Internal Revenue Bulletin 2025-5 (PDF rendition): IRS Announcements

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Bulletin No. 2025–5
January 27, 2025
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
ADMINISTRATIVE
Announcement 2025-6, page 526.
This is an Announcement that implements a pilot program
testing changes to Fast Track Settlement (FTS) programs
currently available to taxpayers under examination in the
Internal Revenue Service (IRS) Large Business and Interna-
tional (LB&I), Small Business/Self-Employed (SB/SE) and
Tax Exempt/Government Entities (TE/GE) Divisions. This
Announcement also describes pilot program changes to
Post Appeals Mediation (PAM) procedures and introduces a
“Last Chance FTS” pilot program for SB/SE taxpayers. In
this 2-year pilot, the primary changes to the current FTS pro-
grams include: (1) FTS may be used for a specific issue in a
case rather than requiring all issues in a case to be eligible
for FTS; and (2) PAM will be available for all taxpayers in the
FTS programs. In addition, the “Last Chance FTS” pilot pro-
gram is intended to further publicize availability of FTS and
will initially be limited to select SB/SE cases.
REG-116610-20, page 638.
This document contains proposed amendments to the reg-
ulations governing practice before the IRS. These regula-
tions propose to eliminate provisions related to registered
tax return preparers, classify the use of certain contingent
fee arrangements by practitioners as disreputable conduct,
establish new standards for appraisals and the disqualifica-
tion of appraisers, and update certain provisions as appro-
priate.
T.D. 10017, page 517.
These final regulations provide three rules regarding the
timing of supervisory approval of penalties required under
section 6751(b). The appropriate rule depends on the pro-
cedures the IRS must follow before it may assess a penalty.
For penalties that are included in a pre-assessment notice
that provides the basis for Tax Court jurisdiction upon timely
petition, supervisory approval may be obtained at any time
before the notice is issued. For penalties raised in Tax Court
following a petition, supervisory approval may be obtained
at any time prior to the Commissioner requesting that the
court determine the penalty. For penalties that are not sub-
ject to pre-assessment review in Tax Court, supervisory
approval may be obtained at any time prior to assessment.
The regulations also include a list of penalties excepted from
the requirements of section 6751(b), and definitions of the
terms “immediate supervisor,” “designated higher level offi-
cial,” “personally approved (in writing),” and “automatically
calculated through electronic means.”
INCOME TAX
Notice 2025-7, page 524.
This notice provides temporary relief allowing eligible taxpay-
ers to rely on alternative methods for making an adequate
identification, within the meaning of § 1.1012-1(j)(3)(ii), with
respect to units of a digital asset held in the custody of a
broker.
REG-105479-18, page 527.
This document contains proposed regulations regarding pre-
viously taxed earnings and profits of foreign corporations
and related basis adjustments. The proposed regulations
affect foreign corporations with previously taxed earnings
and profits and their shareholders.
Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and
enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
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stantive rulings necessary to promote a uniform application
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modify, or amend any of those previously published in the
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nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
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ings to taxpayers or technical advice to Service field offices,
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comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
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against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
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To the extent practicable, pertinent cross references to these
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January 27, 2025 Bulletin No. 2025–5

Part I
26 CFR 1.6751(b)-1
T.D. 10017
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Rules for Supervisory
Approval of Penalties
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains
final regulations regarding supervisory
approval of certain penalties assessed by
the IRS. The final regulations are nec-
essary to address uncertainty regarding
various aspects of supervisory approval
of penalties that have arisen due to recent
judicial decisions. The final regulations
affect the IRS and persons assessed certain
penalties by the IRS.
DATES: Effective Date: These regula-
tions are effective December 23, 2024.
Applicability Date: For date of applica-
bility, see §301.6751(b)-1(f).
FOR FURTHER INFORMATION
CONTACT: William Prater, (202) 317-
6845 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document amends the Regula-
tions on Procedure and Administration (26
CFR part 301) by adding final regulations
under section 6751(b) of the Internal Rev-
enue Code (Code) relating to supervisory
approval of certain penalties assessed by
the IRS. Section 6751(b)(1) expressly del-
egates to the Secretary of the Treasury or
her delegate the authority to designate, for
purposes of approving the initial determi-
nation of a penalty assessment under the
Code, a higher level official other than
the immediate supervisor of the individ-
ual making that initial determination.
In addition, section 7805(a) of the Code
authorizes the Secretary to “prescribe
all needful rules and regulations for the
enforcement of [the Code], including all
rules and regulations as may be necessary
by reason of any alteration of law in rela-
tion to internal revenue.”
Background
On April 11, 2023, a notice of proposed
rulemaking (REG-121709-19) relating to
supervisory approval of certain penal-
ties under section 6751(b) was published
in the Federal Register (88 FR 21564).
See the Background and the Explanation
of Provisions sections of the preamble to
REG-121709-19 for a discussion of the
proposed regulations, which are incorpo-
rated in this document to the extent not
inconsistent with the Summary of Com-
ments and Explanation of Revisions sec-
tion of this preamble.
Eight comments responding to the
notice of proposed rulemaking were
received and are available at https://www.
regulations.gov or upon request. A pub-
lic hearing was held on September 11,
2023, and four speakers provided testi-
mony. After careful consideration of all
of the written comments and testimony,
the proposed regulations are adopted by
this Treasury decision with minor modi-
fication. The public comments are sum-
marized and discussed in the Summary of
Comments and Explanation of Revisions.
Summary of Comments and
Explanation of Revisions
Many of the comments addressed sim-
ilar issues and expressed similar points
of view. The comments largely opposed
the proposed timing rules and many of
the proposed definitions. Comments
expressed concern that the proposed reg-
ulations would not implement what the
comments viewed as the purpose of sec-
tion 6751(b). The Treasury Department
and the IRS disagree with these com-
ments’ characterization of the text and
effect of the proposed regulations, as well
as their characterization of the statute’s
text and scope, its legislative history, and
the caselaw interpreting it.
As explained in the preamble to the
proposed regulations, the purpose of these
rules is to clarify application of section
6751(b) in a manner that is consistent
with the statutory text and that promotes
nationwide uniformity, administrability
for the IRS, and ease of understanding
by taxpayers. Several comments sug-
gested alternative rules that would impose
extra-statutory formalities on IRS employ-
ees that would increase the probability of
appropriate penalties being avoided if IRS
employees do not satisfy those formali-
ties. By contrast, the adopted rules faith-
fully interpret the statutory text, ensure
penalties are imposed where appropriate,
and guard against inappropriate use of
penalties.
1. Comments on Proposed Timing Rules
The proposed regulations included
three rules regarding the timing of super-
visory approval of penalties under section
6751(b). Proposed §301.6751(b)-1(c) pro-
vided that, for penalties that are included
in a pre-assessment notice issued to a tax-
payer that provides the basis for jurisdic-
tion in the United States Tax Court (Tax
Court) upon timely petition, supervisory
approval must be obtained at any time
before the notice is mailed by the IRS.
Proposed §301.6751(b)-1(d) provided
that, for penalties raised in the Tax Court
after a petition, supervisory approval
may be obtained at any time prior to the
Commissioner requesting that the court
determine the penalty. Finally, proposed
§301.6751(b)-1(b) provided that super-
visory approval for penalties that are not
subject to pre-assessment review in the
Tax Court may be obtained at any time
prior to assessment.
Comments argued that the proposed
timing rules should be rejected in favor of
earlier deadlines for supervisory approval
of penalties, which the comments asserted
would more effectively prevent bargain-
ing by the IRS. The comments’ suggested
deadlines, however, lack any basis in the
statutory text, and are supported by rea-
soning that has been rejected by three
Bulletin No. 2025–5 517 January 27, 2025

United States Circuit Courts of Appeals
(circuit courts). Moreover, the suggested
earlier deadlines would not do anything to
prevent bargaining, as the preamble to the
proposed regulations explained. Despite
the comments’ stated concerns about the
existence of bargaining, no comment
identified a specific example of bargain-
ing, and no court has ever found that an
IRS employee attempted to use a penalty
as a bargaining chip.
Some comments suggested that the
timing rule should require supervisory
approval before issuance of a 30-day let-
ter
1
(or substantive equivalent). As sup-
port for this suggestion, one comment
stated that caselaw supported the assertion
that the statute is ambiguous regarding
when approval must occur. This comment
misinterprets the existing caselaw, which
has focused on an ambiguity as to what
the “initial determination” is that must be
approved, not on when the approval must
occur. On the question of when approval
must occur, the circuit courts that have
considered the issue have uniformly held
that a supervisor can approve a penalty
at any point before losing discretion over
whether to approve imposition of the
penalty. The comments advocating for
requiring approval before issuance of a
30-day letter (or substantive equivalent)
rest heavily on a misunderstanding of a
supervisor’s authority and on policy rea-
sons that are not in fact served by the sug-
gested deadline. The comments also fail
to address the circuit courts’ opinions that
are contrary to their recommendations on
this issue.
As multiple circuit courts have
explained, the statute lacks an “express
timing requirement,” and the Tax Court’s
“formal communication” rule has no basis
in the text of the statute. Kroner v. Com-
missioner, 48 F.4th 1272, 1276 (11th Cir.
2022); Laidlaw’s Harley Davidson Sales,
Inc. v. Commissioner, 29 F.4th 1066, 1072
(9th Cir. 2022), reh’g en banc denied, No.
20-73420 (9th Cir. July 14, 2022); Mine-
myer v. Commissioner, Nos. 21-9006 &
21-9007, 2023 WL 314832 (10th Cir. Jan-
uary 19, 2023). As explained in the pream-
ble to the proposed regulations, the lack
of any deadline in the statute other than
assessment indicates that the provision did
not intend an earlier deadline.
Despite this, the Tax Court has continued
to apply its own precedent in cases appeal-
able to circuits other than the Ninth, Tenth,
and Eleventh. See Aldridge v. Commis-
sioner, T.C. Memo. 2024-24 (appealable to
the Eighth Circuit); Swift v. Commissioner,
T.C. Memo. 2024-13 (appealable to the
Fifth Circuit); Bachner v. Commissioner,
T.C. Memo. 2023-148; Robinson v. Com-
missioner, T.C. Memo. 2023-147 (appeal-
able to the Fourth Circuit); Jadhav v. Com-
missioner, T.C. Memo. 2023-140; Conrad
v. Commissioner, T.C. Memo. 2023-100;
Braen v. Commissioner, T.C. Memo 2023-
85 (appealable to the Third Circuit). For
cases appealable to the Ninth Circuit, the
Tax Court has held that it will follow the
timing rule of Laidlaw’s, which the Tax
Court interpreted to require a case-by-case
analysis of whether a particular supervisor
retained the discretion to approve penalties
when they did so. See Kraske v. Commis-
sioner, 161 T.C. 104 (2023). In Kraske and
Pangelina v. Commissioner, T.C. Memo.
2024-5, the Tax Court suggested that an
IRS Examination Division (Exam) super-
visor’s discretion may be lost when a case
is transferred to the Independent Office
of Appeals (Appeals), but this is factually
incorrect. As the Ninth Circuit recognized
in Laidlaw’s, it is only “once the notice is
sent” that “the Commissioner begins to
lose discretion over whether the penalty
is assessed.” Laidlaw’s, 29 F.4th at 1071
n.4. Even when a case is transferred from
Exam to Appeals, the Exam supervisor
still has discretion to provide the required
approval because the penalty is still before
the IRS as a whole. As the preamble to the
proposed regulations noted, a supervisor’s
discretion is lost only after the IRS issues a
pre-assessment notice subject to Tax Court
review to a taxpayer. Because a supervisor
retains discretion to approve a penalty until
that point, issuance of the pre-assessment
notice subject to Tax Court review remains
the appropriate deadline for obtaining
supervisory approval of penalties included
in such a notice.
The earlier deadlines that comments
recommended and that the Tax Court con-
tinues to impose do not serve the legis-
lative purpose that penalties be imposed
where appropriate. By contrast, the pro-
posed timing rules serve the legislative
purpose of imposing penalties where
appropriate while ensuring the require-
ment for supervisory approval can prevent
bargaining. The proposed timing rules
are consistent with all of the circuit-level
authority interpreting the statute and pro-
vide a bright-line rule that is administrable
for the IRS and fair to taxpayers. Accord-
ingly, this Treasury decision adopts the
proposed timing rules without modifica-
tion.
2. Comments on Proposed Definitions
A. Individual who first proposed the
penalty
The proposed regulations provided that
the individual who first proposes a penalty
is the individual who section 6751(b)(1)
references as the individual making the
initial determination of a penalty assess-
ment. A proposal can be made either to
a taxpayer (or the taxpayer’s representa-
tive) or to the individual’s supervisor or a
designated higher level official. One com-
ment agreed with the proposed definition
of “individual who first proposed the pen-
alty,” while two others disagreed.
The proposed regulations illustrated
the effect of this definition in an exam-
ple in which a Revenue Agent proposes a
penalty to her immediate supervisor, but
the supervisor does not approve the pen-
alty and it does not appear in the statutory
notice of deficiency; the penalty is then
raised by an IRS Office of Chief Coun-
sel (Counsel) Attorney in a Tax Court
Answer and that attorney is considered
the “individual who first proposed the
penalty.” Those disagreeing with the pro-
posed definition argued that, in that exam-
ple, it was the Revenue Agent and not
the Counsel attorney that made the initial
determination of the penalty. Such a view
is at odds with the statutory text, which
references (with respect to the penalty)
the “initial determination of . . . assess-
ment”, and caselaw. See North Donald
LA Property, LLC v. Commissioner, T.C.
Memo. 2023-50 (citing multiple cases
1
Typically a 30-day letter proposes penalties and gives the taxpayer an opportunity to request an administrative appeal.
January 27, 2025 518 Bulletin No. 2025–5

Bulletin No. 2025–5 519 January 27, 2025
before concluding that “[w]e have never
held that the exam team’s decision not to
assert a penalty has any bearing on Chief
Counsel’s ability to assert that penalty
later”). As the preamble to the proposed
regulations explained, an initial determi-
nation that does not ultimately result in an
assessment of a penalty is not an “initial
determination of . . . assessment.” In addi-
tion, adopting the comments’ suggested
interpretation would render section 6214,
which allows Counsel to raise a penalty
in an answer, amended answer, or other
pleading, meaningless because it would
remove Counsel’s ability to make an inde-
pendent evaluation of whether a penalty is
appropriate.
By contrast, the proposed definition
harmonizes the statutory scheme and
allows the IRS the flexibility to pursue
penalties when appropriate. The IRS
should not be prevented from asserting a
penalty solely because an individual IRS
employee involved earlier in the process
did not determine that the penalty was
appropriate at the time such employee
considered it, a result that would follow
from adopting the comments’ suggestions.
Instead, the IRS should be permitted to
assert penalties that both a Counsel attor-
ney and the attorney’s supervisor believe
are warranted.
Comments’ concerns about the pro-
posed definition of “individual who first
proposed the penalty” have led the Trea-
sury Department and the IRS to conclude
that language is needed to clarify that, for
purposes of determining which individual
first proposed a penalty, the individual
must have proposed the penalty either to
a taxpayer (or the taxpayer’s represen-
tative) or to the individual’s supervisor
or designated higher level official. This
requirement is to preclude informal sug-
gestions of coworkers or supervisors as
being treated as the initial determination
of a penalty assessment when those indi-
viduals had no official responsibility with
respect to a penalty determination or the
responsibility was a supervisory one. This
interpretation also allows supervisors to
do their job of reviewing and directing a
subordinate’s work, which may include
suggesting that their subordinates propose
a penalty. It also eliminates those who are
not assigned responsibility for making an
initial penalty determination from being
treated as having done so by virtue of
having made an informal comment about
a penalty to a coworker. An example is
added to these final regulations to illus-
trate the effect of the definition. Specifi-
cally, the new example highlights that an
individual who did not make a proposal
to a taxpayer, supervisor, or designated
higher level official is not the individual
who made the initial determination of a
penalty assessment.
B. Immediate supervisor and designated
higher level officials
The proposed regulations defined
the term “immediate supervisor” as any
individual with responsibility to review
another individual’s proposal of penalties
without the proposal being subject to an
intermediary’s approval.
Some comments argued that the pro-
posed definition of “immediate supervi-
sor” was too vague, and that it could allow
non-managerial, non-supervisory person-
nel to approve penalties. Some argued that
the definition should be revised to mean
any individual who “directly supervises
the substantive work” of an individual,
while others recommended that it be lim-
ited to a single individual that meets the
definition of a “supervisor” or “manager”
under other provisions of Federal law
related to labor and employment matters.
These alternative suggestions focus
on substantive work generally, rather
than penalty review specifically. Because
supervisory approval in this context relates
only to penalties, this broader focus is not
appropriate. By looking to an individual’s
assigned job duties rather than their title,
the proposed definition takes a functional
approach that is consistent with the stat-
utory purpose of ensuring that a person
that is familiar with the penalty aspects
of a case be the one to give approval to
assert penalties. See Sand Inv. Co. v.
Commissioner, 157 T.C. 136, 142 (2021)
(holding that the legislative history sup-
ports the conclusion that the person with
the greatest familiarity with the facts and
legal issues presented by the case is the
“immediate supervisor” for purposes of
section 6751(b)). Moreover, unlike some
of the suggested alternatives, the proposed
definition recognizes that IRS employees
often have multiple supervisors with dif-
ferent roles for different parts of an exam-
ination.
After consideration of the comments,
the final regulations adopt the proposed
definition with one modification. Rather
than defining “immediate supervisor”
as “any individual with responsibility to
approve another individual’s proposal of
penalties,” the adopted definition defines
it as “any individual with responsibility
to review another individual’s proposal
of penalties.” This definition recognizes
that a person assigned to review a penalty
proposal has the responsibility to make a
judgment call about the appropriateness
of the penalty. Responsibility to review
another’s work is the hallmark of being a
supervisor. The definition adopted in the
final regulations takes a practical approach
that is consistent with the statute’s focus
on supervision of the penalty proposal.
Pursuant to the grant of authority in
section 6751(b)(1) to designate which
higher level officials may approve the ini-
tial determination, in addition to the gen-
eral grant of authority in section 7805(a),
the proposed regulations defined a “higher
level official” as any person who has been
directed via the Internal Revenue Manual
or other assigned job duties to approve
another individual’s proposal of penalties
before they are included in a notice that
is a prerequisite to Tax Court jurisdiction,
an answer to a Tax Court petition, or are
assessed without the need for such inclu-
sion.
Some comments disagreed with this
definition, arguing that it is too vague
and should be narrowed to only a small
group of upper-level management. But
these comments’ suggested alternatives
reject a functional approach in favor of
unnecessary formalities that could result
in appropriate penalties being eliminated.
They are also inconsistent with section
6751(b)’s provision of discretion to des-
ignate which higher level officials may
designate a penalty. Accordingly, the final
regulations adopt the proposed definition
without change.
C. Personally approved (in writing)
The proposed regulations define “per-
sonally approved (in writing)” to mean
any writing, including in electronic form,
that is made by the writer to signify the

January 27, 2025 520 Bulletin No. 2025–5
writer’s assent and that reflects that it was
intended as approval.
Comments argued that the definition of
“personally approved (in writing)” should
be revised to require that the approval,
if made electronically, be made through
a digital signature that includes a soft-
ware-generated timestamp indicating
when the document was signed and who
signed it. One comment also argued that,
alternatively, the IRS should require that
a statement of signing accompany the
request for a supervisor’s approval of a
penalty.
After consideration of the comments,
the proposed definition is adopted without
change. Adopting the comments’ sugges-
tions would impose formalities that frus-
trate imposition of appropriate penalties.
The statute does not mandate the use of a
particular type of signature, only that the
approval be in writing. While it may be a
best practice to use digital signatures with
software-generated timestamps, mandat-
ing their use would go beyond the scope
of the statute and these regulations. Nor
does the statute require the immediate
supervisor to use any particular format
when approving the penalty, such as with
a statement of signing. The functional
approach adopted in these final regula-
tions ensures that written approval, which
is all the statute requires, is obtained. See
PBBM-Rose Hill, Ltd. v. Commissioner,
900 F.3d 193, 213 (5th Cir. 2018) (reject-
ing an argument that section 6751(b)(1)
was not satisfied because the penalty was
not on the same page as the signature);
Deyo v. Commissioner, 296 F. App’x 157
(2d Cir. 2008) (rejecting an argument
that section 6751(b)(1) was not satisfied
because the approval was provided by a
stamp rather than a manual signature);
Thompson v. Commissioner, T.C. Memo.
2022-80 (rejecting the argument that
cross-examination of a revenue agent
and his supervisor was needed because it
“would be immaterial and wholly irrele-
vant” where there was written approval
in the record); Raifman v. Commissioner,
T.C. Memo. 2018-101 (same).
D. Automatically calculated through
electronic means
The proposed regulations provide that
a penalty is “automatically calculated
through electronic means” if it is pro-
posed by an IRS computer program with-
out human involvement. A penalty is no
longer considered “automatically calcu-
lated through electronic means” if a tax-
payer responds to a computer-generated
notice proposing a penalty and challenges
the penalty or the amount of tax to which
the penalty is attributable, and an IRS
employee works the case.
Some comments argued that the pro-
posed definition of “automatically cal-
culated through electronic means” is too
broad and encompasses penalties that,
in the comments’ view, should never
be exempt from supervisory approval
for various reasons. As explained in the
preamble to the proposed regulations,
the scope of this definition is limited to
identifying when a penalty should be
considered exempt from the supervisory
approval requirements of section 6751(b)
(1) by operation of section 6751(b)(2)(B).
Comments sought to narrow the proposed
definition and impose additional require-
ments on the IRS that are divorced from
the statutory requirements. The comments
were directed to whether proposal and
assessment of certain penalties should
ever be automated, as opposed to whether
a specific penalty was in fact “automati-
cally calculated through electronic means”
within the meaning of section 6751(b)(2)
(B). As such, the comments go beyond the
scope of the regulations.
One comment recommended that
the proposed definition be revised to
eliminate the requirement that an IRS
employee consider a taxpayer’s response
to an automatically-generated notice in
order to remove the penalty from the
automatically-calculated exception.
In this comment’s view, this require-
ment could lead to situations where the
IRS ignores correspondence and asserts
penalties without proper consideration
of the taxpayer’s response to an auto-
matically-generated penalty notice. The
Treasury Department and the IRS are
sensitive to the comment’s concerns but
consider this a matter outside of the scope
of these regulations. The stated concerns
are policy considerations about how
the IRS should handle correspondence.
They are not within the scope of these
regulations, which seek only to interpret
and define the statutory text of section
6751(b). As stated in the preamble to the
proposed regulations, it is the policy of
the IRS to give “full and fair consider-
ation to evidence in favor of not impos-
ing [a] penalty, even after the [IRS’]s
initial consideration supports imposition
of a penalty . . . .” This policy should
prohibit the type of conduct with which
the comment is concerned. Finally, even
if the IRS did fail to consider a taxpayer’s
response to an automatically-generated
penalty notice, there would be no bar-
gaining nor would there be an individual
who made an initial determination with
respect to the penalty at issue. Accord-
ingly, it would be impossible for the IRS
to obtain supervisory approval from the
(non-existent) individual’s supervisor. As
the preamble to the proposed regulations
explains, requiring supervisory approval
in that situation would disrupt the auto-
mated process and would not square with
the statutory text. For these reasons, the
proposed definition is adopted without
modification.
3. Other Comments
Comments made a number of other
recommendations that went beyond the
scope of the proposed regulations. These
recommendations related to the types of
forms the IRS should use in document-
ing supervisory approval and how those
forms should be provided to taxpayers,
the internal practices the IRS should fol-
low to ensure compliance with section
6751(b) among its employees, and the
types of employees that should be per-
mitted to approve certain penalties over
a certain dollar threshold. Other com-
ments also criticized the existing penalty
approval process as ineffective and stated
that pending legislation would soon obvi-
ate the need for these regulations. Finally,
one comment was submitted that did not
relate to section 6751(b).
Aside from being outside of the scope
of these regulations, adopting these rec-
ommendations would impose laborious
formalities that are not required by section
6751(b) and that would give taxpayers and
their representatives more opportunities to
avoid the penalties that Congress intended
be asserted against them. The final regula-
tions therefore do not adopt these recom-
mendations.

Bulletin No. 2025–5 521 January 27, 2025
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agree-
ment, Review of Treasury Regulations
under Executive Order 12866 (June 9,
2023), tax regulatory actions issued by the
IRS are not subject to the requirements of
section 6(b) of Executive Order 12866, as
amended. Therefore, a regulatory impact
assessment is not required.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6), it is hereby
certified that these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on these regulations
imposing no obligations on small entities
and therefore no economic impact on
those entities. Because these regulations
ensure that only appropriate penalties
will apply by imposing requirements on
the IRS and do not otherwise bear on the
applicability of any penalty, the final reg-
ulations do not impose a significant eco-
nomic impact on a substantial number of
small entities.
Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Chief Counsel for the Office of
Advocacy of the Small Business Admin-
istration for comment on its impact on
small businesses, and no comments were
received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) 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 aggre-
gate, or by the private sector, of $100 mil-
lion in 1995 dollars, updated annually for
inflation. This rule does not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (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 gov-
ernments, 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 final 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 Exec-
utive order.
V. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs has
designated this rule as not a “major rule,”
as defined by 5 U.S.C. 804(2).
Drafting Information
The principal author of these regula-
tions is William Prater of the Office of the
Associate Chief Counsel (Procedure and
Administration). However, other person-
nel from the Treasury Department and the
IRS participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation
for part 301 is amended by adding an
entry for §301.6751(b)-1(a)(4) in numer-
ical order to read in part as follows:
Authority: 26 U.S.C. 7805
* * * * *
Section 301.6751(b)-1(a)(4) also
issued under 26 U.S.C. 6751(b)(1).
* * * * *
Par. 2. Section 301.6751(b)-1 is added
to read as follows:
§301.6751(b)-1 Supervisory and higher
level official approval for penalties.
(a) Approval requirement—(1) In gen-
eral. Except as provided in paragraph (a)
(2) of this section, section 6751(b) of the
Internal Revenue Code (Code) generally
bars the assessment of a penalty unless
the initial determination of the assessment
of the penalty is personally approved (in
writing) by the immediate supervisor of
the individual making the initial deter-
mination or such higher level official as
the Secretary of the Treasury or her del-
egate may designate. Paragraph (a)(2) of
this section lists penalties not subject to
section 6751(b)(1) and this paragraph (a)
(1). Paragraph (a)(3) of this section pro-
vides definitions of terms used in section
6751(b) and this section. Paragraph (a)
(4) of this section designates the higher
level officials described in this paragraph
(a)(1). Paragraphs (b) through (d) of this
section apply section 6751(b)(1) and this
paragraph (a)(1) to penalties not subject
to pre-assessment review in the United
States Tax Court (Tax Court), penalties
that are subject to pre-assessment review
in the Tax Court, and penalties raised
in the Tax Court after a petition is filed,
respectively. Paragraph (e) of this section
provides examples illustrating the appli-
cation of section 6751(b) and this section.
Paragraph (f) of this section provides
dates of applicability of this section.
(2) Exceptions. Under section 6751(b)
(2), section 6751(b)(1) and this section do
not apply to:
(i) Any penalty under section 6651,
6654, 6655, 6673, 6662(b)(9), or 6662(b)
(10) of the Code; or
(ii) Any other penalty automatically
calculated through electronic means.
(3) Definitions. For purposes of section
6751(b) and this section, the following
definitions apply—
(i) Penalty. The term penalty means
any penalty, addition to tax, or additional
amount under the Code.
(ii) Individual who first proposed the
penalty. Except as otherwise provided

January 27, 2025 522 Bulletin No. 2025–5
in this paragraph (a)(3)(ii), the individ-
ual who first proposed the penalty is the
individual who section 6751(b)(1) and
paragraph (a)(1) of this section reference
as the individual making the initial deter-
mination of a penalty assessment. For
purposes of this section, a proposal of a
penalty can be made only to either a tax-
payer (or the taxpayer’s representative)
or to the individual’s supervisor or desig-
nated higher level official. A proposal of
a penalty, as defined in paragraph (a)(3)
(i) of this section, to a taxpayer does not
include mere requests for information
relating to a possible penalty or inquiries
of whether a taxpayer wants to participate
in a general settlement initiative for which
the taxpayer may be eligible, but does
include offering the taxpayer an oppor-
tunity to agree to a particular penalty in
a particular amount other than a penalty
under a settlement initiative offered to a
class of taxpayers. An individual who first
proposed the penalty is not the individual
whom section 6751(b)(1) and paragraph
(a)(1) of this section reference as the indi-
vidual making the initial determination of
a penalty assessment if the assessment of
the penalty is attributable to an indepen-
dent proposal made by a different individ-
ual.
(iii) Immediate supervisor. The term
immediate supervisor means any individ-
ual with responsibility to review another
individual’s proposal of penalties, as
defined in paragraph (a)(3)(i) of this sec-
tion, without the proposal being subject to
an intermediary’s approval.
(iv) Higher level official. The term
higher level official means any person
designated under paragraph (a)(4) of this
section as a higher level official autho-
rized to approve a penalty for purposes of
section 6751(b)(1).
(v) Personally approved (in writing).
The term personally approved (in writing)
means any writing, including in electronic
form, made by the writer to signify the
writer’s assent. No signature or particular
words are required so long as the circum-
stances of the writing reflect that it was
intended as approval.
(vi) Automatically calculated through
electronic means. A penalty, as defined
in paragraph (a)(3)(i) of this section, is
automatically calculated through elec-
tronic means if an IRS computer program
automatically generates a notice to the
taxpayer that proposes the penalty. If a
taxpayer responds in writing or otherwise
to the automatically-generated notice and
challenges the proposed penalty, or the
amount of tax to which the proposed pen-
alty is attributable, and an IRS employee
considers the response prior to assessment
(or the issuance of a notice of deficiency
that includes the penalty), then the penalty
is no longer considered “automatically
calculated through electronic means.”
(4) Higher level official. Any person
who has been directed by the Internal Rev-
enue Manual or other assigned job duties
to approve another individual’s proposal
of penalties before they are included in a
pre-assessment notice prerequisite to Tax
Court jurisdiction, an answer, amended
answer, or amendment to the answer to a
Tax Court petition, or are assessed with-
out need for such inclusion, is designated
as a higher level official authorized to
approve the penalty for purposes of sec-
tion 6751(b)(1).
(b) Penalties not subject to pre-as-
sessment review in the Tax Court. The
requirements of section 6751(b)(1) and
paragraph (a)(1) of this section are sat-
isfied for a penalty that is not subject to
pre-assessment review in the Tax Court if
the immediate supervisor of the individual
who first proposed the penalty personally
approves the penalty in writing before the
penalty is assessed. Alternatively, a per-
son designated as a higher level official as
described in paragraph (a)(4) of this sec-
tion may provide the approval otherwise
required by the immediate supervisor.
(c) Penalties subject to pre-assessment
review in the Tax Court. The requirements
of section 6751(b)(1) and paragraph (a)(1)
of this section are satisfied for a penalty
that is included in a pre-assessment notice
that provides a basis for Tax Court juris-
diction upon timely petition if the imme-
diate supervisor of the individual who first
proposed the penalty personally approves
the penalty in writing on or before the date
the notice is mailed. Alternatively, a per-
son designated as a higher level official
as described in paragraph (a)(4) of this
section may provide the approval other-
wise required by the immediate supervi-
sor. Examples of a pre-assessment notice
described in this paragraph (c) include a
statutory notice of deficiency under sec-
tion 6212 of the Code, a notice of final
partnership administrative adjustment
under former section 6223 of the Code,
and a notice of final partnership adjust-
ment under section 6231 of the Code.
(d) Penalties raised in the Tax Court
after a petition. The requirements of sec-
tion 6751(b)(1) and paragraph (a)(1) of
this section are satisfied for a penalty that
the Commissioner raises in the Tax Court
after a petition (see section 6214(a) of the
Code) if the immediate supervisor of the
individual who first proposed the penalty
personally approves the penalty in writing
no later than the date on which the Com-
missioner requests that the court deter-
mine the penalty. Alternatively, a person
designated as a higher level official as
described in paragraph (a)(4) of this sec-
tion may provide the approval otherwise
required by the immediate supervisor.
(e) Examples. The following examples
illustrate the rules of this section.
(1) Example 1. In the course of an audit regard-
ing a penalty not subject to pre-assessment review
in the Tax Court, Revenue Agent A concludes that
Taxpayer T should be subject to the penalty under
section 6707A of the Code for failure to disclose a
reportable transaction. Revenue Agent A sends T
a letter giving T the option to agree to the penalty;
submit additional information to A about why the
penalty should not apply; or request within 30 days
that the matter be sent to the Independent Office
of Appeals (Appeals) for consideration. After T
requests that Appeals consider the case, A prepares
the file for transmission, and B (who is A’s immedi-
ate supervisor, as defined in paragraph (a)(3)(iii) of
this section) signs a cover memorandum informing
Appeals of the proposed penalty and asks Appeals
to consider it. The Appeals Officer upholds the pen-
alty, and it is assessed. The requirements of section
6751(b)(1) are satisfied because B’s signature on the
cover memorandum is B’s personal written assent to
the penalty proposed by A and was given before the
penalty was assessed.
(2) Example 2. In the course of an audit, Revenue
Agent A concludes that Taxpayer T should be subject
to an accuracy-related penalty for substantial under-
statement of income tax under section 6662(b)(2).
Revenue Agent A sends T a Letter 915, Examina-
tion Report Transmittal, along with an examination
report that includes the penalty. The Letter 915 gives
T the option to agree to the examination report; pro-
vide additional information to be considered; discuss
the report with A or B (who is A’s immediate super-
visor, as defined in paragraph (a)(3)(iii) of this sec-
tion); or request a conference with an Appeals Offi-
cer. T agrees to assessment of the penalty and signs
the examination report to consent to the immediate
assessment and collection of the amounts shown on
the report. B provides written supervisory approval
of the penalty after T signs the examination report,
but before the penalty is assessed. Paragraph (b) of
this section applies because T’s agreement to assess-

Bulletin No. 2025–5 523 January 27, 2025
ment of the penalty excepts it from pre-assessment
review in the Tax Court. Because B provided writ-
ten supervisory approval before assessment of the
penalty, the requirements of section 6751(b)(1) are
satisfied.
(3) Example 3. In the course of an audit of Tax-
payer T by a team of revenue agents, Revenue Agent
A concludes that T should be subject to an accu-
racy-related penalty for negligence under section
6662(b)(1) and (c). Supervisor B is the issue man-
ager and is assigned the duty to review the Notice
of Proposed Adjustment for any penalty A would
propose. Revenue Agent A reports to B, but B is not
responsible for the overall management of the audit
of T. C is the case manager of the team auditing T
and is responsible for the overall management of the
audit of T. C may assign tasks to A and other team
members, and has responsibility for approving any
examination report presented to T.
(i) Alternative Outcome 1: Only B approves
the penalty in writing before the mailing to T of a
notice of deficiency that includes the penalty. Under
paragraph (a)(3)(iii) of this section, B qualifies as
the immediate supervisor of A with respect to A’s
penalty proposal, and the requirements of section
6751(b)(1) are met.
(ii) Alternative Outcome 2: Only C approves the
penalty in writing before the mailing to T of a notice
of deficiency that includes the penalty. Because C
has responsibility to approve A’s proposal of the pen-
alty as part of approving the examination report, C
qualifies as a higher level official designated under
paragraph (a)(4) of this section to approve the pen-
alty proposed by A, and the requirements of section
6751(b)(1) are met.
(4) Example 4. In the course of an audit, Rev-
enue Agent A concludes that Taxpayer T should be
subject to a penalty for negligence under section
6662(c). Revenue Agent A recommends the penalty
to her immediate supervisor B, who thinks more
factual development is needed to support the pen-
alty but must close the audit immediately due to the
limitations period on assessment expiring soon. The
IRS issues a statutory notice of deficiency without
the penalty and T files a petition in the Tax Court.
In reviewing the case file and conducting discovery,
IRS Chief Counsel Attorney C concludes that the
facts support imposing a negligence penalty under
section 6662(c). Attorney C proposes to her imme-
diate supervisor, D, that the penalty should apply
and should be raised in an Answer pursuant to sec-
tion 6214(a). D agrees and signs the Answer that
includes the penalty before it is filed. The section
6662(c) penalty at issue is subject to pre-assess-
ment review in the Tax Court and was raised in the
Tax Court after a petition was filed under paragraph
(d) of this section. Therefore, written supervisory
approval under paragraph (d) of this section was
required prior to filing the written pleading that
includes the penalty. Attorney C is the individual
who first proposed the penalty for purposes of sec-
tion 6751(b)(1) and paragraphs (d) and (a)(3)(ii) of
this section, and she secured timely written super-
visory approval from D, the immediate supervisor,
as defined in paragraph (a)(3)(iii) of this section.
As a result, the requirements of section 6751(b)(1)
are met. Revenue Agent A did not make the initial
determination of the penalty assessment because
any assessment would not be attributable to A’s
proposal but would be based on the independent
proposal of Attorney C raised pursuant to section
6214(a).
(5) Example 5. In the course of an audit, Rev-
enue Agent A concludes that Taxpayer T should be
subject to a penalty for negligence under section
6662(c). Revenue Agent A includes the penalty in a
draft report that she sends for review to her imme-
diate supervisor B. B reviews A’s recommenda-
tion and notices that A did not consider whether a
penalty for a substantial understatement of income
tax under section 6662(d) should apply in the alter-
native. B sends an email to A telling her to “add a
section 6662(d) penalty if the math checks out.”
Revenue Agent A reviews the facts, determines that
the imposition of the section 6662(d) penalty is war-
ranted, and adds the penalty to a report she issues
to the taxpayer. Revenue Agent A is the individual
who first proposed both of the penalties for purposes
of section 6751(b)(1) and paragraphs (d) and (a)(3)
(ii) of this section because she is the individual who
first proposed the penalty to the taxpayer. Supervisor
B did not make the initial determination of the sec-
tion 6662(d) penalty because, even though she first
thought of and suggested it, she did not propose it to
the taxpayer or her supervisor (or designated higher
level official).
(6) Example 6. The IRS’s Automated Underre-
porter (AUR) computer program detects a discrep-
ancy between the information received from a third
party and the information contained on Taxpayer
T’s return. AUR automatically generates a CP2000,
Notice of Underreported Income, that includes an
adjustment based on the unreported income and
a proposed penalty under section 6662(d) that is
mailed to T. The CP2000 gives T 30 days to respond
to contest the proposed adjustments and the penalty.
T submits a response to the CP2000, asking only for
more time to respond. More time is granted but no
further response is received from T, and a statutory
notice of deficiency that includes the adjustments
and the penalty is automatically generated and issued
to T. The section 6662(d) penalty at issue is auto-
matically calculated through electronic means under
paragraphs (a)(2)(ii) and (a)(3)(vi) of this section.
The penalty was proposed by the AUR computer
program, which generated a notice to T that proposed
the penalty. Although T submitted a response to the
CP2000, the response did not challenge the proposed
penalty, or the amount of tax to which the proposed
penalty is attributable. Therefore, the penalty was
automatically calculated through electronic means
and written supervisory approval was not required.
(f) Applicability date. The rules of this
section apply to penalties assessed on or
after December 23, 2024.
Douglas W. O’Donnell,
Deputy Commissioner.
Approved: December 2, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register Decem-
ber 20, 2024, 4:15 p.m., and published in the issue
of the Federal Register for December 23, 2024, 89
FR 104419)

January 27, 2025 524 Bulletin No. 2025–5
Part III
TEMPORARY RELIEF
UNDER SECTION 1.1012-
1(j)(3)(ii)
Notice 2025-7
SECTION 1. PURPOSE
This notice allows eligible taxpay-
ers to use certain alternative methods for
making an adequate identification, within
the meaning of § 1.1012-1(j)(3)(ii),
1
with
respect to units of a digital asset held in
the custody of a broker that are sold, dis-
posed of, or transferred during the relief
period specified in this notice.
SECTION 2. BACKGROUND
Section 1012(c)(1) provides that in
the case of the sale, exchange, or other
disposition of a specified security on or
after the applicable date, the conventions
prescribed by regulations under that sec-
tion must be applied on an account-by-
account basis. Section 1012(c)(3) pro-
vides that, for purposes of that section,
the terms “specified security” and “appli-
cable date” have the meaning given those
terms in section 6045(g)(3). Section
80603 of the Infrastructure Investment
and Jobs Act, Pub. L. No. 117-58, 135
Stat. 429, 1339 (2021), expanded the
definition of a specified security in sec-
tion 6045(g)(3) to include digital assets
with an applicable date of January 1,
2023. Section 6045(g)(3)(D) generally
defines a digital asset, for purposes of
information reporting by brokers, as any
digital representation of value which is
recorded on a cryptographically secured
distributed ledger or any similar technol-
ogy as specified by the Secretary.
On August 29, 2023, the Department
of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS)
published in the Federal Register (88 FR
59576) proposed regulations (2023 pro-
posed regulations) under sections 6045,
1001, and 1012, and other sections of the
Code. The 2023 proposed regulations, in
part, would have clarified the statutory
requirements for determining and identi-
fying the cost basis of digital assets. Con-
sistent with section 1012(c), the proposed
regulations would have required basis
determination on an account-by-account
basis.
On July 9, 2024, the Treasury Depart-
ment and the IRS published in the Federal
Register (89 FR 56480) T.D. 10000 (final
regulations). Section 1.1012-1(j) of the
final regulations provides ordering rules
for determining which units of the same
digital asset should be treated as sold, dis-
posed of, or transferred when a taxpayer
holds multiple units of that same digital
asset within the same wallet that were
acquired on different dates or at different
prices. Paragraph (j) generally applies
separate rules depending on whether or
not the units are held by the taxpayer in
the custody of a broker.
For digital asset units held in the cus-
tody of a taxpayer’s broker, § 1.1012-1(j)
(3)(ii) generally permits a taxpayer to
make an adequate identification of the
units to be sold, disposed of, or transferred
by specifying to the custodial broker, no
later than the date and time of the sale, dis-
position, or transfer, the particular units of
the digital asset to be sold, disposed of, or
transferred by reference to any identifier
that the broker designates as sufficiently
specific to allow it to determine the basis
and holding period of those units. Section
1.1012-1(j)(3)(ii) also permits taxpay-
ers to make an adequate identification of
such units by using a standing order or
instruction communicated to their custo-
dial broker. Further, if the custodial broker
offers taxpayers only one method of mak-
ing a specific identification, for example
by the earliest date on which units of the
same digital asset were acquired, the lat-
est date on which units of the same digital
asset were acquired, or the highest basis, §
1.1012-1(j)(3)(ii) treats such method as a
standing order or instruction.
For units held in the custody of a broker
but for which the taxpayer does not make
an adequate identification of the units sold,
disposed of, or transferred in accordance
with § 1.1012-1(j)(3)(ii), § 1.1012-1(j)(3)
(i) treats such units as sold, disposed of,
or transferred in order of time from the
earliest date on which units of that same
digital asset held in the custody of the bro-
ker were acquired by the taxpayer (“FIFO
rule”). Regardless of whether the taxpayer
makes an adequate identification, in the
case of digital assets exchanged for dif-
ferent digital assets, § 1.1012-1(j)(3)(iii)
treats any units withheld for either the
broker’s backup withholding obligations
under section 3406, or for payment of
services described in § 1.1001-7(b)(1)(ii)
(digital asset transaction costs), as coming
from the units received in the exchange.
Separate ordering rules, found in §
1.1012-1(j)(1) and (2), prescribe how
units not held in the custody of a broker
are identified as the units sold, disposed
of, or transferred. The temporary relief
described in this notice does not apply to
digital asset units not held in the custody
of a broker.
Section 1.1012-1(j)(6) provides that §
1.1012-1(j) applies to all acquisitions and
dispositions of digital assets on or after
January 1, 2025.
Contemporaneously with the issu-
ance of § 1.1012-1(j), the IRS issued
Rev. Proc. 2024-28, 2024-31 I.R.B. 326
(July 29, 2024), which provides guidance
to taxpayers regarding how to transition
from a universal or multi-wallet basis
allocation methodology to a wallet by
wallet or account by account basis allo-
cation methodology. Specifically, sub-
ject to certain requirements, Rev. Proc.
2024-28 provides a safe harbor on which
taxpayers may rely to allocate their units
of unattached basis to a digital asset
wallet or account that holds the same
number of remaining digital asset units
based on the taxpayer’s records of such
unattached basis and remaining units so
long as the allocation is reasonable. Rev.
Proc. 2024-28 permits taxpayers either
to make a specific unit allocation or to
make a global allocation in order to allo-
cate units of unattached basis, subject to
various conditions.
1
Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code (Code) or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2025–5 525 January 27, 2025
The Treasury Department and the IRS
understand that some digital asset brokers
may not have in place, by January 1, 2025,
the technology needed to accept specific
instructions or standing orders communi-
cated by taxpayers. These technology lim-
itations may leave some taxpayers unable to
make adequate identifications in conformity
with § 1.1012-1(j)(3)(ii). Thus, by default,
any units in the custody of such brokers that
are sold, disposed of, or transferred would
be determined under the FIFO rule.
This notice provides temporary relief
allowing taxpayers to use additional meth-
ods for making an adequate identification
within the meaning of § 1.1012-1(j)(3)(ii)
during the relief period, as defined in sec-
tion 3.03 of this notice. This notice does not
prohibit taxpayers from complying with §
1.1012-1(j)(3)(ii) as originally prescribed. In
addition, this notice does not affect how the
safe harbor described in Rev. Proc. 2024-28
applies. Taxpayers relying on the safe har-
bor described in Rev. Proc. 2024-28 may
also rely on the temporary relief described
in section 4.02 of this notice once the appli-
cable requirements of Rev. Proc. 2024-28
have been satisfied, including, in the case
of taxpayers making a global allocation, the
completion of the global allocation.
A method of specifically identifying the
units of a digital asset sold, disposed of, or
transferred (for example, by the earliest
acquired, the latest acquired, or the high-
est basis) is not a method of accounting
to which section 446 or section 481 apply.
See § 1.1012-1(j)(4). Finally, the tempo-
rary relief described in this notice does not
apply for purposes of the § 1.6045-1 rules
for digital assets. See T.D. 10000.
SECTION 3. DEFINITIONS
Except as otherwise provided, the fol-
lowing definitions apply solely for pur-
poses of this notice:
.01 Digital Asset. The term “digi-
tal asset” has the meaning provided in §
1.1012-1(j).
.02 Broker. The term “broker” has the
meaning provided in § 1.1012-1(j).
.03 Relief Period. The term “relief
period” means the period beginning on
January 1, 2025, and ending on December
31, 2025.
SECTION 4. TEMPORARY RELIEF
.01 Scope. The temporary relief
described in section 4.02 of this notice
is available only with respect to units of
a digital asset held in the custody of a
broker that are sold, disposed of, or trans-
ferred during the relief period.
.02 Temporary Relief under § 1.1012-
1(j)(3)(ii). A taxpayer may make an
adequate identification during the relief
period of a taxpayer’s units of a digital
asset to be sold, disposed of, or transferred
from the taxpayer’s units held in the cus-
tody of a broker by:
(1) Identifying, no later than the date
and time of the sale, disposition, or
transfer, on the taxpayer’s books
and records, the particular units to
be sold, disposed of, or transferred
by reference to any identifier, such
as purchase date and time or the pur-
chase price for the unit, that is suffi-
cient to identify the basis and holding
period of the units sold, disposed of,
or transferred; or
(2) Recording a standing order on the
taxpayer’s books and records, pro-
vided that the recorded standing
order includes sufficient information
to identify any digital asset units
sold, disposed of, or transferred and
is entered into the taxpayer’s books
and records before the units covered
by the order are sold, disposed of, or
transferred.
.03 Nonapplication of § 1.1012-1(j)
(3)(ii). If a taxpayer makes an adequate
identification under subsection 4.02 of
this notice, the rule in § 1.1012-1(j)(3)
(ii), which treats taxpayers whose bro-
ker offers only one method of making a
specific identification as having made
a standing order or instruction, does not
apply during the relief period.
.04 Safe harbor under Rev. Proc. 2024-
28. Taxpayers relying on the safe harbor
under Rev. Proc. 2024-28 may rely on the
temporary relief described in section 4.02
of this notice only after the applicable
requirements of Rev. Proc. 2024-28 have
been satisfied.
SECTION 5. RELIANCE
Taxpayers may rely on the temporary
relief described in section 4.02 of this
notice only for the duration of the relief
period, as defined in section 3.03 of this
notice. Accordingly, taxpayers may not
rely on the temporary relief described in
section 4.02 of this notice to identify units
held in the custody of the broker as the
units sold, disposed of, or transferred in
the case of sales, dispositions and trans-
fers made after the relief period ends.
SECTION 6. EFFECTIVE DATE
This notice is effective December 31,
2024.
SECTION 7. DRAFTING
INFORMATION
The principal authors of this notice
are Kyle Walker and Alexa T. Dubert of
the Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information regarding this notice, contact
Kyle Walker or Alexa Dubert at (202)
317-4718 (not a toll-free number).

January 27, 2025 526 Bulletin No. 2025–5
Part IV
Pilot Program Changes to
Fast Track Settlement
Announcement 2025-6
This announcement describes a pilot
program testing changes to Fast Track
Settlement (FTS) programs currently
available to taxpayers under examination
in the Large Business and International
(LB&I), Small Business/Self-Employed
(SB/SE), and Tax Exempt/Government
Entities (TE/GE) operating divisions (col-
lectively, Exam).
FTS enables taxpayers that have
unagreed issues in at least one open taxable
year under examination to work together
with Exam and the IRS Independent Office
of Appeals (Appeals) to resolve outstanding
disputed factual and legal issues while the
case is still in Exam’s jurisdiction. LB&I,
SB/SE, and TE/GE each jointly adminis-
ter FTS with Appeals. FTS is optional for
taxpayers and does not eliminate or replace
existing dispute resolution options, includ-
ing taxpayers’ opportunities to request
Appeals consideration or a conference with
an Exam manager.
This announcement also describes pilot
program changes to Post Appeals Media-
tion (PAM) procedures and introduces a
“Last Chance FTS” pilot program for SB/
SE taxpayers.
BACKGROUND
FTS began as a pilot program in 2001
with the goal of successfully using dispute
resolution techniques to promote issue
resolution at earlier stages. See Notice
2001-67, 2001-2 C.B. 544 (December 3,
2001). In 2003, the IRS formally estab-
lished FTS for taxpayers under the juris-
diction of the Large and Mid-Size Busi-
ness division, a predecessor to LB&I.
The IRS also allowed the use of Appeals’
alternative dispute resolution (ADR) set-
tlement authority in certain cases under
the jurisdiction of SB/SE. See Rev. Proc.
2003-40, 2003-25 I.R.B. 1044 (June 23,
2003). In 2012, the IRS permanently
established the FTS program for taxpay-
ers under the jurisdiction of TE/GE. See
Announcement 2012-34, 2012-36 I.R.B.
334 (September 4, 2012). Thereafter,
Rev. Proc. 2017-25, 2017-14 I.R.B. 1039
(April 3, 2017), formally established the
SB/SE FTS program.
The PAM program allows a taxpayer
and Appeals to resolve disputes through
mediation while a taxpayer’s case is still
under consideration by Appeals. Both the
taxpayer and Appeals must agree to medi-
ation, which is not binding. The PAM pro-
cedures are described in Rev. Proc. 2014-
63, 2014-53 I.R.B. 1014 (December 29,
2014). See also section 7123(b)(1) of the
Internal Revenue Code (Code). Both FTS
and PAM operate in accordance with these
authorities as well as applicable portions
of the Internal Revenue Manual (IRM).
FTS AND PAM PILOT PROGRAM
CHANGES
The changes being piloted under FTS
and PAM incorporate and rely upon all
existing FTS and PAM guidance except
for that which is the subject of specific
pilot revisions. All existing procedures
for commencing and conducting FTS and
PAM not specifically modified by this
announcement remain in place and con-
tinue in operation.
Under the pilot program, FTS can be
applied to one or more issues in a case.
Previously, if a taxpayer had one issue that
was ineligible for FTS, the entire case was
ineligible. In addition, participation in FTS
will not disqualify a taxpayer from PAM.
Requests to participate in FTS and PAM
will not be denied without the approval of
a first-line executive. These first line exec-
utives include but are not limited to:
• For Appeals: Director Examina-
tion Appeals, Director Collection
Appeals, Director Specialized Exam-
ination Program & Referrals.
• For LB&I: Director, Field Operations.
• For SB/SE: Area Director, Field
Examination; Director, Specialty Tax.
• For TE/GE: Director Exempt Organi-
zations (EO) Examinations; Director
EO Rulings & Agreements; Direc-
tor Government Entities; Director
Employee Plans (EP) Examinations;
Director EP Rulings & Agreements.
When requests for FTS or PAM are
formally denied, taxpayers will receive an
explanation for the denial. Finally, the pilot
program removes the pre-FTS managerial
conference requirements for SB/SE and
TE/GE taxpayers. See IRM 8.26.2.5(1)
(06-23-2017); IRM 8.26.7.2.1(1) (03-28-
2014).
These changes are intended to extend
the provisions of the current FTS and
PAM programs to a wider range of cases
and to increase usage and oversight
of ADR within the IRS. These piloted
changes will be evaluated after a two-
year test period to determine the degree
to which they should be discontinued,
adjusted, or made permanent. Among
other factors, this evaluation will be
based on usage data, experiences of IRS
personnel, and taxpayer satisfaction. The
FTS pilot will be available to any tax-
payer under the jurisdiction of Exam.
The PAM pilot will likewise be avail-
able to taxpayers nationwide who have
non-docketed cases before Appeals.
LAST CHANCE FTS PILOT
PROGRAM
The IRS will also undertake a lim-
ited-scope Last Chance FTS pilot pro-
gram. Under this program, when a
taxpayer submits a protest in response
to a 30-day or equivalent letter issued
at the conclusion of an examination
under SB/SE’s jurisdiction, the SB/SE
Group Manager overseeing the case will
ask Appeals to contact the taxpayer to
inform the taxpayer of the FTS option.
The designated Appeals point-of-con-
tact will act as a neutral resource inde-
pendent of the SB/SE examination staff
proposing the adjustment or enforce-
ment action and will provide the tax-
payer with information regarding FTS.
If the taxpayer requests FTS and the SB/
SE examination team consents to par-
ticipate, the rules of traditional FTS,
as modified by the FTS pilot described
in this announcement, will apply. If the
taxpayer chooses not to request FTS,
the case will be transferred by SB/SE to
Appeals using currently existing proce-
dures.

Bulletin No. 2025–5 527 January 27, 2025
The Last Chance FTS pilot program,
which is intended to further publicize
availability of FTS, will initially be lim-
ited to select cases under examination
by SB/SE revenue agents and tax com-
pliance officers. The Last Chance FTS
pilot program will not impact a taxpay-
er’s eligibility for FTS. Instead, the IRS’s
objective is to determine whether partic-
ipation in FTS increases when taxpayers
are reminded of their FTS options imme-
diately prior to the case entering Appeals’
jurisdiction.
EFFECTIVE DATE AND
EXPIRATION
The FTS and PAM pilot program
changes described in this announcement
are effective for all requests for FTS made
on or after January 15, 2025 and expire
on January 15, 2027. The Last Chance
FTS pilot program is effective beginning
on January 15, 2025 and expires on Jan-
uary 15, 2027.
COMMENTS
The IRS encourages taxpayers to sub-
mit written comments on the changes
being piloted, including suggested
improvements to make FTS and PAM
more useful and effective. Comments may
be submitted electronically via the Fed-
eral eRulemaking Portal at https://www.
regulations.gov (type “IRS Announce-
ment 2025-6” in the search field on the
Regulations.gov home page to find this
notice and submit comments). Alterna-
tively, comments may be submitted by
mail to: Internal Revenue Service, Attn:
CC:PA:LPD:PR (Announcement 2025-6),
Room 5203, P.O. Box 7604, Ben Frank-
lin Station, Washington, D.C. 20044.
Comments may be submitted at any point
during the pilot period.
DRAFTING INFORMATION
The principal author of this announce-
ment is Robin Ferguson of the Office of
the Associate Chief Counsel (Procedure
and Administration). For further informa-
tion regarding this announcement, contact
Robin Ferguson at (202) 317-5217 (not a
toll-free number).
Notice of Proposed
Rulemaking
Previously Taxed Earnings
and Profits and Related
Basis Adjustments
REG-105479-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations regarding previously
taxed earnings and profits of foreign cor-
porations and related basis adjustments.
The proposed regulations affect foreign
corporations with previously taxed earn-
ings and profits and their shareholders.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 3, 2025.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submis-
sions via the Federal eRulemaking Portal
at www.regulations.gov (indicate IRS and
REG-105479-18) by following the online
instructions for submitting comments.
Requests for a public hearing must be sub-
mitted as prescribed in the “Comments
and Requests for a Public Hearing” sec-
tion.
Once submitted to the Federal eRulemak-
ing Portal, comments cannot be edited or
withdrawn. The Department of the Trea-
sury (Treasury Department) and the IRS
will publish for public availability any
comment submitted electronically or on
paper to its public docket. Send paper sub-
missions to: CC:PA:01:PR (REG-105479-
18), room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Station,
Washington, D.C. 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations generally, Elena M. Madaj at
(202) 317-3576; concerning the portions
of the proposed regulations relating to sec-
tion 1502, Jeremy Aron-Dine at (202) 317-
6847; concerning the portions of the pro-
posed regulations relating to partnerships,
Jennifer N. Keeney at (202) 317-6850;
and concerning submissions of comments
and requests for a public hearing, contact
the Publications and Regulations Section
of the Office of Associate Chief Counsel
(Procedure and Administration) by email
at publichearings@irs.gov (preferred) or
by telephone at (202) 317-6901 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed addi-
tions and amendments to 26 CFR part 1
(proposed regulations) under sections 959
and 961 and certain other provisions of
the Internal Revenue Code (Code) regard-
ing previously taxed earnings and profits
(PTEP). As discussed in the Explanation
of Provisions, the primary provisions of
the proposed regulations are issued pursu-
ant to the express delegations of authority
under sections 245A(g), 743(b), 904(d)
(7), 951A(f)(1)(B), 960(f), 961(a) through
(c), 965(o), 986(c)(2), 989(c), and 1502.
The proposed regulations are also issued
pursuant to the express delegation of
authority under section 7805(a).
Background
I. Scope
The Background describes PTEP,
including provisions giving rise to PTEP
and provisions regarding the treatment
of PTEP, and related guidance and issues
under existing law. Any term used but not
defined in this preamble has the meaning
given to it in the proposed regulations.
II. PTEP
A. Overview
Sections 959 and 961 are intended to
operate in tandem to prevent double taxa-
tion of PTEP, which is earnings and profits
(E&P) of a foreign corporation described
in section 959(c)(1) or (c)(2). Section

January 27, 2025 528 Bulletin No. 2025–5
959 designates amounts of E&P as PTEP
based on amounts included, or treated as
included, in gross income with respect
to the foreign corporation under section
951(a).
The remainder of this part II of the
Background summarizes provisions giv-
ing rise to PTEP, provisions regarding the
treatment of PTEP, and existing regula-
tions under sections 959 and 961.
B. Provisions giving rise to PTEP
1. Section 951(a)
Section 951(a)(1)(A) requires a United
States shareholder (as defined in section
951(b) or, if applicable, section 953(c)(1)
(A)) of a foreign corporation to include in
gross income its pro rata share of the cor-
poration’s subpart F income (as defined
in section 952) for a taxable year of the
corporation (subpart F income inclusion),
if the corporation is a controlled foreign
corporation (CFC) (as defined in section
957(a) or, if applicable, section 957(b)
or 953(c)(1)(B)) at any time during the
taxable year and the shareholder owns
(within the meaning of section 958(a))
stock of the corporation on the last day of
the taxable year on which the corporation
is a CFC (last relevant day). Pursuant to
section 951(a)(1)(B), the United States
shareholder is generally required to also
include in gross income its amount deter-
mined under section 956 (section 956
amount) for the taxable year of the foreign
corporation (section 956 inclusion). This
amount represents an effective repatri-
ation of E&P and is computed based on
certain United States property held by the
corporation. Ownership of stock within
the meaning of section 958(a) means stock
owned directly and stock owned indirectly
through foreign entities, including domes-
tic partnerships to the extent treated as
foreign partnerships under §1.958-1(d)
(1) (discussed in part III.B of the Back-
ground). For purposes of the remainder of
this preamble, a reference to stock owner-
ship means stock owned within the mean-
ing of section 958(a).
Section 951(a)(2) determines a United
States shareholder’s pro rata share of a
foreign corporation’s subpart F income
by first allocating a portion of such sub-
part F income to the United States share-
holder, and then reducing such allocation
in accordance with section 951(a)(2)
(B) to take into account certain distri-
butions where ownership of the stock of
the foreign corporation is acquired by the
United States shareholder during the cor-
poration’s taxable year. See §1.951-1(b).
Subpart F income allocated to a United
States shareholder before the applica-
tion of section 951(a)(2)(B) is computed
by multiplying the subpart F income by
a fraction, the numerator of which is
the portion of the foreign corporation’s
hypothetical distribution described in
§1.951-1(e) that would be distributed
with respect to the shareholder’s stock of
the corporation, and the denominator of
which is the amount of such hypotheti-
cal distribution. See §1.951-1(e). The
amount of the hypothetical distribution
is equal to the foreign corporation’s allo-
cable E&P, which is generally the cor-
poration’s E&P for the taxable year (not
reduced by distributions during the year).
See §1.951-1(e)(1)(ii).
A special rule under section 245A(e)
treats certain hybrid dividends received by
a CFC as subpart F income of the receiv-
ing CFC for purposes of section 951(a)
(1)(A). Similarly, section 964(e)(4) treats
certain gain from a sale of stock of a for-
eign corporation by a CFC as subpart F
income of the selling CFC for purposes
of section 951(a)(1)(A). Consequently, a
United States shareholder of such a receiv-
ing CFC or selling CFC includes in gross
income under section 951(a)(1)(A) its pro
rata share of such subpart F income.
2. Section 951A(a)
Pursuant to section 951A(a), a United
States shareholder of a CFC is required to
include in gross income its global intangi-
ble low-taxed income (GILTI inclusion).
See §1.951A-1(b). A United States share-
holder’s GILTI inclusion is determined
by taking into account the shareholder’s
pro rata share of tested items (as defined
in §1.951A-1(f)(5)) of CFCs in which the
shareholder owns stock, such as tested
income, tested loss, and qualified business
asset investment. See §1.951A-1(c). A
United States shareholder’s pro rata share
of a CFC’s tested items is determined in
the same manner as a pro rata share of
subpart F income under section 951(a)
(2), subject to certain modifications. See
§1.951A-1(d).
Section 951A(f)(1)(A) provides that
a GILTI inclusion is treated in the same
manner as a subpart F income inclusion
for purposes of applying certain provi-
sions of the Code, including sections 959
and 961. Section 951A(f)(1)(B) grants
the Secretary authority to provide rules
for applying section 951A(f)(1)(A) to
other provisions of the Code in any case
in which the determination of subpart F
income is required to be made at the level
of the CFC.
3. Section 1248(a) or (f)
Section 1248(a) requires a United
States person that satisfies certain owner-
ship requirements with respect to stock in
a foreign corporation to include gain rec-
ognized on a sale or exchange of stock in
such foreign corporation in gross income
as a dividend, to the extent of the E&P of
the foreign corporation attributable to the
stock (including E&P of certain lower-tier
foreign corporations pursuant to section
1248(c)(2), but not including PTEP pursu-
ant to section 1248(d)(1)). Section 1248(f)
provides similar rules for certain distribu-
tions in nonrecognition transactions.
Section 959(e) treats an amount
included in gross income of any person as
a dividend under section 1248(a) or (f) as
an amount included in gross income under
section 951(a)(1)(A), for purposes of sec-
tion 959.
4. Section 965
The transition tax imposed under sec-
tion 965 as part of the Tax Cuts and Jobs
Act, Public Law 115-97, 131 Stat. 2054
(2017) (the Act) increased the subpart F
income of certain foreign corporations
and treated such foreign corporations as
CFCs for purposes of section 951 (if not
already the case). Section 965(a) and (e).
Consequently, a United States shareholder
of such a foreign corporation generally
included in gross income under section
951(a)(1)(A) its pro rata share of such
additional subpart F income, subject to
reduction under section 965(b) for certain
E&P deficits attributable to stock of other
foreign corporations owned by the share-
holder.

Bulletin No. 2025–5 529 January 27, 2025
For purposes of section 959, the tran-
sition tax also treated the amount of a
reduction to a United States sharehold-
er’s inclusion with respect to a foreign
corporation under section 965(b) as an
amount included in the shareholder’s
gross income with respect to the foreign
corporation under section 951(a). Section
965(b)(4)(A).
C. Provisions regarding the treatment of
PTEP
1. Gross Income Exclusions Under
Section 959
Section 959 prevents double taxation
by excluding PTEP from gross income of
United States persons and CFCs. See H.R.
Rep. No. 87-1447, at A101-102 (1962).
Section 959(a) provides that, when
PTEP of a foreign corporation is distrib-
uted to, or would otherwise be included
under section 951(a)(1)(B) in gross
income of, a United States shareholder
whose inclusion under section 951(a) gave
rise to the PTEP, the PTEP is excluded
from the United States shareholder’s gross
income. Under successor rules within sec-
tion 959(a), the exclusion extends to any
other United States person who acquires
from any person any portion of the United
States shareholder’s interest in the foreign
corporation (subject to any proof of iden-
tity rules that may be prescribed by the
Secretary).
Section 959(b) applies for purposes of
section 951(a) and provides that, when
PTEP of a CFC is distributed through a
chain of ownership described under sec-
tion 958(a), the PTEP is excluded from the
gross income of another CFC in the chain
for purposes of applying section 951(a) to
such CFC with respect to the United States
shareholder whose inclusion under sec-
tion 951(a) gave rise to the PTEP. Under
successor rules within section 959(b), the
exclusion extends to any CFC of any other
United States shareholder who acquires
from any person any portion of the United
States shareholder’s interest in the CFC
(subject to any proof of identity rules that
may be prescribed by the Secretary).
Section 959(c) treats PTEP as distrib-
uted before E&P that is not PTEP. It does
so by allocating distributions first to PTEP
described in section 959(c)(1) (PTEP
resulting from a section 956 inclusion or
PTEP that have been excluded under sec-
tion 959(a)(2)), then to PTEP described
in section 959(c)(2) (all other PTEP), and
finally to non-PTEP (section 959(c)(3)
E&P).
For purposes of section 959, section
951A(f)(1) treats the portion of a United
States shareholder’s GILTI inclusion that
is allocated to a CFC in the same manner
as a subpart F income inclusion.
Section 959(f) allocates a section 956
amount first to PTEP described in sec-
tion 959(c)(2) and then to section 959(c)
(3) E&P, taking into account distributions
made by the foreign corporation. A sec-
tion 956 amount is not allocated to PTEP
described in section 959(c)(1) because,
under section 956(a) and (b)(1), that PTEP
is taken into account in determining the
section 956 amount.
Thus, under section 959, a CFC’s E&P
for a taxable year of the CFC is first clas-
sified as PTEP to reflect any subpart F
income inclusions or GILTI inclusions
with respect to the CFC. Next, any dis-
tributions made by the CFC during the
taxable year are allocated to PTEP (and
such PTEP is reduced). Then, any sec-
tion 956 amount with respect to the CFC
is determined for the taxable year, which
is allocated to remaining section 959(c)
(2) PTEP (and such PTEP is reclassified
as section 959(c)(1) PTEP). Finally, the
CFC’s E&P for the taxable year is classi-
fied as PTEP to reflect any inclusion under
section 951(a)(1)(B).
2. Basis Adjustments Under Section 961
Section 961 describes rules that pro-
vide for basis increases to reflect amounts
included in gross income under section
951(a) and basis reductions and gain rec-
ognition to reflect distributions of PTEP.
Basis increases prevent undistributed
PTEP of a foreign corporation from giving
rise to gain or a subpart F income inclusion
of a covered shareholder, and thus addi-
tional tax, in a sale or exchange of stock
of the foreign corporation or property
through which such stock is owned. See
H.R. Rep. No. 87-1447, at A106 (1962);
H.R. Rep. No. 105-148, at 529-30 (1997).
Basis reductions and gain recognition pre-
vent double benefits that would otherwise
arise (for example, by ensuring a distri-
bution of PTEP does not create a loss in
the stock or other property on which the
distribution is made because of basis pro-
vided under section 961 for the inclusion
that gave rise to the PTEP).
Section 961(a) provides that, under
regulations prescribed by the Secretary,
a United States shareholder’s basis in
its stock in a CFC, and basis in property
through which it owns such stock, is
increased by the amount included in the
shareholder’s gross income under section
951(a) with respect to such stock or prop-
erty.
Section 961(b)(1) provides that, under
regulations prescribed by the Secretary,
when a United States shareholder or a
United States person receives an amount
that is excluded from gross income under
section 959(a), the basis of the stock or
other property with respect to which the
amount is received is reduced by the
amount so excluded. To the extent that
an amount excluded from gross income
under section 959(a) exceeds the basis of
the stock or other property with respect
to which it is received, section 961(b)(2)
treats the amount as gain from the sale or
exchange of property.
Section 961(c) provides that, under
regulations prescribed by the Secretary, if
a United States shareholder owns stock in
a CFC that is owned by another CFC, then
adjustments similar to the adjustments
provided by section 961(a) and (b) are
made to the basis of such stock, and the
basis of stock in any other CFC through
which the United States shareholder owns
the stock of the first mentioned CFC, but
only for the purposes of determining the
amount included under section 951 in the
gross income of such United States share-
holder. Under successor rules within sec-
tion 961(c), basis adjustments carry over
to any other United States shareholder
who acquires from any person any portion
of the interest of the United States share-
holder by reason of which the shareholder
was treated as owning the relevant CFC
stock (subject to any proof of identity
rules that may be prescribed by the Sec-
retary). Section 961(c) further provides
that the adjustments described in section
961(c) do not apply to any stock owned
by the United States shareholder to which
a basis adjustment applies under section
961(a) or (b).

January 27, 2025 530 Bulletin No. 2025–5
For purposes of section 961, section
951A(f)(1) treats the portion of a United
States shareholder’s GILTI inclusion that
is allocated to a CFC in the same manner
as a subpart F income inclusion.
Section 1.965-2(f)(1) generally pro-
vides that basis is not increased under
section 961 to reflect PTEP resulting from
section 965(b), but §1.965-2(f)(2) permits
taxpayers to elect to make certain basis
adjustments.
3. Foreign Currency Gain or Loss Under
Section 986(c)
Section 986(c)(1) requires the recogni-
tion of foreign currency gain or loss with
respect to distributions of PTEP attrib-
utable to movements in exchange rates
between the date of the income inclusion
that gave rise to the PTEP and the distribu-
tion of the PTEP. Section 986(c)(1) further
provides that such foreign currency gain
or loss is treated as ordinary income or
loss from the same source as the associ-
ated income inclusion. Section 986(c)(2)
provides that the Secretary shall prescribe
regulations with respect to distributions
of PTEP through tiers of foreign corpo-
rations. Section 989(c) provides that the
Secretary shall prescribe such regulations
as may be necessary or appropriate to
carry out the purposes of the subpart that
includes section 986 (subpart J of part III,
subchapter N, chapter 1, subtitle A of the
Code).
Notice 88-71, 1988-2 C.B. 374 (1988
notice), provides guidance regard-
ing foreign currency gain or loss with
respect to PTEP and announced an intent
to issue regulations consistent with the
guidance. Under the 1988 notice, such
foreign currency gain or loss is deter-
mined with respect to each separate
category of income listed in section
904(d)(1) pursuant to a formula and is
recognized immediately before certain
sales or exchanges of stock of a foreign
corporation with respect to undistrib-
uted PTEP of the foreign corporation.
See also §1.985-5(e)(2) (requiring a
United States shareholder to recognize
foreign currency gain or loss when a
CFC changes its functional currency
to the U.S. dollar); §1.367(b)-2(j)(2)(i)
(application of section 986(c) to certain
nonrecognitions).
Section 1.986(c)-1 addresses foreign
currency gain or loss with respect to dis-
tributions of PTEP resulting from section
965. The rules provide that foreign cur-
rency gain or loss with respect to PTEP
resulting from section 965(a) is determined
based on movements in the exchange rate
between December 31, 2017, and the time
such PTEP is distributed, and that any such
gain or loss recognized is reduced in the
same proportion as the reduction by a sec-
tion 965(c) deduction amount (as defined
in §1.965-1(f)(42)) of the section 965(a)
inclusion amount (as defined in §1.965-
1(f)(38)) that gave rise to the PTEP. The
rules also provide that section 986(c) does
not apply with respect to distributions of
PTEP resulting from section 965(b).
4. Foreign Income Taxes Under Sections
164(a), 901(a), and 960(b)
Section 164(a) generally provides that
a taxpayer is allowed a deduction for cer-
tain foreign income taxes paid or accrued
by the taxpayer.
Section 901(a) generally provides
that a taxpayer choosing to credit foreign
income taxes is allowed a credit for cer-
tain foreign income taxes paid or accrued
by the taxpayer plus, in the case of a
domestic corporation, the taxes deemed to
have been paid by the domestic corpora-
tion under section 960.
Section 960(b) applies for purposes
of sections 901 through 909 (relating to
the foreign tax credit). Section 960(b)(1)
provides that, if PTEP distributed by a
CFC to a corporate United States share-
holder of the CFC is excluded from gross
income under section 959(a), the United
States shareholder is deemed to have paid
the foreign income taxes that are properly
attributable to the PTEP and that have not
already been deemed paid by a domes-
tic corporation. Similarly, section 960(b)
(2) provides that, if PTEP distributed by
a CFC to another CFC is excluded from
gross income under section 959(b), the
recipient CFC is deemed to have paid the
foreign income taxes that are properly
attributable to the PTEP and that have not
already been deemed paid by a domestic
corporation. Section 960(f) provides that
the Secretary shall prescribe such regula-
tions or other guidance as may be neces-
sary or appropriate to carry out the pro-
visions of section 960. Section 904(d)(1)
provides that certain provisions including
section 960 apply separately with respect
to certain categories of income, and sec-
tion 904(d)(7) provides that the Secretary
shall prescribe such regulations as may be
necessary or appropriate for the purposes
of section 904(d).
For purposes of determining the amount
of foreign income taxes deemed paid,
§1.960-3 requires the establishment and
maintenance of foreign corporation-level
accounts that track a foreign corporation’s
PTEP and foreign income taxes associated
with the PTEP. Those regulations adopt a
system of accounting for PTEP in annual
accounts for each separate section 904
category (as defined in §1.960-1(b)(23))
and further segregate each annual account
among ten PTEP groups.
Section 965(g) and §1.965-5 disallow
a percentage (referred to as the applicable
percentage, as defined in §1.965-5(d)) of
any credit or deduction for foreign income
taxes associated with PTEP resulting from
section 965(a) or (b). Section 245A(d) and
§1.245A(d)-1 disallow the entirety of any
credit or deduction for foreign income
taxes associated with PTEP resulting from
income inclusions by reason of section
245A(e)(2) (regarding hybrid dividends)
or certain income inclusions by reason of
section 964(e)(4) (regarding sales of stock
of a foreign corporation by a CFC). Sec-
tions 245A(g) and 965(o) provide that the
Secretary shall prescribe such regulations
or other guidance as may be necessary or
appropriate to carry out the provisions of
sections 245A and 965, respectively.
5. Election Under Section 962
Section 962(a) provides that, under
regulations prescribed by the Secretary, an
individual United States shareholder may
elect to be taxed at domestic corporate
rates on amounts included in the individ-
ual’s gross income under section 951(a)
and that those amounts are treated as taken
into account by a domestic corporation for
purposes of applying the relevant pro-
visions of section 960. The election also
applies to amounts included in the individ-
ual’s gross income under section 951A(a)
because, for purposes of section 962, such
amounts are treated in the same manner as
a subpart F income inclusion. See section

Bulletin No. 2025–5 531 January 27, 2025
951A(f)(1). The purpose of section 962
generally is to equate an individual’s tax
burden with respect to certain earnings of
a CFC with the tax burden the individual
would have had if the individual were to
own the CFC through a domestic corpo-
ration. See S. Rep. No. 87-1881, at 92-93
(1962).
To carry out this purpose, section
962(d) generally subjects PTEP to an
additional level of taxation when distrib-
uted. It does so by, notwithstanding sec-
tion 959(a)(1), requiring that the distrib-
uted PTEP be included in gross income
to the extent it exceeds the amount of tax
paid on the amounts to which the election
under section 962 applied.
Section 961(a) also carries out this pur-
pose by, in the case of an election under
section 962, limiting a basis increase for
an income inclusion to which the elec-
tion applied to the amount of tax paid by
the individual with respect to the income
inclusion. Additionally, in a distribution
of PTEP, section 961(b)(1) limits a basis
decrease to the amount that is excluded
from gross income under section 959(a)
after the application of section 962(d).
6. Section 1411
Section 1411 generally imposes a 3.8
percent tax on the net investment income
of certain individuals, trusts, and estates.
Under section 1411(c)(1) and §1411-
4(a), net investment income includes
certain income from dividends and net
gain from the disposition of property.
Section 1.1411-10 provides, in relevant
part, rules regarding the application
of section 1411 to individuals, trusts,
and estates that own stock of a CFC,
and §1.1411-10(g) allows an election
with respect to a CFC to treat amounts
included in income under section 951(a)
with respect to the CFC as net investment
income for purposes of §1.1411-4(a)(1)
(i). See also §1.951A-5(b)(1) (treating a
GILTI inclusion in the same manner as a
subpart F income inclusion for purposes
of applying section 1411). If the election
provided under §1.1411-10(g) is made,
a distribution of E&P that is not treated
as a dividend pursuant to section 959(d)
is generally not treated as a dividend for
purposes of section 1411(c)(1)(A)(i) and
§1.1411-4(a)(1)(i). See §1.1411-10(c)
(1)(i)(B). If the election provided under
§1.1411-10(g) is not made, however, net
investment income could reflect value
attributable to PTEP, either when the
PTEP is distributed or when a United
States shareholder directly or indirectly
disposes of stock of the CFC. Thus, if no
election is made, a distribution of E&P
that is not treated as a dividend pursuant
to section 959(d) is nevertheless a div-
idend for purposes of determining net
investment income under section 1411(c)
(1)(A)(i) and §1.1411-4(a)(1)(i), pro-
vided the distribution is attributable to
amounts that are or have been included
in gross income under section 951(a) in
a taxable year beginning after Decem-
ber 31, 2012. See §1.1411-10(c)(1)(i)(A)
(1). For purposes of calculating gain on
the disposition of stock of a CFC, basis
adjustments under section 961(a) and (b)
are similarly not taken into account for
section 1411 purposes in the absence of
the election. See §1.1411-10(d)(1).
D. Regulations under sections 959 and
961
The current regulations under sections
959 and 961 were issued in 1965 and have
not been updated to reflect certain statu-
tory changes (for example, the enactment
of section 961(c)). The regulations also do
not address a number of issues relating to
the operation of sections 959 and 961.
In 2006, the Treasury Department
and the IRS issued a notice of proposed
rulemaking (71 FR 51155) (2006 pro-
posed regulations) to provide more com-
plete rules and address various open issues
under sections 959 and 961 and related
provisions.
In 2018, the Treasury Department and
the IRS issued Notice 2019-01, 2019-02
I.R.B. 275 (2019 notice), which announced
an intent to withdraw the 2006 proposed
regulations and issue a new notice of pro-
posed rulemaking under sections 959 and
961 to address certain issues arising from
the Act. The 2019 notice described rules
for the maintenance of PTEP accounts and
other aspects relating to the operation of
section 959 and requested comments on
certain topics. The Treasury Department
and the IRS received several written com-
ments in response to the 2019 notice. In
2022, the Treasury Department and the
IRS formally withdrew the 2006 proposed
regulations (87 FR 63981).
As indicated in the 2019 notice,
changes made by the Act had a signifi-
cant impact on the role of PTEP and how
it functions within the U.S. tax system
and, in certain cases, exacerbated the need
to address longstanding issues. Thus, in
addition to the need for updated and more
complete rules as contemplated in the
2006 proposed regulations, the issuance
of new regulations requires consideration
of multiple issues raised by the Act. Cer-
tain significant considerations about the
role of PTEP in the current U.S. tax sys-
tem are summarized below.
First, the Act significantly increased
the types of income that give rise to PTEP,
several of which involve specific rules
and limitations to determine foreign cur-
rency gain or loss and the availability of
foreign tax credits. Giving effect to the
various rules and limitations introduced
by the Act requires a detailed accounting
system to track PTEP in new groups, and
to ensure those rules and limitations are
appropriately applied by taxpayers and
can be administered by the IRS.
The Act also substantially increased
the amount of PTEP in the U.S. tax sys-
tem. In many cases, a considerable portion
of a CFC’s income has been (or will be)
subject to tax under section 951(a)(1)(A)
or 951A(a), including by reason of the
transition tax imposed under section 965,
and thus only the residual amount of the
CFC’s income constitutes section 959(c)
(3) E&P.
At the same time, the Act introduced
section 245A, which in certain cases
allows a domestic corporation to claim a
dividends received deduction for section
959(c)(3) E&P. As a result, unlike before
the Act where section 959(c)(3) E&P
generally was subject to U.S. tax (with a
possible foreign tax credit in some cases)
when repatriated to the domestic corpo-
ration, such E&P may now generally be
repatriated without U.S. tax to a recipi-
ent domestic corporation. Nonetheless,
there are important distinctions between
section 959(c)(3) E&P and PTEP – in
particular, the section 245A deduction
generally allows E&P to be distributed
without a corresponding basis reduc-
tion (but see sections 961(d) and 1059),
whereas a distribution of PTEP reduces

January 27, 2025 532 Bulletin No. 2025–5
basis (or gives rise to gain) in accor-
dance with section 961(b). Therefore,
PTEP may not be preferable to section
959(c)(3) E&P and taxpayers might take
inappropriate positions to maximize the
existence of section 959(c)(3) E&P. For
example, a taxpayer may wish to claim a
section 961 basis increase for an amount
included in gross income but apply the
section 245A deduction on a distribution
of the corresponding E&P so that such
E&P is repatriated tax-free without any
basis reduction under section 961(b). To
prevent this type of planning, it is criti-
cal for the system to properly maintain
the PTEP character of that E&P so that
section 961(b) applies when the E&P is
distributed.
Existing rules governing PTEP also do
not adequately address structures where
a United States shareholder owns only a
portion of the stock in an upper-tier CFC
that owns stock in a lower-tier CFC. In
particular, there are no rules prescribing
the manner in which basis under section
961(c) functions in these non-wholly
owned structures. Further, after the enact-
ment of section 951A in the Act, it is much
more likely for United States shareholders
to have disparate amounts of PTEP with
respect to the same CFC because a United
States shareholder’s GILTI inclusion is
determined based on items attributable to
all the stock of CFCs owned by the United
States shareholder, and this can raise
issues about how section 959(b) applies
in distributions of the PTEP (such as the
issues discussed in part II.D.1.ii of the
Explanation of Provisions). Thus, changes
in the Act have compounded already
existing complexities with respect to the
treatment of PTEP and basis in stock in
non-wholly owned structures.
Finally, existing rules do not suffi-
ciently address the operation of the PTEP
provisions with respect to domestic part-
nerships (or certain S corporations) in light
of the enactment of section 951A and the
extension of aggregate treatment to such
entities in determining inclusions under
both sections 951(a) and 951A(a) (as dis-
cussed in part III.A of the Background).
Moreover, certain unresolved issues, such
as whether a partnership obtains basis
in stock of a CFC to account for PTEP,
which had previously been limited to for-
eign partnerships, now apply equally to
domestic partnerships (and certain S cor-
porations).
III. Other Guidance and Issues
A. Regulations under section 958
Before the Act, domestic partnerships
(and S corporations by operation of section
1373(a)) were treated as owning stock of a
foreign corporation for purposes of deter-
mining inclusions in gross income under
section 951(a), and, thus, PTEP accounts
under section 959 were maintained, and
related basis adjustments under section
961 were made, at the partnership level.
Following the enactment of section
951A in the Act, in 2019 the Treasury
Department and the IRS published final
regulations treating a domestic partnership
(and certain S corporations) as an aggre-
gate of its partners for purposes of apply-
ing section 951A and related provisions.
TD 9866, 84 FR 29288. That is, partners
do not take into account a distributive
share of a section 951A inclusion with
respect to the domestic partnership and its
CFCs, but instead are treated as propor-
tionately owning the stock of those CFCs,
with the result that (as with foreign part-
nerships) income inclusions under section
951A are determined directly (and solely)
by partners that are United States share-
holders with respect to a CFC. Subse-
quently, in 2022, the Treasury Department
and the IRS published §1.958-1(d) which,
consistent with the approach adopted
under section 951A, extends the aggregate
treatment of domestic partnerships to sec-
tion 951. TD 9960, 87 FR 3648.
Under §1.958-1(d), for purposes of
sections 951, 951A, and 956(a), as well
as any provision that specifically applies
by reference to those sections (or reg-
ulations issued under those sections),
a domestic partnership is generally not
treated as owning stock of a foreign cor-
poration under section 958(a), and stock
of a foreign corporation owned by the
domestic partnership is instead treated in
the same manner as stock of a foreign cor-
poration owned by a foreign partnership
under section 958(a)(2) and §1.958-1(b).
Accordingly, because sections 959 and
961 specifically apply by reference to sec-
tions 951 and 951A (in the latter case, as
a result of section 951A(f)(1)(A)), aggre-
gate treatment of domestic partnerships
applies for purposes of sections 959 and
961 pursuant to §1.958-1(d). Regulations
do not, however, specifically address the
application of sections 959 and 961 with
respect to domestic partnerships or their
partners under §1.958-1(d).
B. Regulations under section 1502
Section 1502 authorizes the Secretary
to prescribe regulations for an affiliated
group of corporations that join in filing (or
that are required to join in filing) a con-
solidated return (consolidated group, as
defined in §1.1502-1(h)) to clearly reflect
the U.S. tax liability of the consolidated
group and to prevent avoidance of such
tax liability. For purposes of carrying out
those objectives, section 1502 also permits
the Secretary to prescribe rules that may
be different from the provisions of chap-
ter 1 of subtitle A of the Code that would
apply if the corporations composing the
consolidated group filed separate returns.
Pursuant to these rules, members of a
consolidated group are treated as separate
entities for some purposes but as divisions
of a single corporation for other purposes.
See, for example, §1.1502-13(a)(2).
Regulations issued under section
1502 address the application of certain
provisions of subpart F in the context
of consolidated groups. See, for exam-
ple, §1.1502-51 (application of section
951A to consolidated groups); §1.1502-
80(j) (addressing determination of sec-
tion 951(a)(2)(B) reduction for distribu-
tions under section 959(b) for purposes
of sections 951(a)(1)(A) and 951A(a)).
However, regulations do not address the
application of sections 959 and 961 with
respect to a consolidated group or its
members.
Explanation of Provisions
I. Scope
The proposed regulations provide rules
addressing core aspects of the PTEP sys-
tem, including rules that address long-
standing issues under sections 959 and
961, account for new provisions and
amendments under the Act, and imple-
ment the 1988 notice and 2019 notice.
Future guidance will address certain issues

Bulletin No. 2025–5 533 January 27, 2025
not addressed in the proposed regulations,
for example, issues involving nonrecog-
nition transactions, redemptions, trans-
actions to which section 964(e) applies,
and structures where CFCs are partners
in a partnership. See also Notice 2024-16,
2024-5 I.R.B. 622 (announcing intent to
issue proposed regulations addressing the
treatment of section 961(c) basis in certain
transactions in which a domestic corpora-
tion acquires stock of a CFC in a liquida-
tion described in section 332 or an asset
reorganization described in section 368(a)
(1)). Future guidance may also address
any issues regarding the interaction of the
proposed regulations with existing rules
under other provisions.
II. Section 959 Regulations
A. Overview
The proposed regulations under section
959 provide rules for PTEP accounting
(both at the shareholder-level and foreign
corporation-level), exclusions from gross
income, and related determinations and
adjustments.
B. PTEP accounting (proposed §1.959-2)
1. Shareholder-Level Accounts
i. In general
Integral to the proposed regulations are
annual PTEP accounts, dollar basis pools,
and PTEP tax pools, which are established
and maintained by a covered shareholder
with respect to a foreign corporation in
which the shareholder owns stock. See
proposed §1.959-2(b)(1). These are inte-
gral aspects of the PTEP system because
they ensure proper tracking of amounts
described under provisions of the Code
such as sections 959(a), 986(c), and
960(b). These rules are issued pursuant
to the express delegations of authority
under sections 245A(g), 904(d)(7), 960(f),
965(o), and 989(c).
A covered shareholder means any
United States person, other than a domes-
tic partnership. See proposed §1.959-1(b);
see also part VIII.A of the Explanation of
Provisions (providing that an S corpora-
tion is generally treated in the same man-
ner as a domestic partnership). Domestic
partnerships are excluded from this defi-
nition because they are treated as aggre-
gates of their partners in determining
stock ownership for purposes of section
959 (discussed in part III.A of the Back-
ground). A covered shareholder is not lim-
ited to a United States shareholder because
the exclusion under section 959(a) is not
limited to United States shareholders. For
example, section 959(a) applies to any
United States person who acquires from
any person an interest in a foreign corpo-
ration with PTEP.
ii. Annual PTEP accounts
Annual PTEP accounts track a foreign
corporation’s PTEP with respect to a cov-
ered shareholder. See proposed §1.959-
2(b)(1). These accounts represent PTEP
distributable exclusively to the covered
shareholder (or a successor), directly or
indirectly through tiers, on any stock of
the foreign corporation.
Each annual PTEP account relates to a
single taxable year of the foreign corpo-
ration and a single section 904 category,
and PTEP within an annual PTEP account
is maintained in the foreign corporation’s
functional currency and assigned among
ten PTEP groups and two subgroups. See
proposed §1.959-2(b)(2). Tracking PTEP
on an annual basis is necessary to apply
the “last-in, first-out” rule for distributions
of PTEP in section 959(c), and PTEP is
maintained in the foreign corporation’s
functional currency pursuant to section
986(b). Tracking PTEP by section 904
category and by PTEP groups is necessary
to implement rules determining foreign
currency gain or loss and foreign tax cred-
its with respect to PTEP.
The ten PTEP groups fall within two
categories – section 959(c)(2) PTEP
groups and section 959(c)(1) PTEP
groups. See proposed §1.959-2(b)(2)
(i). The section 959(c)(2) groups sepa-
rately track PTEP resulting from subpart
F income inclusions, GILTI inclusions,
application of section 965(a) or 965(b),
or income inclusions to which section
245A(d) applies (PTEP resulting from
section 245A(e)(2) or certain PTEP result-
ing from section 959(e) (concerning sec-
tion 1248) or section 964(e)(4) (concern-
ing certain dispositions of foreign stock)).
The section 959(c)(1) PTEP groups cor-
respond to the section 959(c)(2) PTEP
groups and account for the reclassification
of PTEP pursuant to section 959(a)(2).
PTEP arising from section 956 inclusions
is combined with reclassified PTEP aris-
ing from subpart F income inclusions.
The two subgroups track PTEP arising
from income inclusions of certain cov-
ered shareholders. See proposed §1.959-
2(b)(2)(ii). One subgroup tracks PTEP
arising from an income inclusion of an
individual and includible in gross income
under section 962(d) when distributed
in a distribution to which section 959(a)
would otherwise apply (taxable section
962 PTEP). The second subgroup tracks
PTEP arising from an income inclusion
of an individual, estate, or trust that
would be includible in net investment
income under section 1411(c) when
distributed (that is, the election under
§1.1411-10(g) is not made and, thus, the
income inclusion giving rise to the PTEP
was not taken into account in determin-
ing net investment income).
Additionally, for PTEP resulting from
the application of section 965(a) or (b),
an adjusted applicable percentage must
be maintained, which tracks the percent-
age of a credit or deduction for foreign
income taxes associated with PTEP that
is disallowed under §1.965-5. See pro-
posed §1.959-2(b)(2)(iii)(A). Similarly,
for PTEP resulting from the application of
section 965(a), a section 965(c) deduction
percentage must be maintained, which
tracks the percentage of foreign cur-
rency gain or loss with respect to PTEP
that is not recognized under §1.986(c)-1.
See proposed §1.959-2(b)(2)(iii)(B). The
adjusted applicable percentage and the
section 965(c) deduction percentage are
tracked by section 904 category. Each
is determined using a single weighted
average across that section 904 category,
which is intended to reduce the compli-
ance burden and facilitate administrability
in cases in which the applicable percent-
age or section 965(c) deduction amount
differs with respect to PTEP in the section
904 category by not requiring the separate
tracking of those percentages or amounts.
See also part IX.B.3. of the Explanation of
Provisions (describing transition rules for
the initial determination of the adjusted
applicable percentage and section 965(c)
deduction percentage).

January 27, 2025 534 Bulletin No. 2025–5
iii. Dollar basis pools and PTEP tax pools
Dollar basis pools track the basis in U.S.
dollars of a foreign corporation’s PTEP
with respect to a covered shareholder,
and such dollar basis is used to deter-
mine foreign currency gain or loss under
section 986(c). See proposed §1.959-2(b)
(1). PTEP tax pools track the U.S. dollar
amount of foreign income taxes associ-
ated with a foreign corporation’s PTEP
with respect to a covered shareholder,
and such taxes are assigned to a credit-
able PTEP tax group to the extent eligible
to be deemed paid under section 960(b).
See proposed §1.959-2(b)(1) and (4)(ii).
The creditable PTEP tax group tracks for-
eign income taxes that are eligible to be
deemed paid under section 960(b).
Furthermore, together, dollar basis and
the U.S. dollar amount of associated for-
eign income taxes determine basis reduc-
tions under section 961 for distributions of
PTEP. See also part III.C.2 of the Expla-
nation of Provisions.
Tracking foreign income taxes associ-
ated with PTEP in a shareholder-specific
manner (consistent with how PTEP is
tracked) differs from the approach under
existing §1.960-3 (and the 1988 notice),
which tracks such taxes only at the CFC-
level (without regard to the shareholder
whose PTEP account was reduced by the
taxes). This new approach ensures that,
in structures involving multiple covered
shareholders, foreign income taxes are
associated with PTEP with respect to a
particular covered shareholder and do not
include foreign income taxes that were
imposed on PTEP with respect to another
covered shareholder. Thus, in a distribu-
tion of PTEP to a covered shareholder,
the covered shareholder’s basis is reduced
under section 961(b) by the foreign
income taxes that are (i) associated with
(and consequently reduced) PTEP with
respect to the covered shareholder, and (ii)
deemed paid by the covered shareholder.
This method is intended to prevent each
covered shareholder from incurring dou-
ble taxation on a single item of income,
by ensuring that a covered shareholder
is able to take into account the foreign
income taxes associated with the PTEP
with respect to the covered shareholder.
Generally, dollar basis pools and PTEP
tax pools are maintained on a year-by-year
basis, with one pool for each PTEP group
within each annual PTEP account. See
proposed §1.959-2(b)(3) and (4). Main-
tenance of separate dollar basis pools for
each PTEP group prevents the commin-
gling of dollar basis of PTEP that is sub-
ject to different rules with respect to the
recognition of foreign currency gain or
loss under section 986(c). Maintenance
of separate PTEP tax pools for each PTEP
group prevents the commingling of for-
eign income taxes for which the related
PTEP is subject to different rules regard-
ing the applicability of section 960(b).
Under an exception intended to sim-
plify PTEP accounting, a covered share-
holder may elect to combine dollar basis
pools and PTEP tax pools across years.
See proposed §1.959-2(c). In such a case,
each dollar basis pool and PTEP tax pool
relates to PTEP assigned to a single PTEP
group and a single section 904 category
(without regard to the taxable years to
which the PTEP relates). See proposed
§1.959-2(b)(3) and (4). This election is
consistent with a comment in response to
the 2019 notice that recommended allow-
ing taxpayers to pool dollar basis across
years within section 904 categories.
If a covered shareholder elects to com-
bine dollar basis pools and PTEP tax pools
across years, the election applies to the
covered shareholder’s dollar basis pools
and PTEP tax pools with respect to each
foreign corporation in which the covered
shareholder owns stock. See proposed
§1.959-2(c)(1). This ensures consistent
treatment by not permitting a covered
shareholder to maintain combined pools
with respect to some foreign corporations
but not others. A combined pool election
may be revoked only with the consent of
the Commissioner. See proposed §1.959-
2(c)(2).
2. Foreign Corporation-Level Accounts
Foreign corporation-level accounts
track a foreign corporation’s PTEP and
associated foreign income taxes (corporate
PTEP accounts and corporate PTEP tax
pools, respectively). See proposed §1.959-
2(d)(1) and (d)(2). A corporate PTEP
account and corporate PTEP tax pool each
relate to a single covered shareholder,
and PTEP or foreign income taxes within
such an account are assigned to section
904 categories and PTEP groups (as is the
case in shareholder-level accounts). These
accounts reflect that PTEP and associated
foreign income taxes are foreign corpora-
tion-level attributes (which, as discussed
in part II.B.1 of the Explanation of Provi-
sions, are tracked in a shareholder-specific
manner). These accounts also are nec-
essary to allocate and apportion current
year taxes paid or accrued by a foreign
corporation among the relevant statutory
and residual groupings of the foreign cor-
poration, as discussed in part II.F of the
Explanation of Provisions, as well as for
computations under section 956, which
take into account E&P described in sec-
tion 959(c)(1). Finally, as with sharehold-
er-level accounts, these rules are issued
pursuant to the express delegations of
authority under sections 245A(g), 904(d)
(7), 960(f), 965(o), and 989(c).
A corporate PTEP account relating to
a covered shareholder represents all PTEP
within the covered shareholder’s annual
PTEP accounts with respect to the for-
eign corporation (therefore, unlike share-
holder-level accounts, a corporate PTEP
account does not relate to a single taxable
year of the foreign corporation). Similarly,
a corporate PTEP tax pool for a covered
shareholder represents all foreign income
taxes within the covered shareholder’s
PTEP tax pools with respect to the foreign
corporation. Thus, as a covered sharehold-
er’s annual PTEP accounts and PTEP tax
pools with respect to a foreign corporation
are adjusted, the foreign corporation-level
accounts (including the PTEP groups
within the accounts) are also adjusted.
The proposed regulations do not pro-
vide rules for maintaining a foreign cor-
poration-level account for section 959(c)
(3) E&P because the Treasury Department
and the IRS are studying whether such
E&P should be separately computed with
respect to each covered shareholder in
certain instances and related issues (for
example, coordination with section 1248).
For example, assume a case in which US1
and US2, each a covered shareholder, own
60% and 40%, respectively, of the stock
of CFC1, a foreign corporation. CFC1 has
$75x and $0 of PTEP with respect to US1
and US2, respectively, but only $50x of
total E&P as a result of incurring a deficit
in E&P after generating the PTEP. Under
a shareholder-specific approach to com-

Bulletin No. 2025–5 535 January 27, 2025
puting CFC1’s section 959(c)(3) E&P,
such E&P would be negative $45x with
respect to US1 ($50x × 60% − $75x) and
$20x with respect to US2 ($50x × 40%
− $0). Under a non-shareholder-specific
approach to computing section 959(c)
(3) E&P, CFC1’s section 959(c)(3) E&P
would be negative $25x ($50x − $75x).
The proposed regulations clarify that a
foreign corporation’s E&P is determined
independently of the foreign corporation’s
PTEP. See proposed §1.959-2(d)(3). For
example, in a distribution by a foreign
corporation with respect to its stock, sec-
tion 316 determines the extent to which
the distribution is made out of the for-
eign corporation’s E&P, and section 959
determines the extent to which the portion
that is made out of E&P is a distribution
of PTEP. See also proposed §1.959-10(c)
(2)(iii) (Example 2, alternative facts,
regarding a distribution of built-in loss
property). Additionally, as in the example
in the preceding paragraph, the proposed
regulations clarify that a foreign corpora-
tion’s E&P may be less than the foreign
corporation’s PTEP because a loss does
not reduce PTEP.
C. Shareholder-level account adjustments
(proposed §1.959-3)
1. In General
The proposed regulations describe the
adjustments made to a covered sharehold-
er’s annual PTEP accounts (including
PTEP groups within those accounts and,
if applicable, relevant percentages for
section 965 PTEP and PTEP subgroups),
dollar basis pools, and PTEP tax pools
with respect to a foreign corporation. See
proposed §1.959-3. The rules for making
these adjustments are issued pursuant to
the express delegations of authority under
sections 245A(g), 904(d)(7), 986(c)(2),
960(f), 965(o), and 989(c).
These adjustments reflect income inclu-
sions and transactions related to a taxable
year of the foreign corporation, and the
adjustments preserve the character of the
foreign corporation’s PTEP with respect
to the covered shareholder (for example,
the taxable year, section 904 category,
and PTEP group to which PTEP relates).
In applying these rules to tiers of foreign
corporations, the adjustments are applied
successively from the lowest-tier foreign
corporation to the highest-tier foreign cor-
poration. See proposed §1.959-3(g).
An adjustment to annual PTEP
accounts is treated as made at one of three
points in time (each of which is discussed
below in this part II.C of the Explanation
of Provisions), which determines when
PTEP becomes (or ceases to be) avail-
able for distribution to the covered share-
holder: (i) at the beginning of the first day
of the foreign corporation’s taxable year,
(ii) concurrently with the transaction giv-
ing rise to the adjustment, or (iii) at the
end of the last day of the foreign corpora-
tion’s taxable year. See proposed §1.959-
3(f). An adjustment to dollar basis pools
and PTEP tax pools is treated as made
concurrently with the related adjustment
to annual PTEP accounts.
2. Beginning of Year Adjustments
Three types of PTEP are added to
annual PTEP accounts at the beginning
of the foreign corporation’s taxable year
(even if, for example, the determination
of the amount giving rise to the PTEP
occurs at the end of such taxable year).
This timing ensures that PTEP generated
or received during the taxable year is
available for distribution as of the start of
the taxable year, consistent with sections
316(a)(2) and 959(c) (which determine
dividend treatment and the application of
section 959(a) or (b) based on E&P for the
taxable year).
The first type is PTEP arising from the
covered shareholder’s subpart F income
inclusion or GILTI inclusion with respect
to the foreign corporation for the taxable
year. See proposed §1.959-3(c)(1)(i) and
(ii). To reflect the addition of this PTEP,
basis equal to the U.S. dollar amount of the
income inclusion giving rise to the PTEP
is added to related dollar basis pools. See
proposed §1.959-3(d)(1)(i).
The second type is PTEP with respect
to the covered shareholder that is distrib-
uted to the foreign corporation during the
taxable year (discussed in part II.D of the
Explanation of Provisions). See proposed
§1.959-3(c)(1)(iii). To reflect the addition
of this PTEP, the dollar basis and asso-
ciated foreign income taxes of the PTEP
are added to related dollar basis pools
and PTEP tax pools, and such taxes are
assigned to the creditable PTEP tax group
to the extent the foreign corporation is
deemed to pay the taxes under section
960(b)(2) and proposed §1.960-3(c). See
proposed §1.959-3(d)(1)(ii), (e)(1)(i).
Further, the PTEP is reduced by current
year taxes allocated and apportioned to
the PTEP (that is, by foreign income taxes
imposed on the PTEP and paid or accrued
by the foreign corporation in the tax-
able year, as distinguished from foreign
income taxes described in the preceding
sentence, which were paid or accrued
by another foreign corporation in a prior
distribution of the PTEP). See proposed
§1.959-3(c)(1)(v); see also part II.F of the
Explanation of Provisions (rules for allo-
cating and apportioning current year taxes
to PTEP). Such current year taxes reduce
related dollar basis pools and are added to
related PTEP tax pools, where the taxes
are assigned to the creditable PTEP tax
group to the extent the foreign corporation
is a CFC and a credit for the taxes is not
disallowed or suspended at the level of the
CFC. See proposed §1.959-3(d)(1)(iii), (e)
(1)(ii).
The third type is PTEP with respect to
the covered shareholder that results from
the application of the foreign corpora-
tion’s section 961(c) basis to gain recog-
nized by the foreign corporation during
the taxable year (discussed in part III.E
of the Explanation of Provisions). See
proposed §1.959-3(c)(1)(iv). To reflect
the addition of this PTEP, the dollar basis
of the PTEP is added to related dollar
basis pools. See proposed §1.959-3(d)(1)
(ii). Further, current year taxes allocated
and apportioned to the PTEP reduce the
PTEP, reduce related dollar basis pools,
and are added to related PTEP tax pools,
where (like in a distribution) the taxes are
assigned to the creditable PTEP tax group
to the extent the foreign corporation is a
CFC and a credit for the taxes is not dis-
allowed or suspended at the level of the
CFC. See proposed §1.959-3(d)(1)(iii), (e)
(1)(ii).
3. Time of Transaction Adjustments
Three types of PTEP are added to, or
removed from, annual PTEP accounts
concurrently with the relevant transaction
occurring during the foreign corporation’s
taxable year.

