Coordination of Extraordinary Disposition and Disqualified Basis Rules, 76960-76975 [2020-26074]

Download as PDF 76960 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations That airspace extending upward from 700 feet above the surface within a 15 mile radius of Nashville International Airport, and within a 9-mile radius of Smyrna Airport, and within a 7-mile radius of Music City Executive Airport, and within a 10-mile radius of Lebanon Municipal Airport, and within a 9-mile radius of Murfreesboro Municipal Airport, and within an 8.6-mile radius of John C. Tune Airport, and that airspace within a 6-mile radius of the Point In Space serving Vanderbilt University Medical Center Hospital. Issued in College Park, Georgia, on November 24, 2020. Andreese C. Davis, Manager, Airspace & Procedures Team South, Eastern Service Center, Air Traffic Organization. [FR Doc. 2020–26439 Filed 11–30–20; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9934] RIN 1545–BP57 Coordination of Extraordinary Disposition and Disqualified Basis Rules Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations under sections 245A and 951A of the Internal Revenue Code (the ‘‘Code’’) that coordinate the extraordinary disposition rule under section 245A of the Code with the disqualified basis and disqualified payment rules under section 951A of the Code. This document also contains final regulations under section 6038 of the Code regarding information reporting to facilitate administration of the final regulations. The final regulations affect corporations that are subject to the extraordinary disposition rule and the disqualified basis rule or the disqualified payment rule. This document finalizes proposed regulations published on August 27, 2020. SUMMARY: khammond on DSKJM1Z7X2PROD with RULES3 DATES: Effective date: These regulations are effective on January 12, 2021. Applicability dates: For dates of applicability, see §§ 1.245A–11 and 1.6038–2(m)(5). FOR FURTHER INFORMATION CONTACT: Logan M. Kincheloe, (202) 317–6937 (not a toll-free number). VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 SUPPLEMENTARY INFORMATION: Background On August 27, 2020, the Department of the Treasury (‘‘Treasury Department’’) and the IRS published proposed regulations (REG–124737–19) under sections 245A, 951A, and 6038 in the Federal Register (85 FR 53098) (the ‘‘proposed regulations’’). The Treasury Department and the IRS received one written comment with respect to the proposed regulations; however, the comment was not substantively related to, and did not suggest any revisions to, the proposed regulations. Therefore, this preamble does not address the comment. The written comment is available at www.regulations.gov or upon request. A public hearing on the proposed regulations was not held because there were no requests to speak. This document contains amendments to 26 CFR part 1 under sections 245A, 951A, and 6038 (the ‘‘final regulations’’). Any term used but not defined in this preamble has the meaning given to it in the final regulations or the preamble to the proposed regulations. The effective date of these regulations is delayed until January 12, 2021, to provide for the orderly amendment of § 1.951A–2 by TD 9922, 85 FR 71998, published on November 12, 2020, and with a delayed effective date of January 11, 2021. The changes to § 1.951A–2 made in these regulations are to the regulation text as amended by TD 9922. Explanation of Revisions I. Overview The extraordinary disposition rule and the disqualified basis rule generally address certain transactions, involving related controlled foreign corporations (‘‘CFCs’’) of a section 245A shareholder, that were not subject to current U.S. tax solely by reason of having occurred during the disqualified period. In general, as to the section 245A shareholder, the extraordinary disposition rule ensures that earnings and profits generated by such a transaction are subject to U.S. tax when distributed as a dividend, and the disqualified basis rule ensures that basis generated by the transaction does not offset or reduce income that would otherwise be subject to U.S. tax at the section 245A shareholder-level under section 951(a)(1)(A) or 951A(a), or at the CFC-level under section 882(a) (that is, as income effectively connected with the conduct of a trade or business in the United States). See §§ 1.245A–5 and 1.951A–2(c)(5). PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 Absent a coordination mechanism, the extraordinary disposition rule and the disqualified basis rule could give rise to excess taxation as to a section 245A shareholder, because the earnings and profits to which the extraordinary disposition rule applies (‘‘extraordinary disposition E&P’’), and the basis to which the disqualified basis rule applies (‘‘disqualified basis’’), are generally a function of a single amount of gain. The proposed regulations coordinate the extraordinary disposition rule and the disqualified basis rule through two operative rules: The DQB reduction rule, which reduces disqualified basis in certain cases, and the EDA reduction rule, which reduces an extraordinary disposition account in certain cases. See proposed §§ 1.245A–7 and 1.245A–8. These operative rules also apply to coordinate the extraordinary disposition rule and the disqualified payment rule, which addresses transactions similar to those to which the disqualified basis rule applies. This rulemaking finalizes the proposed regulations, with one revision, as discussed in part II of this Explanation of Revisions. II. The DQB Reduction Rule—Treatment of Prior Extraordinary Disposition Amounts Under the proposed regulations, the DQB reduction rule generally applies when, as to a section 245A shareholder, extraordinary disposition E&P become subject to U.S. tax by reason of the application of the extraordinary disposition rule to a distribution of the extraordinary disposition E&P. See proposed §§ 1.245A–7(b) and 1.245A– 8(b). In general, the DQB reduction rule provides that basis attributable to gain to which the extraordinary disposition E&P are also attributable is no longer disqualified basis. Id. The preamble to the proposed regulations noted that the Treasury Department and the IRS were studying whether the DQB reduction rule should also apply by reason of a prior extraordinary disposition amount described in § 1.245A–5(c)(3)(i)(D)(1)(i) through (iv). The preamble requested comments on this matter, but none were received. Such a prior extraordinary disposition amount generally represents extraordinary disposition E&P that have become subject to U.S. tax as to a section 245A shareholder other than by direct application of the extraordinary disposition rule—for example, extraordinary disposition E&P that give rise to an income inclusion to the section 245A shareholder by reason of sections 951(a)(1)(B) and 956(a). Under the extraordinary disposition rule, the E:\FR\FM\01DER1.SGM 01DER1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations application of the other provision to the extraordinary disposition E&P results in a reduction to the application of the extraordinary disposition rule, because otherwise the earnings and profits (or an amount of