Internal Revenue Bulletin 2000-48 (PDF rendition): IRS Announcements

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.

INCOME TAX
Rev. Rul. 2000–52, page 516.
2000 base period T-bill rate. The “base period T-bill rate”
for the period ending September 30, 2000, is published, as
required by section 995(f) of the Code.
REG–116050–99, page 520.
Proposed regulations under section 367(b) of the Code
relate to the carryover and allocation of certain tax attribut-
es, such as earnings and profits and foreign income tax
accounts, in transactions described in section 367(b) of the
Code. A public hearing is scheduled for March 13, 2001.
EMPLOYEE PLANS
Notice 2000–59, page 519.
Weighted average interest rate update.The weighted
average interest rate for November 2000 and the resulting
permissible range of interest rates used to calculate current
liability for purposes of the full funding limitation of section
412(c)(7) of the Code are set forth.
EMPLOYMENT TAX
Announcement 2000–97, page 557.
The Service announces a new reporting code to be used
beginning with the 2001 Form W-2. An employee’s income
from the exercise of nonstatutory options must also be
reported on Form W-2 in box 12 using Code V.
ADMINISTRATIVE
Announcement 2000–95, page 556.
Registration is currently underway for the Thirteenth Annual
Institute on Current Issues in International Taxation to be
held on December 7 and 8, 2000.
Announcement 2000–96, page 556.
This document contains corrections to a notice of proposed
rulemaking and a notice of public hearing (REG–209038–
89, 2000–34 I.R.B. 191) relating to transfers of property by
U.S. persons to foreign trusts that have U.S. beneficiaries.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2000–48
November 27, 2000
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.
Department of the Treasury
Internal Revenue Service
Actions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.

November 27, 20002000–48 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive 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 in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying 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 pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions 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 Subpart B, Legislation 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 Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first 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 first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
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.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2000–48 I.R.B.November 27, 2000
It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on un-
appealed issues decided adverse to the
government. Generally, an Action on De-
cision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirma-
tive statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action
on Decision may be superseded by new
legislation, regulations, rulings, cases, or
Actions on Decisions.
Prior to 1991, the Service published ac-
quiescence or nonacquiescence only in cer-
tain regular Tax Court opinions. The Service
has expanded its acquiescence program to
include other civil tax cases where guidance
is determined to be helpful. Accordingly, the
Service now may acquiesce or nonacquiesce
in the holdings of memorandum Tax Court
opinions, as well as those of the United
States District Courts, Claims Court, and
Circuit Courts of Appeal. Regardless of the
court deciding the case, the recommendation
of any Action on Decision will be published
in the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as acqui-
escence, acquiescence in result only, or
nonacquiescence. Both “acquiescence”
and “acquiescence in result only” mean
that the Service accepts the holding of the
court in a case and that the Service will
follow it in disposing of cases with the
same controlling facts. However, “acqui-
escence” indicates neither approval nor
disapproval of the reasons assigned by the
court for its conclusions; whereas, “acqui-
escence in result only” indicates disagree-
ment or concern with some or all of those
reasons. “Nonacquiescence” signifies
that, although no further review was
sought, the Service does not agree with
the holding of the court and, generally,
will not follow the decision in disposing
of cases involving other taxpayers. In ref-
erence to an opinion of a circuit court of
appeals, a “nonacquiescence” indicates
that the Service will not follow the hold-
ing on a nationwide basis. However, the
Service will recognize the precedential
impact of the opinion on cases arising
within the venue of the deciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumu-
lative Bulletin for the first half of the
year. A semiannual consolidation also ap-
pears in the first Bulletin for the follow-
ing January and in the Cumulative Bul-
letin for the last half of the year.
The Commissioner ACQUIESCES in
the following decision:
Weisbart v. United States Department
of Treasury and Internal Revenue
Service,
1
222 F. 3d 93 (2d Cir. 2000), rev’g99–1
USTC (CCH) ¶ 50,549 (E.D.N.Y. 1999)
Actions Relating to Decisions of the Tax Court
1
Acquiescence relating to whether the “timely mailing/timely filing” rule of I.R.C. section 7502 applies to a claim for refund included on a tax return mailed after
the due date of the return.

Section 995.—Taxation of DISC
Income to Shareholders
2000 base period T-bill rate.The
“base period T-bill rate” for the period
ending September 30, 2000, is pub-
lished, as required by section 995(f) of
the Code.
Rev. Rul. 2000–52
Section 995(f)(l) of the Internal Rev-
enue Code provides that a shareholder of
a DISC shall pay interest each taxable
year in an amount equal to the product of
the shareholder’s DISC-related deferred
tax liability for the year and the “base
period T-bill rate.” Under section
995(f)(4), the base period T-bill rate is
the annual rate of interest determined by
the Secretary to be equivalent to the av-
erage investment yield of United States
Treasury bills with maturities of 52
weeks which were auctioned during the
one-year period ending on September 30
of the calendar year ending with (or of
the most recent calendar year ending be-
fore) the close of the taxable year of the
shareholder. The base period T-bill rate
for the period ending September 30,
2000, is 5.96 percent.
Pursuant to section 6622 of the Code,
interest must be compounded daily. The
table below provides factors for com-
pounding the base period T-bill rate daily
for any number of days in the share-
holder’s taxable year (including a 52-53
week accounting period) for the 2000
base period T-bill rate. To compute the
amount of the interest charge for the
shareholder’s taxable year, multiply the
amount of the shareholder’s DISC-related
deferred tax liability (as defined in section
995(f)(2)) for that year by the base period
T-bill rate factor corresponding to the
number of days in the shareholder’s tax-
able year for which the interest charge is
being computed. Generally, one would
use the factor for 365 days. One would
use a different factor only if the share-
holder’s taxable year for which the inter-
est charge being determined is a short tax-
able year, if the shareholder uses the
52-53 week taxable year, or if the share-
holder’s taxable year is a leap year.
For the base period T-bill rates for the
periods ending in prior years, see: Rev. Rul.
86–132, 1986–2 C.B. 137; Rev. Rul.
87–129, 1987–2 C.B. 196; Rev. Rul.
88–94, 1988–2 C.B. 301; Rev. Rul.
89–116, 1989–2 C.B. 197; Rev. Rul.
90–96, 1990–2 C.B. 188; Rev. Rul. 91–59,
1991–2 C.B. 347; Rev. Rul. 92–98, 1992–2
C.B. 201; Rev. Rul. 93–77, 1993–2 C.B.
253; Rev. Rul. 94–68, 1994–2 C.B. 177;
Rev. Rul. 95–77, 1995–2 C.B. 122; Rev.
Rul. 96–55, 1996–2 C.B. 57; Rev. Rul.
97–49, 1997–2 C.B. 89; Rev. Rul. 98–55,
1998–2 C.B. 665; and Rev. Rul. 99–52,
1999–50 I.R.B. 652.
DRAFTING INFORMATION
The principal author of this revenue
ruling is David Bergkuist of the Office of
the Associate Chief Counsel (Interna-
tional). For further information about
this revenue ruling, contact Mr.
Bergkuist at (202) 622-3850 (not a toll-
free call).
2000 ANNUAL RATE
COMPOUNDED DAILY
5.96 PERCENT
DAYSFACTOR
1.000162842
2.000325710
3.000488604
4.000651525
5.000814473
6.000977447
7.001140448
8.001303475
9.001466529
10.001629609
11.001792716
12.001955849
13.002119009
14.002282196
15.002445409
16.002608649
17.002771915
18.002935208
19.003098528
20.003261874
21.003425247
22.003588646
23.003752072
24.003915524
25.004079003
5.96 PERCENT
DAYSFACTOR
26.004242509
27.004406042
28.004569601
29.004733186
30.004896799
31.005060437
32.005224103
33.005387795
34.005551514
35.005715260
36.005879032
37.006042831
38.006206656
39.006370509
40.006534387
41.006698293
42.006862225
43.007026184
44.007190170
45.007354182
46.007518222
47.007682287
48.007846380
49.008010499
50.008174645
51.008338818
52.008503017
53.008667243
54.008831496
55.008995776
56.009160082
57.009324416
58.009488775
59.009653162
60.009817576
61.009982016
62.010146483
63.010310977
64.010475497
65.010640045
66.010804619
67.010969220
68.011133848
69.011298502
70.011463184
71.011627892
72.011792627
73.011957389
74.012122177
75.012286993
November 27, 20005162000–48 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

5.96 PERCENT
DAYSFACTOR
76.012451835
77.012616704
78.012781600
79.012946523
80.013111473
81.013276450
82.013441453
83.013606484
84.013771541
85.013936625
86.014101736
87.014266874
88.014432039
89.014597230
90.014762449
91.014927694
92.015092967
93.015258266
94.015423592
95.015588945
96.015754325
97.015919732
98.016085166
99.016250627
100.016416115
101.016581630
102.016747171
103.016912740
104.017078336
105.017243958
106.017409608
107.017575284
108.017740988
109.017906718
110.018072476
111.018238260
112.018404072
113.018569910
114.018735776
115.018901668
116.019067588
117.019233534
118.019399508
119.019565508
120.019731536
121.019897591
122.020063672
123.020229781
124.020395917
125.020562080
5.96 PERCENT
DAYSFACTOR
126.020728270
127.020894487
128.021060731
129.021227002
130.021393300
131.021559625
132.021725977
133.021892357
134.022058763
135.022225197
136.022391658
137.022558146
138.022724660
139.022891203
140.023057772
141.023224368
142.023390991
143.023557642
144.023724320
145.023891024
146.024057756
147.024224516
148.024391302
149.024558115
150.024724956
151.024891824
152.025058719
153.025225641
154.025392590
155.025559567
156.025726570
157.025893601
158.026060659
159.026227745
160.026394857
161.026561997
162.026729164
163.026896358
164.027063579
165.027230828
166.027398104
167.027565407
168.027732737
169.027900095
170.028067479
171.028234892
172.028402331
173.028569797
174.028737291
175.028904813
5.96 PERCENT
DAYSFACTOR
176.029072361
177.029239937
178.029407540
179.029575170
180.029742828
181.029910512
182.030078225
183.030245964
184.030413731
185.030581525
186.030749347
187.030917195
188.031085072
189.031252975
190.031420906
191.031588864
192.031756850
193.031924862
194.032092903
195.032260970
196.032429065
197.032597187
198.032765337
199.032933514
200.033101719
201.033269951
202.033438210
203.033606497
204.033774811
205.033943152
206.034111521
207.034279917
208.034448341
209.034616792
210.034785271
211.034953777
212.035122310
213.035290871
214.035459459
215.035628075
216.035796719
217.035965389
218.036134087
219.036302813
220.036471566
221.036640347
222.036809155
223.036977991
224.037146854
225.037315744
2000–48 I.R.B.517November 27, 2000

November 27, 20005182000–48 I.R.B.
5.96 PERCENT
DAYSFACTOR
226.037484662
227.037653608
228.037822581
229.037991582
230.038160610
231.038329665
232.038498749
233.038667859
234.038836998
235.039006163
236.039175357
237.039344578
238.039513826
239.039683102
240.039852406
241.040021737
242.040191096
243.040360482
244.040529896
245.040699337
246.040868806
247.041038303
248.041207827
249.041377379
250.041546959
251.041716566
252.041886200
253.042055863
254.042225553
255.042395270
256.042565016
257.042734788
258.042904589
259.043074417
260.043244273
261.043414157
262.043584068
263.043754007
264.043923973
265.044093967
266.044263989
267.044434039
268.044604116
269.044774221
270.044944353
271.045114514
272.045284702
273.045454918
274.045625161
275.045795432
5.96 PERCENT
DAYSFACTOR
276.045965731
277.046136058
278.046306412
279.046476794
280.046647204
281.046817642
282.046988107
283.047158600
284.047329121
285.047499670
286.047670246
287.047840851
288.048011483
289.048182142
290.048352830
291.048523545
292.048694289
293.048865060
294.049035858
295.049206685
296.049377539
297.049548422
298.049719332
299.049890270
300.050061235
301.050232229
302.050403250
303.050574300
304.050745377
305.050916482
306.051087615
307.051258775
308.051429964
309.051601180
310.051772425
311.051943697
312.052114997
313.052286325
314.052457681
315.052629065
316.052800477
317.052971916
318.053143384
319.053314879
320.053486403
321.053657954
322.053829533
323.054001140
324.054172776
325.054344439
5.96 PERCENT
DAYSFACTOR
326.054516130
327.054687849
328.054859596
329.055031371
330.055203174
331.055375005
332.055546863
333.055718750
334.055890665
335.056062608
336.056234579
337.056406578
338.056578605
339.056750659
340.056922742
341.057094853
342.057266992
343.057439159
344.057611354
345.057783577
346.057955828
347.058128107
348.058300415
349.058472750
350.058645113
351.058817505
352.058989924
353.059162372
354.059334847
355.059507351
356.059679883
357.059852443
358.060025031
359.060197647
360.060370291
361.060542963
362.060715664
363.060888392
364.061061149
365.061233934
366.061406747
367.061579588
368.061752457
369.061925354
370.062098280
371.062271234

2000–48 I.R.B.519November 27, 2000
Weighted Average Interest Rate
Update
Notice 2000–59
Notice 88–73 provides guidelines for de-
termining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current lia-
bility for the purpose of the full funding
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Omnibus
Budget Reconciliation Act of 1987 and as
further amended by the Uruguay Round
Agreements Act, Pub. L. 103-465 (GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for October
2000 is 5.80 percent.
1
The following rates were determined
for the plan years beginning in the month
shown below.
Part III. Administrative, Procedural, and Miscellaneous
90% to 105%90% to 110%
WeightedPermissiblePermissible
MonthYearAverageRangeRange
November20005.945.34 to 6.235.34 to 6.53
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. For further information regarding
this notice, call the Employee Plans Actu-
arial hotline, (202) 622-6076 between
2:30 and 3:30 p.m. Eastern time (not a
toll-free number). Mr. Newman’s number
is (202) 622-8458 (also not a toll-free
number).
1
In Notice 2000–55, 2000–43 I.R.B. 393, which is
the weighted average interest rate update notice for
October 2000, the month referred to in this para-
graph should have been September 2000.

November 27, 20005202000–48 I.R.B.
Notice of Proposed Rulemaking
and Notice of Public Hearing
Stock Transfer Rules: Carryover
of Earnings and Taxes
REG–116050–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations addressing transac-
tions described in section 367(b) of the
Internal Revenue Code (section 367(b)
transactions). A section 367(b) transac-
tion includes a corporate reorganization,
liquidation, or division involving one or
more foreign corporations. The proposed
regulations address the carryover of cer-
tain tax attributes, such as earnings and
profits and foreign income tax accounts,
when two corporations combine in a sec-
tion 367(b) transaction. The proposed
regulations also address the allocation of
certain tax attributes when a corporation
distributes stock of another corporation in
a section 367(b) transaction. This docu-
ment also provides notice of a public
hearing on the proposed regulations.
DATES: Written or electronic comments
and requests to speak (with outlines of
oral comments) at a public hearing sched-
uled for March 13, 2001 must be received
by February 20, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–116050–99), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand deliv-
ered Monday through Friday between the
hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–116050–99), Couri-
er’s Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC. Alternatively, taxpayers may submit
comments electronically via the Internet by
selecting the “Tax Regs” option on the IRS
Home Page, or by submitting comments
directly to the IRS Internet site at
http://www.irs.gov/tax_regs/
regslist.html. The public hearing will be
held in room 7218, Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Anne O’Connell Devereaux, at
(202) 622-3850; concerning submissions
of comments, the hearing, and/or to be
placed on the building access list to attend
the hearing, Guy Traynor, at (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the
collection of information should be sent to
the Office of Management and Budget,
Attn: Desk Officer for the Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal Rev-
enue Service, Attn: IRS Reports Clearance
Officer, W:CAR:MP:FP:S:O, Washington,
DC 20224. Comments on the collection of
information should be received by January
16, 2001. Comments are specifically re-
quested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information in this
proposed regulation is in §1.367(b)–1.
This collection of information is required
by the IRS to verify compliance with the
regulations under section 367(b) relating
to exchanges described therein. The
likely respondents are corporations that
are affected by such exchanges.
Estimated total annual reporting bur-
den: 1,800 hours.
The estimated annual burden per re-
spondent is 3 hours.
Estimated number of respondents: 600.
Estimated annual frequency of re-
sponses: One.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On December 27, 1977, the IRS and
Treasury issued proposed and temporary
regulations under section 367(b) of the
Code. Subsequent guidance updated and
amended the 1977 temporary regulations
several times over the next 14 years. On
August 26, 1991, the IRS and Treasury is-
sued proposed regulations §§1.367(b)–1
through 1.367(b)–6 (the 1991 proposed
regulations). Final regulations under sec-
tion 367(b) of the Internal Revenue Code
(Code) were issued in June 1998 and Jan-
uary 2000 and the 1977 temporary regula-
tions and the 1991 proposed regulations
were generally removed. The preamble to
the January 2000 final regulations refers
to proposed regulations that would be is-
sued at a later date to address the carry-
over of certain corporate tax attributes in
transactions involving one or more for-
eign corporations. Those proposed regu-
lations are set forth in this document.
Overview
A. General Policies of Section 367(b)
In general, section 367 governs corpo-
rate restructurings under sections 332,
Part IV. Items of General Interest

351, 354, 355, 356, and 361 (Subchapter
C nonrecognition transactions) in which
the status of a foreign corporation as a
“corporation” is necessary for the applica-
tion of the relevant nonrecognition provi-
sions. Other provisions in Subchapter C
(Subchapter C carryover provisions)
apply to such transactions in conjunction
with the enumerated provisions and detail
additional consequences that occur in
connection with the transactions. For ex-
ample, sections 362 and 381 govern the
carryover of basis and earnings and prof-
its from the transferor corporation to the
transferee corporation in applicable trans-
actions and section 312 governs the allo-
cation of earnings and profits from a dis-
tributing corporation in a transaction
described in section 355.
The Subchapter C carryover provisions
generally have been drafted to apply to
domestic corporations and U.S. share-
holders, and thus do not fully take into ac-
count the cross-border aspects of U.S.
taxation. For example, sections 381 and
312 do not take into account source and
foreign tax credit issues that arise when
earnings and profits move from one cor-
poration to another.
Congress enacted section 367(b) to en-
sure that international tax considerations
in the Code are adequately addressed
when the Subchapter C provisions apply
to an exchange involving a foreign corpo-
ration in order to prevent the avoidance of
U.S. taxation. Because determining the
proper interaction of the Code’s interna-
tional and Subchapter C provisions is
“necessarily highly technical,” Congress
granted the Secretary broad regulatory au-
thority to provide the “necessary or ap-
propriate” rules rather than enacting a
complex statutory regime. H.R. Rep. No.
658, 94
th
Cong., 1
st
Sess. 241 (1975).
Thus, section 367(b)(2) provides in part
that the regulations “shall include (but
shall not be limited to) regulations . . .
providing . . . the extent to which adjust-
ments shall be made to earnings and prof-
its, basis of stock or securities, and basis
of assets.”
The proposed regulations provide rules
regarding the movement of certain corpo-
rate tax attributes between corporations in
a Subchapter C nonrecognition transac-
tion involving one or more foreign corpo-
rations. Generally, the regulations con-
tinue to apply the principles of the
Subchapter C carryover provisions with
modifications as necessary or appropriate
to preserve international tax policies of
the Code and to prevent material distor-
tions of income.
The remainder of this Overview section
is divided by specific categories of sec-
tion 367(b) transactions and describes the
relevant Subchapter C and international
policies and provisions. The “Details of
Provisions” portion of this preamble de-
scribes the proposed regulations’ princi-
pal operative rules that implement the
policies and reconcile the provisions de-
scribed in the Overview portion of this
preamble. The IRS and Treasury wel-
come comments regarding both the gen-
eral approach and the specific provisions
of the proposed regulations.
B.Specific Policies Related to Inbound
Nonrecognition Transactions (Prop. Reg.
§1.367(b)–3)
Proposed §1.367(b)–3 addresses acqui-
sitions by a domestic corporation (domes-
tic acquiring corporation) of the assets of
a foreign corporation (foreign acquired
corporation) in a section 332 liquidation
or an asset acquisition described in sec-
tion 368(a)(1), such as a C, D, or F reor-
ganization (inbound nonrecognition trans-
action).
The preamble to the January 2000 final
regulations generally describes interna-
tional policy issues that can arise in an in-
bound nonrecognition transaction. The
preamble states that the “principal policy
consideration of section 367(b) with re-
spect to inbound nonrecognition transac-
tions is the appropriate carryover of at-
tributes from foreign to domestic
corporations. This consideration has in-
terrelated shareholder-level and corpo-
rate-level components.” The final regula-
tions address the carryover of certain
attributes, such as the carryover of foreign
taxes, earnings and profits, and basis.
However, the carryover of earnings and
profits and basis are addressed only to the
extent attributable to earnings and profits
accumulated during a U.S. shareholder’s
holding period, i.e., “the all earnings and
profits amount,” as defined in
§1.367(b)–2(d).
The preamble to the final regulations
also notes that it would be consistent with
the policy considerations of section
367(b) for future regulations to provide
further rules with respect to the extent to
which attributes carry over from a foreign
corporation to a U.S. corporation. The
proposed regulations do not comprehen-
sively address this issue. Compare Mod-
ify Treatment of Built-In Losses and
Other Attribute Trafficking, General Ex-
planations of the Administration’s Fiscal
Year 2001 Revenue Proposals at 205.
However, the proposed regulations do
provide additional rules concerning sev-
eral attributes, specifically net operating
loss and capital loss carryovers, and earn-
ings and profits that are not included in
income as an all earnings and profits
amount (or a deficit in earnings and prof-
its). The proposed regulations generally
provide that these tax attributes carry over
from a foreign acquired corporation to a
domestic acquiring corporation only to
the extent that they are effectively con-
nected to a U.S. trade or business (or at-
tributable to a permanent establishment,
in the case of an applicable U.S. income
tax treaty).
C.Specific Policies Related to Foreign
381 Transactions (Prop. Reg.
§1.367(b)–7)
Proposed regulation §1.367(b)–7 ap-
plies to an acquisition by a foreign corpo-
ration (foreign acquiring corporation) of
the assets of another foreign corporation
(foreign target corporation) in a transac-
tion described in section 381 (foreign 381
transaction) and addresses the manner in
which earnings and profits and foreign in-
come taxes of the foreign acquiring cor-
poration and foreign target corporation
carry over to the surviving foreign corpo-
ration (foreign surviving corporation).
This would include, for example, a C or D
reorganization or a section 332 liquida-
tion between two foreign corporations.
The international provisions of the
Code distinguish between categories of
foreign corporations. A foreign acquiring,
target, or surviving corporation can be a
controlled foreign corporation as defined
in section 957 (CFC), a noncontrolled
section 902 corporation as defined in sec-
tion 904(d)(2)(E) after 2003, the effective
date of section 1105(b) of Public Law
105-34 (111 Stat. 788) (the 1997 Act)
(look-through 10/50 corporation and, to-
gether with CFCs, look-through corpora-
tions), a noncontrolled section 902 corpo-
ration before 2003 (non-look-through
2000–48 I.R.B.521November 27, 2000

10/50 corporation and, together with
look-through 10/50 corporations, 10/50
corporations), or a foreign corporation
that is neither a CFC nor a 10/50 corpora-
tion (less-than-10%-U.S.-owned foreign
corporation).
The principal Code sections implicated
by the carryover of earnings and profits
and foreign income taxes in a foreign 381
transaction are sections 381, 902, 904, and
959. Section 381 generally permits earn-
ings and profits (or deficit in earnings and
profits) to carry over to a surviving corpo-
ration, thus enabling “the successor corpo-
ration to step into the ‘tax shoes’ of its pre-
decessor. . . . [and] represents the
economic integration of two or more sepa-
rate businesses into a unified business en-
terprise.” H. Rep. No. 1337, 83rd Cong.,
2nd Sess. 41 (1954). However, a deficit in
earnings and profits of either the trans-
feree or transferor corporation can only be
used to offset earnings and profits accu-
mulated after the date of transfer (hover-
ing deficit rule). Section 381(c)(2)(B).
The hovering deficit rule is a legislative
mechanism designed to deter the traffick-
ing in favorable tax attributes that the IRS
and courts had repeatedly encountered.
See, e.g., Commissioner v. Phipps, 336
U.S. 410 (1949). The proposed regula-
tions adopt the principles of section 381
but adapt its operation in consideration of
the international provisions that address
foreign corporations’ earnings and profits
and their related foreign income taxes,
such as sections 902, 904, and 959.
Section 902 generally provides that a
deemed paid foreign tax credit is avail-
able to a domestic corporation that re-
ceives a dividend from a foreign corpora-
tion in which it owns 10 percent or more
of the voting stock (i.e., a look-through
corporation or non-look-through 10/50
corporation). The Code modifies the gen-
eral last-in, first-out (LIFO) rule of sec-
tion 316 and provides that look-through
corporations and non-look-through 10/50
corporations pay dividends out of multi-
year pools of earnings and profits and for-
eign income taxes for earnings and profits
accumulated (and related foreign income
taxes paid or deemed paid) in taxable
years beginning after December 31, 1986,
or the first day after which a domestic
corporation owns 10 percent or more of
the voting stock of a foreign corporation,
whichever is later. Section 902(c). (The
Code and regulations refer to pooled earn-
ings and profits and foreign income taxes
as post-1986 undistributed earnings and
post-1986 foreign income taxes even
though a particular corporation may begin
to pool after 1986. Sections 902(c)(1)
and (2), §1.902–1(a)(8) and (9).)
Congress enacted the pooling rules be-
cause it believed that averaging of foreign
income taxes was fairer than distributions
out of annual layers. Joint Committee on
Taxation, General Explanation of the Tax
Reform Act of 1986 (Public Law 99–514)
(1986 Bluebook) at 870. Averaging pre-
vents taxpayers from inflating their for-
eign income tax rate for a particular year
in order to obtain artificially enhanced
foreign tax credits. Id. Averaging also
prevents the trapping of foreign income
taxes in years in which a taxpayer may
have no earnings and profits. Id. How-
ever, Congress enacted pooling on a lim-
ited basis. Earnings and profits accumu-
lated (and related foreign income taxes
paid or deemed paid) while a foreign cor-
poration is a less-than-10%-U.S.-owned
foreign corporation and pre-1987 earn-
ings and profits accumulated (and related
foreign income taxes paid or deemed
paid) by a look-through corporation or
non-look-through 10/50 corporation are
not pooled. Rather, such earnings and
profits (and related foreign income taxes)
are maintained in separate annual layers.
Section 902(c)(6). (The Code and regula-
tions refer to earnings and profits and for-
eign income taxes in annual layers as pre-
1987 accumulated profits and pre-1987
foreign income taxes even though a par-
ticular corporation may have annual lay-
ers for years after 1986. Section
902(c)(6); §1.902–1(a)(10).)
A distribution of earnings and profits is
first out of pooled earnings and profits
and then, only after all pooled earnings
and profits have been distributed, out of
annual layers of earnings and profits on a
LIFO basis. Section 902(a) and (c). The
retention of annual layers beneath pooled
earnings and profits limits the need to
recreate tax histories, an administrative
burden that is more significant for periods
during which a corporation had limited
nexus to the U.S. taxing jurisdiction and
for pre-1987 earnings and profits when
pooling was not required.
The section 904 foreign tax credit limi-
tation ensures that taxpayers can use for-
eign tax credits only to offset U.S. tax on
foreign source income. The limitation is
computed separately with respect to dif-
ferent categories of income (baskets).
The purpose of the baskets is to limit tax-
payers’ ability to cross-credit taxes from
different categories of foreign source in-
come. Congress was concerned that,
without separate limitations, cross-credit-
ing opportunities would distort economic
incentives to invest in the United States
versus abroad. 1986 Bluebook at 862.
A dividend received by a U.S. share-
holder that owns less than 10 percent of
the stock of a foreign corporation is cate-
gorized as passive income because such a
dividend is in the nature of a portfolio in-
vestment. 1986 Bluebook at 866.
A dividend received by a U.S. share-
holder that owns 10 percent or more of a
foreign corporation is subject to other
limitations. Dividends paid by a non-
look-through 10/50 corporation to a 10
percent or greater U.S. corporate share-
holder are currently subject to a separate
basket limitation on a corporation-by-cor-
poration basis. Congress initially sepa-
rately basketed dividends from each
10/50 corporation because it believed a
minority investment in a foreign corpora-
tion did not create sufficient identity of
interest to justify look-through treatment
and that cross-crediting of taxes among
investments in 10/50 corporations was in-
appropriate because the foreign compa-
nies were not parts of a single economic
unit. 1986 Bluebook at 868. In addition,
Congress was concerned about the admin-
istrability of applying the look-through
rules to 10/50 corporations. 1986 Blue-
book at 868.
In 1997, Congress amended the Code’s
treatment of dividends from 10/50 corpo-
rations to provide that dividends paid
after taxable years beginning after De-
cember 31, 2002 by a look-through 10/50
corporation out of earnings and profits ac-
cumulated before 2003 are subject to a
single separate basket limitation for all
10/50 corporations, while dividends paid
out of earnings and profits accumulated
after 2003 are treated as income in a bas-
ket based on the ratio of the earnings and
profits attributable to income in such bas-
ket to the foreign corporation’s total earn-
ings and profits (the so-called “look-
through” approach). Earnings and profits
accumulated after 2003 by a look-through
November 27, 20005222000–48 I.R.B.