January 27, 2025 536 Bulletin No. 2025–5
The first type is PTEP distributed by
the foreign corporation during the tax-
able year. See proposed §1.959-3(c)(1)
(vi). To reflect the removal of this PTEP,
the dollar basis and associated foreign
income taxes of the PTEP are removed
from related dollar basis pools and PTEP
tax pools. See proposed §1.959-3(d)(1)
(iv), (e)(1)(iii).
The second type is PTEP arising from
gain recognized by the covered share-
holder on the sale or exchange of stock
during the taxable year that is recharac-
terized and included in gross income as
a dividend under section 1248 by rea-
son of E&P attributed to stock of the
foreign corporation under section 1248.
See proposed §1.959-3(c)(1)(vii); see
also section 959(e). This timing prevents
iterative computations that could result if
the PTEP were available for distribution
earlier in the taxable year. To reflect the
addition of this PTEP, basis equal to the
U.S. dollar amount of the income inclu-
sion giving rise to the PTEP is added to
related dollar basis pools. See proposed
§1.959-3(d)(1)(i). The Treasury Depart-
ment and the IRS are studying whether a
foreign corporation’s PTEP should simi-
larly be increased to reflect gain treated
as a dividend under section 964(e)(1) by
reason of E&P of the foreign corporation,
which amount generally increases the
selling CFC’s PTEP, and welcome com-
ments on whether increasing the foreign
corporation’s PTEP would be appropriate
notwithstanding the duplicative result
(that is, PTEP would be in the selling
CFC and the foreign corporation whose
E&P gave rise to the dividend).
The third type is PTEP that transfers
from (or to) the covered shareholder under
section 959’s successor rules (discussed
in part II.G of the Explanation of Provi-
sions). See proposed §1.959-3(c)(1)(viii),
(ix). To reflect the removal (or addition)
of this PTEP, the dollar basis and associ-
ated foreign income taxes of the PTEP are
removed from (or added to) related dollar
basis pools and PTEP tax pools. See pro-
posed §1.959-3(d)(1)(iv) and (v), (e)(1)
(iii) and (iv).
4. End of Year Adjustments
Two types of adjustments are made at
the end of the foreign corporation’s tax-
able year. These adjustments relate to the
covered shareholder’s section 956 amount
with respect to the foreign corporation for
the taxable year.
First, PTEP to which the section 956
amount is allocated (which, as discussed
in part II.E of the Explanation of Pro-
visions, is excluded from the covered
shareholder’s gross income under section
959(a)(2)) is reassigned within annual
PTEP accounts from section 959(c)(2)
PTEP groups to section 959(c)(1) PTEP
groups. See proposed §1.959-3(c)(1)(x).
To reflect the reclassification, the dol-
lar basis and associated foreign income
taxes of the PTEP are moved from dollar
basis pools and PTEP tax pools relating
to section 959(c)(2) PTEP groups to dol-
lar basis pools and PTEP tax pools relat-
ing to section 959(c)(1) PTEP groups.
See proposed §1.959-3(d)(1)(vi), (e)(1)
(v).
Next, PTEP arising from the portion
of the section 956 amount included in
the covered shareholder’s gross income
under section 951(a)(1)(B) is added to
annual PTEP accounts. See proposed
§1.959-3(c)(1)(xi). In addition, an
amount of basis equal to the U.S. dollar
amount of the section 956 inclusion giv-
ing rise to the PTEP is added to related
dollar basis pools. See proposed §1.959-
3(d)(1)(i).
Further, additional rules address cases
where the covered shareholder acquires
ownership of stock of the foreign cor-
poration on or after the last relevant
day of the foreign corporation’s taxable
year (that is, the last day of such taxable
year on which the foreign corporation is
a CFC) and a portion of a section 956
amount of a United States shareholder is
attributable to such stock. See proposed
§1.959-3(c)(4). Under these rules, PTEP
of the foreign corporation that has trans-
ferred to the covered shareholder but to
which such portion of the section 956
amount is ultimately allocated (discussed
in part II.E of the Explanation of Provi-
sions) is reclassified from section 959(c)
(2) PTEP groups to section 959(c)(1)
PTEP groups. Moreover, the foreign cor-
poration’s PTEP with respect to the cov-
ered shareholder is increased to reflect
the inclusion in income by the United
States shareholder of such portion of the
section 956 amount.
D. Distributions of PTEP (proposed
§1.959-4)
1. Application of Exclusions
i. In general
The proposed regulations provide
rules regarding the exclusions from
gross income under section 959(a)(1)
and (b) for PTEP that is distributed to a
covered shareholder or a CFC. See pro-
posed §1.959-4; see also part II.D.2 of the
Explanation of Provisions (determining
distributed PTEP).
Under the section 959(a)(1) exclusion,
PTEP distributed to a covered shareholder,
other than taxable section 962 PTEP, is
excluded from the covered shareholder’s
gross income. See proposed §1.959-4(b)
(1); see also section 962(d) and proposed
§1.312-8(c) (domestic corporation’s
receipt of PTEP does not increase E&P,
discussed in part VIII.I of the Explanation
of Provisions).
Under the section 959(b) exclusion,
PTEP distributed by a CFC to another
CFC is excluded from the recipient CFC’s
gross income for purposes of determin-
ing the recipient CFC’s subpart F income
and tested income or tested loss, provided
that the PTEP relates to a covered share-
holder that is a United States shareholder
in both CFCs. See proposed §1.959-4(b)
(2); see also §1.312-6(b) (the distribution
generally increases the recipient CFC’s
E&P) and proposed §1.952-1(c)(4) (the
distribution does not increase the recipi-
ent CFC’s current year E&P for purposes
of the limitation in section 952(c)(1)(A),
discussed in part VIII.I of the Explanation
of Provisions).
Applying the section 959(b) exclusion
for purposes of determining the recipient
CFC’s tested income or tested loss pre-
vents double taxation (and thus is con-
sistent with the policy of section 959)
in cases where the distribution is not a
related party dividend described in sec-
tion 951A(c)(2)(A)(i)(IV) and therefore
could otherwise result in tested income.
The Treasury Department and the IRS
are of the view that this approach, which
is issued under the express delegation of
authority in section 951A(f)(1)(B), is con-
sistent with section 951A(f)(1)(A) (treat-
ing an inclusion under section 951A(a)

Bulletin No. 2025–5 537 January 27, 2025
in the same manner as an inclusion under
section 951(a)(1)(A) for purposes of sec-
tion 959), which should be interpreted as
allowing references to section 951(a) in
section 959 to be treated as including a
reference to section 951A(a).
Applying the section 959(b) exclusion
only to PTEP distributed by a CFC to
another CFC is consistent with the stat-
ute. However, under the express delega-
tion of authority in section 965(o), the
proposed regulations provide a special
rule pursuant to which a specified foreign
corporation (as defined in §1.965-1(f)
(45)(i)(B)) that is not a CFC is treated
as a CFC for purposes of applying the
section 959(b) exclusion to section 965
PTEP distributed by the specified for-
eign corporation, which ensures that the
section 959(b) exclusion applies to such
PTEP when received by a CFC. See pro-
posed §1.959-4(b)(2)(ii). The Treasury
Department and the IRS are studying
the application of section 959(b) to other
PTEP distributed by a foreign corpora-
tion that is not a CFC (for example, in a
case where the foreign corporation was
a CFC when the PTEP was generated
but is no longer a CFC when the PTEP
is distributed). Irrespective of whether
the section 959(b) exclusion applies to
PTEP distributed to a foreign corpora-
tion, the PTEP remains PTEP and, in a
subsequent distribution, may be excluded
from gross income under section 959(a)
(1) or (b). See proposed §§1.959-2 and
1.959-3 (describing shareholder-level
annual PTEP accounts and related adjust-
ments with respect to a foreign corpora-
tion without regard to CFC status). This
treatment is required to give effect to
section 959(a), which does not depend on
the CFC status of any intermediary enti-
ties through which a covered shareholder
ultimately receives PTEP.
ii. Split-ownership structures
Under the proposed regulations, the
section 959(b) exclusion applies at the
CFC-level by excluding a distribution
of PTEP from the recipient CFC’s gross
income for certain purposes. In structures
where stock of a CFC is not all owned by
a single United States shareholder, the
application of the section 959(b) exclu-
sion at the CFC-level could, absent spe-
cial rules, result in all United States share-
holders of the CFC sharing any benefits of
the exclusion (rather than just the United
States shareholder to which the excluded
PTEP relates) and partial double taxation
to the United States shareholder to which
the excluded PTEP relates (to the extent
the exclusion benefits other United States
shareholders).
Guidance issued before the Act
generally used a “gross-up” mecha-
nism to address this issue. Rev. Rul.
82-16, 1982-1 C.B. 106, considered a
scenario where a United States share-
holder owned 70% of the stock of an
upper-tier CFC, with the remaining
30% owned by non-United States share-
holders, and the upper-tier CFC owned
all the stock of a lower-tier CFC. The
lower-tier CFC earned $100x of subpart
F income, which gave rise to a $70x
subpart F income inclusion and, thus,
$70x of PTEP with respect to the United
States shareholder. In a later year, the
lower-tier CFC distributed $200x to the
upper-tier CFC. The ruling concluded
that section 959(b) looks to the total
amount of E&P of the lower-tier CFC
that caused the United States sharehold-
er’s subpart F income inclusion, with
the result that section 959(b) excluded
$100x (rather than $70x) from the
upper-tier CFC’s subpart F income in
applying section 951(a) to the United
States shareholder. Conversely, a $70x
exclusion under section 959(b) would
have caused the upper-tier CFC to have
an additional $30x of subpart F income
from the distribution, which would have
led to a $21x ($30x × 70%) subpart F
income inclusion for the United States
shareholder even though its share of the
distribution was all attributable to PTEP.
However, a gross-up mechanism raises
certain issues. For example, computing a
gross-up may be complex or burdensome
in light of the increased prevalence of
PTEP that is not pro rata with respect to
United States shareholders following the
Act (for instance, PTEP resulting from a
GILTI inclusion, which is not determined
solely by reference to a particular CFC).
Additionally, a gross-up mechanism could
result in the need for different determina-
tions of a CFC’s subpart F income (and
tested income or tested loss) for different
United States shareholders of the CFC,
which is inconsistent with the way that
these types of income are treated under
existing regulations for other purposes of
the Code such as the expense allocation
rules or foreign tax credit rules.
Accordingly, instead of a gross-up
mechanism, the proposed regulations
coordinate the section 959(b) exclusion
with revisions to the pro rata share rules
of section 951(a) (discussed in part IV.C
of the Explanation of Provisions). Under
this approach, a CFC’s subpart F income
is determined with respect to all share-
holders by excluding the same amount of
PTEP received by the CFC, and United
States shareholders’ pro rata shares of the
CFC’s subpart F income are computed in
a manner so that any benefits of the appli-
cation of the section 959(b) exclusion
to PTEP with respect to a United States
shareholder generally inure only to that
United States shareholder. For instance, if
two United States shareholders own equal
interests in a CFC, and the CFC receives
a distribution half of which is PTEP with
respect to one United States shareholder
(because there is PTEP with respect to the
United States shareholder at least equal to
its share of distribution) and the other half
of which gives rise to subpart F income
(because there is no PTEP with respect to
the other United States shareholder and no
exception from subpart F income applies),
then only the United States shareholder
with respect to which there is no PTEP has
a pro rata share of the subpart F income
resulting from the distribution.
The Treasury Department and the IRS
are of the view that the approach in the
proposed regulations appropriately car-
ries out the shareholder-specific nature of
section 959(b) (that is, excluding PTEP
with respect to a United States share-
holder from a CFC’s gross income for
purposes of the application of section
951(a) to the CFC with respect to the
United States shareholder). Additionally,
this approach conforms with the approach
for applying section 961(c) which, under
the proposed regulations (as discussed
in part III.E of the Explanation of Provi-
sions), also provides for a gross income
exclusion at the CFC-level that is coor-
dinated with the section 951(a) pro rata
share rules to ensure its benefits gener-
ally inure only to the appropriate United
States shareholder.

January 27, 2025 538 Bulletin No. 2025–5
iii. Issues involving allocation rules under
section 861
The approach in the proposed regu-
lations discussed in part II.D.1.ii of the
Explanation of Provisions (applying the
section 959(b) exclusion, as well as sec-
tion 961(c), at the CFC-level) can lead to
issues involving the rules of section 861
for allocating and apportioning deductions
because a CFC’s deductions that are not
current year taxes are not allocated and
apportioned under section 861 to PTEP.
See §1.960-1(c)(1)(ii) and proposed
§1.959-6(d)(1).
For example, in a case where some,
but not all, of a distribution received by
a CFC is PTEP, an amount of the CFC’s
deductible interest expense could reduce
the non-PTEP portion of the distribution.
See also proposed §1.951-1(h)(2)(ii)(C)
(Example 1, alternative facts). This may
result in a benefit if the non-PTEP por-
tion would give rise to subpart F income
or tested income, but otherwise may not
be beneficial if the interest deductions
reduce section 959(c)(3) E&P and thus the
potential for a dividends received deduc-
tion under section 245A. Comments are
requested on how to appropriately allocate
and apportion deductions of a CFC when
some, but not all, of a distribution (or gain
recognized) is PTEP.
For example, comments are requested
on whether deductions that are not cur-
rent year taxes, such as deductible interest
expense, should be allocated and appor-
tioned to, and therefore reduce, the CFC’s
PTEP. Under this approach, to the extent
PTEP with respect to a United States
shareholder is reduced by deductions that
are not current year taxes, the shareholder
could be allowed to retain an equivalent
amount of adjusted basis in property
directly owned by the shareholder and on
which the remaining PTEP is ultimately
distributed, with the result that the share-
holder would receive a benefit equivalent
to a deduction (similar to the result dis-
cussed in Part III.C.2.ii of the Explanation
of Provisions in the case of foreign income
taxes that are associated with PTEP but
not credited under section 901).
Comments are also requested on
whether, as an alternative to the approach
in the proposed regulations, sections
959(b) and 961(c) should apply at the
shareholder-level. Under this type of
approach, instead of section 959(b) pre-
venting a distribution to a CFC from giv-
ing rise to subpart F income (as it has his-
torically been interpreted, but with respect
to a particular shareholder), section 959(b)
would generally reduce a United States
shareholder’s pro rata share of the CFC’s
subpart F income, to the extent attribut-
able to distributed PTEP. Furthermore,
section 961(c) would apply in a similar
manner in the case of a CFC’s gain from
a sale or other disposition of stock of a
foreign corporation. Comments should
address whether a CFC’s deductions that
are not current year taxes, such as deduct-
ible interest expense, should be allocated
and apportioned to gross income of the
CFC that does not give rise to an inclu-
sion at the shareholder-level under section
959(b) or 961(c) or whether CFC-level
provisions (such as section 954(c)(3) or
(c)(6) or 964(e)(1)) apply to such income
and, if so applied, whether the E&P from
the income should be treated as section
959(c)(3) E&P or PTEP to ensure that the
CFC-level and shareholder-level provi-
sions interact appropriately.
2. Determining Distributed PTEP
i. Covered distributions
For a distribution to be considered a
distribution of PTEP under section 959,
the proposed regulations first require that
the distribution be a covered distribution,
which is generally defined as any distribu-
tion made by a foreign corporation with
respect to its stock to the extent that the
distribution is a dividend (as defined in
section 316), determined without regard
to section 959(d). See proposed §1.959-
4(c)(1). While a covered distribution
may include deemed distributions treated
as dividends (for example, distributions
under section 304), a covered distribution
does not include an amount treated as a
dividend by reason of section 78, 367(b),
964(e)(1), or 1248. A deemed dividend
under section 78 is determined without
regard to E&P (and does not represent a
distribution of E&P to any shareholder),
and deemed dividends under the other
provisions, regardless of whether they
constitute deemed distributions of E&P,
are determined by excluding PTEP (apart
from §1.367(b)-2(j)(2)(ii), which sepa-
rately provides for a deemed distribution
of PTEP in certain nonrecognition trans-
actions, and §1.367(b)-3(g)(1), which
separately provides for a deemed distri-
bution of E&P, including PTEP, in cer-
tain inbound nonrecognition transactions
described in §1.367(b)-3). The proposed
regulations do not address the treatment
of dividends arising under section 356(a)
(2) as covered distributions, which will
be addressed in future guidance regarding
reorganizations (although no inference is
intended as to the treatment of such div-
idends under current law). See proposed
§1.959-4(c)(2).
Comments on the 2019 notice asserted
that a distribution of PTEP should not
depend on the existence of E&P that
would result in a dividend under section
316, stating that section 959(c) requires
applying section 316 separately to sec-
tions 959(c)(1), (c)(2), and (c)(3) in deter-
mining whether there is sufficient E&P
under section 316 to support a distribu-
tion of E&P under that paragraph. Com-
ments noted that the approach described
in the 2019 notice was contrary to section
959(a) and inconsistent with the policy of
section 959 to facilitate the repatriation of
PTEP. The Treasury Department and the
IRS remain of the view described in the
2019 notice under which the reference to
section 316(a) in section 959(c) indicates
that, under the statute, a distribution of
PTEP cannot occur unless there is suffi-
cient current or accumulated E&P to sup-
port what would otherwise be a dividend
under section 316. This reading of the stat-
ute is consistent with the principle under-
lying section 959 that PTEP represents a
type of E&P. Thus, the proposed regula-
tions do not adopt the comments.
ii. Analyzing covered distributions
The proposed regulations provide rules
for determining the extent to which PTEP
is distributed in a covered distribution. See
proposed §1.959-4(d). Under these rules,
each covered shareholder first determines
its share of the covered distribution, which
is the portion of the covered distribution
that is made to the covered shareholder
or any portion of the covered distribu-
tion that is made to an upper-tier foreign
corporation and assigned to the covered

Bulletin No. 2025–5 539 January 27, 2025
shareholder under proposed §1.951-2 (dis-
cussed in part IV.B of the Explanation of
Provisions). See proposed §1.959-4(d)(1).
For this purpose, the portion of a covered
distribution that is made to a partnership,
or that is treated as made to the partnership
in the case of tiered partnerships, is treated
as made to the partnership’s partners in
accordance with their respective distribu-
tive shares of such portion. See proposed
§1.959-4(c)(3). Thus, if a covered share-
holder is a partner in an upper-tier part-
nership, the covered shareholder’s share
of a covered distribution would include a
portion of the covered distribution that is
made to a lower-tier partnership because
an amount of the covered distribution
made to the lower-tier partnership would
be treated as made to the upper-tier part-
nership by reason of the upper-tier part-
nership being a partner in the lower-tier
partnership and, in turn, an amount of the
covered distribution treated as made to the
upper-tier partnership would be treated as
made to the covered shareholder by reason
of the covered shareholder being a partner
in the upper-tier partnership.
Next, each covered shareholder allo-
cates its share of the covered distribu-
tion to the distributing foreign corpora-
tion’s PTEP with respect to the covered
shareholder, to the extent thereof and in
accordance with the composition rules
described in part II.D.2.iii of the Expla-
nation of Provisions, and then allocates
any remaining portion of such share to the
distributing foreign corporation’s section
959(c)(3) E&P. See proposed §1.959-4(d)
(2) and (e)(1). For this purpose, the dis-
tributing foreign corporation’s PTEP is
determined immediately before the cov-
ered distribution (and thus includes PTEP
resulting from a subpart F income inclu-
sion or GILTI inclusion for the distribut-
ing foreign corporation’s taxable year in
which the covered distribution is made
because such PTEP is added to the cov-
ered shareholder’s annual PTEP accounts
at the beginning of the taxable year).
Further, because the amount of a cov-
ered shareholder’s share of a covered
distribution is determined on an aggre-
gate basis rather than on a share-specific
basis, the proposed regulations treat a pro
rata portion of all PTEP distributed in
each covered shareholder’s share of the
covered distribution as distributed with
respect to each share of stock of the dis-
tributing foreign corporation on which the
covered shareholder’s share of the cov-
ered distribution is made. See proposed
§1.959-4(d)(4); see also proposed §1.959-
10(c)(1) (Example 1). In this way, basis
adjustments resulting from distributed
PTEP can be made on each share of stock
of the foreign corporation in accordance
with section 961 and, if applicable, PTEP
of a recipient foreign corporation can be
increased.
iii. Composition rules
As discussed in part II.C of the Back-
ground, different types of PTEP can
have different tax effects, including with
respect to foreign currency gain or loss
under section 986(c) or deemed paid taxes
under section 960(b). Thus, once a cov-
ered shareholder has identified the portion
of its share of a covered distribution that is
allocated to PTEP, it is necessary to deter-
mine the specific PTEP that is distributed.
The proposed regulations include compo-
sition rules for this purpose. See proposed
§1.959-4(d)(3) and (e)(2) through (5); see
also proposed §1.959-10(c)(2) (Example
2).
Under these composition rules, PTEP
is sourced from section 959(c)(1) PTEP
groups before section 959(c)(2) PTEP
groups and then from each group within
the section 959(c)(1) PTEP groups or sec-
tion 959(c)(2) PTEP groups, respectively,
on a “last-in, first-out” basis, subject to a
priority rule for PTEP resulting from sec-
tion 965 (section 965 priority rule). See
proposed §1.959-4(e)(2), (3). Addition-
ally, PTEP that otherwise has the same
priority is sourced first from PTEP that
is not taxable section 962 PTEP and then
from taxable section 962 PTEP, consistent
with the rules currently in §1.962-3. See
proposed §1.959-4(e)(4). Lastly, PTEP
that has the same priority is sourced on a
pro rata basis. See proposed §1.959-4(e)
(5).
The section 965 priority rule sources
PTEP in section 959(c)(1) PTEP groups
first from the reclassified section 965(a)
PTEP group, then from the reclassified
section 965(b) PTEP group, and finally
from the remaining section 959(c)(1)
PTEP groups. See proposed §1.959-4(e)
(2)(ii). Similarly, for PTEP in section
959(c)(2) PTEP groups, the section 965
priority rule sources such PTEP first
from the section 965(a) PTEP group, then
from the section 965(b) PTEP group, and
finally from the remaining section 959(c)
(2) PTEP groups. See proposed §1.959-
4(e)(2)(iii). The section 965 priority rule,
which is issued under the express del-
egation of authority in section 965(o),
is consistent with the 2019 notice and is
intended to simplify PTEP recordkeeping
and IRS administration.
Comments on the 2019 notice stated
that the section 965 priority rule (as
described in the notice) would be a depar-
ture from the last-in, first-out approach for
sourcing distributions from E&P, and also
argued that there is no suggestion in sec-
tion 965 or its legislative history that such
a departure was intended or is necessary
or appropriate. Other comments asserted
that the policy for the section 965 priority
rule was unclear, stating that a pure last-in,
first-out approach does not impose addi-
tional burdens on taxpayers because once
a taxpayer has determined its section 965
PTEP the additional burden of maintain-
ing that information is minimal. Further,
even if the section 965 priority rule sim-
plifies PTEP recordkeeping, comments
noted that this may be outweighed by the
reduction in foreign tax credits under sec-
tion 960(b) that accompanies distributions
of section 965 PTEP. Another comment
noted that the section 965 priority rule
would adversely affect certain individu-
als who made section 962 elections and
are economically compelled to distribute
their PTEP every year to pay taxes aris-
ing under section 951(a) because it would
accelerate the distribution of PTEP that
is not excluded from gross income under
section 962(d). Given these concerns,
and because the section 965 priority rule
departs from the longstanding approach in
existing §1.959-3(b), comments requested
that taxpayers be able to elect to apply a
last-in, first-out approach with no prioriti-
zation of section 965 PTEP.
The Treasury Department and the IRS
continue to be of the view that the sec-
tion 965 priority rule will simplify PTEP
recordkeeping and IRS administration in
the future by eventually eliminating sec-
tion 965 PTEP (which, as noted in part II.C
of the Background requires specific and
detailed rules to apply sections 960(b) and

January 27, 2025 540 Bulletin No. 2025–5
986(c)) and reducing the overall number
of PTEP groups that need to be tracked.
The Treasury Department and the IRS are
of the view that, on balance, this benefit
outweighs the concerns raised in com-
ments. Additionally, the section 965 prior-
ity rule is within the scope of the authority
delegated to the Treasury Department and
the IRS to administer section 965, includ-
ing through sections 965(o) and 7805(a).
Further, the proposed regulations do not
adopt comments suggesting that taxpayers
be allowed to not apply the section 965
priority rule because this would under-
mine the simplification and burden reduc-
tion policy of the rule.
iv. Dollar basis and associated foreign
income taxes rules
The proposed regulations provide a pro
rata approach for determining the dollar
basis and associated foreign income taxes
of PTEP distributed in a covered share-
holder’s share of a covered distribution.
See proposed §1.959-4(e)(3), (f) and (g).
Under this approach, the portion of a dollar
basis pool or PTEP tax pool, as applicable,
attributed to distributed PTEP is deter-
mined based on the percentage that such
PTEP represents of all PTEP relating to
the dollar basis pool or PTEP tax pool. As
discussed in part II.B.1.iii of the Explana-
tion of Provisions, dollar basis pools and
PTEP tax pools are maintained separately
within each annual PTEP account for each
PTEP group unless a combined pool elec-
tion is in effect, in which case each dol-
lar basis pool and PTEP tax pool relates
to PTEP assigned to a single PTEP group
and a single section 904 category (without
regard to the taxable years to which the
PTEP relates).
E. PTEP to which a section 956 amount
is allocated (proposed §1.959-5)
The proposed regulations provide rules
regarding the exclusion from gross income
under section 959(a)(2) for PTEP that
would otherwise be included under sec-
tion 951(a)(1)(B). See proposed §1.959-5;
see also proposed §1.959-10(c)(4) (Exam-
ple 4). Under these rules, a covered share-
holder allocates its section 956 amount
(that is, the amount determined under
section 956 and §1.956-1 with respect to
the covered shareholder and a CFC) first
to the CFC’s PTEP that is with respect
to the covered shareholder and assigned
to section 959(c)(2) PTEP groups, to the
extent thereof and in accordance with the
principles of the composition rules for
distributions of PTEP, and then allocates
any remaining portion of such section
956 amount to the CFC’s section 959(c)
(3) E&P. See proposed §1.959-5(c)(1) and
(d)(1).
For purposes of these rules, the CFC’s
PTEP is determined on the last relevant
day of the CFC’s taxable year to which the
section 956 amount relates (that is, the last
day of such taxable year on which the for-
eign corporation is a CFC). See proposed
§1.959-5(d)(2). However, the CFC’s PTEP
is reduced to the extent it is distributed on
or after the last relevant day to ensure that
the section 956 amount is allocated only to
section 959(c)(2) PTEP that remains after
accounting for all covered distributions
during the CFC’s taxable year, in accor-
dance with section 959(f)(2). Moreover,
the PTEP is determined without regard
to any transfer of PTEP from the covered
shareholder to a successor covered share-
holder on (or after) the last relevant day,
thereby ensuring that section 959(c)(2)
PTEP that exists with respect to the cov-
ered shareholder when the covered share-
holder’s ownership of stock of the CFC
is determined for purposes of sections
951(a)(1)(B) and 956 may be taken into
account for purposes of section 959(a)(2).
As with distributions of PTEP, the pro-
posed regulations use a pro rata approach
to determine the dollar basis and asso-
ciated foreign income taxes of PTEP to
which a section 956 amount is allocated.
See proposed §1.959-5(e) and (f).
F. Allocating and apportioning current
year taxes to PTEP (proposed §1.959-6)
The proposed regulations provide
rules for the application of §1.861-20 to
allocate and apportion current year taxes
to the statutory groupings (as generally
described in §1.861-8(a)(4)) of PTEP of a
foreign corporation. See proposed §1.959-
6(b) (describing the statutory groupings
for purposes of proposed §1.959-6 as the
corporate PTEP accounts of the foreign
corporation described in proposed §1.959-
2(d)(1)). These rules are issued pursuant
to the express delegations of authority
under sections 245A(g), 904(d)(7), 960(f),
and 965(o).
Under the proposed regulations, cur-
rent year taxes are generally associated
with PTEP to the extent the foreign cor-
poration pays or accrues such taxes with
respect to PTEP arising by reason of a
PTEP realization event that occurs in the
same taxable year. See proposed §1.959-
6(b); see also proposed §1.959-10(c)(3)
(Example 3). A PTEP realization event
occurs if there is a distribution of PTEP
or gain recognized on a sale, exchange, or
other disposition of foreign stock that is
treated as PTEP as a result of the applica-
tion of section 961(c) basis. Current year
taxes that are paid or accrued with respect
to a PTEP realization event that occurs in
a different taxable year may not be asso-
ciated with PTEP of a foreign corporation
(consistent with the rule in current §1.960-
1(d)(3)(ii)(B)). See proposed §1.959-6(b)
and 1.960-1(d)(3)(ii)(B).
Proposed §1.959-6(c) provides rules
relating to the application of the allocation
and apportionment rules in §1.861-20.
Current year taxes (in the foreign corpo-
ration’s functional currency) are allocated
and apportioned to each corporate PTEP
account of the foreign corporation that
is increased during the taxable year as
the result of a PTEP realization event by
applying the rules in §1.861-20 and treat-
ing PTEP with respect to each covered
shareholder arising by reason of a PTEP
realization event as an amount of dividend
income (in the case of a distribution of
PTEP) or gain from the sale, exchange, or
other disposition of foreign stock (in the
case of PTEP resulting from the applica-
tion of section 961(c) basis). See proposed
§1.959-6(c) for purposes of identifying the
corresponding U.S. item under §1.861-
20(b) through (c). While certain United
States shareholders (taking into account
the application of §1.958-1(d)) must take
into account a pro rata share of a CFC’s
subpart F income and tested income (or
loss), the CFC’s deductions are not divided
into pro rata shares allocable to particular
shareholders, and instead, must be allo-
cated and apportioned to gross income of
the CFC before the determination of each
United States shareholder’s pro rata share
of subpart F income and tested income
(or loss). As a result, because deductions

Bulletin No. 2025–5 541 January 27, 2025
must be allocated and apportioned to a
CFC’s income (rather than being allocated
directly to United States shareholders), it
is necessary to allocate and apportion cur-
rent year taxes with respect to the statu-
tory groupings of PTEP of the foreign cor-
poration, which the proposed regulations
provide are the corporate PTEP accounts
described in proposed §1.959-2(d)(1).
The proposed regulations also clarify
other aspects of allocations of deductions
involving PTEP. In particular, the pro-
posed regulations provide that no deduc-
tions, other than current year taxes, may be
allocated and apportioned to the statutory
groupings of PTEP of a foreign corpora-
tion (consistent with the rule in current
§1.960-1(c)(1)(ii)). See proposed §1.959-
6(d)(1). See also the request for comments
in Part II.D.1.iii of the Explanation of
Provisions on an approach that would also
allocate and apportion deductions, other
than current year taxes, to PTEP.
Finally, the proposed regulations pro-
vide that current year taxes paid or accrued
by a foreign corporation that are denom-
inated in a currency other than the func-
tional currency of the foreign corporation
are translated into the functional currency
of the foreign corporation at the spot rate
on the day on which the current year taxes
are paid or accrued. See proposed §1.959-
6(d)(2). This currency translation rule
applies for purposes of (i) making certain
adjustments to accounts maintained under
section 959 and the proposed regulations
in the foreign corporation’s functional
currency and (ii) allocating and appor-
tioning functional currency amounts at the
level of the foreign corporation.
G. General successor transactions
(proposed §1.959-7)
1. In General
If there is an acquisition of stock of a
foreign corporation that results in a change
of ownership of stock of the foreign cor-
poration, successor rules in section 959
generally transfer the foreign corpora-
tion’s PTEP with respect to the covered
shareholder that relinquishes ownership
of stock of the foreign corporation to the
covered shareholder that acquires own-
ership of the stock. See section 959(a)
(applying the rules of section 959(a) to any
other United States person who acquires
any portion of a United States share-
holder’s interest in a foreign corporation
from any person); section 959(b) (simi-
larly applying to any other United States
shareholder who acquires any portion of
a United States shareholder’s interest in a
CFC from any person). These successor
rules generally ensure that PTEP is not
subject to U.S. tax again in the hands of
the acquiring covered shareholder when
received in a distribution, even though that
shareholder did not own the stock of the
foreign corporation when the PTEP was
generated and therefore did not have the
inclusion that gave rise to the PTEP. Addi-
tionally, the rules ensure that E&P retains
its PTEP status and thus remains subject
to the rules under sections 959 and 961,
rather than reverting to section 959(c)(3)
E&P and potentially becoming eligible for
a deduction under section 245A without a
reduction in basis.
The proposed regulations address cer-
tain transactions subject to the successor
rules in section 959, which the proposed
regulations refer to as general successor
transactions. See proposed §1.959-7(b)
(1); see also part III.C.4 of the Explana-
tion of Provisions (discussing rules for
section 961(c) basis in general successor
transactions). A general successor trans-
action occurs when a covered shareholder
(successor covered shareholder) acquires
ownership of stock of one or more foreign
corporations (each, an acquired foreign
corporation) that, immediately before the
transaction, is owned by another covered
shareholder (transferor covered share-
holder). The acquisition may be direct or
indirect. For example, a sale of stock of
a foreign corporation by a covered share-
holder (or by an upper-tier foreign corpo-
ration owned by the covered shareholder)
to another covered shareholder (or to an
upper-tier foreign corporation owned by
such other covered shareholder) is a gen-
eral successor transaction.
However, a general successor transac-
tion is determined without regard to any
portion of an acquisition of ownership of
stock of a foreign corporation that results
from any of the following: (i) an issuance
of stock or a partnership interest, (ii) a
redemption of stock (within the mean-
ing of section 317(b)) or a liquidating
distribution in redemption of a partner-
ship interest, or (iii) a transfer of stock
of a foreign corporation, or any property
through which stock of a foreign corpo-
ration is owned, if such stock or property
is substituted basis property. See proposed
§1.959-7(b)(2). For example, an exchange
of stock of a foreign corporation solely for
stock of another foreign corporation in an
exchange under section 351(a) or 354(a),
or as part of an exchange described in sec-
tion 361, is not a general successor trans-
action because such stock is substituted
basis property, even if covered sharehold-
ers’ ownership of stock of the foreign cor-
poration changes in the exchange. Alter-
natively, to the extent stock of a foreign
corporation is not substituted basis prop-
erty in such transactions (for example, if
basis in the stock is determined under sec-
tion 301(d) or 358(a)(2)), then the acqui-
sition of ownership of stock of the foreign
corporation is a general successor trans-
action. The Treasury Department and the
IRS intend to issue additional rules regard-
ing the transfer of PTEP in acquisitions
that are not general successor transactions
and proposed §§1.959-8 and 1.959-9 are
reserved for this purpose. In these acqui-
sitions, the Treasury Department and the
IRS are considering adding a rule as part
of finalization of the proposed regulations
providing that, for any period before those
additional rules apply and after existing
§1.959-1(d) (successor in interest rules) is
removed upon finalization of the proposed
regulations, PTEP will transfer automat-
ically (that is, without any requirement
to submit proof of identity to the IRS) in
accordance with the statute and consistent
with the manner in which PTEP transfers
in general successor transactions (as dis-
cussed in part II.G.2 of the Explanation
of Provisions). The Treasury Department
and the IRS request comments on this
potential rule.
2. Categories of Transferred PTEP
The proposed regulations provide that
two categories of an acquired foreign cor-
poration’s PTEP transfer from the trans-
feror covered shareholder to the successor
covered shareholder (and thus become
PTEP with respect to the successor cov-
ered shareholder) in a general successor
transaction. See proposed §1.959-7(c);
see also §1.959-10(c)(5) (Example 5). For

January 27, 2025 542 Bulletin No. 2025–5
both categories of PTEP, the transfer is not
subject to any requirement to submit proof
of identity to the IRS (in contrast to current
§1.959-1(d)) and, thus, the transfer occurs
automatically, although taxpayers should
maintain sufficient records to substanti-
ate the transfer on examination. See also
§1.245A-5(c)(4) (automatically transfer-
ring certain shareholder-level accounts in
certain acquisitions of stock); §1.245A(e)-
1(d)(4)(iii) (similar). The automatic trans-
fer ensures that E&P retains PTEP status
and, therefore, will be excluded from
income under section 959 and give rise to
basis reductions under section 961 in sub-
sequent distributions.
The first category of PTEP that transfers
is PTEP of the acquired foreign corpora-
tion with respect to the transferor covered
shareholder, as determined immediately
before the general successor transaction.
However, if the general successor transac-
tion occurs before the last relevant day of
the acquired foreign corporation’s taxable
year, certain current year PTEP does not
transfer because such current year PTEP
relates to shares of stock either retained
by the transferor covered shareholder or
acquired by the transferor covered share-
holder concurrently with or after the gen-
eral successor transaction. See proposed
§1.959-7(c)(1). Only a pro rata portion of
this PTEP (called general successor PTEP)
transfers, and the amount is determined
based on the percentage of a hypothetical
distribution by the acquired foreign corpo-
ration that would be made with respect to
the stock of the corporation acquired by
the successor covered shareholder. See
proposed §1.959-7(d). In this way, distri-
butions made by the acquired foreign cor-
poration after the general successor trans-
action will generally be allocated to PTEP
to the same extent the distributions would
be so allocated if the general successor
transaction did not occur.
The second category of PTEP that
transfers is PTEP resulting from the appli-
cation of section 1248 to gain recognized
by the transferor covered shareholder in
the general successor transaction. See
proposed §1.959-7(c)(2). Because section
1248 only applies to the extent of E&P
of the acquired foreign corporation that
is attributable to the stock being sold or
exchanged in the general successor trans-
action, the Treasury Department and the
IRS determined that it is appropriate for
PTEP described in this category (called
section 959(e) successor PTEP) to transfer
in the general successor transaction. The
transfer of all PTEP arising under section
1248 in a sale or exchange of a foreign
corporation is consistent with existing
guidance. See Rev. Rul. 90-31, 1990-1
C.B. 147.
Like for distributions, the proposed
regulations use a pro rata approach to
determine the dollar basis and associated
foreign income taxes of general successor
PTEP. See proposed §1.959-7(e)(1) and
(f)(1). The dollar basis of section 959(e)
successor PTEP is the U.S. dollar amount
of the income inclusion giving rise to the
PTEP. See proposed §1.959-7(e)(2). There
are no associated foreign income taxes
with respect to section 959(e) successor
PTEP because the PTEP is newly created
PTEP to which foreign income taxes will
not yet have been allocated and appor-
tioned. See proposed §1.959-7(f)(2).
3. Deemed Covered Shareholder
Section 959(a) applies to any other
United States person “who acquires from
any person” any portion of a United States
shareholder’s interest in a foreign corpo-
ration. See also section 959(b) (similarly
applying to an acquisition from “any per-
son”). Accordingly, if there is an acqui-
sition of stock of a foreign corporation,
section 959 does not condition a trans-
fer of the foreign corporation’s PTEP on
whether the transfer is by or from a cov-
ered shareholder (or United States share-
holder).
For example, if a nonresident alien
individual acquires ownership of all the
stock of a foreign corporation that has
PTEP from a covered shareholder and
another covered shareholder subsequently
acquires ownership of all the stock from
the individual, then, absent an election
under section 338(g), the foreign cor-
poration’s PTEP transfers to the second
covered shareholder. This prevents dou-
ble taxation of the PTEP and ensures that
PTEP does not become section 959(c)
(3) E&P (potentially eligible for a divi-
dends received deduction under section
245A(a)). However, existing guidance
does not clearly address whether the
amount of PTEP that transfers is reduced
for transactions during the individual’s
ownership period (for example, for E&P
distributed by the foreign corporation to
the individual).
To address the transfer of a foreign
corporation’s PTEP among covered share-
holders where there is intervening foreign
ownership, the proposed regulations treat
any stock of a foreign corporation not
owned by a covered shareholder as owned
by a single hypothetical person that is
deemed to be a covered shareholder (the
deemed covered shareholder). See pro-
posed §1.959-7(g). Under these rules, the
deemed covered shareholder is treated in
the same manner as a covered shareholder
for purposes of transferring PTEP under
section 959, and a reference to a covered
shareholder includes the deemed covered
shareholder. See proposed §1.959-7(g)
(1). Thus, in the example described in the
preceding paragraph, the foreign corpora-
tion’s PTEP transfers in the first acquisi-
tion from the first covered shareholder to
the deemed covered shareholder (who is a
hypothetical person treated as owning all
the stock of the foreign corporation owned
by the nonresident alien individual). Then,
in the second acquisition, the foreign cor-
poration’s PTEP, adjusted using a reason-
able method to reflect transactions during
the deemed covered shareholder’s owner-
ship period (for example, reductions for
distributions), transfers from the deemed
covered shareholder to the second cov-
ered shareholder. See §1.959-7(g)(2). In
cases where there are no previous covered
shareholders or PTEP, the deemed cov-
ered shareholder rules have no effect.
The Treasury Department and the IRS
are of the view that alternative approaches
such as “freezing” a foreign corporation’s
PTEP during periods in which its stock is
not owned by a covered shareholder could
inappropriately separate a foreign corpo-
ration’s PTEP from its E&P and give rise
to double taxation or other distortions.
For example, under such an alternative,
a covered shareholder could transfer the
stock of an upper-tier foreign corporation
that owns stock of a lower-tier foreign
corporation with PTEP to a nonresident
alien individual, the lower-tier foreign
corporation could distribute all its E&P to
the upper-tier foreign corporation without
affecting its PTEP, and then the stock of
the upper-tier foreign corporation could

Bulletin No. 2025–5 543 January 27, 2025
be transferred to another individual cov-
ered shareholder that would succeed to
the PTEP that remains with the lower-tier
foreign corporation even though it has no
E&P. If the form of the transaction were
respected for Federal income tax pur-
poses, the result would be that a distribu-
tion by the upper-tier foreign corporation
would not be sourced from PTEP and the
transferred PTEP of the lower-tier foreign
corporation could be distributed only to
the extent that the lower-tier foreign cor-
poration earns section 959(c)(3) E&P.
The Treasury Department and the IRS
recognize that shareholders of a foreign
corporation may not track PTEP of the
foreign corporation that transfers to the
deemed covered shareholder. In these
cases, a covered shareholder that even-
tually succeeds to the PTEP must deter-
mine the amount and character of the
PTEP, including by reconstructing trans-
actions that affected the PTEP while the
foreign corporation was under foreign
ownership. This reconstruction is similar
to other determinations that sharehold-
ers must make in certain acquisitions
of stock of a foreign corporation for
which an election under section 338(g)
is not made, for example determinations
regarding the foreign corporation’s basis
in assets or its E&P. The use of a single
deemed covered shareholder to repre-
sent all foreign ownership of a foreign
corporation is intended to ease the bur-
den of this reconstruction by focusing
only on whether and how PTEP moves
under foreign ownership rather than, for
example, by attributing portions of PTEP
to each shareholder that is a nonresident
alien individual and separately analyz-
ing such portions. The Treasury Depart-
ment and the IRS welcome comments
about how to decrease the compliance
burden and improve the administrabil-
ity of this regime while still ensuring
that the correct amount and character of
PTEP is transferred from one covered
shareholder to another even when there
is intervening foreign ownership. For
instance, the Treasury Department and
the IRS welcome comments on whether
a majority United States shareholder of
a CFC should be permitted or required to
track PTEP that transfers from a minority
United States shareholder of that CFC to
the deemed covered shareholder.
III. Section 961 Regulations
A. Overview
As discussed in part II.C.2 of the Back-
ground, section 961 authorizes regulations
that provide for basis increases to reflect
income inclusions under section 951 and
basis reductions and gain recognition to
reflect distributions of PTEP. Generally,
the purpose of basis increases is to pre-
vent PTEP of a foreign corporation from
giving rise to additional U.S. tax in a sale
or exchange of stock of the foreign cor-
poration or property through which such
stock is owned (for example, an interest
in a partnership) when the stock or other
property is sold before the PTEP is dis-
tributed. The purpose of basis reductions
and gain recognition is to prevent double
benefits from the basis increases provided
under section 961.
Thus, the proposed regulations under
section 961 adjust the basis in shares of
stock of a foreign corporation owned by a
covered shareholder, and the basis in any
items of property through which the cov-
ered shareholder owns stock of the foreign
corporation, to reflect the foreign corpo-
ration’s PTEP with respect to the cov-
ered shareholder (for example, to reflect
income inclusions giving rise to the PTEP
or distributions of the PTEP). Unlike
annual PTEP accounts, basis adjustments
under the proposed regulations are spe-
cific to a share of stock or other item of
property, consistent with each item of
property having separate basis under the
Code. Timing of basis adjustments gener-
ally matches the timing of related adjust-
ments to annual PTEP accounts. Further,
the proposed regulations under section
961 provide rules for different types of
basis under section 961, including the tax
consequences of the basis, and are issued
pursuant to the express delegations of
authority in section 961(a), (b), and (c).
As discussed in part III.A of the Back-
ground, a covered shareholder does not
include a domestic partnership because
a domestic partnership is treated as an
aggregate of its partners in determining
stock ownership for purposes of section
961. See proposed §1.961-1(b); see also
part VIII.A of the Explanation of Provi-
sions (providing that an S corporation is
generally treated in the same manner as a
domestic partnership). As also discussed
in part III.A of the Background, under sec-
tion 958(a) stock ownership means stock
owned directly and stock owned indi-
rectly through foreign entities, including
domestic partnerships to the extent treated
as foreign partnerships under §1.958-1(d)
(1). Thus, the adjustments provided for
by the proposed section 961 regulations
also apply at the partner level to covered
shareholders that own stock of a foreign
corporation through one or more domestic
(or foreign) partnerships. See part III.B.3
of this Explanation of Provisions for a
discussion of basis provided in stock of
a foreign corporation directly owned by a
partnership.
B. Types of property units and basis
(proposed §1.961-2)
1. In General
Under the proposed regulations, the
type of basis provided in an item of prop-
erty depends on whether the direct owner
of the item is a covered shareholder, part-
nership, or CFC. This is because when
the direct owner of an item of property
is a partnership or CFC, covered share-
holder-specific basis is necessary so that
the benefits of basis provided in the item
to reflect income inclusions of a covered
shareholder inure only to that shareholder.
Additionally, section 961(c) provides that
the basis in the case of an item of property
directly owned by a CFC only applies for
the purposes of determining the amount
included under section 951 in the gross
income of a United States shareholder.
Specific rules are therefore needed with
respect to basis adjustments for property
owned by a CFC to reflect the limited pur-
poses of basis under section 961(c).
Thus, the proposed regulations set forth
rules for three types of property (each
referred to as a property unit) and basis:
(i) section 961(a) ownership units and
adjusted basis, which is provided to a cov-
ered shareholder, (ii) derivative ownership
units and derived basis, which is provided
to a partnership and is covered share-
holder-specific, and (iii) section 961(c)
ownership units and section 961(c) basis,
which is provided to a CFC and is cov-
ered shareholder-specific. See proposed
§1.961-2; see also proposed §1.961-12(c)

January 27, 2025 544 Bulletin No. 2025–5
(Example 1). Each type of basis is main-
tained in U.S. dollars to ensure that basis
reductions for a distribution of PTEP are
commensurate with prior basis increases
reflecting the income inclusion giving rise
to the PTEP, regardless of movements in
exchange rates (with any such movements
taken into account under the rules for rec-
ognizing foreign currency gain or loss
pursuant to section 986(c)).
2. Section 961(a) Ownership Units and
Adjusted Basis
A section 961(a) ownership unit is a
share of stock of a foreign corporation
directly owned by a covered shareholder,
or a partnership interest directly owned
by a covered shareholder and through
which the covered shareholder owns stock
of a foreign corporation. See proposed
§1.961-2(c). For example, if a covered
shareholder directly owns an interest in
a partnership and the partnership owns
(directly or indirectly) stock of a foreign
corporation, the partnership interest is a
section 961(a) ownership unit. A covered
shareholder is provided adjusted basis in a
section 961(a) ownership unit.
3. Derivative Ownership Units and
Derived Basis
A derivative ownership unit is a share
of stock of a foreign corporation directly
owned by a partnership and owned (indi-
rectly) by one or more covered sharehold-
ers through only one or more partnerships
(for example, not through a foreign cor-
poration), or a partnership interest directly
owned by another partnership and through
which one or more covered sharehold-
ers own stock of a foreign corporation
through only partnerships. See proposed
§1.961-2(d)(1). For example, if a covered
shareholder directly owns an interest in a
partnership and the partnership directly
owns shares of stock of a foreign corpo-
ration, each share of stock of the foreign
corporation is a derivative ownership unit
(and the interest in the partnership is a sec-
tion 961(a) ownership unit). If, instead,
the partnership is a lower-tier partnership
an interest in which is directly owned by
an upper-tier partnership and the covered
shareholder directly owns an interest in
the upper-tier partnership, the upper-tier
partnership’s interest in the lower-tier
partnership is also a derivative ownership
unit along with each share of stock of the
foreign corporation directly owned by the
lower-tier partnership (and the interest in
the upper-tier partnership directly owned
by the covered shareholder is a section
961(a) ownership unit).
A partnership is provided derived basis
in a derivative ownership unit, which is
maintained separately with respect to each
covered shareholder that owns the deriv-
ative ownership unit through only one or
more partnerships. See proposed §1.961-
2(d)(2). Derived basis may be positive or
negative and is treated as an attribute of
the partnership but has no effect on the
partnership’s common basis in the deriv-
ative ownership unit (that is, the partner-
ship’s basis that is shared among all part-
ners) or any other asset of the partnership.
See part III.C of the Explanation of Pro-
visions for a discussion of adjustments to
derived basis, including the allowance of
negative derived basis. Derived basis is
intended to operate in a manner similar to
a basis adjustment under section 743(b).
See parts III.D and F of the Explanation
of Provisions for the tax consequences of
derived basis.
4. Section 961(c) Ownership Units and
Section 961(c) Basis
A section 961(c) ownership unit is a
share of stock of a foreign corporation
directly owned by a CFC and owned
(indirectly) by one or more covered share-
holders. See proposed §1.961-2(e)(1). For
example, if a covered shareholder directly
owns stock of an upper-tier CFC and the
upper-tier CFC directly owns shares of
stock of a lower-tier foreign corporation,
each share of stock of the lower-tier for-
eign corporation owned by the upper-tier
CFC is a section 961(c) ownership unit.
A CFC is provided section 961(c) basis
in a section 961(c) ownership unit, which
is maintained separately with respect to
each covered shareholder that owns the
section 961(c) ownership unit. See pro-
posed §1.961-2(e)(2). Section 961(c) basis
may be positive or negative and is treated
as an attribute of the CFC that generally is
taken into account on the sale, exchange,
or other disposition of the section 961(c)
ownership unit, but has no effect on the
CFC’s adjusted basis in the section 961(c)
ownership unit or any other asset of the
CFC. See part III.C of the Explanation
of Provisions for a discussion of adjust-
ments to section 961(c) basis, including
the allowance of negative section 961(c)
basis. Section 961(c) basis applies only
for the purposes prescribed in the sec-
tion 961 regulations and, therefore, does
not affect the amount of the CFC’s gross
income or E&P. See parts III.E through G
of the Explanation of Provisions for the
tax consequences of section 961(c) basis.
5. Certain Basis Not Addressed
i. Section 961(c) basis and non-CFCs
Consistent with the statutory language
of section 961(c), the proposed regulations
provide for basis under section 961(c)
only with respect to stock of a CFC that is
directly owned by another CFC. Although
a section 961(c) ownership unit is defined
as a share of stock of a foreign corporation
directly owned by a CFC, section 961(c)
basis adjustments are generally made only
with respect to section 961(c) ownership
units that are shares of stock in a CFC,
as discussed in part III.C of the Explana-
tion of Provisions. See proposed §1.961-3
(basis increases for income inclusions);
proposed §1.961-4(d) (basis reductions
for distributions); proposed §1.961-5(b)
(adjustments for foreign currency gain or
loss). The Treasury Department and the
IRS are studying whether, and to what
extent, basis adjustments may or should
also be made under section 961(c) in cases
where stock of a CFC is owned by a cov-
ered shareholder through a foreign corpo-
ration that is not a CFC or where a CFC
owns stock of a foreign corporation that
used to be a CFC.
A CFC’s section 961(c) basis with
respect to a covered shareholder in stock
of a lower-tier foreign corporation that is
provided under the proposed regulations
when that lower-tier foreign corporation
was a CFC continues to exist, however, if
that lower-tier foreign corporation ceases
to be a CFC (a share of stock of the low-
er-tier foreign corporation is a section
961(c) ownership unit regardless of CFC
status). Thus, for example, section 961(c)
basis in stock of a foreign corporation that
was a CFC but ceases to be a CFC may

Bulletin No. 2025–5 545 January 27, 2025
transfer to another covered shareholder
in a general successor transaction and
become section 961(c) basis with respect
to that covered shareholder. See proposed
§1.961-5(c) (discussed in part III.C.4 of
the Explanation of Provisions). Similarly,
a CFC’s positive section 961(c) basis in
stock of a foreign corporation that was
a CFC but ceases to be a CFC may be
applied to certain gain recognized by the
CFC with respect to stock of that foreign
corporation. See proposed §1.961-9 (dis-
cussed in part III.E of the Explanation of
Provisions).
ii. Partnership interests owned by foreign
corporations
Under the proposed regulations, a
property unit does not include a share of
stock of a foreign corporation or a part-
nership interest to the extent the share of
stock or partnership interest is directly
owned by a partnership and the interests
of such partnership are owned by foreign
corporations (including CFCs). Nor does a
property unit include a partnership interest
directly owned by a foreign corporation.
For example, assume a covered share-
holder directly owns all the stock of two
upper-tier CFCs, the upper-tier CFCs are
the only direct partners in a partnership,
and the partnership directly owns all the
stock of a lower-tier CFC. In such a case,
neither the shares of stock of the lower-tier
CFC directly owned by the partnership,
nor the upper-tier CFCs’ interests in the
partnership, are property units. The Trea-
sury Department and the IRS are studying
whether the basis that should be provided
in these items of property should be simi-
lar to derived basis or section 961(c) basis
or have characteristics of both. Thus, the
proposed regulations do not address the
extent to which section 961 provides basis
in such items.
C. Basis adjustments (proposed §§1.961-
3, 1.961-4, and 1.961-5)
1. Basis Increases for Certain Income
Inclusions
i. In general
To reflect a covered shareholder’s
income inclusions under sections 951(a)
and 951A(a) for a taxable year of a CFC,
the proposed regulations provide rules to
increase the basis of property units that
are shares of stock of the CFC owned by
the covered shareholder and the basis of
any property units through which the cov-
ered shareholder owns such stock. See
proposed §1.961-3(b); see also proposed
§1.961-12(c) (Example 2). For this pur-
pose, a reference to basis means adjusted
basis of the covered shareholder in the
case of a section 961(a) ownership unit,
derived basis with respect to the covered
shareholder in the case of a derivative
ownership unit, and section 961(c) basis
with respect to the covered shareholder
in the case of a section 961(c) ownership
unit.
Generally, the basis of each prop-
erty unit is increased by the amount that
would be distributed with respect to the
property unit in a hypothetical distribu-
tion by the CFC equal to the U.S. dol-
lar amount of the covered shareholder’s
income inclusions (hypothetical distri-
bution rule). See proposed §1.961-3(c)
(1) and (4); see also part III.C.1.ii of the
Explanation of Provisions (discussing
additional rules that apply in the case of
a midyear transaction). The hypothetical
distribution is treated as made through
all tiers to the covered shareholder on
the last relevant day of the CFC’s tax-
able year (taking into account only stock
or other property owned by the covered
shareholder). See proposed §1.961-3(e).
In this way, under the grant of regulatory
authority in section 961, a property unit
is generally provided an amount of basis
matching the amount by which basis of
the property unit is reasonably expected
to be reduced under section 961 when
PTEP resulting from the income inclu-
sions is subsequently distributed to the
covered shareholder. The amount of basis
provided to a particular property unit will
generally equal the covered sharehold-
er’s income inclusion attributable to that
property unit, but the amount may differ
in certain cases.
For example, consider a case where
the covered shareholder owns all the
stock of the CFC, with such stock con-
sisting of a single preferred share with
a $10x preference and common stock.
The CFC has $100x of E&P for its tax-
able year, consisting of $90x of subpart
F income, $0 of tested income or tested
loss, and $10x of other income. The
covered shareholder includes $90x in
gross income under section 951(a)(1)(A)
(under §1.951-1, $9x of the inclusion is
attributable to the preferred share and the
remaining $81x is attributable to the com-
mon stock), and, consequently, the CFC’s
PTEP with respect to the covered share-
holder increases by $90x. While only $9x
of the covered shareholder’s $90x income
inclusion is attributable to the preferred
share, the proposed regulations increase
the basis of the preferred share by $10x
and the basis of the common stock by the
remaining $80x. This approach takes into
account that, of the first $10x of PTEP
distributed by the CFC to the covered
shareholder, that amount is likely to be
distributed on the preferred share. And,
if the basis adjustments to the preferred
share were to instead match the income
inclusion attributable to that share ($9x),
the covered shareholder would receive a
$10x distribution on the preferred share,
thus potentially giving rise to gain under
section 961(b)(2) in an amount equal to
that difference. The proposed regulations
prevent that result by adjusting the basis in
the preferred share by $10x. The Treasury
Department and the IRS request com-
ments on this approach, including whether
there are ways to improve the accuracy of
allocating basis to a property unit without
undue complexity and additional compli-
ance and administrative burden, and with-
out creating the possibility of inappropri-
ate results.
However, if the CFC distributes PTEP
with respect to the covered shareholder
before the last relevant day of the CFC’s
taxable year, the policies underlying the
hypothetical distribution rule (matching
basis with distributed PTEP) are better
carried out by using such actual distribu-
tions (rather than a hypothetical distribu-
tion on the last relevant day) to allocate
basis increases among property units, par-
ticularly when there are midyear transac-
tions (though where there is no midyear
transaction the two approaches generally
produce the same results). Thus, an actual
distribution rule applies in these cases and
consequently reduces the amount that can
give rise to a basis increase pursuant to
the hypothetical distribution rule. See pro-
posed §1.961-3(c)(3).

January 27, 2025 546 Bulletin No. 2025–5
The actual distribution rule applies in
chronological order to distributions of the
CFC’s PTEP with respect to the covered
shareholder, and in each case generally
increases basis of a share of stock of the
CFC on which the distribution is made
by the amount of the reduction required
under section 961 to such basis by reason
of the distribution. See proposed §1.961-
3(d)(2). However, basis increases to stock
of the CFC under the actual distribution
rule cannot exceed the U.S. dollar amount
of the covered shareholder’s income
inclusions, excluding for this purpose an
income inclusion under section 951(a)(1)
(B) because such inclusion does not give
rise to PTEP that could be distributed
before the last relevant day of the CFC’s
taxable year. Additionally, the actual dis-
tribution rule applies only to distributions
on stock of the CFC that the covered
shareholder owns on the last relevant day
because the covered shareholder’s income
inclusions with respect to the CFC are
attributable only to that stock.
Basis increases to stock of the CFC
under the actual distribution rule “tier
up” through property units through which
the covered shareholder owns such stock,
based on how the PTEP that is actually
distributed would be further distributed
in a hypothetical distribution made at
the time of the actual distribution. See
proposed §1.961-3(d)(3). The Treasury
Department and the IRS considered alter-
native approaches to tiering such as ana-
lyzing the extent to which PTEP is further
distributed before the last relevant day,
but those approaches could give rise to
additional complexity and burden. For
instance, the approaches could require
rules tracing distributed PTEP through
tiers of foreign corporation and coordinat-
ing applications of the actual distribution
rule at each tier. The Treasury Department
and the IRS welcome comments on the
actual distribution rule, including whether
there are ways to improve the accuracy
of tiering without undue complexity and
additional compliance and administrative
burden.
Generally, each basis increase under
the hypothetical distribution rule or actual
distribution rule is treated as made at the
beginning of the first day of the CFC’s
taxable year or, if later, at the beginning of
the first day in the taxable year on which
the covered shareholder owns the prop-
erty unit. See proposed §1.961-3(d)(1),
(e)(1). In this way, the timing of a basis
increase generally matches when PTEP to
which the basis is attributable could first
be distributed on the property unit. Addi-
tionally, the portion of a basis increase for
a section 951(a)(1)(B) inclusion is treated
as made at the end of the last day of the
taxable year, subject to a special rule.
See proposed §1.961-3(e)(1). The special
rule applies where a property unit that
will receive a basis increase for the sec-
tion 951(a)(1)(B) inclusion is transferred
before the end of the taxable year (but on
or after the last relevant day of the taxable
year), and in such a case accelerates the
basis increase to the property unit so that it
is treated as made immediately before the
transfer, thereby ensuring that the basis
is available in determining the tax con-
sequences of the transfer. See proposed
§1.961-3(e)(4).
ii. Midyear transactions
Additional rules address unique timing
considerations for basis increases when a
midyear transaction occurs during the tax-
able year of a CFC. See proposed §1.961-
3(c)(2). A midyear transaction represents
any transaction occurring before the
last relevant day of the taxable year that
changes the covered shareholder’s own-
ership structure of the CFC (for example,
an exchange of the covered shareholder’s
stock of the CFC or an issuance of stock of
the CFC to the covered shareholder).
In the case of a midyear transaction, a
basis increase under the hypothetical dis-
tribution rule or actual distribution rule is
treated as made at the earliest time during
the CFC’s taxable year at which the same
ownership structure is in place as the own-
ership structure when the relevant hypo-
thetical or actual distribution is made. See
proposed §1.961-3(d)(1), (e)(1). Thus, for
a basis increase under the actual distribu-
tion rule, if the distribution is made before
all midyear transactions, the basis increase
is treated as made at the beginning of the
first day of the CFC’s taxable year; on the
other hand, if the distribution is made after
a midyear transaction, the basis increase
is treated as made immediately after the
most recent midyear transaction preceding
the distribution. This approach is intended
to prevent distortions, including possible
duplication of basis in certain cases.
For example, assume a covered share-
holder (US1) directly owns all the stock
of two CFCs (CFC1 and CFC2) on Jan-
uary 1 of year 1. On June 30 of year 1,
US1 exchanges all the stock of CFC1
solely for stock of CFC2 in an exchange
described in section 351(a) (which is a
midyear transaction with respect to CFC1
and CFC2). CFC1 makes no distributions
during its taxable year ending on Decem-
ber 31 of year 1, and US1 has a $100x
subpart F income inclusion with respect
to CFC1 for that taxable year. Thus, under
the hypothetical distribution rule, US1
increases its adjusted basis in its stock of
CFC2 by $100x and CFC2 increases its
section 961(c) basis with respect to US1
in its stock of CFC1 by $100x. However,
basis could be inappropriately duplicated
if the $100x basis increase in the stock of
CFC1 were treated as made on January 1
of year 1, which would be the case absent
the section 351 exchange. This could
occur if US1’s basis in its stock of CFC2
were to both be increased under the hypo-
thetical distribution rule and take a basis
under section 358(a) reflecting the basis
increase in the stock of CFC1 under the
hypothetical distribution rule. To address
this, special timing rules treat the $100x
basis increase in each of the stock of CFC1
and stock of CFC2 as made immediately
after the section 351 exchange, which is
the first time during CFC1’s taxable year
at which the same ownership structure is
in place as the ownership structure on the
last relevant day of the taxable year (when
the hypothetical distribution determining
the basis increase is made).
2. Basis Reductions and Gain
Recognition for Distributions
i. In general
As discussed in part II.C.2 of the Back-
ground, section 961(b)(1) provides for
reductions to the basis of stock or other
property with respect to which a covered
shareholder receives PTEP excluded from
its gross income under section 959(a),
with amounts in excess of such basis
resulting in gain under section 961(b)(2).
Section 961(c) indicates that the Secre-
tary should issue regulations providing

Bulletin No. 2025–5 547 January 27, 2025
for adjustments similar to those in section
961(b) with respect to PTEP received by
a CFC and amounts in excess of section
961(c) basis.
In order to implement the statutory
language of section 961, the proposed reg-
ulations provide rules for reducing basis
and recognizing gain with respect to prop-
erty units to reflect distributions of PTEP.
See proposed §1.961-4; see also proposed
§1.961-12(c)(3) (Example 3). These rules
describe the amounts of adjustments, lim-
itations on basis reductions, and treatment
of gain under section 961, which can dif-
fer depending on the type of property unit
for which the basis is being adjusted. The
adjustments are treated as made concur-
rently with the distribution if the property
unit is stock of a foreign corporation or, if
the property unit is an interest in a part-
nership, concurrently with an adjustment
to the partnership interest under section
705 resulting from the distribution. See
proposed §1.961-4(e) and (f)(1).
ii. Adjustments to section 961(a)
ownership units
If a covered shareholder receives a dis-
tribution of PTEP that is excluded from
its gross income under section 959(a)
(that is, PTEP other than taxable section
962 PTEP), then the covered sharehold-
er’s adjusted basis of each section 961(a)
ownership unit is generally reduced by the
dollar basis and associated foreign income
taxes of the PTEP received with respect
to the section 961(a) ownership unit. See
proposed §1.961-4(b)(2)(i) and (ii). Asso-
ciated foreign income taxes are taken into
account for this purpose because when
foreign income taxes are allocated and
apportioned to PTEP, the foreign income
taxes reduce the PTEP and the dollar basis
of the PTEP, as discussed in part II.C.2 of
the Explanation of Provisions. As a result,
the sum of the dollar basis and associated
foreign income taxes of PTEP represent
the amount by which basis was increased
under section 961 when the PTEP was
generated.
However, the associated foreign
income taxes (which represent PTEP that
was eliminated by foreign income taxes)
reduce adjusted basis only to the extent
the covered shareholder is allowed a
credit under section 901 for those taxes.
See proposed §1.961-4(b)(2)(i). Conse-
quently, associated foreign income taxes
ultimately give rise to either a credit or an
amount equivalent to a deduction (in the
form of retained adjusted basis, which,
in turn, will produce a lesser amount of
gain or an additional amount of loss on
a subsequent sale of the section 961(a)
ownership unit relative to the gain or loss
that would result if adjusted basis were
reduced by associated foreign income
taxes). The Treasury Department and the
IRS are of the view that this prevents
double taxation of PTEP but are studying
whether the policies of section 245A(d)
or 965(g) (denying a credit or deduction
for foreign income taxes) should require
reducing adjusted basis for associated for-
eign income taxes of PTEP resulting from
section 245A(e) or 965.
Further, to the extent the required
reduction to adjusted basis of a section
961(a) ownership unit exceeds such
adjusted basis, the covered shareholder is
treated as recognizing gain from a sale or
exchange of the section 961(a) ownership
unit, in accordance with section 961(b)(2).
See proposed §1.961-4(b)(2)(iii) and (f)
(1). Basis of another section 961(a) own-
ership unit (for example, another share
of stock of the foreign corporation) can-
not be used to reduce gain under section
961(b)(2), which is consistent with the
approach in section 301(c)(3), pursuant to
which basis is not shared among shares of
stock on distributions. See also Johnson
v. United States, 435 F.2d 1257 (4th Cir.
1971).
Moreover, unlike the approach
described in the 2006 proposed regula-
tions, basis attributable to section 961
does not shift from one share to another
share when PTEP is distributed with
respect to the other share. The Treasury
Department and the IRS are of the view
that a shifting approach could give rise
to inappropriate results, is not required
by section 961 (which increases basis for
income inclusions without any indication
that such basis must or should remain tied
to the PTEP resulting from the income
inclusion), and would depart from analo-
gous provisions like section 358 (which,
for example, increases basis for contri-
butions to capital without subsequently
shifting such basis to follow distributions
of capital). Further, the approach in the
proposed regulations is consistent with
the share-by-share approach in the current
regulations under section 961. See §1.961-
2(b) and (c).
As an example of inappropriate results
that could arise from basis shifting,
assume a covered shareholder owns all
the stock of a foreign corporation with
PTEP and contributes money to the cor-
poration in exchange for a newly-issued
share of stock, and the corporation subse-
quently distributes the PTEP, including on
the newly-issued share. If a portion of the
basis that had been provided under section
961(a) for the PTEP were to shift from the
original shares to the newly-issued share
as a result of the distribution, then that
basis would be added on top of the exist-
ing fair market value basis in the new-
ly-issued share (by an amount equal to the
amount of PTEP distributed on that share),
which could produce a noneconomic loss
in the newly-issued share. Additionally,
as indicated in the document withdraw-
ing the 2006 proposed regulations (87
FR 63981), the Treasury Department
and the IRS are aware of transactions in
which taxpayers have taken positions that
basis shifting produces large uneconomic
losses, and the IRS may challenge such
positions and other positions giving rise to
abuse or inappropriate results.
iii. Adjustments to derivative ownership
units
If, through a partnership or tiered part-
nerships, one or more covered shareholder
partners are treated as receiving PTEP that
is excluded from gross income under sec-
tion 959(a) and the proposed section 959
regulations, then each such partnership’s
derived basis with respect to such covered
shareholders of derivative ownership units
is reduced to reflect the PTEP received
with respect to the derivative ownership
units. See proposed §1.961-4(c)(1); see
also part II.D.2.ii of the Explanation of
Provisions (portion of a covered distribu-
tion that is made to a partnership, or that
is treated as made to the partnership in
the case of tiered partnerships, is treated
as made to the partnership’s partners in
accordance with their respective distribu-
tive shares of such portion). Specifically,
starting with the partnership at the lowest
tier, the partnership’s derived basis with

January 27, 2025 548 Bulletin No. 2025–5
respect to each covered shareholder part-
ner of each derivative ownership unit is
generally reduced by the dollar basis and
associated foreign income taxes of the
PTEP with respect to the covered share-
holder that is treated as received by the
covered shareholder through the partner-
ship with respect to the derivative own-
ership unit. See proposed §1.961-4(c)(2)
(i) and (ii). A basis increase under section
705 for the distribution occurs at the same
time as the reduction to derived basis,
with the result that, in tiered partnership
structures, derived basis of an upper-tier
partnership in a lower-tier partnership
interest is reduced and common basis
in the lower-tier partnership interest is
increased (the common basis, in turn, may
be decreased in a distribution to the upper-
tier partnership by the lower-tier partner-
ship of the amounts that constituted the
PTEP, for example).
However, to the extent the required
reduction to derived basis with respect to a
covered shareholder of a derivative own-
ership unit exceeds the derived basis (for
example, because a partnership purchased
stock of a CFC and thus has no derived
basis with respect to the derivative own-
ership unit), the excess first reduces the
covered shareholder’s positive section
743(b) basis adjustment of the derivative
ownership unit (if any), but not below
zero. See proposed §1.961-4(c)(2)(iii).
Thus, this rule, by treating the positive
section 743(b) basis adjustment in the
same manner as adjusted basis specific
to the covered shareholder, is consistent
with §1.743-1(j) (regarding the effect of
a basis adjustment under section 743(b)).
Then, any remaining portion of the excess
reduces the derived basis below zero, sub-
ject to a limitation. See id. As discussed
in part III.C.2.v of the Explanation Provi-
sions, this limitation is intended to prevent
reductions to derived basis of the deriva-
tive ownership unit from having the effect
of reducing the partnership’s total basis
(measured for this purpose by netting
common basis and all negative derived
basis) of the derivative ownership unit
below zero.
Finally, to the extent the required
reduction to derived basis with respect to a
covered shareholder of a derivative own-
ership unit exceeds the amount of posi-
tive derived basis, positive section 743(b)
basis, and negative derived basis created,
the partnership is treated as recogniz-
ing gain from a sale or exchange of the
derivative ownership unit. See proposed
§1.961-4(c)(2)(iv). The gain is allocated
by the partnership solely to the covered
shareholder and is taken into account in
adjusting basis under section 705, but it
has no effect on any partnership’s com-
putations or allocations of any other items
under section 703 or 704 or on the cov-
ered shareholder’s capital account. See
proposed §1.961-4(f)(2).
iv. Adjustments to section 961(c)
ownership units
If a CFC receives a distribution of
PTEP, then the CFC’s section 961(c) basis
with respect to each covered shareholder
of each section 961(c) ownership unit is
generally reduced by the dollar basis and
associated foreign income taxes of the
PTEP with respect to the covered share-
holder that is received with respect to the
section 961(c) ownership unit. See pro-
posed §1.961-4(d)(2)(i) and (ii).
To the extent the required reduction
to section 961(c) basis with respect to a
covered shareholder of a section 961(c)
ownership unit exceeds such section
961(c) basis (for example, because a CFC
purchased stock of another CFC and thus
has no section 961(c) basis with respect
to the section 961(c) ownership unit or a
portion of the distributed PTEP is section
965(b) PTEP), the excess reduces the sec-
tion 961(c) basis below zero, subject to a
limitation. See proposed §1.961-4(d)(2)
(ii). As discussed in part III.C.2.v of the
Explanation of Provisions, this limitation
is intended to prevent reductions to sec-
tion 961(c) basis of the section 961(c)
ownership unit from having the effect of
reducing the CFC’s total basis (measured
for this purpose by netting adjusted basis
and all negative section 961(c) basis) of
the section 961(c) ownership unit below
zero. Then, any remaining portion of the
excess is treated as gain recognized by
the CFC from a sale or exchange of the
section 961(c) ownership unit, and such
gain is assigned from the CFC solely to
the covered shareholder. See proposed
§1.961-4(d)(2)(iii). Gain recognized by a
CFC under this rule applies only for pur-
poses of determining amounts included in
gross income of United States sharehold-
ers under proposed §1.961-11 (discussed
in part III.G. of the Explanation of Pro-
visions) because section 961(c) applies
only for limited purposes. See proposed
§1.961-4(f)(3). Therefore, the gain does
not affect the CFC’s items of gross income
for purposes of section 952 or 951A or its
E&P.
The Treasury Department and the IRS
are of the view that the gain recognition
rules described in this part III.C.2 of the
Explanation of Provisions appropriately
prevent use of the same basis more than
once, provide similar outcomes for similar
transactions at different tiers, and ensure
the tax consequences of the gain are cov-
ered shareholder-specific. Any alterna-
tive approach that did not require gain
recognition under section 961(b)(2) and
(c) for amounts in excess of basis would
necessarily have to narrow the application
of section 961(c) basis (discussed in part
III.E of the Explanation of Provisions),
with the result that section 961(c) basis
would not be available for use in a section
301(c)(3) transaction and, in a sale, might
be available for use only to the extent of
undistributed PTEP.
Consider the following examples
illustrating that the proposed regulations
provide a consistent approach ensuring
that distributions appropriately reduce
basis or result in the recognition of gain.
First, assume US1, a covered shareholder,
directly owns the single share of outstand-
ing stock of CFC1, a newly formed for-
eign corporation. For simplicity, assume
US1 has $0 basis in its stock in CFC1. In
year 1, CFC1 generates $100x of PTEP
with respect to US1, which increases
US1’s adjusted basis of the share of stock
of CFC1 from $0 to $100x. In year 2,
CFC1 makes a $100x distribution out of
E&P and, in year 3, CFC1 makes a $100x
distribution that is not out of E&P. In this
case, the year 2 distribution is tax-free
(that is, the distribution is excluded from
US1’s gross income under section 959(a)
but reduces US1’s adjusted basis in its
stock of CFC1 under section 961(b)(1)),
and the year 3 distribution requires US1
to recognize $100x of gain under section
301(c)(3). Alternatively, assume CFC1
generates a deficit in E&P in year 2 and
generates E&P in year 3, with the result
that the year 3 distribution, but not the

Bulletin No. 2025–5 549 January 27, 2025
year 2 distribution, is out of E&P. In such
a case, the year 2 $100x distribution is tax-
free under section 301(c)(2) by reason of
US1’s adjusted basis pursuant to section
961(a), and the year 3 $100x distribution
requires US1 to recognize $100x of gain
under section 961(b)(2), which appropri-
ately prevents a double use of basis.
Now assume instead that CFC2, a for-
eign corporation directly owned by US1,
directly owns the single share of stock of
CFC1 (rather than US1), CFC2’s adjusted
basis of the share of stock of CFC1 is $0,
and CFC2’s section 961(c) basis with
respect to US1 of the share of stock of
CFC1 is increased from $0 to $100x to
reflect the $100x of PTEP generated by
CFC1 with respect to US1. In that case,
if CFC1’s year 2 distribution is out of
E&P, the year 2 distribution is tax-free
under sections 959 and 961 and the year
3 distribution requires CFC2 to recog-
nize $100x of gain under section 301(c)
(3), which US1 will generally include in
gross income under section 951(a). Alter-
natively, if the year 3 distribution is out of
E&P instead of the year 2 distribution, the
year 2 distribution is tax-free by reason of
CFC2’s section 961(c) basis and the year
3 distribution requires CFC2 to recognize
$100x of gain pursuant to section 961(c),
which US1 will generally include in gross
income under the rules described in part
III.G of the Explanation of Provisions.
v. Limitations on negative derived basis
and negative section 961(c) basis
As discussed in parts III.C.2.iii and iv
of the Explanation of Provisions, a part-
nership’s derived basis or a CFC’s section
961(c) basis with respect to a covered
shareholder of a property unit can be
reduced below zero (and therefore result
in negative basis instead of triggering
immediate gain recognition) as a result
of a distribution of PTEP with respect to
the property unit, subject to a limitation.
The concept of negative section 961(c)
basis stems from the language of section
961(c) (providing “adjustments similar
to the adjustments” of section 961(a) and
(b), “but only for the purposes of deter-
mining the amount included under section
951”), which contemplates section 961(c)
basis replicating the outcomes that would
occur for section 951 purposes if the
CFC’s adjusted basis could be increased
or reduced under section 961(a) or (b).
In this way, negative section 961(c) basis
can be conceptualized as a reduction to
adjusted basis that has no tax effect until
a transaction relevant for purposes of sec-
tion 951 occurs with respect to the prop-
erty unit. Negative derived basis follows
the same concept.
Under the limitation, a distribution can
reduce (or further reduce) derived basis or
section 961(c) basis below zero only to the
extent of the amount of the partnership’s
common basis or the CFC’s adjusted basis
of the property unit that is available with
respect to the covered shareholder (deter-
mined as described in the next paragraph).
See proposed §1.961-4(c)(3)(i) and (d)(3)
(i). In the case of a partnership, the amount
of common basis available with respect to
the covered shareholder is reduced by the
covered shareholder’s negative section
743(b) basis adjustment of the derivative
ownership unit (if applicable). See pro-
posed §1.961-4(c)(3)(i).
The common basis or adjusted basis
available with respect to the covered
shareholder is determined by first com-
puting the partnership’s common basis or
the CFC’s adjusted basis of the property
unit, reduced, as applicable, by all nega-
tive derived basis or all negative section
961(c) basis of the property unit (regard-
less of the covered shareholders to which
the negative basis relates). See proposed
§1.961-4(c)(3)(ii) and (d)(3)(ii). This
amount represents the partnership’s com-
mon basis or the CFC’s adjusted basis that
is potentially available to reduce derived
basis or section 961(c) basis of the prop-
erty unit below zero. To address concur-
rent adjustments with respect to multiple
covered shareholders, the partnership’s
available common basis or the CFC’s
available adjusted basis is then multiplied
by a fraction. The fraction determines the
basis available with respect to a covered
shareholder based on relative amounts
by which derived basis or section 961(c)
basis with respect to the covered share-
holders would be reduced below zero
without limitation.
The Treasury Department and the IRS
are of the view that allowing, but limiting
the amount of, negative basis in this way
has the effect of permitting the partner-
ship’s common basis or CFC’s adjusted
basis of the property unit to be reduced
to, but not below, zero. These rules do
not affect the treatment or availability of
a partnership’s common basis or a CFC’s
adjusted basis under any other provision
of the Code (and, thus, for example, do not
impact the application of section 704(c)).
The Treasury Department and the
IRS considered other approaches to the
limitation such as looking to a covered
shareholder’s share of common basis or
adjusted basis, based on the percentage
of the interests in the partnership (using
§1.743-1(d) principles, for example) or
the stock of the CFC that is owned by
the covered shareholder. However, those
approaches would give rise to additional
complexity and burden because, for exam-
ple, they could require rules adjusting
negative basis with respect to a covered
shareholder to the extent that an issuance
reduces the covered shareholder’s share of
common basis or adjusted basis. Further,
as discussed in part III.F of the Explana-
tion of Provisions, rules requiring gain
recognition in transactions involving neg-
ative basis adequately prevent a covered
shareholder from disproportionality bene-
fiting from common basis or adjusted basis
because gain recognized by a partnership
or a CFC under those rules is allocated or
assigned to covered shareholders based on
relative amounts of negative basis with
respect to the covered shareholders. Thus,
although a partnership’s common basis or
a CFC’s adjusted basis is available with
respect to all covered shareholders in
determining the amount by which derived
basis or section 961(c) basis can be nega-
tive, a covered shareholder will generally
be required to include in gross income any
gain attributable to negative basis with
respect to the covered shareholder.
The Treasury Department and the IRS
request comments on the approach to lim-
iting negative basis in the proposed regu-
lations, including alternative methods for
determining the amount of a partnership’s
common basis or a CFC’s adjusted basis
available with respect to a covered share-
holder for this purpose.
3. Basis Adjustments for Foreign
Currency Gain or Loss
To reflect foreign currency gain or
loss recognized under section 986(c) by

January 27, 2025 550 Bulletin No. 2025–5
a covered shareholder with respect to a
foreign corporation’s PTEP in a general
successor transaction or other transac-
tion not including a distribution of PTEP
(see proposed §1.986(c)-1, discussed in
part V of the Explanation of Provisions),
the proposed regulations provide rules
to adjust the basis of property units that
are shares of stock of the foreign corpo-
ration owned by the covered shareholder.
These adjustments “tier up” through any
property units through which the covered
shareholder owns such stock, with the
result that the basis of such property units
is also adjusted. See proposed §1.961-5(b)
(1). For purposes of these rules, a refer-
ence to basis means adjusted basis of the
covered shareholder in the case of a sec-
tion 961(a) ownership unit, derived basis
with respect to the covered shareholder in
the case of a derivative ownership unit,
and section 961(c) basis with respect to
the covered shareholder in the case of a
section 961(c) ownership unit. These rules
are issued pursuant to the express delega-
tions of authority under sections 965(o)
and 989(c) (as well as those under sections
961(a), (b), and (c), as described in part
III.A. of the Explanation of Provisions).
The amount of the basis adjustments
is equal to the amount of net foreign cur-
rency gain or loss. See proposed §1.961-
5(b)(2). This is determined by comparing
the sum of all foreign currency gain and
the sum of all foreign currency loss that
the covered shareholder recognizes with
respect to the foreign corporation’s PTEP
in the transaction under section 986(c),
without regard to limitations on the rec-
ognition of such foreign currency gain or
loss for PTEP resulting from section 965.
Generally, the basis of each property
unit is increased by the property unit’s
share of net foreign currency gain or is
reduced by the property unit’s share of net
foreign currency loss, as applicable, deter-
mined in each case based on a hypotheti-
cal distribution by the foreign corporation
equal to all PTEP of the foreign corpo-
ration with respect to which the covered
shareholder recognizes (or, but for limita-
tions for PTEP resulting from section 965,
would recognize) foreign currency gain
or loss in the transaction. See proposed
§1.961-5(b)(3) and (4). The basis adjust-
ments are treated as made immediately
before the transaction (and therefore are
taken into account in the transaction). See
proposed §1.959-5(b)(4). Additionally,
like in the case of distributions of PTEP, a
reduction to basis can reduce derived basis
or section 961(c) basis below zero and can
result in gain recognition with respect to a
property unit. See id.
These basis adjustments are consistent
with the 1988 notice and prevent foreign
currency gain or loss with respect to PTEP,
which is recognized at the covered share-
holder-level under section 986(c), from
also being taken into account with respect
to property units sold or exchanged in the
transaction (which might otherwise occur
if basis of the property units were not
adjusted to reflect movements in exchange
rates between the time of the income
inclusion that gave rise to the PTEP (and
basis) and the time of the transaction). The
adjustments to basis are determined with-
out regard to the limitations on the rec-
ognition of foreign currency gain or loss
with respect to PTEP resulting from sec-
tion 965, which ensures that such unrec-
ognized foreign currency gain or loss does
not result in a commensurate amount of
gain or loss with respect to property units
sold or exchanged in the transaction. See
also part V.B of the Explanation of Pro-
visions (discussing rules under which
foreign currency gain or loss with respect
to PTEP resulting from section 965(a)
is reduced based on the section 965(c)
deduction percentage, and no foreign cur-
rency gain or loss is recognized for PTEP
arising under section 965(b)).
4. Successor Basis
i. In general
If there is an acquisition of stock of a
foreign corporation that results in a change
of ownership of stock of the foreign cor-
poration, successor rules in section 961(c)
generally transfer the foreign corpora-
tion’s section 961(c) basis with respect to
the covered shareholder that relinquishes
ownership of stock of the foreign cor-
poration to the covered shareholder who
acquires ownership of the stock. See
section 961(c) (prescribed adjustments
to basis in CFC stock also apply to any
United States shareholder that acquires
from any person any portion of the interest
of a United States shareholder by reason
of which such shareholder was treated as
owning CFC stock). These rules generally
ensure that undistributed PTEP of a low-
er-tier foreign corporation does not give
rise to additional U.S. tax in the hands of
the acquiring covered shareholder when
stock of the corporation is later sold by
an upper-tier CFC, even though the cov-
ered shareholder did not own such stock
when the PTEP was generated and section
961(c) basis was increased. These succes-
sor basis rules are issued pursuant to the
express delegation of authority under sec-
tion 743(b) (as well as the express delega-
tion of authority under section 961(c), as
described in part III.A. of the Explanation
of Provisions).
The proposed regulations set forth
rules for transferring section 961(c) basis
in a general successor transaction, as well
as for transferring a partnership’s derived
basis if the general successor transaction
involves an acquisition of an interest in
a partnership (acquired partnership). See
proposed §1.961-5(c). These rules gen-
erally provide parity between derived
basis and section 961(c) basis in a gen-
eral successor transaction and, in the case
of an acquired partnership, ensure that
the successor covered shareholder suc-
ceeds to derived basis (as compared to an
approach that attempted to replace all or
a portion of derived basis with a section
743(b) basis adjustment, which would
require an election under section 754 to
be in effect or a substantial built-in loss).
The Treasury Department and the IRS
intend to issue additional rules regarding
the transfer of section 961(c) basis and
derived basis (as well as the transfer of
PTEP) in acquisitions that are not general
successor transactions. In these acquisi-
tions, the Treasury Department and the
IRS are considering adding a rule as
part of finalization of the proposed reg-
ulations that, similar to the potential rule
discussed in part II.G.1 of the Explana-
tion of Provisions, provides that section
961(c) basis and derived basis transfer
automatically in periods before those
additional rules apply.
In a general successor transaction,
a portion of an acquired partnership’s
derived basis or acquired foreign corpo-
ration’s section 961(c) basis with respect
to the transferor covered shareholder of
a property unit transfers to the succes-

Bulletin No. 2025–5 551 January 27, 2025
sor covered shareholder and therefore
becomes with respect to the successor
covered shareholder. Thus, to reflect the
general successor transaction, derived
basis or section 961(c) basis is increased
(or reduced) by the basis that transfers to
(or from) the covered shareholder, and
those adjustments are treated as made
concurrently with the general successor
transaction. See proposed §1.961-5(c)
(1) and (2)(iii). The amount of basis that
transfers may be a positive or negative
amount and is equal to a pro rata portion
of the derived basis or section 961(c)
basis of the property unit immediately
before the general successor transaction,
plus any increase, or minus any decrease,
to the basis for foreign currency gain or
loss recognized under section 986(c) in
the general successor transaction (dis-
cussed in part V of the Explanation of
Provisions). See proposed §1.961-5(c)(2)
(i) and (ii).
The pro rata portion is determined
based on the percentage, by value, of the
transferor covered shareholder’s interests
in the acquired partnership or acquired
foreign corporation that the succes-
sor covered shareholder acquires in the
general successor transaction. See pro-
posed §1.961-5(c)(2)(i). This approach
is intended to transfer derived basis or
section 961(c) basis commensurate with
the percentage change of the transferor
covered shareholder’s indirect interests
in the partnership’s common basis or for-
eign corporation’s adjusted basis by rea-
son of the general successor transaction.
The Treasury Department and the IRS are
of the view that alternative approaches –
such as transferring an amount of derived
basis or section 961(c) basis equal to the
amount of PTEP that transfers in the gen-
eral successor transaction – could give
rise to inappropriate outcomes or undue
complexity where derived basis or section
961(c) basis is not equal to the PTEP that
transfers in the general successor transac-
tion.
ii. Deemed covered shareholder
Consistent with the deemed covered
shareholder rules discussed in part II.G.3
of the Explanation of Provisions, the pro-
posed regulations provide that the deemed
covered shareholder is treated in the
same manner as a covered shareholder in
determining the transfer of derived basis
or section 961(c) basis. See proposed
§1.961-5(c)(3)(i). Thus, for example, if
a covered shareholder owns all the stock
of an upper-tier CFC, the upper-tier CFC
directly owns all the stock of a lower-tier
CFC, and the covered shareholder sells a
portion of its stock of the upper-tier CFC
to a nonresident alien individual, then a
portion of the upper-tier CFC’s section
961(c) basis in the stock of the lower-tier
CFC transfers from the seller covered
shareholder to the deemed covered share-
holder. The proposed regulations further
provide that, to the extent the deemed
covered shareholder is treated as owning
stock of any foreign corporation that is
not otherwise a CFC, the foreign corpo-
ration is treated as a CFC for purposes
of determining section 961(c) basis that
transfers to or from the deemed covered
shareholder. See proposed §1.961-5(c)(3)
(ii). This is intended to allow for section
961(c) basis to transfer from the deemed
covered shareholder to a subsequent cov-
ered shareholder (as properly adjusted
under the proposed section 961 regula-
tions) even if both an upper-tier foreign
corporation and the lower-tier foreign
corporation in which the upper-tier for-
eign corporation directly owns stock
cease to be CFCs during the period in
which the stock of the foreign corpora-
tions is considered owned by the deemed
covered shareholder.
In cases where basis of a derivative
ownership unit or section 961(c) owner-
ship unit transfers from the deemed cov-
ered shareholder to a covered shareholder,
the covered shareholder must use a rea-
sonable method to determine the amount
of transferred basis. See proposed §1.961-
5(c)(3)(iii). The proposed regulations
provide that such method must take into
account adjustments to basis with respect
to the deemed covered shareholder that
would have been made under the proposed
regulations if the basis were with respect
to a covered shareholder during the time
that it was with respect to the deemed cov-
ered shareholder.
Like in the context of the deemed cov-
ered shareholder rules for purposes of
transferring PTEP, the Treasury Depart-
ment and the IRS welcome comments on
this regime.
iii. Coordination with section 743(b)
In certain general successor transac-
tions in which an acquired partnership
has a section 754 election in effect or a
substantial built-in loss as defined under
section 743(d), property of the acquired
partnership will receive a section 743(b)
basis adjustment with respect to the suc-
cessor covered shareholder. Accordingly,
the proposed regulations take into account
derived basis that transfers to the succes-
sor covered shareholder in calculating the
overall section 743(b) basis adjustment
and its allocation among the acquired
partnership’s assets with respect to the
successor covered shareholder. See pro-
posed §1.961-5(d). In transactions involv-
ing multiple tiers of acquired partnerships,
this coordination rule applies to each
acquired partnership.
5. Basis Adjustments for Deemed
Dividends under Section 1248(c)(2) or
964(e)(1)
The Treasury Department and the IRS
are studying whether basis under sec-
tion 961 should be increased to reflect
gain treated as a dividend under section
1248(c)(2) or 964(e)(1). For example, to
the extent gain recognized by a covered
shareholder on a sale of stock of a first-
tier CFC is treated as a dividend under
section 1248(c)(2) by reason of E&P of a
third-tier CFC (and therefore gives rise to
PTEP under section 959(e)), the Treasury
Department and the IRS are considering
whether (and to what extent) the first-
tier CFC’s and second-tier CFC’s section
961(c) basis can and should be increased
to reflect the resulting PTEP. The Treasury
Department and the IRS request com-
ments on this topic.
D. Tax consequences of positive derived
basis (proposed §1.961-8)
1. In General
The rules for a partnership’s positive
derived basis with respect to a covered
shareholder are generally intended to rep-
licate the outcome that would occur on a
sale, exchange, or other disposition of the
derivative ownership unit if such basis
were an additional amount of common

January 27, 2025 552 Bulletin No. 2025–5
basis taken into account in determining
gain or loss allocable to the covered share-
holder. These rules are generally modeled
after the rules in §1.743-1.
Under the proposed regulations, in a
sale, exchange, or other disposition by
a partnership (transferring partnership)
of one or more derivative ownership
units (transferred units), each partner’s
distributive share of gain or loss recog-
nized by the transferring partnership is
first determined under section 704 with-
out regard to positive derived basis (but
with regard to any section 743(b) basis
adjustment with respect to the partner).
See proposed §1.961-8(b)(1). Then,
positive derived basis is applied to each
covered shareholder’s distributive share
of such gain or loss, in an amount equal
to the transferring partnership’s posi-
tive derived basis with respect to the
covered shareholder of the transferred
units, subject to two limitations (dis-
cussed in part III.D.2 of the Explanation
of Provisions). See proposed §1.961-
8(b)(2)(i); see also proposed §1.961-
12(c)(4) (Example 4). This application
of positive derived basis can decrease
a distributive share of gain, increase a
distributive share of loss, or convert a
distributive share of gain to a distribu-
tive share of loss.
The application of positive derived
basis to a covered shareholder’s distribu-
tive share is generally treated as an appli-
cation of positive derived basis by the
transferring partnership. See proposed
§1.961-8(b)(1). However, if the covered
shareholder owns the transferred units
through tiered partnerships, only the part-
nership in which the covered shareholder
directly owns an interest is treated as
applying the positive derived basis).
To coordinate with section 705, the
proposed regulations provide that adjusted
basis of a partnership interest directly
owned by the covered shareholder is
adjusted under section 705 after taking
into account the partnership’s application
of positive derived basis to the covered
shareholder’s distributive share of gain or
loss with respect to the transferred units.
See proposed §1.961-8(c). On the other
hand, in tiered partnership structures, an
upper-tier partnership’s common basis in
a lower-tier partnership interest is adjusted
under section 705 without regard to the
application of positive derived basis to the
covered shareholder’s distributive share.
See proposed §1.961-8(d). Additionally,
an upper-tier partnership’s derived basis
with respect to the covered shareholder
in a lower-tier partnership interest (start-
ing at the lowest-tier if there is more than
one lower-tier partnership) is concurrently
reduced (or gain is recognized, as appli-
cable) by the amount of positive derived
basis applied to the covered shareholder’s
distributive share. In this way, an upper-
tier partnership’s derived basis in a low-
er-tier partnership interest is replaced with
common basis under section 705 (which
may be decreased under section 705(a)(2)
when the lower-tier partnership makes a
distribution).
2. Limitations
As discussed in part III.D.1 of the
Explanation of Provisions, the amount of
positive derived basis applied to a covered
shareholder’s distributive share of gain
or loss with respect to transferred units is
equal to the transferring partnership’s pos-
itive derived basis with respect to the cov-
ered shareholder of the transferred units,
subject to two limitations. See proposed
§1.961-8(b)(2)(i).
The first limitation applies in non-
recognition transactions to replicate the
effect of additional basis under the “boot-
within-gain” rule of section 351(b) or
356(a)(1), where additional basis might
reduce the amount of gain realized but
not the amount of gain recognized. See
proposed §1.961-8(b)(2)(ii). Under this
limitation, the amount of positive derived
basis applied to the covered shareholder’s
distributive share is equal to the excess of
the amount of positive derived basis with
respect to the covered shareholder of the
transferred units over the covered share-
holder’s share of the gain realized but not
recognized by the transferring partner-
ship with respect to the transferred units
(determined without regard to derived
basis). In this way, positive derived basis
is available for use only to the extent
that, if the positive derived basis were
additional common basis taken into
account in determining gain allocable
to the covered shareholder, such derived
basis would reduce gain recognized with
respect to the transferred units.
To illustrate this limitation, assume
US1, a covered shareholder, directly
owns a 50 percent interest in PRS1, a
partnership, and PRS1 directly owns the
single share of outstanding stock of F1, a
foreign corporation. The fair market value
of the share is $150x. PRS1’s common
basis of the share is $100x, and PRS1’s
derived basis with respect to US1 of the
share is $15x. PRS1 exchanges the share
for $120x of stock and $30x of money
in a reorganization described in section
368(a)(1)(D), recognizing $30x of gain
on the exchange under section 356(a)(1)
(the lesser of the $30x of money received
and the $50x of gain in the stock of F1)
and therefore $20x of the $50x of realized
gain is not recognized due to the boot
limitation in section 356(a)(1). US1’s dis-
tributive share of the recognized gain is
$15x ($30x × 50%), determined without
regard to derived basis. Under the lim-
itation in the proposed regulations, only
$5x of positive derived basis is applied to
such distributive share (thus, $10x of the
$15x of derived basis is not available for
use). The $5x is computed as the excess
of $15x (the amount of positive derived
basis with respect to US1 without regard
to the limitation), over $10x ($20x ×
50%, which represents US1’s share of
the realized-but-not-recognized gain).
Accordingly, US1’s distributive share of
gain taking into account derived basis
is $10x (US1’s $15x distributive share
of gain without regard to derived basis
over $5x of positive derived basis avail-
able under the limitation). This $10x rep-
resents the amount of gain that would be
recognized under section 356(a)(1) and
allocated to US1 if such were determined
based on $75x of value (50% of each
of the $120x of stock consideration and
$30x of money) and $65x of basis (50%
of the $100x of common basis, increased
by the $15x of derived basis).
Under the second limitation, positive
derived basis can increase or create a dis-
tributive share of loss only if the trans-
ferring partnership recognizes, or would
recognize, loss on the sale, exchange, or
other disposition of the transferred units
and a current deduction in respect of the
loss is, or would be, allowable. See pro-
posed §1.961-8(b)(2)(iii). Thus, for exam-
ple, positive derived basis cannot create a
distributive share of loss if the gain recog-

