Internal Revenue Bulletin 2018-43 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

## 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 2018-13, page 714.

The Office of Professional Responsibility (OPR) announces re-
cent disciplinary sanctions involving attorneys, certified public
accountants, enrolled agents, enrolled actuaries, enrolled re-
tirement plan agents, and appraisers. These individuals are
subject to the regulations governing practice before the Inter-
nal Revenue Service (IRS), which are set out in Title 31, Code
of Federal Regulations, Part 10, and which are published in
pamphlet form as Treasury Department Circular No. 230. The
regulations prescribe the duties and restrictions relating to
such practice and prescribe the disciplinary sanctions for vio-
lating the regulations.

## Employee Plans

### Notice 2018-81, page 666.

This notice describes the manner in which taxpayers notify the
Internal Revenue Service of revocation of an election to aggre-
gate or disaggregate certain church-related organizations from
treatment as a single employer under section 414(c)(2)(C) and
(D). Churches and church-related organizations are allowed to
make elections to aggregate or disaggregate for this purpose
under section 414(c)(2)(C) and (D), which were added to the
Code by section 336(a) of the Protecting Americans from Tax
Hikes Act of 2015 (Public Law 114-113 (129 Stat. 2242
(2015)) (PATH Act). This notice also requests comments with
respect to potential guidance on certain other issues raised by
PATH Act provisions related to church plans.

Bulletin No.

2018-43

October 22, 2018

## Income Tax

REG-104390-18, page 671.

This document contains proposed regulations implementing
section 951A of the Internal Revenue Code. Section 951A was
added to the Internal Revenue Code by the Tax Cuts and Jobs
Act, Pub. L. 115-97 (2017), which was enacted on December
22, 2017. This document also contains proposed regulations
under sections 951, 1502, and 6038. These proposed regu-
lations would affect United States shareholders of controlled
foreign corporations.

### REV. PROC. 2018-53, page 667.

The purpose of this revenue procedure is to provide proce-
dures for taxpayers seeking private letter rulings regarding the
satisfaction under section 361(b)(3) or (c)(3) or assumption
under section 357 of debt of a distributing corporation pursu-
ant to a transaction described by §§ 355 and 368(a)(1)(D).
Certain information and representations are required to be
submitted with such taxpayers' submissions.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force 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 official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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 the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

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, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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## Part III. Administrative, Procedural, and Miscellaneous

### Notice Regarding Certain Church Plan Clarifications under Section 336 of the PATH Act

Notice 2018-81

#### I. PURPOSE

This notice describes the manner in
which taxpayers notify the Internal Reve-
nue Service (IRS) of revocation of an
election to aggregate or disaggregate cer-
tain church-related organizations from
treatment as a single employer under sec-
tion 414(c)(2)(C) and (D). Churches and
church-related organizations are allowed
to make elections to aggregate or disag-
gregate for this purpose under section
414(c)(2)(C) and (D), which were added
to the Code by section 336(a) of the Pro-
tecting Americans from Tax Hikes Act of
2015 (Public Law 114-113 (129 Stat.
2242 (2015)) (PATH Act). This notice
also requests comments with respect to
potential guidance on certain other issues
raised by PATH Act provisions related to
church plans.

#### II. BACKGROUND

Section 414(c) generally provides that
employees of employers that are members
of a group under common control are
treated as employed by a single employer.
Section 414(c) is used in determining,
among other requirements, whether a re-
tirement plan complies with applicable
nondiscrimination requirements. Section
336(a) of the PATH Act amended section
414(c) by adding a new section 414(c)(2).
Under section 414(c)(2)(C) and (D), an
election may be made to aggregate or dis-
aggregate certain church-related organiza-
tions, respectively, for purposes of treat-
ment as a single employer under section
414(c). Under these provisions, the "elec-
tion, once made, shall apply to all suc-
ceeding plan years unless revoked with
notice provided to the Secretary in such
manner as the Secretary shall prescribe."
However, the provisions do not require
that the Secretary be notified of any elec-
tion under section 414(c)(2).

### III. PROVIDING NOTICE OF REVOCATION OF ELECTION TO AGGREGATE OR DISAGGREGATE

The PATH Act does not prescribe spe-
cific rules for making or revoking elec-
tions under section 414(c)(2)(C) or (D),
other than requiring that the IRS be noti-
fied of the revocation of an election.
Therefore, for purposes of section 414(c)
(2)(C) and (D), the generally applicable
substantiation and recordkeeping require-
ments of section 6001, including require-
ments described in Rev. Proc. 98-25
(1998-1 CB 689), apply. Accordingly, to
satisfy the statutory requirement that no-
tice be provided to the IRS if an election
made under section 414(c)(2)(C) or (D) is
subsequently revoked, the entity autho-
rized to revoke the election must provide a
copy of the revocation upon request by the
IRS.

## IV. EFFECTIVE DATE

This notice is effective for revocations
of elections under section 414(c)(2)(C) or
(D) made on or after October 22, 2018.
Before October 22, 2018, any reasonable
method of notifying the Secretary regard-
ing revocations of elections under section
414(c)(2)(C) or (D) is acceptable, includ-
ing the generally applicable substantiation
and recordkeeping requirements of sec-
tion 6001 that would satisfy Section III of
this notice.

## V. COMMENTS REQUESTED REGARDING POTENTIAL ADDITIONAL GUIDANCE

The Department of the Treasury and the
IRS request comments on whether addi-
tional guidance under section 336 of the
PATH Act would be helpful. Send submis-
sions to CC:PA:LPD:PR, (Notice 2018-
81), Room 5203, Internal Revenue Service,
PO Box 7604, Ben Franklin Station, Wash-
ington, D.C. 20044. Comments may also be
hand delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
Internal Revenue Service, CC:PA:LPD:PR,
(Notice 2018-81), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue,
N.W., Washington DC. Alternatively, com-
ments may be submitted via the Internet at

notice.comments@irscounsel.treas.gov
(Notice 2018-81). Please submit writ-
ten comments by December 21, 2018.
All comments will be available for pub-
lic inspection.

## VI. PAPERWORK REDUCTION ACT

The collection of information con-
tained in this notice has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-2279.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid OMB control number.

The collection of information in this
notice is in section III. This information
is required to revoke an election to ag-
gregate or disaggregate certain organi-
zations under section 414(c)(2)(C) or
(D). The collection of information is
mandatory if such an election is re-
voked. The likely respondents are spon-
sors of church plans.

The estimated total annual reporting
burden is 6.1 hours. The estimated annual
burden per respondent is approximately 2
hours. The estimated number of respon-
dents is 31. The estimated annual fre-
quency of responses is 3.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become rele-
vant to the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

## VII. DRAFTING INFORMATION

The principal author of this notice is
Jeremy D. Lamb of the Office of Associ-
ate Chief Counsel (Tax Exempt and Gov-
ernment Entities). For further information
regarding this notice, contact Mr. Lamb at
(202) 317-6799 (not a toll-free number).

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26 CFR 601.201: Rulings and determination letters
(Also Part I, §§ 355, 1.355-1.)

## Rev. Proc. 2018-53

### SECTION 1. PURPOSE

This revenue procedure provides proce-
dures for taxpayers requesting private letter
rulings regarding certain issues pertaining to
reorganizations under § 368(a)(1)(D) and
§ 355 of the Internal Revenue Code of 1986
(Divisive Reorganizations), including repre-
sentations, information, and analysis that
taxpayers requesting these rulings should
submit.

### SECTION 2. BACKGROUND

In a Divisive Reorganization, a corpo-
ration (Distributing) transfers property to
a corporation it controls (within the mean-
ing of § 368(c)) immediately thereafter
(Controlled), in exchange for consider-
ation. The consideration received by Dis-
tributing (§ 361 Consideration) includes
Controlled stock and also may include
money, securities or other debt obligations
of which Controlled is the obligor, and
other property. Controlled may also as-
sume liabilities of Distributing. To com-
plete the Divisive Reorganization, Dis-
tributing distributes the Controlled stock,
and possibly other § 361 Consideration, to
its shareholders and may also distribute
§ 361 Consideration in satisfaction of its
obligations to holders of its securities or to
other creditors.

In section 5.01(10) of Rev. Proc.
2013-3, 2013-1 I.R.B. 113, the Internal
Revenue Service (Service) modified its
prior practice and stated that it would no
longer rule on whether § 355 or § 361
applied to Distributing's distribution of
Controlled stock or securities in exchange
for, and in retirement of, putative Distrib-
uting debt if such Distributing debt was
issued in anticipation of the distribution.
The Service set forth this no-rule position
most recently in section 5.01(4) of Rev.
Proc. 2017-3, 2017-1 I.R.B 130. In Rev.
Proc. 2017-38, 2017-22 I.R.B. 1258, the
Service modified Rev. Proc. 2017-3 to
remove this no-rule position.

In Rev. Proc. 2017-52, 2017-41 I.R.B.
283, the Service introduced a pilot pro-
gram to allow rulings on the overall fed-
eral income tax consequences of Divisive
Reorganizations and other distributions

under § 355, provided procedures for tax-
payers requesting these rulings, and clar-
ified procedures for taxpayers requesting
rulings on significant issues (defined in
section 3.01(53) of Rev. Proc. 2018-3,
2018-1 I.R.B. 130).

On October 13, 2017, the Service re-
leased a statement to inform taxpayers and
their advisers of changes relating to re-
quests for private letter rulings on certain
corporate transactions. This statement
provides, in part, the following:

If, in connection with a section 355
distribution, a distribution of stock, se-
curities or other property to the distrib-
uting corporation's shareholders or
creditors is substantially delayed, IRS
will continue to rule on whether the
delayed distribution is tax-free under
section 355 or section 361. However,
rulings on such issues will not be based
solely on the length of the delay. In-
stead, IRS will rule on this issue only
based on substantial scrutiny of the
facts and circumstances (including the
circumstances of the delay) and full
consideration of the legal issues and
the effects of a ruling on federal tax
administration.

The Department of the Treasury and
the Service continue to study the issues
relating to assumption and satisfaction of
Distributing's obligations in Divisive Re-
organizations. The Service has deter-
mined, however, that taxpayers requesting
rulings on certain of these issues should
follow specified procedures and submit
specified representations and related in-
formation and analysis.

## SECTION 3. APPLICATION AND PROCEDURES

### .01 Ruling requests to which procedures apply

A taxpayer engaging in a Divisive Re-
organization may request rulings that no
gain or loss will be recognized to Distrib-
uting (i) upon Controlled's assumption of
liability for an obligation of Distributing
(§ 357(a)), and (ii) upon Distributing's
receipt of § 361 Consideration and its
distribution of the § 361 Consideration to
a creditor in satisfaction of Distributing's
debt obligation (§§ 361(b) and (c)). Each
such ruling may be a Significant Issue
Ruling, described in section 6.03(2) of

Rev. Proc. 2018-1, 2018-1 I.R.B. 1, or it
may be included in a Transactional Rul-
ing, defined in section 2.03(1)(c) of Rev.
Proc. 2017-52.

The procedures described in section
3.03 of this revenue procedure apply to a
request for a Significant Issue Ruling or a
Transactional Ruling, as appropriate, to
the extent that a subject of the request is
an assumption by Controlled of liability
for Distributing Debt or the satisfaction of
Distributing Debt with § 361 Consider-
ation. For purposes of this revenue proce-
dure, an obligation is Distributing Debt if
(a) Distributing is the obligor, and (b) the
obligation (i) is evidenced by a debt in-
strument (defined in § 1.1275-1(d)) that is
not a contingent payment debt instrument
subject to § 1.1275-4 (Non-contingent
Debt Instrument) and (ii) by its terms is
payable only in money. (For example,
Distributing Debt does not include an ob-
ligation that, by its terms, can be satisfied
with § 361 Consideration, other than
money, at Distributing's option.)

### .02 Ruling requests on similar or related transactions

The Service will continue to rule on
transactions that are not described in sec-
tion 3.01 of this revenue procedure but are
similar to such transactions. These trans-
actions include assumption or satisfaction
of Distributing's obligations that are not
Distributing Debt (for example, contin-
gent liabilities) and distributions of § 361
Consideration to Distributing's sharehold-
ers. However, this revenue procedure does
not describe procedures for requesting
such rulings or the representations, infor-
mation, or analysis that taxpayers request-
ing such rulings should submit. See gen-
erally Rev. Proc. 2018-1 and Rev. Proc.
2017-52.

A taxpayer may request rulings regard-
ing assumption or satisfaction of some
obligations that are, and of other obliga-
tions that are not, Distributing Debt. In
this situation, the taxpayer should follow
the procedures described in section 3.03
of this revenue procedure with respect to
the Distributing Debt and should follow
the procedures described in Rev. Proc.
2018-1 and Rev. Proc. 2017-52 with re-
spect to the other obligations. Additional
representations, information, and analysis
may be required.

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### .03 Procedures

In a request for rulings described in
section 3.01 of this revenue procedure, the
taxpayer should submit (in addition to the
representations, information, and analysis
described in Rev. Proc. 2018-1 and Rev.
Proc. 2017-52) information that describes
(1) the Distributing Debt that will be as-
sumed or satisfied (including the relevant
terms of the Non-contingent Debt Instru-
ments that evidence the Distributing Debt
and the date or dates on which the Dis-
tributing Debt was incurred), (2) the § 361
Consideration that will be distributed to
creditors in satisfaction of the Distributing
Debt, and (3) the transactions that will
implement Controlled's assumption of li-
ability for Distributing Debt or Distribut-
ing's receipt of § 361 Consideration and
its distribution of § 361 Consideration to
creditors in satisfaction of Distributing
Debt.

The taxpayer should also submit infor-
mation and analysis to establish that (1)
any assumption of Distributing Debt by
Controlled will be consideration received
by Distributing in the Divisive Reorgani-
zation, and (2) any distribution of § 361
Consideration by Distributing to its cred-
itors in satisfaction of Distributing Debt
will be in connection with the plan of
reorganization.

If, at the time of the first distribution of
Controlled stock to Distributing share-
holders, the assumption or satisfaction of
Distributing Debt is subject to any contin-
gency, the taxpayer should (1) describe
each contingency and any alternative
transactions and (2) establish that there
are one or more substantial business rea-
sons for the plan not being fixed and de-
termined at that time. Documentation of
such business reasons should be submitted
only if requested.

In addition, the taxpayer should submit
the representations, information, and anal-
ysis set forth in section 3.04 of this reve-
nue procedure.

.04 Representations, information, and
analysis

The representations, information, and
analysis described in paragraphs (1) through
(8) of this section 3.04 should be submitted.
With respect to these representations, the
taxpayer should not follow the procedures in

section 3.04 of Rev. Proc. 2017-52. Instead,
the taxpayer should set forth each applicable
representation and the additional informa-
tion and analysis described in this section
3.04. If the taxpayer believes that any of the
representations is not applicable, the tax-
payer should explain its rationale for this
belief.

If the taxpayer is unable to submit an
applicable representation in the form set
forth in this section 3.04 (Standard Rep-
resentation), the taxpayer should submit
(1) an explanation for its inability to pro-
vide the Standard Representation and (2)
the rationale supporting the issuance of
each relevant requested ruling in the ab-
sence of the Standard Representation. If
appropriate, the taxpayer should submit
(1) a modified representation that ad-
dresses the same matter, (2) an explana-
tion of the modification, and (3) the ratio-
nale supporting the issuance of each
relevant requested ruling, taking into ac-
count the modified Standard Representa-
tion.

The representations in this section 3.04
use terms defined in this revenue proce-
dure. The taxpayer should include in its
request either (1) definitions of these
terms that are consistent with the defini-
tions in this revenue procedure or (2) a
statement to the effect that these terms
have the meanings set forth in this reve-
nue procedure.

(1) Distributing as obligor in sub-
stance. Submit the following REPRE-
SENTATION: Distributing is in sub-
stance the obligor of each Distributing
Debt that will be assumed or satisfied.
With respect to any such Distributing
Debt, the taxpayer should submit informa-
tion regarding any co-obligation, guaran-
tee, indemnity, surety, make-well, keep-
well, or similar arrangement, including
security provided by any person other
than Distributing. The taxpayer should
also submit information and analysis to
establish that, taking into account any
such arrangement, Distributing is in sub-
stance the obligor of such Distributing
Debt.

(2) Holder not a Related Person. Sub-
mit the following REPRESENTATION:
No holder of Distributing Debt that will
be assumed or satisfied is a person related
to Distributing or Controlled within the
meaning of § 267(b) or § 707(b)(1) (Re-

lated Person). If a holder is a Related
Person, the taxpayer should establish that
the § 361 Consideration received by the
Related Person will be used to satisfy an
obligation that is evidenced by a Non-
contingent Debt Instrument and is held by
a person other than a Related Person. The
taxpayer should also submit information
and analysis to address any potential ap-
plication of the consolidated return regu-
lations, including § 1.1502-13(g).

(3) Holder of Distributing Debt. Sub-
mit the following REPRESENTATION:
The holder of Distributing Debt that will
be assumed or satisfied will not hold the
debt for the benefit of Distributing, Con-
trolled, or any Related Person. A collateral
benefit received by Distributing from an ar-
rangement with an intermediary (for exam-
ple, facilitation of exchanges of § 361 Con-
sideration for Distributing Debt) will not be
treated as the intermediary holding Distrib-
uting Debt for the benefit of Distributing,
Controlled, or a Related Person. If an inter-
mediary will acquire pre-existing Distribut-
ing Debt from any person, and such Distrib-
uting Debt will be satisfied with § 361
Consideration, submit the following addi-
tional REPRESENTATIONS: [Name of
intermediary] will not acquire Distributing
Debt from Distributing, Controlled, or any
Related Person. Neither Distributing, nor
Controlled, nor any Related Person will
participate in any profit gained by [name of
intermediary] upon an exchange of § 361
Consideration; nor will any such profit be
limited by agreement or other arrangement.
The value of the § 361 Consideration re-
ceived by [name of intermediary] in satis-
faction of the Distributing Debt will not
exceed the amount to which the holder is
entitled under the terms of the Distributing
Debt. The taxpayer should describe any co-
obligation, guarantee, indemnity, surety,
make-well, keep-well, or similar arrange-
ment, including additional security, pro-
vided to the intermediary by Distributing,
Controlled, or any Related Person for risk of
loss with respect to the Distributing Debt.

(4) Distributing Debt as historic debt.
Submit the following REPRESENTA-
TION: Distributing incurred the Distrib-
uting Debt that will be assumed or satis-
fied (a) before the request for any relevant
ruling is submitted and (b) no later than
60 days before the earliest of the follow-
ing dates: (i) the date of the first public

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announcement (as defined in § 1.355-
7(h)(10)) of the Divisive Reorganization
or a similar transaction, (ii) the date of
the entry by Distributing into a binding
agreement to engage in the Divisive Re-
organization or a similar transaction, and
(iii) the date of approval of the Divisive
Reorganization or a similar transaction
by the board of directors of Distributing.
A transaction is a similar transaction if it
would have effected a direct or indirect
separation of all, or a significant portion
of, the same assets as the Divisive Reor-
ganization that is the subject of the
taxpayer's ruling request (cf. § 1.355-
7(h)(12) and (13) (describing the terms
"similar acquisition (not involving a pub-
lic offering)" and "similar acquisition in-
volving a public offering," respectively).
If Distributing incurred or will incur any
of the Distributing Debt that will be as-
sumed or satisfied at a later time, the tax-
payer should establish that, based on all
the facts and circumstances, the borrow-
ing and the assumption or satisfaction of
such Distributing Debt will result in an
allocation of historic Distributing Debt
between Distributing and Controlled or an
exchange of historic Distributing Debt for
Controlled stock. As one example, the
taxpayer may establish that the proceeds
of the more-recently incurred Distributing
Debt were used to satisfy other Distribut-
ing Debt that was incurred no later than
the time described in the representation in
this section 3.04(4) (cf. Rev. Rul. 79-258,
1979-2 C.B. 143 (in connection with a
Divisive Reorganization, Controlled's as-
sumption of liability for debt newly issued
by Distributing to replace historic debt
incurred in connection with the business
to be transferred to Controlled did not
cause § 357(b) to apply to the assump-
tion)). As another example, the taxpayer
may establish that the proceeds of the
Distributing Debt assumed or satisfied
were or will be used in Controlled's busi-
ness.

(5) Historic average. Submit the fol-
lowing REPRESENTATION: The total
adjusted issue price (determined under
§ 1.1275-1(b)) of Distributing Debt that
will be assumed or satisfied does not ex-
ceed the historic average of the total ad-
justed issue price of (a) Distributing Debt
owed to persons other than Related Per-
sons and (b) obligations that are evi-

denced by Non-contingent Debt Instru-
ments and are owed by other members of
Distributing's separate affiliated group
(within the meaning of § 355(b)(3)(B)) to
persons other than Related Persons. The
historic average of total adjusted issue
price should be determined based on debt
outstanding as of the close of the eight
fiscal quarters that ended or will end im-
mediately before the date of approval of
the Divisive Reorganization by the board
of directors of Distributing.

(6) Delayed satisfaction of Distributing
Debt. If applicable, submit the following
REPRESENTATIONS: There are one
or more substantial business reasons for
any delay in satisfying Distributing Debt
with § 361 Consideration beyond 30 days
after the date of the first distribution of
Controlled stock to Distributing's share-
holders. All the Distributing Debt that will
be satisfied with § 361 Consideration will
be satisfied no later than 180 days after
such distribution. The taxpayer should
submit information and analysis to estab-
lish the substantial business reasons for
any delay in satisfying Distributing Debt
after the 30-day period beginning on the
date of the first distribution of Controlled
stock to Distributing's shareholders. If
satisfaction of any Distributing Debt with
§ 361 Consideration will occur more than
180 days after the date of such first distri-
bution, the taxpayer should submit infor-
mation and analysis to establish that,
based on all the facts and circumstances,
the satisfaction will be in connection with
the plan of reorganization. Documentation
of the matters described in this section
3.04(6) should be submitted only if re-
quested.

(7) No replacement of Distributing
Debt. Submit the following REPRESEN-
TATION: Distributing will not replace
any Distributing Debt that will be as-
sumed or satisfied with previously com-
mitted borrowing, other than borrowing
in the ordinary course of business pursu-
ant to a revolving credit agreement or
similar arrangement. The purpose of this
representation is to establish that the ap-
plication of § 361 to the proposed trans-
actions is consistent with the purposes of
§ 361. If Distributing is a prospective
borrower under a revolving credit agree-
ment or similar arrangement, the tax-
payer should submit information and

analysis to establish that the agreement
or arrangement was not entered into,
and amounts of borrowing provided for
therein were not increased, in a transac-
tion related to the Divisive Reorganiza-
tion.

(8) General information and analysis.
Submit information and analysis to estab-
lish that, under general principles of tax
law, the transactions (including any ex-
change facilitated by an intermediary)
should not be recast, recharacterized, or
otherwise treated as one or more transac-
tions that would not qualify under the
relevant provisions of the Internal Reve-
nue Code of 1986.

## SECTION 4. MISCELLANEOUS

Taxpayers and their advisers are en-
couraged to contact the Office of Asso-
ciate Chief Counsel (Corporate) with
questions and comments regarding these
matters. Taxpayers seeking rulings de-
scribed in section 3.01 of this revenue
procedure are encouraged to request
pre-submission conferences. See section
10.07 of Rev. Proc. 2018-1.

## SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 Section 6.03(3)(d) of Rev. Proc.
2018-1 is modified by deleting the second
paragraph and adding the following text in
its place:

The taxpayer should consult other pub-
lished authorities (see, for example, Ap-
pendix G of this revenue procedure, which
identifies certain checklist and guideline
revenue procedures, including Rev. Proc.
2017-52 and Rev. Proc. 2018-53, to
identify information or representations but
only to the extent that they relate to the
issue).

.02 Section 7.01(2)(a) of Rev. Proc.
2018-1 is modified by deleting the text of
the second sentence of the first paragraph
and adding the following text in its place:

But see section 3.02 and section 4 of
Rev. Proc. 2017-52, 2017-41 I.R.B. 283,
for requirements relating to ruling re-
quests under § 355, and section 3.04 of
Rev. Proc. 2018-53, 2018-43 I.R.B.
XXX, for requirements relating to ruling
requests involving assumption or satisfac-
tion of the distributing corporation's debt
in connection with § 355 distributions.

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.03 Section .01 of Appendix G to Rev.
Proc. 2018-1 is modified as follows:

(1) In the column titled REVENUE
PROCEDURE AND NOTICE, in the text
corresponding to "Subchapter C-Corpo-
rate Distributions, Adjustments, Trans-
fers, and Reorganizations" found in the
column CODE OR REGULATION SEC-
TION, by deleting the text and adding the
following text in its place:

Rev. Proc. 77-37, 1977-2 C.B. 568, as
modified by Rev. Proc. 89-30, 1989-1
C.B. 895, and as amplified by Rev. Proc.
77-41, 1977-2 C.B. 574, Rev. Proc. 83-
81, 1983-2 C.B. 598 (see also Rev. Proc.
2018-3), Rev. Proc. 84-42, 1984-1 C.B.
521 (superseded, in part, as to no-rule
areas by Rev. Proc. 2018-3), Rev. Proc.
86-42, 1986-2 C.B. 722, Rev. Proc. 89-
50, 1989-2 C.B. 631, Rev. Proc. 2017-52,
2017-41 I.R.B. 283 (relating to Transac-
tional Rulings for Covered Transactions),
and Rev. Proc. 2018-53, 2018-43 I.R.B.
XXX. But see section 3.01(53) of Rev.
Proc. 2018-3, which states that the Ser-
vice will not issue a letter ruling as to
whether a transaction constitutes a reor-
ganization within the meaning of § 368
(except as provided in section 6.03(2)(b)
of this revenue procedure). However,
the Service will issue a letter ruling ad-
dressing significant issues (within the
meaning of section 3.01(53) of Rev.
Proc. 2018-3) presented in a reorgani-
zation within the meaning of § 368. The
information and representations de-
scribed in these revenue procedures
should be included in a letter ruling
request only to the extent that they relate
to the significant issues with respect to
which the letter ruling is requested. See
section 6.03(2) of this revenue proce-
dure.

(2) In the column titled REVENUE
PROCEDURE AND NOTICE, in the text
corresponding to "355 Checklist question-
naire" found in the column CODE OR
REGULATION SECTION, by deleting

the text and adding the following text in
its place:

Rev. Proc. 2017-52, 2017-41 I.R.B.
283, and Rev. Proc. 2018-53, 2018-43
I.R.B. XXX. See also section 6.03(2) of
this revenue procedure.

.04 Rev. Proc. 2017-52 is amplified
and modified.

## SECTION 6. EFFECTIVE DATE

This revenue procedure will apply to
all ruling requests postmarked or, if not
mailed, received by the Service after Oc-
tober 3, 2018. If a ruling request described
in section 3.01 of this revenue procedure
is pending on such date, the taxpayer
should consider a supplemental submis-
sion with the representations, information,
and analysis described in section 3.03 and
section 3.04 of this revenue procedure (to
the extent this material has not been sub-
mitted).

## SECTION 7. PAPERWORK REDUCTION ACT

The collections of information in this
revenue procedure have been reviewed
and approved by the Office of Manage-
ment and Budget (OMB) in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
1522.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid OMB control number.

The collections of information in this
revenue procedure are in section 3. This
information is required to determine
whether a taxpayer would qualify for tax-
free treatment to the extent allowed under
§ 357 and § 361. The collections of infor-
mation are required to obtain a benefit.
The likely respondents are corporations
that control another corporation, as well as
the management of the corporation the

stock of which is distributed or that con-
trols the corporation the stock of which is
being distributed.

The estimated total annual reporting
burden for Rev. Proc. 2018-1 is 326,436
hours.

The estimated annual burden per re-
spondent for Rev. Proc. 2018-1 varies
from 1 to 200 hours, depending on indi-
vidual circumstances, with an estimated
average of 82 hours. The estimated num-
ber of respondents is 3,956.

The estimated total annual reporting
burden for this revenue procedure adds
955 hours to the burden imposed by Rev.
Proc. 2018-1.

The estimated annual burden per re-
spondent for this revenue procedure varies
from 5 to 50 hours, depending on individ-
ual circumstances, with an estimated av-
erage of 15 hours. The estimated number
of additional respondents added to Rev.
Proc. 2018-1 by this revenue procedure is
2, increasing the estimated number of re-
spondents to Rev. Proc. 2018-1 to 3,958.

The estimated average burden for Rev.
Proc. 2018-1, as increased by this reve-
nue procedure, is 82 hours.

The estimated annual frequency of re-
sponses is on occasion.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue tax law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

## SECTION 8. DRAFTING INFORMATION

The principal author of this revenue
procedure is J.P. Stemwedel of the Office
of Associate Chief Counsel (Corporate).
For further information regarding this rev-
enue procedure, please contact Mr. Stem-
wedel at (202) 317-5024.

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## Part IV. Items of General Interest

### Notice of Proposed Rulemaking Guidance Related to Section 951A (Global Intangible Low-Taxed Income)

REG-104390-18

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations implementing sec-
tion 951A of the Internal Revenue Code.
Section 951A was added to the Internal
Revenue Code by the Tax Cuts and Jobs
Act, which was enacted on December 22,
2017. This document also contains pro-
posed regulations under sections 951,
1502, and 6038. These proposed regula-
tions would affect United States share-
holders of controlled foreign corporations.

DATES: Written or electronic comments
and requests for a public hearing must be
received by November 26, 2018.

ADDRESSES: Send submissions to:
Internal Revenue Service, CC:PA:LP-
D:PR (REG-104390-18), Room 5203,
Post Office Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand-delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR
(indicate REG-104390-18), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, N.W., Washington, DC
20224, or sent electronically, via the Federal
eRulemaking Portal at www.regulations.gov
(IRS REG-104390-18).

FOR FURTHER INFORMATION CON-
TACT: Concerning proposed regulations
§§ 1.951-1, 1.951A-0 through 1.951A-7,
1.6038-2, and 1.6038-5, Melinda E. Har-
vey or Michael Kaercher at (202) 317-
6934; concerning proposed regulations
§§ 1.1502-12, 1.1502-13, 1.1502-32, and
1.1502-51, Austin Diamond-Jones at
(202) 317-6847 or Kevin M. Jacobs at
(202) 317-5332; concerning submissions

of comments or requests for a public hear-
ing, Regina L. Johnson at (202) 317-6901
(not toll free numbers).

SUPPLEMENTARY INFORMATION:
Background

This document contains proposed
amendments to 26 CFR part 1 under
sections 951, 951A, 1502, and 6038 (the
"proposed regulations"). Added to the
Internal Revenue Code ("Code") by sec-
tion 14201(a) of the Tax Cuts and Jobs
Act, Pub. L. 115-97 (2017) ("the Act"),
section 951A requires a United States
shareholder ("U.S. shareholder") of any
controlled foreign corporation ("CFC")
for any taxable year to include in gross
income the shareholder's global intangi-
ble low-taxed income ("GILTI") for
such taxable year. Section 14201(d) of
the Act provides that section 951A ap-
plies to taxable years of foreign corpo-
rations beginning after December 31,
2017, and to taxable years of U.S. share-
holders in which or with which such
taxable years of foreign corporations
end. The proposed regulations under
section 951A provide guidance for U.S.
shareholders to determine the amount of
GILTI to include in gross income
("GILTI inclusion amount").

Section 14201(b) of the Act added two
new foreign tax credit provisions relating
to GILTI - section 960(d) provides a for-
eign tax credit for taxes properly attribut-
able to tested income taken into account
by a domestic corporation under section
951A, and section 904(d)(1)(A) provides
that any amount included in gross income
under section 951A (other than passive
category income) is treated as a separate
category of income for purposes of sec-
tion 904. In addition, section 14202(a) of
the Act added section 250 to the Code
providing domestic corporations a deduc-
tion equal to a percentage of their GILTI
inclusion amount and foreign-derived in-
tangible income, subject to a taxable in-
come limitation. The proposed regulations
do not include any rules relating to foreign
tax credits or the deduction under section
250. Rules relating to foreign tax credits
and the deduction under section 250 will
be included in separate notices of pro-

posed rulemaking. It is anticipated that the
proposed regulations relating to foreign
tax credits will provide rules for assigning
the section 78 gross-up attributable to for-
eign taxes deemed paid under section
960(d) to the separate category described
in section 904(d)(1)(A).

Before the Act, section 951(b) defined
a U.S. shareholder of a foreign corpora-
tion as a United States person ("U.S. per-
son") that holds at least 10 percent of the
total combined voting power of all classes
of stock entitled to vote in a foreign cor-
poration. Section 14214(a) of the Act
amended this definition to include a U.S.
person that holds at least 10 percent of the
total value of shares of all classes of stock of
the foreign corporation. Section 14215(a) of
the Act amended section 951(a)(1) to elim-
inate the requirement that a foreign corpo-
ration must be a CFC for an uninterrupted
period of 30 days or more in order to give
rise to an inclusion under section 951(a)(1)
(the "30-day requirement"). These amend-
ments apply to taxable years of foreign cor-
porations beginning after December 31,
2017, and to taxable years of U.S. share-
holders with or within which such taxable
years of foreign corporations end. See sec-
tions 14214(b) and 14215(b) of the Act. The
proposed regulations under section 951 in-
corporate these amendments into the regu-
lations and provide other guidance neces-
sary for U.S. shareholders to coordinate
subpart F and GILTI.

#### Explanation of Provisions

##### I. Section 951A

###### A. Overview

The Act established a participation ex-
emption system under which certain earn-
ings of a foreign corporation can be repa-
triated to a corporate U.S. shareholder
without U.S. tax. See section 14101(a) of
the Act and section 245A. However, Con-
gress recognized that, without any base
protection measures, the participation ex-
emption system could incentivize taxpay-
ers to allocate income - in particular,
mobile income from intangible property -
that would otherwise be subject to the full
U.S. corporate tax rate to CFCs operating
in low- or zero-tax jurisdictions. See Sen-

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ate Committee on the Budget, 115th
Cong., Reconciliation Recommendations
Pursuant to H. Con. Res. 71, at 365
(Comm. Print 2017) (“Senate Explana-
tion"). Therefore, Congress enacted sec-
tion 951A in order to subject intangible
income earned by a CFC to U.S. tax on a
current basis, similar to the treatment of a
CFC's subpart F income under section
951(a)(1)(A). However, in order to not
harm the competitive position of U.S. cor-
porations relative to their foreign peers,
GILTI of a corporate U.S. shareholder is
taxed at a reduced rate by reason of the
deduction under section 250 (with the re-
sulting U.S. tax further reduced by a por-
tion of foreign tax credits under section
960(d)). Id. Also, due to the administra-
tive difficulty in identifying income attrib-
utable to intangible assets, in contrast to
income from tangible assets, intangible
income (and thus GILTI) is determined
for purposes of section 951A based on a
formulaic approach, under which a 10-
percent return is attributed to certain tan-
gible assets ("qualified business asset in-
vestment" or "QBAI") and then each
dollar of certain income above such "nor-
mal return" is effectively treated as intan-
gible income. Id. at 366.

Section 951A(a) provides that a U.S.
shareholder of any CFC for a taxable year
must include in gross income its GILTI
for that year. A GILTI inclusion is treated
in a manner similar to a section 951(a)
(1)(A) inclusion of a CFC's subpart F
income for many purposes of the Code.
See section 951A(f)(1). However, a
GILTI inclusion is determined in a man-
ner that is fundamentally different from
that of an inclusion under section 951(a)
(1)(A). Subpart F income is determined at
the level of a CFC, and then a U.S. share-
holder that owns stock directly or indi-
rectly in the CFC generally includes in
gross income its pro rata share of the
CFC's subpart F income. The amount of
the shareholder's section 951(a)(1)(A) in-
clusion with respect to one CFC is not
taken into account in determining the
shareholder's section 951(a)(1)(A) in-
clusion with respect to another CFC. A
U.S. shareholder's pro rata share of a
CFC's subpart F income is generally the
final step in determining its section
951(a)(1)(A) inclusion.

Similar to an inclusion under section
951(a)(1)(A), the determination of a U.S.
shareholder's GILTI inclusion amount be-
gins with the calculation of certain items
of each CFC owned by the shareholder,
such as tested income, tested loss, or
QBAI. A U.S. shareholder then deter-
mines its pro rata share of each of these
CFC-level items in a manner similar to a
shareholder's pro rata share of subpart F
income under section 951(a)(2). See sec-
tion 951A(e)(1). However, in contrast to
an inclusion under section 951(a)(1)(A),
the U.S. shareholder's pro rata shares of
these items are not amounts included in
gross income, but rather amounts taken
into account by the shareholder in deter-
mining the GILTI included in the share-
holder's gross income. The U.S. share-
holder aggregates (and then nets or
multiplies) its pro rata share of each of
these items into a single shareholder-level
amount - for example, aggregate tested
income reduced by aggregate tested loss
becomes net CFC tested income and ag-
gregate QBAI multiplied by 10 percent
becomes deemed tangible income return.
A shareholder's GILTI inclusion amount
for a taxable year is then calculated by
subtracting one aggregate shareholder-
level amount from another - the share-
holder's net deemed tangible income re-
turn ("net DTIR") is the excess of deemed
tangible income return over certain inter-
est expense, and, finally, its GILTI inclu-
sion amount is the excess of its net CFC
tested income over its net DTIR.

As explained above, a U.S. shareholder
does not compute a separate GILTI inclu-
sion amount with respect to each CFC for
a taxable year, but rather computes a sin-
gle GILTI inclusion amount by reference
to all its CFCs. Cf. section 951A(f)(2)
(allocating the U.S. shareholder's GILTI
inclusion amount to each tested income
CFC for purposes of various sections of
the Code). Because a U.S. shareholder's
GILTI inclusion amount is determined
based on the relevant items of all the
CFCs of which it is a U.S. shareholder, the
effect of the provision is generally to en-
sure that a U.S. shareholder is taxed on its
GILTI wherever (and through whichever
CFC) derived. See, for example, Senate
Explanation at 366 ("The Committee be-
lieves that calculating GILTI on an aggre-
gate basis, instead of on a CFC-by-CFC

basis, reflects the interconnected nature of
a U.S. corporation's global operations and
is a more accurate way of determining a
U.S. corporation's global intangible in-
come.").

The proposed regulations under section
951A follow an outline similar to the
description in this overview. Proposed
§§ 1.951A-2 through 1.951A-4 provide
detailed guidance on items determined at
the CFC level - that is, tested income and
tested loss, QBAI, and the items necessary
to determine the amount of certain interest
expense that reduces net DTIR. Proposed
§ 1.951A-1(d) provides rules for deter-
mining the U.S. shareholder's pro rata
share of these CFC-level items. Finally,
proposed § 1.951A-1(c) provides rules
describing the aggregation of the U.S.
shareholder's pro rata share amounts to
determine the shareholder's GILTI inclu-
sion amount.

##### B. General rules and definitions

###### 1. Inclusion of GILTI in Gross Income

Proposed § 1.951A-1 provides general
rules to determine a U.S. shareholder's
GILTI inclusion amount and associated
definitions. Some of the definitions distin-
guish between a CFC's taxable year and
a U.S. shareholder's taxable year. For
example, a "U.S. shareholder inclusion
year" refers to the relevant taxable year of
the U.S. shareholder and is defined as a
taxable year of the U.S. shareholder that
includes a CFC inclusion date (as that term
is defined in the proposed regulations) of the
CFC. See proposed § 1.951A-1(e)(4). A
"CFC inclusion year" refers to the relevant
taxable year of the CFC beginning after
December 31, 2017 (the effective date of
section 951A for a foreign corporation that
is a CFC). See proposed § 1.951A-1(e)(2).