10/50 corporation are distributed before
earnings and profits accumulated by that
same foreign corporation before 2003.
Joint Committee on Taxation, General
Explanation of Tax Legislation Enacted in
1997 (1997 Bluebook) at 303.
The legislative history indicates that
Congress changed its view with respect to
10/50 corporations because the separate
basket limitation for dividends from each
10/50 corporation imposed a substantial
recordkeeping burden and discouraged
minority investments in foreign joint ven-
tures. 1997 Bluebook at 302. However,
as described above, the 1997 Act enacted
look-through treatment for 10/50 corpora-
tion dividends only on a limited basis.
Furthermore, Congress provided regula-
tory authority regarding the treatment of
distributions out of earnings and profits
for periods prior to a taxpayer’s acquisi-
tion of stock in a look-through 10/50 cor-
poration because of concerns that look-
through treatment could provide
inappropriate opportunities to traffic in
foreign tax credits.
Dividends paid by a CFC out of earn-
ings and profits accumulated while the
corporation was not a CFC are treated as a
distribution from a 10/50 corporation
while dividends paid out of earnings and
profits accumulated while the corporation
was a CFC are eligible for look-through
treatment. Section 904(d)(2)(E)(i) and
(d)(3). As in the case of a look-through
10/50 corporation, pooled earnings and
profits of a CFC that are eligible for look-
through treatment are distributed before
other pooled earnings and profits. Prop.
Reg. §1.904–4(g)(3)(iii). Congress pro-
vided look-through treatment for divi-
dends paid by CFCs in order to provide
greater parity between the treatment of in-
come earned through a branch and a sub-
sidiary. 1986 Bluebook at 866.
Before 1997, except as otherwise pro-
vided in regulations, dividend distribu-
tions to a 10 percent U.S. shareholder of a
CFC did not obtain look-through treat-
ment unless the distributed earnings and
profits accrued while the shareholder was
a 10 percent U.S. shareholder and the cor-
poration was a CFC. Section
904(d)(2)(E)(i), as in effect before the
1997 Act. This rule was intended to pre-
vent trafficking in foreign income taxes
related to preacquisition earnings and
profits. However, because of the admin-
istrative issues presented by maintaining
shareholder-level earnings and profits ac-
counts, Congress modified the rule in
1997 to provide that look-through treat-
ment applies with respect to CFC earn-
ings and profits without regard to whether
a 10 percent U.S. shareholder was a
shareholder at the time accumulated.
However, pre-CFC earnings and profits
continue to be treated as earnings and
profits of a 10/50 corporation because of
foreign tax credit trafficking concerns.
The section 904 basketing rules reflect
Congress’ concern with respect to cross-
crediting opportunities and its intent to
limit the benefit of look-through treat-
ment to appropriate circumstances.
Where Congress determined that look-
through is inappropriate, a dividend is
treated as passive income or is subject to a
separate limitation for 10/50 corporations
(whether separately or collectively). Reg-
ulations have not yet been issued with re-
spect to preacquisition earnings and prof-
its of a look-through 10/50 corporation
and the effect, if any, on the treatment of
pre-CFC earnings and profits described in
section 904(d)(2)(E)(i). The IRS and
Treasury solicit comments as to the ap-
propriate treatment of such earnings and
profits after 2003 in light of Congress’
anti-trafficking concerns, as well as the
impact that such rules should have on the
section 367(b) regulations.
Another international provision impli-
cated by the movement of earnings and
profits in foreign 381 transactions is sec-
tion 959. Section 959 governs the distrib-
ution of earnings and profits that have
been previously taxed to U.S. sharehold-
ers under section 951(a) (PTI). After
studying the interaction of section 367(b)
and the PTI rules, the IRS and Treasury
determined that more guidance under sec-
tion 959 would be useful before issuing
regulations to address PTI issues that
arise under section 367(b). Accordingly,
the IRS and Treasury have opened a sepa-
rate regulations project under section 959
and expect to issue regulations that ad-
dress PTI issues under section 959 as well
as section 367(b) in the future. The fun-
damental issue under consideration in that
project is whether earnings and profits
that are treated as PTI should be distrib-
utable to another shareholder, as well as
the various implications that result from
that determination. The IRS and Treasury
invite comments with respect to these is-
sues. Accordingly, the proposed regula-
tions reserve on section 367(b) issues re-
lated to PTI.
Other sections may have also applied to
characterize pre-transaction earnings of a
foreign acquiring corporation or a foreign
target corporation for certain purposes of
the Code. For example, certain earnings
may have been subject to characterization
as U.S. source earnings under section
904(g), effectively connected earnings
and profits under section 884, or post-
1986 undistributed U.S. earnings under
section 245. The characterization of such
earnings carry over to the foreign surviv-
ing corporation for purposes of applying
the relevant Code sections. See Georday
Enterprises v. Commissioner, 126 F.2d
384 (4
th
Cir. 1942).
D.Specific Policies Related to Foreign
Divisive Transactions (Prop. Reg.
§1.367(b)–8)
Proposed regulation §1.367(b)–8 ad-
dresses the allocation of earnings and
profits and foreign income taxes in a
transaction described in section 312(h)
(that is, a section 355 distribution whether
or not in connection with a section
368(a)(1)(D) reorganization) in which ei-
ther or both the distributing or the con-
trolled corporation is a foreign corpora-
tion (foreign divisive transaction). The
scope of proposed §1.367(b)–8 thus en-
compasses three situations: a domestic
distributing corporation that distributes
stock of a foreign controlled corporation,
a foreign distributing corporation that dis-
tributes stock of a domestic controlled
corporation, and a foreign distributing
corporation that distributes stock of a for-
eign controlled corporation. The pro-
posed regulations generally adopt the
principles embodied in the regulations
under section 312(h) but modify their ap-
plication in consideration of the interna-
tional provisions such as the source and
foreign tax credit rules.
Regulations under section 312(h) re-
flect the principle that a pro rata portion of
a distributing corporation’s earnings and
profits should be reduced to account for
the distribution of a portion of its assets.
§1.312–10. Furthermore, the earnings and
profits of a controlled corporation should
include the portion of the distributing cor-
poration’s earnings and profits allocable to
2000–48 I.R.B.523November 27, 2000

any assets transferred to the controlled
corporation in connection with a section
368(a)(1)(D) reorganization (D reorgani-
zation) that immediately precedes the sec-
tion 355 distribution (together with a D re-
organization, a D/355 distribution).
§1.312–10(a). If a section 355 distribution
is not preceded by a D reorganization, the
earnings and profits of the controlled cor-
poration are at least equal to the amount of
the reduction in the distributing corpora-
tion’s earnings and profits. §1.312–10(b).
It is likely that this rule was included to
prevent taxpayers from using a section
355 distribution as a device to facilitate a
bailout of earnings and profits through the
controlled corporation. (The §1.312–10
rules are derived from the Senate’s direc-
tions to the IRS and Treasury in imple-
menting the regulatory authority in section
312(h); the Senate Report does not, how-
ever, explain its reasons for these rules.
Senate Finance Committee, Report on
H.R. 8300 (1954), at 249.)
The application of the §1.312–10 rules
to foreign divisive transactions implicates
the Code’s international provisions be-
cause earnings and profits are moving in
the cross-border context and because the
earnings and profits of controlled foreign
corporations are being adjusted. In trans-
actions involving a domestic distributing
corporation and a foreign controlled cor-
poration, the foreign controlled corpora-
tion may succeed to earnings and profits
of the domestic distributing corporation.
A post-transaction distribution by the for-
eign controlled corporation out of earn-
ings and profits it receives from the do-
mestic distributing corporation is
generally eligible for the dividends re-
ceived deduction and treated as U.S.
source income under sections 243(e) and
861(a)(2)(C). This treatment is appropri-
ate because the earnings and profits have
already been subject to U.S. corporate
taxation and should not be subject to a
second level of U.S. corporate tax upon
repatriation if the earnings and profits
would have qualified for the dividends re-
ceived deduction if distributed before the
section 355 distribution. H.R. Rep. No.
2101, at 3 (1960). In addition, such earn-
ings and profits should not increase a do-
mestic distributee’s foreign tax credit lim-
itation under section 904.
In circumstances where the foreign
controlled corporation makes a post-
transaction distribution to foreign share-
holders, the foreign divisive transaction
should not alter the character of earnings
and profits allocated from the domestic
distributing corporation. Otherwise, the
section 355 distribution may serve as a
vehicle to avoid U.S. tax, including U.S.
withholding tax. Accordingly, the pro-
posed regulations provide that a post-
transaction distribution out of earnings
and profits of a distributing corporation
that carry over to a foreign controlled cor-
poration is generally treated as a U.S.
source dividend for purposes of Chapter 3
of subtitle A of the Code. See Georday
Enterprises v. Commissioner, 126 F.2d
384 (4
th
Cir. 1942).
Foreign divisive transactions involving
a foreign distributing corporation and a
domestic controlled corporation are simi-
lar to inbound nonrecognition transac-
tions to the extent the domestic controlled
corporation receives assets of a foreign
corporation. Current regulations under
§1.367(b)–3 require direct and indirect
U.S. shareholders in an inbound asset re-
organization to include an all earnings
and profits amount in income in order to
ensure, in part, that the bases of assets
repatriated to the United States reflect an
after-tax amount. Section 1.367(b)–3(d)
and proposed §1.367(b)–3(f) provide fur-
ther rules regarding the carryover of earn-
ings and profits and foreign income taxes
from a foreign corporation to a domestic
corporation. Those rules should also
apply to a section 355 distribution involv-
ing a foreign distributing corporation and
a domestic controlled corporation. These
transactions also implicate the current
rules under §1.367(b)–5, because a reduc-
tion in a foreign distributing corporation’s
earnings and profits can directly affect the
post-transaction application of section
1248 with respect to U.S. shareholders of
the distributing corporation.
Foreign divisive transactions involving
a foreign distributing corporation and a
foreign controlled corporation raise issues
similar to those raised in the context of a
foreign 381 transaction described in
§1.367(b)–7, to the extent the controlled
corporation succeeds to earnings and
profits (and related foreign income taxes)
of the distributing corporation. Accord-
ingly, the proposed regulations adopt the
principles of §1.367(b)–7 to determine
the manner in which the foreign con-
trolled corporation succeeds to the earn-
ings and profits (and related foreign in-
come taxes) of a foreign distributing cor-
poration. These transactions also
implicate the §1.367(b)–5 rules concern-
ing diminutions in U.S. shareholders’ sec-
tion 1248 amounts.
The proposed regulations under
§1.367(b)–8 balance the §1.312–10 rules
and policies with the interests and con-
cerns of the relevant international provi-
sions of the Code. However, the IRS and
Treasury recognize that the mechanics of
§1.312–10 as applied in the international
context can be cumbersome and complex.
The IRS and Treasury solicit comments as
to whether the mechanical difficulties of
applying the section 312 rules in the
cross-border context outweigh the bene-
fits and, if so, whether there are simpler
alternative regimes that would address the
international policy concerns without
compromising the Subchapter C policies
embodied in §1.312–10.
Details of Provisions
A.Prop. Reg. §1.367(b)–1
The proposed regulations supplement
the current §1.367(b)–1 notice require-
ments in consideration of the transactions
addressed by proposed §§1.367(b)–7 and
1.367(b)–8. Accordingly, foreign surviv-
ing corporations described in proposed
§1.367(b)–7 and distributing and con-
trolled corporations involved in transac-
tions described in proposed §1.367(b)–8
are included within the scope of the
§1.367(b)–1 notice requirement.
B. Prop. Reg. §1.367(b)–3
The proposed regulations address the
carryover of net operating loss and capital
loss carryovers, and earnings and profits
that are not included in income as an all
earnings and profits amount (or a deficit
in earnings and profits). The proposed
regulations generally provide that these
tax attributes do not carry over from a for-
eign acquired corporation to a domestic
acquiring corporation unless they are ef-
fectively connected to a U.S. trade or
business (or attributable to a permanent
establishment, in the context of a relevant
U.S. income tax treaty).
The limitations on the carryover of
these attributes prevent inappropriate or
anomalous results. For example, net op-
November 27, 20005242000–48 I.R.B.

erating loss and capital loss carryovers are
eligible to carry over from a foreign ac-
quired corporation to a domestic acquir-
ing corporation only to the extent the un-
derlying deductions or losses were
allowable under Chapter 1 of subtitle A of
the Code. Thus, only a net operating loss
or capital loss carryover that is effectively
connected to a U.S. trade or business (or
attributable to a permanent establishment)
may carry over. Inappropriate or anom-
alous results are thus avoided because
losses incurred by a foreign acquired cor-
poration outside the U.S. taxing jurisdic-
tion should not be available to offset the
future U.S. tax liability of a domestic ac-
quiring corporation. Otherwise, a tax-
payer would have an incentive to import
losses into the United States in order to
shelter future income from U.S. tax.
The carryover of earnings and profits
(or a deficit in earnings and profits) of the
foreign acquired corporation can create
similarly inappropriate results. For exam-
ple, the policies underlying the section
243(a) dividends received deduction are
not present with respect to a subsequent
distribution by the domestic acquiring
corporation out of earnings and profits ac-
cumulated by the foreign acquired corpo-
ration because those earnings and profits
are not generally subject to a U.S. corpo-
rate level of tax. On the other hand, if the
foreign acquired corporation has PTI,
those earnings should not be taxed again
when distributed to U.S. shareholders to
whom the PTI is attributable regardless of
whether or not the U.S. shareholder is eli-
gible for the dividends received deduc-
tion. A deficit in earnings and profits can
also be used to avoid tax, such as in the
case of a foreign shareholder of a domes-
tic acquiring corporation that imports a
deficit and therefore is not subject to U.S.
withholding tax on subsequent corporate
distributions.
As a result of the issues raised by a car-
ryover of earnings and profits and given
that §1.367(b)–3 already requires U.S.
shareholders to include in income as a
deemed dividend the all earnings and
profits amount, the proposed regulations
provide that earnings and profits (or
deficit in earnings and profits) of the for-
eign acquired corporation do not carry
over to the domestic acquiring corpora-
tion except to the extent effectively con-
nected to a U.S. trade or business (or at-
tributable to a permanent establishment,
in the context of a relevant U.S. income
tax treaty).
C.Prop. Reg. §1.367(b)–7
Proposed §1.367(b)–7 provides the
manner in which a foreign surviving cor-
poration succeeds to and takes into ac-
count the earnings and profits and foreign
income taxes of a foreign acquiring cor-
poration and a foreign target corporation.
The proposed regulation attempts to pre-
serve the character of earnings and profits
and foreign income taxes to the extent
possible in light of the applicable statu-
tory limitations, as well as the relevant
policy and administrative concerns.
Compare §1.381(c)(2)–1(a)(3) (ensuring
that earnings and profits accumulated be-
fore March 1, 1913 retain their character
as pre-1913 earnings and profits after a
section 381 transaction). Accordingly, the
proposed rules provide that, to the extent
possible, pooled earnings and profits (and
foreign income taxes) remain pooled,
earnings and profits (and foreign income
taxes) in annual layers remain in annual
layers, foreign income taxes trapped be-
fore the transaction remain trapped after
the transaction, and earnings and profits
(and foreign income taxes) remain in the
same basket before and after the transac-
tion.
The proposed regulation also respects
the section 902 preference for distributing
pooled earnings and profits before earn-
ings and profits in annual layers. Accord-
ingly, proposed §1.367(b)–7 provides that
a foreign surviving corporation’s pooled
earnings and profits are distributed first
(even though earnings and profits in the
annual layers may have been accumulated
after earnings and profits in the pool) and
annual layers are distributed on a LIFO
basis. Similarly, the proposed regulation
also incorporates the section 904 prefer-
ence for distributing pooled earnings and
profits eligible for look-through before
other pooled earnings and profits.
However, in certain cases, an overrid-
ing statutory policy requires that the pro-
posed regulation modify the character of
earnings and profits (and related foreign
income taxes). For example, if a CFC
combines with a non-look-through 10/50
corporation in a foreign 381 transaction
and the foreign surviving corporation is a
non-look-through 10/50 corporation, divi-
dends paid by the surviving non-look-
through 10/50 corporation are required to
be separately basketed and do not obtain
the benefit of look-through. Thus, earn-
ings and profits of a CFC that would have
obtained the benefit of look-through if
distributed before the foreign 381 transac-
tion are not eligible for look-through after
the transaction. (The loss of look-through
in connection with this type of foreign
381 transaction is somewhat ameliorated
by a U.S. shareholder’s section 1248
amount inclusion under §1.367(b)–4 with
respect to earnings and profits that ac-
crued during its holding period.)
Proposed regulation §1.367(b)–7 also
provides rules regarding the carryover of
deficits in earnings and profits from one
foreign corporation to another. The pur-
pose of the hovering deficit rule in the do-
mestic context is to prevent the trafficking
of deficits in earnings and profits. Other-
wise, a corporation with positive earnings
and profits may acquire or be acquired by
another corporation with a deficit in earn-
ings and profits and make distributions
out of capital rather than earnings and
profits.
In transactions involving foreign cor-
porations, similar concerns exist regard-
ing the trafficking of deficits in earnings
and profits. The ability to benefit from
combining positive and deficit earnings
and profits among foreign corporations is
different than in the domestic context,
however, because of the nature of the for-
eign tax credit rules. In a reorganization
involving two domestic corporations, the
hovering deficit rule applies to a corpora-
tion with a net accumulated deficit in
earnings and profits because the relevant
statutory rules do not distinguish among
classes of earnings and profits. In con-
trast, the foreign tax credit rules require
further subcategorization of earnings and
profits according to the pooling and bas-
keting rules. Because of these distinc-
tions, taxpayers may inappropriately ben-
efit by trafficking in an earnings and
profits deficit in a basket, pool, or particu-
lar annual layer, even though a corpora-
tion may have net positive earnings and
profits. Accordingly, the proposed regu-
lations apply the hovering deficit princi-
ple to the relevant subcategories of earn-
ings and profits and provide that foreign
income taxes related to the deficit are not
added to the foreign surviving corpora-
2000–48 I.R.B.525November 27, 2000

tion’s foreign income tax accounts until
all of the deficit has been offset with post-
transaction earnings. (Under proposed
§1.367(b)–9 (which is described below),
these hovering deficit rules do not apply
to F reorganizations and foreign 381
transactions in which either the foreign
target corporation or the foreign acquiring
corporation is newly created.)
Because the treatment of distributions
by a foreign surviving corporation de-
pends on whether it is a look-through cor-
poration, a non-look-through 10/50 cor-
poration, or a less-than-10%-U.S.-owned
foreign corporation, proposed
§1.367(b)–7 is divided according to these
categories. The proposed regulation uses
the term surviving corporation in order to
prevent confusion between the acquiring
corporation and the foreign surviving en-
tity. In addition, the term highlights the
proposed regulation’s general approach
that provides the same results regardless
of whether a corporation is the ostensible
acquiring or target corporation.
1. Look-through surviving corporation
Where the foreign surviving corpora-
tion is a look-through corporation, the
proposed regulation generally preserves
the character of earnings and profits and
foreign income taxes. For example, if a
CFC (CFC1) acquires the assets of an-
other CFC (CFC2) in a foreign 381 trans-
action and the surviving corporation is a
CFC, then the corporations’ positive
amounts of earnings and profits and for-
eign income taxes would carry over in a
manner that combines the look-through
earnings and profits pools (and related
foreign income taxes) of each corporation
on a basket-by-basket basis. Thus, for ex-
ample, CFC1’s passive basket would be
combined with CFC2’s passive basket,
CFC1’s general basket would be com-
bined with CFC2’s general basket, and so
forth.
If CFC1 or CFC2 has pooled earnings
and profits or foreign income taxes that
do not qualify for look-through treatment
(non-look-through pool) (for example,
earnings and profits accumulated during a
period when the corporation was not a
CFC and that are subject to a separate
10/50 limitation), such earnings and prof-
its and foreign income taxes would be dis-
tributed only after all of the look-through
earnings and profits pool has been distrib-
uted. This rule is consistent with the or-
dering rule in Prop. Reg. §1.904–
4(g)(3)(iii), which provides that when a
10/50 corporation becomes a CFC,
pooled earnings and profits accumulated
and foreign income taxes paid or accrued
while the corporation is a CFC are distrib-
uted before pooled earnings and profits
accumulated and foreign income taxes
paid or accrued while the corporation was
a 10/50 corporation. (If the foreign sur-
viving corporation is instead a look-
through 10/50 corporation, this rule is
also consistent with the earnings and prof-
its in the look-through pool being distrib-
uted before earnings and profits in the
non-look-through pool.)
When earnings and profits from the
non-look-through pool are distributed, the
earnings and profits will be distributed
pro rata out of the non-look-through pools
of CFC1 and CFC2 (if any) and placed in
two separate baskets under section
904(d)(1)(E). This preserves the charac-
ter of the earnings and profits and related
foreign income taxes and is consistent
with the policy of section 904(d)(1)(E) to
maintain separate baskets for each 10/50
corporation. After 2003, these earnings
and profits will continue to be distributed
pro rata from separate non-look-through
pools but will be combined into a single
10/50 basket in the hands of the distribu-
tee. Maintaining separate pools prevents
the refreshing of foreign income taxes
that would have been trapped had the for-
eign 381 transaction not occurred. (The
same rules apply in the case of a foreign
surviving corporation that is a look-
through 10/50 corporation.)
If CFC1 or CFC2 has pre-1987 accu-
mulated profits (i.e., annual layers of
earnings and profits) or foreign income
taxes, then those earnings and profits are
distributed only after the distribution of
all pooled earnings and profits and taxes,
regardless of whether those earnings and
profits may have been accumulated after
the pooled earnings and profits of the
other corporation. Such earnings and
profits are distributed on a LIFO basis and
pro rata out of the respective corpora-
tion’s annual layers if both companies
have earnings and profits in the same year
that are treated as pre-1987 accumulated
profits and foreign income taxes. This
rule respects two international policies.
First, pooled earnings and profits are dis-
tributed before earnings and profits in an-
nual layers. Second, earnings and profits
in annual layers should not be pooled un-
less they are distributed to an upper-tier
entity. Compare §1.902–1(a)(8)(ii) (pro-
viding that distributions out of pre-1987
earnings and profits by a lower-tier corpo-
ration are included in the post-1986 earn-
ings and profits of an upper-tier corpora-
tion). This rule is also consistent with the
section 902 rule that traps foreign income
taxes in annual layers in which there are
no earnings and profits.
These results preserve the character of
earnings and profits and taxes because
pooled earnings and profits and taxes re-
main pooled, earnings and profits and
taxes retain the same character under the
look-through provisions, and foreign in-
come taxes that were trapped before the
foreign 381 transaction remain trapped.
The rules are also consistent with con-
cerns about limiting the administrative
burden of requiring taxpayers to recreate
tax histories.
Because of the foreign tax credit con-
siderations presented by foreign 381
transactions, §1.367(b)–7 applies the hov-
ering deficit rule to subcategories of earn-
ings and profits. Thus, deficits in the
look-through pool, non-look-through
pool, and net deficits in annual layers can
offset only future earnings and profits of
the foreign surviving corporation. In ad-
dition, a hovering deficit cannot be used
to reduce current earnings and profits of
the foreign surviving corporation and, as
a result, does not reduce subpart F in-
come. Foreign income taxes related to a
hovering deficit do not enter the foreign
income tax accounts of the surviving cor-
poration until the entire hovering deficit
offsets post-transaction earnings and prof-
its. However, foreign income taxes re-
lated to the post-transaction earnings that
are offset by the hovering deficit immedi-
ately enter the foreign income tax ac-
counts of the foreign surviving corpora-
tion.
2.Non-look-through 10/50 surviving
corporation
The proposed regulation’s rules with
respect to a non-look-through 10/50 cor-
poration apply if the foreign surviving
corporation is a 10/50 corporation before
2003. The principal statutory limitation
of a non-look-through 10/50 corporation
November 27, 20005262000–48 I.R.B.

is that a dividend distribution is not eligi-
ble for look-through treatment and is in-
stead separately basketed for each 10/50
corporation. As a result, earnings and
profits of an acquiring or target corpora-
tion that would have been eligible for
look-through (assuming the corporation
qualified under the look-through rule) if
distributed before the foreign 381 transac-
tion lose their look-through character
after the transaction.
For example, suppose a CFC combines
with a non-look-through 10/50 corpora-
tion in a foreign 381 transaction in 2001
and the surviving entity is a non-look-
through 10/50 corporation. Prior to the
transaction, the CFC maintained earnings
and profits and foreign income tax ac-
counts expecting that the look-through
rules would apply on a distribution of
earnings and profits to U.S. shareholders.
However, after the foreign 381 transac-
tion, section 904(d)(1)(E) requires that a
distribution from the surviving 10/50 cor-
poration will be deemed to be paid out of
a single pool of earnings and profits that
will be separately basketed. In order to
address the carryover of attributes to a
non-look-through 10/50 corporation in a
manner consistent with section
904(d)(1)(E), the proposed regulations
combine the net positive earnings and
profits and foreign income taxes in the re-
spective pools of the acquiring and target
corporations. (Thus, the separate baskets
of pooled earnings and profits and foreign
income taxes of the CFC would be netted
into a single pool along with the non-
look-through 10/50 corporation’s pooled
earnings and profits and foreign income
taxes.)
Annual layers of the acquiring and tar-
get corporations are carried over to the
foreign surviving corporation under the
same rules as described above with re-
spect to look-through corporations. Hov-
ering deficit rules similar to those de-
scribed with respect to a look-through
corporation’s non-look-through pool and
annual layers also apply to surviving non-
look-through 10/50 corporations.
Look-through treatment of earnings
and profits and foreign income taxes does
not re-emerge if the corporation later be-
comes a look-through corporation. For
example, if the surviving non-look-
through 10/50 corporation becomes a
CFC, all of the earnings and profits and
foreign income taxes of the surviving
non-look-through 10/50 corporation re-
main as earnings and profits to which the
look-through rules do not apply. Look-
through only applies to earnings and prof-
its accumulated after the corporation be-
comes a CFC. The IRS and Treasury
believe that this rule is appropriate be-
cause of the administrative difficulties
posed by recreating tax histories. In addi-
tion, earnings and profits and foreign in-
come taxes of a CFC accumulated during
a U.S. shareholder’s holding period are
generally deemed distributed (and the
look-through rules apply) if a U.S. share-
holder includes a section 1248 amount in
income under §1.367(b)–4 in connection
with the foreign 381 transaction.
3. Less-than-10%-U.S.-owned foreign
surviving corporation
Proposed §1.367(b)–7 also determines
the manner in which earnings and profits
and foreign income taxes of the acquiring
and target corporation are combined if the
foreign surviving corporation is a less-
than-10%-U.S.-owned foreign corpora-
tion. Generally, rules similar to the rules
provided for annual layers of look-
through corporations and non-look-
through 10/50 corporations apply with re-
spect to the annual layers of the acquiring
and target corporation, but the rules take
into account the possibility that one of the
corporations may have been a CFC or
10/50 corporation immediately prior to
the foreign 381 transaction.
If either the acquiring or target corpora-
tion is a CFC or a 10/50 corporation, its
pooled earnings and profits and foreign
income taxes are treated as earnings and
profits and foreign income taxes accumu-
lated in the annual layer of the applicable
corporation immediately before the for-
eign 381 transaction. For example, sup-
pose a less-than-10%-U.S.-owned foreign
corporation combines with a 10/50 corpo-
ration and the foreign surviving corpora-
tion is a less-than-10%-U.S.-owned for-
eign corporation. The foreign surviving
corporation is an entity that has never
been required to pool earnings and profits
and foreign income taxes under section
902(c)(3). Accordingly, distributions
from the foreign surviving corporation are
out of annual layers on a LIFO basis.
Rather than recreating the tax history of
the acquired 10/50 corporation for each
year, the proposed regulation places all
pooled earnings and profits and foreign
income taxes of the 10/50 corporation
into a single annual layer that closes im-
mediately before the foreign 381 transac-
tion. This rule is intended to ameliorate
administrative burdens while respecting
the policy that earnings and profits and
foreign income taxes are distributed from
annual layers for a less-than-10%-U.S.-
owned foreign corporation. Because of
concerns about neutrality, the same result
applies regardless of whether the 10/50
corporation is the ostensible acquiring or
target corporation.
If the surviving less-than-10%-U.S.-
owned foreign corporation later becomes
a non-look-through 10/50 corporation or a
look-through corporation, earnings and
profits and foreign income taxes that were
pooled or obtained the benefit of look-
through prior to the foreign 381 transac-
tion are not recreated. Instead, those
earnings and profits and foreign income
taxes remain as earnings and profits accu-
mulated and foreign income taxes paid or
deemed paid while the corporation was a
less-than-10%-U.S.-owned foreign corpo-
ration. As in the case of a surviving non-
look-through 10/50 corporation that later
becomes a look-through corporation, this
rule is provided because of administrative
issues associated with recreating tax his-
tories. In addition, earnings and profits
and foreign income taxes of a CFC accu-
mulated during a shareholder’s holding
period generally would have been deemed
distributed (and the look-through rules
would have applied) if the shareholder
was required to include a section 1248
amount in income under §1.367(b)–4 in
connection with the foreign 381 transac-
tion.
D. Prop. Reg. §1.367(b)–8
Section 1.367(b)–8 provides rules ap-
plicable to foreign divisive transactions.
The regulation is divided into four sec-
tions. Section 1.367(b)–8(b) provides
rules that are generally applicable to for-
eign divisive transactions. The other
three sections describe the application of
the general rules to specific situations.
Section 1.367(b)–8(c) applies to a distrib-
ution by a domestic distributing corpora-
tion of the stock of a foreign controlled
corporation, §1.367(b)–8(d) applies to a
distribution by a foreign distributing cor-
2000–48 I.R.B.527November 27, 2000

poration of the stock of a domestic con-
trolled corporation, and §1.367(b)–8(e)
applies to a distribution by a foreign dis-
tributing corporation of the stock of a for-
eign controlled corporation.
1. General rules applicable to foreign
divisive transactions
Section 1.367(b)–8(b) provides that the
rules of §1.312–10 generally apply to de-
termine the allocation of earnings and
profits between a distributing and a con-
trolled corporation, as well as to deter-
mine the reduction in the earnings and
profits of a distributing corporation. The
rules of §1.312–10 are, however, subject
to certain modifications.
In a D/355 distribution involving a con-
trolled corporation that is newly created
as part of the transaction, §1.312–10(a)
allocates the pre-transaction earnings and
profits of the distributing corporation be-
tween the distributing and controlled cor-
porations based upon a comparison of the
fair market values of the assets received
by the controlled corporation and the as-
sets retained by the distributing corpora-
tion after the D reorganization. Section
1.312–10(a) provides that, “in a proper
case,” this allocation should be based on
the relative net bases of the assets trans-
ferred and retained by the distributing
corporation, or based on another “appro-
priate” method.
The proposed regulations generally
adopt the rule of §1.312–10(a), except
that the allocation is based upon relative
net adjusted bases of assets transferred
and retained in all cases. This rule re-
flects the view that net basis is the most
accurate measure of the appropriate
amount of earnings and profits that should
be allocated to the assets transferred by a
distributing corporation in the D reorgani-
zation. For example, in cases where the
controlled corporation recognizes gain on
a later sale or distribution of appreciated
property that it receives from the distrib-
uting corporation an allocation based
upon relative bases prevents a misalloca-
tion of earnings and profits to the con-
trolled corporation.
In a section 355 distribution that is not
preceded by a D reorganization,
§1.312–10(b) provides that the earnings
and profits of the distributing corporation
are decreased by an amount equal to the
lesser of (i) the amount by which the earn-
ings and profits of the distributing corpo-
ration would have been decreased if it had
transferred the stock of the controlled cor-
poration to a new corporation in a D/355
distribution, and (ii) the net worth of the
controlled corporation. For this purpose,
net worth is defined as “the sum of the
bases of all of the properties plus cash
minus all liabilities.” If “the earnings and
profits of the controlled corporation im-
mediately before the transaction are less
than the amount of the decrease in earn-
ings and profits of the distributing corpo-
ration . . . the earnings and profits of the
controlled corporation, immediately after
the transaction, shall be equal to the
amount of such decrease. If the earnings
and profits of the controlled corporation
immediately before the transaction are
more than the amount of the decrease in
the earnings and profits of the distributing
corporation, they shall remain the same.”
Section 1.312–10(b) reflects the princi-
ple that a pro rata portion of a distributing
corporation’s earnings and profits should
be reduced to account for the distribution
of the controlled corporation. In addition,
the requirement that the earnings and
profits of the controlled corporation at
least equal the reduction in the distribut-
ing corporation’s earnings and profits ap-
pears intended to prevent a bailout of
earnings and profits through the con-
trolled corporation, while preventing the
potential double counting of earnings and
profits in situations where the distributing
corporation did not organize the con-
trolled corporation.
In consideration of the complexities
raised by the cross-border application of
the §1.312–10(b) adjustment to the con-
trolled corporation’s earnings and profits,
taken together with the current rules that
prevent the potential bailout of earnings
and profits in the international context
(such as the §1.367(b)–5 requirement that
a shareholder include in income a reduc-
tion in its section 1248 amount), the IRS
and Treasury have concluded that the
§1.312–10(b) rules should be modified
when applied to section 367(b) transac-
tions. Accordingly, the proposed regula-
tions provide that the earnings and profits
of the distributing corporation are de-
creased in an amount equal to the amount
by which the earnings and profits of the
distributing corporation would have been
decreased if it had transferred the stock of
the controlled corporation to a new corpo-
ration in a D/355 distribution. However,
the earnings and profits of the controlled
corporation are not increased or replaced.
The reduction in earnings and profits (and
related foreign income taxes) of the dis-
tributing corporation disappears unless
otherwise included in income, such as
under §1.367(b)–5.
Section 1.312–10 does not specifically
address the allocation and reduction of
earnings and profits in connection with a
D/355 distribution that involves a preex-
isting controlled corporation. The pro-
posed regulations provide that, in such a
case, the distributing corporation’s earn-
ings and profits are reduced in a manner
that incorporates both the rules applicable
to a D/355 distribution with a newly cre-
ated controlled corporation and a section
355 distribution that is not preceded by a
D reorganization. The rule thus accounts
for a decrease in earnings and profits at-
tributable to assets transferred to the con-
trolled corporation as part of the D reor-
ganization as well as a decrease in
earnings and profits attributable to the
distribution of stock of a preexisting con-
trolled corporation (without regard to the
D reorganization). The controlled corpo-
ration succeeds only to those earnings and
profits allocable to the property it receives
in the D reorganization.
In consideration of the international
provisions’ distinctions among classes
and categories of earnings and profits,
proposed §1.367(b)–8(b) specifically ad-
dresses the determination of which earn-
ings and profits of the distributing corpo-
ration are affected by a foreign divisive
transaction. The proposed regulation pro-
vides that an allocation or reduction in
earnings and profits shall generally be pro
rata out of a cross-section of the distribut-
ing corporation’s tax history (except to
the extent it is included in income as a
deemed dividend such as under
§1.367(b)–3 or §1.367(b)–5). This rule
determines the earnings and profits (and
related foreign income taxes, where ap-
plicable) that remain in the distributing
corporation after the transaction as well as
any earnings and profits (and related for-
eign income taxes, where applicable) to
which the controlled corporation succeeds
in a D reorganization.
The proposed §1.367(b)–8(b) cross-
section rule decreases the earnings and
November 27, 20005282000–48 I.R.B.

