the
proposed regulations and the no-action baseline can be illustrated by
an example.
Suppose CFC A (a wholly-owned foreign subsidiary of a U.S. parent)
has $0 E&P and transfers assets worth $100x to CFC B (also a wholly-
owned foreign subsidiary of the same U.S. parent) during the
disqualified period in a transaction that is an extraordinary
disposition, and suppose the transferred assets have basis of $0
immediately before the transfer. CFC A obtains $100x of earnings and
profits of which, because of the final regulations under section 245A,
only 50 percent qualifies for the section 245A deduction (if
distributed to the U.S. parent as a dividend). Also, as a result of the
sale of the asset during the disqualified period, CFC B obtains $100x
of basis in the asset which, because of Sec. 1.951A-2(c)(5), cannot be
used to offset subpart F income, tested income for GILTI purposes, or
ECTI as it is amortized or depreciated. Additionally, the amortization
or depreciation deductions on this $100x of disqualified basis reduce
CFC B's earnings that otherwise may have qualified for the section 245A
deduction.
Thus, over the life of the amortization or depreciation of the
asset with $100x basis, CFC B could, absent the proposed regulations,
have $100x more tested income (potentially taxed at an effective rate
of 10.5%, or $10.50x tax) than it would have had if the $100x of
amortization or depreciation had been allowed to reduce tested income
(assuming that CFC B has at least $100x of gross tested income in that
period and neither it nor its U.S parent has any other attributes that
can reduce GILTI). The amortization or depreciation deductions would
also reduce CFC B's untaxed earnings and profits by $100x, potentially
eliminating the ability to distribute $100x tax-free under section
245A.
Suppose that, in the same taxable year as the extraordinary
disposition to CFC B, CFC A makes a dividend distribution to the U.S.
parent of $100x out of the extraordinary disposition account. The
section 245A deduction is limited to 50 percent of the earnings
distributed
[[Page 53110]]
(under Sec. 1.245A-5) and hence the U.S. parent pays $10.50x of tax
(assuming CFC A's earnings and profits are solely attributable to the
extraordinary disposition transaction). U.S. parent's extraordinary
disposition account with respect to CFC A is reduced by $100x and
subsequent income earned by CFC A can be repatriated tax free.
Under the proposed regulations, once CFC A makes that distribution
of $100x out of its extraordinary disposition account subject to a
$10.50x tax, the $100x of basis that CFC B has in the asset transferred
during the disqualified period is no longer disqualified basis and can
give rise to amortization or depreciation deductions that offset CFC
B's gross tested income, potentially eliminating $10.50x tax on CFC B's
tested income. This lowers the effective tax rate on CFC B's future
income and may spur additional economic activity.
iii. Profile of Affected Taxpayers
The taxpayers potentially affected by the proposed regulations are
direct or indirect U.S. shareholders of at least two related foreign
corporations, one that has an extraordinary disposition account and the
other that has assets with disqualified basis corresponding to the
extraordinary disposition account. This means that the foreign
corporation with the extraordinary disposition account has a fiscal
year and engaged in a disposition of property (i) during the period
between January 1, 2018, and the end of the transferor foreign
corporation's last taxable year beginning before January 1, 2018; (ii)
outside the ordinary course of the foreign corporation's activities;
and (iii) generally, while the corporation was a CFC.
The Treasury Department and the IRS have not estimated how many
taxpayers are likely to be affected by the proposed regulations because
data on the taxpayers that may have engaged in these particular
transactions are not readily available. Based on tabulations of the
2014 Statistics of Income Study file, the Treasury Department and the
IRS estimate that there are approximately 5,000 domestic corporations
with at least one fiscal year CFC. However, the number of potentially
affected taxpayers is likely substantially smaller than the number of
domestic corporations with at least one fiscal year CFC because a
domestic corporation will not be affected unless it has a fiscal year
CFC that engaged in a non-routine sale with a related party during the
disqualified period that created an extraordinary disposition account
and disqualified basis under Sec. Sec. 1.245A-5 and 1.951A-2(c)(5),
and the domestic corporation must then incur the type of cost
(limitation of the section 245A deduction or allocation of deductions
or losses to residual CFC gross income and reduction in untaxed
earnings) that causes the proposed regulations to apply.
II. Paperwork Reduction Act
The collections of information in the proposed regulations are in
Sec. 1.6038-2(f)(17) and (18).
The collection of information in Sec. 1.6038-2(f)(17) is mandatory
for every U.S. shareholder of a CFC that holds an item of property that
has disqualified basis within the meaning of Sec. 1.951A-3(h)(2)
during an annual accounting period and files Form 5471 for that period
(OMB control number 1545-0123). The collection of information in Sec.
1.6038-2(f)(17) is satisfied by providing information about the items
of property with disqualified basis held by the CFC during the CFC's
accounting period as Form 5471 and its instructions may prescribe. For
purposes of the Paperwork Reduction Act, the reporting burden
associated with Sec. 1.6038-2(f)(17) will be reflected in the
applicable Paperwork Reduction Act submission associated with Form
5471. As provided below, the estimated number of respondents for the
reporting burden associated with Sec. 1.6038-2(f)(17) is 7,500-8,500,
based on estimates provided by the Research, Applied Analytics and
Statistics Division of the IRS.
The related new or revised tax form is as follows:
----------------------------------------------------------------------------------------------------------------
Revision of existing Number of respondents
New form (estimate)
----------------------------------------------------------------------------------------------------------------
Schedule to Form 5471.............. ....................... [check] 7,500-8,500
----------------------------------------------------------------------------------------------------------------
The collection of information in Sec. 1.6038-2(f)(18) is mandatory
for every U.S. shareholder of a CFC that applies the rules of proposed
Sec. Sec. 1.245A-6 through 1.245A-11 during an annual accounting
period and files Form 5471 for that period (OMB control number 1545-
0123). The collection of information in Sec. 1.6038-2(f)(18) is
satisfied by providing information about the reduction to an
extraordinary disposition account made pursuant to proposed Sec.
1.245A-7(b) or Sec. 1.245A-8(b) and reductions to an item of specified
property's disqualified basis pursuant to proposed Sec. 1.245A-7(c) or
Sec. 1.245A-8(c) during the corporation's accounting period as Form
5471 and its instructions may prescribe. For purposes of the Paperwork
Reduction Act, the reporting burden associated with Sec. 1.6038-
2(f)(18) will be reflected in the applicable Paperwork Reduction Act
submission associated with Form 5471. As provided below, the estimated
number of respondents for the reporting burden associated with Sec.
1.6038-2(f)(18) is 7,500-8,500, based on estimates provided by the
Research, Applied Analytics and Statistics Division of the IRS.
The related new or revised tax form is as follows:
----------------------------------------------------------------------------------------------------------------
Revision of existing Number of respondents
New form (estimate)
----------------------------------------------------------------------------------------------------------------
Schedule to Form 5471.............. ....................... [check] 7,500-8,500
----------------------------------------------------------------------------------------------------------------
The current status of the Paperwork Reduction Act submissions
related to the new revised Form 5471 as a result of the information
collections in the proposed regulations is provided in the accompanying
table. The reporting burdens associated with the information
collections in Sec. 1.6038-2(f)(17) and (18) are included in the
aggregated burden estimates for OMB control number 1545-0123, which
represents a total estimated burden time for all forms and schedules
for corporations of 3.157 billion hours and total estimated monetized
costs of $58.148 billion
[[Page 53111]]
($2017). The overall burden estimates provided in 1545-0123 are
aggregate amounts that relate to the entire package of forms associated
with the OMB control number and will in the future include but not
isolate the estimated burden of the tax forms that will be revised as a
result of the information collections in the proposed regulations.
These numbers are therefore unrelated to the future calculations needed
to assess the burden imposed by the temporary regulations. The Treasury
Department and the IRS urge readers to recognize that these numbers are
duplicates of estimates provided for informational purposes in other
proposed and final regulatory actions and to guard against over-
counting the burden that international tax provisions imposed before
the Act.
No burden estimates specific to the proposed regulations are
currently available. The Treasury Department and the IRS have not
identified any burden estimates, including those for new information
collections, related to the requirements under the proposed
regulations. The Treasury Department and the IRS request comments on
all aspects of information collection burdens related to the proposed
regulations, including estimates for how much time it would take to
comply with the paperwork burdens described above for each relevant
form and ways for the IRS to minimize the paperwork burden. Proposed
revisions to these forms that reflect the information collections
contained in these proposed regulations will be made available for
public comment at www.irs.gov/draftforms and will not be finalized
until after approved by OMB under the PRA.
----------------------------------------------------------------------------------------------------------------
Information collection Type of filer OMB No.(s) Status
----------------------------------------------------------------------------------------------------------------
Form 5471............................. Business (new model)..... 1545-0123 Published in the Federal
Register on 9/30/19.
Public Comment period closed
on 11/29/19.
Approved by OMB through 1/31/
2021.
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https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-for-forms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s
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III. Regulatory Flexibility Act
It is hereby certified that this rulemaking will not have a
significant economic impact on a substantial number of small entities
within the meaning of section 601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6). The small entities that are subject to Sec.
1.245A-5 are small entities that are U.S. shareholders of certain
foreign corporations that are otherwise eligible for the section 245A
deduction on distributions from the foreign corporation. The small
entities that are subject to Sec. 1.951A-2(c)(5) are U.S. shareholders
of certain foreign corporations that are subject to tax under section
951 with respect to subpart F income of those foreign corporations or
section 951A with respect to tested income of those foreign
corporations.
The taxpayers potentially affected by these proposed regulations
are U.S. shareholders of at least two related foreign corporations, one
that has an extraordinary disposition account and the other that has
assets with disqualified basis corresponding to the extraordinary
disposition account. This means that the foreign corporation with the
extraordinary disposition account has or had a fiscal year and engaged
in a disposition of property (i) during the period between January 1,
2018, and the end of the transferor foreign corporation's last taxable
year beginning before 2018; (ii) outside the ordinary course of the
foreign corporation's activities; and (iii) generally, while the
corporation was a CFC.
The Treasury Department and the IRS have not estimated how many
taxpayers are likely to be affected by these regulations because data
on the taxpayers that may have engaged in these particular transactions
are not readily available. Based on tabulations of the 2014 Statistics
of Income Study file the Treasury Department and the IRS estimate that
there are approximately 5,000 domestic corporations with at least one
fiscal year CFC. Previous estimates suggest that approximately half of
domestic corporations with CFCs have less than $25 million in gross
receipts. However, the number of potentially affected taxpayers is
smaller than the number of domestic corporations with at least one
fiscal year CFC because a domestic corporation will not be affected
unless its fiscal year CFC engages in a non-routine sale with a related
party that creates an extraordinary disposition account and
disqualified basis, and the domestic corporation must then incur the
type of cost (limitation of the section 245A deduction or allocation of
deductions or losses to residual CFC gross income and reduction in
untaxed earnings) that causes these proposed regulations to apply.
There are several industries that may be identified as small even
through their annual receipts are above $25 million or because they
have fewer employees than the SBA Size Standard for that industry. The
Treasury Department and the IRS do not have more precise data
indicating the number of small entities that will be potentially
affected by the regulations. The rule may affect a substantial number
of small entities, but data are not readily available to assess how
many entities will be affected. Nevertheless, for the reasons described
below, the Treasury Department and the IRS have determined that the
regulations will not have a significant economic impact on small
entities.
The Treasury Department and the IRS have concluded that there is no
significant economic impact on such entities as a result of the
proposed regulations. To make this determination, the Treasury
Department and the IRS calculated the ratio of estimated global
intangible lowed-taxed income (``GILTI'') and subpart F income tax
attributable to these businesses to aggregate total sales data. Bureau
of Economic Analysis data on the activities of multinational
enterprises report total sales of all foreign affiliates of U.S.
parents of $7,183 billion in 2017 (accessed at this web address in
December, 2018: https://apps.bea.gov/iTable/iTable.cfm?ReqID=2&step=1).
Projections for GILTI and Subpart F tax revenues average $20 billion
per year over the ten-year budget window (see Joint Committee on
Taxation, Estimated Budget Effects of the Conference Agreement for H.R.
1, The ``Tax Cuts and Jobs Act, JCX-67-17, December 18, 2017),
resulting in a less than 1 percent share of GILTI and Subpart F tax in
total sales of U.S.--parented affiliates. Compliance costs for these
regulations will be a small fraction of the revenue amounts. Thus, any
tax regulation that affects the proceeds from GILTI and subpart F
income would have an economic impact of less than 3 to 5
[[Page 53112]]
percent of ``receipts'' (as that term is defined in 13 CFR 121.104, the
provision for calculating small business receipts, to mean sales and
any other measure of gross income), an economic impact that the
Treasury Department and IRS regard as the threshold for significant
under the Regulatory Flexibility Act. This calculated percentage is
furthermore an upper bound on the true expected effect of the proposed
regulations because not all the GILTI and subpart F income estimated to
be attributable to small entities will be affected by the proposed
regulations. For example, GILTI and subpart F income that is not
attributable to a CFC that holds property with disqualified basis (or
property that would otherwise have disqualified basis in the absence of
these regulations) is not affected by these proposed regulations.
Consequently, the Treasury Department and the IRS have determined that
these proposed regulations will not have a significant economic impact
on a substantial number of small entities. Pursuant to section 7805(f)
of the Code, these proposed regulations have been submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on the impact on small businesses.
Comments and Requests for Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal authors of the proposed regulations are Logan M.