other earnings and profits) could be taxed as to the section 245A shareholder both by reason of the other provision and the extraordinary disposition rule. See § 1.245A– 5(c)(3)(i)(D). This reduction to the application of the extraordinary disposition rule will generally result in an extraordinary disposition being subject to a single level of U.S. tax. The Treasury Department and the IRS have determined that the DQB reduction rule should also apply by reason of a prior extraordinary disposition amount described in § 1.245A–5(c)(3)(i)(D)(1)(i) through (iv), and therefore the final regulations provide a rule to this effect. See §§ 1.245A–7(b)(3) and 1.245A– 8(b)(6). Absent such an approach, gain to which extraordinary disposition E&P and disqualified basis are attributable could in effect be taxed both by reason of the disqualified basis rule and a provision other than the extraordinary disposition rule. Applicability Dates The final regulations apply to taxable years of foreign corporations beginning on or after December 1, 2020, and to taxable years of section 245A shareholders in which or with which such taxable years of foreign corporations end. See § 1.245A–11(a). In addition, taxpayers may choose to apply the final regulations to taxable years beginning before December 1, 2020, subject to certain limitations. See § 1.245A–11(b). Special Analyses These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. I. Paperwork Reduction Act (‘‘PRA’’) The collections of information in the final regulations are in § 1.6038–2(f)(17) and (18). Under the PRA (44 U.S.C. 3501 et seq.), an agency may not conduct or sponsor and a person is not required to Schedule to Form 5471 ............................................................................................................... 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 §§ 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 khammond on DSKJM1Z7X2PROD with RULES3 The current status of the PRA submissions related to the new revised Form 5471 as a result of the information collections in the final regulations is provided in the 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 1545–0123, which represents a total estimated burden time for all forms and schedules for VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 Revision of existing form Number of respondents (estimate) ........................ ✓ 7,500–8,500 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 corporations of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017). The overall burden estimates provided in 1545– 0123 are aggregate amounts that relate to the entire package of forms associated with the OMB control number and will in the future include but not isolate the estimated burden of the tax forms that will be revised as a result of the information collections in the final regulations. These numbers are PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 respond to a collection of information unless it displays a valid OMB control number. 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 PRA, the reporting burden associated with § 1.6038–2(f)(17) will be reflected in the applicable PRA 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: New disposition account made pursuant to § 1.245A–7(b) or § 1.245A–8(b) and reductions to an item of specified property’s disqualified basis pursuant to § 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 PRA, the reporting burden associated with § 1.6038–2(f)(18) will be reflected in the applicable PRA submission associated Schedule to Form 5471 ............................................................................................................... 76961 therefore unrelated to the future calculations needed to assess the burden imposed by the final 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. E:\FR\FM\01DER1.SGM 01DER1 76962 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations No burden estimates specific to the final 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 final regulations. Proposed revisions to these forms that reflect the information collections contained in these final Information collection Type of filer Form 5471 ............................... Business (NEW Model) .......... regulations will be made available for public comment at www.irs.gov/ draftforms and will not be finalized until after approved by OMB under the PRA. OMB No.(s) 1545–0123 Status Published in the Federal Register on 9/30/19. Public Comment period closed on 11/29/19. Approved by OMB through 1/31/2021. khammond on DSKJM1Z7X2PROD with RULES3 https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-forforms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s. II. 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 final 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 VerDate Sep<11>2014 20:50 Nov 30, 2020 Jkt 253001 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 final 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 final 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 PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 (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 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 final regulations because not all the GILTI and subpart F income estimated to be attributable to small entities will be affected by the final 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 final regulations. Consequently, the Treasury Department and the IRS have determined that these final regulations will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, the proposed regulations (REG– 124737–19) preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment E:\FR\FM\01DER1.SGM 01DER1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations on the impact on small businesses, and no comments were received. III. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. IV. Executive Order 13132: Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Drafting Information The principal author of the final regulations is Logan M. Kincheloe, Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order for §§ 1.245A–6 through 1.245A–11 to read in part as follows: khammond on DSKJM1Z7X2PROD with RULES3 ■ 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). * * * VerDate Sep<11>2014 * * 16:24 Nov 30, 2020 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: ■ § 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 § 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. * Jkt 253001 PO 00000 * * Frm 00015 * Fmt 4700 * Sfmt 4700 76963 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–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 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 76964 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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 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 PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 (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. (3) Special rule regarding prior extraordinary disposition amounts. For purposes of paragraph (b)(1) of this section, to the extent that an extraordinary disposition account of a section 245A shareholder is reduced