profits of a distributing corporation with-
out regard to the type of income generated
by the assets of the controlled corpora-
tion. This is consistent with the general
assumption in §1.312–10 and the pro-
posed regulations that the earnings and
profits of the distributing corporation
should be decreased proportionately to re-
flect the transfer or distribution of assets,
rather than by some other measure, such
as by determining the earnings and profits
attributable to the income generated by
assets transferred or distributed (a tracing
model) or by decreasing most recently ac-
cumulated earnings and profits to the ex-
tent of assets transferred or distributed (a
dividend model).
2. Branch profits tax considerations
Notwithstanding the above-described
rules, the proposed regulations provide
that an allocation or reduction in a distrib-
uting corporation’s earnings and profits
shall not reduce the distributing corpora-
tion’s effectively connected earnings and
profits or non-previously taxed accumu-
lated effectively connected earnings and
profits, as defined in the branch profits
rule in section 884 (branch earnings).
Both a domestic or foreign distributing
corporation can potentially have branch
earnings that are subject to the branch
profits tax.
In the case of a foreign divisive trans-
action that does not include a D reorgani-
zation, a U.S. branch of a foreign distrib-
uting corporation would be retained by
the foreign distributing corporation. Ac-
cordingly, §1.367(b)–8 should not reduce
the foreign distributing corporation’s
branch earnings because such a reduction
would improperly decrease the earnings
subject to the branch profits tax upon the
section 355 distribution (which would
trigger the branch profits tax under sec-
tion 884). The same issues arise in the
case of a D/355 distribution in which a
foreign distributing corporation transfers
the assets that are not part of a U.S.
branch to a controlled corporation. The
IRS and Treasury do not believe that it is
appropriate to reduce the earnings that
could give rise to a subsequent branch
profits tax under these circumstances.
Different issues arise in a foreign divi-
sive transaction in which a foreign distrib-
uting corporation transfers the assets of a
U.S. branch to a controlled corporation as
part of a D/355 distribution. While the
branch profits rules permit a deferral of
the branch profits tax in certain instances
(by allowing branch earnings to be allo-
cated to the domestic transferee in propor-
tion to the assets transferred when a
branch is incorporated in a section 351
exchange in a domestic corporation (see
§1.884–2T(d)(1)), the branch profits tax
is triggered in any event if stock of the in-
corporated branch is later distributed to its
shareholders. See §1.884–2T(d)(5). Ac-
cordingly, because foreign divisive trans-
actions include a section 355 distribution
immediately following the D reorganiza-
tion, it would be unnecessary and inap-
propriate to attribute branch earnings to a
domestic controlled corporation under
proposed §1.367(b)–8.
Similar branch profits issues can arise
with respect to a domestic distributing
corporation. While branch earnings are
accumulated by a foreign corporation,
such earnings may have been carried over
to a domestic corporation in a prior sec-
tion 351 or 381 transaction. See
§1.884–2T(c)(4). Accordingly, the pro-
posed regulations treat domestic distribut-
ing corporations in the same manner as
foreign distributing corporations with re-
spect to branch earnings.
3. Domestic corporation distributes
stock of a foreign corporation
In foreign divisive transactions involv-
ing a domestic distributing corporation
and a foreign controlled corporation, the
foreign controlled corporation may suc-
ceed to earnings and profits of the domes-
tic distributing corporation. The regula-
tions provide that sections 243(e) and
861(a)(2)(C) apply to earnings and profits
allocated to the foreign controlled corpo-
ration that were accumulated by a domes-
tic corporation. In addition, a post-trans-
action distribution out of earnings and
profits allocated to the foreign controlled
corporation is generally treated as a U.S.
source dividend under section 904(g) and
for purposes of Chapter 3 of subtitle A of
the Code. See Georday Enterprises v.
Commissioner, 126 F.2d 384 (4
th
Cir.
1942).
4. Foreign corporation distributes stock
of a domestic corporation
In foreign divisive transactions involv-
ing a foreign distributing corporation and
a domestic controlled corporation, two is-
sues arise in determining the appropriate
reduction in the foreign distributing cor-
poration’s earnings and profits and its ef-
fects on the earnings and profits of the do-
mestic controlled corporation. First, it
should be determined whether it is appro-
priate to reduce PTI of the foreign distrib-
uting corporation and, if so, in what man-
ner (e.g., if the foreign distributing
corporation has earnings and profits that
are PTI and not PTI, should the reduction
in earnings and profits be out of PTI first,
last, pro rata, or depending on the identity
of the controlled corporation’s sharehold-
ers). As in the case of §1.367(b)–7,
§1.367(b)–8 reserves on PTI issues, and
the IRS and Treasury solicit comments
with respect to the appropriate treatment
of these amounts.
Second, a domestic corporation suc-
ceeds to the earnings and profits of a for-
eign corporation if the section 355 distrib-
ution is preceded by a D reorganization.
Because earnings and profits are allocable
from foreign corporate solution to U.S.
corporate solution, U.S. shareholders are
required to include in income the all earn-
ings and profits amount attributable to
earnings and profits that carry over to the
controlled corporation. The proposed
regulations provide rules that coordinate
the proposed §1.367(b)–8 and the current
§1.367(b)–3 regimes. The regulations,
however, reserve with respect to the treat-
ment of U.S. persons that own foreign
distributing corporation stock after a non
pro rata distribution. The IRS and Trea-
sury invite comments as to whether U.S.
shareholders should have an all earnings
and profits amount inclusion in connec-
tion with a non pro rata foreign divisive
transaction in which they do not receive
stock of the domestic controlled corpora-
tion.
5. Foreign corporation distributes stock
of a foreign corporation
In foreign divisive transactions involv-
ing a foreign distributing corporation and
a foreign controlled corporation, the for-
eign controlled corporation may succeed
to earnings and profits of the foreign dis-
tributing corporation. Because such earn-
ings and profits are allocated from one
foreign corporation to another foreign
corporation, the transaction raises issues
similar to those in a foreign 381 transac-
2000–48 I.R.B.529November 27, 2000

tion. Accordingly, the proposed regula-
tions adopt and apply the principles in
proposed regulation §1.367(b)–7 to these
transactions.
E.Prop. Reg. §1.367(b)–9
Proposed §1.367(b)–9 provides special
rules applicable to foreign-to-foreign F
reorganizations and foreign 381 transac-
tions in which either the foreign target
corporation or the foreign acquiring cor-
poration is newly created. Proposed
§1.367(b)–9 also applies to foreign divi-
sive transactions that involve a foreign
distributing and a foreign controlled cor-
poration, either of which is newly created.
Under proposed §1.367(b)–9, a foreign
surviving corporation succeeds to earnings
and profits, deficits in earnings and profits,
and foreign income taxes without regard to
the proposed §1.367(b)–7 hovering deficit
rules. See section 1.381(b)–1(a)(2) (pro-
viding an analogous rule with respect to do-
mestic F reorganizations).
This rule prevents inappropriate tax
consequences. For example, under the
generally applicable hovering deficit
rules, a foreign corporation with signifi-
cant deficits in earnings and profits could
combine with a newly created foreign
corporation and thereafter distribute divi-
dends (along with deemed paid foreign
income taxes under section 902), despite
the presence of a significant deficit that
would have precluded a dividend distribu-
tion before the transaction. Proposed
§1.367(b)–7 provides the Commissioner
discretion to apply the principles of pro-
posed §1.367(b)–9 to circumstances
where a principal purpose of the foreign
381 transaction is to affirmatively use the
hovering deficit rule in order to gain a tax
benefit.
Proposed Effective Dates
These regulations are proposed to
apply to section 367(b) exchanges that
occur on or after 30 days after these regu-
lations are published as final regulations
in the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulation
does not impose a collection of informa-
tion on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic or
written comments (a signed original and
eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying.
A public hearing has been scheduled
for March 13, 2001, beginning at 10 a.m.,
in room 7218 of the Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building secu-
rity procedures, visitors must enter at the
10th Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFOR-
MATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments and
an outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
February 20, 2001. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
uling of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Anne O’Connell Devereaux, Of-
fice of Associate Chief Counsel (Interna-
tional). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
* * * * *
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 revising the entries
for sections 1.367(b)–7, 1.367(b)–8, and
1.367(b)–9 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(b)–7 also issued under
26 U.S.C. 367(a) and (b), 26 U.S.C. 902,
and 26 U.S.C. 904.
Section 1.367(b)–8 also issued under
26 U.S.C. 367(a) and (b), 26 U.S.C. 902,
and 26 U.S.C. 904.
Section 1.367(b)–9 also issued under
26 U.S.C. 367(a) and (b), 26 U.S.C. 902,
and 26 U.S.C. 904. * * *
Par. 2. Section 1.312–10 is amended by
adding paragraph (d) to read as follows:
§1.312–10 Allocation of earnings in
certain corporate separations.
* * * * *
(d) For additional rules involving for-
eign corporations, see §1.367(b)–8.
Par. 3. Section 1.367(b)–0 is amended
by:
1. Revising the introductory text.
2. Revising the entry for
§1.367(b)–2(j)(3) and adding entries for
§1.367(b)–2(j)(4), (j)(5), and (l).
3. Adding entries for §1.367(b)–3(e)
and (f).
4. Adding entries for
§1.367(b)–5(c)(2)(i), (c)(2)(ii), and (e)(3).
5. Adding entries for §§1.367(b)–7
through 1.367(b)–9.
The revisions and additions read as fol-
lows:
§1.367(b)–0 Table of contents.
This section lists the paragraphs con-
tained in §§1.367(b)–1 through
1.367(b)–9.
* * * * *
§1.367(b)–2 Definitions and special
rules.
November 27, 20005302000–48 I.R.B.

* * * * *
(j) * * *
(3) Dividend described in section 243(e).
(4) Coordination with §1.367(b)–8(c)(2).
(5) Other rules.
* * * * *
(l) Additional definitions.
(1) Foreign income taxes.
(2) Post-1986 undistributed earnings.
(3) Post-1986 foreign income taxes.
(4) Pre-1987 accumulated profits.
(5) Pre-1987 foreign income taxes.
(6) Pre-1987 section 960 earnings and
profits.
(7) Pre-1987 section 960 foreign income
taxes.
(8) Earnings and profits.
(9) Look-through corporation.
(10) Non-look-through 10/50 corporation.
(11) Less-than-10%-U.S.-owned foreign
corporation.
(12) Separate category.
(13) Statutory grouping of earnings and
profits.
§1.367(b)–3 Repatriation of foreign
corporate assets in certain
nonrecognition transactions.
* * * * *
(e) Net operating loss and capital loss car-
ryovers.
(f) Carryover of earnings and profits.
* * * * *
§1.367(b)–5 Distributions of stock
described in section 355.
* * * * *
(c) * * *
(2) * * *
(i) In general.
(ii) Exception.
* * * * *
(e) * * *
(3) Divisive D reorganization with a pre-
existing controlled corporation.
* * * * *
§1.367(b)–7 Carryover of earnings and
profits and foreign income taxes in
certain foreign-to-foreign nonrecognition
transactions.
(a) Scope.
(b) General rules.
(1) Non-previously taxed earnings and
profits and related taxes.
(2) Previously taxed earnings and profits.
[Reserved]
(c) Ordering rule for post-transaction dis-
tributions.
(1) If foreign surviving corporation is a
look-through corporation.
(2) If foreign surviving corporation is a
non-look-through 10/50 corporation.
(3) If foreign surviving corporation is a
less-than-10%-U.S.-owned foreign corpo-
ration.
(d) Look-through pool.
(1) In general.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(2) Hovering deficit.
(i) Offset rule.
(ii) Related taxes.
(3) Examples.
(e) Non-look-through pool.
(1) If foreign surviving corporation is a
look-through corporation.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(iii) Hovering deficit.
(A) Offset rule.
(B) Related taxes.
(iv) Examples.
(2) If foreign surviving corporation is a
non-look-through 10/50 corporation.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(iii) Hovering deficit.
(A) Offset rule.
(B) Related taxes.
(iv) Examples.
(f) Pre-pooling annual layers.
(1) If foreign surviving corporation is a
look-through corporation or a non-look-
through 10/50 corporation.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(iii) Deficits.
(A) Aggregate positive earnings and
profits.
(B) Aggregate deficit in earnings and
profits.
(iv) Pre-1987 section 960 earnings and
profits and foreign income taxes.
(v) Examples.
(2) If foreign surviving corporation is a
less-than-10%-U.S.-owned foreign corpo-
ration. (i) Qualifying earnings and taxes.
(ii) Carryover rule.
(iii) Deficits.
(A) Aggregate positive earnings and
profits.
(B) Aggregate deficit in earnings and
profits.
(iv) Pre-1987 section 960 earnings and
profits and foreign income taxes.
(v) Examples.
(g) Special rules.
(1) Treatment of deficit.
(2) Reconciling taxable years.
(3) Post-transaction change of status.
(4) Ordering rule for offsetting multiple
hovering deficits.
(i) Rule.
(ii) Example.
(5) Pro rata rule for earnings during trans-
action year.
(6) Nonapplicability of hovering deficit
rules to certain transactions.
(i) Rule.
(ii) Example.
(h) Effective date.
§1.367(b)–8 Allocation of earnings and
profits and foreign income taxes in
certain foreign corporate separations.
(a) Scope.
(b) General rules.
(1) Application of §1.312–10.
(i) In general.
(ii) Special rules for application of
§1.312–10(b).
(A) Distributing corporation.
(B) Controlled corporation.
(iii) Net deficit in pre-transaction earn-
ings.
(iv) Use of net bases.
(v) Gain recognized by distributing cor-
poration.
(vi) Coordination with branch profits tax.
(2) Cross-section of earnings and profits.
(3) Foreign income taxes.
(4) Divisive D reorganization with a pre-
existing controlled corporation.
(i) Calculation of earnings and profits of
distributing corporation.
(ii) Calculation of earnings and profits of
controlled corporation.
(c) Foreign divisive transactions involv-
ing a domestic distributing corporation
and a foreign controlled corporation.
(1) Scope.
(2) Earnings and profits allocated to a for-
eign controlled corporation.
(3) Examples.
(d) Foreign divisive transactions involv-
ing a foreign distributing corporation and
a domestic controlled corporation.
(1) Scope.
(2) Coordination with §1.367(b)–3.
(i) In general.
(ii) Determination of all earnings and
profits amount.
2000–48 I.R.B.531November 27, 2000

(iii) Interaction with section 358 and
§1.367(b)–2(e)(3)(ii).
(iv) Coordination with §1.367(b)–3(c).
(v) Special rule for U.S. persons that own
foreign distributing corporation stock
after a non pro rata distribution. [Re-
served]
(3) Foreign income taxes.
(4) Previously taxed earnings and profits.
[Reserved]
(5) Coordination with §1.367(b)–5.
(6) Examples.
(e) Foreign divisive transactions involv-
ing a foreign distributing corporation and
a foreign controlled corporation.
(1) Scope.
(2) Earnings and profits of foreign con-
trolled corporation.
(i) In general.
(ii) Special rule for pre-transaction earn-
ings allocated to a newly created con-
trolled corporation.
(3) Foreign income taxes.
(4) Previously taxed earnings and profits.
[Reserved]
(5) Coordination with §1.367(b)–5.
(6) Examples.
(f) Effective date.
§1.367(b)–9 Special rule for F
reorganizations and similar transactions.
(a) Scope.
(b) Hovering deficit rules inapplicable.
(c) Example.
(d) Effective date.
Par. 4. Section 1.367(b)–1 is amended
by:
1. Removing the language “and” at the
end of paragraph (c)(2)(iii).
2. Removing the period at the end of
paragraph (c)(2)(iv)(B) and adding “;” in
its place.
3. Adding paragraphs (c)(2)(v),
(c)(2)(vi), and (c)(2)(vii).
4. Revising paragraphs (c)(3)(ii)(A),
(c)(4)(iv), and (c)(4)(v).
The additions and revisions read as fol-
lows:
§1.367(b)–1 Other transfers.
* * * * *
(c) * * *
(2) * * *
(v) A foreign surviving corporation de-
scribed in §1.367(b)–7(a);
(vi) A distributing corporation that is
subject to the rules of §1.367(b)–8; and
(vii) A controlled corporation that is
subject to the rules of §1.367(b)–8.
(3) * * *
(ii) * * *
(A) United States shareholders (as de-
fined in §1.367(b)–3(b)(2)) of foreign
corporations described in paragraph
(c)(2)(i), (v), (vi), or (vii) of this section;
and
* * * * *
(4) * * *
(iv) A statement that describes any
amount (or amounts) required, under the
section 367(b) regulations, to be taken
into account as income or loss or as an ad-
justment (including an adjustment under
§1.367(b)–7, 1.367(b)–8, or 1.367(b)–9)
to basis, earnings and profits, or other tax
attributes as a result of the exchange;
(v) Any information that is or would be
required to be furnished with a Federal in-
come tax return pursuant to regulations
under section 332, 351, 354, 355, 356,
361, 368, or 381 (whether or not a Federal
income tax return is required to be filed),
if such information has not otherwise
been provided by the person filing the
section 367(b) notice;
* * * * *
Par. 5. Section 1.367(b)–2 is amended
by:
1. Revising paragraph (j)(1)(i).
2. Redesignating paragraph (j)(3) as
paragraph (j)(5).
3. Adding new paragraphs (j)(3) and
(j)(4).
4. Adding paragraph (l).
The revision and addition read as fol-
lows:
§1.367(b)–2 Definitions and special
rules.
* * * * *
(j) Sections 985 through 989—(1)
Change in functional currency of a quali-
fied business unit—(i) Rule. If, as a result
of a section 367(b) exchange described in
section 381(a) or 312(h), a qualified busi-
ness unit (as defined in section 989(a))
(QBU) has a different functional currency
determined under the rules of section
985(b) than it used prior to the transac-
tion, then the QBU shall be deemed to
have automatically changed its functional
currency immediately prior to the transac-
tion. A QBU that is deemed to change its
functional currency pursuant to this para-
graph (j) must make the adjustments de-
scribed in §1.985–5.
* * * * *
(3) Dividend described in section
243(e). Dividend distributions by a for-
eign corporation out of earnings and prof-
its accumulated by a domestic corporation
that are eligible for the dividends received
deduction under section 243(e) shall not
exceed an amount equal to the U.S. dollar
value of the earnings and profits at the
time the earnings and profits were accu-
mulated by such domestic corporation.
See §1.367(b)–8(c)(3), Example 1and
Example 3.
(4) Coordination with
§1.367(b)–8(c)(2). Solely for purposes of
Chapter 3 of subtitle A of the Internal
Revenue Code, dividend distributions by
a foreign corporation that are treated
under §1.367(b)–8(c)(2) as U.S. source
shall not exceed an amount equal to the
U.S. dollar value of the earnings and prof-
its at the time allocated to the foreign cor-
poration. See §1.367(b)–8(c)(3), Exam-
ple 1.
* * * * *
(l) Additional definitions—(1) Foreign
income taxes. The term foreign income
taxeshas the meaning set forth in §1.902–
1(a)(7).
(2) Post-1986 undistributed earnings.
The term post-1986 undistributed earn-
ingshas the meaning set forth in §1.902-
1(a)(9).
(3) Post-1986 foreign income taxes.
The term post-1986 foreign income taxes
has the meaning set forth in §1.902–
1(a)(8).
(4) Pre-1987 accumulated profits. The
term pre-1987 accumulated profitsmeans
the earnings and profits described in
§1.902–1(a)(10)(i), computed in accor-
dance with the rules of §1.902–
1(a)(10)(ii).
(5) Pre-1987 foreign income taxes.
The term pre-1987 foreign income taxes
has the meaning set forth in §1.902–
1(a)(10)(iii).
(6) Pre-1987 section 960 earnings and
profits. The term pre-1987 section 960
earnings and profitsmeans the earnings
and profits of a foreign corporation accu-
mulated in taxable years beginning before
January 1, 1987, computed under
§1.964–1(a) through (e), and translated
into the functional currency (as deter-
mined under section 985) of the foreign
corporation at the spot rate on the first day
of the foreign corporation’s taxable year
November 27, 20005322000–48 I.R.B.

beginning after December 31, 1986. For
further guidance, see Notice 88–70
(1988–2 C.B. 369, 370) (see also
§601.601(d)(2) of this chapter). The term
pre-1987 section 960 earnings and profits
does not include earnings and profits that
represent previously taxed earnings and
profits for purposes of section 959.
(7) Pre-1987 section 960 foreign in-
come taxes. The term pre-1987 section
960 foreign income taxesmeans the for-
eign income taxes related to pre-1987 sec-
tion 960 earnings and profits, determined
in accordance with the rules of
§1.902–1(a)(10)(iii), except that the U.S.
dollar amounts of pre-1987 section 960
foreign income taxes are determined by
reference to the exchange rates in effect
when the taxes were paid or accrued.
(8) Earnings and profits. The term
earnings and profitsmeans post-1986
undistributed earnings, pre-1987 accumu-
lated profits, and pre-1987 section 960
earnings and profits.
(9) Look-through corporation. The
term look-through corporationmeans a
foreign corporation that is subject to the
look-through rules of section 904(d)(3) or
section 904(d)(4) (as in effect for taxable
years beginning after December 31, 2002
(the day before the effective date of sec-
tion 1105(b) of Public Law 105-34 (111
Stat. 788)) and regulations thereunder.
(10) Non-look-through 10/50 corpora-
tion. The term non-look- through 10/50
corporationmeans a noncontrolled sec-
tion 902 corporation as defined in section
904(d)(2)(E) that is not a look-through
corporation.
(11) Less-than-10%-U.S.-owned for-
eign corporation. The term less-than-
10%-U.S.-owned foreign corporation
means a foreign corporation that is neither
a look-through corporation nor a non-
look-through 10/50 corporation.
(12) Separate category. The term sep-
arate categoryhas the meaning set forth
in section 904(d)(1), and shall also in-
clude any other category of income to
which section 904(a), (b), and (c) are ap-
plied separately under any other provision
of the Internal Revenue Code (e.g., sec-
tions 56(g)(4)(C)(iii)(IV), 245(a)(10),
865(h), 901(j), and 904(g)(10)).
(13) Statutory grouping of earnings
and profits. The term statutory grouping
of earnings and profitsmeans the earn-
ings and profits from a specific source or
activity that must be determined for pur-
poses of applying a provision of the Inter-
nal Revenue Code. Compare
§1.861–8(a)(4) (providing an analogous
definition for statutory grouping of gross
income).
Par. 6. Section 1.367(b)–3 is amended
by adding paragraphs (e) and (f) to read as
follows:
§1.367(b)–3 Repatriation of foreign
corporate assets in certain
nonrecognition transactions.
* * * * *
(e) Net operating loss and capital loss
carryovers. A net operating loss or capi-
tal loss carryover of the foreign acquired
corporation is described in section
381(c)(1) and (c)(3) and thus is eligible to
carry over from the foreign acquired cor-
poration to the domestic acquiring corpo-
ration only to the extent the underlying
deductions or losses were allowable under
chapter 1 of subtitle A of the Internal Rev-
enue Code. Thus, only a net operating
loss or capital loss carryover that is effec-
tively connected with the conduct of a
trade or business within the United States
(or that is attributable to a permanent es-
tablishment, in the context of an applica-
ble United States income tax treaty) is eli-
gible to be carried over under section 381.
For further guidance, see Rev. Rul.
72–421 (1972–2 C.B. 166) (see also
§601.601(d)(2) of this chapter).
(f) Carryover of earnings and profits.
Except to the extent otherwise specifi-
cally provided (see, e.g., Notice 89–79
(1989–2 C.B. 392) (see also
§601.601–(d)(2) of this chapter)), earn-
ings and profits of the foreign acquired
corporation that are not included in in-
come as a deemed dividend under the sec-
tion 367(b) regulations (or deficit in earn-
ings and profits) are eligible to carry over
from the foreign acquired corporation to
the domestic acquiring corporation under
section 381(c)(2) or §1.367(b)–8(b)(1)(i)
only to the extent such earnings and prof-
its (or deficit in earnings and profits) are
effectively connected with the conduct of
a trade or business within the United
States (or are attributable to a permanent
establishment, in the context of an applic-
able United States income tax treaty). All
other earnings and profits (or deficit in
earnings and profits) of the foreign ac-
quired corporation shall not carry over to
the domestic acquiring corporation and,
as a result, shall be eliminated.
Par. 7. Section 1.367(b)–5 is amended
by:
1. Revising paragraphs (b)(1)(ii) and
(c)(2).
2. Adding paragraph (e)(3).
The revisions and addition read as fol-
lows:
§1.367(b)–5 Distributions of stock
described in section 355.
* * * * *
(b) * * *
(1) * * *
(ii) If the distributee is an individual or
a tax-exempt entity as described in
§1.337(d)–4(c)(2) then, solely for pur-
poses of determining the gain recognized
by the distributing corporation, the con-
trolled corporation shall not be considered
to be a corporation, and the distributing
corporation shall recognize any gain (but
not loss) realized on the distribution.
* * * * *
(c) * * *
(2) Adjustment to basis in stock and in-
come inclusion—(i) In general. If the dis-
tributee’s postdistribution amount (as de-
fined in paragraph (e)(2) of this section)
with respect to the distributing or con-
trolled corporation is less than the distrib-
utee’s predistribution amount (as defined
in paragraph (e)(1) of this section) with re-
spect to such corporation, then the distrib-
utee’s basis in such stock immediately
after the distribution (determined under
the normal principles of section 358) shall
be reduced by the amount of the differ-
ence. However, the distributee’s basis in
such stock shall not be reduced below
zero, and to the extent the foregoing re-
duction would have reduced basis below
zero, the distributee shall instead include
such amount in income as a deemed divi-
dend from such corporation. See, e.g.,
paragraph (g)Example 1of this section.
(ii) Exception. The basis reduction rule
of paragraph (c)(2)(i) of this section shall
apply only to the extent such reduction in-
creases the distributee’s section 1248
amount (as defined in §1.367(b)–2(c)(1))
with respect to the distributing or con-
trolled corporation; otherwise such basis
reduction shall be replaced by the income
inclusion rule of paragraph (c)(2)(i) of
this section. See, e.g., §1.367(b)–8(d)(6)
Example 2.
2000–48 I.R.B.533November 27, 2000

