Reg. § 1.965-8 Affiliated groups (including consolidated groups).
(a) Scope This section provides rules for applying section and the section regulations to members of an affiliated group (as defined in section ), including members of a consolidated group (as defined in ). of this section provides guidance regarding the application of section to determine the section inclusion amounts of a member of an affiliated group. of this section provides guidance for designating the source of aggregate unused E&P deficits. Paragraph (d) provides rules regarding earning and profits and stock basis adjustments. of this section provides rules that treat members of a consolidated group as a single person for certain purposes. of this section provides definitions that apply for purposes of this section. of this section provides examples illustrating the application of this section.
(b) Reduction of E&P net surplus shareholder's pro rata share of the section 965(a) earnings amount of a deferred foreign income corporation by the allocable share of the applicable share of the aggregate unused E&P deficit
(1) In general This applies after the application of for purposes of determining the section inclusion amount with respect to a deferred foreign income corporation of a section U.S. shareholder that is both an E&P net surplus shareholder and a member of an affiliated group in which not all members are members of the same consolidated group. If this applies, the U.S. dollar amount of the section U.S. shareholder's pro rata share of the section earnings amount of the deferred foreign income corporation is further reduced (but not below zero) by the deferred foreign income corporation's allocable share of the section U.S. shareholder's applicable share of the affiliated group's aggregate unused E&P deficit.
(2) Consolidated group as part of an affiliated group If some, but not all, members of an affiliated group are members of a consolidated group, then the consolidated group is treated as a single member of the affiliated group for purposes of and of this section.
(c) Designation of portion of excess aggregate foreign E&P deficit taken into account
(1) In general This provides rules for designating the source of an aggregate unused E&P deficit of an affiliated group that is not also a consolidated group taken into account under section and of this section if the amount described in of this section with respect to the affiliated group exceeds the amount described in of this section with respect to the affiliated group. If this applies, each member of the affiliated group that is an E&P net deficit shareholder must designate by maintaining in its books and records a statement (identical to the statement maintained by all other such members) setting forth the portion of the excess aggregate foreign E&P deficit of the E&P net deficit shareholder taken into account under section and of this section. See for a rule for designating the portion of a section U.S. shareholder's pro rata share of a specified E&P deficit of an E&P deficit foreign corporation taken into account under section , , and of this section, as applicable.
(2) Consolidated group as part of an affiliated group If some, but not all, members of an affiliated group are properly treated as members of a consolidated group, then the consolidated group is treated as a single member of the affiliated group for purposes of applying of this section.
(d) Adjustments to earning and profits and stock basis
(1) [Reserved]
(2) Consolidated groups See for adjustments to members' earnings and profits and for adjustments to members' basis.
(e) Treatment of a consolidated group or other affiliated group as a single section 958(a) U.S. shareholder or a single person
(1) In general All members of a consolidated group that are section U.S. shareholders of a specified foreign corporation are treated as a single section U.S. shareholder for purposes of section , , and . Furthermore, all members of a consolidated group are treated as a single person for purposes of paragraphs (h), (k), and (n) of section and . In addition, all members of an affiliated group that are section U.S. shareholders of a specified foreign corporation are treated as a single section U.S. shareholder for purposes of . Thus, for example, any election governed by section and must be made by the agent (within the meaning of ) of the group as a single election on behalf of all members of the consolidated group. Similarly, the determination of whether the transfer of assets by one member to a non-member of the consolidated group would constitute an acceleration event under takes into account all of the assets of the consolidated group, which for purposes of this determination, includes all of the assets of each consolidated group member. In analyzing issues relating to the transfer of assets of a consolidated group, appropriate adjustments are made to prevent the duplication of assets or asset value.
(2) Limitation of this section does not apply to treat all members of a consolidated group as a single section U.S. shareholder or a single person, as applicable, for purposes of determining the amount of any member's inclusion under section (including a section inclusion), the foreign income taxes deemed paid with respect to a section inclusion (see sections and ), or any purpose other than those specifically listed in of this section or another provision of the section regulations.
(3) Determination of section 965(c) deduction amount For purposes of determining the section deduction amount of any section U.S. shareholder that is a member of a consolidated group, the aggregate foreign cash position of the section U.S. shareholder is equal to the aggregate section inclusion amount of the section U.S. shareholder multiplied by the group cash ratio of the consolidated group.