under § 1.245A–5(c)(3)(i)(A) by reason of a prior extraordinary disposition amount described in § 1.245A– 5(c)(3)(i)(D)(1)(i) through (iv), the extraordinary disposition account is considered to give rise to an extraordinary disposition amount or tiered extraordinary disposition amount (and the amount by which the account is reduced is treated as an extraordinary disposition amount or tiered extraordinary disposition amount). (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 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. E:\FR\FM\01DER1.SGM 01DER1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations (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. khammond on DSKJM1Z7X2PROD with RULES3 § 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. (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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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 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 10 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 PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 76965 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 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 76966 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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— VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 (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 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 PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 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 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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. (6) Special rule regarding prior extraordinary disposition amounts. For purposes of paragraph (b)(1) of this section, to the extent that an extraordinary disposition account of a section 245A shareholder is reduced under § 1.245A–5(c)(3)(i)(A) by reason of a prior extraordinary disposition amount described in § 1.245A– 5(c)(3)(i)(D)(1)(i) through (iv), the extraordinary disposition account is considered to give rise to an extraordinary disposition amount or tiered extraordinary disposition amount (and the amount by which the account is reduced is treated as an extraordinary disposition amount or tiered extraordinary disposition amount). (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— VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 (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 § 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 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 76967 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 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: E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 76968 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations (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— (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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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 PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 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 § 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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 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 PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 76969 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 § 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 76970 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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 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 March 1, 2021— (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 PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 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 § 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. E:\FR\FM\01DER1.SGM 01DER1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations (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). (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). khammond on DSKJM1Z7X2PROD with RULES3 § 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. VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 (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 § 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 ($150×¥$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 PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 76971 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 § 1.245A–5(c)(1), to the extent of $140x. As a result, the balance of the extraordinary disposition account is reduced to $10x ($150×¥$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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 76972 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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 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 PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 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 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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. (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 VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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). (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 PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 76973 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 § 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 E:\FR\FM\01DER1.SGM 01DER1 khammond on DSKJM1Z7X2PROD with RULES3 76974 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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, VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 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)— (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 PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 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 § 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– E:\FR\FM\01DER1.SGM 01DER1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Rules and Regulations 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 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 RULES3 § 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 December 1, 2020 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 a taxable year of a foreign corporation beginning before December 1, 2020 and to a taxable year VerDate Sep<11>2014 16:24 Nov 30, 2020 Jkt 253001 of a section 245A shareholder in which or with which such taxable year ends, 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 and any subsequent taxable years beginning before December 1, 2020. ■ Par. 4. Section 1.951A–2 is 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 is 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 4700 Sfmt 4700 76975 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 December 1, 2020. 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. Approved: November 13, 2020 David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2020–26074 Filed 11–25–20; 4:45 pm] BILLING CODE 4830–01–P E:\FR\FM\01DER1.SGM 01DER1