Bulletin No. 2025–5 553 January 27, 2025
nized with respect to the transferred units
is pursuant to section 301(c)(3).
3. Certain Scenarios Not Addressed
The proposed regulations do not
address the interaction of derived basis
with the rules regarding distributions by
a partnership (for example, sections 732
and 734). The Treasury Department and
the IRS request comments on this interac-
tion, including whether derived basis with
respect to a covered shareholder should
be taken into account in the case of a dis-
tribution by a partnership of a derivative
ownership unit to the covered shareholder
or to another partner and whether derived
basis should be taken into account in the
case of distributions of other types of
assets by a partnership.
The proposed regulations also do not
address the effect of derived basis under
the dividend recharacterization rules of
section 1248. The Treasury Department
and the IRS are studying this and other
issues with respect to the application of
section 1248 when stock of a foreign cor-
poration is owned through a partnership
(for example, the manner in which section
1248(d)(1) applies to exclude PTEP in
determining deemed dividend treatment),
and welcome comments on these issues.
E. Tax consequences of positive section
961(c) basis (proposed §1.961-9)
1. In General
As discussed in part III.B.4 of the
Explanation of Provisions, a CFC’s sec-
tion 961(c) basis applies only for the pur-
poses prescribed in the section 961 regu-
lations and thus does not affect the amount
of the CFC’s gross income or E&P. Under
the rules in the proposed regulations for
the tax consequences of positive section
961(c) basis, gain to which positive sec-
tion 961(c) basis is applied is treated as
PTEP that is generally excluded from the
CFC’s gross income under section 961(c)
(section 961(c) exclusion). See proposed
§1.961-9. The proposed regulations
describe the section 961(c) exclusion,
the application of section 961(c) basis to
gain, and the PTEP that results from such
application (including the character of the
PTEP).
2. Section 961(c) Exclusion
i. In general
The section 961(c) exclusion oper-
ates in a similar manner to the section
959(b) exclusion. It provides that PTEP
resulting from the application of a CFC’s
section 961(c) basis to gain recognized
by the CFC is excluded from the CFC’s
gross income for purposes of determining
the CFC’s subpart F income and tested
income or tested loss, provided that the
PTEP relates to a covered shareholder that
is a United States shareholder in the CFC.
See proposed §1.961-9(b); see also part
III.E.3 of the Explanation of Provisions
(determining PTEP resulting from section
961(c) basis).
The Treasury Department and the IRS
are of the view that E&P attributable
to gain to which section 961(c) basis is
applied gives rise to PTEP. Section 959(a)
refers to E&P of a foreign corporation that
is “attributable to amounts which are, or
have been, included in gross income under
section 951(a) [or 951A(a)].” Gain recog-
nized by an upper-tier foreign corporation
on the disposition of stock of a lower-tier
foreign corporation may likewise reflect
amounts included in gross income under
section 951(a) or 951A(a) with respect
to the lower-tier foreign corporation and,
thus, give rise to E&P that is attributable
to such amounts. Because section 961(c)
basis reflects amounts included in gross
income under section 951(a) or 951A(a),
the application of section 961(c) basis to
such gain means that the resulting E&P is
attributable to an amount included in gross
income under section 951(a) or 951A(a)
in accordance with the language of section
959(a). Additionally, treating the resulting
E&P as PTEP (rather than section 959(c)
(3) E&P) prevents double non-taxation
and double taxation and provides symme-
try between distributions and dispositions
involving foreign stock, as discussed in
part III.E.2.ii of the Explanation of Pro-
visions.
The proposed regulations apply the
section 961(c) exclusion for purposes of
determining a CFC’s tested income or
tested loss pursuant to the express dele-
gation of authority in section 951A(f)(1)
(B), which prevents double taxation and
is therefore consistent with the policy of
section 961. Additionally, this approach
is consistent with section 951A(f)(1)
(A) (treating an inclusion under section
951A(a) in the same manner as an inclu-
sion under section 951(a)(1)(A) for pur-
poses of section 961), which should be
interpreted as allowing references to sec-
tion 951 in section 961(c) to be treated as
including a reference to section 951A(a).
This approach is also consistent with a
comment received in response to the 2019
notice, which requested clarification that
section 961(c) basis applies for purposes
of determining tested income, noting that
some comments asserted that section
961(c) basis only applies in determining
a CFC’s subpart F income. See also TD
9866, 84 FR 29288, 29298 (describing
similar comments received in response to
proposed regulations under section 951A).
Further, the application of the sec-
tion 961(c) exclusion at the CFC-level is
coordinated with the pro rata share rules
of section 951(a) (discussed in part IV.C
of the Explanation of Provisions). Under
this approach, a CFC’s subpart F income
is determined with respect to all share-
holders by excluding the same amount of
PTEP resulting from section 961(c) basis
of the CFC, and United States sharehold-
ers’ pro rata shares of the CFC’s subpart
F income are computed in a manner so
that any benefits of the application of the
section 961(c) exclusion to PTEP with
respect to a United States shareholder
generally inure only to that United States
shareholder. For instance, if two United
States shareholders own equal interests in
a CFC and, on a sale of foreign stock by
the CFC, the CFC recognizes gain half of
which is treated as PTEP with respect to
one United States shareholder (because
there is positive section 961(c) basis with
respect to the United States shareholder at
least equal to its share of the gain) and the
other half of which gives rise to subpart F
income (because there is no section 961(c)
basis with respect to the other United
States shareholder and no exception from
subpart F income applies), then only the
United States shareholder with respect to
which there is no section 961(c) basis has
a pro rata share of the subpart F income
resulting from the sale.
Lastly, by applying section 961(c)
at the CFC-level, the proposed regula-
tions provide symmetry between sections

January 27, 2025 554 Bulletin No. 2025–5
959(b) and 961(c), which are companion
provisions with a common purpose. Thus,
PTEP is generally treated the same under
the proposed regulations regardless of
whether it arises from a distribution or
disposition involving stock of a foreign
corporation. As indicated in part II.D.1.iii
of the Explanation of Provisions, the
Treasury Department and the IRS request
comments on the CFC-level approach
in the proposed regulations, including
alternative approaches providing symme-
try between sections 959(b) and 961(c)
(such as a shareholder-level approach), or
whether symmetry is necessary under the
statute.
ii. Considerations in treating sheltered
E&P as PTEP
The Treasury Department and the IRS
considered treating a CFC’s E&P that is
sheltered from tax by positive section
961(c) basis with respect to a covered
shareholder as section 959(c)(3) E&P.
However, such an approach could give
rise to double non-taxation or double taxa-
tion. Moreover, treating sheltered E&P as
PTEP provides symmetry between distri-
butions and dispositions involving foreign
stock because both E&P to which annual
PTEP accounts are applied and E&P to
which section 961(c) basis is applied are
treated as PTEP.
For example, double non-taxation
could occur if the sheltered E&P were to
subsequently give rise to a dividend for
which the covered shareholder is allowed
a dividends received deduction under sec-
tion 245A (including as a result of a dis-
position pursuant to section 1248(j)). In
that case, the taxable portion of any unre-
alized appreciation in stock of the CFC,
to the extent attributable to unrealized
appreciation in the CFC’s assets, could
be reduced by the amount of the dividend
(because the dividend reduces the value
of the CFC stock without a correspond-
ing basis reduction or, in a disposition
of stock, because gain attributable to the
appreciation is recharacterized as a divi-
dend). See also TD 9866, 84 FR 29288,
29298 (discussing this concern and
requesting comments). This would result
in double non-taxation when combined
with the covered shareholder’s adjusted
basis (increased under section 961(a)) in
its top-tier CFC stock, which generally
would not be reduced when section 959(c)
(3) E&P is distributed with respect to the
stock. Treating the sheltered E&P as PTEP
prevents this outcome because section 961
reduces basis for distributions of PTEP
(thereby preventing double benefits) and,
in a disposition, PTEP is not taken into
account under section 1248.
In a case where the covered shareholder
is not eligible for a section 245A deduc-
tion (for example, because the covered
shareholder is an individual), the covered
shareholder would generally include the
sheltered E&P in gross income when dis-
tributed by the CFC if the sheltered E&P
were treated as section 959(c)(3) E&P.
This would represent double taxation with
respect to the E&P that gave rise to the
section 961(c) basis because such E&P
was taxed under section 951(a) or 951A(a)
when earned and would in effect be taxed
again when the sheltered E&P is distrib-
uted to the covered shareholder. Although
the covered shareholder’s adjusted basis
under section 961(a) in its top-tier CFC
stock would generally not be reduced for
the distribution of the sheltered E&P, there
would nevertheless be double taxation
until or unless that basis can be utilized,
and even in that case there may be a char-
acter mismatch. See also TD 9866, 84 FR
29288, 29298 (requesting comments on
the extent to which adjustments should be
made to the operation of section 961(c) to
minimize the potential for the same item
of income being subject to tax more than
once); 2006 proposed regulations, 71 FR
51155, 51162 (noting similar concerns).
Treating the sheltered E&P as PTEP pre-
vents this outcome because a distribution
of PTEP to a covered shareholder is gen-
erally excluded from gross income under
section 959(a).
The Treasury Department and the IRS
also considered treating sheltered E&P
as section 959(c)(3) E&P but reducing
basis (including the covered shareholder’s
adjusted basis in its top-tier CFC stock) to
the extent the sheltered E&P is eligible for
a section 245A deduction. However, this
approach is not being proposed because
it would raise other issues, including the
timing of the basis reduction (either imme-
diately upon creation of sheltered E&P,
which may later cause excess taxation, or
only upon distribution of sheltered E&P,
which would require additional tracking),
and would not address the double taxation
issue for covered shareholders that do not
qualify for a section 245A deduction.
3. Application of Section 961(c) Basis to
Gain and Resulting PTEP
i. In general
The rules for applying a CFC’s positive
section 961(c) basis with respect to a cov-
ered shareholder are generally intended
to replicate the outcome that would occur
on a sale, exchange, or other disposition
of the section 961(c) ownership unit if
such basis were an additional amount
of adjusted basis taken into account in
determining gain allocable to the covered
shareholder under section 951.
Under the proposed regulations, in a
sale, exchange, or other disposition by a
CFC of one or more section 961(c) owner-
ship units that are shares of stock of a sin-
gle foreign corporation (transferred units),
the CFC first determines gain recognized
with respect to the transferred units (cov-
ered gain). See proposed §1.961-9(c)(1).
Covered gain is determined on an aggre-
gate basis with respect to all transferred
units, without regard to section 961(c)
basis or loss recognized on any transferred
unit (and before any application of section
964(e) or other dividend recharacterization
provisions). Then, portions of the covered
gain are assigned to covered shareholders
under proposed §1.951-2 (the same rules
that assign covered distributions, dis-
cussed in part IV.B of the Explanation of
Provisions), and this determines a covered
shareholder’s share of the covered gain.
See proposed §1.961-9(d)(1).
Next, positive section 961(c) basis is
applied (on an aggregate basis) to each
covered shareholder’s share of the covered
gain, in an amount equal to the CFC’s pos-
itive section 961(c) basis with respect to
the covered shareholder of the transferred
units (but not in excess of such share), and
subject to a limitation in nonrecognition
transactions (similar to the limitation rule
that applies to derived basis discussed in
part III.D.1 of the Explanation of Provi-
sions). See proposed §1.961-9(d)(2), (e).
This application of positive section 961(c)
basis characterizes the covered sharehold-
er’s share of the covered gain as PTEP

Bulletin No. 2025–5 555 January 27, 2025
with respect to the covered shareholder,
and that PTEP is generally excluded from
the CFC’s gross income for purposes
of determining its subpart F income and
tested income or tested loss. See proposed
§1.961-9(b), (d)(3); see also proposed
§1.961-12(c)(5) (Example 5).
An aggregate approach to applying
positive section 961(c) basis allows pos-
itive section 961(c) basis of a transferred
unit to be applied to a portion of the cov-
ered shareholder’s share of the covered
gain that is recognized with respect to
another transferred unit. For example,
in a case where there are two transferred
units, one of which is sold at a loss but
has positive section 961(c) basis with
respect to the covered shareholder and
the other of which is sold at a gain but
has no section 961(c) basis with respect
to the covered shareholder, positive sec-
tion 961(c) basis in the first transferred
unit will be applied to gain recognized
with respect to the second transferred
unit (and, to the extent so applied, the
gain will be treated as PTEP and will be
reduced only by any foreign income taxes
allocated and apportioned to the PTEP).
Aggregating positive section 961(c) basis
in this manner is intended to replicate
the effect of netting gains and losses on
similar types of property in determining
a CFC’s subpart F income. See section
954(c)(1)(B) (foreign personal holding
company income includes the portion of
gross income that consists of the excess
of gains over losses from the sale or
exchange of certain property). Although
aggregation differs from the share-by-
share approach under section 961 to
adjusting basis (including for purposes of
determining the consequences of distribu-
tions of PTEP), it provides a simpler and
more direct way of achieving the same
effect as a share-by-share approach to the
use of positive section 961(c) basis that
allows excess section 961(c) basis on a
particular share to be applied to gain rec-
ognized on another share of stock in the
same foreign corporation for which there
is not sufficient section 961(c) basis to
fully offset the gain. See also part III.E.4
of the Explanation of Provisions (discuss-
ing a rule allocating PTEP to shares of
stock in order to facilitate the application
of dividend recharacterization provisions
like section 964(e)).
The proposed regulations, however, do
not allow positive section 961(c) basis of
transferred units in excess of the covered
shareholder’s share of the covered gain to
be applied to other covered gain or to cre-
ate a loss that reduces subpart F income
or tested income. Allowing section 961(c)
basis in stock of a foreign corporation to
only reduce a section 951 inclusion attrib-
utable to sales, exchanges, or other dispo-
sitions of stock of that foreign corporation
is consistent with the language of section
961(c), with the result that only shares
of stock of the same foreign corporation
should be viewed as similar types of prop-
erty for purposes of replicating the effect
of netting under section 961(c). Unused
positive section 961(c) basis, however,
may be applied to gain recognized pur-
suant to section 961(c), provided the gain
is recognized with respect to stock of the
foreign corporation to which the section
961(c) basis relates, as discussed in part
III.G of the Explanation of Provisions.
ii. Character and dollar basis of resulting
PTEP
As discussed in part II.C of the Back-
ground, the character of PTEP (for exam-
ple, the taxable year, section 904 cate-
gory, and PTEP group to which the PTEP
relates) must be tracked to ensure the
proper application of provisions regard-
ing the treatment of PTEP. Accordingly,
the proposed regulations provide rules
for determining the character of a CFC’s
PTEP with respect to a covered share-
holder that results from the application
of positive section 961(c) basis to the
covered shareholder’s share of covered
gain (section 961(c) PTEP). See proposed
§1.961-9(d)(3) and (f)(1). Generally, the
effect of these rules is to duplicate undis-
tributed PTEP of lower-tier foreign corpo-
rations by having the PTEP “tier up” into
the CFC, but without reducing PTEP of
the lower-tier foreign corporations, and
this effect is analogous to the effect of sec-
tion 964(e)(1) (“tiering-up” certain sec-
tion 959(c)(3) E&P of lower-tier foreign
corporation in certain sales or exchanges
of stock by a CFC).
The proposed regulations generally
adopt a mirroring approach, which pro-
vides that section 961(c) PTEP takes the
same character as PTEP that transfers
from the covered shareholder under sec-
tion 959 or is eliminated (for example,
by reason of an election under section
338(g)) in the sale, exchange, or other dis-
position of the transferred units (referred
to as mirrored PTEP). See proposed
§1.961-9(f)(2); see also proposed §1.961-
12(c)(5) (Example 5). Mirrored PTEP is
increased for foreign income taxes asso-
ciated with such transferred or eliminated
PTEP because those taxes relate to PTEP
to which section 961(c) basis used in the
transaction is attributable. The mirroring
rule is intended to identify (and dupli-
cate) PTEP to which section 961(c) basis
used in the transaction is attributable in
an administrable manner that does not
impose undue burden on taxpayers. Alter-
native approaches that were considered
include requiring section 961(c) basis to
be established and maintained with the
same characterizations with which annual
PTEP accounts are established and main-
tained (so that section 961(c) PTEP could
be characterized based on section 961(c)
basis, portions of would relate to each
PTEP group). However, the view of the
Treasury Department and the IRS is that
those approaches would be unduly bur-
densome because they would substantially
increase the information required to be
tracked under section 961(c).
In some cases, section 961(c) PTEP
may be less than mirrored PTEP. This
could occur, for example, if a foreign
corporation’s assets depreciate in value
before the transaction or if mirrored PTEP
consists of PTEP attributable to section
965(b) (which does not increase section
961(c) basis). In that case, section 961(c)
PTEP takes the same character as a pro
rata portion of mirrored PTEP. In other
words, the mirroring rule applies but mir-
rored PTEP is pro rata reduced to equal
section 961(c) PTEP.
In other cases, section 961(c) PTEP
may exceed mirrored PTEP. This could
occur if section 961(c) basis used in the
transaction is attributable to PTEP that
was distributed before the transaction in
a manner different than how the PTEP
was expected to be distributed when the
section 961(c) basis was provided. In that
case, the mirroring rule applies to the
extent of mirrored PTEP, with a “look-
back” rule applying to the portion of sec-
tion 961(c) PTEP that is not characterized

January 27, 2025 556 Bulletin No. 2025–5
under the mirroring rule (excess section
961(c) PTEP). See proposed §1.961-9(f)
(3). Under the lookback rule, excess sec-
tion 961(c) PTEP takes the same charac-
ter as lookback PTEP, which is PTEP that
resulted from income inclusions under
sections 951(a) and 951A(a) of the cov-
ered shareholder attributable to the trans-
ferred units (including stock of a low-
er-tier foreign corporation owned through
the transferred units) during a 36-month
lookback period (without any reduction
for foreign income taxes imposed on that
PTEP). The lookback rule is intended
to provide an administrable method to
approximate PTEP that should be viewed
as duplicated in the transaction, while
minimizing taxpayer burden in the limited
cases where section 961(c) PTEP exceeds
mirrored PTEP. Like under the mirroring
rule, lookback PTEP is pro rata reduced
to equal excess section 961(c) PTEP if
excess section 961(c) PTEP is less than
lookback PTEP.
If excess section 961(c) PTEP is
greater than lookback PTEP, the portion
of excess section 961(c) PTEP that is not
characterized under the lookback rule
is characterized as PTEP relating to the
section 245A(d) PTEP group, the taxable
year in which the transaction occurs, and
the general category under section 904(d)
(1)(D). See proposed §1.961-9(f)(4). The
Treasury Department and the IRS are
of the view that this rule is a necessary
consequence of balancing compliance
and administrative burden with precision
under the mirroring rule and lookback
rule, and that alternative characterizations
could inappropriately incentivize transac-
tions intended to distribute PTEP to which
section 961(c) basis used in the transac-
tion is attributable in a manner different
than the manner in which the PTEP was
expected to be distributed when the sec-
tion 961(c) basis was provided.
Finally, the proposed regulations pro-
vide that the dollar basis of section 961(c)
PTEP is equal to the U.S. dollar amount
of section 961(c) basis giving rise to the
PTEP. See proposed §1.961-9(g). Because
section 961(c) basis is adjusted to take
into account foreign currency gain or loss
recognized in the transaction (as discussed
in part III.C.3 of the Explanation of Provi-
sions), any foreign currency gain or loss
subsequently recognized with respect to
the section 961(c) PTEP is determined by
reference to the time the section 961(c)
PTEP comes into existence.
4. Coordination with Dividend
Recharacterization Provisions
The proposed regulations provide two
rules to coordinate with provisions of the
Code or regulations that would treat cov-
ered gain, in whole or in part, as a divi-
dend. The first rule provides that such div-
idend recharacterization provisions do not
apply to the portion of covered gain that is
PTEP. See proposed §1.961-9(c)(2). Thus,
for example, section 961(c) basis applies
and characterizes covered gain as PTEP
before the application of section 964(e)
(treating gain recognized by a CFC on
the sale or exchange of stock in a foreign
corporation as a dividend in certain cases),
similar to how adjusted basis must be
taken into account to determine gain rec-
ognized before applying section 964(e).
The second rule allocates PTEP result-
ing from section 961(c) basis to trans-
ferred units. See proposed §1.961-9(d)(5)
and (h). This rule is intended to facilitate
the application of dividend recharacteri-
zation provisions by providing certainty
about the amount of gain with respect to a
particular transferred unit that is treated as
PTEP, which otherwise might be unclear
in light of the aggregation component in
applying positive section 961(c) basis
(discussed in part III.E.3.i of the Explana-
tion of Provisions).
Further, the Treasury Department and
the IRS are studying other issues involv-
ing dividend recharacterization provisions
(for example, the application of section
1248(d)(1) in section 964(e) transactions)
and may address these issues in future
guidance.
F. Gain recognition in transactions
involving property units with negative
basis (proposed §1.961-10)
To account for negative derived basis
and negative section 961(c) basis, the
proposed regulations provide rules that
treat a partnership or CFC as recognizing
gain with respect to a property unit. See
proposed §1.961-10. These rules are con-
sistent with the theory of negative basis
described in part III.C.2.v the Explanation
of Provisions, which provides that nega-
tive basis is akin to a reduction to common
basis or adjusted basis that only has a tax
effect when the common basis or adjusted
basis becomes relevant to determining
taxable income in a transaction.
One set of rules applies in any trans-
action in which a partnership’s common
basis or CFC’s adjusted basis of a prop-
erty unit is relevant in determining gain or
loss recognized with respect to the prop-
erty unit – for example, a sale or exchange
of the property unit or a distribution under
section 301(c)(2) on the property unit. See
proposed §1.961-10(b)(1) and (c)(1); see
also proposed §1.961-12(c)(6) and (7)
(Examples 6 and 7). In these cases, the
partnership or CFC is treated as recogniz-
ing gain with respect to the property unit
to the extent of the additional amount of
gain, plus the lesser amount of loss, that
it would have recognized in the transac-
tion if its common basis or adjusted basis
of the property unit were reduced by all
negative derived basis or negative section
961(c) basis of the property unit. In this
way, negative basis gives rise to gain that
reflects income that would exist or coun-
teracts loss that would not exist if com-
mon basis or adjusted basis were reduced
by the negative basis, thereby replicating
the outcome that would occur in the trans-
action if common basis or adjusted basis
were so reduced.
So, for example, in a sale of a property
unit, negative basis of the property unit
generally gives rise to an equal amount of
gain. In contrast, in a distribution under
section 301(c)(2) with respect to a prop-
erty unit or an exchange of a property
unit under section 351, negative basis of
the property unit gives rise to an amount
of gain equal to the gain that would have
been recognized under section 301(c)(3)
or 351(b), as applicable, if common basis
(in the case of a partnership) or adjusted
basis (in the case of a CFC) were reduced
by all negative basis of the property unit.
Another set of rules applies in any
transaction in which a property unit loses
its status as a derivative ownership unit or
section 961(c) ownership unit. This could
occur, for example, as a result of a trans-
fer by a partnership of a derivative own-
ership unit to a foreign corporation in an
exchange to which section 351 applies, or
a distribution by a CFC of a section 961(c)

Bulletin No. 2025–5 557 January 27, 2025
ownership unit to a domestic corporation
in a transaction to which sections 332 and
337 apply. See proposed §1.961-10(b)(2)
(ii) and (c)(2)(ii). This could also occur if
an upper-tier foreign corporation ceases to
be a CFC, in which case shares of stock
of a lower-tier foreign corporation directly
owned by the upper-tier foreign corpora-
tion would no longer be section 961(c)
ownership units. In these cases, the part-
nership or CFC is treated as recognizing
gain with respect to the property unit to
the extent of all negative derived basis or
negative section 961(c) basis of the prop-
erty unit, and this addresses a concern that
the negative basis might otherwise not be
taken into account. The Treasury Depart-
ment and the IRS are studying to what
extent this set of rules should be narrowed
or eliminated in future guidance if a rule
is adopted that converts one type of basis
into another type (for example, a rule that
converts derived basis into section 961(c)
basis or section 961(c) basis into adjusted
basis in a nonrecognition transaction).
A portion of gain recognized by a part-
nership or CFC under these rules is allo-
cated by the partnership or assigned from
the CFC, as applicable, to each covered
shareholder by multiplying the gain by the
percentage of the aggregate negative basis
of the property unit that is negative basis
with respect to the covered shareholder.
See proposed §1.961-10(b)(3) and (c)(3).
This approach treats the gain (which may
be less than the aggregate negative basis
of the property unit) as relating pro rata
to the negative basis with respect to each
covered shareholder, thereby preventing
a covered shareholder from dispropor-
tionality benefiting from common basis
or adjusted basis that enabled the creation
of negative basis (as discussed in part
III.C.2.v of the Explanation of Provisions)
and ensuring the tax consequences of
negative basis are specific to the covered
shareholder to which the negative basis
relates.
Additionally, the gain is treated in the
same manner as gain recognized in connec-
tion with distributions of PTEP in excess
of basis (discussed in part III.C.2.iii and iv
of the Explanation of Provisions), which
reflects that the negative basis giving rise
to the gain arose as a result of prior dis-
tributions of PTEP. See proposed §1.961-
10(b)(4) and (c)(4). Thus, the gain applies
for all purposes of the Code in the case of
a partnership and, in the case of a CFC,
is recognized pursuant to section 961(c)
and applies only for purposes of determin-
ing amounts included in gross income of
United States shareholders under the rules
discussed in part III.G of the Explanation
of Provisions. Further, the gain is treated
as separate from the transaction and there-
fore, for example, does not give rise to
basis adjustments under section 358 or
362 in a nonrecognition transaction.
Lastly, after determining gain required
to be recognized under these rules, neg-
ative derived basis or negative section
961(c) basis that causes the gain to be rec-
ognized is eliminated concurrently with
the transaction. See proposed §1.961-
10(b)(5) and (c)(5). Thus, if the covered
shareholder continues to own the property
unit (for example, if the transaction is a
section 301(c)(2) distribution), then such
negative basis will cease to be taken into
account with respect to the covered share-
holder and, if the transaction is a general
successor transaction, then the negative
basis will not be taken into account with
respect to the successor covered share-
holder.
G. United States shareholder inclusions
for gain recognized under section 961(c)
(proposed §1.961-11)
1. In General
The proposed regulations provide rules
requiring United States shareholders of a
CFC to include in gross income their allo-
cated portions of the CFC’s section 961(c)
income. See proposed §1.961-11; see also
proposed §1.961-12(c)(8) (Example 8). A
CFC’s section 961(c) income is, for a tax-
able year of the CFC, all gain recognized
by the CFC pursuant to section 961(c) for
amounts in excess of basis or by reason of
a trigger of negative section 961(c) basis
(as discussed in parts III.C.2.iv, C.3, and F
of the Explanation of Provisions).
These rules are intended to ensure sec-
tion 961(c) income is taken into account
(and thus has a tax consequence) at the
covered shareholder-level such that sec-
tion 961(c) basis is treated in the same
manner as adjusted basis in directly held
CFC stock or derived basis (where, for
example, amounts in excess of basis under
section 961 are always taken into account
at the covered shareholder-level). Specifi-
cally, a United States shareholder owning
stock of a CFC on the last relevant day of
a taxable year of the CFC must include
in gross income its allocated amount of
the CFC’s section 961(c) income for that
taxable year. See proposed §1.961-11(b).
The amount so allocated to a United States
shareholder is the sum of any portions of
such section 961(c) income assigned to
the United States shareholder under the
section 961 regulations (adjusted, if appli-
cable, for transfers of stock of the CFC,
as discussed in part III.G.2 of the Expla-
nation of Provisions), reduced by any loss
that the CFC is treated as recognizing
under section 961(c) with respect to the
United shareholder. See proposed §1.961-
11(c).
This loss under section 961(c) is equal
to the CFC’s positive section 961(c) basis
with respect to the United States share-
holder of section 961(c) ownership units
sold, exchanged, or disposed of by the
CFC in the taxable year, but only to the
extent the positive section 961(c) basis is
not applied to covered gain, and subject
to two limitations. See proposed §1.961-
11(e). Under the first limitation, positive
section 961(c) basis can create or increase
a loss under section 961(c) only if the
CFC recognizes, or would recognize, loss
on the sale, exchange, or other disposition
and a current deduction in respect of the
loss is, or would be, allowable. Under the
second limitation, positive section 961(c)
basis can create or increase a loss under
section 961(c) only to the extent of the
amount of section 961(c) income that
both is otherwise allocable to the United
States shareholder and relates to stock of
the same foreign corporation to which the
positive section 961(c) basis relates. This
is consistent with the same foreign cor-
poration limitation for applying positive
section 961(c) basis to covered gain (dis-
cussed in part III.E.3.i of the Explanation
of Provisions).
The United States shareholder includes
its allocated amount of section 961(c)
income in gross income in its taxable year
in which or with which the CFC’s taxable
year ends, and the allocated amount is
treated in the same manner as an amount
included in gross income under section
951(a)(1)(A) for purposes of applying

January 27, 2025 558 Bulletin No. 2025–5
sections 961 and 989(b). See proposed
§1.961-11(b). Thus, under section 961,
the inclusion increases basis in the United
States shareholder’s stock of the CFC
and any property units through which the
United States shareholder owns stock of
the CFC, consistent with how a subpart
F income inclusion increases basis. The
inclusion does not increase the CFC’s
PTEP, however, because the section
961(c) income does not give rise to E&P
at the level of the CFC, and thus there is no
amount related to the inclusion satisfying
section 959’s description of PTEP (E&P
attributable to amounts which are, or have
been, included in gross income under sec-
tion 951(a)). Moreover, increasing basis
but not PTEP helps to ensure that gain is
not recognized on subsequent distribu-
tions of PTEP the distribution of which
gave rise to the section 961(c) income.
2. Adjustments for Transfers of CFC
Stock
The proposed regulations provide
additional rules in allocating a CFC’s
section 961(c) income for a taxable year
if stock of the CFC is transferred during
the taxable year. See proposed §1.961-
11(d). These rules are necessary because
gain comprising section 961(c) income is
assigned to covered shareholders at the
time of the transaction giving rise to the
gain (for example, a distribution in excess
of basis) but, due to a transfer of stock of
the CFC, a covered shareholder to which
a portion of the gain is assigned may not
own stock of the CFC stock on the last rel-
evant day of the CFC’s taxable year.
One set of rules applies if the CFC is an
acquired foreign corporation in a general
successor transaction that occurs during
the taxable year. See proposed §1.961-
11(d)(1). In such a case, if the general suc-
cessor transaction occurs before the last
relevant day of the taxable year, then a pro
rata portion of section 961(c) income that
is recognized before the general successor
transaction and assigned to the transferor
covered shareholder is treated as instead
assigned to the successor covered share-
holder. Alternatively, if the general succes-
sor transaction occurs on or after the last
relevant day of the taxable year, then a pro
rata portion of section 961(c) income that
is recognized after the general successor
transaction and assigned to the successor
covered shareholder is treated as instead
assigned to the transferor covered share-
holder. In both cases, the pro rata portion
is determined based on the percentage of
the CFC’s section 961(c) basis that trans-
fers in the general successor transaction.
A second set of rules applies the princi-
ples of the first set of rules to transactions,
other than general successor transactions,
in which the CFC’s section 961(c) basis
is transferred to another covered share-
holder. See proposed §1.961-11(d)(2).
IV. Section 951 Regulations
A. Overview
The proposed regulations under section
951 provide two coordinated sets of rules
regarding the assignment and allocation
of covered items, which are gross income
of a foreign corporation consisting of cov-
ered distributions or covered gains. One
set applies at the foreign corporation-level
to assign covered items to covered share-
holders, with these rules identifying the
portions of covered items to which attri-
butes specific to a covered shareholder
(PTEP or section 961(c) basis) may be
applied to exclude such portions under
section 959(b) or 961(c). See proposed
§1.951-2 (discussed in part IV.B of the
Explanation of Provisions). The other set
applies at the shareholder-level to allocate
a CFC’s subpart F income to United States
shareholders, with these rules ensuring
that the CFC’s subpart F income attrib-
utable to covered items is allocated con-
sistently with how the covered items were
assigned under the first set of rules. See
proposed §1.951-1(c) (discussed in part
IV.C of the Explanation of Provisions).
B. Foreign corporation-level rules
for assigning covered items (proposed
§1.951-2)
1. In General
The proposed regulations assign por-
tions of a foreign corporation’s covered
items to covered shareholders that own
stock of the foreign corporation during
the foreign corporation’s taxable year in
which the covered items are received or
recognized by the foreign corporation. See
proposed §1.951-2(b). The assignments
are done on a covered-item-by-covered-
item basis, in each case first by assigning
the covered item under a general assign-
ment rule, and then by adjusting assign-
ments for any general successor transac-
tions.
2. General Assignment Rule
The general assignment rule assigns
a pro rata portion of a covered item of a
foreign corporation to each covered share-
holder that owns stock of the foreign cor-
poration on the last relevant day of the for-
eign corporation’s taxable year in which
the covered item is received or recognized
by the foreign corporation (that is, the last
day of such taxable year on which the for-
eign corporation is a CFC). See proposed
§1.951-2(c)(1); see also proposed §1.951-
2(h)(3)(i) (Example 1). The pro rata por-
tion is determined based on the percent-
age of the foreign corporation’s allocable
E&P for the taxable year that would be
allocated to the covered shareholder in
the hypothetical distribution described in
§1.951-1(e), applied by treating allocable
E&P as equal to the greater of the foreign
corporation’s E&P for the taxable year
and all covered items of the foreign cor-
poration. See proposed §1.951-2(d). By
applying §1.951-1(e) in this way, the gen-
eral assignment rule is consistent with the
principles of the pro rata share rules under
section 951(a). See §1.951-1(e).
3. Adjustments for General Successor
Transactions
A foreign corporation that is an acquired
foreign corporation in a general successor
transaction that occurs before the last rel-
evant day of a taxable year of the foreign
corporation may receive or recognize a
covered item before the general succes-
sor transaction (pre-transaction covered
item). In that case, the general succes-
sor transaction could preclude PTEP or
section 961(c) basis with respect to the
transferor covered shareholder from being
applied to the covered item (as a result of
reducing the allocation of the foreign cor-
poration’s E&P to the covered shareholder
in the hypothetical distribution described
in §1.951-1(e) and therefore reducing the
covered shareholder’s assignment under

Bulletin No. 2025–5 559 January 27, 2025
the general assignment rule). This could
inappropriately separate PTEP and basis
from the appropriate covered shareholder.
To illustrate this issue, assume US1 is
a covered shareholder and each of CFC1
and CFC2 is a CFC with a calendar tax-
able year. On January 1 of year 1, US1
owns all the stock of CFC1, and CFC1
owns all the stock of CFC2. On June 30
of year 1, CFC2 makes a $100x covered
distribution to CFC1, which immediately
makes a $100x covered distribution to
US1. On September 30 of year 1, US1 sells
all its stock of CFC1 to US2, an unrelated
covered shareholder in what constitutes
a general successor transaction. Without
regard to the covered distributions, CFC2
has $100x of PTEP with respect to US1
(relating to the prior year) and CFC1 has
$0 of PTEP.
Under the general assignment rule, the
entire $100x of the covered distribution
received by CFC1 would be assigned to
US2 (the covered shareholder owning all
the stock of CFC1 on December 31 of
year 1, the last relevant day of CFC1’s tax-
able year). As a result, no PTEP would be
applied to either covered distribution (and
each covered distribution would reduce
the distributing CFC’s section 959(c)(3)
E&P by $100x).
The proposed regulations include addi-
tional rules to address this issue. Specif-
ically, the additional rules increase the
portion of a pre-transaction covered item
that otherwise (without the additional
rules) would be assigned to the transferor
covered shareholder and correspondingly
decrease the portions of the item that oth-
erwise (without the additional rules) would
be assigned to connected covered share-
holders. See proposed §1.951-2(e); see
also proposed §1.951-2(h)(3)(ii) (Exam-
ple 2). A connected covered shareholder
means the successor covered shareholder
(or any other covered shareholder owning
the stock acquired in the general successor
transaction, in the case of back-to-back
general successor transactions, for exam-
ple) and any covered shareholder related
to such covered shareholder (determined
under section 267(b) or 707(b)). See pro-
posed §1.951-2(g).
Thus, in the example above, the addi-
tional rules assign all the covered distribu-
tion received by CFC1 to US1 (rather than
to US2, a connected covered shareholder),
and $100x of CFC2’s PTEP with respect
to US1 is applied to the covered distri-
bution (which, in turn, increases CFC1’s
PTEP with respect to US1 by $100x). As a
result, that covered distribution is treated
in the same manner as if the sale had not
occurred, and $100x of CFC1’s PTEP with
respect to US1 is then available to be (and
in fact is) distributed by CFC1 to US1.
If, instead, CFC1 did not make a covered
distribution before the sale, then $100x of
PTEP of CFC1 with respect to US1 would
transfer from US1 to US2 in the sale.
Subject to two limitations, the increase
to the transferor covered shareholder’s
assignment is equal to the additional
amount of the pre-transaction covered
item that would have been assigned to the
transferor covered shareholder if the date
on which the covered item is received or
recognized were the last relevant day and
the hypothetical distribution for purposes
of the general assignment rule were treated
as made immediately before the covered
item is received or recognized. See pro-
posed §1.951-2(e)(2)(i). In this way, the
transferor covered shareholder’s assign-
ment of a pre-transaction covered item is,
as illustrated above, generally consistent
with what would have been its assignment
if the general successor transaction and
any subsequent transactions that change
the ownership of stock of the acquired for-
eign corporation (for example, issuances
of stock by the acquired foreign corpora-
tion) had not occurred.
With the limitations, the increase
applies only to the extent it results in addi-
tional PTEP or section 961(c) basis with
respect to the transferor covered share-
holder being applied to the pre-transac-
tion covered item, and the increase cannot
exceed the portions of the covered item
that otherwise (without the additional
rules) would be assigned to connected
covered shareholders. See proposed
§1.951-2(e)(2)(iii). Thus, the additional
rules only shift an assignment of gross
income identified under the principles
of section 951(a) as allocable to covered
shareholders that bear a defined relation-
ship to the transferor covered shareholder
(through the general successor transaction
or relatedness). The Treasury Depart-
ment and the IRS are of the view that this
approach reasonably balances the policies
of the general assignment rule (following
the principles of section 951(a)) and the
additional rules (assuring the tax conse-
quences of PTEP and basis remain with
the appropriate covered shareholder).
The corresponding decrease applies,
first, to assignments of connected cov-
ered shareholders owning, on the last
relevant day, stock acquired in the gen-
eral successor transaction and, next, to
assignments of other connected covered
shareholders, in each case on a pro rata
basis. See proposed §1.951-2(e)(3) and
(4). With this ordering, assignments of
such other connected covered sharehold-
ers are decreased only if their ownership
of stock of the acquired foreign corpora-
tion increases after the general successor
transaction. The Treasury Department and
the IRS are of the view that applying the
additional rules to such other connected
covered shareholders maintains the integ-
rity of the additional rules (for example,
by preventing issuances to covered share-
holders related to the successor covered
shareholder from reducing the application
of the additional rules, as could otherwise
occur because the issuances would have
the effect of reducing the successor cov-
ered shareholder’s assignment under the
general assignment rule, which, in turn,
would limit the increase to the transferor
covered shareholder’s assignment).
Similar additional rules apply if a for-
eign corporation is an acquired foreign
corporation in a general successor trans-
action that occurs on or after the last rel-
evant day of a taxable year of the foreign
corporation and the foreign corporation
receives or recognizes a covered item after
the general successor transaction. See pro-
posed §1.951-2(e)(2)(ii). In these cases,
the additional rules increase the portion of
such an item that otherwise (without the
additional rules) would be assigned to the
successor covered shareholder, generally
by correspondingly decreasing the portion
of the item that otherwise (without the
additional rules) would be assigned to the
transferor covered shareholder. See also
proposed §1.951-2(h)(3)(iii) (Example 3).
C. Shareholder-level rules for allocating
subpart F income (proposed §1.951-1)
Under §1.951-1 (and as discussed in
part II.B.1 of the Background), a CFC’s
subpart F income is allocated to each

January 27, 2025 560 Bulletin No. 2025–5
United States shareholder of the CFC
based on a fraction, the numerator of
which is the United States shareholder’s
share of the CFC’s allocable E&P, and
denominator of which is the CFC’s alloca-
ble E&P. See §1.951-1(e). The amount of
subpart F income so allocated to a United
States shareholder is the United States
shareholder’s pro rata share of the foreign
corporation’s subpart F income, subject
to certain adjustments. See §1.951-1(b);
see also §1.951A-1(d) (determining pro
rata shares of tested income in the same
manner).
If a CFC’s subpart F income attribut-
able to covered items were allocated to
United States shareholders in the same
manner, the income might be allocated
differently than how the covered items
were assigned at the CFC-level as part of
determining the extent to which the cov-
ered items are PTEP excluded from the
CFC’s gross income under section 959(b)
or 961(c). See also proposed §1.951-2
(assignment rules, discussed in part IV.B
of the Explanation of Provisions). This
could cause the tax consequences of PTEP
or section 961(c) basis to not be specific
to the United States shareholder to which
such attribute relates, which would be
inconsistent with the shareholder-specific
nature of sections 959(b) and 961(c) and
could result in partial double taxation to
the United States shareholder.
For instance, assume two unrelated
United States shareholders are assigned
equal portions of covered gain recognized
by a CFC, with the half assigned to one
United States shareholder characterized
as PTEP excluded from the CFC’s gross
income under section 961(c) (because
there is positive section 961(c) basis with
respect to the United States shareholder at
least equal to such shareholder’s share of
the covered gain) and the half assigned to
the other United States shareholder char-
acterized as subpart F income (because
there is no section 961(c) basis with
respect to the other United States share-
holder and no exception from subpart F
income applies). In such a case, the Trea-
sury Department and the IRS are of the
view that allocating half of the subpart
F income from the covered gain to each
United States shareholder would be incon-
sistent with sections 951(a) and 961(c), as
doing so would cause the United States
shareholders to share both any benefits
of the section 961(c) exclusion and any
detriments of the inclusion in subpart F
income.
To address this, the proposed regu-
lations modify §1.951-1 so that a CFC’s
subpart F income attributable to covered
items is separately allocated to United
States shareholders. See proposed §1.951-
1(c)(1); see also proposed §1.951-1(h)(2)
(ii) (Example 1). Subpart F income attrib-
utable to covered items is determined on a
covered-item-by-covered-item basis, and
in each case is the portion of the covered
item that is included in the CFC’s for-
eign base company income (adjusted net
foreign base company income as defined
in §1.954-1(a)(5)) or insurance income
(adjusted net insurance income as defined
in §1.954-1(a)(6)). See proposed §1.951-
1(c)(2)(i). The proposed regulations facil-
itate these determinations by treating each
portion of gross foreign base company
income (as defined in §1.954-1(a)(2)) that
consists of a covered item as a single item
of income. See proposed §1.954-1(c)(1)
(iii)(C).
Subpart F income attributable to a cov-
ered item is allocated to United States
shareholders consistently with how the
covered item was assigned at the CFC-
level as part of determining the extent to
which the covered item is PTEP excluded
from the CFC’s gross income under sec-
tion 959(b) or 961(c). Specifically, subpart
F income attributable to a covered item
is allocated to each United States share-
holder based on a fraction, the numerator
of which is the portion of the covered item
that is both assigned at the CFC-level to
the United States shareholder and included
in the CFC’s adjusted gross foreign base
company income or adjusted gross insur-
ance company income (as defined in
§1.954-1(a)(3) or (6)), and the denomina-
tor of which is the portion of the covered
item that is included in adjusted gross
foreign base company income or adjusted
gross insurance company income. See
proposed §1.951-1(c)(2)(ii). In this way,
a United States shareholder’s pro rata
share of subpart F income attributable to a
covered item is the subpart F income that
results from the United States sharehold-
er’s assigned portion of the covered item.
Then, remaining subpart F income
(that is, subpart F income not attributable
to covered items) is allocated pro rata to
United States shareholders in accordance
with existing §1.951-1. Specifically, such
subpart F income is allocated to each
United States shareholder based on a frac-
tion, the numerator of which is the United
States shareholder’s share of the CFC’s
allocable E&P (determined under §1.951-
1(e)), and the denominator of which is
the CFC’s allocable E&P. See proposed
§1.951-1(c)(2)(iii).
Thus, under the proposed regulations,
the effect of sections 959(b) and 961(c) on
allocations under section 951(a) is limited
to ensuring that any benefits of the applica-
tion of the relevant exclusion to a portion
of a covered item, or any detriments of
an inclusion of such portion in subpart F
income, generally inure only to the United
States shareholder to which the portion was
assigned in determining the extent to which
the portion is excludable PTEP. Accord-
ingly, under the proposed regulations, sec-
tions 959(b) and 961(c) do not affect the
allocation of subpart F income attributable
to gross income not eligible for exclusion
under those sections. Similarly, the pro-
posed regulations do not affect the alloca-
tion of tested items under section 951A.
See proposed §1.951A-1(d) (pro rata shares
of tested income, tested loss, and qualified
business asset investment are determined
in the same manner as the determination
of pro rata shares of subpart F income not
attributable to covered items); see also
§1.951A-1(d)(5) and (6) (pro rata shares of
tested interest expense and tested interest
income determined by reference to pro rata
shares of tested income and tested loss, as
applicable).
An alternative approach that treated the
allocation of subpart F income attributable
to covered items as altering the manner in
which other income of the CFC is allo-
cated would require broader revisions to
§1.951-1. Under this type of approach,
a CFC would be treated as having four
types of allocable income, which together
would equal allocable E&P: subpart F
income, tested income, excludable PTEP
income (that is, PTEP that is distributed
to, or results from section 961(c) basis
of, the CFC and is excluded from the
CFC’s gross income under section 959(b)
or 961(c), reduced by current year taxes
allocated and apportioned thereto), and
residual income (equal to the excess of

Bulletin No. 2025–5 561 January 27, 2025
the CFC’s E&P for the taxable year over
the sum of the other types of income). A
United States shareholder’s share of the
CFC’s allocable E&P would be treated as
first relating to income attributable to cov-
ered items, with any remaining portion of
the share treated as relating on a pro rata
basis to all other income. However, this
approach would generally produce the
same results as the approach in the pro-
posed regulations, except in cases where
a deductible item (other than current year
taxes) disproportionately reduces a cov-
ered item (because some, but not all, of the
covered item is excludable PTEP and thus
the deduction reduces only the non-PTEP
portion of the covered item). Moreover,
the Treasury Department and the IRS are
of the view that sections 959(b) and 961(c)
do not require such an approach.
Lastly, the Treasury Department and
the IRS request comments on whether
additional rules are warranted for allocat-
ing tested items in cases where a covered
item is excluded from subpart F income
by reason of section 954(b)(3)(A)’s de
minimis rule and may consequently give
rise to tested income (which, under the
proposed regulations, would be allocated
under the rules for subpart F income not
attributable to covered items).
V. Section 986(c) Regulations (proposed
§1.986(c)-1)
A. Overview
The proposed regulations under sec-
tion 986(c) describe the circumstances in
which a covered shareholder recognizes
foreign currency gain or loss with respect
to PTEP and provide rules for determining
the amount of gain or loss that is recog-
nized. These rules are issued pursuant to
the express delegations of authority under
sections 986(c)(2), 965(o), and 989(c).
See also part VIII.F of the Explanation
of Provisions (proposing to withdraw or
studying whether to withdraw provisions
regarding foreign currency gain or loss in
§§1.985-5 and 1.985-7).
B. Circumstances in which foreign
currency gain or loss is recognized
Under the proposed regulations, a cov-
ered shareholder recognizes foreign cur-
rency gain or loss under section 986(c) with
respect to PTEP in two circumstances. See
proposed §1.986(c)-1(b)(1). The first cir-
cumstance is when PTEP is distributed to
the covered shareholder (including PTEP
treated as received through a partnership).
The second circumstance is when PTEP
ceases to be with respect to the covered
shareholder (for example, as a result
of being transferred to another covered
shareholder in a general successor trans-
action or eliminated as a consequence of
an election under section 338(g)). These
rules, which are generally consistent with
the 1988 notice, provide parity between
distributions of PTEP and dispositions
of foreign stock that in each case present
the last opportunity for the covered share-
holder to recognize foreign currency gain
or loss with respect to PTEP.
The proposed regulations provide that
no foreign currency gain or loss is recog-
nized in a distribution of PTEP to a foreign
corporation. See proposed §1.986(c)-1(c).
In these cases, the Treasury Department
and the IRS are of the view that preserv-
ing the dollar basis of the PTEP (through
adjustments to shareholder-level dollar
basis pools) is the appropriate application
of section 986(c) at the time of the distri-
bution, with such dollar basis then deter-
mining foreign currency gain or loss when
the PTEP is subsequently distributed to
the covered shareholder.
Foreign currency gain or loss is also
generally not recognized (and dollar basis
is preserved) when PTEP transfers in a
transaction other than a general succes-
sor transaction (for example, a transfer
of stock of a CFC by a domestic corpo-
ration to a non-consolidated domestic
corporation in a section 351 transaction).
See proposed §1.986(c)-1(b)(5); but see
§1.367(b)-2(j)(2)(i). This rule limits the
ability to recognize foreign currency gain
or loss in nonrecognition transactions or
other transactions where gain or loss is
generally not recognized. Comments are
requested on this rule and, more gener-
ally, whether foreign currency gain or
loss should not be recognized and thus
deferred in sales or other transactions
involving related parties.
Foreign currency gain or loss recog-
nized with respect to PTEP is recognized
concurrently with the transaction requir-
ing recognition of such gain or loss. See
proposed §1.986(c)-1(b)(4). Additionally,
the foreign currency gain or loss is treated
as ordinary income or loss from the same
source and relating to the same section
904 category as the income inclusion that
gave rise to the PTEP (consistent with
the rule in §1.904-4(p) for distributions
of PTEP). See also proposed §1.961-5(b)
(adjusting basis for foreign currency gain
or loss recognized in a transaction other
than a distribution, as discussed in part
III.C.3 of this Explanation of Provisions).
C. Determining foreign currency gain or
loss
Foreign currency gain or loss with
respect to PTEP is determined by translat-
ing the PTEP (which is denominated in the
foreign corporation’s functional currency)
into U.S. dollars at the spot rate on the day
of the transaction requiring recognition of
such gain or loss and subtracting from that
U.S. dollar amount the dollar basis of the
PTEP. See proposed §1.986(c)-1(b)(2);
see also proposed §1.959-10(c)(2) (Exam-
ple 2). A positive difference is foreign cur-
rency gain and the absolute value of a neg-
ative difference is foreign currency loss.
As a result, foreign currency gain or
loss with respect to PTEP is based on
movements in exchange rates between the
time of the income inclusion giving rise
to the PTEP (translated pursuant to the
appropriate exchange rate) or, if applica-
ble, the most recent prior transfer of the
PTEP (treated as the deemed distribution
described in section 986(c)(1)), and the
date of the transaction requiring recog-
nition of such gain or loss (treated as the
actual distribution described in section
986(c)(1)).
D. Limitations
Consistent with existing §1.986(c)-1
(discussed in part II.C.3 of the Back-
ground of this preamble), only a portion of
foreign currency gain or loss with respect
to PTEP resulting from section 965(a) is
recognized, based on the section 965(c)
deduction percentage with respect to the
PTEP, and no foreign currency gain or
loss is recognized with respect to PTEP
resulting from section 965(b). See pro-
posed §1.986(c)-1(b)(3)(i) and (ii). Fur-
ther, no foreign currency gain or loss is

January 27, 2025 562 Bulletin No. 2025–5
recognized with respect to taxable section
962 PTEP because such PTEP is included
in gross income pursuant to section 962(d)
and, therefore, the foreign currency gain
or loss is accounted for in gross income.
See proposed §1.986(c)-1(b)(3)(iii).
VI. Section 960 Regulations (proposed
§§1.960-1 and1.960-3)
Current §§1.960-1 and 1.960-2 provide
rules for computing the amount of foreign
income taxes deemed paid under section
960(a) and (d), and current §§1.960-1 and
1.960-3 provide rules for computing the
amount of foreign income taxes deemed
paid under section 960(b). The PTEP
accounting rules under proposed §1.959-2
replace the rules in current §1.960-3 that
describe a CFC’s PTEP, and the rules allo-
cating and apportioning current year taxes
to PTEP in proposed §1.959-6 replace the
rules in current §1.960-1 for purposes of
applying section 960(b). Other rules relat-
ing to PTEP that are included in current
§§1.960-1 and 1.960-3 have also been
replaced by rules in the proposed regu-
lations under section 959 to ensure con-
formity and proper tracking of amounts
described in sections 959 and 960(b). Cur-
rent §§1.960-1 through 1.960-3, as modi-
fied by proposed §§1.960-1 and 1.960-3,
will generally continue to describe how
deemed paid taxes are computed under
section 960, and incorporate updates to
coordinate those rules with the proposed
regulations under sections 959 and 961.
Proposed §1.960-1 limits the rules in
§1.960-1 to the computation of deemed
paid taxes under section 960(a) and (d). To
this end, proposed §1.960-1 treats a CFC’s
PTEP arising by reason of a PTEP realiza-
tion event during its taxable year as gross
income in a residual income group, rather
than as gross income in a PTEP group. See
proposed §1.960-1(d)(2)(ii)(D). However,
proposed §1.959-6 provides specific rules
for allocating and apportioning current
year taxes arising by reason of a PTEP
realization event that occurred during a
taxable year to the statutory groupings of
PTEP of a foreign corporation. Addition-
ally, proposed §1.959-2 generally pro-
vides rules for tracking the foreign income
taxes associated with PTEP. See parts II.F
and II.B of the Explanation of Provisions
for a discussion of proposed §§1.959-6
and 1.959-2, respectively. Finally, pro-
posed §1.960-1(d)(3)(ii)(B) (consistent
with current §1.960-1(d)(3)(ii)(B)) pro-
vides specific rules for assigning foreign
gross income to the statutory and residual
groupings of income of a CFC when the
CFC pays or accrues current year taxes
with respect to a PTEP realization event
that occurs in a different U.S. taxable year.
Proposed §1.960-1 also includes changes
to current §1.960-1 to conform with the
approach and terminology used in the pro-
posed regulations under sections 959 and
961 and in proposed §1.960-3.
Proposed §1.960-3 provides rules for
determining foreign income taxes that
are deemed paid under section 960(b)
with respect to the receipt of a distribu-
tion of PTEP, primarily by reference to
PTEP tax pools. In particular, the foreign
income taxes that are properly attributable
to a distribution of PTEP are the foreign
income taxes removed from the corporate
PTEP tax pools of the distributing CFC
under proposed §1.959-2(d)(2) and the
PTEP tax pools of the covered shareholder
under §1.959-3(e)(1)(iii) (that is, the for-
eign income taxes associated with the dis-
tributed PTEP under proposed §1.959-4),
but only to the extent the foreign income
taxes are in the creditable PTEP tax group
immediately before the distribution.
These rules are issued pursuant to the
express delegation of authority under sec-
tion 960(f).
VII. Section 1502 Regulations (proposed
§1.1502-59)
The proposed regulations provide rules
specific to members of a consolidated
group. See proposed §1.1502-59. These
rules are issued pursuant to the express
delegation of authority under section
1502.
The proposed regulations provide that
members of a consolidated group are
treated as a single covered shareholder
for purposes of section 959 and the regu-
lations thereunder. See proposed §1.1502-
59(c). This approach is consistent with
guidance on the application of other inter-
national tax rules to consolidated groups
(for example, §§1.1502-50, 1.1502-51,
and 1.1502-80(j)).
Consequently, a consolidated group
maintains only a single set of annual
PTEP accounts, dollar basis pools, and
PTEP tax pools with respect to a foreign
corporation whose stock is owned by one
or more members. These annual PTEP
accounts track the foreign corporation’s
PTEP with respect to the group and thus,
for example, determine whether a covered
distribution received by any member of
the group from the foreign corporation is
a distribution of PTEP.
This application of single-entity treat-
ment is important to ensure the proper
reflection of the consolidated group’s
income. Without the application of sin-
gle-entity treatment for purposes of share-
holder-level PTEP accounting, a consoli-
dated group effectively could elect in or
out of PTEP distributions by changing
the structure through which it owns stock
of foreign corporations. For example,
assume that a member of a consolidated
group (M1) owns all the stock of CFC and
has a subpart F income inclusion of $100x
in year 1 with respect to CFC. Absent
single-entity treatment, M1, and not the
consolidated group, would have $100x of
PTEP in its annual PTEP accounts with
respect to CFC. In year 2, the first $100x
of covered distributions from CFC would
be characterized as distributions of PTEP.
However, if another member (M2) made
a contribution to CFC at the beginning of
year 2 in exchange for 50% of the stock
of CFC, only the first $100x of covered
distributions to M1, and no covered dis-
tribution to M2, would be characterized as
a distribution of PTEP. Therefore, if CFC
made a pro rata covered distribution of
$100x, only $50x would be characterized
as PTEP. Applying single-entity treatment
thus ensures that changes in the location
of ownership of foreign stock within a
consolidated group do not change the
group’s characterization of a distribution
by the foreign corporation.
In contrast, the proposed regulations
incorporate a mix of single- and sepa-
rate-entity treatment for purposes of sec-
tion 961 in order to prevent basis shifting
between members. See proposed §1.1502-
59(d); see also part III.C.2.ii of the Expla-
nation of Provisions (describing how,
outside of the consolidated group context,
basis cannot be shared among section
961(a) ownership units even if owned by
the same covered shareholder). The pro-
posed regulations respect each member’s

Bulletin No. 2025–5 563 January 27, 2025
separate basis in its directly held property
units, and adjustments to the basis of sec-
tion 961(a) ownership units are thus com-
puted on a separate-entity basis. Conse-
quently, a distribution of PTEP may result
in the recognition of gain under section
961(b)(2) if the distributee member has
insufficient basis in a section 961(a) own-
ership unit. The Treasury Department and
the IRS are of the view that an approach
like that in the 2006 proposed regula-
tions, in which one member may access
basis belonging to another member, would
create opportunities for inappropriate tax
planning by shifting basis among mem-
bers in a way that does not reflect the eco-
nomics of the members’ investments.
For indirectly held property units (for
example, lower-tier CFC stock), a con-
solidated group is treated as a single cov-
ered shareholder. For example, a partner-
ship has only a single derived basis in a
derivative ownership unit with respect to
a group, and, similarly, a CFC has only
a single section 961(c) basis in a section
961(c) ownership unit with respect to a
group and increases to derived basis and
section 961(c) basis generally are com-
puted on a single-entity basis. However,
the proposed regulations also include
rules to prevent basis shifting among
members with respect to these property
units, because member shareholders may
have different bases in these property units
under other rules (for example, under sec-
tion 743(b)). When computing reductions
in basis to derivative ownership units or
section 961(c) ownership units, the pro-
posed rules provide that the group basis
of the relevant property unit is allocated
to the member shareholders, the basis
reduction is computed separately for each
member (and may trigger gain if there is
insufficient basis), and then the basis is
recombined.
The proposed regulations also pro-
vide rules for corporations that become
or cease to be members of a consolidated
group. See proposed §1.1502-59(e). These
rules generally implement single-entity
treatment by mirroring the principles that
would apply if members of the group
were divisions of a single corporation. For
example, if a shareholder of a foreign cor-
poration joins a consolidated group, solely
for purposes of applying sections 959 and
961, the transaction is treated as if the
group directly acquired the stock in the
foreign corporation. Similarly, if a share-
holder of a foreign corporation ceases to
be a member of a consolidated group,
solely for purposes of applying sections
959 and 961, the transaction is treated as
if the group directly disposed of the stock
in the foreign corporation.
When the proposed regulations are
finalized, the Treasury Department and
the IRS intend to conform the terminol-
ogy in §1.1502-80(j) (treating a consol-
idated group as a single United States
shareholder for purposes of applying sec-
tion 951(a)(2)(B) to distributions of PTEP
from one CFC to another) to match these
regulations, and may relocate that rule to
§1.1502-59.
VIII. Miscellaneous Provisions
A. S corporations
Consistent with section 1373(a), the
proposed regulations generally treat an
S corporation in the same manner as a
domestic partnership and thus as not
a covered shareholder. See proposed
§§1.959-1(c)(1) and 1.961-1(c)(1). When
this treatment applies, each owner of the
S corporation maintains annual PTEP
accounts, dollar basis pools, and PTEP
tax pools (as applicable) with respect
to a foreign corporation in which the S
corporation owns stock (rather than the
S corporation itself). Also, like domestic
partnerships, an S corporation is provided
derived basis in a derivative ownership
unit directly owned by the S corporation.
Notwithstanding the general rule that
an S corporation is not treated as a covered
shareholder, an exception provides that an
S corporation is a covered shareholder for
any taxable year of the S corporation for
which the S corporation is treated as an
entity separate from its owners in deter-
mining stock ownership for purposes of
section 951(a) or 951A(a). See proposed
§§1.959-11(d) and 1.961-13(c); see also
part IX.B.5 of the Explanation of Provi-
sions (describing transition rules applica-
ble to domestic partnerships, including S
corporations). Thus, the exception applies
if the S corporation has made an election
described in §1.958-1(e), as proposed to
be amended at 87 FR 3890 (Jan. 25, 2022),
or section 3.02 of Notice 2020-69, 2020-
39 I.R.B. 604. Accordingly, an S corpora-
tion is a covered shareholder if such elec-
tion is in effect and the S corporation thus
includes amounts in gross income under
sections 951(a) and 951A(a).
Where the exception applies to an S
corporation (and thus both the S corpo-
ration and its owners are covered share-
holders), rules relating to distributions
of PTEP, derived basis (of a partnership
that is owned by the S corporation), and
section 961(c) basis (of a CFC that is
owned by the S corporation) apply to the
S corporation in its capacity as a covered
shareholder before those rules apply to an
owner of the S corporation. See proposed
§§1.959-11(d) and 1.961-13(c). For exam-
ple, a covered distribution made to the S
corporation is first a distribution of the
distributing foreign corporation’s PTEP
with respect to the S corporation, and
then, to the extent remaining, a distribu-
tion of the distributing foreign corpora-
tion’s PTEP with respect to owners of the
S corporation.
B. Passive foreign investment companies
The proposed regulations do not
address passive foreign investment com-
panies (PFICs) (as defined in 1297(a)) or
a PFIC’s earnings and profits described in
section 1293(c). The Treasury Department
and the IRS are studying issues involving
PFICs, including coordination of sections
959 and 1293(c), and may address these
issues in future guidance.
C. Foreign trusts and foreign estates
For purposes of determining owner-
ship under section 958(a)(2), stock owned
by a foreign trust (within the meaning of
section 7701(a)(31)(B)) described in sec-
tions 671 through 679 (relating to grantors
and others treated as substantial owners)
is treated as being owned proportionately
by its grantors or other persons treated as
owners under sections 671 through 679 of
any portion of the trust that includes the
stock. See §1.958-1(b). Similarly, stock
owned by any other foreign trust (not
described in sections 671 through 679)
or a foreign estate (within the meaning of
section 7701(a)(31)(A)) is treated as being
owned proportionately by its beneficia-
ries. See id. Consistent with section 961(a)

January 27, 2025 564 Bulletin No. 2025–5
and (b), which provide for adjustments to
the basis of property of a United States
shareholder by reason of which the share-
holder is considered under section 958(a)
(2) as owning stock of a CFC, the current
regulations under section 961 provide for
adjustments to a United States sharehold-
er’s basis in a beneficial interest in a for-
eign trust or foreign estate through which
the United States shareholder owns stock
of a CFC. See §§1.961-1 and 1.961-2.
The proposed regulations, however,
do not address the operation of sections
959 and 961 with respect to foreign trusts
(thus, for example, if a covered share-
holder owns stock of a CFC through a
foreign trust, the proposed regulations
do not address the treatment of a cov-
ered distribution received by the foreign
trust from the CFC or basis in the covered
shareholder’s interest in the foreign trust
or the trust’s stock of the CFC). The Trea-
sury Department and the IRS are studying
the manner in which section 959 should
be applied in these structures to ensure
that PTEP distributed to a covered share-
holder through a foreign trust is properly
excluded from the covered shareholder’s
gross income. Comments are requested
on the treatment of foreign trusts under
section 959, including whether treatment
similar to a foreign corporation or part-
nership is appropriate or would impose
significant burdens on such trusts, their
owners, or beneficiaries. Comments are
also requested on the appropriateness
and effect of providing basis adjustments
under section 961 in structures involving
these entities as well as the interaction
between these provisions and the rules in
section 643(i) that treat certain loans from
foreign trusts as distributions.
Comments are likewise requested on
how foreign estates, which are also not
addressed in the proposed regulations,
should be treated for purposes of sections
959 and 961.
D. Section 962
Consistent with section 962(d), the
proposed regulations do not exclude tax-
able section 962 PTEP that is distributed
to a covered shareholder from the share-
holder’s gross income. See proposed
§1.959-4(b)(1). Similarly, consistent with
section 961(a) and (b), the proposed regu-
lations do not increase or reduce adjusted
basis or derived basis for taxable section
962 PTEP. See proposed §§1.961-3(f)(2)
and 1.961-4(b)(1), (c)(1). However, the
proposed regulations apply the section
959(b) exclusion to, and provide section
961(c) basis for, taxable section 962 PTEP
to prevent further tax on such PTEP in dis-
tributions to, or dispositions of stock by,
a CFC. See proposed §§1.959-4(b)(2) and
1.961-3. Thus, taxable section 962 PTEP
is generally subject to an additional level
of taxation only in distributions to a cov-
ered shareholder or dispositions of section
961(a) ownership units or derivative own-
ership units.
Under the proposed regulations, PTEP
retains its character as taxable section 962
PTEP in a general successor transaction
and thus may transfer from a transferor
covered shareholder to a successor cov-
ered shareholder. Likewise, taxable sec-
tion 962 PTEP may be reflected in PTEP
resulting from section 961(c) basis. In this
way, the proposed regulations are consis-
tent with the requirement in section 962(d)
that taxable section 962 PTEP be included
in gross income when distributed because
it has not been sufficiently taxed.
Further, the proposed regulations
remove §1.962-3 because the proposed
regulations generally incorporate the rules
in §1.962-3. See, for example, proposed
§1.959-4. The proposed regulations, how-
ever, do not incorporate §1.962-3(b)(3)
(iv), which describes the application of a
foreign corporation’s E&P deficit to tax-
able section 962 PTEP, and §1.962-3(b)
(4), which provides that §1.962-3 does
not apply to a distribution of section 962
PTEP treated as in exchange for stock.
The Treasury Department and the IRS
request comments on these rules, includ-
ing whether they continue to be needed
and, if so, their interaction with these reg-
ulations.
E. Currency translation
In applying the proposed regulations
in certain cases, an amount must be trans-
lated into a currency different than the
currency in which it is denominated. For
example, in a distribution of PTEP to a
foreign corporation, the PTEP must be
translated into the functional currency of
the recipient foreign corporation (if the
recipient foreign corporation and distrib-
uting foreign corporation have different
functional currencies) so that the PTEP
can be added to annual PTEP accounts
with respect to the recipient foreign cor-
poration (which are maintained in the
recipient foreign corporation’s functional
currency). As an additional example, in
applying section 961(c) basis to a CFC’s
covered gain, the section 961(c) basis
(which is maintained is U.S. dollars) must
be translated into the CFC’s functional
currency if the CFC does not use the U.S.
dollar as its functional currency. Accord-
ingly, the proposed regulations provide
currency translation rules where relevant.
See, for example, proposed §§1.951-2(f),
1.959-3(c)(5), 1.959-6(d)(2), and 1.961-
9(e)(3). The Treasury Department and the
IRS welcome comments on these rules.
F. Section 985
When a CFC changes its functional
currency to the U.S. dollar, §1.985-5(e)
(2) requires a United States shareholder
of that CFC to recognize foreign currency
gain or loss with respect to PTEP under
section 986(c) as if all of the PTEP were
distributed to the United States share-
holder immediately before the change. No
rules currently require recognition of for-
eign currency gain or loss with respect to
PTEP when a CFC with a functional cur-
rency other than the U.S. dollar distributes
PTEP to a CFC with a functional currency
that is the U.S. dollar, nor does §1.985-
5(e)(2) apply when a CFC changes its
functional currency to a currency other
than the U.S. dollar. As a result, current
law requires recognizing foreign currency
gain or loss on PTEP deemed distributed
to a CFC immediately before it converts
its functional currency to the U.S. dollar
but not immediately after.
As noted in part V.A of this Explana-
tion of provisions, the rules in the pro-
posed regulations for recognizing foreign
currency gain or loss with respect to PTEP
require recognizing such gain or loss in
distributions of PTEP to a covered share-
holder and dispositions of foreign stock
because those circumstances present the
last opportunity for the covered share-
holder to recognize foreign currency gain
or loss with respect to the PTEP. In the
case of a distribution of PTEP to a foreign

Bulletin No. 2025–5 565 January 27, 2025
corporation, the dollar basis is preserved,
which in turn preserves the appropriate
application of section 986(c) until one of
the circumstances noted in the previous
sentence occurs. The Treasury Depart-
ment and the IRS are of the view that
the appropriate time to recognize foreign
currency gain or loss should not depend
on whether and when a CFC changes its
functional currency, nor on the functional
currencies involved. The proposed regu-
lations provide a comprehensive system
for determining and tracking the dollar
basis of PTEP (through dollar basis pools,
PTEP groups, and annual PTEP accounts),
as well as for using these accounts to
determine foreign currency gain or loss
when appropriate. To the extent the rule
in §1.985-5(e)(2) was supported by con-
cerns that having a U.S. dollar basis in
PTEP that are measured in the U.S. dollar
might create administrative difficulties or
lead to the undercounting of foreign cur-
rency gain or loss, the Treasury Depart-
ment and the IRS are of the view that the
comprehensive system promulgated in
the proposed regulations alleviates that
concern. See, for example, part V of this
Explanation of Provisions for rules deter-
mining currency gain and loss. Finally,
the Treasury Department and the IRS are
also concerned that the rule in §1.985-5(e)
(2) may permit taxpayers to inappropri-
ately accelerate foreign currency loss by
deeming a distribution of such PTEP to a
CFC that then changes its functional cur-
rency to the U.S. dollar. Accordingly, the
proposed regulations withdraw the rule in
§1.985-5(e)(2).
For similar reasons, the Treasury
Department and the IRS are studying
whether §1.985-7(c)(3), which requires
certain adjustments by a United States
shareholder related to foreign currency
gain or loss with respect to PTEP in cases
involving dollar approximate separate
transactions method of accounting, should
be modified.
G. Qualified deficit transition rule for
domestic partnerships (including S
corporations)
Under the qualified deficit rule of sec-
tion 952(c)(1)(B), a United States share-
holder’s pro rata share of any prior-year
E&P deficit of a CFC may generally be
used to reduce the United States share-
holder’s subpart F income inclusion with
respect to the CFC to the extent such
deficit is attributable to the same quali-
fied activity as the activity that gives rise
to the current year subpart F income of
the CFC (and has not already been taken
into account under section 952(c)(1)(B)).
For this purpose, the United States share-
holder’s pro rata share of any prior-year
E&P deficit is the lesser of the amount
determined (under rules similar to section
951(a)(2)) at the close of the current tax-
able year or at the close of the taxable year
in which the deficit arose. Section 952(c)
(1)(B)(iv).
As described in part III.A of the Back-
ground, because a domestic partnership
was previously treated as an entity for
purposes of including amounts in income
under section 951(a)(1)(A) with respect
to CFCs it owned, the domestic partner-
ship would have been entitled to utilize
those CFCs’ qualified deficits to reduce
its subpart F income inclusions. However,
under §1.958-1(d), a domestic partnership
is now generally treated as an aggregate
of its partners for purposes of determin-
ing which United States shareholder has
a subpart F income inclusion with respect
to a CFC. To accommodate this aggre-
gate approach for domestic partnerships,
and like the transition rule for partner-
ship-level accounts described in proposed
§1.959-11(e) and part IX.B.5 of the Expla-
nation of Provisions, the proposed regula-
tions provide a transition rule that ensures
a prior-year E&P deficit of a CFC is taken
into account by a domestic partnership’s
United States shareholder partners for tax-
able years of the CFC to which §1.958-
1(d) applies to the domestic partnership.
See proposed §1.952-1(c)(5).
Under the transition rule, a United
States shareholder that owns stock of a
CFC through an interest in a domestic
partnership on the transition date (which is
the last day of the first taxable year of the
CFC to which §1.958-1(d) applies to the
domestic partnership) takes into account
its assigned portion of any prior-year E&P
deficit of the CFC that arose before the
application of §1.958-1(d) in determining
the shareholder’s pro rata share of a pri-
or-year E&P deficit under section 952(c)
(1)(B)(iv)(II). See proposed §1.952-1(c)
(5)(i). The United States shareholder’s
assigned portion is determined based on
liquidation rights as of the transition date.
See proposed §1.952-1(c)(5)(ii); see also
part IX.B.5 of the Explanation of Provi-
sions (discussing a similar concept used
in pushing out annual PTEP accounts,
dollar basis pools, and PTEP tax pools to
partners). The United States shareholder’s
pro rata share of the prior-year E&P defi-
cit as of the close of the taxable year in
which section 952(c)(1)(B) would apply
to reduce its subpart F income inclusion
is determined by reference to the United
States shareholder’s ownership of the
stock of the CFC at such time.
As with the proposed regulations gen-
erally, an S corporation is treated in the
same manner as a domestic partnership
for purposes of applying this transition
rule. See section 1373(a) and part VIII.A
of the Explanation of Provisions. How-
ever, unlike domestic partnerships, an S
corporation may have elected to defer the
application of §1.958-1(d) and maintain
entity treatment for purposes of section
951(a)(1)(A), in which case the transition
rule may not apply until such election
ceases to have effect. See part VIII.A of
the Explanation of Provisions.
The transition rule generally applies
with respect to taxable years of foreign
corporations beginning on or after the date
the proposed regulations are finalized in a
Treasury Decision, although taxpayers are
permitted to apply the transition rule to
earlier taxable years if certain consistency
requirements are satisfied and the period
of limitations on assessment is open for
those taxable years under section 6501.
See proposed §1.952-1(c)(5)(iii).
H. Anti-avoidance rules
The proposed regulations include
anti-avoidance rules. See proposed
§§1.959-1(d) and 1.961-1(d). Under these
rules, appropriate adjustments are made if
a transaction, series of transactions, plan,
or arrangement is engaged in with a prin-
cipal purpose of avoiding the purposes of
section 959 or 961 or the regulations there-
under. These rules are intended to address
transactions that are designed to produce
double-nontaxation by, for instance, con-
verting distributions of E&P from PTEP
(which generally may be received tax-
free under section 959 but requires a basis

January 27, 2025 566 Bulletin No. 2025–5
reduction under section 961) to section
959(c)(3) E&P (which may be received
tax-free under other provisions and may
not require a basis reduction) or vice versa.
For example, assume a corporate cov-
ered shareholder owns all the stock of a
foreign corporation and the foreign corpo-
ration has PTEP with respect to the corpo-
rate covered shareholder. If an individual
who would have purchased newly issued
shares in the foreign corporation instead
purchases shares from the corporate cov-
ered shareholder with a principal purpose
of succeeding to a portion of the foreign
corporation’s PTEP with respect to the
corporate covered shareholder’s PTEP
and with the expectation that at some point
in the future the corporate covered share-
holder will contribute the proceeds to the
foreign corporation (thus achieving the
individual’s intended effect of acquiring
newly issued shares, while also transfer-
ring the PTEP from the corporate covered
shareholder to the individual), appropriate
adjustments may be made to disregard the
transfer of PTEP. The result would be the
same if the transaction was entered into
with a principal purpose of reducing the
foreign corporation’s PTEP with respect
to the corporate covered shareholder.
I. Clarifications and other matters
The proposed regulations clarify that a
distribution of PTEP does not increase the
E&P of a recipient domestic corporation
(because the E&P of a domestic corpora-
tion is increased for, and at the time of, an
inclusion giving rise to PTEP, and distri-
butions to which sections 959 and 961(b)
apply are described in section 312(f)(2)).
See proposed §§1.312-6(f) and 1.312-
8(c). No inference is intended as to the
treatment under these provisions of other
amounts a domestic corporation includes
in its gross income as a result of ownership
of stock in a foreign corporation, such as
inclusions with respect to a PFIC, and the
Treasury Department and IRS continue
to consider these issues. Additionally, the
proposed regulations clarify that, solely
for purposes of the limitation in section
952(c)(1)(A), PTEP received by, or result-
ing from section 961(c) basis of, a CFC
is not included in the CFC’s current year
E&P. See proposed §1.952-1(c)(4). This
treatment is consistent with §1.952-1(c)
(3) (Example 1) and coordinates sections
952(c), 959(b), and 961(c) so that PTEP
does not have the effect of increasing sub-
part F income.
The proposed regulations also pro-
vide that, for purposes of section 163(j),
PTEP received by, or resulting from sec-
tion 961(c) basis of, a foreign corpora-
tion does not give rise to tentative taxable
income (because the income that gave rise
to the PTEP has already been taken into
account), and this rule is issued under the
express delegation of authority in section
163(j)(8)(B). See proposed §1.163(j)-7(g)
(2). Moreover, the proposed regulations
revise §1.951-1(a)(1) to reflect the repeal
of provisions relating to foreign base com-
pany shipping income and foreign invest-
ments in less developed countries and
move the examples in §1.951-1(e)(7) to a
separate example paragraph.
The proposed regulations modify
§1.905-3(b)(2)(ii) to clarify that if a for-
eign tax redetermination impacts the char-
acterization or amount of a distribution
or inclusion in any other year, that year is
an affected year for which a redetermina-
tion of U.S. tax is required. This is a con-
forming change relating to the timing and
ordering rules in the proposed regulations,
which could, in certain situations, result in
a foreign tax redetermination impacting
the characterization or amount of a dis-
tribution or inclusion not only in a subse-
quent year, but in a prior year.
IX. Applicability Dates and Transition
Rules
A. Applicability dates
1. General Applicability Date and
Application to 2019 Notice Years
The proposed regulations would gen-
erally apply to taxable years of foreign
corporations beginning on or after the
date the proposed regulations are final-
ized in a Treasury Decision and to taxable
years of persons for which such taxable
years of foreign corporations are rele-
vant (general applicability date). See, for
example, proposed §§1.951-1(i), 1.951-
2(i), 1.959-12(b), 1.960-7(c), 1.961-14(b),
1.986(c)-1(e), and 1.1502-59(g).
Notwithstanding the general applicabil-
ity date, portions of the proposed section
959 regulations relating to rules described
in the 2019 notice would apply before the
general applicability date to taxable years
of United States shareholders (and succes-
sors in interest) ending after December 14,
2018, and taxable years of foreign corpo-
rations ending with or within those taxable
years, as described in the 2019 notice (2019
notice years). See proposed §1.959-12(c).
For this purpose, taxpayers are required
to apply to 2019 notice years the rules in
proposed §§1.959-1(c) (treatment of S cor-
porations), 1.959-2 (accounting of PTEP),
1.959-3 (adjustments to shareholder-level
accounts and, consequently, foreign-cor-
poration level accounts), 1.959-4(e) and
1.959-5(d) (allocation of distributions and
section 956 amounts), and the relevant
definitions in 1.959-1(b) (collectively, the
2019 notice provisions). Consistent with
the 2019 notice, PTEP is treated as dis-
tributed under section 959 to the extent the
distribution constitutes a dividend under
section 316 (determined without regard to
section 959(d)). Additionally, because tax-
payers may have maintained PTEP groups
in accordance with the groups described in
the 2019 notice, taxpayers may use those
PTEP groups for 2019 notice years instead
of the PTEP groups listed in proposed
§1.959-2. Furthermore, neither the por-
tions of proposed §§1.959-2 and 1.959-3
relating to PTEP tax pools, corporate PTEP
tax pools, adjusted applicable percentages,
and section 965(c) deduction percentages,
nor the portions of proposed §§1.959-3
through 1.959-5 and 1.959-7 relating to the
timing of adjustments and determinations,
are 2019 notice provisions, and, therefore,
taxpayers are not required to apply these
provisions to 2019 notice years.
Apart from the 2019 notice provisions,
the proposed regulations would apply
before the general applicably date only if
taxpayers choose to apply the proposed
regulations early in accordance with
the rules described in part IX.A.2 of the
Explanation of Provisions.
2. Early Application Option
Taxpayers would be permitted to choose
to apply the proposed regulations in their
entirety to taxable years of foreign cor-
porations beginning before the general
applicability date (such years to which the
regulations are applied, the early applica-

Bulletin No. 2025–5 567 January 27, 2025
tion years) if certain conditions prescribed
in proposed §1.959-12(d) are satisfied
(early application option). See, for exam-
ple, proposed §§1.951-1(i), 1.951-2(i),
1.960-7(c), 1.961-14(b), 1.986(c)-1(e), and
1.1502-59(g). The early application option
would satisfy, and therefore supersede, the
required application of the 2019 notice pro-
visions if the first early application year
precedes, or is the same as, the first 2019
notice year. See proposed §1.959-12(c).
Under the early application option,
taxpayers must apply the proposed regu-
lations, as finalized, in their entirety to an
early application year and all succeeding
early application years, all taxable years of
covered shareholders for which the early
application years are relevant, and all tax-
able years of related foreign corporations
(determined under section 267(b)) that
end on or after the later of the last day of
the first early application year and the first
day on which the foreign corporations are
related. See proposed §1.959-12(d)(2). Fur-
ther, all taxable years of covered sharehold-
ers for which the early application years are
relevant must be open under section 6501,
which each covered shareholder must con-
firm in a written statement to the foreign
corporation that also provides the covered
shareholder’s consent to apply the pro-
posed regulations before the general appli-
cability date. See proposed §1.959-12(d)(3)
and (4). These conditions are intended to
promote consistency and administrability.
B. Transition rules
1. In General
To facilitate the initial application of the
proposed regulations, the proposed regu-
lations include transition rules under sec-
tion 959 for establishing and conforming
accounts under section 959, as well as rules
under section 961 for establishing derived
basis and section 961(c) basis. These rules
also address particular transition issues
relating to the treatment of domestic part-
nerships (including S corporations).
2. Annual PTEP Accounts, Dollar Basis
Pools, and Corporate PTEP Accounts
As of the beginning of the first taxable
year of a foreign corporation to which the
proposed section 959 regulations apply
pursuant to the 2019 notice or the early
application option, a reasonable method
must be used to establish annual PTEP
accounts, dollar basis pools, and corporate
PTEP accounts in accordance with pro-
posed §1.959-2, including to reflect any
prior adjustments that would have been
made under the principles of proposed
§§1.959-2 through 1.959-5 and 1.959-7.
See proposed §1.959-11(b)(1) and (2)(i).
Additionally, adjustments must be made
to account for the transition tax under sec-
tion 965. See proposed §1.959-11(b)(3).
In establishing these accounts, any
existing accounts of a covered shareholder
must be conformed to the requirements of
proposed §1.959-2. See proposed §1.959-
11(b)(2)(i). Further, in the case of existing
accounts tracking PTEP or dollar basis
in multi-year pools, a reasonable method
to conforming the accounts includes an
approach consistent with the rules in the
2019 notice. See proposed §1.959-11(b)
(2)(ii).
Lastly, a reasonable method used to
establish annual PTEP accounts, dol-
lar basis pools, and corporate PTEP
accounts must be consistently applied
by the covered shareholder with respect
to all foreign corporations in which the
covered shareholder owns stock. The
same method must also be applied by all
covered shareholders that join in filing a
federal income tax return (for example,
domestic corporations that file a consol-
idated federal income tax return in cases
where the early application option does
not apply). See proposed §1.959-11(b)
(2)(i). In cases where there are multiple
covered shareholders of a foreign corpo-
ration, corporate PTEP accounts of a for-
eign corporation are established based on
the reasonable method applied by each
covered shareholder. Thus, for exam-
ple, assume US1, a covered shareholder,
owns all the stock of CFC1 and 40% of
the stock of CFC2, and that both CFC1
and CFC2 are foreign corporations. The
remaining 60% of the stock of CFC2 is
owned by US2, a covered shareholder
unrelated to US1. US1 must consistently
use a reasonable method for establish-
ing its annual PTEP accounts and dollar
basis pools with respect to CFC1 and
CFC2, and US2 must use a reasonable
method for its own determination of
those accounts with respect to CFC2.
CFC1’s corporate PTEP accounts would
then reflect the annual PTEP accounts
of US1, and CFC2’s corporate PTEP
accounts would then reflect the annual
PTEP accounts of US1 and US2.
3. PTEP Tax Pools, Corporate PTEP Tax
Pools, and Section 965 Related Amounts
As of the beginning of the first taxable
year of a foreign corporation to which the
proposed section 959 regulations apply
pursuant to the general applicability date
or the early application option, the pro-
posed regulations require the establish-
ment of PTEP tax pools, corporate PTEP
tax pools, adjusted applicable percentages,
and section 965(c) deduction percentages
reflecting the foreign corporation’s PTEP.
See proposed §1.959-11(c)(1).
PTEP tax pools and corporate PTEP
tax pools are established by adding a pro
rata portion of the foreign corporation’s
PTEP group taxes (prior-law PTEP group
taxes) with respect to PTEP groups (pri-
or-law PTEP group), as those terms are
defined in current §1.960-3, to each PTEP
tax pool with respect to the foreign cor-
poration. See proposed §1.959-11(c)(2).
This is determined by multiplying the pri-
or-law PTEP group taxes by a fraction, the
numerator of which is the balance of the
prior-law PTEP group that is PTEP relat-
ing to the PTEP tax pool, and the denom-
inator of which is the balance of the pri-
or-law PTEP group.
An adjusted applicable percentage is
established with respect to all the foreign
corporation’s PTEP resulting from section
965 within a covered shareholder’s annual
PTEP accounts relating to the same section
904 category by calculating a weighted
average of the applicable percentages
with respect to the PTEP (as defined in
§1.965-5(d)). See proposed §1.959-11(c)
(3). A section 965(c) deduction percent-
age is established with respect to all the
foreign corporation’s PTEP resulting from
section 965(a) within a covered share-
holder’s annual PTEP accounts relating to
the same section 904 category by calcu-
lating a weighted average of the percent-
ages for which foreign currency gain or
loss recognized under section 986(c) with
respect to distributions of the PTEP would
be reduced under current §1.986(c)-1. See
proposed §1.959-11(c)(4).

January 27, 2025 568 Bulletin No. 2025–5
4. Derived Basis of Partnerships and
Section 961(c) Basis
As of the beginning of the first taxable
year of a foreign corporation to which
the proposed section 961 regulations
apply pursuant to the general applicabil-
ity date or the early application option,
a partnership’s derived basis or a CFC’s
section 961(c) basis of a property unit is
established based on the amount of basis
that would exist in the property unit if the
principles of the applicable proposed sec-
tion 961 regulations were to have applied
for all prior periods, determined using a
reasonable method. See proposed §1.961-
13(b)(1), (2), and (3). The reasonable
method must be consistently applied to
each foreign corporation owned by the
partnership or CFC and with respect to
each covered shareholder that owns an
interest in the partnership or stock in the
CFC. For this purpose, the establishment
of section 961(c) basis includes replacing
any existing basis under section 961(c) in
the property unit, to the extent a foreign
corporation took the position under cur-
rent law that it was afforded such basis,
with section 961(c) basis as prescribed in
the proposed section 961 regulations.
The rule for establishing derived basis
applies to foreign partnerships and is
also applicable to domestic partnerships
(including S corporations) to the extent
that aggregate treatment applies with
respect to the domestic partnership under
§1.958-1(d) or former §1.951A-1(e)
(1) (as in effect before TD 9960, 87 FR
3648) before the application of the pro-
posed section 961 regulations. However,
in the case of a domestic partnership, the
amount of any derived basis does not take
into account amounts included in income
by the domestic partnership or any low-
er-tier domestic partnership for periods
in which aggregate treatment does not
apply. For example, if a domestic part-
nership directly owns stock in a CFC, the
domestic partnership’s derived basis is
determined without regard to any subpart
F income inclusion of the domestic part-
nership attributable to the CFC in a period
before §1.958-1(d) applies to the domes-
tic partnership, which instead gives rise to
adjusted basis of the domestic partnership
under section 961(a). See part IX.B.5 of
the Explanation of Provisions for a discus-
sion of the treatment of such basis under
the proposed regulations, which is not
converted into derived basis as a result of
§1.958-1(d) applying to the domestic part-
nership.
The proposed regulations also pro-
vide that a specified foreign corporation
that is not otherwise a CFC is treated
as a CFC for purposes of applying the
principles of proposed §1.961-3 to an
income inclusion under section 951(a)
(1)(A) that arises by reason of section
965(a). See proposed §1.961-13(b)(4).
This rule is intended to clarify that basis
increases are made to stock of a foreign
corporation for inclusions arising under
section 965(a) regardless of CFC status.
However, no basis increases are afforded
under section 961 for PTEP attributable
to section 965(b). See section 965(b)(4)
(A) (providing that the amount of the
reduction described in section 965(b)
is treated as included in gross income
under section 951(a) only for purposes
of applying section 959).
The transition rules for the establish-
ment of derived basis and section 961(c)
basis are intended to facilitate the appli-
cation of the rules governing such basis
under the proposed regulations and should
not be interpreted in a manner that results
in a double benefit. To ensure this result,
the proposed regulations provide that
derived basis or section 961(c) basis is
increased to reflect an income inclusion
under section 951(a)(1)(A) or 951A(a)
only to the extent such an increase would
not duplicate basis at the level of the
partnership or CFC to reflect the income
inclusion. See proposed §1.961-13(b)(5).
Thus, for example, if a foreign partnership
was provided basis with respect to stock
in a foreign corporation under §1.965-2(h)
(5)(ii) for an income inclusion, no derived
basis is provided to the foreign part-
nership under the proposed regulations
for the inclusion (and any existing basis
under §1.965-2(h)(5)(ii) in the property
unit remains and, thus, is not converted to
derived basis). As an additional example,
if a CFC previously claimed basis under
section 961(c) for an income inclusion,
section 961(c) basis is provided to the
CFC under the proposed regulations for
the inclusion only to the extent the pre-
viously-claimed-basis has not been used
(and, therefore, can be replaced with sec-
tion 961(c) basis pursuant to the proposed
regulations).
5. Treatment of Domestic Partnerships
(Including S Corporations)
For taxable years of a domestic part-
nership (including an S corporation by
operation of section 1373(a)) to which
§1.958-1(d)(1) does not apply, the domes-
tic partnership is treated as an entity
separate from its owners in determining
stock ownership for purposes of section
951(a) and therefore is required to include
amounts in gross income under section
951(a). In these cases, foreign corpora-
tions may have PTEP with respect to the
domestic partnership and the domestic
partnership may have been provided basis
under section 961(a). Moreover, in a case
where former §1.951A-1(e)(1) (as in effect
before TD 9960, 87 FR 3648) treated the
domestic partnership as an aggregate of
its partners for purposes of applying sec-
tion 951A and related provisions, both the
domestic partnership and its partners may
be United States shareholders with income
inclusions attributable to the same CFC.
The proposed regulations address
the treatment of domestic partnerships
before the application of §1.958-1(d)(1)
by, in these cases, treating the domestic
partnership as a covered shareholder. See
proposed §§1.959-11(d) and 1.961-13(c).
In addition, rules regarding distributions
of PTEP, derived basis (of a partnership
that is owned by the domestic partner-
ship), and section 961(c) basis (of a CFC
that is owned by the domestic partnership)
apply to the domestic partnership in its
capacity as a covered shareholder before
those rules apply to covered shareholders
that own interests in the domestic part-
nership. See proposed §§1.959-11(d) and
1.961-13(c). In this way, the PTEP and
basis afforded with respect to a domestic
partnership as a covered shareholder are
taken into account before looking to the
PTEP and basis with respect to covered
shareholders that own interests in the part-
nership. In addition to providing a rule
for coordinating the operation of these
provisions in the interim period before
§1.958-1(d)(1) applies, this rule should
reduce the amount of PTEP and basis of a
domestic partnership that ultimately must
be converted to be with respect to covered

Bulletin No. 2025–5 569 January 27, 2025
shareholders that own interests in the part-
nership when §1.958-1(d) applies.
Once both §1.958-1(d)(1) and the pro-
posed regulations apply to a domestic part-
nership (and, consequently, the domestic
partnership is no longer a covered share-
holder), the proposed regulations con-
vert the domestic partnership’s accounts
described in proposed §1.959-2 (annual
PTEP accounts, dollar basis pools, and
PTEP tax pools) to accounts with respect
to covered shareholders owning interests
in the domestic partnership, including the
deemed covered shareholder to the extent
any interest in the domestic partnership
is not owned by a covered shareholder.
See proposed §1.959-11(e). Similarly,
the proposed regulations convert a CFC’s
section 961(c) basis with respect to the
domestic partnership to section 961(c)
basis with respect to covered sharehold-
ers owning interests in the domestic part-
nership (including the deemed covered
shareholder). See proposed §1.961-13(d).
Additionally, because another partner-
ship may have derived basis with respect
to the domestic partnership (for exam-
ple, if the domestic partnership owns an
interest in a foreign partnership that owns
stock of a CFC, with the foreign partner-
ship having derived basis with respect to
the domestic partnership), the proposed
regulations likewise convert the other
partnership’s derived basis to derived
basis with respect to covered sharehold-
ers owning interests in the domestic part-
nership. See id.
The conversion of the domestic part-
nership’s annual PTEP accounts, dollar
basis pools, and PTEP tax pools is based
on liquidation rights and occurs once the
proposed regulations apply to the domes-
tic partnership (either pursuant to the gen-
eral applicability date or the early applica-
tion option) or, if later, once §1.958-1(d)
first applies to the domestic partnership
(including, in the case of S corporations,
because an election not to apply §1.958-
1(d) ceases to have effect). See proposed
§1.959-11(e)(2)(i)(B). Because the con-
version of accounts under these rules
depends on when §1.958-1(d) first applies
to a particular domestic partnership, the
rules may apply at different times in cases
where stock of a foreign corporation is
owned through tiers of domestic partner-
ships.
The conversion of derived basis or
section 961(c) basis is determined consis-
tently, and occurs concurrently, with the
conversion of the accounts under section
959. See proposed §1.961-13(d)(2)(i) and
(3)(i). The proposed regulations do not
convert basis previously provided to the
domestic partnership under section 961(a)
into derived basis, nor do the proposed
regulations affect prior basis adjustments
made under section 705. Thus, for exam-
ple, if a domestic corporation owns an
interest in a foreign partnership, and that
foreign partnership owns an interest in a
domestic partnership that owns stock of
a CFC, the proposed regulations do not
alter the treatment of basis provided to
the domestic partnership in its CFC stock
under section 961(a) or the related basis
afforded to the foreign partnership in its
domestic partnership interest under sec-
tion 705.
Special Analyses
I. Regulatory Planning and Review —
Economic Analysis
Pursuant to the Memorandum of
Agreement, Review of Treasury Regula-
tions under Executive Order 12866 (June
9, 2023), tax regulatory actions issued by
the IRS are not subject to the requirements
of section 6 of Executive Order 12866, as
amended. Therefore, a regulatory impact
assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of
1995 (44 U.S.C. 3501-3520) generally
requires that a Federal agency obtain the
approval of the Office of Management
and Budget before collecting information
from the public, whether such collection
of information is mandatory, voluntary,
or required to obtain or retain a benefit.
There are no additional information col-
lection requirements associated with the
proposed regulations.
III. Regulatory Flexibility Act
When an agency issues a rulemaking
proposal, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) (RFA) requires the
agency to prepare and make available for
public comment an initial regulatory flexi-
bility analysis that will describe the impact
of the proposed rule on small entities. See
5 U.S.C. 603(a). Section 605 of the RFA
provides an exception to this requirement
if the agency certifies that the proposed
rulemaking will not have a substantial
economic impact on a substantial number
of small entities. A small entity is defined
as a small business, small nonprofit orga-
nization, or small governmental jurisdic-
tion. See U.S.C. 601(3) through (6).
The Treasury Department and the IRS
do not expect that the proposed regula-
tions will have a significant economic
impact on a substantial number of small
entities within the meaning of sections
601(3) through (6) of the RFA. The pro-
posed regulations provide guidance on
issues regarding sections 959 and 961 and
related provisions but do not change the
economic impact of the existing regula-
tions or impose any new costs on small
entities. It is unlikely the proposed reg-
ulations will affect a substantial number
of small businesses due to the significant
resources and investment required to
engage in the type of foreign operations
to which the proposed regulations are rel-
evant. However, because there is a pos-
sibility of significant economic impact
on a substantial number of small entities,
an initial regulatory flexibility analysis
for the regulation is provided below. The
Treasury Department and the IRS request
comments from the public on the number
of small entities that may be impacted and
whether that impact will be economically
significant.
Pursuant to section 7805(f) of the
Code, the proposed regulations have been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on small
businesses.
A. Reasons why the action is being
considered
The proposed regulations update the
core aspects of the PTEP system in a
manner that addresses both longstand-
ing issues and more recent issues (such
as those arising under the Act), thereby
reducing potential uncertainty under the
existing regulations, ensuring consistent
outcomes across taxpayers and economi-

January 27, 2025 570 Bulletin No. 2025–5
cally similar transactions, and preventing
double taxation and double non-taxation.
These updates to the PTEP system involve
PTEP accounting, the application of sec-
tion 959(b), the application of section 961
as to certain property owned by a partner-
ship, the application of section 961(c), and
rules coordinating sections 951(a), 959(b),
and 961(c).
The proposed regulations described in
part II of the Explanation of Provisions
establish covered shareholder-specific
PTEP accounts, and this accounting pre-
vents inappropriate outcomes that could
arise under an alternative approach in
light of the Act (such as share-specific
accounting) while ensuring a covered
shareholder the benefit of PTEP relating
to it. This covered shareholder-specific
accounting applies to the other aspects
of the PTEP system – namely, sections
986(c) and 960(b) – and ensures con-
sistency across the PTEP system. The
proposed regulations also provide rules
under sections 959(b) and 951 that
address longstanding issues that arise in
certain split-ownership structures (that
is, structures in which stock of a CFC is
not all owned by a single United States
shareholder), which issues were exacer-
bated by the Act.
The proposed regulations described in
part III of the Explanation of Provisions
provide guidance addressing longstanding
issues under section 961. That is, the pro-
posed regulations provide rules to adjust
the basis in shares of stock of a foreign
corporation owned indirectly by a covered
shareholder through only one or more
partnerships, and the basis under section
961(c) in shares of stock of a foreign cor-
poration owned by a CFC, to reflect the
foreign corporation’s PTEP with respect
to the covered shareholder. Additionally,
the proposed regulations, as discussed
in part III.E of the Explanation of Provi-
sions, provide rules treating E&P gener-
ated by gain to which section 961(c) is
applied as PTEP. This approach ensures
consistent outcomes across economically
similar transactions regardless of how a
foreign corporation’s PTEP is monetized
(whether through a distribution to which
section 959(b) applies or a disposition to
which section 961(c) applies), and, by
treating the E&P as PTEP, reflects the pol-
icy of sections 959 and 961 and prevents
both double taxation and double non-tax-
ation.
The proposed regulations, as discussed
in part IV of the Explanation of Provi-
sions, provide rules under section 951 that
work in tandem with sections 959(b) and
961(c) to perfect the approach discussed
in the preceding paragraphs. These rules
comprise two sets of rules, one applying
at the foreign corporation-level and one
applying at the shareholder-level, that
together ensure that attributes like PTEP
and section 961(c) basis are allocated to
the appropriate shareholder, consistent
with the shareholder-specific nature of
sections 959(b) and 961(c).
B. Objectives of, and legal basis for, the
proposed regulations
The proposed regulations are intended
to provide guidance addressing core
aspects of the PTEP system and signifi-
cant statutory changes since the current
regulations were finalized. The legal basis
for these regulations is contained in var-
ious sections of the Code, including sec-
tions 959, 960, 961, 965, 986, and 7805.
C. Small business entities to which these
regulations will apply
Because an estimate of the number of
small businesses affected is not currently
feasible, this initial regulatory flexibility
analysis assumes that a substantial num-
ber of small businesses will be affected.
However, as noted above, the Treasury
Department and the IRS believe that it
is unlikely the proposed regulations will
affect a substantial number of small busi-
nesses due to the significant resources
and investment required to engage in the
type of foreign operations to which the
proposed regulations are relevant. The
Treasury Department and the IRS do not
expect that these regulations will affect a
substantial number of small nonprofit or
small governmental jurisdictions.
D. Projected reporting, recordkeeping,
and other compliance requirements
In certain cases, the proposed regula-
tions require information that currently is
tracked at the foreign corporation-level to
also be tracked at the shareholder-level.
E. Duplicate, overlapping, or relevant
Federal rules
The proposed regulations would
replace portions of existing regulations.
The Treasury Department and the IRS are
not aware of any Federal rules that dupli-
cate, overlap, or conflict with these regu-
lations.
F. Alternatives considered
The Treasury Department and the
IRS considered alternatives including
alternatives to treating E&P generated
by gain to which section 961(c) applies
as PTEP. One alternative, as discussed
in part III.E.2.ii of the Explanation of
Provisions, involved treating such E&P
as section 959(c)(3) E&P. However, this
approach was not adopted because it
could lead to double taxation or double
non-taxation, while also creating dis-
symmetry between distributions (E&P
to which annual PTEP accounts apply is
PTEP) and dispositions involving foreign
stock (E&P to which section 961(c) basis
applies is not PTEP). The proposed regu-
lations, by providing certainty regarding
longstanding issues under section 961(c),
reduce economic burden, and, by protect-
ing the policies underlying sections 959
and 961, ensure a covered shareholder
the benefit of PTEP relating to it; this
represents the approach with the least
economic impact.
The Treasury Department and the
IRS also considered alternatives to the
proposed rules under section 951 that
work in tandem with sections 959(b)
and 961(c). But the alternatives either
could not provide the certainty or the
consistency of the approach in the pro-
posed regulations or could not properly
protect against double taxation or dou-
ble non-taxation.
The proposed regulations, and the
PTEP system generally, apply uniformly
to large and small business entities. The
Treasury Department and the IRS are of
the view that such an approach is neces-
sitated by the statutory scheme; in other
words, a small business exception could
undermine the provisions comprising the
PTEP system. Accordingly, there is no
viable alternative to the proposed regula-
tions for small entities.