(f) Definitions This provides definitions that apply for purposes of applying the section regulations to members of an affiliated group, including members of a consolidated group.
(1) Aggregate unused E&P deficit
(i) General rule The term aggregate unused E&P deficit means, with respect to an affiliated group, the lesser of—
(A) The sum of the excess aggregate foreign E&P deficit with respect to each E&P net deficit shareholder that is a member of the affiliated group, or
(B) The amount determined under of this section.
(ii) Reduction with respect to E&P net deficit shareholders that are not wholly owned by the affiliated group If the group ownership percentage of an E&P net deficit shareholder is less than 100 percent, the amount of the excess aggregate foreign E&P deficit with respect to the E&P net deficit shareholder that is taken into account under of this section is the product of the group ownership percentage multiplied by the excess aggregate foreign E&P deficit.
(2) Allocable share The term allocable share means, with respect to a deferred foreign income corporation and an E&P net surplus shareholder's applicable share of an aggregate unused E&P deficit of an affiliated group, the product of the E&P net surplus shareholder's applicable share of the affiliated group's aggregate unused E&P deficit and the ratio described in with respect to the deferred foreign income corporation.
(3) Applicable share The term applicable share means, with respect to an E&P net surplus shareholder and an aggregate unused E&P deficit of an affiliated group, the amount that bears the same proportion to the affiliated group's aggregate unused E&P deficit as—
(i) The product of—
(A) The E&P net surplus shareholder's group ownership percentage, multiplied by
(B) The amount that would (but for section and of this section) constitute the E&P net surplus shareholder's aggregate section inclusion amount, bears to
(ii) The aggregate amount determined under of this section with respect to all E&P net surplus shareholders that are members of the group.
(4) Consolidated group aggregate foreign cash position The term consolidated group aggregate foreign cash position means, with respect to a consolidated group, the aggregate foreign cash position (as defined in ) determined by treating each member of the consolidated group that is a section U.S. shareholder as a single section U.S. shareholder pursuant to of this section.
(5) E&P net deficit shareholder The term E&P net deficit shareholder means a section U.S. shareholder that has an excess aggregate foreign E&P deficit.
(6) E&P net surplus shareholder The term E&P net surplus shareholder means a section U.S. shareholder that would (but for section and of this section) have an aggregate section inclusion amount greater than zero.
(7) Excess aggregate foreign E&P deficit The term excess aggregate foreign E&P deficit means, with respect to a section U.S. shareholder, the amount, if any, by which the amount described in with respect to the section U.S. shareholder exceeds the amount described in with respect to the section U.S. shareholder.
(8) Group cash ratio The term group cash ratio means, with respect to a consolidated group, the ratio of—
(i) The consolidated group aggregate foreign cash position, to
(ii) The sum of the aggregate section inclusion amounts of all members of the consolidated group.
(9) Group ownership percentage The term group ownership percentage means, with respect to a section U.S. shareholder that is a member of an affiliated group, the percentage of the value of the stock of the United States shareholder which is held by other includible corporations in the affiliated group. Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this that is also used in section has the same meaning as when used in such section. Additionally, if the term is used in the context of a rule for which all members of a consolidated group are treated as a single section U.S. shareholder under of this section, then the group ownership percentage is determined solely with respect to the value of the stock of the common parent of the consolidated group held by other includible corporations that are not members of the consolidated group.
(g) Examples The following examples illustrate the application of this section.
Example 1.
(1) Application of affiliated group rule—(i) Facts—(A) In general. USP owns all of the stock of USS1, USS2, and USS3. Each of USP, USS1, USS2, and USS3 is a domestic corporation and is a member of an affiliated group of which USP is the common parent (the “USP Group”). The USP Group has not elected to file a consolidated federal income tax return. USS1 owns all of the stock of CFC1 and CFC2, USS2 owns all of the stock of CFC3, and USS3 owns all of the stock of CFC4. Each of CFC1, CFC2, CFC3, and CFC4 is a controlled foreign corporation within the meaning of section , and, therefore, each is a specified foreign corporation under section and . Each of USP, USS1, USS2, USS3, CFC1, CFC2, CFC3, and CFC4 has the calendar year as its taxable year.