Agencies

[Federal Register Volume 85, Number 231 (Tuesday, December 1, 2020)]
[Rules and Regulations]
[Pages 76960-76975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26074]


=======================================================================
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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9934]
RIN 1545-BP57


Coordination of Extraordinary Disposition and Disqualified Basis 
Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

SUMMARY: This document contains final regulations under sections 245A 
and 951A of the Internal Revenue Code (the ``Code'') that coordinate 
the extraordinary disposition rule under section 245A of the Code with 
the disqualified basis and disqualified payment rules under section 
951A of the Code. This document also contains final regulations under 
section 6038 of the Code regarding information reporting to facilitate 
administration of the final regulations. The final regulations affect 
corporations that are subject to the extraordinary disposition rule and 
the disqualified basis rule or the disqualified payment rule. This 
document finalizes proposed regulations published on August 27, 2020.

DATES: 
    Effective date: These regulations are effective on January 12, 
2021.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.245A-11 and 1.6038-2(m)(5).

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

SUPPLEMENTARY INFORMATION:

Background

    On August 27, 2020, the Department of the Treasury (``Treasury 
Department'') and the IRS published proposed regulations (REG-124737-
19) under sections 245A, 951A, and 6038 in the Federal Register (85 FR 
53098) (the ``proposed regulations'').
    The Treasury Department and the IRS received one written comment 
with respect to the proposed regulations; however, the comment was not 
substantively related to, and did not suggest any revisions to, the 
proposed regulations. Therefore, this preamble does not address the 
comment. The written comment is available at www.regulations.gov or 
upon request. A public hearing on the proposed regulations was not held 
because there were no requests to speak.
    This document contains amendments to 26 CFR part 1 under sections 
245A, 951A, and 6038 (the ``final regulations''). Any term used but not 
defined in this preamble has the meaning given to it in the final 
regulations or the preamble to the proposed regulations.
    The effective date of these regulations is delayed until January 
12, 2021, to provide for the orderly amendment of Sec.  1.951A-2 by TD 
9922, 85 FR 71998, published on November 12, 2020, and with a delayed 
effective date of January 11, 2021. The changes to Sec.  1.951A-2 made 
in these regulations are to the regulation text as amended by TD 9922.