Bulletin No. 2025–5 571 January 27, 2025
IV. 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 man-
date that may result in expenditures in any
one year by a State, local, or Tribal gov-
ernment, in the aggregate, or by the pri-
vate sector, of $100 million in 1995 dol-
lars, updated annually for inflation. The
proposed regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (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. The proposed regula-
tions do not have federalism implica-
tions, do not impose substantial direct
compliance costs on State and local
governments, and do not preempt State
law within the meaning of the Executive
order.
Comments and Requests for a Public
Hearing
Before the proposed regulations
are adopted as final regulations, con-
sideration will be given to comments
that are submitted timely to the IRS as
prescribed in the preamble under the
“ADDRESSES” section. In addition to
the comments specifically requested in
the Explanation of Provisions, the Trea-
sury Department and the IRS request
comments on all aspects of the proposed
regulations. Any comments submitted
will be made available at www.regula-
tions.gov or upon request.
A public hearing will be scheduled
if requested in writing by any per-
son who timely submits written com-
ments. Requests for a public hearing are
encouraged to be made electronically. If
a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal Reg-
ister.
Statement of Availability of IRS
Documents
Any IRS Revenue Procedures, Reve-
nue Rulings, Notices, or other guidance
cited in this document are published in
the Internal Revenue Bulletin (or Cumu-
lative Bulletin) and are available from the
Superintendent of Documents, U.S. Gov-
ernment Publishing Office, Washington,
DC 20402, or by visiting the IRS website
at www.irs.gov.
Drafting Information
The principal authors of these regula-
tions are Karen R. Li, Elena M. Madaj and
Chadwick Rowland, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and the
Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority cita-
tion for part 1 is amended by revising
the entry for §1.951-1, adding entries
in numerical order for §§1.951-2,
1.959-1 through 1.959-12, and 1.961-1
through 1.961-13, revising the entry
for §1.986(c)-1, and adding an entry in
numerical order for §1.1502-59 to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Sections 1.951-1 and 1.951-2 also
issued under 26 U.S.C. 951, 959, and 961.
* * * * *
Sections 1.959-1 through 1.959-12 also
issued under 26 U.S.C. 245A(g), 904(d)
(7), 951A(f)(1)(B), 959, 960(f), 962,
965(o), 986, 986(c)(2), 989(c), and 1373.
* * * * *
Sections 1.961-1 through 1.961-13 also
issued under 26 U.S.C. 743(b), 959, 961
and 961(a), (b), and (c), 965(o), and 1373.
* * * * *
Section 1.986(c)-1 also issued under
26 U.S.C. 962, 965(o), 986 and 986(c)(2),
and 989(c).
* * * * *
Section 1.1502-59 also issued under 26
U.S.C. 959, 960, 961, 986, and 1502.
* * * * *
Par. 2. Section 1.163(j)-7 is amended
by:
1. Revising paragraph (g)(2); and
2. Adding a sentence to the end of para-
graph (m)(2).
The revision and addition read as fol-
lows:
§1.163(j)-7 Application of the
section 163(j) limitation to foreign
corporations and United States
shareholders.
* * * * *
(g) * * *
(2) Treatment of certain dividends and
previously taxed earnings and profits. For
purposes of computing the ATI of a rel-
evant foreign corporation for a taxable
year, the following amounts are (without
duplication) subtracted from tentative tax-
able income—
(i) Any dividend included in gross
income that is received from a related per-
son, within the meaning of section 954(d)
(3), with respect to the distributee; and
(ii) Any previously taxed earnings and
profits that are distributed to the foreign
corporation in a covered distribution
(determined under §1.959-4) or that result
from the application of section 961(c)
basis to covered gain recognized by the
foreign corporation (determined under
§1.961-9).
* * * * *
(m) * * *
(2) * * * Paragraph (g)(2)(ii) of this
section applies to a taxable year of a for-
eign corporation that begins on or after
[date of publication of final regulations in
the Federal Register] or is an early appli-

January 27, 2025 572 Bulletin No. 2025–5
cation year (as described in §1.959-12(d))
and to a taxable year of a person for which
such taxable year of that foreign corpora-
tion is relevant.
* * * * *
Par. 3. Section 1.245A(d)-1 is amended
by:
1. Revising the first sentence of para-
graph (c)(22); and
2. For each paragraph listed in the
table, removing the language in
the ‘‘Remove’’ column wherever it
appears and adding in its place the
language in the ‘‘Add’’ column:
Paragraph
RemoveAdd
(d)(2)(i)section 951A PTEP (as defined in §1.960-
3(c)(2)(viii)) in a single annual PTEP
account (as defined in §1.960-3(c)(1))
previously taxed earnings and profits assigned
to the section 951A PTEP group (as defined in
§1.959-1(b)) within a single annual PTEP account
(as defined in §1.959-1(b))
(d)(2)(ii)(B)section 951A PTEPpreviously taxed earnings and profits assigned to
the section 951A PTEP group
(d)(3)(i)section 951A PTEP (as defined in §1.960-
3(c)(2)(viii)) in a single annual PTEP
account (as defined in §1.960-3(c)(1))
previously taxed earnings and profits assigned
to the section 951A PTEP group (as defined in
§1.959-1(b)) within a single annual PTEP account
(as defined in §1.959-1(b))
(d)(3)(ii)(B)section 951A PTEPpreviously taxed earnings and profits assigned to
the section 951A PTEP group
(d)(4)(i)section 951(a)(1)(A) PTEP (as defined in
§1.960-3(c)(2)(x)) in a single annual PTEP
account (as defined in §1.960-3(c)(1))
previously taxed earnings and profits assigned to
the section 951(a)(1)(A) PTEP group (as defined in
§1.959-1(b)) within a single annual PTEP account
(as defined in §1.959-1(b))
(d)(4)(i)section 951(a)(1)(A) PTEPpreviously taxed earnings and profits assigned to
the section 951(a)(1)(A) PTEP group
(d)(4)(ii)(B)(1) through (3),
and (D)
section 951(a)(1)(A) PTEPpreviously taxed earnings and profits assigned to
the section 951(a)(1)(A) PTEP group
The revision reads as follows:
§1.245A(d)-1 Disallowance of foreign
tax credit or deduction.
* * * * *
(c) * * *
(22) * * * The term section 245A(d)
PTEP means previously taxed earnings
and profits assigned to a section 245A(d)
PTEP group or a reclassified section
245A(d) PTEP group (each as defined in
§1.959-1(b)). * * *
* * * * *
Par. 4. Section 1.312-6 is amended by
adding paragraph (f) to read as follows:
§1.312-6 Earnings and profits.
* * * * *
(f) An amount included in a corpora-
tion’s gross income under section 951(a)
or 951A(a) for a particular period is taken
into account in computing the corpora-
tion’s earnings and profits for that period.
See also §1.312-8(c) (domestic corpora-
tion’s receipt of previously taxed earnings
and profits does not increase earnings and
profits). This paragraph (f) applies to a
taxable year of a corporation beginning
on or after [date of publication of final
regulations in the Federal Register]. This
paragraph (f) also applies to a taxable year
of a domestic corporation that is a share-
holder in a foreign corporation, if a tax-
able year of the foreign corporation that
is an early application year (as described
in §1.959-12(d)) ends with or within the
taxable year of the domestic corporation.
Par. 5. Section 1.312-8 is amended by
adding paragraph (c) to read as follows:
§1.312-8 Effect on earnings and profits
of receipt of tax-free distributions
requiring adjustment or allocation of
basis of stock.
* * * * *
(c) Previously taxed earnings and prof-
its that are distributed to a domestic cor-
poration in a covered distribution (deter-
mined under §1.959-4) do not increase
the corporation’s earnings and profits. See
§§1.959-4 and 1.961-4 for rules exclud-
ing distributed previously taxed earnings
and profits from gross income and reduc-
ing basis. See also §1.312-6(f) (sections
951(a) and 951A(a) inclusions increase
earnings and profits). This paragraph (c)
applies to a taxable year of a domestic
corporation beginning on or after [date
of publication of final regulations in the
Federal Register]. This paragraph (c) also
applies to a taxable year of a domestic
corporation that is a shareholder in a for-
eign corporation, if a taxable year of the
foreign corporation that is an early appli-
cation year (as described in §1.959-12(d))
ends with or within the taxable year of the
domestic corporation.
Par. 6. Section 1.743-1 is amended by
adding paragraphs (d)(4) and (j)(7) to read
as follows:
§1.743-1 Optional adjustment to basis
of partnership property.
* * * * *

Bulletin No. 2025–5 573 January 27, 2025
(d) * * *
(4) Coordination with derived basis.
See §1.961-5(d) for a rule coordinating
the application of this paragraph (d) with
derived basis that transfers to a transferee.
* * * * *
(j) * * *
(7) Covered distributions treated as
previously taxed earnings and profits.
See §1.961-4(c)(2)(iii) for rules regard-
ing the use of a positive basis adjustment
under section 743(b) upon the receipt of
a covered distribution that is treated as
previously taxed earnings and profits with
respect to certain direct or indirect part-
ners of the partnership.
* * * * *
§1.861-20 [Amended]
Par. 7. Section 1.861-20 is amended
by:
1. In paragraph (a), adding the language
“1.959-6,” after the language, “1.904-
6,”;
2. In paragraph (d)(2)(ii)(B), adding the
language “§1.959-6(c) and” before
the language “§ 1.960-1(d)(3)(ii)”,
and removing the language “income
groups or PTEP groups” and adding
the language “previously taxed earn-
ings and profits and to income groups,
respectively,” in its place;
3. In paragraph (d)(3)(i)(B)(1), add-
ing the language “§1.959-6(c) and”
before the language Ҥ 1.960-1(d)
(3)(ii)”, and removing the language
“income groups or PTEP groups”
and adding the language “previously
taxed earnings and profits and to
income groups, respectively,” in its
place; and
4. In paragraph (g)(6)(i), removing the
language “section 965(a) PTEP (as
defined in §1.960-3(c)(2)(vi)) in a sin-
gle annual PTEP account (as defined
in § 1.960-3(c)(1))” and adding the
language “previously taxed earnings
and profits assigned to the section
965(a) PTEP group (as defined in
§1.959-1(b)) within a single annual
PTEP account (as defined in §1.959-
1(b))” in its place.
§1.904-6 [Amended]
Par. 8. Section 1.904-6 is amended by:
1. In paragraph (e)(2), removing the
language “§1.959-1” and adding the
language “§1.959-4” in its place,
adding the language “(as defined in
§1.959-1(b))” after “annual PTEP
account”, and removing the language
“§1.960-3(c)” and adding the lan-
guage “§1.959-1(b)” in its place;
2. Removing paragraph (e)(3);
3. Redesignating paragraph (e)(4) as
new paragraph (e)(3);
4. In newly redesignated paragraph (e)
(3)(i), removing the language “(e)(4)
(ii)” and adding the language “(e)(3)
(ii)” in its place; and
5. In newly redesignated paragraph (e)
(3)(ii)(C), removing the language “(e)
(4)(ii)(B)” and adding the language
“(e)(3)(ii)(B)” in its place.
§1.905-3 [Amended]
Par. 9. Section 1.905-3 is amended by:
1. In paragraph (a), removing the
language “PTEP group taxes (as
defined in § 1.960-3(d)(1))” and
adding the language “a tax pool
described in §1.959-2(b)(4) or (d)
(2)” in its place;
2. In the fifth sentence of paragraph (a),
removing the language “PTEP group
taxes” and adding the language “a tax
pool described in §1.959-2(b)(4) or
(d)(2)” in its place;
3. In the last sentence of paragraph (a),
removing the language “PTEP group
taxes” and adding the language “a tax
pool described in §1.959-2(b)(4) or
(d)(2)” in its place; and
4. In the last sentence of paragraph (b)
(2)(ii), removing the language “sub-
sequent”.
§1.905-4 [Amended]
Par. 10. Section 1.905-4 is amended
by, in paragraph (c)(6), removing the lan-
guage “PTEP group taxes (as defined in
§1.960-3(d)(1))” and adding the language
“a tax pool described in §1.959-2(b)(4) or
(d)(2)” in its place.
Par. 11. Section 1.951-1 is amended
by:
1. Removing the introductory text of
paragraph (a), revising paragraphs (a)
(1) and (2), and adding headings for
paragraphs (a)(3) and (4);
2. In the introductory text of paragraph
(b)(1), removing the language “(a)
(2)(i)” and “(e)” and adding the lan-
guage “(a)(1)(i)” and “(c)” in their
places, respectively;
3. Adding paragraph (c);
4. Revising the heading for paragraph
(e) and revising paragraph (e)(1)(i);
5. In paragraph (e)(1)(ii)(A), adding the
language “and not reduced by distri-
butions during the year” immediately
before the semicolon;
6. In paragraph (g)(1), adding the lan-
guage “(or, if applicable pursuant to
section 953(c)(1)(A), any stock of
such foreign corporation)” immedi-
ately before the period;
7. Revising paragraph (h);
8. Redesignating paragraph (e)(7) as
paragraph (h)(1) and revising the
heading and introductory text of
newly redesignated paragraph (h)(1);
9. In newly redesignated paragraph (h)
(1)(i)(I), adding the language “cov-
ered items (within the meaning of
paragraph (c)(3) of this section),”
immediately after the language “nei-
ther”;
10. In newly redesignated paragraphs
(h)(1)(ii) through (viii), removing
the language “(e)(1) of this section”
wherever it may appear and adding
the language “(c)(1) of this section”
in its place;
11. In newly redesignated paragraph (h)
(1)(viii)(A), removing the language
“(e)(7)(vii)(A) of this section” and
adding the language “(h)(1)(vii)(A)
of this section” in its place;
12. Adding paragraph (h)(2); and
13. Adding paragraph (i).
The revisions and additions read as fol-
lows:
§1.951-1 Amounts included in gross
income of United States shareholders.
(a) * * *
(1) Section 951(a) inclusions. If a for-
eign corporation is a controlled foreign
corporation (within the meaning of sec-
tion 957 or, if applicable, section 953(c)
(1)(B)) at any time during a taxable year
of the foreign corporation, every person
who is a United States shareholder (as
defined in section 951(b) and paragraph
(g) of this section) of the foreign corpora-

January 27, 2025 574 Bulletin No. 2025–5
tion at any time during such taxable year
and owns (within the meaning of section
958(a)) stock in the foreign corporation on
the last day in such taxable year on which
the foreign corporation is a controlled
foreign corporation shall, for the United
States shareholder’s taxable year in which
or with which such taxable year of the
foreign corporation ends, include in gross
income the sum of—
(i) The United States shareholder’s pro
rata share (determined under paragraph
(b) of this section) of the foreign corpo-
ration’s subpart F income (as defined in
section 952) for the taxable year of the
foreign corporation; and
(ii) The amount determined under sec-
tion 956 with respect to the United States
shareholder for the taxable year of the for-
eign corporation, but only to the extent not
excluded from gross income under section
959(a)(2) and §1.959-5.
(2) Currency translation. See section
989(b) for translating an amount included
in income under this section into U.S. dol-
lars.
(3) Characterization of inclusion in
determining a personal holding company.
* * *
(4) Certain stock ownership rules. * * *
* * * * *
(c) Pro rata share of subpart F
income—(1) In general. For purposes
of paragraph (b) of this section, a United
States shareholder’s pro rata share of the
foreign corporation’s subpart F income for
the taxable year of the foreign corporation
is the sum of all subpart F income allocated
to the United States shareholder in accor-
dance with the rules described in paragraph
(c)(2) of this section. Under those rules,
subpart F income attributable to covered
items (that is, subpart F income attributable
to certain distributions and certain gain
with respect to stock) is separately allo-
cated, in each case consistently with how
the covered item is assigned at the foreign
corporation-level under §1.951-2 as part of
determining the extent to which attributes
specific to the United States shareholder
(that is, previously taxed earnings and
profits or section 961(c) basis) are applied
to exclude the covered item from the for-
eign corporation’s subpart F income under
section 959(b) or 961(c). Then, subpart F
income not attributable to covered items is
allocated based on the United States share-
holder’s share of the foreign corporation’s
allocable earnings and profits (as deter-
mined under paragraph (e) of this section).
See paragraphs (c)(3) and (h) of this section
for definitions and examples, respectively.
(2) Rules for allocating subpart F
income—(i) Determine subpart F income
attributable to each covered item. First,
determine the subpart F income of the
foreign corporation attributable to each
covered item, computed as the portion of
the covered item that is included in for-
eign base company income (as defined in
§1.954-1(a)(5)) or insurance income (as
defined in §1.954-1(a)(6)). See §1.951-
2(b) for the definition of a covered item.
(ii) Allocate subpart F income attrib-
utable to each covered item. Second, allo-
cate to the United States shareholder a pro
rata portion of the subpart F income attrib-
utable to each covered item, determined
by multiplying such subpart F income by
a fraction. The numerator of the fraction
is the portion of the covered item that is
both assigned to the United States share-
holder under §1.951-2 and included in
adjusted gross foreign base company
income (as defined in §1.954-1(a)(3)) or
adjusted gross insurance company income
(as defined in §1.954-1(a)(6)), and the
denominator of the fraction is the por-
tion of the covered item that is included
in adjusted gross foreign base company
income or adjusted gross insurance com-
pany income. However, if the denomina-
tor of the fraction would be zero, then the
fraction is considered to be zero.
(iii) Allocate subpart F income not
attributable to covered items. Third, allo-
cate to the United States shareholder a
pro rata portion of all subpart F income
of the foreign corporation not attribut-
able to covered items, determined by
multiplying all such subpart F income by
a fraction. The numerator of the fraction
is the portion of the foreign corporation’s
hypothetical distribution described in
paragraph (e) of this section that would
be distributed with respect to the stock
of the corporation that the United States
shareholder owns (within the meaning of
section 958(a)), and the denominator of
the fraction is the amount of such hypo-
thetical distribution.
(3) Definitions. For purposes of this
paragraph (c), the term covered item has
the meaning provided in §1.951-2(b).
* * * * *
(e) Hypothetical distribution—(1) * * *
(i) Hypothetical distribution and
hypothetical distribution date. For a
taxable year of a controlled foreign
corporation, the hypothetical distri-
bution described in this paragraph (e)
(hypothetical distribution) is a distribu-
tion treated as made by the corporation
with respect to stock of the corporation
owned by all shareholders of the corpo-
ration in an amount equal to the corpora-
tion’s allocable earnings and profits for
the taxable year, on the last day of the
taxable year on which the corporation is
a controlled foreign corporation (hypo-
thetical distribution date).
* * * * *
(h) Examples—(1) Examples not
involving covered items. The following
examples illustrate the application of
paragraphs (c) and (e) of this section in
cases not involving covered items.
* * * * *
(2) Examples involving covered items.
The following examples illustrate the
application of paragraphs (c) and (e) of
this section in cases involving covered
items.
(i) Assumed facts. For purposes of the
examples in this paragraph (h)(2), unless
otherwise indicated, the following facts
are assumed:
(A) US1 and US2 are unrelated domes-
tic corporations that are covered share-
holders. Neither US1 nor US2 is a mem-
ber of a consolidated group (as defined in
§1.1502-1(h)).
(B) F1, F2, and F3 are foreign corpora-
tions, each of which is a controlled foreign
corporation and uses the British pound (£)
as its functional currency.
(C) Each entity uses the calendar year
as its taxable year, and no entity has a
short taxable year.
(D) To the extent a covered item received
or recognized by a foreign corporation is
previously taxed earnings and profits, the
covered item is excluded in determining
the foreign corporation’s subpart F income
and tested income or tested loss under sec-
tion 959(b) and §1.959-4 or section 961(c)
and §1.961-9, as applicable.
(E) To the extent a covered item
received or recognized by a foreign cor-
poration is not previously taxed earnings
and profits, the covered item is—

Bulletin No. 2025–5 575 January 27, 2025
(1) In the case of a covered distribu-
tion, excluded in determining the for-
eign corporation’s subpart F income
and tested income or tested loss under
sections 954(c)(6) and 951A(c)(2)(A)(i)
(IV); and
(2) In the case of covered gain,
included in the foreign corporation’s for-
eign personal holding company income
(as defined in section 954(c)) and then
its adjusted gross foreign base company
income (as defined in §1.954-1(a)(3))
either because section 964(e)(1) does not
apply or because section 964(e)(4) applies.
(F) The only reductions to adjusted
gross foreign base company income (as
defined in §1.954-1(a)(3)) are for deduc-
tions under §1.954-1(a)(4). Thus, there are
no reductions by reason of section 952(c)
(subpart F income limited to current earn-
ings and profits) or section 954(b)(4)
(exception for certain income subject to
high foreign taxes).
(G) To the extent a covered item
received or recognized by a foreign corpo-
ration is excluded in determining the for-
eign corporation’s subpart F income and
tested income or tested loss as described
in this paragraph (h)(2)(i), the listed exclu-
sion is not necessarily the only applicable
exclusion.
(ii) Example 1: Subpart F income attributable to
covered items—(A) Facts—(1) In general. US1 and
US2 each directly own 50% of the single class of
outstanding stock of F1. F1 directly owns all the out-
standing stock of each of F2 and F3. For F1’s taxable
year ending on December 31 of year 3, F1’s gross
income consists of two covered items, which are a
£60x covered distribution received from F2 and £40x
of covered gain recognized with respect to stock of
F3. US1 and US2 are assigned equal portions of each
covered item under §1.951-2. The entirety of US1’s
assigned portion of each covered item is previously
taxed earnings and profits (because, in the case of
the covered distribution, £30x of F2’s previously
taxed earnings and profits with respect to US1 is
applied to US1’s assigned portion and, in the case of
the covered gain, £20x of F1’s section 961(c) basis
with respect to US1 is applied to US1’s assigned
portion). None of US2’s assigned portion of either
covered item is previously taxed earnings and prof-
its (because F2 has no previously taxed earnings and
profits with respect to US2 and F1 has no section
961(c) basis with respect to US2). F1 has no deduc-
tions for the taxable year.
(2) Subpart F income. For F1’s taxable year end-
ing on December 31 of year 3, F1 has £20x of sub-
part F income consisting of foreign base company
income (adjusted net foreign base company income
as defined in §1.954-1(a)(5)), which in turn consists
of foreign personal holding company income (as
defined in section 954(c)). Table 1 in this paragraph
(h)(2)(ii)(A)(2) provides the treatment of F1’s gross
income in computing its adjusted net foreign base
company income.
Table 1 to paragraph (h)(2)(ii)(A)(2) of this section
FOREIGN BASE COMPANY INCOME ANALYSIS
Gross income
Foreign base company income
Adjusted gross FBCIReductionsAdjusted net FBCI
£60x covered
distribution from F2
US1’s £30x assigned portion
£0
(§959(b))
US2’s £30x assigned portion
£0
(§954(c)(6))
£40x covered gain on
F3 stock
US1’s £20x assigned portion
£0
(§961(c))
£0
£20x
(£20x − £0)
US2’s £20x assigned portion£20x
(B) Analysis. Under paragraph (c) of this sec-
tion, F1’s subpart F income attributable to each
covered item is separately allocated to US1 and
US2. F1 has £0 of subpart F income attributable
to the covered distribution and £20x of subpart F
income attributable to the covered gain because in
each case that is the portion of the covered item
that is included in F1’s adjusted net foreign base
company income. See paragraph (c)(2)(i) of this
section. The £20x of subpart F income attributable
to the covered gain is allocated to each of US1 and
US2 by multiplying the amount of such subpart F
income by a fraction, the numerator of which is the
portion of the covered gain that is both assigned to
the United States shareholder under §1.951-2 and
included in F1’s adjusted gross foreign base com-
pany income (£0 in the case of US1, and £20x in
the case of US2), and the denominator of which is
the portion of the covered gain that is included in
F1’s adjusted gross foreign base company income
(£20x). See paragraph (c)(2)(ii) of this section.
Thus, US2 is allocated all £20x of the subpart F
income attributable to the covered gain. Accord-
ingly, for purposes of paragraph (b) of this section,
US1 has a £0 pro rata share, and US2 has a £20x pro
rata share, of F1’s £20x of subpart F income. See
paragraph (c)(1) of this section.
(C) Alternative facts: expenses—(1) Facts. The
facts are the same as in paragraph (h)(2)(ii)(A) of
this section, except as follows. Only £10x of US1’s
assigned portion of the covered gain is previously
taxed earnings and profits (because there is only
£10x of section 961(c) basis with respect to US1
available to be applied to US1’s assigned portion).
In addition, F1 has £5x of deductions, which are
not foreign income taxes, that are definitely related
to the covered gain. The deductions reduce F1’s
adjusted gross foreign base company income
by £5x in computing net foreign base company
income under §1.954-1(a)(4). Thus, F1 has £25x
of subpart F income, all of which is attributable to
the covered gain.
(2) Analysis. As summarized in Table 1 in
this paragraph (h)(2)(ii)(C)(2), the £25x of sub-
part F income attributable to the covered gain is
allocated to each of US1 and US2 by multiplying
the amount of such subpart F income by a frac-
tion, the numerator of which is the portion of the
covered gain that is both assigned to the United
States shareholder under §1.951-2 and included in
F1’s adjusted gross foreign base company income
(£10x in the case of US1, and £20x in the case of
US2), and the denominator of which is the por-
tion of the covered gain that is included in F1’s
adjusted gross foreign base company income
(£30x). See paragraph (c)(2)(ii) of this section.
Accordingly, for purposes of paragraph (b) of this
section, US1 has a £8.3x pro rata share, and US2
has a £16.7x pro rata share, of F1’s £25x of sub-
part F income.

January 27, 2025 576 Bulletin No. 2025–5
(iii) Example 2: Subpart F income attributable
and not attributable to covered items—(A) Facts—
(1) In general. US1 and US2 each directly own 50%
of the single class of outstanding stock of F1. F1
directly owns all the outstanding stock of each of F2
and F3. For F1’s taxable year ending on December
31 of year 3, F1 has £500x of allocable earnings and
profits for purposes of the hypothetical distribution
described in paragraph (e) of this section. F1’s gross
income for the taxable year consists of a £60x cov-
ered distribution received from F2, £40x of covered
gain recognized with respect to stock of F3, £295x of
royalty income received from an unrelated person,
and £125x of foreign oil and gas extraction income
(as defined in section 907(c)(1)). US1 and US2 are
assigned equal portions of each covered item under
§1.951-2, and the entirety of US1’s assigned portion
of each covered item, but none of US2’s assigned
portion of either covered item, is previously taxed
earnings and profits (because, in the case of the
covered distribution, there are sufficient previously
taxed earnings and profits with respect to US1 to be
applied to US1’s assigned portion and there are no
previously taxed earnings and profits with respect to
US2 to be applied to US2’s assigned portion, and, in
the case of the covered gain, there is sufficient sec-
tion 961(c) basis with respect to US1 to be applied to
US1’s assigned portion and there is no section 961(c)
basis with respect to US2 to be applied to US2’s
assigned portion). F1 has £20x of deductions for the
taxable year, consisting of £15x of foreign withhold-
ing taxes imposed on the covered distribution and
£5x of expenses, which are not foreign income taxes,
that are definitely related to the covered gain. The
£5x of expenses reduce F1’s adjusted gross foreign
base company income by £5x in computing net for-
eign base company income under §1.954-1(a)(4).
(2) Subpart F income. For F1’s taxable year end-
ing on December 31 of year 3, F1 has £310x of sub-
part F income consisting of foreign base company
income (adjusted net foreign base company income
as defined in §1.954-1(a)(5)). Table 1 in this para-
graph (h)(2)(iii)(A)(2) provides the treatment of F1’s
items of gross income in computing its adjusted net
foreign base company income.
Table 1 to paragraph (h)(2)(ii)(C)(2) of this section
FOREIGN BASE COMPANY INCOME ANALYSIS
Gross income
Foreign base company income
Allocation of subpart F income
attributable to the covered item under
§1.951-1(c)(2)(ii)
Adjusted gross FBCIReductionsAdjusted net FBCIUS1US2
£60x covered
distribution
from F2
US1’s £30x assigned
portion
£0
(§959(b))
US2’s £30x assigned
portion
£0
(§954(c)(6))
£40x covered
gain on F3
stock
US1’s £20x assigned
portion
£10x
(§961(c) for remaining £10x)
£5x
£25x
(£30x − £5x)
£8.3x
(£25x × £10x/£30x)
£16.7x
(£25x × £20x/£30x)
US2’s £20x assigned
portion
£20x
Table 1 to paragraph (h)(2)(iii)(A)(2) of this section
FOREIGN BASE COMPANY INCOME ANALYSIS
Gross income
Foreign base company income
Adjusted gross FBCIReductionsAdjusted net FBCI
£60x covered
distribution from F2
US1’s £30x assigned portion
£0
(§959(b))
US2’s £30x assigned portion
£0
(§954(c)(6))
£40x covered gain on
F3 stock
US1’s £20x assigned portion
£0
(§961(c))
£5x
£15x
(£20x − £5x)
US2’s £20x assigned portion£20x
£295x royalty income£295x£0
£295x
(£295x − £0)
£125x foreign oil and gas extraction income£0
(B) Analysis—(1) In general. Under paragraph
(c) of this section, F1’s subpart F income attribut-
able to each covered item is separately allocated to
US1 and US2, and then F1’s remaining subpart F
income is allocated to the United States sharehold-
ers. As described in paragraphs (h)(2)(iii)(B)(2) and
(3) of this section and summarized in Table 1 in this
paragraph (h)(2)(iii)(B)(1), US1 is allocated a total
of £147.5x, and US2 is allocated a total of £162.5x,
of subpart F income. Accordingly, for purposes of
paragraph (b) of this section, US1 has a £147.5x pro
rata share, and US2 has a £162.5x pro rata share, of
F1’s £310x of subpart F income. See paragraph (c)
(1) of this section.

Bulletin No. 2025–5 577 January 27, 2025
Table 1 to paragraph (h)(2)(iii)(B)(1) of this section
FOREIGN BASE COMPANY INCOME ANALYSIS
Gross income
Foreign base company income
Allocation of subpart F income under
§1.951-1(c)(2)(ii) and (iii)
Adjusted gross FBCIReductionsAdjusted net FBCIUS1US2
£60x covered
distribution
from F2
US1’s £30x assigned
portion
£0
(§959(b))
US2’s £30x assigned
portion
£0
(§954(c)(6))
£40x covered
gain on F3 stock
US1’s £20x assigned
portion
£0
(§961(c))
£5x
£15x
(£20x − £5x)
£0
(£15x × £0/£20x)
£15x
(£15x × £20x/£20x)
US2’s £20x assigned
portion
£20x
£295x royalty income£295x£0
£295x
(£295x − £0)
£147.5x
(£295x ×
£250x/£500x)
£147.5x
(£295x ×
£250x/£500x)
£125x foreign oil and gas extraction income£0
(2) Allocation of subpart F income attributable
to covered items. F1 has £0 of subpart F income
attributable to the covered distribution and £15x of
subpart F income attributable to the covered gain
because in each case that is the portion of the covered
item that is included in F1’s adjusted net foreign base
company income. See paragraph (c)(2)(i) of this sec-
tion. The £15x of subpart F income attributable to the
covered gain is allocated to each of US1 and US2 by
multiplying the amount of such subpart F income by
a fraction, the numerator of which is the portion of
the covered gain that is both assigned to the United
States shareholder under §1.951-2 and included in
F1’s adjusted gross foreign base company income
(£0 in the case of US1, and £20x in the case of US2),
and the denominator of which is the portion of the
covered gain that is included in F1’s adjusted gross
foreign base company income (£20x). See paragraph
(c)(2)(ii) of this section. Thus, US2 is allocated all
£15x of the subpart F income attributable to the cov-
ered gain.
(3) Allocation of subpart F income not attrib-
utable to covered items. F1 has £295x of subpart F
income not attributable to covered items (£310x −
£15x). This subpart F income is allocated to each of
US1 and US2 by multiplying the amount of the sub-
part F income by a fraction, the numerator of which
is portion of F1’s £500x hypothetical distribution
described in paragraph (e) of this section that would
be distributed with respect to stock of F1 that the
United States shareholder owns (£250x in the case
of each of US1 and US2), and the denominator of
which is the amount of the hypothetical distribution
(£500x). See paragraph (c)(2)(iii) of this section.
Thus, each of US1 and US2 is allocated £147.5x
of the subpart F income not attributable to covered
items.
(C) Alternative facts: tested income—(1) Facts.
The facts are the same as in paragraph (h)(2)(iii)(A)
of this section, except that F1’s £125x item of foreign
oil and gas extraction income is instead gross tested
income. Because there are no allowable deductions
properly allocable to the gross tested income, F1 thus
has £125x of tested income.
(2) Analysis. The results are the same as in para-
graph (h)(2)(iii)(B) of this section. In addition, each
of US1 and US2 has a £62.5x pro rata share of F1’s
£125x of tested income, determined by multiplying
the amount of the tested income by the fraction used
in allocating F1’s subpart F income not attributable
to covered items to the United States shareholder
(£250x/£500x, as described in paragraph (h)(2)(iii)
(B)(3) of this section). See §1.951A-1(d)(2).
(i) Applicability date. This section
applies to taxable years of foreign corpo-
rations that begin on or after [date of pub-
lication of final regulations in the Federal
Register] or are early application years (as
described in described in §1.959-12(d))
and to taxable years of persons for which
such taxable years of those foreign cor-
porations are relevant. See §1.951-1 as
contained in 26 CFR part 1 revised as of
April 1, 2024, for a version of this section
applicable to prior taxable years.
Par. 12. Add section 1.951-2 to read as
follows:
§1.951-2 Foreign corporation-level
assignment rules for covered items.
(a) Scope. This section sets forth the
rules for assigning a foreign corpora-
tion’s covered items to covered share-
holders. Under §§1.959-4 and 1.961-9,
these assignments determine the extent to
which shareholder-specific attributes (pre-
viously taxed earnings and profits or sec-
tion 961(c) basis) are applied to the cov-
ered items. Paragraph (b) of this section
defines a covered item. Paragraph (c) of
this section describes the rules for assign-
ing covered items. Paragraph (d) of this
section describes a fraction determining
assignments under the general assignment
rule. Paragraph (e) of this section adjusts
assignments to account for general suc-
cessor transactions. Paragraph (f) of this
section provides a currency translation
rule. Paragraph (g) of this section provides
definitions and rules of general applicabil-
ity for purposes of this section. Paragraph
(h) of this section provides examples
illustrating the application of this section.
Paragraph (i) of this section provides the
applicability date of this section.
(b) Covered items. A covered item is
gross income of a foreign corporation that
consists of either the portion of a covered
distribution received by the foreign cor-
poration (determined under §1.959-4) or
a covered gain recognized by the foreign
corporation (determined under §1.961-9).
Covered shareholders that own stock of a
foreign corporation during a taxable year
of the foreign corporation in which the
foreign corporation receives or recognizes
a covered item are assigned portions of the
covered item in accordance with the rules
described in paragraph (c) of this section.
See also paragraph (g) of this section,
incorporating §1.959-1(b) for the defini-
tion of covered shareholder, §1.959-4(c)
for the definition of covered distribution,
and §1.961-9(c) for the definition of cov-
ered gain.
(c) Rules for assigning a covered
item—(1) Determine assignments based
on stock ownership on the last relevant

January 27, 2025 578 Bulletin No. 2025–5
day. First, assign a pro rata portion of the
covered item to each covered shareholder
that owns stock of the foreign corpora-
tion on the last relevant day of the foreign
corporation’s taxable year (defined in
§1.959-1(b) as the last day of the taxable
year on which the foreign corporation is
a controlled foreign corporation), deter-
mined by multiplying the amount of the
covered item by the fraction computed in
accordance with paragraph (d) of this sec-
tion. If there is no day during the taxable
year on which the foreign corporation is a
controlled foreign corporation, then treat
the last day of the taxable year as the last
relevant day.
(2) Adjust assignments for general suc-
cessor transactions. Second, if the foreign
corporation is an acquired foreign corpo-
ration in one or more general successor
transactions that occur during the foreign
corporation’s taxable year, then, for each
such general successor transaction (start-
ing with the earliest transaction), adjust
covered shareholders’ assigned portions
of the covered item in accordance with
paragraph (e) of this section. See also
paragraph (g) of this section, incorpo-
rating §1.959-7(b) for the definitions of
acquired foreign corporation and general
successor transaction.
(d) Fraction in determining assign-
ments—(1) In general. In determining a
covered shareholder’s assigned portion
of a covered item of a foreign corpora-
tion under paragraph (c)(1) of this section,
the fraction described in that paragraph
is computed as follows. The numerator
of the fraction is the amount that would
be the covered shareholder’s share of
the hypothetical distribution described in
§1.951-1(e) for the foreign corporation’s
taxable year if, for purposes of this para-
graph (d), §1.951-1(e) were applied with
the modifications described in paragraph
(d)(2) of this section. The denominator of
the fraction is the amount that would be
the hypothetical distribution described in
§1.951-1(e) for the foreign corporation’s
taxable year if, for purposes of this para-
graph (d), §1.951-1(e) were applied with
the modifications described in paragraph
(d)(2) of this section.
(2) Modifications—(i) Allocable earn-
ings and profits. For purposes of this
paragraph (d), the foreign corporation’s
allocable earnings and profits (as defined
in §1.951-1(e)(1)(ii)) are treated as the
amount that is the greater of—
(A) The earnings and profits of the
foreign corporation for the taxable year,
determined under section 964 and not
reduced by distributions during the tax-
able year; and
(B) The sum of all covered items of the
foreign corporation for the taxable year.
(ii) Controlled foreign corporation
status. For purposes of this paragraph
(d), §1.951-1(e) applies without regard
to whether the foreign corporation is a
controlled foreign corporation. In addi-
tion, if there is no day during the taxable
year on which the foreign corporation is
a controlled foreign corporation, then the
hypothetical distribution date (as defined
in §1.951-1(e)(1)(i)) is treated as the last
day of the taxable year.
(e) Rules for general successor trans-
actions—(1) In general. In adjusting
covered shareholders’ assignments of
a covered item for a general successor
transaction under paragraph (c)(2) of
this section, increase an assignment in
accordance with paragraph (e)(2) of this
section, and then decrease assignments
in accordance with paragraphs (e)(3) and
(4) of this section. Generally, under these
rules (together with §§1.959-4 and 1.961-
9), previously taxed earnings and profits
or section 961(c) basis with respect to the
transferor covered shareholder (if the gen-
eral successor transaction occurs before
the last relevant day) or successor cov-
ered shareholder (if the general successor
transaction occurs on or after the last rel-
evant day) are applied to a covered item
to the same extent such previously taxed
earnings and profits or section 961(c) basis
would have been applied if the general
successor transaction had not occurred.
(2) Increase—(i) General successor
transaction occurring before the last rel-
evant day. If the general successor trans-
action occurs before the last relevant day
of the taxable year but after the covered
item is received or recognized, then, sub-
ject to the limitation in paragraph (e)(2)
(iii) of this section, increase the trans-
feror covered shareholder’s assignment
of the covered item as follows. Increase
the assignment by the additional portion
of the covered item that would have been
assigned to the transferor covered share-
holder under paragraph (c)(1) of this sec-
tion if the day on which the covered item
is received or recognized were the last
relevant day and the hypothetical distribu-
tion described in paragraph (d)(1) of this
section were treated as made immediately
before the covered item is received or rec-
ognized.
(ii) General successor transaction
occurring on or after the last relevant day.
If the general successor transaction occurs
on or after the last relevant day of the tax-
able year but before the covered item is
received or recognized, then, subject to the
limitation in paragraph (e)(2)(iii) of this
section, increase the successor covered
shareholder’s assignment of the covered
item as follows. Increase the assignment
by the additional portion of the covered
item that would have been assigned to
the successor covered shareholder under
paragraph (c)(1) of this section if the day
on which the covered item is received or
recognized were the last relevant day and
the hypothetical distribution described
in paragraph (d)(1) of this section were
treated as made immediately before the
covered item is received or recognized.
(iii) Limitations. The increase pursuant
to paragraph (e)(2)(i) or (ii) of this sec-
tion applies only to the extent it results
in an additional portion of the covered
item being previously taxed earnings
and profits that are both with respect to
the covered shareholder described in that
paragraph and excluded from the foreign
corporation’s gross income under section
959(b) and §1.959-4 or section 961(c)
and §1.961-9. Further, the increase cannot
exceed the aggregate of each connected
covered shareholder’s assigned portion of
the covered item under paragraph (c)(1) of
this section.
(3) Decreases for connected covered
shareholders owning acquired stock. For
each connected covered shareholder that
owns acquired stock of the foreign corpo-
ration on the last relevant day of the tax-
able year, decrease the connected covered
shareholder’s assignment (but not below
zero) by the product of the increase pursu-
ant to paragraph (e)(2) of this section and
a fraction. The numerator of the fraction
is the connected covered shareholder’s
assigned portion of the covered item under
paragraph (c)(1) of this section, and the
denominator of the fraction is the aggre-
gate of the assigned portion of the covered

Bulletin No. 2025–5 579 January 27, 2025
item under paragraph (c)(1) of this section
of each connected covered shareholder
described in the preceding sentence.
(4) Decreases for connected covered
shareholders not owning acquired stock.
For each connected covered shareholder
that does not own acquired stock of the
foreign corporation on the last relevant
day of the taxable year, decrease the con-
nected covered shareholder’s assignment
by the product of the increase pursuant to
paragraph (e)(2) of this section, reduced
by the decreases pursuant to paragraph
(e)(3) of this section, and a fraction. The
numerator of the fraction is the connected
covered shareholder’s assigned portion of
the covered item under paragraph (c)(1)
of this section, and the denominator of the
fraction is the aggregate of the assigned
portion of the covered item under para-
graph (c)(1) of this section of each con-
nected covered shareholder described in
the preceding sentence.
(f) Currency rule. For purposes of this
section, if a covered item of a foreign
corporation is denominated in a currency
other than the foreign corporation’s func-
tional currency, then the covered item is
translated into the foreign corporation’s
functional currency at the spot rate on the
day on which the covered item is received
or recognized.
(g) Definitions and rules of general
applicability. The definitions in §§1.959-
1(b) and 1.961-(b), and the rules of gen-
eral applicability in §§1.959-1(c) and (d)
and 1.961-1(c) and (d), apply for purposes
of this section, with the following addi-
tions.
Acquired stock. The term acquired
stock means, in a general successor trans-
action, stock of an acquired foreign corpo-
ration the ownership of which is acquired
by the successor covered shareholder.
Connected covered shareholder. The
term connected covered shareholder
means, in a general successor transaction,
a covered shareholder that owns acquired
stock of an acquired foreign corporation
on the last relevant day of the acquired for-
eign corporation’s taxable year in which
the general successor transaction occurs,
or any covered shareholder bearing a
relationship described in section 267(b)
(determined without regard to section
267(c)(3)) or 707(b) to a covered share-
holder first described in this sentence.
Covered item. The term covered item
has the meaning provided in paragraph (b)
of this section.
(h) Examples—(1) In general. This
paragraph (h) provides examples illustrat-
ing the application of this section.
(2) Assumed facts. For purposes of the
examples in this paragraph (h), unless oth-
erwise indicated, the following facts are
assumed:
(i) US1 and US2 are unrelated domes-
tic corporations that are covered share-
holders. Neither US1 nor US2 is a mem-
ber of a consolidated group (as defined in
§1.1502-1(h)).
(ii) F1, F2, and F3 are foreign corpora-
tions, each of which is a controlled foreign
corporation and uses the British pound (£)
as its functional currency.
(iii) Each entity uses the calendar year
as its taxable year, and no entity has a
short taxable year.
(3) Examples—(i) Example 1: General assign-
ment rule and single class of stock—(A) Facts. US1
and US2 each directly own 50% of the single class
of outstanding stock of F1. F1 directly owns all the
outstanding stock of each of F2 and F3. For F1’s tax-
able year ending on December 31 of year 3, the last
relevant day is December 31, and F1 has £500x of
earnings and profits and two covered items. The cov-
ered items are a £60x covered distribution received
from F2 and £40x of covered gain recognized with
respect to stock of F3.
(B) Analysis. The portion of each covered item
assigned to each of US1 and US2 is determined by
multiplying the amount of the covered item by a frac-
tion, the numerator of which is the portion of a £500x
hypothetical distribution treated as made by F1 on
the last relevant day that would be distributed with
respect to stock of F1 that the covered shareholder
owns (£250x in the case of each US1 and US2), and
the denominator of which is the amount of the hypo-
thetical distribution (£500x). See paragraphs (c)(1)
and (d)(1) of this section; see also paragraph (d)(2)
of this section (treating F1’s hypothetical distribution
as equal to the greater of £500x, F1’s earnings and
profits for the taxable year, and £100x, the sum of
F1’s covered items for the taxable year). Thus, US1
and US2 are each assigned £30x of the covered dis-
tribution (£60x × £250x/£500x) and £20x of the cov-
ered gain (£40x × £250x/£500x).
(C) Alternative facts: common stock and pre-
ferred stock—(1) Facts. The facts are the same as in
paragraph (h)(3)(i)(A) of this section (Example 1),
except as follows. The stock of F1 owned by US1
is an 8% nonparticipating, voting preferred share of
stock with a par value of £1,000x, and the stock of
F1 owned by US2 is common stock. There are no
accrued but unpaid dividends with respect to the pre-
ferred stock.
(2) Analysis. The portion of each covered item
assigned to each of US1 and US2 is determined by
multiplying the amount of the covered item by a frac-
tion, the numerator of which is the portion of a £500x
hypothetical distribution treated as made by F1 on
the last relevant day that would be distributed with
respect to stock of F1 that the covered shareholder
owns (£80x in the case of US1, computed as 0.08 ×
£1,000x, and £420x in the case of US2, computed as
£500x − £80x), and the denominator of which is the
amount of the hypothetical distribution (£500x). See
paragraphs (c)(1) and (d) of this section. Thus, US1
is assigned £9.6x of the covered distribution (£60x ×
£80x/£500x) and £6.4x of the covered gain (£40x ×
£80x/£500x), and US2 is assigned £50.4x of the cov-
ered distribution (£60x × £420x/£500x) and £33.6x
of the covered gain (£40x × £420x/£500x).
(ii) Example 2: General successor transaction
occurs before the last relevant day and after a cov-
ered distribution—(A) Facts. US1 directly owns all
the shares of the single class of outstanding stock of
F1, and F1 directly owns all the outstanding stock of
F2. On June 30 of year 3, US1 sells all the stock of
F1 to US2 for money equal to the fair market value
of the stock in a general successor transaction. For
F1’s taxable year ending on December 31 of year
3, the last relevant day is December 31, and F1 has
£500x of earnings and profits and one covered item.
The covered item is a £100x covered distribution
received by F1 from F2 on March 31. Immediately
before the covered distribution, F2 has £100x of
previously taxed earnings and profits with respect
to US1.
(B) Analysis—(1) In general. Without regard to
paragraphs (c)(2) and (e) of this section (adjustments
for general successor transactions), US2 would be
assigned all £100x (and thus US1 would be assigned
none) of the covered item because US2 owns all the
stock of F1 on the last relevant day and therefore
US2 would have a 100% share of a £500x hypo-
thetical distribution treated as made by F1 on that
day. See paragraphs (c)(1) and (d) of this section.
However, because the sale is a general successor
transaction occurring before the last relevant day but
after F1 receives the covered item, the assignments
to US1 (the transferor covered shareholder) and US2
(a connected covered shareholder by reason of own-
ing acquired stock of F1 on the last relevant day)
are adjusted. See paragraphs (c)(2) and (e)(1) of this
section. The specific adjustments are described in
paragraph (h)(3)(ii)(B)(2) of this section. As a result
of these adjustments, the entirety of the covered item
is a distribution to F1 of F2’s previously taxed earn-
ings and profits with respect to US1 under §1.959-4.
Moreover, the previously taxed earnings and profits
could be distributed by F1 to US1 before the sale
and, to the extent not so distributed, are previously
taxed earnings and profits of F1 that transfer from
US1 to US2 in the sale under §1.959-7.
(2) Adjustments. US1’s assigned portion of the
covered item is increased by £100x, which is the
additional portion of the covered item that would
have been assigned to US1 under paragraph (c)(1)
of this section if March 31 were the last relevant day
(and, thus, F1’s £500x hypothetical distribution were
treated as made when US1 owned all the stock of F1
and would therefore have a 100% share of the hypo-
thetical distribution). See paragraph (e)(2)(i) of this
section. In determining this increase, the first limita-
tion in paragraph (e)(2)(iii) of this section does not
apply because a £100x increase does not exceed the
amount of F2’s previously taxed earnings and profits

January 27, 2025 580 Bulletin No. 2025–5
with respect to US1 that could be applied to exclude
such additional portion of the covered item from F1’s
gross income under section 959(b). In addition, the
second limitation in paragraph (e)(2)(iii) of this sec-
tion does not apply because a £100x increase does
not exceed the amount of the covered item assigned
to US2 under paragraph (c)(1) of this section. The
£100x increase to US1’s assigned portion of the cov-
ered item decreases US2’s assigned portion of the
covered item from £100x to £0. See paragraph (e)
(3) of this section.
(C) Alternative facts: limitation on increase
and multiple connected covered shareholders—(1)
Facts. The facts are the same as in paragraph (h)(3)
(ii)(A) of this section (Example 2), except as follows.
Immediately before the £100x covered distribution
on March 31, F2 has £90x (rather than £100x) of
previously taxed earnings and profits with respect to
US1. On September 30 of year 3, F1 issues shares of
its single class of outstanding stock to US3, a corpo-
rate covered shareholder related to US2 within the
meaning of section 267(b), with the result that US2
and US3 each own half of the stock of F1 on the last
relevant day.
(2) Analysis—(i) In general. Without regard to
paragraphs (c)(2) and (e) of this section (adjustments
for general successor transactions), US2 and US3
would each be assigned £50x (and thus US1 would
be assigned none) of the covered item because US2
and US3 each own half of the stock of F1 on the last
relevant day and therefore would each have a 50%
share of a £500x hypothetical distribution treated as
made by F1 on that day. See paragraphs (c)(1) and
(d) of this section. However, because the sale is a
general successor transaction occurring before the
last relevant day but after F1 receives the covered
item, the assignments to US1 (the transferor covered
shareholder), US2 (a connected covered shareholder
by reason of owning acquired stock of F1 on the last
relevant day), and US3 (a connected covered share-
holder by reason of bearing a relationship described
in section 267(b) to US2) are adjusted. See para-
graphs (c)(2) and (e)(1) of this section. The specific
adjustments are described in paragraph (h)(3)(ii)(C)
(2)(ii) of this section. As a result of these adjust-
ments, £90x of the covered item is a distribution to
F1 of F2’s previously taxed earnings and profits with
respect to US1 under §1.959-4. Moreover, the previ-
ously taxed earnings and profits could be distributed
by F1 to US1 before the sale and, to the extent not so
distributed, are previously taxed earnings and profits
of F1 that transfer from US1 to US2 in the sale under
§1.959-7.
(ii) Adjustments. US1’s assigned portion of the
covered item is increased by £90x, which is the
lesser of the additional portion of the covered item
that would have been assigned to US1 if March 31
were the last relevant day (£100x) and the amount
of F2’s previously taxed earnings and profits with
respect to US1 that could be applied to exclude such
additional portion of the covered item from F1’s
gross income under section 959(b) (£90x). See para-
graphs (e)(2)(i) and (iii) of this section. Because US2
owns acquired stock of F1 on the last relevant day,
the £90x increase to US1’s assigned portion of the
covered item first decreases US2’s assigned portion
of the covered item, from £50x to £0. See paragraph
(e)(3) of this section. Then, the remaining £40x
increase to US1’s assigned portion of the covered
item decreases US3’s assigned portion of the cov-
ered item, from £50x to £10x. See paragraph (e)(4)
of this section.
(iii) Example 3: General successor transaction
occurs after the last relevant day—(A) Facts. US1
directly owns all 100 shares of the single class of
outstanding stock of F1. F1 directly owns all the
outstanding stock of F2. On March 31 of year 3, F1
issues 100 shares of its single class of outstanding
stock to a nonresident alien individual and, conse-
quently, F1 ceases to be a controlled foreign corpora-
tion. On June 30 of year 3, US1 sells its 100 shares of
stock of F1 to US2 for money equal to the stock’s fair
market value in a general successor transaction. For
F1’s taxable year ending on December 31 of year 3,
the last relevant day is March 31 and F1 has £500x of
earnings and profits and one covered item. The cov-
ered item is a £100x covered distribution received
by F1 from F2 on September 30. Immediately before
the covered distribution, F2 has £50x of previously
taxed earnings and profits with respect to US2 (all
of which transferred from US1 to US2 in the Sale).
(B) Analysis—(1) In general. Without regard to
paragraphs (c)(2) and (e) of this section (adjustments
for general successor transactions), US2 would be
assigned none of the covered item because US2
owns none of the stock of F1 on the last relevant day
and therefore US2 would have a 0% share of a £500x
hypothetical distribution treated as made by F1 on
that day. See paragraphs (c)(1) and (d) of this section.
However, because the sale is a general successor
transaction occurring on or after the last relevant day
but before F1 receives the covered item, the assign-
ments to US2 (the successor covered shareholder)
and US1 (a connected covered shareholder by reason
of owning acquired stock of F1 on the last relevant
day) are adjusted. See paragraphs (c)(2) and (e)(1) of
this section. The specific adjustments are described
in paragraph (h)(3)(iii)(B)(2) of this section. As a
result of these adjustments, £50x of the covered item
is a distribution to F1 of F2’s previously taxed earn-
ings and profits with respect to US2 under §1.959-4.
(2) Adjustments. US2’s assigned portion of the
covered item is increased by £50x, which is the addi-
tional portion of the covered item that would have
been assigned to US2 under paragraph (c)(1) of this
section if September 30 were the last relevant day
(and, thus, F1’s £500x hypothetical distribution were
treated as made when US2 owned half of the stock
of F1 and would therefore have a 50% share of the
hypothetical distribution). See paragraph (e)(2)(ii)
of this section. In determining this increase, the first
limitation in paragraph (e)(2)(iii) of this section does
not apply because a £50x increase does not exceed
the amount of F2’s previously taxed earnings and
profits with respect to US2 that could be applied to
exclude such additional portion of the covered item
from F1’s gross income under section 959(b). In
addition, the second limitation in paragraph (e)(2)
(iii) of this section does not apply because a £50x
increase does not exceed the amount of the covered
item assigned to US1 under paragraph (c)(1) of this
section. The £50x increase to US2’s assigned portion
of the covered item decreases US1’s assigned por-
tion of the covered item by £50x. See paragraph (e)
(3) of this section.
(i) Applicability date. This section
applies to taxable years of foreign corpo-
rations that begin on or after [date of pub-
lication of final regulations in the Federal
Register] or are early application years (as
described in §1.959-12(d)) and to taxable
years of persons for which such taxable
years of those foreign corporations are
relevant.
Par. 13. Section 1.951A-1 is amended
by, for each paragraph listed in the follow-
ing table, removing the language in the
‘‘Remove’’ column wherever it appears
and adding in its place the language in the
‘‘Add’’ column:

Bulletin No. 2025–5 581 January 27, 2025
ParagraphRemoveAdd
(d)(1)§1.951-1(b) and (e)§1.951-1(b) and (c)
(d)(1)subpart F incomesubpart F income not attributable to covered items
(d)(2)(i)§1.951-1(b) and (e)§1.951-1(b) and (c)
(d)(2)(i)substituting “tested income” for “subpart
F income” each place it appears, other
than in §1.951-1(e)(1)(ii)(B) and the
denominator of the fraction described in
§1.951-1(b)(1)(ii)(A)
substituting “tested income” for “subpart F income”
each place it appears in §1.951-1(b) other than in the
denominator of the fraction described in §1.951-1(b)(1)(ii)
(A), substituting “tested income of the foreign corporation”
for “all subpart F income of the foreign corporation not
attributable to covered items” in §1.951-1(c)(2)(iii), and
substituting “such tested income” for “such subpart F
income” in §1.951-1(c)(2)(iii)
(d)(3)(iii)§1.951-1(e)(7)(vii)§1.951-1(h)(1)(vii)
(d)(3)(iii)(A)(2)(i)
§1.951-1(e)(1)§1.951-1(c)(2)(iii)
(d)(4)(i)§1.951-1(b) and (e)§1.951-1(b) and (c)
(d)(4)(i)(A)substituted for “subpart F income” each
place it appears
substituted for “subpart F income” each place it appears in
§1.951-1(b) and (c), “tested loss of the foreign corporation”
is substituted for “all subpart F income of the foreign
corporation not attributable to covered items” in §1.951-
1(c)(2)(iii), and “such tested loss” is substituted for “such
subpart F income” in §1.951-1(c)(2)(iii)
(d)(4)(iv)§1.951-1(e)(7)(viii)§1.951-1(h)(1)(viii)
Par. 14. Section 1.951A-2 is amended
by:
1. In paragraph (c)(1)(iv), removing the
language “and”;
2. In paragraph (c)(1)(v), removing the
period and adding the language “,
and” in its place; and
3. Adding paragraph (c)(1)(vi).
The addition reads as follows:
§1.951A-2 Tested income and tested
loss.
* * * * *
(c) * * *
(1) * * *
(vi) Previously taxed earnings and
profits excluded from the corporation’s
gross income under section 959(b) and
§1.959-4 or section 961(c) and §1.961-9.
* * * * *
Par. 15. Section 1.951A-7 is amended
by adding paragraph (f) to read as follows:
§1.951A-7 Applicability dates.
* * * * *
(f) Pro rata share determinations and
exclusions under sections 959(b) and
961(c). Sections 1.951A-1(d) and 1.951A-
2(c)(1)(vi) apply to taxable years of for-
eign corporations that begin on or after
[date of publication of final regulations in
the Federal Register] or are early applica-
tion years (as described in §1.959-12(d))
and to taxable years of persons for which
such taxable years of those foreign corpo-
rations are relevant. See §1.951A-1(d) as
contained in 26 CFR part 1 revised as of
April 1, 2024, for a version of §1.951A-
1(d) applicable to prior taxable years.
Par. 16. Section 1.952-1 is amended by
adding paragraphs (c)(4), (c)(5), and (h) to
read as follows:
§1.952-1 Subpart F income defined.
* * * * *
(c) * * *
(4) Coordination of earnings and prof-
its limitation with sections 959(b) and
961(c)—(i) In general. Distributions of
previously taxed earnings and profits
received by a controlled foreign corpo-
ration, and previously taxed earnings and
profits resulting from the application of a
controlled foreign corporation’s section
961(c) basis to gain recognized by the
controlled foreign corporation, are not
included in the controlled foreign corpo-
ration’s earnings and profits for the tax-
able year for purposes of the limitation in
section 952(c)(1)(A). See paragraph (h)
of this section (regarding excluding pre-
viously taxed earnings and profits from
a controlled foreign corporation’s gross
income for purposes of determining its
subpart F income).
(ii) Applicability date. Paragraph (c)(4)
(i) of this section applies to taxable years
of foreign corporations that begin on or
after [date of publication of final regula-
tions in the Federal Register] or are early
application years (as described in §1.959-
12(d)) and to taxable years of persons for
which such taxable years of those foreign
corporations are relevant.
(5) Transition rule for deficits of a
domestic partnership that was an inclu-
sion shareholder with respect to a con-
trolled foreign corporation—(i) In gen-
eral. For purposes of applying section
952(c)(1)(B) to any taxable year of a
controlled foreign corporation, a United
States shareholder that owns (within the
meaning of section 958(a)) stock of the
controlled foreign corporation by reason
of an interest in a domestic partnership
on the last day of the first taxable year of
the controlled foreign corporation during

January 27, 2025 582 Bulletin No. 2025–5
which §1.958-1(d) applies to the domes-
tic partnership (or, if earlier, the last day
of such taxable year on which the foreign
corporation is a controlled foreign corpo-
ration) (transition date) takes into account
its assigned portion of any prior year defi-
cit (determined under paragraph (c)(5)
(ii) of this section) for any taxable year of
the controlled foreign corporation ending
before the application of §1.958-1(d) in
determining the United States sharehold-
er’s pro rata share of a prior year deficit
under section 952(c)(1)(B)(iv)(II), and the
domestic partnership ceases to take into
account such prior year deficit.
(ii) Assigned portion of prior year
deficit. A United States shareholder’s
assigned portion of a prior year deficit is
determined on the transition date by mul-
tiplying a domestic partnership’s pro rata
share of the prior year deficit (determined
under section 952(c)(1)(B)(iv)(II) as of
the close of the taxable year in which the
deficit arose) by a fraction, the numera-
tor of which is the liquidation value of
the United States shareholder’s interest
in the partnership and the denominator of
which is the aggregate liquidation value
of all partners’ interests in the partner-
ship. For purposes of this fraction, the
liquidation value of a partner’s interest
in the partnership is the amount of cash
the partner would receive with respect to
the interest if, on the transition date, the
partnership (and any partnership through
which the partner indirectly owns an
interest in the partnership) sold all of its
property for an amount of cash equal to
the fair market value of the property (tak-
ing into account section 7701(g)), satis-
fied all of its liabilities (other than those
described in §1.752-7), paid an unrelated
third party to assume all of its §1.752-7
liabilities in a fully taxable transaction,
and then the partnership (and any part-
nership through which the partner indi-
rectly owns an interest in the partnership)
liquidated.
(iii) Applicability date. This paragraph
(c)(5) applies to taxable years of foreign
corporations beginning on or after [date
of publication of final regulations in the
Federal Register], and to taxable years
of United States shareholders in which or
with which such taxable years of foreign
corporation end. A United States share-
holder may apply this paragraph (c)(5) to
a taxable year of a foreign corporation that
precedes the taxable years described in the
preceding sentence if each of the follow-
ing conditions is satisfied—
(A) Consistent application condition.
This paragraph (c)(5) is applied in its
entirety to the taxable year and all suc-
ceeding taxable years of the foreign cor-
poration, to all taxable years of United
States shareholders to which such a tax-
able year of the foreign corporation is rel-
evant, and to all taxable years of related
foreign corporations that end on or after
the later of the last day of the first taxable
year of the foreign corporation to which
this paragraph (c)(5) applies and the first
day on which the foreign corporations
are related. For purposes of the preceding
sentence, foreign corporations are related
if the foreign corporations bear a relation-
ship to each other described in section
267(b).
(B) Open period of limitations condi-
tion. The period of limitations on assess-
ment for each taxable year described in
paragraph (c)(5)(iii)(A) of this section is
open under section 6501.
(C) Written consent condition. Each
United States shareholder described in
paragraph (c)(5)(iii)(A) of this section
provides to the foreign corporation a writ-
ten statement in which the United States
shareholder consents to apply the rules
described in this paragraph (c)(5) to the
taxable years of the United States share-
holder described in paragraph (c)(5)(iii)
(A) of this section and affirms that the
period of limitations on assessment for
each such taxable year is open under sec-
tion 6501.
* * * * *
(h) Exclusions from gross income
under sections 959(b) and 961(c). See
§§1.959-4 and 1.961-9 for rules excluding
previously taxed earnings and profits from
a controlled foreign corporation’s gross
income for purposes of determining its
subpart F income.
Par. 17. Section 1.954-1 is amended
by:
1. In paragraph (c)(1)(iii)(A), adding the
language “or income from a covered
item” immediately after the language
“that is passive”; and
2. Adding paragraphs (c)(1)(iii)(C) and
(h)(4).
The additions read as follows:
§1.954-1 Foreign base company
income.
* * * * *
(c) * * *
(1) * * *
(iii) * * *
(C) Covered items. A single item of
income is the portion of a covered item (as
defined in §1.951-2(b)) that—
(1) Falls within a single category of
foreign base company income described
in paragraph (c)(1)(iii)(A)(1) or (2) of this
section;
(2) Falls within a separate category (as
defined in §1.904-5(a)(4)(v)); and
(3) In the case of any amount which
constitutes passive foreign personal hold-
ing company income, falls within a single
group of passive income under the group-
ing rules of §1.904-4(c)(3), (4), or (5).
* * * * *
(h) * * *
(4) Paragraph (c)(1)(iii)(C) of this sec-
tion. Paragraph (c)(1)(iii)(C) of this sec-
tion applies to taxable years of a foreign
corporation that begin on or after [date
of publication of final regulations in the
Federal Register] or are early application
years (as described in §1.959-12(d)), and
to taxable years of a United States share-
holder of the foreign corporation in which
or with which such taxable year of such
foreign corporation ends.
Par. 18. Section 1.959-1 is revised to
read as follows:
§1.959-1 Overview, definitions, and
rules of general applicability.
(a) Overview—(1) In general. The sec-
tion 959 regulations provide rules regard-
ing previously taxed earnings and profits.
This section sets forth definitions and rules
of general applicability. Section 1.959-2
sets forth rules for shareholder-level and
foreign corporation-level accounting of
a foreign corporation’s previously taxed
earnings and profits. Section 1.959-3 pro-
vides the adjustments under section 959
to shareholder-level accounts with respect
to a foreign corporation. Section 1.959-4
provides rules for excluding previously
taxed earnings and profits received in a
distribution from gross income of a cov-
ered shareholder or controlled foreign
corporation. Section 1.959-5 provides

Bulletin No. 2025–5 583 January 27, 2025
rules for excluding the portion of a section
956 amount that is allocated to previously
taxed earnings and profits from gross
income of a covered shareholder. Section
1.959-6 provides rules for allocating and
apportioning current year taxes paid or
accrued by a foreign corporation to its pre-
viously taxed earnings and profits. Section
1.959-7 provides rules for transferring
previously taxed earnings and profits in
a general successor transaction. Sections
1.959-8 through 1.959-9 are reserved.
Section 1.959-10 provides examples illus-
trating the application of the section 959
regulations. Section 1.959-11 sets forth
transition rules. Section 1.959-12 sets
forth applicability dates. See §1.1502-
59 for additional rules for a consolidated
group.
(2) Scope. This section sets forth defini-
tions and rules of general applicability for
purposes of the section 959 regulations.
Paragraph (b) of this section provides
definitions. Paragraph (c) of this section
provides rules relating to S corporations.
Paragraph (d) of this section provides an
anti-avoidance rule.
(b) Definitions. The following defini-
tions apply for purposes of the section 959
regulations.
2019 notice provisions. The term 2019
notice provisions has the meaning pro-
vided in §1.959-12(c)(2).
Acquired foreign corporation. The
term acquired foreign corporation has the
meaning provided in §1.959-7(b).
Adjusted applicable percentage. The
term adjusted applicable percentage has
the meaning provided in §1.959-2(b)(2)
(iii)(A).
Annual PTEP account. The term
annual PTEP account means an account
that is described in §1.959-2(b)(1) and
tracks previously taxed earnings and prof-
its.
Character. The term character means,
with respect to previously taxed earnings
and profits, the taxable year, section 904
category, PTEP group and, if applicable,
PTEP subgroup to which the previously
taxed earnings and profits relate, as well
as, if applicable, the adjusted applicable
percentage and section 965(c) deduction
percentage with respect to the previously
taxed earnings and profits.
Controlled foreign corporation. The
term controlled foreign corporation has
the meaning provided in section 957(a)
(or, if applicable, section 957(b) or 953(c)
(1)(B)).
Corporate PTEP account. The term
corporate PTEP account has the meaning
provided in §1.959-2(d)(1).
Corporate PTEP tax pool. The term
corporate PTEP tax pool has the meaning
provided in §1.959-2(d)(2).
Covered distribution. The term covered
distribution has the meaning provided in
§1.959-4(c).
Covered gain. The term covered gain
has the meaning provided in §1.961-9(c).
Covered shareholder. The term cov-
ered shareholder means a United States
person (as described in section 7701(a)
(30)), other than a domestic partnership.
Creditable PTEP tax group. The term
creditable PTEP tax group has the mean-
ing provided in §1.959-2(b)(4)(ii).
Current year taxes. The term current
year taxes has the meaning provided in
§1.960-1(b)(4) except that “foreign cor-
poration” is substituted for “controlled
foreign corporation” and “the foreign cor-
poration’s taxable year” is substituted for
“current taxable year”.
Deemed covered shareholder. The
term deemed covered shareholder has the
meaning provided in §1.959-7(g).
Dollar basis pool. The term dollar basis
pool means an account that is described in
§1.959-2(b)(1) and that tracks the basis in
U.S. dollars of previously taxed earnings
and profits.
Domestic partnership. The term
domestic partnership has the meaning
provided in section 7701(a)(2) and (4).
See paragraph (c) of this section, provid-
ing that an S corporation is treated in the
same manner as a domestic partnership.
Early application corporation. The
term early application corporation has
the meaning provided in §1.959-12(d)(1).
Early application years. The term
early application years has the meaning
provided in §1.959-12(d)(1).
Foreign income taxes. The term foreign
income taxes has the meaning provided in
§1.901-2(a).
General successor PTEP. The term
general successor PTEP has the meaning
provided in §1.959-7(c)(1).
General successor transaction. The
term general successor transaction has
the meaning provided in §1.959-7(b).
GILTI inclusion amount. The term
GILTI inclusion amount has the meaning
provided in §1.951A-1(c)(1) (or §1.1502-
51(b) in the case of a member of a consol-
idated group, as defined in §1.1502-1(h)).
Last relevant day. The term last rele-
vant day means the last day of a taxable
year of a foreign corporation on which the
foreign corporation is a controlled foreign
corporation.
Multi-year dollar basis account. The
term multi-year dollar basis account has
the meaning provided in §1.959-11(b)(2)
(ii)(B).
Multi-year PTEP account. The term
multi-year PTEP account has the meaning
provided in §1.959-11(b)(2)(ii)(A).
Own. The term own (or ownership or
owned), when used with respect to stock
of a foreign corporation, means to own
the stock within the meaning of section
958(a) and §1.958-1(a) (thus determined
by treating a domestic partnership in the
same manner as a foreign partnership
pursuant to §1.958-1(d)). When used
with respect to interests in a partnership,
own (or ownership or owned) means to
own the interests within the meaning of
the preceding sentence, determined by
treating the interests as stock of a foreign
corporation.
Previously taxed earnings and prof-
its. The term previously taxed earnings
and profits means earnings and profits of
a foreign corporation that are described
in section 959(c)(1) or (2). See §1.959-
2(b) and (d) for covered sharehold-
er-level and foreign corporation-level
accounting of previously taxed earnings
and profits.
Prior-law PTEP groups. The term pri-
or-law PTEP groups has the meaning pro-
vided in §1.959-11(c)(2)(iii).
Prior-law PTEP group taxes. The
term prior-law PTEP group taxes has the
meaning provided in §1.959-11(c)(2)(iii).
PTEP group. The term PTEP group
means any of the groups listed in §1.959-
2(b)(2)(i).
PTEP realization event. The term
PTEP realization event has the meaning
provided in §1.959-6(b).
PTEP subgroup. The term PTEP sub-
group means any of the groups listed in
§1.959-2(b)(2)(ii).
PTEP tax pool. The term PTEP tax
pool means an account that is described

January 27, 2025 584 Bulletin No. 2025–5
in §1.959-2(b)(1) and that tracks the U.S.
dollar amount of foreign income taxes
associated with previously taxed earnings
and profits.
Relevant taxable year. The term rel-
evant taxable year has the meaning pro-
vided in §1.959-3(b).
S corporation. The term S corpora-
tion has the meaning provided in section
1361(a)(1). See paragraph (c) of this sec-
tion, providing that an S corporation is
treated in the same manner as a domestic
partnership.
Same priority PTEP. The term same
priority PTEP has the meaning provided
in §1.959-4(e)(5).
Section 904 category. The term section
904 category has the meaning provided in
§1.960-1(b).
Section 956 amount. The term section
956 amount has the meaning provided in
§1.959-5(c).
Section 959 regulations. The term sec-
tion 959 regulations means the regulations
in this part issued under section 959.
Section 965(c) deduction percent-
age. The term section 965(c) deduction
percentage has the meaning provided in
§1.959-2(b)(2)(iii)(B).
Spot rate. The term spot rate has the
meaning provided in §1.988-1(d).
Substituted basis property. The term
substituted basis property has the meaning
provided in section 7701(a)(42).
Successor covered shareholder. The
term successor covered shareholder has
the meaning provided in §1.959-7(b).
Subpart F income. The term subpart F
income has the meaning provided in sec-
tion 952 and §1.952-1.
Taxable year. The term taxable year has
the meaning provided in section 7701(a)
(23), determined by treating a person (as
described in section 7701(a)(1)) other
than an individual that does not otherwise
have a taxable year as computing taxable
income on the basis of the calendar year.
Tested income. The term tested income
has the meaning provided in section
951A(c)(2) and §1.951A-2(b)(1).
Tested loss. The term tested loss has
the meaning provided in section 951A(c)
(2) and §1.951A-2(b)(2).
Transferor covered shareholder. The
term transferor covered shareholder has
the meaning provided in §1.959-7(b).
United States shareholder. The term
United States shareholder has the mean-
ing provided in section 951(b) (or, if
applicable, section 953(c)(1)(A)).
(c) Treatment of an S corporation—(1)
In general. Except as provided in para-
graph (c)(2) of this section, for purposes
of the section 959 regulations, an S cor-
poration is treated in the same manner as
a domestic partnership, a reference to a
domestic partnership includes an S corpo-
ration, and shareholders of an S corpora-
tion are treated as partners of such partner-
ship. See section 1373(a). As applicable,
the treatment of an S corporation and its
shareholders under the preceding sentence
is determined by replacing any partner-
ship-specific provision with the equivalent
provision for S corporations (for exam-
ple, a reference to a partner’s distributive
share of a partnership’s income refers to a
shareholder’s pro rata share of an S corpo-
ration’s income).
(2) Treatment as a covered shareholder
for taxable years for which elective entity
treatment applies for §1.958-1(d)(1) pur-
poses. See §1.959-11(d) for a rule treating
an S corporation as a covered shareholder
for any taxable year of the S corporation
for which §1.958-1(d)(1) does not apply
and §1.959-11(e) for a transition rule
converting S corporation-level accounts
(for example, annual PTEP accounts) to
accounts of covered shareholders owning
interests in the S corporation once the S
corporation is no longer treated as a cov-
ered shareholder.
(d) Anti-avoidance rule. If a trans-
action, series of transactions, plan, or
arrangement is engaged in with a principal
purpose of avoiding the purposes of sec-
tion 959 and the section 959 regulations,
then appropriate adjustments are made,
which may include adjustments to disre-
gard the transaction, series of transactions,
plan, or arrangement.
Par. 19. Section 1.959-2 is revised to
read as follows:
§1.959-2 Accounting of previously
taxed earnings and profits.
(a) Scope. This section sets forth rules
for shareholder-level and foreign corpora-
tion-level accounting of a foreign corpora-
tion’s previously taxed earnings and prof-
its. Paragraph (b) of this section provides
the shareholder-level accounting rules.
Paragraph (c) of this section provides rules
relating to combined pool elections for cer-
tain covered shareholder-level accounts.
Paragraph (d) of this section provides the
foreign corporation-level accounting rules.
(b) Shareholder-level accounting—
(1) In general. A covered shareholder
that owns stock of a foreign corporation
must establish and maintain annual PTEP
accounts, dollar basis pools, and PTEP
tax pools with respect to the foreign cor-
poration in accordance with this para-
graph (b) and the adjustments prescribed
in §1.959-3. The annual PTEP accounts
track the foreign corporation’s previously
taxed earnings and profits with respect to
the covered shareholder, the dollar basis
pools track the basis in U.S. dollars of the
previously taxed earnings and profits, and
the PTEP tax pools track the U.S. dollar
amount of any foreign income taxes asso-
ciated with the previously taxed earnings
and profits. See also §1.1502-59(c)(2),
treating members of a consolidated group
as a single covered shareholder for pur-
poses of section 959.
(2) Annual PTEP accounts—(i) In
general. Each annual PTEP account must
relate to a single taxable year of the for-
eign corporation and a single section 904
category. In addition, previously taxed
earnings and profits within each annual
PTEP account must be maintained in the
foreign corporation’s functional currency
and assigned to the PTEP groups identi-
fied in the following table.

Bulletin No. 2025–5 585 January 27, 2025
Table 1 to paragraph (b)(2)(i) of this section
PTEP groups
Section 959(c)(1) PTEP groupsSection 959(c)(2) PTEP groups
GroupDescriptionGroupDescription
General section 959(c)
(1) PTEP group
Earnings and profits described in
section 959(c)(1) and not described in
another PTEP group
Section 951(a)(1)(A)
PTEP group
Earnings and profits described in
section 959(c)(2) and not described in
another PTEP group
Reclassified section
951A PTEP group
Earnings and profits described
in section 959(c)(1) and initially
assigned to the section 951A PTEP
group
Section 951A PTEP
group
Earnings and profits described in
section 959(c)(2) by reason of section
951A
Reclassified section
245A(d) PTEP group
Earnings and profits described
in section 959(c)(1) and initially
assigned to the section 245A(d) PTEP
group
Section 245A(d) PTEP
group
Earnings and profits described in
section 959(c)(2) by reason of an
income inclusion to which section
245A(d) applies
Reclassified section
965(a) PTEP group
Earnings and profits described
in section 959(c)(1) and initially
assigned to the section 965(a) PTEP
group
Section 965(a) PTEP
group
Earnings and profits described in
section 959(c)(2) by reason of section
965(a)
Reclassified section
965(b) PTEP group
Earnings and profits described
in section 959(c)(1) and initially
assigned to the section 965(b) PTEP
group
Section 965(b) PTEP
group
Earnings and profits described in
section 959(c)(2) by reason of section
965(b)
(ii) Subgroups—(A) In general. To the
extent required under §1.959-3(c), previ-
ously taxed earnings and profits assigned
to a PTEP group within an annual PTEP
account must be further assigned to the
taxable section 962 PTEP subgroup or
taxable section 1411 subgroup. These
subgroups track previously taxed earnings
and profits that will be includible in gross
income under section 962(d) or includible
in net investment income under section
1411(c) when distributed to the covered
shareholder, as applicable.
(B) Coordination rule. A subgroup
described in paragraph (b)(2)(ii)(A) of
this section is not treated as a separate
PTEP group for purposes of establishing
and maintaining dollar basis pools and
PTEP tax pools.
(iii) Percentages with respect to section
965 previously taxed earnings and prof-
its—(A) Adjusted applicable percentage.
An adjusted applicable percentage must
be established and maintained with respect
to all previously taxed earnings and profits
assigned to the reclassified section 965(a)
PTEP group, reclassified section 965(b)
PTEP group, section 965(a) PTEP group,
and section 965(b) PTEP group and relat-
ing to a single section 904 category (there-
fore without regard to the taxable years
to which the previously taxed earnings
and profits relate). The adjusted applica-
ble percentage tracks the percentage of
a credit or deduction for foreign income
taxes associated with previously taxed
earnings and profits that is disallowed
under §1.965-5. See §1.959-11(c)(3) for
the initial determination of the adjusted
applicable percentage and §1.959-3(c)(3)
for adjustments.
(B) Section 965(c) deduction percent-
age. A section 965(c) deduction percent-
age must be established and maintained
with respect to all previously taxed earn-
ings and profits assigned to the reclassi-
fied section 965(a) PTEP group and sec-
tion 965(a) PTEP group and relating to
a single section 904 category (therefore
without regard to the taxable years to
which the previously taxed earnings and
profits relate). The section 965(c) deduc-
tion percentage tracks the percentage of
foreign currency gain or loss with respect
to previously taxed earnings and profits
that is not recognized under §1.986(c)-1.
See §1.959-11(c)(4) for the initial deter-
mination of the section 965(c) deduction
percentage and §1.959-3(c)(3) for adjust-
ments.
(iv) Deemed taxable years. If previ-
ously taxed earnings and profits are dis-
tributed to an upper-tier foreign corpo-
ration or result from the application of
section 961(c) basis to gain recognized by
an upper-tier corporation, and the previ-
ously taxed earnings and profits relate to
a taxable year of a lower-tier foreign cor-
poration that includes one or more days
on which the upper-tier foreign corpora-
tion did not exist, then, solely for purposes
of the establishment and maintenance of
annual PTEP accounts, the upper-tier cor-
poration is treated as having the taxable
year or taxable years it would have had
if it were to have existed on those days,
determined based on the manner in which
it computes its taxable income for its ini-
tial taxable year.
(3) Dollar basis pools. Each dollar
basis pool must relate to previously taxed
earnings and profits assigned to a single
PTEP group within a single annual PTEP
account or, if a combined pool election
applies to the covered shareholder, previ-
ously taxed earnings and profits assigned
to a single PTEP group and relating to a

January 27, 2025 586 Bulletin No. 2025–5
single section 904 category (therefore
without regard to the taxable years to
which the previously taxed earnings and
profits relate). Basis within each dollar
basis pool must be maintained in U.S. dol-
lars.
(4) PTEP tax pools—(i) In general.
Each PTEP tax pool must relate to previ-
ously taxed earnings and profits assigned
to a single PTEP group within a single
annual PTEP account or, if a combined
pool election applies to the covered share-
holder, previously taxed earnings and
profits assigned to a single PTEP group
and relating to a single section 904 cat-
egory (therefore without regard to the
taxable years to which the previously
taxed earnings and profits relate). Foreign
income taxes within each PTEP tax pool
must be maintained in U.S. dollars.
(ii) Creditable PTEP tax group. To the
extent required under §1.959-3(e), for-
eign income taxes within each PTEP tax
pool must be assigned to the creditable
PTEP tax group. This group tracks for-
eign income taxes that are eligible to be
deemed paid under section 960(b).
(c) Combined pool elections—(1) In
general. For purposes of paragraph (c)
of this section, a combined pool election
is made for a taxable year of a covered
shareholder and, once made, remains in
effect until revoked. The combined pool
election applies with respect to each for-
eign corporation in which the covered
shareholder owns stock, beginning as of
the first day of the first taxable year of
the foreign corporation that ends with
or within the taxable year of the covered
shareholder for which the combined pool
election is made or, if later, the first day in
which the covered shareholder owns stock
of the foreign corporation.
(2) Revocation. A combined pool elec-
tion may only be revoked with the consent
of the Commissioner (and in the time and
manner specified by the Commissioner),
and such consent will be granted only in
rare and unusual circumstances.
(3) Time and manner of making elec-
tion—(i) In general. Except as otherwise
provided by a form, instruction, publica-
tion, or other guidance, a covered share-
holder makes a combined pool election
by, for a transaction related to a timely
filed (including extensions) original Fed-
eral income tax return of the covered
shareholder, computing the dollar basis of,
or foreign income taxes associated with,
previously taxed earnings and profits con-
sistent with a combined pool election.
(ii) Sixty-month limitation on a subse-
quent election. A covered shareholder is
not permitted to make a combined pool
election for any taxable year beginning
less than 60 months after the last day that
a previous combined pool election applied
to the covered shareholder (or a predeces-
sor).
(4) Converting to combined pools. As
of the beginning of the first day that a cov-
ered shareholder’s combined pool election
applies with respect to a foreign corpora-
tion, each of the covered shareholder’s
dollar basis pools or PTEP tax pools with
respect to the foreign corporation (a com-
bined pool) is equal to the sum of all of
the dollar basis pools or PTEP tax pools,
as applicable, that, immediately before the
combined pool election applies, related to
the same PTEP group and section 904 cat-
egory to which the combined pool relates.
(d) Foreign corporation-level account-
ing—(1) Corporate PTEP accounts.
Corporate PTEP accounts must be estab-
lished and maintained with respect to a
foreign corporation. Each corporate PTEP
account must relate to a single covered
shareholder, and previously taxed earn-
ings and profits within a corporate PTEP
account must be assigned to section 904
categories and the PTEP groups identi-
fied in the table to paragraph (b)(2)(i) of
this section. A corporate PTEP account
for a covered shareholder is equal to the
aggregate of all previously taxed earnings
and profits that are within such covered
shareholder’s annual PTEP accounts with
respect to the foreign corporation. Thus,
as a covered shareholder’s annual PTEP
accounts with respect to the foreign cor-
poration are adjusted under §1.959-3,
the foreign corporation’s corporate PTEP
account for the covered shareholder and
the foreign corporation’s earnings and
profits described in section 959(c)(1) or
(c)(2) are also adjusted.
(2) Corporate PTEP tax pools. Corpo-
rate PTEP tax pools must be established
and maintained by a foreign corporation.
Each corporate PTEP tax pool must relate
to a single covered shareholder, and for-
eign income taxes within a corporate PTEP
tax pool must be assigned to section 904
categories and the PTEP groups identified
in the table to paragraph (b)(2)(i) of this
section. A corporate PTEP tax pool relat-
ing to a covered shareholder is equal to
the aggregate of all foreign income taxes
that are within that covered shareholder’s
PTEP tax pools with respect to the foreign
corporation. Thus, as a covered share-
holder’s PTEP tax pools with respect to
the foreign corporation are adjusted under
§1.959-3, the foreign corporation’s cor-
porate PTEP tax pool relating to the cov-
ered shareholder is also adjusted. Foreign
income taxes within a corporate PTEP tax
pool that are eligible to be deemed paid
under section 960(b) are assigned to the
creditable PTEP tax group within the cov-
ered shareholder’s PTEP tax pools.
(3) Earnings and profits determined
independently of previously taxed earn-
ings and profits. A foreign corporation’s
earnings and profits are determined inde-
pendently of the foreign corporation’s pre-
viously taxed earnings and profits. Thus,
for example, the extent to which a distri-
bution is made out of a foreign corpora-
tion’s earnings and profits is determined
independently of the foreign corporation’s
corporate PTEP accounts. See section 316.
Similarly, a foreign corporation’s earnings
and profits may be less than the foreign
corporation’s previously taxed earning
and profits (with the result that the foreign
corporation has a deficit in earnings and
profits described in section 959(c)(3)).
Par. 20. Section 1.959-3 is revised to
read as follows:
§1.959-3 Adjustments to shareholder-
level accounts.
(a) Scope. This section provides the
adjustments under section 959 to share-
holder-level accounts with respect to a
foreign corporation. Paragraph (b) of this
section provides the general rule, pursu-
ant to which shareholder-level accounts
(annual PTEP accounts, dollar basis
pools, and PTEP tax pools) are adjusted
with respect to a foreign corporation to
reflect income inclusions relating to, and
transactions occurring within, the foreign
corporation’s taxable year. Paragraph (c)
of this section describes adjustments to
annual PTEP accounts. Paragraph (d) of
this section describes adjustments to dol-
lar basis pools. Paragraph (e) of this sec-

Bulletin No. 2025–5 587 January 27, 2025
tion describes adjustments to PTEP tax
pools. Paragraph (f) of this section pro-
vides timing rules for when adjustments
are treated as made. Paragraph (g) of this
section provides an ordering rule for the
application of this section to tiered for-
eign corporations. See also §1.959-2(d)
(1) and (2), providing that as sharehold-
er-level accounts are adjusted with respect
to a foreign corporation under this section,
the foreign corporation-level accounts are
consequently also adjusted.
(b) In general. To reflect income inclu-
sions and transactions related to a taxable
year of a foreign corporation (such tax-
able year for which this section is being
applied, the relevant taxable year), a cov-
ered shareholder’s annual PTEP accounts,
dollar basis pools, and PTEP tax pools
with respect to the foreign corporation
must be adjusted in accordance with the
rules in this section.
(c) Adjustments to annual PTEP
accounts—(1) In general—(i) Increases
for amounts included in gross income
under section 951(a)(1)(A). If the foreign
corporation is a controlled foreign corpora-
tion and the covered shareholder includes
in gross income its pro rata share of the
corporation’s subpart F income for the
relevant taxable year under section 951(a)
(1)(A) (including by reason of section
245A(e)(2) or 964(e)(4), but not including
an amount described in section 959(e)),
then, for each annual PTEP account that
relates to the relevant taxable year and a
section 904 category to which a portion
of the inclusion is assigned (determined at
the level of the covered shareholder, thus
after the application of §1.904-4(c)), add
an amount of previously taxed earnings
and profits equal to such portion to the
annual PTEP account. Assign such pre-
viously taxed earnings and profits to the
section 951(a)(1)(A) PTEP group, except
assign previously taxed earnings and prof-
its to the section 245A(d) PTEP group to
the extent section 245A(d) applies to the
inclusion giving rise to the previously
taxed earnings and profits (see sections
245A(e)(3) and 964(e)(4)). If applicable,
further assign previously taxed earnings
and profits to a PTEP subgroup in accor-
dance with paragraph (c)(2) of this sec-
tion.
(ii) Increases for amounts included in
gross income under section 951A(a). If the
foreign corporation is a controlled foreign
corporation and the covered shareholder
includes in gross income the portion of its
GILTI inclusion amount that is treated as
with respect to the corporation for the rel-
evant taxable year under section 951A(a)
and (f)(2), then, for each annual PTEP
account that relates to the relevant taxable
year and a section 904 category to which
a portion of the inclusion is assigned
(determined at the level of the covered
shareholder, thus after the application of
§1.904-4(c)), add an amount of previ-
ously taxed earnings and profits equal to
such portion to the annual PTEP account.
Assign such previously taxed earnings and
profits to the section 951A PTEP group. If
applicable, further assign previously taxed
earnings and profits to a PTEP subgroup
in accordance with paragraph (c)(2) of
this section.
(iii) Increases for receipt of distributed
previously taxed earnings and profits.
If, during the relevant taxable year, pre-
viously taxed earnings and profits with
respect to the covered shareholder are
distributed to the foreign corporation in
a covered distribution (determined under
§1.959-4), then add such distributed pre-
viously taxed earnings and profits to the
annual PTEP accounts in accordance with
paragraph (c)(3) of this section.
(iv) Increases for previously taxed
earnings and profits resulting from section
961(c) basis. If, during the relevant tax-
able year, previously taxed earnings and
profits with respect to the covered share-
holder result from the application of pos-
itive section 961(c) basis to covered gain
recognized by the foreign corporation
(determined under §1.961-9), then add
such resulting previously taxed earnings
and profits to the annual PTEP accounts in
accordance with paragraph (c)(3) of this
section.
(v) Decreases for current year taxes. If
previously taxed earnings and profits are
added to a PTEP group within an annual
PTEP account pursuant to paragraph (c)
(1)(iii) or (iv) of this section, then reduce
the previously taxed earnings and prof-
its in that PTEP group by the amount
of the current year taxes allocated and
apportioned under §1.959-6 to the corre-
sponding PTEP group of the foreign cor-
poration. The corresponding PTEP group
of the foreign corporation is the PTEP
group of the foreign corporation that is
of the same type as the increased PTEP
group and that is within a corporate PTEP
account of the foreign corporation that is
with respect to the covered shareholder. If
the PTEP group of that type in multiple
annual PTEP accounts increases pursu-
ant to paragraph (c)(1)(iii) or (iv) of this
section, apportion the amount of the cur-
rent year taxes allocated and apportioned
under §1.959-6 to the corresponding PTEP
group of the foreign corporation among
those increased PTEP groups under the
principles of §1.861-20.
(vi) Decreases for distributed previ-
ously taxed earnings and profits. If, during
the relevant taxable year, the foreign cor-
poration distributes previously taxed
earnings and profits with respect to the
covered shareholder in a covered distri-
bution (determined under §1.959-4), then
remove such distributed previously taxed
earnings and profits from the annual PTEP
accounts.
(vii) Increases for amounts included in
gross income as a dividend under section
1248(a) or (f). If, during the relevant tax-
able year, gain recognized by the covered
shareholder is included in gross income
as a dividend under section 1248(a) or (f)
by reason of earnings and profits of the
foreign corporation, then, for each annual
PTEP account that relates to the relevant
taxable year and a section 904 category to
which a portion of the inclusion is assigned
(determined at the level of the covered
shareholder, thus after the application of
§1.904-4(c)), add an amount of previously
taxed earnings and profits equal to such
portion to the annual PTEP account (see
section 959(e)). Assign such previously
taxed earnings and profits to the section
951(a)(1)(A) PTEP group, except assign
previously taxed earnings and profits to the
section 245A(d) PTEP group to the extent
section 245A(d) applies to the inclusion
giving rise to the previously taxed earn-
ings and profits (including by reason of
section 245A(e)(3)). If applicable, further
assign previously taxed earnings and prof-
its to a PTEP subgroup in accordance with
paragraph (c)(2) of this section.
(viii) Decreases with respect to trans-
feror covered shareholder for transferred
previously taxed earnings and profits. If,
during the relevant taxable year, previ-
ously taxed earnings and profits of the for-

January 27, 2025 588 Bulletin No. 2025–5
eign corporation transfer from the covered
shareholder in a general successor trans-
action (determined under §1.959-7), then
remove such transferred previously taxed
earnings and profits from the annual PTEP
accounts.
(ix) Increases with respect to successor
covered shareholder for transferred previ-
ously taxed earnings and profits. If, during
the relevant taxable year, previously taxed
earnings and profits of the foreign corpo-
ration transfer to the covered shareholder
in a general successor transaction (deter-
mined under §1.959-7), then add such
transferred previously taxed earnings and
profits to the annual PTEP accounts in
accordance with paragraph (c)(3) of this
section.
(x) Reassignments for previously taxed
earnings and profits to which a section 956
amount is allocated. If the foreign corpo-
ration is a controlled foreign corporation
and a portion of the covered shareholder’s
section 956 amount with respect to the
corporation for the relevant taxable year is
allocated to previously taxed earnings and
profits (determined under §1.959-5), then
reassign such previously taxed earnings
and profits from a section 959(c)(2) PTEP
group to the section 959(c)(1) PTEP group
in the same row in the table in §1.959-2(b)
(2)(i). If applicable, further assign pre-
viously taxed earnings and profits to the
PTEP subgroup to which they relate. See
paragraph (c)(4) of this section in the case
of certain acquisitions of stock to which
a section 956 amount of another share-
holder is attributable.
(xi) Increases for amounts included
in gross income under section 951(a)(1)
(B). If the foreign corporation is a con-
trolled foreign corporation and the cov-
ered shareholder includes in gross income
a portion of its section 956 amount with
respect to the corporation for the relevant
taxable year under section 951(a)(1)(B),
then, for each annual PTEP account that
relates to the relevant taxable year and a
section 904 category to which a portion
of the inclusion is assigned (determined at
the level of the covered shareholder, thus
after the application of §1.904-4(c)), add
an amount of previously taxed earnings
and profits equal to such portion to the
annual PTEP account. Assign such pre-
viously taxed earnings and profits to the
general section 959(c)(1) PTEP group. If
applicable, further assign previously taxed
earnings and profits to a PTEP subgroup
in accordance with paragraph (c)(2) of
this section. See paragraph (c)(4) of this
section in the case of certain acquisitions
of stock to which a section 956 amount of
another shareholder is attributable.
(2) Assignment to PTEP subgroups—
(i) Taxable section 962 PTEP subgroup.
If the covered shareholder is an individual
and an election under §1.962-2 applies to
the covered shareholder’s income inclu-
sions under section 951(a) or 951A(a)
for the relevant taxable year, then further
assign a portion of previously taxed earn-
ings and profits added pursuant to para-
graph (c)(1)(i), (ii), or (xi) of this section
(section 951(a) or 951A(a) inclusions) to
the taxable section 962 PTEP subgroup.
The portion of previously taxed earnings
and profits assigned to the taxable section
962 PTEP subgroup is equal to the excess
of the previously taxed earnings and prof-
its over the income tax paid under this
chapter on the income inclusions giving
rise to the previously taxed earnings and
profits (determined by translating such tax
into the foreign corporation’s functional
currency at the exchange rate at which the
income inclusion is translated into U.S.
dollars under section 989(b)).
(ii) Taxable section 1411 PTEP sub-
group. If the covered shareholder is an
individual, estate, or trust, then further
assign previously taxed earnings and
profits added pursuant to paragraph (c)
(1)(i), (ii), (vii), and (xi) of this section
(section 951(a), 951A(a), or 1248(a) or
(f) inclusions) to the taxable section 1411
PTEP subgroup to the extent the income
inclusion giving rise to the previously
taxed earnings and profits is not taken into
account in determining net investment
income under §1.1411-4(a)(1)(i).
(3) Preserving the character of previ-
ously taxed earnings and profits—(i) In
general. Add previously taxed earnings
and profits that are described in para-
graph (c)(1)(iii), (iv), or (ix) of this sec-
tion (previously taxed earnings and profits
received in a distribution, resulting from
section 961(c) basis, or transferred to the
covered shareholder) and that relate to a
single section 904 category and single tax-
able year to the annual PTEP account that
relates to such section 904 category and
such taxable year or a taxable year (includ-
ing a deemed taxable year) that ends with,
or closest to, the last day of such taxable
year, as applicable. Assign the previously
taxed earnings and profits to the PTEP
group, and if applicable PTEP subgroup,
to which they relate. See §1.959-4, 1.959-
7, or 1.961-9 for rules determining the
character of previously taxed earnings and
profits received, transferred, or resulting
from section 961(c) basis, respectively.
(ii) Recalculate percentages with
respect to section 965 previously taxed
earnings and profits—(A) In general.
If applicable in adding previously taxed
earnings and profits described in para-
graph (c)(1)(iii), (iv), or (ix) of this sec-
tion (previously taxed earnings and profits
received in a distribution, resulting from
section 961(c) basis, or transferred to
the covered shareholder) to annual PTEP
accounts relating to the same section 904
category, recalculate an adjusted applica-
ble percentage or section 965(c) deduction
percentage with respect to relevant previ-
ously taxed earnings and profits within
such annual PTEP accounts so that the
percentage is a weighted average of—
(1) The adjusted applicable percentage
or section 965(c) deduction percentage
with respect to relevant previously taxed
earnings and profits within the annual
PTEP accounts immediately before the
addition; and
(2) The adjusted applicable percentage
or section 965(c) deduction percentage
with respect to relevant previously taxed
earnings and profits added to the annual
PTEP accounts.
(B) Determining the weighted average.
The weighted average is determined as
the sum of the product of each percentage
described in paragraph (c)(3)(ii)(A)(1) or
(2) of this section and the amount of previ-
ously taxed earnings and profits described
in that paragraph, divided by the sum of
the amounts of previously taxed earnings
and profits described in those paragraphs.
(4) Certain acquisitions of stock to
which a section 956 amount is attribut-
able. If the covered shareholder acquires
ownership of stock of the foreign corpo-
ration during the relevant taxable year but
on or after the last relevant day of the rel-
evant taxable year (for example, in a gen-
eral successor transaction), and a portion
of a section 956 amount of a United States
shareholder is attributable to such stock,

Bulletin No. 2025–5 589 January 27, 2025
then treat such portion of the section 956
amount and any inclusion thereof in gross
income of the United States shareholder
as being of the covered shareholder for
purposes of paragraphs (c)(1)(x) and (xi)
of this section.
(5) Currency rule. All adjustments to
annual PTEP accounts are made in the
functional currency of the foreign corpo-
ration, determined, as applicable, by trans-
lating an inclusion described in paragraph
(c)(1)(ii) of this section into functional
currency at the average exchange rate for
the relevant taxable year (see §1.951A-
5(b)(3)) and by translating previously
taxed earnings and profits described in
paragraph (c)(1)(iii) of this section into
functional currency at the spot rate on
the day of the distribution (see section
989(b)). See also §1.961-9 (determin-
ing previously taxed earnings and prof-
its described in paragraph (c)(1)(iv) of
this section in functional currency), and
§1.959-6 (determining current year taxes
described in paragraph (c)(1)(v) of this
section in functional currency).
(d) Adjustments to dollar basis pools—
(1) In general—(i) Increases for U.S. dol-
lar amount of income inclusions under
sections 951(a), 951A(a), and 1248(a) or
(f). For each addition pursuant to para-
graph (c)(1)(i), (ii), (vii), or (xi) of this
section of previously taxed earnings and
profits relating to a single dollar basis
pool, add an amount of basis equal to the
income inclusion under section 951(a),
951A(a), or 1248(a) or (f) giving rise to
such previously taxed earnings and profits
to the dollar basis pool.
(ii) Increases for dollar basis of
received or resulting previously taxed
earnings and profits. For each addition
pursuant to paragraph (c)(1)(iii) or (iv) of
this section of previously taxed earnings
and profits relating to a single dollar basis
pool, add the dollar basis of such previ-
ously taxed earnings and profits (deter-
mined under §1.959-4 or 1.961-9, as
applicable) to the dollar basis pool.
(iii) Decreases for current year taxes.
For each reduction pursuant to paragraph
(c)(1)(v) of this section to previously
taxed earning and profits relating to a sin-
gle dollar basis pool, reduce the basis in
the dollar basis pool by the amount of the
current year taxes giving rise to the reduc-
tion.
(iv) Decreases for dollar basis of dis-
tributed or transferred previously taxed
earnings and profits. For each removal
pursuant to paragraph (c)(1)(vi) or (viii)
of this section of previously taxed earn-
ings and profits relating to a single dol-
lar basis pool, remove the dollar basis of
such previously taxed earnings and profits
(determined under §1.959-4 or 1.959-7, as
applicable) from the dollar basis pool.
(v) Increases for dollar basis of trans-
ferred previously taxed earnings and prof-
its, adjusted for foreign currency gain or
loss. For each addition pursuant to para-
graph (c)(1)(ix) of this section of previ-
ously taxed earnings and profits relating
to a single dollar basis pool, add the dollar
basis of such previously taxed earnings
and profits (determined under §1.959-7
and adjusted in accordance with the next
sentence) to the dollar basis pool. In
applying the preceding sentence, increase
(or decrease) the dollar basis of trans-
ferred previously taxed earnings and prof-
its by foreign currency gain (or foreign
currency loss) that the transferor covered
shareholder recognizes with respect to the
previously taxed earnings and profits. In
addition, determine such foreign currency
gain or loss without regard to §1.986-1(c)
(3)(i) and (ii) (limitations for previously
taxed earnings and profits resulting from
section 965) and by treating the deemed
covered shareholder in the same manner
as a covered shareholder.
(vi) Adjustments for dollar basis of
previously taxed earnings and profits to
which a section 956 amount is allocated.
For each reassignment pursuant to para-
graph (c)(1)(x) of this section of previ-
ously taxed earnings and profits relating to
a single dollar basis pool, remove the dol-
lar basis of such previously taxed earnings
and profits (determined under §1.959-5)
from the dollar basis pool relating to the
section 959(c)(2) PTEP group from which
the previously taxed earnings and profits
are reassigned and add such basis to the
dollar basis pool relating to the section
959(c)(1) PTEP group to which the previ-
ously taxed earnings and profits are reas-
signed.
(2) Currency rule. All adjustments to
dollar basis pools are made in U.S. dol-
lars, determined, as applicable, by trans-
lating inclusions described in paragraph
(d)(1)(i) of this section into U.S. dollars
in accordance with section 989(b) and
current year taxes described in paragraph
(d)(1)(iii) of this section into U.S. dollars
in accordance with section 986(a) and
§1.986(a)-1.
(e) Adjustments to PTEP tax pools—
(1) In general—(i) Increases for foreign
income taxes associated with previously
taxed earnings and profits received. For
each addition pursuant to paragraph (c)
(1)(iii) of this section of previously taxed
earnings and profits relating to a single
PTEP tax pool, add the foreign income
taxes that are associated with such pre-
viously taxed earnings and profits (deter-
mined under §1.959-4(g)) to the PTEP
tax pool. Assign such associated foreign
income taxes to the creditable PTEP tax
group only to the extent the foreign cor-
poration is deemed to pay the taxes under
section 960(b)(2) and §1.960-3(c). See
paragraph (e)(1)(ii) of this section for
increases to PTEP tax pools for current
year taxes paid or accrued by the foreign
corporation on the receipt of the previ-
ously taxed earnings and profits.
(ii) Increases for current year taxes.
For each reduction pursuant to paragraph
(c)(1)(v) of this section to previously
taxed earnings and profits relating to a
single PTEP tax pool, add to the PTEP tax
pool the current year taxes giving rise to
the reduction. Assign such current year
taxes to the creditable PTEP tax group
only if the foreign corporation is a con-
trolled foreign corporation when the taxes
are paid or accrued and a credit for the
taxes is not disallowed or suspended at the
level of the controlled foreign corporation
(see, for example, section 245A(e)(3) and
§1.245A(d)-1(a)(2) and sections 901(k)
(1), (l), and (m), 909, and 6038(c)(1)(B)).
(iii) Decreases for foreign income taxes
associated with distributed or transferred
previously taxed earnings and profits. For
each removal pursuant to paragraph (c)(1)
(vi) or (viii) of this section of previously
taxed earnings and profits relating to a
single PTEP tax pool, remove the for-
eign income taxes that are associated with
such previously taxed earnings and profits
(determined under §1.959-4 or 1.959-7, as
applicable) from the PTEP tax pool.
(iv) Increases for foreign income taxes
associated with transferred previously
taxed earnings and profits. For each addi-
tion pursuant to paragraph (c)(1)(ix) of

January 27, 2025 590 Bulletin No. 2025–5
this section of previously taxed earnings
and profits relating to a single PTEP tax
pool, add the foreign income taxes that
are associated with such previously taxed
earnings and profits (determined under
§1.959-7) to the PTEP tax pool. Assign
such associated foreign income taxes to
the creditable PTEP tax group only to the
extent the taxes related to the creditable
PTEP tax group immediately before the
general successor transaction.
(v) Adjustments for foreign income
taxes associated with previously taxed
earnings and profits to which a section
956 amount is allocated. For each reas-
signment pursuant to paragraph (c)(1)(x)
of this section of previously taxed earn-
ings and profits relating to a single PTEP
tax pool, remove the foreign income taxes
that are associated with such previously
taxed earnings and profits (determined
under §1.959-5) from the PTEP tax pool
relating to the section 959(c)(2) PTEP
group from which the previously taxed
earnings and profits are reassigned and
add such foreign income taxes to the PTEP
tax pool relating to the section 959(c)
(1) PTEP group to which the previously
taxed earnings and profits are reassigned.
Assign such associated foreign income
taxes to the creditable PTEP tax group
only to the extent the taxes relate to the
creditable PTEP tax group immediately
before the reassignment.
(2) Currency rule. All adjustments to
PTEP tax pools are made in U.S. dollars,
determined, as applicable, by translating cur-
rent year taxes described in paragraph (e)(1)
(ii) of this section into U.S. dollars in accor-
dance with section 986(a) and §1.986(a)-1.
(f) Timing of adjustments—(1) Annual
PTEP accounts. An adjustment to an
annual PTEP account is treated as made
in accordance with the timing rules in the
following table. In the case of adjustments
described in paragraphs (c)(1)(iii) through
(xi) of this section that are treated as made
at the same time, such adjustments are
treated as made at that time in sequence
(starting with the adjustment in the earli-
est paragraph).
Table 1 to paragraph (f)(1) of this section
Timing of annual PTEP account adjustments
Adjustment described
in this section
Description
When adjustment is treated as
made
Paragraph (c)(1)(i)
Increases for amounts included in gross income under section
951(a)(1)(A)
Beginning of the first day of the
relevant taxable year
Paragraph (c)(1)(ii)
Increases for amounts included in gross income under section
951A(a)
Paragraph (c)(1)(iii)
Increases for receipt of distributed previously taxed earnings and
profits
Paragraph (c)(1)(iv)
Increases for previously taxed earnings and profits resulting
from section 961(c) basis
Paragraph (c)(1)(v) Decreases for current year taxes
Paragraph (c)(1)(vi)Decreases for distributed previously taxed earnings and profits
Concurrently with the covered
distribution
Paragraph (c)(1)(vii)
Increases for amounts included in gross income as a dividend
under section 1248
Concurrently with the sale or
exchange
Paragraph (c)(1)(viii)Decreases for transferred previously taxed earnings and profits
Concurrently with the general
successor transaction
Paragraph (c)(1)(ix)Increases for transferred previously taxed earnings and profits
Paragraph (c)(1)(x)
Reassignments for previously taxed earnings and profits to
which a section 956 amount is allocated
End of the last day of the relevant
taxable year
Paragraph (c)(1)(xi)
Increases for amounts included in gross income under section
951(a)(1)(B)
(2) Dollar basis pools. An adjustment
to a dollar basis pool is treated as made
concurrently with the related adjustment
described in paragraph (c) of this sec-
tion.
(3) PTEP tax pools. An adjustment to
a PTEP tax pool is treated as made con-
currently with the related adjustment
described in paragraph (c) of this section.
(g) Bottom-up application to tiered for-
eign corporations. For purposes of apply-
ing this section to tiered foreign corpo-
rations, this section is applied first to the
foreign corporation at the lowest tier, then
to the foreign corporation at the next low-
est tier, and so on.
Par. 21. Section 1.959-4 is revised to
read as follows:
§1.959-4 Exclusion from gross income
of previously taxed earnings and
profits received in a distribution.
(a) Scope. This section provides the
rules for distributions of previously taxed
earnings and profits under section 959.
Paragraph (b) of this section excludes
previously taxed earnings and profits

Bulletin No. 2025–5 591 January 27, 2025
received by a covered shareholder or con-
trolled foreign corporation in a distribu-
tion from gross income. Paragraph (c) of
this section defines a covered distribution.
Paragraph (d) of this section describes
rules for analyzing a covered distribution,
including rules for determining the extent
to which a covered distribution is a dis-
tribution of previously taxed earnings and
profits. Paragraph (e) of this section pro-
vides rules for allocating covered distribu-
tions to earnings and profits. Paragraph (f)
of this section provides a dollar basis rule.
Paragraph (g) of this section provides an
associated foreign income taxes rule. See
§1.959-10(c)(1) and (2) (Examples 1 and
2) for examples illustrating the application
of this section. See also §§1.367(b)-2(j)(2)
(ii) and 1.367(b)-3(g)(1) for deemed dis-
tributions of previously taxed earnings
and profits under other provisions of the
Code.
(b) Exclusion from gross income—(1)
Distribution by a foreign corporation to
a covered shareholder. Previously taxed
earnings and profits that are distributed
to a covered shareholder, other than pre-
viously taxed earnings and profits relating
to the taxable section 962 PTEP subgroup,
are excluded from the covered sharehold-
er’s gross income.
(2) Distribution by a controlled foreign
corporation to another controlled foreign
corporation—(i) In general. Previously
taxed earnings and profits that are distrib-
uted by a controlled foreign corporation
to another controlled foreign corporation
are excluded from the recipient controlled
foreign corporation’s gross income, solely
for purposes of determining the recipient
controlled foreign corporation’s subpart F
income and tested income or tested loss,
and provided that the covered shareholder
to which the previously taxed earnings
and profits relate is a United States share-
holder in both controlled foreign corpora-
tions.
(ii) Treatment of a specified foreign
corporation as a controlled foreign cor-
poration. A specified foreign corporation
(as defined in §1.965-1(f)(45)(i)(B)) that
is not otherwise a controlled foreign cor-
poration is treated as a controlled foreign
corporation for purposes of applying para-
graph (b)(2)(i) of this section to previ-
ously taxed earnings and profits resulting
from the application of section 965 that
are distributed by the specified foreign
corporation.
(3) Additional consequences. Upon
a distribution of previously taxed earn-
ings and profits, see paragraph (d)(5) of
this section for adjustments to previously
taxed earnings and profits, §1.961-4 for
basis adjustments, §1.986(c)-1 for rec-
ognition of foreign currency gain or loss
if the distribution is to a covered share-
holder, and §1.960-3 for deemed paid for-
eign income taxes if the distribution is to
a United States shareholder that is a cor-
poration or to a controlled foreign corpo-
ration. See also section 962(d) (previously
taxed earnings and profits distributed to
a covered shareholder and relating to the
taxable section 962 PTEP subgroup are
included in gross income); §1.1411-10(c)
(1)(i)(A)(1) (previously taxed earnings
and profits distributed to a covered share-
holder and relating to the taxable section
1411 subgroup are included in net invest-
ment income).
(c) Covered distribution—(1) In gen-
eral. A covered distribution is a distribu-
tion of property made by a foreign corpo-
ration to its shareholders with respect to its
stock, to the extent that the distribution is a
dividend (as defined in section 316), deter-
mined without regard to section 959(d),
and not including an amount treated as a
dividend by reason of section 78, 367(b),
964(e)(1), or 1248. In a covered distribu-
tion, previously taxed earnings and prof-
its are distributed in accordance with the
rules described in paragraph (d) of this
section.
(2) [Reserved]
(3) Treatment of a partner’s distribu-
tive share of a covered distribution. For
purposes of the section 959 regulations, if
a portion of a covered distribution is made
or is treated as made under this paragraph
(c)(3) to a partnership, a partner’s distrib-
utive share of such portion is treated as a
portion of the covered distribution made
to the partner.
(d) Rules for analyzing a covered dis-
tribution—(1) Determine each covered
shareholder’s share of the covered dis-
tribution. First, determine each covered
shareholder’s share of the covered distri-
bution, computed as the sum of—
(i) Any portion of the covered distri-
bution that is made to the covered share-
holder, and
(ii) Any portions of the covered distri-
bution that are made to upper-tier foreign
corporations and assigned to the covered
shareholder under §1.951-2.
(2) Determine distributed previously
taxed earnings and profits. Second, deter-
mine the extent to which each covered
shareholder’s share of the covered distri-
bution is a distribution of previously taxed
earnings and profits in accordance with
paragraph (e) of this section.
(3) Determine dollar basis and asso-
ciated foreign income taxes. Third, deter-
mine the dollar basis of, and foreign
income taxes associated with, distributed
previously taxed earnings and profits in
accordance with paragraphs (f) and (g) of
this section.
(4) Treat distributed previously taxed
earnings and profits as distributed pro
rata with respect to shares of stock of the
foreign corporation. Fourth, treat a pro
rata portion of all previously taxed earn-
ings and profits distributed in each covered
shareholder’s share of the covered distri-
bution as distributed with respect to each
share of stock of the foreign corporation
owned by the covered shareholder, deter-
mined by multiplying all such previously
taxed earnings and profits by a fraction.
The numerator of the fraction is the sum
of any portion of the covered distribution
that is made with respect to the share of
stock to the covered shareholder and any
portions of the covered distribution that
are made with respect to the share of stock
to upper-tier foreign corporations and
assigned to the covered shareholder under
§1.951-2. The denominator of the fraction
is the amount of the covered shareholder’s
share of the covered distribution.
(5) Adjust previously taxed earnings
and profits and make related account
adjustments. Fifth, decrease the distribut-
ing foreign corporation’s previously taxed
earnings and profits, and if applicable
increase a recipient foreign corporation’s
previously taxed earnings and profits, to
reflect the covered distribution and make
the related adjustments described in
§1.959-3 to each covered shareholder’s
accounts.
(e) Allocation of distributions—(1) In
general. A covered shareholder’s share of
a covered distribution (determined under
paragraph (d)(1) of this section) is first
allocated to previously taxed earnings and

January 27, 2025 592 Bulletin No. 2025–5
profits of the foreign corporation that are
with respect to the covered shareholder
immediately before the covered distribu-
tion (as reflected in the covered sharehold-
er’s annual PTEP accounts with respect
to the foreign corporation), to the extent
thereof and in accordance with paragraphs
(e)(2) through (5) of this section. Any
remaining portion of such share is allo-
cated to the foreign corporation’s earnings
and profits described in section 959(c)(3).
(2) Priority rules—(i) Section 959(c)
(1) rule. Allocate the covered sharehold-
er’s share of the covered distribution first
to previously taxed earnings and prof-
its assigned to a section 959(c)(1) PTEP
group and then to previously taxed earn-
ings and profits assigned to a section
959(c)(2) PTEP group.
(ii) Rules within section 959(c)(1)
PTEP groups. In allocating the covered
shareholder’s share of the covered dis-
tribution to previously taxed earnings
and profits assigned to section 959(c)(1)
PTEP groups, allocate first to previously
taxed earnings and profits assigned to the
reclassified section 965(a) PTEP group,
then to previously taxed earnings and
profits assigned to the reclassified section
965(b) PTEP group, and finally to previ-
ously taxed earnings and profits assigned
to the remaining section 959(c)(1) PTEP
groups.
(iii) Rules within section 959(c)(2)
PTEP groups. In allocating the covered
shareholder’s share of the covered dis-
tribution to previously taxed earnings
and profits assigned to section 959(c)(2)
PTEP groups, allocate first to previously
taxed earnings and profits assigned to the
section 965(a) PTEP group, then to previ-
ously taxed earnings and profits assigned
to the section 965(b) PTEP group, and
finally to previously taxed earnings and
profits assigned to the remaining section
959(c)(2) PTEP groups.
(3) Last-in, first-out rule. In allocating
the covered shareholder’s share of the
covered distribution to previously taxed
earnings and profits assigned to a single
PTEP group or PTEP groups with the
same priority (for example, the section
951(a)(1)(A) PTEP group, section 951A
PTEP group, and section 245A(d) PTEP
group), allocate first to previously taxed
earnings and profits that relate to the most
recent taxable year, then to previously
taxed earnings and profits that relate to the
next most recent taxable year, and so on.
(4) Section 962 ordering rule. In allo-
cating the covered shareholder’s share
of the covered distribution to previ-
ously taxed earnings and profits that are
assigned to a single PTEP group or PTEP
groups with the same priority and that
relate to the same taxable year, allocate
first to previously taxed earnings and
profits that are not assigned to the taxable
section 962 PTEP subgroup, and then to
previously taxed earnings and profits that
are assigned to such subgroup.
(5) Pro rata rule. In allocating the cov-
ered shareholder’s share of the covered
distribution to previously taxed earnings
and profits that are assigned to a single
PTEP group or PTEP groups with the
same priority and that relate to the same
taxable year and have the same classifica-
tion for section 962 purposes (same prior-
ity PTEP), allocate to a pro rata portion of
same priority PTEP, determined by mul-
tiplying all same priority PTEP by a frac-
tion, the numerator of which is the amount
to be allocated to same priority PTEP, and
the denominator of which is the amount of
same priority PTEP.
(f) Dollar basis rule. The dollar basis of
previously taxed earnings and profits dis-
tributed in a covered shareholder’s share
of a covered distribution (determined
under paragraph (d)(2) of this section) is
computed separately with respect to previ-
ously taxed earnings and profits relating to
a single dollar basis pool, and in each case
is equal to a pro rata portion of the dollar
basis pool immediately before the covered
distribution. The pro rata portion is deter-
mined by multiplying all basis in the dol-
lar basis pool by a fraction, the numerator
of which is previously taxed earnings and
profits distributed in the covered share-
holder’s share of the covered distribution
and relating to the dollar basis pool, and
the denominator of which is all previously
taxed earnings and profits relating to the
dollar basis pool.
(g) Associated foreign income taxes
rule. The foreign income taxes that are
associated with previously taxed earnings
and profits distributed in a covered share-
holder’s share of a covered distribution
(determined under paragraph (d)(2) of
this section) are computed separately with
respect to previously taxed earnings and
profits relating to a single PTEP tax pool,
and in each case are equal to a pro rata
portion of the PTEP tax pool immediately
before the covered distribution. The pro
rata portion is determined by multiplying
all foreign income taxes in the PTEP tax
pool by a fraction, the numerator of which
is previously taxed earnings and profits
distributed in the covered shareholder’s
share of the covered distribution and relat-
ing to the PTEP tax pool, and the denom-
inator of which is all previously taxed
earnings and profits relating to the PTEP
tax pool. Thus, associated foreign income
taxes are sourced pro rata from foreign
income taxes assigned to the creditable
PTEP tax group in the PTEP tax pool and
other foreign income taxes in the PTEP
tax pool.
Par. 22. Sections 1.959-5 through
1.959-12 are added to read as follows:
Sec.
* * * * *
1.959-5 Exclusion of a section 956 amount
from gross income to the extent allocated
to previously taxed earnings and profits.
1.959-6 Allocating and apportioning cur-
rent year taxes to previously taxed earn-
ings and profits of a foreign corporation.
1.959-7 General successor transactions.
1.959-8 and 1.959-9 [Reserved]
1.959-10 Examples.
1.959-11 Transition rules.
1.959-12 Applicability dates.
* * * * *
§1.959-5 Exclusion of a section 956
amount from gross income to the
extent allocated to previously taxed
earnings and profits.
(a) Scope. This section provides rules
for previously taxed earnings and profits
to which a section 956 amount is allo-
cated. Paragraph (b) of this section defines
a section 956 amount. Paragraph (c) of
this section describes rules for analyzing
a section 956 amount, including rules for
determining the extent to which a section
956 amount is excluded from gross income
under section 959(a)(2). Paragraph (d) of
this section provides rules for allocating
a section 956 amount to previously taxed
earnings and profits. Paragraph (e) of
this section provides a dollar basis rule.