###### 2. Determination of Net DTIR

Proposed § 1.951A-1(c)(3) defines net
DTIR, which is computed at the U.S.
shareholder level based on QBAI (as de-
fined in proposed § 1.951A-3(b)) held by
the shareholder's CFCs and offsets the
shareholder's net CFC tested income for
purposes of determining the shareholder's
GILTI inclusion amount. A CFC's QBAI
is equal to its aggregate average adjusted

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bases in specified tangible property, which
is defined as tangible property used in the
production of tested income. See section
951A(d)(2)(A) and proposed § 1.951A-
3(c)(1). Consistent with the statute and the
conference report accompanying the Act
("Conference Report"), the proposed reg-
ulations clarify that a tested loss CFC does
not have specified tangible property. See
H.R. Rep. No. 115-466, at 642, fn. 1536
(2017) (Conf. Rep.) and proposed
§ 1.951A-3(b), (c)(1), and (g)(1). Ac-
cordingly, for purposes of calculating its
GILTI inclusion amount, a U.S. share-
holder does not take into account the
tangible property of a tested loss CFC in
calculating its aggregate pro rata share
of QBAI, its deemed tangible income
return, or its net DTIR.

###### 3. Determination of Pro Rata Share

Section 951A(e)(1) provides that, for
purposes of determining a U.S. sharehold-
er's GILTI inclusion amount, the share-
holder's pro rata share of a CFC's tested
income, tested loss, and QBAI "shall be
determined under the rules of section
951(a)(2) in the same manner as such sec-
tion applies to subpart F income." Accord-
ingly, the proposed regulations incorpo-
rate the pro rata share rules of section
951(a)(2) and § 1.951-1(b) and (e), with
appropriate modifications to account for
the differences between subpart F income,
on the one hand, and tested income, tested
loss, and QBAI, on the other. Similar to
the determination of a U.S. shareholder's
pro rata share of subpart F income, pro-
posed § 1.951A-1(d)(1) provides that a
U.S. shareholder's pro rata share of any
CFC item necessary for calculating its
GILTI inclusion amount is determined by
reference to the stock such shareholder
owns (within the meaning of section
958(a)) in the CFC ("section 958(a)
stock") as of the close of the CFC's tax-
able year, including section 958(a) stock
treated as owned by the U.S. shareholder
through a domestic partnership under pro-
posed § 1.951A-5(c). See section I.F of
this Explanation of Provisions for an ex-
planation of proposed rules for domestic
partnerships and their partners.

In several places, the provisions of pro-
posed § 1.951A-1(d) reference section
951(a)(2) and proposed § 1.951-1(e),

which amends existing § 1.951-1(e). See
section II.A of this Explanation of Provi-
sions for an explanation of the proposed
modifications to § 1.951-1(e). Comments
requested guidance on how to determine a
preferred shareholder's pro rata share of
CFC items for purposes of GILTI. Rules
relating to the allocation of tested in-
come to preferred stock are included in
proposed § 1.951A-1(d)(2) by cross-
reference to proposed § 1.951-1(e). In
addition, the proposed regulations pro-
vide rules relating to a preferred share-
holder's pro rata share of tested loss and
QBAI.

A U.S. shareholder's pro rata share of
tested income generally is determined in
the same manner as its pro rata share of
subpart F income under section 951(a)(2)
and § 1.951-1(b) and (e) (that is, based on
the relative amount that would be received
by the shareholder in a year-end hypothet-
ical distribution of all the CFC's current
year earnings). See proposed § 1.951A-
1(d)(2)(i). For purposes of determining a
U.S. shareholder's pro rata share of a
CFC's QBAI, the amount of QBAI dis-
tributed in the hypothetical distribution of
section 951(a)(2)(A) and § 1.951-1(e) is
generally proportionate to the amount of
the CFC's tested income distributed in the
hypothetical distribution. See proposed
§ 1.951A-1(d)(3)(i). However, a special
rule in the proposed regulations provides
that if a CFC's QBAI exceeds 10 times its
tested income, so that the amount of
QBAI allocated to preferred stock would
exceed 10 times the tested income allo-
cated to the preferred stock under the gen-
eral proportionate allocation rule, the ex-
cess amount of QBAI is allocated solely
to the CFC's common stock. See proposed
§ 1.951A-1(d)(3)(ii). The proposed cap
on QBAI allocated to a preferred share-
holder (10 times tested income) is derived
from the statutory cap on the amount of
QBAI that may be used to compute GILTI
(10 percent of aggregate QBAI). These
rules in the proposed regulations ensure
that the notional "normal return" associ-
ated with the CFC's QBAI generally
flows to the shareholders in a manner con-
sistent with their economic rights in the
earnings of the CFC. For illustration, see
proposed § 1.951A-1(d)(3)(iii), Examples
1 and 2.

For purposes of determining a U.S.
shareholder's pro rata share of a CFC's
tested loss, the amount distributed in the
hypothetical distribution is the amount of
the tested loss, rather than the CFC's cur-
rent earnings and profits, and the tested
loss is distributed solely with respect to
the CFC's common stock, except in cer-
tain cases involving dividend arrearages
with respect to preferred stock and com-
mon stock with no liquidation value. See
proposed § 1.951A-1(d)(4)(i) through
(iii). In the latter case, the proposed reg-
ulations provide that any amount of tested
loss that would otherwise be distributed in
the hypothetical distribution to a class of
common stock that has no liquidation
value is instead distributed to the most
junior class of equity with a positive liq-
uidation value to the extent of the liqui-
dation value. See proposed § 1.951A-
1(d)(4)(iii). In subsequent years, tested
income is allocated to any class of stock to
the extent that tested loss was allocated to
such class in prior years under this special
rule. See proposed § 1.951A-1(d)(2)(ii).
In addition, the proposed regulations pro-
vide that section 951(a)(2)(B) is applied to
reduce tested losses, but modified to treat
the amount of a dividend received by an-
other person as equal to the amount of the
tested loss, without regard to whether an
actual dividend is made by the tested loss
CFC. See proposed § 1.951A-1(d)(4)
(i)(D). The effect of this rule is to reduce
a shareholder's pro rata share of tested
loss in proportion to the number of days
the shareholder did not own the stock of
the tested loss CFC within the meaning of
section 958(a). Each of these modifica-
tions is intended to ensure that the tested
loss of a CFC is allocated to each U.S.
shareholder in an amount commensurate
with the economic loss borne by the
shareholder by reason of the tested loss.

Proposed § 1.951A-1(d)(5) and (6)
provide rules for determining a sharehold-
er's pro rata share of "tested interest ex-
pense" and "tested interest income." Tested
interest expense and tested interest income
are defined in proposed § 1.951A-4, which
is discussed in section I.E of this Explana-
tion of Provisions. A U.S. shareholder's pro
rata share of a CFC's tested interest expense
for a taxable year equals the amount by
which the CFC's tested interest expense re-
duces the shareholder's pro rata share of

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tested income, increases the shareholder's
pro rata share of tested loss, or both. Con-
versely, a U.S. shareholder's pro rata share
of tested interest income for a taxable year
equals the amount by which the CFC's
tested interest income increases the share-
holder's pro rata share of tested income,
reduces the shareholder's pro rata share of
tested loss, or both. For example, tested in-
terest income could both increase a U.S.
shareholder's pro rata share of tested in-
come and decrease its pro rata share of
tested loss if a CFC with tested income for a
taxable year would have, without regard to
the tested interest income, a tested loss for
the taxable year.

The Department of the Treasury
("Treasury Department") and the IRS re-
quest comments on the proposed ap-
proaches for determining a U.S. share-
holder's pro rata share of a CFC's QBAI
and tested loss, including how (or
whether) to allocate tested loss of a CFC
when no class of CFC stock has positive
liquidation value.

##### 4. Foreign Currency Translation

Because GILTI is computed at the U.S.
shareholder level, the tested income,
tested loss, tested interest expense, tested
interest income, and QBAI of a CFC that
uses a functional currency other than the
U.S. dollar must be translated into U.S.
dollars. The appropriate exchange rate un-
der section 989(b)(3) for income inclu-
sions under section 951(a)(1)(A) is the
average exchange rate for the taxable year
of the foreign corporation. GILTI inclu-
sion amounts are similar to section 951(a)
(1)(A) inclusions in that both inclusions
are determined based on certain income
(and, in the case of GILTI, certain losses)
of the CFC for the taxable year of the CFC
that ends with or within the taxable year
of the U.S. shareholder. Therefore, the
proposed regulations prescribe the same
translation rule that is used for subpart F
income for translating a pro rata share of
tested income, tested loss, tested interest
expense, tested interest income, and
QBAI. See proposed § 1.951A-1(d)(1).
Similarly, a U.S. shareholder's GILTI
inclusion amount that is allocated to a
tested income CFC under section
951A(f)(2) is translated from U.S. dol-
lars into the CFC's functional currency

using the average exchange rate for the
taxable year of the tested income CFC.
See proposed § 1.951A-6(b)(2)(iii).

##### C. Tested income and tested loss

###### 1. Determination of Gross Income and Allowable Deductions

Under section 951A(c)(2), tested in-
come and tested loss are determined by
beginning with a CFC's gross income,
excluding certain items (gross income af-
ter exclusions, "gross tested income"),
and then subtracting properly allocable
deductions determined using rules similar
to the rules of section 954(b)(5). While
section 951A does not specifically address
which expenses of a CFC are allowable
as a deduction, existing rules under
§ 1.952-2 apply to determine the gross
income and deductions of a CFC taken
into account in determining its subpart F
income. The Treasury Department and the
IRS have determined that due to the sim-
ilarities between gross tested income and
subpart F income (for example, gross
tested income and subpart F income are
both determined at the CFC level and
taxed to a U.S. shareholder on a current
basis), and the overlap between CFCs im-
pacted by GILTI and subpart F (since a
CFC can have both tested income and
subpart F income), the determinations of
gross income and allowable deductions
for GILTI should be made in a manner
similar to the determination of subpart F
income. Accordingly, the proposed regula-
tions require that the gross income and al-
lowable deduction determinations are made
under the rules of § 1.952-2. See proposed
§ 1.951A-2(c)(2). Under § 1.952-2(a)(1)
and proposed § 1.951A-2(c)(2), subject to
the special rules in § 1.952-2(c), tested in-
come or tested loss of a CFC is determined
by treating the CFC as a domestic corpora-
tion taxable under section 11 and by apply-
ing the principles of section 61 and the reg-
ulations thereunder. Therefore, only items
of deduction that would be allowable in
determining the taxable income of a domes-
tic corporation may be taken into account
for purposes of determining a CFC's tested
income or tested loss. If an item of a CFC
would be disallowed as a deduction in de-
termining the CFC's taxable income if the
CFC were a domestic corporation, the item

cannot be taken into account for purposes of
determining the tested income or tested loss
of the CFC even if the item reduces the
CFC's earnings and profits.

The Treasury Department and the IRS
request comments on the application of
the rules under § 1.952-2 for purposes of
determining subpart F income, tested in-
come, and tested loss. In particular, com-
ments are requested as to whether these
rules should allow a CFC a deduction, or
require a CFC to take into account in-
come, that is expressly limited to domestic
corporations under the Code. For exam-
ple, questions have arisen as to whether a
CFC could be entitled to a dividends re-
ceived deduction under section 245A,
even though section 245A by its terms
applies only to dividends received by a
domestic corporation. See Conf. Rep. at
599, fn. 1486. The Treasury Department
and the IRS also welcome comments on
other approaches to determining tested in-
come or tested loss, including whether
additional modifications should be made
to § 1.952-2 for purposes of calculating
GILTI.

Comments have also requested guid-
ance on the interactions of section 163(j)
and section 267A with section 951A. Is-
sues related to sections 163(j), 245A, and
267A will be addressed in future guid-
ance.

2\. Income Excluded from Foreign Base
Company Income and Insurance Income
by Reason of Section 954(b)(4)

As noted in section I.C.1 of this Expla-
nation of Provisions, section 951A(c)(2)
requires that the gross income of the CFC
for the taxable year be determined without
regard to certain items. One of these items
is gross income excluded from foreign
base company income (as defined in sec-
tion 954) or insurance income (as defined
in section 953) of the CFC by reason of
electing the exception under section
954(b)(4) ("high-tax exception"). In re-
sponse to comments, the proposed regula-
tions clarify that this exclusion applies
only to income that is excluded from for-
eign base company income and insurance
income solely by reason of an election
made to exclude the income under the
high-tax exception of section 954(b)(4).
Accordingly, the exclusion does not apply

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to income that would not otherwise be
subpart F income or to categories of in-
come that do not constitute subpart F in-
come due to exceptions other than the
high-tax exception (for example, as a re-
sult of an exception to foreign personal
holding company income under section
954(c)(6) or section 954(h)).

3\. Gross Income Taken into Account in
Determining Subpart F Income

Another item excluded from gross
tested income is gross income taken into
account in determining a corporation's
subpart F income. Comments have re-
quested guidance on the interaction be-
tween the earnings and profits limitation
to subpart F income under section 952(c),
including the recapture rule in section
952(c)(2), and the determination of gross
tested income for purposes of section
951A. The Treasury Department and the
IRS have determined that any income de-
scribed in section 952(a) is "taken into
account in determining subpart F income"
regardless of whether the section 952(c)
limitation applies, and therefore should
not be included in gross tested income.
Conversely, the recapture of subpart F
income under section 952(c)(2), even if by
reason of earnings and profits attributable
to gross tested income, does not result in
excluding any amount from gross tested
income. Therefore, the proposed regula-
tions provide that tested income and tested
loss are determined without regard to the
application of section 952(c). See pro-
posed § 1.951A-2(c)(4).

##### 4. Determination of Allowable Deductions Properly Allocable to Gross Tested Income

Section 951A(c)(2)(A)(ii) provides
that tested income and tested loss are de-
termined by subtracting from a CFC's
gross tested income "the deductions (in-
cluding taxes) properly allocable to such
gross income under rules similar to the
rules of section 954(b)(5) (or to which
such deductions would be allocable if there
were such gross income)." Regulations un-
der section 954(b)(5) require taxpayers to
determine net subpart F income by prop-
erly allocating and apportioning deduc-
tions to the various categories of subpart

F income. For this purpose, § 1.954-
1(c) provides that taxpayers must first
determine the gross amount of each item
of income in a category of income (as
described in § 1.954-1(c)(1)(iii)) and
then allocate and apportion expenses to
these categories under the principles of
sections 861, 864, and 904(d). Accord-
ingly, in order to apply the principles of
section 954(b)(5) to section 951A (as
required under section 951A(c)(2)(A)
(ii)), the proposed regulations provide
that allowable deductions determined
under the principles of § 1.952-2 are
allocated and apportioned to gross
tested income under the principles of
section 954(b)(5) and § 1.954-1(c),
treating gross tested income that falls
within a single separate category (as de-
fined in § 1.904-5(a)(1)) as an addi-
tional category of income for this pur-
pose. See proposed § 1.951A-2(c)(3).

Section I.D.5 of this Explanation of
Provisions describes a rule that disregards
basis in specified tangible property cre-
ated in certain taxable transfers occurring
before the effective date of section 951A
for purposes of calculating QBAI. See
§ 1.951A-3(h)(2). These rules are cross-
referenced in proposed § 1.951A-2(c)(5)
to disallow any loss or deduction related
to such stepped up-basis in any deprecia-
ble or amortizable property (including, for
example, intangible property) for pur-
poses of calculating tested income or
tested loss.

##### D. QBAI

###### 1. QBAI and Specified Tangible Property

Proposed § 1.951A-3(b) provides that
a tested income CFC's QBAI for any tax-
able year is the average of the CFC's
aggregate adjusted bases as of the close of
each quarter in specified tangible property
that is used in a trade or business of the
corporation and of a type with respect to
which a deduction is allowable under sec-
tion 167. In general, specified tangible
property is tangible property used in the
production of tested income. See proposed
§ 1.951A-3(c)(1). Tangible property is
defined as property for which the depre-
ciation deduction provided by section
167(a) is eligible to be determined under

section 168 (even if the CFC has elected
not to apply section 168). See proposed
§ 1.951A-3(c)(2). The proposed regula-
tions define tangible property by reference
to whether the property can be depreciated
under section 168 because, unlike section
167, section 168 applies only to tangible
property, and there is a substantial amount
of guidance delineating property subject
to section 168.

Property that is used in the production
of both gross tested income and gross
income that is not gross tested income
("dual use property") is proportionately
treated as specified tangible property. See
proposed § 1.951A-3(d)(1). Generally,
the proportion is determined based on the
relative amount of gross tested income to
income other than gross tested income
that the property generates for the taxable
year. See proposed § 1.951A-3(d)(2)(i). A
special rule is provided for determining
the proportion of the property treated as
specified tangible property if the property
generates no directly identifiable income
(for example, because the property is used
in general and administrative functions
that contribute to the generation of all the
income of the CFC). See proposed
§ 1.951A-3(d)(2)(ii).

Under § 1.167(a)-2, the depreciation
allowance for tangible property applies
only to that part of the property which is
subject to wear and tear, to decay or de-
cline from natural causes, to exhaustion,
and to obsolescence. Accordingly, for
purposes of section 951A, property that
may be in part depreciable qualifies as
specified tangible property to the extent it
is depreciable. For example, precious
metal used in a manufacturing process
may be considered specified tangible
property in part because it is depreciable
in part. See Rev. Rul. 2015-11, 2015-21
I.R.B. 975.

##### 2. Determination of Adjusted Basis of Specified Tangible Property

Proposed § 1.951A-3(e) provides rules
to determine the adjusted basis of speci-
fied tangible property for purposes of de-
termining QBAI. The general rule in
proposed § 1.951A-3(e)(1), like section
951A(d)(3), provides that the adjusted ba-
sis in any property is determined by using
the alternative depreciation system under

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section 168(g) ("ADS") and allocating the
depreciation deduction with respect to
the property ratably to each day during
the period in the taxable year to which the
depreciation relates. ADS applies for pur-
poses of determining QBAI irrespective
of whether the basis of the property is
determined using another depreciation
method for other purposes of the Code.

The Treasury Department and the IRS
recognize that taxpayers may hold speci-
fied tangible property that was acquired
before December 22, 2017, that was not
depreciated using ADS. Section 951A(d)
does not distinguish between property ac-
quired before December 22, 2017, and
property acquired on or after December
22, 2017. The Treasury Department and
the IRS have concluded that, regardless of
the date acquired, the adjusted basis in
specified tangible property should be de-
termined under ADS in order for the U.S.
shareholder's pro rata share of QBAI to be
properly determined and not distorted.
Therefore, the proposed regulations pro-
vide that when determining QBAI, the
adjusted basis in property placed in ser-
vice before December 22, 2017, is deter-
mined using ADS as if this system had
applied from the date that the property
was placed in service. See proposed
§ 1.951A-3(e)(3).

##### 3. Short Taxable Year

Net DTIR is intended to reduce a U.S.
shareholder's GILTI inclusion amount by
an annual return on specified tangible
property. To ensure that the net DTIR of a
CFC with a taxable year of less than 12
months (a "short taxable year") reflects an
annual return, the proposed regulations
provide a methodology to reduce the
QBAI of a CFC with a short taxable year
to an amount that, if annualized, would
produce an amount equal to the QBAI for
a 12-month taxable year. See proposed
§ 1.951A-3(f).

##### 4. Specified Tangible Property Held Through a Partnership

Section 951A(d)(3)1 (the "partnership
QBAI paragraph") states that if a CFC holds
an interest in a partnership at the close of the

CFC's taxable year, the CFC takes into ac-
count under section 951A(d)(1) its "distrib-
utive share of the aggregate of the partner-
ship's adjusted bases (determined as of such
date in the hands of the partnership)" in
specified tangible property in computing its
QBAI. The partnership QBAI paragraph
further provides that a CFC's "distributive
share of the adjusted basis of any property
shall be the controlled foreign corporation's
distributive share of income with respect to
such property."

The statutory language "distributive
share of the aggregate of the partnership's
adjusted basis" is ambiguous because the
term "distributive share" is used in sub-
chapter K of the Code with respect to
income, gain, loss, and credits of a part-
nership, but not the bases of assets. A
partner of a partnership has a basis in its
partnership interest ("outside basis"),
while the partnership has a separate basis
in the assets of the partnership ("inside
basis"). The proposed regulations there-
fore use the term "share" (rather than "dis-
tributive share") when referring to the
amount of the inside basis of a partnership
asset that a partner that is a CFC may
include in its QBAI.

The partnership QBAI paragraph pro-
vides that a CFC "shall take into account"
under section 951A(d)(1) the CFC's dis-
tributive share of the basis in partnership
specified tangible property. Because sec-
tion 951A(d)(1) requires an averaging of
basis over the close of each quarter of the
taxable year of the CFC, and the term
"distributive share" as it pertains to basis
is ambiguous, it is unclear based on the
statute how a CFC determines its distrib-
utive share of the basis of partnership
specified tangible property for purposes of
determining its QBAI. One interpretation
of the partnership QBAI paragraph is that
a CFC partner's QBAI is increased by an
amount equal to the CFC partner's share
of the basis that the partnership has in its
specified tangible property as of the close
of the CFC partner's taxable year. How-
ever, that interpretation would be contrary
to the requirement in section 951A(d)(1)
that the CFC's bases in specified tangible
property be averaged over four quarters.
Furthermore, giving the term "distributive
share" effect, the amount determined at

the end of the CFC partner's taxable year
should be reduced for any period during
the taxable year when the partnership did
not own the property, whereas a CFC part-
ner of a partnership that disposed of prop-
erty before the close of the CFC's taxable
year would receive no QBAI benefit if
there were a single measurement date. In
addition, a requirement that a partner-
ship's basis in specified tangible property
be measured on the last day of a CFC
partner's taxable year could be burden-
some for partnerships that have one or
more CFC partners with taxable years that
do not coincide with the partnership's tax-
able year and, in those cases, would have
the effect of decoupling the CFC partner's
share of the basis of partnership property
used to compute the CFC partner's QBAI
from the CFC partner's distributive share
of the partnership's income from the prop-
erty that is taken into account in comput-
ing the CFC partner's tested income.
Moreover, because depreciation is treated
as reducing the adjusted basis of property
on each day during the taxable year, cal-
culating a partnership's basis on the final
day of the CFC partner's taxable year will
generally result in an artificially low basis
relative to calculating average adjusted
basis over the course of the partnership's
taxable year. For the foregoing reasons, the
proposed regulations determine a CFC part-
ner's share of the partnership's adjusted ba-
sis in specified tangible property by refer-
ence to the partnership's average adjusted
basis in the property as of the close of each
quarter of the partnership's taxable year that
ends with or within the CFC's taxable year.
See proposed § 1.951A-3(g)(3).

A partner that is a CFC takes into ac-
count its share of the adjusted basis of
specified tangible property held by a part-
nership in computing QBAI if, among
other things, the property "is used in the
production of tested income (determined
with respect to such controlled foreign
corporation's distributive share of income
with respect to such property)." Section
951A(d)(3)(C). Consistent with the gen-
eral rule for QBAI, only a tested income
CFC can increase its QBAI by reason of
specified tangible property owned by a
partnership. See proposed § 1.951A-
3(g)(1). Further, consistent with the par-

1As enacted, section 951A(d) contains two paragraphs designated as paragraph (3).

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enthetical in the partnership QBAI para-
graph, the proposed regulations provide
that a CFC partner determines its share of
the partnership's average adjusted basis in
specified tangible property based on the
amount of its distributive share of the
gross income produced by the property
that is included in the CFC partner's gross
tested income relative to the total amount
of gross income produced by the property.
See proposed § 1.951A-3(g)(2). The pro-
posed regulations incorporate the dual use
property rule of section 951A(d)(2)(B) in
the context of specified tangible property
owned indirectly through a partnership
and include similar rules for addressing
specified tangible property that does not
produce any directly identifiable income.
The calculation is performed separately
for each item of specified tangible prop-
erty held by the partnership, taking into
account the CFC partner's distributive
share of income with respect to such prop-
erty.

The Treasury Department and the IRS
request comments on the proposed ap-
proach to specified tangible property held
through a partnership, including the rules
addressing specified tangible property that
does not produce directly identifiable in-
come.

##### 5. Anti-Abuse Provisions

Section 951A(d)(4) provides that
"[t]he Secretary shall issue such regula-
tions or other guidance as the Secretary
determines appropriate to prevent the
avoidance of the purposes of this subsec-
tion, including regulations or other guid-
ance which provide for the treatment of
property if-(A) such property is trans-
ferred, or held, temporarily, or (B) the
avoidance of the purposes of this para-
graph is a factor in the transfer or holding
of such property." The Conference Report
describes the scope of section 951A(d)(4),
stating that "[t]he conferees intend that
non-economic transactions intended to af-
fect tax attributes of CFCs and their U.S.
shareholders (including amounts of tested
income and tested loss, tested foreign in-
come taxes, net deemed tangible income
return, and QBAI) to minimize tax under
this provision be disregarded." Conf. Rep.
at 645. One specific example illustrated in
the Conference Report is a transaction that

occurs after the measurement date of post-
1986 earnings and profits under section
965 but before the first taxable year for
which section 951A is effective in order to
increase a CFC's QBAI. Id.

Consistent with section 951A(d)(4)
and the Conference Report, as well as the
Secretary's broad authority under section
7805(a) to "prescribe all needful rules and
regulations for the enforcement of" the
Code, the proposed regulations provide
that specified tangible property of a tested
income CFC is disregarded for purposes
of determining the tested income CFC's
average aggregate basis in specified tan-
gible property if the tested income CFC
acquires the property with a principal pur-
pose of reducing the GILTI inclusion
amount of a U.S. shareholder and holds
the property temporarily but over at least
one quarter end. See proposed § 1.951A-
3(h)(1). For this purpose, property held
for less than a twelve month period that
includes at least one quarter end during
the taxable year of a tested income CFC is
treated as temporarily held and acquired
with a principal purpose of reducing the
GILTI inclusion amount of a U.S. share-
holder. Id.

The Treasury Department and the IRS
are aware that taxpayers are engaging in
transactions like the ones described in
the Conference Report involving taxable
transfers of property from one CFC to
another CFC before the first taxable year
of the transferor CFC to which section
951A applies in order to provide the trans-
feree CFC with a stepped-up basis in the
transferred property that, for example,
may increase a U.S. shareholder's amount
of QBAI with respect to the CFC for
periods when it is subject to section 951A.
See Conf. Rep. at 645. The stepped-
up basis may also reduce the transferee
CFC's tested income or increase its tested
loss (for example, due to increased depre-
ciation or amortization deductions) during
periods when it is subject to section 951A.
The Treasury Department and the IRS
have determined that it would be inappro-
priate for a taxpayer to reduce its GILTI
inclusion amount for any taxable year by
reason of a stepped-up basis in CFC assets
attributable to transactions between re-
lated CFCs during the period after De-
cember 31, 2017, but before the effective
date of section 951A. Accordingly, the pro-

posed regulations disallow the benefit of a
stepped-up basis in specified tangible prop-
erty transferred between related CFCs dur-
ing the period before the transferor CFC's
first inclusion year for purposes of calculat-
ing the transferee CFC's QBAI. See pro-
posed § 1.951A-3(h)(2). As discussed in
section I.C.4 of this Explanation of Provi-
sions, these rules are also cross-referenced
in proposed § 1.951A-2(c)(5) to disregard a
stepped-up basis in any property that is de-
preciable or amortizable for purposes of cal-
culating tested income and tested loss.

The U.S. tax results claimed with re-
spect to transactions that fall outside the
scope of the anti-abuse rules in the pro-
posed regulations may, nonetheless, be
challenged under other statutory provi-
sions or judicial doctrines.

###### E. Specified interest expense

To calculate a U.S. shareholder's net
DTIR, section 951A(b)(2)(B) provides
that 10 percent of the aggregate of the
shareholder's pro rata share of the QBAI
of each CFC (defined as "deemed tangible
income return" in proposed § 1.951A-
1(c)(3)(ii)) is reduced by "the amount of
interest expense taken into account under
subsection (c)(2)(A)(ii) in determining
such shareholder's net CFC tested income
for the taxable year to the extent the in-
terest income attributable to such expense
is not taken into account in determining
such shareholder's net CFC tested in-
come." Deductions taken into account un-
der section 951A(c)(2)(A)(ii) are deduc-
tions (including taxes) that are properly
allocable to gross tested income for pur-
poses of calculating tested income and
tested loss. Thus, only a U.S. sharehold-
er's pro rata share of interest expense that
is currently deductible and properly allo-
cable to gross tested income is taken
into account for purposes of determining
the interest expense described in section
951A(b)(2)(B). For purposes of the pro-
posed regulations, interest expense de-
scribed in section 951A(b)(2)(B) is re-
ferred to as "specified interest expense."
See proposed § 1.951A-1(c)(3)(iii).

Specified interest expense is a U.S.
shareholder-level determination which is
net of "attributable" interest income taken
into account by the U.S. shareholder. Spe-
cifically, specified interest expense of a

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U.S. shareholder is its pro rata share of
interest expense properly allocable to
gross tested income reduced by its pro rata
share of interest income included in gross
tested income to the extent attributable to
such interest expense. The effect of this
formulation is to count against net DTIR
only a U.S. shareholder's pro rata share of
interest expense allocable to gross tested
income to the extent that the related inter-
est income is not also reflected in the U.S.
shareholder's pro rata share of the tested
income of another CFC, such as in the
case of third-party interest expense or in-
terest expense paid to related U.S. per-
sons.

The amount of interest income "attrib-
utable" to interest expense is not defined
in section 951A(b)(2)(B). Accordingly, it
is necessary to define this concept in the
proposed regulations. A definition that in-
corporates a strict tracing approach would
require a U.S. shareholder to determine
each item of interest expense with respect
to each debt instrument of each of its
CFCs to determine whether, and to what
extent, the interest income with respect to
that debt instrument is taken into account
by the U.S. shareholder in determining the
shareholder's net CFC tested income.
However, the Treasury Department and
the IRS have determined that a tracing
approach for specified interest expense
would be administratively burdensome
and difficult to reconcile with the frame-
work of section 951A, which generally
requires a determination of CFC-level
items followed by a second determination
of U.S. shareholder-level aggregate pro
rata shares of such items. A tracing ap-
proach for specified interest expense
would necessitate a hybrid determination,
in which the relevant item - "attributable"
interest income - could not be determined
at the level of the CFC, but rather would
require a matching at the U.S. shareholder
level of the shareholder's pro rata share of
each item of interest expense with its pro
rata share of each item of interest income
attributable to such interest expense. A
tracing approach would create particular
complexity with respect to interest paid
between CFCs that are owned by different
U.S. shareholders in different proportions
or with respect to interest for which the
accrual of the expense and inclusion of the
income occur in separate taxable years.

The Treasury Department and the IRS
have instead determined that a netting ap-
proach to specified interest expense ac-
complishes the purpose of the specified
interest expense rule in a more adminis-
trable manner and is consistent with the
requirement that "attributable" interest in-
come be netted against interest expense.
Therefore, the proposed regulations pro-
vide that a U.S. shareholder's specified
interest expense is the excess of its aggre-
gate pro rata share of the tested interest
expense of each CFC over its aggregate
pro rata share of the tested interest income
of each CFC. See proposed § 1.951A-
1(c)(3)(iii). Tested interest expense and
tested interest income are generally de-
fined by reference to all interest expense
and interest income that is taken into
account in determining a CFC's tested
income or tested loss. See proposed
§ 1.951A-4(b)(1) and (2).

Comments have questioned whether
interest expense of a captive finance CFC
must be taken into account for purposes of
determining a U.S. shareholder's specified
interest expense, or whether the related
interest income from unrelated customers
may be available to offset such interest
expense. Under a netting approach to the
computation of specified interest expense,
without modifications, whether a CFC's
active banking business increases or re-
duces the specified interest expense of a
U.S. shareholder relative to other taxpay-
ers depends on whether the third-party
expense related to such business is greater
than or less than interest income related to
such business. The Treasury Department
and the IRS have determined that a U.S.
shareholder's specified interest expense,
and therefore its net DTIR and its GILTI
inclusion amount, should not depend on
whether the U.S. shareholder has one or
more CFCs engaged in the active conduct
of a financing or insurance business, as
long as the interest expense of the CFC is
incurred exclusively to fund such business
with unrelated persons and thus not in-
curred, for instance, to fund the acquisi-
tion of specified tangible property. There-
fore, the proposed regulations exclude
from the definition of tested interest ex-
pense any interest expense of a CFC that
is an eligible controlled foreign corpo-
ration (within the meaning of section
954(h)(2)) or a qualifying insurance

company (within the meaning of section
953(e)(3)) ("qualified CFC"), except to
the extent of the qualified CFC's assets
unrelated to its financing or insurance busi-
ness and any interest income received by the
qualified CFC from loans to certain related
persons (interest expense described in this
sentence, "qualified interest expense"). See
proposed § 1.951A-4(b)(1)(iii). Further, the
proposed regulations exclude from the def-
inition of tested interest income any interest
income of a qualified CFC included in the
gross tested income of the qualified CFC for
the CFC inclusion year that is excluded
from subpart F income due to the active
financing exception of section 954(h) or the
active insurance exception of section 954(i)
("qualified interest income"). See proposed
§ 1.951A-4(b)(2)(iii).

For purposes of determining specified
interest expense, interest income and in-
terest expense are defined broadly to en-
compass any amount treated as interest
under the Code or regulations, and any
other amount incurred or recognized in a
transaction or series of integrated or re-
lated transactions in which the use or
forbearance of funds is secured for a
period of time if the expense or loss is
predominately incurred in consideration
of the time value of money. See pro-
posed § 1.951A-4(b)(1)(ii) and (2)(ii).

Comments requested clarification of
whether the interest expense of a tested
loss CFC is used in the determination of
specified interest expense. Regardless of
whether interest expense increases tested
loss or reduces tested income, the expense
is "taken into account . . . in determining
the shareholder's net CFC tested income"
within the meaning of section 951A(b)
(2)(B). In addition, if a tested loss CFC's
interest expense were not taken into ac-
count for purposes of determining speci-
fied interest expense, a taxpayer could
easily avoid specified interest expense by
incurring offshore debt through a tested
loss CFC. Therefore, the proposed regu-
lations confirm that any interest expense
taken into account for purposes of deter-
mining the tested income or tested loss of
a CFC is also taken into account in deter-
mining a U.S. shareholder's specified in-
terest expense.

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###### F. Domestic partnerships and their partners

Comments requested guidance on the
treatment of domestic partnerships that
own stock of CFCs. Section 951A itself
does not contain any specific rules on do-
mestic partnerships and their partners that
directly or indirectly own stock of CFCs.
Accordingly, proposed § 1.951A-5 pro-
vides this guidance to domestic partner-
ships and their partners on how to com-
pute their GILTI inclusion amounts. This
guidance also applies to S corporations
and their shareholders, which are treated
as partnerships and partners for purposes
of sections 951 through 965. See section
1373.

A domestic partnership is a U.S. per-
son by definition under section 7701(a)(4)
and (30) and can therefore be a U.S.
shareholder of a CFC under section
951(b). Under current law, a domestic
partnership that is a U.S. shareholder in-
cludes in gross income its section
951(a)(1)(A) inclusion with respect to a
CFC, and its partners include in gross in-
come their distributive share of such inclu-
sion. However, as noted in section I.A of
this Explanation of Provisions, there is no
analog in section 951(a)(1)(A) to the U.S.
shareholder-level determinations required
by section 951A, and thus the level at which
the section 951(a)(1)(A) determination is
made - whether at the level of the partner-
ship or its partners - does not generally
affect the amount of the inclusion, if the
partnership and its partners are all U.S.
shareholders. On the other hand, the GILTI
inclusion amount is an aggregation of the
U.S. shareholder's pro rata shares of tested
income, tested loss, QBAI, tested interest
expense, and tested interest income of each
of its CFCs. Thus, the level at which the
GILTI calculation is made dictates the CFC
items to be taken into account by the share-
holder, and each of these items can impact
the shareholder's GILTI inclusion amount.

The Treasury Department and the IRS
considered a number of approaches to ap-
plying section 951A with respect to do-
mestic partnerships and their partners. A
pure aggregate approach to the treatment
of domestic partnerships and their part-
ners would treat the partnership as an ag-
gregate of its partners, so that each partner
would calculate its own GILTI inclusion

amount taking into account its pro rata
share of CFC items through the partner-
ship. However, a pure aggregate approach
might also be interpreted by taxpayers to
exempt small partners of a domestic part-
nership from the GILTI regime entirely, a
result that is not clearly contemplated in
section 951A or its legislative history and
is inconsistent with section 951.

The Treasury Department and the IRS
also considered a pure entity approach.
Under a pure entity approach, the domes-
tic partnership would determine its own
GILTI inclusion amount, and each partner
would take into gross income its distribu-
tive share of such amount. In the case of a
partner that is a U.S. shareholder of CFCs
owned by the partnership and other CFCs
outside the partnership, a pure entity ap-
proach would effectively fragment the
shareholder's GILTI inclusion amount
into multiple GILTI inclusion amounts by
separating the items of the CFCs owned
by the shareholder through the partnership
from the items of the CFCs owned by the
shareholder outside the partnership, in-
cluding through other domestic partner-
ships. An approach that dramatically al-
ters a U.S. shareholder's inclusion under
section 951A for a taxable year depending
on the legal structure by which the share-
holder owns each CFC presents both
an inappropriate planning opportunity as
well as a trap for the unwary. Such an
approach is also inconsistent with the
structure of section 951A, which requires
an aggregation of all relevant items of a
shareholder's CFCs in order to compute a
single GILTI inclusion amount for a U.S.
shareholder. As discussed in section III.A
of this Explanation of Provisions, the
Treasury Department and the IRS relied
on similar considerations in concluding
that the relevant items of each CFC owned
directly or indirectly by members of a
consolidated group should be taken into
account in determining the GILTI inclu-
sion amount of each member of that
group.

In addition, the Treasury Department
and the IRS have concluded that other
provisions that are related to, and interde-
pendent with, section 951A should apply
at the level of a domestic corporate part-
ner. Section 960(d) provides a domestic
corporation that is a U.S. shareholder a
credit for foreign taxes paid by a CFC that

are properly attributable to tested income
"taken into account" by the domestic cor-
poration, and determines the amount of
that credit by reference to the corpora-
tion's aggregate pro rata share of tested
income. See section 960(d)(2)(B) and (3).
A domestic partnership is not eligible to
claim deemed paid credits under section
960(d). Furthermore, under a pure entity
approach, a domestic corporate partner of
a domestic partnership may not be eligible
for a deemed paid credit by reason of its
distributive share of the partnership's
GILTI inclusion because a partner would
not have a pro rata share of the tested
income of any CFC owned by the partner-
ship, and thus it would not take into ac-
count the tested income of any such CFC.
Similarly, only a domestic corporation is
eligible for a section 250 deduction.
Nonetheless, the Conference Report indi-
cates that the domestic corporate partners
of a domestic partnership should get the
benefit of a section 250 deduction, which
is consistent with an aggregate approach.
See Conf. Rep. at 623, fn. 1517.

Based on the foregoing, the Treasury
Department and the IRS have determined
that the approach that best harmonizes the
treatment of domestic partnerships and
their partners across all provisions of the
GILTI regime (sections 250, 951A, and
960(d)) is neither a pure aggregate nor a
pure entity approach. Rather, the most
harmonious approach treats a domestic
partnership as an entity with respect to
partners that are not U.S. shareholders of
any CFC owned by the partnership, but
treats the partnership as an aggregate for
purposes of partners that are themselves
U.S. shareholders with respect to one or
more CFCs owned by the partnership.
This approach ensures that each non-U.S.
shareholder partner takes into income its
distributive share of the domestic partner-
ship's GILTI inclusion amount (similar to
subpart F), while permitting a partner that
is itself a U.S. shareholder to determine a
single GILTI inclusion amount by refer-
ence to all its CFCs, whether owned di-
rectly or through a partnership, as well as
allowing a corporate U.S. shareholder to
calculate a foreign tax credit under section
960(d) with respect to each such CFC and
to compute a section 250 deduction with
respect to its GILTI inclusion amount de-
termined by reference to each such CFC.