Kincheloe and Shane M. McCarrick, Office of Associate Chief Counsel
(International). However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order for Sec. Sec. 1.245A-6 through 1.245A-11 to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.245A-6 through 1.245A-11 also issued under 26 U.S.C.
245A(g), 882(c)(1)(A), 951A, 954(b)(5), 954(c)(6), and 965(o).
* * * * *
0
Par. 2. Section 1.245A-5 is amended by:
0
1. In the first sentence of paragraph (c)(3)(i)(A), adding immediately
after the language ``by the prior extraordinary disposition amount''
the language ``and as provided in Sec. 1.245A-7 or Sec. 1.245A-8.''
0
2. Revising paragraph (j)(8)(ii).
The revision reads as follows:
Sec. 1.245A-5 Limitation of section 245A deduction and section
954(c)(6) exception.
* * * * *
(j) * * *
(8) * * *
(ii) Analysis. Because the royalty prepayment was carried out with
a principal purpose of avoiding the purposes of this section,
appropriate adjustments are required to be made under the anti-abuse
rule in paragraph (h) of this section. CFC1 is a CFC that has a
November 30 taxable year, so under paragraph (c)(3)(iii) of this
section, CFC1 has a disqualified period beginning on January 1, 2018,
and ending on November 30, 2018. In addition, even though the
intangible property licensed by CFC1 to CFC2 is specified property,
CFC2's prepayment of the royalty would not be treated as a disposition
of the specified property by CFC1 and, therefore, would not constitute
an extraordinary disposition (and thus would not give rise to
extraordinary disposition E&P), absent the application of the anti-
abuse rule of paragraph (h) of this section. Pursuant to paragraph (h)
of this section, the earnings and profits of CFC1 generated as a result
of the $100x of prepaid royalty are treated as extraordinary
disposition E&P for purposes of this section and, therefore, US1 has an
extraordinary disposition account with respect to CFC1 of $100x. In
addition, the prepaid royalty gives rise to a disqualified payment (as
defined in Sec. 1.951A-2(c)(6)(ii)(A)) of $100x. As a result, Sec.
1.245A-7(b) or Sec. 1.245A-8(b), as applicable, applies to reduce the
disqualified payment in the same manner as if the disqualified payment
were disqualified basis, and Sec. 1.245A-7(c) or Sec. 1.245A-8(c), as
applicable, applies to reduce the extraordinary disposition account in
the same manner as if the deductions directly or indirectly related to
the disqualified payment were deductions attributable to disqualified
basis of an item of specified property that corresponds to the
extraordinary disposition account.
* * * * *
0
Par. 3. Sections 1.245A-6 through 1.245A-11 are added to read as
follows:
Sec.
* * * * *
1.245A-6 Coordination of extraordinary disposition and disqualified
basis rules.
1.245A-7 Coordination rules for simple cases.
1.245A-8 Coordination rules for complex cases.
1.245A-9 Other rules and definitions.
1.245A-10 Examples.
1.245A-11 Applicability dates.
* * * * *
Sec. 1.245A-6 Coordination of extraordinary disposition and
disqualified basis rules.
(a) Scope. This section and Sec. Sec. 1.245A-7 through 1.245A-11
coordinate the application of the extraordinary disposition rules of
Sec. 1.245A-5(c) and (d) and the disqualified basis rule of Sec.
1.951A-2(c)(5). Section 1.245A-7 provides coordination rules for simple
cases, and Sec. 1.245A-8 provides coordination rules for complex
cases. Section 1.245A-9 provides definitions and other rules, including
rules of general applicability for purposes of this section and
Sec. Sec. 1.245A-7 through 1.245A-11. Section 1.245A-10 provides
examples illustrating the application of this section and Sec. Sec.
1.245A-7 through 1.245A-9. Section 1.245A-11 provides applicability
dates.
(b) Conditions to apply coordination rules for simple cases. For a
taxable year of a section 245A shareholder for which the conditions
described in paragraphs (b)(1) and (2) of this section are satisfied,
the section 245A shareholder may apply the coordination rules of Sec.
1.245A-7 (rules for simple cases) to an extraordinary disposition
account of the section 245A shareholder with respect to an SFC and
disqualified basis of an
[[Page 53113]]
item of specified property that corresponds to the extraordinary
disposition account (as determined pursuant to Sec. 1.245A-9(b)(1)).
If the conditions are not satisfied, then the coordination rules of
Sec. 1.245A-8 (rules for complex cases) apply beginning with the first
day of the first taxable year of the section 245A shareholder for which
the conditions are not satisfied and all taxable years thereafter. If
the conditions are satisfied for a taxable year of the section 245A
shareholder but the section 245A shareholder chooses not to apply the
coordination rules of Sec. 1.245A-7 for that taxable year, then the
coordination rules of Sec. 1.245A-8 apply to that taxable year
(though, for a subsequent taxable year, the section 245A shareholder
may apply the coordination rules of Sec. 1.245A-7, provided that the
conditions described in paragraphs (b)(1) and (2) of this section are
satisfied for such subsequent taxable year and have been satisfied for
all earlier taxable years). For purposes of applying paragraphs (b)(1)
and (2) of this section, a reference to a section 245A shareholder, an
SFC, or a CFC does not include a successor of the section 245A
shareholder, the SFC, or the CFC, respectively.
(1) Requirements related to the SFC. The condition of this
paragraph (b)(1) is satisfied for a taxable year of the section 245A
shareholder if the following requirements are satisfied:
(i) On January 1, 2018, the section 245A shareholder owns (within
the meaning of section 958(a)) all of the stock (by vote and value) of
the SFC.
(ii) On each day of the taxable year of the section 245A
shareholder, the section 245A shareholder owns (within the meaning of
section 958(a)) all of the stock (by vote and value) of the SFC.
(iii) On no day during the taxable year of the section 245A
shareholder was the SFC a distributing or controlled corporation in a
transaction described in a section 355, or did the SFC acquire the
assets of a corporation as to which there is an extraordinary
disposition account pursuant to a transaction described in section 381
(that is, taking into account the requirements of this paragraph (b)(1)
and paragraph (b)(2) of this section, the section 245A shareholder's
extraordinary disposition account with respect to the SFC has not been
not been adjusted pursuant to the rules of Sec. 1.245A-5(c)(4)).
(2) Requirements related to an item of specified property that
corresponds to an extraordinary disposition account and a CFC holding
the item. The condition of this paragraph (b)(2) is satisfied for a
taxable year of a section 245A shareholder if the following
requirements are satisfied:
(i) For each item of specified property with disqualified basis
that corresponds to the extraordinary disposition account, the item of
specified property is held by a CFC immediately after the extraordinary
disposition of the item of specified property.
(ii) For each CFC described in paragraph (b)(2)(i) of this
section--
(A) All of the stock (by vote and value) of the CFC is owned
(within the meaning of section 958(a)) by the section 245A shareholder
and any domestic affiliates of the section 245A shareholder immediately
after the extraordinary disposition described in paragraph (b)(2)(i) of
this section;
(B) For each taxable year of the CFC that ends with or within the
taxable year of the section 245A shareholder, there is no extraordinary
disposition account with respect to the CFC, and the sum of the balance
of the hybrid deduction accounts (as described in Sec. 1.245A(e)-
1(d)(1)) with respect to shares of stock of the CFC is zero (determined
as of the end of the taxable year of the CFC and taking into account
any adjustments to the accounts for the taxable year); and
(C) On each day of each taxable year of the CFC that ends with or
within the taxable year of the section 245A shareholder, and on each
day of each taxable year of the CFC that begins with or within the
taxable year of the section 245A shareholder--
(1) The CFC holds the item of specified property described in
paragraph (b)(1)(i) of this section;
(2) The section 245A shareholder and any domestic affiliates own
(within the meaning of section 958(a)) all of the stock (by vote and
value) of the CFC;
(3) The CFC does not hold any item of specified property with
disqualified basis other than an item of specified property that
corresponds to the extraordinary disposition account;
(4) The CFC does not own an interest in a partnership, trust, or
estate (directly or indirectly through one or more other partnerships,
trusts, or estates) that holds an item of specified property with
disqualified basis; and
(5) The CFC is not engaged in the conduct of a trade or business in
the United States and therefore does not have ECTI, and the CFC does
not have any deficit in earnings and profits subject to Sec.
1.381(c)(2)-1(a)(5).
Sec. 1.245A-7 Coordination rules for simple cases.
(a) Scope. This section applies for a taxable year of a section
245A shareholder for which the conditions of Sec. 1.245A-6(b)(1) and
(2) are satisfied and for which the section 245A shareholder chooses to
apply this section (in lieu of Sec. 1.245A-8).
(b) Reduction of disqualified basis by reason of an extraordinary
disposition amount or tiered extraordinary disposition amount--(1) In
general. If, for a taxable year of a section 245A shareholder, an
extraordinary disposition account of the section 245A shareholder gives
rise to one or more extraordinary disposition amounts or tiered
extraordinary disposition amounts, then, with respect to an item of
specified property that corresponds to the extraordinary disposition
account, the disqualified basis of the item of specified property is,
solely for purposes of Sec. 1.951A-2(c)(5), reduced (but not below
zero) by an amount (determined in the functional currency in which the
extraordinary disposition account is maintained) equal to the product
of--
(i) The sum of the extraordinary disposition amounts and the tiered
extraordinary disposition amounts; and
(ii) A fraction, the numerator of which is the disqualified basis
of the item of specified property, and the denominator of which is the
sum of the disqualified basis of each item of specified property that
corresponds to the extraordinary disposition account.
(2) Timing rules regarding disqualified basis. See Sec. 1.245A-
9(b)(2) for timing rules regarding the determination of, and reduction
to, disqualified basis of an item of specified property.
(c) Reduction of extraordinary disposition account by reason of the
allocation and apportionment of deductions or losses attributable to
disqualified basis--(1) In general. If, for a taxable year of a CFC,
the CFC holds one or more items of specified property that correspond
to an extraordinary disposition account of a section 245A shareholder
with respect to an SFC, then the extraordinary disposition account is
reduced (but not below zero) by the lesser of the amounts described in
paragraphs (c)(1)(i) and (ii) of this section (each determined in the
functional currency of the CFC).
(i) The excess (if any) of the adjusted earnings of the CFC for the
taxable year of the CFC, over the sum of the previously taxed earnings
and profits accounts with respect to the CFC for purposes of section
959 (determined as of the end of the taxable year of the CFC and taking
into account any adjustments to the accounts for the taxable year).
(ii) The balance of the section 245A shareholder's RGI account with
respect to the CFC (determined as of the end of the taxable year of the
CFC, but without
[[Page 53114]]
regard to the application of paragraph (c)(4)(ii) of this section for
the taxable year).
(2) Timing of reduction to extraordinary disposition account. See
Sec. 1.245A-9(b)(3) for timing rules regarding the reduction to an
extraordinary disposition account.
(3) Adjusted earnings. The term adjusted earnings means, with
respect to a CFC and a taxable year of the CFC, the earnings and
profits of the CFC, determined as of the end of the CFC's taxable year
(taking into account all distributions during the taxable year), and
with the adjustments described in paragraphs (c)(3)(i) through (iii) of
this section.
(i) The earnings and profits are increased by the amount of any
deduction or loss that is or was allocated and apportioned to residual
CFC gross income of the CFC solely by reason of Sec. 1.951A-
2(c)(5)(i).
(ii) The earnings and profits are decreased by the amount by which
an RGI account with respect to the CFC has been decreased pursuant to
paragraph (c)(4)(ii) of this section for a prior taxable year of the
CFC.
(iii) The earnings and profits are determined without regard to
income described in section 245(a)(5)(A) or dividends described in
section 245(a)(5)(B) (determined without regard to section 245(a)(12)).
(4) RGI account. For a taxable year of a CFC, the following rules
apply to determine the balance of a section 245A shareholder's RGI
account with respect to the CFC:
(i) The balance of the RGI account is increased by the sum of the
amounts of deductions and losses of the CFC that, but for Sec. 1.951A-
2(c)(5)(i), would have decreased one or more categories of the CFC's
positive subpart F income or the CFC's tested income, or increased or
given rise to a tested loss or one or more qualified deficits of the
CFC.
(ii) The balance of the RGI account is decreased to the extent
that, by reason of the application of paragraph (c)(1) of this section
with respect to the taxable year of the CFC, there is a reduction to
the extraordinary disposition account of the section 245A shareholder.
Sec. 1.245A-8 Coordination rules for complex cases.
(a) Scope. This section applies beginning with the first day of the
first taxable year of a section 245A shareholder for which Sec.
1.245A-7 does not apply and for all taxable years thereafter, or for a
taxable year of a section 245A shareholder for which the section 245A
shareholder chooses not to apply Sec. 1.245A-7.
(b) Reduction of disqualified basis by reason of an extraordinary
disposition amount or tiered extraordinary disposition amount--(1) In
general. If, for a taxable year of a section 245A shareholder, an
extraordinary disposition account of the section 245A shareholder gives
rise to one or more extraordinary disposition amounts or tiered
extraordinary disposition amounts, then, with respect to an item of
specified property that corresponds to the extraordinary disposition
account and for which the ownership requirement of paragraph (b)(3)(i)
of this section is satisfied for the taxable year of the section 245A
shareholder, solely for purposes of Sec. 1.951A-2(c)(5), the
disqualified basis of the item of specified property is reduced (but
not below zero) by an amount (determined in the functional currency in
which the extraordinary disposition account is maintained) equal to the
product of--
(i) The excess (if any) of--
(A) The sum of the extraordinary disposition amounts and the tiered
extraordinary disposition amounts; over
(B) The basis benefit account with respect to the extraordinary
disposition account (determined as of the end of the taxable year of
the section 245A shareholder, and without regard to the application of
paragraph (b)(4)(i)(B) of this section for the taxable year); and
(ii) A fraction, the numerator of which is the disqualified basis
of the item of specified property, and the denominator of which is the
sum of the disqualified basis of each item of specified property that
corresponds to the extraordinary disposition account and for which the
ownership requirement of paragraph (b)(3)(i) of this section is
satisfied for the taxable year of the section 245A shareholder.
