Reg. § 1.965-4 Disregard of certain transactions.
(a) Scope This section provides rules that disregard certain transactions for purposes of applying section to a United States shareholder. of this section provides rules that disregard transactions undertaken with a principal purpose of changing the amount of a section element of a United States shareholder. of this section provides rules that disregard certain changes in method of accounting and entity classification elections that would otherwise change the amount of a section element. of this section defines the term section element. of this section provides rules of application concerning and of this section. of this section provides rules that disregard certain transactions occurring between E&P measurement dates. of this section provides examples illustrating the application of this section.
(b) Transactions undertaken with a principal purpose of changing the amount of a section 965 element
(1) General rule Except as otherwise provided in of this section, a transaction is disregarded for purposes of determining the amounts of all section elements of a United States shareholder if each of the following conditions is satisfied with respect to any section element of the United States shareholder—
(i) The transaction occurs, in whole or in part, on or after November 2, 2017 (the specified date);
(ii) The transaction is undertaken with a principal purpose of changing the amount of a section element of the United States shareholder; and
(iii) The transaction would, without regard to this , change the amount of the section element of the United States shareholder.
(2) Presumptions and exceptions for the application of the general rule
(i) Overview Under through of this section, certain transactions are presumed to be undertaken with a principal purpose of changing the amount of a section element of a United States shareholder for purposes of of this section. The presumptions described in through of this section may be rebutted only if facts and circumstances clearly establish that the transaction was not undertaken with a principal purpose of changing the amount of a section element of a United States shareholder. A taxpayer that takes the position that the presumption is rebutted must attach a statement to its return for its taxable year in which or with which the relevant taxable year of the relevant specified foreign corporation ends disclosing that it has rebutted the presumption. In the case of a transaction described in or of this section, if the presumption does not apply because the transaction occurs in the ordinary course of business, whether the transaction was undertaken with a principal purpose of changing the amount of a section element of a United States shareholder must be determined under all the facts and circumstances. Under through of this section, certain transactions are treated per se as being undertaken with a principal purpose of changing the amount of a section element of a United States shareholder, and, therefore, such transactions are disregarded under of this section if the conditions of and of this section are satisfied. Further, under of this section, certain distributions are treated per se as not being undertaken with a principal purpose of changing the amount of a section element of a United States shareholder and therefore are not disregarded under of this section.
(ii) Definitions
(A) Relatedness For purposes of through of this section, a person is treated as related to a United States shareholder if, either immediately before or immediately after the transaction (or series of related transactions), the person bears a relationship to the United States shareholder described in section or section .
(B) Transfer
(1) In general For purposes of and of this section, the term transfer includes any disposition of stock or property, including a sale or exchange, contribution, distribution, issuance, redemption, recapitalization, or loan of stock or property, and includes an indirect transfer of stock or property.
(2) Indirect transfer For purposes of of this section, the term indirect transfer includes a transfer of property or stock owned by an entity through a transfer of an interest in such entity (or an interest in an entity that has a direct or indirect interest in such entity), and a transfer of property or stock to a person through a transfer of property or stock to a pass-through entity of which such person is a direct or indirect owner.
(iii) Cash reduction transactions
(A) General rule For purposes of of this section, a cash reduction transaction is presumed to be undertaken with a principal purpose of changing the amount of a section element of a United States shareholder. For this purpose, the term cash reduction transaction means a transfer of cash, accounts receivable, or cash-equivalent assets by a specified foreign corporation to a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of the specified foreign corporation, or an assumption by a specified foreign corporation of an account payable of a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of the specified foreign corporation, if such transfer or assumption would, without regard to of this section, reduce the aggregate foreign cash position of the United States shareholder. The presumption described in this does not apply to a cash reduction transaction that occurs in the ordinary course of business.