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Therefore, the proposed regulations
provide that, in general, a domestic part-
nership that is a U.S. shareholder of one or
more CFCs (“U.S. shareholder partner-
ship") computes its own GILTI inclusion
amount in the same manner as any other
U.S. shareholder, and each partner takes
into account its distributive share of the
domestic partnership's GILTI inclusion
amount under section 702 and § 1.702-
1(a)(8)(ii). See proposed § 1.951A-5(b).
However, for purposes of section 951A
and the proposed regulations, a partner
that is itself a U.S. shareholder (within the
meaning of section 951(b)) ("U.S. share-
holder partner") of one or more CFCs
owned directly or indirectly by a domestic
partnership ("partnership CFC") is treated
as owning proportionately section 958(a)
stock in each such partnership CFC as if
the partnership were a foreign partnership.
See proposed § 1.951A-5(c). As a result,
a partner that is itself a U.S. shareholder
of a CFC owned by a domestic partner-
ship computes its GILTI inclusion amount
for a taxable year by taking into account
its proportionate share of the partnership's
pro rata share of each of the relevant
items - tested income, tested loss, QBAI,
tested interest income, and tested interest
expense - of such CFC. This rule applies
regardless of whether the domestic part-
nership itself has a GILTI inclusion
amount for the taxable year. See proposed
§ 1.951A-5(g), Example 6. In the case
that a partner is treated as owning the
section 958(a) stock of one or more part-
nership CFCs, the partner's distributive
share of the partnership's GILTI inclusion
amount is determined solely by reference
to partnership CFCs in which the partner
is not a U.S. shareholder. See proposed
§ 1.951A-5(c) and (g), Example 3. A U.S.
shareholder partnership is therefore re-
quired to provide to its partners their dis-
tributive share of the partnership's GILTI
inclusion amount, as well as provide to
each U.S. shareholder partner the part-
ner's proportionate share of the partner-
ship's pro rata share (if any) of each CFC
tested item of each partnership CFC of the
partnership, and forms and instructions
will be updated accordingly. See proposed
§ 1.951A-5(f).

To illustrate the differences between
the approach taken in the proposed regu-
lations and the pure entity approach, con-

sider a domestic partnership (PRS) with
two domestic corporate partners, US1 and
US2, owning 5 percent and 95 percent of
PRS, respectively. PRS owns 100 percent
of the single class of stock of FS1, a CFC
with tested income of $100x, and 100
percent of the single class of stock of FS2,
a CFC with tested loss of $50x. US2 also
owns 100 percent of the single class of
stock of FS3, a CFC with tested loss of
$20x. Under a pure entity approach,
US2's distributive share of PRS's GILTI
inclusion amount would be $47.50x
(95% x ($100x - $50x)), and US2's pro
rata share of FS3's tested loss of $20x
would be unused. Under the proposed reg-
ulations, US2, because it is a U.S. share-
holder partner with respect to FS1 and FS2,
aggregates its proportionate share of the
tested income and tested loss of FS1 and
FS2 with its pro rata share of the tested loss
of FS3 in determining its GILTI inclusion
amount of $27.50x ((95%x($100x-$50x))
\- $20x). Accordingly, under a pure entity
approach, US2 would be incentivized to re-
organize its ownership structure (for exam-
ple, by liquidating PRS or contributing the
stock of FS3 to PRS) in order to obtain the
full benefit of the tested loss of FS3. Under
the proposed regulations, however, US2 has
the same GILTI inclusion amount whether it
owns its CFCs directly or through one or
more partnerships.

The Treasury Department and the IRS
request comments as to whether any other
approach to the treatment of domestic
partnerships and their partners for pur-
poses of section 951A, including a pure
entity approach or a pure aggregate ap-
proach, would more appropriately harmo-
nize the provisions of the GILTI regime
than the approach of the proposed regula-
tions, particularly in light of the adminis-
trative and compliance burdens associated
with any other approach and the approach
of the proposed regulations. In addition,
the Treasury Department and the IRS re-
quest comments on adjustments required
by reason of computing a GILTI inclusion
amount, in whole or in part, at the level of
the partner of a domestic partnership, in-
cluding adjustments to the partner's basis
in its partnership interest, the partner's
section 704(b) capital account, the part-
nership's basis in CFC stock under section
961, and a CFC's previously taxed earn-

ings and profits with respect to the partner
or partnership under section 959.

G. Treatment of GILTI inclusion amount
and adjustments to earnings and profits
and basis

###### 1. Treatment of GILTI as Subpart F Income for Certain Purposes

A U.S. shareholder's GILTI inclusion
amount is not an inclusion under section
951(a)(1)(A). Nevertheless, for purposes of
some provisions, GILTI inclusion amounts
are treated similarly to section 951(a)(1)(A)
inclusions. Section 951A(f)(1)(A) provides
that any GILTI included in gross income is
treated in the same manner as an amount
included under section 951(a)(1)(A) for pur-
poses of applying sections 168(h)(2)(B),
535(b)(10), 851(b), 904(h)(1), 959, 961,
962, 993(a)(1)(E), 996(f)(1), 1248(b)(1),
1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D),
and 6655(e)(4).

Section 951A(f)(1)(B) grants the Sec-
retary authority to provide rules applying
section 951A(f)(1)(A) to other provisions
of the Code. A comment requested clari-
fication as to whether GILTI inclusion
amounts are net investment income under
section 1411. Pursuant to the authority in
section 951A(f)(1)(B), the proposed regula-
tions provide that a GILTI inclusion amount
is treated in the same manner as an amount
included under section 951(a)(1)(A) for pur-
poses of applying section 1411. See pro-
posed § 1.951A-6(b)(1). Thus, for example,
a U.S. shareholder that has made an election
pursuant to § 1.1411-10(g) with respect to a
CFC to treat amounts included in gross in-
come under section 951(a)(1)(A) as net in-
vestment income and to apply the basis ad-
justment rules of sections 961(a) and (b)
with respect to such amounts for section
1411 purposes should also treat the portion
of the U.S. shareholder's GILTI inclusion
amount treated as being with respect to the
CFC under section 951A(f)(2) and proposed
§ 1.951A-6(b)(2) as net investment income.

Comments have requested that regula-
tions clarify that an inclusion under sec-
tion 951A is determined before an in-
clusion under section 951(a)(1)(B). The
Treasury Department and the IRS have
determined that clarification is unneces-
sary. Because a GILTI inclusion amount
is treated as a section 951(a)(1)(A) in-

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clusion for purposes of section 959, the
determination of the amount included
under section 951(a)(1)(B) is made after
the determination of the amount of a
section 951(a)(1)(A) inclusion and the
GILTI inclusion amount. See section
959(a)(2) and (f)(1). The Treasury De-
partment and the IRS intend to issue a
separate notice of proposed rulemaking
to update the regulations under sections
959 and 961 to account for the Act's
modifications to the U.S. international
tax system, including the enactment of
section 245A.

The characterization of GILTI inclu-
sions for purposes of determining the un-
related business taxable income of tax-
exempt entities will be addressed in
separate guidance. The Treasury Depart-
ment and the IRS request comments on
other areas in which the characterization
of a GILTI inclusion amount is relevant,
and whether it is appropriate in those ar-
eas to treat a GILTI inclusion amount in
the same manner as a section 951(a)(1)(A)
inclusion or in some other manner (for
example, as a dividend).

###### 2. Interaction with Sections 163(e)(3)(B)(i) and 267(a)(3)(B)

Section 267(a)(3)(B) generally pro-
vides that a deduction for an item payable
to a related CFC is not allowed until paid,
except to the extent that an amount attrib-
utable to that item is includible (deter-
mined without regard to properly alloca-
ble deductions and qualified deficits) in
the gross income of a U.S. shareholder.
Section 163(e)(3)(B)(i) provides a similar
rule for original issue discount on a debt
instrument held by a related CFC.

The Treasury Department and the IRS
have determined that deductions should
not be deferred under sections 163(e)(3)
(B)(i) and 267(a)(3)(B) to the extent an
item is taken into account in determining
a U.S. shareholder's GILTI inclusion
amount. Accordingly, the proposed regu-
lations provide that a deduction is allowed
under sections 163(e)(3)(B)(i) and 267(a)
(3)(B) for an item taken into account in
determining the net CFC tested income of
a U.S. shareholder, including a U.S. share-
holder treated under the proposed regula-
tions as owning section 958(a) stock of a
CFC owned by a domestic partnership.

See proposed § 1.951A-6(c)(1). In the
case of a U.S. shareholder that is a domes-
tic partnership, this rule applies only to the
extent that one or more U.S. persons
(other than domestic partnerships) that are
direct or indirect partners of the domestic
partnership include in gross income their
distributive share of the partnership's
GILTI inclusion amount or the item is
taken into account by a U.S. shareholder
partner of the domestic partnership by rea-
son of § 1.951A-5(c). See proposed
§ 1.951A-6(c)(2).

##### 3. Basis Adjustments for the Use of Tested Losses

In determining a U.S. shareholder's net
CFC tested income, the U.S. shareholder's
pro rata share of a tested loss of one CFC
may offset the shareholder's pro rata share
of tested income of another CFC. Under
the statute, such a use of a tested loss does
not reduce the U.S. shareholder's basis in
the stock of the tested loss CFC, increase
the stock basis of the tested income CFC,
or affect the earnings and profits of either
the tested loss CFC or the tested income
CFC.

The Treasury Department and the IRS
have determined that in certain cases the
lack of adjustments to stock basis of a
tested loss CFC can lead to inappropriate
results. For example, if the U.S. share-
holder's basis in the stock of the tested
loss CFC is not reduced to reflect the use
of the tested loss to offset tested income
taken into account by the U.S. share-
holder, the U.S. shareholder would recog-
nize a second and duplicative benefit of
the loss - either through the recognition of
a loss or the reduction of gain - if the
stock of the tested loss CFC is disposed
of. See Charles Ilfeld Co. v. Hernandez,
292 U.S. 62 (1934) (denying the loss on
stock of subsidiaries upon liquidation
when operating losses were previously
claimed from the subsidiaries' operations
because "[i]f allowed, this would be the
practical equivalent of double deduc-
tion"); U.S. v. Skelly Oil. Co., 394 U.S.
678 (1969) ("the Code should not be in-
terpreted to allow respondent 'the practi-
cal equivalent of a double deduction"
(citing Charles Ilfeld Co.)); § 1.161-1. On
the other hand, in the case of a corporate
U.S. shareholder, but not in the case of an

individual, gain recognized on the dispo-
sition of a CFC attributable to offset tested
income would, in most cases, be elimi-
nated as a result of the application of
section 964(e) or section 1248(a) and (j),
to the extent the gain is recharacterized as
a dividend that is eligible for the divi-
dends received deduction under section
245A. Accordingly, proposed § 1.951A-
6(e) generally provides that in the case of
a corporate U.S. shareholder (excluding
regulated investment companies and real
estate investment trusts), for purposes of
determining the gain, loss, or income on
the direct or indirect disposition of stock
of a CFC, the basis of the stock is reduced
by the amount of tested loss that has been
used to offset tested income in calculating
net CFC tested income of the U.S. share-
holder. The basis reduction is only made
at the time of the disposition and therefore
does not affect the stock basis prior to a
disposition. Requiring the basis reduction
only at the time of the disposition prevents
the use of tested losses alone from causing
the recognition of gain if the reduction
exceeds the amount of stock basis.

The basis adjustments apply only to the
extent a "net" tested loss of the controlled
foreign corporation has been used. This
limitation is intended to ensure that the
reduction applies only to the extent nec-
essary to eliminate the duplicative loss in
the stock. For example, if a $100x tested
loss of a CFC (CFC1) offsets $100x of
tested income of another CFC (CFC2) in
one year in determining a U.S. sharehold-
er's net CFC tested income, and in the
next year CFC1 has $20x of tested income
that is offset by a $20x tested loss of
CFC2, then the $100x used tested loss
attributable to the CFC1 stock from the
first year is reduced by the $20x of its
tested income from the second year that
was offset by the tested loss of CFC2,
resulting in a "net" used tested loss of
$80x. See proposed § 1.951A-6(e)(2).

Similar adjustments apply when the
tested loss CFC is treated as owned by the
U.S. shareholder through certain interven-
ing foreign entities by reason of section
958(a)(2) to prevent the indirect use of the
duplicative loss through the disposition of
interests in those intervening entities. The
regulations provide an exception to those
rules in certain cases when the tested loss
CFC and the CFC that generated the

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tested income that is offset by the tested
loss are in the same section 958(a)(2)
ownership chain; adjustments are not ap-
propriate in these cases because there is
no duplicative loss to the extent the shares
of both CFCs are directly or indirectly
disposed of. See proposed § 1.951A-
6(e)(1)(ii).

A direct disposition of the stock of a
CFC can result in the indirect disposition
of the stock of one or more lower-tier
CFCs. See proposed § 1.951A-6(e)(6)
(ii)(B). In such a case, basis adjustments
may be made to both the stock of the
upper-tier CFC and the stock of the lower-
tier CFCs. Accordingly, the proposed reg-
ulations provide ordering rules for making
these adjustments that, in general, are in-
tended to prevent gain resulting from a
basis adjustment attributable to the use of
a single tested loss from being taken into
account more than once. See proposed
§ 1.951A-6(e)(1)(iv).

The proposed regulations also include
rules that take into account certain non-
recognition transactions involving CFCs,
such as the acquisition of CFC stock by a
domestic corporation and transactions de-
scribed in section 381. See proposed
§ 1.951A-6(e)(4)(ii) and (e)(5). These
rules are intended to prevent the elimina-
tion or avoidance of the basis adjustments
through these types of transactions.

Finally, the proposed regulations pro-
vide a special rule to address dispositions
of CFC stock by another CFC that is not
wholly owned by a single domestic cor-
poration. See proposed § 1.951A-6(e)(7).
This rule, which is consistent with pro-
posed § 1.961-3(b) and Revenue Ruling
82-16, 1982-1 C.B. 106, is intended to
ensure that the appropriate amount of sub-
part F income is taken into account by
U.S. shareholders of the CFC as a result of
the disposition.

The Treasury Department and the IRS
request comments on these rules, includ-
ing whether additional adjustments to
stock basis or earnings and profits should
be made to account for a used tested loss
or offset tested income (for example,
whether adjustments should be provided
that are consistent with those set forth in
proposed § 1.965-2(d) and (f) (REG-
104226-18, 83 FR 39514, August 9,
2018)). Comments are also requested on
whether similar rules should apply to non-

corporate U.S. shareholders, taking into
account the fact that non-corporate U.S.
shareholders are not entitled to a divi-
dends received deduction under section
245A. Additionally, comments are re-
quested as to whether the definition of
"disposition" should be modified. For ex-
ample, the Treasury Department and the
IRS are considering broadening the term
to include transactions that do not involve
an actual transfer of stock but might result
in taxable gain but for the presence of tax
basis in CFC stock. Examples of such
transactions include distributions subject
to section 301(c)(2) or 1059.

##### II. Section 951

###### A. Pro rata share rules

Section 1.951-1(e) was revised in 2005
and 2006 to address certain avoidance
structures, such as structures that resulted
in non-economic allocations of subpart F
income to shareholders of CFCs that are
not U.S. shareholders. The Treasury De-
partment and the IRS have become aware
of additional avoidance structures. For ex-
ample, the existing regulations require an
allocation of earnings and profits between
classes of stock with discretionary distri-
bution rights based on the fair market
value of the stock. While this rule appro-
priately allocates subpart F income in
some cases (for example, involving mul-
tiple classes of common stock), some tax-
payers have attempted to improperly allo-
cate subpart F income by applying these
rules to certain structures involving shares
with preferred liquidation and distribution
rights. Similar avoidance structures in-
volve cumulative preferred stock with
dividends that compound less frequently
than annually.

This notice of proposed rulemaking
proposes to amend § 1.951-1(e) to ad-
dress these avoidance structures, which
implicate section 951A as well as section
951. The proposed regulations clarify that,
for purposes of determining a U.S. share-
holder's pro rata share of subpart F in-
come, earnings and profits for the taxable
year are first hypothetically distributed
among the classes of stock and then hy-
pothetically distributed to each share in
the class on the hypothetical distribution
date, which is the last day of the CFC's

taxable year on which it is a CFC. In lieu
of prescribing a determination based on
fair market value, the proposed regula-
tions provide that the amount of earnings
and profits that would be distributed with
respect to classes of stock is based on all
relevant facts and circumstances. See pro-
posed § 1.951-1(e)(3). In addition, the
proposed regulations disregard any trans-
action or arrangement that is part of a plan
a principal purpose of which is to reduce a
U.S. shareholder's pro rata share of the
subpart F income of a CFC. See proposed
§ 1.951-1(e)(6). This rule also applies for
purposes of determining a U.S. sharehold-
er's pro rata share of amounts for purposes
of calculating the shareholder's GILTI in-
clusion amount. Id. As a result of adding
this broader rule, the proposed regulations
do not include the specific anti-avoidance
rule involving section 304 transactions in
existing § 1.951-1(e)(3)(v).

The proposed regulations also modify
§ 1.951-1(e) in specific ways to take into
account section 951A. For example, the
proposed regulations provide that a U.S.
shareholder's pro rata share of a CFC's
subpart F income is determined by refer-
ence to the shareholder's proportionate
share of the total current earnings and
profits that would be distributed in the
hypothetical distribution. In addition to
determining a U.S. shareholder's pro rata
share of a CFC's subpart F income,
§ 1.951-1(e) also applies for purposes of
determining the shareholder's pro rata
share of the CFC's tested income. See also
proposed § 1.951A-1(d)(2). However, be-
cause tested income is not limited to the
earnings and profits of a CFC, and be-
cause a CFC's tested loss increases its
earnings and profits for purposes of deter-
mining the subpart F income limitation in
section 952(c)(1), the earnings and profits
allocated in the hypothetical distribution
may exceed the earnings and profits of the
CFC computed under section 964. Ac-
cordingly, the hypothetical distribution in
the proposed regulations is based on the
greater of the section 964 earnings and
profits or the sum of the subpart F income
(increased by reason of any tested loss
add-back under section 951A(c)(2)(B)(ii)
and proposed § 1.951A-6(d)) and tested
income of the CFC.

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###### B. Partnership blocker structures

Notice 2010-41, 2010-22 I.R.B. 715,
stated that forthcoming regulations would
treat a domestic partnership as a foreign
partnership for purposes of identifying the
U.S. shareholder of a CFC required to
include in gross income its pro rata share
of the CFC's subpart F income in the
circumstances described in the notice. The
Treasury Department and the IRS have
determined that the same rules should also
apply to identify the U.S. shareholder of a
CFC for purposes of section 951A. Ac-
cordingly, the proposed regulations treat
certain controlled domestic partnerships as
foreign partnerships for purposes of identi-
fying a U.S. shareholder for purposes of
sections 951 through 964. See also proposed
§ 1.965-1(e) (REG-104226-18, 83 FR
39514, August 9, 2018) (adopting a similar
partnership blocker rule for purposes of the
section 965 regulations).

###### C. Other modifications

The proposed regulations also update
§ 1.951-1 consistent with the modifica-
tion in the Act of the definition of a U.S.
shareholder and the elimination in the Act
of the 30-day requirement. See proposed
§ 1.951-1(a) and (g)(1).

##### III. Section 1502

###### A. In general

Section 1502 provides the Secretary
authority

to prescribe such regulations as he may
deem necessary in order that the tax liabil-
ity of any affiliated group of corporations
making a consolidated return and of each
corporation in the group, both during and
after the period of affiliation, may be
returned, determined, computed, as-
sessed, collected, and adjusted, in such
manner as clearly to reflect the income-tax
liability and the various factors necessary
for the determination of such liability, and
in order to prevent avoidance of such tax
liability.

A consolidated group member's inclu-
sion of subpart F income under section
951(a)(1)(A) is determined at the member
level. However, as discussed in section
I.A of this Explanation of Provisions, a

section 951(a)(1)(A) inclusion with re-
spect to a CFC is determined solely by
reference to the subpart F income of the
CFC, and therefore determining a member's
section 951(a)(1)(A) inclusion solely by ref-
erence to a CFC the stock of which is owned
(within the meaning of section 958(a)) by
the member is not distortive of the consoli-
dated group's income tax liability. As a
result, the location of the CFC within
the group generally has no effect on the
consolidated group's income tax liabil-
ity by reason of section 951(a)(1)(A). In
contrast, section 951A requires an ag-
gregate, U.S. shareholder-level calcula-
tion, under which a member's pro rata
share of the relevant items of one CFC
can increase or decrease a member's
GILTI inclusion amount otherwise re-
sulting from its ownership of another
CFC. Accordingly, a determination of
a member's GILTI inclusion amount
solely based on its pro rata share of the
items of a CFC the stock of which is
owned (within the meaning of section
958(a)) by that member may not result
in a clear reflection of the consolidated
group's income tax liability. For exam-
ple, a consolidated group could segre-
gate one CFC with tested interest ex-
pense under one member and another
CFC with QBAI under another member,
thereby increasing the net DTIR of the
second member relative to the consoli-
dated group's net DTIR if determined at
a group level. Alternatively, a strict,
separate-entity application of section
951A could inappropriately increase a
consolidated group's income tax liabil-
ity, because one member's excess pro
rata share of tested losses or QBAI over
tested income would be unavailable to
reduce another member's GILTI inclu-
sion amount.

###### B. Section 1.1502-51

In response to comments, the Treasury
Department and the IRS have determined
that a member's GILTI inclusion amount
should be determined by reference to the
relevant items of each CFC owned by
members of the same consolidated group.
As discussed in section I.A of this Expla-
nation of Provisions, a U.S. shareholder
includes in gross income its GILTI inclu-
sion amount for any taxable year. GILTI

inclusion amount is defined under pro-
posed § 1.951A-1(c)(1) as, with respect to
a U.S. shareholder for a taxable year of
the shareholder, the excess (if any) of the
shareholder's net CFC tested income over
the shareholder's net DTIR for the taxable
year. Under proposed § 1.1502-51, this
definition applies equally to a U.S. share-
holder that is a member of a consolidated
group. However, consistent with the au-
thority in section 1502, the proposed reg-
ulations provide special definitions of net
CFC tested income and net DTIR in order
to clearly reflect the income tax liability of
the consolidated group. Specifically, the
proposed regulations provide that, to de-
termine a member's GILTI inclusion
amount, the pro rata shares of tested loss,
QBAI, tested interest expense, and tested
interest income of each member are ag-
gregated, and then a portion of each ag-
gregate amount is allocated to each mem-
ber of the group that is a U.S. shareholder
of a tested income CFC based on the
proportion of such member's aggregate
pro rata share of tested income to the total
tested income of the consolidated group.
See proposed § 1.1502-51(e).

As discussed in section I.G.3 of this
Explanation of Provisions, proposed
§ 1.951A-6(e) provides that the ad-
justed basis of the stock of a CFC is
adjusted immediately before its disposi-
tion. Proposed § 1.1502-51(c) provides
special rules for making these adjust-
ments to the adjusted basis of the stock
of a CFC owned by a member in a
manner that reflects the special defini-
tions applicable to members.

###### C. Section 1.1502-32

Section 1.1502-32 provides rules for
adjusting the basis of the stock of a sub-
sidiary owned by another member to re-
flect, among other items, the subsidiary's
items of income. Accordingly, no new
rules are necessary to adjust the basis of
the stock of a member because of a GILTI
inclusion. However, as previously dis-
cussed, proposed §§ 1.951A-6(e) and
1.1502-51(c) provide rules for adjusting
the basis of the stock of a CFC immedi-
ately before its disposition. As a result,
proposed § 1.1502-32(b)(3)(ii)(E) and
(iii)(C) provide for adjustments to the ba-
sis of the stock of a member to reflect

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those rules. Specifically, the proposed
rules treat a portion of a member's offset
tested income amount as tax-exempt in-
come and all of a member's used tested
loss amount as a noncapital, nondeduct-
ible expense.

As previously discussed, the Treasury
Department and the IRS have determined
that in the case of a corporate U.S. share-
holder, gain recognized on the disposition
of stock of a CFC attributable to offset
tested income would, in most cases, be
eliminated as a result of the application of
section 964(e)(4) or section 1248(a) and
(j), to the extent the gain or income is
eligible for the dividends received deduc-
tion under section 245A. In order to not
incentivize a sale of the stock of a CFC
over a sale of stock of a member, pro-
posed § 1.1502-32(b)(3)(ii)(F) provides
that a member is also treated as receiving
tax-exempt income immediately before
another member recognizes income, gain,
deduction, or loss with respect to a share
of the first member's stock. The amount of
this additional tax-exempt income is the
net offset tested income amount allocable
to the shares of any CFC owned by the
first member to the extent that a distribu-
tion of such amount would have been
characterized as a dividend eligible for a
section 245A deduction and not subject to
section 1059.

The Treasury Department and the IRS
request comments regarding the coordina-
tion of the rules of proposed §§ 1.951A-
6(e) and 1.1502-51(c) with the investment
adjustment regime of § 1.1502-32. Com-
ments are specifically requested on: (1)
whether the amount of the adjustments to
the basis of member stock should be lim-
ited to the amount of the adjustments to
the basis of the stock of a CFC under the
rules of proposed § 1.951A-6(e); (2)
whether the adjustments to the basis of
member stock should all be made on a
current basis, made to the extent of the
basis adjustments provided in proposed
§ 1.951A-6(e) on a current basis with any
remaining adjustments being made at the
time of a disposition of stock of a CFC or
of a member, or made only at the time of
a disposition of the stock of a CFC or of a
member; and (3) whether rules should
provide that a deduction under section
245A should not be treated as tax-exempt
income to the extent that the underlying

dividend is attributable to offset tested
income for which basis adjustments have
already been made. Additionally, com-
ments are specifically requested as to
whether there are any circumstances in
which there should be a deemed disposi-
tion of the stock of a CFC owned by a
member, such that the rules of proposed
§ 1.951A-6(e) would apply, including,
but not limited to, a deconsolidation or
taxable disposition of the stock of a mem-
ber that owns (directly or indirectly) the
stock of a CFC to either a person outside
of the consolidated group or to another
member, and a transfer of the stock of a
member in an intercompany transaction
that is a nonrecognition transaction.
Similarly, comments are specifically re-
quested as to whether there are other
transactions that should be described in
the definition of transferred shares in
proposed § 1.1502-32(b)(3)(ii)(F)(1),
such as a deemed disposition pursuant to
§ 1.1502-19(c)(1)(iii)(B). Lastly, com-
ments are specifically requested as to
whether any other adjustments are nec-
essary to prevent the duplication of gain
or loss resulting from a member's own-
ership of a CFC, including situations
where a member owning a CFC joins
another consolidated group.

In response to comments received, no
new rules are being proposed under
§ 1.1502-33, which provides rules for ad-
justing the earnings and profits of a sub-
sidiary and any member owning stock of
the subsidiary. The Treasury Department
and the IRS request comments on whether
additional rules under § 1.1502-33 or any
other regulations issued under section
1502 are necessary.

##### IV. Sections 1.6038-2(a) and 1.6038-5

Under section 6038(a)(1), U.S. persons
that control foreign corporations must file
certain information returns with respect to
those corporations. Before the Act, a U.S.
shareholder would not have had an in-
come inclusion under section 951(a)(1)
with respect to a foreign corporation un-
less the corporation had been a CFC for an
uninterrupted period of at least 30 days
during the taxable year. While section
6038 does not limit the reporting require-
ments to foreign corporations that a U.S.
person controls for an uninterrupted pe-

riod of at least 30 days, § 1.6038-2(a)
does provide for such a limit. To coordi-
nate with the amendment to section
951(a)(1) that removed the 30-day re-
quirement, this notice of proposed rule-
making proposes to revise § 1.6038-2(a)
to provide that certain information report-
ing is required for U.S. persons that con-
trol a foreign corporation at any time dur-
ing an annual accounting period.

Section 6038(a)(4) allows the Secre-
tary to require any U.S. shareholder of a
CFC to provide information required un-
der section 6038(a)(1), which includes
information that is similar to the listed
information in section 6038(a)(1)(A)
through (a)(1)(E), as well as information
that "the Secretary determines to be ap-
propriate to carry out the provisions of
this title." In order to effectively adminis-
ter and enforce section 951A, the Treasury
Department and the IRS have determined
that, in general, U.S. shareholders must
file a new Schedule I-1, Information for
Global Intangible Low-Taxed Income, to
Form 5471, Information Return of U.S.
Persons With Respect To Certain Foreign
Corporations, as well as new Form 8992,
U.S Shareholder Calculation of Global In-
tangible Low-Taxed Income (GILTI), to
provide the information that a U.S. share-
holder needs with respect to each of its
CFCs to determine the U.S. shareholder's
GILTI inclusion amount for a taxable
year. Proposed § 1.6038-5 provides the
filing requirements for new Form 8992.

##### V. Applicability Dates

Consistent with the applicability date of
section 951A, proposed §§ 1.951-1(e)(1)
(ii)(B), 1.951A-1 through 1.951A-6,
1.1502-32(b)(3)(ii)(E), (b)(3)(ii)(F), and
(b)(3)(iii)(C), and 1.1502-51 are proposed
to apply to taxable years of foreign corpo-
rations beginning after December 31, 2017,
and to taxable years of U.S. shareholders in
which or with which such taxable years
of foreign corporations end. See section
7805(b)(2). Proposed § 1.951-1(e) (pro rata
share of subpart F income) (other than
§ 1.951-1(e)(1)(ii)(B)) is proposed to apply
to taxable years of U.S. shareholders ending
on or after October 3, 2018. See section
7805(b)(1)(B). Consistent with the applica-
bility date of the modification to section 951
in the Act, proposed § 1.951-1(a) (con-

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trolled foreign corporations) and § 1.951-
1(g) (definition of U.S. shareholder) are pro-
posed to apply to taxable years of foreign
corporations beginning after December 31,
2017, and to taxable years of U.S. share-
holders with or within which such taxable
years of foreign corporations end. See sec-
tion 7805(b)(2). Proposed § 1.951-1(h)
(special rule for partnership blocker struc-
ture) is proposed to apply to taxable years of
domestic partnerships ending on or after
May 14, 2010. See Notice 2010-41 and
section 7805(b)(1)(C). Although proposed
§ 1.951-1(h) applies for purposes of both
section 951 and section 951A, the only prac-
tical effect of applying this rule to taxable
years of domestic partnerships ending on or
after May 14, 2010, and before January 1,
2018, concerns the application of section
951. The proposed rule does not have rele-
vance to the application of section 951A
until the first taxable year of a CFC owned
by a domestic partnership beginning after
December 31, 2017 (the effective date of
section 951A). Proposed § 1.6038-2(a) (in-
formation returns required of U.S. persons
with respect to annual accounting periods of
certain foreign corporations) and proposed
§ 1.6038-5 (information returns required of
certain U.S. persons to report amounts de-
termined with respect to certain foreign
corporations for GILTI purposes) are
proposed to apply to taxable years of
foreign corporations beginning on or
after October 3, 2018. See sections
6038(a)(3) and 7805(b)(1)(B).

#### Special Analyses

Regulatory Planning and Review -
Economic Analysis

Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and, if
regulation is necessary, to select regulatory
approaches that maximize net benefits (in-
cluding potential economic, environmental,
public health and safety effects, distributive
impacts, and equity). Executive Order
13563 emphasizes the importance of quan-
tifying both costs and benefits, of reducing
costs, of harmonizing rules, and of promot-
ing flexibility. The Executive Order 13771
designation for any final rule resulting from
these proposed regulations will be informed
by comments received.

The proposed regulations have been
designated by the Office of Information
and Regulatory Affairs (OIRA) as subject
to review under Executive Order 12866
pursuant to the Memorandum of Agree-
ment (April 11, 2018) between the Trea-
sury Department and the Office of Man-
agement and Budget regarding review of
tax regulations. OIRA has determined that
the proposed rulemaking is significant.
Accordingly, the proposed regulations
have been reviewed by OIRA. For more
detail on the economic analysis, please
refer to the following analysis.

##### A. Overview

The proposed regulations provide tax-
payers with computational, definitional,
and anti-avoidance guidance regarding the
application of section 951A. They provide
guidance for U.S. shareholders to deter-
mine the amount of GILTI to include in
gross income and how to compute the
components of GILTI. Among other ben-
efits, this clarity helps ensure that taxpay-
ers all calculate GILTI in a similar man-
ner, which promotes efficiency and equity
contingent on the provisions of the overall
Code.

The proposed regulations under sec-
tions 951A, 1502, and 6038 (proposed
§§ 1.951A-1 through 1.951A-7, 1.1502-
12, 1.1502-13, 1.1502-32, and 1.1502-51,
and 1.6038-5) provide details for taxpayers
(including members of a consolidated
group) regarding the computation of certain
components of GILTI (for example, tested
income and tested loss, QBAI, net deemed
tangible income return, and specified inter-
est expense), describe the consequences of a
GILTI inclusion for purposes of other sec-
tions of the Code, and detail the reporting
requirements associated with GILTI. These
proposed regulations further establish anti-
abuse rules to prevent taxpayers from taking
measures to inappropriately reduce their
GILTI through certain transfers of property.
They also disallow certain losses that reduce
GILTI from being used a second time.

The proposed regulations under sec-
tions 951 and 6038 (proposed §§ 1.951-1
and 1.6038-2) prevent taxpayers from
avoiding an inclusion of subpart F income
under section 951(a) or the inclusion of
GILTI under section 951A through certain
artificial arrangements involving the own-

ership of CFC stock, coordinate the cal-
culation of a U.S. shareholder's subpart F
with its GILTI, and conform the regula-
tions to other amendments in the Act,
including a modification to the definition
of U.S. shareholder for purposes of sec-
tions 951(a) and 951A and the elimination
of the 30-day CFC status requirement.
This economic analysis describes the eco-
nomic benefits and costs of the proposed
regulations.

##### B. Economic Analysis of the Proposed Regulations

###### 1. Background

Because section 951A is a new Code
section, many of the details behind the
relevant terms and necessary calculations
required for the computation of a U.S.
shareholder's GILTI inclusion amount
would benefit from greater specificity.
Thus, as is expected after the passage of
major tax reform legislation, the regula-
tions answer open questions and provide
detail and specificity for the definitions
and concepts described in section 951A,
so that U.S. shareholders can readily and
accurately determine their GILTI inclu-
sion amounts. For example, the regula-
tions provide definitions of crucial terms,
such as tested income, tested loss, speci-
fied tangible property, and specified inter-
est expense.

As discussed in section I.A. of the Ex-
planation of Provisions, although a GILTI
inclusion is treated similarly to an inclu-
sion of subpart F income for some pur-
poses, it is determined in a manner funda-
mentally different from that of a subpart F
inclusion. Therefore, in some cases it is
appropriate for the regulations to rely on
subpart F principles, but in other cases
different rules are necessary. For example,
the regulations apply subpart F rules for
purposes of (1) determining a U.S. share-
holder's pro rata share of certain items of
a CFC, (2) translating foreign currency to
U.S. dollars, (3) determining gross income
and allowable deductions, and (4) allocat-
ing and apportioning allowable deduc-
tions to gross tested income. However, it
would be inappropriate to rely on subpart
F rules for the GILTI computations that
are performed at the U.S. shareholder
level because subpart F income is deter-

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mined solely at the level of a CFC. For
example, the regulations provide detail on
how a U.S. shareholder determines its
specified interest expense at the share-
holder level based on the interest expense
and interest income of each CFC owned
by the shareholder.

Additionally, the proposed regulations
provide rules regarding the interaction of
certain aspects of section 951A with other
provisions. For example, they clarify that,
regarding the interaction of the earnings
and profits limitation (including recap-
ture) for subpart F income and the deter-
mination of gross tested income, tested
income and tested loss are computed with-
out regard to the earnings and profits lim-
itation in section 952(c). In addition, the
proposed regulations provide that GILTI
inclusion amounts are considered net in-
vestment income under section 1411. Fi-
nally, the proposed regulations provide
that certain deductions between related
parties are not deferred under sections
163(e)(3)(B)(i) and 267(a)(3)(B) to the
extent the income is taken into account in
determining a U.S. shareholder's GILTI
inclusion amount.

Section 951A provides the Secretary
of the Treasury the authority to issue
regulations and other guidance to pre-
vent the avoidance of the purposes of sec-
tion 951A(d). As such, regulations under
§§ 1.951A-2 and 1.951A-3 provide that
certain transactions that reduce a U.S. share-
holder's GILTI inclusion amount, for exam-
ple, by increasing a CFC's qualified busi-
ness asset investment (QBAI) or decreasing
a CFC's tested income, will be disregarded
for purposes of the GILTI computation.

Further, the Treasury Department and
the IRS have determined that, in the ab-
sence of any adjustment, inappropriate re-
sults may arise in cases that a U.S. share-
holder's pro rata share of the tested loss of
one CFC offsets the shareholder's pro rata
share of the tested income of another CFC
in determining the shareholder's GILTI
inclusion amount. In particular, a U.S.
shareholder disposing of the stock of a
tested loss CFC could recognize second,
duplicative benefits from a single eco-
nomic loss. Therefore, the proposed reg-
ulations provide that, when determining
gain or loss on the disposition of the stock
of a tested loss CFC, the U.S. sharehold-
er's basis in the stock of the tested loss

CFC is reduced by the cumulative amount
of tested losses that were used to offset
tested income in determining the share-
holder's net CFC tested income.

The statute is silent on the computation
of GILTI for members of a consolidated
group and for domestic partnerships and
their partners. Absent these regulations,
there would be uncertainty among taxpay-
ers as to whether to calculate a GILTI
inclusion amount at the level of a member
or its consolidated group, or at the level of
a domestic partnership or its partners.
Without guidance, different taxpayers
would likely take different positions on
these matters. The proposed regulations
provide clarity by (1) determining the
GILTI inclusion amount of each member
of a consolidated group by taking into
account the relevant items of each CFC
owned by members of such group, and (2)
providing guidance on the computation of
the GILTI inclusion amount of domestic
partnerships and their partners.

Finally, these proposed regulations
provide reporting requirements necessary
to properly administer and enforce section
951A. In particular, the Treasury Depart-
ment and the IRS have determined that
U.S. shareholders must file a new Sched-
ule I-1, Information for Global Intangible
Low-Taxed Income, associated with Form
5471, Information Return of U.S. Persons
With Respect To Certain Foreign Corpo-
rations, as well as new Form 8992, U.S
Shareholder Calculation of Global Intan-
gible Low-Taxed Income (GILTI), in or-
der to provide the information that a U.S.
shareholder is using with respect to each
of its CFCs to determine the U.S. share-
holder's GILTI inclusion amount for a
taxable year. The proposed regulations
also provide that a U.S. shareholder part-
nership must include on its Schedule K-1,
associated with Form 1065, U.S. Return
of Partnership Income, certain informa-
tion necessary for its partners to determine
their distributive share of the partnership's
GILTI inclusion amount or, in the case of
U.S. shareholder partners, to determine
their own GILTI inclusion amounts. Fi-
nally, to coordinate with the amendment
to section 951(a)(1) that removed the 30-
day CFC status requirement for subpart F
inclusions, the proposed regulations pro-
vide that certain information reporting is
required for U.S. persons that control a

foreign corporation at any time during an
annual accounting period.

###### 2. Anticipated benefits and costs of the proposed regulations

###### a. Baseline

The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations against a baseline-
the way the world would look in the ab-
sence of the proposed regulations.

###### b. Anticipated Benefits

The Treasury Department and the IRS
expect that the certainty and clarity pro-
vided by these proposed regulations, rel-
ative to the baseline, will enhance U.S.
economic performance under the statute.
Because a tax has not previously been
imposed on GILTI and the statute is silent
on certain aspects of definitions and cal-
culations, taxpayers can particularly ben-
efit from enhanced specificity regarding
the relevant terms and necessary calcula-
tions they are required to apply under the
statute. In the absence of this enhanced
specificity, similarly situated taxpayers
might interpret the statutory rules of sec-
tion 951A differently, potentially result-
ing in inequitable outcomes. For example,
different taxpayers might pursue income-
generating activities based on different as-
sumptions about whether that income will
be counted as GILTI, and some taxpayers
may forego specific investments that other
taxpayers deem worthwhile based on dif-
ferent interpretations of the tax conse-
quences alone. The guidance provided in
these regulations helps to ensure that tax-
payers face more uniform incentives when
making economic decisions, a tenet of
economic efficiency. Consistent reporting
across taxpayers also increases the IRS's
ability to consistently enforce the tax
rules, thus increasing equity and decreas-
ing opportunities for tax evasion.