Explanation of Revisions

I. Overview

    The extraordinary disposition rule and the disqualified basis rule 
generally address certain transactions, involving related controlled 
foreign corporations (``CFCs'') of a section 245A shareholder, that 
were not subject to current U.S. tax solely by reason of having 
occurred during the disqualified period. In general, as to the section 
245A shareholder, the extraordinary disposition rule ensures that 
earnings and profits generated by such a transaction are subject to 
U.S. tax when distributed as a dividend, and the disqualified basis 
rule ensures that basis generated by the transaction does not offset or 
reduce income that would otherwise be subject to U.S. tax at the 
section 245A shareholder-level under section 951(a)(1)(A) or 951A(a), 
or at the CFC-level under section 882(a) (that is, as income 
effectively connected with the conduct of a trade or business in the 
United States). See Sec. Sec.  1.245A-5 and 1.951A-2(c)(5).
    Absent a coordination mechanism, the extraordinary disposition rule 
and the disqualified basis rule could give rise to excess taxation as 
to a section 245A shareholder, because the earnings and profits to 
which the extraordinary disposition rule applies (``extraordinary 
disposition E&P''), and the basis to which the disqualified basis rule 
applies (``disqualified basis''), are generally a function of a single 
amount of gain. The proposed regulations coordinate the extraordinary 
disposition rule and the disqualified basis rule through two operative 
rules: The DQB reduction rule, which reduces disqualified basis in 
certain cases, and the EDA reduction rule, which reduces an 
extraordinary disposition account in certain cases. See proposed 
Sec. Sec.  1.245A-7 and 1.245A-8. These operative rules also apply to 
coordinate the extraordinary disposition rule and the disqualified 
payment rule, which addresses transactions similar to those to which 
the disqualified basis rule applies.
    This rulemaking finalizes the proposed regulations, with one 
revision, as discussed in part II of this Explanation of Revisions.

II. The DQB Reduction Rule--Treatment of Prior Extraordinary 
Disposition Amounts

    Under the proposed regulations, the DQB reduction rule generally 
applies when, as to a section 245A shareholder, extraordinary 
disposition E&P become subject to U.S. tax by reason of the application 
of the extraordinary disposition rule to a distribution of the 
extraordinary disposition E&P. See proposed Sec. Sec.  1.245A-7(b) and 
1.245A-8(b). In general, the DQB reduction rule provides that basis 
attributable to gain to which the extraordinary disposition E&P are 
also attributable is no longer disqualified basis. Id.
    The preamble to the proposed regulations noted that the Treasury 
Department and the IRS were studying whether the DQB reduction rule 
should also apply by reason of a prior extraordinary disposition amount 
described in Sec.  1.245A-5(c)(3)(i)(D)(1)(i) through (iv). The 
preamble requested comments on this matter, but none were received. 
Such a prior extraordinary disposition amount generally represents 
extraordinary disposition E&P that have become subject to U.S. tax as 
to a section 245A shareholder other than by direct application of the 
extraordinary disposition rule--for example, extraordinary disposition 
E&P that give rise to an income inclusion to the section 245A 
shareholder by reason of sections 951(a)(1)(B) and 956(a). Under the 
extraordinary disposition rule, the

[[Page 76961]]

application of the other provision to the extraordinary disposition E&P 
results in a reduction to the application of the extraordinary 
disposition rule, because otherwise the earnings and profits (or an 
amount of other earnings and profits) could be taxed as to the section 
245A shareholder both by reason of the other provision and the 
extraordinary disposition rule. See Sec.  1.245A-5(c)(3)(i)(D). This 
reduction to the application of the extraordinary disposition rule will 
generally result in an extraordinary disposition being subject to a 
single level of U.S. tax.
    The Treasury Department and the IRS have determined that the DQB 
reduction rule should also apply by reason of a prior extraordinary 
disposition amount described in Sec.  1.245A-5(c)(3)(i)(D)(1)(i) 
through (iv), and therefore the final regulations provide a rule to 
this effect. See Sec. Sec.  1.245A-7(b)(3) and 1.245A-8(b)(6). Absent 
such an approach, gain to which extraordinary disposition E&P and 
disqualified basis are attributable could in effect be taxed both by 
reason of the disqualified basis rule and a provision other than the 
extraordinary disposition rule.

Applicability Dates

    The final regulations apply to taxable years of foreign 
corporations beginning on or after December 1, 2020, and to taxable 
years of section 245A shareholders in which or with which such taxable 
years of foreign corporations end. See Sec.  1.245A-11(a). In addition, 
taxpayers may choose to apply the final regulations to taxable years 
beginning before December 1, 2020, subject to certain limitations. See 
Sec.  1.245A-11(b).

Special Analyses

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.