(B) Per se rules for certain distributions Notwithstanding the presumption described in of this section, except in the case of a specified distribution, a cash reduction transaction that is a distribution by a specified foreign corporation to a United States shareholder of the specified foreign corporation is treated per se as not being undertaken with a principal purpose of changing the amount of a section element of the United States shareholder for purposes of of this section. A specified distribution is treated per se as being undertaken with a principal purpose of changing the amount of a section element of a United States shareholder for purposes of of this section. For purposes of this , the term specified distribution means a cash reduction transaction that is a distribution by a specified foreign corporation of a United States shareholder if and to the extent that, at the time of the distribution, there was a plan or intention for the distributee to transfer cash, accounts receivable, or cash-equivalent assets to any specified foreign corporation of the United States shareholder or a distribution that is a non pro rata distribution to a foreign person that is related to the United States shareholder. For purposes of the preceding sentence, there is no plan or intention for the distributee to transfer cash, accounts receivable, or cash-equivalent assets to any specified foreign corporation of the United States shareholder if the transfer is pursuant to a legal obligation entered into before November 2, 2017. A taxpayer that takes the position that a cash reduction transaction is not a specified distribution because a transfer of cash, accounts receivable, or cash-equivalent asset is pursuant to a legal obligation entered into before November 2, 2017, must attach a statement to its return for its taxable year in which or with which the relevant taxable year of the relevant specified foreign corporation ends disclosing the position.
(iv) E&P reduction transactions
(A) General rule For purposes of of this section, an E&P reduction transaction is presumed to be undertaken with a principal purpose of changing the amount of a section element of a United States shareholder. For purposes of this , the term E&P reduction transaction means a transaction between a specified foreign corporation and any of a United States shareholder of the specified foreign corporation, another specified foreign corporation of a United States shareholder of the specified foreign corporation, or any person related to a United States shareholder of the specified foreign corporation, if the transaction would, without regard to of this section, reduce either the accumulated post-1986 deferred foreign income or the post-1986 undistributed earnings (as defined in section ) of the specified foreign corporation or another specified foreign corporation of any United States shareholder of such specified foreign corporation. The presumption described in this does not apply to an E&P reduction transaction that occurs in the ordinary course of business.
(B) Per se rule for specified transactions A specified transaction is treated per se as being undertaken with a principal purpose of changing the amount of a section element of a United States shareholder for purposes of of this section. For purposes of the preceding sentence, the term specified transaction means an E&P reduction transaction that involves one or more of the following: A complete liquidation of a specified foreign corporation to which section applies; a sale or other disposition of stock by a specified foreign corporation; or a distribution by a specified foreign corporation that reduces the earnings and profits of the specified foreign corporation pursuant to section .
(v) Pro rata share transactions
(A) General rule For purposes of of this section, a pro rata share transaction is presumed to be undertaken with a principal purpose of changing the amount of a section element of a United States shareholder. For this purpose, the term pro rata share transaction means either a pro rata share reduction transaction or an E&P deficit transaction.
(1) Definition of pro rata share reduction transaction For purposes of this , the term pro rata share reduction transaction means a transfer of the stock of a specified foreign corporation by either a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of the specified foreign corporation (including by the specified foreign corporation itself) to a person related to the United States shareholder if the transfer would, without regard to of this section, reduce the United States shareholder's pro rata share of the section earnings amount of the specified foreign corporation, reduce the United States shareholder's pro rata share of the cash position of the specified foreign corporation, or both.
(2) Definition of E&P deficit transaction For purposes of this , the term E&P deficit transaction means a transfer to either a United States shareholder or a person related to the United States shareholder of the stock of an E&P deficit foreign corporation by a person related to the United States shareholder (including by the E&P deficit foreign corporation itself) if the transfer would, without regard to of this section, increase the United States shareholder's pro rata share of the specified E&P deficit of the E&P deficit foreign corporation.
(B) Per se rule for internal group transactions An internal group transaction is treated per se as being undertaken with a principal purpose of changing the amount of a section element of a United States shareholder for purposes of of this section. For purposes of the preceding sentence, the term internal group transaction means a pro rata share transaction if, immediately before or after the transfer, the transferor of the stock of the specified foreign corporation and the transferee of such stock are members of an affiliated group in which the United States shareholder is a member. For this purpose, the term affiliated group has the meaning set forth in section , determined without regard to paragraphs (1) through (8) of section , and the term members of an affiliated group means entities included in the same affiliated group. For purposes of identifying an affiliated group and the members of such group, each partner in a partnership, as determined without regard to this sentence, is treated as holding its proportionate share of the stock held by the partnership, as determined under the rules and principles of sections through 777, and if one or more members of an affiliated group own, in the aggregate, at least 80 percent of the interests in a partnership's capital or profits, the partnership will be treated as a corporation that is a member of the affiliated group.
(C) Example The following example illustrates the application of the rules in this .