For example, the proposed regulations
provide a definition of specified interest
expense that adopts a netting approach.
Alternatives would be to adopt a tracing
approach or to remain silent. The Trea-
sury Department and the IRS rejected a
tracing approach because it would be
more burdensome for taxpayers due to

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the complexity of matching, at the U.S.
shareholder-level, of the shareholder's
pro rata share of each item of interest
expense with its pro rata share of each
item of interest income. The Treasury
Department and the IRS also rejected
the option of remaining silent because if
taxpayers relied on statutory language
alone, taxpayers would adopt different
approaches because the statute does not
define what "attributable" means, leav-
ing it open to differing interpretations.

As discussed above, there are similar-
ities between GILTI and subpart F. Where
appropriate, these proposed regulations
rely on rules already developed under sub-
part F. Since taxpayers to whom GILTI
applies are already subject to the subpart F
regime, it is less costly to them to apply
rules they are already familiar with, and
they will benefit in reduced time and cost
spent learning new rules. For example, the
proposed regulations apply existing sub-
part F rules for determining allowable de-
ductions for GILTI purposes. By relying
on existing infrastructure, the proposed
regulations allow taxpayers to use the
same analysis that they already conduct
for subpart F purposes. For additional dis-
cussion of the rules for determining allow-
able deductions, see section I.C.1 of the
Explanation of Provisions section.

The Treasury Department and the IRS
next considered the benefits and costs of
providing these specific proposed terms,
calculations, and other details regarding
GILTI. In developing these proposed reg-
ulations, the Treasury Department and the
IRS have generally aimed to apply the
principle that an economically efficient
tax system would treat income derived
from similar economic decisions simi-
larly, to the extent consistent with the
statute and considerations of administra-
bility of the tax system. Similar economic
decisions, in the context of GILTI, are
those that involve property of a similar
degree of immobility and that demonstrate
active business operations and presence in
any particular jurisdiction. See, for exam-
ple, Senate Explanation, at 366.

An economically efficient tax system
would also generally keep the choice
among businesses' ownership and organi-
zational structures neutral contingent on
the provisions of the corporate income tax
and other tax provisions that may affect

organizational structure. The Treasury
Department and the IRS expect that the
proposed regulations, in providing that
GILTI be generally calculated on a con-
solidated group basis and at the partner
level in the case of partners that are U.S.
shareholders of one or more partnership
CFCs, will ensure that shareholders face
uniform tax treatment on their GILTI-
relevant investments regardless of owner-
ship or organizational structure, thus en-
couraging market-driven as opposed to
tax-driven structuring decisions. If, as an
alternative policy approach, GILTI were
determined solely at the level of a member
(in the case of consolidated groups) or
solely at the level of a partnership (in the
case of domestic partnerships and their
partners), many taxpayers would be com-
pelled to reorganize their ownership struc-
tures just to obtain the full aggregation of
CFC attributes as envisioned by Congress.
Yet other taxpayers would be incentivized
to reorganize in an attempt to avoid full
aggregation so as to reduce their inclusion
below an amount that accurately reflects
their GILTI. For an illustration, see
section I.F of the Explanation of Provi-
sions. Therefore, the Treasury Department
and the IRS propose that GILTI be calcu-
lated on a consolidated group basis and at
the partner level in the case of partners
that are U.S. shareholders of one or more
partnership CFCs. The preamble dis-
cusses further why those approaches were
taken, as well as describing alternative
approaches considered. The Treasury De-
partment and the IRS request comments
on this proposed approach.

##### c. Anticipated impacts on administrative and compliance costs

Because the statute requires payment
of tax regardless of the issuance of regu-
lations or instructions, the new forms, re-
visions to existing forms, and proposed
regulations can lower the burden on tax-
payers of determining their tax liability.
The Treasury Department and the IRS ex-
pect that the proposed regulations will re-
duce the costs for taxpayers to comply
with the Act, relative to the baseline of no
promulgated regulations. The proposed
regulations require that each U.S. share-
holder partnership provide to each partner
its distributive share of the partnership's

GILTI inclusion amount and, if the part-
ner is a U.S. shareholder of one or more
partnership CFCs, the partner's propor-
tionate share of the partnership's pro rata
share of each relevant item of the partner-
ship CFC. Under the baseline, the burden
would potentially have fallen on each
partner, who would be required to deter-
mine its own distributive share of the
partnership's GILTI inclusion amount
or, if a U.S. shareholder of a partnership
CFC, determine its own GILTI inclusion
amount by reference to the partnership's
pro rata share of items of the partnership
CFC. While this latter burden is difficult
to assess, because it is unclear how part-
ners would calculate these amounts in
the absence of a determination by the
partnership and it is similarly unclear
what efforts might be made by the part-
nership to help the partners fulfill this
obligation, the Treasury Department and
the IRS expect that it would be signifi-
cantly greater than the burden incurred
under the proposed regulations.

Proposed § 1.6038-2(a) increases
record-keeping requirements for taxpay-
ers because it requires all taxpayers to
file Form 5471 if they held stock in a
CFC during the taxable year regardless
of the duration of the holding period,
rather than only if they held the stock
for a 30-day period under the current
regulation. The changes in the proposed
regulation derive directly from statutory
changes to the holding period require-
ment in the Act.

##### C. Paperwork Reduction Act

The collections of information in these
proposed regulations with respect to sec-
tion 951A are in proposed §§ 1.951A-5(f)
and 1.6038-5. A separate collection of
information applicable to controlling U.S.
shareholders of a foreign corporation is in
proposed § 1.6038-2(a).

The collection of information in pro-
posed § 1.6038-5 is mandatory for each
U.S. shareholder (including a U.S. share-
holder partner) that owns (within the
meaning of section 958(a)) stock of a
CFC. The collection of information in
proposed § 1.6038-5 is satisfied by sub-
mitting a new reporting form, Form 8992,
U.S. Shareholder Calculation of Global
Intangible Low-Taxed Income (GILTI),

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with an income tax return. In addition, for
those U.S. shareholders that are required
to file Form 5471, Information Return of
U.S. Persons with Respect to Certain For-
eign Corporations, a new Schedule I-1,
Information for Global Intangible Low-
Taxed Income, has been added. For pur-
poses of the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) ("PRA"), the
reporting burden associated with proposed
§ 1.6038-5 will be reflected in the IRS
Form 14029, Paperwork Reduction Act
Submission, associated with Form 5471
(OMB control number 1545-0704) and
the new Form 8992 (OMB control number
1545-0123).

The collection of information in pro-
posed § 1.951A-5(f) requires each U.S.
shareholder partnership to provide to its
partners their distributive share of the
partnership's GILTI inclusion amount, as

well as provide to each U.S. shareholder
partner their proportionate share of the
partnership's pro rata share (if any) of
each CFC tested item of each partnership
CFC of the partnership. The Treasury De-
partment and the IRS anticipate revising
Schedule K-1 (Form 1065), Partner's
Share of Income, Deductions, Credits,
etc., or its instructions to require the pro-
vision of this information. For purposes of
the PRA, the reporting burden associated
with proposed § 1.951A-5(f) will be re-
flected in the IRS Form 14029, Paperwork
Reduction Act Submission, associated
with Schedule K-1 (Form 1065, OMB
control number 1545-0123).

The collection of information currently
required from a U.S. person that controls a
foreign corporation is revised by proposed
§ 1.6038-2(a). Section 1.6038-2(a) pres-
ently requires only those U.S. persons

with uninterrupted control of a foreign
corporation for 30 days or more during the
shareholder's annual accounting period to
file Form 5471 for that period. Consistent
with statutory changes in the Act, the re-
vised collection of information in pro-
posed § 1.6038-2(a) eliminates the 30-
day holding period as a precondition to
reporting and requires every U.S. person
that controls a foreign corporation at any
time during an annual accounting period
to file Form 5471 for that period. For
purposes of the PRA, the reporting burden
associated with proposed § 1.6038-2(a)
will be reflected in the IRS Form 14029,
Paperwork Reduction Act Submission, as-
sociated with Form 5471.

When available, drafts of IRS forms
are posted for comment at https://apps.irs.
gov/app/picklist/list/draftTaxForms.html.

Related New or Revised Tax Forms

New

Revision of existing form

Number of respondents (estimated)

Schedule I-1 (Form 5471)

☒ ✓

25,000 - 35,000

Form 8992

☒ ✓

25,000 - 35,000

Form 1065/1120S, Schedule K

☒ ✓

8,000 - 12,000

Form 5471 (30 days)

☒ ✓

&lt;1,000

##### D. Regulatory Flexibility Act

It is hereby certified that this notice of
proposed rulemaking will not have a sig-
nificant economic impact on a substantial
number of small entities within the mean-
ing of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).

The domestic small business entities
that are subject to section 951A and this
notice of proposed rulemaking are those
domestic small business entities that are
U.S. shareholders of a CFC. 2 Generally, a
U.S. shareholder is any U.S. person that
owns 10 percent or more of a foreign
corporation's stock, measured either by
value or voting power. A CFC is a foreign
corporation in which more than 50 percent
of its stock is owned by U.S. shareholders,
again measured either by value or voting
power. Data about the number of domestic
small business entities potentially affected
by these regulations are not readily avail-
able.

The domestic small business entities
that are subject to the requirements of
proposed § 1.951A-5(f) or 1.6038-5 of
this notice of proposed rulemaking are
U.S. shareholders of one or more CFCs.
The Treasury Department and the IRS do
not have data to assess the number of
small entities potentially affected by
§ 1.951A-5(f) or 1.6038-5. However,
businesses that are U.S. shareholders of
CFCs are generally not small businesses
because the ownership of sufficient stock
in a CFC in order to be a U.S. shareholder
generally entails significant resources and
investment. Therefore, the Treasury De-
partment and the IRS do not believe that
a substantial number of domestic small
business entities will be subject to pro-
posed § 1.951A-5(f) or 1.6038-5. Conse-
quently, the Treasury Department and
the IRS do not believe that proposed
§ 1.951A-5(f) or 1.6038-5 will have a
significant economic impact on a substan-
tial number of domestic small business

entities. Therefore, a Regulatory Flexibil-
ity Analysis under the Regulatory Flexi-
bility Act is not required with respect to
the collection of information requirements
of proposed § 1.951A-5(f) or 1.6038-5.

Existing § 1.6038-2(a) requires only
those U.S. persons with uninterrupted
control of a foreign corporation for 30
days or more during the shareholder's an-
nual accounting period to file Form 5471
for that period. Proposed § 1.6038-2(a)
eliminates the 30-day holding period as a
precondition to reporting and requires ev-
ery U.S. person that controls a foreign
corporation at any time during an annual
accounting period to file Form 5471 for
that period. As a result, those U.S. share-
holders that control a foreign corporation
for less than 30 days will now be required
to file Form 5471 pursuant to proposed
§ 1.6038-2(a). The domestic small busi-
ness entities subject to the requirements of
proposed § 1.6038-2(a) are those domes-
tic small business entities that control a

2 The Treasury Department and the IRS estimate that there are 25,000-35,000 respondents of all sizes that are likely to file Schedule I-1, Form 5471. Only a small proportion of these are
likely to be small businesses. The Treasury Department and the IRS request comments on the number of small businesses that are likely to file Schedule I-1.

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foreign corporation at any time during a
taxable year. For these purposes, a domes-
tic small business entity controls a foreign
corporation by owning more than 50 per-
cent of that foreign corporation's stock,
measured either by voting power or value.
The Treasury Department and the IRS do
not believe that a substantial number of
domestic small business entities that are
controlling shareholders of a foreign cor-
poration will become Form 5471 filers
due to the information collection in pro-
posed § 1.6038-2(a) for the following
reasons. First, significant resources and
investment are required for a U.S. person
to own and operate a business in a foreign
country as a corporation. Second, the
Treasury Department and the IRS believe
that satisfying the stock ownership re-
quirement for control for purposes of pro-
posed § 1.6038-2(a) requires a potential
outlay of significant resources and invest-
ment, including active involvement in
managing the foreign corporation due to
controlling ownership of the corporation,
such that few domestic small business enti-
ties are likely to control foreign corporations
for purposes of proposed § 1.6038-2(a). For
these reasons, the Treasury Department and
the IRS do not believe it likely that a do-
mestic small business entity would have
controlling ownership of a foreign corpora-
tion for less than a 30-day period in a tax-
able year. As a result, the Treasury Depart-
ment and the IRS do not believe that a
substantial number of domestic small busi-
ness entities will be affected by the pro-
posed § 1.6038-2(a) eliminating the 30-day
holding period as a precondition to filing
Form 5471. Consequently, the Treasury De-
partment and the IRS do not believe that
proposed § 1.6038-2(a) will have a signif-
icant economic impact on a substantial
number of domestic small business entities.
Therefore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act is not
required with respect to the requirements of
proposed § 1.6038-2(a).

Notwithstanding this certification, the
Treasury Department and the IRS invite
comments from the public about the im-
pact of this proposed rule on small enti-
ties.

Pursuant to section 7805(f), this notice
of proposed rulemaking has been submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for

comment on its impact on small busi-
nesses. The IRS invites the public to com-
ment on this certification.

##### E. 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. In
2018, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in
expenditures by state, local, or tribal gov-
ernments, or by the private sector in ex-
cess of that threshold.

##### F. Executive Order 13132: Federalism

Executive Order 13132 (entitled “Fed-
eralism") prohibits an agency from pub-
lishing any rule that has federalism implica-
tions 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 require-
ments of section 6 of the Executive Order.
This proposed rule does not have federalism
implications and does not impose substan-
tial direct compliance costs on state and
local governments or preempt state law
within the meaning of the Executive Order.

#### Comments and Requests for Public Hearing

Before the proposed regulations are ad-
opted as final regulations, consideration will
be given to any comments that are submit-
ted timely to 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 pro-
posed regulations, and specifically on the
issues identified in sections I.B.3, I.C.1,
I.D.4, I.F, I.G.1, I.G.3, and III.C of the Ex-
planations of Provisions. All comments will
be available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-

ments. If a public hearing is scheduled, then
notice of the date, time, and place for the
public hearing will be published in the Fed-
eral Register.

#### Drafting Information

The principal authors of the proposed
regulations are Melinda E. Harvey and
Michael Kaercher of the Office of Asso-
ciate Chief Counsel (International) and
Austin Diamond-Jones and Kevin M. Ja-
cobs of the Office of Associate Chief
Counsel (Corporate). However, other per-
sonnel from the IRS and the Treasury
Department participated in the develop-
ment of the proposed regulations.

#### Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance cited
in this document are published in the In-
ternal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Printing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.

#### List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record-
keeping requirements.

#### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.951-1 also issued under 26
U.S.C. 7701(a). * * *

Sections 1.951A-2 and 1.951A-3 also

issued under 26 U.S.C. 951A(d). * * *

Section 1.951A-5 also issued under 26
U.S.C. 6031.

Section 1.951A-6 also issued under 26
U.S.C. 951A(f)(1)(B).

Section 1.1502-51 also issued under
26 U.S.C. 1502. * * *

Section 1.6038-2 also issued under 26
U.S.C. 6038.

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Section 1.6038-5 also issued under 26
U.S.C. 6038. * * *

Par. 2. Section 1.951-1 is amended by:
1\. Revising the introductory language
in paragraph (a).

2\. Revising paragraphs (e) and (g)(1).

3\. Adding paragraphs (h) and (i).

The revisions and additions read as fol-
lows:

§ 1.951-1 Amounts included in gross in-
come of United States shareholders.

(a) In general. If a foreign corporation
is a controlled foreign corporation (within
the meaning of section 957) at any time
during any taxable year of such corpora-
tion, every person-
* * * * *

(e) Pro rata share of subpart F income
defined-(1) In general-(i) Hypothetical
distribution. For purposes of paragraph
(b) of this section, a United States share-
holder's pro rata share of a controlled
foreign corporation's subpart F income
for a taxable year is the amount that bears
the same ratio to the corporation's subpart
F income for the taxable year as the
amount of the corporation's current earn-
ings and profits that would be distributed
with respect to the stock of the corpora-
tion which the United States shareholder
owns (within the meaning of section
958(a)) for the taxable year bears to the
total amount of the corporation's current
earnings and profits that would be distrib-
uted with respect to the stock owned by all
the shareholders of the corporation if all
the current earnings and profits of the cor-
poration for the taxable year (not reduced
by actual distributions during the year)
were distributed (hypothetical distribu-
tion) on the last day of the corporation's
taxable year on which such corporation is
a controlled foreign corporation (hypo-
thetical distribution date).

(ii) Determination of current earnings
and profits. For purposes of this paragraph
(e), the amount of current earnings and
profits of a controlled foreign corporation
for a taxable year is treated as the greater
of the following two amounts:

(A) The earnings and profits of the
corporation for the taxable year deter-
mined under section 964; or

(B) The sum of the subpart F income
(as determined under section 952 and
increased as provided under section
951A(c)(2)(B)(ii) and § 1.951A-6(d))

of the corporation for the taxable year
and the tested income (as defined in
section 951A(c)(2)(A) and § 1.951A-
2(b)(1)) of the corporation for the tax-
able year.

(2) One class of stock. If a controlled
foreign corporation for a taxable year has
only one class of stock outstanding, the
amount of the corporation's current earn-
ings and profits distributed in the hypo-
thetical distribution with respect to each
share in the class of stock is determined as
if the hypothetical distribution were made
pro rata with respect to each share in the
class of stock.

(3) More than one class of stock. If a
controlled foreign corporation for a tax-
able year has more than one class of stock
outstanding, the amount of the corpora-
tion's current earnings and profits distrib-
uted in the hypothetical distribution with
respect to each class of stock is determined
under this paragraph (e)(3) based on the
distribution rights of each class of stock on
the hypothetical distribution date, and then
further distributed pro rata with respect to
each share in the class of stock. Subject to
paragraphs (e)(4) through (6) of this section,
the distribution rights of a class of stock are
determined taking into account all facts and
circumstances related to the economic rights
and interest in the current earnings and prof-
its of the corporation of each class, includ-
ing the terms of the class of stock, any
agreement among the shareholders and,
where appropriate, the relative fair market
value of shares of stock.

(4) Special rules-(i) Redemptions,
liquidations, and returns of capital. Not-
withstanding the terms of any class of
stock of the controlled foreign corporation
or any agreement or arrangement with re-
spect thereto, no amount of current earn-
ings and profits is distributed in the hypo-
thetical distribution with respect to a
particular class of stock to the extent that
a distribution of such amount would con-
stitute a distribution in redemption of
stock (even if such redemption would be
treated as a distribution of property to
which section 301 applies pursuant to sec-
tion 302(d)), a distribution in liquidation,
or a return of capital.

(ii) Certain cumulative preferred stock.
If a controlled foreign corporation has
outstanding a class of redeemable pre-
ferred stock with cumulative dividend

rights and dividend arrearages that do not
compound at least annually at a rate that
equals or exceeds the applicable Federal
rate (as defined in section 1274(d)(1))
(AFR), the amount of the corporation's
current earnings and profits distributed in
the hypothetical distribution with respect
to the class of stock may not exceed the
amount of dividends actually paid during
the taxable year with respect to the class
of stock plus the present value of the
unpaid current dividends with respect to
the class determined using the AFR that
applies on the date the stock is issued for
the term from such issue date to the man-
datory redemption date and assuming the
dividends will be paid at the mandatory
redemption date. For purposes of this
paragraph (e)(4)(ii), if the class of pre-
ferred stock does not have a mandatory
redemption date, the mandatory redemp-
tion date is the date that the class of pre-
ferred stock is expected to be redeemed
based on all facts and circumstances.

(iii) Dividend arrearages. If there is an
arrearage in dividends for prior taxable
years with respect to a class of preferred
stock of a controlled foreign corporation,
an amount of the corporation's current
earnings and profits is distributed in the
hypothetical distribution to the class of
preferred stock by reason of the arrearage
only to the extent the arrearage exceeds
the accumulated earnings and profits of
the controlled foreign corporation remain-
ing from prior taxable years beginning
after December 31, 1962, as of the begin-
ning of the taxable year, or the date on
which such stock was issued, whichever is
later. If there is an arrearage in dividends
for prior taxable years with respect to
more than one class of preferred stock, the
previous sentence is applied to each class
in order of priority, except that the accu-
mulated earnings and profits remaining
after the applicable date are reduced by
the earnings and profits necessary to sat-
isfy arrearages with respect to classes of
stock with a higher priority. For purposes
of this paragraph (e)(4)(iii), the amount of
any arrearage is determined by taking into
account the time value of money princi-
ples in paragraph (e)(4)(ii) of this section.

(5) Restrictions or other limitations on
distributions-(i) In general. A restriction
or other limitation on distributions of an
amount of earnings and profits by a con-

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trolled foreign corporation is not taken
into account in determining the amount of
the corporation's current earnings and
profits distributed in a hypothetical distri-
bution to a class of stock of the controlled
foreign corporation.

(ii) Definition. For purposes of para-
graph (e)(5)(i) of this section, a restriction
or other limitation on distributions in-
cludes any limitation that has the effect of
limiting the distribution of an amount of
earnings and profits by a controlled for-
eign corporation with respect to a class of
stock of the corporation, other than cur-
rency or other restrictions or limitations
imposed under the laws of any foreign
country as provided in section 964(b).

(iii) Exception for certain preferred
distributions. For purposes of paragraph
(e)(5)(i) of this section, the right to receive
periodically a fixed amount (whether de-
termined by a percentage of par value, a
reference to a floating coupon rate, a
stated return expressed in terms of a cer-
tain amount of U.S. dollars or foreign
currency, or otherwise) with respect to a
class of stock the distribution of which is
a condition precedent to a further distri-
bution of earnings and profits that year
with respect to any class of stock (not
including a distribution in partial or com-
plete liquidation) is not a restriction or
other limitation on the distribution of
earnings and profits by a controlled for-
eign corporation.

(iv) Illustrative list of restrictions and
limitations. Except as provided in para-
graph (e)(5)(iii) of this section, restric-
tions or other limitations on distributions
include, but are not limited to-

(A) An arrangement that restricts the
ability of a controlled foreign corporation
to pay dividends on a class of stock of the
corporation until a condition or conditions
are satisfied (for example, until another
class of stock is redeemed);

(B) A loan agreement entered into by a
controlled foreign corporation that re-
stricts or otherwise affects the ability to
make distributions on its stock until cer-
tain requirements are satisfied; or

(C) An arrangement that conditions the
ability of a controlled foreign corporation
to pay dividends to its shareholders on the
financial condition of the corporation.

(6) Transactions and arrangements
with a principal purpose of reducing pro

rata shares. For purposes of this para-
graph (e), any transaction or arrangement
that is part of a plan a principal purpose of
which is the avoidance of Federal income
taxation, including, but not limited to, a
transaction or arrangement to reduce a
United States shareholder's pro rata share
of the subpart F income of a controlled
foreign corporation, which transaction or
arrangement would avoid Federal income
taxation without regard to this paragraph
(e)(6), is disregarded in determining such
United States shareholder's pro rata share
of the subpart F income of the corpora-
tion. This paragraph (e)(6) also applies for
purposes of the pro rata share rules de-
scribed in § 1.951A-1(d) that reference
this paragraph (e), including the rules in
§ 1.951A-1(d)(3) that determine the pro
rata share of qualified business asset in-
vestment based on the pro rata share of
tested income.

(7) Examples. The application of this
section is illustrated by the examples in
this paragraph (e)(7).

(i) Common facts for examples in paragraph
(e)(7). Except as otherwise stated, the following
facts are assumed for purposes of the examples.

(A) FC1 is a controlled foreign corporation.

(B) USP1, USP2, and USP3 are domestic corpo-
rations and United States shareholders of FC1.

(C) Individual A is a foreign individual, and FC2
is a foreign corporation.

(D) All persons use the calendar year as their
taxable year.

(E) Any ownership of FC1 by any shareholder is
for all of Year 1.

(F) The common shareholders of FC1 are enti-
tled to dividends when declared by FC1's board of
directors.

(G) There are no accrued but unpaid dividends
with respect to preferred shares, and common shares
have positive liquidation value.

(H) FC1 makes no distributions during Year 1.

(I) There are no other facts and circumstances
related to the economic rights and interest of any
class of stock in the current earnings and profits of a
foreign corporation, and no transaction or arrange-
ment was entered into as part of a plan a principal
purpose of which is the avoidance of Federal income
taxation.

(J) FC1 does not have tested income within the
meaning of section 951A(c)(2)(A) and § 1.951A-
2(b)(1) or tested loss within the meaning of section
951A(c)(2)(B) and §1.951A-2(b)(2).

(ii) Example 1: single class of stock-(A) Facts.
FC1 has outstanding 100 shares of one class of stock.
USP1 owns 60 shares of FC1. USP2 owns 40 shares
of FC1. For Year 1, FC1 has $1,000x of earnings and
profits and $100x of subpart F income within the
meaning of section 952.

(B) Analysis. FC1 has one class of stock. There-
fore, under paragraph (e)(2) of this section, FC1's

current earnings and profits of $1,000x are distrib-
uted in the hypothetical distribution pro rata to each
share of stock. Accordingly, under paragraph (e)(1)
of this section, for Year 1, USPI's pro rata share of
FC1's subpart F income is $60x ($100x x $600x/
$1,000x) and USP2's pro rata share of FC1's subpart
F income is $40x ($100x x $400x/$1,000x).

(iii) Example 2: common and preferred stock-
(A) Facts. FC1 has outstanding 70 shares of com-
mon stock and 30 shares of 4% nonparticipating,
voting preferred stock with a par value of $10x per
share. USP1 owns all of the common shares. Indi-
vidual A owns all of the preferred shares. For Year 1,
FC1 has $100x of earnings and profits and $50x of
subpart F income within the meaning of section 952.
In Year 1, FC1 distributes as a dividend $12x to
Individual A with respect to Individual A's preferred
shares.

(B) Analysis. The distribution rights of the pre-
ferred shares are not a restriction or other limitation
within the meaning of paragraph (e)(5) of this sec-
tion. Under paragraph (e)(3) of this section, the
amount of FC1's current earnings and profits distrib-
uted in the hypothetical distribution with respect to
Individual A's preferred shares is $12x and with
respect to USPI's common shares is $88x. Accord-
ingly, under paragraph (e)(1) of this section, USPI's
pro rata share of FC1's subpart F income is $44x
($50x x $88x/$100x) for Year 1.

(iv) Example 3: restriction based on cumulative
income-(A) Facts. FC1 has outstanding 10 shares
of common stock and 400 shares of 2% nonpartici-
pating, voting preferred stock with a par value of $1x
per share. USP1 owns all of the common shares. FC2
owns all of the preferred shares. USP1 and FC2
cause the governing documents of FC1 to provide
that no dividends may be paid to the common share-
holders until FC1 cumulatively earns $100,000x of
income. For Year 1, FC1 has $50x of earnings and
profits and $50x of subpart F income within the
meaning of section 952. In Year 1, FC1 distributes as
a dividend $8x to FC2 with respect to FC2's pre-
ferred shares.

(B) Analysis. The agreement restricting FC1's
ability to pay dividends to common shareholders
until FC1 cumulatively earns $100,000x of income is
a restriction or other limitation within the meaning of
paragraph (e)(5) of this section. Therefore, the re-
striction is disregarded for purposes of determining
the amount of FC1's current earnings and profits
distributed in the hypothetical distribution to a class
of stock. The distribution rights of the preferred
shares are not a restriction or other limitation within
the meaning of paragraph (e)(5) of this section-
.Under paragraph (e)(3) of this section, the amount
of FC1's current earnings and profits distributed in
the hypothetical distribution with respect to FC2's
preferred shares is $8x and with respect to USPI's
common shares is $42x. Accordingly, under para-
graph (e)(1) of this section, USP1's pro rata share of
FC1's subpart F income is $42x for Year 1.

(v) Example 4: redemption rights-(A) Facts.
FC1 has outstanding 40 shares of common stock and
10 shares of 4% nonparticipating, voting preferred
stock with a par value of $50x per share. Pursuant to
the terms of the preferred stock, FC1 has the right to
redeem at any time, in whole or in part, the preferred
stock. FC2 owns all of the preferred shares. USP1,

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wholly owned by FC2, owns all of the common
shares. For Year 1, FC1 has $100x of earnings and
profits and $100x of subpart F income within the
meaning of section 952. In Year 1, FC1 distributes as
a dividend $20x to FC2 with respect to FC2's pre-
ferred shares.

(B) Analysis. If FC1 were treated as having re-
deemed any preferred shares, the redemption would
be treated as a distribution to which section 301
applies under section 302(d) due to FC2's construc-
tive ownership of the common shares. However,
under paragraph (e)(4)(i) of this section, no amount
of earnings and profits is distributed in the hypothet-
ical distribution to the preferred shareholders on the
hypothetical distribution date as a result of FC1's
right to redeem, in whole or in part, the preferred
shares. FC1's redemption rights with respect to the
preferred shares cannot affect the distribution of
current earnings and profits in the hypothetical dis-
tribution to FC1's shareholders. As a result, the
amount of FC1's current earnings and profits distrib-
uted in the hypothetical distribution with respect to
FC2's preferred shares is $20x and with respect to
USP1's common shares is $80x. Accordingly, under
paragraph (e)(1) of this section, USP1's pro rata
share of FC1's subpart F income is $80x for Year 1.

(vi) Example 5: shareholder owns common and
preferred stock-(A) Facts. FC1 has outstanding 40
shares of common stock and 60 shares of 6% non-
participating, nonvoting preferred stock with a par
value of $100x per share. USP1 owns 30 shares of
the common stock and 15 shares of the preferred
stock during Year 1. The remaining 10 shares of
common stock and 45 shares of preferred stock of
FC1 are owned by Individual A. For Year 1, FC1 has
$1,000x of earnings and profits and $500x of subpart
F income within the meaning of section 952.

(B) Analysis. Under paragraph (e)(5)(iii) of this
section, the right of the holder of the preferred stock
to receive 6% of par value is not a restriction or other
limitation within the meaning of paragraph (e)(5) of
this section. The amount of FC1's current earnings
and profits distributed in the hypothetical distribu-
tion with respect to FC1's preferred shares is $360x
(0.06 x $100x x 60) and with respect to its common
shares is $640x ($1,000x - $360x). As a result, the
amount of FC1's current earnings and profits distrib-
uted in the hypothetical distribution to USP1 is
$570x, the sum of $90x ($360x x 15/60) with respect
to its preferred shares and $480x ($640x x 30/40)
with respect to its common shares. Accordingly,
under paragraph (e)(1) of this section, USP1's pro
rata share of the subpart F income of FC1 is $285x
($500x x $570x/$1,000x).

(vii) Example 6: subpart F income and tested
income-(A) Facts. FC1 has outstanding 700 shares
of common stock and 300 shares of 4% nonpartici-
pating, voting preferred stock with a par value of
$100x per share. USP1 owns all of the common
shares. USP2 owns all of the preferred shares. For
Year 1, FC1 has $10,000x of earnings and profits,
$2,000x of subpart F income within the meaning of
section 952, and $9,000x of tested income within the
meaning of section 951A(c)(2)(A) and § 1.951A-
2(b)(1).

(B) Analysis-(1) Pro rata share of subpart F
income. The current earnings and profits of FC1
determined under paragraph (e)(1)(ii) of this section

are $11,000x, the greater of FC1's earnings and
profits as determined under section 964 ($10,000x)
or the sum of FC1's subpart F income and tested
income ($2,000x + $9,000x). The amount of FC1's
current earnings and profits distributed in the hypo-
thetical distribution with respect to USP2's preferred
shares is $1,200x (.04 x $100x x 300) and with
respect to USPI's common shares is $9,800x
($11,000x - $1,200x). Accordingly, under paragraph
(e)(1) of this section, USP1's pro rata share of FC1's
subpart F income is $1,782x ($2,000x x $9,800x/
$11,000x), and USP2's pro rata share of FC1's sub-
part F income is $218x ($2,000x x $1,200x/
$11,000x).

(2) Pro rata share of tested income. The same
analysis applies for the hypothetical distribution with
respect to the tested income as under paragraph
(ii)(A) of this Example 6 with respect to the subpart
F income. Accordingly, under § 1.951A-1(d)(2),
USPI's pro rata share of FC1's tested income is
$8,018x ($9,000x x $9,800x/$11,000x), and USP2's
pro rata share of FC1's tested income is $982x
($9,000x x $1,200x/$11,000x) for Year 1.

(viii) Example 7: subpart F income and tested
loss-(A) Facts. The facts are the same as in para-
graph (A) of Example 6, except that for Year 1, FC1
has $8,000x of earnings and profits, $10,000x of
subpart F income within the meaning of section 952
(but without regard to the limitation in section
952(c)), and $2,000x of tested loss within the mean-
ing of section 951A(c)(2)(B) and § 1.951A-2(b)(2).
Under section 951A(c)(2)(B)(ii) and § 1.951A-6(d),
the earnings and profits of FC1 are increased for
purposes of section 952 by the amount of FC1's
tested loss. Accordingly, taking into account section
951A(c)(2)(B)(ii) and § 1.951A-6(d), the subpart F
income of FC1 is $10,000x.

(B) Analysis-(1) Pro rata share of subpart F
income. The current earnings and profits determined
under paragraph (e)(1)(ii) of this section are
$10,000x, the greater of the earnings and profits of
FC1 determined under section 964 ($8,000x) or the
sum of FC1's subpart F income and tested income
($10,000x + $0). The amount of FC1's current earn-
ings and profits distributed in the hypothetical dis-
tribution with respect to USP2's preferred shares is
$1,200x (.04 x $100x x 300) and with respect to
Corp A's common shares is $8,800x ($10,000x -
$1,200x). Accordingly, under paragraph (e)(1) of
this section, for Year 1, USPI's pro rata share of
FC1's subpart F income is $8,800x and USP2's pro
rata share of FC1's subpart F income is $1,200x.

(2) Pro rata share of tested loss. The current
earnings and profits determined under § 1.951A-
1(d)(4)(i)(B) are $2,000x, the amount of FC1's
tested loss. Under § 1.951A-1(d)(4)(i)(C), the entire
$2,000x tested loss is distributed in the hypothetical
distribution with respect to USPI's common shares.
Accordingly, USP1's pro rata share of the tested loss
is $2,000x.

* * * * *

(g) * * *

(1) In general. For purposes of sections
951 through 964, the term "United States
shareholder" means, with respect to a for-
eign corporation, a United States person
(as defined in section 957(c)) who owns

within the meaning of section 958(a), or is
considered as owning by applying the
rules of ownership of section 958(b), 10
percent or more of the total combined
voting power of all classes of stock enti-
tled to vote of such foreign corporation, or
10 percent or more of the total value of
shares of all classes of stock of such for-
eign corporation.

* * * * *

(h) Special rule for partnership blocker
structures-(1) In general. For purposes
of sections 951 through 964, a controlled
domestic partnership is treated as a for-
eign partnership in determining the stock
of a controlled foreign corporation owned
(within the meaning of section 958(a)) by
a United States person if the following
conditions are satisfied-

(i) Without regard to this paragraph
(h), the controlled domestic partnership
owns (within the meaning of section
958(a)) stock of a controlled foreign cor-
poration; and

(ii) If the controlled domestic partner-
ship (and all other controlled domestic
partnerships in the chain of ownership of
the controlled foreign corporation) were
treated as foreign-

(A) The controlled foreign corporation
would continue to be a controlled foreign
corporation; and

(B) At least one United States share-
holder of the controlled foreign corpora-
tion would be treated as owning (within
the meaning of section 958(a)) stock of
the controlled foreign corporation through
another foreign corporation that is a direct
or indirect partner in the controlled do-
mestic partnership.

(2) Definition of a controlled domestic
partnership. For purposes of paragraph
(h)(1) of this section, the term controlled
domestic partnership means, with respect
to a United States shareholder described
in paragraph (h)(1)(ii)(B) of this section, a
domestic partnership that is controlled by
the United States shareholder and persons
related to the United States shareholder.
For purposes of this paragraph (h)(2), con-
trol generally is determined based on all
the facts and circumstances, except that a
partnership will be deemed to be con-
trolled by a United States shareholder and
related persons in any case in which those
persons, in the aggregate, own (directly or

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indirectly through one or more partner-
ships) more than 50 percent of the inter-
ests in the partnership capital or profits.
For purposes of this paragraph (h)(2), a
related person is, with respect to a United
States shareholder, a person that is related
to the United States shareholder within the
meaning of section 267(b) or 707(b)(1).

(3) Example-(i) Facts. USP, a domestic corpo-
ration, owns all of the stock of CFC1 and CFC2.
CFC1 and CFC2 own 60% and 40%, respectively, of
the interests in the capital and profits of DPS, a
domestic partnership. DPS owns all of the stock of
CFC3. Each of CFC1, CFC2, and CFC3 is a con-
trolled foreign corporation. USP, DPS, CFC1, CFC2,
and CFC3 all use the calendar year as their taxable
year. For Year 1, CFC3 has $100x of subpart F
income (as defined under section 952) and $100x of
earnings and profits.

(ii) Analysis. DPS is a controlled domestic part-
nership with respect to USP within the meaning of
paragraph (h)(2) of this section because more than
50% of the interests in its capital or profits are owned
by persons related to USP within the meaning of
section 267(b) (that is, CFC1 and CFC2), and thus
DPS is controlled by USP and related persons. With-
out regard to paragraph (h) of this section, DPS is a
United States shareholder that owns (within the
meaning of section 958(a)) stock of CFC3, a con-
trolled foreign corporation. If DPS were treated as
foreign, CFC3 would continue to be a controlled
foreign corporation, and USP would be treated as
owning (within the meaning of section 958(a)) stock
in CFC3 through CFC1 and CFC2, which are both
partners in DPS. Thus, under paragraph (h)(1) of this
section, DPS is treated as a foreign partnership for
purposes of determining the stock of CFC3 owned
(within the meaning of section 958(a)) by USP.
Accordingly, USP's pro rata share of CFC3's sub-
part F income for Year 1 is $100x, and USP
includes in its gross income $100x under section
951(a)(1)(A). DPS is not a United States share-
holder of CFC3 for purposes of sections 951
through 964.

(i) Applicability dates. Paragraphs (a),
(e)(1)(ii)(B), and (g)(1) of this section ap-
ply to taxable years of foreign corpora-
tions beginning after December 31, 2017,
and to taxable years of United States
shareholders with or within which such
taxable years of foreign corporations end.
Except for paragraph (e)(1)(ii)(B), para-
graph (e) of this section applies to taxable
years of United States shareholders end-
ing on or after October 3, 2018. Paragraph
(h) of this section applies to taxable years
of domestic partnerships ending on or af-
ter May 14, 2010.

* * * * *

Par. 3. Section 1.951A-0 is added to
read as follows:

§ 1.951A-0 Outline of section 951A
regulations.

§ 1.951A-2 Tested income and tested
loss.

This section lists the headings for

(a) Scope.

§§ 1.951A-1 through 1.951A-7.

(b) Definitions related to tested income

and tested loss.

(1) Tested income and tested income

§ 1.951A-1 General provisions.

CFC.

(2) Tested loss and tested loss CFC.

(a) Overview.

(c) Rules relating to the determination

(1) In general.

of tested income and tested loss. (1) Definition of gross tested income.

(2) Scope.

(2)

Determination of gross tested in-

(b) Inclusion of global intangible low-

come

and allowable deductions.

taxed income.

(3)

Allocation of deductions to gross

(c) Determination of GILTI inclusion

tested

income.

amount.

(4)

Nonapplication of section 952(c).