(2) Timing rules regarding disqualified basis. See Sec. 1.245A-
9(b)(2) for timing rules regarding the determination of, and reduction
to, disqualified basis of an item of specified property.
(3) Ownership requirement with respect to an item of specified
property--(i) In general. For a taxable year of a section 245A
shareholder, the ownership requirement of this paragraph (b)(3)(i) is
satisfied with respect to an item of specified property if, on at least
one day that falls within the taxable year, the item of specified
property is held by--
(A) The section 245A shareholder;
(B) A person (other than the section 245A shareholder) that, on at
least one day that falls within the section 245A shareholder's taxable
year, is a related party with respect to the section 245A shareholder
(such a person, a qualified related party with respect to the section
245A shareholder for the taxable year of the section 245A shareholder);
or
(C) A specified entity at least ten percent of the interests of
which are, on at least one day that falls within the section 245A
shareholder's taxable year, owned directly or indirectly through one or
more other specified entities by the section 245A shareholder or a
qualified related party.
(ii) Rules for determining an interest in a specified entity. For
purposes of paragraph (b)(3)(i)(C) of this section, the phrase ``at
least 10 percent of the interests'' means--
(A) If the specified entity is a foreign corporation, at least 10
percent of the stock (by vote or value) of the foreign corporation;
(B) If the specified entity is a partnership, at least 10 percent
of the interests in the capital or profits of the partnership; or
(C) If the specified entity is not a foreign corporation or a
partnership, at least 10 percent of the value of the interests in the
specified entity.
(4) Basis benefit account--(i) General rules. The term basis
benefit account means, with respect to an extraordinary disposition
account of a section 245A shareholder, an account of the section 245A
shareholder (the initial balance of which is zero), adjusted pursuant
to the rules of paragraphs (b)(4)(i)(A) and (B) of this section on the
last day of each taxable year of the section 245A shareholder. The
basis benefit account must be maintained in the same functional
currency as the extraordinary disposition account.
(A) The balance of the basis benefit account is increased to the
extent that a basis benefit amount with respect to an item of specified
property that corresponds to the section 245A shareholder's
extraordinary disposition account is assigned to the taxable year of
the section 245A shareholder. However, if the extraordinary disposition
ownership percentage applicable to the section 245A shareholder's
extraordinary disposition account is less than 100 percent, then, the
basis benefit account is instead increased by the amount equal to the
basis benefit amount multiplied by the extraordinary disposition
ownership percentage.
(B) The balance of the basis benefit account is decreased to the
extent that, for a taxable year that includes the date on which the
section 245A shareholder's taxable year ends, disqualified basis of an
item of specified property would have been reduced pursuant to
paragraph (b)(1) of this
[[Page 53115]]
section but for an amount in the basis benefit account.
(ii) Rules for determining a basis benefit amount--(A) In general.
The term basis benefit amount means, with respect to an item of
specified property that has disqualified basis, the portion of
disqualified basis that, for a taxable year, is directly (or indirectly
through one or more specified entities that are not corporations) taken
into account for U.S. tax purposes by a U.S. tax resident, a CFC
described in Sec. 1.267A-5(a)(17), or a specified foreign person and--
(1) Reduces the amount of the U.S. tax resident's taxable income,
one or more categories of the CFC's positive subpart F income, the
CFC's tested income, or the specified foreign person's ECTI, as
applicable; or
(2) Prevents a decrease or offset of the amount of the CFC's tested
loss or qualified deficits.
(B) Rules for determining whether disqualified basis of an item of
specified property is taken into account. For purposes of paragraph
(b)(4)(ii)(A) of this section, disqualified basis of an item of
specified property is taken into account for U.S. tax purposes without
regard to whether the disqualified basis is reduced or eliminated under
Sec. 1.951A-3(h)(2)(ii)(B)(1).
(C) Timing rules when disqualified basis gives rise to a deferred
or disallowed loss. To the extent disqualified basis of an item of
specified property gives rise to a deduction or loss during a taxable
year that is deferred, then the determination of whether the item of
deduction or loss gives rise to a basis benefit amount under paragraph
(b)(4)(ii)(A) of this section is made when the item of deduction or
loss is no longer deferred. In addition, to the extent disqualified
basis of an item of specified property gives rise to a deduction or
loss during a taxable year that is disallowed under section 267(a)(1),
then a basis benefit amount is treated as occurring in the taxable year
when and to the extent that gain is reduced pursuant to section 267(d),
and provided that the gain is described in paragraph (b)(4)(ii)(A) of
this section.
(iii) Rules for assigning a basis benefit amount to a taxable year
of a section 245A shareholder--(A) In general. For purposes of applying
paragraph (b)(4)(i)(A) of this section with respect to a section 245A
shareholder, a basis benefit amount with respect to an item of
specified property is assigned to a taxable year of the section 245A
shareholder if--
(1) With respect to the item of specified property, the ownership
requirement of paragraph (b)(3)(i) of this section is satisfied for the
taxable year of the section 245A shareholder; and
(2) The basis benefit amount occurs during the taxable year of the
section 245A shareholder, or a taxable year of a U.S. tax resident
(other than the section 245A shareholder), a CFC described in Sec.
1.267A-5(a)(17), or a specified foreign person, as applicable, that--
(i) Ends with or within the taxable year of the section 245A
shareholder; or
(ii) Begins with or within the taxable year of the section 245A
shareholder, but only in a case in which but for this paragraph
(b)(4)(iii)(A)(2)(ii) the basis benefit amount would not be assigned to
a taxable year of the section 245A shareholder.
(B) Anti-duplication rule. For purposes of paragraph (b)(4)(i)(A)
of this section, to the extent that disqualified basis of an item of
specified property gives rise to a basis benefit amount that is
assigned to a taxable year of a section 245A shareholder under
paragraph (b)(4)(iii)(A) of this section, and thereafter such
disqualified basis gives rise to an additional basis benefit amount,
the additional basis benefit amount cannot be assigned to another
taxable year of any section 245A shareholder. Thus, for example, if the
entire amount of disqualified basis of an item of specified property
gives rise to a basis benefit amount for a particular taxable year of a
CFC and is assigned to a taxable year of a section 245A shareholder
but, pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(1)(ii), the disqualified
basis is not reduced or eliminated in such taxable year of the CFC
(because, for example, the buyer is a CFC that is a related party) and,
as a result, the disqualified basis thereafter gives rise to an
additional basis benefit amount, then no portion of the additional
basis benefit amount is assigned to a taxable year of any section 245A
shareholder.
(iv) Successor rules for basis benefit accounts. To the extent that
an extraordinary disposition account of a section 245A shareholder is
adjusted pursuant to Sec. 1.245A-5(c)(4), a basis benefit account with
respect to the extraordinary disposition account is adjusted in a
similar manner.
(5) Special rules regarding duplicate DQB of an item of exchanged
basis property--(i) Adjustments to certain rules in applying paragraph
(b)(1) of this section. For purposes of paragraph (b)(1) of this
section for a taxable year of a section 245A shareholder, the following
rules apply with respect to duplicate DQB of an item of exchanged basis
property:
(A) Duplicate DQB of the item of exchanged basis property with
respect to an item of specified property to which the item of exchanged
property relates is not taken into account for purposes of paragraph
(b)(1) of this section if the disqualified basis of the item of
specified property is taken into account for purposes of paragraph
(b)(1) of this section. Thus, for example, if for a taxable year of a
section 245A shareholder the ownership requirement of paragraph (b)(3)
of this section is satisfied with respect to an item of specified
property and an item of exchanged basis property that relates to the
item of specified property, all of the disqualified basis of which is
duplicate DQB with respect to the item of specified property, then only
the disqualified basis of the item of specified property is taken into
account for purposes of, and is subject to reduction under, paragraph
(b)(1) of this section.
(B) If, pursuant to paragraph (b)(5)(i)(A) of this section,
duplicate DQB of an item of exchanged basis property with respect to an
item of specified property is not taken into account for purposes of
paragraph (b)(1) of this section, then, solely for purposes of Sec.
1.951A-2(c)(5), the duplicate DQB of the item of exchanged basis
property is reduced (in the same manner as it would be if the
disqualified basis were taken into account for purposes of paragraph
(b)(1) of this section) by the product of the amounts described in
paragraphs (b)(5)(i)(B)(1) and (2) of this section.
(1) The reduction, under paragraph (b)(1) of this section for the
taxable year of the section 245A shareholder, to the disqualified basis
of the item of specified property to which the item of exchanged basis
property relates.
(2) A fraction, the numerator of which is the duplicate DQB of the
item of exchanged basis property with respect to the item of specified
property, and the denominator of which is the sum of the amounts of
duplicate DQB with respect to the item of specified property of each
item of exchanged basis property that relates to the item of specified
property and for which the ownership requirement of paragraph (b)(3)(i)
of this section is satisfied for the taxable year of the section 245A
shareholder. For purposes of determining this fraction, duplicate DQB
of an item of exchanged basis property is determined pursuant to the
rules of paragraph (b)(2)(i) of this section (by replacing the term
``paragraph (b)(1)'' in that paragraph with the term ``paragraph
(b)(5)(i)(B)''). In addition, duplicate DQB of an item of exchanged
basis property is excluded from the denominator of the fraction to
[[Page 53116]]
the extent the duplicate DQB is attributable to duplicate DQB of
another item of exchanged basis property that is included in the
denominator of the fraction.
(ii) Adjustments to certain rules in applying paragraph (b)(4) of
this section. For purposes of paragraph (b)(4)(i)(A) of this section,
to the extent that disqualified basis of an item of specified property
gives rise to a basis benefit amount that is assigned to a taxable year
of a section 245A shareholder under paragraph (b)(4)(iii)(A) of this
section, and thereafter duplicate DQB attributable to such disqualified
basis of the item of specified property gives rise to an additional
basis benefit amount, the additional basis benefit amount cannot be
assigned to another taxable year of any section 245A shareholder.
Similarly, for purposes of paragraph (b)(4)(i)(A) of this section, to
the extent that duplicate DQB attributable to disqualified basis of an
item of specified property gives rise to a basis benefit amount that is
assigned to a taxable year of a section 245A shareholder under
paragraph (b)(4)(iii)(A) of this section, and thereafter such
disqualified basis of the item of specified property (or duplicate DQB
attributable to such disqualified basis of the item of specified
property) gives rise to an additional basis benefit amount, the
additional basis benefit amount cannot be assigned to another taxable
year of any section 245A shareholder.
(c) Reduction of extraordinary disposition account by reason of the
allocation and apportionment of deductions or losses attributable to
disqualified basis--(1) In general. For a taxable year of a CFC, if
there is an RGI account with respect to the CFC that relates to an
extraordinary disposition account of a section 245A shareholder with
respect to an SFC, and the section 245A shareholder satisfies the
ownership requirement of paragraph (c)(5) of this section for the
taxable year of the CFC, then, subject to the limitations in paragraphs
(c)(6) and (7) of this section, the extraordinary disposition account
is reduced (but not below zero) by the lesser of the following amounts
(each determined in the functional currency of the CFC)--
(i) The excess (if any) of--
(A) The product of--
(1) The adjusted earnings of the CFC for the taxable year of the
CFC; and
(2) The percentage of stock of the CFC (by value) that, in
aggregate, is owned directly or indirectly through one or more
specified entities by the section 245A shareholder and any domestic
affiliates on the last day of the taxable year of the CFC; over
(B) The sum of--
(1) The sum of the balance of the section 245A shareholder's and
any domestic affiliates' previously taxed earnings and profits accounts
with respect to the CFC for purposes of section 959 (determined as of
the end of the taxable year of the CFC and taking into account any
adjustments to the accounts for the taxable year);
(2) The sum of the balance of the hybrid deduction accounts (as
described in Sec. 1.245A(e)-1(d)(1)) with respect to shares of stock
of the CFC that the section 245A shareholder and any domestic
affiliates own (within the meaning of section 958(a), and determined by
treating a domestic partnership as foreign) as of the end of the
taxable year of the CFC and taking into account any adjustments to the
accounts for the taxable year; and
(3) The sum of the balance of the section 245A shareholder's and
any domestic affiliates' extraordinary disposition accounts with
respect to the CFC (determined as of the end of the taxable year of the
CFC and taking into account any adjustments to the accounts for the
taxable year). However, if the section 245A shareholder or a domestic
affiliate has an RGI account with respect to the CFC that relates to an
extraordinary disposition account with respect to the CFC, then only
the excess, if any, of the balance of the extraordinary disposition
account over the balance of the RGI account that relates to the
extraordinary disposition account (determined as of the end of the
taxable year of the CFC, but without regard to the application of
paragraph (c)(4)(i)(B) of this section for the taxable year) is taken
into account for purposes of this paragraph (c)(1)(i)(B)(3). In
addition, for purposes of this paragraph (c)(1)(i)(B)(3), an
extraordinary disposition account that but for paragraph (e)(1) of this
section would be with respect to the CFC for purposes of this section
is treated as an extraordinary disposition account with respect to the
CFC and thus is taken into account for purposes of this paragraph
(c)(1)(i)(B)(3).