Bulletin No. 2025–5 593 January 27, 2025
Paragraph (f) of this section provides an
associated foreign income taxes rule. See
§1.959-10(c)(4) (Example 4) for an exam-
ple illustrating the application of this sec-
tion.
(b) Section 956 amount. A section 956
amount is the amount determined under
section 956 and §1.956-1 with respect to
a covered shareholder and a controlled
foreign corporation. A section 956 amount
is excluded from gross income in accor-
dance with the rules described in para-
graph (c) of this section.
(c) Rules for analyzing a section 956
amount—(1) Determine the portion of the
section 956 amount excluded from gross
income under section 959(a)(2). First, the
portion of the section 956 amount that it is
allocated to section 959(c)(2) previously
taxed earnings and profits, which is deter-
mined in accordance with paragraph (d) of
this section, is excluded from the covered
shareholder’s gross income.
(2) Determine dollar basis and asso-
ciated foreign income taxes. Second,
determine the dollar basis of, and foreign
income taxes associated with, previously
taxed earnings and profits to which the
section 956 amount is allocated in accor-
dance with paragraphs (e) and (f) of this
section.
(3) Adjust previously taxed earnings
and profits and make related account
adjustments. Third, reassign the con-
trolled foreign corporation’s previously
taxed earnings and profits to which the
section 956 amount is allocated from sec-
tion 959(c)(2) PTEP groups to section
959(c)(1) PTEP groups, and if applicable
increase the controlled foreign corpora-
tion’s previously taxed earnings and prof-
its assigned to the general section 959(c)
(1) PTEP group by reason of section
951(a)(1)(B), to reflect the section 956
amount and make the related adjustments
described in §1.959-3.
(d) Allocation of section 956
amounts—(1) In general. A covered
shareholder’s section 956 amount is first
allocated to previously taxed earnings and
profits of the controlled foreign corpora-
tion that are with respect to the covered
shareholder and assigned to section 959(c)
(2) PTEP groups (determined as described
in paragraph (d)(2) of this section)), to the
extent thereof and in accordance with the
principles of §1.959-4(e)(2)(iii) through
(5). Any remaining portion of the section
956 amount is allocated to the controlled
foreign corporation’s earnings and profits
described in section 959(c)(3).
(2) Determination of previously taxed
earnings and profits. In applying para-
graph (d)(1) of this section, previously
taxed earnings and profits are determined
on the last relevant day of the controlled
foreign corporation’s taxable year to
which the section 956 amount relates,
but are reduced to the extent distributed
during the taxable year, and are deter-
mined without regard to any transfer of
previously taxed earnings and profits from
the covered shareholder on (or after) the
last relevant day of the taxable year.
(e) Dollar basis rule. The dollar basis
of previously taxed earnings and profits
to which a covered shareholder’s sec-
tion 956 amount is allocated (determined
under paragraph (d)(1) of this section) is
computed separately with respect to previ-
ously taxed earnings and profits relating to
a single dollar basis pool, and in each case
is equal to a pro rata portion of the dollar
basis pool determined in the same manner
as previously taxed earnings and profits
are determined in paragraph (d)(2) of this
section. The pro rata portion is determined
by multiplying all basis in the dollar basis
pool by a fraction, the numerator of which
is previously taxed earnings and profits to
which the section 956 amount is allocated
and relating to the dollar basis pool, and
the denominator of the which is all previ-
ously taxed earnings and profits relating to
the dollar basis pool.
(f) Associated foreign income taxes
rule. The foreign income taxes that are
associated with previously taxed earn-
ings and profits to which a covered share-
holder’s section 956 amount is allocated
(determined under paragraph (d)(1) of
this section) are computed separately with
respect to previously taxed earnings and
profits relating to a single PTEP tax pool,
and in each case are equal to a pro rata
portion of the PTEP tax pool determined
in the same manner as previously taxed
earnings and profits are determined in
paragraph (d)(2) of this section. The pro
rata portion is determined by multiplying
all foreign income taxes in the PTEP tax
pool by a fraction, the numerator of which
is previously taxed earnings and profits
to which the section 956 amount is allo-
cated and relating to the PTEP tax pool,
and the denominator of which is all pre-
viously taxed earnings and profits relating
to the PTEP tax pool. Thus, associated
foreign income taxes are sourced pro rata
from foreign income taxes assigned to the
creditable PTEP tax group in the PTEP tax
pool and other foreign income taxes in the
PTEP tax pool.
§1.959-6 Allocating and apportioning
current year taxes to previously taxed
earnings and profits of a foreign
corporation.
(a) Scope. This section provides rules
for allocating and apportioning current
year taxes for purposes of sections 959
and 960(b). Paragraph (b) of this section
provides the general rule for determin-
ing which foreign income taxes paid or
accrued by a foreign corporation may be
allocated and apportioned to previously
taxed earnings and profits. Paragraph
(c) of this section provides rules for the
application of §1.861-20 to allocate and
apportion current year taxes among corpo-
rate PTEP accounts. Paragraph (d) of this
section provides additional rules regard-
ing the allocation and apportionment of
deductions to previously taxed earnings
and profits and a currency translation rule.
See §1.959-10(c)(3) (Example 3) for an
example illustrating the application of this
section.
(b) In general. Current year taxes that a
foreign corporation pays or accrues during
its taxable year by reason of a PTEP real-
ization event that occurs during the same
taxable year are allocated and apportioned
to the statutory groupings (as generally
described in §1.861-8(a)(4)) of previously
taxed earnings and profits of the foreign
corporation and to the residual grouping
in accordance with the rules of paragraph
(c) of this section. For purposes of this
section, the statutory groupings are the
corporate PTEP accounts of the foreign
corporation described in §1.959-2(d)(1).
A PTEP realization event is an increase to
the previously taxed earnings and profits
of a foreign corporation by reason of its
receipt of a covered distribution (as deter-
mined under §1.959-4) or the application
of section 961(c) basis of the foreign cor-
poration to covered gain (as determined
under §1.961-9) during the taxable year,

January 27, 2025 594 Bulletin No. 2025–5
as determined under §1.959-2(d)(1). Cur-
rent year taxes that are paid or accrued
with respect to a PTEP realization event
that occurs in a different taxable year
may not be allocated and apportioned to
the corporate PTEP accounts of a foreign
corporation. See §1.960-1(d)(3)(ii)(B) for
rules regarding the assignment of foreign
gross income to the statutory and residual
groupings of income of a controlled for-
eign corporation when the controlled for-
eign corporation pays or accrues current
year taxes with respect to a PTEP realiza-
tion event that occurs in a different taxable
year.
(c) Rules for allocating and appor-
tioning current year taxes to previously
taxed earnings and profits. Allocate and
apportion current year taxes that a foreign
corporation pays or accrues during its tax-
able year by reason of a PTEP realization
event that occurs during the same taxable
year (translated, if applicable, into the for-
eign corporation’s functional currency as
described in paragraph (d)(3) of this sec-
tion) to its statutory groupings of previ-
ously taxed earnings and profits and to the
residual grouping in accordance with the
rules of §1.861-20. For this purpose, for-
eign gross income that a foreign corpora-
tion includes under foreign law by reason
of a distribution that it receives, or by rea-
son of its disposition of stock, is assigned
to its statutory groupings of previously
taxed earnings and profits by treating pre-
viously taxed earnings and profits arising
from the distribution or disposition as
included in the U.S. dividend amount or
the U.S. capital gain amount, respectively,
for purposes of applying §1.861-20(d)
(1). For the definitions of U.S. dividend
amount and U.S. capital gain amount, see
§1.861-20(b).
(d) Additional rules—(1) No deduc-
tions other than deductions for current
year taxes paid or accrued with respect
to a PTEP realization event that occurs
in the same taxable year are allocated or
apportioned to the statutory groupings of
previously taxed earnings and profits of a
foreign corporation. No deductions of a
foreign corporation, other than deductions
for current year taxes that the foreign cor-
poration pays or accrues during its taxable
year with respect to a PTEP realization
event that occurs in the same taxable year,
may be allocated or apportioned under
section 861 to the statutory groupings of
previously taxed earnings and profits of
the foreign corporation.
(2) Currency rule. For purposes of this
section, if current year taxes that a foreign
corporation pays or accrues are denomi-
nated in a currency other than the foreign
corporation’s functional currency, then the
current year taxes are translated into the
foreign corporation’s functional currency
at the spot rate on the day on which the
current year taxes are paid or accrued. See
section 986(a) and §1.986(a)-1 for rules
translating current year taxes into U.S.
dollars.
§1.959-7 General successor
transactions.
(a) Scope. This section identifies certain
transactions in which a foreign corpora-
tion’s previously taxed earnings and prof-
its with respect to a covered shareholder
transfer to (and thus become previously
taxed earnings and profits with respect to)
another covered shareholder under section
959 (defined as general successor transac-
tions) and provides rules for determining
the previously taxed earnings and profits
that transfer. Paragraph (b) of this section
provides definitions. Paragraph (c) of this
section describes rules for analyzing a
general successor transaction, including
rules for determining previously taxed
earnings and profits that transfer in the
general successor transaction. Paragraph
(d) of this section describes a fraction
determining the pro rata portion of cer-
tain previously taxed earnings and profits
that transfer. Paragraph (e) of this section
provides a dollar basis rule. Paragraph (f)
of this section provides an associated for-
eign income taxes rule. Paragraph (g) of
this section provides rules regarding the
deemed covered shareholder. See §1.959-
10(c)(5) (Example 5) for an example illus-
trating the application of this section. See
also §§1.959-8 and 1.959-9, regarding the
extent to which previously taxed earnings
and profits transfer under section 959 in a
transaction other than a general successor
transaction.
(b) General successor transaction—(1)
In general. A general successor transac-
tion is any transaction in which a covered
shareholder (the successor covered share-
holder) acquires ownership of stock of
one or more foreign corporations (each, an
acquired foreign corporation) that, imme-
diately before the transaction, is owned by
another covered shareholder (the trans-
feror covered shareholder), determined
without regard to any portion of an acqui-
sition of ownership of stock that results
from a transaction described in paragraph
(b)(2) of this section. In a general succes-
sor transaction, previously taxed earnings
and profits of each acquired foreign cor-
poration transfer from the transferor cov-
ered shareholder to the successor covered
shareholder (and thus become with respect
to the successor covered shareholder) in
accordance with the rules described in
paragraph (c) of this section.
(2) Certain transactions. A transaction
is described in this paragraph (b)(2) if the
transaction is—
(i) An issuance of stock or a partner-
ship interest,
(ii) A redemption of stock (within the
meaning of section 317(b)) or a liquidat-
ing distribution in redemption of a part-
nership interest, or
(iii) A transfer of stock of a foreign cor-
poration, or any property through which
stock of a foreign corporation is owned, if
such stock or property is substituted basis
property.
(3) Additional consequences. Upon a
general successor transaction, see §1.961-5
for basis adjustments and §1.986(c)-1 for
recognition of foreign currency gain or
loss by the transferor covered shareholder.
(c) Rules for analyzing a general suc-
cessor transaction—(1) Determine gen-
eral successor PTEP—(i) In general.
First, determine general successor PTEP,
which for each acquired foreign corpora-
tion is computed by multiplying all pre-
viously taxed earnings and profits of the
acquired foreign corporation that are with
respect to the transferor covered share-
holder immediately before the general
successor transaction by the fraction com-
puted in accordance with paragraph (d) of
this section.
(ii) Previously taxed earnings and prof-
its not eligible to transfer if the general
successor transaction is before the last
relevant day. In applying paragraph (c)(1)
(i) of this section, if the general succes-
sor transaction is before the last relevant
day of the acquired foreign corporation’s
taxable year that includes the general suc-

Bulletin No. 2025–5 595 January 27, 2025
cessor transaction, then do not take into
account (and thus do not transfer to the
successor covered shareholder) any previ-
ously taxed earnings and profits that result
from an income inclusion of the trans-
feror covered shareholder under section
951(a)(1)(A) or 951A(a) for such taxable
year (as accounted for in adjusting annual
PTEP accounts pursuant to §1.959-3(c)(1)
(i) and (ii)). For example, if the successor
covered shareholder acquires less than all
of the transferor covered shareholder’s
stock of the acquired foreign corporation,
and the transferor covered shareholder
continues to own the retained stock on
the last relevant day, then any previously
taxed earnings and profits resulting from
the transferor covered shareholder’s
income inclusions under section 951(a)
(1)(A) and 951A for the acquired foreign
corporation’s taxable year do not transfer
in the general successor transaction.
(2) Determine section 959(e) successor
PTEP. Second, determine section 959(e)
successor PTEP, which for each acquired
foreign corporation is all the previously
taxed earnings and profits of the acquired
foreign corporation that, under section
959(e), result from the application of sec-
tion 1248 to gain recognized by the trans-
feror covered shareholder in the general
successor transaction (as accounted for in
adjusting annual PTEP accounts pursuant
to §1.959-3(c)(1)(vii)).
(3) Determine dollar basis and asso-
ciated foreign income taxes. Third, deter-
mine the dollar basis of, and foreign
income taxes associated with, general suc-
cessor PTEP and section 959(e) successor
PTEP in accordance with paragraph (e) of
this section.
(4) Transfer previously taxed earn-
ings and profits and make related account
adjustments. Fourth, transfer general suc-
cessor PTEP and section 959(e) successor
PTEP from the transferor covered share-
holder to the successor covered share-
holder and make the related adjustments
described in §1.959-3.
(d) Fraction in determining general
successor PTEP—(1) In general. In
determining general successor PTEP of
an acquired foreign corporation, the frac-
tion described in paragraph (c)(1)(i) of
this section is computed as follows. The
numerator of the fraction is the portion of
the acquired foreign corporation’s hypo-
thetical distribution described in para-
graph (d)(2) of this section that, under the
principles of §1.951-1(e)(2) through (6),
would be distributed with respect to the
stock of the acquired foreign corporation
the ownership of which is acquired by the
successor covered shareholder in the gen-
eral successor transaction. The denomina-
tor of the fraction is the amount of such
hypothetical distribution. However, if the
denominator of the fraction would be zero,
then the fraction is considered to be zero.
(2) Hypothetical distribution. The
hypothetical distribution described in this
paragraph (d)(2) is a hypothetical distri-
bution treated as made by the acquired
foreign corporation with respect to stock
of the acquired foreign corporation,
immediately before the general successor
transaction and in an amount equal to the
acquired foreign corporation’s previously
taxed earnings and profits with respect to
the transferor covered shareholder (deter-
mined as described in paragraph (c)(1)
of this section). In the hypothetical dis-
tribution, stock of the acquired foreign
corporation is taken into account only to
the extent owned by the transferor cov-
ered shareholder immediately before the
general successor transaction, and the
earnings and profits of the acquired for-
eign corporation are treated as equal to the
amount of the hypothetical distribution.
(e) Dollar basis rule—(1) General suc-
cessor PTEP. The dollar basis of previ-
ously taxed earnings and profits compos-
ing general successor PTEP (determined
under paragraph (c)(1) of this section) is
computed separately with respect to previ-
ously taxed earnings and profits relating to
a single dollar basis pool, and in each case
is equal to a pro rata portion of the dollar
basis pool immediately before the general
successor transaction. The pro rata por-
tion is determined by multiplying all basis
in the dollar basis pool by a fraction, the
numerator of which is previously taxed
earnings and profits composing general
successor PTEP and relating to the dollar
basis pool, and the denominator of which
is all previously taxed earnings and profits
relating to the dollar basis pool.
(2) Section 959(e) successor PTEP.
The dollar basis of previously taxed earn-
ings and profits composing section 959(e)
successor PTEP (determined under para-
graph (c)(2) of this section) is equal to the
U.S. dollar amount of the income inclu-
sion giving rise to the previously taxed
earnings and profits (as accounted for in
increasing dollar basis pools pursuant to
§1.959-3(d)(1)(i)).
(f) Associated foreign income taxes
rule—(1) General successor PTEP. The
foreign income taxes that are associated
with previously taxed earnings and prof-
its composing general successor PTEP
(determined under paragraph (c)(1) of
this section) are computed separately with
respect to previously taxed earnings and
profits relating to a single PTEP tax pool,
and in each case are equal to a pro rata
portion of the PTEP tax pool immediately
before the general successor transaction.
The pro rata portion is determined by
multiplying all foreign income taxes in the
PTEP tax pool by a fraction, the numera-
tor of which is previously taxed earnings
and profits composing general successor
PTEP and relating to the PTEP tax pool,
and the denominator of which is all pre-
viously taxed earnings and profits relating
to the PTEP tax pool. Thus, associated
foreign income taxes are sourced pro rata
from foreign income taxes assigned to the
creditable PTEP tax group in the PTEP tax
pool and other foreign income taxes in the
PTEP tax pool.
(2) Section 959(e) successor PTEP.
The foreign income taxes associated with
previously taxed earnings and profits
composing section 959(e) successor PTEP
(determined under paragraph (c)(2) of this
section) are zero.
(g) Deemed covered shareholder—(1)
In general. The deemed covered share-
holder is a hypothetical person that is
treated as owning all the stock of any
foreign corporation that is not owned
by a covered shareholder. For purposes
of transferring previously taxed earn-
ings and profits under section 959, the
deemed covered shareholder is treated in
the same manner as a covered shareholder
and a reference to a covered shareholder
includes the deemed covered shareholder.
Thus, for example, if a covered share-
holder sells stock of a foreign corporation
to a nonresident alien individual, then the
sale is a general successor transaction and
previously taxed earnings and profits of
the foreign corporation transfer from the
seller covered shareholder to the deemed
covered shareholder under this section.

January 27, 2025 596 Bulletin No. 2025–5
Moreover, if the individual subsequently
sells stock of the foreign corporation to
a covered shareholder, then previously
taxed earnings and profits of the foreign
corporation (adjusted consistent with
§1.959-3, including to reflect distributions
from the foreign corporation to the indi-
vidual) transfer from the deemed covered
shareholder to the buyer covered share-
holder under this section.
(2) Determining previously taxed earn-
ings and profits that transfer from the
deemed covered shareholder. In a trans-
action in which previously taxed earnings
and profits of a foreign corporation trans-
fer from the deemed covered shareholder
to a covered shareholder, the covered
shareholder must use a reasonable method
in determining the amount and character
of the transferred previously taxed earn-
ings and profits and in determining the
foreign income taxes associated with the
transferred previously taxed earnings
and profits. Such method must take into
account adjustments to previously taxed
earnings and profits with respect to the
deemed covered shareholder that would
have been made under §1.959-3 if the pre-
viously taxed earnings and profits were
respect to a covered shareholder.
§§1.959-8 and 1.959-9 [Reserved]
§1.959-10 Examples.
(a) In general. This section provides
examples that illustrate the application of
§§1.959-1 through 1.959-9.
(b) Assumed facts. For purposes of the
examples in this section, unless otherwise
indicated, the following facts are assumed:
(1) US1 and US2 are unrelated domes-
tic corporations that are covered share-
holders, each of which uses the U.S. dollar
as its functional currency and has a com-
bined pool election in effect under §1.959-
2(c). Neither US1 nor US2 is a member
of a consolidated group (as defined in
§1.1502-1(h)).
(2) F1 and F2 are foreign corporations,
each of which is a controlled foreign cor-
poration and uses the British pound (£) as
its functional currency.
(3) PRS is a partnership.
(4) Each entity uses the calendar year
as its taxable year, and no entity has a
short taxable year.
(5) Tables depicting annual PTEP
accounts, dollar basis pools, or PTEP tax
pools do not depict accounts or PTEP
groups with a balance of zero.
(c) Examples—(1) Example 1: Exclusion from
gross income of previously taxed earnings and prof-
its distributed in a covered distribution—(i) Facts.
US1 directly owns all 100 shares of the single class
of outstanding stock of F1. In year 3, F1 makes a
£300x distribution of money with respect to its stock
(£3x with respect to each share), and the entirety of
this £300x is a covered distribution (a dividend as
defined in section 316, determined without regard
to section 959(d)). Immediately before the covered
distribution, F1 has £180x of previously taxed earn-
ings and profits with respect to US1, none of which
is assigned to the taxable section 962 PTEP group.
This example only analyzes the extent to which pre-
viously taxed earnings and profits are distributed and
excluded from gross income under section 959. See
paragraph (c)(2) of this section (Example 2) for an
illustration of composition, dollar basis, and associ-
ated foreign income taxes of distributed previously
taxed earnings and profits, along with foreign cur-
rency gain or loss under section 986(c) and deemed
paid taxes under section 960(b). See also §1.961-4
(basis reductions and gain recognition for distribu-
tions of previously taxed earnings and profits).
(ii) Analysis. For purposes of analyzing the cov-
ered distribution, US1’s share of the covered distri-
bution is the entire £300x because that amount of the
covered distribution is made to US1. See §1.959-4(d)
(1). Such share is allocated first to F1’s previously
taxed earnings and profits that are with respect to US1
immediately before the covered distribution (£180x)
and then to F1’s earnings and profits described in
section 959(c)(3) and, therefore, is a distribution
of £180x of previously taxed earnings and profits
and £120x of earnings and profits described in sec-
tion 959(c)(3). See §1.959-4(d)(2) and (e)(1). These
previously taxed earnings and profits are treated as
distributed pro rata with respect to the stock of F1
on which US1’s share of the covered distribution
is made. See §1.959-4(d)(4). Accordingly, £1.8x of
previously taxed earnings and profits is treated as
distributed with respect to each share of F1 stock,
computed by multiplying the £180x distributed pre-
viously taxed earnings and profits by a fraction, the
numerator of which is the portion of US1’s share of
the covered distribution that is made with respect to
the share of F1 stock (£3x), and the denominator of
which is the amount of US1’s share of the covered
distribution (£300x). See id. US1 excludes the £180x
of previously taxed earnings and profits distributed
to it from its gross income. See §1.959-4(b)(1); see
also §1.312-8(c) (US1’s receipt of previously taxed
earnings and profits does not increase its earnings
and profits).
(iii) Alternative facts: split-ownership—(A)
Facts. The facts are the same as in paragraph (c)(1)
(i) of this section (Example 1), except as follows.
US1 owns all the outstanding stock of F2, and US1
directly owns 80%, and F2 directly owns 20%, of
the stock of F1. Thus, US1 receives a £240x portion,
and F2 receives a £60x portion, of the £300x covered
distribution made by F1. Under §1.951-2, US1 is
assigned the entirety of the £60x portion of the cov-
ered distribution received by F2.
(B) Analysis. For purposes of analyzing the
covered distribution, US1’s share of the covered
distribution is the entire £300x, the sum of the
portion of the covered distribution that is made to
US1 (£240x) and the portion of the covered dis-
tribution that is made to F2 and assigned to US1
under §1.951-2 (£60x). See §1.959-4(d)(1). As
is the case in paragraph (c)(1)(ii) of this section,
such share is treated as a distribution of £1.8x of
previously taxed earnings and profits with respect
to each share of F1 stock (and F1’s previously
taxed earnings and profits with respect to US1
are reduced by the £180x of distributed previ-
ously taxed earnings and profits). Accordingly,
US1 is treated as receiving £144x of previously
taxed earnings and profits (£1.8x × 80 shares of
F1 stock directly owned by US1) and F2 is treated
as receiving £36x of previously taxed earnings
and profits (£1.8x × 20 shares of F1 stock directly
owned by F2). US1 excludes the £144x of pre-
viously taxed earnings and profits distributed to
it from its gross income. See §1.959-4(b)(1). F2
excludes the £36x of previously taxed earnings
distributed to it from its gross income, solely for
purposes of determining its subpart F income and
tested income or tested loss. See §1.959-4(b)(2)(i).
(iv) Alternative facts: partnership-structure—
(A) Facts. The facts are the same as in paragraph (c)
(1)(i) of this section (Example 1), except as follows.
PRS directly owns all the stock of F1. US1 and US2,
in the aggregate, directly own all the interests in
PRS, and PRS’s partnership agreement provides that
US1 has a 60% share, and US2 has a 40% share, of
any of PRS’s items of income, gain, deduction, or
loss. The covered distribution made by F1 is equal
to £500x (£5x with respect to each share) and thus
gives rise to £500x of dividend income to PRS, of
which US1 has a £300x distributive share (£500x ×
60%) and US2 has a £200x distributive share (£500x
× 40%). Immediately before the covered distribu-
tion, F1 has no previously taxed earnings and profits
with respect to US2.
(B) Analysis—(1) US1’s share of the covered dis-
tribution. US1 is treated as receiving £300x of the
covered distribution, equal to its distributive share of
the covered distribution. See §1.959-4(c)(3). There-
fore, for purposes of analyzing the covered distribu-
tion, US1’s share of the covered distribution is £300x
(the amount of the covered distribution treated as
made to US1). See §1.959-4(d)(1). For such share,
the results are the same as in paragraph (c)(1)(ii) of
this section.
(2) US2’s share of the covered distribution. US2
is treated as receiving £200x of the covered distri-
bution, equal to its distributive share of the cov-
ered distribution. See §1.959-4(c)(3). Therefore,
for purposes of analyzing the covered distribution,
US2’s share of the covered distribution is £200x (the
amount of the covered distribution treated as made to
US2). See §1.959-4(d)(1). The entirety of such share
is a distribution of earnings and profits described in
section 959(c)(3) because F1 has no previously taxed
earnings and profits with respect to US2. See §1.959-
4(d)(2) and (e)(1). US2 excludes none of its £200x
distributive share of the covered distribution from its
gross income under section 959 because none of the
covered distribution received by US2 is previously
taxed earnings and profits.

Bulletin No. 2025–5 597 January 27, 2025
(2) Example 2: Composition, dollar basis, and
associated foreign income taxes of distributed pre-
viously taxed earnings and profits—(i) Facts. US1
directly owns all 100 shares of the single class
of outstanding stock of F1. In year 8, F1 makes a
£225x distribution of money with respect to its stock
(£2.25x with respect to each share), and the entirety
of this £225x is a covered distribution. On the day
of the covered distribution, the spot rate is $1:£0.4.
Tables 1 through 3 in this paragraph (c)(2)(i) pro-
vide F1’s previously taxed earnings and profits with
respect to US1, determined immediately before the
covered distribution and thus reflecting adjustments
pursuant to §1.959-3 for US1’s income inclusions
under sections 951(a)(1)(A) and 951A (£80x and
£70x, respectively) for F1’s taxable year ending
on December 31 of year 8. Some of the previously
taxed earnings and profits are previously taxed earn-
ings and profits that were distributed to F1 by other
foreign corporations in earlier years. The adjusted
applicable percentage with respect to previously
taxed earnings and profits that resulted from section
965(a) or (b) and relate to the general category is
60%, and the section 965(c) deduction percentage
with respect to previously taxed earnings and profits
that resulted from 965(a) and relate to the general
category is 60%.
Table 1 to paragraph (c)(2)(i) of this section
US1’S ANNUAL PTEP ACCOUNTS WITH RESPECT TO F1
§904 Category
Total
Taxable
Year
General CategoryPassive Category§951A Category
§965(a)
PTEP group
§965(b)
PTEP group
§951(a)(1)(A)
PTEP group
§951(a)(1)(A)
PTEP group
Reclassified §951A
PTEP group
§951A
PTEP group
Year 8£50x£30x£70x£150x
Year 3£65x£10x£75x
Year 1
£20x£20x£20x£60x
Table 2 to paragraph (c)(2)(i) of this section
US1’S DOLLAR BASIS POOLS WITH RESPECT TO F1 (COMBINED POOL ELECTION)
§904 Category
General CategoryPassive Category§951A Category
§965(a)
PTEP group
§965(b)
PTEP group
§951(a)(1)(A)
PTEP group
§951(a)(1)(A)
PTEP group
Reclassified §951A
PTEP group
§951A
PTEP group
$40x$40x$125x$115x$188.5x$204x
Table 3 to paragraph (c)(2)(i) of this section
US1’S PTEP TAX POOLS WITH RESPECT TO F1 (COMBINED POOL ELECTION)
§904 Category
General Category
Passive
Category
§951A Category
§965(a)
PTEP group
§965(b)
PTEP group
§951(a)(1)(A)
PTEP group
§951(a)(1)(A)
PTEP group
Reclassified §951A
PTEP group
§951A
PTEP group
Creditable PTEP
tax group
$10x$10x$6x$26x$4x
Other taxes
$4x
(ii) Analysis—(A) Distributed previously taxed
earnings and profits. The entirety of US1’s share of
the covered distribution (£225x) is allocated to F1’s
previously taxed earnings and profits that are with
respect to US1 immediately before the covered dis-
tribution because such previously taxed earnings and
profits (£285x, computed as £150x + £75x + £60x,
as set forth in table 1 in paragraph (c)(2)(i) of this
section), are at least equal to such share. See §1.959-
4(d)(2) and (e)(1). Specifically, US1’s share of the
covered distribution is allocated first to the £65x of
previously taxed earnings and profits assigned to
the reclassified section 951A PTEP group, second
to the £20x of previously taxed earnings and prof-
its assigned to the section 965(a) PTEP group, and
third to the £20x of previously taxed earnings and
profits assigned to the section 965(b) PTEP group.
See §1.959-4(e)(2). The remaining portion of US1’s
share of the covered distribution (£120x, computed
as £225x − £65x − £20x − £20x) is allocated pro
rata to previously taxed earnings and profits that
relate to year 8 and, therefore, is allocated to £40x
of previously taxed earnings and profits assigned to
the section 951(a)(1)(A) PTEP group and relating to
year 8 and the general category (computed as £50x
× £120x/£150x), £24x of previously taxed earnings
and profits assigned to the section 951(a)(1)(A) PTEP
group and relating to year 8 and the passive category
(computed as £30x × £120x/£150x), and £56x of
previously taxed earnings and profits assigned to
the section 951A PTEP group and relating to year
8 and the section 951A category (computed as £70x
× £120x/£150x). See §1.959-4(e)(3) and (e)(5). US1
excludes the £225x of previously taxed earnings and
profits distributed to it from its gross income. See
§1.959-4(b)(1); see also §1.961-4 (basis reductions
and gain recognition for distributions of previously
taxed earnings and profits).
(B) Dollar basis and foreign currency gain or
loss. The dollar basis of previously taxed earnings
and profits distributed in US1’s share of the covered
distribution (described in paragraph (c)(2)(ii)(A) of

January 27, 2025 598 Bulletin No. 2025–5
this section) is computed separately with respect to
previously taxed earnings and profits relating to a
single dollar basis pool, and in each case is equal
to a pro rata portion of the dollar basis pool imme-
diately before the covered distribution (determined
by multiplying all basis in the dollar basis pool by
a fraction, the numerator of which is previously
taxed earnings and profits distributed in the US1’s
share of the covered distribution and relating to the
dollar basis pool, and the denominator of which is
all previously taxed earnings and profits relating
to the dollar basis pool). See §1.959-4(f). Under
§1.986(c)-1, US1 recognizes foreign currency gain
or loss with respect to previously taxed earnings
and profits distributed to it, determined by translat-
ing the previously taxed earnings and profits into
U.S. dollars using the spot rate on the day of the
covered distribution and then subtracting from that
U.S. dollar amount the dollar basis of the previously
taxed earnings and profits. US1 does not recognize
60% (the section 965(c) deduction percentage)
of the foreign currency gain or loss with respect
to the previously taxed earnings and profits relat-
ing to the section 965(a) PTEP group. Table 1 in
this paragraph (c)(2)(ii)(B) provides computations
for dollar basis and foreign currency gain or loss
with respect to each group of distributed previously
taxed earnings and profits. Thus, US1 recognizes a
total of $8.8x of foreign currency gain and $28.8x
of foreign currency loss.
Table 1 to paragraph (c)(2)(ii)(B) of this section
DOLLAR BASIS AND FOREIGN CURRENCY (FX) GAIN OR LOSS OF DISTRIBUTED PTEP
§904 Category
Taxable
Year
General CategoryPassive Category§951A Category
§965(a)
PTEP group
§965(b)
PTEP group
§951(a)(1)(A)
PTEP group
§951(a)(1)(A)
PTEP group
Reclassified §951A
PTEP group
§951A
PTEP group
Year 8
Distributed PTEP£40x£24x£56x
Dollar basis
$100x
($125x ×
£40x/£50x)
$55.2x
($115x ×
£24x/£50x)
$142.8x
($204x ×
£56x/£80x)
FX gain or loss
$0
(£40x × $1/£0.4 −
$100x)
$4.8x gain
(£24x × $1/£0.4 −
$55.2x)
$2.8x loss
(£56x × $1/£0.4 −
$142.8x)
Year 3
Distributed PTEP£65x
Dollar basis
$188.5x
($188.5x ×
£65x/£65x)
FX gain or loss
$26x loss
(£65x × $1/£0.4 −
$188.5x)
Year 1
Distributed PTEP£20x£20x
Dollar basis
$40x
($40x × £20x/£20x)
$40x
($40x × £20x/£20x)
FX gain or loss
$4x gain
((£20x × $1/£0.4−
$40x) × (100% −
60%))
Not applicable
(C) Associated foreign income taxes. The foreign
income taxes that are associated with previously taxed
earnings and profits distributed in US1’s share of the
covered distribution (described in paragraph (c)(2)
(ii)(A) of this section) are computed separately with
respect to previously taxed earnings and profits relat-
ing to a single PTEP tax pool, and in each case are
equal to a pro rata portion of the PTEP tax pool imme-
diately before the covered distribution (determined by
multiplying all foreign income taxes in the PTEP tax
pool by a fraction, the numerator of which is previ-
ously taxed earnings and profits distributed in US1’s
share of the covered distribution and relating to the
PTEP tax pool, and the denominator of which is all
previously taxed earnings and profits relating to the
PTEP tax pool). See §1.959-4(g). Table 1 in this para-
graph (c)(2)(ii)(C) provides these computations (and
refers to associated foreign income taxes sourced from
the creditable PTEP tax group as “creditable taxes”
and associated foreign income taxes not sourced from
the creditable PTEP tax group as “other taxes”).

Bulletin No. 2025–5 599 January 27, 2025
Table 1 to paragraph (c)(2)(ii)(C) of this section
ASSOCIATED FOREIGN INCOME TAXES OF DISTRIBUTED PTEP
§904 Category
Taxable
Year
General CategoryPassive Category§951A Category
§965(a)
PTEP group
§965(b)
PTEP group
§951(a)(1)(A)
PTEP group
§951(a)(1)(A)
PTEP group
Reclassified §951A
PTEP group
§951A
PTEP group
Year 8
Distributed PTEP£40x£24x£56x
Creditable taxes$0
$2.9x
($6x × £24x/£50x)
$2.8x
($4x ×
£56x/£80x)
Other taxes
$1.9x
($4x × £24x/£50x)
Year 3
Distributed PTEP£65x
Creditable taxes
$26x
($26x × £65x/£65x)
Other taxes
Year 1
Distributed PTEP£20x£20x
Creditable taxes
$10x
($10x ×
£20x/£20x)
$10x
($10x ×
£20x/£20x)
Other taxes
(D) Deemed paid taxes. Under section 960(b),
because F1 is a controlled foreign corporation in
which US1 is a United States shareholder, US1 is
deemed to pay the foreign income taxes properly
attributable to previously taxed earnings and prof-
its distributed to it, which are the foreign income
taxes that are both associated with the previously
taxed earnings and profits and sourced from the
creditable PTEP tax group. See §1.960-3(b). Thus,
US1 is deemed to pay $51.7x of foreign income
taxes ($2.9x + $2.8x + $26x + $10x + $10x).
Under §1.965-5(c), US1 is disallowed a credit for
60% (the adjusted applicable percentage) of the
foreign income taxes deemed paid with respect
to the previously taxed earnings and profits relat-
ing to the section 965(a) PTEP group or section
965(b) PTEP group, with the result that in each
case US1 is disallowed a credit for $6x of the for-
eign income taxes deemed paid with respect to
each of those groups of previously taxed earnings
and profits ($10x × 60%).
(E) Account adjustments. To reflect the covered
distribution, the distributed previously taxed earn-
ings and profits, the dollar basis of the distributed
previously taxed earnings and profits, and the foreign
income taxes associated with the distributed previ-
ously taxed earnings and profits are removed from
US1’s annual PTEP accounts, dollar basis pools, and
PTEP tax pools with respect to F1. See §1.959-3(c)
(1)(vi), (d)(1)(iv), and (e)(1)(iii). These adjustments
are treated as made concurrently with the covered
distribution. See §1.959-3(f). In addition, the dis-
tributed previously taxed earnings and profits, and
the foreign income taxes associated with distributed
previously taxed earnings and profits, are removed
from F1’s corporate PTEP accounts and corporate
PTEP tax pools for US1, and these adjustments are
also treated as made concurrently with the covered
distribution. See §1.959-2(d).
(iii) Alternative facts: distribution of built-in
loss property—(A) Facts. The facts are the same
as in paragraph (c)(2)(i) of this section (Example
2), except that, in the covered distribution (which
continues to be £225x), F1 distributes property other
than money. At the time of the covered distribution,
the fair market value of the property is £225x and
F1’s adjusted basis of the property is £250x. Thus,
the covered distribution decreases F1’s earnings and
profits by £250x. See sections 301(b)(1) and 312(a)
(3).
(B) Analysis. The results are the same as in para-
graph (c)(2)(ii) of this section and thus the covered
distribution decreases F1’s previously taxed earnings
and profits by £225x. The remainder of the £250x
decrease to F1’s earnings and profits under section
312(a)(3) is accounted for by decreasing (including
below zero, if applicable) F1’s earnings and profits
described in section 959(c)(3) by £25x.
(iv) Alternative facts: distribution to a foreign
corporation—(A) Facts. The facts are the same as
in paragraph (c)(2)(i) of this section (Example 2),
except as follows. US1 directly owns all the stock of
F2, and F2 directly owns all 100 shares of the single
class of stock of F1. Thus, F2 receives the entirety of
the £225x covered distribution made by F1. Under
§1.951-2, US1 is assigned the entirety of the £225x
covered distribution received by F2.
(B) Analysis. The results are the same as
described in paragraph (c)(2)(ii) of this section,
except that F2 excludes the £225x of distributed
previously taxed earnings and profits from its gross
income in accordance with §1.959-4(b)(2), US1
does not recognize foreign currency gain or loss with
respect to the distributed previously taxed earnings
and profits in accordance with §1.986(c)-1(c), and
F2 is deemed to pay the $51.7x of foreign income
taxes that are both associated with the distributed
previously taxed earnings and profits and sourced
from the creditable PTEP tax group in accordance
with §1.960-3(c). In addition, the distributed previ-
ously taxed earnings and profits (£225x), the dollar
basis of the distributed previously taxed earnings and
profits ($566.5x), and the foreign income taxes asso-
ciated with the distributed previously taxed earnings
and profits ($51.7x + $1.9x = $53.6x) are added to
US1’s annual PTEP accounts, dollar basis pools, and
PTEP tax pools with respect to F2. See §1.959-3(c)
(1)(iii), (d)(1)(ii), and (e)(1)(i). Only the $51.7x por-
tion of the associated foreign income taxes that F2 is
deemed to pay are assigned to the creditable PTEP
tax group within US1’s PTEP tax pools with respect
to F2. See §1.959-3(e)(1)(i). These adjustments are
treated as made at the beginning of F2’s taxable year
ending on December 31 of year 8. See §1.959-3(f).
In addition, the distributed previously taxed earnings
and profits, and the foreign income taxes associated
with the distributed previously taxed earnings and
profits, are added to F2’s corporate PTEP accounts
and corporate PTEP tax pools for US1, and these
adjustments are also treated as made at the beginning
of F2’s taxable year ending on December 31 of year
8. See §1.959-2(d).
(3) Example 3: Current year taxes imposed on a
covered distribution—(i) Facts. US1 directly owns
60%, and US2 directly owns 40%, of the single class
of outstanding stock of F2. F2 owns all the outstand-
ing stock of F1. In year 3, F1 makes a £500x covered
distribution to F2. Foreign withholding taxes of £75x
(£500x × 15%) are paid on the covered distribution.
F2 takes foreign income taxes into account when paid,
the withholding taxes meet the definition of current

January 27, 2025 600 Bulletin No. 2025–5
year taxes for F2’s taxable year ending on Decem-
ber 31 of year 3, and, other than pursuant to section
245A(d), no credits for taxes are disallowed or sus-
pended at the level of F2. On the day of the covered
distribution, the spot rate is $1:£0.5. Under §1.959-
4, the entirety of US1’s £300x share of the covered
distribution (£500x × 60%) is a distribution of F1’s
previously taxed earnings and profits with respect to
US1, and none of US2’s £200x share of the covered
distribution (£500x × 40%) is a distribution of previ-
ously taxed earnings and profits. The distributed pre-
viously taxed earnings and profits consist of £120x of
previously taxed earnings and profits assigned to the
section 951(a)(1)(A) PTEP group and relating to year
2 and the passive category (Character A PTEP), £80x
of previously taxed earnings and profits assigned to
the section 245A(d) PTEP group and relating to year
2 and the passive category (Character B PTEP), £70x
of previously taxed earnings and profits assigned to
the section 951(a)(1)(A) PTEP group and relating to
year 1 and the general category (Character C PTEP),
and £30x of previously taxed earnings and profits
assigned to the section 951(a)(1)(A) PTEP group and
relating to year 1 and the passive category (Character
D PTEP), as summarized in table 1 in this paragraph
(c)(3)(i). This example only analyzes the allocation
and apportionment of the current year taxes and
related adjustments to previously taxed earnings and
profits accounts. See also §1.959-4 (exclusion from
gross income of previously taxed earnings and prof-
its received in a distribution); §1.986(c)-1(c) (no for-
eign currency gain or loss recognized in distributions
of previously taxed earnings and profits to a foreign
corporation); §1.961-4 (basis reductions and gain rec-
ognition for distributions of previously taxed earnings
and profits).
Table 1 to paragraph (c)(3)(i) of this section
DISTRIBUTED PTEP
§904 Category
Taxable
Year
General CategoryPassive Category
§951(a)(1)(A) PTEP group§951(a)(1)(A) PTEP group§245A(d) PTEP group
Year 2
£120x
(Character A)
£80x
(Character B)
Year 1
£70x
(Character C)
£30x
(Character D)
(ii) Analysis—(A) In general. As a result of the
covered distribution, which is a PTEP realization
event, F2 has £300x of previously taxed earnings
and profits with respect to US1 and £0 of previously
taxed earnings and profits with respect to US2. The
foreign gross income that F2 includes by reason of
its receipt of the covered distribution is assigned
to the statutory groupings, which are described in
§1.959-2(d)(1), and residual grouping by treating the
previously taxed earnings and profits arising from
such distribution as included in the U.S. dividend
amount for purposes of §1.861-20(d)(1). See §1.959-
6(c). The relevant statutory groupings are F2’s cor-
porate PTEP accounts that were increased by reason
of its receipt of a covered distribution which was
previously taxed earnings and profits with respect to
US1 and the remaining portion of the covered distri-
bution is assigned to the residual income grouping.
See id. The £75x of current year taxes imposed on
the covered distribution is allocated and apportioned
to the previously taxed earnings and profits (US1’s
share of the covered distribution) and the residual
income grouping (US2’s share of the covered dis-
tribution) pro rata, with the result that £45x (£75x
× £300x/£500x) is allocated and apportioned to pre-
viously taxed earnings and profits arising from the
covered distribution and the remaining £30 (£75x
× £200x/£500x) is assigned to the residual income
grouping. See id.
(B) Allocation and apportionment of current
year taxes among PTEP groups. The £45x of cur-
rent year taxes allocated and apportioned to the
previously taxed earnings and profits arising from
the PTEP realization event with respect to US1 is
further allocated and apportioned among the sec-
tion 904 categories and PTEP groups within each
corporate PTEP account that is increased by reason
of F2’s PTEP realization event. See §1.959-6(b) and
(c). Accordingly, £18x of current year taxes is allo-
cated and apportioned to Character A PTEP (£45x
× £120x/£300x), £12x of current year taxes is allo-
cated and apportioned to Character B PTEP £45x ×
£80x/£300x), £10.5x of current year taxes is allo-
cated and apportioned to Character C PTEP (£45x ×
£70x/£300x), and £4.5x of current year taxes is allo-
cated and apportioned to Character D PTEP (£45x
× £30x/£300x), each within F2’s corporate PTEP
account with respect to US1.
(C) Account adjustments—(1) Shareholder-level
accounts. After the current year taxes are allocated
and apportioned to the corporate PTEP accounts of
F2 with respect to US1, the previously taxed earn-
ings and profits in US1’s PTEP groups within its
annual PTEP accounts are reduced to reflect the
current year taxes allocated and apportioned to the
corresponding PTEP groups of F2. See §1.959-3(c)
(1)(v). These adjustments are treated as made at the
beginning of F2’s taxable year ending on December
31 of year 3. See §1.959-3(f). Concurrently with this
reduction, US1’s dollar basis pools with respect to F2
are reduced by $90x, the U.S. dollar amount of the
reduction that reflects the current year taxes allocated
and apportioned to the distributed previously taxed
earnings and profits (£45x × $1/£0.5), and $90x of
current year taxes is added to US1’s PTEP tax pools
with respect to F2. See §1.959-3(d)(1)(iii) and (d)
(2), (e)(1)(ii) and (e)(2); see also section 986(a) and
§1.986(a)-1 (translation of foreign income taxes into
U.S. dollars). Tables 1 through 3 in this paragraph
(c)(3)(ii)(C) summarize the adjustments to US1’s
accounts to reflect the current year taxes.
Table 1 to paragraph (c)(3)(ii)(C)(1) of this section
US1’S ANNUAL PTEP ACCOUNTS WITH RESPECT TO F2 – ADJUSTMENTS FOR CURRENT YEAR TAXES
Taxable Year
§904 Category
General CategoryPassive Category
§951(a)(1)(A) PTEP group§951(a)(1)(A) PTEP group§245A(d) PTEP group
Year 2£18x reduction£12x reduction
Year 1
£10.5x reduction£4.5x reduction

Bulletin No. 2025–5 601 January 27, 2025
Table 2 to paragraph (c)(3)(ii)(C)(1) of this section
US1’S DOLLAR BASIS POOLS WITH RESPECT TO F2 (COMBINED POOL ELECTION) – ADJUSTMENTS FOR CURRENT YEAR TAXES
§904 Category
General CategoryPassive Category
§951(a)(1)(A) PTEP group§951(a)(1)(A) PTEP group§245A(d) PTEP group
$21x reduction
(£10.5x × $1/£0.5)
$45x reduction
((£18x + £4.5x) × $1/£0.5)
$24x reduction
(£12x × $1/£0.5)
Table 3 to paragraph (c)(3)(ii)(C)(1) of this section
US1’S PTEP TAX POOLS WITH RESPECT TO F2 (COMBINED POOL ELECTION) – ADJUSTMENTS FOR CURRENT YEAR TAXES
§904 Category
General Category
Passive Category
§951(a)(1)(A) PTEP group
§951(a)(1)(A) PTEP group§245A(d) PTEP group
Creditable PTEP tax group
$21x increase
(£10.5x × $1/£0.5)
$45x increase
((£18x + £4.5x) × $1/£0.5)
Other taxes
$24x increase
(£12x × $1/£0.5)
(2) Corporate-level accounts. Concurrently with
the adjustments described in paragraph (c)(3)(ii)(C)
(1) of this section, the previously taxed earnings and
profits in F2’s corporate PTEP accounts for US1 are
reduced by £45x and the foreign income taxes in
F2’s corporate PTEP tax pools for US1 are increased
by $90x. See §1.959-2(d).
(4) Example 4: Section 956 amount—(i) Facts.
Individual A, a citizen of the United States, owns
all the outstanding stock of F1 and does not make
an election to apply the provisions of section 962
for any taxable year. For F1’s taxable year ending
on December 31 of year 3, the last relevant day is
December 31 and Individual A’s section 956 amount
(amount determined under section 956 and §1.956-1)
is £200x. At the beginning of the last relevant day, F1
has £125x of previously taxed earnings and profits
with respect to Individual A, all of which relate to
F1’s taxable year ending on December 31 of year 1
and are assigned to section 959(c)(2) PTEP groups.
On the last relevant day, F1 makes a £75x covered
distribution to Individual A, the entirety of which is
allocated to (and thus is a distribution of) F1’s pre-
viously taxed earnings and profits with respect to
Individual A under §1.959-4. This example only ana-
lyzes the extent to which the section 956 amount is
allocated to previously taxed earnings and profits and
excluded from gross income under section 959, along
with related adjustments to annual PTEP accounts.
See also §1.959-3(d) and (e) (related adjustments to
dollar basis pools and PTEP tax pools).
(ii) Analysis—(A) Allocation to previously taxed
earnings and profits. Individual A’s section 956
amount is first allocated to F1’s previously taxed
earnings and profits that are with respect to Individ-
ual A and assigned to section 959(c)(2) PTEP groups
on the last relevant day, but reduced to reflect the
covered distribution (£50x, computed as £125x −
£75x). See §1.959-5(c)(1) and (d). The £50x portion
of the section 956 amount allocated to previously
taxed earnings and profits is excluded from Individ-
ual A’s gross income. See §1.959-5(c)(1). Under sec-
tion 951(a)(1)(B), Individual A includes the remain-
ing £150x of the section 956 amount (translated into
U.S. dollars in accordance with section 989(b)) in its
gross income.
(B) Annual PTEP account adjustments. To
reflect the section 956 amount, the £50x of previ-
ously taxed earnings and profits to which the section
956 amount is allocated are reassigned from section
959(c)(2) PTEP groups to section 959(c)(1) PTEP
groups within Individual A’s annual PTEP accounts
relating to F1’s taxable year ending on December 31
of year 1, and then £150x of previously taxed earn-
ings and profits are added to Individual A’s annual
PTEP accounts relating to F1’s taxable year ending
on December 31 of year 3, where they are assigned
to the general section 959(c)(1) PTEP group. See
§1.959-3(c)(1)(x) and (xi). These adjustments are
treated as made at the end of the last day of F1’s
taxable year ending on December 31 of year 3. See
§1.959-3(f)(1).
(5) Example 5: General successor transaction—
(i) Facts. US1 directly owns all 100 shares of the
single class of outstanding stock of F1. On June 30 of
year 3, US1 sells 40 shares of stock of F1 to US2 for
money equal to the fair market value of the shares.
Section 304 does not apply to the sale. Immediately
before the sale, F1 has £180x of previously taxed
earnings and profits with respect to US1, none of
which resulted from an income inclusion of US1 for
F1’s taxable year ending on December 31 of year 3
under section 951(a)(1)(A) or 951A(a) because F1
has no subpart F income or tested income for such
taxable year. As a result of gain that US1 recognizes
on the sale and includes in gross income as a divi-
dend under section 1248(a) by reason of F1’s earn-
ings and profits described in section 959(c)(3), F1’s
previously taxed earnings and profits with respect to
US1 are increased by £20x under section 959(e) and
§1.959-3(c)(1)(vii), concurrently with the sale. This
example only discusses the extent to which previ-
ously taxed earnings and profits transfer under sec-
tion 959. See also §1.959-3 (related adjustments to
annual PTEP accounts, dollar basis pools, and PTEP
tax pools); §1.986(c)-1 (recognition of foreign cur-
rency gain or loss with respect to transferred previ-
ously taxed earnings and profits).
(ii) Analysis—(A) In general. The sale is a
general successor transaction in which F1 is an
acquired foreign corporation, US1 is the transferor
covered shareholder, and US2 is the successor cov-
ered shareholder. See §1.959-7(b)(1). As described
in paragraphs (c)(5)(ii)(B) and (C) of this section,
there is £72x of general successor PTEP and £20x
of section 959(e) successor PTEP. Such previously
taxed earnings and profits transfer from US1 to US2,
concurrently with the general successor transaction.
See §1.959-3(f)(1).
(B) General successor PTEP. General succes-
sor PTEP is a pro rata portion of F1’s previously
taxed earnings and profits that are with respect
to US1 immediately before the general successor
transaction (£180x), determined by multiplying all
such previously taxed earnings and profits by 40%,
which is the percentage of a £180x hypothetical
distribution treated as made by F1 immediately
before the general successor transaction that would
be distributed with respect to stock of F1 that US2
acquires in the general successor transaction. See
§1.959-7(c)(1)(i) and (d). Thus, there is £72x of
general successor PTEP, sourced pro rata from each
PTEP group within each of US1’s annual PTEP
accounts with respect to F1. See also §1.959-7(e)
(1) and (f)(1) (rules for determining the dollar basis
and associated foreign income taxes of general suc-
cessor PTEP).

January 27, 2025 602 Bulletin No. 2025–5
(C) Section 959(e) successor PTEP. Section
959(e) successor PTEP is all £20x of F1’s previously
taxed earnings and profits with respect to US1 that,
under section 959(e), result from the application of
section 1248 to gain recognized by US1 in the gen-
eral successor transaction. See §1.959-7(c)(2); see
also §1.959-7(e)(2) and (f)(2) (providing the dollar
basis of section 959(e) successor PTEP, and provid-
ing that the foreign income taxes associated with sec-
tion 959(e) successor PTEP is zero).
(iii) Alternative facts: previously taxed earnings
and profits not eligible to transfer—(A) Facts. The
facts are the same as in paragraph (c)(5)(i) of this
section (Example 5), except as follows. F1 has £10x
of subpart F income for its taxable year ending on
December 31 of year 3 and thus US1 includes £6x
(£10x × 60% of stock of F1 retained by US1) in its
gross income for such taxable year under section
951(a)(1)(A). Consequently, F1 has an additional
£6x of previously taxed earnings and profits with
respect to US1 immediately before the sale.
(B) Analysis. The results are the same as
described in paragraph (c)(5)(ii) of this section.
None of the additional £6x of previously taxed earn-
ings and profits transfer to US2 because the gen-
eral successor transaction is before December 31
of year 3, the last relevant day of F1’s taxable year
that includes the general successor transaction. See
§1.959-7(c)(1)(ii).
(iv) Alternative facts: deemed covered share-
holder—(A) Facts. The facts are the same as in para-
graph (c)(5)(i) of this section (Example 5), except
that the purchaser of the shares of stock of F1 is a
nonresident alien individual (Individual B).
(B) Analysis. The results are the same as described
in paragraph (c)(5)(ii) of this section, applied by sub-
stituting the deemed covered shareholder (who is a
hypothetical person treated as owning all the stock of
F1 owned by Individual B) for US2. See §1.959-7(g).
Thus, if a covered shareholder subsequently acquires
a portion of Individual B’s stock of F1, then a portion
of F1’s previously taxed earnings and profits with
respect to the deemed covered shareholder (adjusted
consistent with §1.959-3, including to reflect any
distributions from F1 to Individual B) transfer from
the deemed covered shareholder to the acquiror cov-
ered shareholder.
§1.959-11 Transition rules.
(a) Scope. This section sets forth
transition rules for the section 959 reg-
ulations. Paragraph (b) of this section
addresses the establishment of annual
PTEP accounts, dollar basis pools, and
corporate PTEP accounts and provides
for adjustments to reflect the transition
tax under section 965. Paragraph (c) of
this section addresses the establishment
of PTEP tax pools, corporate PTEP tax
pools, adjusted applicable percentages,
and section 965(c) deduction percent-
ages. Paragraph (d) of this section treats
a domestic partnership (including an S
corporation) as a covered shareholder for
periods in which §1.958-1(d)(1) does not
apply. Paragraph (e) converts accounts
of a domestic partnership (including an
S corporation) to accounts of covered
shareholders owning interests in the
domestic partnership when both §1.958-
1(d)(1) and the section 959 regulations
apply.
(b) Establishing annual PTEP
accounts, dollar basis pools, and corpo-
rate PTEP accounts and adjustments for
section 965 transition tax—(1) In general.
When applying the 2019 notice provisions
pursuant to §1.959-12(c) (interim applica-
tion of 2019 notice provisions), or the sec-
tion 959 regulations (other than §§1.959-8
and 1.959-9) pursuant to §1.959-12(d)
(optional early application), to a taxable
year of a foreign corporation, annual
PTEP accounts, dollar basis pools, and
corporate PTEP accounts are established
and adjusted in accordance with the rules
described in paragraphs (b)(2) and (3) of
this section.
(2) Establishment of accounts—(i) In
general. As of the beginning of the first
taxable year of the foreign corporation to
which the 2019 notice provisions apply,
or, if earlier, the first taxable year of the
foreign corporation to which the section
959 regulations (other than §§1.959-8
and 1.959-9) apply, a reasonable method
(consistently applied) must be used to
establish annual PTEP accounts, dol-
lar basis pools, and corporate PTEP
accounts reflecting the foreign corpo-
ration’s previously taxed earnings and
profits, including to reflect adjustments
to previously taxed earnings and profits
that would have been made if the prin-
ciples of §§1.959-2 through 1.959-5 and
1.959-7 were to have previously applied.
Establishing accounts in accordance with
the preceding sentence includes con-
forming any of a covered shareholder’s
existing previously taxed earnings and
profits accounts with respect to the for-
eign corporation, or dollar basis accounts
with respect to the previously taxed earn-
ings and profits, to the requirements of
§1.959-2. In addition, a covered share-
holder is treated as consistently applying
a reasonable method only if the covered
shareholder and any covered sharehold-
ers with which the covered shareholder
joins in filing a Federal income tax return
apply that method with respect to all for-
eign corporations in which the covered
shareholders own stock.
(ii) Multi-year accounts—(A) Pre-
viously taxed earnings and profits. To
the extent a covered shareholder has an
account reflecting previously taxed earn-
ings and profits of the foreign corporation
that relate to two or more taxable years and
are described in the next sentence (multi-
year PTEP account), a reasonable method
to conforming the multi-year PTEP
account to the requirements of §1.959-2
includes treating such previously taxed
earnings and profits as assigned to the
general section 959(c)(1) PTEP group or
the section 951(a)(1)(A) PTEP group (as
applicable) within an annual PTEP account
that relates to the last taxable year of the
foreign corporation ending on or before
December 31, 2017, and the section 904
category to which the multi-year PTEP
account relates. Previously taxed earnings
and profits are described in this sentence
to the extent they are described in section
959(c)(1)(A) by reason of section 951(a)
(1)(B) and not by reason of section 959(a)
(2); described in section 959(c)(1)(B),
including by reason of section 959(a)(3)
(before its repeal); or described in section
959(c)(2) by reason of section 951(a)(1)
(A) and without regard to section 965(a),
965(b)(4)(A), 951A(f)(2), 245A(e)(2),
959(e), or 964(e)(4).
(B) Dollar basis. To the extent a cov-
ered shareholder has an account reflect-
ing the dollar basis of previously taxed
earnings and profits of the foreign corpo-
ration that relate to two or more taxable
years (multi-year dollar basis account),
a reasonable method for conforming the
multi-year dollar basis account to the
requirements of §1.959-2 includes treat-
ing previously taxed earnings and prof-
its to which the multi-year dollar basis
account relates as having a dollar basis
equal to a pro rata portion of the multi-
year dollar basis account, and placing
that dollar basis into the related dollar
basis pool. The pro rata portion is deter-
mined by multiplying the multi-year
dollar basis account by a fraction, the
numerator of which is previously taxed
earnings and profits to which the multi-
year dollar basis account relates, and the

Bulletin No. 2025–5 603 January 27, 2025
denominator of which is all previously
taxed earnings and profits to which the
multi-year dollar basis account relates.
(3) Adjustments for section 965 tran-
sition tax—(i) Increases for amounts
included in gross income under section
951(a)(1)(A) by reason of section 965(a).
When adding previously taxed earnings
and profits to annual PTEP accounts to
reflect an amount a covered shareholder
includes in gross income under section
951(a)(1)(A) with respect to the foreign
corporation by reason of section 965(a),
assign such previously taxed earnings and
profits to the section 965(a) PTEP group
(rather than the section 951(a)(1)(A)
PTEP group).
(ii) Increases for section 965(b) reduc-
tions. For purposes of adjusting annual
PTEP accounts and dollar basis pools,
treat an amount that a covered shareholder
would have included in gross income
under section 951(a)(1)(A) with respect
to the foreign corporation but for section
965(b) and §1.965-1(b)(2) or 1.965-8(b),
as applicable, as included in the covered
shareholder’s gross income under section
951(a)(1)(A) with respect to the foreign
corporation, and assign previously taxed
earnings and profits resulting from such
treatment to the section 965(b) PTEP
group (rather than the section 951(a)(1)
(A) PTEP group).
(c) Establishing PTEP tax pools, cor-
porate PTEP tax pools, adjusted appli-
cable percentages, and section 965(c)
deduction percentages—(1) In general.
As of the beginning of the first taxable
year of a foreign corporation to which
the section 959 regulations (other than
§§1.959-8 and 1.959-9) apply pursuant to
§1.959-12(b) (general applicability date)
or, if applicable, §1.959-12(d) (optional
early application), PTEP tax pools, corpo-
rate PTEP tax pools, adjusted applicable
percentages, and section 965(c) deduction
percentages reflecting the foreign corpo-
ration’s previously taxed earnings and
profits must be established in accordance
with the rules described in paragraphs (c)
(2) through (4) of this section.
(2) PTEP tax pools and corporate
PTEP tax pools. PTEP tax pools and cor-
porate PTEP tax pools are established by
adding a pro rata portion of the foreign
corporation’s prior-law PTEP group taxes
with respect to a prior-law PTEP group
(defined in this paragraph (c)(2)) to each
PTEP tax pool with respect to the foreign
corporation, determined by multiplying
such prior-law PTEP group taxes by a
fraction. The numerator of the fraction is
the balance of the prior-law PTEP group
that is previously taxed earnings and prof-
its relating to the PTEP tax pool, and the
denominator of the fraction is the balance
of the prior-law PTEP group. For purposes
of this paragraph (c)(2), prior-law PTEP
group taxes and prior-law PTEP groups
mean PTEP group taxes and PTEP groups,
respectively, as defined in §1.960-3 as
contained in 26 CFR part 1 revised as of
April 1, 2024.
(3) Adjusted applicable percentage.
An adjusted applicable percentage is
established with respect to all of the
foreign corporation’s previously taxed
earnings and profits assigned to the
reclassified section 965(a) PTEP group,
reclassified section 965(b) PTEP group,
section 965(a) PTEP group, and section
965(b) PTEP group within a covered
shareholder’s annual PTEP accounts
relating to the same section 904 cate-
gory by calculating a weighted average
of the applicable percentages (as defined
in §1.965-5(d)) with respect to the pre-
viously taxed earnings and profits. The
weighted average is determined as the
sum of the product of each such applica-
ble percentage and the amount of previ-
ously taxed earnings and profits to which
the applicable percentage relates, divided
by the sum of the amount of previously
taxed earnings and profits described in
the preceding sentence. For purposes of
this paragraph (c)(3), applicable percent-
ages and previously taxed earnings and
profits are determined as of the beginning
of the taxable year.
(4) Section 965(c) deduction percent-
age. A section 965(c) deduction percent-
age is established with respect to all of
the foreign corporation’s previously taxed
earnings and profits assigned to the reclas-
sified section 965(a) PTEP group and sec-
tion 965(a) PTEP group within a covered
shareholder’s annual PTEP accounts relat-
ing to the same section 904 category by
calculating a weighted average of the per-
centages for which foreign currency gain
or loss recognized under section 986(c)
with respect to distributions of the previ-
ously taxed earnings and profits would be
reduced under §1.986(c)-1 as contained in
26 CFR part 1 revised as of April 1, 2024.
The weighted average is determined as the
sum of the product of each such percentage
and the amount of previously taxed earn-
ings and profits to which the percentage
relates, divided by the sum of the amount
of previously taxed earnings and profits
described in the preceding sentence. For
purposes of this paragraph (c)(4), percent-
ages for which foreign currency gain or
loss would be reduced under §1.986(c)-1
and previously taxed earnings and profits
are determined as of the beginning of the
taxable year.
(d) Treatment of domestic partnerships
(including S corporations) before appli-
cation of §1.958-1(d)(1). For purposes of
the section 959 regulations, a domestic
partnership (including an S corporation) is
treated as a covered shareholder for any
taxable year of the domestic partnership to
which §1.958-1(d)(1) does not apply. If a
domestic partnership is treated as a cov-
ered shareholder, then rules regarding dis-
tributions of previously taxed earnings and
profits apply to the domestic partnership
in its capacity as a covered shareholder
before those rules apply to covered share-
holders that own interests in the domestic
partnership. In such a case, for example, a
covered distribution made to the domestic
partnership is first a distribution of the dis-
tributing foreign corporation’s previously
taxed earnings and profits with respect
to the partnership and then, to the extent
remaining, a distribution of the distribut-
ing foreign corporation’s previously taxed
earnings and profits with respect to cov-
ered shareholders owning interests in the
partnership.
(e) Converting domestic partner-
ship-level (including S corporation-level)
accounts to partner-level accounts after
the application of §1.958-1(d)(1)—(1) In
general. As of the beginning of the first
taxable year of a domestic partnership
(including an S corporation) to which both
§1.958-1(d)(1) and the section 959 regula-
tions (other than §§1.959-8 and 1.959-9)
apply (pursuant to §1.959-12(c) (general
applicability date) or (d) (optional early
application)), the domestic partnership’s
accounts described in §1.959-2 with

January 27, 2025 604 Bulletin No. 2025–5
respect to a foreign corporation are con-
verted to accounts of covered sharehold-
ers owning interests in the partnership in
accordance with the rules described in
paragraphs (e)(2) through (4) of this sec-
tion.
(2) Rules for converting accounts-(i)
Allocate previously taxed earnings and
profits to each covered shareholder—
(A) In general. First, allocate a pro rata
portion of the foreign corporation’s pre-
viously taxed earnings and profits with
respect to the domestic partnership to each
covered shareholder owning an interest in
the partnership at the beginning of the tax-
able year, determined by multiplying all
the foreign corporation’s previously taxed
earnings and profits with respect to the
partnership by a fraction. The numerator
of the fraction is the liquidation value of
the covered shareholder’s interest in the
partnership, and the denominator of the
fraction is the aggregate liquidation value
of all partners’ interests in the partnership
(determined in each case under paragraph
(e)(2)(i)(B) of this section).
(B) Liquidation value. For purposes
of this paragraph (e)(2)(i), the liquidation
value of a partner’s interest in the part-
nership is the amount of cash the partner
would receive with respect to the interest
if, at the beginning of the taxable year, the
partnership (and any partnership through
which the partner indirectly owns an inter-
est in the partnership) sold all of its prop-
erty for an amount of cash equal to the fair
market value of the property (taking into
account section 7701(g)), satisfied all of
its liabilities (other than those described
in §1.752-7), paid an unrelated third party
to assume all of its §1.752-7 liabilities in
a fully taxable transaction, and then the
partnership (and any partnership through
which the partner indirectly owns an inter-
est in the partnership) liquidated. More-
over, any change to a partnership agree-
ment made with a principal purpose of
altering the allocation of previously taxed
earnings and profits under this paragraph
(e)(2)(i) is disregarded.
(ii) Compute dollar basis and associ-
ated foreign income taxes. Second, treat
the dollar basis of, or foreign income taxes
associated with, previously taxed earn-
ings and profits allocated to each covered
shareholder as the same as what would be
the dollar basis of, or foreign income taxes
associated with, the previously taxed earn-
ings and profits under §1.959-4 if the pre-
viously taxed earnings and profits were
distributed at the beginning of the taxable
year.
(iii) Eliminate the domestic partner-
ship’s accounts and increase covered
shareholders’ accounts. Third, eliminate
the domestic partnership’s annual PTEP
accounts, dollar basis pools, and PTEP
tax pools with respect to the foreign cor-
poration. Concurrently with such elimina-
tions, increase each covered shareholder’s
annual PTEP accounts, dollar basis pools,
and PTEP tax pools with respect to the
foreign corporation to reflect the foreign
corporation’s previously taxed earnings
and profits that are allocated to the cov-
ered shareholder or the dollar basis of, or
foreign income taxes associated with, the
previously taxed earnings and profits, as
applicable.
(3) Coordination with section 986(c).
No foreign currency gain or loss is rec-
ognized with respect to previously taxed
earnings and profits under section 986(c)
as a result of previously taxed earnings
and profits ceasing to be with respect to
the domestic partnership pursuant to this
paragraph (e) (notwithstanding §1.986(c)-
1).
(4) Coordination with deemed covered
shareholder rules. The portion, if any,
of the foreign corporation’s previously
taxed earnings and profits with respect
to the domestic partnership that does
not give rise to an increase to a covered
shareholder’s annual PTEP accounts with
respect to the foreign corporation under
paragraph (e)(1) of this section becomes
previously taxed earnings and profits
of the foreign corporation with respect
to the deemed covered shareholder for
purposes of subsequently transferring
the previously taxed earnings and prof-
its under section 959. See §1.959-7(g)
for rules regarding the deemed covered
shareholder.
§1.959-12 Applicability dates.
(a) Scope. This section sets forth
applicability dates for the section 959
regulations. Paragraph (b) of this section
provides the general applicability dates.
Paragraph (c) of this section provides
interim application for certain provisions.
Paragraph (d) of this section allows early
application.
(b) In general. Sections 1.959-1
through 1.959-7 and 1.959-10 and 1.959-
11 apply to taxable years of foreign corpo-
rations beginning on or after [date of pub-
lication of final regulations in the Federal
Register] and to taxable years of persons
for which such taxable years of those for-
eign corporations are relevant.
(c) Interim application of 2019 notice
provisions—(1) In general. For taxable
years of United States shareholders (and
successors in interest) ending after Decem-
ber 14, 2018, and to which §§1.959-1
through 1.959-7 and 1.959-10 and 1.959-
11 do not apply pursuant to paragraph (b)
or (d) of this section, and taxable years of
foreign corporations ending with or within
such taxable years, the 2019 notice provi-
sions (defined in paragraph (c)(2) of this
section) and §1.959-11 apply.
(2) 2019 notice provisions. The 2019
notice provisions means §§1.959-1(c)
(treatment of an S corporation), 1.959-2
(accounting of previously taxed earn-
ings and profits), 1.959-3 (adjustments
to shareholder-level accounts and, con-
sequently, foreign corporation-level
accounts), 1.959-4(e) and 1.959-5(d)
(allocation of distributions and section
956 amounts), and the relevant defini-
tions in §1.959-1(b), along with treating
previously taxed earnings and profits as
distributed under section 959 only to the
extent that the distribution is a dividend
(as defined in section 316), determined
without regard to section 959(d). For
purposes of applying the 2019 notice
provisions, the PTEP groups listed in
the following table may be used in lieu
of the PTEP groups listed in §1.959-2,
the portions of §§1.959-2 and 1.959-3
relating to PTEP tax pools, corporate
PTEP tax pools, adjusted applicable
percentages, and section 965(c) deduc-
tion percentages do not apply, and the
portions of §§1.959-3 through 1.959-5
and 1.959-7 relating to the timing of
adjustments and determinations do not
apply.

Bulletin No. 2025–5 605 January 27, 2025
Table 1 to paragraph (c)(2) of this section
2019 notice PTEP groups
Section 959(c)(1) PTEP groupsSection 959(c)(2) PTEP groups
GroupDescriptionGroupDescription
Reclassified section
965(a) PTEP group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 965(a)
Section 965(a)
PTEP group
Earnings and profits described
in section 959(c)(2) by reason of
section 965(a)
Reclassified section
965(b) PTEP group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 965(b)(4)(A)
Section 965(b)
PTEP group
Earnings and profits described
in section 959(c)(2) by reason of
section 965(b)(4)(A)
Section 951(a)(1)
(B) PTEP group
Earnings and profits described in section 959(c)
(1)(A) by reason of section 951(a)(1)(B) and not
by reason of section 959(a)(2)
Reclassified section
951A PTEP group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 951A(f)(2)
Section 951A
PTEP group
Earnings and profits described
in section 959(c)(2) by reason of
section 951A(f)(2)
Reclassified section
245A(e)(2) PTEP
group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 245A(e)(2)
Section 245A(e)
(2) PTEP group
Earnings and profits described
in section 959(c)(2) by reason of
section 245A(e)(2)
Reclassified section
959(e) PTEP group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 959(e)
Section 959(e)
PTEP group
Earnings and profits described
in section 959(c)(2) by reason of
section 959(e)
Reclassified section
964(e)(4) PTEP
group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 964(e)(4)
Section 964(e)
PTEP group
Earnings and profits described
in section 959(c)(2) by reason of
section 964(e)(4)
Reclassified section
951(a)(1)(A) PTEP
group
Earnings and profits described in section 959(c)
(1)(A) that were initially described in section
959(c)(2) by reason of section 951(a)(1)(A) and
not described in another PTEP group
Section 951(a)(1)
(A) PTEP group
Earnings and profits described
in section 959(c)(2) by reason
of section 951(a)(1)(A) and not
described in another PTEP group
Section 956A PTEP
group
Earnings and profits described in section 959(c)
(1)(B), including by reason of section 959(a)(3)
(before its repeal)
(d) Early application—(1) In general.
Sections 1.959-1 through 1.959-7 and
1.959-10 and 1.959-11 may be applied to
a taxable year of a foreign corporation not
described in paragraph (b) of this section,
and then must be applied to all succeed-
ing taxable years of the foreign corpo-
ration not described in paragraph (b) of
this section, if the conditions described
in paragraphs (d)(2) through (4) of this
section are satisfied. The foreign corpo-
ration described in the preceding sen-
tence is the early application corporation
and any taxable years to which the early
application corporation applies §§1.959-1
through 1.959-7, 1.959-10, and 1.959-11
pursuant to the preceding sentence are the
early application years.
(2) Consistent application condition—
(i) In general. The provisions described
in paragraph (d)(2)(ii) of this section
are applied in their entirety to the early
application years and all taxable years of
covered shareholders for which the early
application years are relevant. In addition,
§§1.959-1 through 1.959-7, 1.959-10,
and 1.959-11 are applied in their entirety
pursuant to paragraph (d) of this section
to all taxable years that both are of for-
eign corporations that are related to the
early application corporation and end on
or after the later of the last day of the first
early application year and the first day on
which the foreign corporations are related
to the early application corporation. For
purposes of the preceding sentence, for-
eign corporations are related if the foreign
corporations bear a relationship to each
other described in section 267(b).
(ii) Provisions. The provisions
described in this paragraph (d)(2)(ii) are
§§1.163(j)-7(g)(2)(ii), 1.245A(d)-1(d),
1.312-6(f), 1.312-8(c), 1.861-20, 1.904-
6(e), 1.905-3, 1.905-4(c)(6), 1.951-1,
1.951-2, 1.951A-1(d), 1.951A-2(c)(1)
(vi), 1.952-1(c)(4), 1.954-1(c)(1)(iii)
(C), 1.959-1 through 1.959-7, 1.959-
10, 1.959-11, 1.960-1, 1.960-3, 1.961-1
through 1.961-5, 1.961-8 through 1.961-
13, 1.965-5(d)(5), 1.986(a)-1, 1.986(c)-1,
and 1.1502-59.
(3) Open period of limitations condi-
tion. The period of limitations on assess-
ment for each taxable year described in

January 27, 2025 606 Bulletin No. 2025–5
paragraph (d)(2) of this section is open
under section 6501.
(4) Written consent condition. Each
covered shareholder described in para-
graph (d)(2) of this section provides
to the early application corporation a
written statement in which the covered
shareholder consents to apply the rules
described in paragraph (d)(2) of this sec-
tion to the taxable years of the covered
shareholder described in paragraph (d)(2)
of this section and affirms that the period
of limitations on assessment for each such
taxable year is open under section 6501.
Par. 23. Section 1.960-1 is amended
by:
1. Revising paragraph (a)(1);
2. Revising paragraphs (b)(1) and (b)
(3);
3. Removing paragraph (b)(12);
4. Redesignating paragraphs (b)(13)
through (b)(16) as paragraphs (b)(12)
through (b)(15), respectively;
5. Revising newly redesignated para-
graph (b)(15);
6. Redesignating paragraph (b)(17) as
paragraph (b)(16), and revising newly
redesignated paragraph (b)(16);
7. Adding a new paragraph (b)(17);
8. Removing paragraphs (b)(18) through
(b)(21);
9. Redesignating paragraphs (b)(22)
through (b)(24) as paragraphs (b)(18)
through (b)(20), respectively;
10. Removing paragraph (b)(25);
11. Redesignating paragraphs (b)(26) and
(b)(27) as paragraphs (b)(21) and (b)
(22), respectively, and revising newly
redesignated paragraphs (b)(21) and
(b)(22);
12. Removing paragraph (b)(28);
13. Redesignating paragraphs (b)(29)
through (b)(38) as paragraphs (b)(23)
through (b)(32), respectively;
14. Revising paragraphs (c)(1)(i) through
(iii);
15. In paragraph (c)(1)(iv), removing the
language “§1.960-3(b)” and adding
the language “§1.960-3” in its place;
16. Removing paragraph (c)(1)(v);
17. Redesignating paragraphs (c)(1)(vi)
and (vii) as paragraphs (c)(1)(v) and
(c)(1)(vi), respectively;
18. Revising newly redesignated para-
graphs (c)(1)(v) and (vi);
19. Revising paragraph (c)(2);
20. Revising paragraph (d)(1);
21. Revising paragraphs (d)(2)(i) and (d)
(2)(ii)(A) and (D);
22. Revising the heading of paragraph (d)
(3) and the introductory text of para-
graph (d)(3)(i);
23. Revising the last sentence of para-
graph (d)(3)(i)(A) and the last two
sentences of paragraph (d)(3)(ii)(A);
24. Revising paragraph (d)(3)(ii)(B); and
25. Revising paragraphs (e) and (f).
The additions and revisions read as fol-
lows:
§1.960-1 Overview, definitions, and
computational rules for determining
foreign income taxes deemed paid
under section 960(a), (b), and (d).
(a) Overview—(1) Scope of §§1.960-1
through 1.960-3. This section and
§1.960-2 provide rules for attributing
foreign income taxes paid or accrued by
a controlled foreign corporation to its
income that a corporate United States
shareholder of the controlled foreign cor-
poration takes into account in determining
its subpart F inclusion or GILTI inclusion
amount. This section provides definitions,
identifies the statutory and residual group-
ings for purposes of section 960(a) and
(d), and sets forth computational rules for
determining the amount of income and
taxes assigned to each grouping. Section
1.960-2 provides rules for computing the
amount of foreign income taxes deemed
paid by a corporate United States share-
holder of a controlled foreign corpora-
tion under section 960(a) and (d). Section
1.960-3 provides rules for determining the
foreign income taxes that are deemed paid
by a corporate United States shareholder
in a controlled foreign corporation, or by
a controlled foreign corporation that is a
shareholder in another controlled foreign
corporation, under section 960(b). This
section, §1.960-2, and §1.960-3 provide
the exclusive rules for determining the
foreign income taxes deemed paid by a
domestic corporation or controlled for-
eign corporation under section 960. Only
foreign income taxes paid or accrued by
a controlled foreign corporation that are
properly attributable under these rules to
an item of income that a corporate United
States shareholder of the controlled for-
eign corporation includes as a subpart F
inclusion or GILTI inclusion amount may
be deemed paid by the domestic corpora-
tion under section 960(a) or (d). Only for-
eign income taxes that are properly attrib-
utable under §1.960-3 to previously taxed
earnings and profits that are distributed by
a controlled foreign corporation may be
deemed paid by a domestic corporation
or a controlled foreign corporation under
section 960(b). This section, §1.960-2,
and §1.960-3 also apply for purposes of
any provision that treats a taxpayer as a
domestic corporation that is deemed to
pay foreign income taxes or treats a for-
eign corporation as a controlled foreign
corporation for purposes of section 960.
See, for example, sections 962(a)(2) and
1293(f).
* * * * *
(b) * * *
(1) Annual PTEP account. The term
annual PTEP account has the meaning
provided in §1.959-1(b).
* * * * *
(3) Current taxable year. The term cur-
rent taxable year means the U.S. taxable
year of a controlled foreign corporation
which ends with or within the U.S. taxable
year of a United States shareholder of the
controlled foreign corporation.
* * * * *
(15) Previously taxed earnings and
profits. The term previously taxed earn-
ings and profits has the meaning provided
in §1.959-1(b).
(16) PTEP group. The term PTEP
group has the meaning provided in
§1.959-1(b).
(17) PTEP realization event. The term
PTEP realization event has the meaning
provided in §1.959-1(b).
* * * * *
(21) Specified section 959(a) distribu-
tion. The term specified section 959(a)
distribution means a distribution of previ-
ously taxed earnings and profits, as deter-
mined under §1.959-4, that a domestic
corporation that is a United States share-
holder in a controlled foreign corporation
receives (or is treated as receiving pursu-
ant to §1.959-4(c)(3)) from the controlled
foreign corporation and that is excluded
from the income of the recipient domestic
corporation under §1.959-4(b)(1).
(22) Section 959(b) distribution. The
term section 959(b) distribution means a
distribution of previously taxed earnings
and profits, as determined under §1.959-

Bulletin No. 2025–5 607 January 27, 2025
4, that a controlled foreign corporation
receives from another controlled foreign
corporation and that is excluded from the
income of the recipient controlled foreign
corporation for purposes of determining
the recipient controlled foreign corpora-
tion’s subpart F income and tested income
or tested loss under §1.959-4(b)(2).
* * * * *
(c) * * *
(1) * * *
(i) First, items of gross income of a
controlled foreign corporation for the cur-
rent taxable year are assigned to section
904 categories and included in income
groups within those section 904 catego-
ries under the rules in paragraph (d)(2) of
this section. See section 959 and the reg-
ulations thereunder for rules regarding the
receipt of a section 959(b) distribution by
a controlled foreign corporation.
(ii) Second, deductions (other than for
current year taxes) of a controlled foreign
corporation for the current taxable year
are allocated and apportioned to reduce
gross income in the section 904 categories
and the income groups within a section
904 category. See paragraph (d)(3)(i) of
this section. Additionally, the functional
currency amounts of current year taxes are
allocated and apportioned to reduce gross
income in the section 904 categories and
the income groups within a section 904
category. See paragraph (d)(3)(ii) of this
section. For rules regarding the alloca-
tion and apportionment of foreign income
taxes paid or accrued by a foreign corpo-
ration to previously taxed earnings and
profits, see §1.959-6.
(iii) Third, for purposes of computing
foreign income taxes deemed paid under
section 960(a) and (d), eligible current
year taxes that were allocated and appor-
tioned to income groups in the section 904
categories are translated into U.S. dollars
in accordance with section 986(a) and
§1.986(a)-1.
* * * * *
(v) Fifth, paragraphs (c)(1)(i) through
(iv) of this section are repeated for each
next higher-tier controlled foreign corpo-
ration in the chain.
(vi) Sixth, with respect to the high-
est-tier controlled foreign corporation in a
chain that is owned directly (or indirectly
through one or more partnerships) by the
domestic corporation, foreign income
taxes that are deemed paid under section
960(b)(1) in connection with the receipt
of a specified section 959(a) distribution
by the domestic corporation are computed
under the rules of §1.960-3.
(2) Current taxable year items. For a
current taxable year, the items of income
and deductions (including for taxes), and
the U.S. dollar amounts of current year
taxes, that are included in the compu-
tations described in this section are the
items that a controlled foreign corporation
accrues and takes into account during the
current taxable year. An item of income
with respect to a current taxable year does
not include an amount included as subpart
F income of a controlled foreign corpora-
tion by reason of the recharacterization of
a recapture account established in a prior
U.S. taxable year (and the corresponding
earnings and profits) of the controlled for-
eign corporation under section 952(c)(2)
and §1.952-1(f).
* * * * *
(d) * * *
(1) Scope. This paragraph (d) provides
rules for assigning gross income (includ-
ing gains) of a controlled foreign corpo-
ration for the current taxable year to a
section 904 category and income group
within a section 904 category, and for
allocating and apportioning deductions
(including losses and current year taxes)
and the U.S. dollar amount of eligible
current year taxes of the controlled for-
eign corporation for the current taxable
year among the section 904 categories and
income groups within a section 904 cate-
gory. See §1.959-6 for rules for allocating
and apportioning foreign income taxes
paid or accrued by a foreign corporation
to previously taxed earnings and profits.
(2) * * *
(i) Assigning items of gross income
to section 904 categories. Items of gross
income of a controlled foreign corpora-
tion for the current taxable year are first
assigned to a section 904 category of
the controlled foreign corporation under
§§1.904-4 and 1.904-5. Income of a con-
trolled foreign corporation cannot be
assigned to the section 951A category. See
§1.904-4(g). But see §1.959-2(b)(2)(i) for
rules relating to the assignment of previ-
ously taxed earnings and profits to PTEP
groups within an annual PTEP account,
which may assign previously taxed earn-
ings and profits to the section 951A PTEP
group.
(ii) * * *
(A) In general. Gross income within a
section 904 category is assigned to a sub-
part F income group, tested income group,
or residual income group under the rules
of this paragraph (d)(2)(ii). See §1.959-
2(d) for rules regarding the accounting of
previously taxed earnings and profits by a
foreign corporation.
* * * * *
(D) Residual income group. The term
residual income group means the income
group within a section 904 category that is
not in a subpart F income group or tested
income group. For purposes of this para-
graph (d)(2)(ii)(D), treat items of gross
income that give rise to previously taxed
earnings and profits described in §1.959-
6(b) as gross income in a residual income
group. See paragraph (d)(3)(ii)(B) of this
section for rules regarding the assignment
of foreign gross income to the statutory
and residual groupings of income of a
controlled foreign corporation when the
controlled foreign corporation pays or
accrues current year taxes with respect to
a PTEP realization event that occurs in a
different taxable year.
* * * * *
(3) Allocation and apportionment of
deductions among section 904 categories
and income groups within a section 904
category—(i) In general. Gross income
of a controlled foreign corporation in each
income group within each section 904 cat-
egory is reduced by deductions (includ-
ing losses and current year taxes) of the
controlled foreign corporation for the cur-
rent taxable year under the rules in this
paragraph (d)(3)(i). For purposes of this
paragraph (d)(3), allocate and apportion
current year taxes arising by reason of a
PTEP realization event that occurs in the
same taxable year to the residual income
group within a section 904 category under
§1.959-6(c). For additional rules regard-
ing the allocation and apportionment of
deductions (including foreign income
taxes) paid or accrued by a foreign cor-
poration to previously taxed earnings and
profits, see §1.959-6.
(A) * * * See paragraph (d)(3)(ii) of
this section for special rules for allocating
and apportioning current year taxes to sec-
tion 904 categories and income groups.

