On November 29, 2024, the U.S. Treasury Department and IRS released long-awaited proposed regulations (REG-105479-18) under sections 959 and 961, and certain other provisions of the Internal Revenue Code of 1986, as amended (the "Code," and such proposed regulations, the "Proposed Regulations"), addressing certain core aspects of the previously taxed earnings and profits ("PTEP") system. The PTEP system under section 959 and the corresponding basis-adjustment rules under section 961 are the key mechanisms for avoiding double taxation of foreign earnings previously taxed under Subpart F of the Code.
Some of the more noteworthy proposed rules can be summarized as follows:
- Proposed section 959 regulations would provide detailed rules for PTEP accounting (both at the shareholder and foreign corporation levels), exclusions from gross income, and related determinations and adjustments.
- Proposed section 961 regulations would adjust basis in shares of stock of a controlled foreign corporation ("CFC") and any items of property (e.g., partnership interests) through which a U.S. person owns stock in a CFC to reflect the CFC's PTEP, which include new rules to provide derived basis adjustments at the level of a partnership that holds shares of stock in a CFC and significant coverage of the section 961(c) basis-adjustment rules for stock in lower-tier CFCs (each previously unaddressed in final regulations under section 961).
- Proposed section 951 regulations would address the assignment and allocation of a foreign corporation's gross income arising from covered distributions or covered gains.
- Proposed section 986(c) regulations implementing Notice 88-71 (1988-2 C.B. 374) would provide guidance on when a U.S. shareholder should recognize foreign currency gains or losses with respect to PTEP and the calculation of such gains and losses.
- Additionally, the Proposed Regulations would include updates to section 960, refining the interaction of the PTEP and foreign tax credit rules, rules addressing consolidated group members, S corporations, functional currency under section 985, and anti-avoidance rules.
- The Proposed Regulations would also include transition rules to facilitate their initial implementation, including for (i) establishing and conforming accounts under section 959, (ii) establishing derived basis and section 961(c) basis, and (iii) addressing certain transition issues regarding the treatment of domestic partnerships and S corporations.
Future guidance, anticipated to be issued as an additional set of proposed regulations, is expected to address issues not covered in the Proposed Regulations, including nonrecognition transactions, redemptions, transactions subject to section 964(e), situations where CFCs act as partners in a partnership and the transfer of PTEP in transactions that are not general successor transactions.
Although taxpayers can choose to adopt the Proposed Regulations early under specific conditions, the Proposed Regulations would generally apply to taxable years of foreign corporations beginning on or after the date the proposed regulations are finalized and to taxable years of persons for which such taxable years are relevant. Notwithstanding this general applicability date, certain portions of the proposed section 959 regulations, reflecting rules initially addressed under Notice 2019-01 (2019-02 I.R.B. 275), would apply to taxable years of U.S. shareholders ending after December 14, 2018, and to taxable years of foreign corporations ending with or within those taxable years.
Treasury and the IRS have expressly requested comments on several parts of the Proposed Regulations. Taxpayers may consider submitting comments on the Proposed Regulations, which are due 90 days after the date of publication in the Federal Register (i.e., December 2, 2024).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