(ii) The balance of the RGI account with respect to the CFC that
relates to the section 245A shareholder's extraordinary disposition
account with respect to the SFC (determined as of the end of the
taxable year of the CFC, but without regard to the application of
paragraph (c)(4)(i)(B) of this section for the taxable year).
(2) Timing of reduction to extraordinary disposition account. See
Sec. 1.245A-9(b)(3) for timing rules regarding the reduction to an
extraordinary disposition account.
(3) Adjusted earnings. The term adjusted earnings means, with
respect to a CFC and a taxable year of the CFC, the earnings and
profits of the CFC, determined as of the end of the CFC's taxable year
(taking into account all distributions during the taxable year, and not
taking into account any deficit in earnings and profits subject to
Sec. 1.381(c)(2)-1(a)(5)) and with the adjustments described in
paragraphs (c)(3)(i) through (iv) of this section.
(i) The earnings and profits are increased by the amount of any
deduction or loss that--
(A) Is or was attributable to disqualified basis of an item of
specified property, but only to the extent that gain recognized on the
extraordinary disposition of the item of specified property was
included in the initial balance of an extraordinary disposition
account;
(B) Is or was allocated and apportioned to residual CFC gross
income of the CFC (or a predecessor) solely by reason of Sec. 1.951A-
2(c)(5)(i); and
(C) Does not or has not given rise to or increased a deficit in
earnings and profits subject to Sec. 1.381(c)(2)-1(a)(5), determined
as of the end of the taxable year of the CFC.
(ii) The earnings and profits are decreased by the amount by which
any RGI account with respect to the CFC has been decreased pursuant to
paragraph (c)(4)(i)(B) of this section for a prior taxable year of the
CFC.
(iii) The earnings and profits are determined without regard to
earnings attributable to income described in section 245(a)(5)(A) or
dividends described in section 245(a)(5)(B) (determined without regard
to section 245(a)(12)).
(iv) The earnings and profits are decreased by the amount of any
deduction or loss that, but for paragraph (c)(3)(i)(C) of this section,
would be described in paragraph (c)(3)(i) of this section.
(4) RGI account--(i) In general. For a taxable year of a CFC, the
following rules apply to determine the balance of a section 245A
shareholder's RGI account that is with respect to the CFC and that
relates to an extraordinary disposition account of the section 245A
shareholder with respect to an SFC:
(A) The balance of the RGI account is increased by the product of
the amounts described in paragraphs (c)(4)(i)(A)(1) and (2) of this
section for a taxable year of the CFC.
(1) The sum of the amounts of deductions and losses of the CFC
that--
[[Page 53117]]
(i) Are attributable to disqualified basis of one or more items of
specified property that correspond to the extraordinary disposition
account; and
(ii) But for Sec. 1.951A-2(c)(5)(i), would have decreased one or
more categories of the CFC's positive subpart F income, the CFC's
tested income, or the CFC's ECTI, or increased or given rise to a
tested loss or one or more qualified deficits of the CFC.
(2) The lesser of--
(i) A fraction (expressed as a percentage), the numerator of which
is the sum of the portions of the CFC's subpart F income and tested
income or tested loss (expressed as a positive number) taken into
account under sections 951(a)(1)(A) and 951A(a) (as determined under
the rules of Sec. Sec. 1.951-1(b) and (e) and 1.951A-1(d)) by the
section 245A shareholder and any domestic affiliates of the section
245A shareholder and the section 245A shareholder's and any domestic
affiliates' pro rata shares of the CFC's qualified deficits (expressed
as a positive number), and the denominator of which is the sum of the
CFC's subpart F income, tested income or tested loss (expressed as a
positive number), and qualified deficits (expressed as a positive
number), but for purposes of this paragraph (c)(4)(i)(A)(2)(i) treating
ECTI (expressed as a positive number) as if it were subpart F income;
and
(ii) The extraordinary disposition ownership percentage applicable
as to the section 245A shareholder's extraordinary disposition account.
(B) The balance of the RGI account is decreased to the extent that,
by reason of the application of paragraph (c)(1) of this section with
respect to the taxable year of the CFC, there is a reduction to the
extraordinary disposition account of the section 245A shareholder.
(ii) Successor rules for RGI accounts. To the extent that an
extraordinary disposition account of a section 245A shareholder is
adjusted pursuant to Sec. 1.245A-5(c)(4), an RGI account of a CFC with
respect to the extraordinary disposition account is adjusted in a
similar manner.
(5) Ownership requirement with respect to a CFC. For a taxable year
of a CFC, a section 245A shareholder satisfies the ownership
requirement of this paragraph (c)(5) if, on the last day of the CFC's
taxable year, the section 245A shareholder or a domestic affiliate is a
United States shareholder with respect to the CFC.
(6) Allocation of reductions among multiple extraordinary
disposition accounts. This paragraph (c)(6) applies if, by reason of
the application of paragraph (c)(1) of this section with respect to a
taxable year of a CFC (and but for the application of this paragraph
(c)(6) and paragraph (c)(7) of this section), the sum of the reductions
under paragraph (c)(1) of this section to two or more extraordinary
disposition accounts of a section 245A shareholder or a domestic
affiliate of the section 245A shareholder would exceed the amount
described in paragraph (c)(1)(i)(A) of this section (the amount of such
excess, the excess amount). When this paragraph (c)(6) applies, the
reduction to each extraordinary disposition account described in the
previous sentence is equal to the reduction that would occur but for
this paragraph (c)(6) and paragraph (c)(7) of this section, less the
product of the excess amount and a fraction, the numerator of which is
the balance of the extraordinary disposition account, and the
denominator of which is the sum of the balances of all of the
extraordinary dispositions accounts described in the previous sentence.
For purposes of determining this fraction, the balance of an
extraordinary disposition account is determined as of the end of the
taxable year of the section 245A shareholder or the domestic affiliate,
as applicable, that includes the date on which the CFC's taxable year
ends (and after the determination of any extraordinary disposition
amounts or tiered extraordinary disposition amounts for the taxable
year of the section 245A shareholder or the domestic affiliate, as
applicable, and adjustments to the extraordinary disposition account
for prior extraordinary disposition amounts).
(7) Extraordinary disposition account not reduced below balance of
basis benefit account. An extraordinary disposition account of a
section 245A shareholder cannot be reduced pursuant to paragraph (c)(1)
of this section below the balance of the basis benefit account with
respect to the extraordinary disposition account (determined when a
reduction to the extraordinary disposition account would occur under
paragraph (c)(1) of this section).
(d) Special rules for determining when specified property
corresponds to an extraordinary disposition account--(1) Substituted
property--(i) Treatment as specified property that corresponds to an
extraordinary disposition account. For purposes of this section, an
item of substituted property is treated as an item of specified
property that corresponds to an extraordinary disposition account to
which the related item of specified property (that is, the item of
specified property to which the item of substituted property relates,
as described in paragraph (d)(1)(ii) of this section) corresponds. In
addition, in a case in which an item of substituted property relates to
an item of specified property that corresponds to a particular
extraordinary disposition account and an item of specified property
that corresponds to another extraordinary disposition account (such
that, pursuant to this paragraph (d)(1)(i), the item of substituted
property is treated as corresponding to multiple extraordinary
disposition accounts), only the disqualified basis of the item of
substituted property attributable to the first item of specified
property is taken into account for purposes of applying this section as
to the first extraordinary disposition account, and, similarly, only
the disqualified basis of the item of substituted property attributable
to the second item of specified property is taken into account for
purposes of applying this section as to the second extraordinary
disposition account.
(ii) Definition of substituted property. The term substituted
property means an item of property the disqualified basis of which is,
pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(2)(i) or (iii), increased by
reason of a reduction under Sec. 1.951A-3(h)(2)(ii)(B)(1) in
disqualified basis of an item of specified property. An item of
substituted property relates to an item of specified property if the
disqualified basis of the item of substituted property was increased by
reason of a reduction in disqualified basis of the item of specified
property.
(2) Exchanged basis property--(i) Treatment as specified property
that corresponds to an extraordinary disposition account for certain
purposes. For purposes of this section, an item of exchanged basis
property is treated as an item of specified property that corresponds
to an extraordinary disposition account to which the related item of
specified property (that is, the item of specified property to which
the item of exchanged basis property relates) corresponds.
(ii) Definition of exchanged basis property. The term exchanged
basis property means an item of property the disqualified basis of
which, pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(2)(ii), includes
disqualified basis of an item of specified property. An item of
exchanged basis property relates to an item of specified property if
the disqualified basis of the item of exchanged basis property includes
disqualified basis of the item of specified property.
(iii) Definition of duplicate DQB--(A) In general. The term
duplicate DQB means, with respect to an item of exchanged basis
property and the item of specified property to which the exchanged
basis property relates, the
[[Page 53118]]
disqualified basis of the item of exchanged basis property that
includes or is attributable to disqualified basis of the item of
specified property.
(B) Certain nonrecognition transfers involving stock or a
partnership interest. To the extent that an item of exchanged basis
property that is stock or an interest in a partnership (lower-tier
item) includes disqualified basis of an item of specified property to
which the lower-tier item relates (contributed item), and another item
of exchanged basis property that is stock or a partnership interest
(upper-tier item) includes disqualified basis of the lower-tier item
that is attributable to disqualified basis of the contributed item, the
disqualified basis of the upper-tier item is attributable to
disqualified basis of the contributed item and the upper-tier item is
an item of exchanged basis property that relates to the contributed
item. The principles of the preceding sentence apply each time
disqualified basis of an item of exchanged basis property that is stock
or an interest in a partnership is included in disqualified basis of
another item of exchanged basis property that is stock or an interest
in a partnership.
(C) Multiple nonrecognition transfers of an item of specified
property. To the extent that multiple items of exchanged basis property
that are stock or interests in a partnership include disqualified basis
of the same item of specified property (contributed item) to which the
items of exchanged basis property relate, and the issuer of one of the
items of exchanged basis property (upper-tier successor item) receives
the other item of exchanged basis property (lower-tier successor item)
in exchange for the contributed property, the disqualified basis of the
upper-tier successor item is attributable to disqualified basis of the
lower-tier successor item and the upper-tier successor item is an item
of exchanged basis property that relates to the lower-tier successor
item. The principles of the preceding sentence apply each time
disqualified basis of an item of specified property to which an item of
exchanged basis property that is stock or an interest in partnership
relates is included in disqualified basis of another item of exchanged
basis property that is stock or an interest in a partnership.
(e) Special rules when extraordinary disposition accounts are
adjusted pursuant to Sec. 1.245A-5(c)(4)--(1) Extraordinary
disposition account with respect to multiple SFCs. This paragraph
(e)(1) applies if, pursuant to Sec. 1.245A-5(c)(4)(ii) or (iii) (the
transaction or transactions by reason of which Sec. 1.245A-5(c)(4)(ii)
or (iii) applies, the adjustment transaction), an extraordinary
disposition account of a section 245A shareholder with respect to an
SFC (such extraordinary disposition account, the transferor ED account;
and such SFC, the transferor SFC) gives rise to an increase in the
balance of an extraordinary disposition account with respect to another
SFC (such extraordinary disposition account, the transferee ED account;
such SFC, the transferee SFC; and such increase, the adjustment
amount). When this paragraph (e)(1) applies, the following rules apply
for purposes of this section:
(i) A ratable portion of the transferee ED account is treated as
retaining its status as an extraordinary disposition account with
respect to the transferor SFC and is not treated as an extraordinary
disposition account with respect to the transferee SFC (the transferee
ED account to such extent, the deemed transferor ED account), based on
the adjustment amount relative to the balance of the transferee ED
account (without regard to this paragraph (e)(1)) immediately after the
adjustment transaction. Thus, for example, whether or not the
transferor SFC is in existence immediately after the transaction, the
items of specified property that correspond to the deemed transferor ED
account are the same as the items of specified property that correspond
to the transferor ED account. As an additional example, whether or not
the transferor SFC is in existence immediately after the transaction
the extraordinary disposition ownership percentage with respect to the
deemed transferor ED account is the same as the extraordinary
disposition ownership percentage with respect to the transferor ED
account (except to the extent the extraordinary disposition ownership
percentage is adjusted pursuant to the rules of paragraph (e)(2) of
this section).
(ii) In the case of an amount (such as an extraordinary disposition
amount or tiered extraordinary disposition amount) determined by
reference to the transferee ED account (without regard to this
paragraph (e)(1)), the portion of the amount that is considered
attributable to the deemed transferor ED account (and not the
transferee ED account) is equal to the product of such amount and a
fraction, the numerator of which is the balance of the deemed
transferor ED account, and the denominator of which is the balance of
the transferee ED account (determined without regard to this paragraph
(e)(1)). Thus, for example, if after an adjustment transaction the
transferee ED account (without regard to this paragraph (e)(1)) gives
rise to an extraordinary disposition amount, and if the fraction
(expressed as a percentage) is 40, then, for purposes of this section,
40 percent of the extraordinary disposition amount is treated as
attributable to the deemed transferor ED account and the remaining 60
percent of the extraordinary disposition amount is attributable to the
transferee ED account, and the balance of each of the deemed transferor
ED account and the transferee ED account is correspondingly reduced.
(2) Extraordinary disposition accounts with respect to a single
SFC. If an extraordinary disposition account of a section 245A
shareholder with respect to an SFC is reduced by reason of Sec.
1.245A-5(c)(4), then, except as provided in paragraph (e)(1) of this
section, for purposes of this section, the extraordinary disposition
ownership percentage as to the extraordinary disposition account (as
well as the extraordinary disposition ownership percentage as to any
extraordinary disposition account with respect to the SFC that is
increased by reason of the reduction) is adjusted in a similar manner.