January 27, 2025 608 Bulletin No. 2025–5
* * * * *
(ii) * * *
(A) * * * For special rules regarding
current year taxes paid or accrued with
respect to a PTEP realization event that
occurs in a different taxable year, see para-
graph (d)(3)(ii)(B) of this section. For pur-
poses of determining foreign income taxes
deemed paid under section 960(a) and (d)
and §1.960-2, the U.S. dollar amount of
eligible current year taxes is assigned to
the section 904 categories and income
groups to which the eligible current year
taxes are allocated and apportioned.
(B) Current year taxes that a controlled
foreign corporation pays or accrues that
relate to a PTEP realization event that
occurs in a different U.S. taxable year.
If a current year tax is allocated and
apportioned by reference to foreign gross
income that includes previously taxed
earnings and profits with respect to a PTEP
realization event that occurs in a different
taxable year, the foreign gross income is
assigned to the subpart F income group,
tested income group, or residual income
group to which the income that gave rise
to the previously taxed earning and prof-
its would be assigned if that income were
recognized by that controlled foreign
corporation under Federal income tax
principles in the current taxable year. For
example, a net basis tax paid or accrued
with respect to a section 959(b) distribu-
tion that occurred in the preceding taxable
year would be assigned to a section 904
category and to a subpart F income group,
tested income group, or residual income
group by reference to the income that gave
rise to the previously taxed earnings and
profits.
(e) Current year taxes related to a
residual income group are not deemed
paid. Current year taxes paid or accrued
by a controlled foreign corporation that
are allocated and apportioned under para-
graph (d)(3)(ii) of this section to a resid-
ual income group cannot be deemed paid
under section 960 for any taxable year,
except to the extent such taxes are allo-
cated and apportioned to previously taxed
earnings and profits under §1.959-6 and
deemed paid by a domestic corporation
under §1.960-3.
(f) Example. The following example
illustrates the application of this section
and §1.960-3.
(1) Facts—(i) CFC1 and CFC2. CFC1, a con-
trolled foreign corporation, conducts business in
Country X. CFC1 uses the “u” as its functional cur-
rency. At all relevant times, 1u=$1. CFC1 owns all
the stock of CFC2, a controlled foreign corporation.
All the stock of CFC1 and CFC2 is owned (within
the meaning of section 958(a)) by corporate United
States shareholders that use the calendar year as their
U.S. taxable year. CFC1 and CFC2 both use the cal-
endar year as their U.S. and foreign taxable years.
(ii) Income of CFC1 and CFC2. In Year 3, CFC1
earns 2,000,000u of gross income that is foreign base
company sales income, and 1,000,000u of interest
income from unrelated persons, for both U.S. and
Country X tax law purposes. Under Country X tax
law, CFC1’s interest income is exempt from tax. In
Year 3, CFC1 also receives a section 959(b) distribu-
tion from CFC2 of 4,000,000u of previously taxed
earnings and profits, in the general category and
relating to a single PTEP group and taxable year.
There are no foreign income taxes associated with
the previously taxed earnings and profits distributed
by CFC2 at the level of CFC2 under §1.959-4. The
section 959(b) distribution is treated as a dividend
taxable to CFC1 under Country X tax law. In Year
3, CFC2 earns no gross income and receives no dis-
tributions.
(iii) Deductions of CFC1 and CFC2 other than
taxes. For both U.S. and Country X tax purposes,
in Year 3, CFC1 incurs 1,500,000u of deductible
expenses other than current year taxes that are alloca-
ble to all gross income. For U.S. tax purposes, under
§§1.861-8 through 1.861-14T, 1,000,000u of the
deductions are apportioned to CFC1’s foreign base
company sales income and 500,000u of the deduc-
tions are apportioned to CFC1’s interest income.
Under Country X tax law, 1,000,000u of deductions
are apportioned to the 4,000,000u treated as a div-
idend, and 500,000u of deductions are apportioned
to the 2,000,000u of foreign base company sales
income. Under Country X tax law, no deductions are
apportioned to the interest income. Under Country
X tax law, CFC1 pays eligible current year taxes of
900,000u on a base of 4,500,000u (7,000,000u gross
income − 1,000,000u exemption and 1,500,000u
deductions) consisting of 3,000,000u (4,000,000u −
1,000,000u) of previously taxed earnings and prof-
its, 1,000,000u of interest income (exempt from tax
under Country X law), and 1,500,000u (2,000,000u
− 500,000u) of foreign base company sales income.
In Year 3, CFC2 has no expenses (including current
year taxes).
(2) Analysis—(i) CFC2. Under paragraph (c)
(1) of this section, the computational rules of para-
graph (c)(1) of this section are applied beginning
with CFC2. However, CFC2 has no gross income or
expenses in Year 3. Accordingly, the computational
rules in paragraphs (c)(1)(i) through (iv) of this sec-
tion are not relevant with respect to CFC2. Under
paragraph (c)(1)(v) of this section, the rules in para-
graph (c)(1)(i) through (iv) of this section are then
applied to CFC1.
(ii) CFC1—(A) Step 1. Under paragraph (c)(1)
(i) of this section, CFC1’s items of gross income for
the current taxable year are assigned to section 904
categories and included in income groups within
those section 904 categories. Under paragraph (d)(2)
(i) of this section and §1.904-4, the interest income
is passive category income and the foreign base com-
pany sales income is general category income. Under
paragraph (d)(2)(ii) of this section, the 1,000,000u
of interest income is assigned to a subpart F income
group (the “FPHCI income group”) within the pas-
sive category because it is foreign personal holding
company income described in §1.954-1(c)(1)(iii)(A)
(1)(i) that falls within a single group of income under
§1.904-4(c)(3)(iii) for passive income that is sub-
ject to no withholding tax or other foreign tax. The
2,000,000u of foreign base company sales income
is assigned to a subpart F income group within the
general category (the “FBCSI income group”),
because it is foreign base company income described
in §1.954-1(c)(1)(iii)(A)(2)(i). Under paragraph (d)
(2) of this section, the 4,000,000u of previously
taxed earnings and profits is treated as a U.S. div-
idend amount (as defined in §1.861-20(b)(21)) and
is assigned to the residual income group within the
general category for purposes of applying section
960(a) and (d) and §§1.960-1 and 1.960-2.
(B) Step 2—(1) Allocation and apportionment of
deductions other than taxes. Under paragraph (c)(1)
(ii) of this section, CFC1’s deductions for the current
taxable year are allocated and apportioned among
the section 904 categories and income groups within
a section 904 category that were increased as pro-
vided in paragraph (c)(1)(i) of this section. Under
paragraph (d)(3)(i) of this section and §§1.861-8
through 1.861-14T, 1,000,000u of deductions are
allocated and apportioned to the FBCSI income
group within the general category, and 500,000u
of deductions are allocated and apportioned to the
FPHCI income group within the passive category.
Therefore, CFC1 has 1,000,000u (2,000,000u −
1,000,000u) of pre-tax income attributable to the
FBCSI income group within the general category
and 500,000u (1,000,000u − 500,000u) of pre-tax
income attributable to the FPHCI income group
within the passive category. For U.S. tax purposes,
no deductions other than eligible current year taxes
are allocated and apportioned to the 4,000,000u of
previously taxed earnings and profits in CFC1’s
residual income group within the general category
because no deductions of CFC1 other than deduc-
tions for current year taxes are allocated and appor-
tioned to previously taxed earnings and profits under
section 861. See paragraph (d)(3)(i) of this section
and §1.959-6(d)(1).
(2) Allocation and apportionment of current
year taxes. Under paragraph (c)(1)(ii) of this sec-
tion, CFC1’s current year taxes are allocated and
apportioned among the section 904 categories and
income groups within a section 904 category that
were increased as provided in paragraph (c)(1)(i) of
this section. Under paragraphs (d)(3)(i) and (ii) of
this section, for purposes of allocating and appor-
tioning taxes to reduce the income in a section 904
category or an income group, §1.861-20 (as mod-
ified by §1.904-6(c)) is applied to determine the
amount of foreign taxable income, computed under
Country X tax law but characterized under Federal
income tax law, in each section 904 category and
income group that is included in the Country X tax
base. For Country X tax purposes, 1,000,000u of
deductions are allocated and apportioned to CFC1’s
4,000,000u of previously taxed earnings and profits,
which is assigned to the residual income grouping

Bulletin No. 2025–5 609 January 27, 2025
within the general category, 500,000u of deductions
are allocated and apportioned to the FBCSI income
group within the general category, and no deduc-
tions are allocated and apportioned to the FPHCI
income group in the passive category. Therefore,
for Country X tax purposes, CFC1 has 3,000,000u
of foreign taxable income assigned to the resid-
ual income group within the general category,
1,500,000u of foreign taxable income assigned
to the FBCSI income group within the general
category, and no taxable income assigned to the
FPHCI income group within the passive category.
Under paragraphs (d)(3)(i) and (ii) of this section
and §1.959-6, 600,000u (3,000,000u/4,500,000u
× 900,000u) of the 900,000u eligible current year
taxes paid by CFC1 are related to the residual
income group within the general category, and
300,000u (1,500,000u/4,500,000u × 900,000u) are
related to the FBCSI income group within the gen-
eral category. No current year taxes are allocated
or apportioned to the FPHCI income group within
the passive category because the interest expense is
exempt from Country X tax. See §1.959-6 for rules
allocating and apportioning the 600,000u of current
year taxes among the corporate PTEP accounts,
section 904 categories, and PTEP groups. Thus,
for U.S. tax purposes, CFC1 has 3,400,000u of
previously taxed earnings and profits (4,000,000u
− 600,000u) in the residual income group within
the general category (see §§1.959-2 and 1.959-3
for rules relating to accounting for previously taxed
earnings and profits), 500,000u of income in the
FPHCI income group within the passive category,
and 700,000u of income (1,000,000u − 300,000u)
in the FBCSI income group within the general cat-
egory.
(C) Step 3. Under paragraph (c)(1)(iii) of this
section, for purposes of computing foreign income
taxes deemed paid under section 960(a), CFC1 has
$300,000 of current year taxes in the FBCSI income
group within the general category. Under paragraph
(e) of this section, the United States shareholders
of CFC1 cannot claim a credit with respect to the
$600,000 of taxes on CFC1’s income in the resid-
ual income group under section 960, except to the
extent the taxes are allocated and apportioned to
previously taxed earnings and profits under §1.959-6
and deemed paid by a domestic corporation under
section 960(b) and §1.960-3.
(D) Step 4. Under paragraph (c)(1)(iv) of this
section, the United States shareholders of CFC1
compute current year taxes deemed paid under sec-
tion 960(a) and (d) and the rules of §1.960-2. None
of the Country X tax is allocated to CFC1’s FPHCI
income group. Therefore, there are no current year
taxes deemed paid by CFC1’s United States share-
holders with respect to their passive category sub-
part F inclusions. Country X tax equal to $300,000 is
allocated and apportioned to CFC1’s FBCSI income
group. Therefore, $300,000 of the current year taxes
are deemed paid by CFC1’s United States sharehold-
ers with respect to their general category subpart F
inclusions. See §1.960-2(b)(5) and (c)(7) for exam-
ples of the application of section 960(a) and (d) and
the rules in §1.960-2. The remaining $600,000 of
Country X tax is allocated and apportioned to the
residual income group within the general category
with respect to the previously taxed earnings and
profits and will generally be allocated and appor-
tioned to previously taxed earnings and profits under
the rules in §1.959-6.
(E) Step 5. Paragraph (c)(1)(v) of this section
does not apply because CFC1 is the highest-tier con-
trolled foreign corporation in the chain.
(F) Step 6. Paragraph (c)(1)(vi) of this section
does not apply because CFC1 did not make a speci-
fied section 959(a) distribution.
Par. 24. Section 1.960-3 is revised to
read as follows:
§1.960-3 Foreign income taxes deemed
paid under section 960(b).
(a) Scope. This section provides rules
for determining foreign income taxes that
are deemed paid under section 960(b)
with respect to the receipt of distributions
of previously taxed earnings and profits.
Paragraph (b) of this section describes
the foreign income taxes that a domestic
corporation is deemed to pay with respect
to its receipt of a specified section 959(a)
distribution. Paragraph (c) of this section
describes the foreign income taxes that a
controlled foreign corporation is deemed
to pay with respect to its receipt of a sec-
tion 959(b) distribution. For rules regard-
ing the maintenance and adjustment by
a foreign corporation of corporate PTEP
accounts and corporate PTEP tax pools
with respect to each of its covered share-
holders, see §1.959-2(d). For rules regard-
ing the maintenance and adjustment by
a covered shareholder of annual PTEP
accounts and PTEP tax pools with respect
to a foreign corporation in which it owns
stock, see §§1.959-2(b) and 1.959-3(c)
and (e).
(b) Foreign income taxes deemed paid
under section 960(b)(1)—(1) In general.
A domestic corporation that is a United
States shareholder of a controlled for-
eign corporation is deemed to have paid
the foreign income taxes that are properly
attributable to a specified section 959(a)
distribution that it receives from the con-
trolled foreign corporation and that have
not been deemed to have been paid by a
domestic corporation under section 960
for the current taxable year or any prior
taxable year. A credit for foreign income
taxes deemed paid under this section may
be subject to disallowance under other
provisions of the Code or regulations
in this title that apply at the level of the
United States shareholder.
(2) Properly attributable. The foreign
income taxes that are properly attribut-
able to a specified section 959(a) distri-
bution are the foreign income taxes that
are removed under §§1.959-2(d)(2) and
1.959-3(e)(1)(iii) from each creditable
PTEP tax group (as defined in §1.959-2(b)
(4)(ii)) by reason of the specified section
959(a) distribution.
(c) Foreign income taxes deemed paid
under section 960(b)(2)—(1) In gen-
eral. A controlled foreign corporation is
deemed to have paid the foreign income
taxes that are properly attributable to a
section 959(b) distribution that it receives
from another controlled foreign corpo-
ration and that have not been deemed to
have been paid by a domestic corporation
under section 960 for the current taxable
year or any prior taxable year.
(2) Properly attributable. The foreign
income taxes that are properly attributable
to a section 959(b) distribution received
by a controlled foreign corporation are
the foreign income taxes that are removed
under §§1.959-2(d)(2) and 1.959-3(e)(1)
(iii) from each creditable PTEP tax group
(as defined in §1.959-1(b)) by reason of
the section 959(b) distribution.
Par. 25. Section 1.960-7 is amended
by:
1. In the first sentence of paragraph (a),
removing the language “paragraph
(b)” and adding the language “para-
graphs (b) and (c)” in its place; and
2. Adding a new paragraph (c).
The addition reads as follows:
§1.960-7 Applicability dates.
* * * * *
(c) Sections 1.960-1 and 1.960-3 apply
to taxable years of a foreign corporation
that begin on or after [date of publication
of final regulations in the Federal Reg-
ister] or are early application years (as
described in §1.959-12(d)), and to taxable
years of a domestic corporation that is a
United States shareholder of the foreign
corporation in which or with which such
taxable years of such foreign corporation
end. See §§1.960-1 and 1.960-3 as con-
tained in 26 CFR part 1 revised as of April
1, 2024, for a version of these sections
applicable to prior taxable years.
Par. 26. Section 1.961-1 is revised to
read as follows:

January 27, 2025 610 Bulletin No. 2025–5
§1.961-1 Overview, definitions, and
rules of general applicability.
(a) Overview—(1) In general. The
section 961 regulations provide rules
for basis adjustments related to previ-
ously taxed earnings and profits. Section
1.961-1 sets forth definitions and rules
of general applicability. Section 1.961-2
describes the types of property units and
types of basis for purposes of applying
section 961. Section 1.961-3 provides
basis increases for income inclusions.
Section 1.961-4 provides reductions to
basis and gain recognition for distribu-
tions of previously taxed earnings and
profits. Section 1.961-5 provides basis
adjustments for foreign currency gain or
loss and for general successor transac-
tions. Sections 1.961-6 and 1.961-7 are
reserved. Section 1.961-8 describes the
consequences of positive derived basis.
Section 1.961-9 describes the conse-
quences of positive section 961(c) basis.
Section 1.961-10 describes the conse-
quences of negative derived basis and
negative section 961(c) basis. Section
1.961-11 provides for the inclusion by
United States shareholders in a controlled
foreign corporation of the controlled for-
eign corporation’s income arising under
section 961(c). Section 1.961-12 pro-
vides examples illustrating the applica-
tion of the section 961 regulations. Sec-
tion 1.961-13 sets forth transition rules.
Section 1.961-14 sets forth applicability
dates. See §1.1502-59 for additional rules
for a consolidated group.
(2) Scope. This section sets forth defini-
tions and rules of general applicability for
purposes of the section 961 regulations.
Paragraph (b) of this section provides
definitions. Paragraph (c) of this section
provides rules relating to S corporations.
Paragraph (d) of this section provides an
anti-avoidance rule.
(b) Definitions. The definitions in
§1.959-1(b) apply for purposes of the sec-
tion 961 regulations, with the following
additions.
Acquired partnership. The term
acquired partnership has the meaning
provided in §1.961-5(c)(1).
Common basis. The term common
basis means a partnership’s adjusted basis
of an item of property, excluding any basis
that is solely with respect to a specific
partner (for example, a section 743(b)
basis adjustment or derived basis).
Covered gain. The term covered gain
has the meaning provided in §1.961-9(c)
(1).
Derived basis. The term derived basis
means basis described in §1.961-2(d)(2).
Derivative ownership unit. The term
derivative ownership unit has the meaning
provided in §1.961-2(d)(1).
Lookback PTEP. The term look-
back PTEP has the meaning provided in
§1.961-9(f)(3)(ii).
Lower-tier partnership interest. The
term lower-tier partnership interest has
the meaning provided in §1.961-8(d).
Midyear transaction. The term midyear
transaction has the meaning provided in
§1.961-3(c)(2).
Mirrored PTEP. The term mirrored
PTEP has the meaning provided in
§1.961-9(f)(2)(ii).
Negative derived basis. The term neg-
ative derived basis means the amount by
which derived basis with respect to a cov-
ered shareholder of a derivative owner-
ship unit is less than zero.
Negative section 961(c) basis. The term
negative section 961(c) basis means the
amount by which section 961(c) basis with
respect to a covered shareholder of a sec-
tion 961(c) ownership unit is less than zero.
Net foreign currency gain. The term
net foreign currency gain has the meaning
provided in §1.961-5(b)(2).
Net foreign currency loss. The term net
foreign currency loss has the meaning pro-
vided in §1.961-5(b)(2).
Nonrecognition transaction. The term
nonrecognition transaction has the mean-
ing provided in section 7701(a)(45).
Positive derived basis. The term pos-
itive derived basis means the amount by
which derived basis with respect to a cov-
ered shareholder of a derivative owner-
ship unit is greater than zero.
Positive section 961(c) basis. The term
positive section 961(c) basis means the
amount by which section 961(c) basis
with respect to a covered shareholder of
a section 961(c) ownership unit is greater
than zero.
Property unit. The term property unit
has the meaning provided in §1.961-2(b).
Relevant taxable year. The term rel-
evant taxable year has the meaning pro-
vided in §1.961-3(b).
Section 951(a)(1)(A) inclusion amount.
The term section 951(a)(1)(A) inclusion
amount has the meaning provided in
§1.961-3(c)(1)(ii).
Section 951(a)(1)(B) inclusion amount.
The term section 951(a)(1)(B) inclusion
amount has the meaning provided in
§1.961-3(c)(1)(iii).
Section 961 regulations. The term sec-
tion 961 regulations means the regulations
in this part issued under section 961.
Section 961(a) ownership unit. The
term section 961(a) ownership unit has
the meaning provided in §1.961-2(c).
Section 961(c) basis. The term section
961(c) basis means basis described in
§1.961-2(e)(2).
Section 961(c) income. The term sec-
tion 961(c) income has the meaning pro-
vided in §1.961-11(b).
Section 961(c) ownership unit. The
term section 961(c) ownership unit has the
meaning provided in §1.961-2(e)(1).
Section 961(c) PTEP. The term section
961(c) PTEP has the meaning provided in
§1.961-9(f)(1).
Transferred units. The term transferred
units has the meaning provided in §1.961-
8(b)(1) or §1.961-9(c)(1), as applicable.
Transferring partnership. The term
transferring partnership has the meaning
provided in §1.961-8(b)(1).
Upper-tier partnership. The term
upper-tier partnership has the meaning
provided in §1.961-8(d).
(c) Treatment of an S corporation—(1)
In general. Except as provided in para-
graph (c)(2) of this section, for purposes
of the section 961 regulations, an S cor-
poration is treated in the same manner as
a domestic partnership, a reference to a
domestic partnership includes an S corpo-
ration, and shareholders of an S corpora-
tion are treated as partners of such partner-
ship. See section 1373(a). As applicable,
the treatment of an S corporation and its
shareholders under the preceding sentence
is determined by replacing any partner-
ship-specific provision with the equivalent
provision for S corporations (for example,
a reference to an adjustment under section
705 to a partner’s basis in its partnership
interest refers to the adjustment under sec-
tion 1367 to a shareholder’s basis in its
stock of an S corporation).
(2) Treatment as a covered share-
holder for taxable years for which elec-

Bulletin No. 2025–5 611 January 27, 2025
tive entity treatment applies for §1.958-
1(d)(1) purposes. See §1.961-13(c) for a
rule treating an S corporation as a cov-
ered shareholder for any taxable year of
the S corporation for which §1.958-1(d)
(1) does not apply and §1.961-13(d) for
a transition rule converting basis with
respect to an S corporation to basis with
respect to covered shareholders owning
interests in the S corporation once the S
corporation is no longer treated as a cov-
ered shareholder.
(d) Anti-avoidance rule. If a trans-
action, series of transactions, plan, or
arrangement is engaged in with a principal
purpose of avoiding the purposes of sec-
tion 961 and the section 961 regulations,
then appropriate adjustments are made,
which may include adjustments to disre-
gard the transaction, series of transactions,
plan, or arrangement.
Par. 27. Section 1.961-2 is revised to
read as follows:
§1.961-2 Types of property units and
basis.
(a) Scope. This section describes the
types of property units and types of basis
for purposes of applying section 961.
Paragraph (b) of this section defines a
property unit and provides the general rule
for basis of a property unit. Paragraphs (c)
through (e) of this section provide defini-
tions and rules for section 961(a) owner-
ship units, derivative ownership units, and
section 961(c) ownership units, respec-
tively. See §§1.961-3 through 1.961-11
for basis adjustments and the effects of
basis and §1.961-12(c)(1) (Example 1) for
an example illustrating the application of
this section.
(b) Property unit. A property unit is
a section 961(a) ownership unit, deriv-
ative ownership unit, or section 961(c)
ownership unit, as applicable (defined
in paragraphs (c) through (e) of this sec-
tion). Basis in a property unit must be
established and maintained in U.S. dollars
in accordance with this section and the
adjustments prescribed in the section 961
regulations.
(c) Section 961(a) ownership unit. A
section 961(a) ownership unit is a share
of stock of a foreign corporation directly
owned by a covered shareholder, or an
interest in a partnership directly owned by
a covered shareholder and through which
the covered shareholder owns stock of
a foreign corporation. A covered share-
holder is provided adjusted basis in a sec-
tion 961(a) ownership unit.
(d) Derivative ownership unit—(1)
In general. A derivative ownership unit
is a share of stock of a foreign corpora-
tion directly owned by a partnership and
owned (indirectly) by one or more covered
shareholders through only one or more
partnerships, or an interest in a partnership
directly owned by another partnership and
through which one or more covered share-
holders own stock of a foreign corporation
through only partnerships. A partnership
is provided derived basis in a derivative
ownership unit in accordance with para-
graph (d)(2) of this section.
(2) Derived basis. Derived basis is
basis of a derivative ownership unit that
must be established and maintained sepa-
rately with respect to each covered share-
holder that owns the derivative ownership
unit through only one or more partner-
ships. Derived basis with respect to a cov-
ered shareholder may be a positive or neg-
ative amount and is treated as an attribute
of the partnership that directly owns the
derivative ownership unit.
(e) Section 961(c) ownership unit—(1)
In general. A section 961(c) ownership
unit is a share of stock of a foreign corpo-
ration directly owned by a controlled for-
eign corporation and owned (indirectly)
by one or more covered shareholders. A
controlled foreign corporation is provided
section 961(c) basis in a section 961(c)
ownership unit in accordance with para-
graph (e)(2) of this section.
(2) Section 961(c) basis. Section 961(c)
basis is basis of a section 961(c) owner-
ship unit that must be established and
maintained separately with respect to each
covered shareholder that owns the section
961(c) ownership unit. Section 961(c)
basis with respect to a covered shareholder
may be a positive or negative amount and
is treated as an attribute of the controlled
foreign corporation that directly owns the
section 961(c) ownership unit. Section
961(c) basis applies only for the purposes
prescribed in the section 961 regulations
and, therefore, for example does not affect
the amount of the controlled foreign cor-
poration’s gross income or the amount of
its earnings and profits.
Par. 28. Sections 1.961-3 through
1.961-14 are added to read as follows:
Sec.
* * * * *
1.961-3 Basis increases for certain income
inclusions.
1.961-4 Basis reductions and gain recog-
nition for distributions.
1.961-5 Basis adjustments for foreign cur-
rency gain or loss and for general succes-
sor transactions.
1.961-6 and 1.961-7 [Reserved]
1.961-8 Application of positive derived
basis to covered shareholders’ distributive
shares of gain or loss.
1.961-9 Exclusion from gross income
of previously taxed earnings and prof-
its resulting from positive section 961(c)
basis.
1.961-10 Gain recognition for negative
basis.
1.961-11. Amounts included in gross
income of United States shareholders.
1.961-12 Examples.
1.961-13 Transition rules.
1.961-14 Applicability dates.
* * * * *
§1.961-3 Basis increases for certain
income inclusions.
(a) Scope. This section provides the
increases to basis under section 961 for
inclusions under sections 951(a) and
951A(a) and §1.961-11. Paragraph (b)
of this section provides the general rule,
pursuant to which, to reflect a covered
shareholder’s income inclusions for a
controlled foreign corporation’s tax-
able year, basis of certain property units
(shares of stock of the controlled foreign
corporation directly owned by the cov-
ered shareholder, property through which
the covered shareholder owns (indirectly)
stock of the controlled foreign corpora-
tion, and shares of stock of the controlled
foreign corporation owned (indirectly) by
the covered shareholder), is increased.
Paragraph (c) of this section describes the
specific rules for increasing basis pursuant
to paragraph (b) of this section. Paragraph
(d) of this section determines certain basis
increases based on distributions of pre-
viously taxed earnings and profits by the
controlled foreign corporation during the

January 27, 2025 612 Bulletin No. 2025–5
taxable year. Paragraph (e) of this sec-
tion determines certain basis increases
based on a hypothetical distribution, to
the extent paragraph (d) of this section
does not increase basis. Paragraph (f) of
this section provides limitations on basis
increases in certain cases. See §1.961-
12(c)(2) (Example 2) for an example illus-
trating the application of this section.
(b) In general. To reflect a covered
shareholder’s income inclusions for a tax-
able year of a controlled foreign corpora-
tion (such taxable year for which this sec-
tion is being applied, the relevant taxable
year), basis of property units that are shares
of stock of the controlled foreign corpo-
ration owned by the covered shareholder,
and basis of any property units through
which the covered shareholder owns stock
of the controlled foreign corporation, is
in each case increased in accordance with
the rules described in paragraph (c) of this
section. Generally, under those rules, basis
increases begin at the level of stock of the
controlled foreign corporation and then
tier through property units through which
the covered shareholder owns such stock,
with at each level basis increases allocated
among property units based on how previ-
ously taxed earnings and profits resulting
from the income inclusions are, or likely
will be, distributed on the property units
(thus, the allocations may differ from the
extent to which the income inclusions are
attributable to the property units). Solely
for purposes of this section, a reference to
the basis of a property unit means adjusted
basis in the case of a section 961(a) own-
ership unit, derived basis with respect to
the covered shareholder in the case of
a derivative ownership unit, or section
961(c) basis with respect to the covered
shareholder in the case of a section 961(c)
ownership unit.
(c) Rules for increasing basis—(1)
Determine amount of income inclusions
giving rise to increases to basis—(i) In
general. First, determine the amount of
the covered shareholder’s income inclu-
sions with respect to the controlled for-
eign corporation for the relevant taxable
year that give rise to increases to basis
under section 961, computed as the sum
of the section 951(a)(1)(A) inclusion
amount and section 951(a)(1)(B) inclu-
sion amount (defined in paragraphs (c)(1)
(ii) and (iii) of this section).
(ii) Section 951(a)(1)(A) inclusion
amount. The section 951(a)(1)(A) inclu-
sion amount is the sum of any amount (in
U.S. dollars) that the covered shareholder
includes in gross income with respect to
the controlled foreign corporation for the
relevant taxable year under section 951(a)
(1)(A) or 951A(a) or §1.961-11.
(iii) Section 951(a)(1)(B) inclusion
amount. The section 951(a)(1)(B) inclu-
sion amount is the amount (in U.S. dol-
lars) that the covered shareholder includes
in gross income with respect to the con-
trolled foreign corporation for the relevant
taxable year under section 951(a)(1)(B).
(2) Determine if any midyear trans-
actions occur. Second, determine if any
midyear transactions (which affect the
timing of certain basis adjustments under
paragraphs (d) and (e) of this section)
occur within the relevant taxable year. A
midyear transaction is any sale, exchange,
or other disposition (including an issuance
or redemption) occurring before the last
relevant day of the relevant taxable year
and involving one or more items of prop-
erty that, immediately before or after the
sale, exchange, or other disposition are
stock of the controlled foreign corpora-
tion owned by the covered shareholder
or property through which the covered
shareholder owns stock of the controlled
foreign corporation.
(3) Apply actual distribution rule.
Third, if, before the last relevant day of
the relevant taxable year, the controlled
foreign corporation distributes previously
taxed earnings and profits with respect to
the covered shareholder in a covered dis-
tribution (determined under §1.959-4),
then increase basis for a portion of the
section 951(a)(1)(A) inclusion amount in
accordance with paragraph (d) of this sec-
tion.
(4) Apply hypothetical distribution rule.
Fourth, increase basis for any remaining
portion of the section 951(a)(1)(A) inclu-
sion amount and the section 951(a)(1)(B)
inclusion amount in accordance with para-
graph (e) of this section.
(d) Actual distribution rule—(1) In
general. For each distribution described
in paragraph (c)(3) of this section (start-
ing with the earliest distribution), increase
basis of property units that are shares of
stock of the controlled foreign corporation
and, if applicable, property units through
which the covered shareholder owns such
shares, in accordance with paragraphs (d)
(2) and (3) of this section. Treat each such
increase to basis as made at the beginning
of the first day of the relevant taxable year,
unless the distribution is made after any
midyear transactions, in which case treat
each such increase as made immediately
after the midyear transaction that most
recently precedes the distribution.
(2) Increases to basis of shares of stock
of the controlled foreign corporation.
Increase the basis of each property unit
that is a share of stock of the controlled
foreign corporation that the covered
shareholder owns on the last relevant day
of the relevant taxable year by the amount
of the adjustment required under §1.961-4
(basis reductions and gain recognition for
distributions) to such basis by reason of
the distribution, subject to the following
limitation. Do not increase the basis of the
share by an amount greater than the prod-
uct of the section 951(a)(1)(A) inclusion
amount, reduced by all increases to basis
under this paragraph (d)(2) by reason of
earlier distributions, and a fraction, the
numerator of which is the portion of the
distribution that is made with respect to
the share, and the denominator of which is
the amount of the distribution.
(3) Increases to basis of property units
through which the covered shareholder
owns stock of the controlled foreign cor-
poration. If, when the distribution is made,
the covered shareholder owns stock of the
controlled foreign corporation through
one or more property units, then increase
the basis of each such property unit by
the portion of the hypothetical distribu-
tion described in paragraph (e)(2) of this
section (modified as described in the next
sentence) that would be distributed with
respect to the property unit in accordance
with paragraph (e)(3) of this section, sub-
ject to the limitations in paragraph (f) of
this section. For purposes of this para-
graph (d)(3), the hypothetical distribution
is treated as made when the distribution
of previously taxed earnings and profits is
made, the amount of the hypothetical dis-
tribution is equal to the increase to basis
under paragraph (d)(2) of this section by
reason of the distribution of previously
taxed earnings and profits, and, at the level
of the controlled foreign corporation, the
hypothetical distribution is made in the

Bulletin No. 2025–5 613 January 27, 2025
same manner as the distribution of previ-
ously taxed earnings and profits.
(e) Hypothetical distribution rule—
(1) In general. Increase the basis of each
property unit that the covered share-
holder owns on the last relevant day of
the relevant taxable year by the portion
of the hypothetical distribution described
in paragraph (e)(2) of this section that
would be distributed with respect to the
property unit in accordance with para-
graph (e)(3) of this section, subject to
the limitations in paragraph (f) of this
section. Except as provided in paragraph
(e)(4) of this section, treat a portion of
each such increase to basis as made at
the end of the last day of the relevant tax-
able year, determined by multiplying the
amount of the increase to basis by a frac-
tion, the numerator of which is the sec-
tion 951(a)(1)(B) inclusion amount, and
the denominator of which is the amount
of the hypothetical distribution. Treat the
remaining portion of each such increase
to basis as made at the beginning of the
first day of the relevant taxable year on
which the covered shareholder owns the
property unit, unless there are any mid-
year transactions, in which case treat
each such remaining portion as made
immediately after the last midyear trans-
action occurring during the relevant tax-
able year.
(2) Hypothetical distribution. The
hypothetical distribution described in
this paragraph (e)(2) is a hypothetical
distribution treated as made by the con-
trolled foreign corporation, through all
property (if any) through which the cov-
ered shareholder owns stock of the con-
trolled foreign corporation, to the covered
shareholder on the last relevant day of the
relevant taxable year. The amount of the
hypothetical distribution is equal to the
section 951(a)(1)(A) inclusion amount,
reduced by any increases to basis under
paragraph (d)(2) of this section, plus the
section 951(a)(1)(B) inclusion amount. In
the hypothetical distribution, stock of the
controlled foreign corporation and other
property is taken into account only to the
extent owned by the covered shareholder
on the last relevant day, and the earnings
and profits of the controlled foreign cor-
poration and any foreign corporations
through which the hypothetical distribu-
tion is treated as made are in each case
treated as equal to the amount of the hypo-
thetical distribution.
(3) Distribution rights. The portion of
the hypothetical distribution that would
be distributed with respect to a property
unit is determined under the principles of
§1.951-1(e)(2) through (6). However, an
earlier distribution affects property units’
distribution rights for purposes of the
hypothetical distribution to the extent such
earlier distribution results in the section
951(a)(1)(A) inclusion amount increasing
basis under paragraph (d) of this section.
(4) Certain increase to basis for sec-
tion 951(a)(1)(B) inclusion amount. If
basis of a property unit is increased pur-
suant to the second sentence of paragraph
(e)(1) of this section, and at the end of the
last day of the relevant taxable year the
covered shareholder either does not own
the property unit or owns the property unit
in a manner different than how the cov-
ered shareholder owns the property unit
at the time of the hypothetical distribution
described in paragraph (e)(2) of this sec-
tion, then treat such increase to basis as
made immediately before the transaction
in which the covered shareholder ceases
to own the property unit in the same man-
ner as it owns the property unit at the time
of such hypothetical distribution. In addi-
tion, treat such increase to basis as made
after the determination of any amount that
must be included in gross income as a div-
idend (for example, under section 1248 or
§1.367(b)-4) as a result of such transac-
tion.
(f) Limitations—(1) Section 961(c)
ownership units that are not stock of a
controlled foreign corporation. Section
961(c) basis of a section 961(c) ownership
unit is increased only if the section 961(c)
ownership unit is a share of stock of a con-
trolled foreign corporation.
(2) Taxable section 962 previously
taxed earnings and profits. The portion of
an income inclusion that gives rise to pre-
viously taxed earnings and profits relat-
ing to the taxable section 962 PTEP sub-
group does not increase adjusted basis of
a section 961(a) ownership unit or derived
basis of a derivative ownership unit.
(3) Derivative ownership units that are
partially owned by foreign corporations.
If a derivative ownership unit is owned
(indirectly) by one or more foreign corpo-
rations, then an increase to derived basis
of the derivative ownership unit resulting
from a hypothetical distribution described
in paragraph (d)(3) or (e)(2) of this section
cannot exceed the portion of the hypothet-
ical distribution that would be distributed
to the covered shareholder through only
the derivative ownership unit and any
interests in partnerships.
§1.961-4 Basis reductions and gain
recognition for distributions.
(a) Scope. This section sets forth the
rules for reducing basis and recognizing
gain under section 961 for distributions
of previously taxed earnings and profits.
Paragraph (b) of this section describes
adjustments to section 961(a) ownership
units in the case of distributions of pre-
viously taxed earnings and profits to a
covered shareholder. Paragraph (c) of this
section describes adjustments to deriva-
tive ownership units in the case of distri-
butions of previously taxed earnings and
profits through one or more partnerships
to one or more covered shareholders.
Paragraph (d) of this section describes
adjustments to section 961(c) ownership
units in the case of distributions of previ-
ously taxed earnings and profits to a con-
trolled foreign corporation. Paragraph (e)
of this section provides timing rules for
when adjustments are treated as made.
Paragraph (f) of this section provides rules
regarding the treatment of gain recognized
under this section. See §1.961-12(c)(3)
(Example 3) for an example illustrating
the application of this section.
(b) Adjustments to section 961(a) own-
ership units—(1) In general. If a covered
shareholder receives previously taxed
earnings and profits that are excluded from
its gross income under section 959(a) and
§1.959-4, then the resulting adjustments
under section 961 to the covered share-
holder’s adjusted basis of section 961(a)
ownership units are determined in accor-
dance with the rules described in para-
graph (b)(2) of this section.
(2) Rules for adjusting basis—(i)
Determine amounts of adjustments. First,
determine the amount of the adjustment to
the covered shareholder’s adjusted basis
of each section 961(a) ownership unit,
which is equal to the dollar basis of, and
foreign income taxes associated with,
previously taxed earnings and profits that

January 27, 2025 614 Bulletin No. 2025–5
are received with respect to such section
961(a) ownership unit (determined under
§1.959-4), but only including foreign
income taxes for which the covered share-
holder is allowed a credit under section
901.
(ii) Reduce basis. Second, reduce the
covered shareholder’s adjusted basis of
each section 961(a) ownership unit by the
amount of the adjustment to such adjusted
basis (determined under paragraph (b)(2)
(i) of this section), but not below zero.
(iii) Recognize gain. Third, to the extent
that the amount of an adjustment to the
covered shareholder’s adjusted basis of a
section 961(a) ownership unit (determined
under paragraph (b)(2)(i) of this section)
exceeds such adjusted basis, treat the cov-
ered shareholder as recognizing gain with
respect to such section 961(a) ownership
unit in accordance with paragraph (f) of
this section.
(c) Adjustments to derivative owner-
ship units—(1) In general. If, through a
partnership, one or more covered share-
holders receive previously taxed earn-
ings and profits that are excluded from
the covered shareholders’ gross income
under section 959(a) and §1.959-4, then
the resulting adjustments under section
961 to the partnership’s derived basis of
derivative ownership units are determined
in accordance with the rules described
in paragraph (c)(2) of this section. In the
case of tiered partnerships, each tiered
partnership’s derived basis of derivative
ownership units is adjusted as described
in paragraph (c)(2) of this section, starting
with the partnership at the lowest tier.
(2) Rules for adjusting basis—(i)
Determine amounts of adjustments. First,
determine the amount of the adjustment
to the partnership’s derived basis with
respect to each covered shareholder of
each derivative ownership unit, which is
equal to the dollar basis of, and foreign
income taxes associated with, previously
taxed earnings and profits that are both
with respect to such covered shareholder
and received with respect to such deriv-
ative ownership unit (determined under
§1.959-4).
(ii) Reduce positive derived basis. Sec-
ond, reduce the partnership’s derived basis
with respect to each covered shareholder
of each derivative ownership unit by the
amount of the adjustment to such derived
basis (determined under paragraph (c)(2)
(i) of this section), but not below zero.
(iii) Reduce positive section 743(b)
basis (if applicable) and increase neg-
ative derived basis. Third, to the extent
that the amount of an adjustment to the
partnership’s derived basis with respect
to a covered shareholder of a derivative
ownership unit (determined under para-
graph (c)(2)(i) of this section) exceeds
the related reduction to positive derived
basis (determined under paragraph (c)(2)
(ii) of this section), reduce the covered
shareholder’s positive section 743(b)
basis adjustment of such derivative own-
ership unit (if applicable), but not below
zero, and then, if applicable, reduce such
derived basis below zero, but only to the
extent permitted under paragraph (c)(3)
of this section.
(iv) Recognize and allocate gain.
Fourth, to the extent that the amount of
an adjustment to the partnership’s derived
basis with respect to a covered share-
holder of a derivative ownership unit
(determined under paragraph (c)(2)(i) of
this section) exceeds the aggregate of the
related reductions to derived basis (deter-
mined under paragraphs (c)(2)(ii) and (iii)
of this section) and positive section 743(b)
basis (determined under paragraph (c)(2)
(iii) of this section), treat the partnership
as recognizing gain with respect to such
derivative ownership unit in accordance
with paragraph (f) of this section, and
allocate the gain solely to the covered
shareholder.
(3) Limitation on reducing derived
basis—(i) In general. An adjustment to a
partnership’s derived basis with respect to
a covered shareholder of a derivative own-
ership unit can reduce (or further reduce)
such derived basis below zero only to the
extent of the amount of common basis of
such derivative ownership unit available
with respect to the covered shareholder
(determined under paragraph (c)(3)(ii) of
this section), less, if applicable, the cov-
ered shareholder’s negative section 743(b)
basis adjustment of the derivative owner-
ship unit (expressed as a positive amount).
(ii) Determining common basis avail-
able with respect to the covered share-
holder. In applying paragraph (c)(3)(i) of
this section, the amount of common basis
of the derivative ownership unit available
with respect to the covered shareholder
is equal to the product of the following
amounts—
(A) The partnership’s common basis
of the derivative ownership unit (trans-
lated, if applicable, into U.S. dollars
at the spot rate on the day on which the
adjustment described in paragraph (c)
(3)(i) of this section would be treated as
reducing basis), reduced by all negative
derived basis of the derivative ownership
unit (determined immediately before the
adjustment described in paragraph (c)
(3)(i) of this section would be treated as
made); and
(B) A fraction, the numerator of which
is the amount by which the adjustment
described in paragraph (c)(3)(i) of this
section would reduce derived basis with
respect to the covered shareholder below
zero if derived basis could be reduced
without limitation, and the denominator
of which is the sum of the amounts by
which the adjustment described in para-
graph (c)(3)(i) of this section and any
concurrent adjustments to derived basis
with respect to other covered shareholders
would reduce derived basis of the deriva-
tive ownership unit below zero if derived
basis could be reduced without limitation.
(d) Adjustments to section 961(c) own-
ership units—(1) In general. If a con-
trolled foreign corporation receives previ-
ously taxed earnings and profits that are
excluded from its gross income under sec-
tion 959(b) and §1.959-4, then the result-
ing adjustments under section 961 to the
controlled foreign corporation’s section
961(c) basis of section 961(c) ownership
units are determined in accordance with
the rules described in paragraph (d)(2) of
this section.
(2) Rules for adjusting basis—(i)
Determine amounts of adjustments. First,
determine the amount of the adjustment to
the controlled foreign corporation’s sec-
tion 961(c) basis with respect to each cov-
ered shareholder of each section 961(c)
ownership unit, which is equal to the
dollar basis of, and foreign income taxes
associated with, previously taxed earn-
ings and profits that are both with respect
to such covered shareholder and received
with respect to such section 961(c) own-
ership unit (determined under §1.959-4).
(ii) Reduce basis. Second, reduce the
controlled foreign corporation’s section
961(c) basis with respect to each cov-

Bulletin No. 2025–5 615 January 27, 2025
ered shareholder of each section 961(c)
ownership unit by the amount of the
adjustment to such section 961(c) basis,
including below zero, but only to the
extent permitted under paragraph (d)(3)
of this section.
(iii) Recognize and assign gain. Third,
to the extent that the amount of an adjust-
ment to the controlled foreign corpora-
tion’s section 961(c) basis with respect to
a covered shareholder of a section 961(c)
ownership unit (determined under para-
graph (d)(2)(i) of this section) exceeds the
related reduction to section 961(c) basis
(determined under paragraph (d)(2)(ii)
of this section), treat the controlled for-
eign corporation as recognizing gain with
respect to such section 961(c) ownership
unit in accordance with paragraph (f) of
this section, and assign the gain solely to
the covered shareholder.
(3) Limitation on reducing section
961(c) basis—(i) In general. An adjust-
ment to a controlled foreign corporation’s
section 961(c) basis with respect to a cov-
ered shareholder of a section 961(c) own-
ership unit can reduce (or further reduce)
such section 961(c) basis below zero only
to the extent of the amount of adjusted
basis of such section 961(c) ownership
unit available with respect to the covered
shareholder (determined under paragraph
(d)(3)(ii) of this section).
(ii) Determining adjusted basis avail-
able with respect to the covered share-
holder. In applying paragraph (d)(3)(i)
of this section, the amount of adjusted
basis of the section 961(c) ownership
unit available with respect to the covered
shareholder is equal to the product of the
following amounts—
(A) The controlled foreign corpora-
tion’s adjusted basis of the section 961(c)
ownership unit (translated, if applicable,
into U.S. dollars at the spot rate on the
day on which the adjustment described in
paragraph (d)(3)(i) of this section would
be treated as reducing basis), reduced by
all negative section 961(c) basis of the
section 961(c) ownership unit (deter-
mined immediately before the adjustment
described in paragraph (d)(3)(i) of this
section would be treated as made); and
(B) A fraction, the numerator of which
is the amount by which the adjustment
described in paragraph (d)(3)(i) of this
section would reduce section 961(c)
basis with respect to the covered share-
holder below zero if section 961(c) basis
could be reduced without limitation, and
the denominator of which is the sum of
the amounts by which the adjustment
described in paragraph (d)(3)(i) of this
section and any concurrent adjustments
to section 961(c) basis with respect to
other covered shareholders would reduce
section 961(c) basis of the section 961(c)
ownership unit below zero if section
961(c) basis could be reduced below zero
without limitation.
(e) Timing of basis reductions—(1)
Basis of stock. A reduction to basis of
stock of a foreign corporation under para-
graph (b), (c), or (d) of this section is
treated as made concurrently with the dis-
tribution giving rise to the basis reduction
(and before any other adjustment to basis
by reason of the distribution, for example,
under section 301(c)(2)).
(2) Basis of partnership interests. A
reduction to basis of an interest in a part-
nership under paragraph (b) or (c) of this
section is treated as made concurrently
with the adjustment under section 705 to
such interest in the partnership by reason
of the distribution giving rise to the basis
reduction.
(f) Treatment of gain—(1) In general.
Gain treated as recognized with respect
to a section 961(a) ownership unit, deriv-
ative ownership unit, or section 961(c)
ownership unit under paragraph (b), (c),
or (d) of this section is treated as gain
from a sale or exchange of such owner-
ship unit occurring concurrent with when
the adjustment described in that paragraph
would be treated as reducing basis.
(2) Gain recognized by a partnership.
Gain treated as recognized by a partner-
ship under paragraph (c) of this section
constitutes an item of gain solely with
respect to the covered shareholder to
which it is allocated and has no effect on
any partnership’s computation or alloca-
tion of any other item under section 703
or 704 or on the covered shareholder’s
capital account. The gain is treated as the
covered shareholder’s distributive share
of gain of the partnership (derived through
each partnership through which the cov-
ered shareholder owns the partnership
recognizing the gain, if applicable) and is
taken into account in adjusting basis under
section 705.
(3) Gain recognized by a controlled
foreign corporation. Gain treated as rec-
ognized by a controlled foreign corpora-
tion under paragraph (d) of this section
is gain recognized pursuant to section
961(c). Such gain applies only for pur-
poses of determining amounts included in
gross income of United States sharehold-
ers of the controlled foreign corporation
under §1.961-11 and, therefore, for exam-
ple does not affect the controlled foreign
corporation’s items of gross income for
purposes of section 952 or 951A or its
earnings and profits.
(4) Translation rule. If applicable, gain
treated as recognized by a partnership or
controlled foreign corporation under para-
graph (c) or (d) of this section is translated
into functional currency at the spot rate
on the day on which the gain is treated as
recognized.
§1.961-5 Basis adjustments for foreign
currency gain or loss and for general
successor transactions.
(a) Scope. This section sets forth the
rules for adjusting basis under section
961 for foreign currency gain or loss rec-
ognized with respect to previously taxed
earnings and profits under section 986(c)
and for general successor transactions.
Paragraph (b) of this section provides the
adjustments for foreign currency gain or
loss. Paragraph (c) of this section provides
the adjustments for general successor
transactions. Paragraph (d) of this section
coordinates with section 743(b).
(b) Adjustments for foreign currency
gain or loss—(1) In general. If a covered
shareholder recognizes foreign currency
gain or loss with respect to a foreign cor-
poration’s previously taxed earnings and
profits under §1.986(c)-1 in a transaction
other than a distribution of the previously
taxed earnings and profits, then basis of
property units that are shares of stock
of the foreign corporation owned by the
covered shareholder, and basis of any
property units through which the covered
shareholder owns stock of the foreign cor-
poration, is in each case adjusted in accor-
dance with the rules described in para-
graphs (b)(2) through (4) of this section.
Generally, under those rules, basis adjust-
ments begin at the level of stock of the
foreign corporation and then tier through

January 27, 2025 616 Bulletin No. 2025–5
property units through which the covered
shareholder owns such stock, with at each
level basis adjustments allocated among
property units based on proportionate
shares of foreign currency gain or loss.
Solely for purposes of this paragraph (b),
a reference to the basis of a property unit
means adjusted basis in the case of a sec-
tion 961(a) ownership unit, derived basis
with respect to the covered shareholder in
the case of a derivative ownership unit,
or section 961(c) basis with respect to the
covered shareholder in the case of a sec-
tion 961(c) ownership unit.
(2) Determine net foreign currency
gain or loss. First, determine the amount
of foreign currency gain or loss that gives
rise to adjustments to basis, computed by
comparing the sum of all foreign currency
gain and the sum of all foreign currency
loss that the covered shareholder recog-
nizes with respect to the foreign corpora-
tion’s previously taxed earnings and prof-
its in the transaction under §1.986(c)-1(b),
without regard to §1.986(c)-1(b)(3)(i)
and (ii) (limitations for previously taxed
earnings and profits resulting from section
965). The excess of the sum of foreign
currency gain over the sum of foreign cur-
rency loss is net foreign currency gain, and
the excess of the sum of foreign currency
loss over the sum of foreign currency gain
is net foreign currency loss.
(3) Determine each property unit’s
share of net foreign currency gain or
loss—(i) In general. Second, determine
each property unit’s share of net foreign
currency gain or net foreign currency loss
by multiplying the net foreign currency
gain or net foreign currency loss, as appli-
cable, by a fraction (which is based on a
hypothetical distribution by the foreign
corporation of previously taxed earnings
and profits with respect to which the cov-
ered shareholder recognizes, or would
recognize, foreign currency gain or loss
in the transaction). The numerator of the
fraction is the portion of the hypothetical
distribution described in paragraph (b)(3)
(ii) of this section that, under the princi-
ples of §1.951-1(e)(2) through (6), would
be distributed with respect to the property
unit, and the denominator of the fraction
is the amount of such hypothetical distri-
bution.
(ii) Hypothetical distribution. The
hypothetical distribution described in this
paragraph (b)(3)(ii) is a hypothetical dis-
tribution treated as made by the foreign
corporation, through all property (if any)
through which the covered shareholder
owns stock of the foreign corporation,
to the covered shareholder immediately
before the transaction. The amount of
the hypothetical distribution is equal to
all previously taxed earnings and profits
of the foreign corporation with respect
to which the covered shareholder rec-
ognizes (or, but for §1.986(c)-1(b)(3)(i)
and (ii), would recognize) any foreign
currency gain or loss in the transaction.
In the hypothetical distribution, stock
of the foreign corporation is taken into
account only to the extent owned by the
covered shareholder immediately before
but not immediately after the transaction,
and other property is taken into account
only to the extent owned by the covered
shareholder immediately before the trans-
action. The earnings and profits of the
foreign corporation and any foreign cor-
porations through which the hypothetical
distribution is treated as made are in each
case treated as equal to the amount of the
hypothetical distribution.
(4) Adjust basis—(i) In general. Third,
adjust the basis of each property unit in
accordance with paragraph (b)(4)(ii) or
(iii) of this section, as applicable, start-
ing with property units at the lowest tier
and subject to the limitation in paragraph
(b)(4)(iv) of this section. Treat each such
adjustment to basis as made immediately
before the transaction (and therefore take
the adjustments into account in determin-
ing the Federal income tax consequences
of the transaction).
(ii) Basis increases for net foreign
currency gain. In the case of net foreign
currency gain, increase the basis of each
property unit by the property unit’s share
of the net foreign currency gain (deter-
mined under paragraph (b)(3) of this sec-
tion).
(iii) Basis reductions and gain rec-
ognition for net foreign currency loss.
In the case of net foreign currency loss,
reduce the basis of each property unit by
the property unit’s share of net foreign
currency loss (determined under para-
graph (b)(3) of this section) or recognize
gain in accordance with the principles of
§1.961-4 (applied by treating such share
of net foreign currency loss as the amount
of the adjustment to basis described in
§1.961-4(b)(2)(i), (c)(2)(i), or (d)(2)(i), as
applicable).
(iv) Limitation for section 961(c) own-
ership units. Section 961(c) basis of a
section 961(c) ownership unit is adjusted
only if the section 961(c) ownership unit
is a share of stock of a controlled foreign
corporation. A specified foreign corpora-
tion (as defined in §1.965-1(f)(45)(i)(B))
that is not otherwise a controlled foreign
corporation is treated as a controlled for-
eign corporation for purposes of applying
this paragraph (b)(4) to foreign currency
gain or loss with respect to previously
taxed earnings and profits resulting from
the application of section 965(a).
(c) Successor basis—(1) In general. In
a general successor transaction, derived
basis of each partnership in which the suc-
cessor covered shareholder acquires own-
ership of a partnership interest (each an
acquired partnership), and section 961(c)
basis of each acquired foreign corpora-
tion, transfers from the transferor cov-
ered shareholder to the successor covered
shareholder (and thus becomes derived
basis or section 961(c) basis with respect
to the successor covered shareholder) in
accordance with the rules described in
paragraph (c)(2) this section. Solely for
purposes of this paragraph (c), a refer-
ence to the basis of a property unit means
derived basis with respect to the transferor
covered shareholder in the case of a deriv-
ative ownership unit, or section 961(c)
basis with respect to the transferor cov-
ered shareholder in the case of a section
961(c) ownership unit.
(2) Rules for transferring basis—(i)
Allocate basis before adjustment for
foreign currency gain or loss. First, for
each property unit directly owned by an
acquired partnership or acquired foreign
corporation, allocate to the successor cov-
ered shareholder a pro rata portion of the
basis of the property unit immediately
before the adjustments pursuant to para-
graph (b) of this section by reason of the
general successor transaction, determined
by multiplying such basis by a fraction.
The numerator of the fraction is the value
of the interest in the acquired partnership
or stock of the acquired corporation, as
applicable, ownership of which is acquired
by the successor covered shareholder in
the general successor transaction. The

Bulletin No. 2025–5 617 January 27, 2025
denominator of the fraction is the total
value of all the interests of the acquired
partnership or all the stock of the acquired
foreign corporation, as applicable, that
the transferor covered shareholder owns
immediately before the general successor
transaction.
(ii) Adjust allocations for foreign cur-
rency gain or loss. Second, adjust the
allocation of basis of each property unit as
follows. Increase the allocation to the suc-
cessor covered shareholder by the amount
of the increase to basis of the property unit
pursuant to paragraph (b) of this section
by reason of the general successor trans-
action. Decrease the allocation to the suc-
cessor covered shareholder by the amount
of the reduction to basis of the property
unit pursuant to paragraph (b) of this sec-
tion by reason of the general successor
transaction.
(iii) Transfer of successor basis. Third,
transfer basis from the transferor cov-
ered shareholder to the successor covered
shareholder by reducing basis with respect
to the transferor covered shareholder, and
increasing basis with respect to the succes-
sor covered shareholder, of each property
unit by the amount of basis of the property
unit allocated to the successor covered
shareholder under paragraphs (c)(2)(i)
and (ii) of this section (if such amount is
positive) or, if such amount is negative, by
increasing basis with respect to the trans-
feror covered shareholder and reducing
basis with respect to the successor covered
shareholder by such amount, expressed as
a positive number. Treat each such trans-
fer of basis as made concurrently with the
general successor transaction.
(3) Deemed covered shareholder—(i)
In general. For purposes of transferring
basis under this paragraph (c), the deemed
covered shareholder is treated in the same
manner as a covered shareholder and a ref-
erence to a covered shareholder includes
the deemed covered shareholder. Thus,
for example, if a covered shareholder sells
an interest in a partnership that directly
owns stock of a foreign corporation to a
nonresident alien individual in a general
successor transaction, then derived basis
of the partnership transfers from the seller
covered shareholder to the deemed cov-
ered shareholder under this paragraph (c).
Moreover, if the individual subsequently
sells the partnership interest to a covered
shareholder, then derived basis of the part-
nership (adjusted consistent with the sec-
tion 961 regulations, including to reflect
distributions from the foreign corpora-
tion to the individual) transfers from the
deemed covered shareholder to the buyer
covered shareholder under this paragraph
(c).
(ii) Treatment as controlled foreign
corporation stock. Solely for purposes
of determining section 961(c) basis that
transfers to or from the deemed covered
shareholder under this paragraph (c), any
foreign corporation in which the deemed
covered shareholder is treated as owning
stock is treated as a controlled foreign cor-
poration (to the extent the foreign corpo-
ration is not otherwise a controlled foreign
corporation). Thus, for example, if a cov-
ered shareholder sells stock of an upper-
tier foreign corporation that directly owns
stock of a lower-tier foreign corporation to
a nonresident alien individual in a general
successor transaction, the upper-tier for-
eign corporation’s shares of stock in the
lower-tier foreign corporation remain sec-
tion 961(c) ownership units and section
961(c) basis of the upper-tier foreign cor-
poration transfers from the seller covered
shareholder to the deemed covered share-
holder under this paragraph (c) even if the
upper-tier foreign corporation ceases to be
a controlled foreign corporation as a result
of the sale. Consequently, if the individual
subsequently sells the stock of the upper-
tier foreign corporation to a covered
shareholder and, as a result, the upper-tier
foreign corporation becomes a controlled
foreign corporation, then section 961(c)
basis of the upper-tier foreign corporation
(adjusted consistent with the section 961
regulations, including to reflect distribu-
tions from the lower-tier foreign corpora-
tion to the upper-tier foreign corporation)
transfers from the deemed covered share-
holder to the buyer covered shareholder
under this paragraph (c).
(iii) Determining basis that transfers
from the deemed covered shareholder. In
a transaction in which basis of a derivative
ownership unit or section 961(c) owner-
ship unit transfers from the deemed cov-
ered shareholder to a covered shareholder,
the covered shareholder must use a reason-
able method in determining the amount of
transferred basis. Such method must take
into account adjustments to basis with
respect to the deemed covered shareholder
that would have been made under the sec-
tion 961 regulations if the basis were with
respect to a covered shareholder during
the time that it was with respect to the
deemed covered shareholder.
(d) Coordination of successor derived
basis with section 743(b). For purposes of
a basis adjustment under section 743(b)
with respect to a derivative ownership unit
directly owned by an acquired partner-
ship, the amount of any basis adjustment
with respect to the successor covered
shareholder to the acquired partnership’s
assets is calculated under §1.743-1(d) and
allocated under §1.755-1(b) by including
any derived basis in the basis of the deriv-
ative ownership unit that is transferred to
the successor covered shareholder under
paragraph (c)(2) of this section for pur-
poses of gain and loss calculations and
basis allocations under those provisions.
§§1.961-6 and 1.961-7 [Reserved]
§1.961-8 Application of positive
derived basis to covered shareholders’
distributive shares of gain or loss.
(a) Scope. This section describes the
consequences of a partnership’s positive
derived basis. Paragraph (b) of this section
applies positive derived basis to covered
shareholders’ distributive shares of gain or
loss recognized by a partnership on a sale,
exchange, or other disposition of deriv-
ative ownership units. Paragraph (c) of
this section describes related basis adjust-
ments to certain partnership interests
directly owned by a covered shareholder.
Paragraph (d) of this section describes
related basis adjustments to certain low-
er-tier partnership interests directly owned
by an upper-tier partnership. See §1.961-
12(c)(4) (Example 4) for an example illus-
trating the application of this section.
(b) Sale, exchange, or other disposi-
tion of derivative ownership units with
positive derived basis—(1) In general.
In a sale, exchange, or other disposition
by a partnership (transferring partner-
ship) of one or more derivative own-
ership units (transferred units), each
partner’s distributive share of gain or
loss recognized by the transferring part-
nership on the sale, exchange, or other
disposition is first determined without

January 27, 2025 618 Bulletin No. 2025–5
regard to derived basis (taking into a
partner’s section 743(b) basis adjust-
ment). Then, positive derived basis is
applied to each covered shareholder’s
distributive share of such gain or loss
in accordance with paragraph (b)(2) of
this section. Such application of positive
derived basis to a covered shareholder’s
distributive share is treated as an appli-
cation of positive derived basis by the
transferring partnership, unless the cov-
ered shareholder owns the transferred
units through multiple partnerships, in
which case only partnerships in which
the covered shareholder directly owns
an interest are treated as applying the
positive derived basis.
(2) Application of positive derived
basis—(i) In general. A covered share-
holder’s distributive share of gain or loss
with respect to transferred units (deter-
mined without regard to derived basis,
and expressed as a negative amount in
the case of a distributive share of loss) is
adjusted by subtracting the transferring
partnership’s positive derived basis with
respect to the covered shareholder of the
transferred units, subject to the limitations
in paragraphs (b)(2)(ii) and (iii) of this
section, as applicable.
(ii) Limitation in nonrecognition trans-
actions. In a nonrecognition transaction,
the amount of positive derived basis that
is taken into account in applying para-
graph (b)(2)(i) of this section with respect
to the covered shareholder is limited to the
excess of the amount of positive derived
basis that would be taken into account
by the covered shareholder but for this
paragraph (b)(2)(ii) over the covered
shareholder’s share of the gain realized
but not recognized by the transferring
partnership with respect to the transferred
units. The covered shareholder’s share of
such realized-but-not-recognized gain is
determined by multiplying the amount of
that gain of the transferring partnership
by a fraction, the numerator of which is
the covered shareholder’s distributive
share of gain recognized by the transfer-
ring partnership with respect to the trans-
ferred units (determined without regard
to derived basis), and the denominator of
which is the amount of gain recognized by
the transferring partnership with respect to
the transferred units (determined without
regard to derived basis).
(iii) Limitation on loss. Positive derived
basis can create or increase a distributive
share of loss only if loss is, or would be if
there were a loss, recognized by the trans-
ferring partnership on the sale, exchange,
or other disposition of the transferred
units and a current deduction in respect of
the loss is, or would be, allowable.
(iv) Translation rule. If applicable,
positive derived basis is translated into
functional currency at the spot rate on the
day on which the sale, exchange, or other
disposition occurs.
(c) Basis adjustment to top-tier part-
nership interest. In the case of a partner-
ship interest that is directly owned by a
covered shareholder and through which
the covered shareholder owns the trans-
ferred units described in paragraph (b) of
this section, adjusted basis of such interest
is adjusted under section 705 after taking
into account the partnership’s application
of positive derived basis to the covered
shareholder’s distributive share of gain or
loss with respect to the transferred units
(determined under paragraph (b)(2) of this
section).
(d) Basis adjustments to lower-tier
partnership interests. In the case of a part-
nership interest (lower-tier partnership
interest) that is directly owned by another
partnership (upper-tier partnership) and
through which a covered shareholder
owns the transferred units described in
paragraph (b) of this section, the upper-tier
partnership’s basis in such lower-tier part-
nership interest is adjusted as described in
this paragraph (d). Common basis in the
lower-tier partnership interest is adjusted
under section 705 without regard to the
application of positive derived basis to the
covered shareholder’s distributive share
of gain or loss with respect to the trans-
ferred units (determined under paragraph
(b)(2) of this section). Concurrently with
and taking into account the adjustment
under section 705, derived basis with
respect to the covered shareholder of the
lower-tier partnership interest is reduced
by the amount of positive derived basis
applied to the covered shareholder’s dis-
tributive share of gain or loss with respect
to the transferred units (determined under
paragraph (b)(2) of this section) or gain is
recognized in accordance with the princi-
ples of §1.961-4 (applied by treating such
amount of applied positive derived basis
as the amount of the adjustment to basis
described in §1.961-4(c)(2)(i)). If there
is more than one lower-tier partnership,
adjustments to derived basis under this
paragraph (d) are made starting with the
partnership at the lowest tier.
§1.961-9 Exclusion from gross income
of previously taxed earnings and
profits resulting from positive section
961(c) basis.
(a) Scope. This section describes the
consequences of positive section 961(c)
basis. Paragraph (b) of this section
excludes from gross income previously
taxed earnings and profits resulting from
the application of section 961(c) basis to
covered gain. Paragraph (c) of this sec-
tion defines covered gain. Paragraph (d)
of this section describes rules for analyz-
ing covered gain. Paragraph (e) of this
section provides rules for applying posi-
tive section 961(c) basis to covered gain.
Paragraph (f) of this section provides rules
characterizing covered gain as previously
taxed earnings and profits. Paragraph (g)
of this section provides a dollar basis rule.
Paragraph (h) of this section provides a
rule allocating previously taxed earnings
and profits to shares of stock. See §1.961-
12(c)(5) (Example 5) for an example illus-
trating the application of this section.
(b) Exclusion from gross income of pre-
viously taxed earnings and profits result-
ing from section 961(c) basis. Previously
taxed earnings and profits that result from
the application of a controlled foreign cor-
poration’s section 961(c) basis to covered
gain are excluded from the controlled for-
eign corporation’s gross income, solely
for purposes of determining the controlled
foreign corporation’s subpart F income
and tested income or tested loss, and
provided that the covered shareholder to
which the previously taxed earnings and
profits relate is a United States shareholder
in the controlled foreign corporation.
(c) Covered gain—(1) In general.
Covered gain is all gain recognized by a
controlled foreign corporation on a sale,
exchange, or other disposition of one
or more section 961(c) ownership units
that are shares of stock of a single cor-
poration (transferred units), determined
without regard to loss recognized on
any transferred unit and without regard

Bulletin No. 2025–5 619 January 27, 2025
to section 961(c) basis. Covered gain
includes amounts treated as gain from a
sale, exchange, or other disposition (for
example, under section 301(c)(3)), other
than gain recognized pursuant to section
961(c) (for example, for distributions of
previously taxed earnings and profits in
excess of basis under §1.961-4(d)). Sec-
tion 961(c) basis is applied to covered
gain, and previously taxed earnings and
profits result from such application of sec-
tion 961(c) basis, in accordance with the
rules described in paragraph (d) of this
section.
(2) Coordination with dividend rechar-
acterization provisions. Section 964(e)(1)
(or any provision of the Code or regula-
tions in this title that would treat covered
gain as a dividend in whole or in part) does
not apply to the portion of covered gain to
which section 961(c) basis is applied and
that, consequently, is previously taxed
earnings and profits.
(d) Rules for analyzing covered gain—
(1) Determine each covered shareholder’s
share of the covered gain. First, determine
each covered shareholder’s share of the
covered gain, computed as the portion of
the covered gain that is assigned to the
covered shareholder under §1.951-2.
(2) Apply section 961(c) basis. Second,
apply the controlled foreign corporation’s
positive section 961(c) basis to each cov-
ered shareholder’s share of the covered
gain in accordance with paragraph (e) of
this section.
(3) Characterize covered gain as pre-
viously taxed earnings and profits. Third,
characterize the portion of each covered
shareholder’s share of the covered gain
to which section 961(c) basis is applied
as previously taxed earnings and prof-
its of the controlled foreign corporation
in accordance with paragraph (f) of this
section. Such characterization does not
reduce previously taxed earnings and
profits of the foreign corporation in which
shares of stock are transferred units or
any foreign corporation in which stock is
owned through the transferred units.
(4) Determine dollar basis. Fourth,
determine the dollar basis of previously
taxed earnings and profits resulting from
section 961(c) basis in accordance with
paragraph (g) of this section.
(5) Treat resulting previously taxed
earnings and profits as recognized with
respect to particular transferred units.
Fifth, treat previously taxed earnings and
profits resulting from section 961(c) basis
as recognized with respect to particular
transferred units by allocating such previ-
ously taxed earnings and profits in accor-
dance with paragraph (h) of this section.
Such allocation is taken into account,
for example, in applying section 964(e)
(1) (taking into account paragraph (c)(2)
of this section) to gain recognized with
respect to a particular transferred unit.
(6) Adjust previously taxed earnings
and profits and make related account
adjustments. Sixth, increase the controlled
foreign corporation’s previously taxed
earnings and profits to reflect previously
taxed earnings and profits resulting from
section 961(c) basis and make the related
adjustments described in §1.959-3 to each
covered shareholder’s accounts.
(e) Application of positive section
961(c) basis—(1) In general. In a sale,
exchange, or other disposition in which a
controlled foreign corporation recognizes
covered gain, the controlled foreign cor-
poration’s positive section 961(c) basis
with respect to a covered shareholder of
the transferred units is applied to such
covered shareholder’s share of the cov-
ered gain (determined under paragraph (d)
(1) of this section), to the extent thereof
and subject to the limitation in paragraph
(e)(2) of this section.
(2) Limitation in nonrecognition trans-
actions. In a nonrecognition transaction,
the amount of positive section 961(c) basis
that is taken into account in applying para-
graph (e)(1) of this section with respect to
the covered shareholder is limited to the
excess of the amount of positive section
961(c) basis that would be taken into
account by the covered shareholder but
for this paragraph (e)(2) over the covered
shareholder’s share of the gain realized but
not recognized by the controlled foreign
corporation with respect to the transferred
units. The covered shareholder’s share
of such realized-but-not-recognized gain
is determined by multiplying the amount
of that gain of the controlled foreign cor-
poration by a fraction, the numerator of
which is the covered shareholder’s share
of covered gain with respect to the trans-
ferred units (determined under paragraph
(d)(1) of this section), and the denomi-
nator of which is the amount of covered
gain with respect to the transferred units
(determined under paragraph (c)(1) of this
section).
(3) Translation rule. If applicable,
positive section 961(c) basis is translated
into functional currency of the controlled
foreign corporation at the spot rate on the
day on which the sale, exchange, or other
disposition occurs.
(4) Unused positive section 961(c)
basis. See §1.961-11(c)(2) and (e) for rules
applying positive section 961(c) basis in
excess of covered gain to gain recognized
pursuant to section 961(c).
(f) Characterization of covered gain
as previously taxed earnings and prof-
its—(1) In general. The portion of a cov-
ered shareholder’s share of covered gain
to which section 961(c) basis is applied
(determined under paragraph (d)(2) of
this section) is characterized as previously
taxed earnings and profits with respect to
the covered shareholder (section 961(c)
PTEP) in accordance with the rules
described in paragraphs (f)(2) through (4)
of this section.
(2) Mirroring rule—(i) In general. The
portion of section 961(c) PTEP that does
not exceed the amount of mirrored PTEP
(defined in paragraph (f)(2)(ii) of this sec-
tion) has the same character as a pro rata
portion of mirrored PTEP. The pro rata
portion is determined by multiplying mir-
rored PTEP by a fraction, the numerator
of which is the portion of section 961(c)
PTEP described in the preceding sen-
tence and the denominator of which is the
amount of mirrored PTEP.
(ii) Mirrored PTEP. For purposes of
this paragraph (f)(2), mirrored PTEP is—
(A) All previously taxed earnings and
profits that transfer from the covered
shareholder under §1.959-7 in the sale,
exchange, or other disposition in which
the covered gain is recognized (or that
would so transfer if the transferred units
were sold in a general successor transac-
tion); and
(B) All previously taxed earnings and
profits that would exist if foreign income
taxes associated with previously taxed
earnings and profits described in para-
graph (f)(2)(ii)(A) of this section (deter-
mined under §1.959-7 and, if applicable,
translated into the functional currency of
the foreign corporation to which the pre-
viously taxed earnings and profits would

January 27, 2025 620 Bulletin No. 2025–5
relate at the spot rate on the day on which
the sale, exchange, or other disposition
occurs) were treated as an additional
amount of such previously taxed earnings
and profits.
(iii) Currency rule. For purposes of this
paragraph (f)(2), if any previously taxed
earnings and profits described in para-
graph (f)(2)(ii) of this section are denom-
inated in a currency other than the func-
tional currency of the controlled foreign
corporation recognizing the covered gain,
then such previously taxed earnings and
profits are translated into such controlled
foreign corporation’s functional currency
at the spot rate on the day on which the
covered gain is recognized.
(3) Lookback rule—(i) In general.
The portion of section 961(c) PTEP that
is not characterized under paragraph (f)
(2) of this section, if any, and that does
not exceed the amount of lookback PTEP
(defined in paragraph (f)(3)(ii) of this
section) has the same character as a pro
rata portion of lookback PTEP. The pro
rata portion is determined by multiplying
lookback PTEP by a fraction, the numer-
ator of which is the portion of section
961(c) PTEP described in the preceding
sentence and the denominator of which is
the amount of lookback PTEP.
(ii) Lookback PTEP. For purposes of
this paragraph (f)(3), lookback PTEP is all
previously taxed earnings and profits that
both—
(A) Resulted from an income inclu-
sion under section 951(a) or 951A(a) of
the covered shareholder attributable to the
transferred units (including stock owned
through the transferred units); and
(B) Were related to a taxable year of
a foreign corporation ending during the
36-month period that ends on the day on
which the covered gain is recognized.
(iii) Currency rule. For purposes of this
paragraph (f)(3), if any previously taxed
earnings and profits described in para-
graph (f)(3)(ii) of this section are denom-
inated in a currency other than the func-
tional currency of the controlled foreign
corporation recognizing the covered gain,
then such previously taxed earnings and
profits are translated into such controlled
foreign corporation’s functional currency
by translating the U.S. dollar amount of
the income inclusion giving rise to the
previously taxed earnings and profits at
the spot rate on the day on which the cov-
ered gain is recognized.
(4) Section 245A(d) PTEP rule. The
portion of section 961(c) PTEP that
is not characterized under paragraphs
(f)(2) and (3) of this section, if any, is
characterized as relating to the section
245A(d) PTEP group, the taxable year
of the controlled foreign corporation in
which the covered gain is recognized,
and the general category income under
section 904(d)(1)(D).
(g) Dollar basis rule. The dollar basis
of previously taxed earnings and profits
with respect to a covered shareholder that
result from section 961(c) basis (deter-
mined under paragraph (d)(3) of this sec-
tion) is equal to the U.S. dollar amount of
the section 961(c) basis giving rise to such
previously taxed earnings and profits.
(h) Allocation of previously taxed
earnings and profits—(1) In general. Pre-
viously taxed earnings and profits with
respect to a covered shareholder that
result from section 961(c) basis (deter-
mined under paragraph (d)(3) of this sec-
tion) are allocated to transferred units in
accordance with the rules of paragraph (h)
(2) of this section.
(2) Rules—(i) Stacking rule. First, allo-
cate to each transferred unit an amount of
previously taxed earnings and profits equal
to the lesser of the amount of positive sec-
tion 961(c) basis with respect to the cov-
ered shareholder of the transferred unit (to
the extent taken into account in applying
paragraph (e)(1) of this section) and the
portion of the covered shareholder’s share
of the covered gain that is recognized with
respect to the transferred unit.
(ii) Pro rata rule. Second, allocate to
each transferred unit a pro rata portion of
any amount of previously taxed earnings
and profits not allocated under paragraph
(h)(2)(i) of this section, determined by
multiplying such amount by a fraction.
The numerator of the fraction is the por-
tion of the covered shareholder’s share of
the covered gain that is recognized with
respect to the transferred unit, less the
amount of previously taxed earnings and
profits allocated to the transferred unit
under paragraph (h)(2)(i) of this section.
The denominator of the fraction is the
amount of previously taxed earnings and
profits not allocated under paragraph (h)
(2)(i) of this section.
§1.961-10 Gain recognition for negative
basis.
(a) Scope. This section describes the
consequences of negative derived basis
and negative section 961(c) basis. Para-
graph (b) of this section sets forth a rule
requiring gain recognition for negative
derived basis. Paragraph (c) of this section
sets forth a rule requiring gain recogni-
tion for negative section 961(c) basis. See
§1.961-12(c)(6) and (7) (Examples 6 and
7) for examples illustrating the application
of this section.
(b) Gain recognition for negative
derived basis—(1) In general. If a part-
nership has negative derived basis of a
derivative ownership unit, then, in any
transaction involving the derivative own-
ership unit (for example, a sale, exchange,
or distribution under section 301(c)(2)),
the partnership is treated as recognizing
gain with respect to the derivative own-
ership unit in accordance with the rules
described in paragraphs (b)(2) through (5)
of this section.
(2) Amount of gain—(i) In general.
The amount of the gain recognized is
equal to the additional amount of gain,
plus the lesser amount of loss (expressed
as a positive amount), that the partner-
ship would have recognized in the trans-
action if, immediately before the trans-
action, the partnership’s common basis
of the derivative ownership unit were
reduced by all negative derived basis of
the derivative ownership unit. Thus, for
example, in a sale of the derivative own-
ership unit, the amount of the gain recog-
nized is generally equal to the sum of all
negative derived basis of the derivative
ownership unit and, in a nonrecognition
transaction, the amount of the gain rec-
ognized may be less than the sum of all
negative derived basis of the derivative
ownership unit.
(ii) Special rule if derivative ownership
unit ceases to be a derivative ownership
unit. If the derivative ownership unit is
not a derivative ownership unit immedi-
ately after the transaction (including, for
example, because the derivative owner-
ship unit is redeemed, or becomes directly
owned by a foreign corporation or cov-
ered shareholder, in the transaction), then,
notwithstanding paragraph (b)(2)(i) of this
section, the amount of the gain recognized

Bulletin No. 2025–5 621 January 27, 2025
is equal to the sum of all negative derived
basis of the derivative ownership unit.
(iii) Translation rule. If applicable,
negative derived basis is translated into
functional currency at the spot rate on the
day on which the transaction involving the
derivative ownership unit occurs.
(3) Allocation of gain. A pro rata por-
tion of the gain is allocated to each covered
shareholder, determined by multiplying
the amount of such gain by a fraction. The
numerator of the fraction is the negative
derived basis with respect to the covered
shareholder of the derivative ownership
unit, and the denominator of the fraction
is the sum of all negative derived basis of
the derivative ownership unit.
(4) Treatment of gain. The gain is
treated in the same manner as gain recog-
nized under §1.961-4(c) for distributions
of previously taxed earnings and profits
in excess of basis (and thus the rules in
§1.961-4(f) apply to the gain), except that
the gain is recognized concurrently with,
but separate from, the transaction.
(5) Negative derived basis eliminated
to the extent it gives rise to gain. Negative
derived basis is eliminated to the extent it
increases the amount of gain recognized
under this paragraph (b), concurrent with
the transaction.
(c) Gain recognition for negative sec-
tion 961(c) basis—(1) In general. If a con-
trolled foreign corporation has negative
section 961(c) basis of a section 961(c)
ownership unit, then, in any transaction
involving the section 961(c) ownership
unit (for example, a sale, exchange, or
distribution under section 301(c)(2)), the
controlled foreign corporation is treated as
recognizing gain with respect to the sec-
tion 961(c) ownership unit in accordance
with the rules described in paragraphs (c)
(2) through (5) of this section.
(2) Amount of gain—(i) In general.
The amount of the gain recognized is
equal to the additional amount of gain,
plus the lesser amount of loss (expressed
as a positive amount), that the controlled
foreign corporation would have recog-
nized in the transaction if, immediately
before the transaction, the controlled
foreign corporation’s adjusted basis of
the section 961(c) ownership unit were
reduced by all negative section 961(c)
basis of the section 961(c) ownership unit.
Thus, for example, in a sale of the section
961(c) ownership unit, the amount of the
gain recognized is generally equal to the
sum of all negative section 961(c) basis of
the section 961(c) ownership unit and, in a
nonrecognition transaction, the amount of
the gain recognized may be less than the
sum of all negative section 961(c) basis of
the section 961(c) ownership unit.
(ii) Special rule if section 961(c) own-
ership unit ceases to be a section 961(c)
ownership unit. If the section 961(c) own-
ership unit is not a section 961(c) owner-
ship unit immediately after the transaction
(including, for example, because the sec-
tion 961(c) ownership unit is redeemed,
or becomes directly owned by a covered
shareholder, in the transaction), then, not-
withstanding paragraph (c)(2)(i) of this
section, the amount of the gain recognized
is equal to the sum of all negative section
961(c) basis of the section 961(c) owner-
ship unit.
(iii) Translation rule. If applicable,
negative section 961(c) basis is translated
into functional currency of the controlled
foreign corporation at the spot rate on the
day on which the transaction involving the
section 961(c) ownership unit occurs.
(3) Assignment of gain. A pro rata por-
tion of the gain is assigned to each covered
shareholder, determined by multiplying
the amount of such gain by a fraction. The
numerator of the fraction is the negative
section 961(c) basis with respect to the
covered shareholder of the section 961(c)
ownership unit, and the denominator of
the fraction is the sum of all negative
section 961(c) basis of the section 961(c)
ownership unit.
(4) Treatment of gain. The gain is
treated in the same manner as gain recog-
nized under §1.961-4(d) for distributions
of previously taxed earnings and profits
in excess of basis (and thus the rules in
§1.961-4(f) apply to the gain), except that
the gain is recognized concurrently with,
but separate from, the transaction. Thus,
the gain is recognized pursuant to section
961(c) and therefore applies only for pur-
poses of determining amounts included in
gross income of United States sharehold-
ers of the controlled foreign corporation
under §1.961-11.
(5) Negative section 961(c) basis elim-
inated to the extent it gives rise to gain.
Negative section 961(c) basis is elimi-
nated to the extent it increases the amount
of gain recognized under this paragraph
(c), concurrent with the transaction.
§1.961-11 Amounts included in gross
income of United States shareholders.
(a) Scope. This section sets forth rules
regarding amounts that United States
shareholders of a controlled foreign cor-
poration must include in gross income
under section 961(c) to account for gain
recognized by the controlled foreign cor-
poration pursuant to section 961(c) (for
distributions of previously taxed earnings
and profits in excess of basis under §1.961-
4(d), for foreign currency loss in excess of
basis under §1.961-5(b), or for negative
section 961(c) basis under §1.961-10(c)).
Paragraph (b) of this section provides the
general rule. Paragraph (c) of this section
allocates gain recognized pursuant to sec-
tion 961(c) to a United States shareholder.
Paragraph (d) of this section adjusts allo-
cations of gain to reflect transfers of stock
of the controlled foreign corporation.
Paragraph (e) of this section determines
loss recognized under section 961(c) with
respect to a United States shareholder.
See §1.961-12(c)(8) (Example 8) for an
example illustrating the application of
this section. See also §1.961-3, regarding
basis increases for an inclusion under this
section.
(b) In general. If a United States share-
holder owns stock of a controlled foreign
corporation on the last relevant day of a
taxable year of the controlled foreign
corporation, and the controlled foreign
corporation recognizes gain pursuant to
section 961(c) within that taxable year (all
such gain, section 961(c) income), then
the United States shareholder includes in
gross income the amount of section 961(c)
income that is allocated to the United
States shareholder (determined under
paragraph (c) of this section). The inclu-
sion is for the United States shareholder’s
taxable year in which or with which the
controlled foreign corporation’s taxable
year ends and is treated in the same man-
ner as an amount included in gross income
under section 951(a)(1)(A) solely for pur-
poses of increasing basis under §1.961-3
and translation into U.S. dollars under
989(b).
(c) Allocation of section 961(c) income.
For purposes of paragraph (b) of this sec-

January 27, 2025 622 Bulletin No. 2025–5
tion, the amount of the controlled foreign
corporation’s section 961(c) income that
is allocated to a United States shareholder
is the excess (if any) of—
(1) The sum of any portions of section
961(c) income that are assigned to the
United States shareholder under §1.961-
4, 1.961-5, or 1.961-10, adjusted, if
applicable, in accordance with paragraph
(d) of this section as a result of transfers
of stock of the controlled foreign corpo-
ration; over
(2) The amount of loss that the con-
trolled foreign corporation is treated as
recognizing under section 961(c) with
respect to the United shareholder in
accordance with paragraph (e) of this
section.
(d) Rules for transfers of stock of the
controlled foreign corporation—(1) Gen-
eral successor transactions—(i) General
successor transaction occurring before
the last relevant day. For purposes of
paragraph (c)(1) of this section, if the con-
trolled foreign corporation is an acquired
foreign corporation in a general successor
transaction that occurs before the last rel-
evant day of the controlled foreign corpo-
ration’s taxable year, then treat a pro rata
portion of section 961(c) income that is
both recognized before the general succes-
sor transaction and assigned to the trans-
feror covered shareholder under §1.961-4,
1.961-5, or 1.961-10 as instead assigned
to the successor covered shareholder,
determined by multiplying such section
961(c) income by the fraction described
in §1.961-5(c)(2)(i) for determining the
controlled foreign corporation’s section
961(c) basis that transfers in the general
successor transaction.
(ii) General successor transaction
occurring on or after the last relevant
day. For purposes of paragraph (c)(1)
of this section, if the controlled foreign
corporation is an acquired foreign corpo-
ration in a general successor transaction
that occurs on or after the last relevant
day of the controlled foreign corpora-
tion’s taxable year, then treat a pro rata
portion of section 961(c) income that is
both recognized after the general suc-
cessor transaction and assigned to the
successor covered shareholder under
§1.961-4, 1.961-5, or 1.961-10 as instead
assigned to the transferor covered share-
holder, determined by multiplying such
section 961(c) income by the fraction
described in §1.961-5(c)(2)(i) for deter-
mining the controlled foreign corpora-
tion’s section 961(c) basis that transfers
in the general successor transaction.
(2) Other transfers. The principles of
paragraph (d)(1) of this section apply to
transactions, other than general successor
transactions, in which the controlled for-
eign corporation’s 961(c) basis transfers
to another covered shareholder.
(e) Determining loss under section
961(c)—(1) In general. For purposes
of paragraph (c)(2) of this section, the
amount of loss that the controlled foreign
corporation is treated as recognizing under
section 961(c) with respect to the United
States shareholder is, subject to the lim-
itations in paragraph (e)(2) of this section,
equal to the sum of the controlled foreign
corporation’s positive section 961(c) basis
with respect to the United States share-
holder of section 961(c) ownership units
that are sold, exchanged, or otherwise
disposed of by the controlled foreign
corporation within the controlled foreign
corporation’s taxable year, reduced by the
amount of such positive section 961(c)
basis that is applied to covered gain under
§1.961-9.
(2) Limitations—(i) In general. Positive
section 961(c) basis of section 961(c) own-
ership units increases the amount of loss
that the controlled foreign corporation is
treated as recognizing under section 961(c)
only if loss is, or would be if there were a
loss, recognized by the controlled foreign
corporation on the sale, exchange, or other
disposition of the section 961(c) ownership
units and a current deduction in respect of
the loss is, or would be, allowable.
(ii) Loss recognized only to the extent of
certain gain. Positive section 961(c) basis
of section 961(c) ownership units that are
shares of stock of a single foreign corpo-
ration increases the amount of loss that the
controlled foreign corporation is treated
as recognizing under section 961(c) only
to the extent of the portion of the amount
described in paragraph (c)(1) of this section
that is recognized with respect to stock of
such foreign corporation.
(3) Translation rule. If applicable, pos-
itive section 961(c) basis of section 961(c)
ownership units is translated into the con-
trolled foreign corporation’s functional
currency at the spot rate on the day of the
sale, exchange, or other disposition of the
section 961(c) ownership units.
§1.961-12 Examples.
(a) In general. This section provides
examples that illustrate the application of
§§1.961-1 through 1.961-11.
(b) Assumed facts. For purposes of the
examples in this section, unless otherwise
indicated, the following facts are assumed
for U.S. tax purposes:
(1) US1 and US2 are unrelated domes-
tic corporations that are covered share-
holders, each of which uses the U.S. dol-
lar as its functional currency and chooses
to claim a credit for foreign income taxes
pursuant to section 901. Neither US1 nor
US2 is a member of a consolidated group
(as defined in §1.1502-1(h)).
(2) F1, F2, and F3 are foreign corpora-
tions, each of which is a controlled foreign
corporation and uses the British pound (£)
as its functional currency.
(3) PRS1 and PRS2 are partnerships.
(4) Each entity uses the calendar year
as its taxable year, and no entity has a
short taxable year.
(5) There are no adjustments under sec-
tion 743(b) to the basis of any partnership
property.
(c) Examples—(1) Example 1: Types of property
units and basis—(i) Facts. US1 directly owns 60,
and US2 directly owns 40, of the 100 shares of the
single class of outstanding stock of F1. F1 directly
owns all 50 shares of the single class of outstanding
stock of F2. This example only analyzes the types
of basis provided under section 961 in the items of
property.
(ii) Analysis. Each of the 60 shares of stock of F1
directly owned by US1 and the 40 shares of stock of
F1 directly owned by US2 is a section 961(a) own-
ership unit in which the covered shareholder (US1
or US2) is provided adjusted basis. See §1.961-2(c).
In addition, each of the 50 shares of stock of F2
directly owned by F1, a controlled foreign corpo-
ration, is a section 961(c) ownership unit in which
F1 is provided section 961(c) basis. See §1.961-2(e)
(1). F1’s section 961(c) basis in each section 961(c)
ownership unit is maintained separately with respect
to each of US1 and US2. See §1.961-2(e)(2). Further,
each of the section 961(a) ownership units and sec-
tion 961(c) ownership units is a property unit, and
adjusted basis or section 961(c) basis in the property
unit, as applicable, is maintained in U.S. dollars. See
§1.961-2(b).
(iii) Alternative facts: partnership structure—
(A) Facts. The facts are the same as paragraph (c)
(1)(i) of this section (Example 1), except that US1
and US2, in the aggregate, directly own all the inter-
ests in PRS1, and PRS1 directly owns all 100 of the
shares of stock of F1.

Bulletin No. 2025–5 623 January 27, 2025
(B) Analysis. The interest in PRS1 directly
owned by each of US1 and US2 is a section 961(a)
ownership unit in which the covered shareholder
(US1 or US2) is provided adjusted basis. See §1.961-
2(c). In addition, each of the 100 shares of stock of
F1 directly owned by PRS1 is a derivative ownership
unit in which PRS1 is provided derived basis. See
§1.961-2(d)(1). PRS1’s derived basis in each deriv-
ative ownership unit is established and maintained
separately with respect to each of US1 and US2. See
§1.961-2(d)(2). Further, as is the case in paragraph
(c)(1)(ii) of this section, each of the 50 shares of
stock of F2 directly owned by F1, a controlled for-
eign corporation, is a section 961(c) ownership unit
in which F1 is provided section 961(c) basis, and that
basis is maintained separately with respect to each of
US1 and US2. Moreover, each of the section 961(a)
ownership units, derivative ownership units, and sec-
tion 961(c) ownership units is a property unit, and
adjusted basis, derived basis, or section 961(c) basis
in the property unit, as applicable, is maintained in
U.S. dollars. See §1.961-2(b).
(2) Example 2: Basis increases for income inclu-
sions—(i) Facts. US1 directly owns all 100 shares
of the single class of outstanding stock of F1, and
F1 directly owns all 50 shares of the single class of
outstanding stock of F2. Thus, the shares of stock of
F1 directly owned by US1 are section 961(a) own-
ership units, and the shares of stock of F2 directly
owned by F1 are section 961(c) ownership units.
For F2’s taxable year ending on December 31 of
year 3, the last relevant day is December 31 and
US1 includes $80x in gross income under section
951(a)(1)(A) (its pro rata share of F2’s subpart F
income, translated into U.S. dollars in accordance
with section 989(b)) and $120x in gross income
under section 951A(a) (the portion of its GILTI
inclusion amount that is treated as with respect
to F2 for the taxable year under section 951A(f)
(2)). F2 does not make any covered distributions,
and therefore does not distribute any previously
taxed earnings and profits, during the taxable year.
This example only analyzes basis increases for the
income inclusions. See also §1.312-6(f) (income
inclusions increase US1’s earnings and profits);
§1.959-3 (adjustments to previously taxed earnings
and profits accounts).
(ii) Analysis—(A) In general. To reflect US1’s
income inclusions for F2’s taxable year ending on
December 31 of year 3, basis of shares of stock of
F2, and basis of shares of stock of F1 (property units
through which US1 owns stock of F2), is in each
case increased in accordance with §1.961-3. See
§1.961-3(b). In the case of stock of F2, F1’s section
961(c) basis with respect to US1 is increased because
shares of stock of F2 are section 961(c) ownership
units and F2 is a controlled foreign corporation, as
required by §1.961-3(f)(1). In the case of stock of
F1, US1’s adjusted basis is increased because shares
of stock of F1 are section 961(a) ownership units.
Paragraph (c)(2)(ii)(B) of this section provides the
specific increases to basis.
(B) Increases to basis of each property unit. The
amount of US1’s income inclusions with respect to
F2 that give rise to increases to basis under section
961 is $200x ($80x + $120x). See §1.961-3(c)(1).
In determining the specific increases to basis, the
actual distribution rule in §1.961-3(d) does not
apply because F2 does not distribute any previously
taxed earnings and profits before the last relevant
day. See §1.961-3(c)(3). Thus, the hypothetical dis-
tribution rule in §1.961-3(e) determines the entirety
of the increases to basis for the income inclusions.
See §1.961-3(c)(4). Under the hypothetical distri-
bution rule, the basis of each share of stock of F2
is increased by $4x ($200x ÷ 50 shares), and the
basis of each share of stock of F1 is increased by
$2x ($200x ÷ 100 shares), which in each case is
equal to the portion of a $200x hypothetical dis-
tribution treated as made by F2 through all tiers to
US1 on the last relevant day that would be distrib-
uted with respect to the property unit. See §1.961-
3(e). These increases to basis are treated as made at
the beginning of F2’s taxable year 3 because there
are no midyear transactions and the entirety of the
$200x of income inclusions is under section 951(a)
(1)(A) or 951A(a). See §1.961-3(c)(2) and (e)(1).
Accordingly, at the beginning of F2’s taxable year
3, F1 increases its section 961(c) basis with respect
to US1 of each share of stock of F2 by $4x, and
US1 increases its adjusted basis of each share of
stock of F1 by $2x.
(iii) Alternative facts: midyear transaction and
actual distribution rule—(A) Facts. The facts are
the same as in paragraph (c)(2)(i) of this section,
except as follows. On January 1 of year 3, US1
directly owns all the stock of F2. On March 31 of
year 3, F2 distributes previously taxed earnings and
profits to US1 (pro rata with respect to the shares
of stock of F2) and, consequently, US1 is required
under §1.961-4 (basis reductions and gain recogni-
tion for distributions) to adjust its adjusted basis of
each share of stock of F2 by $3x (the sum of the
dollar basis and associated foreign income taxes of
the previously taxed earnings and profits that are
distributed on the share). On June 30 of year 3, F1
is formed and US1 immediately contributes all its
stock of F2 to F1 in exchange for 100 shares of
stock of F1. Thus, before the contribution, shares
of stock of F2 are section 961(a) ownership units
and, beginning as of the contribution, all the shares
of stock of F1 are section 961(a) ownership units
and all the shares of stock of F2 are section 961(c)
ownership units.
(B) Analysis—(1) In general. To reflect US1’s
income inclusions for F2’s taxable year ending on
December 31 of year 3, basis of shares of stock of
F2, and basis of shares of stock of F1 (property
units through which US1 owns stock of F2), is in
each case increased in accordance with §1.961-3.
See §1.961-3(b). In the case of stock of F2, because
shares of the stock are section 961(a) ownership
units before the contribution and section 961(c)
ownership units after the contribution, the type of
basis that is increased depends on the timing of
adjustments. Specifically, in the case of stock of
F2 and an increase to basis that is treated as made
before the contribution, the basis that is increased
is US1’s adjusted basis because shares of stock
of F2 are section 961(a) ownership units before
the contribution. In the case of stock of F2 and
an increase to basis that is treated as made after
the contribution, the basis that is increased is F1’s
section 961(c) basis with respect to US1 because
shares of stock of F2 are section 961(c) ownership
units after the contribution and F2 is a controlled
foreign corporation, as required by §1.961-3(f)(1).
In the case of stock of F1, US1’s adjusted basis is
increased because shares of stock of F1 are section
961(a) ownership units. Paragraph (c)(2)(iii)(B)
(2) of this section provides the specific increases
to basis.
(2) Increases to basis of each property unit. The
amount of US1’s income inclusions with respect to
F2 that give rise to increases to basis under section
961 is $200x ($80x + $120x). See §1.961-3(c)(1).
In determining the specific increases to basis for
the income inclusions, the actual distribution rule
in §1.961-3(d) applies because F2’s distribution
of previously taxed earnings and profits is made
before the last relevant day. See §1.961-3(c)(3).
Under the actual distribution rule, basis of each
share of stock of F2 is increased by $3x, which is
equal to the adjustment required under §1.961-4
to the basis of such share by reason of the distri-
bution, and thus basis of stock of F2 increases by
$150x in total ($3x × 50 shares). See §1.961-3(d)
(2). These increases to basis are treated as made
at the beginning of F2’s taxable year because the
distribution is made before the contribution of all
the stock of F2 to F1, the sole midyear transaction
occurring within the taxable year. See §1.961-3(c)
(2) and (d)(1). Then, the hypothetical distribu-
tion rule in §1.961-3(e) determines increases to
basis for the remaining $50x of income inclusions
($200x of income inclusions − $150x of basis
increases to stock of F2 under the actual distri-
bution rule). See §1.961-3(c)(4). Under the hypo-
thetical distribution rule, the basis of each share of
stock of F2, and the basis of each share of stock of
F1, is increased by the portion of a $50x hypothet-
ical distribution treated as made by F2 through all
tiers to US1 on the last relevant day that would be
distributed with respect to the property unit. See
§1.961-3(e). These increases to basis are treated
as made immediately after the contribution (the
sole midyear transaction occurring within F2’s
taxable year). See §1.961-3(e)(1). Table 1 in this
paragraph (c)(2)(iii)(B)(2) provides the increases
to basis.