* * * * *
(e) * * *
(3) Divisive D reorganization with a
preexisting controlled corporation. In the
case of a transaction described in
§1.367(b)–8(b)(4), the predistribution
amount with respect to a distributing or
controlled corporation shall be computed
after the allocation of the distributing cor-
poration’s earnings and profits described in
§1.367(b)–8(b)(4)(i)(A) and (b)(4)(ii)(A)
(without regard to the parenthetical phrase
in §1.367(b)–8(b)(4)(ii)(A)), but before the
reduction in the distributing corporation’s
earnings and profits described in
§1.367(b)–8(b)(4)(i)(B). See, e.g.,
§1.367(b)–8(d)(6) Example 3 and
§1.367(b)–8(e)(7) Example 3.
* * * * *
Par. 8. In §1.367(b)–6, paragraph
(a)(1) is revised to read as follows:
§1.367(b)–6 Effective dates and
coordination rules.
(a) Effective date—(1) In general. Sec-
tions 1.367(b)–1 through 1.367(b)–5, and
this section, apply to section 367(b) ex-
changes that occur on or after the date that
is 30 days after the date these regulations
are published as final regulations in the
Federal Register. For guidance with re-
spect to section 367(b) exchanges that
occur prior to the date 30 days after these
regulations are published as final regula-
tions in the Federal Register,see
§§1.367(b)–1 through 1.367(b)–6 in ef-
fect prior to the date 30 days after these
regulations are published in the Federal
Register(see 26 CFR part 1 revised as of
April 1, 2000).
Par. 9. Section 1.367(b)–7 is added to
read as follows:
§1.367(b)–7 Carryover of earnings and
profits and foreign income taxes in
certain foreign-to-foreign nonrecognition
transactions.
(a) Scope. This section applies to an ac-
quisition by a foreign corporation (foreign
acquiring corporation) of the assets of an-
other foreign corporation (foreign target
corporation) in a transaction described in
section 381 (foreign 381 transaction).
This section describes the manner and ex-
tent to which earnings and profits and for-
eign income taxes of the foreign acquiring
corporation and the foreign target corpora-
tion carry over to the surviving foreign
corporation (foreign surviving corpora-
tion). See §1.367(b)–9 for special rules
governing reorganizations described in
section 368(a)(1)(F) and foreign 381
transactions in which either the foreign
target corporation or the foreign acquiring
corporation is newly created.
(b) General rules—(1) Non-previously
taxed earnings and profits and related
taxes. Earnings and profits and related
foreign income taxes of the foreign ac-
quiring corporation and the foreign target
corporation (pre-transaction earnings and
pre- transaction taxes, respectively) shall
carry over to the foreign surviving corpo-
ration in the manner described in para-
graphs (d), (e), (f), and (g) of this section.
Dividend distributions by the foreign sur-
viving corporation (post-transaction dis-
tributions) shall be out of earnings and
profits and shall reduce related foreign in-
come taxes in the manner described in
paragraph (c) of this section.
(2) Previously taxed earnings and
profits. [Reserved]
(c) Ordering rule for post-transaction
distributions. Dividend distributions out
of a foreign surviving corporation’s earn-
ings and profits shall be ordered in accor-
dance with the rules of paragraph (c)(1),
(2), or (3) of this section, depending on
whether the foreign surviving corporation
is a look-through corporation, a non-look-
through 10/50 corporation, or a less-than-
10%-U.S.-owned foreign corporation.
(1) If foreign surviving corporation is a
look-through corporation. In the case of
a foreign surviving corporation that is a
look-through corporation, post-transac-
tion distributions shall be first out of the
look-through pool (as described in para-
graph (d) of this section), second out of
the non-look-through pool (as described
in paragraph (e)(1) of this section), and
third out of the pre-pooling annual layers
(as described in paragraph (f)(1) of this
section) under an annual last-in, first-out
(LIFO) method.
(2) If foreign surviving corporation is a
non-look-through 10/50 corporation. In
the case of a foreign surviving corporation
that is a non-look-through 10/50 corpora-
tion, post-transaction distributions shall be
first out of the non-look-through pool (as
described in paragraph (e)(2) of this sec-
tion), and second out of the pre-pooling an-
nual layers (as described in paragraph (f)(1)
of this section) under the LIFO method.
(3) If foreign surviving corporation is a
less-than-10%- U.S.-owned foreign cor-
poration. In the case of a foreign surviv-
ing corporation that is a less-than-10%-
U.S.-owned corporation, post-transaction
distributions shall be out of the pre-pool-
ing annual layers (as described in para-
graph (f)(2) of this section) under the
LIFO method.
(d) Look-through pool. If the foreign
surviving corporation is a look-through
corporation, then the look-through pool
shall be determined under the rules of this
paragraph (d).
(1) In general—(i) Qualifying earnings
and taxes. The look-through pool shall
consist of the post-1986 undistributed
earnings and related post-1986 foreign in-
come taxes of the foreign acquiring cor-
poration and the foreign target corpora-
tion that were subject to the look-through
provisions of section 904(d)(3) or section
904(d)(4) (as in effect for taxable years
beginning after December 31, 2002 (the
day before the effective date of section
1105(b) of Public Law 105-34 (111 Stat.
788)) and regulations thereunder.
(ii) Carryover rule. Subject to para-
graph (d)(2) of this section, the amounts
described in paragraph (d)(1)(i) of this
section attributable to the foreign acquir-
ing corporation and the foreign target cor-
poration shall carry over to the foreign
surviving corporation and shall be com-
bined on a separate category-by-separate
category basis.
(2) Hovering deficit. The rules of this
paragraph (d)(2) apply when the foreign ac-
quiring corporation or the foreign target
corporation has a deficit in one or more
separate categories of post-1986 undistrib-
uted earnings described in paragraph
(d)(1)(i) of this section immediately prior to
the foreign 381 transaction. In the event
both the foreign acquiring corporation and
the foreign target corporation have a deficit
in the same separate category of earnings
and profits, such deficits and their related
foreign income taxes shall be combined for
purposes of applying this paragraph (d)(2).
See also paragraphs (g)(1) and (4) of this
section (describing other rules applicable to
a deficit described in this paragraph (d)(2)).
(i) Offset rule. A deficit in a separate cat-
egory of earnings and profits described in
this paragraph (d)(2) shall offset only earn-
ings and profits accumulated by the foreign
surviving corporation after the foreign 381
November 27, 20005342000–48 I.R.B.

transaction (post-transaction earnings) in
the same separate category of earnings and
profits.
(ii) Related taxes. Foreign income taxes
that are related to a deficit in a separate cat-
egory of earnings and profits described in
this paragraph (d)(2) shall be added to the
foreign surviving corporation’s post-1986
foreign income taxes related to that sepa-
rate category of earnings and profits only
after post- transaction earnings in the same
separate category have been offset by and
exceed the entire amount of the deficit.
(3) Examples. The following examples
illustrate the rules of this paragraph (d). The
examples presume the following facts: For-
eign corporations A and B were both incor-
porated after December 31, 1986, always
have been controlled foreign corporations,
and always have had calendar taxable years.
None of the shareholders of foreign corpo-
rations A and B are required to include any
amount in income under §1.367(b)-4 as a
result of the foreign 381 transaction. For-
eign corporations A and B (and all of their
respective qualified business units as de-
fined in section 989) maintain a “u” func-
tional currency. Finally, unless otherwise
stated, any earnings and profits described in
section 904(d)(1)(D) and 904(d)(1)(E)
(shipping income and 10/50 dividends, re-
spectively) qualified for the high tax excep-
tion from subpart F income under section
954(b)(4), and all United States sharehold-
ers elected to exclude such earnings and
profits from subpart F income under section
954(b)(4) and §1.954-1(d)(5). The exam-
ples are as follows:
Example 1—(i) Facts. (A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation A
Separate Category:E&PForeign Taxes
10/50 dividends from
FC1, a noncontrolled
section 902 corporation100u$40
General300u
$60
400u$100
Foreign Corporation B
Separate Category:E&PForeign Taxes
Shipping200u$40
10/50 dividends from
FC2, a noncontrolled
section 902 corporation 50u$20
General 300u$70
550u$130
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a controlled foreign
corporation (CFC).
(ii) Result. Under the rules described in para-
graph (d)(1) of this section, foreign surviving corpo-
ration has the following earnings and profits and for-
eign income taxes accounts:
Separate Category:E&PForeign Taxes
Shipping200u $40
General 600u$130
10/50 dividends from FC1100u $40
10/50 dividends from FC2 50u
$20
950u$230
(iii) Post-transaction distribution. (A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 475u to its
shareholders. Under the rules described in
§1.902–1(d)(1) and paragraph (c)(1) of this section,
the distribution is out of separate categories and re-
duces foreign income taxes as follows:
Separate Category:E&PForeign Taxes
Shipping100u $20
General 300u $65
10/50 dividends from FC150u $20
10/50 dividends from FC2 25u$10
475u$115
(B) The foreign income taxes available to for-
eign surviving corporation shareholders upon the
distribution are subject to the generally applicable
rules and limitations, such as those of sections 902
and 904(d).
(C) Immediately after the distribution, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
Separate Category:E&PForeign Taxes
Shipping100u$20
General300u $65
10/50 dividends from FC150u $20
10/50 dividends from FC2 25u
$10
475u$115
Example 2—(i) Facts. (A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation A
Separate Category:E&PForeign Taxes
Shipping(100u)$ 5
10/50 dividends400u $160
General(200u)
$ 25
100u$190
Foreign Corporation B
Separate Category:E&PForeign Taxes
Shipping100u$20
General 300u
$60
400u$80
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a CFC.
(ii) Result. Under the rules described in para-
graphs (d)(1) and (2) of this section, foreign surviv-
ing corporation has the following earnings and prof-
its and foreign income taxes accounts:
2000–48 I.R.B.535November 27, 2000
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
PositiveTaxesHovering
Separate Category:E&PHovering DeficitAvailableDeficit
Shipping100u(100u)$ 20$ 5
10/50 dividends400u0u $160$ 0
General300u
(200u)$ 60$25
800u(300u)$240$30
(iii) Post-transaction distribution—(A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 400u to its
shareholders. Under the rules described in section
904(d)(3) and paragraph (c)(1) of this section, the
distribution is out of separate categories and reduces
foreign income taxes as follows:
Separate Category:E&PForeign Taxes
Shipping50u $ 10
10/50 dividends 200u $ 80
General 150u$ 30
400u$120
(B) The foreign income taxes available to for-
eign surviving corporation shareholders upon the
distribution are subject to the generally applicable
rules and limitations, such as those of sections 902
and 904(d).
(C) Immediately after the distribution, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:

(iv) Post-transaction earnings. (A) In its taxable
year ending on December 31, 2003, foreign surviv-
ing corporation accumulates earnings and profits
and pays related foreign income taxes as follows:
Separate Category:E&PForeign Taxes
Shipping 105u$20
General 100u
$20
205u$40
(B) None of foreign surviving corporation’s
earnings and profits for its 2003 taxable year qualify
as subpart F income as defined in section 952(a).
Under the rules described in paragraphs (d)(2)(i) and
(ii) of this section, foreign surviving corporation has
the following earnings and profits and foreign in-
come taxes accounts on December 31, 2003:
November 27, 20005362000–48 I.R.B.
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreignwith
PositiveTaxesHovering
Separate Category:E&PHovering DeficitAvailableDeficit
Shipping50u(100u)$ 10$ 5
10/50 dividends200u0u $ 80$ 0
General150u(200u)$ 30$25
400u(300u)$120$30
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
PositiveTaxesHovering
Separate Category:E&PHovering DeficitAvailableDeficit
Shipping 55u0u$ 35$ 0
10/50 dividends200u0u $ 80$ 0
General 150u(100u)$ 50$25
405u(100u)$165$25
Example 3—(i) Facts. The facts are the same as
Example 2(i), (ii), (iii), and (iv)(A), except that the
105u in the section 904(d)(1)(D) shipping separate
category accumulated by foreign surviving corpora-
tion during 2003 qualify as subpart F income, all of
which is included in income under section 951(a) by
United States shareholders (as defined in section
951(b)).
(ii) Result. (A) Under the rule described in para-
graph (g)(1) of this section, the 100u hovering
deficit in the shipping separate category does not re-
duce foreign surviving corporation’s current earn-
ings and profits for purposes of determining subpart
F income. Thus, foreign surviving corporation’s
United States shareholders include their pro rata
shares of the 105u in taxable income for the year and
are eligible for a deemed paid foreign tax credit
under section 960, computed by reference to their
pro rata shares of $20.32 (105u subpart F inclusion
4 (105u + 50u accumulated earnings and profits in
the shipping category = 155u) = 0.68%, x $30 for-
eign income taxes in the shipping category =
$20.32).
(B) Immediately after the subpart F inclusion and
section 960 deemed paid taxes (and taking into ac-
count the taxable year 2003 earnings and profits and
related taxes in the general category), foreign sur-
viving corporation has the following earnings and
profits and foreign income taxes accounts:
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
PositiveTaxesHovering
Separate Category:E&PHovering DeficitAvailableDeficit
Shipping 50u(100u)$ 9.68$ 5
10/50 dividends200u0u $ 80.00$ 0
General150u
(100u)$ 50.00$25
400u(200u)$139.68$30
(C) The 105u included as subpart F income con-
stitutes previously taxed earnings and profits under
section 959.
(e) Non-look-through pool—(1) If for-
eign surviving corporation is a look-
through corporation. If the foreign sur-
viving corporation is a look-through
corporation, then the non-look-through
pool shall be determined under the rules
of this paragraph (e)(1).
(i) Qualifying earnings and taxes. The
non-look-through pool shall consist of the
post-1986 undistributed earnings and re-
lated post-1986 foreign income taxes that
were accumulated (or treated as accumu-
lated) by the foreign target corporation or
the foreign acquiring corporation while it
was a non-look-through 10/50 corpora-
tion.
(ii) Carryover rule. Subject to para-
graph (e)(1)(iii) of this section, the
amounts described in pararaph (e)(1)(i) of
this section attributable to the foreign ac-
quiring corporation and the foreign target
corporation shall carry over to the foreign
surviving corporation but shall not be
combined. Thus, post-transaction distrib-
utions by the foreign surviving corpora-
tion out of the non-look-through pool
shall be made from the separate amounts
attributable to the foreign acquiring cor-
poration and the foreign target corpora-
tion on a pro rata basis, and shall reduce a
pro rata portion of any related foreign in-
come taxes.
(iii) Hovering deficit. The rules of this
paragraph (e)(1)(iii) apply when the for-

eign acquiring corporation or the foreign
target corporation (or both) has a deficit
in the post-1986 undistributed earnings
described in paragraph (e)(1)(i) of this
section immediately prior to the foreign
381 transaction. In the event that this
paragraph (e)(1)(iii) applies to a deficit of
both the foreign acquiring corporation
and the foreign target corporation, the
deficits shall not be combined and the
rules of this paragraph (e)(1)(iii) shall be
applied separately to each of such deficits
on a pro rata basis. See also paragraphs
(g)(1) and (g)(4) of this section (describ-
ing other rules applicable to a deficit de-
scribed in this paragraph (e)(1)(iii)).
(A) Offset rule. A deficit described in
this paragraph (e)(i)(iii) shall offset only
post-transaction earnings. The deficit
shall offset a pro rata portion of post-
transaction earnings accumulated in each
separate category of earnings and profits
by the foreign surviving corporation.
(B) Related taxes. Foreign income
taxes that are related to a deficit described
in this paragraph (e)(1)(iii) shall be added
to the foreign surviving corporation’s
post-1986 foreign income taxes (in the
applicable segregated portion of the non-
look-through pool) only after post-trans-
action earnings have been offset by and
exceed the entire amount of the deficit.
(iv) Examples. The following examples
illustrate the rules of this paragraph (e)(1).
The examples presume the following facts:
Foreign corporation A was a non-look-
through 10/50 corporation from its incorpo-
ration on January 1, 1995 until December
31, 1997; foreign corporation A became a
CFC on January 1, 1998 and has been a
CFC since that time. Foreign corporation
B has been a non-look-through 10/50 cor-
poration since its incorporation on January
1, 1993. Both foreign corporation A and
foreign corporation B always have had cal-
endar taxable years. None of the share-
holders of foreign corporation A are re-
quired to include any amount in income
under §1.367(b)-4 as a result of the foreign
381 transaction. Foreign corporations A
and B (and all of their respective qualified
business units as defined in section 989)
maintain a “u” functional currency. Finally,
any earnings and profits described in sec-
tion 904(d)(1)(E) (10/50 dividends) quali-
fied for the high tax exception from subpart
F income under section 954(b)(4), and all
United States shareholders elected to ex-
clude such earnings and profits from sub-
part F income under section 954(b)(4) and
§1.954–1(d)(5). The examples are as fol-
lows:
Example 1—(i) Facts. (A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation AE&PForeign Taxes
Separate Category:
10/50 dividends100u$ 40
General 300u$ 60
E&P Accumulated as
Non-Look-Through
10/50 Corporation:400u$100
800u$200
Foreign Corporation BE&PForeign Taxes
E&P Accumulated as
Non-Look- Through
10/50 Corporation:200u$ 40
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a CFC.
(ii) Result. Under the rules described in para-
graphs (d)(1), (e)(1)(i), and (e)(1)(ii) of this section,
foreign surviving corporation has the following
earnings and profits and foreign income taxes ac-
counts:
E&PForeign Taxes
Look-Through Pool
Separate Category:
10/50 dividends100u$ 40
General 300u $ 60
Two Side-by-Side Non-Look-
Through Pool Amounts:
Non-look-through pool
amount #1 (from Corp A)400u$100
Non-look-through pool
amount #2 (from Corp B)200u$ 40
1,000u$240
(iii) Post-transaction distribution.(A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 700u to its
shareholders. Under the rules described in para-
graphs (c)(1) and (e)(1)(ii) of this section, the distri-
bution is first out of the look-through pool, then out
of the non-look-through pool, as follows:
Look-Through Pool
Separate Category:E&PForeign Taxes
10/50 dividends100u $ 40
General300u $ 60
Non-Look-Through
Pool Amounts:
Non-look-through
pool amount #1 200u $ 50
Non-look-through
pool amount #2100u
$ 20
700u$170
(B) The foreign income taxes available to foreign
surviving corporation shareholders upon the distrib-
ution are subject to the generally applicable rules
and limitations, such as those of sections 902 and
904(d).
(C) Immediately after the distribution, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
Two Side-by-Side E&PForeign Taxes
Non-Look-Through
Pool Amounts:
Non-look-through
pool amount #1200u$50
Non-look-through
pool amount #2100u
$20
300u$70
Example 2—(i) Facts—(A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation AE&PForeign Taxes
Look-through Pool
Separate Category:
10/50 dividends100u$ 40
General300u $ 60
E&P Accumulated as
Non-Look-Through
10/50 Corporation:400u$100
800u$200
Foreign Corporation BE&PForeign Taxes
E&P Accumulated as
Non-Look-Through
10/50 Corporation:(200u)$ 5
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a CFC.
(ii) Result.Under the rules described in para-
graphs (d)(1), (e)(1)(i), (e)(1)(ii), and (e)(1)(iii) of
this section, foreign surviving corporation has the
following earnings and profits and foreign income
taxes accounts:
2000–48 I.R.B.537November 27, 2000

Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
PositiveTaxesHovering
E&PHovering DeficitAvailableDeficit
Look-through Pool
Separate Category:
10/50 dividends100u$ 40
General 300u $ 60
Two Side-by-Side
Non-Look-Through
Pool Amounts:
Non-look-through
pool amount #1400u$100
Non-look-through
pool amount #2_____(200u)
____$5
800u(200u)$200$5
November 27, 20005382000–48 I.R.B.
(iii) Post-transaction distribution. (A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 600u to its
shareholders. Under the rules described in para-
graphs (c)(1) and (e)(1)(ii) of this section, the distri-
bution is first out of the look-through pool, then out
of the non-look-through pool, as follows:
Look-Through Pool
Separate Category:E&PForeign Taxes
10/50 dividends100u$ 40
General300u$ 60
Non-Look-Through
Pool Amount:
Non-look-through
pool amount #1200u
$ 50
600u$150
(B) The foreign income taxes available to foreign
surviving corporation shareholders upon the distrib-
ution are subject to the generally applicable rules
and limitations, such as those of sections 902 and
904(d).
(C) Immediately after the distribution, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
PositiveTaxesHovering
E&PHovering DeficitAvailableDeficit
Two Side-by-Side
Non-Look-Through
Pool Amounts:
Non-look-through
pool amount #1200u$50
Non-look-through
pool amount #2_____(200u)____$5
200u(200u)$50$5
(iv) Post-transaction earnings. (A) In the tax-
able year ending on December 31, 2003, foreign sur-
viving corporation accumulates earnings and profits
and pays related foreign income taxes as follows:
Separate Category:E&PForeign Taxes
10/50 dividends150u$ 60
General300u
$ 60
450u$120
(B) None of the earnings and profits qualify as
subpart F income as defined in section 952(a).
Under the rules described in paragraph
(e)(1)(iii)(A) of this section, the 200u deficit in
non-look-through pool amount #2 offsets a pro rata
portion of the foreign surviving corporation’s post-
transaction earnings in each separate category.
Thus, the 200u deficit offsets 66.66u of section
904(d)(1)(E) 10/50 dividends separate category
earnings (33.33% of 200u) and offsets 133.34u of
section 904(d)(1)(I) general separate category
earnings (66.67% of 200u). Accordingly, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts as of
December 31, 2002:
E&PForeign Taxes
Look-Through Pool
Separate Category:
10/50 dividends83.34u$ 60
General166.66u$ 60
Two Side-by-Side
Non-Look-Through
Pool Amounts:
Non-look-through
pool amount #1200u$ 50
Non-look-through
pool amount #2______$ 5
450u$175
(C) Under paragraph (e)(1)(iii)(B) of this section,
the $5 of foreign income taxes associated with the
non-look-through pool amount #2 hovering deficit are
added to foreign surviving corporation’s available for-
eign income taxes because post-transaction earnings
have been offset by and exceed the deficit in the non-
look-through pool. However, the $5 of foreign in-
come taxes generally will not be reduced or deemed
paid unless a foreign tax refund restores a positive bal-
ance to the associated earnings pursuant to section
905(c), and thus will be trapped.
(2) If foreign surviving corporation is a
non-look-through 10/50 corporation. If
the foreign surviving corporation is a non-
look-through 10/50 corporation, then the
non-look-through pool shall be deter-
mined under the rules of this paragraph
(e)(2).
(i) Qualifying earnings and taxes. The
non-look-through pool shall consist of the
post-1986 undistributed earnings and re-
lated post-1986 foreign income taxes of
the foreign acquiring corporation and the
foreign target corporation.
(ii) Carryover rule. Subject to para-
graph (e)(2)(iii) of this section, the
amounts described in paragraph (e)(2)(i)
of this section attributable to the foreign
acquiring corporation and the foreign tar-
get corporation shall carry over to the for-
eign surviving corporation and shall be

combined as a single separate category of
earnings and profits under section
904(d)(1)(E).
(iii) Hovering deficit. The rules of this
paragraph (e)(2)(iii) apply when the for-
eign acquiring corporation or the foreign
target corporation (or both) has an aggre-
gate deficit in its post-1986 undistributed
earnings described in paragraph (e)(2)(i)
of this section immediately prior to the
foreign 381 transaction. In the event that
both the foreign acquiring corporation
and the foreign target corporation have
an aggregate deficit in post-1986 undis-
tributed earnings, such deficits and their
related foreign income taxes shall be
combined for purposes of applying this
paragraph (e)(2)(iii). See also paragraphs
(g)(1) and (4) of this section (describing
other rules applicable to a deficit de-
scribed in this paragraph (e)(2)(iii)).
(A) Offset rule. A deficit described in
this paragraph (e)(2)(iii) shall offset only
post-transaction earnings accumulated by
the foreign surviving corporation.
(B) Related taxes. Foreign income
taxes that are related to a deficit de-
scribed in this paragraph (e)(2)(iii) shall
be added to the foreign surviving corpo-
ration’s post-1986 foreign income taxes
only after post-transaction earnings have
been offset by and exceed the entire
amount of the deficit.
(iv) Examples. The following exam-
ples illustrate the rules of this paragraph
(e)(2). The examples presume the fol-
lowing facts: Both foreign corporation A
and foreign corporation B always have
had calendar taxable years. Foreign cor-
porations A and B (and all of their respec-
tive qualified business units as defined in
section 989) maintain a “u” functional
currency. Finally, any earnings and prof-
its described in section 904(d)(1)(E)
(10/50 dividends) qualified for the high
tax exception from subpart F income
under section 954(b)(4), and all United
States shareholders elected to exclude
such earnings and profits from subpart F
income under section 954(b)(4) and
§1.954-1(d)(5). The examples are as fol-
lows:
Example 1—(i) Facts. (A) Foreign corporations
A and B are and always have been non-look-through
10/50 corporations since they were incorporated in
1995. On December 31, 2001, foreign corporations
A and B have the following earnings and profits and
foreign income taxes accounts:
Foreign Corporation AE&PForeign Taxes
E&P accumulated as
non- look-through
10/50 corporation400u$100
Foreign Corporation BE&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation200u$ 40
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a non-look-through
10/50 corporation.
(ii) Result. Under the rules described in para-
graphs (e)(2)(i) and (ii) of this section, foreign sur-
viving corporation has the following earnings and
profits and foreign income taxes accounts:
E&PForeign Taxes
Non-Look-Through Pool600u$140
Example 2—(i) Facts—(A) Foreign corporation
A is and always has been a CFC since it was incor-
porated in 1995. Foreign corporation B is and al-
ways has been a non-look-through 10/50 corpora-
tion since it was incorporated in 1995. Immediately
before the foreign 381 transaction (but after applica-
tion of the rules of §1.367(b)-4 to foreign corpora-
tion A and its shareholders), foreign corporations A
and B have the following earnings and profits and
foreign income taxes accounts:
Foreign Corporation AE&PForeign Taxes
Separate Category:
Passive(200u)$ 10
10/50 dividends100u$ 40
General 300u$ 60
200u$110
Foreign Corporation BE&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation200u$ 30
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a non-look-through
10/50 corporation.
(ii) Result. Because neither foreign corporation
A nor foreign corporation B has an aggregate deficit
in post-1986 undistributed earnings, the rules de-
scribed in paragraphs (e)(2)(i) and (ii) of this section
apply, but the rules described in paragraph (e)(2)(iii)
do not. Accordingly, foreign corporation A’s net
positive earnings and profits of 200u (300u + 100u +
(200u)) and its aggregate foreign income taxes of
$110 ($10 + $40 + $60) are combined with the earn-
ings and profits and foreign income taxes of foreign
corporation B, so that foreign surviving corporation
has the following earnings and profits and foreign
income taxes accounts:
E&PForeign Taxes
Non-Look-Through Pool400u$140
Example 3—(i) Facts. (A) Foreign corporation
A is and always has been a CFC since it was incor-
porated in 1995. Foreign corporation B is and al-
ways has been a non-look-through 10/50 corpora-
tion since it was incorporated in 1995. On
December 31, 2001, foreign corporations A and B
have the following earnings and profits and foreign
income taxes accounts:
Foreign Corporation AE&PForeign Taxes
Separate Category:
Passive(200u)$ 10
10/50 dividends100u$ 40
General (300u)
$ 60
(400u)$110
Foreign Corporation BE&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation200u$ 30
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a non-look-through
10/50 corporation. (Assume that none of the share-
holders of foreign corporation A are required to in-
clude an amount in income under §1.367(b)–4 with
regard to this transaction.)
(ii) Result. Because foreign corporation A has an
aggregate deficit in post-1986 undistributed earn-
ings, the rules of paragraph (e)(2)(iii) of this section
apply. Accordingly, foreign corporation A’s 400u
aggregate deficit in earnings and profits ((200u) +
100u + (300u)) carries over as a hovering deficit to
foreign surviving corporation, so that foreign surviv-
ing corporation has the following earnings and prof-
its and foreign income taxes accounts:
2000–48 I.R.B.539November 27, 2000
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
TaxesHovering
Positive E&PHovering DeficitAvailableDeficit
Non-Look-
Through Pool200u(400u)$30$110

(iii) Post-transaction earnings. (A) In the tax-
able year ending on December 31, 2002, foreign sur-
viving corporation accumulates earnings and profits
and pays related foreign income taxes as follows:
E&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation500u $100
(B) Under the rule described in paragraph
(e)(2)(iii)(A) of this section, the hovering deficit of
400u in the non-look-through pool offsets 400u of
post-transaction earnings. Under the rules of para-
graph (e)(2)(iii)(B) of this section, the foreign in-
come taxes related to the hovering deficit are added
to foreign surviving corporation’s available foreign
income taxes because post-transaction earnings have
been offset by and exceed the deficit in the non-
look-through pool. Accordingly, foreign surviving
corporation has the following earnings and profits
and foreign income taxes accounts as of December
31, 2002:
E&PForeign Taxes
Non-Look-Through Pool300u $240
(f) Pre-pooling annual layers—(1) If
foreign surviving corporation is a look-
through corporation or a non-look-
through 10/50 corporation. If the foreign
surviving corporation is a look-through
corporation or a non-look-through 10/50
corporation, the pre-pooling annual layers
shall be determined under the rules of this
paragraph (f)(1).
(i) Qualifying earnings and taxes. The
pre-pooling annual layers shall consist of
the pre-1987 accumulated profits and the
pre-1987 foreign income taxes of the for-
eign acquiring corporation and the foreign
target corporation.
(ii) Carryover rule. Subject to para-
graph (f)(1)(iii) of this section, the
amounts described in paragraph (f)(1)(i)
of this section attributable to the foreign
acquiring corporation and the foreign tar-
get corporation shall carry over to the for-
eign surviving corporation but shall not
be combined. Thus, when the foreign ac-
quiring corporation and the foreign target
corporation have pre-1987 accumulated
profits in the same year and a distribution
is made therefrom, the rules of
§1.902–1(b)(2)(ii) and (b)(3) shall apply
separately to reduce pre-1987 accumu-
lated profits and pre-1987 foreign income
taxes of the foreign acquiring corporation
and the foreign target corporation on a pro
rata basis. For further guidance, see Rev.
Rul. 68–351 (1968–2 C.B. 307); Rev.
Rul. 70–373 (1970–2 C.B. 152) (see also
§601.601(d)(2) of this chapter); see also
paragraph (g)(2) of this section (govern-
ing the reconciliation of taxable years).
(iii) Deficits. The rules of this para-
graph (f)(1)(iii) apply when the foreign
acquiring corporation or the foreign target
corporation (or both) has a deficit in one
or more years that comprise its pre-1987
accumulated profits immediately prior to
the foreign 381 transaction (see also para-
graphs (g)(1) and (g)(4) of this section,
describing other rules applicable to a
deficit described in this paragraph
(f)(1)(iii)).
(A) Aggregate positive earnings and
profits. If the foreign acquiring corporation
or the foreign target corporation (or both)
has an aggregate positive (or zero) amount
of pre-1987 accumulated profits, but a
deficit in one or more individual years, then
the rules otherwise applicable to such
deficits shall apply separately to the pre-
1987 accumulated profits and related for-
eign income taxes of such corporation. For
further guidance, see Rev. Rul. 74–550
(1974–2 C.B. 209) (see also §601.601(d)(2)
of this chapter); Champion Int’l Corp. v.
Commissioner, 81 T.C. 424 (1983), acq. in
result, 1987–2 C.B. 1; Rev. Rul. 87–72
(1987–2 C.B. 170) (see also §601.601(d)(2)
of this chapter). As a result, no amount in
excess of the aggregate positive amount of
pre-1987 accumulated profits shall be dis-
tributed from the pre-transaction earnings of
the foreign acquiring corporation or the for-
eign target corporation.
(B) Aggregate deficit in earnings and
profits. If the foreign acquiring corpora-
tion or the foreign target corporation (or
both) has an aggregate deficit in pre-1987
accumulated profits, then the rules under
§1.902–2(b) shall apply to such deficit
(and related foreign income taxes) imme-
diately prior to the transaction, except that
the aggregate deficit that is carried for-
ward into the look-through pool (in the
case of a foreign surviving corporation
that is a look-through corporation) or non-
look-through pool (in the case of a foreign
surviving corporation that is a non-look-
through 10/50 corporation) shall be avail-
able to offset only post-transaction earn-
ings accumulated by the foreign surviving
corporation.
(iv) Pre-1987 section 960 earnings and
profits and foreign income taxes. The
pre-1987 section 960 earnings and profits
and pre-1987 section 960 foreign income
taxes attributable to the foreign acquiring
corporation and the foreign target corpo-
ration shall carry over to the foreign sur-
viving corporation but shall not be com-
bined. The rules otherwise applicable to
such amounts shall apply separately to the
pre-1987 section 960 earnings and profits
and pre-1987 section 960 foreign income
taxes of the foreign acquiring corporation
and the foreign target corporation on a pro
rata basis. For further guidance, see No-
tice 88–70 (1988–2 C.B. 369) (see also
§601.601(d)(2) of this chapter).
(v) Examples. The following examples
illustrate the rules of this paragraph (f)(1).
The examples presume the following
facts: foreign corporation A was incorpo-
rated in 1998 and was a less-than-10%-
U.S.-owned foreign corporation through
December 31, 1999. Foreign corporation
A became a non-look-through 10/50 cor-
poration on January 1, 2000 and, as a re-
sult, began to maintain a pool of post-
1986 undistributed earnings on that date.
Foreign corporation B was incorporated
in 1998 and always has been owned by
foreign shareholders (and thus never has
met the requirements of section
902(c)(3)(B)). Both foreign corporation
A and foreign corporation B always have
had calendar taxable years. Foreign cor-
porations A and B (and all of their respec-
tive qualified business units as defined in
section 989) maintain a “u” functional
currency. The examples are as follows:
Example 1—(i) Facts. (A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation AE&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation1,000u$350
1999400u 160u
1998 100u
5u
1,500u
Foreign Corporation BE&PForeign Taxes
2001100u20u
2000150u30u
19990u50u
1998 50u5u
300u105u
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a non-look-through
10/50 corporation.
(ii) Result. Under the rules described in para-
graphs (e)(2)(i), (e)(2)(ii), (f)(1)(i), and (f)(1)(ii) of
this section, foreign surviving corporation has the
following earnings and profits and foreign income
taxes accounts:
November 27, 20005402000–48 I.R.B.