Sec. 1.245A-9 Other rules and definitions.
(a) In general. This section provides rules of general
applicability for purposes of Sec. Sec. 1.245A-6 through 1.245A-10, a
transition rule to revoke an election to eliminate disqualified basis,
and definitions.
(b) Rules of general applicability--(1) Correspondence. An item of
specified property corresponds to a section 245A shareholder's
extraordinary disposition account if gain was recognized on the
extraordinary disposition of the item and the gain was taken into
account in determining the initial balance of the account. See Sec.
1.245A-8(d) for additional rules regarding when an item of property is
treated as corresponding to an extraordinary disposition account in
certain complex cases.
(2) Timing rules related to disqualified basis for purposes of
applying Sec. Sec. 1.245A-7(b) and 1.245A-8(b)--(i) Determination of
disqualified basis. For purposes of determining the fraction described
in Sec. 1.245A-7(b)(1)(ii) or Sec. 1.245A-8(b)(1)(ii) when applying
Sec. 1.245A-7(b)(1) or Sec. 1.245A-8(b)(1)(ii), respectively, for a
taxable year of a section 245A shareholder, disqualified basis of an
item of specified property is determined as of the beginning of the
taxable year of the CFC that holds the item of specified property (in a
case in which Sec. 1.245A-7(b) applies) or the specified property
owner (in a case in which Sec. 1.245A-8(b) applies), in either case,
that includes the date on which the section 245A shareholder's taxable
year ends (and without regard to any reductions to the disqualified
basis of
[[Page 53119]]
the item of specified property pursuant to Sec. 1.245A-7(b)(1) or
Sec. 1.245A-8(b)(1) for such taxable year of the CFC or the specified
property owner, as applicable). However, if disqualified basis of the
item of specified property arose as a result of an extraordinary
disposition that occurred after the beginning of the taxable year of
the CFC or the specified property owner described in the preceding
sentence, then the disqualified basis of the item of specified property
is determined as of the date on which the extraordinary disposition
occurred (and without regard to any reductions to the disqualified
basis of the item of specified property pursuant to paragraph (b)(1) of
this section for such taxable year of the CFC or the specified property
owner).
(ii) Reduction to disqualified basis of an item of specified
property. The reduction to disqualified basis of an item of specified
property pursuant to Sec. 1.245A-7(b)(1) or Sec. 1.245A-8(b)(1)
occurs on the date described in paragraph (b)(2)(i) of this section.
(iii) Definition of specified property owner. For purposes of
applying Sec. 1.245A-8(b)(1) and paragraphs (b)(2)(i) and (ii) of this
section for a taxable year of a section 245A shareholder, the term
specified property owner means, with respect to an item of specified
property, the person that, on at least one day of the taxable year of
the person that includes the date on which the section 245A
shareholder's taxable year ends, held the item of specified property.
However, if, but for this sentence, there would be more than one
specified property owner with respect to the item of specified
property, then the specified property owner is the person that held the
item of specified property on the earliest date that falls within the
section 245A shareholder's taxable year.
(3) Timing rules for reducing an extraordinary disposition account
under Sec. Sec. 1.245A-7(c) and 1.245A-8(c). For purposes of Sec.
1.245A-7(c)(1) or Sec. 1.245A-8(c)(1), as applicable, with respect to
a taxable year of a CFC, the reduction to an extraordinary disposition
account pursuant to Sec. 1.245A-7(c)(1) or Sec. 1.245A-8(c)(1) occurs
as of the end of the taxable year of the section 245A shareholder that
includes the date on which the CFC's taxable year ends (and after the
determination of any extraordinary disposition amounts or tiered
extraordinary amounts, adjustments to the extraordinary disposition
account for prior extraordinary disposition amounts, and the
application of Sec. 1.245A-7(b) or Sec. 1.245A-8(b), as applicable,
each for the taxable year of the section 245A shareholder).
(4) Currency translation. For purposes of applying Sec. Sec.
1.245A-7(b) and 1.245A-8(b), the disqualified basis of (and, if
applicable, a basis benefit amount with respect to) an item of
specified property that corresponds to an extraordinary disposition
account are translated (if necessary) into the functional currency in
which the extraordinary disposition account is maintained, using the
spot rate on the date the extraordinary disposition occurred. A
reduction in disqualified basis of an item of specified property
determined under Sec. 1.245A-7(b)(1) or Sec. 1.245A-8(b)(1) is
translated (if necessary) into the functional currency in which the
disqualified basis of the item of specified property is maintained, and
a reduction in an extraordinary disposition account determined under
Sec. 1.245A-7(c) or Sec. 1.245A-8(c) section is translated (if
necessary) into the functional currency in which the extraordinary
disposition account is maintained, in each case using the spot rate
described in the preceding sentence.
(5) Anti-avoidance rule. Appropriate adjustments are made pursuant
to this paragraph (b)(5), including adjustments that would disregard a
transaction or arrangement in whole or in part, to any amounts
determined under (or subject to application of) this section if a
transaction or arrangement is engaged in with a principal purpose of
avoiding the purposes of Sec. Sec. 1.245A-6 through 1.245A-10.
(c) Transition rule to revoke election to eliminate disqualified
basis--(1) In general. This paragraph (c)(1) applies to an election
that is filed, pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(3), to eliminate
the disqualified basis of an item of specified property. An election to
which this paragraph (c)(1) applies may be revoked if, on or before
[date 90 days after a Treasury decision adopting these rules as final
regulations is published in the Federal Register]--
(i) All controlling domestic shareholders (as defined in Sec.
1.964-1(c)(5)) of the CFC (or, in the case of an election made by a
partnership, the partnership) each attach a revocation statement (in
the manner described in paragraph (c)(2) of this section) to an amended
return, for the taxable year to which the election applies, that
revokes the election (or, in the case of a partnership subject to
subchapter C of chapter 63 of the Internal Revenue Code, requests
administrative adjustment under section 6227); and
(ii) The controlling domestic shareholders (or the partnership)
each file an amended tax return, for any other taxable years reflecting
the election to eliminate the disqualified basis, that reflects the
election having been revoked (or, in the case of a partnership subject
to subchapter C of chapter 63, requests administrative adjustment under
section 6227).
(2) Revocation statement. Except as otherwise provided in
publications, forms, instructions, or other guidance, a revocation
statement attached by a person to an amended tax return must include
the person's name, taxpayer identification number, and a statement that
the revocation statement is filed pursuant to paragraph (c)(1) of this
section to revoke an election pursuant to Sec. 1.951A-
3(h)(2)(ii)(B)(3). In addition, the revocation statement must be filed
in the manner prescribed in publications, forms, instructions, or other
guidance.
(d) Definitions. In addition to the definitions in Sec. 1.245A-5,
the following definitions apply for purposes of Sec. Sec. 1.245A-6
through 1.245A-11.
(1) The term adjusted earnings has the meaning provided in Sec.
1.245A-7(c)(3) or Sec. 1.245A-8(c)(3), as applicable.
(2) The term basis benefit account has the meaning provided in
Sec. 1.245A-8(b)(4)(i).
(3) The term basis benefit amount has the meaning provided in Sec.
1.245A-8(b)(4)(ii).
(4) The term disqualified basis has the meaning provided in Sec.
1.951A-3(h)(2)(ii).
(5) The term domestic affiliate means, with respect to a section
245A shareholder, a domestic corporation that is a related party with
respect to the section 245A shareholder. See also Sec. 1.245A-5(i)(19)
(defining related party).
(6) The term duplicate DQB has the meaning provided in Sec.
1.245A-8(d)(2)(iii).
(7) The term ECTI means, with respect to a taxable year of a
specified foreign person, the taxable income (or loss) of the specified
foreign person determined by taking into account only items of income
and gain that are, or are treated as, effectively connected with the
conduct of a trade or business in the United States (as described in
Sec. 1.882-4(a)(1)) and are not exempt from U.S. tax pursuant to a
treaty obligation of the United States, and items of deduction and loss
that are allocated and apportioned to such items of income and gain.
(8) The term exchanged basis property has the meaning provided in
Sec. 1.245A-8(d)(2)(ii).
(9) The term qualified deficit has the meaning provided in section
952(c)(1)(B)(ii).
[[Page 53120]]
(10) The term qualified related party has the meaning provided in
Sec. 1.245A-8(b)(3)(ii).
(11) The term RGI account means, with respect to a CFC and an
extraordinary disposition account of a section 245A shareholder with
respect to an SFC, an account of the section 245A shareholder with
respect to an SFC (the initial balance of which is zero), adjusted at
the end of each taxable year of the CFC pursuant to the rules of Sec.
1.245A-7(c)(4) or Sec. 1.245A-8(c)(4), as applicable. The RGI account
must be maintained in the functional currency of the CFC.
(12) The term specified foreign person means a nonresident alien
individual (as defined in section 7701(b) and the regulations under
section 7701(b)) or a foreign corporation (including a CFC) that
conducts, or is treated as conducting, a trade or business in the
United States (as described in Sec. 1.882-4(a)(1)).
(13) The term specified property owner has the meaning provided in
Sec. 1.245A-8(b)(2)(iii).
(14) The term subpart F income has the meaning provided in section
952(a).
(15) The term substituted property has the meaning provided in
Sec. 1.245A-8(d)(1)(ii).
(16) The term tested income has the meaning provided in section
951A(c)(2)(A).
(17) The term tested loss has the meaning provided in section
951A(c)(2)(B).
Sec. 1.245A-10 Examples.
(a) Scope. This section provides examples illustrating the
application of Sec. Sec. 1.245A-6 through 1.245A-9.
(b) Presumed facts. For purposes of the examples in the section,
except as otherwise stated, the following facts are presumed:
(1) US1 and US2 are both domestic corporations that have calendar
taxable years.
(2) CFC1, CFC2, CFC3, and CFC4 are all SFCs and CFCs that have
taxable years ending November 30.
(3) Each entity uses the U.S. dollar as its functional currency.
(4) There are no items of deduction or loss attributable to an item
of specified property.
(5) Absent the application of Sec. 1.245A-5, any dividends
received by US1 from CFC1 would meet the requirements to qualify for
the section 245A deduction.
(6) All dispositions of items of specified property by an SFC
during a disqualified period of the SFC to a related party give rise to
an extraordinary disposition.
(7) None of the CFCs have a deficit subject to Sec. 1.381(c)(2)-
1(a)(5), and none of the CFCs are engaged in the conduct of a trade or
business in the United States (and therefore none of the CFCs have
ECTI).
(8) There is no previously taxed earnings and profits account with
respect to any CFC for purposes of section 959. In addition, each
hybrid deduction account with respect to a share of stock of a CFC has
a zero balance at all times. Further, there is no extraordinary
disposition account with respect to any CFC.
(9) Under Sec. 1.245A-11(b), taxpayers choose to apply Sec. Sec.
1.245A-6 through 1.245A-11 to the relevant taxable years.
(c) Examples--(1) Example 1. Reduction of disqualified basis
under rule for simple cases by reason of dividend paid out of
extraordinary disposition account--(i) Facts. US1 owns 100% of the
single class of stock of CFC1 and CFC2. On November 30, 2018, in a
transaction that is an extraordinary disposition, CFC1 sells two
items of specified property, Item 1 and Item 2, to CFC2 in exchange
for $150x of cash (the ``Disqualified Transfer''). Item 1 is sold
for $90x and Item 2 is sold for $60x. Item 1 and Item 2 each has a
basis of $0 in the hands of CFC1 immediately before the Disqualified
Transfer, and therefore CFC1 recognizes $150x of gain as a result of
the Disqualified Transfer ($150x-$0). After the Disqualified
Transfer, CFC2's only assets are Item 1 and Item 2. On November 30,
2018, and thus during US1's taxable year ending December 31, 2018,
CFC1 distributes $150x of cash to US1, and all of the distribution
is characterized as a dividend under section 301(c)(1) and treated
as a distribution out of earnings and profits described in section
959(c)(3). For CFC1's taxable year ending on November 30, 2018, CFC1
has $160x of earnings and profits described in section 959(c)(3),
without regard to any distributions during the taxable year. CFC2
continues to hold Item 1 and Item 2. Lastly, because the conditions
of Sec. 1.245A-6(b)(1) and (2) are satisfied for US1's 2018 taxable
year, US1 chooses to apply Sec. 1.245A-7 (rules for simple cases)
in lieu of Sec. 1.245A-8 (rules for complex cases) for that taxable
year.
(ii) Analysis--(A) Application of Sec. Sec. 1.245A-5 and
1.951A-2 as a result of the Disqualified Transfer. As a result of
the Disqualified Transfer, under Sec. 1.951A-2(c)(5), Item 1 has
disqualified basis of $90x, and Item 2 has disqualified basis of
$60x. In addition, as a result of the Disqualified Transfer, under
Sec. 1.245A-5(c)(3)(i)(A), US1 has an extraordinary disposition
account with respect to CFC1 with an initial balance of $150x. Under
Sec. 1.245A-5(c)(2)(i), $10x of the dividend is considered paid out
of non-extraordinary disposition E&P of CFC1 with respect to US1,
and $140x of the dividend is considered paid out of US1's
extraordinary disposition account with respect to CFC1 to the extent
of the balance of the extraordinary disposition account ($150x).
Thus, the dividend of $150x is an extraordinary disposition amount,
within the meaning of Sec. 1.245A-5(c)(1), to the extent of $140x.
As a result, the balance of the extraordinary disposition account is
reduced to $10x ($150x-$140x).