I. Paperwork Reduction Act (``PRA'')

    The collections of information in the final regulations are in 
Sec.  1.6038-2(f)(17) and (18). Under the PRA (44 U.S.C. 3501 et seq.), 
an agency may not conduct or sponsor and a person is not required to 
respond to a collection of information unless it displays a valid OMB 
control number.
    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 PRA, the reporting burden associated with Sec.  1.6038-
2(f)(17) will be reflected in the applicable PRA 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:

----------------------------------------------------------------------------------------------------------------
                                                                                                    Number of
                                                            New                   Revision of      respondents
                                                                                 existing 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 
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 Sec.  1.245A-7(b) or 
Sec.  1.245A-8(b) and reductions to an item of specified property's 
disqualified basis pursuant to 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 PRA, the reporting 
burden associated with Sec.  1.6038-2(f)(18) will be reflected in the 
applicable PRA 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:

----------------------------------------------------------------------------------------------------------------
                                                                                                    Number of
                                                            New                   Revision of      respondents
                                                                                 existing form      (estimate)
----------------------------------------------------------------------------------------------------------------
Schedule to Form 5471......................  .................................         [check]      7,500-8,500
----------------------------------------------------------------------------------------------------------------

    The current status of the PRA submissions related to the new 
revised Form 5471 as a result of the information collections in the 
final 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 ($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 final regulations. These numbers are 
therefore unrelated to the future calculations needed to assess the 
burden imposed by the final 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.

[[Page 76962]]

    No burden estimates specific to the final 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 final regulations. Proposed 
revisions to these forms that reflect the information collections 
contained in these final 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.
                                       -------------------------------------------------------------------------
                                        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.
----------------------------------------------------------------------------------------------------------------

II. 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 final 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 final 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 final 
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 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 final 
regulations because not all the GILTI and subpart F income estimated to 
be attributable to small entities will be affected by the final 
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 final regulations. 
Consequently, the Treasury Department and the IRS have determined that 
these final regulations will not have a significant economic impact on 
a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
(REG-124737-19) preceding these final regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment

[[Page 76963]]

on the impact on small businesses, and no comments were received.

III. Unfunded Mandates Reform Act

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

IV. Executive Order 13132: Federalism

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

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 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 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

[[Page 76964]]

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.
    (3) Special rule regarding prior extraordinary disposition amounts. 
For purposes of paragraph (b)(1) of this section, to the extent that an 
extraordinary disposition account of a section 245A shareholder is 
reduced under Sec.  1.245A-5(c)(3)(i)(A) by reason of a prior 
extraordinary disposition amount described in Sec.  1.245A-
5(c)(3)(i)(D)(1)(i) through (iv), the extraordinary disposition account 
is considered to give rise to an extraordinary disposition amount or 
tiered extraordinary disposition amount (and the amount by which the 
account is reduced is treated as an extraordinary disposition amount or 
tiered extraordinary disposition amount).
    (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 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.

[[Page 76965]]

    (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 10 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 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

[[Page 76966]]

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 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

[[Page 76967]]

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.
    (6) Special rule regarding prior extraordinary disposition amounts. 
For purposes of paragraph (b)(1) of this section, to the extent that an 
extraordinary disposition account of a section 245A shareholder is 
reduced under Sec.  1.245A-5(c)(3)(i)(A) by reason of a prior 
extraordinary disposition amount described in Sec.  1.245A-
5(c)(3)(i)(D)(1)(i) through (iv), the extraordinary disposition account 
is considered to give rise to an extraordinary disposition amount or 
tiered extraordinary disposition amount (and the amount by which the 
account is reduced is treated as an extraordinary disposition amount or 
tiered extraordinary disposition amount).
    (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:

[[Page 76968]]

    (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--
    (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

[[Page 76969]]

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 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

[[Page 76970]]

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 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 
March 1, 2021--
    (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.

[[Page 76971]]

    (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).
    (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

[[Page 76972]]

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 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

[[Page 76973]]

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.
    (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

[[Page 76974]]

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 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-

[[Page 76975]]

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 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 December 
1, 2020 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 
a taxable year of a foreign corporation beginning before December 1, 
2020 and to a taxable year of a section 245A shareholder in which or 
with which such taxable year ends, 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 and any 
subsequent taxable years beginning before December 1, 2020.

0
Par. 4. Section 1.951A-2 is 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 is 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 December 1, 
2020. 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.

    Approved: November 13, 2020
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-26074 Filed 11-25-20; 4:45 pm]
BILLING CODE 4830-01-P