E&PForeign Taxes
Non-look-through pool1,000u$350
2001100u20u
2000150u30u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #1 (from
Corp A)400u 160u
1999 layer #2 (from
Corp B)0u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #1 (from
Corp A)100u5u
1998 layer #2 (from
Corp B) 50u
5u
1,800u
(iii) Post-transaction distribution. (A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 1,700u to its
shareholders. Under the rules of paragraph (c)(2) of
this section, the distribution is first out of the non-
look-through pool, and then out of the pre-pooling
annual layers under the LIFO method, as follows:
DistributionE&PForeign Taxes
Non-look-through pool1,000u$350
2001100u20u
2000150u30u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #1400u160u
1999 layer #20u0u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #133.33u 1.67u
(100u in layer 4
150u aggregate 1998
earnings = 66.67% x
50u distribution)
1998 layer #216.67u1.67u
(50u in layer 4
150u aggregate 1998
earnings = 33.33% x
50u distribution)
1,700u
(B) The foreign income taxes available to for-
eign surviving corporation shareholders upon the
distribution are subject to the generally applicable
rules and limitations, such as those of sections 902
and 904(d).
(C) Immediately after the distribution, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
E&PForeign Taxes
1999 layer #20.00u50.00u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #166.67u3.33u
1998 layer #2 33.33u
3.33u
100.00u56.66u
(iv) Post-transaction earnings. For the taxable
year ending on December 31, 2003, foreign surviv-
ing corporation accumulates 500u of current earn-
ings and profits and pays $70 in foreign income
taxes. As of the close of the 2003 taxable year, for-
eign surviving corporation has the following earn-
ings and profits and foreign income taxes accounts:
E&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation500.00u $70.00
19990.00u 50.00u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #166.67u3.33u
1998 layer #233.33u
3.33u
600u
Example 2—(i) Facts. (A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation AE&PForeign Taxes
E&P accumulated as
non-look-though
10/50 corporation1,000u$350
1999100u 20u
1998 (50u)
5u
1,050u
Foreign Corporation BE&PForeign Taxes
2001100u20u
2000(50u)5u
19990u 50u
1998 100u10u
150u85u
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a non-look-through
10/50 corporation.
(ii) Result. Because foreign corporations A and B
have aggregate positive amounts of pre-1987 accu-
mulated profits with a deficit in one or more individ-
ual years, the rules of paragraph (f)(1)(iii)(A) of this
section apply. Accordingly, after the foreign 381
transaction, foreign surviving corporation has the
following earnings and profits and foreign income
taxes accounts:
2000–48 I.R.B.541November 27, 2000
Earnings & Profits:Foreign Taxes:
Foreign
Taxes
Foreign Associated
Taxeswith
Positive E&PDeficit E&PAvailableDeficit E&P
Non-Look-Through
10/50 Pool1,000u$350
2001100u20u
2000(50u)5u
Two Side-by-
Side Layers of
1999 E&P:
1999 layer #1
(from foreign
corporation A)100u20u
1999 layer #2
(from foreign
corporation B)0u50u
Two Side-by-
Side Layers of
1998 E&P:
1998 layer #1
(from foreign
corporation A)(50u)5u
1998 layer #2
(from foreign
corporation B)100u
______10u____
1,300u(100u)10u

(iii) Post-transaction distribution—(A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 1,175u to its
shareholders. Under the rules described in para-
graphs (c)(2) and (f)(1)(iii)(A) of this section, the
distribution is first out of the non-look-through pool,
and then out of the pre-pooling annual layers, as fol-
lows:
DistributionE&PForeign Taxes
Non-Look-Through
10/50 Amount1,000u$350
2001100u20u
20000u0u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #150u20u
1999 layer #20u0u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #10u0u
1998 layer #2 25u
5u
1,175u
(B) Under the rules described in paragraph
(f)(1)(iii)(A) of this section, the rules otherwise ap-
plicable when a foreign corporation has an aggre-
gate positive (or zero) amount of pre-1987 accumu-
lated profits, but a deficit in one or more individual
years, apply separately to the pre-1987 accumulated
profits and related foreign income taxes of foreign
corporation A and foreign corporation B. As a re-
sult, distributions out of the pre-pooling annual lay-
ers of foreign corporation A and foreign corporation
B can not exceed the aggregate positive amount of
pre-1987 accumulated profits of each corporation.
Accordingly, only 50u can be distributed from for-
eign corporation A’s pre-pooling annual layers and is
out of its 1999 layer #1. Under Champion Int’l
Corp. v. Commissioner, 81 T.C. 424 (1983), the full
20u of taxes related to 1999 layer #1 is reduced or
deemed paid ($20 x (50 450)). Under Rev. Rul.
74–550 (1974–2 C.B. 209) (see also §601.601(d)(2)
of this chapter), 100u is distributed from foreign cor-
poration B’s 2001 annual layer. Foreign corporation
B’s deficit in 2000 is then rolled back to offset its
1998 annual layer to reduce earnings in that layer to
50u, 25u of which is distributed (and reduces one-
half of that year’s foreign income taxes).
(C) The foreign income taxes available to for-
eign surviving corporation shareholders upon the
distribution are subject to the generally applicable
rules and limitations, such as those of sections 902
and 904(d).
(D) Immediately after the distribution foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
E&PForeign Taxes
2000 0u5u
1999 layer #20u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #10u5u
1998 layer #225u
5u
25u65u
(E) Under the rules described in paragraph
(f)(1)(iii)(A) of this section, the 5u, 50u, and 5u of
foreign income taxes related to foreign surviving
corporation’s 2000 layer, 1999 layer #2, and 1998
layer #1, respectively, remain in those layers. These
foreign income taxes generally will not be reduced
or deemed paid unless a foreign tax refund restores a
positive balance to the associated earnings pursuant
to section 905(c), and thus will be trapped.
Example 3—(i) Facts. (A) On December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation AE&PForeign Taxes
E&P accumulated as
non-look-through
10/50 corporation1,000u$350
1999150u20u
1998 100u5u
1,250u
Foreign Corporation BE&PForeign Taxes
2001100u20u
2000(250u)5u
19990u50u
1998 100u
10u
(50u)85u
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a non-look-through
10/50 corporation.
(ii) Result. (A) Because foreign corporation B
has an aggregate deficit in pre-1987 accumulated
profits, the rules of paragraph (f)(1)(iii)(B) of this
section apply. Accordingly, §1.902–2(b) applies im-
mediately prior to the foreign 381 transaction, ex-
cept that foreign corporation B’s aggregate deficit in
pre-1987 accumulated profits is carried forward into
the post-1986 undistributed earnings pool and is
available to offset only post-transaction earnings ac-
cumulated by foreign surviving corporation. Ac-
cordingly, after the foreign 381 transaction, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
November 27, 20005422000–48 I.R.B.
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
HoveringTaxesHovering
Positive E&PDeficitAvailableDeficit
Non-Look-
Through 10/50
Pool1,000u(50u)$350 $0
20010u20u
20000u5u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #1
(from Corp A)150u20u
1999 layer #2
(from Corp B)0u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #1
(from Corp A)100u5u
1998 layer #2
(from Corp B) 0u
____
10u
_____
1,250u(50u)$0

(B) Under paragraph (f)(1)(iii)(B) of this sec-
tion, the 20u, 5u, 50u, and 10u of foreign income
taxes associated with foreign corporation B’s earn-
ings and profits for 2001, 2000, 1999 layer #2, and
1998 layer #2, respectively, remain in those layers.
These foreign income taxes generally will not be re-
duced or deemed paid unless a foreign tax refund re-
stores a positive balance to the associated earnings
pursuant to section 905(c), and thus will be trapped.
(2) If foreign surviving corporation is
a less-than-10%- U.S.-owned foreign cor-
poration. If the foreign surviving corpo-
ration is a less-than-10%-U.S.-owned for-
eign corporation, then the pre-pooling
annual layers shall be determined under
the rules of this paragraph (f)(2).
(i) Qualifying earnings and taxes. The
pre-pooling annual layers shall consist of
the pre-1987 accumulated profits and the
pre-1987 foreign income taxes of the for-
eign acquiring corporation and the foreign
target corporation. If the foreign acquir-
ing corporation or the foreign target cor-
poration (or both) has post-1986 undis-
tributed earnings or a deficit in post-1986
undistributed earnings, then those earn-
ings or deficits and any related post-1986
foreign income taxes shall be recharacter-
ized as pre-1987 accumulated profits or
deficits and pre-1987 foreign income
taxes of the foreign acquiring corporation
or the foreign target corporation accumu-
lated immediately prior to the foreign 381
transaction.
(ii) Carryover rule. Subject to para-
graph (f)(2)(iii) of this section, the
amounts described in paragraph (f)(2)(i)
of this section attributable to the foreign
acquiring corporation and the foreign tar-
get corporation shall carry over to the for-
eign surviving corporation but shall not
be combined. Thus, when the foreign ac-
quiring corporation and the foreign target
corporation have pre-1987 accumulated
profits in the same year and a distribution
is made therefrom, the principles of
§1.902–1(b)(2)(ii) and (3) shall apply
separately to reduce pre-1987 accumu-
lated profits and pre-1987 foreign income
taxes of the foreign acquiring corporation
and the foreign target corporation on a pro
rata basis. For further guidance, see Rev.
Rul. 68–351 (1968–2 C.B. 307); Rev.
Rul. 70–373 (1970–2 C.B. 152) (see also
§601.601(d)(2) of this chapter); see also
paragraph (g)(2) of this section (govern-
ing the reconciliation of taxable years).
(iii) Deficits. The rules of this para-
graph (f)(2)(iii) apply when the foreign
acquiring corporation or the foreign target
corporation (or both) has a deficit in one
or more years that comprise its pre-1987
accumulated profits immediately prior to
the foreign 381 transaction (and after ap-
plication of the last sentence of paragraph
(f)(2)(i) of this section). See also para-
graphs (g)(1) and (4) of this section (de-
scribing other rules applicable to a deficit
described in this paragraph (f)(2)(iii)).
(A) Aggregate positive earnings and
profits. If the foreign acquiring corpora-
tion or the foreign target corporation (or
both) has an aggregate positive (or zero)
amount of pre-1987 accumulated profits,
but a deficit in one or more individual
years, then the rules otherwise applicable
to such deficits shall apply separately to
the pre-1987 accumulated profits and re-
lated foreign income taxes of such corpo-
ration. For further guidance, see Rev.
Rul. 74–550 (1974–2 C.B. 209) (see also
§601.601(d)(2) of this chapter); Cham-
pion Int’l Corp. v. Commissioner, 81 T.C.
424 (1983), acq. in result, 1987–2 C.B. 1;
Rev. Rul. 87–72 (1987–2 C.B. 170) (see
also §601.601(d)(2) of this chapter). As a
result, no amount in excess of the aggre-
gate positive amount of pre-1987 accu-
mulated profits shall be distributed from
the pre-transaction earnings of the foreign
acquiring corporation or the foreign target
corporation.
(B) Aggregate deficit in earnings and
profits. If the foreign acquiring corpora-
tion or the foreign target corporation (or
both) has an aggregate deficit in pre-1987
accumulated profits, then the rules other-
wise applicable to such deficits shall
apply separately to the pre-transaction
earnings and profits and related taxes of
the applicable corporation. See, e.g., sec-
tions 316(a) and 381(c)(2)(B). Thus, any
aggregate net deficit shall be available to
offset only post-transaction earnings ac-
cumulated by the foreign surviving corpo-
ration.
(iv) Pre-1987 section 960 earnings and
profits and foreign income taxes. The
pre-1987 section 960 earnings and profits
and pre-1987 section 960 foreign income
taxes attributable to the foreign acquiring
corporation and the foreign target corpo-
ration shall carry over to the foreign sur-
viving corporation but shall not be com-
bined. The rules otherwise applicable to
such amounts shall apply separately to the
pre-1987 section 960 earnings and profits
and pre-1987 section 960 foreign income
taxes of the foreign acquiring corporation
and the foreign target corporation on a pro
rata basis. For further guidance, see No-
tice 88–70 (1988–2 C.B. 369) (see also
§601.601(d)(2) of this chapter).
(v) Examples. The following exam-
ples illustrate the rules of this paragraph
(f)(2). The examples presume the follow-
ing facts: Both foreign corporation A and
foreign corporation B always have had
calendar taxable years. Foreign corpora-
tions A and B (and all of their respective
qualified business units as defined in sec-
tion 989) maintain a “u” functional cur-
rency. The examples are as follows:
Example 1—(i) Facts. (A) Foreign corporations
A and B both were incorporated in 1998. Nine per-
cent of the voting stock of foreign corporation A is
owned by domestic corporate shareholder C. Nine
percent of the voting stock of foreign corporation B
is owned by domestic corporate shareholder D.
Shareholders C and D are unrelated. The remaining
91% of the voting stock of each foreign corporation
is owned by unrelated foreign shareholders. Thus,
neither corporation meets the requirements of sec-
tion 902(c)(3)(B). On December 31, 2001, foreign
corporations A and B have the following earnings
and profits and foreign income taxes accounts:
Foreign Corporation AE&PForeign Taxes
2001500u350u
2000400u300u
1999400u 160u
1998 100u5u
1,400u815u
Foreign Corporation BE&PForeign Taxes
2001100u20u
2000300u60u
19990u 50u
1998 50u
5u
450u135u
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a
less-than-10%-U.S.-owned foreign corporation that
does not meet the requirements of section
902(c)(3)(B).
(ii) Result. Under the rules described in para-
graphs (f)(2)(i) and (ii) of this section, foreign sur-
viving corporation has the following earnings and
profits and foreign income taxes accounts:
2000–48 I.R.B.543November 27, 2000

E&PForeign Taxes
Two Side-by-Side
Layers of 2001 E&P:
2001 layer #1 (from
Corp A)500u350u
2001 layer #2 (from
Corp B)100u20u
Two Side-by-Side
Layers of 2000 E&P:
2000 layer #1 (from
Corp A)400u300u
2000 layer #2 (from
Corp B)300u60u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #1 (from
Corp A)400u 160u
1999 layer #2 (from
Corp B)0u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #1 (from
Corp A)100u5u
1998 layer #2 (from
Corp B) 50u5u
1,850u950u
(iii) Post-transaction distribution. (A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 600u to its
shareholders. Under the rules of paragraph (c)(3) of
this section, the distribution is out of pre-pooling an-
nual layers under the LIFO method as follows:
E&PForeign Taxes
Two Side-by-Side
Layers of 2001 E&P:
2001 layer #1 (from
Corp A)500u350u
2001 layer #2 (from
Corp B)100u20u
600u370u
(B) Foreign surviving corporation’s foreign in-
come tax accounts are reduced to reflect the distrib-
ution of earnings and profits, see §1.902-
1(a)(10)(iii), notwithstanding that no shareholders
are eligible to claim deemed paid foreign income
taxes under section 902.
(C) Immediately after the distribution, foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
E&PForeign Taxes
Two Side-by-Side
Layers of 2000 E&P:
2000 layer #1 (from
Corp A)400u300u
2000 layer #2 (from
Corp B)300u60u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #1 (from
Corp A)400u 160u
1999 layer #2 (from
Corp B)0u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #1 (from
Corp A)100u5u
1998 layer #2 (from
Corp B) 50u5u
1,250u580u
Example 2—(i) Facts. (A) The facts are the same
as in Example 1(i)(A), except that foreign corpora-
tion A met the requirements of section 902(c)(3)(B)
on January 1, 2000, when U.S. corporate share-
holder C acquired an additional 1% of voting stock
for a total ownership interest of 10%; foreign corpo-
ration A thereby became a non-look-through 10/50
corporation. On December 31, 2001, foreign corpo-
rations A and B have the following earnings and
profits and foreign income taxes accounts:
Foreign Corporation AE&PForeign Taxes
E&P Accumulated as
Non-Look-Through
10/50 Corporation900u$650
1999400u 160u
1998 100u
5u
1,400u
Foreign Corporation BE&PForeign Taxes
2001100u20u
2000300u60u
19990u 50u
1998 50u5u
450u135u
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a less-than-10%-
U.S.-owned foreign corporation that does not meet
the requirements of section 902(c)(3)(B).
(ii) Result. Under the rules described in para-
graphs (f)(2)(i) and (ii) of this section, foreign sur-
viving corporation has the following earnings and
profits and foreign income taxes accounts:
E&PForeign Taxes
Two Side-by-Side
Layers of 2001 E&P:
2001 layer #1 (from
Corp A’s pool)900u$650
2001 layer #2 (from
Corp B’s layer)100u20u
2000 (from Corp B):300u60u
Two Side-by-Side
Layers of 1999 E&P:
1999 layer #1 (from
Corp A)400u160u
1999 layer #2 (from
Corp B)0u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #1 (from
Corp A)100u5u
1998 layer #2 (from
Corp B) 50u5u
1,850u
(iii) Subsequent ownership change. On January
1, 2007, USS (a domestic corporation) acquires
100% of the stock of foreign surviving corporation.
Under the rules of paragraph (g)(3) of this section,
foreign surviving corporation begins to pool its
earnings and profits under section 902(c)(3) as of
January 1, 2007. Foreign surviving corporation’s
earnings and profits and foreign income taxes ac-
crued before January 1, 2007 retain their character
as pre-1987 accumulated profits and pre-1987 for-
eign income taxes.
Example 3—(i) Facts. (A) The facts are the same
as in Example 2(i)(A), except that on December 31,
2001, foreign corporations A and B have the follow-
ing earnings and profits and foreign income taxes
accounts:
Foreign Corporation AE&PForeign Taxes
E&P Accumulated as
Non-Look-Through
10/50 Corporation1,000u$500
1999(200u)10u
1998 400u5u
1,200u
Foreign Corporation BE&PForeign Taxes
2001300u20u
2000(100u)60u
19990u50u
1998 50u
5u
250u135u
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a less-than-10%-
U.S.-owned foreign corporation that does not meet
the requirements of section 902(c)(3)(B).
(ii) Result. Because foreign corporations A and B
have aggregate positive amounts of pre-1987 earn-
ings and profits with a deficit in one or more indi-
vidual years, the rules of paragraph (f)(2)(iii)(A) of
this section apply. Accordingly, after the foreign
381 transaction, foreign surviving corporation has
the following earnings and profits and foreign in-
come taxes accounts:
November 27, 20005442000–48 I.R.B.

Earnings & Profits:Foreign Taxes:
Foreign
Taxes
Foreign Associated
Taxeswith
Positive E&PDeficit E&PAvailable Deficit E&P
Two Side-by-
Side Layers of
2001 E&P:
2001 layer #1
(from Corp
A’s non-look-
through 10/50
pool) 1,000u$500
2001 layer #2
(from Corp
B’s layer)300u20u
2000 (from
Corp B)(100u)60u
Two Side-by-
Side Layers of
1999 E&P:
1999 layer #1
(from Corp A)(200u)10u
1999 layer #2
(from Corp B)0u50u
Two Side-by-
Side Layers of
1998 E&P:
1998 layer #1
(from Corp A)400u5u
1998 layer #2
(from Corp B) 50u_____5u_____
1,750u(300u)70u
2000–48 I.R.B.545November 27, 2000
(iii) Post-transaction distribution. (A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 1,300u to its
shareholders. Under the rules described in para-
graphs (c)(3) and (f)(2)(iii)(A) of this section, the
distribution is out of the pre-pooling annual layers,
as follows:
E&PForeign Taxes
Paid
Two Side-by-
Side Layers of
2001 E&P:
2001 layer #11,000u$500
2001 layer #2250u20u
1998 E&P:
1998 layer #150u1.25u
(25% of
1,300u5u taxes)
(B) Under the rules described in paragraph
(f)(2)(iii)(A) of this section, the rules otherwise ap-
plicable when a foreign corporation has an aggre-
gate positive (or zero) amount of pre-1987 accumu-
lated profits, but a deficit in one or more individual
years, apply separately to the pre-1987 accumulated
profits and related foreign income taxes of foreign
corporation A and foreign corporation B. As a re-
sult, distributions out of the pre-pooling annual lay-
ers of foreign corporation A and foreign corporation
B cannot exceed the aggregate positive amount of
pre-1987 accumulated profits of each corporation.
Accordingly, only 1,200u and 250u can be distrib-
uted out of foreign corporation A’s and foreign cor-
poration B’s pre-pooling annual layers, respectively.
Thus, 1,250u of the distribution is out of 1,000u of
foreign corporation A’s 2001 layer #1 and 250u of
foreign corporation B’s 2001 layer #2. Under the
principles of §1.902–1(b)(3) and Champion Int’l
Corp. v. Commissioner, 81 T.C. 424 (1983), all of
the taxes in each of those respective layers are re-
duced. Applying Rev. Rul. 74–550 (1974–2 C.B.
209) (see also §601.601(d)(2) of this chapter), the
remaining 50u is distributed from foreign corpora-
tion A’s 1998 layer #1 (after rolling back the 200u
deficit in 1999 layer #1 to reduce earnings in 1998
layer #1 to 200u (400u – 200u)). Thus, after the dis-
tribution, 150u remains in the 1998 layer #1 along
with 3.75u of foreign income taxes (5u x (150u 4
200u)).
(C) Foreign surviving corporation’s foreign in-
come tax accounts are reduced to reflect the distrib-
ution of earnings and profits, see §1.902–
1(a)(10)(iii), notwithstanding that no shareholders
are eligible to claim a credit for deemed paid foreign
income taxes under section 902.
(D) Immediately after the distribution foreign
surviving corporation has the following earnings
and profits and foreign income taxes accounts:
E&PForeign Taxes
20000u60u
Two Side-by-Side Layers
of 1999 E&P:
1999 layer #10u10u
1999 layer #20u50u
Two Side-by-Side Layers
of 1998 E&P:
1998 layer #1150u3.75u
1998 layer #2 0u
5u
150u128.75u
(E) Under the rules described in paragraph
(f)(2)(iii)(A) of this section, the 60u, 10u, 50u, and
5u of foreign income taxes related to foreign surviv-
ing corporation’s 2000 layer, 1999 layer #1, 1999
layer #2, and 1998 layer #2, respectively, remain in
those layers. These foreign income taxes generally
will not be reduced or deemed paid unless a foreign
tax refund restores a positive balance to the associ-
ated earnings pursuant to section 905(c), and thus
will be trapped.
Example 4—(i) Facts. (A) The facts are the
same as in Example 2(i)(A), except that on Decem-
ber 31, 2001, foreign corporations A and B have the
following earnings and profits and foreign income
taxes accounts:
Foreign Corporation AE&PForeign Taxes
E&P Accumulated as
Non-Look- Through
10/50 Corporation: (1,000u)$20
1999(200u)10u
1998 400u
5u
(800u)
Foreign Corporation BE&PForeign Taxes
2001100u20u
2000300u60u
19990u50u
1998 50u
5u
450u135u
(B) On January 1, 2002, foreign corporation A
acquires the assets of foreign corporation B in a re-
organization described in section 368(a)(1)(C). Im-

mediately following the foreign 381 transaction, for-
eign surviving corporation is a less-than-10%-U.S.-
owned foreign corporation.
(ii) Result. Because foreign corporation A has an
aggregate deficit in pre-1987 earnings and profits,
the rules of paragraph (f)(2)(iii)(B) of this section
apply and the rules otherwise applicable apply sepa-
rately to the pre-1987 accumulated profits that carry
over to foreign surviving corporation from foreign
corporation A. Accordingly, after the foreign 381
transaction, foreign surviving corporation has the
following earnings and profits and foreign income
taxes accounts:
November 27, 20005462000–48 I.R.B.
Earnings & Profits:Foreign Taxes:
Foreign
Taxes
Foreign Associated
Taxeswith
Positive E&PDeficit E&PAvailableDeficit E&P
Two Side-by-
Side Layers
of 2001 E&P:
2001 layer #1
(from Corp A)(1,000u)$20
2001 layer #2
(from Corp B)100u20u
2000 300u60u
Two Side-by-
Side Layers
of 1999 E&P:
1999 layer #1
(from Corp A)(200u)10u
1999 layer #2
(from Corp B)0u50u
Two Side-by-Side
Layers of 1998 E&P:
1998 layer #1
(from Corp A)400u5u
1998 layer #2
(from Corp B) 50u
______5u
850u(1,200u)140u
(iii) Post-transaction distribution. (A) During
2002, foreign surviving corporation does not accu-
mulate any earnings and profits or pay or accrue any
foreign income taxes. On December 31, 2002, for-
eign surviving corporation distributes 200u to its
shareholders. Under the rules described in para-
graph (f)(2)(iii)(B) of this section, no distribution
can be made out of the pre-1987 accumulated profits
of foreign corporation A (and the 800u aggregate
deficit is available to offset only post-transaction
earnings accumulated by foreign surviving corpora-
tion). Thus, the distribution is out of pre-pooling an-
nual layers as follows:
E&PForeign Taxes
Paid
2001 layer #2100u20u
2000100u
20u
200u40u
(B) Foreign surviving corporation’s foreign in-
come tax accounts are reduced to reflect the distrib-
ution of earnings and profits, see
§1.902–1(a)(10)(iii), notwithstanding that no share-
holders are eligible to claim deemed paid foreign in-
come taxes under section 902.
(g) Special rules—(1) Treatment of
deficit. Any deficit described in para-
graph (d)(2), (e)(1)(iii), (e)(2)(iii),
(f)(1)(iii), or (f)(2)(iii) of this section shall
not be taken into account in determining
current or accumulated earnings and prof-
its of a foreign surviving corporation, in-
cluding for purposes of calculating—
(A) The earnings and profits limitation
of section 952(c)(1)(A) and (c)(1)(C); and
(B) the amount of the foreign surviving
corporation’s subpart F income as defined
in section 952(a).
(2) Reconciling taxable years. If a for-
eign acquiring corporation and a foreign
target corporation had taxable years end-
ing on different dates, then the pro rata
distribution rules of paragraphs (f)(1)(ii)
and (f)(2)(ii) of this section shall apply
with respect to the taxable years that end
within the same calendar year.
(3) Post-transaction change of status.
If a foreign surviving corporation that is
subject to the rules of paragraph (c)(2) of
this section subsequently becomes a look-
through corporation, or if a foreign sur-
viving corporation that is subject to the
rules of paragraph (c)(3) of this section
subsequently becomes a non-look-
through 10/50 corporation or a look-
through corporation, by reason, for exam-
ple, of a reorganization, liquidation, or
change of ownership, then post-1986
undistributed earnings and post-1986 for-
eign income taxes that have lost their
look-through or pooling character by rea-
son of this section shall not have such
look-through or pooling character re-
stored. See, e.g., paragraph (f)(2)(v) Ex-
ample 2of this section.
(4) Ordering rule for offsetting multiple
hovering deficits —(i) Rule. A foreign
surviving corporation shall apply the
deficit rules of paragraphs (d)(2),
(e)(1)(iii), (e)(2)(iii), (f)(1)(iii), and
(f)(2)(iii) of this section in that order (in
the event that more than one of such rules
applies to the foreign surviving corpora-
tion).
(ii) Example. The following example
illustrates the rules of this paragraph
(g)(4). The examples presume the follow-
ing facts: Foreign corporation A was a
non-look-through 10/50 corporation from
its incorporation on January 1, 1995 until
December 31, 1997; foreign corporation
A became a CFC on January 1, 1998 and
has been a CFC since that time. Foreign
corporation B has been a non-look-
through 10/50 corporation since its incor-
poration on January 1, 1993. Foreign cor-
porations A and B always have had
calendar taxable years. Foreign corpora-
tions A and B (and all of their respective
qualified business units as defined in sec-
tion 989) maintain a “u” functional cur-