(B) Correspondence requirement. Under Sec. 1.245A-9(b)(1), each
of Item 1 and Item 2 corresponds to US1's extraordinary disposition
account with respect to CFC1, because as a result of the
Disqualified Transfer CFC1 recognized gain with respect to Item 1
and Item 2, and the gain was taken into account in determining the
initial balance of US1's extraordinary disposition account with
respect to CFC1.
(C) Reduction of disqualified basis of Item 1. Because Item 1
corresponds to US1's extraordinary disposition account, the
disqualified basis of Item 1 is reduced pursuant to Sec. 1.245A-
7(b)(1) by reason of US1's $140x extraordinary disposition amount
for US1's 2018 taxable year. Paragraphs (c)(2)(ii)(C)(1) through (3)
of this section describe the determinations pursuant to Sec.
1.245A-7(b)(1).
(1) To determine the reduction to the disqualified basis of Item
1, the disqualified basis of Item 1, as well as the disqualified
basis of Item 2, must be determined as of the date described in
Sec. 1.245A-9(b)(2)(i) (and before the application of Sec. 1.245A-
7(b)(1)). See Sec. 1.245A-7(b)(1)(ii). For each of Item 1 and Item
2, that date is December 1, 2018. December 1, 2018, is the first day
of the taxable year of CFC2 (the CFC that holds Item 1 and Item 2)
beginning on December 1, 2018, which is the taxable year of CFC2
that includes December 31, 2018, the date on which US1's 2018
taxable year ends. See Sec. 1.245A-9(b)(2)(i).
(2) Pursuant to Sec. 1.245A-7(b)(1), the disqualified basis of
Item 1 is reduced by $84x, computed as the product of--
(i) $140x, the extraordinary disposition amount; and
(ii) A fraction, the numerator of which is $90x (the
disqualified basis of Item 1 on December 1, 2018, and before the
application of Sec. 1.245A-7(b)(1)), and the denominator of which
is $150x (the disqualified basis of Item 1, $90x, plus the
disqualified basis of Item 2, $60x, in each case determined on
December 1, 2018, and before the application of Sec. 1.245A-
7(b)(1)). See Sec. 1.245A-7(b)(1).
(3) The $84x reduction to the disqualified basis of Item 1
occurs on December 1, 2018, the date on which the disqualified basis
of Item 1 is determined for purposes of determining the reduction
pursuant to Sec. 1.245A-7(b)(1). See Sec. 1.245A-9(b)(2)(ii).
(D) Reduction of disqualified basis of Item 2. For reasons
similar to those described in paragraph (c)(2)(ii)(C) of this
section, on December 1, 2018, the disqualified basis of Item 2 is
reduced by $56x, the amount equal to the product of $140x, the
extraordinary disposition amount, and a fraction, the numerator of
which is $60x (the disqualified basis of Item 2 on December 1, 2018,
and before the application of Sec. 1.245A-7(b)(1)), and the
denominator of which is $150x (the disqualified basis of Item 1,
$90x, plus the disqualified basis of Item 2, $60x, in each case
determined on December 1, 2018, and before the application of Sec.
1.245A-7(b)(1)).
(2) Example 2. Basis benefit amount and impact on reduction to
disqualified basis
[[Page 53121]]
under rule for complex cases--(i) Facts. The facts are the same as
in paragraph (c)(1)(i) of this section (Example 1) (and the results
are the same as in paragraph (c)(1)(ii)(A) of this section), except
that, on December 1, 2018, CFC2 sells Item 1 for $90x of cash to an
individual that is not a related party with respect to US1 or CFC2
(such transaction, the ``Sale,'' and such individual, ``Individual
A''). At the time of the Sale, CFC2's basis in Item 1 is $90x (all
of which is disqualified basis, as described in Sec. 1.951A-
3(h)(2)(ii)(A)). CFC2 takes into the account the disqualified basis
of Item 1 for purposes of determining the amount of gain recognized
on the Sale, which is $0 ($90x-$90x); but for the disqualified
basis, CFC2 would have had $90x of gain that would have been taken
into account in computing its tested income. As a result of the
Sale, the condition of Sec. 1.245A-6(b)(2) is not satisfied,
because on at least one day of CFC2's taxable year beginning on
December 1, 2018 (which begins within US1's 2018 taxable year) CFC2
does not hold Item 1. See Sec. 1.245A-6(b)(2)(ii)(C)(1). US1
therefore applies Sec. 1.245A-8 (rules for complex cases) for its
2018 taxable year. See Sec. 1.245A-6(b).
(ii) Analysis--(A) Ownership requirement. With respect to each
of Item 1 and Item 2, the ownership requirement of Sec. 1.245A-
8(b)(3)(i) is satisfied for US1's 2018 taxable year. This is because
on at least one day that falls within US1's 2018 taxable year, each
of Item 1 and Item 2 is held by CFC2, and US1 directly owns all of
the stock of CFC2 throughout such taxable year (and thus, for
purposes of applying Sec. 1.245A-8(b)(3)(i), US1 owns at least 10%
of the interests of CFC2 on at least one day that falls within such
taxable year). See Sec. 1.245A-8(b)(3).
(B) Basis benefit amount with respect to Item 1 as a result of
the Sale. Under Sec. 1.245A-8(b)(4)(i), US1 has a basis benefit
account with respect to its extraordinary disposition account with
respect to CFC1. As described in paragraphs (c)(2)(ii)(B)(1) through
(3) of this section, the balance of the basis benefit account (which
is initially zero) is, on December 31, 2018, increased by $90x, the
basis benefit amount with respect to Item 1 and assigned to US1's
2018 taxable year.
(1) By reason of the Sale, for CFC2's taxable year beginning
December 1, 2018, and ending November 30, 2019, the entire $90x of
disqualified basis of Item 1 is taken into account for U.S. tax
purposes by CFC2 and, as a result, reduces CFC2's tested income or
increases CFC2's tested loss. Accordingly, for such taxable year,
there is a $90x basis benefit amount with respect to Item 1. See
Sec. 1.245A-8(b)(4)(ii)(A). The result would be the same if the
Sale were to a related person and thus, pursuant to Sec. 1.951A-
3(h)(2)(ii)(B)(1)(ii), no portion of the $90x of disqualified basis
were eliminated or reduced by reason of the Sale. See Sec. 1.245A-
8(b)(4)(ii)(B).
(2) The $90x basis benefit amount with respect to Item 1 is
assigned to US1's 2018 taxable year. This is because the ownership
requirement of Sec. 1.245A-8(b)(3)(i) is satisfied with respect to
Item 1 for US1's 2018 taxable year, and the basis benefit amount
occurs in CFC2's taxable year beginning December 1, 2018, a taxable
year of CFC2 that begins within US1's 2018 taxable year (and, but
for Sec. 1.245A-8(b)(4)(iii)(A)(2)(ii), the basis benefit amount
would not be assigned to a taxable year of US1, such as the taxable
year of US1 beginning January 1, 2019, given that, as result of the
Sale, the ownership requirement of Sec. 1.245A-8(b)(3)(i) would not
be satisfied with respect to Item 1 for such taxable year). See
Sec. 1.245A-8(b)(4)(iii)(A).
(3) On December 31, 2018 (the last day of US1's 2018 taxable
year), US1's basis benefit account with respect to its extraordinary
disposition account with respect to CFC1 is increased by $90x, the
$90x basis benefit amount with respect to Item 1 and assigned to
US1's 2018 taxable year. The basis benefit account is increased by
such amount because Item 1 corresponds to US1's extraordinary
disposition account with respect to CFC1, and the extraordinary
disposition ownership percentage applicable to such extraordinary
disposition account is 100. See Sec. 1.245A-8(b)(4)(i)(A).
(C) Basis benefit amount limitation on reduction to disqualified
basis. By reason of US1's $140x extraordinary disposition amount for
US1's 2018 taxable year, the disqualified basis of Item 1 is reduced
by $30x, and the disqualified basis of Item 2 is reduced by $20x,
pursuant to Sec. 1.245A-8(b)(1). See Sec. 1.245A-8(b). Paragraphs
(c)(2)(ii)(C)(1) through (4) of this section describe the
determinations pursuant to Sec. 1.245A-8(b)(1).
(1) For purposes of determining the reduction to the
disqualified bases of Item 1 and Item 2, the disqualified bases of
the Items are determined on December 1, 2018 (and before the
application of Sec. 1.245A-8(b)(1)). See Sec. 1.245A-8(b)(1)(ii).
The disqualified bases of the Items are determined on December 1,
2018, because that date is the first day of the taxable year of CFC2
beginning on December 1, 2018, which is the taxable year of CFC2
(the specified property owner of each of Item 1 and Item 2) that
includes December 31, 2018, the date on which US1's 2018 taxable
year ends. See Sec. 1.245A-8(b)(2)(i). For purposes of applying
Sec. Sec. 1.245A-8(b)(1) and Sec. 1.245A-9(b)(2) for US1's 2018
taxable year, CFC2 is the specified property owner of each of Item 1
and Item 2 because, on at least one day of CFC2's taxable year that
includes the date on which US1's 2018 taxable year ends (that is, on
at least one day of CFC2's taxable year beginning December 1, 2018),
CFC2 held the Item. See Sec. 1.245A-9(b)(2)(iii). CFC2 is the
specified property owner of Item 1 even though Individual A also
held Item 1 during Individual A's taxable year that includes the
date on which US1's 2018 taxable year ends because CFC2 held Item 1
on an earlier date than Individual A. See Sec. 1.245A-9(b)(2)(iii).
(2) Pursuant to Sec. 1.245A-8(b)(1), the disqualified basis of
Item 1 is reduced by $30x, computed as the product of--
(i) $50x, the excess of the extraordinary disposition amount
($140x) over the balance of the basis benefit account with respect
to US1's extraordinary disposition with respect to CFC1 ($90x); and
(ii) A fraction, the numerator of which is $90x (the
disqualified basis of Item 1 on December 1, 2018, and before the
application of Sec. 1.245A-8(b)(1)), and the denominator of which
is $150x (the disqualified basis of Item 1, $90x, plus the
disqualified basis of Item 2, $60x, in each case determined on
December 1, 2018, and before the application of Sec. 1.245A-
8(b)(1)). See paragraph Sec. 1.245A-8(b)(1).
(3) Pursuant to Sec. 1.245A-8(b)(1), the disqualified basis of
Item 2 is reduced by $20x, computed as the product of--
(i) $50x, the excess of the extraordinary disposition amount
($140x) over the balance of the basis benefit account with respect
to US1's extraordinary disposition with respect to CFC1 ($90x); and
(ii) A fraction, the numerator of which is $60x (the
disqualified basis of Item 2 on December 1, 2018, and before the
application of paragraph (b)(1) of this section), and the
denominator of which is $150x (the disqualified basis of Item 1,
$90x, plus the disqualified basis of Item 2, $60x, in each case
determined on December 1, 2018, and before the application of Sec.
1.245A-8(b)(1)). See Sec. 1.245A-8(b)(1).
(4) The $30x and $20x reductions to the disqualified bases of
Item 1 and Item 2, respectively, occur on December 1, 2018, the date
on which the disqualified bases of the Items are determined for
purposes of determining the reductions pursuant to Sec. 1.245A-
8(b)(1). See Sec. 1.245A-9(b)(2)(ii).
(D) Reduction of basis benefit account. The balance of the basis
benefit account with respect to US1's extraordinary disposition
account with respect to CFC1 is decreased by $90x, the amount by
which, for CFC2's taxable year beginning December 1, 2018, the
disqualified bases of Item 1 and Item 2 would have been reduced
pursuant to Sec. 1.245A-8(b)(1) but for the $90x balance of the
basis benefit account. See Sec. 1.245A-8(b)(4)(i)(B). The reduction
to the balance of the basis benefit account occurs on December 31,
2018, and after the completion of all other computations pursuant to
Sec. 1.245A-8(b). See Sec. 1.245A-8(b)(4)(i)(B).
(3) Example 3. Reduction in balance of extraordinary disposition
account under rules for simple cases by reason of allocation and
apportionment of deductions to residual CFC gross income--(i) Facts.
The facts are the same as in paragraph (c)(1)(i) of this section
(Example 1) (and the results are the same as in paragraph
(c)(1)(ii)(A) of this section), except that CFC1 does not make a
distribution to US1. In addition, during CFC2's taxable year
beginning December 1, 2018, and ending November 30, 2019, the
disqualified basis of Item 1 gives rise to a $6x amortization
deduction, and the disqualified basis of Item 2 gives rise to a $4x
amortization deduction, and each of the amortization deductions is
allocated and apportioned to residual CFC gross income of CFC2
solely by reason of Sec. 1.951A-2(c)(5) (though, but for Sec.
1.951A-2(c)(5), would have been allocated and apportioned to gross
tested income of CFC2). Further, as of the end of CFC2's taxable
year ending November 30, 2019, CFC2 has $15x of earnings and
profits. Lastly, because the conditions of Sec. 1.245A-6(b)(1) and
(2) are satisfied for US1's 2018 taxable year, US1 chooses to apply
Sec. 1.245A-7 (rules for simple cases) in lieu of Sec. 1.245A-8
(rules for complex cases) for that taxable year.
[[Page 53122]]
(ii) Analysis. Pursuant to Sec. 1.245A-7(c)(1), US1's
extraordinary disposition account with respect to CFC1 is reduced by
the lesser of the amount described in Sec. 1.245A-7(c)(1)(i) with
respect to US1, and the RGI account of US1 with respect to CFC2 that
relates to its extraordinary disposition account with respect to
CFC1. See Sec. 1.245A-7(c)(1). Paragraphs (c)(3)(ii)(A) through (D)
of this section describe the determinations pursuant to Sec.