(1) In general.

(i) In general.

(2) Definition of net CFC tested in-

(ii)

Example.

come.

(5)

Disregard of basis in property re-

(3) Definition of net deemed tangible

lated to certain transfers during the dis-

income return.

qualified period.

(i) In general.

(i)

In general.

(ii) Definition of deemed tangible in-

(ii)

Definition of specified property.

come return.

(iii) Definition of disqualified basis.

(iii) Definition of specified interest ex-

(iv) Example.

pense.

(4) Determination of GILTI inclusion

§ 1.951A-3 Qualified business asset

amount for consolidated groups.

investment.

(d) Determination of pro rata share.

(a)

Scope.

(1) In general.

(b) Definition of qualified business as-

(2) Tested income.

set investment.

(i) In general.

(c)

Specified tangible property.

(ii) Special rule for prior allocation of

(1)

In general.

tested loss.

(2)

Tangible property.

(3) Qualified business asset invest-

(d)

Dual use property.

ment.

(1)

In general.

(i) In general.

(2)

Dual use ratio.

(ii) Special rule for preferred stock in

(3)

Example.

case of excess QBAI.

(e)

Determination of adjusted basis of

(iii) Examples.

specified tangible property.

(4) Tested loss.

(1)

In general.

(i) In general.

(2)

Effect of change in law.

(ii) Special rule in case of accrued but

(3)

Specified tangible property placed

unpaid dividends.

in service before enactment of section

(iii) Special rule for stock with no liq-

951A.

uidation value.

(f)

Special rules for short taxable years.

(iv) Examples.

(1)

In general.

(5) Tested interest expense.

(2)

Determination of quarter closes.

(6) Tested interest income.

(3) set

Reduction of qualified business as- investment.

(e) Definitions.

(4)

Example.

(1) CFC inclusion date.

(g)

Partnership property.

(2) CFC inclusion year.

(1)

In general.

(3) Section 958(a) stock.

(2)

Definitions related to partnership

(4) U.S. shareholder inclusion year.

QBAI.

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(i) In general.

(ii) Partnership QBAI ratio.

(iii) Partnership specified tangible
property.

(3) Determination of adjusted basis.

(4) Examples.

(h) Anti-abuse rules for certain trans-
fers of property.

(1) Disregard of basis in specified tan-
gible property held temporarily.

(2) Disregard of basis in specified tan-
gible property related to transfers during
the disqualified period.

(i) In general.

(ii) Determination of disqualified basis.

(A) In general.

(B) Definition of qualified gain
amount.

(C) Definition of disqualified transfer.

(D) Definition of disqualified period.

(E) Related person.

(iii) Examples.

§ 1.951A-4 Tested interest expense and
tested interest income.

(a) Scope.

(b) Definitions related to specified in-
terest expense.

(1) Tested interest expense.

(i) In general.

(ii) Interest expense.

(iii) Qualified interest expense.

(iv) Qualified CFC.

(2) Tested interest income.

(i) In general.

(ii) Interest income.

(iii) Qualified interest income.

(c) Examples.

§ 1.951A-5 Domestic partnerships and
their partners.

(a) Scope.

(b) In general.

(1) Determination of GILTI inclusion
amount of a U.S. shareholder partnership.

(2) Determination of distributive share
of U.S. shareholder partnership's GILTI
inclusion amount of partner other than a
U.S. shareholder partner.

(c) Determination of GILTI inclusion
amount of a U.S. shareholder partner.

(d) Tiered U.S. shareholder partner-
ships.

(e) Definitions.

(1) CFC tested item.

(2) Partnership CFC.

(3) U.S. shareholder partner.

(4) U.S. shareholder partnership.

(f) Reporting requirement.

(g) Examples.

§ 1.951A-6 Treatment of GILTI
inclusion amount and adjustments to
earnings and profits and basis related to
tested loss CFCs.

(a) Scope.

(b) Treatment as subpart F income for
certain purposes.

(1) In general.

(2) Allocation of GILTI inclusion
amount to tested income CFCs.

(i) In general.

(ii) Example.

(iii) Translation of portion of GILTI
inclusion amount allocated to tested in-
come CFC.

(c) Treatment as an amount includible
in the gross income of a United States
person.

(1) In general.

(2) Special rule for a United States
shareholder that is a domestic partnership.

(d) Increase of earnings and profits of
tested loss CFC for purposes of section
952(c)(1)(A).

(e) Adjustments to basis related to net
used tested loss.

(1) In general.

(i) Disposition of stock of a controlled
foreign corporation.

(ii) Disposition of stock of an upper-
tier controlled foreign corporation.

(iii) Disposition of an interest in a for-
eign entity other than a controlled foreign
corporation.

(iv) Order of application of basis re-
ductions.

(v) No duplicative adjustments.

(2) Net used tested loss amount.

(i) In general.

(ii) Used tested loss amount.

(3) Net offset tested income amount.
(i) In general.

(ii) Offset tested income amount.

(4) Attribution to stock.

(i) In general.

(ii) Nonrecognition transactions.

(5) Section 381 transactions.

(6) Other definitions.

(i) Domestic corporation.

(ii) Disposition.

(7) Special rule for disposition by con-
trolled foreign corporation less than 100
percent owned by a single domestic cor-
poration.

(8) Special rules for members of a con-
solidated group.

(9) Examples.

§ 1.951A-7 Applicability dates.

Par. 4. Section 1.951A-1 is added to
read as follows:

§ 1.951A-1 General provisions.

(a) Overview-(1) In general. This sec-
tion and §§ 1.951A-2 through 1.951A-7
(collectively, the section 951A regulations)
provide rules to determine a United States
shareholder's income inclusion under sec-
tion 951A and certain definitions for pur-
poses of section 951A and the section 951A
regulations. This section provides general
rules for determining a United States share-
holder's inclusion of global intangible low-
taxed income. Section 1.951A-2 provides
rules for determining a controlled foreign
corporation's tested income or tested loss.
Section 1.951A-3 provides rules for deter-
mining a controlled foreign corporation's
qualified business asset investment. Section
1.951A-4 provides rules for determining a
controlled foreign corporation's tested inter-
est expense and tested interest income. Sec-
tion 1.951A-5 provides rules relating to the
application of section 951A and the section
951A regulations to domestic partnerships
and their partners. Section 1.951A-6 pro-
vides rules relating to the treatment of the
inclusion of global intangible low-taxed in-
come for certain purposes and adjustments
to earnings and profits and basis of a con-
trolled foreign corporation related to a tested
loss. Section 1.951A-7 provides dates of
applicability.

(2) Scope. Paragraph (b) of this section
provides the general rule requiring a
United States shareholder to include in
gross income its global intangible low-
taxed income for a U.S. shareholder inclu-
sion year. Paragraph (c) of this section
provides rules for determining the amount
of a United States shareholder's global
intangible low-taxed income for the U.S.
shareholder inclusion year, including a
rule for the application of section 951A
and the section 951A regulations to con-

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solidated groups. Paragraph (d) of this
section provides rules for determining a
United States shareholder's pro rata share
of certain items for purposes of determin-
ing the United States shareholder's global
intangible low-taxed income. Paragraph
(e) of this section provides additional gen-
eral definitions for purposes of this section
and the section 951A regulations.

(b) Inclusion of global intangible low-
taxed income. Each person who is a
United States shareholder (as defined in
section 951(b)) of any controlled foreign
corporation (as defined in section 957)
and owns section 958(a) stock (as defined
in paragraph (e)(3) of this section) in any
such controlled foreign corporation includes
in gross income in the U.S. shareholder in-
clusion year (as defined in paragraph (e)(4)
of this section) the shareholder's GILTI in-
clusion amount (as defined in paragraph (c)
of this section), if any, for the U.S. share-
holder inclusion year.

(c) Determination of GILTI inclusion
amount-(1) In general. Except as pro-
vided in paragraph (c)(4) of this section,
the term GILTI inclusion amount means,
with respect to a United States share-
holder and a U.S. shareholder inclusion
year, the excess (if any) of-

(i) The shareholder's net CFC tested
income (as defined in paragraph (c)(2) of
this section) for the year, over

(ii) The shareholder's net deemed tan-
gible income return (as defined in para-
graph (c)(3) of this section) for the year.

(2) Definition of net CFC tested in-
come. The term net CFC tested income
means, with respect to a United States
shareholder and a U.S. shareholder inclu-
sion year, the excess (if any) of-

(i) The aggregate of the shareholder's
pro rata share of the tested income of
each tested income CFC (as defined in
§ 1.951A-2(b)(1)) for the year, over

(ii) The aggregate of the shareholder's
pro rata share of the tested loss of each
tested loss CFC (as defined in § 1.951A-
2(b)(2)) for the year.

(3) Definition of net deemed tangible
income return-(i) In general. The term
net deemed tangible income return means,
with respect to a United States share-
holder and a U.S. shareholder inclusion
year, the excess (if any) of-

(A) The shareholder's deemed tangible
income return (as defined in paragraph
(c)(3)(ii) of this section) for the year, over

(B) The shareholder's specified interest
expense (as defined in paragraph (c)(3)(iii)
of this section) for the year.

(ii) Definition of deemed tangible in-
come return. The term deemed tangible
income return means, with respect to a
United States shareholder and a U.S.
shareholder inclusion year, 10 percent of
the aggregate of the shareholder's pro rata
share of the qualified business asset in-
vestment (as defined in § 1.951A-3(b)) of
each tested income CFC for the year.

(iii) Definition of specified interest ex-
pense. The term specified interest expense
means, with respect to a United States
shareholder and a U.S. shareholder inclu-
sion year, the excess (if any) of-

(A) The aggregate of the shareholder's
pro rata share of the tested interest ex-
pense (as defined in § 1.951A-4(b)(1)) of
each controlled foreign corporation for the
year, over

(B) The aggregate of the shareholder's
pro rata share of the tested interest income
(as defined in § 1.951A-4(b)(2)) of each
controlled foreign corporation for the
year.

(4) Determination of GILTI inclusion
amount for consolidated groups. For pur-
poses of section 951A and the section
951A regulations, a member of a consol-
idated group (as defined in § 1.1502-1(h))
determines its GILTI inclusion amount
under the rules provided in § 1.1502-51.

(d) Determination of pro rata share-
(1) In general. For purposes of paragraph
(c) of this section, each United States
shareholder that owns section 958(a)
stock in a controlled foreign corporation
as of a CFC inclusion date (as defined in
paragraph (e)(1) of this section) deter-
mines for a U.S. shareholder inclusion
year that includes such CFC inclusion
date its pro rata share (if any) of the
controlled foreign corporation's tested
income, tested loss, qualified business
asset investment, tested interest ex-
pense, and tested interest income (each a
CFC tested item), as applicable, for the
CFC inclusion year (as defined in para-
graph (e)(2) of this section). Except as
otherwise provided in this paragraph
(d), a United States shareholder's pro
rata share of each CFC tested item is

determined independently of its pro rata
share of any other CFC tested item. Ex-
cept as modified in this paragraph (d), a
United States shareholder's pro rata
share of any CFC tested item is deter-
mined under the rules of section
951(a)(2) and § 1.951-1(b) and (e) in
the same manner as those provisions
apply to subpart F income. Under sec-
tion 951(a)(2) and § 1.951-1(b) and (e),
as modified by this paragraph (d), a
United States shareholder's pro rata
share of any CFC tested item for a U.S.
shareholder inclusion year is determined
with respect to the section 958(a) stock
of the controlled foreign corporation
owned by the United States shareholder
on the CFC inclusion date. A United
States shareholder's pro rata share of
any CFC tested item is translated into
United States dollars using the average
exchange rate for the CFC inclusion
year of the controlled foreign corpora-
tion. Paragraphs (d)(2) through (5) of
this section provide rules for determin-
ing a United States shareholder's pro
rata share of each CFC tested item of a
controlled foreign corporation.

(2) Tested income-(i) In general. Ex-
cept as provided in paragraph (d)(2)(ii) of
this section, a United States shareholder's
pro rata share of the tested income of each
tested income CFC for a U.S. shareholder
inclusion year is determined under section
951(a)(2) and § 1.951-1(b) and (e), sub-
stituting "tested income" for "subpart F
income" each place it appears, other than
in § 1.951-1(e)(1)(ii)(B).

(ii) Special rule for prior allocation of
tested loss. In any case in which tested
loss has been allocated to any class of
stock in a prior CFC inclusion year under
paragraph (d)(4)(iii) of this section, tested
income is first allocated to each such class
of stock in the order of its liquidation
priority to the extent of the excess (if any)
of the sum of the tested loss allocated to
each such class of stock for each prior
CFC inclusion year under paragraph
(d)(4)(iii) of this section, over the sum of
the tested income allocated to each such
class of stock for each prior CFC inclu-
sion year under this paragraph (d)(2)(ii).
Paragraph (d)(2)(i) of this section applies
for purposes of determining a United
States shareholder's pro rata share of the
remainder of the tested income, except

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that, for purposes of the hypothetical dis-
tribution of section 951(a)(2)(A) and
§ 1.951-1(b) and (e), the amount of cur-
rent earnings and profits of the tested in-
come CFC is reduced by the amount of
tested income allocated under the first
sentence of this paragraph (d)(2)(ii). For
an example of the application of this para-
graph (d)(2), see Example 2 of paragraph
(d)(4)(iv) of this section.

(3) Qualified business asset invest-
ment-(i) In general. Except as provided
in paragraph (d)(3)(ii) of this section, a
United States shareholder's pro rata share
of the qualified business asset investment
of a tested income CFC for a U.S. share-
holder inclusion year bears the same ratio
to the total qualified business asset invest-
ment of the tested income CFC for the
CFC inclusion year as the United States
shareholder's pro rata share of the tested
income of the tested income CFC for the
U.S. shareholder inclusion year bears to
the total tested income of the tested in-
come CFC for the CFC inclusion year.

(ii) Special rule for preferred stock in
case of excess QBAI. If a tested income
CFC's qualified business asset investment
for a CFC inclusion year exceeds 10 times
its tested income for the CFC inclusion
year (such excess, excess QBAI), a United
States shareholder's pro rata share of the
tested income CFC's qualified business as-
set investment is the sum of its pro rata
share determined under paragraph (d)(3)(i)
of this section without regard to the excess
QBAI, plus its pro rata share determined
under paragraph (d)(3)(i) of this section
solely with respect to the excess QBAI and
without regard to tested income allocated to
any share of preferred stock of the tested
income CFC under paragraph (d)(2) of this
section.

(iii) Examples. The following exam-
ples illustrate the application of para-
graphs (d)(2) and (3) of this section. See
also § 1.951-1(e)(7), Example 6 (illustrat-
ing a United States shareholder's pro rata
share of tested income).

(A) Example 1-(1) Facts. FS, a controlled for-
eign corporation, has outstanding 70 shares of com-
mon stock and 30 shares of 4% nonparticipating,
cumulative preferred stock with a par value of $10x
per share. P Corp, a domestic corporation and a
United States shareholder of FS, owns all of the
common shares. Individual A, a United States share-
holder, owns all of the preferred shares. Both FS and
P Corp use the calendar year as their taxable year.
Individual A and P Corp are shareholders of FS for

all of Year 4. At the beginning of Year 4, FS had no
dividend arrearages with respect to its preferred
stock. For Year 4, FS has $100x of earnings and
profits, $120x of tested income, and no subpart F
income within the meaning of section 952. FS also
has $750x of qualified business asset investment for
Year 4.

(2) Analysis-(i) Determination of pro rata
share of tested income. For purposes of determining
P Corp's pro rata share of FS's tested income under
paragraph (d)(2) of this section, the amount of FS's
current earnings and profits for purposes of the hy-
pothetical distribution described in § 1.951-
1(e)(1)(i) is $120x, the greater of its earnings and
profits as determined under section 964 ($100x) or
the sum of its subpart F income and tested income
($0 + $120x). Under paragraph (d)(2) of this section
and § 1.951-1(e)(3), the amount of FS's current
earnings and profits distributed in the hypothetical
distribution is $12x (.04 x $10x x 30) with respect to
Individual A's preferred shares and $108x ($120x -
$12x) with respect to P Corp's common shares.
Accordingly, under paragraph (d)(2) of this section
and § 1.951-1(e)(1), Individual A's pro rata share of
FS's tested income is $12x, and P Corp's pro rata
share of FS's tested income is $108x for Year 4.

(ii) Determination of pro rata share of qualified
business asset investment. The special rule of para-
graph (d)(3)(ii) of this section does not apply be-
cause FS's qualified business asset investment of
$750x does not exceed $1,200x, which is 10 times
FS's tested income of $120x. Accordingly, under the
general rule of paragraph (d)(3)(i) of this section,
Individual A's and P Corp's pro rata share of FS's
qualified business asset investment bears the same
ratio to FS's total qualified business asset investment
as Individual A's and P Corp's pro rata share, re-
spectively, of FS's tested income bears to FS's total
tested income. Thus, Individual A's pro rata share of
FS's qualified business asset investment is $75x
($750x x $12x/$120x), and P Corp's pro rata share
of FS's qualified business asset investment is $675x
($750x x $108x/$120x).

(B) Example 2-(1) Facts. The facts are the
same as in paragraph (1) of Example 1, except that
FS has $1,500x of qualified business asset invest-
ment for Year 4.

(2) Analysis. (i) Determination of pro rata share
of tested income. The analysis and the result are the
same as in paragraph (2)(i) of Example 1.

(ii) Determination of pro rata share of qualified
business asset investment. The special rule of para-
graph (d)(3)(ii) of this section applies because FS's
qualified business asset investment of $1,500x ex-
ceeds $1,200x, which is 10 times FS's tested income
of $120x. Under paragraph (d)(3)(ii) of this section,
Individual A's and P Corp's pro rata share of FS's
qualified business asset investment is the sum of
their pro rata share determined under paragraph
(d)(3)(i) of this section without regard to the excess
QBAI plus their pro rata share with respect to the
excess QBAI but without regard to tested income
allocated to preferred stock under paragraph (d)(2)
of this section. Without regard to the excess QBAI of
$300x, Individual A's pro rata share of FS's quali-
fied business asset investment is $120x ($1,200x x
$12x/$120x), and P Corp's pro rata share of FS's
qualified business asset investment is $1,080x

($1,200x x $108x/$120x). Solely with respect to the
excess QBAI and without regard to tested income
allocated to the preferred stock under paragraph
(d)(2) of this section, Individual A's pro rata share of
FS's qualified business asset investment is $0 ($300x
x $0/$108x), and P Corp's pro rata share of FS's
qualified business asset investment is $300x ($300x
x $108x/$108x). Thus, Individual A's pro rata share
of FS's qualified business asset investment is $120x
($120x + $0), and P Corp's pro rata share of FS's
qualified business asset investment is $1,380x
($1,080x + $300x).

(4) Tested loss-(i) In general. A
United States shareholder's pro rata share
of the tested loss of each tested loss CFC
for a U.S. shareholder inclusion year is
determined under section 951(a)(2) and
§ 1.951-1(b) and (e) with the following
modifications-

(A) "Tested loss" is substituted for
"subpart F income" each place it appears;
(B) For purposes of the hypothetical
distribution described in section 951(a)
(2)(A) and § 1.951-1(e)(1)(i), the amount
of current earnings and profits of a con-
trolled foreign corporation for a CFC in-
clusion year is treated as being equal to
the tested loss of the tested loss CFC for
the CFC inclusion year;

(C) Except as provided in paragraphs
(d)(4)(ii) and (iii) of this section, the hy-
pothetical distribution described in section
951(a)(2)(A) and § 1.951-1(e)(1)(i) is
treated as made solely with respect to the
common stock of the tested loss CFC; and

(D) The amount of the dividend re-
ceived by any other person for purposes of
section 951(a)(2)(B) and § 1.951-1(b)(1)
(ii) is treated as being equal to the amount
of the tested loss of the tested loss CFC
for the CFC inclusion year (regardless of
whether, or the extent to which, the other
person actually receives a dividend).

(ii) Special rule in case of accrued but
unpaid dividends. If a tested loss CFC's
earnings and profits that have accumu-
lated since the issuance of preferred
shares are reduced below the amount nec-
essary to satisfy any accrued but unpaid
dividends with respect to such preferred
shares, then the amount by which the
tested loss reduces the earnings below the
amount necessary to satisfy the accrued
but unpaid dividends is distributed in the
hypothetical distribution described in sec-
tion 951(a)(2)(A) and § 1.951-1(e)(1)(i)
with respect to the preferred stock of the
tested loss CFC and the remainder of the

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tested loss is distributed with respect to
the common stock of the tested loss CFC.

(iii) Special rule for stock with no liq-
uidation value. If a tested loss CFC's com-
mon stock has a liquidation value of zero
and there is at least one other class of equity
with a liquidation preference relative to the
common stock, then the tested loss is dis-
tributed in the hypothetical distribution de-
scribed in section 951(a)(2)(A) and § 1.951-
1(e)(1)(i) with respect to the most junior
class of equity with a positive liquidation
value to the extent of such liquidation value.
Thereafter, tested loss is distributed with
respect to the next most junior class of eq-
uity to the extent of its liquidation value and
so on. All determinations of liquidation
value are to be made as of the beginning of
the CFC inclusion year of the tested loss
CFC.

(iv) Examples. The following examples illustrate
the application of this paragraph (d)(4). See also
§ 1.951-1(e)(7), Example 7 (illustrating a United
States shareholder's pro rata share of subpart F in-
come and tested loss).

(A) Example-(1) Facts. FS, a controlled foreign
corporation, has outstanding 70 shares of common
stock and 30 shares of 4% nonparticipating, cumu-
lative preferred stock with a par value of $10x per
share. P Corp, a domestic corporation and a United
States shareholder of FS, owns all of the common
shares. Individual A, a United States citizen and a
United States shareholder, owns all of the preferred
shares. FS, Individual A, and P Corp all use the
calendar year as their taxable year. Individual A and
P Corp are shareholders of FS for all of Year 5. At
the beginning of Year 5, FS had earnings and profits
of $120x, which accumulated after the issuance of
the preferred stock. At the end of Year 5, the accrued
but unpaid dividends with respect to the preferred
stock are $36x. For Year 5, FS has a $100x tested
loss, and no other items of income, gain, deduction
or loss. At the end of Year 5, FS has earnings and
profits of $20x.

(2) Analysis. FS is a tested loss CFC for Year 5.
Before taking into account the tested loss in Year 5,
FS had sufficient earnings and profits to satisfy the
accrued but unpaid dividends of $36x. The amount
of the reduction in earnings below the amount nec-
essary to satisfy the accrued but unpaid dividends
attributable to the tested loss is $16x ($36x - ($120x
\- $100x)). Accordingly, under paragraph (d)(4)(ii) of
this section, Individual A's pro rata share of the Year
5 tested loss is $16x, and P Corp's pro rata share of
the tested loss is $84x ($100x - $16x).

(B) Example 2-(1) Facts. FS, a controlled for-
eign corporation, has outstanding 100 shares of com-
mon stock and 50 shares of 4% nonparticipating,
cumulative preferred stock with a par value of $100x
per share. P Corp, a domestic corporation and a
United States shareholder of FS, owns all of the
common shares. Individual A, a United States citizen
and a United States shareholder, owns all of the
preferred shares. FS, Individual A, and P Corp all

use the calendar year as their taxable year. Individual
A and P Corp are shareholders of FS for all of Year
1 and Year 2. At the beginning of Year 1, the
common stock had no liquidation value and the
preferred stock had a liquidation value of $5,000x
and no accrued but unpaid dividends. In Year 1, FS
has a tested loss of $1,000x and no other items of
income, gain, deduction, or loss. In Year 2, FS has
tested income of $3,000x and no other items of
income, gain, deduction, or loss and paid no divi-
dends. FS has earnings and profits of $3,000x for
Year 2. At the end of Year 2, FS has accrued but
unpaid dividends of $400x with respect to the pre-
ferred stock ($5000x x 0.04 for Year 1 and $5000x
x 0.04 for Year 2).

(2) Analysis-(i) Year 1. FS is a tested loss CFC
in Year 1. The common stock of FS has liquidation
value of zero and the preferred stock has a liquida-
tion preference relative to the common stock. The
tested loss ($1,000x) does not exceed the liquidation
value of the preferred stock ($5,000x). Accordingly,
under paragraph (d)(4)(iii) of this section, the tested
loss is distributed with respect to the preferred stock
in the hypothetical distribution described in section
951(a)(2)(A) and § 1.951-1(e). Individual A's pro
rata share of the tested loss is $1,000x, and P Corp's
pro rata share of the tested loss is $0.

(ii) Year 2. FS is a tested income CFC in Year 2.
Because $1,000x of tested loss was allocated to the
preferred stock in Year 1 under paragraph (d)(4)(iii)
of this section, the first $1,000x of tested income in
Year 2 is allocated to the preferred stock under
paragraph (d)(2)(ii) of this section. P Corp's and
Individual A's pro rata shares of the remaining
$2,000x of tested income are determined under the
general rule of paragraph (d)(2)(i) of this section,
except that for purposes of the hypothetical distribu-
tion the amount of FS's current earnings and profits
is reduced by the tested income allocated under
paragraph (d)(2)(ii) of this section to $2,000x
($3,000x - $1,000x). Accordingly, under paragraph
(d)(2)(i) of this section, the amount of FS's current
earnings and profits distributed in the hypothetical
distribution with respect to Individual A's preferred
stock is $400x ($400x of accrued but unpaid divi-
dends) and with respect to P Corp's common stock is
$1,600x ($2,000x - $400x). Individual A's pro rata
share of the tested income is $1,400x ($1,000x +
$400x), and P Corp's pro rata share of the tested
income is $1,600x.

(5) Tested interest expense. A United
States shareholder's pro rata share of
tested interest expense of a controlled for-
eign corporation for a U.S. shareholder
inclusion year is equal to the amount by
which the tested interest expense reduces
the shareholder's pro rata share of tested
income of the controlled foreign corpora-
tion for the U.S. shareholder inclusion
year, increases the shareholder's pro rata
share of tested loss of the controlled for-
eign corporation for the U.S. shareholder
inclusion year, or both.

(6) Tested interest income. A United
States shareholder's pro rata share of

tested interest income of a controlled for-
eign corporation for a U.S. shareholder
inclusion year is equal to the amount by
which the tested interest income increases
the shareholder's pro rata share of tested
income of the controlled foreign corpora-
tion for the U.S. shareholder inclusion
year, reduces the shareholder's pro rata
share of tested loss of the controlled for-
eign corporation for the U.S. shareholder
inclusion year, or both.

(e) Definitions. This paragraph (e) pro-
vides additional definitions that apply for
purposes of the section 951A regula-
tions. Other definitions relevant to the
section 951A regulations are included in
§§ 1.951A-2 through 1.951A-6.

(1) CFC inclusion date. The term CFC
inclusion date means the last day of a
CFC inclusion year on which a foreign
corporation is a controlled foreign corpo-
ration.

(2) CFC inclusion year. The term CFC
inclusion year means any taxable year of a
foreign corporation beginning after De-
cember 31, 2017, at any time during
which the corporation is a controlled for-
eign corporation.

(3) Section 958(a) stock. The term sec-
tion 958(a) stock means stock of a con-
trolled foreign corporation owned (di-
rectly or indirectly) by a United States
shareholder within the meaning of section
958(a).

(4) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion year
means a taxable year of a United States
shareholder that includes a CFC inclusion
date of a controlled foreign corporation of
the United States shareholder.

Par. 5. Section 1.951A-2 is added to
read as follows:

§ 1.951A-2 Tested income and tested
loss.

(a) Scope. This section provides gen-
eral rules for determining the tested in-
come or tested loss of a controlled foreign
corporation for purposes of determining a
United States shareholder's net CFC
tested income under § 1.951A-1(c)(2).
Paragraph (b) of this section provides def-
initions related to tested income and tested
loss. Paragraph (c) of this section provides
rules for determining the gross tested in-
come of a controlled foreign corporation

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and the deductions that are properly allo-
cable to gross tested income.

(b) Definitions related to tested income
and tested loss-(1) Tested income and
tested income CFC. The term tested in-
come means the excess (if any) of a con-
trolled foreign corporation's gross tested
income for a CFC inclusion year, over the
allowable deductions (including taxes)
properly allocable to the gross tested in-
come for the CFC inclusion year (a con-
trolled foreign corporation with tested in-
come for a CFC inclusion year, a tested
income CFC).

(2) Tested loss and tested loss CFC.
The term tested loss means the excess (if
any) of a controlled foreign corporation's
allowable deductions (including taxes)
properly allocable to gross tested income
(or that would be allocable to gross tested
income if there were gross tested income)
for a CFC inclusion year, over the gross
tested income of the controlled foreign
corporation for the CFC inclusion year (a
controlled foreign corporation without
tested income for a CFC inclusion year, a
tested loss CFC).

(c) Rules relating to the determination
of tested income and tested loss-(1) Def-
inition of gross tested income. The term
gross tested income means the gross in-
come of a controlled foreign corporation
for a CFC inclusion year determined with-
out regard to-

(i) Items of income described in sec-
tion 952(b),

(ii) Gross income taken into account in
determining the subpart F income of the
corporation,

(iii) Gross income excluded from the
foreign base company income (as defined
in section 954) or the insurance income (as
defined in section 953) of the corporation
solely by reason of an election made under
section 954(b)(4) and § 1.954-1(d)(5),

(iv) Dividends received by the corpo-
ration from related persons (as defined in
section 954(d)(3)), and

(v) Foreign oil and gas extraction in-
come (as defined in section 907(c)(1)) of
the corporation.

(2) Determination of gross income and
allowable deductions. For purposes of de-
termining tested income and tested loss,
the gross income and allowable deduc-
tions of a controlled foreign corporation
for a CFC inclusion year are determined

under the rules of § 1.952-2 for determin-
ing the subpart F income of a controlled
foreign corporation.

(3) Allocation of deductions to gross
tested income. Any deductions of a con-
trolled foreign corporation allowable un-
der paragraph (c)(2) of this section are
allocated and apportioned to gross tested
income under the principles of section
954(b)(5) and § 1.954-1(c), by treating
gross tested income that falls within a
single separate category (as defined in
§ 1.904-5(a)(1)) as a single item of gross
income, in addition to the items set forth
in § 1.954-1(c)(1)(iii).

(4) Nonapplication of section 952(c)-
(i) In general. The gross tested income
and allowable deductions properly alloca-
ble to gross tested income of a controlled
foreign corporation for a CFC inclusion
year are determined without regard to the
application of section 952(c).

(ii) Example. The following example illustrates
the application of this paragraph (c)(4).

(A) Example-(1) Facts. A Corp, a domestic
corporation, owns 100% of the single class of stock
of FS, a controlled foreign corporation. Both A Corp
and FS use the calendar year as their taxable year. In
Year 1, FS has foreign base company income of
$100x, a loss in foreign oil and gas extraction in-
come of $100x, and earnings and profits of $0. FS
has no other income. In Year 2, FS has gross income
of $100x and earnings and profits of $100x. Without
regard to section 952(c)(2), in Year 2 FS has no
income described in any of the categories of income
excluded from gross tested income in paragraphs
(c)(1)(i) through (v) of this section. FS has no allow-
able deductions properly allocable to gross tested
income for Year 2.

(2) Analysis. As a result of the earnings and profits
limitation of section 952(c)(1), FS has no subpart F
income in Year 1, and A Corp has no inclusion with
respect to FS under section 951(a)(1)(A). Under para-
graph (c)(4)(i) of this section, the gross tested income
of FS is determined without regard to section 952(c)(1).
Therefore, in determining the gross tested income of FS
in Year 1, the $100x foreign base company income of
FS in Year 1 is excluded under paragraph (c)(1)(ii) of
this section, and FS has no gross tested income in Year
1\. In Year 2, under section 952(c)(2), FS's earnings and
profits ($100x) in excess of its subpart F income ($0)
are treated as subpart F income. Therefore, FS has
subpart F income of $100x in Year 2, and A Corp has
an inclusion of $100x with respect to FS under section
951(a)(1)(A). Under paragraph (c)(4)(i) of this section,
the gross tested income of FS is determined without
regard to section 952(c)(2). Accordingly, FS's income
in Year 2 is not subpart F income described in para-
graph (c)(1)(ii) of this section, and FS has $100x of
gross tested income in Year 2.

(5) Disregard of basis in property re-
lated to certain transfers during the dis-
qualified period-(i) In general. Any de-

duction or loss attributable to disqualified
basis of any specified property allocated
and apportioned to gross tested income
under paragraph (c)(3) of this section is
disregarded for purposes of determining
tested income or tested loss of a controlled
foreign corporation. For purposes of this
paragraph (c)(5), in the case that a deduc-
tion or loss arises with respect to specified
property with disqualified basis and ad-
justed basis other than disqualified basis,
the deduction or loss is treated as attrib-
utable to the disqualified basis in the same
proportion that the disqualified basis bears
to the total adjusted basis of the property.

(ii) Definition of specified property.
The term specified property means prop-
erty that is of a type with respect to which
a deduction is allowable under section 167
or 197.

(iii) Definition of disqualified basis.
Solely for purposes of paragraph (c)(5)(i)
of this section, the term disqualified basis
has the meaning set forth in § 1.951A-
3(h)(2)(ii) (including with respect to prop-
erty owned by a partnership by reason of
§ 1.951A-3(g)(3)), except that, in apply-
ing the provisions of § 1.951A-3(h)(2) to
determine the disqualified basis, the term
"specified property" is substituted for
"specified tangible property" and the term
"controlled foreign corporation" is substi-
tuted for "tested income CFC" each place
they appear.

(iv) Example-(A) Facts. USP, a domestic cor-
poration, owns all of the stock of CFC1 and CFC2,
each a controlled foreign corporation. Both USP and
CFC1 use the calendar year as their taxable year.
CFC2 uses a taxable year ending November 30. On
November 1, 2018, before the start of its first CFC
inclusion year, CFC2 sells intangible property to
CFC1 that is amortizable under section 197 in ex-
change for $100x of cash. The intangible property
has a basis of $20x in the hands of CFC2, and CFC2
recognizes $80x of gain as a result of the sale ($100x
\- $20x). CFC2's gain is not subject to U.S. tax or
taken into account in determining USP's inclusion
under section 951(a)(1)(A).

(B) Analysis. The sale by CFC1 is a disqualified
transfer (within the meaning of § 1.951A-
3(h)(2)(ii)(C), as modified by paragraph (c)(5)(iii) of
this section) because it is a transfer of specified
property, CFC2 and CFC1 are related persons, and
the transfer occurs during the disqualified period
(within the meaning of § 1.951A-3(h)(2)(ii)(D)).
The disqualified basis is $80x, the excess of CFC1's
adjusted basis in the property immediately after the
disqualified transfer ($100x), over the sum of
CFC2's basis in the property immediately before the
transfer ($20x) and the qualified gain amount (as
defined in § 1.951A-3(h)(2)(ii)(B)) ($0). Accord-
ingly, under paragraph (c)(5)(i) of this section, any

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deduction or loss attributable to the disqualified basis
is disregarded for purposes of determining the tested
income or tested loss of any CFC for any CFC
inclusion year.

Par. 6. Section 1.951A-3 is added to
read as follows:

##### § 1.951A-3 Qualified business asset investment.

(a) Scope. This section provides gen-
eral rules for determining the qualified
business asset investment of a controlled
foreign corporation for purposes of de-
termining a United States shareholder's
deemed tangible income return under
§ 1.951A-1(c)(3)(ii). Paragraph (b) of
this section defines qualified business
asset investment. Paragraph (c) of this
section defines tangible property and
specified tangible property. Paragraph
(d) of this section provides rules and
examples for determining the portion of
property that is specified tangible prop-
erty when the property is used in the
production of both gross tested income
and gross income that is not gross tested
income. Paragraph (e) of this section
provides rules for determining the ad-
justed basis of specified tangible prop-
erty. Paragraph (f) of this section pro-
vides rules for determining qualified
business asset investment of a tested
income CFC with a short taxable year.
Paragraph (g) of this section provides
rules and examples for increasing the
qualified business asset investment of a
tested income CFC by reason of prop-
erty owned through a partnership. Para-
graph (h) of this section provides anti-
abuse rules that disregard the basis of
specified tangible property transferred
in certain transactions when determining
the qualified business asset investment
of a tested income CFC.

(b) Definition of qualified business as-
set investment. The term qualified busi-
ness asset investment means the average
of a tested income CFC's aggregate ad-
justed bases as of the close of each quarter
of a CFC inclusion year in specified tan-
gible property that is used in a trade or
business of the tested income CFC and is
of a type with respect to which a deduc-
tion is allowable under section 167. A
tested loss CFC has no qualified business
asset investment. See paragraph (f) of this
section for rules relating to the qualified

business asset investment of a tested in-
come CFC with a short taxable year.

(c) Specified tangible property-(1) In
general. The term specified tangible prop-
erty means, subject to paragraph (d) of
this section, tangible property used in the
production of gross tested income. None
of the tangible property of a tested loss
CFC is specified tangible property.

(2) Tangible property. The term tangi-
ble property means property for which the
depreciation deduction provided by sec-
tion 167(a) is eligible to be determined
under section 168 without regard to sec-
tion 168(f)(1), (2), or (5) and the date
placed in service.

(d) Dual use property-(1) In general.
In the case of tangible property of a tested
income CFC that is used in both the pro-
duction of gross tested income and the
production of gross income that is not
gross tested income in a CFC inclusion
year, the portion of the adjusted basis in
the property treated as adjusted basis in
specified tangible property for the CFC
inclusion year is determined by multiply-
ing the average of the tested income
CFC's adjusted basis in the property by
the dual use ratio with respect to the prop-
erty for the CFC inclusion year.

(2) Dual use ratio. The term dual use
ratio means, with respect to specified tan-
gible property:

(i) In the case of specified tangible
property that produces directly identifi-
able income for a CFC inclusion year, the
ratio of the gross tested income produced
by the property for the CFC inclusion year
to the total amount of gross income pro-
duced by the property for the CFC inclu-
sion year.

(ii) In the case of specified tangible
property that does not produce directly
identifiable income for a CFC inclusion
year, the ratio of the gross tested income
of the tested income CFC for the CFC
inclusion year to the total amount of gross
income of the tested income CFC for the
CFC inclusion year.

(3) Example. The following example illustrates
the application of this paragraph (d).

(i) Example-(A) Facts. FS is a tested income
CFC. FS owns a machine that only packages Product
A. In Year 1, FS sells Product A to related and
unrelated resellers and earns $1,000x of gross in-
come. For Year 1, sales of Product A produce gross
tested income of $750x and foreign base company
sales income (as defined in section 954(d)) of $250x.
The average adjusted basis of the machine for Year

1 in the hands of FS is $4,000x. FS also owns an
office building for its administrative functions with
an average adjusted basis for Year 1 of $10,000x.
The office building does not produce directly iden-
tifiable income. FS has no other specified tangible
property. For year 1, FS also earns $1,250x of gross
tested income and $2,750x of foreign base company
sales income from sales of Product B. Neither the
machine nor the office building is used in the pro-
duction of income related to Product B. For Year 1,
FS's gross tested income is $2,000x and its total
gross income is $5,000x.

(B) Analysis. The machine and office building
are both property for which the depreciation deduc-
tion provided by section 167(a) is eligible to be
determined under section 168. Therefore, under
paragraph (c)(2) of this section, the machine and
office building are tangible property. Under para-
graph (d)(1) of this section, the portion of the basis
in the machine treated as basis in specified tangible
property is equal to FS's average basis in the ma-
chine for the year ($4,000x), multiplied by the dual
use ratio under paragraph (d)(2)(i) of this section
(75%), which is the proportion that the gross tested
income produced by the property ($750x) bears to
the total gross income produced by the property
($1,000x). Accordingly, $3,000x ($4,000x x 75%) of
FS's adjusted basis in the machine is taken into
account in determining the average of FS's aggre-
gate adjusted bases described in paragraph (b) of this
section. Under paragraph (d)(1) of this section, the
portion of the basis in the office building treated as
basis in specified tangible property is equal to FS's
average basis in the office building for the year
($10,000x), multiplied by the dual use ratio under
paragraph (d)(2)(ii) of this section (40%), which is
the ratio of FS's gross tested income for Year 1
($2,000x) to FS's total gross income for Year 1
($5,000x). Accordingly, $4,000x ($10,000x x 40%)
of FS's adjusted basis in the office building is taken
into account in determining the average of FS's
aggregate adjusted bases described in paragraph (b)
of this section.