rency. Finally, any earnings and profits
described in section 904(d)(1)(E) (10/50
dividends) qualified for the high tax ex-
ception from subpart F income under sec-
tion 954(b)(4), and all shareholders
elected to exclude such earnings and prof-
its from subpart F income under section
954(b)(4) and §1.954–1(d)(5). The exam-
ple is as follows:
Example—(i) Facts. (A) On December 31, 2001,
foreign corporations A and B have the following
earnings and profits and foreign income taxes ac-
counts:
Foreign Corporation AE&PForeign Taxes
Separate Category:
10/50 dividends from
FC1, a noncontrolled
section 902 corporation100u$60
General(300u)$25
E&P Accumulated as
Non-Look-Through
10/50 Corporation300u
$100
100u$185
Foreign Corporation BE&PForeign Taxes
E&P Accumulated as
Non-Look-Through
10/50 Corporation(200u)$50
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). Im-
mediately following the foreign 381 transaction, for-
eign surviving corporation is a CFC.
(ii) Result. Under the rules described in para-
graphs (d)(1), (d)(2), (e)(1)(i), (e)(1)(ii), and
(e)(1)(iii) of this section, foreign surviving corpora-
tion has the following earnings and profits and for-
eign income taxes accounts:
2000–48 I.R.B.547November 27, 2000
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
PositiveHoveringTaxesHovering
E&PDeficitAvailableDeficit
Look-Through Pool:
10/50 dividends100u$60
General (300u) $25
Two Side-by-
Side Non-Look-
Through Pool
Amounts:
Non-look-
through pool
amount #1 (from
Corp A)300u$100
Non-look-
through pool
amount #2 (from
Corp B)_____(200u)
_______$50
400u(500u)$16075
(iii) Post-transaction earnings. (A) In the tax-
able year ending on December 31, 2002, foreign sur-
viving corporation accumulates earnings and profits
and pays related foreign income taxes as follows:
Separate Category:E&PForeign Taxes
10/50 dividends from FC1150u $ 40
General400u$ 60
550u$100
(B) None of the earnings and profits qualify as
subpart F income as defined in section 952(a).
Under the rules of paragraph (g)(4)(i) of this section,
the rules of paragraph (d)(2) of this section apply be-
fore the rules of paragraph (e)(1)(iii) of this section.
Accordingly, post-transaction earnings in a separate
category are first offset by a hovering deficit in the
same separate category in the look-through pool.
Thus, foreign surviving corporation’s 300u deficit in
the section 904(d)(1)(I) general separate category
offsets 300u of post-transaction general separate cat-
egory earnings. After application of paragraph
(d)(2) of this section, foreign surviving corporation
has the following post-transaction earnings available
for further offset by a hovering deficit: 150u in the
section 904(d)(1)(E) 10/50 dividends separate cate-
gory and 100u in the general separate category.
Under paragraph (e)(1)(iii) of this section, a deficit
in the non-look-through pool offsets a pro rata por-
tion of post-transaction earnings in each separate
category. Thus, foreign surviving corporation’s
200u deficit in non-look-through pool amount #2
offsets the remaining post-transaction earnings on a
pro rata basis (200u x (150u 4250u) = 120u against
10/50 dividends separate category earnings and
200u x (100u 4250u) = 80u against general sepa-
rate category earnings). Accordingly, foreign sur-
viving corporation has the following earnings and
profits and foreign income taxes accounts at the end
of 2002:
E&PForeign Taxes
Look-Through Pool
Separate Category:
10/50 dividends130u$100
General20u$85
Two Side-by-Side
Non-Look-Through
Pool Amounts:
Non-look-through
pool amount #1300u$100
Non-look-through
pool amount #2 0u
$ 50
450u$335
(C) Under paragraph (d)(2)(ii) of this section,
the $25 of foreign income taxes related to the 300u
hovering deficit in the section 904(d)(1)(I) general
separate category is added to foreign surviving cor-
poration’s post-1986 foreign income taxes in that
separate category (because post-transaction earnings
in the general separate category have been offset by
and exceed the deficit in that category). Under para-
graph (e)(1)(iii)(B) of this section, the $50 of foreign
income taxes related to the 200u hovering deficit in
non-look-through pool amount #2 is added to for-
eign surviving corporation’s post-1986 foreign in-
come taxes for non-look-through pool amount #2
(because post-transaction earnings have been offset
by and exceed the deficit in the non-look-through
pool). However, the $50 of foreign income taxes
generally will not be reduced or deemed paid unless
a foreign tax refund restores a positive balance to the
associated earnings pursuant to section 905(c), and
thus will be trapped.
(5) Pro rata rule for earnings during
transaction year. For purposes of offset-
ting post-transaction earnings of a foreign
surviving corporation under the rules de-
scribed in paragraphs (d)(2), (e)(1)(iii),
(e)(2)(iii), (f)(1)(iii), and (f)(2)(iii), the
earnings and profits for the taxable year
of the foreign surviving corporation in
which the transaction occurs shall be
deemed to have been accumulated after
such transaction in an amount which
bears the same ratio to the undistributed
earnings and profits of the foreign surviv-
ing corporation for such taxable year
(computed without regard to any earnings
and profits carried over) as the number of
days in the taxable year after the date of

transaction bears to the total number of
days in the taxable year. See, e.g.,
§1.381(c)(2)–1(a)(7) Example 2(illustrat-
ing application of this rule with respect to
domestic corporations).
(6) Nonapplicability of hovering deficit
rules to certain transactions—(i) Rule.
If a principal purpose of a foreign 381
transaction is to gain a tax benefit from
affirmative use of the hovering deficit
rule described in paragraph (d)(2),
(e)(1)(iii), (e)(2)(iii), (f)(1)(iii), or
(f)(2)(iii) of this section, then the Com-
missioner may exercise discretion to
apply the principles of §1.367(b)–9 to
such transaction.
(ii) Example. The following example
illustrates the rules of this paragraph
(h)(6). The example is as follows:
Example—(i) Facts. (A) Foreign corporations A
and B are and always have been wholly owned sub-
sidiaries of USP, a domestic corporation. Both foreign
corporations A and B were incorporated in 1990, and
both always have been CFCs using a calendar taxable
year. Both foreign corporations A and B (and all of
their respective qualified business units as defined in
section 989) maintain a “u” functional currency and 1u
= US$1 at all times. Any earnings and profits de-
scribed in section 904(d)(1)(E) (10/50 dividends)
qualified for the high tax exception from subpart F in-
come under section 954(b)(4), and USP elected to ex-
clude such earnings and profits from subpart F income
under section 954(b)(4) and §1.954–1(d)(5). On De-
cember 31, 2001, foreign corporation A and foreign
corporation B have the following earnings and profits
and foreign income taxes accounts:
Foreign Corporation A
Separate Category:E&PForeign Taxes
Passive(1,000u)$ 5
General 200u $200
(800u)$205
Foreign Corporation B
Separate Category:E&PForeign Taxes
10/50 dividends5u$ 3
(B) On January 1, 2002, foreign corporation B
acquires the assets of foreign corporation A in a re-
organization described in section 368(a)(1)(C). A
principal purpose of the foreign 381 transaction is to
gain a tax benefit from affirmative use of the hover-
ing deficit rule described in paragraph (d)(2) of this
section. Immediately following the foreign 381
transaction, foreign surviving corporation is a CFC.
(ii) Result under general rules. (A) If the rules of
paragraphs (d)(1) and (2) of this section were to
apply, foreign surviving corporation would have the
following earnings and profits and foreign income
taxes accounts immediately after the foreign 381
transaction:
November 27, 20005482000–48 I.R.B.
Earnings & Profits:Foreign Taxes:
Foreign Taxes
Associated
Foreign with
TaxesHovering
Separate Category:Positive E&PHovering DeficitAvailableDeficit
Passive(1,000u)$5
10/50 dividends5u$ 3
General 200u
______$200
205u(1,000u)$203$5
(B) Accordingly, if the hovering deficit rules of
paragraph (d)(2) of this section were to apply, foreign
surviving corporation would be able to pay to USP a
dividend of $205 that would carry deemed paid for-
eign income taxes of $203 under section 902.
(iii) Result under this paragraph (g)(6). Because
a principal purpose of the foreign 381 transaction
was to gain a tax benefit from affirmative use of the
hovering deficit rule described in paragraph (d)(2)
of this section, the Commissioner may exercise dis-
cretion to apply the principles of §1.367(b)–9 to the
transaction. Under the principles of §1.367(b)–9,
the earnings and profits and foreign income taxes
accounts of foreign corporation A and foreign corpo-
ration B are combined under paragraph (d)(1) of this
section without reference to the hovering deficit rule
of paragraph (d)(2) of this section. Accordingly, for-
eign surviving corporation would have the following
earnings and profits and foreign income taxes ac-
counts immediately after the transaction:
Separate Category:E&PForeign Taxes
Passive(1,000u)$ 5
10/50 dividends 5u $ 3
General 200u$200
(795u)$208
(h) Effective date. This section shall
apply to section 367(b) exchanges that
occur on or after the date 30 days after
these regulations are published as final
regulations in the Federal Register.
Par. 10. Section 1.367(b)–8 is added to
read as follows:
§1.367(b)–8 Allocation of earnings and
profits and foreign income taxes in
certain foreign corporate separations.
(a) Scope. This section applies to dis-
tributions to which section 355 (or so
much of section 356 as relates to section
355) applies, whether or not in connection
with a section 368(a)(1)(D) reorganiza-
tion (D reorganization), in which the dis-
tributing corporation or the controlled
corporation (or both) is a foreign corpora-
tion (foreign divisive transaction). For
purposes of this section, the terms distrib-
uting corporation and controlled corpora-
tion have the same meaning as used in
section 355 and the regulations thereun-
der. Paragraph (b) of this section pro-
vides general rules governing the alloca-
tion and reduction of a distributing
corporation’s earnings and profits and for-
eign income taxes (pre-transaction earn-
ings and pre-transaction taxes, respec-
tively) in foreign divisive transactions.
Paragraphs (c), (d), and (e) of this section
describe special rules for the application
of paragraph (b) of this section to specific
situations, depending upon whether the
distributing corporation or the controlled
corporation (or both the distributing and
the controlled corporation) is a foreign
corporation.
(b) General rules—(1) Application of
§1.312–10—(i) In general. Pre-transac-
tion earnings of a distributing corporation
shall be allocated between the distributing
corporation and the controlled corpora-
tion in accordance with the rules of
§1.312-10(a) and shall be reduced in ac-
cordance with the rules of §1.312-10(b),
except to the extent otherwise provided in
this section.
(ii) Special rules for application of
§1.312–10(b)—(A) Distributing corpora-
tion. The pre-transaction earnings of a
distributing corporation shall be reduced
without taking into account
§1.312–10(b)(2).
(B) Controlled corporation. Section
1.312–10(b) shall not apply to increase or
replace the earnings and profits of a con-
trolled corporation by the amount of any
decrease in the pre-transaction earnings of
a distributing corporation.
(iii) Net deficit in pre-transaction earn-
ings. Nothing in this section shall permit
any portion of the pre-transaction earn-
ings of a distributing corporation that has

a net deficit in pre-transaction earnings to
be allocated or reduced under paragraph
(b)(1)(i) of this section. See
§1.312–10(c). Compare paragraph (b)(2)
of this section (requiring an allocation or
reduction of a pro rata portion of deficits
in statutory groupings of earnings and
profits when a distributing corporation
has a net positive amount of pre-transac-
tion earnings).
(iv) Use of net bases. All allocations
and reductions described in paragraph
(b)(1)(i) of this section shall be deter-
mined in accordance with the net bases in
assets. Net basis shall have the same
meaning as under §1.312–10(a).
(v) Gain recognized by distributing cor-
poration. The pre- transaction earnings
that are subject to allocation or reduction
under paragraph (b)(1)(i) of this section
shall include any increase in earnings and
profits from gain recognized or income in-
cluded by the distributing corporation as a
result of the foreign divisive transaction.
See, for example, section 367(a) and (e),
section 1248(f), and §1.367(b)–5(b).
(vi) Coordination with branch profits
tax. An allocation or reduction in a dis-
tributing corporation’s pre-transaction
earnings under paragraph (b)(1)(i) of this
section shall not be out of or reduce effec-
tively connected earnings and profits or
non-previously taxed accumulated effec-
tively connected earnings and profits, as
defined in section 884. See also
§1.884–2T(d)(5)(iii) (providing that such
earnings and profits are not subject to re-
duction under §1.312–10(b)).
(2) Cross-section of earnings and prof-
its. Except to the extent provided in para-
graphs (b)(1)(iii), (b)(1)(vi), (d)(2)(ii),
(d)(4), and (e)(4) of this section and other
than any portion attributable to an inclu-
sion under §1.367(b)–5 or paragraph
(d)(2)(i) of this section, an allocation or
reduction of pre-transaction earnings de-
scribed in paragraph (b)(1)(i) of this sec-
tion shall decrease, on a pro rata basis, the
statutory groupings of earnings and prof-
its (or deficits in statutory groupings of
earnings and profits) of the distributing
corporation. Thus, for example, a pro rata
portion of a foreign distributing corpora-
tion’s separate categories, post-1986
undistributed earnings, and annual layers
of pre-1987 accumulated profits and pre-
1987 section 960 earnings and profits
shall be allocated or reduced.
(3) Foreign income taxes. Pre-transac-
tion taxes of a distributing corporation
shall be ratably allocated or reduced only
to the extent described in paragraphs
(d)(3) and (e)(3) of this section. Thus, a
distributing corporation’s excess foreign
taxes described in section 904(c) shall not
be allocated or reduced under this section.
(4) Divisive D reorganization with a
preexisting controlled corporation. In the
case of a foreign divisive transaction that
includes a D reorganization with a con-
trolled corporation that is not newly cre-
ated (a preexisting controlled corpora-
tion), paragraph (b)(1)(i) of this section
shall apply in the following manner:
(i) Calculation of earnings and profits
of distributing corporation. The pre-
transaction earnings of a distributing cor-
poration shall be reduced by the sum of—
(A) The amount of the reduction in the
pre-transaction earnings of the distribut-
ing corporation as described in
§1.312–10(a) (as determined under this
section); and
(B) The amount of the reduction in the
pre-transaction earnings of the distribut-
ing corporation as described in
§1.312–10(b) (as determined under this
section).
(ii) Calculation of earnings and profits
of controlled corporation. The amount of
earnings and profits of the controlled cor-
poration immediately after the foreign di-
visive transaction shall equal the sum
of—
(A) The amount described in paragraph
(b)(4)(i)(A) of this section (except to the
extent such amounts are included in in-
come as a deemed dividend pursuant to
the foreign divisive transaction or are sub-
ject to the rule of §1.367(b)–3(f)); and
(B) The amount of earnings and profits
of the controlled corporation immediately
before the foreign divisive transaction.
(c) Foreign divisive transactions in-
volving a domestic distributing corpora-
tion and a foreign controlled
corporation— (1) Scope. The rules of
this paragraph (c) apply to a foreign divi-
sive transaction involving a domestic dis-
tributing corporation and a foreign con-
trolled corporation.
(2) Earnings and profits allocated to a
foreign controlled corporation. Pre-trans-
action earnings of a domestic distributing
corporation that are allocated to a foreign
controlled corporation under the rules de-
scribed in paragraph (b)(1)(i) of this sec-
tion shall not be included in the foreign
controlled corporation’s post-1986 undis-
tributed earnings, pre-1987 accumulated
profits, or pre-1987 section 960 earnings
and profits. In addition, if a distribution
by the domestic distributing corporation
out of pre-transaction earnings immedi-
ately before the foreign divisive transac-
tion would have been treated as a U.S.
source dividend under section
861(a)(2)(A) that would not be exempt
from tax under section 871(i)(2)(B) or
881(d), a distribution out of such earnings
and profits by the foreign controlled cor-
poration shall be treated as a U.S. source
dividend under section 904(g) and for
purposes of Chapter 3 of subtitle A of the
Internal Revenue Code. See Georday En-
terprises v. Commissioner, 126 F.2d 384
(4
th
Cir. 1942). See also sections 243(e)
and 861(a)(2)(C) and §1.367(b)–2(j) for
other rules that may apply.
(3) Examples. The following examples
illustrate the application of the rules of
this section to transactions described in
paragraph (c)(1) of this section. The ex-
amples presume the following facts: USD
is a domestic corporation engaged in
manufacturing and shipping activities
through Business A and Business B, re-
spectively. FC is a foreign corporation
that is wholly owned by USD. USD and
FC use calendar taxable years. FC (and
all of its qualified business units as de-
fined in section 989) maintains a “u”
functional currency and, except as other-
wise specified, 1u = US$1 at all times.
The examples are as follows:
Example 1—(i) Facts. The stock of USD is
owned in equal parts by three shareholders, USP (a
domestic corporation), USI (a United States citi-
zen), and FP (a foreign corporation). USD owns as-
sets with total net bases of $260 (including $100 at-
tributable to the Business B shipping assets, which
have a $160 fair market value). USD has $500 of
earnings and profits (that it accumulated). The en-
tire $500 would have been treated as a U.S. source
dividend under section 861(a)(2)(A) that would not
be exempt from tax under sections 871(i)(2)(B) or
881(d) if distributed by USD immediately before
the foreign divisive transaction. On January 1,
2002, USD incorporates FC and transfers to FC the
Business B shipping assets. USD then distributes
the FC stock pro rata to USP, USI, and FP. The
transaction meets the requirements of sections
368(a)(1)(D) and 355.
(ii) Result—(A) Gain Recognition. Under sec-
tion 367(a)(5), USD recognizes gain equal to the dif-
ference between the fair market value and USD’s
adjusted basis in the Business B shipping assets
($160 - $100 = $60).
2000–48 I.R.B.549November 27, 2000

(B) Calculation of USD’s earnings and profits.
Under paragraph (b)(1)(v) of this section, USD’s
pre-transaction earnings include any gain recog-
nized or income included as a result of the foreign
divisive transaction. As described in this Example 1
(ii)(A), USD recognizes $60 of gain as a result of the
foreign divisive transaction. Accordingly, USD has
$560 of pre-transaction earnings ($500 + $60).
Under paragraph (b)(1)(i) of this section, USD’s pre-
transaction earnings are reduced by an amount equal
to its pre-transaction earnings times the net bases of
the assets transferred to FC divided by the net bases
of the assets held by USD immediately before the
foreign divisive transaction ($560 x ($160 4$320)
= $280). Following this reduction, USD has $280 of
earnings and profits ($560 - $280).
(C) Calculation of FC’s earnings and profits.
Under paragraph (b)(1)(i) of this section, the $280
reduction in USD’s pre-transaction earnings is allo-
cated to FC. Under §1.367(b)–2(j)(1), the $280 is
translated into “u” at the spot rate on January 1,
2002, to 280u. Under paragraph (c)(2) of this sec-
tion, the 280u is not included as part of FC’s post-
1986 undistributed earnings, pre-1987 accumulated
profits, or section 960 earnings and profits.
(iii) Post-transaction distribution. During 2002,
FC does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On Decem-
ber 31, 2002, at a time when US$1 = 0.5u, FC dis-
tributes 180u (or $360) to its shareholders. Thus,
FP, USP, and USI each receive a $120 dividend. See
section 989(b)(1). Under paragraph (c)(2) of this
section and §1.367(b)–2(j)(4), $93.33 of the distrib-
ution to FP is subject to withholding under Chapter 3
of subtitle A of the Internal Revenue Code ($280 4
3 = $93.33). Under section 243(e) and
§1.367(b)–2(j)(3), $93.33 of the distribution to USP
is eligible for the dividends received deduction. See
also section 861(a)(2)(C). Under paragraph (c)(2) of
this section, the remaining $26.67 distribution to
USP is treated as U.S. source under section 904(g)
(and is not eligible for the dividends received deduc-
tion under section 243(e)). Under paragraph (c)(2)
of this section, the $120 dividend distribution to USI
is treated as U.S. source under section 904(g).
Example 2—(i) Facts. The stock of USD is
owned by the following unrelated persons: 20 per-
cent by USP (a domestic corporation), 20 percent by
USI (a United States citizen), and 60 percent by FP
(a foreign corporation). FC is a preexisting con-
trolled corporation that was incorporated in 1995
and USD always has owned all of the FC stock.
USD owns assets with total net bases of $320 (in-
cluding $160 attributable to the FC stock), and USD
has $500 of earnings and profits. FC has 150u of
earnings and profits in the section 904(d)(1)(D)
shipping separate category and has $60 of related
foreign income taxes. FC’s earnings and profits
qualified for the high tax exception from subpart F
income under section 954(b)(4), and USD elected to
exclude the earnings and profits from subpart F in-
come under section 954(b)(4) and §1.954–1(d)(5).
On January 1, 2002, USD distributes the stock of FC
to its shareholders in a transaction that meets the re-
quirements of section 355. FC is not a controlled
foreign corporation after the foreign divisive trans-
action. On the date of the foreign divisive transac-
tion, the FC stock has a $460 fair market value.
(ii) Result—(A) Gain Recognition. Under
§1.367(b)– 5(b)(1)(ii), USD recognizes gain equal
to the difference between the fair market value and
USD’s adjusted basis in the FC stock distributed to
USI. Under §1.367(e)–1(b)(1), USD recognizes
gain equal to the difference between the fair market
value and USD’s adjusted basis in the FC stock dis-
tributed to FP. As a result of the transfers to USI and
FP, USD recognizes gain of $240 (4/5 x ($460 -
$160)), $120 of which is included in USD’s income
as a dividend under section 1248(a) and (f)(1) (4/5 x
150u, translated at the spot rate under section
989(b)(2)). Under section 1248(a) and (f)(1), USD
includes as a dividend the difference between the
fair market value and its adjusted basis in the FC
stock distributed to USP to the extent of FC’s earn-
ings and profits attributable to the distributed stock.
For further guidance, see also Notice 87–64 (1987–2
C.B. 375) (see also §601.601(d)(2) of this chapter).
As a result of this transfer, USD includes a $30 divi-
dend under section 1248(a) and (f)(1) (1/5 x 150u).
USD qualifies for a section 902 deemed paid foreign
tax credit with respect to its $150 of section 1248
dividends.
(B) Calculation of USD’s earnings and profits.
Under paragraph (b)(1)(v) of this section, USD’s
pre-transaction earnings include any gain recog-
nized or income included as a result of the foreign
divisive transaction. As described in this Example 2
(ii)(A), USD recognizes and includes a total of $270
of gain and dividend income as a result of the for-
eign divisive transaction. Accordingly, USD has
$770 of pre-transaction earnings ($500 + $270).
Under paragraphs (b)(1)(i) and (b)(1)(ii)(A) of this
section, USD’s pre-transaction earnings are reduced
by the amount of the reduction that would have been
required if USD had transferred the stock of FC to a
new corporation in a D reorganization. Thus, USD’s
pre-transaction earnings are reduced by an amount
equal to its pre-transaction earnings times its net
basis in the FC stock divided by the net bases of the
assets held by USD immediately before the foreign
divisive transaction ($770 x ($430 4$590) =
$561.19). Following this reduction, USD has
$208.81 of earnings and profits ($770 - $561.19).
(C) Calculation of FC’s earnings and profits.
Under paragraph (b)(1)(ii)(B) of this section, FC’s
earnings and profits are not increased (or replaced)
as a result of the foreign divisive transaction.
Example 3—(i) Facts. USP, a domestic corpora-
tion, owns all of the stock of USD. FC is a preexist-
ing controlled corporation and USD has owned all
of the FC stock since FC was incorporated in 1995.
USD owns assets with total net bases of $320 (in-
cluding $100 attributable to the FC stock and $160
attributable to the Business B shipping assets). USD
has $500 of pre-transaction earnings. FC has 150u
of earnings and profits in the section 904(d)(1)(D)
shipping separate category and has $60 of related
foreign income taxes. FC’s earnings and profits
qualified for the high tax exception from subpart F
income under section 954(b)(4), and USD elected to
exclude the earnings and profits from subpart F in-
come under section 954(b)(4) and §1.954–1(d)(5).
On January 1, 2002, USD transfers to FC the Busi-
ness B shipping assets. USD then distributes the FC
stock to USP. The transaction meets the require-
ments of sections 368(a)(1)(D) and 355. USD’s
transfer of the Business B shipping assets to FC falls
within the active trade or business exception to sec-
tion 367(a)(1) described in §1.367(a)–2T. Immedi-
ately after the foreign divisive transaction, the FC
stock has a $460 fair market value. USP and USD
meet and comply with the requirements of section
367(a)(5) and 1248(f)(2) (and any regulations there-
under). (Sections 1.367(b)–5(b)(1)(ii) and
1.367(e)–1(b)(1) do not apply with respect to the
foreign divisive transaction because the distributee,
USP, is a domestic corporation.)
(ii) Result—(A) Calculation of USD’s earnings
and profits. Under paragraph (b)(4)(i) of this sec-
tion, USD’s pre- transaction earnings are reduced by
the sum of the amounts described in paragraphs
(b)(4)(i)(A) and (b)(4)(i)(B) of this section. Under
paragraph (b)(4)(i)(A) of this section, USD’s pre-
transaction earnings are reduced by an amount equal
to USD’s pre-transaction earnings times the net
bases of the assets transferred to FC divided by the
total net bases of the assets held by USD immedi-
ately before the foreign divisive transaction ($500 x
($160 4$320) = $250). Under paragraph
(b)(4)(i)(B) of this section, USD’s pre-transaction
earnings are reduced by an amount equal to USD’s
pre-transaction earnings times USD’s net basis in
the stock of FC (immediately before USD’s transfer
of the shipping assets) divided by the total net bases
of the assets held by USD immediately before the
foreign divisive transaction ($500 x ($100 4$320)
= $156.25). The sum of the amounts described in
paragraphs (b)(4)(i)(A) and (B) of this section is
$406.25 ($250 + $156.25). Following the reduction
described in paragraph (b)(4)(i) of this section, USD
has $93.75 of earnings and profits ($500 - $406.25).
(B) Calculation of FC’s earnings and profits.
Under paragraphs (b)(4)(ii) of this section, the earn-
ings and profits of FC immediately after the foreign
divisive transaction are increased by the amount of
the reduction in USD’s pre-transaction earnings de-
scribed in paragraph (b)(4)(i)(A) of this section
($250). Under §1.367(b)–2(j)(1), this $250 is trans-
lated into “u” at the spot rate on January 1, 2002, to
250u. Under paragraph (c)(2) of this section, the
250u is not included as part of FC’s post-1986
undistributed earnings. FC has 400u in earnings and
profits (250u + 150u) immediately after the foreign
divisive transaction.
(iii) Post-transaction distribution. FC does not
accumulate any earnings and profits or pay or accrue
any foreign income taxes during 2002. On Decem-
ber 31, 2002, FC distributes 100u as a dividend to
USP, which has remained its sole shareholder.
Under section 989(b)(1), the 100u distribution is
translated into US$ at the spot rate on December 31,
2002, to $100. Proportionate parts of the $100 divi-
dend are attributable to the pre-transaction earnings
of FC ($37.50 = $100 x (150 4400)) and USD
($62.50 = $100 x (250 4400)). See sections 243(e)
and 245. Thus, under sections 243(e) and
§1.367(b)–2(j)(3), $62.50 of the distribution is eligi-
ble for the dividends received deduction. See also
section 861(a)(2)(C). The remaining $37.50 of the
distribution (and $15 of related foreign income
taxes) is subject to the generally applicable rules
concerning dividends paid by foreign corporations.
(d) Foreign divisive transactions in-
volving a foreign distributing corporation
and a domestic controlled corporation—
(1) Scope. The rules of this paragraph (d)
apply to a foreign divisive transaction in-
volving a foreign distributing corporation
and a domestic controlled corporation.
November 27, 20005502000–48 I.R.B.