January 27, 2025 624 Bulletin No. 2025–5
Table 1 to paragraph (c)(2)(iii)(B)(2) of this section
BASIS INCREASES TO REFLECT US1’S INCOME INCLUSIONS WITH RESPECT TO F2
Basis increases
January 1 of year 3June 30 of year 3
US1’s adjusted basis of stock of F1 (100 shares)
$0.5x increase for each share
($50x hypothetical distribution ÷ 100 shares)
Stock of F2 (50
shares)
US1’s adjusted basis
(before contribution)
$3x increase for each share
(actual distribution rule)
F1’s section 961(c) basis with
respect to US1 (as of contribution)
$1x increase for each share
($50x hypothetical distribution ÷ 50 shares)
(iv) Alternative facts: partnership structure and
section 951(a)(1)(B) inclusion—(A) Facts. The facts
are the same as in paragraph (c)(2)(i) of this section
(Example 2), except as follows. US1 is a citizen of
the United States (rather than a domestic corpora-
tion), referred to as Individual A for purposes of the
rest of this paragraph (c)(2)(iv), and does not make
an election to apply the provisions of section 962 for
any taxable year. PRS1 directly owns all the stock
of F1, and Individual A owns 60%, and a nonresi-
dent alien individual owns 40%, of the interests in
PRS1. Thus, the interest in PRS1 directly owned by
Individual A is a section 961(a) ownership unit, the
shares of stock of F1 directly owned by PRS1 are
derivative ownership units, and the shares of stock
of F2 directly owned by F1 are section 961(c) own-
ership units. In addition, for F2’s taxable year end-
ing on December 31 of year 3, Individual A includes
$80x in gross income under section 951(a)(1)(A) (its
pro rata share of F2’s subpart F income, translated
into U.S. dollars in accordance with section 989(b)),
$120x in gross income under section 951A(a) (the
portion of its GILTI inclusion amount that is treated
as with respect to F2 for the taxable year under sec-
tion 951A(f)(2)), and $50x in gross income under
section 951(a)(1)(B) (the portion of its section 956
amount that is not allocated to previously taxed earn-
ings and profits, translated into U.S. dollars in accor-
dance with section 989(b)).
(B) Analysis—(1) In general. To reflect Individ-
ual A’s income inclusions for F2’s taxable year ending
on December 31 of year 3, basis of shares of stock
of F2, and basis of shares of stock of F1 and basis
of Individual A’s interest in PRS1 (property units
through which Individual A owns stock of F2), is in
each case increased in accordance with §1.961-3. See
§1.961-3(b). In the case of stock of F2, the basis that
is increased is F1’s section 961(c) basis with respect to
Individual A because shares of stock of F2 are section
961(c) ownership units and F2 is a controlled foreign
corporation, as required by §1.961-3(f)(1). In the case
of stock of F1, PRS1’s derived basis with respect to
Individual A is increased because shares of stock of F1
are derivative ownership units. In the case of Individ-
ual A’s interest in PRS1, Individual A’s adjusted basis
is increased because its interest in PRS1 is a section
961(a) ownership unit. Paragraph (c)(2)(iv)(B) of this
section provides the specific increases to basis.
(2) Increases to basis of each property unit. The
amount of Individual A’s income inclusions with
respect to F2 that give rise to increases to basis under
section 961 is $250x ($80x + $120x + $50x). See
§1.961-3(c)(1). The hypothetical distribution rule in
§1.961-3(e) determines the entirety of the increases
to basis for the income inclusions. See §1.961-3(c)
(3) and (4). Under the hypothetical distribution rule,
the basis of each property unit is increased by the
portion of a $250x hypothetical distribution treated
as made by F2 through all tiers to Individual A on
the last relevant day that would be distributed with
respect to the property unit (determined by regard-
ing stock of F2 and other property only to the extent
owned by Individual A on the last relevant day). See
§1.961-3(e). In addition, because 20% of the $250x
of income inclusions is under section 951(a)(1)(B)
($50x/$250x), 20% of each increase to basis is treated
as made at the end of the last day of F2’s taxable
year (which is when the previously taxed earnings
and profits resulting from the income inclusion under
section 951(a)(1)(B) are added to previously taxed
earnings and profits accounts), with the remaining
80% treated as made at the beginning of the taxable
year (which is when the previously taxed earnings
and profits resulting from the income inclusions
under sections 951(a)(1)(A) and 951A(a) are added
to previously taxed earnings and profits accounts).
See §1.961-3(e)(1). Table 1 in this paragraph (c)(2)
(iii)(B)(2) provides the increases to basis.
Table 1 to paragraph (c)(2)(iv)(B)(2) of this section
BASIS INCREASES TO REFLECT INDIVIDUAL A’S INCOME INCLUSIONS WITH RESPECT TO F2
Basis increases
January 1 of year 3December 31 of year 3
Individual A’s adjusted basis of its
interest in PRS1
$200x increase
($250x × 80%)
$50x increase
($250x × 20%)
PRS1’s derived basis with respect to
Individual A of stock of F1 (100 shares)
$2x increase for each share
($250x ÷ 100 shares × 80%)
$0.5 increase for each share
($250x ÷ 100 shares × 20%)
F1’s section 961(c) basis with respect to
Individual A of stock of F2 (50 shares)
$4x increase for each share
($250x ÷ 50 shares × 80%)
$1x increase for each share
($250x ÷ 50 shares × 20%)
(3) Example 3: Basis reductions and gain rec-
ognition for distributions—(i) Facts. US1 and US2,
in the aggregate, directly own all the shares of the
single class of outstanding stock of F1. In year 3, F1
makes a covered distribution (pro rata with respect
to the shares of stock of F1). Under §1.959-4, the
entirety of the portion of the covered distribution
received by each of US1 and US2 is previously
taxed earnings and profits excluded from the cov-
ered shareholder’s (US1’s or US2’s) gross income.
In addition, the sum of the dollar basis and associ-
ated foreign income taxes of the previously taxed
earnings and profits that are distributed on each
share of stock of F1 owned by US1 is $6x, and
the sum of the dollar basis and associated foreign
income taxes of the previously taxed earnings and
profits that are distributed on each share of stock
of F1 owned by US2 is $4x. Immediately before

Bulletin No. 2025–5 625 January 27, 2025
the covered distribution, US1’s adjusted basis of
each of its shares of stock of F1 is $4.5x, and US2’s
adjusted basis of each of its shares of stock of F1
is $3x. Each of US1 and US2 is deemed to pay the
entirety of the associated foreign income taxes of
the previously taxed earnings and profits distributed
to it under section 960(b) (because all such taxes
are sourced from the creditable PTEP tax group and
the covered shareholder is a United States share-
holder of F1) and is allowed a credit under section
901 for the entirety of such taxes. This example
only analyzes adjustments to basis of US1’s and
US2’s shares of stock of F1 (section 961(a) own-
ership units) under section 961. See also §1.959-3
(adjustments to previously taxed earnings and prof-
its accounts).
(ii) Analysis—(A) In general. Under §1.961-
4(b), each of US1 and US2 reduces its adjusted basis
of, and if applicable recognizes gain with respect
to, each share of stock of F1 on which it receives
previously taxed earnings and profits. The specific
adjustments are provided in paragraphs (c)(3)(ii)(B)
through (D) of this section and summarized in table
1 in this paragraph (c)(3)(ii)(A).
Table 1 to paragraph (c)(3)(ii)(A) of this section
BASIS ADJUSTMENTS RESULTING FROM F1’S DISTRIBUTION OF PTEP
Basis immediately before the
covered distribution
Adjustments to basis under §1.961-4(b)
US1’s adjusted basis of its shares of
stock of F1
$4.5x for each share$6x adjustment for each share
$4.5x reduction to basis
(to $0)
$1.5x gain recognized
US2’s adjusted basis of its shares of
stock of F1
$3x for each share$4x adjustment for each share
$3x reduction to basis
(to $0)
$1x gain recognized
(B) US1’s receipt of previously taxed earnings
and profits. As a result of US1’s receipt of previously
taxed earnings and profits, the amount of the adjust-
ment to US1’s adjusted basis of each of its shares of
stock of F1 is $6x, the dollar basis and associated
foreign income taxes of the previously taxed earn-
ings and profits received on the share. See §1.961-
4(b)(2)(i). Consequently, US1 reduces its adjusted
basis of each of its shares of stock of F1 ($4.5x) to
$0 and then is treated as recognizing $1.5x of gain
with respect to the share (computed as the excess of
the $6x adjustment to basis over the $4.5x reduction
to basis). See §1.961-4(b)(2)(ii) and (iii).
(C) US2’s receipt of previously taxed earnings
and profits. As a result of US2’s receipt of previously
taxed earnings and profits, the amount of the adjust-
ment to US2’s adjusted basis of each of its shares of
stock of F1 is $4x, the dollar basis and associated
foreign income taxes of the previously taxed earn-
ings and profits received on the share. See §1.961-
4(b)(2)(i). Consequently, US2 reduces its adjusted
basis of each of its shares of stock of F1 ($3x) to $0
and then is treated as recognizing $1x of gain with
respect to the share (computed as the excess of the
$4x adjustment to basis over the $3x reduction to
basis). See §1.961-4(b)(2)(ii) and (iii).
(D) Timing of adjustments. The reductions to
adjusted basis described in paragraphs (c)(3)(ii)(B)
and (C) of this section are treated as made, and the
gains described in those paragraphs are treated as
recognized, concurrently with the covered distribu-
tion. See §1.961-4(e)(1) and (f)(1).
(iii) Alternative facts: previously taxed earnings
and profits received through a partnership—(A)
Facts. The facts are the same as in paragraph (c)(3)
(i) of this section (Example 3), except as follows.
PRS1 directly owns all the shares of the single
class of outstanding stock of F1, and US1 and US2,
in the aggregate, directly own all the interests in
PRS1. Under §1.959-4, the entirety of the portion
of the covered distribution treated as received by
each of US1 and US2 through PRS1 is previously
taxed earnings and profits excluded from the cov-
ered shareholder’s (US1’s or US2’s) gross income.
In addition, the sum of the dollar basis and associ-
ated foreign income taxes of the previously taxed
earnings and profits that are both with respect to
US1 and distributed on each share of stock of F1 is
$6x, and the sum of the dollar basis and associated
foreign income taxes of the previously taxed earn-
ings and profits that are both with respect to US2
and distributed on each share of stock of F1 is $4x.
Immediately before the covered distribution, for
each share of stock of F1, PRS1’s common basis is
$2.5x, its derived basis with respect to US1 is $3x,
and its derived basis with respect to US2 is $2x.
This paragraph (c)(3)(iii) analyzes adjustments
to basis of PRS1’s shares of stock of F1 (deriva-
tive ownership units) under section 961. See also
§1.961-4(b) (related adjustments to basis of US1’s
and US2’s interests in PRS1).
(B) Analysis—(1) In general. Under §1.961-4(c),
PRS1 reduces its derived basis of, and if applicable
recognizes gain with respect to, each share of stock
of F1 on which US1 or US2 receives previously
taxed earnings and profits through PRS1. The spe-
cific adjustments are provided in paragraphs (c)(3)
(iii)(B)(2) through (5) of this section and summa-
rized in table 1 in this paragraph (c)(3)(iii)(B)(1).
Table 1 to paragraph (c)(3)(iii)(B)(1) of this section
BASIS ADJUSTMENTS RESULTING FROM F1’S DISTRIBUTION OF PTEP
PRS1 derived basis
immediately before the
covered distribution
Adjustments to PRS1 derived basis under §1.961-4(c)
PRS1’s derived basis with respect to
US1 of its shares of stock of F1
$3x for each share$6x adjustment for each share
$4.5x reduction to basis
(to negative $1.5x)
$1.5x gain recognized
PRS1’s derived basis with respect to
US2 of its shares of stock of F1
$2x for each share$4x adjustment for each share
$3x reduction to basis
(to negative $1x)
$1x gain recognized
(2) US1’s receipt of previously taxed earnings and
profits through PRS1. As a result of US1’s receipt of
previously taxed earnings and profits through PRS1,
the amount of the adjustment to PRS1’s derived basis
with respect to US1 of each of PRS1’s shares of stock
of F1 is $6x, the dollar basis and associated foreign
income taxes of the previously taxed earnings and
profits that are both with respect to US1 and received
on the share. See §1.961-4(c)(2)(i). Consequently,

January 27, 2025 626 Bulletin No. 2025–5
PRS1 reduces its derived basis with respect to US1
of each of its shares of stock of F1 ($3x) to $0 and
then reduces such derived basis below zero in accor-
dance with the limitation in §1.961-4(c)(3), which
permits a $1.5x reduction below zero to the derived
basis because $1.5x of PRS1’s common basis of the
share is available with respect to US1 (as described
in paragraph (c)(3)(iii)(B)(4) of this section). See
§1.961-4(c)(2)(ii) and (iii), (c)(3)(i). Further, PRS1
is treated as recognizing $1.5x of gain with respect
to each of its shares of stock of F1 (computed as the
excess of the $6x adjustment to basis over the sum
of the $3x reduction to positive derived basis and the
$1.5x reduction of derived basis below zero), and
this gain is allocated solely to US1. See §1.961-4(c)
(2)(iv); see also §1.961-4(f)(2) (taking the gain into
account in adjusting US1’s basis in its interest in
PRS1 under section 705).
(3) US2’s receipt of previously taxed earnings and
profits through PRS1. As a result of US2’s receipt of
previously taxed earnings and profits through PRS1,
the amount of the adjustment to PRS1’s derived
basis with respect to US2 of each of PRS1’s shares
of stock of F1 is $4x, the dollar basis and associated
foreign income taxes of the previously taxed earn-
ings and profits that are both with respect to US2 and
received on the share. See §1.961-4(c)(2)(i). Conse-
quently, PRS1 reduces its derived basis with respect
to US2 of each of its shares of stock of F1 ($2x) to
$0 and then reduces such derived basis below zero
in accordance with the limitation in §1.961-4(c)
(3), which permits a $1x reduction below zero to
the derived basis because $1x of PRS1’s common
basis of the share is available with respect to US2
(as described in paragraph (c)(3)(iii)(B)(4) of this
section). See §1.961-4(c)(2)(ii) and (iii) and (c)(3)
(i). Further, PRS1 is treated as recognizing $1x of
gain with respect to each of its shares of stock of F1
(computed as the excess of the $4x adjustment to
basis over the sum of the $2x reduction to positive
derived basis and the $1x reduction of derived basis
below zero), and this gain is allocated solely to US2.
See §1.961-4(c)(2)(iv); see also §1.961-4(f)(2) (tak-
ing the gain into account in adjusting US2’s basis in
its interest in PRS1 under section 705).
(4) Available common basis. For each of PRS1’s
shares of stock of F1, the amount of common basis
of the share that is available with respect to each of
US1 and US2 is determined by multiplying $2.5x
(the common basis of the share, reduced by all
negative derived basis of the share existing imme-
diately before the distribution being analyzed, of
which there is none) by a fraction. See §1.961-4(c)
(3)(ii). The numerator of the fraction is the amount
by which PRS1’s derived basis with respect to the
covered shareholder of the share would be reduced
below zero if derived basis could be reduced without
limitation and, accordingly, is $3x in the case of the
derived basis with respect to US1 (computed as the
excess of the $6x adjustment to basis over the $3x
reduction to positive derived basis) and is $2x in the
case of derived basis with respect to US2 (computed
as the excess of the $4x adjustment to basis over the
$2x reduction to positive derived basis). The denom-
inator of the fraction is the sum of the amounts by
which any of PRS1’s derived basis of the share
would be reduced below zero if derived basis could
be reduced without limitation ($5x, computed as the
$3x with respect to US1 plus the $2x with respect to
US2). Therefore, for each of PRS1’s shares of stock
of F1, there is $1.5x of common basis available
with respect to US1 ($2.5x × $3x/$5x) and $1x of
common basis available with respect to US2 ($2.5x
× $2x/$5x), and this common basis permits a $1.5x
and $1x reduction below zero to derived basis with
respect to US1 and US2, respectively (as described in
paragraphs (c)(3)(iii)(B)(2) and (3) of this section).
See also §1.961-10(b) (gain resulting from negative
derived basis is allocated to covered shareholders in
proportion to relative negative derived basis).
(5) Timing of adjustments. The reductions to
derived basis described in paragraphs (c)(3)(iii)(B)
(2) and (3) of this section are treated as made, and
the gains described in those paragraphs are treated as
recognized, concurrently with the covered distribu-
tion. See §1.961-4(e)(1) and (f)(1).
(iv) Alternative facts: previously taxed earnings
and profits received by a controlled foreign corpora-
tion—(A) Facts. The facts are the same as in para-
graph (c)(3)(i) of this section (Example 3), except
as follows. US1 and US2, in the aggregate, directly
own all the outstanding stock of F2 and are United
States shareholders of F2. F2 directly owns all the
shares of the single class of outstanding stock of F1.
Under §1.959-4, the entirety of each of US1’s and
US2’s share of F1’s covered distribution is previ-
ously taxed earnings and profits excluded from F2’s
gross income for purposes of determining its subpart
F income and tested income or tested loss. In addi-
tion, the sum of the dollar basis and associated for-
eign income taxes of the previously taxed earnings
and profits that are both with respect to US1 and dis-
tributed on each share of stock of F1 is $6x, and the
sum of the dollar basis and associated foreign income
taxes of the previously taxed earnings and profits that
are both with respect to US2 and distributed on each
share of stock of F1 is $4x. Immediately before the
covered distribution, for each share of stock of F1,
F2’s adjusted basis is £1.25x, its section 961(c) basis
with respect to US1 is $3x, and its section 961(c)
basis with respect to US2 is $2x. On the day of the
covered distribution, the spot rate is $1:£0.5. This
paragraph (c)(3)(iv) analyzes adjustments to basis of
F2’s shares of stock of F1 (section 961(c) ownership
units) under section 961.
(B) Analysis—(1) In general. Under §1.961-
4(d), F2 reduces its section 961(c) basis of, and if
applicable recognizes gain with respect to, each
share of stock of F1 on which it receives previously
taxed earnings and profits. The specific adjustments
are provided in paragraphs (c)(3)(iv)(B)(2) through
(5) of this section and summarized in table 1 in this
paragraph (c)(3)(iv)(B)(1).
Table 1 to paragraph (c)(3)(iv)(B)(1) of this section
BASIS ADJUSTMENTS RESULTING FROM F1’S DISTRIBUTION OF PTEP
F2 section 961(c) basis immediately
before the covered distribution
Adjustments to F2 section 961(c) basis under §1.961-4(d)
F2’s section 961(c) basis with respect
to US1 of its shares of stock of F1
$3x for each share$6x adjustment for each share
$4.5x reduction to basis
(to negative $1.5x)
$1.5x gain recognized
F2’s section 961(c) basis with respect
to US2 of its shares of stock of F1
$2x for each share$4x adjustment for each share
$3x reduction to basis
(to negative $1x)
$1x gain recognized
(2) F2’s receipt of previously taxed earnings
and profits with respect to US1. As a result of F2’s
receipt of previously taxed earnings and profits with
respect to US1, the amount of the adjustment to F2’s
section 961(c) basis with respect to US1 of each of
F2’s shares of stock of F1 is $6x, the dollar basis and
associated foreign income taxes of the previously
taxed earnings and profits that are both with respect
to US1 and received on the share. See §1.961-4(d)(2)
(i). Consequently, F2 reduces its section 961(c) basis
with respect to US1 of each of its shares of stock of
F1 ($3x) to $0 and then reduces such section 961(c)
basis below zero in accordance with the limitation
in §1.961-4(d)(3), which permits a $1.5x reduction
below zero to the section 961(c) basis because $1.5x
of F2’s adjusted basis of the share is available with
respect to US1 (as described in paragraph (c)(3)(iv)
(B)(4) of this section). See §1.961-4(d)(2)(ii) and (d)
(3)(i). Further, F2 is treated as recognizing £0.75x
of gain with respect to each of its shares of stock of
F1 (computed as the excess of the $6x adjustment
to basis over the sum of the $3x reduction to posi-
tive section 961(c) basis and the $1.5x reduction of
section 961(c) basis below zero ($1.5x excess), with
such excess of $1.5x translated into British pounds
at $1:£0.5), and this gain is assigned solely to US1.
See §1.961-4(d)(2)(iii) and (f)(4). Moreover, the gain

Bulletin No. 2025–5 627 January 27, 2025
applies only for purposes of determining amounts
included in gross income of US1 and US2 (the
United States shareholders of F2) under §1.961-11.
See §1.961-4(f)(3).
(3) F2’s receipt of previously taxed earnings
and profits with respect to US2. As a result of F2’s
receipt of previously taxed earnings and profits
with respect to US2, the amount of the adjustment
to F2’s section 961(c) basis with respect to US2
of each of F2’s shares of stock of F1 is $4x, the
dollar basis and associated foreign income taxes of
the previously taxed earnings and profits that are
both with respect to US2 and received on the share.
See §1.961-4(d)(2)(i). Consequently, F2 reduces its
section 961(c) basis with respect to US2 of each
of its shares of stock of F1 ($2x) to $0 and then
reduces such section 961(c) basis below zero in
accordance with the limitation in §1.961-4(d)(3),
which permits a $1x reduction below zero to the
section 961(c) basis because $1x of F2’s adjusted
basis of the share is available with respect to US2
(as described in paragraph (c)(3)(iv)(B)(4) of this
section). See §1.961-4(d)(2)(ii) and (d)(3)(i). Fur-
ther, F2 is treated as recognizing £0.5x of gain
with respect to each of its shares of stock of F1
(computed as the excess of the $4x adjustment to
basis over the sum of the $2x reduction to posi-
tive section 961(c) basis and the $1x reduction of
section 961(c) basis below zero ($1x excess), with
such excess of $1x translated into British pounds
at $1:£0.5), and this gain is assigned solely to
US2. See §1.961-4(d)(2)(iii) and (f)(4). Moreover,
the gain applies only for purposes of determining
amounts included in gross income of US1 and
US2 (the United States shareholders of F2) under
§1.961-11. See §1.961-4(f)(3).
(4) Available adjusted basis. For each of F2’s
shares of stock of F1, the amount of adjusted basis
of the share that is available with respect to each of
US1 and US2 is determined by multiplying $2.5x
(the £1.25x of adjusted basis of the share trans-
lated into U.S. dollars at $1:£0.5, reduced by all
negative derived basis of the share existing imme-
diately before the distribution being analyzed, of
which there is none) by a fraction. See §1.961-4(d)
(3)(ii). The numerator of the fraction is the amount
by which F2’s section 961(c) basis with respect
to the covered shareholder of the share would be
reduced below zero if section 961(c) basis could
be reduced without limitation and, accordingly,
is $3x in the case of the section 961(c) basis with
respect to US1 (computed as the excess of the $6x
adjustment to basis over the $3x reduction to posi-
tive section 961(c) basis) and is $2x in the case of
section 961(c) basis with respect to US2 (computed
as the excess of the $4x adjustment to basis over
the $2x reduction to positive section 961(c) basis).
The denominator of the fraction is the sum of the
amounts by which any of F2’s section 961(c) basis
of the share would be reduced below zero if section
961(c) basis could be reduced without limitation
($5x, computed as the $3x with respect to US1
plus the $2x with respect to US2). Therefore, for
each of F2’s shares of stock of F1, there is $1.5x of
adjusted basis available with respect to US1 ($2.5x
× $3x/$5x) and $1x of adjusted basis available with
respect to US2 ($2.5x × $2x/$5x), and this adjusted
basis permits a $1.5x and $1x reduction below
zero to section 961(c) basis with respect to US1
and US2, respectively (as described in paragraphs
(c)(3)(iv)(B)(2) and (3) of this section). See also
§1.961-10(c) (gain resulting from negative section
961(c) basis is allocated to covered shareholders
in proportion to relative negative section 961(c)
basis).
(5) Timing of adjustments. The reductions to sec-
tion 961(c) basis described in paragraphs (c)(3)(iv)
(B)(2) and (3) of this section are treated as made, and
the gains described in those paragraphs are treated as
recognized, concurrently with the covered distribu-
tion. See §1.961-4(e)(1) and (f)(1).
(4) Example 4: Use of positive derived basis—
(i) Facts. US1 and a nonresident alien individual,
in the aggregate, directly own all the interests in
PRS1. PRS1 directly owns all the shares of the
single class of outstanding stock of F1 (derivative
ownership units). In year 3, PRS1 sells all the stock
of F1 for money equal to the stock’s fair market
value. Section 304 does not apply to the sale. US1’s
distributive share of gain recognized by PRS1 on
the sale is $60x, determined without regard to
derived basis. Immediately before the sale (and tak-
ing into account any adjustments under §1.961-5(b)
resulting from the sale), PRS1’s positive derived
basis with respect to US1 of the shares of stock of
F1 is $50x in total. In addition, PRS1 has no nega-
tive derived basis in any of the shares. This example
only analyzes the application of positive derived
basis to US1’s distributive share of gain on the sale.
See also §1.959-3 (adjustments to previously taxed
earnings and profits accounts); §1.959-7 (transfer
of previously taxed earnings and profits in general
successor transactions); §1.986(c)-1 (foreign cur-
rency gain or loss recognized in general successor
transactions).
(ii) Analysis. PRS1 is treated as applying its
$50x of positive derived basis with respect to
US1 of the stock of F1 to US1’s $60x distribu-
tive share of gain on the sale. See §1.961-8(b). As
result, US1’s distributive share of gain on the sale
is adjusted by $50x, to a $10x distributive share of
gain. See also §1.961-8(c) (for purposes of adjust-
ing US1’s adjusted basis of its interest in PRS1
under section 705, US1’s distributive share on the
sale is $10x of gain).
(iii) Alternative facts: positive derived basis
creates a distributive share of loss—(A) Facts. The
facts are the same as in paragraph (c)(4)(i) of this
section, except that PRS1’s positive derived basis
with respect to US1 of the shares of stock of F1
is $75x in total. In addition, if there were a loss in
PRS1’s stock of F1, PRS1 would recognize all such
loss in the sale and a current deduction in respect of
the loss would be allowable.
(B) Analysis. PRS1 is treated as applying its
$75x of positive derived basis with respect to US1
of the stock of F1 to US1’s $60x distributive share
of gain on the sale. See §1.961-8(b). As result, US1’s
distributive share of the gain on the sale is adjusted
by $75x, to a $15x distributive share of loss. See
also §1.961-8(c) (for purposes of adjusting US1’s
adjusted basis of its interest in PRS1 under section
705, US1’s distributive share on the sale is $15x of
loss).
(iv) Alternative facts: tiered partnerships—(A)
Facts. The facts are the same as in paragraph (c)(4)
(i) of this section (Example 4), except as follows.
US1 and a nonresident alien individual, in the aggre-
gate, directly own all the interests in PRS2. PRS2
and a nonresident alien individual, in the aggregate,
directly own all the interests in PRS1. US1’s distrib-
utive share of gain recognized by PRS1 on the sale
(through its interest in PRS2) is $55x, determined
without regard to derived basis.
(B) Analysis. PRS2 is treated as applying PRS1’s
$50x of positive derived basis with respect to US1 of
the stock of F1 to US1’s $55x distributive share of
gain on the sale. See §1.961-8(b). As result, US1’s
distributive share of gain on the sale is adjusted
by $50x, to a $5x distributive share of gain. See
also §1.961-8(c) (for purposes of adjusting US1’s
adjusted basis of its interest in PRS2 under section
705, US1’s distributive share on the sale is $5x of
gain); §1.961-8(d) (for purposes of adjusting PRS2’s
common basis of its interest in PRS1 under section
705, PRS2’s distributive share of gain is determined
without regard to the application of positive derived
basis; concurrently with the adjustment under sec-
tion 705, reducing PRS2’s derived basis with respect
to US1 of the interest in PRS1 by $50x, the amount
of positive derived basis applied to US1’s distribu-
tive share of gain).
(5) Example 5: Use of positive section 961(c)
basis—(i) Facts. US1 and a nonresident alien
individual, in the aggregate, directly own all the
shares of the single class of outstanding stock of
F1. F1 directly owns all the shares of the single
class of outstanding stock of F2 (section 961(c)
ownership units). In year 3, F1 sells all the stock
of F2 for money equal to the stock’s fair market
value. Section 304 does not apply to the sale. F1
recognizes £100x of gain on the sale, determined
without regard to loss recognized on any share and
without regard to section 961(c) basis. This £100x
is covered gain and US1 is assigned a £60x por-
tion of the covered gain under §1.951-2. Imme-
diately before the sale (and taking into account
any adjustments under §1.961-5(b) resulting
from the sale), F1’s positive section 961(c) basis
with respect to US1 of the shares of stock of F2
is £50x in total (as translated from U.S. dollars
into British pounds at the spot rate on the day of
the sale). In addition, F1 has no negative section
961(c) basis in any of the shares. Table 1 in this
paragraph (c)(5)(i) provides the previously taxed
earnings and profits of F2 that transfer from US1
in the sale to a successor covered shareholder
under §1.959-7 (total of £44x), along with the
foreign income taxes that are associated with
such previously taxed earnings and profits (total
of £6x, as translated from U.S. dollars into British
pounds at the spot rate on the day of the sale for
purposes of §1.961-9(f)(2)). This example only
analyzes the extent to which previously taxed
earnings and profits result from the application of
F1’s section 961(c) basis and are excluded from
F1’s gross income under section 961(c). See also
§1.959-3 (adjustments to previously taxed earn-
ings and profits accounts); §1.986(c)-1 (foreign
currency gain or loss recognized in general suc-
cessor transactions).

January 27, 2025 628 Bulletin No. 2025–5
Table 1 to paragraph (c)(5)(i) of this section
F2 PTEP TRANSFERRING FROM US1 & ASSOCIATED FOREIGN INCOME TAXES
§904 Category
Taxable
Year
General CategoryPassive Category§951A Category
§951(a)(1)(A)
PTEP group
§245A(d)
PTEP group
§951(a)(1)(A)
PTEP group
§951A
PTEP group
Year 2
Transferred PTEP£10x
Taxes
Year 1
Transferred PTEP£7.2x£4x£4.8x£18x
Taxes£1.8x£1x£1.2x£2x
(ii) Analysis—(A) In general. For purposes of
analyzing the covered gain, US1’s share of the cov-
ered gain is £60x because that amount of the cov-
ered gain is assigned to US1 under §1.951-2. See
§1.961-9(d)(1). All £50x of F1’s positive section
961(c) basis with respect to US1 of the stock of F2
is applied to such share. See §1.961-9(d)(2) and (e)
(1). As a result, £50x of the covered gain is previ-
ously taxed earnings and profits of F1 with respect to
US1, characterized as described in paragraph (c)(5)
(ii)(B) of this section. See §1.961-9(d)(3) and (f)(1).
F1 excludes the £50x of previously taxed earnings
resulting from section 961(c) basis from its gross
income, solely for purposes of determining its sub-
part F income and tested income or tested loss. See
§1.961-9(b).
(B) Character of previously taxed earnings
and profits resulting from section 961(c) basis. The
mirroring rule in §1.961-9(f)(2) determines the spe-
cific character of all £50x of F1’s previously taxed
earnings and profits resulting from section 961(c)
basis because the amount of such previously taxed
earnings and profits does not exceed the amount of
mirrored PTEP, of which there is £50x. See §1.961-
9(f)(2)(i). The mirrored PTEP is the previously
taxed earnings and profits described in table 1 to
paragraph (c)(5)(i) of this section, determined by
treating foreign income taxes associated with trans-
ferred previously taxed earnings and profits as addi-
tional previously taxed earnings and profits (£44x
+ £6x). See §1.961-9(f)(2)(ii). Under the mirroring
rule, the £50x of previously taxed earnings and
profits resulting from section 961(c) basis have the
same character as the £50x of mirrored PTEP, as
summarized in table 1 in this paragraph (c)(5)(ii)
(B). See §1.961-9(f)(2)(i); see also §1.961-9(g) and
(h) (dollar basis rule and rule for allocating previ-
ously taxed earnings and profits to specific shares
of stock).
Table 1 to paragraph (c)(5)(ii)(B) of this section
F1 PTEP RESULTING FROM §961(C) BASIS
§904 Category
Taxable
Year
General CategoryPassive Category§951A Category
§951(a)(1)(A)
PTEP group
§245A(d)
PTEP group
§951(a)(1)(A)
PTEP group
§951A
PTEP group
Year 2
£10x
(£10x + £0)
Year 1
£9x
(£7.2x + £1.8x)
£5x
(£4x + £1x)
£6x
(£4.8x + £1.2x)
£20x
(£18x + £2x)
(iii) Alternative facts: unused section 961(c)
basis—(A) Facts. The facts are the same as in para-
graph (c)(5)(i) of this section (Example 5), except
that the amount of F1’s covered gain is £70x (instead
of £100x) and US1 is assigned a £42x (instead of
£60x) portion of the covered gain under §1.951-2.
(B) Analysis. For purposes of analyzing the
covered gain, US1’s share of the covered gain is
£42x, and £42x of F1’s £50x of positive section
961(c) basis with respect to US1 of the stock of F2
is applied to such share. See §1.961-9(d)(1) and (2),
(e)(1). As a result, £42x of the covered gain is pre-
viously taxed earnings and profits of F1 with respect
to US1, with the same character as a pro rata portion
of the previously taxed earnings and profits set forth
in table 1 to paragraph (c)(5)(ii)(B) of this section,
determined by multiplying all such previously taxed
earnings and profits by 84% (computed as $42x of
previously taxed earnings and profits resulting from
section 961(c) basis divided by £50x of mirrored
PTEP). See §1.961-9(d)(3), (f)(1) and (2). Moreover,
the £8x of F1’s positive section 961(c) basis that is
not applied to the covered gain is taken into account
only for purposes of determining amounts included
in gross income of United States shareholders of F1
under §1.961-11.
(6) Example 6: Gain recognition for negative
derived basis—(i) Facts. US1 and US2, in the aggre-
gate, directly own all the interests in PRS1. PRS1
directly owns all the shares of the single class of
stock of F1 (derivative ownership units). In year 3,
PRS1 sells all the stock of F1 for money equal to
the stock’s fair market value. Section 304 does not
apply to the sale, and the shares of stock of F1 remain
derivative ownership units immediately after the sale
(because the buyer is a partnership the interests in
which are owned by one or more covered sharehold-
ers). PRS1 recognizes $2x of loss with respect to
each share of stock of F1, determined without regard
to derived basis and allocated to US1 and US2 in
accordance with section 704. Immediately before the
sale (and taking into account any adjustments under
§1.961-5(b) resulting from the sale), for each share
of stock of F1, PRS1’s derived basis with respect
to US1 is negative $1.5x and its derived basis with
respect to US2 is negative $1x. This example only
analyzes the consequences of negative derived basis
in the sale. See also §1.959-3 (adjustments to previ-
ously taxed earnings and profits accounts); §1.959-7
(transfer of previously taxed earnings and profits in
general successor transactions); §1.986(c)-1 (foreign
currency gain or loss recognized in general successor
transactions).
(ii) Analysis. As a result of negative derived
basis, PRS1 is treated as recognizing gain with
respect to each share of stock of F1. See §1.961-
10(b)(1). For each share of stock of F1, the amount
of such gain is $2.5x, which is the lesser amount of
loss ($2x, expressed as a positive amount), plus the
additional amount of gain ($0.5x), that PRS1 would

Bulletin No. 2025–5 629 January 27, 2025
have recognized with respect to the share if PRS1’s
common basis of the share were reduced by $2.5x
(the sum of all PRS1’s negative derived basis of the
share), and thus all negative derived basis gives rise
to gain. See §1.961-10(b)(2)(i); compare paragraph
(c)(6)(iii) of this section (scenario where less than
all negative derived basis gives rise to gain). A pro
rata portion of the $2.5x of gain treated as recognized
with respect to each share of stock of F1 is allocated
to US1 and US2 by multiplying the amount of such
gain by a fraction, the numerator of which is PRS1’s
negative derived basis with respect to the covered
shareholder of the share ($1.5x in the case of US1,
and $1x in the case of US2), and the denominator of
which is the sum of all PRS1’s negative derived basis
of the share ($2.5x). See §1.961-10(b)(3). Thus, in
addition to the allocation in accordance with section
704 of the $2x of loss that PRS1 recognizes with
respect to each share of stock of F1, US1 is allocated
$1.5x, and US2 is allocated $1x, of the $2.5x of
gain treated as recognized by PRS1 with respect to
each share of stock of F1. See §1.961-10(b)(4); see
also §1.961-4(f)(2) (gain allocated to US1 or US2 is
taken into account in adjusting US1’s or US2’s basis
in its interest in PRS1 under section 705).
(iii) Alternative facts: section 301(c)(2) distribu-
tion—(A) Facts. The facts are the same as in para-
graph (c)(6)(i) of this section (Example 6), except as
follows. PRS1 does not sell any stock of F1. In year
3, F1 makes a distribution that is $10x with respect
to each share of its stock. None of the distribution is
a covered distribution because F1 has no accumu-
lated or current year earnings and profits in year 3.
Immediately before the distribution, for each share
of stock of F1, PRS1’s common basis is $12x, its
derived basis with respect to US1 is negative $1.5x,
and its derived basis with respect to US2 is negative
$1x. Thus, section 301(c)(2) applies to the entirety
of the $10x that is distributed with respect to each
share of stock of F1. This example only analyzes the
consequences of negative derived basis in the dis-
tribution.
(B) Analysis. PRS1 determines the amount of
gain it is treated as recognizing as a result of neg-
ative derived basis by calculating the additional
amount of gain that it would have recognized with
respect to each share of stock of F1 under section
301(c)(3) if its common basis of the share were
reduced by $2.5x (the sum of all PRS1’s negative
derived basis of the share). See §1.961-10(b)(2)(i).
Specifically, if PRS1’s common basis of each share
were reduced by $2.5x, the common basis would
be $9.5x ($12x − $2.5x), such that the distribution
of $10x on the share would result in $9.5x being
treated as a return of basis under section 301(c)(2)
and $0.5x being treated as gain recognized under
section 301(c)(3). Thus, PRS1 is treated as recog-
nizing $0.5x of gain with respect to each share as
a result of the $2.5x of negative derived basis of
the share, and PRS1 retains the remaining $2x of
negative derived basis of the share (which, under
these facts, is equal to the portion of the common
basis of the share that is not reduced by the dis-
tribution under section 301(c)(2) ($12x − $10x, or
$2x)). A pro rata portion of the $0.5x of gain treated
as recognized with respect to each share of stock of
F1 is allocated to US1 and US2 by multiplying the
amount of such gain by a fraction, the numerator of
which is PRS1’s negative derived basis with respect
to the covered shareholder of the share ($1.5x in the
case of US1, and $1x in the case of US2), and the
denominator of which is the sum of all PRS1’s neg-
ative derived basis of the share ($2.5x). See §1.961-
10(b)(3). Thus, US1 is allocated $0.3x, and US2 is
allocated $0.2x, of the $0.5x of gain treated as rec-
ognized by PRS1 with respect to each share of stock
of F1. See §1.961-10(b)(4); see also §1.961-4(f)(2)
(gain allocated to US1 or US2 is taken into account
in adjusting US1’s or US2’s basis in its interest in
PRS1 under section 705). Immediately after the
distribution, for each share of stock of F1, PRS1’s
derived basis with respect to US1 is negative $1.2x
(negative $1.5x + $0.3x) and its derived basis with
respect to US2 is negative $0.8x (negative $1x +
$0.2x). See §1.961-10(b)(5).
(7) Example 7: Gain recognition for negative
section 961(c) basis—(i) Facts. US1 and US2, in the
aggregate, directly own all the shares of the single
class of stock of F1 and are United States sharehold-
ers of F1. F1 directly owns all the shares of the single
class of stock of F2 (section 961(c) ownership units).
In year 3, F1 sells all the stock of F2 for money equal
to the stock’s fair market value. Section 304 does not
apply to the sale, and the shares of stock of F2 remain
section 961(c) ownership units immediately after the
sale (because the buyer is a controlled foreign cor-
poration). F1 recognizes £2x of loss with respect to
each share of stock of F2, determined without regard
to section 961(c) basis. Immediately before the sale
(and taking into account any adjustments under
§1.961-5(b) resulting from the sale), for each share
of stock of F2, F1’s section 961(c) basis with respect
to US1 is negative £1.5x and its section 961(c) basis
with respect to US2 is negative £1x (as translated
from U.S. dollars into British pounds at the spot rate
on the day of the sale). This example only analyzes
the consequences of negative section 961(c) basis
in the sale. See also §1.959-3 (adjustments to previ-
ously taxed earnings and profits accounts); §1.959-7
(transfer of previously taxed earnings and profits in
general successor transactions); §1.986(c)-1 (foreign
currency gain or loss recognized in general successor
transactions).
(ii) Analysis. As a result of negative section
961(c) basis, F1 is treated as recognizing gain with
respect to each share of stock of F2. See §1.961-
10(c)(1). For each share of stock of F2, the amount of
such gain is £2.5x, which is the lesser amount of loss
(£2x, expressed as a positive amount), plus the addi-
tional amount of gain (£0.5x), that F1 would have
recognized with respect to the share if F1’s adjusted
basis of the share were reduced by £2.5x (the sum of
all F1’s negative section 961(c) basis of the share),
and thus all negative section 961(c) basis gives rise
to gain. See §1.961-10(c)(2)(i); compare paragraph
(c)(7)(iii) of this section (scenario where less than
all negative section 961(c) basis gives rise to gain).
A pro rata portion of the £2.5x of gain treated as rec-
ognized with respect to each share of stock of F2 is
assigned to US1 and US2 by multiplying the amount
of such gain by a fraction, the numerator of which
is F1’s negative section 961(c) basis with respect to
the covered shareholder of the share (£1.5x in the
case of US1, and £1x in the case of US2), and the
denominator of which is the sum of all F1’s nega-
tive section 961(c) basis of the share (£2.5x). See
§1.961-10(c)(3). Thus, US1 is assigned £1.5x, and
US2 is assigned £1x, of the £2.5x of gain treated as
recognized by F1 with respect to each share of stock
of F2. Moreover, the gain applies only for purposes
of determining amounts included in gross income
of US1 and US2 (the United States shareholders of
F1) under §1.961-11. See §1.961-10(c)(4); see also
§§1.961-4(f)(3) (the gain does not affect F1’s items
of gross income for purposes of section 952 or 951A
or its earnings and profits).
(iii) Alternative facts: section 351 exchange
with boot—(A) Facts. The facts are the same as
in paragraph (c)(7)(i) of this section (Example 7),
except as follows. Instead of the sale, F1 contrib-
utes property, including all its stock of F2, to F3,
a controlled foreign corporation, in exchange for
stock of F3 and money equal, in the aggregate, to
the fair market value of the contributed property.
Other unrelated persons also contribute property
to F3 in exchange for stock of F3 as part of the
same transaction. Section 351(b) applies to F1’s
exchange, but sections 304 and 362(e) do not, and
no income inclusions are required under §1.367(b)-
4. The shares of stock of F2 remain section 961(c)
ownership units immediately after the contribution
(because F3 is a controlled foreign corporation).
In the exchange, for each share of stock of F2, F1
receives stock of F3 and £10x of money but rec-
ognizes no gain because F1’s adjusted basis of the
share is £2x greater than the fair market value of
the share. Immediately before the exchange (and
taking into account any adjustments under §1.961-
5(b) resulting from the exchange), for each share of
stock of F2, F1’s section 961(c) basis with respect
to US1 is negative £1.5x and its section 961(c) basis
with respect to US2 is negative £1x (as translated
from U.S. dollars into British pounds at the spot
rate on the day of the exchange). This example
only analyzes the consequences of negative section
961(c) basis in the exchange.
(B) Analysis. F1 determines the amount of gain
it is treated as recognizing as a result of negative
section 961(c) basis by calculating the additional
amount of gain that it would have recognized with
respect to each share of stock of F2 under section
351(b) if its adjusted basis of the share were reduced
by £2.5x (the sum of all F1’s negative section 961(c)
basis of the share). See §1.961-10(c)(2)(i). Specif-
ically, a £2.5x reduction to F1’s adjusted basis of
each share would convert a £2x loss on the share
into a £0.5x gain, which would then be recognized
pursuant to section 351(b) in the exchange. Thus, F1
is treated as recognizing £0.5x of gain with respect
to each share as a result of the £2.5x of negative
section 961(c) basis of the share, and the remain-
ing £2x of negative section 961(c) basis of the
share is retained (which, under these facts, is equal
to the loss in the share that is not recognized in the
exchange (£2x, the excess of the adjusted basis of
the share over the fair market value of the share)). A
pro rata portion of the £0.5x of gain treated as rec-
ognized with respect to each share of stock of F2 is
assigned to US1 and US2 by multiplying the amount
of such gain by a fraction, the numerator of which
is F1’s negative section 961(c) basis with respect to
the covered shareholder of the share (£1.5x in the
case of US1, and £1x in the case of US2), and the
denominator of which is the sum of all F1’s nega-

January 27, 2025 630 Bulletin No. 2025–5
tive section 961(c) basis of the share (£2.5x). See
§1.961-10(c)(3). Thus, US1 is assigned £0.3x, and
US2 is assigned £0.2x, of the £0.5x of gain treated
as recognized by F1 with respect to each share of
stock of F2. Moreover, the gain applies only for
purposes of determining amounts included in gross
income of US1 and US2 (the United States share-
holders of F1) under §1.961-11. See §1.961-10(c)
(4); see also §§1.961-4(f)(3) (the gain does not affect
F1’s items of gross income for purposes of section
952 or 951A or its earnings and profits). Immedi-
ately after the exchange, for each share of stock of
F2, the functional currency amount of F3’s section
961(c) basis with respect to US1 is negative £1.2x
(negative £1.5x + £0.3x) and its section 961(c) basis
with respect to US2 is negative £0.8x (negative £1x
+ £0.2x). See §1.961-10(c)(5).
(8) Example 8: Amounts included in gross income
of United States shareholders—(i) Facts. US1 and
US2, in the aggregate, directly own all the shares of
the single class of stock of F1 and are United States
shareholders of F1. F1 directly owns all the shares of
the single class of stock of each of F2 and F3 (section
961(c) ownership units). For F1’s taxable year end-
ing on December 31 of year 3, F1 recognizes £50x
of section 961(c) income. The section 961(c) income
consists of £10x of gain recognized as a result of
F1’s receipt of previously taxed earnings and profits
from F2 and £40x of gain recognized as a result of
F1’s sale of stock of F3 with negative section 961(c)
basis. US1 and US2 are assigned equal portions of
the £10x gain under §1.961-4(d) (basis reductions
and gain recognition for distributions) and US2 is
assigned all the £40x gain under §1.961-10(c) (gain
recognition for negative basis). F1 has no positive
section 961(c) basis in any of the sold shares of stock
of F3. This example only analyzes the allocation of
F1’s section 961(c) income and resulting inclusions
in gross income of United States shareholders under
section 961(c).
(ii) Analysis. Under §1.961-11, F1’s £50x of
section 961(c) income is allocated to each of US1
and US2 by adding up the amounts of the section
961(c) income that are assigned to each United
States shareholder. See §1.961-11(c). No additional
computations are required because F1 does not rec-
ognize any loss under section 961(c) and there are
no transfers of stock of F1. See id. Thus, US1 is
allocated £5x (£5x of gain with respect to stock of
F2 plus £0 of gain with respect to stock of F3), and
US2 is allocated £45x (£5x of gain with respect to
stock of F2 plus £40x of gain with respect to stock of
F3), of the section 961(c) income. Accordingly, US1
includes £5x in its gross income and US2 includes
£45x in its gross income, in each case for the United
States shareholder’s (US1’s or US2’s) taxable year
ending on December 31 of year 3 and translated into
U.S. dollars in accordance with section 989(b). See
§1.961-11(b). Under §1.961-3, each of US1’s and
US2’s income inclusion increases its adjusted basis
of its stock of F1 by the U.S. dollar amount of the
inclusion.
(iii) Alternative facts: loss under section 961(c)—
(A) Facts. The facts are the same as in paragraph (c)
(8)(i) of this section (Example 8), except as follows.
F1 is treated as recognizing £7x of loss under section
961(c) with respect to US2 because F1 has positive
section 961(c) basis with respect to US2 in some of
the sold shares of stock of F3 and, under §1.961-9,
all but £7x of such positive section 961(c) basis is
applied to US2’s share of covered gain recognized
by F1 on the sale of stock of F3.
(B) Analysis. Under §1.961-11, F1’s £50x of sec-
tion 961(c) income is allocated to each of US1 and
US2 by first adding up the amounts of the section
961(c) income that are assigned to the United States
shareholder (£5x in the case of US1, and £45x in
the case of US2) and then reducing (but not below
zero) such sum by the amount of loss F1 is treated
as recognizing under section 961(c) with respect
to the United States shareholder (£0 in the case of
US1, and £7x in the case of US2). See §1.961-11(c).
Thus, US1 is allocated £5x (£5x − £0), and US2 is
allocated £38x (£45x − £7x), of the section 961(c)
income. Accordingly, US1 includes £5x in its gross
income and US2 includes £38x in its gross income,
in each case for the United States shareholder’s
(US1’s or US2’s) taxable year ending on December
31 of year 3 and translated into U.S. dollars in accor-
dance with section 989(b). See §1.961-11(b). Under
§1.961-3, each of US1’s and US2’s income inclusion
increases its adjusted basis of its stock of F1 by the
U.S. dollar amount of the inclusion.
§1.961-13 Transition rules.
(a) Scope. This section sets forth transi-
tion rules for the section 961 regulations.
Paragraph (b) of this section addresses
the establishment of derived basis of a
partnership and section 961(c) basis of a
controlled foreign corporation. Paragraph
(c) of this section treats a domestic part-
nership (including an S corporation) as a
covered shareholder for periods in which
§1.958-1(d)(1) does not apply. Paragraph
(d) of this section converts basis with
respect to a domestic partnership (includ-
ing an S corporation) to basis with respect
to covered shareholders owning interests
in the domestic partnership when both
§1.958-1(d)(1) and the section 961 regu-
lations first apply.
(b) Establishing derived basis of a
partnership and section 961(c) basis of
a controlled foreign corporation—(1) In
general. As of the beginning of the first
taxable year of a foreign corporation to
which the section 961 regulations (other
than §§1.961-6 and 1.961-7) apply pur-
suant to §1.961-14(b), a partnership’s
derived basis of derivative ownership
units, and a controlled foreign corpo-
ration’s section 961(c) basis of section
961(c) ownership units, that are shares of
stock of the foreign corporation or prop-
erty through one or more covered share-
holders own stock of the foreign corpo-
ration must be established in accordance
with the rules described in paragraphs (b)
(2) through (5) of this section.
(2) Derived basis—(i) In general.
The partnership’s derived basis of each
derivative ownership unit is established
by increasing derived basis with respect
to each covered shareholder by the U.S.
dollar amount of derived basis with
respect to the covered shareholder that
would exist at the beginning of the tax-
able year (and therefore would not have
been decreased in a distribution or gen-
eral successor transaction, for example)
if the principles of §§1.961-2 through
1.961-5, 1.961-8, and 1.961-10 were
to have previously applied, determined
using a reasonable method (consistently
applied to each foreign corporation
whose stock is owned by the partner-
ship and with respect to each covered
shareholder that owns an interest in the
partnership). In the case of a domestic
partnership, the increase described in the
preceding sentence is determined with-
out regard to an income inclusion of the
domestic partnership or any lower-tier
domestic partnership (for example, an
income inclusion of the domestic part-
nership under section 951(a)(1)(A) that
occurs in a period before §1.958-1(d)
applies to the domestic partnership).
(3) Section 961(c) basis. The controlled
foreign corporation’s section 961(c) basis
of each section 961(c) ownership unit is
established by increasing section 961(c)
basis with respect to each covered share-
holder by the U.S. dollar amount of section
961(c) basis with respect to the covered
shareholder that would exist at the begin-
ning of the taxable year (and therefore
would not have been decreased in a dis-
tribution or general successor transaction,
for example) if the principles of §§1.961-2
through 1.961-5, 1.961-9, 1.961-10, and
1.961-11 were to have previously applied,
determined using a reasonable method
(consistently applied to each foreign cor-
poration whose stock is owned by the
controlled foreign corporation and with
respect to each covered shareholder that
owns stock in the controlled foreign cor-
poration).
(4) Treatment of a specified foreign
corporation as a controlled foreign cor-
poration. A specified foreign corporation
(as defined in §1.965-1(f)(45)(i)(B)) that
is not otherwise a controlled foreign cor-

Bulletin No. 2025–5 631 January 27, 2025
poration is treated as a controlled foreign
corporation for purposes of the applica-
tion of the principles of §1.961-3 to an
income inclusion under section 951(a)(1)
(A) by reason of section 965(a).
(5) Anti-duplication rule. Derived
basis or section 961(c) basis is increased
under this paragraph (b) to reflect an
income inclusion under section 951(a)(1)
(A) or 951A(a) only to the extent such
an increase would not duplicate basis
(including basis previously used) at the
level of the partnership or the controlled
foreign corporation, as applicable, to
reflect the income inclusion (for exam-
ple, in the case of a foreign partnership,
basis previously provided under §1.965-
2(h)(5)(ii)).
(c) Treatment of domestic partner-
ships (including S corporations) before
application of §1.958-1(d)(1). For pur-
poses of the section 961 regulations, a
domestic partnership (including an S cor-
poration) is treated as a covered share-
holder for any taxable year of the domes-
tic partnership to which §1.958-1(d)(1)
does not apply. If a domestic partner-
ship is treated as a covered shareholder,
then rules regarding derived basis (of a
partnership that is owned by the domes-
tic partnership) or section 961(c) basis
(of a controlled foreign corporation that
is owned by the domestic partnership)
apply to the domestic partnership in its
capacity as a covered shareholder before
those rules apply to a covered share-
holder that owns interests in the domestic
partnership. In such a case, for example,
covered gain recognized by a controlled
foreign corporation and assigned to the
domestic partnership is first previously
taxed earnings and profits by reason of
the controlled foreign corporation’s pos-
itive section 961(c) basis with respect
to the domestic partnership and then, to
the extent remaining, previously taxed
earnings and profits by reason of positive
section 961(c) basis with respect to cov-
ered shareholders owning interests in the
domestic partnership.
(d) Converting basis with respect to
domestic partnerships (including S corpo-
rations) to basis with respect to partners
(or shareholders) after the application
of §1.958-1(d)(1)—(1) In general. As of
the beginning of the first taxable year of
a domestic partnership (including an S
corporation) to which both §1.958-1(d)(1)
and the section 961 regulations (other than
§§1.961-6 and 1.961-7) apply (pursuant to
§1.961-14(b)), the rules described in para-
graphs (d)(2) through (4) of this section
apply to convert—
(i) A lower-tier partnership’s derived
basis with respect to the domestic partner-
ship of derivative ownership units (if such
derived basis was earlier established pur-
suant to paragraphs (b)(2) and (c) of this
section) to derived basis with respect to
covered shareholders owning interests in
the domestic partnership; and
(ii) A controlled foreign corporation’s
section 961(c) basis with respect to the
domestic partnership of section 961(c)
ownership units (if such section 961(c)
basis was earlier established pursuant to
paragraphs (b)(3) and (c) of this section)
to section 961(c) basis with respect to cov-
ered shareholders owning interests in the
domestic partnership.
(2) Rules for converting derived basis
with respect to a domestic partnership—
(i) Allocate derived basis to each cov-
ered shareholder. First, allocate a pro rata
portion of the lower-tier partnership’s
derived basis with respect to the domestic
partnership of each derivative ownership
unit to each covered shareholder owning
an interest in the domestic partnership at
the beginning of the taxable year, deter-
mined by multiplying the derived basis
with respect to the domestic partnership
by the fraction described in §1.959-11(e)
(2)(i)(A) for the covered shareholder and
the domestic partnership.
(ii) Transfer derived basis. Second,
transfer to each covered shareholder the
portion of the lower-tier partnership’s
derived basis with respect to the domestic
partnership of each derivative ownership
unit that is allocated to the covered share-
holder under paragraph (d)(2)(i) of this
section.
(3) Rules for converting section 961(c)
basis with respect to a domestic partner-
ship—(i) Allocate section 961(c) basis to
each covered shareholder. First, allocate a
pro rata portion of the controlled foreign
corporation’s section 961(c) basis with
respect to the domestic partnership of each
section 961(c) ownership unit to each cov-
ered shareholder owning an interest in the
domestic partnership at the beginning of
the taxable year, determined by multiply-
ing the section 961(c) basis with respect
to the domestic partnership by the fraction
described in §1.959-11(e)(2)(i)(A) for the
covered shareholder and the domestic
partnership.
(ii) Transfer section 961(c) basis. Sec-
ond, transfer to each covered shareholder
the portion of the controlled foreign
corporation’s section 961(c) basis with
respect to the domestic partnership of
each section 961(c) ownership unit that is
allocated to the covered shareholder under
paragraph (d)(3)(i) of this section.
(4) Coordination with deemed cov-
ered shareholder rules. The portion,
if any, of the lower-tier partnership’s
derived basis with respect to the domes-
tic partnership, or the controlled foreign
corporation’s section 961(c) basis with
respect to the domestic partnership, that
does not increase derived basis or section
961(c) basis with respect to a covered
shareholder becomes with respect to the
deemed covered shareholder for purposes
of subsequently transferring the basis
under §1.961-5(c).
§1.961-14 Applicability dates.
(a) Scope. This section sets forth appli-
cability dates for the section 961 regula-
tions. Paragraph (b) of this section pro-
vides the applicability dates.
(b) Applicability dates. Sections
1.961-1 through 1.961-5 and 1.961-8
through 1.961-13 apply to taxable years of
foreign corporations that begin on or after
[date of publication of final regulations in
the Federal Register] or are early applica-
tion years (as described in §1.959-12(d))
and to taxable years of persons for which
such taxable years of those foreign corpo-
rations are relevant.
Par. 29. Section 1.962-1 is amended
by:
1. Removing the last sentence in para-
graph (a)(3); and
2. Adding paragraph (a)(4).
The addition reads as follows:
§1.962-1 Limitation of tax for
individuals on amounts included in
gross income under section 951(a).
(a) * * *
(4) See section 959 and the regulations
in this part issued under section 959 for

January 27, 2025 632 Bulletin No. 2025–5
rules regarding previously taxed earn-
ings and profits, including previously
taxed earnings and profits assigned to the
taxable section 962 PTEP subgroup (as
defined in §1.959-2(b)(2)(ii)(A)).
* * * * *
§1.962-3 [Removed].
Par. 30. Section 1.962-3 is removed.
Par. 31. Section 1.965-5 is amended
by:
1. In the introductory text of paragraph
(d)(1), removing the language “and
(d)(3)” and adding the language
“through (d)(5)” in its place; and
2. Adding paragraph (d)(5).
The addition reads as follows:
§1.965-5 Allowance of credit or
deduction for foreign income taxes.
* * * * *
(d) * * *
(5) Adjusted applicable percentage for
certain taxable years. For taxable years
to which §§1.959-1 through 1.959-7 and
1.959-10 and 1.959-11 apply (see §1.959-
12), the term applicable percentage means
“adjusted applicable percentage” as
defined in §1.959-2(b)(2)(iii)(A), except
for purposes of §1.959-11(c)(3) (initial
determination of the adjusted applicable
percentage).
Par. 32. Section 1.965-9 is amended by
adding paragraph (d) to read as follows:
§1.965-9 Applicability Dates.
* * * * *
(d) Applicability date for adjusted
applicable percentage. Section 1.965-
5(d)(5) applies to taxable years of foreign
corporations that begin on or after [date
of publication of final regulations in the
Federal Register] or are early application
years (as described in §1.959-12(d)) and
to taxable years of persons for which such
taxable years of those foreign corpora-
tions are relevant.
§1.985-5 [Amended]
Par. 33. Section 1.985-5 is amended by
removing the language “(e)(2),” from the
last sentence in paragraph (a) and remov-
ing and reserving paragraph (e)(2).
§1.986(a)-1 [Amended]
Par. 34. Section 1.986(a)-1 is amended
by:
1. In paragraph (c), removing the lan-
guage “PTEP group taxes (as defined
in § 1.960-3(d)(1))” from the first sen-
tence and adding the language “the
corporate PTEP tax pool (as defined
in §1.959-1(b)) or any covered share-
holder’s PTEP tax pool (as defined in
§1.959-1(b))” in its place.
2. In paragraph (e)(1) removing the lan-
guage “PTEP group taxes” and add-
ing the language “a PTEP tax pool”
in its place.
3. In paragraph (e)(2) removing the lan-
guage “PTEP group taxes (as defined
in § 1.960-3(d)(1))” in the first sen-
tence and adding the language “the
corporate PTEP tax pool (as defined
in §1.959-1(b)) or any covered share-
holder’s PTEP tax pool (as defined in
§1.959-1(b))” in its place, and remov-
ing the language “PTEP group taxes”
in the second sentence and adding
the language “a PTEP tax pool” in its
place.
4. In paragraph (e)(3) removing the lan-
guage “PTEP group taxes” in the last
sentence and adding the language “a
PTEP tax pool” in its place.
Par. 35. Section 1.986(c)-1 is revised
to read as follows:
§1.986(c)-1 Foreign currency gain or
loss with respect to previously taxed
earnings and profits.
(a) Scope. This section provides rules
for the recognition of foreign currency
gain or loss with respect to previously
taxed earnings and profits (as described in
section 959) under section 986(c). Para-
graph (b) of this section provides rules for
distributions of previously taxed earnings
and profits to a covered shareholder and
certain transactions that transfer or elimi-
nate previously taxed earnings and profits.
Paragraph (c) of this section provides a
rule for distributions of previously taxed
earnings and profits to a foreign corpo-
ration. Paragraph (d) of this section pro-
vides definitions. Paragraph (e) of this
section provides the applicability date of
this section. See §1.961-5 for related basis
adjustments in certain cases and §1.959-
10(c)(2) (Example 2) for an example illus-
trating the application of this section. See
also §1.367(b)-2(j)(2) for the interaction
of certain nonrecognition transactions and
section 986(c).
(b) Recognition of foreign currency
gain or loss—(1) In general. If, in any
transaction, previously taxed earnings
and profits with respect to a covered
shareholder are distributed to the covered
shareholder or cease to be with respect
to the covered shareholder (for example,
because the previously taxed earnings and
profits transfer from the covered share-
holder in a general successor transaction
or are eliminated by reason of an election
under section 338(g)), then the covered
shareholder recognizes foreign currency
gain or loss with respect to such previ-
ously taxed earnings and profits in accor-
dance with the rules described in para-
graphs (b)(2) through (4) of this section,
subject to the exception in paragraph (b)
(5) of this section for transfers of previ-
ously taxed earnings and profits other than
in a general successor transaction.
(2) Determining foreign currency gain
or loss. Foreign currency gain or loss is
determined by comparing the U.S. dollar
amount of the previously taxed earnings
and profits described in paragraph (b)(1)
of this section on the day on which the
transaction occurs to the dollar basis of the
previously taxed earnings and profits. If
the U.S. dollar amount exceeds the dollar
basis, the excess is foreign currency gain.
If the dollar basis exceeds the U.S. dollar
amount, the excess is foreign currency
loss. If applicable, the U.S. dollar amount
is determined by translating the previ-
ously taxed earnings and profits into U.S.
dollars at the spot rate on the day on which
the transaction occurs. See §§1.959-4 and
1.959-7 for determining dollar basis in
distributions and general successor trans-
actions, respectively.
(3) Limitations—(i) Section 965(a)
previously taxed earnings and profits. In
the case of previously taxed earnings and
profits that are described in paragraph (b)
(1) of this section and relate to the reclassi-
fied section 965(a) PTEP group or section
965(a) PTEP group, only a portion of for-
eign currency gain or loss with respect to
the previously taxed earnings and profits
is recognized, determined by multiplying
the amount of the foreign currency gain or

Bulletin No. 2025–5 633 January 27, 2025
loss by the excess of 100 percent over the
section 965(c) deduction percentage with
respect to the previously taxed earnings
and profits.
(ii) Section 965(b) previously taxed
earnings and profits. No foreign currency
gain or loss is recognized with respect to
previously taxed earnings and profits that
are described in paragraph (b)(1) of this
section and relate to the reclassified sec-
tion 965(b) PTEP group or section 965(b)
PTEP group.
(iii) Taxable section 962 earnings
and profits. No foreign currency gain or
loss is recognized with respect to previ-
ously taxed earnings and profits that are
described in paragraph (b)(1) of this sec-
tion and relate to the taxable section 962
PTEP subgroup.
(4) Treatment of foreign currency
gain or loss. Foreign currency gain or
loss described in paragraph (b)(1) of this
section is recognized concurrently with
the transaction and is treated as ordinary
income or loss from the same source, and
relating to the same section 904 category,
as the income inclusion to which the pre-
viously taxed earnings and profits are
attributable.
(5) Exception for transfer of previ-
ously taxed earnings and profits other
than in a general successor transaction.
Except as provided in §1.367(b)-2(j)(2)
(i), no foreign currency gain or loss is
recognized with respect to previously
taxed earnings and profits when the pre-
viously taxed earnings and profits trans-
fer to another covered shareholder in a
transaction other than a general successor
transaction.
(c) Distributions of previously taxed
earnings and profits to a foreign corpo-
ration. No foreign currency gain or loss
is recognized with respect to previously
taxed earnings and profits when the pre-
viously taxed earnings and profits are dis-
tributed to a foreign corporation.
(d) Definitions. The definitions in
§1.959-1(b) apply for purposes of this
section.
(e) Applicability date. This section
applies to taxable years of foreign corpo-
rations that begin on or after [date of pub-
lication of final regulations in the Federal
Register] or are early application years (as
described in §1.959-12(d)) and to taxable
years of persons for which such taxable
years of those foreign corporations are
relevant. See §1.986(c)-1 as contained in
26 CFR part 1 revised as of April 1, 2024,
for a version of this section applicable to
prior taxable years.
Par. 36. Section 1.1411-10 is amended
by adding a sentence at the end of para-
graph (c)(1)(i)(A)(1) to read as follows:
§1.1411-10 Controlled foreign
corporations and passive foreign
investment companies.
* * * * *
(c) * * *
(1) * * *
(i) * * *
(A) * * *
(1) * * * See section 959 and the reg-
ulations in this part issued under section
959 for rules regarding previously taxed
earnings and profits, including previously
taxed earnings and profits assigned to the
taxable section 1411 PTEP subgroup (as
defined in §1.959-2(b)(2)(ii)(A)).
* * * * *
Par. 37. Section 1.1502-59 is added to
read as follows:
§1.1502-59 Previously taxed earnings
and profits and related basis
adjustments.
(a) Overview and scope. This section
addresses the consequences to consoli-
dated groups of previously taxed earn-
ings and profits of foreign corporations,
including under section 959 (regarding
exclusions from gross income of distri-
butions of previously taxed earnings and
profits of foreign corporations) and sec-
tion 961 (regarding basis adjustments
to the stock of foreign corporations and
other property). Paragraph (b) of this sec-
tion provides definitions. Paragraph (c) of
this section provides rules to treat a con-
solidated group as a single covered share-
holder for purposes of the rules relating
to previously taxed earnings and profits.
Paragraph (d) of this section addresses
the application of section 961 to consol-
idated groups. Paragraph (e) of this sec-
tion addresses members that join or leave
a consolidated group. Paragraph (f) of this
section contains examples. Paragraph (g)
of this section provides the applicability
date of this section.
(b) Definitions. The definitions and
rules of general applicability in §§1.959-1
and 1.961-1 apply for purposes of this sec-
tion, with the following additions:
(1) Departing transaction. The term
departing transaction has the meaning
provided in paragraph (e)(3) of this sec-
tion.
(2) Group derived basis. The term
group derived basis has the meaning pro-
vided in paragraph (d)(2)(ii) of this sec-
tion.
(3) Group section 961(c) basis. The
term group section 961(c) basis has the
meaning provided in paragraph (d)(2)(ii)
of this section.
(4) Joining transaction. The term join-
ing transaction has the meaning provided
in paragraph (e)(2) of this section.
(5) Member shareholder. The term
member shareholder means a member that
owns stock of a foreign corporation.
(6) Section 959 rules. The term section
959 rules means section 959 and the sec-
tion 959 regulations.
(7) Section 961 rules. The term section
961 rules means section 961 and the sec-
tion 961 regulations.
(c) Single covered shareholder treat-
ment under section 959—(1) Overview.
This paragraph (c) addresses the applica-
tion of the section 959 rules to a consoli-
dated group. Paragraph (c)(2) of this sec-
tion provides the general rule that treats
the group as a single covered shareholder.
Paragraphs (c)(3) through (5) of this sec-
tion describe the application of this gen-
eral rule: paragraph (c)(3) of this section
addresses the maintenance of group PTEP
accounts; paragraph (c)(4) of this sec-
tion provides for the allocation of PTEP
among members; and paragraph (c)(5) of
this section addresses intercompany trans-
fers of foreign corporation stock. Where
other provisions of the Code or regula-
tions reference the section 959 rules (for
example, sections 960(b) and 986(c)), the
treatment described in this paragraph (c)
applies for purposes of the application of
those provisions.
(2) In general. For purposes of apply-
ing the section 959 rules, members of a
consolidated group are treated as a sin-
gle covered shareholder. However, each
member computes and takes into account
its own items with respect to the stock
of foreign corporations (including items

January 27, 2025 634 Bulletin No. 2025–5
allocated by a partnership, or assigned
from a controlled foreign corporation, to
the member). For example, if a member
receives a distribution from a foreign cor-
poration, that member takes into account
the tax consequences of the distribution.
(3) PTEP accounting. For purposes of
applying §§1.959-2 (regarding accounting
of previously taxed earnings and profits)
and 1.959-3 (regarding adjustments to
shareholder-level accounts relating to pre-
viously taxed earnings and profits)—
(i) A consolidated group establishes
and maintains a single set of annual PTEP
accounts, dollar basis pools, and PTEP tax
pools with respect to a foreign corpora-
tion whose stock is owned by one or more
members (for example, a consolidated
group has a single combined pool election
under §1.959-2(c)); and
(ii) A foreign corporation establishes
and maintains a single corporate PTEP
account and corporate PTEP tax pool with
respect to a consolidated group.
(4) Allocation of group accounts—(i)
In general. When necessary (for exam-
ple, to determine a member shareholder’s
section 956 amount or foreign currency
gain or loss under section 986(c)), the rel-
evant amount of the consolidated group’s
accounts described in paragraph (c)(3) of
this section is allocated among the mem-
ber shareholders. The relevant amount is
the amount that the single covered share-
holder would access if all members of a
consolidated group were treated as a sin-
gle covered shareholder. The allocation
is made in proportion to each member
shareholder’s share of the item at issue
relative to the total amount of the item for
all member shareholders.
(ii) Application to covered distribu-
tions—(A) Overview. The allocation
rule in paragraph (c)(4)(i) of this section
applies if one or more member share-
holders receive, or are assigned under
§1.951-2, a portion of a covered distribu-
tion (each, a member’s portion), then each
member shareholder is allocated a portion
of the group’s accounts described in para-
graph (c)(3) of this section to determine
the extent to which the member’s portion
is previously taxed earnings and profits
under §1.959-4.
(B) The relevant amount of the covered
distribution. For purposes of allocating
the group accounts, the relevant amount is
the amount of the total portion of the cov-
ered distribution received by or assigned
to all member shareholders (group’s
portion) that would be previously taxed
earnings and profits to a single covered
shareholder. This amount is determined
under §1.959-4 based on the consolidated
group’s accounts described in paragraph
(c)(3) of this section.
(C) Member shareholder’s PTEP
amount for covered distribution. The
extent to which the member’s portion
is previously taxed earnings and profits
under §1.959-4 is determined by mul-
tiplying the amount determined under
paragraph (c)(4)(ii)(B) of this section by
a fraction. The numerator of the fraction is
the member’s portion, and the denomina-
tor is the group’s portion.
(5) Intercompany transfers. Because a
group maintains a single set of accounts
under paragraph (c)(3) of this section (that
is, member shareholders do not have their
own accounts), an intercompany transfer
(within the meaning of §1.1502-13(b)(1))
of the stock of a foreign corporation is not
a general successor transaction as defined
in §1.959-7(b).
(d) Basis under section 961—(1) Over-
view. This paragraph (d) addresses the
application of the section 961 rules to con-
solidated groups. Paragraph (d)(2) of this
section contains the general rule providing
for single- or separate-entity treatment of
the group with respect to different types
of property units. Paragraphs (d)(3) and
(4) of this section, respectively, address
basis increases and reductions under sec-
tion 961. Paragraph (d)(5) of this section
addresses the use of the group’s basis to
determine gain or loss on a property unit.
(2) Treatment of property units—(i)
Section 961(a) ownership units. Because
member shareholders directly own sec-
tion 961(a) ownership units, adjustments
to these ownership units under the section
961 rules are made separately to member
shareholders’ actual ownership interests.
(ii) Derivative ownership units and
section 961(c) ownership units. Members
of a consolidated group are treated as a
single covered shareholder for purposes
of accounting for the basis of derivative
ownership units and section 961(c) own-
ership units. Therefore, a partnership has
a single derived basis with respect to a
consolidated group in a derivative own-
ership unit (group derived basis), and a
controlled foreign corporation has a single
section 961(c) basis with respect to a con-
solidated group in a section 961(c) owner-
ship unit (group section 961(c) basis).
(3) Basis increases for income inclu-
sions and gains—(i) In general. Adjust-
ments under §§1.961-3 (for inclusions
under sections 951(a), 951A(a), and 961)
and 1.961-5(b) (relating to foreign cur-
rency gain) are determined based on each
member shareholder’s respective income
inclusions under sections 951(a) and
951A(a), foreign currency gain under sec-
tion 986(c), or income inclusions under
§1.961-11. To the extent the adjustment
is to a section 961(a) ownership unit, the
adjustments are made separately to each
member shareholder’s section 961(a)
ownership unit. In contrast, to the extent
the adjustment is to a derivative owner-
ship unit or a section 961(c) ownership
unit, the adjustment is made to the group
derived basis or the group section 961(c)
basis.
(ii) Example. A member (M1) directly
owns all the stock of a foreign corpora-
tion (CFC1), which directly owns all the
preferred stock in another foreign cor-
poration (CFC3). Another member (M2)
owns all the stock of a foreign corpora-
tion (CFC2), which owns all the com-
mon stock of CFC3. M1 and M2 have
section 951(a) inclusions resulting from
CFC3’s subpart F income. M1’s basis in
its CFC1 stock, which is determined sep-
arately with respect to M1, and the group
section 961(c) basis in CFC1’s preferred
stock in CFC3, are both adjusted based on
M1’s inclusion. Similarly, M2’s basis in
its CFC2 stock, which is determined sep-
arately with respect to M2, and the group
section 961(c) basis in CFC2’s common
stock in CFC3, are both adjusted based on
M2’s inclusion.
(4) Basis reductions—(i) Reductions to
basis of section 961(a) ownership units.
Reductions to the basis of section 961(a)
ownership units under §§1.961-4 (for dis-
tributions of previously taxed earnings
and profits) and 1.961-5(b) (relating to
foreign currency loss) are determined on a
separate-entity basis. See paragraph (d)(2)
(i) of this section.
(ii) Reductions to derived basis or sec-
tion 961(c) basis. This paragraph (d)(4)
(ii) coordinates the application of the sec-

Bulletin No. 2025–5 635 January 27, 2025
tion 961 rules to determine how to reduce
group derived basis and group section
961(c) basis under §§1.961-4 and 1.961-5.
(A) Step 1: Proportionate alloca-
tion of derived basis and section 961(c)
basis. When the section 961 rules apply
to reduce derived basis or section 961(c)
basis, the group derived basis and group
section 961(c) basis is allocated to the
member shareholders. The allocation is
made in proportion to each member share-
holder’s share of the item at issue relative
to the total for all member shareholders
(for example, in proportion to a member
shareholder’s PTEP amount for a covered
distribution, as described in paragraph (c)
(4)(ii)(C) of this section).
(B) Step 2: Separate entity basis reduc-
tion. The member shareholders separately
apply the section 961 rules to make the
necessary basis reductions, taking into
account the amount of group derived basis
and group section 961(c) basis allocated
to that member in paragraph (d)(4)(ii)(A)
of this section (step 1) (for example, see
§1.961-4(d) for adjustments to section
961(c) ownership units for distributions of
previously taxed earnings and profits to a
controlled foreign corporation owned by
member shareholders). To the extent the
basis reduction exceeds the relevant basis
in the ownership unit with respect to the
member shareholder, the partnership or
controlled foreign corporation recognizes
gain (for example, see §1.961-4(f)), which
is allocated or assigned to the member
shareholder.
(C) Step 3: Recombination of derived
basis and section 961(c) basis. After
applying the rules in paragraphs (d)(4)(ii)
(A) and (B) of this section, to the extent
there is any remaining positive derived
basis or positive section 961(c) basis, or
any resulting negative derived basis or
negative section 961(c) basis, those bases
are combined to produce the group derived
basis or group section 961(c) basis for the
relevant ownership unit.
(5) Use of group derived basis and
group section 961(c) basis to determine
gain or loss—(i) Section 1.961-8(b)(1)
gain or loss. This paragraph (d)(5)(i)
applies when a member shareholder is
allocated a distributive share of gain or
loss as described in §1.961-8(b)(1). For
purposes of applying positive derived
basis under §1.961-8(b)(2), the member
shareholder is allocated a portion of the
relevant group derived basis in propor-
tion to the member shareholder’s own-
ership interest in the foreign corporation
described in §1.961-8(b)(1) relative to the
aggregate of all ownership interests in the
foreign corporation of all member share-
holders. The relevant group derived basis
is the amount of derived basis the single
covered shareholder would access if all
members of the consolidated group were
treated as a single covered shareholder.
(ii) Section 1.961-9(c) covered gain.
This paragraph (d)(5)(ii) applies when a
member shareholder is assigned a share
of covered gain under §1.951-2. For pur-
poses of applying positive section 961(c)
basis under §1.961-9(e), the member
shareholder is allocated a portion of the
relevant group section 961(c) basis in
proportion to the member shareholder’s
share of covered gain relative to the total
for all member shareholders. The relevant
group section 961(c) basis is the amount
of section 961(c) basis the single covered
shareholder would access if all members
of a consolidated group were treated as a
single covered shareholder.
(e) Consequences of joining or leav-
ing a consolidated group—(1) In general.
For purposes of applying the section 959
rules and the section 961 rules, a transac-
tion in which a member shareholder joins
or leaves a consolidated group is treated
in the same manner as an acquisition or
disposition of the stock of a foreign cor-
poration owned by the member at the time
the member joins or leaves the consoli-
dated group, as applicable. Paragraphs (e)
(2) and (3) of this section coordinate the
application of §§1.959-7 (general succes-
sor transaction rules) and 1.961-5 (succes-
sor basis rules) to transactions in which a
member shareholder joins or leaves a con-
solidated group, respectively. Paragraph
(e)(4) of this section coordinates the appli-
cation of section 986(c) to such transac-
tions. The rules of this paragraph (e) apply
only to transactions treated as acquisitions
or dispositions of stock of the member
shareholder (for example, if a member
shareholder is sold to an unrelated party
and an election under section 338(h)(10)
is made, paragraph (e)(3) of this section
does not apply).
(2) Joining transactions—(i) In gen-
eral. A transaction (joining transaction)
in which a corporation (joining member)
becomes a member of a consolidated
group is treated in the same manner as
a general successor transaction. In the
joining transaction, the transferor cov-
ered shareholder is the joining member,
the successor covered shareholder is the
consolidated group, and the consolidated
group is treated as acquiring ownership
of all the stock of foreign corporations
owned by the joining member. Thus,
for example, any previously taxed earn-
ings and profits in the joining member’s
annual PTEP accounts with respect to a
foreign corporation are added to the con-
solidated group’s annual PTEP accounts
with respect to the foreign corporation.
Similarly, a controlled foreign corpora-
tion’s section 961(c) basis with respect
to the joining member in a section 961(c)
ownership unit is added to the controlled
foreign corporation’s section 961(c) basis
with respect to the consolidated group in
that unit, and a partnership’s derived basis
with respect to the joining member in a
derivative ownership unit is added to the
partnership’s derived basis with respect to
the consolidated group in that unit.
(ii) Combined pool election. The con-
solidated group’s combined pool election
status pursuant to §1.959-2(c) controls
after a joining transaction.
(3) Departing transactions—(i) In
general. A transaction (departing trans-
action) in which a member shareholder
(departing member) ceases to be a mem-
ber of a consolidated group is treated in
the same manner as a general successor
transaction. In the departing transaction,
the transferor covered shareholder is the
consolidated group, the successor covered
shareholder is the departing member, and
the departing member is treated as acquir-
ing ownership of all the stock of foreign
corporations owned by the departing
member at the time of the departing trans-
action. Thus, for example, any previously
taxed earnings and profits in the consol-
idated group’s annual PTEP accounts
with respect to the foreign corporation are
allocated between the consolidated group
and the departing member shareholder.
Similarly, a controlled foreign corpora-
tion’s section 961(c) basis in a section
961(c) ownership unit with respect to the
consolidated group is allocated between
the consolidated group and the depart-

January 27, 2025 636 Bulletin No. 2025–5
ing member, and a partnership’s derived
basis in a derivative ownership unit with
respect to the consolidated group is allo-
cated between the consolidated group and
the departing member.
(ii) Combined pool election. The
departing member retains the consolidated
group’s combined pool election status
under §1.959-2(c). However, if the depart-
ing member joins a new consolidated
group, paragraph (e)(2)(ii) of this section
applies to the new consolidated group.
(4) Coordination with section 986(c).
Joining transactions and departing trans-
actions do not result in recognition of
foreign currency gain or loss under sec-
tion 986(c) (notwithstanding §1.986(c)-
1). Thus, for example, the dollar basis of
previously taxed earnings and profits in a
joining member’s annual PTEP accounts
carries over when adding the previously
taxed earnings and profits to the consoli-
dated group’s annual PTEP accounts pur-
suant to paragraph (e)(2)(i) of this section.
(f) Examples—(1) In general. This
paragraph (f) provides examples illustrat-
ing the application of this section. These
examples do not discuss every conse-
quence of the transactions under related
provisions of the Code and regulations.
(2) Assumed facts. For purposes of the
examples in this paragraph (f), unless oth-
erwise indicated, the following facts are
assumed:
(i) USP, USS1, and USS2 are domestic
corporations, each of which uses the U.S.
dollar as its functional currency. USP is
the common parent of the P consolidated
group (P group), USS1 and USS2 are
members of the P group, and all the stock
of USS1 and USS2 is owned by USP.
(ii) F1 and F2 are controlled foreign
corporations, each of which uses the Brit-
ish pound (£) as its functional currency.
(iii) PRS1 is a partnership.
(iv) Each entity uses the calendar year
as its taxable year, and no entity has a
short taxable year.
(v) There are no adjustments under sec-
tion 743(b) to the basis of any partnership
property.
(3) Example 1: Exclusion from gross income of
distributed previously taxed earnings and profits—
(i) Facts. Each of USS1 and USS2 directly owns 50
of the 100 shares of the single class of outstanding
stock of F1. In year 3, F1 makes a £300x distribution
of money with respect to its stock (£3x with respect
to each share), and the entirety of this £300x is a
covered distribution (a dividend as defined in section
316, determined without regard to section 959(d)).
Immediately before the covered distribution, F1 has
£180x of previously taxed earnings and profits with
respect to the P group, none of which is assigned to
the taxable section 962 PTEP group.
(ii) Analysis. For purposes of analyzing the cov-
ered distribution under §1.959-4, the P group is treated
as a single covered shareholder. See paragraph (c)(2)
of this section. The P group’s share of the covered dis-
tribution is the entire £300x because the entire cov-
ered distribution is made to members of the P group
(£150x to USS1 plus £150x to USS2). See §1.959-
4(d)(1). The £300x are allocated first to F1’s previ-
ously taxed earnings and profits that are with respect
to the P group immediately before the covered distri-
bution (£180x), and then to F1’s earnings and profits
described in section 959(c)(3). Therefore, the £300x
consist of £180x of previously taxed earnings and
profits and £120x of earnings and profits described
in section 959(c)(3). See §1.959-4(d)(2) and (e)(1).
These previously taxed earnings and profits are treated
as distributed pro rata with respect to the F1 stock on
which the P group’s share of the covered distribution
is made. See §1.959-4(d)(4) and paragraph (c)(4)
(ii) of this section. Accordingly, £1.8x of previously
taxed earnings and profits is treated as distributed with
respect to each share of F1 stock. See id. USS1 and
USS2 each excludes the £90x ((£150x ÷ £300x) ×
£180x) of previously taxed earnings and profits dis-
tributed to it from its gross income. See §1.959-4(b)(1)
and paragraph (c)(4)(ii) of this section. Moreover, the
distributions of previously taxed earnings and profits
to USS1 and USS2 do not result in any investment
adjustments under §1.1502-32 (see §1.1502-32(b)(5)
(ii), Example 9) or adjustments to earnings and profits
(see §§ 1.312-8(c) and 1.1502-33). Because this anal-
ysis depends only on F1’s PTEP with respect to the P
group, these results do not depend on whether USS1
or USS2 owned F1 stock or had income inclusions
with respect to F1 during the taxable years to which
the distributed previously taxed earnings and profits
relate.
(4) Example 2: Basis increases for income
inclusions—(i) Facts. F1 has two classes of stock
outstanding. USS1 directly owns all 100 shares of
F1 common stock, and USS2 directly owns all 100
shares of F1 preferred stock. F1 directly owns all 50
shares of the single class of outstanding stock of F2.
The shares of F1 stock directly owned by USS1 or
USS2 are section 961(a) ownership units, and the
shares of F2 stock directly owned by F1 are section
961(c) ownership units. For year 3, USS1 includes
$60x and USS2 includes $40x in gross income under
section 951(a)(1)(A) with respect to F2 (their pro
rata shares of F2’s subpart F income, translated into
U.S. dollars in accordance with section 989(b)). F2
does not make any covered distributions, and there-
fore does not distribute any previously taxed earn-
ings and profits, during the taxable year.
(ii) Analysis—(A) In general. To reflect USS1’s
and USS2’s income inclusions for year 3, the basis of
the F2 stock and F1 stock is increased in accordance
with §1.961-3. See §1.961-3(b). F1’s section 961(c)
basis in the F2 stock with respect to the P group is
increased based on the total inclusions of the P
group, because members of a consolidated group are
treated as a single covered shareholder for purposes
of accounting for basis of section 961(c) ownership
units, and because all of the P group’s inclusions arise
with respect to this F2 stock. See paragraphs (d)(2)(ii)
and (d)(3)(i) of this section. USS1’s adjusted basis in
the F1 common stock and USS2’s adjusted basis in
the F1 preferred stock are increased based on each
member’s separate inclusion, because adjustments to
section 961(a) ownership units are made separately to
member shareholders’ actual ownership interests. See
paragraphs (d)(2)(i) and (d)(3)(i) of this section.
(B) Increases to basis of each property unit. The
amount of the P group’s income inclusions with
respect to F2 that give rise to increases to basis under
section 961 is $100x ($60x + $40x). See §1.961-
3(c)(1) and paragraph (d)(3) of this section. Under
§1.961-3(e), the section 961(c) basis with respect to
the P group of each share of F2 stock is increased
by $2x ($100x ÷ 50 shares). The basis of each share
of F1 common stock owned by USS1 is increased
by $0.60x ($60x ÷ 100 shares) and the basis of
each share of F1 preferred stock owned by USS2
is increased by $0.40x ($40x ÷ 100 shares). These
increases to basis are treated as made at the begin-
ning of F2’s taxable year. See §1.961-3(c)(2) and
(e)(1). These adjustments to the basis of the section
961(a) ownership units may be different from the
adjustments that would be made under §1.961-3(e)
if they were all held by a single owner.
(C) Section 1502 basis and E&P adjustments.
USP increases its basis in its USS1 stock by $60x
and in its USS2 stock by $40x, reflecting each mem-
ber’s inclusion in income under section 951(a)(1)
(A). See §1.1502-32(b)(2)(i). Because the income
inclusions increase USS1’s and USS2’s earnings and
profits (see §1.312-6(f)), USP’s earnings and profits
are increased under §1.1502-33(b)(1).
(5) Example 3: Basis reductions and gain recog-
nition for distributions from upper-tier foreign cor-
poration—(i) Facts. USS1 and USS2 directly own
all the shares of the single class of outstanding stock
of F1, with USS1 owning 60 shares and USS2 own-
ing 40 shares. In year 3, F1 makes a pro rata covered
distribution to USS1 and USS2. Under §1.959-4,
the entirety of the covered distribution is previously
taxed earnings and profits with respect to the P group
and excluded from the members’ gross income. In
addition, the sum of the dollar basis and associated
foreign income taxes of the previously taxed earn-
ings and profits that are distributed on each share
of F1 stock is $6x. Immediately before the covered
distribution, USS1’s adjusted basis in each share of
its F1 stock is $8x, and USS2’s adjusted basis in
each share of its F1 stock is $5x. Each of USS1 and
USS2 is deemed to pay the entirety of the associated
foreign income taxes of the previously taxed earn-
ings and profits distributed to it under section 960(b)
(because all such taxes are sourced from the cred-
itable PTEP tax group and the member is a United
States shareholder of F1) and is allowed a credit
under section 901 for the entirety of such taxes.
(ii) Analysis. Under §1.961-4(b), each of USS1
and USS2 separately reduces its adjusted basis in each
share of F1 stock on which it receives previously taxed
earnings and profits and, if applicable, recognizes gain
with respect to those shares. See paragraph (d)(4)(i)
of this section. The adjustment to each share of F1
stock is $6x, the sum of the dollar basis and associated
foreign income taxes of the previously taxed earnings

Bulletin No. 2025–5 637 January 27, 2025
and profits received by the member on the share. See
§1.961-4(b)(2)(i). The basis of each of USS1’s shares
of F1 stock is reduced to $2x ($8x original basis − $6x
adjustment). See §1.961-4(b)(2)(ii). The basis of each
of USS2’s shares of F1 stock is reduced to $0x, and
USS2 recognizes $1x of gain per share ($5x original
basis − $6x adjustment). See §1.961-4(b)(2)(ii) and
(iii). These adjustments are treated as made concur-
rently with the covered distribution. See §1.961-4(e)
(1) and (f)(1).
(6) Example 4: Basis reductions and gain recog-
nition for distributions from lower-tier foreign corpo-
ration—(i) Facts. USS1 and USS2 directly own all
the shares of the single class of outstanding stock of
F1, with USS1 owning 60 shares and USS2 owning
40 shares. F1 directly owns all the shares of the single
class of outstanding stock of F2. In year 3, F2 makes
a covered distribution to F1. Under §1.959-4, the
entirety of the covered distribution is previously taxed
earnings and profits that are with respect to the P group
and excluded from F1’s gross income for purposes of
determining its subpart F income and its tested income
or tested loss. In addition, the sum of the dollar basis
and associated foreign income taxes of the previously
taxed earnings and profits that are distributed on each
share of F2 stock is $6x. Immediately before the cov-
ered distribution, F1’s adjusted basis in each share of
F2 stock is £1.50x, and its section 961(c) basis with
respect to the P group in each share is $5x. On the day
of the covered distribution, the spot rate is $1:£0.5.
(ii) Analysis. Under §1.961-4(d), F1 reduces its
section 961(c) basis in each share of F2 stock on
which it receives previously taxed earnings and prof-
its. If applicable, F1 recognizes gain with respect to
those shares. These adjustments are made separately
with respect to USS1 and USS2. See paragraph (d)
(4)(ii) of this section. First, under paragraph (d)(4)
(ii)(A) of this section, for each share of F2 stock,
F1’s section 961(c) basis with respect to the P group
is allocated proportionately to USS1 ($3x, or 60%)
and USS2 ($2x, or 40%). Next, under paragraph (d)
(4)(ii)(B) of this section, the basis reductions are
made separately for each of USS1 and USS2. For
each share of F2 stock, USS1’s portion of F1’s sec-
tion 961(c) basis ($3x) is reduced by USS1’s share
of the dollar basis and associated foreign income
taxes ($3.60x = 60% × $6x). See §1.961-4(d)(2).
Because the reduction exceeds the positive section
961(c) basis, it must be tested against the limitation
in §1.961-4(d)(3). The amount of F1’s adjusted basis
in each share that is available with respect to USS1
is £0.90x (60% × £1.50x), which is equal to $1.80x.
Because $1.80x is greater than $0.60x, USS1’s por-
tion of F1’s section 961(c) basis is reduced to neg-
ative $0.60x ($3x − $3.60x), and no gain is recog-
nized under §1.961-4(d)(2)(iii). Similarly, USS2’s
share of F1’s section 961(c) basis in each share of
F2 stock ($2x) is reduced by its share of the dollar
basis and associated foreign income taxes ($2.40x =
40% × $6x). The amount of F1’s adjusted basis in
each share that is available with respect to USS2 is
£0.60x (40% × £1.50x), which is equal to $1.20x.
Therefore, USS2’s portion of F1’s section 961(c)
basis is reduced to negative $0.40x ($2x − $2.40x),
and no gain is recognized under §1.961-4(d)(2)(iii).
Finally, under paragraph (d)(4)(ii)(C) of this section,
the separately computed section 961(c) bases are
recombined. As a result, F1’s section 961(c) basis
with respect to the P group in each share of F2 stock
is negative $1x (negative $0.60x + negative $0.40x =
negative $1x). The reductions to section 961(c) basis
are treated as made concurrently with the covered
distribution. See §1.961-4(e)(1) and (f)(1).
(iii) Alternative facts: distribution in excess of
basis. The facts are the same as in paragraph (f)(6)
(i) of this section (Example 4), except that the sum of
the dollar basis and associated foreign income taxes
per share of F2 stock is $9x instead of $6x. The appli-
cation of paragraph (d)(4)(ii)(A) of this section is the
same as in paragraph (f)(6)(ii) of this section. When
applying paragraph (d)(4)(ii)(B) of this section, the
basis reductions per share are $5.40x (60% × $9x) for
USS1 and $3.60x (40% × $9x) for USS2. Because the
reductions again exceed the positive section 961(c)
basis, they must be tested against the limitation in
§1.961-4(d)(3). The amounts of F1’s adjusted basis
in each share that are available with respect to each
member are the same as in paragraph (f)(6)(ii) of this
section. For USS1, because the $1.80x limitation is
less than $2.40x ($3x section 961(c) basis − $5.40x
adjustment), USS1’s portion of F1’s section 961(c)
basis per share is reduced to negative $1.80x, and
$0.60x ($2.40x − $1.80x) of gain per share is recog-
nized under §1.961-4(d)(2)(iii), with this gain assigned
solely to USS1. Similarly, for USS2, the $1.20x lim-
itation is less than $1.60x ($2x section 961(c) basis
− $3.60x adjustment). Therefore, USS2’s portion of
F1’s section 961(c) basis per share is reduced to nega-
tive $1.20x, and $0.40x ($1.60x − $1.20x) of gain per
share is recognized under §1.961-4(d)(2)(iii), with this
gain assigned solely to USS2. The basis of USS1 and
USS2’s F1 stock is increased under §1.961-3 to reflect
the gains recognized by F1 and included in the mem-
ber’s gross income pursuant to §1.961-11. Finally,
under paragraph (d)(4)(ii)(C) of this section, the sepa-
rately computed section 961(c) bases are recombined.
As a result, F1’s section 961(c) basis with respect to
the P group in each share of F2 stock is negative $3x
(negative $1.80x + negative $1.20x = negative $3x).
(7) Example 5: Use of positive derived basis—(i)
Facts. USS1, USS2, and a nonresident alien individ-
ual, in the aggregate, directly own all the interests in
PRS1, with USS1 and USS2 owning equal interests in
PRS1. PRS1 directly owns all the shares of the single
class of outstanding stock of F1 (derivative ownership
units). In year 3, PRS1 sells all the F1 stock to an unre-
lated party for money. The distributive share of the
gain recognized by PSI is $30x to each of USS1 and
USS2, determined without regard to derived basis.
Immediately before the sale (and taking into account
any adjustments under §1.961-5(b) resulting from the
sale), PRS1’s positive derived basis with respect to the
P group in the F1 stock is $50x in total. In addition,
PRS1 has no negative derived basis with respect to the
P group in any of the shares.
(ii) Analysis. In applying PRS1’s positive derived
basis with respect to the P group in the F1 stock, a
pro rata portion of such derived basis is taken into
account with respect to each member. See paragraph
(d)(5)(i) of this section. Thus, because USS1 and
USS2 own equal interests in PRS1, $25x (or 50%) of
the derived basis is taken into account with respect
to each of USS1 and USS2. Accordingly, for each of
USS1 and USS2, PRS1 is treated as applying $25x
of derived basis to the member’s $30x distributive
share of gain on the sale. See §1.961-8(b). As result,
each member’s distributive share of gain on the sale
is adjusted by $25x, to a $5x distributive share of
gain. See also §1.961-8(c) (for purposes of adjusting
each member’s adjusted basis in its PRS1 interest
under section 705, the member’s distributive share
of gain on the sale is $5x).
(8) Example 6: Use of positive section 961(c)
basis—(i) Facts. USS1, USS2, and a nonresident
alien individual, in the aggregate, directly own all the
shares of the single class of outstanding stock of F1.
USS1 and USS2 own an equal number of shares of
F1. F1 directly owns all the shares of the single class
of outstanding stock of F2 (section 961(c) ownership
units). In year 3, F1 sells all the F2 stock to an unre-
lated party for money. F1 recognizes £100x of gain
on the sale, determined without regard to loss rec-
ognized on any share and without regard to section
961(c) basis. This £100x is covered gain, and each
of USS1 and USS2 is assigned a £30x portion of the
covered gain under §1.951-2. Immediately before the
sale (and taking into account any adjustments under
§1.961-5(b) resulting from the sale), F1’s positive
section 961(c) basis in the F2 stock with respect to
the P group is £50x (as translated from U.S. dollars
into British pounds at the spot rate on the day of the
sale). In addition, F1 has no negative section 961(c)
basis with respect to the P group in any of the shares.
(ii) Analysis. In applying F1’s positive section
961(c) basis with respect to the P group of the F2
stock, a pro rata portion of such section 961(c) basis
is taken into account with respect to each mem-
ber. See paragraph (d)(5)(ii) of this section. Thus,
because USS1 and USS2 own equal interests in F1,
£25x (£30x ÷ £60x, or 50%) of the section 961(c)
basis is taken into account with respect to each of
USS1 and USS2. All £25x of the section 961(c) basis
taken into account with respect to each of USS1 and
USS2 is applied to the member’s £30x share of the
covered gain. See §1.961-9(d)(2) and (e)(1). As a
result, a total of £50x of the covered gain is previ-
ously taxed earnings and profits of F1 with respect
to the P group, characterized in accordance with
§1.961-9(f)(2) through (4). See §1.961-9(d)(3), (f)
(1) and paragraph (c)(1) of this section. F1 excludes
the £50x of previously taxed earnings resulting from
section 961(c) basis from its gross income, solely for
purposes of determining its subpart F income and
tested income or tested loss. See §1.961-9(b).
(g) Applicability date. This section
applies to a taxable year of a consolidated
group for which a taxable year of a foreign
corporation is relevant if such taxable year
of the foreign corporation begins on or after
[date of publication of final regulations in
the Federal Register] or is an early appli-
cation year (as described in §1.959-12(d)).
Heather C. Maloy,
Acting Deputy Commissioner.
(Filed by the Office of the Federal Register Novem-
ber 29, 2024, 8:45 a.m., and published in the issue
of the Federal Register for December 02, 2024, 89
FR 95362)

January 27, 2025 638 Bulletin No. 2025–5
Notice of Proposed
Rulemaking
Regulations Governing
Practice Before the Internal
Revenue Service
REG-116610-20
AGENCY: Office of the Secretary, Trea-
sury.
ACTION: Notice of proposed rulemak-
ing, notice of public hearing, and with-
drawal of notice of proposed rulemaking.
SUMMARY: This document contains
proposed amendments to the regula-
tions governing practice before the IRS.
These regulations propose to eliminate
provisions related to registered tax return
preparers, classify the use of certain con-
tingent fee arrangements by practitioners
as disreputable conduct, establish new
standards for appraisals and the disquali-
fication of appraisers, and update certain
provisions as appropriate. This document
also provides notice of a public hearing
on the proposed regulations and with-
draws the notice of proposed rulemaking
published on July 28, 2009. The regula-
tions would affect registered tax return
preparers, enrolled agents (EAs), enrolled
retirement plan agents, enrolled actuaries,
Annual Filing Season Program (AFSP)
participants, attorneys, certified public
accountants (CPAs), appraisers, and other
practitioners.
DATES: Electronic or written comments
must be received by February 24, 2025.
The public hearing is being held on March
6, 2025, at 10 a.m. Eastern Time (ET).
Requests to speak and outlines of topics to
be discussed at the public hearing must be
submitted as prescribed in the “Comments
and Public Hearing” section. The IRS must
receive speakers’ outlines of the topics to
be discussed at the public hearing by Feb-
ruary 24, 2025. If no outlines are received
by February 24, 2025, the public hearing
will be cancelled. Requests to attend the
public hearing must be received by 5 p.m.
ET on March 4, 2025. As of December 26,
2024, the notice of proposed rulemaking
(REG-113289-08) published on July 28,
2009 (74 FR 37183), is withdrawn.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submis-
sions via the Federal eRulemaking Portal
at https://www.regulations.gov (indicate
IRS and REG-116610-20) by following
the online instructions for submitting
comments. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment submitted electronically or
on paper to the public docket. Send paper
submissions to: CC:PA:01:PR (REG-
116610-20), room 5203, Internal Revenue
Service, P.O. Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, William J. Prater at (202)
317-6251; concerning submissions of
comments or the public hearing, The Pub-
lications and Regulations Section at (202)
317-6901 (not toll-free numbers) or by
sending an email to publichearings@irs.
gov (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed
regulations that would amend the reg-
ulations under 31 U.S.C. 330 relating to
the regulation of practice before the IRS,
which are codified at 31 CFR part 10 and
reprinted as Treasury Department Circular
No. 230 (Circular 230). Since 1884, Fed-
eral law (now codified at 31 U.S.C. 330),
has expressly authorized the Secretary of
the Treasury (Secretary) to regulate prac-
tice before the Treasury Department. Spe-
cifically, 31 U.S.C. 330(a) provides that
subject to section 500 of title 5, the Sec-
retary may “regulate the practice of rep-
resentatives of persons before the Depart-
ment of the Treasury.” In addition, before
admitting a representative to practice, the
Secretary may require that the representa-
tive demonstrate “good character,” “good
reputation,” the “necessary qualifications
to enable the representative to provide to
persons valuable service,” and “compe-
tency to advise and assist persons in pre-
senting their cases.” See 31 U.S.C. 330(a).
The Secretary may delegate these duties
and powers to another officer or employee
of the Treasury Department under 31
U.S.C. 321(b).
Background
The provisions of 31 CFR part 10 are
currently designated as §§10.0 through
10.93 and a section of the current regula-
tions is referred to as, as an example, “cur-
rent §10.0” in this Background and the
Explanation of Provisions. Circular 230,
which contains current §§10.0 through
10.93 related to governing practice before
the IRS, has been amended periodically
since it was first published in 1921.
A. Tax Return Preparation
Prior to 2011, individual tax return pre-
parers were generally not subject to Circu-
lar 230 unless the tax return preparer was
an attorney, certified public accountant
(CPA), enrolled agent (EA), or other type
of practitioner identified in Circular 230.
On June 3, 2011, the Treasury Department
and the IRS published final regulations
(TD 9527) in the Federal Register (76
FR 32286) to establish qualifications for
tax return preparers, which required them
to become registered tax return preparers
subject to the requirements under Circular
230 and describing the allowable scope of
a registered tax return preparer’s practice
before the IRS (2011 amendments).
The 2011 amendments were chal-
lenged in Loving v. IRS, 917 F.Supp.2d 67
(D.D.C. 2013), in which case the plaintiffs
argued that the Treasury Department and
the IRS did not have authority under 31
U.S.C. 330 to regulate tax return prepa-
ration because return preparation was not
practice before the IRS. The United States
District Court for the District of Columbia
(District Court for the District of Colum-
bia or district court) concluded that under
31 U.S.C. 330(a), practice before the IRS
is limited to representing taxpayers before
the IRS by assisting them in presenting
their cases. Because the district court con-
sidered preparing and filing tax returns as
falling short of “presenting a case,” it held

Bulletin No. 2025–5 639 January 27, 2025
that the Treasury Department and the IRS
lacked statutory authority to regulate tax
return preparation as practice before the
IRS under 31 U.S.C. 330(a) and enjoined
the Treasury Department and the IRS
from enforcing the 2011 amendments
to Circular 230 related to registered tax
return preparers. The United States Court
of Appeals for the District of Columbia
Circuit (DC Circuit or court of appeals)
affirmed the district court’s opinion and
order for injunction. The court of appeals
upheld the district court’s statutory con-
struction, explaining that, while tax return
preparers assist taxpayers, they do not
represent taxpayers before the IRS or for-
mally act as their agent. Loving v. IRS, 742
F.3d 1013 (D.C. Cir. 2014).
B. Contingent Fees
Final regulations (TD 9359) published
in the Federal Register (72 FR 54540) on
September 26, 2007, amended the rules
under Circular 230 regarding charging
contingent fees in current §10.27 (2007
amendments). The 2007 amendments
amended the exceptions to the general
prohibition on contingent fees, which pro-
hibited practitioners from charging con-
tingent fees for original returns, to permit
practitioners to charge a contingent fee for
services rendered in connection with the
IRS’s examination of, or challenge to, (i)
an original tax return or (ii) an amended
return or claim for refund or credit where
the amended return or claim for refund
or credit was filed within 120 days of the
taxpayer receiving a written notice of the
examination or a written challenge to the
original tax return. The Treasury Depart-
ment and the IRS subsequently clarified
the 2007 amendments in Notice 2008-
43, 2008-1 C.B. 748 (March 26, 2008)
to provide that a practitioner may charge
a contingent fee for services rendered in
connection with the IRS’s examination
of, or challenge to, an amended return or
claim for refund or credit filed (1) before
the taxpayer received a written notice of
examination of, or a written challenge to,
the original tax return or (2) no later than
120 days after the receipt of such writ-
ten notice or written challenge. Notice
2008-43 also provided an exception that
allows practitioners to charge a contingent
fee with respect to whistleblower claims
under section 7623 of the Internal Rev-
enue Code (Code). Current §10.27 also
permits practitioners to charge contingent
fees in connection with the determination
of statutory interest and penalties and for
services rendered in connection with judi-
cial proceedings arising under the Code.
Current §10.27 prohibits contingent fee
arrangements for services rendered in
connection with any other matter before
the IRS, including the preparation of orig-
inal returns, amended returns, and claims
for refund or credit.
On July 28, 2009, the Treasury Depart-
ment and the IRS published in the Fed-
eral Register (74 FR 37183) a notice of
proposed rulemaking (REG-113289-08)
proposing modifications to the rules relat-
ing to contingent fees under Circular 230
(2009 proposed regulations). The 2009
proposed regulations have not been final-
ized.
In 2014, the District Court for the Dis-
trict of Columbia held that preparing and
filing ordinary refund claims, like prepar-
ing original tax returns, did not involve
representing taxpayers or practice before
the IRS. Ridgely v. Lew, 55 F. Supp.3d 89
(D.D.C. 2014). As a result, according to
the district court, the IRS lacked author-
ity to treat the preparation of ordinary
refund claims as practice before the IRS
as described under 31 U.S.C. 330(a). Id.
Thus, the district court concluded that the
IRS cannot prohibit charging contingent
fees for ordinary refund claims based on
its authority to regulate practice before the
IRS under 31 U.S.C. 330(a).
C. Written Tax Advice
Circular 230 was most recently
amended in TD 9668, which was pub-
lished in the Federal Register (79 FR
33685) on June 12, 2014, to, among other
changes, revise rules relating to written
tax advice and eliminate the covered opin-
ion rules (in former §10.35) that previ-
ously governed written tax advice.
Explanation of Provisions
The proposed regulations contained
in this notice of proposed rulemaking
would amend Circular 230 by eliminat-
ing provisions related to registered tax
return preparers or that imposed stan-
dards on tax return preparation that are
unrelated to representation before the
Treasury Department and the IRS. The
proposed regulations would also amend
Circular 230 by eliminating current
§10.27, which, among other things, treats
the preparation of tax returns and claims
for refund or credit as matters before the
IRS for which contingent fees may not
be charged, and defining certain contin-
gent fee arrangements as disreputable
conduct. Specifically, the proposed reg-
ulations would establish that contingent
fee arrangements for services in con-
nection with preparing an original tax
return, amended tax return, or claim for
refund or credit constitute disreputable
conduct subject to sanction. Because
the proposed regulations would make
substantial changes to the regulation of
contingent fees under Circular 230, this
document also proposes to withdraw the
2009 proposed regulations.
The proposed regulations would also
revise or eliminate provisions that are out
of date and incorporate new provisions to
better align Circular 230 with the modern
practice environment. The scope of the
proposed regulations is limited to practice
before the IRS. Therefore, the proposed
regulations would not alter or supplant
other ethical standards applicable to prac-
titioners.
A section of the proposed regulations
is referred to as, as an example, “proposed
§10.0” in this Explanation of Provisions
and the Special Analyses.
A. Amendments Regarding Tax Return
Preparation
1. Elimination of Regulation of
Registered Tax Return Preparers as
Practitioners
As a result of the decision and injunc-
tion order in Loving, the 2011 amendments
that relate to registered tax return prepar-
ers are no longer enforceable. Therefore,
the proposed regulations would eliminate
rules regarding registered tax return pre-
parers under current §§10.3 through 10.6.
The proposed regulations would also
remove references to registered tax return
preparers under current §§10.0, 10.2,
10.30, 10.38, and 10.90 and redesignate
current §10.90 as §10.110.