(e) Determination of adjusted basis of
specified tangible property-(1) In gen-
eral. The adjusted basis in specified tan-
gible property is determined by using the
alternative depreciation system under sec-
tion 168(g), and by allocating the depre-
ciation deduction with respect to such
property for the CFC inclusion year rat-
ably to each day during the period in the
taxable year to which such depreciation
relates.

(2) Effect of change in law. The deter-
mination of adjusted basis for purposes of
paragraph (b) of this section is made with-
out regard to any provision of law enacted
after December 22, 2017, unless such later
enacted law specifically and directly

amends the definition of qualified busi-
ness asset investment under section 951A.

(3) Specified tangible property placed
in service before enactment of section

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951A. The adjusted basis in property
placed in service before December 22,
2017, is determined using the alternative
depreciation system under section 168(g),
as if this system had applied from the date
that the property was placed in service.

(f) Special rules for short taxable
years-(1) In general. In the case of a
tested income CFC that has a CFC inclu-
sion year that is less than twelve months
(a short taxable year), the rules for deter-
mining the qualified business asset invest-
ment of the tested income CFC under this
section are modified as provided in para-
graphs (f)(2) and (3) of this section with
respect to the CFC inclusion year.

(2) Determination of quarter closes. For
purposes of determining quarter closes, in
determining the qualified business asset in-
vestment of a tested income CFC for a short
taxable year, the quarters of the tested in-
come CFC for purposes of this section are
the full quarters beginning and ending
within the short taxable year (if any), deter-
mining quarter length as if the tested income
CFC did not have a short taxable year, plus
one or more short quarters (if any).

(3) Reduction of qualified business as-
set investment. The qualified business as-
set investment of a tested income CFC for
a short taxable year is the sum of-

(i) The sum of the tested income CFC's
aggregate adjusted bases in specified tan-
gible property as of the close of each full
quarter (if any) in the CFC inclusion year
divided by four, plus

(ii) The tested income CFC's aggregate
adjusted bases in specified tangible prop-
erty as of the close of each short quarter
(if any) in the CFC inclusion year multi-
plied by the sum of the number of days in
each short quarter divided by 365.

(4) Example. The following example illustrates
the application of this paragraph (f).

(i) Example-(A) Facts. USP1, a domestic cor-
poration, owns all of the stock of FS, a controlled
foreign corporation. USP1 owns FS from the begin-
ning of Year 1. On July 15, Year 1, USP1 sells FS to
USP2, an unrelated person. USP2 makes a section
338(g) election with respect to the purchase of FS, as
a result of which FS's taxable year is treated as
ending on July 15. USP1, USP2, and FS all use the
calendar year as their taxable year. FS's aggregate
adjusted bases in specified tangible property are
$250x as of March 31, $300x as of June 30, $275x as
of July 15, $500x as of September 30, and $450x as
of December 31.

(B) Analysis-(1) Determination of short taxable
years and quarters. FS has two short taxable years in
Year 1. The first short taxable year is from January 1

to July 15, with two full quarters (January 1-March
31 and April 1-June 30) and one short quarter (July
1-July 15). The second taxable year is from July 16
to December 31, with one short quarter (July 16-
September 30) and one full quarter (October
1-December 31).

(2) Calculation of qualified business asset invest-
ment for the first short taxable year. Under para-
graph (f)(2) of this section, for the first short taxable
year in Year 1, FS has three quarter closes (March
31, June 30, and July 15). Under paragraph (f)(3) of
this section, the qualified business asset investment
of FS for the first short taxable year is $148.80x, the
sum of $137.50x (($250x + $300x)/4) attributable to
the two full quarters and $11.30x ($275x x 15/365)
attributable to the short quarter.

(3) Calculation of qualified business asset invest-
ment for the second short taxable year. Under para-
graph (f)(2) of this section, for the second short
taxable year in Year 1, FS has two quarter closes
(September 30 and December 31). Under paragraph
(f)(3) of this section, the qualified business asset
investment of FS for the second short taxable year is
$217.98x, the sum of $112.50x ($450x/4) attribut-
able to the one full quarter and $105.48x ($500x x
77/365) attributable to the short quarter.

(g) Partnership property-(1) In gen-
eral. For purposes of paragraph (b) of this
section, if a tested income CFC holds an
interest in one or more partnerships as of
the close of the CFC inclusion year, the
qualified business asset investment of the
tested income CFC for the CFC inclusion
year is increased by the sum of the tested
income CFC's partnership QBAI with re-
spect to each partnership for the CFC in-
clusion year. A tested loss CFC has no
partnership QBAI for a CFC inclusion
year.

(2) Definitions related to partnership
QBAI-(i) In general. The term partner-
ship QBAI means the sum of the tested
income CFC's share of the partnership's
adjusted basis in partnership specified tan-
gible property as of the close of a partner-
ship taxable year that ends with or within
a CFC inclusion year. A tested income
CFC's share of the partnership's adjusted
basis in partnership specified tangible
property is determined separately with re-
spect to each partnership specified tangi-
ble property of the partnership by multi-
plying the partnership's adjusted basis in
the property by the partnership QBAI ra-
tio with respect to the property. If the
partnership's taxable year is less than
twelve months, the principles of para-
graph (f) of this section apply in determin-
ing a tested income CFC's partnership
QBAI with respect to the partnership.

(ii) Partnership QBAI ratio. The term
partnership QBAI ratio means, with re-
spect to partnership specified tangible
property:

(A) In the case of partnership specified
tangible property that produces directly
identifiable income for a partnership tax-
able year, the ratio of the tested income
CFC's distributive share of the gross in-
come produced by the property for the
partnership taxable year that is included in
the gross tested income of the tested in-
come CFC for the CFC inclusion year to
the total gross income produced by the
property for the partnership taxable year.

(B) In the case of partnership specified
tangible property that does not produce
directly identifiable income for a partner-
ship taxable year, the ratio of the tested
income CFC's distributive share of the
gross income of the partnership for the
partnership taxable year that is included in
the gross tested income of the tested in-
come CFC for the CFC inclusion year to
the total amount of gross income of the
partnership for the partnership taxable
year.

(iii) Partnership specified tangible
property. The term partnership specified
tangible property means tangible property
(as defined in paragraph (c)(2) of this sec-
tion) of a partnership that is-

(A) Used in the trade or business of the
partnership,

(B) Of a type with respect to which a
deduction is allowable under section 167,
and

(C) Used in the production of tested
income.

(3) Determination of adjusted basis.
For purposes of this paragraph (g), a part-
nership's adjusted basis in partnership
specified tangible property is determined
based on the average of the partnership's
adjusted basis in the property as of the
close of each quarter in the partnership
taxable year. The principles of paragraphs
(e) and (h) of this section apply for pur-
poses of determining a partnership's ad-
justed basis in partnership specified tangi-
ble property and the portion of such
adjusted basis taken into account in deter-
mining a tested income CFC's partnership
QBAI.

(4) Examples. The following examples illustrate
the rules of this paragraph (g).

(i) Example 1-(A) Facts. FC, a tested income
CFC, is a partner in PRS. Both FC and PRS use the

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calendar year as their taxable year. PRS owns two
assets, Asset A and Asset B, both of which are
tangible property used in PRS's trade or business
that it depreciates under section 168. The average of
PRS's adjusted basis as of the close of each quarter
of PRS's taxable year in Asset A is $100x and the
average of PRS's adjusted basis as of the end of each
quarter of PRS's taxable year in Asset B is $50x.
Asset A produces $10x of directly identifiable gross
income in Year 1, and Asset B produces $50x of
directly identifiable gross income in Year 1. FC's
distributive share of the gross income from Asset A
is $8x and its distributive share of the gross income
from Asset B is $10x. FC's entire distributive share
of income from Asset A and Asset B is included in
FC's gross tested income for Year 1. PRS partners'
distributive shares satisfy the requirements of section
704.

(B) Analysis. Each of Asset A and Asset B is
partnership specified tangible property because each
is tangible property, of a type with respect to which
a deduction is allowable under section 167, used in
PRS's trade or business, and used in the production
of tested income. FC's partnership QBAI ratio for
Asset A is 80%, the ratio of FC's distributive share
of the gross income from Asset A for Year 1 that is
included in FC's gross tested income ($8x) to the
total gross income produced by Asset A for Year 1
($10x). FC's partnership QBAI ratio for Asset B is
20%, the ratio of FC's distributive share of the gross
income from Asset B for Year 1 that is included in
FC's gross tested income ($10x) to the total gross
income produced by Asset B for Year 1 ($50x). FC's
share of the average of PRS's adjusted basis of Asset
A is $80x, PRS's adjusted basis in Asset A of $100x
multiplied by FC's partnership QBAI ratio for Asset
A of 80%. FC's share of the average of PRS's
adjusted basis of Asset B is $10x, PRS's adjusted
basis in Asset B of $50x multiplied by FC's partner-
ship QBAI ratio for Asset B of 20%. Therefore, FC's
partnership QBAI with respect to PRS is $90x
($80x + $10x). Accordingly, under paragraph (g)(1)
of this section, FC increases its qualified business
asset investment for Year 1 by $90x.

(ii) Example 2-(A) Facts. FC, a tested income
CFC, owns a 50% interest in PRS. PRS owns Asset
A, which is specified tangible property. The average
of PRS's adjusted basis as of the close of each
quarter of PRS's taxable year in Asset A is $100x.
FC has the same taxable year as PRS. Asset A
produces $20x of directly identifiable gross income
in Year 1, and PRS has $22x of expenses in Year 1
that are properly allocable to such income. There-
fore, FC's allocation of net income or loss from PRS
is $1x loss, which is comprised of FC's distributive
share of the gross income from Asset A of $10x, all
of which is included in FC's gross tested income for
Year 1, and FC's distributive share of the expenses
related to Asset A of $11x, all of which is taken into
account in determining its tested income under
§ 1.951-2(c). PRS has no other income or loss in
Year 1. FC also has $8x of gross tested income from
other sources in Year 1, and no deductions properly
allocable to such income. PRS partners' distributive
shares satisfy the requirements of section 704.

(B) Analysis. FC's partnership QBAI ratio for
Asset A is 50%, the ratio of FC's distributive share
of the gross income from Asset A for Year 1 that is

included in FC's gross tested income ($10x) to the
total gross income produced by Asset A for Year 1
($20x). FC's share of the average of PRS's adjusted
basis in Asset A is $50x, PRS's adjusted basis in
Asset A of $100x multiplied by FC's partnership
QBAI ratio for Asset A of 50%. FC increases its
qualified business asset investment by $50x, not-
withstanding that FC would not be a tested income
CFC but for its $8x of gross tested income from
other sources.

(h) Anti-abuse rules for certain trans-
fers of property-(1) Disregard of basis
in specified tangible property held tempo-
rarily. If a tested income CFC (acquiring
CFC) acquires specified tangible property
(as defined in paragraph (c)(1) of this sec-
tion) with a principal purpose of reducing
the GILTI inclusion amount of a United
States shareholder for any U.S. share-
holder inclusion year, and the tested in-
come CFC holds the property temporarily
but over at least the close of one quarter, the
specified tangible property is disregarded in
determining the acquiring CFC's average
adjusted basis in specified tangible property
for purposes of determining the acquiring
CFC's qualified business asset investment
for any CFC inclusion year during which
the tested income CFC held the property.
For purposes of this paragraph (h)(1), spec-
ified tangible property held by the tested
income CFC for less than a twelve month
period that includes at least the close of one
quarter during the taxable year of a tested
income CFC is treated as temporarily held
and acquired with a principal purpose of
reducing the GILTI inclusion amount of a
United States shareholder for a U.S. share-
holder inclusion year if such acquisition
would, but for this paragraph (h)(1), reduce
the GILTI inclusion amount of a United
States shareholder for a U.S. shareholder
inclusion year.

(2) Disregard of basis in specified tan-
gible property related to transfers during
the disqualified period-(i) In general.
For purposes of determining the qualified
business asset investment of a tested in-
come CFC for a CFC inclusion year, in
applying the alternative depreciation sys-
tem under section 168(g) to determine the
tested income CFC's adjusted basis in
specified tangible property, any disquali-
fied basis with respect to the specified
tangible property is not taken into ac-
count.

(ii) Determination of disqualified ba-
sis-(A) In general. The term disqualified
basis means, with respect to specified tan-

gible property, the excess (if any) of the
property's adjusted basis immediately af-
ter a disqualified transfer, over the sum of
the property's adjusted basis immediately
before the disqualified transfer and the
qualified gain amount with respect to the
disqualified transfer. Disqualified basis
may be reduced or eliminated through
depreciation, amortization, sales or ex-
changes, section 362(e), and other meth-
ods. In such circumstances, in the case of
specified tangible property with disquali-
fied basis and adjusted basis other than
disqualified basis, the disqualified basis is
reduced or eliminated in the same propor-
tion that the disqualified basis bears to the
total adjusted basis of the property.

(B) Definition of qualified gain amount.
The term qualified gain amount means, with
respect to a disqualified transfer, the sum of
the following amounts:

(1) The amount of gain recognized by a
controlled foreign corporation (transferor
CFC) on the disqualified transfer of the
specified tangible property that is subject
to U.S. federal income tax under section
882 (except to the extent the gain is sub-
ject to a reduced rate of tax, or is exempt
from tax, pursuant to an applicable treaty
obligation of the United States); and

(2) Any United States shareholder's
pro rata share of the gain recognized by
the transferor CFC on the disqualified
transfer of the specified tangible property
(determined without regard to properly al-
locable deductions) taken into account in
determining the United States sharehold-
er's inclusion under section 951(a)(1)(A),
excluding any amount that is described in
paragraph (h)(2)(ii)(B)(1) of this section.

(C) Definition of disqualified transfer.
The term disqualified transfer means a
transfer of specified tangible property dur-
ing a transferor CFC's disqualified period
by the transferor CFC to a related person
in which gain was recognized, in whole or
in part, by the transferor CFC, regardless
of whether the property was specified tan-
gible property in the hands of the trans-
feror CFC. For purposes of the preceding
sentence, a transfer includes any disposi-
tion, sale or exchange, contribution, or
distribution of the specified tangible prop-
erty, and includes an indirect transfer (for
example, a transfer of an interest in a
partnership is treated as a transfer of the
assets of the partnership and transfer by or

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to a partnership is treated as a transfer by
or to its partners).

(D) Definition of disqualified period.
The term disqualified period means, with
respect to a transferor CFC, the period
beginning on January 1, 2018, and ending
as of the close of the transferor CFC's last
taxable year that is not a CFC inclusion
year. A transferor CFC that has a CFC
inclusion year beginning January 1, 2018,
has no disqualified period.

(E) Related person. For purposes of
this paragraph (h)(2), a person is related to
a controlled foreign corporation if the per-
son bears a relationship to the controlled
foreign corporation described in section
267(b) or 707(b) immediately before or
immediately after the transfer.

(iii) Examples. The following examples illustrate
the application of this paragraph (h)(2).

(A) Example 1-(1) Facts. USP, a domestic cor-
poration, owns all of the stock of CFC1 and CFC2,
each a controlled foreign corporation. Both USP and
CFC1 use the calendar year as their taxable year.
CFC2 uses a taxable year ending November 30. On
November 1, 2018, before the start of its first CFC
inclusion year, CFC2 sells specified tangible prop-
erty that has a basis of $10x in the hands of CFC2 to
CFC1 in exchange for $100x of cash. CFC2 recog-
nizes $90x of gain as a result of the sale ($100x -
$10x), $30x of which is foreign base company in-
come (within the meaning of section 954). USP
includes in gross income under section 951(a)(1)(A)
its pro rata share of the subpart F income of $30x.
CFC2's gain is not otherwise subject to U.S. tax or
taken into account in determining USP's inclusion
under section 951(a)(1)(A).

(2) Analysis. The transfer is a disqualified trans-
fer because it is a transfer of specified tangible
property; CFC1 and CFC2 are related persons; and
the transfer occurs during the disqualified period, the
period that begins on January 1, 2018, and ends the
last day before the first CFC inclusion year of CFC2
(November 30, 2018). The disqualified basis is $60x,
the excess of CFC1's adjusted basis in the property
immediately after the disqualified transfer ($100x),
over the sum of CFC2's basis in the property imme-
diately before the transfer ($10x) and USP's pro rata
share of the gain recognized by CFC1 on the transfer
of the property taken into account by USP under
section 951(a)(1)(A) ($30x). Accordingly, under
paragraph (h)(2)(i) of this section, for purposes of
determining the qualified business asset investment
of any tested income CFC for any CFC inclusion
year, in applying section 168(g) to determine the
CFC's basis in the specified tangible property, the
$60x disqualified basis of the property is not taken
into account.

(B) Example 2-(1) Facts. The facts are the
same as in paragraph (1) of Example 1, except that
CFC2 uses the calendar year as its taxable year.

(2) Analysis. Because CFC2 has a taxable year
beginning January 1, 2018, CFC2 has no disqualified
period. Accordingly, the property was not trans-
ferred during a disqualified period of CFC2, and

there is no disqualified basis with respect to the
property.

Par. 7. Section 1.951A-4 is added to
read as follows:

§ 1.951A-4 Tested interest expense and
tested interest income.

(a) Scope. This section provides gen-
eral rules for determining the tested inter-
est expense and tested interest income of a
controlled foreign corporation for pur-
poses of determining a United States
shareholder's specified interest expense
under § 1.951A-1(c)(3)(iii). Paragraph (b)
of this section provides the definitions re-
lated to tested interest expense and tested
interest income. Paragraph (c) of this
section provides examples illustrating
these definitions and the application of
§ 1.951A-1(c)(3)(iii). The amount of
specified interest expense determined
under § 1.951A-1(c)(3)(iii) and this sec-
tion is the amount of interest expense
described in section 951A(b)(2)(B).

(b) Definitions related to specified in-
terest expense-(1) Tested interest ex-
pense-(i) In general. The term tested
interest expense means interest expense
paid or accrued by a controlled foreign
corporation taken into account in deter-
mining the tested income or tested loss of
the controlled foreign corporation for the
CFC inclusion year under § 1.951A-2(c),
reduced by the qualified interest expense
of the controlled foreign corporation.

(ii) Interest expense. The term interest
expense means any expense or loss that is
treated as interest expense by reason of
the Internal Revenue Code or the regula-
tions thereunder, and any other expense or
loss incurred in a transaction or series of
integrated or related transactions in which
the use of funds is secured for a period of
time if such expense or loss is predomi-
nately incurred in consideration of the
time value of money.

(iii) Qualified interest expense. The
term qualified interest expense means,
with respect to a qualified CFC, the inter-
est expense paid or accrued by the quali-
fied CFC taken into account in determin-
ing the tested income or tested loss of the
qualified CFC for the CFC inclusion year,
multiplied by the fraction (not to exceed
one) described in paragraph (b)(1)(iii)(A)
of this section, and then reduced (but not

to less than zero) by the amount described
in paragraph (b)(1)(iii)(B) of this section.

(A) The numerator of the fraction de-
scribed in this paragraph (b)(1)(iii)(A) is
the average of the aggregate adjusted
bases as of the close of each quarter of
obligations or financial instruments held
by the qualified CFC that give rise to
income excluded from foreign personal
holding company income (as defined in
section 954(c)(1)) by reason of section
954(h) or (i), and the denominator is the
average of the aggregate adjusted bases as
of the close of each quarter of all assets
held by the qualified CFC. For purposes of
this paragraph (b)(1)(iii)(A), the basis of
the stock of another qualified CFC held by
a qualified CFC is treated as basis of an
obligation or financial instrument giving
rise to income excluded from foreign per-
sonal holding company income by reason
of section 954(h) or (i) in an amount equal
to the basis of the stock multiplied by
the fraction described in this paragraph
(b)(1)(iii)(A) determined with respect to
the assets of such other qualified CFC.

(B) The amount described in this para-
graph (b)(1)(iii)(B) is the amount of inter-
est income of the qualified CFC for the
CFC inclusion year that is excluded from
foreign personal holding company income
(as defined in section 954(c)(1)) by reason
of section 954(c)(3) or (6).

(iv) Qualified CFC. The term qualified
CFC means an eligible controlled foreign
corporation (within the meaning of sec-
tion 954(h)(2)) or a qualifying insurance
company (within the meaning of section
953(e)(3)).

(2) Tested interest income-(i) In gen-
eral. The term tested interest income
means interest income included in the
gross tested income of a controlled for-
eign corporation for the CFC inclusion
year, reduced by qualified interest income
of the controlled foreign corporation.

(ii) Interest income. The term interest
income means any income or gain that is
treated as interest income by reason of the
Internal Revenue Code or the regulations
thereunder, and any other income or gain
recognized in a transaction or series of
integrated or related transactions in which
the forbearance of funds is secured for a
period of time if such income or gain is
predominately derived from consideration
of the time value of money.

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(iii) Qualified interest income. The
term qualified interest income means, with
respect to a qualified CFC, interest income
of the qualified CFC included in the gross
tested income of the qualified CFC for the
CFC inclusion year that is excluded from
foreign personal holding company income
(as defined in section 954(c)(1)) by reason
of section 954(h) or (i).

(c) Examples. The following examples illustrate
the application of this section.

(1) Example 1: wholly-owned CFCs-(i) Facts.
A Corp, a domestic corporation, owns 100% of the
single class of stock of each of FS1 and FS2, each a
controlled foreign corporation. A Corp, FS1, and
FS2 all use the calendar year as their taxable year. In
Year 1, FS1 pays $100x of interest to FS2. Also, in
Year 1, FS2 pays $100x of interest to a bank that is
not related to A Corp, FS1, or FS2. The interest paid
by each of FS1 and FS2 is taken into account in
determining the tested income and tested loss of FS1
and FS2 under § 1.951A-2(c), and the interest re-
ceived by FS2 is not foreign personal holding com-
pany income (as defined in section 954(c)(1)) by
reason of section 954(c)(6) and thus is included in
gross tested income. For Year 1, taking into account
interest income and expense, FS1 has $500x of
tested income and FS2 has $400x of tested loss.
Neither FS1 nor FS2 is a qualified CFC.

(ii) Analysis-(A) CFC-level determination;
tested interest expense and tested interest income.
FS1 has $100x of tested interest expense for Year 1.
FS2 has $100x of tested interest expense and $100x
of tested interest income for Year 1.

(B) United States shareholder-level determina-
tion; pro rata share and specified interest expense.
Under § 1.951A-1(d)(5) and (6), A Corp's pro rata
share of FS1's tested interest expense is $100x, its
pro rata share of FS2's tested interest expense is
$100x, and its pro rata share of FS2's tested interest
income is $100x. For Year 1, A Corp's aggregate pro
rata share of tested interest expense is $200x and its
aggregate pro rata share of tested interest income is
$100x. Accordingly, under § 1.951A-1(c)(3)(iii), A
Corp's specified interest expense is $100x ($200x -
$100x) for Year 1.

(2) Example 2: less than wholly-owned CFCs-
(i) Facts. The facts are the same as in paragraph (i)
of Example 1, except that A Corp owns 50% of the
single class of stock of FS1 and 80% of the single
class of stock of FS2.

(ii) Analysis. (A) CFC-level determination;
tested interest expense and tested interest income.
The analysis is the same as in paragraph (ii)(A) of
Example 1.

(B) United States shareholder-level determina-
tion; pro rata share and specified interest expense.
Under § 1.951A-1(d)(5) and (6), A Corp's pro rata
share of FS1's tested interest expense is $50x ($100x
x 0.50), its pro rata share of FS2's tested interest
expense is $80x ($100x x 0.80), and its pro rata share
of FS2's tested interest income is $80x ($100x x
0.80). For Year 1, A Corp's aggregate pro rata share
of the tested interest expense is $130x and its aggre-
gate pro rata share of the tested interest income is
$80x. Accordingly, under § 1.951A-1(c)(3)(iii), A

Corp's specified interest expense is $50x ($130x -
$80x) for Year 1.

(3) Example 3: qualified CFC-(i) Facts. B
Corp, a domestic corporation, owns 100% of the
single class of stock of each of FS1 and FS2, each a
controlled foreign corporation. B Corp, FS1, and
FS2 all use the calendar year as their taxable year.
FS2 is an eligible controlled foreign corporation
within the meaning of section 954(h)(2). In Year 1,
FS1 pays $100x of interest to FS2, which interest
income is excluded from the foreign personal
holding company income (as defined in section
954(c)(1)) of FS2 by reason of section 954(c)(6).
Also, in Year 1, FS2 pays $250x of interest to a
bank, and receives an additional $300x of interest
from customers that are not related to FS2, which
interest income is excluded from foreign personal
holding company income by reason of section
954(h). The interest paid by each of FS1 and FS2
is taken into account in determining the tested
income and tested loss of FS1 and FS2, and the
interest received by FS2 is included in gross tested
income. FS1 is not a qualified CFC. FS2 does not
own stock in any qualified CFC. FS2's average
adjusted bases in obligations or financial instru-
ments that give rise to income excluded from
foreign personal holding company income by rea-
son of section 954(h) is $8,000x, and FS2's aver-
age adjusted bases in all its assets is $10,000x.

(ii) Analysis-(A) CFC-level determination;
tested interest expense and tested interest income.
FS1 has $100x of tested interest expense for Year 1.
FS2 is a qualified CFC because it is an eligible
controlled foreign corporation within the meaning of
section 954(h)(2). As a result, in determining the
tested interest income and tested interest expense of
FS2, the qualified interest income and qualified in-
terest expense of FS2 are excluded. FS2 has qualified
interest income of $300x, the amount of FS2's in-
terest income that is excluded from foreign personal
holding company income by reason of section
954(h). In addition, FS2 has qualified interest ex-
pense of $100x, the amount of FS2's interest ex-
pense taken into account in determining FS2's tested
income or tested loss under § 1.951A-2(c) ($250x),
multiplied by a fraction, the numerator of which is
FS2's average adjusted bases in obligations or finan-
cial instruments that give rise to income excluded
from foreign personal holding company income by
reason of section 954(h) ($8,000x), and the denom-
inator of which is F2's average adjusted bases in all
its assets ($10,000x), and then reduced by the
amount of the interest income received from FS1
excluded from foreign personal holding company
income by reason of section 954(c)(6) ($100x).
Therefore, for Year 1, FS2 has tested interest income
of $100x ($400x - $300x) and tested interest expense
of $150x ($250x - $100x).

(B) United States shareholder-level determina-
tion; pro rata share and specified interest expense.
Under § 1.951A-1(d)(5) and (6), B Corp's pro rata
share of FS1's tested interest expense is $100x, its
pro rata share of FS2's tested interest expense is
$150x, and its pro rata share of FS2's tested interest
income is $100x. For Year 1, B Corp's aggregate pro
rata share of tested interest expense is $250x
($100x + $150x) and its aggregate pro rata share of
tested interest income is $100x ($0 + $100x). Ac-

cordingly, under § 1.951A-1(c)(3)(iii), B Corp's
specified interest expense is $150x ($250x - $100x)
for Year 1.

Par. 8. Section 1.951A-5 is added to
read as follows:

§ 1.951A-5 Domestic partnerships and
their partners.

(a) Scope. This section provides rules
regarding the application of section 951A
and the section 951A regulations to do-
mestic partnerships that own (within the
meaning of section 958(a)) stock in one or
more controlled foreign corporations and
to partners of such domestic partnerships,
including United States persons (within
the meaning of section 957(c)). Paragraph
(b) of this section provides rules for the
determination of the GILTI inclusion
amount of a domestic partnership and the
distributive share of such amount of a
partner that is not a United States share-
holder with respect to one or more con-
trolled foreign corporations owned by the
domestic partnership. Paragraph (c) of this
section provides rules for the determina-
tion of the GILTI inclusion amount of a
partner that is a United States shareholder
with respect to one or more controlled
foreign corporations owned by a domestic
partnership. Paragraph (d) of this section
provides rules for tiered domestic partner-
ships. Paragraph (e) of this section pro-
vides the definitions of CFC tested item,
partnership CFC, U.S. shareholder part-
ner, and U.S. shareholder partnership.
Paragraph (f) of this section requires a
domestic partnership to provide certain
information to each partner necessary for
the partner to determine its GILTI inclu-
sion amount or its distributive share of the
partnership's GILTI inclusion amount.
Paragraph (g) of this section provides ex-
amples illustrating the rules of this sec-
tion. For rules regarding the treatment of
certain controlled domestic partnerships
owned through one or more foreign cor-
porations as foreign partnerships for pur-
poses of sections 951 through 964, includ-
ing section 951A and the section 951A
regulations, see § 1.951-1(h).

(b) In general-(1) Determination of
GILTI inclusion amount of a U.S. share-
holder partnership. A U.S. shareholder
partnership determines its GILTI inclu-
sion amount for its U.S. shareholder in-
clusion year under the general rules appli-

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cable to United States shareholders in
section 951A and the section 951A regu-
lations.

(2) Determination of distributive share
of U.S. shareholder partnership's GILTI
inclusion amount of a partner other than a
U.S. shareholder partner. Each partner of
a U.S. shareholder partnership that is not a
U.S. shareholder partner takes into ac-
count its distributive share of the U.S.
shareholder partnership's GILTI inclusion
amount (if any) for the U.S. shareholder
inclusion year in accordance with section
702 and § 1.702-1(a)(8)(ii).

(c) Determination of GILTI inclusion
amount of a U.S. shareholder partner. For
purposes of section 951A and the section
951A regulations, section 958(a) stock of
a partnership CFC owned by a U.S. share-
holder partnership is treated as section
958(a) stock owned proportionately by
each U.S. shareholder partner that is a
United States shareholder of the partner-
ship CFC in the same manner as if the
U.S. shareholder partnership were a for-
eign partnership under section 958(a)(2)
and § 1.958-1(b). Accordingly, for pur-
poses of determining a U.S. shareholder
partner's GILTI inclusion amount, the
U.S. shareholder partner determines its
pro rata share of any CFC tested item of a
partnership CFC based on the section
958(a) stock owned by the U.S. share-
holder partner by reason of this paragraph
(c). In addition, a U.S. shareholder part-
ner's distributive share of the GILTI in-
clusion amount of a U.S. shareholder part-
nership is determined without regard to
the partnership's pro rata share of any
CFC tested item of a partnership CFC
with respect to which the U.S. shareholder
partner is a United States shareholder.

(d) Tiered U.S. shareholder partner-
ships. In the case of tiered U.S. share-
holder partnerships, section 958(a) stock
of a partnership CFC treated as owned
under paragraph (c) of this section by a
U.S. shareholder partner that is also a U.S.
shareholder partnership is treated as sec-
tion 958(a) stock owned by the U.S.
shareholder partnership for purposes of
applying paragraph (c) of this section to a
U.S. shareholder partner of such U.S.
shareholder partnership.

(e) Definitions. The following defini-
tions apply for purposes of this section:

(1) CFC tested item. The term CFC
tested item has the meaning set forth in
§ 1.951A-1(d)(1).

(2) Partnership CFC. The term part-
nership CFC means, with respect to a U.S.
shareholder partnership, a controlled for-
eign corporation stock of which is owned
(within the meaning of section 958(a)) by
the U.S. shareholder partnership.

(3) U.S. shareholder partner. The term
U.S. shareholder partner means, with re-
spect to a U.S. shareholder partnership
and a partnership CFC of the U.S. share-
holder partnership, a United States person
that is a partner in the U.S. shareholder
partnership and that is also a United States
shareholder (as defined in section 951(b))
of the partnership CFC.

(4) U.S. shareholder partnership. The
term U.S. shareholder partnership means
a domestic partnership (within the mean-
ing of section 7701(a)(4)) that is a United
States shareholder of one or more con-
trolled foreign corporations.

(f) Reporting requirement. A U.S.
shareholder partnership must furnish to
each partner on or with such partner's
Schedule K-1 (Form 1065 or successor
form) for each U.S. shareholder inclusion
year of the partnership the partner's dis-
tributive share of the partnership's GILTI
inclusion amount (if any) and, with re-
spect to a U.S. shareholder partner, the
partner's proportionate share of the part-
nership's pro rata share (if any) of each
CFC tested item of each partnership CFC
of the partnership and any other informa-
tion required in the form or instructions.
See section 6031(b).

(g) Examples. The following examples
illustrate the rules of this section. None of
the persons in the following examples
own an interest in any controlled foreign
corporation other than as described.

(1) Example 1: domestic partnership with part-
ners that are not United States shareholders-(i)
Facts. Eleven U.S. citizens ("individuals") each own
a 9% interest of PRS, a domestic partnership. The
remaining 1% interest of PRS is owned by X Corp,
a domestic corporation. None of the individuals or X
Corp are related. PRS owns 100% of the single class
of stock of FC, a controlled foreign corporation. The
individuals, X Corp, PRS, and FC all use the calen-
dar year as their taxable year. In Year 1, FC has
$130x of tested income and $50x of qualified busi-
ness asset investment.

(ii) Analysis-(A) Partnership-level calculation.
PRS is a U.S. shareholder partnership with respect to
FC. Under paragraph (b)(1) of this section, PRS
determines its GILTI inclusion amount for Year 1.

PRS's pro rata share of FC's tested income is $130x.
PRS's pro rata share of FC's qualified business asset
investment is $50x. PRS's net CFC tested income is
$130x. PRS's net deemed tangible income return is
$5x ($50x x 0.10). PRS's GILTI inclusion amount
for Year 1 is $125x ($130x - $5x).

(B) Partner-level calculation. Neither X Corp
nor the individuals are U.S. shareholder partners
with respect to FC. Accordingly, under paragraph
(b)(2) of this section, each of the individuals and X
Corp includes its distributive share of PRS's GILTI
inclusion amount ($11.25x each for the individuals
and $1.25x for X Corp) in gross income for Year 1.

(2) Example 2: domestic partnership with part-
ners that are United States shareholders; multiple
partnership CFCs-(i) Facts. X Corp and Y Corp
are domestic corporations that own 40% and 60%,
respectively, of PRS, a domestic partnership. PRS
owns 100% of the single class of stock of FC1 and of
FC2, each a controlled foreign corporation. X Corp,
Y Corp, PRS, FC1, and FC2 all use the calendar year
as their taxable year. In Year 1, FC1 has $130x of
tested income and $50x of qualified business asset
investment, and FC2 has $30x of tested loss.

(ii) Analysis-(A) Partnership-level calculation.
PRS is a U.S. shareholder partnership with respect to
each of FC1 and FC2. Under paragraph (b)(1) of this
section, PRS determines its GILTI inclusion amount
for Year 1. PRS's pro rata share of FC1's tested
income is $130x and of FC2's tested loss is $30x.
PRS's pro rata share of FC1's qualified business
asset investment is $50x. PRS's net CFC tested
income is $100x ($130x - $30x). PRS's net deemed
tangible income return is $5x ($50x x 0.10). PRS's
GILTI inclusion amount for Year 1 is $95x ($100x -
$5x).

(B) Partner-level calculation. X Corp and Y
Corp are U.S. shareholder partners with respect to
FC1 and FC2. Accordingly, under paragraph (c) of
this section, X Corp and Y Corp are treated as
owning section 958(a) stock of FC1 and FC2 pro-
portionately as if PRS were a foreign partnership.
Thus, X Corp's pro rata share of FC1's tested in-
come is $52x ($130x x 0.40), and its pro rata share
of FC2's tested loss is $12x ($30x x 0.40). X Corp's
pro rata share of FC1's qualified business asset in-
vestment is $20x ($50x x 0.40). Accordingly, X
Corp's net CFC tested income is $40x ($52x - $12x),
and its net deemed tangible income return is $2x
($20x x 0.10). X Corp's GILTI inclusion amount for
Year 1 is $38x ($40x - $2x). Y Corp's pro rata share
of FC1's tested income is $78x ($130x x 0.60), and
its pro rata share of FC2's tested loss is $18x ($30x
x 0.60). Y Corp's pro rata share of FC1's qualified
business asset investment is $30x ($50x x 0.60).
Accordingly, Y Corp's net CFC tested income is
$60x ($78x - $18x), and its net deemed tangible
income return is $3x ($30x x 0.10). Y Corp's GILTI
inclusion amount for Year 1 is $57x ($60x - $3x).
Because X Corp and Y Corp are both U.S. share-
holder partners with respect to FC1 and FC2, the
only partnership CFCs of PRS, X Corp and Y Corp
each includes its proportionate share of PRS's share
of each CFC tested item of FC1 and FC2 under
paragraph (c) of this section rather than including a
distributive share of the GILTI inclusion amount of
PRS.

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(3) Example 3: domestic partnership with part-
ners that are United States shareholders with respect
to some, but not all, of the controlled foreign corpo-
rations owned by the domestic partnership-(i)
Facts. X Corp and Y Corp are domestic corporations
that own 40% and 60%, respectively, of PRS, a
domestic partnership. PRS owns 20% of the single
class of stock of FC1 and 10% of the single class of
stock of FC2. In addition, Y Corp owns 100% of the
single class of stock of FC3. FC1, FC2, and FC3 are
controlled foreign corporations. X Corp, Y Corp,
PRS, FC1, FC2, and FC3 all use the calendar year as
their taxable year. In Year 1, FC1 has $100x of
tested income, FC2 has $80x of tested income, and
FC3 has $10x of tested loss.

(ii) Analysis. (A) Partnership-level calculation.
PRS is a U.S. shareholder partnership with respect to
each of FC1 and FC2. Under paragraph (b)(1) of this
section, PRS determines its GILTI inclusion amount
for Year 1. PRS's pro rata share of FC1's tested income
is $20x ($100x x 0.20) and of FC2's tested income is
$8x ($80x x 0.10). PRS's net CFC tested income is
$28x ($20x + $8x). PRS has no net deemed tangible
income return. PRS's GILTI inclusion amount for Year
1 is $28x.

(B) Partner-level calculation-(1) X Corp. X
Corp is not a U.S. shareholder partner with respect to
either FC1 or FC2 because X Corp owns (within the
meaning of section 958) less than 10% of each of
FC1 (40% x 20% = 8%) and FC2 (40% x 10%=
4%). Accordingly, under paragraph (b)(2) of this
section, X Corp includes in income its distributive
share, or $11.20x ($28x x 0.40), of PRS's GILTI
inclusion amount in Year 1.

(2) Y Corp. Y Corp is a United States shareholder
of FC3. Y Corp is also a U.S. shareholder partner
with respect to FC1, because it owns (within the
meaning of section 958) at least 10% (60% x 20% =
12%) of the stock of FC1, but not with respect to
FC2, because Y Corp owns (within the meaning of
section 958) less than 10% of the stock of FC2 (60%
x 10% = 6%). Accordingly, under paragraph (c) of
this section, Y Corp is treated as owning section
958(a) stock of FC1 proportionately as if PRS were
a foreign partnership. Thus, Y Corp's pro rata share
of FC1's tested income is $12x ($20x x 0.60). Y
Corp's pro rata share of FC3's tested loss is $10x
($10x x 1). Accordingly, Y Corp's net CFC tested
income is $2x ($12x - $10x) and Y Corp has no net
deemed tangible income return. Y Corp's GILTI
inclusion amount for Year 1 is $2x. In addition,
under paragraph (c) of this section, for purposes of
determining Y Corp's distributive share of PRS's
GILTI inclusion amount, Y Corp's distributive share
of PRS's GILTI inclusion amount is determined
without regard to PRS's pro rata share of any item of
FC1. PRS's GILTI inclusion amount computed
solely with respect to FC2 is $8x ($80x x 0.10). Y
Corp's distributive share of PRS's GILTI inclusion
amount is $4.80x ($8x x 0.60) in Year 1.