(1) Facts FP, a foreign corporation, owns all of the stock of USP, a domestic corporation. USP owns all of the stock of FS, a foreign corporation. USP has a calendar year taxable year; FS's taxable year ends November 30. On January 2, 2018, USP transfers all of the stock of FS to FP in exchange for cash. On January 3, 2018, FS makes a distribution with respect to the stock transferred to FP. USP treats the transaction as a taxable sale of the FS stock and claims a dividends received deduction under section with respect to its deemed dividend under section as a result of the sale. FS has post-1986 earnings and profits as of December 31, 2017, and no post-1986 earnings and profits that are attributable to income effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1 or that, if distributed, would be excluded from the gross income of a United States shareholder under section .
(2) Analysis The transfer of the stock of FS is a pro rata share reduction transaction and thus a pro rata share transaction because such transfer is by USP, a United States shareholder, to FP, a person related to USP, and the transfer would, without regard to the rule in of this section, reduce USP's pro rata share of the section earnings amount of FS. Because USP and FP are also members of an affiliated group within the meaning of of this section, the transfer of the stock of FS is also an internal group transaction and is treated per se as being undertaken with a principal purpose of changing the amount of a section element of USP. Accordingly, because the transfer occurs after the specified date and reduces USP's section inclusion amount with respect to FS, the transfer is disregarded for purposes of determining any section element of USP with the result that, among other things, USP's pro rata share of FS's section earnings amount is determined as if USP owned (within the meaning of section ) 100% of the stock of FS on the last day of FS's inclusion year and no other person received a distribution with respect to such stock during such year. See section and (B).
(c) Disregard of certain changes in method of accounting and entity classification elections
(1) Changes in method of accounting Any change in method of accounting made for a taxable year of a specified foreign corporation that ends in 2017 or 2018 is disregarded for purposes of determining the amounts of all section elements with respect to a United States shareholder if the change in method of accounting would, without regard to this , change the amount of any section element described in or of this section with respect to the United States shareholder, or change the amount of the section element described in of this section other than by reason of an increase in a section inclusion amount with respect to the specified foreign corporation, regardless of whether the change in method of accounting is made with a principal purpose of changing the amount of a section element with respect to the United States shareholder. The rule described in the preceding sentence applies regardless of whether the change in method of accounting was made in accordance with the procedures described in Rev. Proc. 2015-13, 2015-5 I.R.B. 419 (or successor), and regardless of whether the change in method of accounting was properly made, but it does not apply to a change in method of accounting for which the original and/or duplicate copy of any Form 3115, “Application for Change in Accounting Method,” requesting the change was filed before the specified date (as defined in of this section).
(2) Entity classification elections Except as otherwise provided in of this section, an election under to change the classification of an entity that is filed on or after the specified date (as defined in of this section) is disregarded for purposes of determining the amounts of all section elements of a United States shareholder if the election would, without regard to this , change the amount of any section element of the United States shareholder, regardless of whether the election is made with a principal purpose of changing the amount of a section element of the United States shareholder. An election filed on or after the specified date is subject to the preceding sentence even if the election was filed with an effective date that is before the specified date.
(d) Definition of a section 965 element For purposes of and of this section, the term section element means, with respect to a United States shareholder, any of the following amounts (collectively, section elements)—
(1) The United States shareholder's section inclusion amount with respect to a specified foreign corporation;
(2) The aggregate foreign cash position of the United States shareholder; or
(3) The amount of foreign income taxes of a specified foreign corporation deemed paid by the United States shareholder under section as a result of a section inclusion.
(e) Rules for applying paragraphs (b) and (c) of this section
(1) Determination of whether there is a change in the amount of a section 965 element For purposes of and of this section, there is a change in the amount of a section element of a United States shareholder as a result of a transaction, change in accounting method, or election to change an entity's classification, if, without regard to , , or of this section, the transaction, change in accounting method, or change in entity classification would—
(i) Reduce the amount described in of this section,
(ii) Reduce the amount described in of this section, but only if such amount is less than the United States shareholder's aggregate section inclusion amount, or
(iii) Increase the amount described in of this section.
(2) Treatment of domestic pass-through owners as United States shareholders For purposes of and of this section, if a domestic pass-through entity is a United States shareholder, then a domestic pass-through owner with respect to the domestic pass-through entity that is not otherwise a United States shareholder is treated as a United States shareholder.