(2) Coordination with §1.367(b)–3—
(i) In general. In the case of a foreign di-
visive transaction that includes a D reor-
ganization, the rules of §1.367(b)–3 are
applicable with respect to the pre-transac-
tion earnings of a foreign distributing cor-
poration that are allocable to a domestic
controlled corporation under paragraph
(b)(1)(i) of this section.
(ii) Determination of all earnings and
profits amount. An all earnings and prof-
its amount inclusion under paragraph
(d)(2)(i) of this section shall be computed
with respect to the pre-transaction earn-
ings that are allocable to the domestic
controlled corporation, without regard to
the parenthetical phrase in paragraph
(b)(4)(ii)(A) of this section.
(iii) Interaction with section 358 and
§1.367(b)– 2(e)(3)(ii). The basis increase
provided in §1.367(b)– 2(e)(3)(ii) shall
apply to an all earnings and profits
amount inclusion under paragraph
(d)(2)(i) of this section, subject to the fol-
lowing rules—
(A) Section 358 shall apply to deter-
mine the distributee’s basis in the foreign
distributing and domestic controlled cor-
poration without regard to the all earnings
and profits amount inclusion;
(B) After application of the rule in
paragraph (d)(2)(iii)(A) of this section,
the basis increase provided in
§1.367(b)–2(e)(3)(ii) shall be applied in a
manner that attributes such basis increase
solely to the exchanging shareholder’s
stock in the domestic controlled corpora-
tion; and
(C) the rule of paragraph (d)(2)(iii)(B)
of this section shall apply prior to
§1.367(b)–5(c)(4) and (d)(4).
(iv) Coordination with §1.367(b)–3(c).
In applying the rule of §1.367(b)–3(c)(2),
an exchanging shareholder described in
§1.367(b)–3(c)(1) shall recognize gain
with respect to the stock of the domestic
controlled corporation after the foreign
divisive transaction.
(v) Special rule for U.S. persons that
own foreign distributing corporation
stock after a non pro rata distribution.
[Reserved]
(3) Foreign income taxes. Pre-transac-
tion taxes related to a foreign distributing
corporation’s pre-transaction earnings
that are allocable or are reduced under the
rules described in paragraph (b)(1)(i) of
this section shall be ratably reduced. Pre-
transaction taxes related to a foreign dis-
tributing corporation’s pre-transaction
earnings that are allocable to a domestic
controlled corporation under the rules de-
scribed in paragraph (b)(1)(i) of this sec-
tion shall not carry over to the domestic
controlled corporation. Nothing in this
paragraph (d)(3) shall affect the deemed
paid taxes that otherwise would accom-
pany an inclusion under §1.367(b)–5 or
paragraph (d)(2)(i) of this section.
(4) Previously taxed earnings and prof-
its. [Reserved]
(5) Coordination with §1.367(b)–5.
See also §1.367(b)–5(c) and (d) for other
rules that may apply to a foreign divisive
transaction described in paragraph (d)(1)
of this section.
(6) Examples. The following examples
illustrate the application of the rules of
this section to transactions described in
paragraph (d)(1) of this section. The ex-
amples presume the following facts: FD is
a foreign corporation engaged in manu-
facturing and shipping activities through
Business A and Business B, respectively.
Any earnings and profits of FD described
in section 904(d)(1)(D) (shipping income)
qualified for the high tax exception from
subpart F income under section 954(b)(4),
and FD’s United States shareholders
elected to exclude the earnings and profits
from subpart F income under section
954(b)(4) and §1.954–1(d)(5). USC is a
domestic corporation that is wholly
owned by FD. FD and USC use calendar
taxable years. FD (and all of its qualified
business units as defined in section 989)
maintains a “u” functional currency, and
1u = US$1 at all times. The examples are
as follows:
Example 1—(i) Facts. (A) USP, a domestic cor-
poration, has owned all of the stock of FD since
FD’s incorporation in 1995. USP’s adjusted basis in
the FD stock is $100, and the FD stock has a fair
market value of $800. FD owns assets with total net
bases of 320u (including 160u attributable to the
Business B shipping assets), and has the following
pre-transaction earnings and pre-transaction taxes
accounts:
Separate Category:E&PForeign Taxes
General300u$60
Shipping200u$80
500u $140
(B) On January 1, 2002, FD incorporates USC
and transfers to USC the Business B shipping assets.
FD then distributes the USC stock to USP. The
transaction meets the requirements of sections
368(a)(1)(D) and 355. Immediately after the foreign
divisive transaction, the FD stock and the USC stock
each have a fair market value of $400.
(ii) Results—(A) Calculation of FD’s earnings
and profits. Under paragraph (b)(1)(i) of this sec-
tion, FD’s pre- transaction earnings are reduced by
an amount equal to its pre-transaction earnings times
the net bases of the assets transferred to USC di-
vided by the net bases of the assets held by FD im-
mediately before the foreign divisive transaction
(500u x (160u 4320u) = 250u). Following this re-
duction, FD has 250u of earnings and profits (500u -
250u).
(B) All earnings and profits amount inclusion.
Under §1.367(b)–3 and paragraph (d)(2)(i) of this
section, USP includes in income as an all earnings
and profits amount the pre-transaction earnings of
FD that are allocable to USC under paragraph
(b)(1)(i) of this section. Thus, USP’s all earnings
and profits amount inclusion is $250. See also sec-
tion 989(b)(1) and paragraph (d)(2)(ii) of this sec-
tion. Under §1.367(b)–3(b)(3)(i) and
§1.367(b)–2(e), USP includes the all earnings and
profits amount as a deemed dividend received from
FD immediately before the foreign divisive transac-
tion. Because the requirements of section 902 are
met, USP qualifies for a deemed paid foreign tax
credit with respect to the deemed dividend that it re-
ceives from FD. Under §1.902–1(d)(1), the $250
deemed dividend is out of FD’s separate categories
and reduces foreign income taxes as follows:
Separate Category:E&PForeign Taxes
General150u$30
Shipping100u
$40
250u $70
(C) Calculation of USP’s basis in USC and
USC’s earnings and profits. Under paragraph
(d)(2)(iii) of this section, the §1.367(b)–2(e)(3)(ii)
basis increase applies with respect to USP’s all earn-
ings and profits amount inclusion from FD and is at-
tributed solely to USP’s basis in USC (after applica-
tion of section 358). Accordingly, USP has a $300
basis in the USC stock ($50 section 358 basis, deter-
mined by reference to the relative values of USP’s
FD and USC stock: $100 pre-transaction basis x
($400 4$800) + $250 §1.367(b)–2(e)(3)(ii) basis
increase = $300). Because USP included in income
as a deemed dividend under §1.367(b)–3 and para-
graph (d)(2) of this section the pre-transaction earn-
ings of FD that are allocable to USC under para-
graph (b)(1)(i) of this section, such earnings and
profits are not available to increase USC’s earnings
and profits. As a result, USC has zero earnings and
profits immediately after the foreign divisive trans-
action.
(D) Application of §1.367(b)–5(c). The basis ad-
justment and income inclusion rules of
§1.367(b)–5(c)(2) apply if USP’s postdistribution
amount with respect to FD stock is less than its pre-
distribution amount with respect to FD stock. Under
§1.367(b)–5(e)(1), USP’s predistribution amount
with respect to FD stock is USP’s section 1248
amount attributable to such stock computed immedi-
ately before the distribution but after taking into ac-
count the allocation of earnings and profits as a re-
sult of the D reorganization. Thus, USP’s
predistribution amount with respect to FD stock is
$250 (500u - 250u). See also section 989(b)(2).
Under section 358, USP allocates its $100 basis in
FD stock between FD stock and USC stock accord-
ing to the stock blocks’ relative values, yielding a
$50 ($100 x ($400 4$800)) basis in FD stock. See
2000–48 I.R.B.551November 27, 2000

also paragraph (d)(2)(iii) of this section. Under
§1.367(b)–5(e)(2), USP’s postdistribution amount
with respect to FD stock is USP’s section 1248
amount with respect to such stock, computed imme-
diately after the distribution. Accordingly, USP’s
postdistribution amount with respect to FD stock is
$250. Because USP’s postdistribution amount with
respect to FD stock is not less than its predistribu-
tion amount, USP is not required to make any basis
adjustment or include any income under
§1.367(b)–5(c).
(E) FD’s earnings and profits after the foreign di-
visive transaction. Following the reduction de-
scribed in this Example 1(ii)(A) and (B), FD has the
following earnings and profits and foreign income
taxes accounts:
Separate Category:E&PForeign Taxes
General150u$30
Shipping100u$40
250u $70
Example 2—(i) Facts. (A) USP, a domestic cor-
poration, has owned all of the stock of FD since
FD’s incorporation in 1995. USP’s adjusted basis in
the FD stock is $400 and the FD stock has a fair
market value of $800. USC is a preexisting con-
trolled corporation. FD owns assets with net total
bases of 320u (including 160u attributable to the
USC stock), and has the following pre-transaction
earnings and pre-transaction taxes accounts:
Separate Category:E&PForeign Taxes
General300u$60
Shipping200u
$80
500u $140
(B) On January 1, 2002, FD distributes the USC
stock to USP in a transaction that meets the require-
ments of section 355. Immediately after the foreign
divisive transaction, the FD stock and the USC stock
each have a $400 fair market value.
(ii) Results—(A) Calculation of FD’s earnings
and profits. Under paragraphs (b)(1)(i) and
(b)(1)(ii)(A) of this section, FD’s pre-transaction
earnings are reduced by the amount of the reduction
that would have been required if FD had transferred
the stock of USC to a new corporation in a D reorga-
nization. Thus, FD’s pre-transaction earnings are re-
duced by an amount equal to its pre-transaction
earnings times its net basis in the USC stock divided
by the net bases of the assets held by FD immedi-
ately before the foreign divisive transaction (500u x
(160u 4320u) = 250u). Following this reduction,
FD has 250u of earnings and profits (500u - 250u).
(B) Calculation of USC’s earnings and profits.
Under paragraph (b)(1)(ii)(B) of this section, USC’s
earnings and profits are not increased (or replaced)
as a result of the foreign divisive transaction. As a
result, USP is not required to include an amount in
income under paragraph (d)(2)(i) of this section.
(C) Application of §1.367(b)–5(c). The basis
adjustment and income inclusion rules of
§1.367(b)–5(c)(2) apply if USP’s postdistribution
amount with respect to FD stock is less than its pre-
distribution amount with respect to FD stock.
Under §1.367(b)–5(e)(1), USP’s predistribution
amount with respect to FD stock is USP’s section
1248 amount attributable to such stock computed
immediately before the distribution. Thus, USP’s
predistribution amount with respect to FD stock is
$400 (the predistribution amount is limited to
USP’s built-in gain in FD stock immediately before
the distribution ($800 - $400)). See also section
989(b)(2). Under section 358, USP allocates its
$400 basis in FD stock between FD stock and USC
stock according to the stock blocks’ relative values,
yielding a $200 ($400 x ($400 4$800)) basis in
each block. Under §1.367(b)–5(e)(2), USP’s post-
distribution amount with respect to FD stock is
USP’s section 1248 amount with respect to such
stock, computed immediately after the distribution.
Accordingly, USP’s postdistribution amount with
respect to FD stock is $200 (the postdistribution
amount is limited to USP’s built-in gain in FD
stock immediately after the distribution ($400 -
$200)). Because USP’s postdistribution amount
with respect to FD stock is $200 less than its pre-
distribution amount with respect to such stock
($400 - $200), §1.367(b)–5(c)(2)(i) and (ii) require
USP to reduce its basis in FD stock by the $200 dif-
ference, but only to the extent such reduction in-
creases USP’s section 1248 amount with respect to
the FD stock. As a result, USP reduces its basis in
the FD stock from $200 to $150 and includes $150
in income as a deemed dividend from FD. Because
the requirements of section 902 are met, USP qual-
ifies for a deemed paid foreign tax credit with re-
spect to the deemed dividend that it receives from
FD. Under §1.902–1(d)(1), the $150 deemed divi-
dend is out of FD’s separate categories and reduces
foreign income taxes as follows:
Separate Category:E&PForeign Taxes
General90u$18
Shipping 60u
$24
150u $42
(D) Basis adjustment. Under §1.367(b)–5(c)(3),
USP does not increase its basis in FD stock as a re-
sult of USP’s $150 deemed dividend from FD.
Under §1.367(b)–5(c)(4), USP increases its basis in
the USC stock by the amount by which it decreased
its basis in the FD stock, as well as by the amount of
its deemed dividend inclusion. The
§1.367(b)–5(c)(4) basis increase applies in full be-
cause USP’s basis in the USC stock is not increased
above the fair market value of such stock. Thus,
USP increases its basis in USC stock to $400 ($200
+ $50 + $150).
(E) Reduction in FD’s statutory groupings of
earnings and profits. Under paragraph (b)(2) of this
section, the reduction in FD’s pre-transaction earn-
ings that is not attributable to USP’s inclusion under
§1.367(b)–5 decreases FD’s statutory groupings of
earnings and profits on a pro rata basis. Under
paragraph (d)(3) of this section, FD’s pre-transac-
tion taxes also are ratably reduced. As described in
this Example 2(ii)(A), the reduction in FD’s pre-
transaction earnings is 250u. As described in this
Example 2(ii)(C), 150u of the 250u reduction is at-
tributable to an inclusion under §1.367(b)–5. As a
result, under paragraphs (b)(2) and (d)(3) of this
section the remaining 100u reduction in FD’s pre-
transaction earnings is out of the following separate
categories of earnings and profits and foreign in-
come taxes:
Separate Category:E&PForeign Taxes
General60u$12
Shipping40u
$16
100u$28
(F) FD’s earnings and profits after the foreign di-
visive transaction. After the reductions described in
this Example 2(ii)(C) and (E), FD has the following
earnings and profits and foreign income taxes ac-
counts:
Separate Category:E&PForeign Taxes
General150u$30
Shipping100u$40
250u$70
Example 3—(i) Facts. (A) USP, a domestic
corporation, has owned all of the stock of FD
since FD’s incorporation in 1995. USP’s adjusted
basis in the FD stock is $400 and the FD stock has
a fair market value of $800. USC is a preexisting
controlled corporation. FD owns assets with total
net bases of 320u (including 160u attributable to
the USC stock and 80u attributable to the Busi-
ness B shipping assets), and has the following
pre-transaction earnings and pre-transaction taxes
accounts:
Separate Category:E&PForeign Taxes
General300u$ 60
Shipping200u$ 80
500u $140
(B) On January 1, 2002, FD transfers to USC
the Business B shipping assets. FD then distrib-
utes the USC stock to USP. The transaction meets
the requirements of sections 368(a)(1)(D) and 355.
Immediately after the foreign divisive transaction,
the FD stock has a $200 fair market value and the
USC stock has a $600 fair market value.
(ii) Results—(A) Calculation of FD’s earnings
and profits. Under paragraph (b)(4)(i) of this sec-
tion, FD’s pre-transaction earnings are reduced by
the sum of the amounts described in paragraphs
(b)(4)(i)(A) and (B) of this section. Under para-
graph (b)(4)(i)(A) of this section, FD’s pre-transac-
tion earnings are reduced by an amount equal to
FD’s pre-transaction earnings times the net bases of
the Business B shipping assets transferred to USC
divided by the total net bases of the assets held by
FD immediately before the foreign divisive transac-
tion (500u x (80u 4320u) = 125u). Under para-
graph (b)(4)(i)(B) of this section, FD’s pre-transac-
tion earnings are reduced by an amount equal to
FD’s pre-transaction earnings times FD’s net basis
in the stock of USC divided by the total net bases of
the assets held by FD immediately before the for-
eign divisive transaction (500u x (160u 4320u) =
250u). The sum of the amounts described in para-
graphs (b)(4)(i)(A) and (B) of this section is 375u
(125u + 250u).
(B) All earnings and profits amount inclusion.
Under §1.367(b)–3 and paragraph (d)(2)(i) of this
section, USP is required to include in income as
an all earnings and profits amount the pre-transac-
tion earnings of FD that are allocable to USC
under paragraph (b)(1)(i) of this section. Under
paragraph (b)(4)(ii)(A) of this section, the 125u of
pre-transaction earnings described in paragraph
(b)(4)(i)(A) are allocable to USC. Thus, the all
earnings and profits amount is $125. See also
section 989(b)(1) and paragraph (d)(2)(ii) of this
section. Under §§1.367(b)–3(b)(3)(i) and
1.367(b)–2(e), USP includes the all earnings and
profits amount as a deemed dividend received
from FD immediately before the foreign divisive
transaction. Because the requirements of section
902 are met, USP qualifies for a deemed paid for-
November 27, 20005522000–48 I.R.B.

eign tax credit with respect to the deemed divi-
dend that it receives from FD. Under
§1.902–1(d)(1), the $125 deemed dividend is out
of FD’s separate categories and reduces foreign
income taxes as follows:
Separate Category:E&PForeign Taxes
General75u$15
Shipping 50u
$20
125u$35
(C) Calculation of USP’s basis in USC and
USC’s earnings and profits. Under paragraph
(d)(2)(iii) of this section, the §1.367(b)–2(e)(3)(ii)
basis increase applies with respect to USP’s all earn-
ings and profits amount inclusion and is attributed
solely to USP’s basis in USC (after application of
section 358). Accordingly, USP has a $425 basis in
the USC stock ($300 section 358 basis, determined
by reference to the relative values of USP’s FD and
USC stock: $400 pre-transaction basis x ($600 4
$800) + $125 §1.367(b)–2(e)(3)(ii) basis increase =
$425). Because USP included in income as a
deemed dividend under §1.367(b)–3 and paragraph
(d)(2) of this section the pre-transaction earnings of
FD that are allocable to USC under paragraph
(b)(1)(i) of this section, such earnings and profits are
not available to increase USC’s earnings and profits.
As a result, USC’s earnings and profits are not in-
creased as a result of the foreign divisive transac-
tion.
(D) Application of §1.367(b)–5(c). The basis ad-
justment and income inclusion rules of
§1.367(b)–5(c)(2) apply if USP’s postdistribution
amount with respect to FD stock is less than its pre-
distribution amount with respect to FD stock. Under
§1.367(b)–5(e)(1) and (3), USP’s predistribution
amount with respect to FD stock is USP’s section
1248 amount attributable to such stock computed
immediately before the distribution, after the alloca-
tion of FD’s pre-transaction earnings described in
paragraphs (b)(4)(i)(A) and (ii)(A) of this section,
but without regard to the reduction in FD’s pre-
transaction earnings described in paragraph
(b)(4)(i)(B) of this section. Thus, USP’s predistribu-
tion amount with respect to FD stock is $375 ($500 -
$125). See also section 989(b)(2). Under section
358, USP allocates its $400 basis in FD stock be-
tween FD stock and USC stock according to the
stock blocks’ relative values, yielding a $100 ($400
x ($200 4$800)) basis in FD stock. See also para-
graph (d)(2)(iii) of this section. Under
§1.367(b)–5(e)(2), USP’s postdistribution amount
with respect to FD stock is USP’s section 1248
amount with respect to such stock, computed imme-
diately after the distribution. Accordingly, USP’s
postdistribution amount with respect to FD stock is
$100. (While FD has earnings and profits of 125u
immediately after the foreign divisive transaction,
USP’s postdistribution amount is limited to its built-
in gain in FD stock immediately after the distribu-
tion ($200 - $100).) Because USP’s postdistribution
amount with respect to FD stock is $275 less than its
predistribution amount with respect to such stock
($375 - $100), §1.367(b)–5(c)(2)(i) and (ii) require
USP to reduce its basis in FD stock, but only to the
extent such reduction increases USP’s section 1248
amount with respect to the FD stock. As a result,
USP reduces its basis in the FD stock from $100 to
$75 and includes $250 in income as a deemed divi-
dend from FD. Because the requirements of section
902 are met, USP qualifies for a deemed paid for-
eign tax credit with respect to the deemed dividend
that it receives from FD. Under §1.902–1(d)(1), the
$250 deemed dividend is out of FD’s separate cate-
gories and reduces foreign income taxes as follows:
Separate Category:E&PForeign Taxes
General150u$30
Shipping100u
$20
250u $50
(E) Basis adjustment. Under §1.367(b)–5(c)(3),
USP does not increase its basis in FD stock as a re-
sult of USP’s $250 deemed dividend from FD.
Under §1.367(b)–5(c)(4), USP increases its basis in
the USC stock by the amount by which it decreased
its basis in the FD stock, as well as by the amount of
its deemed dividend inclusion, but only up to the fair
market value of USP’s USC stock. As described in
this Example 3(ii)(C), USP has already increased its
basis in the USC stock to $525. Because the fair
market value of FD’s USC stock is $600, USP’s
basis increase under §1.367(b)–5(c)(4) is limited to
$75. See also paragraph (d)(2)(iii)(C) of this sec-
tion. Thus, USP has a $600 basis in the USC stock
immediately after the foreign divisive transaction.
(F) Reduction in FD’s statutory groupings of
earnings and profits. Under paragraph (b)(2) of this
section, the reduction in FD’s pre-transaction earn-
ings that is not attributable to USP’s inclusion under
paragraph (d)(2)(i) of this section or §1.367(b)–5 de-
crease FD’s statutory groupings of earnings and
profits on a pro rata basis. Under paragraph (d)(3)
of this section, FD’s pre-transaction taxes are also
ratably reduced. As described in this Example 3
(ii)(A), the reduction in FD’s pre- transaction earn-
ings is 375u. As described in this Example 3(ii)(B)
and (D), the entire 375u reduction was subject to in-
clusion as a deemed dividend by USP under para-
graph (d)(2)(i) of this section or §1.367(b)–5. Thus,
none of FD’s pre-transaction earnings remain to be
reduced under paragraph (b)(2) of this section.
(G) FD’s earnings and profits after the foreign
divisive transaction. After the reductions described
in this Example 3(ii)(B) and (D), FD has the follow-
ing earnings and profits and foreign income taxes
accounts:
Separate Category:E&PForeign Taxes
General75u$15
Shipping50u
$20
125u $35
(e) Foreign divisive transactions in-
volving a foreign distributing corporation
and a foreign controlled corporation—
(1) Scope. The rules of this paragraph (e)
apply to a foreign divisive transaction in-
volving a foreign distributing corporation
and a foreign controlled corporation.
(2) Earnings and profits of foreign
controlled corporation—(i) In general.
Except to the extent specified in para-
graph (e)(2)(ii) of this section, pre-trans-
action earnings of a foreign distributing
corporation that are allocated to a foreign
controlled corporation under the rules de-
scribed in paragraphs (b)(1)(i) and (4) of
this section shall carry over to the foreign
controlled corporation in accordance with
the rules described in §1.367(b)–7.
(ii) Special rule for pre-transaction
earnings allocated to a newly created
controlled corporation. Section
1.367(b)–9 shall apply to pre-transaction
earnings that are allocated from a foreign
distributing corporation to a newly cre-
ated foreign controlled corporation under
the rules described in paragraph (b)(1)(i)
of this section.
(3) Foreign income taxes. Pre-transac-
tion taxes related to a foreign distributing
corporation’s pre-transaction earnings
that are allocated or reduced under the
rules described in paragraph (b)(1)(i) of
this section shall be ratably reduced. Pre-
transaction taxes related to a foreign dis-
tributing corporation’s pre-transaction
earnings that are allocated to a foreign
controlled corporation under the rules de-
scribed in paragraph (b)(1)(i) of this sec-
tion shall carry over to the foreign con-
trolled corporation in accordance with the
rules of §1.367(b)–7. Section 1.367(b)–9
shall apply to pre-transaction taxes that
are allocated from a foreign distributing
corporation to a newly created foreign
controlled corporation under the rules de-
scribed in paragraph (b)(1)(i) of this sec-
tion.
(4) Previously taxed earnings and prof-
its. [Reserved]
(5) Coordination with §1.367(b)–5.
See also §1.367(b)–5(c) and (d) for other
rules that may apply to a foreign divisive
transaction described in paragraph (e)(1)
of this section.
(6) Examples. The following examples
illustrate the application of the rules of
this section to transactions described in
paragraph (e)(1) of this section. The ex-
amples presume the following facts: FD is
a foreign corporation engaged in manu-
facturing and shipping activities through
Business A and Business B, respectively.
FC is a foreign corporation that is wholly
owned by FD. Any earnings and profits
of FD or FC described in section
904(d)(1)(D) (shipping income) qualified
for the high tax exception from subpart F
income under section 954(b)(4), and FD’s
and FC’s United States shareholders
elected to exclude the earnings and profits
from subpart F income under section
954(b)(4) and §1.954–1(d)(1). FD and
FC have calendar taxable years. FD and
FC (and all of their respective qualified
2000–48 I.R.B.553November 27, 2000

business units as defined in section 989)
maintain a “u” functional currency, and
1u = US$1 at all times. The examples are
as follows:
Example 1—(i) Facts. (A) USP, a domestic cor-
poration, has owned all of the stock of FD since
FD’s incorporation in 1995. USP’s adjusted basis in
the FD stock is $400 and the FD stock has a fair
market value of $800. FD owns assets with total net
bases of 320u (including 160u attributable to the
Business B shipping assets), and has the following
pre-transaction earnings and pre-transaction taxes
accounts:
Separate Category:E&PForeign Taxes
General300u$60
Shipping200u$80
500u$140
(B) On January 1, 2002, FD incorporates FC and
transfers to FC the Business B shipping assets. FD
then distributes the FC stock to USP. The transac-
tion meets the requirements of sections 368(a)(1)(D)
and 355. Immediately after the foreign divisive
transaction, the FD stock and the FC stock each have
a $400 fair market value.
(ii) Result. (A) Calculation of FD’s earnings
and profits. Under paragraph (b)(1)(i) of this sec-
tion, FD’s pre-transaction earnings are reduced by
an amount equal to its pre-transaction earnings
times the net bases of the assets transferred to FC
divided by the net bases of the assets held by FD
immediately before the foreign divisive transaction
(500u x (160u 4320u) = 250u). Following this re-
duction, FD has 250u of earnings and profits (500u
- 250u).
(B) Application of §1.367(b)–5(c). The basis ad-
justment and income inclusion rules of
§1.367(b)–5(c)(2) apply if USP’s postdistribution
amount with respect to FD or FC stock is less than
its predistribution amount with respect to such stock.
Under §1.367(b)–5(e)(1), USP’s predistribution
amount with respect to FD or FC stock is USP’s sec-
tion 1248 amount attributable to such stock com-
puted immediately before the distribution but after
taking into account the allocation of earnings and
profits as a result of the D reorganization. Thus,
USP’s predistribution amounts with respect to FD
and FC stock are both $200. See also section
989(b)(2) and §1.1248–1(d)(3). Under section 358,
USP allocates its $400 basis in FD stock between
FD stock and FC stock according to the stock
blocks’ relative values, yielding a $200 ($400 x
($400 4$800)) basis in each block. Under
§1.367(b)–5(e)(2), USP’s postdistribution amount
with respect to FD or FC stock is USP’s section
1248 amount with respect to such stock, computed
immediately after the distribution. Accordingly,
USP’s postdistribution amounts with respect to FD
and FC stock are both $200. Because USP’s post-
distribution amounts with respect to FD and FC
stock are not less than USP’s respective predistribu-
tion amounts, USP is not required to make any basis
adjustment or include any income under
§1.367(b)–5(c).
(C) Reduction in FD’s statutory groupings of
earnings and profits. Under paragraph (b)(2) of this
section, the 250u reduction in FD’s pre-transaction
earnings decreases FD’s statutory groupings of earn-
ings and profits on a pro rata basis. Under paragraph
(e)(3) of this section, FD’s pre-transaction taxes also
are ratably reduced. Accordingly, FD’s pre-transac-
tion earnings and pre-transaction taxes are reduced
by the following amounts:
Separate Category:E&PForeign Taxes
General150u$30
Shipping100u
$40
250u$70
(D) Calculation of FC’s earnings and profits.
Under paragraph (e)(2) of this section, the pre-trans-
action earnings of FD that are allocated to FC under
paragraph (b)(1)(i) of this section carry over to FC
in accordance with the rules of §1.367(b)–7, subject
to the rule of §1.367(b)–9. Under paragraph (e)(3)
of this section, FD’s pre-transaction taxes related to
the pre-transaction earnings that are allocated to FC
similarly carry over to FC in accordance with the
rules of §1.367(b)–7, subject to the rule of
§1.367(b)–9. As a result, under §1.367(b)–7(d), FC
has the following earnings and profits and foreign
income taxes accounts immediately after the foreign
divisive transaction:
Separate Category:E&PForeign Taxes
General150u$30
Shipping100u
$40
250u$70
Example 2—(i) Facts. (A) USP, a domestic cor-
poration, has owned all of the stock of FD since
FD’s incorporation in 1995. USP’s adjusted basis in
the FD stock is $300 and the FD stock has a fair
market value of $1,500. FC is a preexisting con-
trolled corporation and FD has always owned all of
the FC stock. FD owns assets with total net bases of
320u (including 160u attributable to the FC stock).
FD and FC have the following earnings and profits
and foreign income taxes accounts:
FD:
Separate Category:E&PForeign Taxes
General400u$ 50
Passive(100u)$ 6
Shipping 200u$ 80
500u $136
FC:
Separate Category:E&PForeign Taxes
General600u$100
Passive(50u)$ 6
Shipping100u
$ 40
650u$146
(B) On January 1, 2002, FD distributes the FC
stock to USP in a transaction that meets the require-
ments of section 355. Immediately after the foreign
divisive transaction, the FD stock and the FC stock
each have a $750 fair market value.
(ii) Result—(A) Calculation of FD’s earnings
and profits. Under paragraph (b)(1)(i) and (ii)(A) of
this section, FD’s pre-transaction earnings are re-
duced by the amount of the reduction that would
have been required if FD had transferred the stock of
FC to a new corporation in a D reorganization.
Thus, FD’s pre-transaction earnings are reduced by
an amount equal to its pre-transaction earnings times
its net basis in the FC stock divided by the net bases
of the assets held by FD immediately before the for-
eign divisive transaction (500u x (160u 4320u) =
250u). Following this reduction, FD has 250u of
earnings and profits (500u - 250u).
(B) Application of §1.367(b)–5(c). The basis ad-
justment and income inclusion rules of
§1.367(b)–5(c) apply if USP’s postdistribution
amount with respect to FD or FC stock is less than
its predistribution amount with respect to such stock.
Under §1.367(b)–5(e)(1), USP’s predistribution
amount with respect to FD or FC stock is USP’s sec-
tion 1248 amount attributable to such stock com-
puted immediately before the distribution. Thus,
USP’s predistribution amounts with respect to FD
and FC stock are $500 and $650, respectively. See
also section 989(b)(2). Under section 358, USP al-
locates its $300 basis in FD stock between FD stock
and FC stock according to the stock blocks’ relative
values, yielding a $150 ($300 x ($750 4$1,500))
basis in each block. Under §1.367(b)–5(e)(2),
USP’s postdistribution amount with respect to FD or
FC stock is USP’s section 1248 amount with respect
to such stock, computed immediately after the distri-
bution. Accordingly, USP’s postdistribution amount
with respect to FD stock is $250 (500u - 250u), and
its postdistribution amount with respect to FC stock
is $600 (while FC has 650u of earnings and profits
immediately after the foreign divisive transaction,
USP’s postdistribution amount is limited to its
built–in gain in FC stock immediately after the dis-
tribution ($750 - $150)). USP’s postdistribution
amount with respect to both the FD and FC stock is
less than its predistribution amount with respect to
such stock. This difference is $50 with respect to
FC ($650 - $600), and $250 with respect to FD
($500 - $250). Under §1.367(b)–5(c)(2)(i) and (ii),
USP is required to reduce its basis in the FD and FC
stock, but only to the extent such reductions increase
USP’s section 1248 amount with respect to the
stock. Accordingly, USP reduces its basis in the FC
stock by $50, and thereafter USP has a $100 basis in
such stock ($150 - $100). Because a reduction in
USP’s basis in FD stock would not increase any of
USP’s section 1248 amount with respect to such
stock, USP includes the entire $250 difference be-
tween its predistribution and postdistribution
amounts with respect to the FD stock as a deemed
dividend from FD. Because the requirements of sec-
tion 902 are met, USP qualifies for a deemed paid
foreign tax credit with respect to the deemed divi-
dend that it receives from FD. Under
§1.960–1(i)(4), the 100u deficit in the section
904(d)(1)(A) passive separate category is allocated
proportionately against the other separate categories
for purposes of computing the deemed paid credit on
the distribution. Thus, there are 333.33u (400u -
(100u x (400u 4600u))) of available earnings in the
section 904(d)(1)(I) general separate category
(along with $50 of foreign income taxes) and
166.67u (200u - (100u x (200u 4600u))) of avail-
able earnings in the section 904(d)(1)(D) shipping
separate category (along with $80 of foreign income
taxes). Under §1.902–1(d)(1), the $250 deemed div-
idend is out of FD’s separate categories and reduces
foreign income taxes as follows:
Separate Category:E&PForeign Taxes
General166.67u$25
Passive0u$ 0
Shipping 83.33u
$40
250u$65
(C) Basis adjustments. Under §1.367(b)–5(c)(3),
USP does not increase its basis in FD stock as a re-
sult of USP’s $250 deemed dividend from FD.
November 27, 20005542000–48 I.R.B.