1.245A-8(c)(1).
(A) Computation of adjusted earnings of CFC2, and amount
described in Sec. 1.245A-7(c)(1)(i) with respect to US1. To
determine the amount described in Sec. 1.245A-7(c)(1)(i) with
respect to US1, the adjusted earnings of CFC2 must be computed for
CFC2's taxable year ending November 30, 2019. See Sec. 1.245A-
7(c)(1)(i). Paragraphs (c)(3)(ii)(A)(1) and (2) of this section
describe these determinations.
(1) The adjusted earnings of CFC2 for its taxable year ending
November 30, 2019, is $25x, computed as $15x (CFC2's earnings and
profits as of November 30, 2019, the last day of that taxable year),
plus $10x (the sum of the $6x and $4x amortization deductions of
CFC2 for that taxable year, which is the amount of all deductions or
losses of CFC2 that is or was attributable to disqualified basis of
items of specified property and allocated and apportioned to
residual CFC gross income of CFC2 solely by reason of Sec. 1.951A-
2(c)(5)(i)). See Sec. 1.245A-7(c)(3).
(2) For CFC2's taxable year ending November 30, 2019, the amount
described in Sec. 1.245A-7(c)(1)(i) with respect to US1 is $25x,
computed as the excess of $25x (the adjusted earnings) over $0 (the
sum of the balance of the previously taxed earnings and profits
accounts with respect to CFC2).
(B) Increase to balance of RGI account. Under Sec. 1.245A-
9(d)(11), US1 has an RGI account with respect to CFC2 that relates
to its extraordinary disposition account with respect to CFC1. On
November 30, 2019 (the last day of CFC2's taxable year), the balance
of the RGI account (which is initially zero) is increased by $10x,
the sum of the $6x and $4x amortization deductions of CFC2 for its
taxable year ending November 30, 2019. See Sec. 1.245A-7(c)(4)(i).
Each of the amortization deductions is taken into account for this
purpose because, but for Sec. 1.951A-2(c)(5)(i), the deduction
would have decreased CFC2's tested income or increased or given rise
to a tested loss of CFC2. See Sec. 1.245A-7(c)(4)(i).
(C) Reduction in balance of extraordinary disposition account.
Pursuant to Sec. 1.245A-7(c)(1), US1's extraordinary disposition
account with respect to CFC1 is reduced by $10x, the lesser of the
amount described in Sec. 1.245A-7(c)(1)(i) with respect to US1 for
CFC2's taxable year ending November 30, 2019 ($25x), and the balance
of US1's RGI account with respect to CFC2 that relates to its
extraordinary disposition account with respect to CFC1 ($10x,
determined as of November 30, 2019, but without regard to the
application of Sec. 1.245A-7(c)(4)(ii) for the taxable year of CFC2
ending on that date). See Sec. 1.245A-7(c)(1). The $10x reduction
in the balance of US1's extraordinary disposition account occurs on
December 31, 2019, the last day of US1's taxable year that includes
November 30, 2019 (the last day of CFC2's taxable year). See Sec.
1.245A-9(c)(3).
(D) Reduction in balance of RGI account. On November 30, 2019
(the last day of CFC2's taxable year), the balance of US1's RGI
account with respect to CFC2 that relates to its extraordinary
disposition account with respect to CFC1 is decreased by $10x, the
amount of the reduction, pursuant to Sec. 1.245A-7(c)(1) section
and by reason of the RGI account, to US1's extraordinary disposition
account with respect to CFC1. See Sec. 1.245A-7(c)(4)(ii).
Therefore, following that reduction, the balance of the RGI account
is zero ($10x-$10x).
(iii) Alternative facts in which the reduction is limited by
earnings and profits. The facts are the same as in paragraph
(c)(3)(i) of this section (Example 3), except that CFC2 has a $5x
deficit in its earnings and profits as of the end of its taxable
year ending November 30, 2019. In this case--
(A) The adjusted earnings of CFC2 for its taxable year ending
November 30, 2019, is $5x, computed as -$5x (CFC2's deficit in
earnings and profits as of November 30, 2019) plus $10x (the sum of
the $6x and $4x amortization deductions of CFC2), see Sec. 1.245A-
7(c)(3);
(B) The amount described in Sec. 1.245A-7(c)(1)(i) with respect
to US1 for CFC's taxable year ending November 30, 2019, is $5x,
computed as the excess of $5x (the adjusted earnings) over $0 (the
sum of the balance of the previously taxed earnings and profits
accounts with respect to CFC2), see Sec. 1.245A-7(c)(1)(i);
(C) On December 31, 2019, US1's extraordinary disposition
account with respect to CFC1 is reduced by $5x, the lesser of the
amount described in Sec. 1.245A-7(c)(1)(i) with respect to US1 for
CFC2's taxable year ending November 30, 2019 ($5x), and the balance
of US1's RGI account with respect to CFC2 that relates to its
extraordinary disposition account with respect to CFC1 ($10x,
determined as of November 30, 2019, but without regard to the
application of Sec. 1.245A-8(c)(4)(i)(B) for the taxable year of
CFC2 ending on that date), see Sec. Sec. 1.245A-7(c)(1) and 1.245A-
9(c)(3); and
(D) On November 30, 2019 (the last day of CFC2's taxable year),
the balance of US1's RGI account with respect to CFC2 is decreased
by $5x (the amount of the reduction, pursuant to Sec. 1.245A-
7(c)(1) and by reason of the RGI account, to US1's extraordinary
disposition account with respect to CFC1) and, therefore, following
such reduction, the balance of the RGI account is $5x ($10x-$5x),
see Sec. 1.245A-7(c)(4)(ii).
(4) Example 4. Reduction to extraordinary disposition accounts
limited by Sec. 1.245A-8(c)(6)--(i) Facts. The facts are the same
as in paragraph (c)(3)(iii) of this section (Example 3, alternative
facts in which the reduction is limited by earnings and profits)
(and the results are the same as in paragraph (c)(1)(ii)(A) of this
section), except that US1 also owns 100% of the stock of US2, which
owns 100% of the stock of CFC3, and on November 30, 2018, in a
transaction that was an extraordinary disposition, CFC3 sold an item
of specified property (``Item 3'') to CFC2 in exchange for $200x of
cash. Item 3 had a basis of $0 in the hands of CFC3 immediately
before the sale and, therefore, CFC3 recognized $200x of gain as a
result of the sale ($200x-$0), Item 3 has $200x of disqualified
basis under Sec. 1.951A-2(c)(5), and US2 has an extraordinary
disposition account with respect to CFC3 with an initial balance of
$200x under Sec. 1.245A-5(c)(3)(i)(A). Moreover, during CFC2's
taxable year beginning December 1, 2018, and ending November 30,
2019, the disqualified basis of Item 3 gives rise to a $20x
amortization deduction, which is allocated and apportioned to
residual CFC gross income of CFC2 solely by reason of Sec. 1.951A-
2(c)(5) (though, but for Sec. 1.951A-2(c)(5), would have been
allocated and apportioned to gross tested income of CFC2). Further,
as of the end of US1's 2018 taxable year, the balance of US1's basis
benefit account with respect to its extraordinary disposition
account with respect to CFC1 is $0; similarly, as of the end of
US2's 2018 taxable year, the balance of US2's basis benefit account
with respect to its extraordinary disposition account with respect
to CFC2 is $0. Because CFC2 holds items of specified property that
correspond to more than one extraordinary disposition account (that
is, Item 1 and Item 2 correspond to US1's extraordinary disposition
account with respect to CFC2, and Item 3 corresponds to US2's
extraordinary disposition account with respect to CFC2), the
condition of Sec. 1.245A-6(b)(2) is not satisfied. See Sec.
1.245A-6(b)(2)(ii)(C)(3). US1 and US2 therefore apply Sec. 1.245A-8
(rules for complex cases) for their 2018 taxable years.
(ii) Analysis. Pursuant to Sec. 1.245A-8(c)(1), US1's
extraordinary disposition account with respect to CFC1 is, subject
to the limitation in Sec. 1.245A-8(c)(6), reduced by the lesser of
the amount described in Sec. 1.245A-8(c)(1)(i) with respect to US1,
and the RGI account of US1 with respect to CFC2 that relates to its
extraordinary disposition account with respect to CFC1. See Sec.
1.245A-8(c)(1). Similarly, US2's extraordinary disposition account
with respect to CFC3 is, subject to the limitation in Sec. 1.245A-
8(c)(6), reduced by the lesser of the amount described in Sec.
1.245A-8(c)(1)(i) with respect to US2, and the RGI account of US2
with respect to CFC2 that relates to its extraordinary disposition
account with respect to CFC3. See Sec. 1.245A-8(c)(1). Paragraphs
(c)(4)(ii)(A) through (F) of this section describe the
determinations pursuant to Sec. 1.245A-8(c)(1).
(A) Ownership requirement. Each of US1 and US2 satisfy the
ownership requirement of Sec. 1.245A-8(c)(5) for CFC2's taxable
year ending November 30, 2019, because on the last day of that
taxable year each is a United States shareholder with respect to
CFC2. See Sec. 1.245A-8(c)(5).
(B) Computation of adjusted earnings of CFC2, and amount
described in Sec. 1.245A-8(c)(1)(i) with respect to US1 and US2.
The adjusted earnings of CFC2 for its taxable year ending November
30, 2019, is $25x, computed as -$5x (CFC2's deficit in earnings and
profits as of November 30, 2019), plus $30x (the sum of the $6x,
$4x, and $20x amortization deductions of CFC2). See Sec. 1.245A-
8(c)(3). For CFC2's taxable year ending November 30, 2019, the
amount described in Sec. 1.245A-8(c)(1)(i) with respect to US1 is
$25x, computed as the excess of the
[[Page 53123]]
product of $25x (the adjusted earnings) and 100% (the percentage of
the stock of CFC2 that US1 and its domestic affiliate, US2, own),
over $0 (the sum of the balance of certain previously taxed earnings
and profits accounts and hybrid deduction accounts). See Sec.
1.245A-8(c)(1)(i). Similarly, for CFC2's taxable year ending
November 30, 2019, the amount described in Sec. 1.245A-8(c)(1)(i)
with respect to US2 is $25x, computed as the excess of the product
of $25x (the adjusted earnings) and 100% (the percentage of the
stock of CFC2 that US2 and its domestic affiliate, US1, own), over
$0 (the sum of the balance of certain previously taxed earnings and
profits accounts and hybrid deduction accounts). See Sec. 1.245A-
8(c)(1)(i).
(C) Increase to balance of RGI account. As described in
paragraph (c)(3)(ii)(B) of this section, US1 has an RGI account with
respect to CFC2 that relates to its extraordinary disposition
account with respect to CFC1, and the balance of the RGI account is
$10x on November 30, 2019 (the last day of CFC2's taxable year).
Similarly, US2 has an RGI account with respect to CFC2 that relates
to its extraordinary disposition account with respect to CFC3, and
the balance of the RGI account is $20x on November 30, 2019
(reflecting a $20x increase to the balance of the account for the
$20x amortization deduction of CFC2 for its taxable year ending
November 30, 2019). See Sec. 1.245A-8(c)(4)(i).
(D) Reduction in balance of extraordinary disposition accounts
but for Sec. 1.245A-8(c)(6). But for the application of Sec.
1.245A-8(c)(6), US1's extraordinary disposition account with respect
to CFC2 would be reduced by $10x, which is the lesser of $25x, the
amount described in Sec. 1.245A-8(c)(1)(i) with respect to US1 for
CFC2's taxable year ending November 30, 2019, and $10x, the balance
of the RGI account of US1 with respect to CFC2 that relates to its
extraordinary disposition account with respect to CFC1 (determined
as of November 30, 2019, but without regard to the application of
Sec. 1.245A-8(c)(4)(i)(B) for the taxable year of CFC2 ending on
that date). See Sec. 1.245A-8(c)(1)(i) and (ii). Similarly, but for
the application of Sec. 1.245A-8(c)(6), US2's extraordinary
disposition account with respect to CFC3 would be reduced by $20x,
which is the lesser of $25x, the amount described in Sec. 1.245A-
8(c)(1)(i) with respect to US2 for CFC2's taxable year ending
November 30, 2019, and $20x, the balance of the RGI account of US2
with respect to CFC2 that relates to its extraordinary disposition
account with respect to CFC3 (determined as of November 30, 2019,
but without regard to the application of Sec. 1.245A-8(c)(4)(i)(B)
for the taxable year of CFC2 ending on that date). See Sec. 1.245A-
8(c)(1)(i) and (ii).