January 27, 2025 640 Bulletin No. 2025–5
2. Revision of Standards Relating to Tax
Return Preparation
Circular 230 contains provisions that
are unrelated to the registered tax return
preparer program but impose specific
standards on tax return preparation. Con-
sistent with the holding in Loving, the
proposed regulations would eliminate or
revise these provisions to impose stan-
dards related to tax returns prepared,
approved, or submitted in connection with
representing a client in a matter before
the IRS. This distinction would be also
incorporated under the amended defini-
tion of “practice before the IRS” under
proposed §10.2(a)(4), which would clarify
that practice before the IRS includes the
preparation and submission of tax returns
in connection with representing a client in
a matter before the IRS.
Current §10.8 provides rules related to
tax return preparation, describes actions
that individuals who did not prepare all,
or substantially all, of a tax return can take
before the IRS, and prohibits non-prac-
titioners from preparing all, or substan-
tially all, of a tax return. The proposed
regulations would eliminate the current
language under §10.8 in its entirety. How-
ever, guidance regarding what actions
non-practitioners may take in response to
IRS inquiries is still necessary and autho-
rized under 31 U.S.C. 330. Therefore, the
proposed regulations would retitle current
§10.8 as “Participation in IRS proceed-
ings by non-practitioners” and would pro-
vide that, except for appraisers who have
been disqualified pursuant to proposed
§10.61(a), any individual may appear as a
witness before the IRS or furnish informa-
tion at the request of the IRS.
Current §10.22 imposes standards
related to diligence as to accuracy, includ-
ing standards related to the preparation or
approval of tax returns, documents, affi-
davits, and other papers. The proposed
regulations would revise current §10.22 to
specify that the diligence as to the accu-
racy requirement for tax returns is limited
to tax returns prepared, approved, or sub-
mitted in connection with representing a
client in a matter before the IRS. The pro-
posed regulations would not revise exist-
ing diligence standards related to docu-
ments, affidavits, and other papers that
are not tax returns. The diligence require-
ments in the proposed regulations would
also apply to a practitioner’s preparation
of a tax return prior to representing a cli-
ent in a matter before the IRS when the
subsequent representation involves the tax
return. When the representation involves
a tax return prepared by a practitioner, the
practitioner’s diligence with respect to
preparing the tax return would be treated
under the proposed regulations as related
to the practitioner’s practice before the
IRS under 31 U.S.C. 330(a).
Current §10.34 imposes standards
with respect to a practitioner’s prepara-
tion of tax returns and other documents.
The current regulations incorporate stan-
dards under the Code relating to tax return
positions, describe standards for advising
clients with respect to potential penalties,
and address the ability of a practitioner to
rely on information furnished by a client.
The proposed regulations would main-
tain these standards but clarify that the
standards only apply to a tax return either
when the tax return is prepared while rep-
resenting a client before the IRS or when
the tax return prepared prior to representa-
tion is submitted while representing a cli-
ent before the IRS, regardless of whether
the tax return was filed with the IRS before
the representation begins. With respect to
tax returns prepared prior to representa-
tion, the current standards relate to a prac-
titioner’s duty to not further an unreason-
able return position taken on a previously
prepared return while representing a client
in a matter before the IRS. The proposed
regulations would not impose the stan-
dards on the preparation of a tax return in
the absence of a practitioner’s representa-
tion of a client.
B. Amendments Regarding the
Regulation of Contingent Fees
Current §10.27 prohibits practitioners
from entering into contingent fee arrange-
ments for services rendered in connection
with a “matter before the IRS,” which
§10.27(c)(2) defines to include assisting
with filing tax returns or claims for refund
or credit and “all matters connected with a
presentation to the [IRS] . . . relating to a
taxpayer’s rights, privileges, or liabilities
under the laws and regulations adminis-
tered by the [IRS].” Current §10.27 was
intended to restrict contingent fee arrange-
ments based on their potential to encour-
age practitioners and their clients to take
aggressive positions with the hope that
they will not be audited.
As described in the Background, the
District Court for the District of Colum-
bia held in Ridgely that practitioners do
not act in a representative capacity when
they assist clients with “ordinary refund
claims,” which are defined as refund
claims, including amended returns, filed
prior to the examination of a tax return
for that taxable year or period. The dis-
trict court also concluded that preparing
an ordinary refund claim is not an activ-
ity that constitutes practice before the IRS
under 31 U.S.C. 330(a). Thus, the court
concluded that the IRS cannot prohibit
charging contingent fees for ordinary
refund claims based on its authority to
regulate practice before the IRS under 31
U.S.C. 330(a). The court did not otherwise
address the propriety of contingent fees.
The proposed regulations would
remove current §10.27 and, under sub-
part C, define disreputable conduct under
proposed §10.51 to include both charging
contingent fees in connection with the
preparation of an original or amended tax
return or claim for refund or credit, and
charging fees that, under the facts and cir-
cumstances, are unconscionable fees.
Charging a contingent fee for the
preparation of an original return, amended
return, or claim for refund or credit pre-
pared prior to the examination of a tax
return is disreputable conduct because
these circumstances encourage evasion
or abuse of Federal tax laws by incentiv-
izing practitioners to take unduly aggres-
sive tax positions for their clients, which
would increase their clients’ reported tax
benefits, thus resulting in personal gain
for the practitioner. A practitioner with a
direct, financial interest in the tax benefits
of a client may be incentivized to increase
such tax benefits. Therefore, these con-
tingent fee arrangements reflect conduct
that is incompatible with ethical practice
before the Treasury Department or the
IRS under Circular 230.
Under 31 U.S.C. 330(c), the Treasury
Department and the IRS have the author-
ity to censure or suspend or disbar from
practice before the Treasury Department
or the IRS practitioners who engage in
disreputable conduct whether or not the

Bulletin No. 2025–5 641 January 27, 2025
conduct constitutes representation of a
client. Unlike the contingent fee standards
under current §10.27, proposed §10.51
is not dependent upon the preparation of
a tax return or claim for refund or credit
constituting practice before the IRS.
Charging contingent fees for preparing
tax returns, amended returns, and claims
for refund or credit is prohibited under
the rules of professional conduct applica-
ble to many accountants. The American
Institute for Certified Public Accountants
(AICPA) Code of Professional Conduct,
for example, acknowledges the disreputa-
ble nature of contingent fees and prohib-
its CPAs from charging contingent fees
for the preparation of original returns,
amended returns, and ordinary refund
claims because of the risk that these con-
tingent fee arrangements would allow a
CPA to benefit improperly from an inter-
est in, or relationship with, a client. See
AICPA Code of Professional Conduct
1.000.010.14(c); 1.510.001.01(b). Many
state accountancy board rules also pro-
hibit contingent fee arrangements for pre-
paring an original or amended return or
claim for refund or credit. See, e.g., N.J.
Admin. Code section 13:29-3.8(e) (2019);
Tenn. Code Ann. section 62-1-123(b)(1)
(B) (2016) (prohibiting contingent fees
for preparation of an original return); Cal.
Code Regs. Tit. 16 section 62(a)(2) & (3)
(2021); cf. New York Society of Certified
Public Accountants Code of Professional
Conduct Rule 302 (March 2013).
C. Enrolled Retirement Plan Agent and
Enrolled Agent Procedures
Current §10.3(e)(1) provides that
enrolled retirement plan agents (ERPAs)
may practice before the IRS. Current
§10.4(b) authorizes the IRS to grant status
as ERPAs to individuals who demonstrate
special competence in qualified retirement
plan matters by passing a written exam-
ination and who have not engaged in any
conduct that would justify suspension or
disbarment under Circular 230. The IRS
stopped offering the Enrolled Retirement
Plan Agent Special Enrollment Examina-
tion (ERPA-SEE) on February 12, 2016,
and no longer accepts applications for
new enrollment as an ERPA. Because of
a steady decline in ERPA-SEE test-takers,
the cost to administer the ERPA-SEE no
longer warranted offering the test. See 83
FR 58202, published in the Federal Reg-
ister on November 19, 2018. Individuals
who had passed the ERPA-SEE before
February 12, 2016, and are currently
enrolled as ERPAs can maintain their sta-
tus. Therefore, the proposed regulations
would clarify that ERPAs who passed the
ERPA-SEE prior to February 12, 2016,
remain authorized to practice before the
IRS if they continue to pay the annual user
fee described under 26 CFR 300.10(b)
and complete the continuing education
described in §10.6(e). The proposed
regulations would also remove current
§10.4(b), which describes the process to
become an ERPA by special examination.
Current §10.4(d) provides that a for-
mer IRS employee, based on past service
and technical experience in the IRS, may
be granted enrollment as an EA or ERPA
without testing if certain criteria are met.
There is no statutory requirement that the
IRS provide this exemption to former
employees and administering requests for
this waiver has consumed substantial IRS
resources. Accordingly, the proposed reg-
ulations would eliminate the opportunity
for former IRS employees to apply for a
waiver of enrollment requirements as of
30 days after the date these regulations are
published in the Federal Register as final
regulations. Applications from former IRS
employees submitted on or before that
date would be processed according to the
procedures under current §10.4(d).
Current §10.5 includes ERPAs in the
description of application procedures to
become a practitioner under Circular 230.
Because the IRS no longer offers the spe-
cial enrollment examination to become an
ERPA and no longer accepts applications
for new enrollment as an ERPA, these pro-
cedures are no longer relevant and refer-
ences to ERPAs would be removed under
proposed §10.5. The renewal period and
procedures for existing ERPAs remains
unchanged under current §10.6.
Current §10.6(b) states that the IRS
will provide confirmation of enrollment
to EAs and ERPAs by issuing a registra-
tion card or certificate. Instead of speci-
fying the form of confirmation, proposed
§10.6(b) would provide that the IRS will
issue a document, which may be an enroll-
ment card or other document. This revi-
sion would give the IRS flexibility as to
the form of enrollment confirmation pro-
vided to practitioners in the future with-
out requiring an amendment to the regu-
lations.
Current §10.6(d)(2) provides an expla-
nation of the renewal period for EAs.
Proposed §10.6(d)(2) would make minor
revisions to this description but makes no
substantive changes to the renewal period
or renewal process for EAs.
D. Limited Practice and Annual Filing
Season Program (AFSP) Participants
Proposed §10.7(c)(1)(viii) would pro-
vide that individuals who possess a current
Annual Filing Season Program (AFSP)
Record of Completion may engage in lim-
ited practice, by representing taxpayers
before the IRS with respect to tax returns
or claims for refund or credit the individu-
als prepared and signed during a calendar
year for which a Record of Completion
was issued. The individual must have a
valid Record of Completion for the calen-
dar year in which the tax return or claim
for refund or credit was prepared and
signed and a valid Record of Completion
for the year or years in which the represen-
tation occurs. AFSP participants generally
are otherwise unenrolled preparers who,
pursuant to Rev. Proc. 2014-42, 2014-29
I.R.B. 192 (July 14, 2014), voluntarily
consent to be subject to Circular 230
duties and restrictions to participate in the
AFSP, including prohibitions on incompe-
tence or disreputable conduct, and must
comply with the duties and restrictions to
the extent they represent taxpayers before
the IRS under the AFSP. The authority for
the Treasury Department and the IRS to
implement the AFSP was upheld by the
DC Circuit, in AICPA v. IRS, 746 Fed.
Appx. 1 (D.C. Cir. 2018).
E. Continuing Education Provider Fees
Under current §10.9(a)(2), continuing
education providers that provide educa-
tion to practitioners on subject matters
described under current §10.6(f) must be
approved by the IRS, obtain a continuing
education number, and pay any applicable
user fee. Continuing education providers
must follow the procedures outlined under
Rev. Proc. 2012-12, 2012-2 I.R.B. 275
(January 9, 2012) to become an accredited

January 27, 2025 642 Bulletin No. 2025–5
provider and obtain a continuing educa-
tion provider number. Continuing edu-
cation providers must renew their status
annually by renewing their provider num-
ber and paying a user fee. Under current
§10.9(a)(4), continuing education provid-
ers must seek approval for individual con-
tinuing education programs and obtain a
program number.
The continuing education program
is administered by a third-party vendor
through a five-year contract with the IRS.
The vendor will charge continuing edu-
cation providers a $650 application and
renewal fee through 2025. Continuing
education providers must renew for the
upcoming calendar year before midnight
on December 31 or incur late fees ranging
between $100 and $200. Under the ven-
dor’s contract with the IRS, the vendor’s
fee is reviewed and approved by the IRS.
Because the IRS does not incur any
direct costs to administer the continuing
education program, it does not currently
charge a separate user fee to recover
costs. In the future, however, the IRS may
charge a user fee if circumstances change.
Any future user fee will be calculated pur-
suant to the Independent Offices Appro-
priation Act of 1952 (31 U.S.C. 9701) and
OMB Circular A-25, User Charges. New
proposed §10.9(c) explains that a poten-
tial user fee may be charged in addition
to the current vendor fee for approval of
continuing education providers and their
programs.
F. Knowledge of Error or Omission
Current §10.21 requires practitioners
to advise a client of any noncompliance
with internal revenue laws or any error
or omission on a tax return or other doc-
ument submitted to the IRS and the con-
sequences under the Code and regulations
of the noncompliance, error, or omission.
Proposed §10.21 would clarify that the
noncompliance, error, or omission may
have been made by either the client or the
practitioner or a prior practitioner, such
as if the practitioner or prior practitioner
made an inadvertent mistake on a tax
return prepared and filed for the client that
the practitioner later discovers.
Proposed §10.21 would expand the
current guidance by requiring practi-
tioners to explain actions the client should
take to correct the noncompliance, error,
or omission. Knowingly failing to inform
a client of the noncompliance, error, or
omission is disreputable conduct under
31 U.S.C. 330(c) because it causes prac-
titioners to perpetuate false or misleading
information to the IRS and potentially
exposes the client to penalties and other
adverse consequences. Proposed §10.21
would also instruct practitioners to con-
sider whether they can continue to meet
their obligation to exercise diligence
under proposed §10.22(a) as to the accu-
racy of tax returns and other documents if
the client refuses to take corrective action
during the course of the practitioner’s rep-
resentation. A practitioner’s obligation
under proposed §10.22(a) applies only to
tax returns that are prepared, approved, or
submitted in connection with representing
a client in a matter before the IRS. Under
those circumstances, the failure to correct
inaccurate or unsupportable return posi-
tions would result in their perpetuation in
submissions to the IRS during the course
of the practitioner’s representation. These
changes would align Circular 230 with
similar professional standards relating to
knowledge of a client’s error. See AICPA
Statement on Standards for Tax Services
No. 6 (Knowledge of Error: Return Prepa-
ration and Administrative Proceedings)
(Rev. April 30, 2018); see also Schmitz v.
Crotty, 528 N.W. 112 (Iowa 1995) (hold-
ing that in a civil malpractice action, an
attorney was negligent for, in part, failing
to correct an error on tax returns that he
was aware of).
G. Negotiation of Payments to Clients
Current §10.31 provides that a practi-
tioner may not endorse or otherwise nego-
tiate any check issued to a client by the
Government in respect of a Federal tax
liability, including directing or accept-
ing payment by any means, electronic or
otherwise, into an account owned or con-
trolled by the practitioner or any firm or
other entity with which the practitioner is
associated. When it was last amended in
2014, this regulation was revised to clarify
that the prohibition on practitioner nego-
tiation of taxpayer tax refunds applied to
the electronic environment in which both
the IRS and practitioners operated. Pro-
posed §10.31 would maintain this prohi-
bition and broaden it to apply to all elec-
tronic payments to clients with respect to
a Federal tax liability, including prepaid
debit cards, phone or mobile payments, or
other forms of electronic payments, even
if that payment method is not currently
used by the Treasury Department. These
changes acknowledge the evolving elec-
tronic environment in which tax refunds
and other payments to taxpayers are pro-
cessed through a variety of means.
H. Best Practices for Tax Practitioners
Current §10.33 provides best practices
for practitioners related to client repre-
sentation. Proposed §10.33 would replace
references to “tax advisors” with “tax
practitioners” to better align §10.33 with
descriptions used elsewhere in Circular
230.
Proposed §10.33(a)(4) would provide
that it is a best practice for practitioners
to create a data security policy to main-
tain safeguards with respect to client
information and establish a plan and pro-
cedures for responding to data breaches.
Practitioners who also prepare returns
have a legal obligation to comply with the
Federal Trade Commission’s Safeguards
Rule under the Gramm-Leach Bliley Act,
which requires businesses to implement
safeguards, including a written informa-
tion security plan, to protect the security,
confidentiality and integrity of customer
information. 16 CFR part 314 (2002). This
proposed change acknowledges this duty
and complements the newly proposed duty
to maintain technological competence
under proposed §10.35 and better aligns
Circular 230 with other professional stan-
dards. See American Bar Association For-
mal Ethics Opinion 18-483; IRS Publica-
tion 4557, Safeguarding Taxpayer Data;
IRS Publication 5708, Creating a Written
Information Security Plan for Your Tax &
Accounting Practice.
Proposed §10.33(a)(5) would provide
that it is a best practice for practitioners
to identify, evaluate, and address a mental
impairment arising out of, or related to,
age, substance abuse, a physical or mental
health condition, or some other circum-
stance that could adversely impact a prac-
titioner’s ability to effectively represent
a client before the IRS. An impairment,
left untreated, can have adverse conse-

Bulletin No. 2025–5 643 January 27, 2025
quences on a client’s representation and to
the health and well-being of a practitioner.
The purpose of proposed §10.33(a)(5) is
to encourage practitioners who are suffer-
ing from a mental impairment to seek and
obtain assistance or treatment. See, e.g.,
DC Legal Ethics Opinion 377.
Proposed §10.33(a)(6) would provide
that it is a best practice for practitioners
to establish a business continuity and suc-
cession plan that includes procedures and
safeguards related to both the cessation of
a practitioner’s practice or the occurrence
of an outside event, such as a natural
disaster or cyberattack. Business continu-
ity and succession planning are essential
because they proactively protect clients
in the event of a practitioner’s death or
disability or from the occurrence of an
unforeseen event.
Finally, proposed §10.33 would elim-
inate current §10.33(b), which provides
steps to ensure that a firm’s procedures
are consistent with best practices. Current
§10.33(b) would be duplicative of pro-
cedures under proposed §10.36 to ensure
compliance with subparts A, B, and C of
part 10, which instructs practitioners to
take reasonable steps to ensure that the
firm’s procedures are consistent with the
best practices under proposed §10.33(a).
I. Duty to Maintain Technological
Competence
Current §10.35 provides that a practi-
tioner must be competent when engaged
in practice before the IRS. Specifically,
practitioners are required to have the
appropriate level of knowledge, skill,
thoroughness, and preparation necessary
for the matter in which the practitioner is
engaged. Increasingly, competence also
includes maintaining familiarity with
technological tools used to represent a cli-
ent. A similar standard for technological
competency is included in the American
Bar Association (ABA) Model Rules of
Professional Conduct. Proposed §10.35
is based on Comment 8 to ABA Model
Rule 1.1 and would define competency
to include understanding the benefits and
risks associated with relevant technology
used by the practitioner to provide ser-
vices to clients or to store or transmit con-
fidential information, including tax return
information.
J. Regulation of Written Tax Advice
Current §10.37 provides basic princi-
ples to which all practitioners must adhere
when giving written tax advice. Circular
230 was amended in 2014 to eliminate the
covered opinion rules (in former §10.35)
and replace them with broad standards for
written tax advice under a current §10.37.
See TD 9668. Proposed §10.37 would
maintain these principles-based stan-
dards and make minor wording changes.
Current §10.37(d) defines a “Federal tax
matter,” for purposes of that section, as the
application or interpretation of a revenue
provision defined under section 6110(i)
(1)(B) of the Code, any provision of law
impacting a person’s obligations under
the internal revenue laws and regulations,
and any other law or regulation adminis-
tered by the IRS. Proposed §10.37 would
amend this definition of a Federal tax mat-
ter under proposed §10.37(d) to clarify
that it encompasses any transaction, plan,
arrangement, or other matter (whether
prospective or completed), which is of
the type that the IRS determines has the
potential for tax avoidance or evasion.
This proposed change aligns standards
for written tax advice under proposed
§10.37 more closely with the statutory
language of 31 U.S.C. 330(e), which
acknowledges that the Treasury Depart-
ment may “impose standards applicable
to the rendering of written advice with
respect to any entity, transaction plan or
arrangement, or other plan or arrange-
ment, which is of a type which the Secre-
tary determines as having a potential for
tax avoidance or evasion.”
Current §10.37(c)(1) imposes a reason-
able practitioner standard, considering all
of the facts and circumstances, to deter-
mine whether a practitioner has complied
with the written advice standards under
this section. Current §10.37(c)(2) imposes
the same reasonable practitioner standard
in the case of an opinion the practitioner
knows or has reason to know will be used
by another person to promote, market,
or recommend to one or more taxpayers
a partnership or other entity, investment
plan, or arrangement a significant purpose
of which is the avoidance or evasion of any
tax (Significant Purpose Transactions).
Current §10.37(c)(2) adds that, under the
facts-and-circumstances analysis for Sig-
nificant Purpose Transactions, emphasis
will be “given to the additional risk caused
by the practitioner’s lack of knowledge of
the taxpayer’s particular circumstances.”
Considering a practitioner’s knowledge of
the taxpayer’s circumstances is generally
relevant to whether a practitioner has sat-
isfied written tax advice standards. There-
fore, the proposed regulations would
remove paragraph (c)(2) in current §10.37
and proposed §10.37(c) would include
consideration of the practitioner’s knowl-
edge of the client’s particular circum-
stances under the reasonable practitioner
standard.
K. Incompetence or Disreputable
Conduct
Current §10.51 defines disreputable
conduct for which a practitioner may be
sanctioned. Incompetence or disreputable
conduct under current §10.51 is a basis for
imposing sanctions against practitioners
that is separate from a failure to meet
the duties and abide by the restrictions
relating to practice before the IRS under
subpart B. Subpart C, retitled to relate
to incompetence and disreputable con-
duct, would redesignate current §10.51
as proposed §10.50 and, as described in
part B of this Explanation of Provisions,
proposed §10.51 would define certain fee
arrangements that constitute disreputable
conduct.
Proposed §10.50(a) would explain that
a practitioner can be sanctioned for con-
duct that relates to the practitioner’s over-
all fitness to practice and is not limited
to actions taken while representing cli-
ents in a matter before the IRS. Proposed
§10.50(a)(12) would clarify that contemp-
tuous conduct subject to sanction includes
conduct in connection with practice before
the IRS, any proceeding pursuant to redes-
ignated proposed §10.80 or any investi-
gation by the Treasury Inspector General
for Tax Administration. New proposed
§10.50(a)(19) would provide that the will-
ful failure to follow any Federal tax law is
disreputable conduct because knowingly
violating a Federal tax law reflects a lack
of due regard for the tax laws.
New proposed §10.50(b) would pro-
vide that any assessment against a prac-
titioner of penalties relating to a willful
attempt to understate tax liabilities under

January 27, 2025 644 Bulletin No. 2025–5
section 6694(b); aiding or abetting in the
understatement of tax liabilities under
section 6701; careless, reckless, or inten-
tional disregard for the rules or regulations
(within the meaning of 26 CFR 1.6662-
3(b)(2) and 1.6694-3(c)) under section
6662(b)(1); or promotion of abusive tax
shelters under section 6700 will be consid-
ered a violation of proposed §10.50(a)(7).
The assessment of any of these penalties,
however, would not be required to show a
violation of proposed §10.50(a)(7).
L. Appraiser Standards
The proposed regulations would
incorporate new subpart D, which pro-
vides definitions related to appraisers
and standards for the disqualification of
appraisers. Current §10.50(b) references
the authority of the Secretary, or her dele-
gate, and the IRS to disqualify appraisers
from presenting evidence or testimony in
any administrative proceeding before the
Treasury Department or the IRS. Current
Circular 230, however, does not provide
a separate definition of appraisers or what
constitutes an administrative proceeding
for purposes of disqualification. The pro-
posed regulations would provide separate
definitions for both appraisers and admin-
istrative proceedings and explain how
they would relate to the new appraiser
standards. Current §10.60(b) provides
that proceedings to disqualify appraisers
can be instituted whenever a penalty has
been assessed against an appraiser under
the Code and the IRS determines that the
appraiser acted willfully, recklessly, or
through gross incompetence with respect
to the conduct at issue.
This penalty prerequisite limits the
IRS’s ability to respond to misconduct
under Circular 230 when the misconduct
is not covered by a specific penalty, an
applicable penalty is not imposed, or a pro-
posed penalty assessment has not yet been
made. There is no penalty prerequisite for
appraiser disqualification under 31 U.S.C.
330, and the only procedural requirement
for the disqualification of appraisers under
31 U.S.C. 330(d) is notice and an opportu-
nity for a hearing. An appraiser’s conduct
may be disreputable or fail to conform to
appraisal standards even when the IRS has
not assessed a penalty or when no penalty
under the Code is applicable. Therefore,
the proposed regulations would eliminate
the penalty prerequisite under current
§10.60(b) because it provides an unneces-
sary barrier to address misconduct.
Proposed §10.61, under new subpart
D, would require appraisals submitted
in an administrative proceeding before
the IRS to conform to the substance and
principles of the Uniform Standards of
Professional Appraisal Practice (USPAP)
promulgated by the Appraisal Standards
Board of the Appraisal Foundation or the
International Valuation Standards (IVS)
promulgated by the International Valua-
tion Standards Council. Proposed §10.61
would thus ensure that appraisals sub-
mitted in an administrative proceeding
generally conform to broadly applicable
standards without requiring strict com-
pliance with such standards. Appraisers
who willfully fail to meet these standards
may be subject to disqualification under
Circular 230. A failure to conform to the
substance and principles of either USPAP
or IVS standards that is not the result of
willful, reckless, or grossly incompetent
conduct is not sanctionable. In contrast,
appraisers who recklessly or through
gross incompetence engage in a pattern
of submitting appraisals that do not con-
form to the substance and principles of
USPAP or IVS standards may be subject
to disqualification under the proposed
regulations. The IRS’s Office of Profes-
sional Responsibility (OPR) would deter-
mine whether an appraisal conforms to
the substance and principles of these gen-
eral appraisal guidelines during the Cir-
cular 230 investigatory and disciplinary
process, prior to instituting any formal
disciplinary proceeding under subpart F
of 31 CFR part 10. An opinion by a court,
such as the United States Tax Court (Tax
Court), finding that an appraiser failed
to comply with the substance and prin-
ciples of USPAP (or otherwise violated
the standards for appraisers) may be con-
sidered when making that determination.
See, e.g., Oconee Landing Property, LLC
v. Commissioner, T.C. Memo. 2024-25
(finding that the appraisers had reached
an advance agreement with the donors
to appraise the subject property “in the
neighborhood of” a pre-determined over-
valued price).
Using the substance and principles of
the USPAP or IVS appraisal standards as
a basis for disqualification would enable
the IRS to proactively address inade-
quate appraisals submitted in adminis-
trative proceedings. Both USPAP and
IVS provide broad standards for gen-
eral appraisal methodology. USPAP and
IVS appraisal standards also provide a
generally accepted standard of care that
is widely followed in U.S. and interna-
tional valuation matters for real property,
personal property, and businesses. As
such, they form a “floor” for appraiser
competency, similar to how the ABA’s
Model Rules of Professional Conduct
provide general standards for attor-
neys. Like state bars, other professional
appraiser organizations and state licens-
ing boards elaborate on and are free to
impose stricter standards on appraisers.
Further, USPAP is required for state-li-
censed and state-certified real property
appraisers and has been widely adopted
by professional appraisal societies. Inter-
nal Revenue Service Advisory Council
Annual Report at 118-28 (November
2017). Under Notice 2006-96, 2006-46
I.R.B. 902 (November 13, 2006), the IRS
already recognizes USPAP as generally
accepted appraisal standards relating to
charitable contribution deductions under
section 170(f)(11)(E)(i) of the Code. The
Tax Court has also looked to adherence
to USPAP as a measure of the credibility
of an appraisal. See, e.g., Estate of Cecil
v. Commissioner, T.C. Memo. 2023-24
(giving no weight to a valuation that was
inconsistent with USPAP). Therefore, the
proposed regulations would provide addi-
tional clarity to appraisers with respect to
the standard for appraisals submitted in
an IRS administrative proceeding.
Proposed §10.61(b)(2) would also
provide that appraisers who know or rea-
sonably should know that an appraisal
will be used in an administrative pro-
ceeding by taxpayers to support a sub-
stantial valuation misstatement under
section 6662(e), a substantial estate or
gift tax valuation understatement within
the meaning of section 6662(g), or a
gross valuation misstatement pursuant
to section 6662(h), would be subject to
disqualification if they act willfully, reck-
lessly, or through gross incompetence.
This standard would allow the IRS to
address common appraiser misconduct
related to tax return positions.

Bulletin No. 2025–5 645 January 27, 2025
Consistent with current §10.60(b), new
proposed §10.61(c) would provide that an
appraiser who has been assessed a penalty
under section 6694, 6695A, 6700, or 6701
of the Code, for which it is determined that
the appraiser acted willfully, recklessly, or
through gross incompetence with respect
to the proscribed conduct may be disqual-
ified for engaging in disreputable conduct,
although this assessment is not a prereq-
uisite to disqualification. Appraisers who
have been assessed penalties as a result of
their willful, reckless, or grossly incom-
petent conduct have engaged in disrepu-
table conduct that should disqualify them
from presenting evidence or testimony
in an administrative proceeding before
the Treasury Department or the IRS and
should result in the appraiser’s appraisals
having no probative effect in an adminis-
trative proceeding. If the penalty is later
abated, an appraiser can petition for rein-
statement under redesignated proposed
§10.101.
The proposed regulations also provide
that an appraiser may show adherence
to USPAP standards when issuing the
relevant appraisal, which will be taken
into account as a defense in determin-
ing whether an appraiser acted willfully,
recklessly, or through gross incompetence
with respect to potential disqualification
under proposed §10.61(b)(2) or (c).
Because appraisers are not practi-
tioners under Circular 230, it is appropri-
ate to include standards relating to their
disqualification under a separate subpart
from standards relating to practitioners.
However, because appraisers are sub-
ject to the same notice and opportunity
for a hearing as practitioners under Cir-
cular 230, disqualification procedures
for appraisers would remain the same as
those for practitioners under new subpart
F (Rules Applicable to Disciplinary Pro-
ceedings).
M. Effect of Disbarment, Suspension, or
Censure
In 2017, the United States District
Court for the District of Nevada held in
Sexton v. Hawkins, 119 A.F.T.R. 2d 2017-
1187 (D. Nev. 2017), that the Treasury
Department and the IRS did not have juris-
diction to investigate whether suspended
practitioners have violated the terms of
their suspension because suspended indi-
viduals were not considered practitioners
under Circular 230. The Treasury Depart-
ment and the IRS disagree with this hold-
ing. The IRS has continuing jurisdiction to
investigate suspended practitioners under
31 U.S.C. 330(c), which provides author-
ity to suspend, disbar, or censure practi-
tioners under Circular 230. The ability to
investigate compliance by practitioners
with the terms of their censure or suspen-
sion is critical to ensure compliance and
maintain the integrity of practitioner dis-
cipline under Circular 230. Practitioners
who do not comply with requests for
information from OPR or who violate the
terms of their suspension may face further
sanctions, such as monetary penalties or
disbarment.
Proposed §10.99(e) would clarify that
suspended practitioners remain practi-
tioners under Circular 230 for the pur-
poses of investigating and acting on any
violation of a suspension or any violation
of the law or regulations governing prac-
tice before the IRS while suspended. It is
also important to the enforcement of 31
U.S.C. 330 and the integrity of Circular
230 for the IRS to ensure that individ-
uals who are not authorized to practice
before the IRS, either because they have
been disbarred or because they do not
have the required credentials, do not claim
authority to practice. Proposed §10.99(f),
therefore, would clarify that the IRS has
jurisdiction to make inquiries to determine
whether an individual has wrongly held
themselves out as a practitioner.
N. Expedited Suspension
Current §10.81 provides guidance on
how practitioners can petition OPR for
reinstatement, but it does not address
practitioners or appraisers who have
been suspended or disqualified through
the expedited procedures under current
§10.82. Moreover, while current §10.82
authorizes the immediate suspension of
a practitioner who has engaged in certain
conduct, it does not include expedited pro-
cedures for appraisers or address the vol-
untary forfeiture of a license or certifica-
tion by practitioners or appraisers. Current
§10.81, which is proposed to be redesig-
nated as §10.101, would allow practi-
tioners or appraisers who have received an
expedited suspension or disqualification
to petition for reinstatement at any time
upon a showing of good cause.
The proposed changes to current
§10.82, which is proposed to be redes-
ignated as §10.102, explain that practi-
tioners can establish good cause by show-
ing that the conditions giving rise to their
expedited suspension or disqualification
no longer apply. For example, the resto-
ration of a suspended license, the reversal
of a conviction, or the removal of a sanc-
tion may be sufficient to show good cause.
Proposed §10.102 would also extend
expedited disciplinary proceedings to
appraisers who have had a license or cer-
tification revoked or suspended by a state
licensing or certification board or who
have voluntarily forfeited their license or
certification. Finally, proposed §10.102(e)
(1)(iii) would clarify that, when a prac-
titioner or appraiser responds to a show
cause order but does not request a confer-
ence, the IRS will issue a written notice
of expedited suspension immediately fol-
lowing consideration of a practitioner or
appraiser’s response.
Proposed §10.102(a)(7)(i) and (ii),
redesignated from §10.82(b)(5)(i) and (ii),
would only update the cross-references in
those provisions. They are otherwise not
proposed to be revised, though they are set
out in their entirety below for the conve-
nience of the reader. The Treasury Depart-
ment and IRS do not seek comments on
the substance of these provisions, and
any such comments would be outside the
scope of the proposed regulations.
O. Comments Requested
The Treasury Department and the IRS
request comments on all aspects of the
proposed regulations. Comments are also
specifically requested on whether, in a
future regulation, the definition of prac-
titioners eligible to practice before the
IRS should be proposed to be expanded
to include individuals admitted to practice
law in a Tribal court.
Proposed Applicability Date
The proposed regulations are proposed
to apply 30 days after date of publication
of final regulations in the Federal Regis-
ter.

January 27, 2025 646 Bulletin No. 2025–5
Special Analyses
I. Regulatory Planning and Review
The Office of Information and Regula-
tory Affairs has determined that this reg-
ulation is not significant and not subject
to review under Executive Order 12866
(June 9, 2023). Therefore, a regulatory
impact assessment is not required.
II. Initial Regulatory Flexibility Analysis
When the IRS issues a general notice
of proposed rulemaking, the Regulatory
Flexibility Act (RFA) requires the agency
to “prepare and make available for public
comment an initial regulatory flexibility
analysis,” which will “describe the impact
of the proposed rule on small entities.” 5
U.S.C. 603(a). Unless an agency deter-
mines that a proposal is not likely to have a
significant economic impact on a substan-
tial number of small entities, section 603 of
the RFA requires the agency to present an
initial regulatory flexibility analysis (IRFA)
of the proposed rule. The proposed regu-
lations will affect a substantial number of
small entities. Because the proposed reg-
ulations do not impose new requirements
on practitioners or appraisers, the Treasury
Department and the IRS do not anticipate
that the proposed regulations, if promul-
gated, would have a significant economic
impact on any of the regulated entities. The
Treasury Department and the IRS, how-
ever, request comments on the potential
economic impact of the proposed regula-
tions and include an IRFA.
Description of the reasons why action
by the agency is being considered and
succinct statement of the objectives of,
and the legal basis for, the proposed
rule.
As discussed in this preamble, current
Circular 230 has not been amended since
2014 and many of its provisions have been
made obsolete by current law or need to
be updated to reflect the current practice
environment. Accordingly, the proposed
regulations would eliminate provisions
related to tax return preparation outside of
practice before the IRS, revise contingent
fee rules, and update various standards and
procedures. In addition, the definition of
appraiser and the procedures for disquali-
fying appraisers from submitting appraisals
in an administrative proceeding before the
Treasury Department or the IRS are being
amended and updated. Thus, the general
objective of the proposed regulations is to
align Circular 230 with current law and to
clarify or update its standards. None of the
revisions, however, propose to impose new
standards or burdens on practitioners or
appraisers. The proposed regulations would
either update long-standing Circular 230
standards or incorporate standards that prac-
titioners or appraisers comply with outside
of practice before the IRS. For example,
the proposed contingent fee restrictions are
also incorporated in other widely applicable
rules of professional conduct. Likewise,
appraisers are generally already required
to meet the broad appraisal standards refer-
enced by the proposed regulations.
The legal basis for the proposed regula-
tions is 31 U.S.C. 330.
Description of and, where feasible, an
estimate of the number of small entities
to which the proposed rule will apply.
The proposed regulations would affect
EAs, ERPAs, attorneys, CPAs, and AFSP
participants who practice before the IRS.
The proposed regulations would also
affect appraisers who submit appraisals
in an administrative proceeding before
the Treasury Department or the IRS. Cir-
cular 230 affects both individual practi-
tioners and firms. For example, the flush
language of 31 U.S.C. 330(c) authorizes
the Secretary, or her delegate, to impose
a monetary penalty on a firm if the firm
knew or should have known that a rep-
resentative acting on its behalf intended
to defraud a client. Further, proposed
§10.36(a) would require practitioners
who oversee a firm’s practice to take rea-
sonable steps to ensure that the firm has
adequate procedures to comply with Cir-
cular 230. However, because the proposed
regulations would only affect individual
practitioners and appraisers, the economic
impact of these regulations on any small
entity generally will be the result of an
individual practitioner or appraiser own-
ing a small business, or a small business
employing a practitioner or appraiser, and
the business paying for the individual to
maintain its status or to comply with other
requirements in the Circular. Because an
estimate of the number of small entities to
which the proposed rule will apply is not
available, the Treasury Department and
the IRS considered the estimated number
of practitioners and appraisers who will
be affected by the proposed rule. Based on
IRS records, the total number of impacted
practitioners and appraisers is approxi-
mately 451,405. Specifically, Centralized
Authorization File records, which reflect
practitioners who filed third-party autho-
rizations with the IRS, reflect approx-
imately 200,000 unique CPAs, 65,000
unique attorneys, and 40,000 unique
practitioners who identify as both attor-
neys and CPAs as of May 17, 2024. Fur-
ther, IRS Return Preparer Office (RPO)
registration records show approximately
62,383 EAs, 608 ERPAs, 3,402 enrolled
actuaries, and 75,357 AFSP participants.
Finally, in 2022, the most recent year
for which complete data are available,
approximately 4,200 unique appraisers
signed the “Declaration of Appraiser” on
a Form 8283, Noncash Charitable Con-
tributions. Appraisers sign Forms 8283
for appraisals that are used in connection
with a tax return or claim of refund. Thus,
the forms represent a reasonable approxi-
mation of appraisers who are likely to be
covered by these proposed rules.
A description of the projected record-
keeping, and other compliance require-
ments of the proposed rule, including
an estimate of the classes of small enti-
ties that will be subject to such require-
ments that the type of professional
skills necessary for preparation of the
report or record.
No reporting or recordkeeping require-
ments are projected to be associated with
the proposed regulations.
Identification, to the extent practicable,
of all relevant Federal rules that may
duplicate, overlap, or conflict with the
proposed rule.
The IRS is not aware of any Federal
rules that duplicate, overlap, or conflict
with the proposed rule.
Description of any significant alterna-
tives to the proposed rule that accom-

Bulletin No. 2025–5 647 January 27, 2025
plish the stated objectives of applicable
statutes and that minimize any signifi-
cant economic impact of the proposed
rule on small entities, including a dis-
cussion of significant alternatives.
Section 330 of title 31, United States
Code authorizes the Secretary, or her del-
egate, to impose standards on individuals
who practice before the Treasury Depart-
ment and the IRS; to suspend or disbar
from practice certain individuals; and to
bar certain appraisers from submitting
evidence or testimony in any adminis-
trative proceeding before the Treasury
Department or the IRS. The Treasury
Department and the IRS have issued
regulations under Circular 230 for these
purposes since 1921 and have regularly
updated them to reflect changing law
and current standards of practice. These
updates, including those found in the pro-
posed regulations, are essential to ensure
that practitioners and appraisers are com-
petent, reputable and have the necessary
requirements to provide taxpayers with
valuable service. The proposed regula-
tions could have created a new standard
for appraisals submitted in an administra-
tive proceeding before the IRS, but that
would have been more burdensome to
appraisers. Instead, requiring appraisals
to conform in substance and principles to
the USPAP or IVS is less costly and bur-
densome because appraisers are already
required to abide by these standards.
Further, the proposed regulations could
have implemented case law to preclude
regulating contingent fee arrangements
for preparing original or amended returns
and ordinary refund claims, but this posi-
tion would not have met the objective to
discourage unduly aggressive tax posi-
tions that result in evasion or abuse of the
Federal tax laws. Therefore, the proposed
regulations would adopt a straightforward
standard: charging a contingent fee for the
preparation of an original return, amended
return, or claim for refund or credit pre-
pared prior to the examination of a tax
return is disreputable conduct.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires that
agencies assess anticipated costs and ben-
efits and take certain other actions before
issuing a final rule that includes any Fed-
eral mandate that may result in expendi-
tures 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. This
proposed rule does 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 (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 gov-
ernments, 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
proposed 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.
V. Executive Order 13175: Consultation
and Coordination With Indian Tribal
Governments
Executive Order 13175 (Consultation
and Coordination With Indian Tribal Gov-
ernments) prohibits an agency from pub-
lishing any rule that has Tribal implications
if the rule either imposes substantial, direct
compliance costs on Indian Tribal gov-
ernments, and is not required by statute,
or preempts Tribal law, unless the agency
meets the consultation and funding require-
ments of section 5 of the Executive order.
The Treasury Department and the IRS
will hold a consultation with Tribal lead-
ers to receive Tribal feedback on whether
practitioners eligible to practice before the
IRS should include individuals admitted
to practice law in a Tribal court, which
will inform the development of future reg-
ulations.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance
cited in this preamble are published in the
Internal Revenue Bulletin (or Cumula-
tive Bulletin) and are available from the
Superintendent of Documents, U.S. Gov-
ernment Publishing Office, Washington,
DC 20402, or by visiting the IRS website
at https://www.irs.gov.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
timely submitted to the Treasury Depart-
ment and the IRS as prescribed in this
preamble under the ADDRESSES head-
ing. The Treasury Department and the
IRS request comments on all aspects of
the proposed regulations. Any electronic
and paper comments submitted will be
available at https://www.regulations.gov
or upon request. Once submitted to the
Federal eRulemaking Portal, comments
cannot be edited or withdrawn.
A public hearing is being held on
March 6, 2025, beginning at 10 a.m. ET,
in the Auditorium at the Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security
procedures, visitors must enter at the Con-
stitution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
Participants may alternatively attend the
public hearing by telephone.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit an outline of the topics to be dis-
cussed as well as the time to be devoted to
each topic by February 24, 2025. A period
of ten minutes will be allocated to each
person for making comments. After the
deadline for receiving outlines has passed,
the IRS will prepare an agenda contain-
ing the schedule of speakers. Copies of
the agenda will be made available free of
charge at the hearing. If no outlines of the
topics to be discussed at the hearing are
received by February 24, 2025, the pub-
lic hearing will be cancelled. If the pub-
lic hearing is cancelled, a notification of
cancellation of the public hearing will be
published in the Federal Register.

January 27, 2025 648 Bulletin No. 2025–5
Individuals who want to testify in per-
son at the public hearing must send an
email to publichearings@irs.gov to have
your name added to the building access
list. The subject line of the email must
contain the regulation number REG-
116610-20 and, the language TESTIFY
In Person. For example, the subject line
may say: Request to TESTIFY In Person
at Hearing for REG-116610-20.
Individuals who want to testify by tele-
phone at the public hearing must send an
email to publichearings@irs.gov to receive
the telephone number and access code for
the hearing. The subject line of the email
must contain the regulation number REG-
116610-20 and the language TESTIFY
Telephonically. For example, the subject
line may say: Request to TESTIFY Tele-
phonically at Hearing for REG-116610-20.
Individuals who want to attend the
public hearing in person without testify-
ing must also send an email to publichear-
ings@irs.gov to have your name added to
the building access list. The subject line
of the email must contain the regulation
number (REG-116610-20) and the lan-
guage ATTEND In Person. For exam-
ple, the subject line may say: Request to
ATTEND Hearing In Person for REG-
116610-20. Requests to attend the public
hearing must be received by 5 p.m. ET on
March 4, 2025.
Individuals who want to attend the
public hearing telephonically without
testifying must also send an email to pub-
lichearings@irs.gov to receive the tele-
phone number and access code for the
hearing. The subject line of the email must
contain the regulation number (REG-
116610-20) and the language ATTEND
Hearing Telephonically. For example, the
subject line may say: Request to ATTEND
Hearing Telephonically for REG-116610-
20. Requests to attend the public hearing
must be received by 5 p.m. ET on March
4, 2025.
Hearings will be made accessible to
people with disabilities. To request spe-
cial assistance during the hearing, contact
the Publications and Regulations Branch
of the Office of Associate Chief Counsel
(Procedure and Administration) by send-
ing an email to publichearings@irs.gov
(preferred) or by telephone at (202) 317-
6901 (not a toll-free number) by at least
March 3, 2025.
Drafting Information
The principal author of these regula-
tions is William J. Prater of the Office of
the Associate Chief Counsel (Procedure
and Administration). However, other per-
sonnel from the Treasury Department and
the IRS participated in the development of
the regulations.
Withdrawal of Notice of Proposed
Rulemaking
The Treasury Department and the IRS
withdraw the notice of proposed rulemaking
(REG-113289-08) that was published in the
Federal Register on July 28, 2009 (74 FR
37183) under the authority of 31 U.S.C. 330.
List of Subjects in 31 CFR Part 10
Accountants, Administrative practice
and procedure, Lawyers, Reporting and
recordkeeping requirements, Taxes.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 31 CFR
part 10 as follows:
PART 10—PRACTICE BEFORE THE
INTERNAL REVENUE SERVICE
Paragraph 1. The authority for 31
CFR part 10 continues to read as follows:
Authority: Sec. 3, 23 Stat. 258, secs.
2-12, 60 Stat. 237 et seq.; 5 U.S.C. 301,
500, 551-559; 31 U.S.C. 321; 31 U.S.C.
330; Reorg. Plan No. 26 of 1950, 15 FR
4935, 64 Stat. 1280, 3 CFR, 1949-1953
Comp., P. 1017.
Par. 2. Part 10 is amended by removing
the language “taxpayer”, “taxpayers”, and
“taxpayer’s” wherever they appear and
adding the language “client”, “clients”,
and “client’s” in their places, respectively.
Par. 3. Section 10.0 is revised to read
as follows:
§10.0 Scope of part.
(a) In general. This part contains rules
governing the recognition of attorneys,
certified public accountants, enrolled
agents, enrolled retirement plan agents,
enrolled actuaries, and other persons
representing clients before the Internal
Revenue Service. This part also estab-
lishes standards for appraisers who submit
appraisals or present evidence or testi-
mony to the Department of the Treasury
or the Internal Revenue Service (IRS).
Subpart A of this part sets forth rules relat-
ing to the authority to practice before the
IRS; subpart B of this part prescribes the
duties and restrictions relating to subpart
A; subpart C of this part prescribes incom-
petence and disreputable conduct; subpart
D of this part sets forth standards relating
to the disqualification of appraisers and
prescribes sanctions for violating the stan-
dards; subpart E of this part prescribes the
sanctions for violating the standards in
subparts B through D; subpart F of this
part contains the rules applicable to dis-
ciplinary proceedings and general provi-
sions relating to the availability of official
records.
(b) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 4. Section 10.2 is amended by:
1. Revising paragraphs (a)(4) through
(6).
2. Removing paragraphs (a)(7) and (8).
3. Revising paragraph (b).
The revisions read as follows:
§10.2 Definitions.
(a) * * *
(4) Practice before the Internal Reve-
nue Service comprehends all matters con-
nected with a presentation to the Internal
Revenue Service or any of its officers or
employees relating to a client’s rights,
privileges, or liabilities under laws or reg-
ulations administered by the Internal Rev-
enue Service. Such presentations include,
but are not limited to, preparing docu-
ments; filing documents; corresponding
and communicating with the Internal Rev-
enue Service; rendering written advice
with respect to any entity, transaction, plan
or arrangement, or other plan or arrange-
ment having a potential for tax avoidance
or evasion; and representing a client at
conferences, hearings, and meetings. Any
action that supports a presentation to the
Internal Revenue Service, including the
preparation and submission of tax returns

Bulletin No. 2025–5 649 January 27, 2025
in connection with representing a client in
a matter before the Internal Revenue Ser-
vice, may constitute practice before the
Internal Revenue Service.
(5) Practitioner means any individual
described in §10.3(a), (b), (c), (d), or (e).
(6) A tax return includes an amended
tax return and a claim for refund or credit
within the meaning of section 6696(e)(2)
of the Internal Revenue Code, such as a
claim for refund or credit made on IRS
Form 843, Claim for Refund and Request
for Abatement.
(b) This section is applicable beginning
on [date 30 days after date of publication
of final regulations in the Federal Regis-
ter].
Par. 5. Section 10.3 is amended by:
1. Revising paragraphs (c), (d)(3), and
(e)(1) and (3).
2. Removing paragraph (f).
3. Redesignating paragraphs (g)
through (j) as paragraphs (f) through (i).
4. Revising newly redesignated para-
graph (i).
The revisions read as follows:
§10.3 Who may practice.
* * * * *
(c) Enrolled agents. Any individual
enrolled as an agent pursuant to this part
who is not currently under suspension or
disbarment from practice before the Inter-
nal Revenue Service, and whose valid
enrollment is active and has not been ter-
minated under §10.6, may practice before
the Internal Revenue Service.
(d) * * *
(3) An individual who practices before
the Internal Revenue Service pursuant to
paragraph (d)(1) of this section is sub-
ject to the provisions of this part in the
same manner as attorneys, certified public
accountants, enrolled agents, and enrolled
retirement plan agents.
(e) * * *
(1) Any individual enrolled prior to
February 12, 2016, as a retirement plan
agent pursuant to this part who is not cur-
rently under suspension or disbarment
from practice before the Internal Revenue
Service, and whose enrollment is not in
inactive status or has not been terminated
under §10.6, may practice before the
Internal Revenue Service.
* * * * *
(3) An individual who practices before
the Internal Revenue Service pursuant to
paragraph (e)(1) of this section is sub-
ject to the provisions of this part in the
same manner as attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries.
* * * * *
(i) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 6. Section 10.4 is amended by:
1. Revising the section heading.
2. Removing paragraphs (b) through
(d).
3. Redesignating paragraphs (e) and (f)
as paragraphs (b) and (c).
4. Revising newly redesignated para-
graph (c).
The revisions read as follows:
§10.4 Eligibility to become an enrolled
agent.
* * * * *
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register]. Former IRS
employees must apply for special enroll-
ment in accordance with 31 CFR 10.4(d),
revised as of July 1, [year to be deter-
mined], on or before [date 30 days after
date of publication of final regulations in
the Federal Register].
Par. 7. Section 10.5 is amended by
revising the section heading and para-
graphs (a), (b), (d)(2), (e), and (g) to read
as follows:
§10.5 Application to become an
enrolled agent.
(a) Form; address. An applicant to
become an enrolled agent must apply as
required by forms or procedures estab-
lished and published by the Internal Reve-
nue Service, including proper execution of
required forms under oath or affirmation.
The address on the application will be the
address under which a successful appli-
cant is enrolled and is the address to which
all correspondence concerning enrollment
will be sent.
(b) Fee. A reasonable nonrefundable
fee may be charged for each application
to become an enrolled agent. See 26 CFR
part 300.
* * * * *
(d) * * *
(2) If the applicant does not pass the tax
compliance or suitability check, the appli-
cant will not be issued a confirmation of
enrollment pursuant to §10.6(b). An appli-
cant who is initially denied enrollment
for failure to pass a tax compliance check
may reapply after the initial denial if the
applicant becomes current with respect to
the applicant’s tax liabilities.
(e) Temporary recognition. On receipt
of a properly executed application, the
Commissioner, or delegate, may grant
the applicant temporary recognition to
practice pending a determination as to
whether status as an enrolled agent should
be granted. Temporary recognition will be
granted only in unusual circumstances and
it will not be granted, in any circumstance,
if the application is not regular on its face,
if the information stated in the application,
if true, is not sufficient to warrant grant-
ing the application to practice, or if the
Commissioner, or delegate, has informa-
tion indicating that the statements in the
application are untrue or that the applicant
would not otherwise qualify to become
an enrolled agent. Issuance of temporary
recognition does not constitute either a
designation or a finding of eligibility as an
enrolled agent, and the temporary recogni-
tion may be withdrawn at any time.
* * * * *
(g) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 8. Section 10.6 is amended by:
1. Revising the section heading and
paragraphs (a), (b), (c), and (d)(1) and (2).
2. Removing paragraph (d)(4).
3. Redesignating paragraphs (d)(5)
through (7) as paragraphs (d)(4) through
(6).
4. Revising newly redesignated para-
graphs (d)(4) and (6) and paragraph (e)
introductory text.
5. Removing paragraph (e)(1)(iii).
6. Redesignating paragraph (e)(1)(iv)
as paragraph (e)(1)(iii).
7. Removing paragraphs (e)(3) and (f)
(1)(iii).
8. Revising paragraphs (f)(2)(ii) head-
ing, (f)(2)(iii)(C), (i)(4) and (5), and (j)(2).

January 27, 2025 650 Bulletin No. 2025–5
9. In paragraph (j)(3), removing the
language “or inactive registered individu-
als” from the end of the first sentence.
10. Revising paragraphs (j)(4) through
(6), (k), (l), and (n).
The revisions read as follows:
§10.6 Term and renewal of status as an
enrolled agent or enrolled retirement
plan agent.
(a) Term. Each individual authorized
to practice before the Internal Revenue
Service as an enrolled agent or enrolled
retirement plan agent will be accorded
active enrollment status subject to renewal
of enrollment as provided in this part.
(b) Confirmation of enrollment. The
Internal Revenue Service will issue an
enrollment document (such as an enroll-
ment card or other document) to an indi-
vidual who meets the enrollment require-
ments in this paragraph (b) and whose
application to practice before the Inter-
nal Revenue Service is approved. This
approval will be valid for the period stated
on the enrollment document. An enrolled
agent or enrolled retirement plan agent
may not practice before the Internal Rev-
enue Service without a valid approval.
The enrollment document is in addition to
any notification that may be provided to
each individual who obtains a preparer tax
identification number.
(c) Change of address. An enrolled
agent or enrolled retirement plan agent
must send notification of any change of
address to the address specified by the
Internal Revenue Service within 60 days
of the change of address. This notifica-
tion must include the enrolled agent’s or
enrolled retirement plan agent’s name,
prior address, new address, tax identifi-
cation number(s) (including preparer tax
identification number), and the date the
change of address is effective. Unless
this notification is sent, the address for
purposes of any correspondence from
the appropriate Internal Revenue Service
office responsible for administering this
part will be the address reflected on the
practitioner’s most recent application for
enrollment, or application for renewal of
enrollment. A practitioner’s change of
address notification under this part will
not constitute a change of the practi-
tioner’s last known address for purposes
of section 6212 of the Internal Revenue
Code.
(d) * * *
(1) In general. Enrolled agents or
enrolled retirement plan agents must
renew their status with the Internal Reve-
nue Service to maintain eligibility to prac-
tice before the Internal Revenue Service.
Failure to receive notification from the
Internal Revenue Service of the renewal
requirement will not be justification for
the individual’s failure to satisfy the
requirement of this paragraph (d).
(2) Renewal period for enrolled agents.
(i) Applications for renewal of status as an
enrolled agent will be required between
November 1 and January 31 every three
years according to the last digit of the
individual’s Social Security number or
tax identification number. Those indi-
viduals who receive initial enrollment as
an enrolled agent after November 1 and
before April 2 of the applicable renewal
period will not be required to renew their
enrollment before the first full renewal
period following the receipt of their initial
enrollment.
(ii) Enrolled agents who have a Social
Security number or tax identification num-
ber that ends with the numbers 0, 1, 2, or 3,
except for those individuals who received
their initial enrollment after November
1, 2024, must apply for renewal between
November 1, 2024, and January 31, 2025.
The renewal will be effective April 1, 2025.
(iii) Enrolled agents who have a Social
Security number or tax identification num-
ber that ends with the numbers 4, 5, or 6,
except for those individuals who received
their initial enrollment after November
1, 2025, must apply for renewal between
November 1, 2025, and January 31, 2026.
The renewal will be effective April 1,
2026.
(iv) Enrolled agents who have a Social
Security number or tax identification
number that ends with the numbers 7, 8,
or 9, or who do not have a Social Secu-
rity number, except for those individu-
als who received their initial enrollment
after November 1, 2026, must apply for
renewal between November 1, 2026, and
January 31, 2027. The renewal will be
effective April 1, 2027.
* * * * *
(4) Notification of renewal. After
review and approval, the Internal Reve-
nue Service will notify the individual of
the renewal and will issue the individual a
document evidencing current status as an
enrolled agent or enrolled retirement plan
agent.
* * * * *
(6) Forms. Forms required for renewal
may be obtained by sending a written
request to the address specified by the
Internal Revenue Service or from such
other source as the Internal Revenue Ser-
vice will publish in the Internal Revenue
Bulletin (see 26 CFR 601.601(d)(2)(ii)
(b)) and on the Internal Revenue Service
website.
(e) Condition for renewal: continuing
education. To qualify for renewal as an
enrolled agent or enrolled retirement plan
agent an individual must certify in the
manner prescribed by the Internal Rev-
enue Service that the individual has sat-
isfied the requisite number of continuing
education hours.
* * * * *
(f) * * *
(2) * * *
(ii) Correspondence or individual
study programs (including recorded pro-
grams). * * *
(iii) * * *
(C) The maximum continuing educa-
tion credit for instruction and preparation
may not exceed six hours annually for
enrolled agents and enrolled retirement
plan agents.
* * * * *
(i) * * *
(4) If a request for waiver is not
approved, the individual will be placed
in inactive status. The individual will be
notified that the waiver was not approved
and that the individual has been placed
on a roster of inactive enrolled agents or
enrolled retirement plan agents.
(5) If the request for waiver is not
approved, the individual may file a protest
as prescribed by the Internal Revenue Ser-
vice in forms, instructions, or other appro-
priate guidance. A protest filed under this
section is not governed by subpart F of
this part.
* * * * *
(j) * * *
(2) The continuing education records
of an enrolled agent or enrolled retirement
plan agent may be reviewed to deter-
mine compliance with the requirements

Bulletin No. 2025–5 651 January 27, 2025
and standards for renewal as provided in
paragraph (f) of this section. As part of
this review, the enrolled agent or enrolled
retirement plan agent may be required
to provide the Internal Revenue Service
with copies of any continuing education
records required to be maintained under
this part. If the enrolled agent or enrolled
retirement plan agent fails to comply with
the requirement in this paragraph (j)(2),
any continuing education hours claimed
may be disallowed.
* * * * *
(4) Individuals in inactive status and
individuals who are ineligible to practice
before the Internal Revenue Service may
not state or imply that they are eligible to
practice before the Internal Revenue Ser-
vice, or use the terms enrolled agent or
enrolled retirement plan agent, the desig-
nations EA or ERPA, or other form of ref-
erence to eligibility to practice before the
Internal Revenue Service.
(5) An individual placed in inactive sta-
tus may be reinstated to an active status by
filing an application for renewal and pro-
viding evidence of the completion of all
required continuing education hours for
the enrollment cycle. Continuing educa-
tion credit under this paragraph (j)(5) may
not be used to satisfy the requirements of
the enrollment cycle in which the indi-
vidual has been placed back on the active
roster.
(6) An individual placed in inactive
status must file an application for renewal
and satisfy the requirements for renewal
as set forth in this section within three
years of being placed in inactive status.
Otherwise, the name of such individual
will be removed from the inactive status
roster and the individual’s status as an
enrolled agent or enrolled retirement plan
agent will terminate. Future eligibility for
active status must then be reestablished by
the individual as provided in this section.
* * * * *
(k) Inactive retirement status. An indi-
vidual who no longer practices before the
Internal Revenue Service may request to
be placed in an inactive retirement status
at any time and such individual will be
placed in an inactive retirement status.
The individual will be ineligible to prac-
tice before the Internal Revenue Service.
An individual who is placed in an inactive
retirement status may be reinstated to an
active status by filing an application for
renewal and providing evidence of the
completion of the required continuing
education hours for the enrollment cycle.
Inactive retirement status is not available
to an individual who is ineligible to prac-
tice before the Internal Revenue Service
or an individual who is the subject of a
pending disciplinary matter under this
part.
(l) Renewal while under suspension or
disbarment. An individual who is ineligi-
ble to practice before the Internal Revenue
Service by virtue of disciplinary action
under this part is required to conform to
the requirements for renewal of enroll-
ment before the individual’s eligibility is
restored.
* * * * *
(n) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 9. Section 10.7 is amended by
adding paragraph (c)(1)(viii) and revising
paragraph (f) to read as follows:
§10.7 Representing oneself;
participating in rulemaking; limited
practice; and special appearances.
* * * * *
(c) * * *
(1) * * *
(viii) An individual who possesses a
current Annual Filing Season Program
(AFSP) Record of Completion may rep-
resent a client before revenue agents, cus-
tomer service representatives, or similar
officers and employees of the Internal
Revenue Service, including the Taxpayer
Advocate Service, during an examination
of a tax return or claim for refund or credit
that the individual prepared and signed.
The individual must have: a valid Record
of Completion for the calendar year in
which the tax return or claim for refund
or credit was prepared and signed and a
valid Record of Completion for the year or
years in which the representation occurs.
* * * * *
(f) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 10. Section 10.8 is revised to read
as follows:
§10.8 Participation in IRS proceedings
by non-practitioners.
(a) Furnishing Information. Any indi-
vidual, except appraisers who have been
disqualified pursuant to §10.61(a), includ-
ing non-practitioners, may appear as a
witness before the Internal Revenue Ser-
vice, or furnish information at the request
of the Internal Revenue Service or any of
its officers or employees.
(b) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 11. Section 10.9 is amended by:
1. In paragraph (a)(2)(i), removing the
language “and pay any applicable user
fee” from the end of the paragraph.
2. In paragraph (a)(2)(ii), removing the
language “and paying any applicable user
fee” from the end of the paragraph.
3. In paragraph (a)(4)(i), removing the
language “and pay any applicable user
fee” from the first sentence in the para-
graph.
4. Revising paragraph (c).
5. Adding paragraph (d).
The revision and addition read as fol-
lows:
§10.9 Continuing education providers
and continuing education programs.
* * * * *
(c) Fee. In addition to any vendor fees
that are charged, a continuing education
provider may be required to pay a user fee
to obtain or renew a continuing education
provider number or continuing education
provider program number.
(d) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 12. Section 10.21 is revised to
read as follows:
§10.21 Knowledge of error or omission.
(a) In general. A practitioner who, while
representing a client in a matter before the
Internal Revenue Service, knows that either
the client, the practitioner, or a prior prac-
titioner has not complied with the revenue
laws of the United States and regulations,
or has made an error in or omission from

January 27, 2025 652 Bulletin No. 2025–5
any return, document, affidavit, or other
paper that the client submitted or executed
under the revenue laws of the United States
and regulations, must advise the client
promptly of the fact of such noncompli-
ance, error, or omission. The practitioner
must advise the client of the consequences
of the noncompliance, error, or omission,
as provided under the internal revenue laws
of the United States and regulations, and
recommend the corrective actions, such as
disclosure, to be taken.
(b) Disclosure and continued repre-
sentation. If a practitioner is representing
a client in a matter before the Internal
Revenue Service, the practitioner should
request the client’s agreement to disclose
the noncompliance, error, or omission to
the Internal Revenue Service. The practi-
tioner must also take reasonable steps to
ensure that the noncompliance, error, or
omission is not repeated in subsequent
submissions to the Internal Revenue Ser-
vice. If the client does not agree to disclose
the noncompliance, error, or omission, the
practitioner should consider whether the
practitioner can continue to represent the
client before the Internal Revenue Service
and meet the obligation to ensure dili-
gence as to accuracy under §10.22.
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 13. Section 10.22 is amended by
revising paragraphs (a)(1) through (3) and
(c) to read as follows:
§10.22 Diligence as to accuracy.
(a) * * *
(1) In preparing or assisting in the
preparation of, approving, or submitting
documents, affidavits, and other papers,
including tax returns prepared, approved
or submitted in connection with represent-
ing a client in a matter before the Internal
Revenue Service;
(2) In determining the correctness of oral
or written representations made by the prac-
titioner when representing a client in a mat-
ter before the Internal Revenue Service; and
(3) In determining the correctness of
oral or written representations made by
the practitioner to clients when represent-
ing clients in a matter before the Internal
Revenue Service.
* * * * *
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
§10.27 [Removed]
Par. 14. Section 10.27 is removed.
Par. 15. Section 10.30 is amended by
revising paragraphs (a)(1) and (e) to read
as follows:
§10.30 Solicitation.
(a) * * *
(1) A practitioner may not, with respect
to any Internal Revenue Service matter,
in any way use or participate in the use
of any form of public communication or
private solicitation containing a false,
fraudulent, or coercive statement or claim;
or a misleading or deceptive statement
or claim. Enrolled agents and enrolled
retirement plan agents, in describing their
professional designation, may not utilize
the term certified or imply an employ-
er-employee relationship with the Internal
Revenue Service. Examples of accept-
able descriptions for enrolled agents are
“enrolled to represent clients before the
Internal Revenue Service,” “enrolled to
practice before the Internal Revenue Ser-
vice,” “admitted to practice before the
Internal Revenue Service,” EA, or E.A.
Similarly, examples of acceptable descrip-
tions for enrolled retirement plan agents
are “enrolled to represent clients before
the Internal Revenue Service as a retire-
ment plan agent” and “enrolled to practice
before the Internal Revenue Service as a
retirement plan agent,” ERPA, or E.R.P.A.
* * * * *
(e) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
* * * * *
Par. 16. Section 10.31 is revised to
read as follows:
§10.31 Negotiation of payments to
clients.
(a) In general. A practitioner may not
endorse or otherwise negotiate or transfer
any paper or electronic check, prepaid or
debit card, phone or mobile payment, or
other form of payment issued to a client
by the government in respect of a Federal
tax liability. Negotiate or transfer includes
directing or accepting payment by any
means, electronic or otherwise, into an
account owned, controlled by, or held for
the benefit of the practitioner or any firm
or other entity with which the practitioner
is associated.
(b) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 17. Section 10.33 is amended by:
1. Revising the section heading and
paragraphs (a) introductory text and (a)
(1).
2. Redesignating paragraph (a)(4) as
paragraph (a)(7).
3. Adding new paragraph (a)(4) and
paragraphs (a)(5) and (6).
4. Revising paragraph (b).
5. Removing paragraph (c).
The revisions and additions read as fol-
lows:
§10.33 Best practices for tax
practitioners.
(a) Best practices. Tax practitioners
should provide clients with the highest
quality representation concerning Federal
tax issues by adhering to best practices
in providing advice and in preparing or
assisting in the preparation of a submis-
sion to the Internal Revenue Service. In
addition to compliance with the standards
of practice provided elsewhere in this part,
best practices include the following:
(1) Communicating clearly with the
client regarding the terms of the engage-
ment, including those relating to fees,
expenses, and payment. For example, the
practitioner should determine the client’s
expected purpose for and use of the advice
and should have a clear understanding
with the client regarding the form and
scope of the advice or assistance to be
rendered.
* * * * *
(4) Maintaining a policy related to data
security safeguards with respect to a cli-
ent’s tax return or other confidential infor-
mation. Practitioners should also consider
developing an incident response plan
with specific procedures for responding

Bulletin No. 2025–5 653 January 27, 2025
to a data breach and for disclosure of data
breaches to clients.
(5) Identifying, evaluating, and
addressing a mental impairment, whether
chronic or temporary, arising out of or
related to age, substance abuse, a physi-
cal or mental health condition, or other
circumstance that may have an adverse
impact on a tax practitioner’s ability to
provide the highest quality representation
of a client before the Internal Revenue
Service.
(6) Establishing a business continuity
and succession plan that addresses proce-
dures and safeguards in the event of the
sale or cessation of the practitioner’s prac-
tice, the practitioner’s death or disability,
or the occurrence of extraordinary events
such as a natural disaster, cyberattack, or
pandemic.
* * * * *
(b) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 18. Section 10.34 is amended by
revising the section heading and para-
graphs (a) heading, (a)(1)(i) introductory
text, (c)(1)(i) and (ii), and (d) and (e) to
read as follows:
§10.34 Standards with respect to tax
returns, documents, affidavits, and
other papers prepared or submitted
while representing a client before the
Internal Revenue Service.
(a) Tax returns prepared or submitted
while representing a client in a matter
before the IRS. (1) * * *
(i) Prepare, while representing a client
in a matter before the Internal Revenue
Service or, for tax returns prepared by the
practitioner prior to the representation,
including returns already filed with the
Internal Revenue Service, submit a tax
return or claim for refund or a claim for
a credit that the practitioner knows or rea-
sonably should know contains a position
that—
* * * * *
(c) * * *
(1) * * *
(i) A position taken on a tax return that
is relevant to the representation of a client
in a matter before the Internal Revenue
Service if—
(A) The practitioner provided written
advice, as defined under §10.37, to the cli-
ent with respect to the position; or
(B) The practitioner prepared and sub-
mitted the tax return while representing
the client in a matter before the IRS.
(ii) Any document, affidavit or other
paper submitted in a matter before the
Internal Revenue Service.
* * * * *
(d) Relying on information furnished
by clients. A practitioner advising a client
to take a position on a tax return, docu-
ment, affidavit or other paper submitted
in a matter before the Internal Revenue
Service, generally may rely in good faith
without verification upon information fur-
nished by the client. However, the prac-
titioner may not ignore the implications
of information furnished to, or actually
known by, the practitioner, and must make
reasonable inquiries if the information as
furnished appears to be incorrect, incon-
sistent with an important fact or another
factual assumption, or incomplete.
(e) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 19. Section 10.35 is amended by
adding a sentence at the end of paragraph
(a) and revising paragraph (b) to read as
follows:
§10.35 Competence.
(a) * * * Competency includes under-
standing the benefits and risks associated
with relevant technology that is used by
the practitioner to provide services to cli-
ents or to store and transmit tax return and
other confidential information.
(b) This section is applicable beginning
on [date 30 days after date of publication
of final regulations in the Federal Regis-
ter].
Par. 20. Section 10.36 is amended by
revising paragraphs (a) and (c) to read as
follows:
§10.36 Procedures to ensure
compliance.
(a) Any individual subject to the pro-
visions of this part who has (or individu-
als who have or share) principal authority
and responsibility for overseeing a firm’s
practice governed by this part, including,
while representing a client, the provision
of advice concerning Federal tax matters
or the preparation or submission of docu-
ments in a matter before the Internal Rev-
enue Service, must take reasonable steps
to ensure that the firm has adequate proce-
dures in effect for all members, associates,
and employees (whether or not those indi-
viduals are otherwise subject to this part)
for purposes of complying with subparts
A through C of this part, as applicable
(including the best practices described in
§10.33(a)). In the absence of a person or
persons identified by the firm as having
the principal authority and responsibility
described in this paragraph (a), the Inter-
nal Revenue Service may identify one or
more individuals subject to the provisions
of this part responsible for compliance
with the requirements of this section.
* * * * *
(c) This section is applicable beginning
on [date 30 days after date of publication
of final regulations in the Federal Regis-
ter].
Par. 21. Section 10.37 is amended by
revising the section heading and para-
graphs (b)(2), (c), (d) introductory text,
(d)(2), and (e) to read as follows:
§10.37 Requirements for written tax
advice.
* * * * *
(b) * * *
(2) The practitioner knows or reason-
ably should know that the other person
is not competent or lacks the necessary
qualifications to provide the advice, or is
unaware of all relevant facts and circum-
stances; or
* * * * *
(c) Standard of review. In evaluat-
ing whether a practitioner giving written
advice concerning one or more Federal
tax matters complied with the require-
ments of this section, the Commissioner,
or delegate, will apply a reasonable prac-
titioner standard, considering all facts and
circumstances, including, but not limited
to, the scope of the engagement, the prac-
titioner’s knowledge of the client’s partic-
ular circumstances, and the type and spec-
ificity of the advice sought by the client.
(d) Federal tax matter. A Federal tax
matter, as used in this section, is any trans-

January 27, 2025 654 Bulletin No. 2025–5
action, plan, arrangement, or other matter
(whether prospective or completed), which
is of a type that the Internal Revenue Ser-
vice determines as having a potential for
tax avoidance or evasion, concerning the
application or interpretation of—
* * * * *
(2) Any provision of law impacting a
person’s obligations under the internal
revenue laws and regulations, including
but not limited to the person’s liability to
pay tax, ability to take a specific return
position (whether prospective or com-
pleted), or obligation to file returns; or
* * * * *
(e) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
§§10.38, 10.91, and 10.93 [Removed]
Par. 22. Sections 10.38, 10.91, and
10.93 are removed.
§§10.50, 10.51, 10.52, 10.53, 10.60,
10.61, 10.62, 10.63, 10.64, 10.65, 10.66,
10.67, 10.68, 10.69, 10.70, 10.71, 10.72,
10.73, 10.74, 10.75, 10.76, 10.77, 10.78,
10.79, 10.80, 10.81, 10.82, 10.90, and
10.92 [Redesignated as §§10.70, 10.50,
10.71, 10.72, 10.80, 10.81, 10.82, 10.83,
10.84, 10.85, 10.86, 10.87, 10.88, 10.89,
10.90, 10.91, 10.92, 10.93, 10.94, 10.95,
10.96, 10.97, 10.98, 10.99, 10.100,
10.101, 10.102, 10.100, and 10.113]
Par. 23. Redesignate the sections in the
first column as the sections in the second
column:
Current Section:New Section:
10.5010.70
10.5110.50
10.5210.71
10.5310.72
10.6010.80
10.6110.81
10.6210.82
10.6310.83
10.6410.84
10.6510.85
10.6610.86
10.6710.87
10.6810.88
10.6910.89
10.7010.90
10.7110.91
10.7210.92
10.7310.93
10.7410.94
10.7510.95
10.7610.96
10.7710.97
10.7810.98
10.7910.99
10.8010.100
10.8110.101
10.8210.102
10.9010.110
10.9210.113

Bulletin No. 2025–5 655 January 27, 2025
Par. 24. Revise the heading for subpart
C to read as follows:
Subpart C—Incompetence or
Disreputable Conduct
Par. 25. Newly redesignated §10.50 is
amended by:
1. Revising paragraphs (a) introductory
text and (a)(12).
2. Adding paragraph (a)(19).
3. Revising paragraph (b).
4. Adding paragraph (c).
The revisions and additions read as fol-
lows:
§10.50 Incompetence or disreputable
conduct.
(a) Incompetence or disreputable
conduct. Incompetence or disreputable
conduct for which a practitioner may be
sanctioned under §10.70 includes actions
that relate to a practitioner’s fitness to
practice before the Internal Revenue Ser-
vice, regardless of whether those actions
are connected to a presentation to the
Internal Revenue Service as defined under
§10.2(a)(4). Incompetence or disreputable
conduct includes, but is not limited to—
* * * * *
(12) Contemptuous conduct in con-
nection with practice before the Internal
Revenue Service (or during any proceed-
ing pursuant to §10.80 or an investigation
by the Treasury Inspector General for
Tax Administration), including the use of
abusive or otherwise contemptuous acts
or language, making false accusations
or statements, knowing them to be false,
or circulating or publishing malicious or
libelous matter.
* * * * *
(19) Willfully failing to follow any
Federal tax law.
(b) Assessment of certain penalties.
Assessment against a practitioner of a pen-
alty related to a willful attempt to under-
state tax liabilities under section 6694(b)
of the Internal Revenue Code (Code);
aiding or abetting in the understatement
of tax liabilities under section 6701 of the
Code; careless, reckless, or intentional
disregard for applicable rules or regu-
lations (within the meaning of 26 CFR
1.6662-3(b)(2) and 1.6694-3(c)) under
section 6662(b)(1) of the Code; or promo-
tion of abusive tax shelters under section
6700 of the Code will be considered a vio-
lation of paragraph (a)(7) of this section.
The assessment of any of these penalties,
however, is not required to show a viola-
tion of paragraph (a)(7) of this section.
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 26. New §10.51 is added to sub-
part C to read as follows:
§10.51 Fees that constitute disreputable
conduct.
(a) Unconscionable fees. Charging an
unconscionable fee is disreputable con-
duct.
(b) Contingent fees. Charging a contin-
gent fee in connection with the prepara-
tion of an original or amended tax return
or claim for refund or credit prepared prior
to the examination of the tax return is dis-
reputable conduct.
(1) Preparation of an original or
amended tax return or claim for refund
or credit includes providing advice that is
directly relevant to determining the exis-
tence, character, or amount of an item,
entry, or another portion of a tax return or
claim for refund, including any schedules
that are part of the tax return or claim for
refund or credit.
(2) Contingent fee is any fee that is
based in whole or in part on whether or
not a position taken on a tax return or
other filing avoids challenge by the Inter-
nal Revenue Service or is sustained either
by the Internal Revenue Service or in lit-
igation. A contingent fee includes a fee
that is based on a percentage of the refund
reported on a tax return, that is based on a
percentage of the taxes saved, or that oth-
erwise depends on the specific tax result
attained. A contingent fee also includes
any fee arrangement in which the practi-
tioner will reimburse the client for all or a
portion of the client’s fee in the event that
a position on a tax return or other filing is
challenged by the Internal Revenue Ser-
vice or is not sustained, whether pursuant
to an indemnity agreement, a guarantee,
rescission rights, or any other arrange-
ment with a similar effect.
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 27. Revise the heading for subpart
D to read as follows:
Subpart D—Appraisers
Par. 28. Add new §§10.60 through
10.62 to subpart D to read as follows:
* * * * *
Sec.
10.60 Definitions.
10.61 Disqualification of appraisers.
10.62 Receipt of information concerning
appraisers.
* * * * *
§10.60 Definitions.
(a) Appraiser. The term appraiser
means any individual who determines
the market value of any asset to support
a position taken on a tax return or in an
administrative proceeding. Appraisers
include, but are not limited to, individu-
als who meet the definition of a “qualified
appraiser” under section 170(f)(11)(E) of
the Internal Revenue Code.
(b) Administrative proceeding. An
administrative proceeding for purposes of
this subpart, includes any matter or other
action before the Department of the Trea-
sury or the Internal Revenue Service that
involves the presentation of documents,
testimony, or other evidence. Adminis-
trative proceedings include, but are not
limited to, investigations, examinations,
appeals, and collection actions.
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
§10.61 Disqualification of appraisers.
(a) Authority to disqualify appraisers.
The Commissioner, or delegate, after due
notice and an opportunity for a hearing,
may disqualify an appraiser for violations
of any of the standards under paragraph
(b) of this section or for the disreputa-
ble conduct described under paragraph
(c) of this section. Disqualification may
include a finding that appraisals by such
appraiser will have no probative effect in

January 27, 2025 656 Bulletin No. 2025–5
an administrative proceeding or barring an
appraiser from presenting evidence or tes-
timony in any administrative proceeding
before the Department of the Treasury or
the Internal Revenue Service.
(1) The disqualification of an appraiser
will remain in effect until the appraiser is
authorized to present evidence or testi-
mony pursuant to §10.101. The prohibi-
tion applies to appraisals, evidence, and
testimony submitted or presented by the
appraiser and is not limited to a specific
appraisal or client. The prohibition also
applies to appraisals made before the
effective date of disqualification.
(2) Any appraisal made by a disqual-
ified appraiser after the effective date of
disqualification will not have probative
effect in any administrative proceeding
before the Department of the Treasury or
the Internal Revenue Service. An appraisal
otherwise barred from admission into
evidence pursuant to this section may be
admitted into evidence solely for the pur-
pose of determining the client’s reliance in
good faith on such appraisal.
(b) Appraisal standards and prohib-
ited conduct. (1) All appraisals submitted
in an administrative proceeding should
conform to the substance and principles
of generally accepted appraisal standards
as evidenced by the Uniform Standards of
Professional Appraisal Practice (USPAP)
promulgated by the Appraisal Standards
Board of the Appraisal Foundation or the
International Valuation Standards (IVS)
promulgated by the International Valua-
tion Standards Council (IVSC).
(2) An appraiser may not prepare an
appraisal, where the appraiser knew or
reasonably should have known that it
would be submitted during an administra-
tive proceeding and used to support a sub-
stantial valuation misstatement as defined
in section 6662(e) of the Internal Revenue
Code (Code), a substantial estate or gift
tax valuation understatement as defined in
section 6662(g), or a gross valuation mis-
statement as defined in section 6662(h).
(c) Disreputable conduct. An appraiser
who has been assessed a penalty under
section 6694, 6695A, 6700, or 6701 of
the Code, for which it is determined that
the appraiser acted willfully, recklessly, or
through gross incompetence with respect
to the proscribed conduct may be disqual-
ified for engaging in disreputable conduct.
(d) Misconduct triggering disqualifi-
cation. An appraiser may be disqualified
under §10.61(a) if the appraiser:
(1) Willfully violates any of the stan-
dards described in paragraphs (b)(1) and
(2) of this section.
(2) Recklessly or through gross incom-
petence engages in a pattern of submit-
ting appraisals that violate the standards
described in paragraph (b)(1) of this sec-
tion.
(3) Recklessly or through gross incom-
petence violates the standard described in
paragraph (b)(2) of this section.
(4) Engages in the disreputable conduct
described in paragraph (c) of this section.
(e) Defenses to disqualification. If
an appraiser shows compliance with the
substance and principles of USPAP stan-
dards or IVS with all relevant appraisals,
the showing will be taken into account
as a defense in determining whether the
appraiser acted willfully, recklessly, or
though gross incompetence with respect
to a violation of paragraph (b)(2) or (c) of
this section.
(f) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
§10.62 Receipt of information
concerning appraisers.
(a) Officer or employee of the Internal
Revenue Service. If an officer or employee
of the Internal Revenue Service has rea-
son to believe an appraiser has violated
§10.61(b)(1) or (2) or has been assessed a
penalty under section 6694, 6695A, 6700,
or 6701 of the Internal Revenue Code, the
officer or employee will promptly make a
written report of the suspected violation.
The report will explain the facts and rea-
sons upon which the officer’s or employ-
ee’s belief rests and must be submitted
to the office(s) of the Internal Revenue
Service responsible for administering or
enforcing this part.
(b) Other persons. Any person other
than an officer or employee of the Inter-
nal Revenue Service having information
of misconduct described in §10.61(d)
may make an oral or written report of the
alleged misconduct to the office(s) of the
Internal Revenue Service responsible for
administering or enforcing this part or any
officer or employee of the Internal Rev-
enue Service. If the report is made to an
officer or employee of the Internal Reve-
nue Service, the officer or employee will
make a written report of the suspected
misconduct and submit the report to the
office(s) of the Internal Revenue Service
responsible for administering and enforc-
ing this part.
(c) Destruction of report. No report
made under paragraph (a) or (b) of this
section will be maintained unless reten-
tion of the report is permissible under the
applicable records control schedule as
approved by the National Archives and
Records Administration and designated in
the Internal Revenue Manual. Reports must
be destroyed as soon as permissible under
the applicable records control schedule.
(d) Effect on proceedings under sub-
part E of this part. The destruction of any
report will not bar any proceeding under
subpart E but will preclude the use of a
copy of the report in a proceeding under
subpart E.
(e) Applicability date. This section is
applicable to conduct occurring on or after
[date 30 days after date of publication of
final regulations in the Federal Register].
Par. 29. Revise the heading for subpart
E to read as follows:
Subpart E–Sanctions for Violation of
the Regulations
§§ 10.70, 10.71, and 10.72 [Transferred
to Subpart E]
Par. 30. Newly redesignated §§ 10.70,
10.71, and 10.72 are transferred to subpart
E.
Par. 31. Newly redesignated §10.70 is
amended by:
1. Removing paragraph (b).
2. Redesignating paragraphs (c)
through (f) as paragraphs (b) through (e).
3. Revising newly redesignated para-
graph (e).
The revision reads as follows:
§10.70 Sanctions.
* * * * *
(e) Applicability date. This section is
applicable to conduct occurring on or after
[date 30 days after date of publication of
final regulations in the Federal Register].

Bulletin No. 2025–5 657 January 27, 2025
Par. 32. Newly redesignated §10.71 is
revised to read as follows:
§10.71 Violations subject to sanction.
(a) A practitioner may be sanctioned
under §10.70 if the practitioner—
(1) Willfully violates any of the regu-
lations (other than § 10.33) contained in
this part; or
(2) Recklessly or through gross incom-
petence (within the meaning of §10.50(a)
(13)) violates §10.34, §10.35, §10.36, or
§10.37.
(b) This section is applicable to con-
duct occurring on or after [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 33. Newly redesignated §10.72 is
amended by revising paragraphs (d) and
(e) to read as follows:
§10.72 Receipt of information
concerning practitioner.
* * * * *
(d) Effect on proceedings under subpart
F of this part. The destruction of any report
will not bar any proceeding under subpart
F but will preclude the use of a copy of the
report in a proceeding under subpart F.
(e) Applicability date. This section is
applicable to conduct occurring on or after
[date 30 days after date of publication of
final regulations in the Federal Register].
Par. 34. Add subpart F to read as fol-
lows:
Subpart F–Rules Applicable to
Disciplinary Proceedings and General
Provisions
§§ 10.80 through 10.102, 10.110, and
10.113 [Transferred to Subpart F]
Par. 35. Newly redesignated §§ 10.80
through 10.102, 10.110, and 10.113 are
transferred to subpart F.
Par. 36. Newly redesignated §10.80 is
amended by revising paragraphs (b) and
(d) to read as follows:
§10.80 Institution of proceeding.
* * * * *
(b) Whenever the Secretary of the
Treasury, or delegate, determines that the
appraiser acted willfully, recklessly, or
through gross incompetence, or engaged
in disreputable conduct, as defined under
§10.61(d)(1) through (4), with respect
to the proscribed conduct, the appraiser
may, in accordance with this section, be
subject to a proceeding for disqualifica-
tion. A proceeding for disqualification of
an appraiser is instituted by the filing of a
complaint, the contents of which are more
fully described in §10.82.
* * * * *
(d) This section is applicable beginning
on [date 30 days after date of publication
of final regulations in the Federal Regis-
ter].
Par. 37. Newly redesignated §10.85 is
amended by:
1. Revising paragraph (a)(2).
2. Adding paragraph (a)(3).
3. Revising paragraph (c).
The revisions and addition read as fol-
lows:
§10.85 Supplemental charges.
(a) * * *
(2) It appears that the respondent has
knowingly introduced false testimony
during the proceedings against the respon-
dent; or
(3) It appears that the respondent has
engaged in contemptuous conduct within
the meaning of §10.50(a)(12) during the
proceedings against the respondent.
* * * * *
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 38. Newly redesignated §10.99 is
amended by revising paragraph (e) and
adding paragraphs (f) and (g) to read as
follows:
§10.99 Effect of disbarment,
suspension, or censure.
* * * * *
(e) Jurisdiction to investigate compli-
ance with censure, suspension, or disqual-
ification. A practitioner or appraiser who
is censured, suspended, or disqualified
under §10.61(a), §10.70, or §10.102 will
be considered a practitioner or appraiser
for the purpose of investigating whether
the practitioner or appraiser is in com-
pliance with the terms of their censure,
suspension, or disqualification. Censured,
suspended, or disqualified practitioners or
appraisers may face additional sanctions
or disbarment for any violation.
(f) Jurisdiction to investigate dis-
barred practitioners and non-prac-
titioners. The IRS may investigate a
practitioner disbarred under §10.70 or
a non-practitioner to determine whether
they are wrongly holding themselves out
as practitioners.
(g) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 39. Newly redesignated §10.101 is
revised to read as follows:
§10.101 Petition for reinstatement.
(a) In general. A practitioner dis-
barred or suspended under §10.70, or
an appraiser disqualified under §10.61,
may petition for reinstatement before the
Internal Revenue Service after the expi-
ration of 5 years following such disbar-
ment, suspension, or disqualification (or
immediately following the expiration of
the suspension or disqualification period,
if shorter than 5 years). A practitioner or
appraiser suspended or disqualified under
§10.102 may petition for reinstatement at
any time upon a showing of good cause
as described in §10.102(f)(2). Reinstate-
ment will not be granted unless the Inter-
nal Revenue Service determines that the
petitioner is not likely to engage thereafter
in conduct contrary to the regulations in
this part, and that granting such reinstate-
ment would not be contrary to the public
interest.
(b) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 40. Newly redesignated §10.102 is
amended by:
1. Revising the section heading.
2. Removing paragraph (a).
3. Redesignating paragraphs (b)
through (h) as paragraphs (a) through (g).
4. Revising newly redesignated para-
graphs (a), (b) introductory text, (b)(2)
and (4), and (e) through (g).
The revisions and additions read as fol-
lows:

January 27, 2025 658 Bulletin No. 2025–5
§10.102 Expedited suspension or
disqualification.
(a) When applicable. The expedited
suspension procedures in this section
are initiated by issuing the show cause
order described under paragraph (d) of
this section. A show cause order will be
issued to any practitioner or appraiser
for whom paragraph (a)(1), (2), (3),
(4), (5), (6), or (7) of this section is true
within the 5 years prior to the date that
the show cause order was issued. The
expedited procedures described in this
section may be used to suspend the prac-
titioner from practice before the Internal
Revenue Service, disqualify an appraiser
from presenting evidence or testimony
in any administrative proceeding before
the Department of the Treasury or the
Internal Revenue Service, or find that
any appraisal made by a disqualified
appraiser after the effective date of dis-
qualification will not have probative
effect in any administrative proceeding
before the Department of the Treasury
or the Internal Revenue Service.
(1) A practitioner has a license to prac-
tice as an attorney, certified public accoun-
tant, or actuary suspended or revoked for
cause (not including failure to pay a pro-
fessional licensing fee) by any authority
or court, agency, body, or board described
in §10.50(a)(10).
(2) An appraiser has a license or certi-
fication to conduct appraisals revoked or
suspended by any state licensing or certi-
fication board.
(3) A practitioner or appraiser has
voluntarily forfeited a practitioner’s or
appraiser’s license or certification after
any authority described in paragraph (a)
(1) or (2) of this section initiated an inves-
tigation of, or proceeding against, the prac-
titioner or appraiser for alleged violations
of applicable standards or rules of conduct
for which the practitioner’s or appraiser’s
license or certification could be suspended
or revoked for cause, if proven. Voluntary
forfeiture includes retirement, resignation,
consensual permanent inactivation, or
similar action.
(4) A practitioner has, irrespective of
whether an appeal has been taken, been
convicted of any crime under title 26,
United States Code, any crime involv-
ing dishonesty or breach of trust, or any
felony for which the conduct involved
renders the practitioner unfit to practice
before the Internal Revenue Service.
(5) A practitioner has violated condi-
tions imposed on the practitioner pursuant
to §10.99(d).
(6) A practitioner has been sanctioned
by a court of competent jurisdiction,
whether in a civil or criminal proceed-
ing (including suits for injunctive relief),
relating to any client’s tax liability or
relating to the practitioner’s own tax lia-
bility, for—
(i) Instituting or maintaining proceed-
ings primarily for delay;
(ii) Advancing frivolous or groundless
arguments; or
(iii) Failing to pursue available admin-
istrative remedies.
(7) A practitioner has demonstrated a
pattern of willful disreputable conduct
by—
(i) Failing to make an annual Federal
tax return, in violation of the Federal tax
laws, during 4 of the 5 tax years imme-
diately preceding the institution of a pro-
ceeding under paragraph (b) of this sec-
tion and remains noncompliant with any
of the practitioner’s Federal tax filing
obligations at the time the notice of sus-
pension is issued under paragraph (e) of
this section; or
(ii) Failing to make a return required
more frequently than annually, in viola-
tion of the Federal tax laws, during 5 of
the 7 tax periods immediately preceding
the institution of a proceeding under para-
graph (b) of this section and remains non-
compliant with any of the practitioner’s
Federal tax filing obligations at the time
the notice of suspension is issued under
paragraph (e) of this section.
(b) Expedited suspension or disqual-
ification procedures. A suspension or
disqualification under this section will
be proposed by a show cause order that
names the respondent, is signed by an
authorized representative of the Internal
Revenue Service under §10.89(a)(1), and
is served according to the rules set forth
in §10.83(a). The show cause order must
give a plain and concise description of the
allegations that constitute the basis for the
proposed suspension or disqualification.
The show cause order must notify the
respondent—
* * * * *
(2) That an expedited suspension or
disqualification decision by default may
be rendered if the respondent fails to file
a response as required;
* * * * *
(4) That the respondent may be sus-
pended or disqualified either immediately
following the expiration of the period
within which a response must be filed or,
if a conference is requested, immediately
following the conference.
* * * * *
(e) Suspension or disqualification—
(1) In general. The Commissioner, or
delegate, may suspend the respondent
from practice before the Internal Rev-
enue Service or disqualify an appraiser
from presenting evidence or testimony in
any administrative proceeding before the
Department of the Treasury or Internal
Revenue Service by a written notice of
expedited suspension or disqualification
immediately following:
(i) The expiration of the period within
which a response to a show cause order
must be filed if the respondent does not
file a response as required by paragraph
(c) of this section;
(ii) The conference described in para-
graph (d) of this section if the Internal
Revenue Service finds that the respondent
is described in paragraph (a) of this sec-
tion;
(iii) If the respondent has not requested
a conference, upon consideration of any
response described in paragraph (c) of this
section; or
(iv) The respondent’s failure to appear,
either personally or through an authorized
representative, at a conference scheduled
by the Internal Revenue Service under
paragraph (d) of this section.
(2) Duration of suspension or disqual-
ification. A suspension or disqualification
under this section will commence on the
date that the written notice of expedited
suspension or disqualification is served
on the practitioner or appraiser, either per-
sonally or through an authorized represen-
tative. The suspension or disqualification
will remain effective until the earlier of:
(i) The date the Internal Revenue Ser-
vice lifts the suspension or disqualification
upon receipt of a petition for reinstatement
under §10.101 and after determining that
the practitioner or appraiser has shown
good cause based on all the relevant facts

Bulletin No. 2025–5 659 January 27, 2025
and circumstances why the suspension or
disqualification should be lifted and the
individual reinstated to practice; or
(ii) The date the suspension or disqual-
ification is lifted or otherwise modified by
an Administrative Law Judge or the Sec-
retary of the Treasury, or delegate decid-
ing appeals, in a proceeding referred to in
paragraph (f) of this section and instituted
under §10.80.
(3) Good cause. For purposes of this
paragraph (e), a suspended practitioner
or disqualified appraiser may show good
cause when, for example, the individual
was suspended or disqualified:
(i) Under paragraphs (a)(1) through (3)
of this section, and the individual’s license
or certificate to practice as an attorney,
certified public accountant, actuary, or
appraiser has been restored;
(ii) Under paragraph (a)(4) of this sec-
tion, and the conviction was reversed on
appeal, with no retrial underway or pend-
ing;
(iii) Under paragraph (a)(5) of this
section, and the individual is no longer in
violation of the conditions imposed on the
individual under §10.99(d) and the indi-
vidual either fully satisfied the conditions
or is compliant with them if they are still
in effect;
(iv) Under paragraph (a)(6) of this
section, and the individual has satisfied
any terms of the court-imposed sanction,
such as payment of a monetary sanction
or completion of mandated hours of pro
bono work; has not been sanctioned again
for the same or substantially similar con-
duct by a court or any other authority
described in §10.50(a)(10); and has ceased
the conduct that resulted in the sanction
(for example, ceased advancing frivolous
or groundless arguments in matters before
the Internal Revenue Service and courts or
other tribunals); or
(v) Under paragraph (a)(7) of this
section, and the individual is fully com-
pliant with the individual’s tax filing
and payment obligations, including any
installment agreement or other payment
arrangement entered into with the Internal
Revenue Service.
(f) Demand for §10.80 proceeding. If
the Internal Revenue Service suspends a
practitioner or disqualifies an appraiser
under the expedited suspension proce-
dures described in this section, the prac-
titioner or appraiser may demand that the
Internal Revenue Service institute a pro-
ceeding under §10.80 and issue the com-
plaint described in §10.82. The demand
must be in writing, specifically reference
the suspension or disqualification action
under §10.82, and be made within 2 years
from the date on which the practitioner’s
suspension or appraiser’s disqualification
commenced. The Internal Revenue Ser-
vice must issue a complaint demanded
under this paragraph (f) within 60 calendar
days of receiving the demand. If the Inter-
nal Revenue Service does not issue such
complaint within 60 days of receiving the
demand, the suspension or disqualifica-
tion is lifted automatically. The preceding
sentence does not, however, preclude the
Commissioner, or delegate, from institut-
ing a regular proceeding under §10.80.
(g) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 41. Newly redesignated §10.110 is
amended by:
1. Removing paragraph (a)(4).
2. Redesignating paragraphs (a)(5) and
(6) as paragraphs (a)(4) and (5).
3. Revising paragraph (c).
The revision reads as follows:
§10.110 Records.
* * * * *
(c) Applicability date. This section is
applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
Par. 42. Sections 10.111 and 10.112
are added to read as follows:
§10.111 Establishment of advisory
committees.
(a) Advisory committees. To promote
and maintain the public’s confidence in tax
advisors, the Internal Revenue Service is
authorized to establish one or more advi-
sory committees composed of at least six
individuals authorized to practice before
the Internal Revenue Service. Member-
ship of an advisory committee must be
balanced among those who practice as
attorneys, accountants, enrolled agents,
enrolled actuaries, and enrolled retirement
plan agents. Under procedures prescribed
by the Internal Revenue Service, an advi-
sory committee may review and make
general recommendations regarding the
practices, procedures, and policies of the
offices described in §10.1.
(b) Applicability date. This section
is applicable beginning on [date 30 days
after date of publication of final regula-
tions in the Federal Register].
§10.112 Saving provision.
Any proceeding instituted under this
part prior to [date 30 days after date of
publication of final regulations in the Fed-
eral Register], for which a final decision
has not been reached or for which judicial
review is still available is not affected by
the revisions to this part effective [effec-
tive date of final regulations]. Any pro-
ceeding under this part based on conduct
engaged in prior to [date 30 days after
date of publication of final regulations in
the Federal Register], which is instituted
after that date, will apply this subpart, but
the conduct engaged in prior to [effective
date of final regulations], will be judged
by the regulations in effect at the time the
conduct occurred.
Par. 43. Section 10.114 is added to
read as follows:
§10.114 Applicability date.
Except as otherwise provided in any
section of this part and subject to §10.112,
the provisions of this part are applicable
on [date 30 days after date of publication
of final regulations in the Federal Regis-
ter].
Douglas W. O’Donnell,
Deputy Commissioner.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register Decem-
ber 20, 2024, 8:45 a.m., and published in the issue
of the Federal Register for December 26, 2024, 89
FR 104915)

Bulletin No. 2025–5 i January 27, 2025
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.
—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

January 27, 2025 ii Bulletin No. 2025–5
Numerical Finding List
1
Bulletin 2025–5
Announcements:
2025-2, 2025-2 I.R.B. 305
2025-3, 2025-2 I.R.B. 306
2025-4, 2025-2 I.R.B. 306
2025-1, 2025-3 I.R.B. 431
2025-5, 2025-3 I.R.B. 433
2025-6, 2025-5 I.R.B. 526
Notices:
2025-1, 2025-3 I.R.B. 415
2025-2, 2025-3 I.R.B. 418
2025-4, 2025-3 I.R.B. 419
2025-5, 2025-3 I.R.B. 426
2025-3, 2025-4 I.R.B. 488
2025-7, 2025-5 I.R.B. 524
Proposed Regulations:
REG-117213-24, 2025-3 I.R.B. 433
REG-134420-10, 2025-4 I.R.B. 513
REG-105479-18, 2025-5 I.R.B. 527
REG-116610-20, 2025-5 I.R.B. 638
Revenue Procedures:
2025-1, 2025-1 I.R.B. 1
2025-2, 2025-1 I.R.B. 118
2025-3, 2025-1 I.R.B. 142
2025-4, 2025-1 I.R.B. 158
2025-5, 2025-1 I.R.B. 260
2025-7, 2025-1 I.R.B. 301
2025-8, 2025-3 I.R.B. 427
2025-9, 2025-4 I.R.B. 491
2025-10, 2025-4 I.R.B. 492
2025-11, 2025-4 I.R.B. 501
2025-12, 2025-4 I.R.B. 512
Revenue Rulings:
2025-1, 2025-3 I.R.B. 307
2025-2, 2025-3 I.R.B. 309
2025-3, 2025-4 I.R.B. 443
Treasury Decisions:
10016, 2025-3 I.R.B. 313
10020, 2025-3 I.R.B. 408
10018, 2025-4 I.R.B. 446
10019, 2025-4 I.R.B. 482
10017, 2025-5 I.R.B. 517
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin
2024–52, dated December 23, 2024.

Bulletin No. 2025–5 iii January 27, 2025
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2025–5
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin
2024–52, dated December 23, 2024.

Internal Revenue Service
Washington, DC 20224
Official Business
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