(4) Example 4: tiered domestic partnerships-(i)
Facts. X Corp and Y Corp are domestic corporations
that own, respectively, a 20% interest and an 80%
interest in PRS1, an upper-tier domestic partnership.
PRS1 owns a 40% interest in PRS2, a lower-tier
domestic partnership. The remaining 60% of PRS2 is
owned by Z Corp, a controlled foreign corporation.
PRS2 is not a controlled domestic partnership within

the meaning of § 1.951-1(h)(2) (because no United
States shareholder of Z Corp (or related persons)
controls PRS2). PRS2 owns 80% of the single class
of stock of FC, a controlled foreign corporation. X
Corp, Y Corp, Z Corp, PRS1, PRS2, and FC all use
the calendar year as their taxable year. In Year 1, FC
has $100x of tested income and $50x of qualified
business asset investment.

(ii) Analysis. (A) Lower-tier partnership-level
calculation. PRS2 is a U.S. shareholder partnership
with respect to FC, because PRS2 directly owns 80%
of the single class of stock of FC. Under paragraph
(b)(1) of this section, PRS2 determines its GILTI
inclusion amount for its taxable year. PRS2's pro
rata share of FC's tested income is $80x ($100x x
0.80). PRS2's pro rata share of FC's qualified busi-
ness asset investment is $40x ($50x x 0.80). PRS2's
net CFC tested income is $80x, and its net deemed
tangible income return is $4x ($40x x 0.10). PRS2's
GILTI inclusion amount for Year 1 is $76x ($80x -
$4x).

(B) Non-U.S. shareholder partner calculation. Z
Corp is not a U.S. shareholder partner of FC. There-
fore, under paragraph (b)(2) of this section, in Year
1, Z Corp includes in income Z Corp's distributive
share of PRS2's GILTI inclusion amount, or $45.60x
($76x x 0.60). Z Corp's gross tested income in Year
1 includes this amount.

(C) Upper-tier partnership-level calculation.
PRS1 is a U.S. shareholder partner with respect to
FC because it owns (within the meaning of section
958) more than 10% of the stock of FC (40% x 100%
(by reason of the application of section 958(b)(2)) =
40%). Accordingly, under paragraph (c) of this sec-
tion, PRS1 is treated as owning section 958(a) stock
of FC proportionately as if PRS2 were a foreign
partnership. Thus, PRS1's pro rata share of FC's
tested income is $32x ($100x x 0.80 x 0.40), and its
pro rata share of FC's qualified business asset in-
vestment is $16x ($50x x 0.80 x 0.40). PRS1's net
CFC tested income is $32x, and its net deemed
tangible income return is $1.60x ($16x x 0.10).
PRS1's GILTI inclusion amount for Year 1 is
$30.40x ($32x - $1.60x).

(D) Upper-tier partnership partner-level calcu-
lation-(1) Treatment of upper-tier partnership. For
purposes of applying paragraph (c) of this section to
determine X Corp and Y Corp's GILTI inclusion
amount, PRS1 is treated as owning section 958(a)
stock of FC.

(2) X Corp. X Corp is not a U.S. shareholder
partner with respect to FC because it owns (within
the meaning of section 958) less than 10% (20% x
40% x 100% (by reason of the application of section
958(b)(2)) = 8%) of the stock of FC. Accordingly,
under paragraph (b)(2) of this section, X Corp in-
cludes its distributive share of PRS1's GILTI inclu-
sion amount in Year 1, which is $6.08x ($30.40x x
0.20).

(3) Y Corp. Y Corp is a U.S. shareholder partner
with respect to FC because it owns (within the mean-
ing of section 958) more than 10% (80% x 40% x
100% (by reason of the application of section
958(b)(2)) = 32%) of the stock of FC. Accordingly,
under paragraphs (c) and (d) of this section, Y Corp
is treated as owning section 958(a) stock of FC
proportionately as if PRS1 and PRS2 were foreign
partnerships. Thus, Y Corp's pro rata share of FC's

tested income is $25.60x ($100x x 0.80 x 0.40 x
0.80), and its pro rata share of FC's qualified busi-
ness asset investment is $12.80x ($50x x 0.80 x 0.40
x 0.80). Y Corp's net CFC tested income is $25.60x,
its net deemed tangible income return is $1.28x
($12.80x x 0.10), and its GILTI inclusion amount is
$24.32x ($25.60x - $1.28x). Because Y Corp is a
U.S. shareholder partner with respect to FC, the only
partnership CFC of PRS1, Y Corp has no distributive
share of the GILTI inclusion amount of PRS1 under
paragraph (c) of this section.

(5) Example 5: S corporation and its sharehold-
ers-(i) Facts. Individual A, a U.S. citizen, and
Grantor Trust, a trust all of which is treated under
sections 671 through 679 as owned by Individual B,
a U.S. citizen, respectively own 5% and 95% of the
single class of stock of Corporation X, an S corpo-
ration. Corporation X owns 100% of the single class
of stock of FC, a controlled foreign corporation.
Individual A, Grantor Trust, Individual B, Corpora-
tion X, and FC all use the calendar year as their
taxable year. In Year 1, FC has $200x of tested
income and $100x of qualified business asset invest-
ment.

(ii) Analysis-(A) S corporation-level calcula-
tion. An S corporation is treated as a partnership for
purposes of sections 951 through 965 under section
1373. Corporation X is a U.S. shareholder partner-
ship with respect to FC, a partnership CFC. Accord-
ingly, under paragraph (b)(1) of this section, Corpo-
ration X determines its GILTI inclusion amount for
Year 1. Corporation X's pro rata share of FC's tested
income is $200x, and its pro rata share of FC's
qualified business asset investment is $100x. Corpo-
ration X's net CFC tested income is $200x, and its
net deemed tangible income return is $10x ($100x x
0.10). Corporation X's GILTI inclusion amount for
Year 1 is $190x ($200x - $10x).

(B) S corporation shareholder-level calculation-
(1) Individual A. Individual A is not a U.S. share-
holder partner with respect to FC because it owns
(within the meaning of section 958) less than 10%
(5% x 100% = 5%) of the FC stock. Accordingly,
under paragraph (b)(2) of this section, Individual A
includes in gross income its proportionate share of
Corporation X's GILTI inclusion amount, which is
$9.50x ($190x x 0.05).

(2) Grantor Trust. Because Individual B is
treated as owning all of Grantor Trust under sections
671 through 679, Individual B is treated as if it
directly owns the shares of stock in Corporation X
owned by Grantor Trust. As a result, Individual B is
treated as a U.S. shareholder partner with respect to
FC because it owns (within the meaning of section
958) more than 10% (95% x 100% = 95%) of the
FC stock. Accordingly, under paragraph (c) of this
section, Individual B is treated as owning section
958(a) stock of FC proportionately as if Corporation
X were a foreign partnership. Thus, Individual B's
pro rata share of FC's tested income is $190x ($200x
x 0.95) and its pro rata share of FC's qualified
business asset investment is $95x ($100x x 0.95).
Individual B's net CFC tested income is $190x, and
its net deemed tangible income return is $9.50x
($95x x 0.10). Individual B's GILTI inclusion
amount for Year 1 is $180.5x ($190x - $9.50x).
Because Individual B is a U.S. shareholder partner
with respect to FC, the only partnership CFC of

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Corporation X, Individual B has no distributive share
of the GILTI inclusion amount of Corporation X
under paragraph (c) of this section.

(6) Example 6: domestic partnership with no
GILTI inclusion amount-(i) Facts. X Corp is a
domestic corporation that owns a 90% interest in
PRS, a domestic partnership. The remaining 10% of
PRS is owned by Y, a foreign individual. PRS owns
100% of the single class of stock of FC1, a con-
trolled foreign corporation, and 100% of the single
class of stock of FC2, a controlled foreign corpora-
tion. X Corp owns 100% of the single class of stock
of FC3, a controlled foreign corporation. X Corp,
PRS, FC1, FC2, and FC3 all use the calendar year as
their taxable year. In Year 1, FC1 has $100x of
tested loss and $80x of tested interest expense, FC2
has $50x of tested income, and FC3 has $150x of
tested income and $500x of qualified business asset
investment in Year 1.

(ii) Analysis-(A) Partnership-level calculation.
PRS is a U.S. shareholder partnership with respect to
FC1 and FC2. Under paragraph (b)(1) of this section,
PRS determines its GILTI inclusion amount for Year
1\. PRS's pro rata share of FC1's tested loss is $100x,
and PRS's pro rata share of FC2's tested income is
$50x. PRS's net CFC tested income is $0 ($50x -
100x), and therefore PRS has no GILTI inclusion
amount for Year 1.

(B) Partner-level calculation. X Corp is a U.S.
shareholder partner with respect to FC1 and FC2
because X Corp owns (within the meaning of section
958) at least 10% of each (90% x 100% = 90%).
Accordingly, under paragraph (c) of this section, X
Corp is treated as owning section 958(a) stock of
FC1 and FC2 proportionately as if PRS were a
foreign partnership. X Corp's pro rata share of FC1's
tested loss is $90x ($100x x 0.90), and X Corp's pro
rata share of FC1's tested interest expense is $72x
($80 x 0.90). X Corp's pro rata share of FC2's tested
income is $45x ($50x x 0.90). X Corp's pro rata
share of FC3's tested income is $150x, and its pro
rata share of FC3's qualified business asset invest-
ment is $500x. X Corp's net CFC tested income is
$105x ($45x + $150x - $90x). X Corp's deemed
tangible income return is $50x ($500x x 0.10), but its
net deemed tangible income return is $0 ($50x -
$72x). X Corp has a GILTI inclusion amount of
$105x ($105x - $0) for Year 1.

Par. 9. Section 1.951A-6 is added to
read as follows:

§ 1.951A-6 Treatment of GILTI
inclusion amount and adjustments to
earnings and profits and basis related to
tested loss CFCs.

(a) Scope. This section provides rules
relating to the treatment of GILTI inclu-
sion amounts and adjustments to earnings
and profits and basis to account for tested
losses. Paragraph (b) of this section pro-
vides that a GILTI inclusion amount is
treated in the same manner as an amount
included under section 951(a)(1)(A) for
purposes of applying certain sections of
the Code. Paragraph (c) of this section

provides rules for the treatment of
amounts taken into account in determin-
ing the net CFC tested income when
applying sections 163(e)(3)(B)(i) and
267(a)(3)(B). Paragraph (d) of this sec-
tion provides rules that increase the
earnings and profits of a tested loss CFC
for purposes of section 952(c)(1)(A).
Paragraph (e) of this section provides
rules for certain basis adjustments to the
stock of a controlled foreign corporation
by reason of tested losses used to reduce
a domestic corporation's net CFC tested
income upon the disposition of the stock
of the controlled foreign corporation.

(b) Treatment as subpart F income for
certain purposes-(1) In general. A
GILTI inclusion amount is treated in the
same manner as an amount included under
section 951(a)(1)(A) for purposes of ap-
plying sections 168(h)(2)(B), 535(b)(10),
851(b), 904(h)(1), 959, 961, 962, 993(a)
(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1),
1411, 6501(e)(1)(C), 6654(d)(2)(D), and
6655(e)(4), and with respect to other sec-
tions of the Internal Revenue Code as
provided in other guidance published in
the Internal Revenue Bulletin.

(2) Allocation of GILTI inclusion
amount to tested income CFCs-(i) In
general. For purposes of the sections re-
ferred to in paragraph (b)(1) of this sec-
tion, the portion of the GILTI inclusion
amount of a United States shareholder
treated as being with respect to each con-
trolled foreign corporation of the United
States shareholder for the U.S. share-
holder inclusion year is-

(A) In the case of a tested loss CFC,
zero, and

(B) In the case of a tested income CFC,
the portion of the GILTI inclusion amount
of the United States shareholder which
bears the same ratio to such inclusion
amount as the United States shareholder's
pro rata share of the tested income of the
tested income CFC for the U.S. share-
holder inclusion year bears to the aggre-
gate amount of the United States share-
holder's pro rata share of the tested
income of each tested income CFC for the
U.S. shareholder inclusion year.

(ii) Example-(A) Facts. USP, a domestic cor-
poration, owns all of the stock of three controlled
foreign corporations, CFC1, CFC2, and CFC3. USP,
CFC1, CFC2, and CFC3 all use the calendar year as
their taxable year. In Year 1, CFC1 has tested in-
come of $100x, CFC2 has tested income of $300x,

and CFC3 has tested loss of $50x. Neither CFC1 nor
CFC2 has qualified business asset investment.

(B) Analysis. In Year 1, USP has a GILTI inclu-
sion amount of $350x ($100x + $300x - $50x). The
aggregate amount of USP's pro rata share of tested
income from CFC1 and CFC2 is $400x ($100x +
$300x). The portion of USP's GILTI inclusion
amount treated as being with respect to CFC1 is
$87.50x ($350x x $100x/$400x). The portion of
USP's GILTI inclusion amount treated as being with
respect to CFC2 is $262.50x ($350x x $300x/
$400x). The portion of USP's GILTI inclusion
amount treated as being with respect to CFC3 is $0
because CFC3 is a tested loss CFC.

(iii) Translation of portion of GILTI
inclusion amount allocated to tested in-
come CFC. The portion of the GILTI in-
clusion amount of a United States share-
holder allocated to a tested income CFC
under section 951A(f)(2) and paragraph
(b)(2)(i) of this section is translated into
the functional currency of the tested in-
come CFC using the average exchange
rate for the CFC inclusion year of the
tested income CFC.

(c) Treatment as an amount includible
in the gross income of a United States
person-(1) In general. For purposes of
sections 163(e)(3)(B)(i) and 267(a)(3)(B),
an item (including original issue discount)
is treated as includible in the gross income
of a United States person to the extent that
such item increases a United States share-
holder's pro rata share of tested income of
a controlled foreign corporation for a U.S.
shareholder inclusion year, reduces the
shareholder's pro rata share of tested loss
of a controlled foreign corporation for the
U.S. shareholder inclusion year, or both.

(2) Special rule for a United States
shareholder that is a domestic partnership.
In the case of a United States shareholder
that is a domestic partnership (within the
meaning of section 7701(a)(4)), an item is
described in paragraph (c)(1) of this section
only to the extent one or more United States
persons (other than domestic partnerships)
that are direct or indirect partners of the
domestic partnership include in gross in-
come their distributive share of the GILTI
inclusion amount (if any) of the domestic
partnership for the U.S. shareholder inclu-
sion year of the domestic partnership in
which such item accrues or such item is
taken into account under paragraph (c)(1) of
this section by a U.S. shareholder partner
(within the meaning of § 1.951A-5(e)(3)) of
the domestic partnership by reason of
§ 1.951A-5(c).

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(d) Increase of earnings and profits of
tested loss CFC for purposes of section
952(c)(1)(A). For purposes of section
952(c)(1)(A) with respect to a CFC inclu-
sion year, the earnings and profits of a
tested loss CFC are increased by an
amount equal to the tested loss of the
tested loss CFC for the CFC inclusion
year.

(e) Adjustments to basis related to net
used tested loss-(1) In general-(i) Dis-
position of stock of a controlled foreign
corporation. In the case of a disposition of
section 958(a) stock of a controlled for-
eign corporation owned (directly or indi-
rectly) by a domestic corporation (speci-
fied stock), the adjusted basis of the
specified stock is reduced immediately be-
fore the disposition by the domestic cor-
poration's net used tested loss amount
with respect to the controlled foreign cor-
poration (if any) attributable to the speci-
fied stock. If the reduction described in the
preceding sentence exceeds the adjusted
basis in the specified stock immediately
before the disposition, such excess is
treated as gain from the sale or exchange
of the stock for the taxable year in which
the disposition occurs.

(ii) Disposition of stock of an upper-
tier controlled foreign corporation. In the
case of a disposition of specified stock of
a controlled foreign corporation (upper-
tier CFC) by reason of which a domestic
corporation owns, or has owned, section
958(a) stock of any other controlled for-
eign corporation (lower-tier CFC), for
purposes of determining the reduction un-
der paragraph (e)(1)(i) of this section, the
domestic corporation's net used tested
loss amount (if any) with respect to the
upper-tier CFC attributable to the speci-
fied stock is-

(A) Increased by the sum of the domes-
tic corporation's net used tested loss
amounts with respect to each lower-tier
CFC attributable to the specified stock;
and

(B) Reduced (but not below zero) by
the sum of the domestic corporation's net
offset tested income amounts with respect
to the upper-tier CFC and each lower-tier
CFC attributable to the specified stock.

(iii) Disposition of an interest in a for-
eign entity other than a controlled foreign
corporation. In the case of a disposition of
an interest in a foreign entity other than a

controlled foreign corporation through
which entity a domestic corporation owns
section 958(a) stock of a controlled for-
eign corporation, for purposes of para-
graph (e)(1)(i) and (ii) of this section, the
controlled foreign corporation is treated as
a lower-tier CFC, the interest in the entity
is treated as specified stock of a controlled
foreign corporation, and the entity is
treated as an upper-tier CFC with respect
to which the domestic corporation has nei-
ther a net used tested loss amount nor a
net offset tested income amount.

(iv) Order of application of basis re-
ductions. In the event of an indirect dis-
position described in paragraph (e)(6)(ii)
(B) of this section, the basis reduction
described in paragraph (e)(1)(i) of this
section is deemed to occur at the lowest-
tier CFC first and, thereafter, up the chain
of ownership until adjustments are made
to the specified stock directly owned by
the person making the disposition de-
scribed in paragraph (e)(6)(ii)(A) of this
section.

(v) No duplicative adjustments. No
item is taken into account under this para-
graph (e)(1) to adjust the basis of specified
stock of a controlled foreign corporation
to the extent that such amount has previ-
ously been taken into account with respect
to a prior basis adjustment with respect to
such stock under this paragraph (e)(1).
Moreover, the basis of specified stock is
not reduced to the extent a taxpayer can
demonstrate to the satisfaction of the Sec-
retary that such adjustments would dupli-
cate prior reductions to the basis of such
stock under section 362(e)(2).

(2) Net used tested loss amount-(i) In
general. The term net used tested loss
amount means, with respect to a domestic
corporation and a controlled foreign cor-
poration, the excess (if any) of-

(A) The aggregate of the domestic cor-
poration's used tested loss amount with
respect to the controlled foreign corpora-
tion for each U.S. shareholder inclusion
year, over

(B) The aggregate of the domestic cor-
poration's offset tested income amount
with respect to the controlled foreign cor-
poration for each U.S. shareholder inclu-
sion year.

(ii) Used tested loss amount. The term
used tested loss amount means, with re-
spect to a domestic corporation and a

tested loss CFC for a U.S. shareholder
inclusion year-

(A) In the case of a domestic corpora-
tion that has net CFC tested income for
the U.S. shareholder inclusion year, the
domestic corporation's pro rata share of
the tested loss of the tested loss CFC for
the U.S. shareholder inclusion year, or

(B) In the case of a domestic corpora-
tion without net CFC tested income for
the U.S. shareholder inclusion year, the
amount that bears the same ratio to the
domestic corporation's pro rata share of
the tested loss of the tested loss CFC for
the U.S. shareholder inclusion year as the
aggregate of the domestic corporation's
pro rata share of the tested income of each
tested income CFC for the U.S. share-
holder inclusion year bears to the aggre-
gate of the domestic corporation's pro rata
share of the tested loss of each tested loss
CFC for the U.S. shareholder inclusion
year.

(3) Net offset tested income amount-
(i) In general. The term net offset tested
income amount means, with respect to a
domestic corporation and a controlled for-
eign corporation, the excess (if any) of the
amount described in paragraph (e)(2)(i)(B)
of this section over the amount described in
paragraph (e)(2)(i)(A) of this section.

(ii) Offset tested income amount. The
term offset tested income amount means,
with respect to a domestic corporation and
a tested income CFC for a U.S. share-
holder inclusion year-

(A) In the case of a domestic corpora-
tion that has net CFC tested income for
the U.S. shareholder inclusion year, the
amount that bears the same ratio to the
domestic corporation's pro rata share of
the tested income of the tested income
CFC for the U.S. shareholder inclusion
year as the aggregate of the domestic cor-
poration's pro rata share of the tested loss
of each tested loss CFC for the U.S. share-
holder inclusion year bears to the aggre-
gate of the domestic corporation's pro rata
share of the tested income of each tested
income CFC for the U.S. shareholder in-
clusion year, or

(B) In the case of a domestic corpora-
tion without net CFC tested income for
the U.S. shareholder inclusion year, the
domestic corporation's pro rata share of
the tested income of the tested income

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CFC for the U.S. shareholder inclusion
year.

(4) Attribution to stock-(i) In general.
The portion of a domestic corporation's
net used tested loss amount or net offset
tested income amount with respect to a
controlled foreign corporation (including
a lower-tier CFC) attributable to specified
stock for purposes of paragraph (e)(1) of
this section is determined based on the
domestic corporation's pro rata share of
the tested loss and tested income, as ap-
plicable, of the controlled foreign corpo-
ration for each U.S. shareholder inclusion
year with respect to such specified stock.
See § 1.951A-1(d)(1), (2), and (4) for
rules regarding the determination of pro
rata share amounts of tested income and
tested loss.

(ii) Nonrecognition transactions. In the
case of specified stock acquired by a domes-
tic corporation in a nonrecognition transac-
tion (as defined in section 7701(a)(45)), the
principles of § 1.1248-8 apply to determine
the domestic corporation's net used tested
loss amount or net offset tested income
amount with respect to a controlled foreign
corporation attributable to specified stock.
For purposes of applying the principles of
§ 1.1248-8, tested income is treated as
earnings and profits and tested loss is treated
as a deficit in earnings and profits.

(5) Section 381 transactions. If a con-
trolled foreign corporation with respect to
which a United States shareholder has a
net used tested loss amount or net offset
tested income amount is a distributor or
transferor corporation in a transaction de-
scribed in section 381(a) (acquired CFC)
in which a controlled foreign corporation
is the acquiring corporation (acquiring
CFC), the domestic corporation's net used
tested loss amount or net offset tested
income amount with respect to the acquir-
ing CFC is increased by the amount of the
net used tested loss amount or net offset
tested income amount of the acquired
CFC. This paragraph (e)(5) does not apply
to the extent that the acquiring CFC is an
upper-tier CFC and such amounts would
be taken into account under paragraph
(e)(1)(ii) of this paragraph if the stock of
the acquiring CFC were disposed of.

(6) Other definitions. The following
additional definitions apply for purposes
of this paragraph (e):

(i) Domestic corporation. The term do-
mestic corporation means a domestic cor-
poration other than a real estate invest-
ment trust (as defined in section 856) or a
regulated investment company (as defined
in section 851).

(ii) Disposition. The term disposition
means-

(A) Any transfer of specified stock that
is taxable, in whole or in part, including a
sale or exchange, contribution, or distri-
bution of the stock, including a deemed
sale or exchange by reason of the speci-
fied stock becoming worthless within the
meaning of section 165(g), or

(B) Any indirect disposition of speci-
fied stock of a lower-tier CFC as a result
of a disposition described in paragraph
(e)(6)(ii)(A) of this section of specified
stock of an upper-tier CFC.

(7) Special rule for disposition by con-
trolled foreign corporation less than 100
percent owned by a single domestic cor-
poration. In the case of a disposition by a
controlled foreign corporation that is not
100 percent owned, within the meaning of
section 958(a), by a single domestic cor-
poration, if a reduction to basis described
in paragraph (e)(1) of this section by rea-
son of a domestic corporation's net used
tested loss amount results in an increase to
the controlled foreign corporation's for-
eign personal holding company income
(as defined in section 954(c)(1)), the do-
mestic corporation's pro rata share of the
subpart F income of the controlled foreign
corporation, as otherwise determined un-
der section 951(a)(2) and § 1.951-1(b)
and (e), is increased by the amount of such
increase, and no other shareholder takes
such subpart F income into account under
section 951(a)(1)(A).

(8) Special rules for members of a con-
solidated group. For purposes of the sec-
tion 951A regulations, a member deter-
mines its net used tested loss amount and
the adjustments made as a result of the
amount under the rules provided in
§ 1.1502-51(c).

(9) Examples. The following examples
illustrate the application of the rules in
this paragraph (e).

(i) Example 1-(A) Facts. USP, a domestic cor-
poration, owns 100% of the single class of stock of
CFC1 and CFC2. USP1, CFC1, and CFC2 all use the
calendar year as their taxable year. In Year 1, CFC2
has $90x of tested loss and CFC1 has $100x of tested
income. At the beginning of Year 2, USP sells all of

the stock of CFC2 to an unrelated buyer for cash.
USP has no used tested loss amount or offset tested
income amount with respect to CFC2 in any year
prior to Year 1. USP has not owned stock in any
other CFC by reason of owning stock of CFC1 and
CFC2.

(B) Analysis. At the time of the disposition, USP
has a net used tested loss amount of $90x with
respect to CFC2 attributable to the CFC2 stock,
which is the specified stock. Because USP does not
own (and has not owned), within the meaning of
section 958(a)(2), stock in any lower-tier CFCs by
reason of the CFC2 stock, there is no adjustment to
the net used tested loss amount of $90x pursuant to
paragraph (e)(1)(ii) of this section. Accordingly, im-
mediately before the disposition of the CFC2 stock,
the basis of the CFC2 stock is reduced by $90x under
paragraph (e)(1)(i) of this section.

(ii) Example 2-(A) Facts. The facts are the
same as in paragraph (A) of Example 1, except that
USP sells only 90% of the shares of CFC2.

(B) Analysis. The analysis is the same as in
paragraph (B) of Example 1, except that USP's net
used tested loss amount attributable to the CFC2
stock that was disposed of is only $81x (90% x
$90x) under paragraph (e)(4)(i) of this section. Ac-
cordingly, immediately before the disposition of
such stock, the basis in the CFC2 stock disposed of
is reduced by $81x under paragraph (e)(1)(i) of this
section.

(iii) Example 3-(A) Facts. The facts are the
same as in paragraph (A) of Example 1, except that
USP sells the CFC2 stock at the beginning of Year 3
and during Year 2 CFC1 has $10x of tested loss that
offsets Year 2 tested income of CFC2.

(B) Analysis. USP has a net used tested loss
amount of $80x with respect to CFC2 attributable to
the CFC2 stock, the amount of USP's used tested
loss amount with respect to CFC2 attributable to the
CFC2 stock in Year 1 of $90x reduced by USP's
offset tested income amount with respect to CFC2
attributable to the CFC2 stock in Year 2 of $10x.
Accordingly, immediately before the disposition of
the CFC2 stock, the basis of the CFC2 stock is
reduced by $80x under paragraph (e)(1)(i) of this
section.

(iv) Example 4-(A) Facts. USP, a domestic
corporation, owns 100% of the single class of stock
of CFC1, and CFC1 owns 100% of the single class
of stock of CFC2. USP1, CFC1, and CFC2 all use
the calendar year as their taxable year. In Year 1,
CFC1 has $100x of tested loss that offsets CFC2's
$100x of tested income. USP sells the stock of CFC1
at the beginning of Year 2. USP has no used tested
loss amount or offset tested income amount with
respect to CFC1 or CFC2 in any year prior to Year
1\. USP has not owned stock in any other CFC by
reason of owning stock of CFC1 and CFC2.

(B) Analysis-(1) Direct disposition. At the time
of the disposition, USP has a net used tested loss
amount of $100x with respect to CFC1 attributable
to the CFC1 stock. However, because USP owns,
within the meaning of section 958(a)(2), CFC2 stock
by reason of the CFC1 stock, USP's $100x net used
tested loss amount with respect to CFC1 attributable
to the CFC1 stock is reduced by USP's $100x net
offset tested income amount with respect to CFC2
attributable to the CFC1 stock. Accordingly, there is

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no adjustment to the basis of the CFC1 stock under
paragraph (e)(1)(i) of this section.

(2) Indirect disposition. Under paragraph
(e)(6)(ii)(B) of this section, USP's disposition of the
CFC1 stock also constitutes an indirect disposition
of the CFC2 stock because CFC1 is an upper-tier
CFC and CFC2 is a lower-tier CFC within the mean-
ing of paragraph (e)(1)(ii) of this section. However,
USP has no net used tested loss amount with respect
to CFC2 attributable to the CFC2 stock. Accord-
ingly, there is no adjustment to the basis of the CFC2
stock under paragraph (e)(1) of this section.

(v) Example 5-(A) Facts. The facts are the
same as in paragraph (A) of Example 4, except that
in Year 1 CFC2 has $100x of tested loss that offsets
CFC1's $100x of tested income. CFC1 sells the
stock of CFC2 at the beginning of Year 2.

(B) Analysis. USP, a domestic corporation, owns
within the meaning of section 958(a) stock of CFC2.
Accordingly, immediately before the disposition,
CFC1's basis in the CFC2 stock is reduced by USP's
net used tested loss amount with respect to CFC2
attributable to the CFC2 stock of $100x under para-
graph (e)(1)(i) of this section.

(vi) Example 6-(A) Facts. The facts are the
same as in paragraph (A) of Example 5, except that
instead of CFC1 selling the stock of CFC2, USP sells
the stock of CFC1.

(B) Analysis-(1) Direct disposition. USP has no
net used tested loss amount with respect to CFC1
attributable to the stock of CFC1. However, because
USP owns, within the meaning of section 958(a)(2),
stock of CFC2 by reason of owning stock of CFC1,
under paragraph (e)(1)(ii) of this section, USP's net
used tested loss amount attributable to the stock of
CFC1 ($0) is increased by USP's net used tested loss
amount with respect to CFC2 attributable to the
CFC1 stock ($100x), and reduced by USP's net
offset tested income amount with respect to CFC1
attributable to the CFC1 stock ($100x). Accordingly,
there is no adjustment to the basis of the CFC1 stock
under paragraph (e)(1) of this section.

(2) Indirect disposition. Under paragraph
(e)(6)(ii)(B) of this section, USP's disposition of
CFC1 stock also constitutes an indirect disposition
of the CFC2 stock because CFC1 is an upper-tier
CFC and CFC2 is a lower-tier CFC within the mean-
ing of paragraph (e)(1)(ii) of this section. Accord-
ingly, immediately before the disposition, CFC1's
basis in the CFC2 stock is reduced by USP's net
used tested loss amount with respect to CFC2 attrib-
utable to the CFC2 stock of $100x under paragraph
(e)(1)(i) of this section. Under paragraph (e)(1)(iv)
of this section, the basis reduction to CFC2's shares
is deemed to occur immediately before any reduc-
tions occur with respect to the stock of CFC1, of
which there are none.

(vii) Example 7-(A) Facts. USP1, a domestic
corporation, owns 90% of the single class of stock of
CFC1, and CFC1 owns 100% of the single class of
stock of CFC2. USP1 also owns 100% of the single
class of stock of CFC3. The remaining 10% of the
stock of CFC1 is owned by USP2, a person unrelated
to USP1. USP2 owns no other CFCs. USP1, USP2,
CFC1, CFC2, and CFC3 all use the calendar year as
their taxable year. In Year 1, CFC1 has no tested
income or tested loss, CFC2 has tested loss of $100x,
and CFC3 has tested income of $100x. CFC1 has no

other earnings or income in Year 1. At the beginning
of Year 2, CFC1 sells CFC2. Without regard to this
paragraph (e), CFC1 would recognize no gain or loss
with respect to the CFC2 stock. USP1 has not owned
stock in any other controlled foreign corporation by
reason of owning stock of CFC1, CFC2, and CFC3.

(B) Analysis. At the time of the disposition,
USP2 has no net used tested loss amount with re-
spect to CFC2. At the time of the disposition, USP1
has a net used tested loss amount of $90x with
respect to CFC2 attributable to the CFC2 stock,
which is the specified stock. Because USP1 does not
own (and has not owned), within the meaning of
section 958(a)(2), stock in any lower-tier CFCs by
reason of the CFC2 stock, there is no adjustment to
the net used tested loss amount of $90x pursuant to
paragraph (e)(1)(ii) of this section. Accordingly, im-
mediately before the disposition of the CFC2 stock,
the basis of the CFC2 stock is reduced by $90x under
paragraph (e)(1)(i) of this section. As a result, CFC1
recognizes gain of $90x on the disposition of the
CFC2 stock, which results in $90x of foreign per-
sonal holding company income and $90x of earnings
and profits. Under paragraph (e)(7) of this section,
USPI's pro rata share of the subpart F income of
CFC1 is increased by $90x, and USP2 does not take
such subpart F income into account under section
951(a)(1)(A).

(viii) Example 8-(A) Facts. USP, a domestic
corporation, owns 100% of the single class of stock
of CFC1 and CFC2, and CFC1 owns 100% of the
single class of stock of CFC3 and CFC4. USP,
CFC1, CFC2, CFC3, and CFC4 all use the calendar
year as their taxable year. In Year 1, CFC1 has no
tested income or tested loss, CFC2 has $200x of
tested income, and CFC3 and CFC4 each have tested
loss of $100x. During Year 2, CFC3 liquidates into
CFC1 in a nontaxable transaction described under
section 332, and CFC1 sells the stock of CFC4 to an
unrelated third party for cash. During Year 2, none
of CFC1, CFC2, CFC3, or CFC4 earn tested income
or tested loss. At the beginning of Year 3, USP sells
the stock of CFC1 to an unrelated third party for
cash. USP has not owned stock in any other CFC by
reason of owning stock in CFC1, CFC2, CFC3, or
CFC4.

(B) Analysis. (1) CFC3's liquidation into CFC1
is not a disposition within the meaning of paragraph
(e)(6)(ii)(A) of this section because CFC1 does not
recognize gain or loss in whole or in part with
respect to the stock of CFC3 under section 332.
Furthermore, CFC1 does not inherit CFC3's net used
tested loss amount under paragraph (e)(5) of this
section because CFC1 is an upper-tier CFC with
respect to CFC3 and would take such amounts into
account under paragraph (e)(1)(ii) of this section at
the time of a future disposition. That is, the CFC3
stock is section 958(a) stock that USP has owned by
reason of its ownership of CFC1 within the meaning
of paragraph (e)(1)(ii) of this section.

(2) At the time of CFC1's sale of the stock of
CFC4, USP has a $100x net used tested loss amount
with respect to CFC4 attributable to the CFC4 stock,
which is the specified stock. Because USP has not
owned, within the meaning of section 958(a)(2),
stock in any lower-tier CFCs by reason of the CFC4
stock, there is no adjustment to the net used tested
loss amount of $100x pursuant to paragraph

(e)(1)(ii) of this section. Accordingly, immediately
before the disposition of the CFC4 stock, the basis of
the CFC4 stock is reduced by $100x under paragraph
(e)(1)(i) of this section.

(3) At the time of USP's sale of CFC1, USP has
no net used tested loss amount with respect to CFC1
attributable to the CFC1 stock. However, USP has
owned, within the meaning of section 958(a)(2),
stock of lower-tier CFCs (CFC3 and CFC4) by rea-
son of its ownership of CFC1. Thus, USP's net used
tested loss amount attributable to the stock of CFC1
($0) is increased by USP's net used tested loss amounts
with respect to CFC3 and CFC4 attributable to the
CFC1 stock ($200x). Accordingly, immediately before
the disposition of the CFC1 stock, the basis of the
CFC1 stock is reduced by $200x under paragraph
(e)(1)(i) of this section. The rule prohibiting duplicative
adjustments under paragraph (e)(1)(v) of this section
does not prevent this basis reduction because the net
used tested loss amounts with respect to the CFC3 and
CFC4 stock were not previously taken into account to
reduce the basis of CFC1 stock.

Par. 10. Section 1.951A-7 is added to
read as follows:

§ 1.951A-7 Applicability dates.

Sections 1.951A-1 through 1.951A-6
apply to taxable years of foreign corpora-
tions beginning after December 31, 2017,
and to taxable years of United States
shareholders in which or with which such
taxable years of foreign corporations end.

Par. 11. Section 1.1502-12 is amended
by adding paragraph (s) to read as follows:

§ 1.1502-12 Separate taxable income.

* * * * *

(s) See § 1.1502-51 for rules relating
to the computation of a member's GILTI
inclusion amount under section 951A and
related basis adjustments.

Par. 12. Section 1.1502-13 is amended
by adding paragraph (c) to Example 4 in
paragraph (f)(7).

The addition reads as follows:

§ 1.1502-13 Intercompany transactions.

* * * * *

(f) * **

(7) * * *

Example 4. * * *

(c) Application of § 1.1502-51(c)(5) to all cash in-
tercompany reorganization under section 368(a)(1)(D).
The facts are the same as in paragraph (a) of this Example
4, except that S's sole asset is stock of a controlled foreign
corporation, within the meaning of section 957, with re-
spect to which S has a net used tested loss amount (within
the meaning of § 1.1502-51(e)(15)) of $15. As in para-
graph (b) of this Example 4, S is treated as receiving
additional B stock with a fair market value of $100 (in lieu
of the $100) and, under section 358, a basis of $25 which

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S distributes to M in liquidation. Immediately after the
sale, pursuant to § 1.1502-51(c)(5), the basis in the B
stock received by M is reduced by $15 (the amount of the
net used tested loss amount with respect to the controlled
foreign corporation) to $10. Following the basis reduction
pursuant to § 1.1502-51(c)(5), the B stock (with the ex-
ception of the nominal share which is still held by M)
received by M is treated as redeemed for $100, and the
redemption is treated under section 302(d) as a distribution
to which section 301 applies. M's basis of $10 in the B
stock is reduced under § 1.1502-32(b)(3)(v), resulting in
an excess loss account of $90 in the nominal share. (See
§ 1.302-2(c).) M's deemed distribution of the nominal
share of B stock to P under § 1.368-2(1) will result in M
generating an intercompany gain under section 311(b) of
$90, to be subsequently taken into account under the
matching and acceleration rules.

* * * * *

Par. 13. Section 1.1502-32 is amended
by:

1\. Adding paragraphs (b)(3)(ii)(E),
(b)(3)(ii)(F), and (b)(3)(iii)(C).

2\. Revising paragraph (j).

The revision and additions read as fol-
lows:

§ 1.1502-32 Investment adjustments.

* * * * *

(b) * * *

(3) * * *

(ii) * * *

(E) Adjustment for the offset tested in-
come amount of a controlled foreign cor-
poration in relation to section 951A. S's
tax-exempt income for a taxable year in-
cludes the aggregate of S's offset tested
income amounts (within the meaning of
§ 1.1502-51(c)(3)) with respect to a con-
trolled foreign corporation (within the
meaning of section 957) for all of its U.S.
shareholder inclusion years (within the
meaning of § 1.951A-1(e)(4)), to the ex-
tent such aggregate does not exceed the
excess (if any) of-

(1) The aggregate of S's used tested
loss amounts (within the meaning of
§ 1.1502-51(c)(2)) with respect to the
controlled foreign corporation for all of its
U.S. shareholder inclusion years, over

(2) The aggregate of S's offset tested
income amounts with respect to the con-
trolled foreign corporation for all of its
U.S. shareholder inclusion years previ-
ously treated as tax-exempt income pur-
suant to this paragraph.

(F) Adjustment for the net offset tested
income amount of a controlled foreign
corporation in relation to section 951A. S
will be treated as having tax-exempt in-

come immediately prior to a transaction
(recognition event) in which another
member of the group recognizes income,
gain, deduction, or loss with respect to a
share of S's stock to the extent provided in
this paragraph (b)(3)(ii)(F). S's tax-
exempt income is equal to the portion of
the allocable amount that would have
been characterized as a dividend to which
section 245A, but not section 1059, would
have applied if the allocable amount had
been distributed by a controlled foreign
corporation to the owner of the transferred
shares immediately before the recognition
event. For purposes of this paragraph-

(1) The term transferred shares means
the shares of a controlled foreign corpo-
ration that S owns within the meaning of
section 958(a) or is considered to own by
applying the rules of ownership of section
958(b) and that are indirectly transferred
as part of the recognition event; and

(2) The term allocable amount means
the net offset tested income amount (within
the meaning of § 1.1502-51(e)(14)) alloca-
ble to the transferred shares.