(E) Application of limitation of Sec. 1.245A-8(c)(6). As
described in paragraph (c)(4)(ii)(D) of this section, but for the
application of Sec. 1.245A-8(c)(6), there would be a total of $30x
of reductions to US1's extraordinary disposition account with
respect to CFC1, and US2's extraordinary disposition account with
respect to CFC3, by reason of the application of Sec. 1.245A-
8(c)(1) with respect to CFC2's taxable year ending November 30,
2019. Because that $30x exceeds the amount described in Sec.
1.245A-8(c)(1)(i) with respect to US1 and US2 ($25x)--
(1) US1's extraordinary disposition account with respect to CFC1
is reduced by $7.86x, computed as $10x (the reduction that would
occur but for Sec. 1.245A-8(c)(6)) less the product of $5x (the
excess amount, computed as $30x, the total reductions that would
occur but for the application of Sec. 1.245A-8(c)(6), less $25x,
the amount described in Sec. 1.245A-8(c)(1)(i)) and a fraction, the
numerator of which is $150x (the balance of US1's extraordinary
disposition account with respect to CFC1) and the denominator of
which is $350x ($150x, the balance of US1's extraordinary
disposition account with respect to CFC1, plus $200x, the balance of
US2's extraordinary disposition account with respect to CFC3), see
Sec. 1.245A-8(c)(6); and
(2) US2's extraordinary disposition account with respect to CFC3
is reduced by $17.14x, computed as $20x (the reduction that would
occur but for Sec. 1.245A-8(c)(6)) less the product of $5x (the
excess amount, computed as $30x, the total reductions that would
occur but for the application of Sec. 1.245A-8(c)(6), less $25x,
the amount described in Sec. 1.245A-8(c)(1)(i)) and a fraction, the
numerator of which is $200x (the balance of US2's extraordinary
disposition account with respect to CFC3) and the denominator of
which is $350x ($150x, the balance of US1's extraordinary
disposition account with respect to CFC1, plus $200x, the balance of
US2's extraordinary disposition account with respect to CFC3), see
Sec. 1.245A-8(c)(6) of this section.
(F) Reduction in balance of RGI accounts. On November 30, 2019
(the last day of CFC2's taxable year)--
(1) The balance of US1's RGI account with respect to CFC2 that
relates to its extraordinary disposition account with respect to
CFC1 is decreased by $7.86x (the amount of the reduction, pursuant
to Sec. 1.245A-8(c)(1) and by reason of the RGI account, to US1's
extraordinary disposition account with respect to CFC1) and, thus,
following that reduction, the balance of the RGI account is $2.14x
($10x-$7.86x), see Sec. 1.245A-8(c)(4)(i)(B); and
(2) The balance of US2's RGI account with respect to CFC2 that
relates to its extraordinary disposition account with respect to
CFC3 is decreased by $17.14x (the amount of the reduction, pursuant
to Sec. 1.245A-8(c)(1) and by reason of the RGI account, to US2's
extraordinary disposition account with respect to CFC3) and, thus,
following that reduction, the balance of the RGI account is $2.86x
($20x-$17.14x), see Sec. 1.245A-8(c)(4)(i)(B).
(5) Example 5. Computation of duplicate DQB--(i) Facts. The
facts are the same as in paragraph (c)(1)(i) of this section
(Example 1) (and the results are the same as in paragraph
(c)(1)(ii)(A) of this section), except that CFC1 does not make any
distribution to US1, and on November 30, 2018, immediately after the
Disqualified Transfer, CFC2 transfers Item 1 to newly-formed CFC3
solely in exchange for the sole share of stock of CFC3 (the
contribution, ``Contribution 1,'' and the share of stock of CFC3,
the ``CFC3 Share'') and, immediately after Contribution 1, CFC3
transfers Item 1 to newly-formed CFC4 solely in exchange for the
sole share of stock of CFC4 (the contribution, ``Contribution 2,''
and the share of stock of CFC4, the ``CFC4 Share''). Pursuant to
section 358(a)(1), CFC2's basis in its share of stock of CFC3 is
$90x, and CFC3's basis in its share of stock of CFC4 is $90x basis.
As a result of Contribution 1, the condition of Sec. 1.245A-6(b)(2)
is not satisfied, because on at least one day of CFC2's taxable year
ending on November 30, 2018 (which ends within US1's 2018 taxable
year), CFC2 does not hold Item 1. See Sec. 1.245A-
6(b)(2)(ii)(C)(1). US1 therefore applies Sec. 1.245A-8 (rules for
complex cases) for its 2018 taxable year. See Sec. 1.245A-6(b).
(ii) Analysis--(A) Application of exchanged basis rule under
section 951A to Contribution 1 and Contribution 2. As a result of
Contribution 1, pursuant to Sec. 1.951A-3(h)(2)(ii)(B)(2)(ii), the
disqualified basis of CFC3 Share includes the disqualified basis of
Item 1 ($90x), and therefore the disqualified basis of CFC3 Share is
$90x. Similarly, as a result of Contribution 2, pursuant to Sec.
1.951A-3(h)(2)(ii)(B)(2)(ii), the disqualified basis of CFC4 Share
also includes the disqualified basis of Item 1 ($90x), and therefore
the disqualified basis of CFC4 Share is $90x.
(B) Determination of duplicate DQB of CFC3 Share as a result of
Contribution 1. Because the disqualified basis of CFC3 Share
includes the disqualified basis of Item 1, CFC3 Share is an item of
exchanged basis property that relates to Item 1. See Sec. 1.245A-
8(d)(2)(ii). In addition, because CFC3 Share is an item of exchanged
basis property that relates to Item 1 (which corresponds to US1's
extraordinary disposition account with respect to CFC1), CFC3 Share
is, for purposes of Sec. 1.245A-8, treated as an item of specified
property that corresponds to US1's extraordinary disposition account
with respect to CFC1. See Sec. 1.245A-8(d)(2)(i). Further, the
duplicate DQB of CFC3 Share as to Item 1 is $90x, the portion of the
disqualified basis of CFC3 Share that includes Item 1's disqualified
basis of $90x. See Sec. 1.245A-8(d)(2)(iii)(A).
(C) Determination of duplicate DQB of CFC4 Share as a result of
Contribution 2. For reasons similar to those described in paragraph
(c)(5)(ii)(B) of this section, CFC4 Share is an item of exchanged
basis property that relates to Item 1, CFC4 is treated for purposes
of Sec. 1.245A-8 as an item of specified property that corresponds
to US1's extraordinary disposition account with respect to CFC1, and
the duplicate DQB of CFC4 Share as to Item 1 is $90x.
(D) Determination of duplicate DQB of CFC3 Share as a result of
Contribution 2. Because the disqualified basis of CFC3 Share and the
disqualified basis of CFC4 Share each includes $90x of the
disqualified basis of Item 1 and CFC3 receives the CFC4 Share in
Contribution 2, the $90x of disqualified basis of CFC3 Share is
attributable to the $90x of disqualified basis of CFC4 Share, and
CFC3 Share is an item of exchanged basis property that relates to
CFC4 Share. See Sec. 1.245A-8(d)(2)(i) and (d)(2)(iii)(C). In
addition, the duplicate DQB of CFC3 Share as to CFC4 Share is $90x.
See Sec. 1.245A-8(d)(2)(iii)(A).
(E) Application of duplicate basis rules in Sec. 1.245A-
8(b)(5). For purposes of computing the fraction described in Sec.
1.245A-8(b)(1)(ii), if US1's extraordinary disposition account
[[Page 53124]]
with respect to CFC1 were to give rise to an extraordinary
disposition amount or a tiered extraordinary disposition amount
during US1's 2018 taxable year, then the duplicate DQB of CFC3 Share
and the duplicate DQB of CFC4 Share would not be taken into account,
because the disqualified basis of Item 1 (an item of specified
property that corresponds to US1's extraordinary disposition account
and as to which each of CFC3 Share and CFC4 share relates) would be
taken into account. See Sec. 1.245A-8(b)(1)(ii) and (b)(5)(i)(A).
Accordingly, in such a case, for US1's 2018 taxable year, the
numerator of the fraction described in Sec. 1.245A-8(b)(1)(ii)
would reflect only the disqualified basis of Item 1 or Item 2, as
applicable, and the denominator would reflect only the sum of the
disqualified basis of each of Item 1 and Item 2. See Sec. 1.245A-
8(b)(1)(ii) and (b)(5)(i)(A). Furthermore, to the extent there were
to be a reduction under Sec. 1.245A-8(b)(1) to the disqualified
basis of Item 1, then the duplicate DQB of CFC4 Share would be
reduced (but not below zero) by the product of the reduction to the
disqualified basis of Item 1 and a fraction, the numerator of which
would be $90x (the duplicate DQB of CFC4 Share), and the denominator
of which would also be $90x (the duplicate DQB of CFC4 Share). See
Sec. 1.245A-8(b)(5)(i)(B). The $90x of duplicate DQB of CFC3 Share
would be excluded from the denominator of the fraction described in
the previous sentence because it is attributable to the $90x of
duplicate DQB of CFC4 Share. See Sec. 1.245A-8(b)(5)(i)(B)(2) (last
sentence). For reasons similar to those described in this paragraph
(c)(4)(ii)(E) with respect to the application of Sec. 1.245A-
8(b)(5)(i)(B) to CFC4 Share, the duplicate DQB of CFC3 Share would
be reduced (but not below zero) by the product of the reduction to
the disqualified basis of Item 1 and a fraction, the numerator of
which would be $90x, and the denominator of which would also be
$90x.
Sec. 1.245A-11 Applicability dates.
(a) In general. Sections 1.245A-6 through 1.245A-11 apply to
taxable years of a foreign corporation beginning on or after [date a
Treasury decision adopting these rules as final regulations is
published in the Federal Register] and to taxable years of section 245A
shareholders in which or with which such taxable years end.
(b) Exception. Notwithstanding paragraph (a) of this section, a
taxpayer may choose to apply Sec. Sec. 1.245A-6 through 1.245A-11 for
taxable years of a foreign corporation beginning before [date a
Treasury decision adopting these rules as final regulations is
published in the Federal Register] and to taxable years of section 245A
shareholders in which or with which such taxable years end, provided
that the taxpayer and all persons bearing a relationship to the
taxpayer described in section 267(b) or 707(b) apply Sec. Sec. 1.245A-
6 through 1.245A-11, in their entirety, and Sec. 1.6038-2(f)(18) for
all such taxable years.
0
Par. 4. Section 1.951A-2, as proposed to be amended at 85 FR 19858
(April 8, 2020), is further amended by:
0
1. Redesignating paragraph (c)(5)(iv) as paragraph (c)(5)(v).
0
2. Adding new paragraph (c)(5)(iv).
0
3. In newly redesignated paragraph (c)(5)(v)(B)(1), removing the
language ``(c)(5)(iv)(A)(1)'' and adding the language
``(c)(5)(v)(A)(1)'' in its place.
0
4. In newly redesignated paragraph (c)(5)(v)(C)(1), removing the
language ``(c)(5)(iv)(B)(1)'' and adding the language
``(c)(5)(v)(B)(1)'' in its place.
0
5. Redesignating paragraph (c)(6)(iv) as paragraph (c)(6)(v).
0
6. Adding new paragraph (c)(6)(iv).
0
7. In newly redesignated paragraph (c)(6)(v)(B)(1), removing the
language ``(c)(6)(iv)(A)(1) and adding the language ``(c)(6)(v)(A)(1)''
in its place.
The additions read as follows:
Sec. 1.951A-2 Tested income and tested loss.
* * * * *
(c) * * *
(5) * * *
(iv) Reductions to disqualified basis pursuant to coordination
rules. See Sec. 1.245A-7(b) or Sec. 1.245A-8(b), as applicable, for
reductions to disqualified basis resulting from the application of
Sec. 1.245A-5.
* * * * *
(6) * * *
(iv) Reductions to disqualified payments pursuant to coordination
rules. See Sec. 1.245A-5(j)(8) and Sec. 1.245A-7(b) or Sec. 1.245A-
8(b), as applicable, for reductions to disqualified payments resulting
from the application of Sec. 1.245A-5.
* * * * *
0
Par. 5. Section 1.6038-2, as proposed to be amended at 85 FR 44650
(July 23, 2020), is further amended by adding paragraphs (f)(17)
and(18) and (m)(5) to read as follows:
Sec. 1.6038-2 Information returns required of United States persons
with respect to annual accounting periods of certain foreign
corporations.
* * * * *
(f) * * *
(17) Reporting of disqualified basis and disqualified payments. If
for the annual accounting period of a corporation it holds an item of
property having disqualified basis within the meaning of Sec. 1.951A-
3(h)(2)(ii) or Sec. 1.951A-2(c)(5), or incurs an item of deduction or
loss related to a disqualified payment (within the meaning of Sec.
1.951A-2(c)(6)(ii)(A)), then Form 5471 (or successor form) must contain
such information about the disqualified basis, or such information
relating to the disqualified payment, in the form and manner and to the
extent prescribed by the form, instructions to the form, publication,
or other guidance published in the Internal Revenue Bulletin.
(18) Adjustments to extraordinary disposition accounts and
disqualified basis If for the annual accounting period a section 245A
shareholder of the corporation reduces its extraordinary disposition
account pursuant to Sec. 1.245A-7(c) or Sec. 1.245A-8(c), as
applicable, or the corporation reduces the disqualified basis in an
item of specified property pursuant to Sec. 1.245A-7(b) or Sec.
1.245A-8(b), as applicable, then Form 5471 (or a successor form) must
contain such information about the reduction to the extraordinary
disposition account or disqualified basis, as applicable, in the form
and manner and to the extent prescribed by the form, instructions to
the form, publication, or other guidance published in the Internal
Revenue Bulletin.
* * * * *
(m) * * *
(5) Special rule for paragraphs (f)(17) and (18) of this section.
Paragraphs (f)(17) and (18) of this section apply with respect to
information for annual accounting periods beginning after [date a
Treasury decision adopting these rules as final regulations is
published in the Federal Register]. In addition, as provided in Sec.
1.245A-11(b), paragraph (f)(18) of this section applies with respect to
information for an annual accounting period that includes a taxable
year for which a taxpayer has chosen to apply Sec. Sec. 1.245A-6
through 1.245A-11 pursuant to Sec. 1.245A-11(b).
* * * * *
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-18544 Filed 8-21-20; 4:15 pm]
BILLING CODE 4830-01-P