(3) Exception for certain incorporation transactions
(i) In general and of this section do not apply to disregard a transfer of stock of a specified foreign corporation by a United States shareholder to a domestic corporation (for this purpose, including an S corporation), provided that—
(A) The transferee's section inclusion amount with respect to the transferred stock of the specified foreign corporation is no lower than the transferor's section inclusion amount with respect to the transferred stock of the specified foreign corporation, determined without regard to the transfer; and
(B) The transferee and the transferor determine their aggregate foreign cash position under of this section.
(ii) Aggregate foreign cash position In the case of a transfer described in of this section, in order to rely on the exception in of this section—
(A) The transferee must treat its pro rata share of the cash position of a specified foreign corporation as of a cash measurement date as of which it did not own the transferred stock of the specified foreign corporation as including the transferor's pro rata share of the cash position of the specified foreign corporation with respect to the transferred stock of the specified foreign corporation as of such cash measurement date for purposes of determining its aggregate foreign cash position; and
(B) The transferor must treat its pro rata share of the cash position of a specified foreign corporation as of a cash measurement date as of which it did not own the transferred stock of the specified foreign corporation as including the transferee's pro rata share of the cash position of the specified foreign corporation with respect to the transferred stock of the specified foreign corporation as of such cash measurement date for purposes of determining its aggregate foreign cash position.
(4) Consequences of liquidation
(i) In general In the case of a liquidation of a specified foreign corporation that is disregarded for purposes of determining the section elements of a United States shareholder pursuant to or of this section, for purposes of determining the amounts of the section elements of the United States shareholder, the date that is treated as the last day of the taxable year of the specified foreign corporation is the later of—
(A) The date of the liquidation; and
(B) The specified liquidation date, if any.
(ii) Specified liquidation date The term specified liquidation date means, in the case of a liquidation of a specified foreign corporation pursuant to an entity classification election that is disregarded for purposes of determining the section elements of a United States shareholder—
(A) November 30, 2017, with respect to a United States shareholder that must include in income under as a deemed dividend the all earnings and profits amount with respect to the United States shareholder's stock of the liquidating specified foreign corporation; or
(B) The date of filing of the entity classification election, with respect to all other United States shareholders.
(f) Disregard of certain transactions occurring between E&P measurement dates
(1) Disregard of specified payments Except as provided in of this section, a specified payment made by a specified foreign corporation (payor specified foreign corporation) to another specified foreign corporation (payee specified foreign corporation) is disregarded for purposes of determining the post-1986 earnings and profits of each of the payor specified foreign corporation and the payee specified foreign corporation as of the E&P measurement date on December 31, 2017.
(2) Definition of specified payment For purposes of of this section, the term specified payment means any amount paid or accrued by the payor specified foreign corporation, including a distribution by the payor specified foreign corporation with respect to its stock, if each of the following conditions are satisfied:
(i) Immediately before or immediately after the payment or accrual of the amount, the payor specified foreign corporation and the payee specified foreign corporation are related within the meaning of section , substituting the term “specified foreign corporation” for “controlled foreign corporation” in each place that it appears;
(ii) The payment or accrual of the amount occurs after November 2, 2017, and on or before December 31, 2017; and
(iii) The payment or accrual of the amount would, without regard to the application of of this section, reduce the post-1986 earnings and profits of the payor specified foreign corporation as of the E&P measurement date on December 31, 2017.
(3) Non-application of disregard rule A section U.S. shareholder may determine the post-1986 earnings and profits of a specified foreign corporation without regard to of this section, provided that it and every section U.S. shareholder related to the first section U.S. shareholder determines the post-1986 earnings and profits of each of its specified foreign corporations without regard to of this section. For purposes of this , a person is treated as related to a section U.S. shareholder if the person bears a relationship to the section U.S. shareholder described in section or .
(4) Examples The following examples illustrate the application of the rules in this .
(i) Example 1. Deductible payment between wholly owned specified foreign corporations is a specified payment
(A) Facts USP, a domestic corporation, owns all of the stock of CFC1, a foreign corporation, which owns all of the stock of CFC2, also a foreign corporation. USP, CFC1, and CFC2 have calendar year taxable years. On November 2, 2017, each of CFC1 and CFC2 has post-1986 earnings and profits of 100u. Neither CFC1 nor CFC2 has post-1986 earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1 or that, if distributed, would be excluded from the gross income of a United States shareholder under section or from the gross income of another shareholder if such shareholder were a United States shareholder; therefore, no adjustment is made under section or , and each of CFC1's and CFC2's accumulated post-1986 deferred foreign income is equal to such corporation's post-1986 earnings and profits. On November 3, 2017, CFC2 makes a deductible payment of 10u to CFC1. The payment does not constitute subpart F income. CFC1 and CFC2 have no other items of income or deduction.