(iii) * * *

(C) Adjustment for the used tested loss
amount of a controlled foreign corpora-
tion in relation to section 951A. S's non-
capital, nondeductible expense includes
its amount of used tested loss amount
(within the meaning of § 1.1502-51(c)(2))
with respect to a controlled foreign corpo-
ration (within the meaning of section 957)
for a U.S. shareholder inclusion year
(within the meaning of § 1.951A-1(e)(4)).
* * * * *

(j) Applicability date-(1) In general.
Paragraph (b)(4)(iv) of this section applies
to any original consolidated Federal in-
come tax return due (without extensions)
after June 14, 2007. For original consoli-
dated Federal income tax returns due
(without extensions) after May 30, 2006,
and on or before June 14, 2007, see
§ 1.1502-32T as contained in 26 CFR part
1 in effect on April 1, 2007. For original
consolidated Federal income tax returns
due (without extensions) on or before
May 30, 2006, see § 1.1502-32 as con-
tained in 26 CFR part 1 in effect on April
1, 2006.

(2) Adjustment for the offset tested in-
come amount, net offset tested income
amount, and used tested loss amount of
a controlled foreign corporation. Para-

graphs (b)(3)(ii)(E), (b)(3)(ii)(F), and
(b)(3)(iii)(C) of this section apply to any
consolidated Federal income tax return for
a taxable year in which or with which the
taxable year of a controlled foreign cor-
poration beginning after December 31,
2017, ends.
* * * * *

Par. 14. Section 1.1502-51 is added to
read as follows:

§ 1.1502-51 Consolidated section 951A.

(a) In general. This section provides
rules for applying section 951A and
§§ 1.951A-1 through 1.951A-7 (the sec-
tion 951A regulations) to each member of
a consolidated group (each, a member)
that is a United States shareholder of any
controlled foreign corporation. Paragraph
(b) describes the inclusion of the GILTI
inclusion amount by a member of a con-
solidated group. Paragraph (c) modifies
the rules provided in § 1.951A-6(e) for
adjustments to basis related to used tested
loss amount. Paragraph (d) provides rules
governing basis adjustments to member
stock resulting from the application of
§ 1.951A-6(e) and paragraph (c) of this
section. Paragraph (e) provides definitions
for purposes of this section. Paragraph (f)
provides examples illustrating the rules of
this section. Paragraph (g) provides an
applicability date.

(b) Calculation of the GILTI inclusion
amount for a member of a consolidated
group. Each member who is a United
States shareholder of any controlled for-
eign corporation includes in gross income
in the U.S. shareholder inclusion year the
member's GILTI inclusion amount, if
any, for the U.S. shareholder inclusion
year. See section 951A(a) and § 1.951A-
1(b). The GILTI inclusion amount of a
member for a U.S. shareholder inclusion
year is the excess (if any) of the member's
net CFC tested income for the U.S. share-
holder inclusion year, over the member's
net deemed tangible income return for the
U.S. shareholder inclusion year, deter-
mined using the definitions provided in
paragraph (e) of this section.

(c) Adjustments to basis related to used
tested loss amount-(1) In general. The
adjusted basis of the section 958(a) stock
of a controlled foreign corporation that is
owned (directly or indirectly) by a mem-

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ber (specified stock) or an interest in a
foreign entity other than a controlled for-
eign corporation by reason of which a
domestic corporation owns (within the
meaning of section 958(a)(2)) stock of a
controlled foreign corporation is adjusted
immediately before its disposition pursu-
ant to § 1.951A-6(e). The amount of the
adjustment is determined using the rules
provided in paragraphs (c)(2), (3), and (4)
of this section.

(2) Determination of used tested loss
amount. For purposes of the section 951A
regulations and this section, the term used
tested loss amount means, with respect to
a member and a tested loss CFC for a U.S.
shareholder inclusion year-

(i) In the case of the consolidated group
tested income equaling or exceeding the
consolidated group tested loss for a U.S.
shareholder inclusion year, the member's
pro rata share (determined under § 1.951A-
1(d)(4)) of the tested loss of the tested loss
CFC for the U.S. shareholder inclusion year.

(ii) In the case of the consolidated group
tested income being less than the consoli-
dated group tested loss for a U.S. share-
holder inclusion year, the amount that bears
the same ratio to the member's pro rata
share (determined under § 1.951A-1(d)(4))
of the tested loss of the tested loss CFC for
the U.S. shareholder inclusion year as
the consolidated group tested income for the
U.S. shareholder inclusion year bears to the
consolidated group tested loss for the U.S.
shareholder inclusion year.

(3) Determination of offset tested in-
come amount. For purposes of the section
951A regulations and this section, the
term offset tested income amount means,
with respect to a member and a tested
income CFC for a U.S. shareholder inclu-
sion year-

(i) In the case of the consolidated group
tested income exceeding the consolidated
group tested loss for a U.S. shareholder
inclusion year, the amount that bears the
same ratio to the member's pro rata share
(determined under § 1.951A-1(d)(2)) of
the tested income of the tested income
CFC for the U.S. shareholder inclusion
year as the consolidated group tested loss
for the U.S. shareholder inclusion year
bears to the consolidated group tested in-
come for the U.S. shareholder inclusion
year.

(ii) In the case of the consolidated
group tested income equaling or being
less than the consolidated group tested
loss for a U.S. shareholder inclusion year,
the member's pro rata share (determined
under § 1.951A-1(d)(2)) of the tested in-
come of the tested income CFC for the
U.S. shareholder inclusion year.

(4) Special rule for disposition by a
controlled foreign corporation less than
100 percent owned by a single domestic
corporation. For purposes of determining
the application of § 1.951A-6(e)(7), the
amount of stock in the controlled foreign
corporation a member owns, within the
meaning of section 958(a), includes any
stock that the member is considered as
owning by applying the rules of owner-
ship of section 958(b).

(5) Special rule for intercompany
nonrecognition transactions. If a mem-
ber engages in a nonrecognition trans-
action (within the meaning of section
7701(a)(45)), with another member in
which stock of a controlled foreign cor-
poration that has a net used tested loss
amount is directly transferred, the ad-
justed basis of the nonrecognition prop-
erty (within the meaning of section 358)
received in the nonrecognition transac-
tion is immediately reduced by the
amount of the net used tested loss
amount. In cases of intercompany trans-
actions that are governed by § 1.368-
2(l), the reduction in basis pursuant to
this paragraph (c)(5) is made prior to the
application of § 1.1502-13(f)(3). See
§ 1.1502-13(f)(7), Example 4(c).

(d) Adjustments to the basis of a mem-
ber. For adjustments to the basis of a mem-
ber related to paragraph (c) of this section,
see § 1.1502-32(b)(3)(ii)(E), (b)(3)(ii)(F),
and (b)(3)(iii)(C).

(e) Definitions. The following defini-
tions apply for purposes of the section-

(1) Aggregate tested income. With re-
spect to a member, the term aggregate
tested income means the aggregate of the
member's pro rata share (determined un-
der § 1.951A-1(d)(2)) of the tested in-
come of each tested income CFC for a
U.S. shareholder inclusion year.

(2) Aggregate tested loss. With respect
to a member, the term aggregate tested loss
means the aggregate of the member's pro
rata share (determined under § 1.951A-

1(d)(4)) of the tested loss of each tested loss
CFC for a U.S. shareholder inclusion year.

(3) Allocable share. The term allocable
share means, with respect to a member
that is a United States shareholder and a
U.S. shareholder inclusion year-

(i) With respect to consolidated group
QBAI, the product of the consolidated
group QBAI of the member's consoli-
dated group and the member's GILTI al-
location ratio.

(ii) With respect to consolidated group
specified interest expense, the product of
the consolidated group specified interest
expense of the member's consolidated
group and the member's GILTI allocation
ratio.

(iii) With respect to consolidated group
tested loss, the product of the consolidated
group tested loss of the member's consol-
idated group and the member's GILTI al-
location ratio.

(4) Consolidated group QBAI. With re-
spect to a consolidated group, the term
consolidated group QBAI means the sum
of each member's pro rata share (deter-
mined under § 1.951A-1(d)(3)) of the
qualified business asset investment of
each tested income CFC for a U.S. share-
holder inclusion year.

(5) Consolidated group specified inter-
est expense. With respect to a consoli-
dated group, the term consolidated group
specified interest expense means the ex-
cess (if any) of-

(i) The sum of each member's pro rata
share (determined under § 1.951A-
1(d)(5)) of the tested interest expense of
each controlled foreign corporation for the
U.S. shareholder inclusion year, over

(ii) The sum of each member's pro rata
share (determined under § 1.951A-1(d)(6))
of the tested interest income of each con-
trolled foreign corporation for the U.S.
shareholder inclusion year.

(6) Consolidated group tested income.
With respect to a consolidated group, the
term consolidated group tested income
means the sum of each member's aggre-
gate tested income for a U.S. shareholder
inclusion year.

(7) Consolidated group tested loss.
With respect to a consolidated group, the
term consolidated group tested loss means
the sum of each member's aggregate
tested loss for a U.S. shareholder inclu-
sion year.

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(8) Controlled foreign corporation.
The term controlled foreign corporation
means a controlled foreign corporation as
defined in section 957.

(9) Deemed tangible income return.
With respect to a member, the term
deemed tangible income return means 10
percent of the member's allocable share of
the consolidated group QBAI.

(10) GILTI allocation ratio. With re-
spect to a member, the term GILTI allo-
cation ratio means the ratio of-

(i) The aggregate tested income of the
member for a U.S. shareholder inclusion
year, to

(ii) The consolidated group tested in-
come of the consolidated group of which
the member is a member for the U.S.
shareholder inclusion year.

(11) GILTI inclusion amount. With re-
spect to a member, the term GILTI inclu-
sion amount has the meaning provided in
paragraph (b) of this section.

(12) Net CFC tested income. With re-
spect to a member, the term net CFC
tested income means the excess (if any)
of-

(i) The member's aggregate tested in-
come, over

(ii) The member's allocable share of
the consolidated group tested loss.

(13) Net deemed tangible income re-
turn. With respect to a member, the term
net deemed tangible income return means
the excess (if any) of the member's
deemed tangible income return over the
member's allocable share of the consoli-
dated group specified interest expense.

(14) Net offset tested income amount.
The term net offset tested income amount
means, with respect to a member and a
controlled foreign corporation, the excess
(if any) of the amount described in para-
graph (e)(15)(ii) of this section over the
amount described in paragraph (e)(15)(i)
of this section.

(15) Net used tested loss amount. The
term net used tested loss amount means,
with respect to a member and a controlled
foreign corporation, the excess (if any)
of -

(i) The aggregate of the member's pro
rata share of each used tested loss amount
of the controlled foreign corporation for
each U.S. shareholder inclusion year over.

(ii) The aggregate of the member's pro
rata share of each offset tested income

amount of the controlled foreign corpora-
tion for each U.S. shareholder inclusion
year.

(16) Offset tested income amount. The
term offset tested income amount has the
meaning provided in paragraph (c)(3) of
this section.

(17) Qualified business asset invest-
ment. The term qualified business asset
investment has the meaning provided in
§ 1.951A-3(b).

(18) Tested income. The term tested
income has the meaning provided in
§ 1.951A-2(b)(1).

(19) Tested income CFC. The term
tested income CFC has the meaning pro-
vided in § 1.951A-2(b)(1).

(20) Tested interest expense. The term
tested interest expense has the meaning
provided in § 1.951A-4(b)(1).

(21) Tested interest income. The term
tested interest income has the meaning
provided in § 1.951A-4(b)(2).

(22) Tested loss. The term tested loss
has the meaning provided in § 1.951A-
2(b)(2).

(23) Tested loss CFC. The term tested
loss CFC has the meaning provided in
§ 1.951A-2(b)(2).

(24) United States shareholder. The
term United States shareholder has the
meaning provided in § 1.951-1(g)(1).

(25) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion year
has the meaning provided in § 1.951A-
1(e)(4).

(26) Used tested loss amount. The term
used tested loss amount has the meaning
provided in paragraph (c)(2) of this sec-
tion.

(f) Examples. The following examples
illustrate the rules of this section. For pur-
poses of the examples in this section, un-
less otherwise stated: P is the common
parent of the P consolidated group; P
owns all of the single class of stock of
subsidiaries USS1, USS2, and USS3, all
of whom are members of the P consoli-
dated group; CFC1, CFC2, CFC3, and
CFC4 are all controlled foreign corpora-
tions (within the meaning of paragraph
(e)(8) of this section); and the taxable year
of all persons is the calendar year.

(1) Example 1: calculation of net CFC tested
income within a consolidated group when all CFCs
are wholly owned by a member-(i) Facts. USS1
owns all of the single class of stock of CFC1. USS2
owns all of the single class of stock of each of CFC2

and CFC3. USS3 owns all of the single class of stock
of CFC4. In Year 1, CFC1 has tested loss of $100,
CFC2 has tested income of $200x, CFC3 has tested
loss of $200x, and CFC4 has tested income of
$600x. Neither CFC2 nor CFC4 has qualified busi-
ness asset investment in Year 1.

(ii) Analysis-(A) Consolidated group tested in-
come and GILTI allocation ratio. USS1 has no ag-
gregate tested income; USS2's aggregate tested in-
come is $200x, its pro rata share (within the meaning
of § 1.951A-1(d)(2)) of CFC2's tested income; and
USS3's aggregate tested income is $600x, its pro
rata share (within the meaning of § 1.951A-1(d)(2))
of CFC4's tested income. Therefore, under para-
graph (e)(6) of this section, the P consolidated
group's consolidated group tested income is $800x
($200x + $600x). As a result, the GILTI allocation
ratios of USS1, USS2, and USS3 are 0 ($0/$800x),
0.25 ($200x/$800x), and 0.75 ($600x/$800x), re-
spectively.

(B) Consolidated group tested loss. Under para-
graph (e)(7) of this section, the P consolidated
group's consolidated group tested loss is $300x
($100x + $200x), the aggregate of USS1's aggre-
gate tested loss, which is equal to its pro rata share
(within the meaning of § 1.951A-1(d)(4)) of CFC1's
tested loss ($100x), and USS2's aggregate tested
loss, which is equal to its pro rata share (within the
meaning of § 1.951A-1(d)(4)) of CFC3's tested loss
($200x). Under paragraph (e)(3)(iii) of this section, a
member's allocable share of the consolidated group
tested loss is the product of the consolidated group
tested loss of the member's consolidated group and
the member's GILTI allocation ratio. Therefore, the
allocable shares of the consolidated group tested loss
of USS1, USS2, and USS3 are $0 (0 x $300x), $75x
(0.25 x $300x), and $225x (0.75 x $300x), respec-
tively.

(C) Calculation of net CFC tested income. Under
paragraph (e)(12) of this section, a member's net
CFC tested income is the excess (if any) of the
member's aggregate tested income over the mem-
ber's allocable share of the consolidated group tested
loss. As a result, USS1's, USS2's, and USS3's net
CFC tested income amounts are $0 ($0 - $0), $125x
($200x - $75x), and $375x ($600x - $225x), respec-
tively.

(2) Example 2: calculation of net CFC tested
income within a consolidated group when ownership
of a tested loss CFC is split between members-(i)
Facts. The facts are the same as in paragraph (i) of
Example 1, except that USS2 and USS3 each own
50% of the single class of stock of CFC3.

(ii) Analysis. As in paragraph (ii) of Example 1,
USS1 has no aggregate tested income and a GILTI
allocation ratio of 0, USS2 has $200x of aggregate
tested income and a GILTI allocation ratio of 0.25,
and USS3 has $600x of aggregate tested income and
a GILTI allocation ratio of 0.75. Additionally, the P
consolidated group's consolidated group tested loss
is $300x (the aggregate of USS1's aggregate tested
loss, which is equal to its pro rata share (within the
meaning of § 1.951A-1(d)(4)) of CFC1's tested loss
($100x); USS2's aggregate tested loss, which is
equal to its pro rata share (within the meaning of
§ 1.951A-1(d)(4)) of CFC3's tested loss ($100x);
and USS3's aggregate tested loss, which is equal to
its pro rata share (within the meaning of § 1.951A-

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1(d)(4)) of CFC3's tested loss ($100x)). As a result,
under paragraph (e)(12) of this section, as in para-
graph (ii)(C) of Example 1, USS1's, USS2's, and
USS3's net CFC tested income amounts are $0 ($0 -
$0), $125x ($200x - $75x), and $375x ($600x -
$225x), respectively.

(3) Example 3: calculation of GILTI inclusion
amount-(i) Facts. The facts are the same as in
paragraph (i) of Example 1, except that CFC2 and
CFC4 have qualified business asset investment of
$500x and $2000x, respectively, for Year 1. In Year
1, CFC1 and CFC4 each have tested interest expense
(within the meaning of § 1.951A-4(b)(1)) of $25x,
and CFC1, CFC2, CFC3, and CFC4 have $0 of
tested interest income (within the meaning of
§ 1.951A-4(b)(2)). CFC1's tested loss of $100x and
CFC4's tested income of $600x take into account the
interest paid.

(ii) Analysis-(A) GILTI allocation ratio. As in
paragraph (ii) of Example 1, the GILTI allocation
ratios of USS1, USS2, and USS3 are 0 ($0/$800x),
0.25 ($200x/$800x), and 0.75 ($600x/$800x), re-
spectively.

(B) Consolidated group QBAI. Under paragraph
(e)(4) of this section, the P consolidated group's
consolidated group QBAI is $2,500x ($500x +
$2,000x), the aggregate of USS2's pro rata share
(determined under § 1.951A-1(d)(3)) of the qualified
business asset investment of CFC2 and USS3's pro
rata share (determined under § 1.951A-1(d)(3)) of
the qualified business asset investment of CFC4.
Under paragraph (e)(3)(i) of this section, a member's
allocable share of consolidated group QBAI is the
product of the consolidated group QBAI of the mem-
ber's consolidated group and the member's GILTI
allocation ratio. Therefore, the allocable shares of
the consolidated group QBAI of each of USS1,
USS2, and USS3 are $0 (0 x $2,500x), $625x (0.25
x $2,500x), and $1,875x (0.75 x $2,500x), respec-
tively.

(C) Consolidated group specified interest ex-
pense-(1) Pro rata share of tested interest expense.
USS1's pro rata share of the tested interest expense
of CFC1 is $25x, the amount by which the tested
interest expense increases USS1's pro rata share of
CFC1's tested loss (from $75x to $100x) for Year 1.
USS3's pro rata share of the tested interest expense
of CFC4 is also $25x, the amount by which the
tested interest expense decreases USS1's pro rata
share of CFC4's tested income (from $625x to
$600x). See § 1.951A-1(d)(5).

(2) Consolidated group specified interest ex-
pense. Under paragraph (e)(5) of this section, the P
consolidated group's consolidated group specified
interest expense is $50x, the excess of the sum of
each member's pro rata share of the tested interest
expense of each controlled foreign corporation
($50x, $25x from USS1 + $25x from USS3), over
the sum of each member's pro rata share of tested
interest income ($0). Under paragraph (e)(3)(ii) of
this section, a member's allocable share of consoli-
dated group specified interest expense is the product
of the consolidated group specified interest expense
of the member's consolidated group and the mem-
ber's GILTI allocation ratio. Therefore, the allocable
shares of consolidated group specified interest ex-
pense of USS1, USS2, and USS3 are $0 (0 x $50x),

$12.50x (0.25 x $50x), and $37.50x (0.75 x $50x),
respectively.

(D) Calculation of deemed tangible income re-
turn. Under paragraph (e)(9) of this section, a mem-
ber's deemed tangible income return means 10 per-
cent of the member's allocable share of the
consolidated group QBAI. As a result, USS1's,
USS2's, and USS3's deemed tangible income re-
turns are $0 (0.1 x $0), $62.50x (0.1 x $625x), and
$187.50x (0.1 x $1,875x), respectively.

(E) Calculation of net deemed tangible income
return. Under paragraph (e)(13) of this section, a
member's net deemed tangible income return means
the excess (if any) of a member's deemed tangible
income return over the member's allocable share of
the consolidated group specified interest. As a result,
USS1's, USS2's, and USS3's net deemed tangible
income returns are $0 ($0 - $0), $50x ($62.50x -
$12.50x), and $150x ($187.50x - $37.50x), respec-
tively.

(F) Calculation of GILTI inclusion amount. Un-
der paragraph (b) of this section, a member's GILTI
inclusion amount for a U.S. shareholder inclusion
year is the excess (if any) of the member's net CFC
tested income for the U.S. shareholder inclusion
year, over the shareholder's net deemed tangible
income return for the U.S. shareholder inclusion
year. As described in paragraph (ii)(C) of Example 1,
the amounts of USS1's, USS2's, and USS3's net
CFC tested income are $0, $125x, and $375x, re-
spectively. As described in paragraph (ii)(E) of this
Example 3, the amounts of USS1's, USS2's, and
USS3's net deemed tangible income return are $0,
$50x, and $150x, respectively. As a result, under
paragraph (b) of this section, USS1's, USS2's, and
USS3's GILTI inclusion amounts are $0 ($0 - $0),
$75x ($125x - $50x), and $225x ($375x - $150x),
respectively.

(G) Calculation of used tested loss amount and
offset tested income amount. As described in para-
graph (ii)(A) of Example 1, P consolidated group's
consolidated group tested income is $800x. As de-
scribed in paragraph (ii)(B) of Example 1, P consol-
idated group's consolidated group tested loss is
$300x. Therefore, the P consolidated group's con-
solidated group tested income exceeds its consoli-
dated group tested loss. As a result, USS1 has a
$100x used tested loss amount with respect to CFC1
and USS2 has a $200x used tested loss amount with
respect to CFC3. Additionally, USS2 has a $75x
offset tested income amount with respect to CFC2
($200x x $300x/$800x) and USS3 has a $225x offset
tested income amount with respect to CFC3 ($600x
x $300x/$800x). See paragraph (c) of this section. P
will adjust its basis in USS1 and USS2 pursuant to
the rule in § 1.1502-32(b)(3)(iii)(C).

(g) Applicability date. This section ap-
plies to taxable years of foreign corpora-
tions beginning after December 31, 2017,
and to taxable years of United States
shareholders in which or with which such
taxable years of foreign corporations end.

Par. 15. Section 1.6038-2 is amended
by:

1\. Revising the section heading.

2\. Revising the first sentence in para-
graph (a).

3\. Revising paragraph (m).
The revisions read as follows:

§ 1.6038-2 Information returns required
of United States persons with respect to
annual accounting periods of certain
foreign corporations.

(a) Requirement of return. Every U.S.
person shall make a separate annual infor-
mation return with respect to each annual
accounting period (described in paragraph
(e) of this section) of each foreign corpo-
ration which that person controls (as de-
fined in paragraph (b) of this section) at
any time during such annual accounting
period. * * *

* * * * *

(m) Applicability dates. This section
applies to taxable years of foreign corpo-
rations beginning on or after October 3,
2018. See 26 CFR 1.6038-2 (revised as of
April 1, 2018) for rules applicable to tax-
able years of foreign corporations begin-
ning before such date.

Par. 16. Section 1.6038-5 is added to
read as follows:

§ 1.6038-5 Information returns required
of certain United States persons to
report amounts determined with respect
to certain foreign corporations for
global intangible low-taxed income
(GILTI) purposes.

(a) Requirement of return. Except as
provided in paragraph (d) of this section,
each United States person who is a United
States shareholder (as defined in section
951(b)) of any controlled foreign corpora-
tion must make an annual return on Form
8992, "U.S. Shareholder Calculation of
Global Intangible Low-Taxed Income
(GILTI)," (or successor form) for each
U.S. shareholder inclusion year (as de-
fined in § 1.951A-1(e)(4)) setting forth
the information with respect to each such
controlled foreign corporation, in such
form and manner, as Form 8992 (or suc-
cessor form) prescribes.

(b) Time and manner for filing. Returns
on Form 8992 (or successor form) re-
quired under paragraph (a) of this section
for a taxable year must be filed with the
United States person's income tax return
on or before the due date (taking into

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account extensions) for filing that per-
son's income tax return.

(c) Failure to furnish information-(1)
Penalties. If any person required to file
Form 8992 (or successor form) under sec-
tion 6038 and this section fails to furnish
the information prescribed on Form 8992
within the time prescribed by paragraph
(b) of this section, the penalties imposed
by section 6038(b) and (c) may apply.

(2) Increase in penalty. If a failure de-
scribed in paragraph (c)(1) of this section
continues for more than 90 days after the
date on which the Director of Field Oper-
ations, Area Director, or Director of Com-
pliance Campus Operations mails notice
of such failure to the person required to
file Form 8992, such person shall pay a
penalty of $10,000, in addition to the pen-
alty imposed by section 6038(b)(1), for
each 30-day period (or a fraction of) dur-
ing which such failure continues after
such 90-day period has expired. The
additional penalty imposed by section
6038(b)(2) and this paragraph (c)(2) shall
be limited to a maximum of $50,000 for
each failure.

(3) Reasonable cause-(i) For pur-
poses of section 6038(b) and (c) and this
section, the time prescribed for furnishing
information under paragraph (b) of this
section, and the beginning of the 90-day
period after mailing of notice by the di-
rector under paragraph (c)(2) of this sec-
tion, shall be treated as being not earlier
than the last day on which reasonable
cause existed for failure to furnish the
information.

(ii) To show that reasonable cause ex-
isted for failure to furnish information as
required by section 6038 and this section,
the person required to report such infor-
mation must make an affirmative showing
of all facts alleged as reasonable cause for
such failure in a written statement con-
taining a declaration that it is made under
the penalties of perjury. The statement
must be filed with the director where the
return is required to be filed. The director
shall determine whether the failure to fur-
nish information was due to reasonable
cause, and if so, the period of time for
which such reasonable cause existed. In
the case of a return that has been filed as
required by this section except for an
omission of, or error with respect to, some
of the information required, if the person

who filed the return establishes to the sat-
isfaction of the director that the person has
substantially complied with this section,
then the omission or error shall not con-
stitute a failure under this section.

(d) Exception from filing requirement.
Any United States person that does not
own, within the meaning of section
958(a), stock of a controlled foreign cor-
poration in which the United States person
is a United States shareholder for a tax-
able year is not required to file Form 8992.
For this purpose, a U.S. shareholder part-
ner (as defined in § 1.951A-5(e)(3)) with
respect to a partnership CFC (as defined in
§ 1.951A-5(e)(2)) is treated as owning,
within the meaning of section 958(a),
stock of the partnership CFC.

(e) Applicability date. This section ap-
plies to taxable years of controlled foreign
corporations beginning on or after Octo-
ber 3, 2018.

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on October 3,
2018, 4:15 p.m., and published in the issue of the Federal
Register for October 10, 2018, [TBD] F.R. [TBD])

#### Announcement of Disciplinary Sanctions From the Office of Professional Responsibility

##### Announcement 2018-13

The Office of Professional Responsi-
bility (OPR) announces recent disciplin-
ary sanctions involving attorneys, certi-
fied public accountants, enrolled agents,
enrolled actuaries, enrolled retirement
plan agents, appraisers, and unenrolled/
unlicensed return preparers (individuals
who are not enrolled to practice and are
not licensed as attorneys or certified pub-
lic accountants). Licensed or enrolled
practitioners are subject to the regulations
governing practice before the Internal
Revenue Service (IRS), which are set out
in Title 31, Code of Federal Regulations,
Subtitle A, Part 10, and which are released
as Treasury Department Circular No. 230.
The regulations prescribe the duties and
restrictions relating to such practice and

prescribe the disciplinary sanctions for
violating the regulations. Unenrolled/
unlicensed return preparers are subject
to Revenue Procedure 81-38 and super-
seding guidance in Revenue Procedure
2014-42, which govern a preparer's el-
igibility to represent taxpayers before
the IRS in examinations of tax returns
the preparer both prepared for the tax-
payer and signed as the preparer. Addi-
tionally, unenrolled/unlicensed return
preparers who voluntarily participate in
the Annual Filing Season Program un-
der Revenue Procedure 2014-42 agree
to be subject to the duties and restric-
tions in Circular 230, including the re-
strictions on incompetent or disreputa-
ble conduct.

The disciplinary sanctions to be im-
posed for violation of the applicable stan-
dards are:

Disbarred from practice before the
IRS-An individual who is disbarred is
not eligible to practice before the IRS as
defined at 31 C.F.R. § 10.2(a)(4) for a
minimum period of five (5) years.

Suspended from practice before the
IRS-An individual who is suspended is
not eligible to practice before the IRS as
defined at 31 C.F.R. § 10.2(a)(4) during
the term of the suspension.

Censured in practice before the
IRS-Censure is a public reprimand. Un-
like disbarment or suspension, censure
does not affect an individual's eligibility
to practice before the IRS, but OPR may
subject the individual's future practice
rights to conditions designed to promote
high standards of conduct.

Monetary penalty-A monetary pen-
alty may be imposed on an individual who
engages in conduct subject to sanction, or
on an employer, firm, or entity if the in-
dividual was acting on its behalf and it
knew, or reasonably should have known,
of the individual's conduct.

Disqualification of appraiser-An
appraiser who is disqualified is barred
from presenting evidence or testimony in
any administrative proceeding before the
Department of the Treasury or the IRS.

Ineligible for limited practice-An
unenrolled/unlicensed return preparer
who fails to comply with the require-
ments in Revenue Procedure 81-38 or to
comply with Circular 230 as required by
Revenue Procedure 2014-42 may be

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determined ineligible to engage in lim-
ited practice as a representative of any
taxpayer. Under the regulations, indi-
viduals subject to Circular 230 may not
assist, or accept assistance from, indi-
viduals who are suspended or disbarred
with respect to matters constituting
practice (i.e., representation) before the
IRS, and they may not aid or abet sus-
pended or disbarred individuals to prac-
tice before the IRS.

Disciplinary sanctions are described in
these terms:

Disbarred by decision, Suspended by
decision, Censured by decision, Mone-
tary penalty imposed by decision, and
Disqualified after hearing-An adminis-
trative law judge (ALJ) issued a decision
imposing one of these sanctions after the
ALJ either (1) granted the government's
summary judgment motion or (2) con-
ducted an evidentiary hearing upon OPR's
complaint alleging violation of the regu-
lations. After 30 days from the issuance of
the decision, in the absence of an appeal,
the ALJ's decision becomes the final
agency decision.

Disbarred by default decision, Sus-
pended by default decision, Censured
by default decision, Monetary penalty
imposed by default decision, and Dis-
qualified by default decision-An ALJ,
after finding that no answer to OPR's
complaint was filed, granted OPR's mo-
tion for a default judgment and issued a
decision imposing one of these sanctions.

Disbarment by decision on appeal,
Suspended by decision on appeal, Cen-
sured by decision on appeal, Monetary
penalty imposed by decision on appeal,
and Disqualified by decision on ap-
peal-The decision of the ALJ was ap-
pealed to the agency appeal authority, act-
ing as the delegate of the Secretary of the
Treasury, and the appeal authority issued
a decision imposing one of these sanc-
tions.

Disbarred by consent, Suspended by
consent, Censured by consent, Mone-
tary penalty imposed by consent, and
Disqualified by consent-In lieu of a dis-
ciplinary proceeding being instituted or
continued, an individual offered a consent
to one of these sanctions and OPR ac-
cepted the offer. Typically, an offer of
consent will provide for: suspension for
an indefinite term; conditions that the in-
dividual must observe during the suspen-
sion; and the individual's opportunity, af-
ter a stated number of months, to file with
OPR a petition for reinstatement affirming
compliance with the terms of the consent
and affirming current fitness and eligibil-
ity to practice (i.e., an active professional
license or active enrollment status, with
no intervening violations of the regula-
tions).

Suspended indefinitely by decision in
expedited proceeding, Suspended indef-
initely by default decision in expedited
proceeding, Suspended by consent in
expedited proceeding-OPR instituted
an expedited proceeding for suspension
(based on certain limited grounds, includ-
ing loss of a professional license for
cause, and criminal convictions).

Determined ineligible for limited
practice -- There has been a final deter-
mination that an unenrolled/unlicensed re-
turn preparer is not eligible for limited
representation of any taxpayer because the
preparer violated standards of conduct or
failed to comply with any of the require-
ments to act as a representative.

A practitioner who has been disbarred
or suspended under 31 C.F.R. § 10.60, or
suspended under § 10.82, or a disqualified
appraiser may petition for reinstatement
before the IRS after the expiration of
5 years following such disbarment, sus-
pension, or disqualification (or immedi-
ately following the expiration of the sus-
pension or disqualification period if
shorter than 5 years). Reinstatement will
not be granted unless the IRS is satisfied

that the petitioner is not likely to engage
thereafter in conduct contrary to Circular
230, and that granting such reinstatement
would not be contrary to the public inter-
est.

Reinstatement decisions are published
at the individual's request, and described
in these terms:

Reinstated to practice before the
IRS -- The individual's petition for rein-
statement has been granted. The individ-
ual is an attorney, certified public accoun-
tant, enrolled agent, enrolled actuary, or
an enrolled retirement plan agent, and el-
igible to practice before the IRS, or in the
case of an appraiser, the individual is no
longer disqualified.

Reinstated to engage in limited prac-
tice before the IRS -- The individual's pe-
tition for reinstatement has been granted.
The individual is an unenrolled/unlicensed
return preparer and eligible to engage in
limited practice before the IRS.

OPR has authority to disclose the
grounds for disciplinary sanctions in these
situations: (1) an ALJ or the Secretary's
delegate on appeal has issued a final de-
cision; (2) the individual has settled a dis-
ciplinary case by signing OPR's "consent
to sanction" agreement admitting to one
or more violations of the regulations and
consenting to the disclosure of the admit-
ted violations (for example, failure to file
Federal income tax returns, lack of due
diligence, conflict of interest, etc.); (3)
OPR has issued a decision in an expedited
proceeding for indefinite suspension; or
(4) OPR has made a final determination
(including any decision on appeal) that an
unenrolled/unlicensed return preparer is
ineligible to represent any taxpayer before
the IRS.

Announcements of disciplinary sanc-
tions appear in the Internal Revenue Bul-
letin at the earliest practicable date. The
sanctions announced below are alphabet-
ized first by state and second by the last
names of the sanctioned individuals.

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City &amp; State

Name

Professional Designation

Disciplinary Sanction

Effective Date(s)

Alabama Birmingham

Ellis, Jesse S.

CPA

Suspended by decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

California San Diego

Sherman, Brent

Enrolled Agent

Suspended by decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from April 10, 2018

San Jose

Smith, Jason M.

CPA

Suspended by decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

Trabuco Canyon

Nowack, Joshua

CPA

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

Illinois

Libertyville

Palmieri, Vincent

Attorney

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

Massachusetts

Edgartown

Armstrong, Roger A.

CPA

Suspended by consent for admitted violations of 31 C.F.R.§ 10.51(a)(1) (2008 and 2011); 10.51(a)(4) (2008 and 2011); 10.51(a)(10) (2014)

Indefinite from February 18, 2016

Peabody

Ginsberg, Barry N.

Enrolled Agent

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 5, 2018

Missouri

Kansas City

Carson, Lydia M.

Attorney

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

Saint Charles

Gable, Travis K.

CPA

Suspended by default decision in expe- dited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from April 5, 2018

New York Yaphank

Grossman, Alan L.

CPA

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from April 25, 2018

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City &amp; State North Carolina

Name

Professional Designation

Disciplinary Sanction

Effective Date(s)

Charlotte

Watson, Carlos D.

Attorney

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

Hickory

Starr, Melanie M.

CPA

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

High Point

Foster, Thomas F.

Attorney

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 5, 2018

Pennsylvania Brockton

Davidson, Robert J.

CPA

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from April 25, 2018

Texas Lockhart

Cline, Laura

CPA

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from April 10, 2018

Vermont Rutland

Canney, John R.

Attorney

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from June 19, 2018

Virginia Powhatan

Bartland, Eric W.

CPA

Suspended by default decision in expedited proceeding under 31 C.F.R. § 10.82(b)

Indefinite from May 23, 2018

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# 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 ap-
plied 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 transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings 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 pe-
riod 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 rulings
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 ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

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.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

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.

BK-Bank.

B.T.A .- Board of Tax Appeals.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

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.

T-Target Corporation.
T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

X-Corporation.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletin 2018-27 through 2018-43

### Announcements:

2018-09, 2018-28 I.R.B. 206
2018-12, 2018-30 I.R.B. 232
2018-13, 2018-43 I.R.B. 714

### Notices:

2018-48, 2018-28 I.R.B. 9
2018-56, 2018-27 I.R.B. 3

2018-58, 2018-33 I.R.B. 305
2018-59, 2018-28 I.R.B. 196
2018-60, 2018-31 I.R.B. 275
2018-61, 2018-31 I.R.B. 278
2018-62, 2018-34 I.R.B. 316
2018-63, 2018-34 I.R.B. 318
2018-64, 2018-35 I.R.B. 347
2018-65, 2018-35 I.R.B. 350
2018-67, 2018-36 I.R.B. 409
2018-68, 2018-36 I.R.B. 418
2018-69, 2018-37 I.R.B. 426
2018-70, 2018-38 I.R.B. 441
2018-71, 2018-41 I.R.B. 548
2018-72, 2018-40 I.R.B. 522
2018-73, 2018-40 I.R.B. 526
2018-74, 2018-40 I.R.B. 529
2018-75, 2018-41 I.R.B. 556
2018-76, 2018-42 I.R.B. 599
2018-77, 2018-42 I.R.B. 601
2018-78, 2018-42 I.R.B. 604
2018-79, 2018-42 I.R.B. 606
2018-80, 2018-42 I.R.B. 609
2018-81, 2018-43 I.R.B. 666

## Proposed Regulations:

REG-130244-17, 2018-41 I.R.B. 593
REG-103474-18, 2018-32 I.R.B. 284
REG-104390-18, 2018-43 I.R.B. 671
REG-104397-18, 2018-41 I.R.B. 560
REG-106977-18, 2018-27 I.R.B. 6
REG-107892-18, 2018-35 I.R.B. 353
REG-112176-18, 2018-37 I.R.B. 430

## Revenue Procedures:

2018-35, 2018-28 I.R.B. 204

2018-36, 2018-38 I.R.B. 442

2018-37, 2018-29

I.R.B. 210

2018-38, 2018-31

I.R.B. 280

2018-39, 2018-34

I.R.B. 319

2018-40, 2018-34

I.R.B. 320

2018-42, 2018-36 I.R.B. 424

2018-43, 2018-36

I.R.B. 425

2018-44, 2018-37 I.R.B. 426

2018-45, 2018-37 I.R.B. 428

2018-46, 2018-39 I.R.B. 460

Revenue Procedures :- Continued

2018-47, 2018-39 I.R.B. 518

2018-48, 2018-40 I.R.B. 521

2018-49, 2018-41 I.R.B. 548
2018-50, 2018-42 I.R.B. 610
2018-52, 2018-42 I.R.B. 611
2018-53, 2018-43 I.R.B. 667

## Revenue Rulings:

2018-19, 2018-27 I.R.B. 1

2018-20, 2018-28 I.R.B. 8

2018-21, 2018-32 I.R.B. 282
2018-22, 2018-34 I.R.B. 308
2018-23, 2018-36 I.R.B. 405

2018-24, 2018-36 I.R.B. 407
2018-25, 2018-39 I.R.B. 445
2018-26, 2018-40 I.R.B. 520
2018-27, 2018-41 I.R.B. 546

## Treasury Decisions:

9834, 2018-31 I.R.B. 233
9835, 2018-33 I.R.B. 288
9836, 2018-33 I.R.B. 291
9838, 2018-34 I.R.B. 309
9839, 2018-35 I.R.B. 325

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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## Finding List of Current Actions on Previously Published Items1

Bulletin 2018-27 through 2018-43

Notices:

2014-5
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2015-28
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2016-57
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2017-45
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

### Revenue Procedures:

2015-27
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2018-31
Modified by
Rev. Proc. 2018-44, 2018-37 I.R.B. 426

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.