Under §1.367(b)–5(c)(4), USP increases its basis in
the FD and FC stock by the amount of its basis de-
crease or deemed dividend inclusion with respect to
the other corporation, but only to the extent such
basis increase does not diminish USP’s postdistribu-
tion amount with respect to that other corporation
and only to the extent of the other corporation’s fair
market value. Under these rules, USP increases its
basis in the FD stock by the full amount by which it
decreased its basis in FC ($150 + $50 = $200). USP
does not increase its basis in the FC stock as a result
of its deemed dividend from FD because any in-
crease in the FC stock basis would diminish USP’s
postdistribution amount with respect to such stock.
(D) FD’s earnings and profits after the foreign
divisive transaction. Because the entire $250 reduc-
tion in FD’s pre- transaction earnings was subject to
inclusion under §1.367(b)–5 (as described in this
Example 2(ii)(B)), paragraph (b)(2) of this section
does not apply. FD has the following earnings and
profits and foreign income taxes accounts immedi-
ately after the foreign divisive transaction (see
§1.960–1(i)(4)):
Separate Category:E&PForeign Taxes
General233.33u$25
Passive(100u)$ 6
Shipping1
16.67u$40
250u$71
(E) Calculation of FC’s earnings and profits.
Under paragraph (b)(1)(ii)(B) of this section, FC’s
earnings and profits are not increased (or replaced)
as a result of the foreign divisive transaction. FC’s
earnings and profits also are not reduced because
USP was not required to include a deemed dividend
out of FC under §1.367(b)–5.
Example 3—(i) Facts. (A) USP, a domestic cor-
poration, has owned all of the stock of FD since
FD’s incorporation in 1995. USP’s adjusted basis in
the FD stock is $100 and the FD stock has a fair
market value of $2,000. FC is a preexisting con-
trolled corporation and FD has always owned all of
the FC stock. FD owns assets with total net bases of
320u (including 100u attributable to the FC stock
and 160u attributable to the Business B shipping as-
sets). FD and FC have the following earnings and
profits and foreign income taxes accounts:
FD:
Separate Category:E&PForeign Taxes
General300u$ 50
10/50 dividends from
FC1, a noncontrolled
section 902 corporation100u$ 6
Shipping200u$ 80
600u$136
FC:
Separate Category:E&PForeign Taxes
General100u$10
Passive (50u)$ 6
Shipping100u$40
150u$56
(B) On January 1, 2002, FD transfers to FC the
Business B shipping assets. FD then distributes the
FC stock to USP. The transaction meets the require-
ments of sections 368(a)(1)(D) and 355. Immediately
after the foreign divisive transaction, the FD stock and
the FC stock each have a $1,000 fair market value.
(ii) Result—(A) Calculation of FD’s earnings
and profits. Under paragraph (b)(4)(i) of this sec-
tion, FD’s pre-transaction earnings are reduced by
the sum of the amounts described in paragraphs
(b)(4)(i)(A) and (B) of this section. Under para-
graph (b)(4)(i)(A) of this section, FD’s pre-transac-
tion earnings are reduced by an amount equal to
FD’s pre-transaction earnings times the net bases of
the Business B shipping assets transferred to FC di-
vided by the total net bases in the assets held by FD
immediately before the foreign divisive transaction
(600u x (160u 4320u) = 300u). Under paragraph
(b)(4)(i)(B) of this section, FD’s pre-transaction
earnings are reduced by an amount equal to FD’s
pre-transaction earnings times FD’s net bases in the
stock of FC divided by the total net bases of the as-
sets held by FD immediately before the foreign divi-
sive transaction (600u x (100u 4320u) = 187.50u).
The sum of the amounts described in paragraphs
(b)(4)(i)(A) and (B) of this section is 487.50u.
(B) Application of §1.367(b)–5(c). The basis ad-
justment and income inclusion rules of
§1.367(b)–5(c)(2) apply if USP’s postdistribution
amount with respect to FD or FC stock is less than
its predistribution amount with respect to such stock.
Under §1.367(b)–5(e)(1) and (3), USP’s predistribu-
tion amount with respect to FD or FC stock is USP’s
section 1248 amount attributable to such stock com-
puted immediately before the distribution, after the
allocation of FD’s pre-transaction earnings de-
scribed in paragraphs (b)(4)(i)(A) and (ii)(A) of this
section, but before the reduction in FD’s pre-transac-
tion earnings described in paragraph (b)(4)(i)(B) of
this section. Thus, USP’s predistribution amounts
with respect to FD and FC stock are $300 (600u -
300u) and $450 (150u + 300u), respectively. See
also section 989(b)(2). Under section 358, USP al-
locates its $100 basis in FD stock between FD stock
and FC stock according to the stock blocks’ relative
values, yielding a $50 ($100 x ($1,000 4$2,000))
basis in each block. Under §1.367(b)–5(e)(2),
USP’s postdistribution amount with respect to FD or
FC stock is USP’s section 1248 amount with respect
to such stock, computed immediately after the distri-
bution. Accordingly, USP’s postdistribution amount
with respect to FD stock is $112.50 (600u - 300u -
187.50u), and its postdistribution amount with re-
spect to FC stock is $450 (150u + 300u). Because
USP’s postdistribution amount with respect to FC
stock is not less than its predistribution amount with
respect to such stock, the §1.367(b)–5(c)(2) basis
adjustment and income inclusion rules do not apply
with respect to the FC stock. Because USP’s post-
distribution amount with respect to FD stock is
$187.50 less than its predistribution amount with re-
spect to such stock ($300 - $112.50), §1.367(b)-
5(c)(2)(i) and (ii) require USP to reduce its basis in
FD stock, but only to the extent such reduction in-
creases USP’s section 1248 amount with respect to
the FD stock. Because a reduction in USP’s basis in
the FD stock would not increase any of USP’s sec-
tion 1248 amount with respect to such stock, USP
includes the entire $187.50 difference between its
predistribution and postdistribution amounts with
respect to the FD stock as a deemed dividend from
FD. Because the requirements of section 902 are
met, USP qualifies for a deemed paid foreign tax
credit with respect to the deemed dividend that it re-
ceives from FD. Under §1.902–1(d)(1), the $187.50
deemed dividend is out of FD’s separate categories
and reduces foreign income taxes as follows:
Separate Category:E&PForeign Taxes
General93.75u$15.63
10/50 dividends from
FC131.25u$ 1.88
Shipping 62.50u
$25
187.50u$42.51
(C) Basis adjustment. Under §1.367(b)–5(c)(3),
the basis increase provided in §1.367(b)–2(e)(3)(ii)
does not apply with respect to USP’s $187.50
deemed dividend from FD. Under
§1.367(b)–5(c)(4), USP increases its basis in the FC
stock by the amount of its deemed dividend inclu-
sion from FD, but only to the extent such basis in-
crease does not diminish USP’s postdistribution
amount with respect to FC stock and only up to the
fair market value of the FC stock. Under these rules,
USP increases its basis in the FC stock by the full
amount of its deemed dividend from FD ($50 +
$187.50 = $237.50).
(D) Reduction in FD’s statutory groupings of
earnings and profits. Under paragraph (b)(2) of this
section, the reduction in FD’s pre-transaction earn-
ings that is not attributable to USP’s inclusion under
§1.367(b)–5 decreases FD’s statutory groupings of
earnings and profits on a pro rata basis. Under para-
graph (e)(3) of this section, FD’s pre-transaction
taxes are also ratably reduced. As described in this
Example 3(ii)(A), the reduction in FD’s pre-transac-
tion earnings is 487.50u. As described in this Exam-
ple 3(ii)(B), 187.50u of the 487.50u reduction is at-
tributable to a deemed dividend inclusion by USP
under §1.367(b)–5. Thus, under paragraphs (b)(2)
and (e)(3) of this section, the remaining 300u reduc-
tion in FD’s pre-transaction earnings and related
pre-transaction taxes is out of FD’s separate cate-
gories and reduces foreign income taxes as follows:
Separate Category:E&PForeign Taxes
General150u$25
10/50 dividends from
FC150u$ 3
Shipping100u
$40
300u$68
(E) Calculation of FC’s earnings and profits.
Under paragraph (b)(4)(ii) of this section, FC’s earn-
ings and profits immediately after the foreign divi-
sive transaction equal the sum of FC’s earnings and
profits immediately before the foreign divisive
transaction, plus the amount of the reduction in FD’s
earnings and profits described in paragraph
(b)(4)(i)(A) of this section, except to the extent such
amount was included in income as a deemed divi-
dend pursuant to the foreign divisive transaction.
The reduction in FD’s earnings and profits described
in paragraph (b)(4)(i)(A) of this section is 300u,
none of which was included in income by USP as a
deemed dividend pursuant to the foreign divisive
transaction. Under paragraphs (e)(2) and (3) of this
section, the 300u of pre-transaction earnings and re-
lated pre-transaction taxes carry over to FC and
combine with FC’s earnings and profits and foreign
income taxes accounts in accordance with the rules
described in §1.367(b)–7. Under §1.367(b)–7(d),
FC has the following earnings and profits and for-
eign income taxes accounts immediately after the
foreign divisive transaction:
2000–48 I.R.B.555November 27, 2000

Taxes
Associated with
HoveringHovering
Separate Category:E&PDeficit TaxesDeficit
General250u$35
10/50 dividends50u$ 3
from FC1
Passive(50u)$6
Shipping200u_____$80 ___
500u(50u)$118$6
November 27, 20005562000–48 I.R.B.
(F) FD’s earnings and profits after the foreign di-
visive transaction. Following the reductions de-
scribed in this Example 3(ii)(B) and (D), FD has the
following earnings and profits and foreign income
taxes accounts:
Separate Category:E&PForeign Taxes
General56.25u$ 9.37
10/50 dividends from
FC118.75u$ 1.12
Shipping37.50u$15
112.50u$25.49
(f) Effective date. This section shall
apply to section 367(b) exchanges that
occur on or after the date 30 days after
these regulations are published as final
regulations in the Federal Register.
Par. 11. Section 1.367(b)–9 is added to
read as follows:
§1.367(b)–9 Special rule for F
reorganizations and similar transactions.
(a) Scope. This section applies to any
foreign 381 transaction (as described in
§1.367(b)–7(a)) described in section
368(a)(1)(F) or in which either the foreign
target corporation or the foreign acquiring
corporation is newly created. This section
also applies to any foreign divisive transac-
tion (as described in §1.367(b)–8(a)) that is
described in §1.367(b)–8(e)(1) and that in-
volves a newly created foreign distributing
or foreign controlled corporation.
(b) Hovering deficit rules inapplicable.
If a transaction is described in paragraph (a)
of this section, a foreign surviving corpora-
tion or a newly created controlled corpora-
tion shall succeed to earnings and profits,
deficits in earnings and profits, and foreign
income taxes without regard to the hover-
ing deficit rules of §1.367(b)–7(d)(2),
(e)(1)(iii), (e)(2)(iii), (f)(1)(iii), and
(f)(2)(iii). In the case of a foreign divisive
transaction, nothing in this section shall af-
fect the application of §1.367(b)–8(b)(iii).
(c) Example. The following example
illustrates the rules of this section:
Example—(i) Facts. (A) Foreign corporation A is
and always has been a wholly owned subsidiary of
USP, a domestic corporation. Foreign corporation A
was incorporated in 1990, and always has been a
controlled foreign corporation using a calendar tax-
able year. Foreign corporation A (and all of its re-
spective qualified business units as defined in sec-
tion 989) maintains a “u” functional currency, and
1u = US$1 at all times. On December 31, 2001, for-
eign corporation A has the following earnings and
profits and foreign income taxes accounts:
Separate Category:E&PForeign Taxes
Passive(1,000u)$ 5
General 200u
$200
(800u)$205
(B) On January 1, 2002, foreign corporation A
moves its place of incorporation from Country 1 to
Country 2 in a reorganization described in section
368(a)(1)(F).
(ii) Result. Under §1.367(b)–7(d), as modified
by paragraph (b) of this section, foreign surviving
corporation has the following earnings and profits
and foreign income taxes accounts immediately
after the foreign 381 transaction:
Separate Category:E&PForeign Taxes
Passive(1,000u)$ 5
General 200u
$200
(800u)$205
(d) Effective date. This section shall
apply to section 367(b) exchanges that
occur on or after the date 30 days after
these regulations are published as final
regulations in the Federal Register.
Par. 12. In §1.367(e)–1, paragraph (a)
is amended by adding a sentence at the
end of the paragraph to read as follows:
§1.367(e)–1 Distributions described in
section 367(e)(1).
(a) * * * See §1.367(b)–8(c)(3) for an
example illustrating the interaction of
§1.367(e)–1 with other sections of the In-
ternal Revenue Code (such as sections
367(b) and 1248).
* * * * *
Par. 13. In §1.381(a)–1, paragraph (c)
is revised to read as follows:
§1.381(a)–1 General rule relating to
carryovers in certain corporate
acquisitions.
* * * * *
(c) Foreign corporations. For addi-
tional rules involving foreign corpora-
tions see §§1.367(b)–7 and 1.367(b)–9.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on No-
vember 8, 2000, 4:19 p.m., and published in the
issue of the Federal Register for November 15,
2000, 65 F.R. 69137)
Registration Still Underway for
the International Taxation
Institute
Announcement 2000–95
Registration is currently underway for
the Thirteenth Annual Institute on Current
Issues in International Taxation, to be held
on December 7 and 8, 2000, at the J.W.
Marriott Hotel in Washington, DC. The In-
ternal Revenue Service and the George
Washington University are jointly sponsor-
ing the Institute, which is designed for pro-
fessionals in international tax law. The pro-
gram will offer a unique opportunity for top
IRS and Treasury officials and tax experts,
as well as leading private sector specialists,
to present their perspectives on breaking is-
sues in international taxation. For more in-
formation on topics and speakers, please
refer to Internal Revenue Bulletin 2000–46,
dated November 13, 2000, Announcement
2000–93. Those interested in attending or
obtaining detailed information should con-
tact the George Washington University,
Conference Management Services, by tele-
phone at (202) 973-1110 or by visiting their
web site at http://www.gwu.edu/~cms/iti13.
Foreign Trusts That Have U.S.
Beneficiaries; Correction
Announcement 2000–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of proposed
rulemaking and notice of public hearing.

SUMMARY: This document contains
corrections to a notice of proposed rule-
making and notice of public hearing
(REG–209038–89, 2000–34 I.R.B. 191)
that was published in the Federal Regis-
teron Monday, August 7, 2000 (65 F.R.
48185) relating to transfers of property by
U.S. persons to foreign trusts having one
or more United States beneficiaries.
FOR FURTHER INFORMATION CON-
TACT: Willard W. Yates at (202) 622-
3880 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking and
notice of public hearing that are the sub-
ject of this correction is under section 679
of the Internal Revenue Code.
Need for Correction
As published, the notice of proposed
rulemaking and notice of public hearing
contains errors that may prove to be mis-
leading and are in need of clarification.
Correction of Publication
Accordingly, the publication of the no-
tice of proposed rulemaking and notice of
public hearing (REG–209038–89), that
was the subject of FR Doc. 00–19897, is
corrected as follows:
1. On page 48187, column 2, in the
preamble under the paragraph heading
“Section 1.679–1 U.S. Transferor Treated
as Owner of Foreign Trust”, first full
paragraph from the top of the column, last
line, the language “November 6, 2000 ” is
corrected to read “August 7, 2000”.
2. On page 48188, column 1, in the pre-
amble under the paragraph heading “Sec-
tion 1.679–2: Trusts Treated as Having a
U.S. Beneficiary”, third full paragraph, last
line, the language “November 6, 2000” is
corrected to read “August 7, 2000”.
3. On page 48188, column 3, in the
preamble under the paragraph heading
“Section 1.679–3 Transfers”, fourth para-
graph, last line, the language “November
6, 2000” is corrected to read “August 7,
2000”.
4. On page 48189, column 2, in the
preamble under the paragraph heading
“Section 1.679–4 Exceptions to General
Rule”, second full paragraph, third line,
the language “trusts after November 6,
2000. Special” is corrected to read
“trusts after August 7, 2000. Special”.
5. On page 48189, column 3, in the
preamble under the paragraph heading
“Section 1.679–5 Pre-immigration
Trusts”, third full paragraph, last line, the
language “after November 6, 2000” is
corrected to read “after August 7, 2000”.
6. On page 48189, column 3, in the
preamble under the paragraph heading
“Section 1.679–6 Outbound Migrations
of Domestic Trusts”, last paragraph in
the column, last line, the language “No-
vember 6, 2000” is corrected to read
“August 7, 2000”.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Office of Special Counsel
(Modernization and Strategic Planning).
(Filed by the Office of the Federal Register on No-
vember 8, 2000, 8:45 a.m., and published in the
issue of the Federal Register for November 9, 2000,
65 F.R. 67318)
New Code V for the 2001 Form
W-2, Box 12
Announcement 2000–97
Purpose
The purpose of this announcement is to
advise employers about an additional
code for use on the 2001 Form W-2. This
code will be used to identify the amount
of compensation related to the exercise of
an employer-provided nonstatutory stock
option currently required to be included in
an employee’s wages in boxes 1, 3 (up to
the social security wage base), and 5.
Nonstatutory Stock Options
A new code (Code V—Income from
the exercise of nonstatutory stock op-
tions) for use in box 12 on the 2001 Form
W-2 has been added to the 2001 Instruc-
tions for Forms W-2 and W-3.
When an employee (or former em-
ployee) exercises nonstatutory stock op-
tion(s), employers are currently required
to report the excess of the fair market
value of the stock received upon exercise
of the option over the amount paid for that
stock on Form W-2 in boxes 1, 3 (up to
the social security wage base), and 5. The
change requires that any compensation re-
lated to the exercise of the nonstatutory
stock option(s) currently included in
boxes 1, 3 (if applicable), and 5 must also
be shown in box 12, using Code V.
2000–48 I.R.B.557November 27, 2000

November 27, 2000i2000–48 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial 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 ap-
plies 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
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the 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
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished 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 super-
seded.
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 pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings 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 for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

2000–48 I.R.B.iiNovember 27, 2000
Numerical Finding List
1
Bulletins 2000–27 through 2000–47
Announcements:
2000–57, 2000–28 I.R.B. 115
2000–58, 2000–30 I.R.B. 135
2000–59, 2000–29 I.R.B. 120
2000–60, 2000–31 I.R.B. 149
2000–61, 2000–30 I.R.B. 136
2000–62, 2000–30 I.R.B. 137
2000–63, 2000–31 I.R.B. 149
2000–64, 2000–31 I.R.B. 149
2000–65, 2000–31 I.R.B. 150
2000–66, 2000–32 I.R.B. 160
2000–67, 2000–32 I.R.B. 160
2000–68, 2000–32 I.R.B. 161
2000–69, 2000–33 I.R.B. 183
2000–70, 2000–34 I.R.B. 204
2000–71, 2000–44 I.R.B. 456
2000–72, 2000–35 I.R.B. 226
2000–73, 2000–35 I.R.B. 230
2000–74, 2000–35 I.R.B. 230
2000–75, 2000–37 I.R.B. 268
2000–76, 2000–36 I.R.B. 260
2000–77, 2000–36 I.R.B. 260
2000–78, 2000–43 I.R.B. 428
2000–79, 2000–39 I.R.B. 303
2000–80, 2000–40 I.R.B. 320
2000–81, 2000–41 I.R.B. 348
2000–82, 2000–42 I.R.B. 385
2000–83, 2000–41 I.R.B. 348
2000–84, 2000–42 I.R.B. 385
2000–85, 2000–43 I.R.B. 429
2000–86, 2000–44 I.R.B. 456
2000–87, 2000–44 I.R.B. 457
2000–88, 2000–44 I.R.B. 460
2000–89, 2000–45 I.R.B. 467
2000–90, 2000–47 I.R.B. 515
2000–91, 2000–46 I.R.B. 484
2000–92, 2000–46 I.R.B.486
2000–93, 2000–46 I.R.B.487
2000–94, 2000–47 I.R.B.515
Court Decisions:
2068, 2000–28 I.R.B. 109
Notices:
2000–33, 2000–27 I.R.B. 97
2000–34, 2000–33 I.R.B. 172
2000–35, 2000–29 I.R.B. 118
2000–36, 2000–33 I.R.B. 173
2000–37, 2000–29 I.R.B. 118
2000–38, 2000–33 I.R.B. 174
2000–39, 2000–30 I.R.B. 132
2000–40, 2000–30 I.R.B. 134
2000–41, 2000–33 I.R.B. 177
2000–42, 2000–39 I.R.B. 302
2000–43, 2000–35 I.R.B. 209
2000–44, 2000–36 I.R.B. 255
2000–45, 2000–36 I.R.B. 256
2000–46, 2000–37 I.R.B. 265
2000–47, 2000–46 I.R.B. 480
2000–48, 2000–37 I.R.B. 265
2000–49, 2000–37 I.R.B. 266
2000–50, 2000–38 I.R.B. 291
2000–51, 2000–38 I.R.B. 291
2000–52, 2000–38 I.R.B. 292
2000–53, 2000–38 I.R.B. 293
Notices—Continued:
2000–54, 2000–42 I.R.B. 356
2000–55, 2000–43 I.R.B. 393
2000–56, 2000–43 I.R.B. 393
2000–57, 2000–43 I.R.B. 389
2000–58, 2000–47 I.R.B. 491
Proposed Regulations:
REG–209038–89, 2000–34 I.R.B. 191
REG–246249–96, 2000–44 I.R.B. 439
REG–105316–98, 2000–27 I.R.B. 98
REG–110311–98, 2000–36 I.R.B. 258
REG–103805–99, 2000–42 I.R.B. 376
REG–105235–99, 2000–44 I.R.B. 447
REG–116495–99, 2000–33 I.R.B. 179
REG–103735–00, 2000–36 I.R.B. 258
REG–103736–00, 2000–36 I.R.B. 258
REG–106511–00, 2000–45 I.R.B. 465
REG–108522–00, 2000–34 I.R.B. 187
REG–108553–00, 2000–44 I.R.B. 452
REG–112502–00, 2000–40 I.R.B. 316
REG–114697–00, 2000–43 I.R.B. 421
Railroad Retirement Quarterly Rate:
2000–28, I.R.B. 112
2000–29, I.R.B. 117
2000–42, I.R.B. 354
Revenue Procedures:
2000–28, 2000–27 I.R.B. 60
2000–29, 2000–28 I.R.B. 113
2000–30, 2000–28 I.R.B. 113
2000–31, 2000–31 I.R.B. 146
2000–32, 2000–33 I.R.B. 172
2000–33, 2000–36 I.R.B. 257
2000–34, 2000–34 I.R.B. 186
2000–35, 2000–35 I.R.B. 211
2000–36, 2000–37 I.R.B. 267
2000–37, 2000–40 I.R.B. 308
2000–38, 2000–40 I.R.B. 310
2000–39, 2000–41 I.R.B. 340
2000–40, 2000–42 I.R.B. 357
2000–41, 2000–42 I.R.B. 371
2000–42, 2000–43 I.R.B. 394
2000–43, 2000–43 I.R.B. 404
2000–44, 2000–43 I.R.B. 409
2000–45, 2000–43 I.R.B. 417
2000–46, 2000–44 I.R.B. 438
2000–47, 2000–46 I.R.B.482
2000–49, 2000–47 I.R.B.491
Revenue Rulings:
2000–32, 2000–27 I.R.B. 1
2000–33, 2000–31 I.R.B. 142
2000–34, 2000–29 I.R.B. 116
2000–35, 2000–31 I.R.B. 138
2000–36, 2000–31 I.R.B. 140
2000–37, 2000–32 I.R.B. 156
2000–38, 2000–32 I.R.B. 157
2000–39, 2000–34 I.R.B. 184
2000–40, 2000–35 I.R.B. 208
2000–41, 2000–36 I.R.B. 248
2000–42, 2000–39 I.R.B. 297
2000–43, 2000–41 I.R.B. 333
2000–44, 2000–41 I.R.B. 336
2000–45, 2000–41 I.R.B. 337
2000–46, 2000–41 I.R.B. 334
2000–47, 2000–37 I.R.B. 264
2000–48, 2000–42 I.R.B. 349
Revenue Rulings—Continued:
2000–49, 2000–44 I.R.B. 430
2000–50, 2000–45 I.R.B. 462
2000–51, 2000–46 I.R.B.469
2000–53, 2000–47 I.R.B.488
Tax Conventions:
2000–46 I.R.B. 475
Treasury Decisions:
8886, 2000–27 I.R.B. 3
8888, 2000–27 I.R.B. 3
8889, 2000–30 I.R.B. 124
8890, 2000–30 I.R.B. 122
8891, 2000–32 I.R.B. 152
8892, 2000–32 I.R.B. 158
8893, 2000–31 I.R.B. 143
8894, 2000–33 I.R.B. 162
8895, 2000–40 I.R.B. 304
8896, 2000–36 I.R.B. 249
8897, 2000–36 I.R.B. 234
8898, 2000–38 I.R.B. 276
8899, 2000–38 I.R.B. 288
8900, 2000–38 I.R.B. 279
8901, 2000–38 I.R.B. 272
8902, 2000–41 I.R.B. 323
8903, 2000–42 I.R.B. 352
8904, 2000–42 I.R.B. 350
8905, 2000–44 I.R.B. 435
8906, 2000–46 I.R.B.470
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–1 through 2000–26
is in Internal Revenue Bulletin 2000–27, dated July
3, 2000.

November 27, 2000iii2000–48 I.R.B.
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2000–27 through 2000–47
Notices:
87–76
Obsoleted by
T.D. 8897, 2000–36 I.R.B. 234
88–24
Obsoleted by
T.D. 8897, 2000–36 I.R.B. 234
88–86
Obsoleted by
T.D. 8897 (section V), 2000–36 I.R.B. 234
97–4
Superseded by
Notice 2000–58, 2000–47 I.R.B. 491
2000–48
Superseded by
Rev. Proc. 2000–39, 2000–41 I.R.B. 340
Proposed Regulations:
LR–97–79
Partial withdrawal by
REG–103805–99, 2000–42 I.R.B. 376
FI–42–90
Withdrawn by
Announcement 2000–63, 2000–31 I.R.B. 149
IA–38–93
Withdrawn by
Announcement 2000–68, 2000–32 I.R.B. 161
REG–107644–98
Corrected by
Announcement 2000–66, 2000–32 I.R.B. 160
REG–108522–00
Corrected by
Announcement 2000–85, 2000–43 I.R.B. 428
Revenue Procedures:
88–23
Superseded by
Rev. Proc. 2000–35, 2000–35 I.R.B. 211
98–50
Modified and superseded by
Rev. Proc. 2000–31, 2000–31 I.R.B. 146
98–51
Modified and superseded by
Rev. Proc. 2000–31, 2000–31 I.R.B. 146
99–18
Modified by
Rev. Proc. 2000–29, 2000–28 I.R.B. 113
99–34
Superseded by
Rev. Proc. 2000–28, 2000–27 I.R.B. 60
99–49
Modified and amplified by
Rev. Proc. 2000–38, 2000–40 I.R.B. 310
2000–3
Amplified by
Rev. Proc. 2000–46, 2000–44 I.R.B. 438
Rev. Proc. 2000–47, 2000–46 I.R.B.482
2000–9
Superseded by
Rev. Proc. 2000–39, 2000–41 I.R.B. 340
Treasury Decisions:
8873
Corrected by
Announcement 2000–74, 2000–35 I.R.B. 230
8883
Corrected by
Announcement 2000–57, 2000–28 I.R.B. 115
8884
Corrected by
Announcement 2000–73, 2000–35 I.R.B. 230
8892
Corrected by
Announcement 2000–81, 2000–41 I.R.B. 348
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–1 through 2000–26 is in Internal Revenue
Bulletin 2000–27, dated July 3, 2000.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www
.irs.gov
. Select Tax Info for Business at the bottom of the
page. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD–ROM
Internal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD–ROM). The CD–ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders(discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250–7954. Please allow two
to six weeks, plus mailing time, for delivery.
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 e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the IRS Bulletin Unit, W:CAR:MP:FP, Washington, DC 20224.
Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300