(B) Analysis The payment from CFC2 to CFC1 is a specified payment because
(1) CFC1 and CFC2 are related specified foreign corporations;
(2) the payment occurs after November 2, 2017, and on or before December 31, 2017; and
(3) the payment would, without regard to the application of the rule in of this section, reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017. Under of this section, the payment is disregarded, and CFC1 and CFC2 each have post-1986 earnings and profits of 100u as of December 31, 2017. Accordingly, the section earnings amount of each of CFC1 and CFC2 is 100u.
(ii) Example 2. Distribution is a specified payment
(A) Facts The facts are the same as in of this section (the facts in Example 1), except instead of a deductible payment to CFC1, CFC2 makes a 10u distribution on November 3, 2017, that, without regard to of this section would reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017, and increase the post-1986 earnings and profits of CFC1 as of the E&P measurement date on December 31, 2017, by 10u.
(B) Analysis The distribution is a specified payment because
(1) CFC1 and CFC2 are related specified foreign corporations;
(2) the distribution occurs after November 2, 2017, and on or before December 31, 2017; and
(3) the distribution would, without regard to the application of the rule in of this section, reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017. Under of this section, the distribution is disregarded with the result that CFC1 and CFC2 each have post-1986 earnings and profits of 100u as of the E&P measurement date on December 31, 2017, and a section earnings amount of 100u.
(iii) Example 3. Deductible payment between related (but not wholly owned) specified foreign corporations is a specified payment
(A) Facts The facts are the same as in of this section (the facts in Example 1), except that CFC1 owns only 51% of the only class of stock of CFC2, the remainder of which is owned by USI, a United States citizen unrelated to USP, CFC1, and CFC2.
(B) Analysis The analysis is the same as in of this section (the analysis in Example 1); thus, the payment is disregarded with the result that CFC1 and CFC2 each have post-1986 earnings and profits of 100u as of the E&P measurement date on December 31, 2017, and a section earnings amount of 100u.
(iv) Example 4. Deductible payment between unrelated specified foreign corporations is not a specified payment
(A) Facts The facts are the same as in of this section (the facts in Example 1), except that CFC1 owns only 50% of the only class of stock of CFC2, the remainder of which is owned by USI, a United States citizen unrelated to USP, CFC1, and CFC2.
(B) Analysis of this section does not apply because CFC1 and CFC2 are not related. Thus, the payment is taken into account with the result that CFC1 has post-1986 earnings and profits of 110u as of the E&P measurement date on December 31, 2017, and a section earnings amount of 110u.
(v) Example 5. Deductible payment and income accrued from unrelated persons are not specified payments
(A) Facts The facts are the same as in of this section (the facts in Example 1), except that CFC2 does not make a deductible payment to CFC1, and, between E&P measurement dates, CFC2 accrues gross income of 20u from a person that is not related to CFC2, and CFC1 incurs a deductible expense of 20u to a person that is not related to CFC1.
(B) Analysis of this section does not apply because neither the deductible expense of CFC1 nor the income accrual by CFC2 are attributable to a specified payment.
(vi) Example 6. Deductible payment and income accrued with respect to unrelated persons are not specified payments; deductible payment between wholly specified foreign corporations is a specified payment
(A) Facts The facts are the same as in of this section (the facts in Example 5), except that CFC2 also makes a deductible payment of 10u to CFC1 on November 3, 2017.
(B) Analysis The deductible payment is a specified payment because
(1) CFC1 and CFC2 are related specified foreign corporations;
(2) the payment occurs after November 2, 2017, and on or before December 31, 2017; and
(3) the deductible payment would, without regard to the application of the rule in of this section, reduce the post-1986 earnings and profits of CFC2 as of the E&P measurement date on December 31, 2017. Accordingly, under of this section, the deductible payment is disregarded with the result that CFC1 and CFC2 have 80u and 120u of post-1986 earnings and profits as of the E&P measurement date on December 31, 2017, respectively. Accordingly, CFC1 and CFC2 have section earnings amounts of 100u and 120u, respectively.
[T.D. 9846, 84 FR 1875, Feb. 5, 2019]