(B) Facts relating to section . CFC1 and CFC3 are deferred foreign income corporations with section earnings amounts of $600x and $300x, respectively. CFC1 and CFC3 have cash positions of $0x and $50x, respectively, on each of their cash measurement dates. CFC2 and CFC4 are E&P deficit foreign corporations with specified E&P deficits of $400x and $100x, respectively. CFC2 and CFC4 have cash positions of $100x and $50x, respectively, on each of their cash measurement dates. The cash positions all consist solely of cash. CFC1, CFC2, CFC3, and CFC4 all use the U.S. dollar as their functional currency.
(ii) Analysis—(A) Section inclusion amounts before application of section . USS1 is a section U.S. shareholder with respect to CFC1 and CFC2; USS2 is a section U.S. shareholder with respect to CFC3; and USS3 is a section U.S. shareholder with respect to CFC4. USS1's pro rata share of CFC1's section earnings amount is $600x. Under section and , USS1's aggregate foreign E&P deficit is $400x, the lesser of the aggregate of USS1's pro rata share of the specified E&P deficit of each E&P deficit foreign corporation ($400x) and the amount described in with respect to USS1 ($600x). Under section and , in determining its section inclusion amount with respect to CFC1, USS1 reduces its pro rata share of the U.S. dollar amount of section earnings amount of CFC1 by CFC1's allocable share of USS1's aggregate foreign E&P deficit. CFC1's allocable share of USS1's aggregate foreign E&P deficit is $400x, which is the product of USS1's aggregate foreign E&P deficit ($400x) and 1, which is the ratio determined by dividing USS1's pro rata share of the section earnings amount of CFC1 ($600x), by the amount described in with respect to USS1 ($600x). Accordingly, under section and (before applying section and of this section), USS1's section inclusion amount with respect to CFC1 would be $200x (USS1's pro rata share of the section earnings amount of CFC1 of $600x reduced by CFC1's allocable share of USS1's aggregate foreign E&P deficit of $400x). Under section and (before applying section and of this section), USS2's section inclusion amount with respect to CFC3 would be $300x (USS2's pro rata share of the section earnings amount of CFC3).
(B) Application of section —(1) Determination of E&P net surplus shareholders and E&P net deficit shareholders. USS1 is an E&P net surplus shareholder because it would have an aggregate section inclusion amount of $200x but for the application of section and of this section. USS2 is also an E&P net surplus shareholder because it would have an aggregate section inclusion amount of $300x but for the application of section and of this section. USS3 is an E&P net deficit shareholder because it has an excess aggregate foreign E&P deficit of $100x.
(2) Determining section inclusion amounts under section . Under section and of this section, for purposes of determining the section inclusion amount of a section U.S. shareholder with respect to a deferred foreign income corporation, if, after applying , the section U.S. shareholder is an E&P net surplus shareholder, then the U.S. dollar amount of the section U.S. shareholder's pro rata share of the section earnings amount of the deferred foreign income corporation is further reduced (but not below zero) by the deferred foreign income corporation's allocable share of the section U.S. shareholder's applicable share of the affiliated group's aggregate unused E&P deficit. USS3 is the only E&P net deficit shareholder in the USP Group, and, therefore, the aggregate unused E&P deficit of the USP Group is equal to USS3's excess aggregate foreign E&P deficit ($100x). The applicable share of the USP Group's aggregate unused E&P deficit of each of USS1 and USS2, respectively, is an amount that bears the same proportion to the USP Group's aggregate unused E&P deficit as the product of the group ownership percentage of USS1 and USS2, respectively, multiplied by the amount that would (but for section and of this section) constitute the aggregate section inclusion amount of USS1 and USS2, respectively, bears to the aggregate of such amounts with respect to both USS1 and USS2. Therefore, USS1's applicable share of the USP Group's aggregate unused E&P deficit is $40 ($100x × ($200x/($200x + $300x))) and USS2's applicable share of the USP Group's aggregate unused E&P deficit is $60x ($100x × ($300x/($200x + $300x))). Because USS1 is a section U.S. shareholder with respect to only one deferred foreign income corporation, the entire $40x of USS1's applicable share of the USP Group's aggregate unused E&P deficit is treated as CFC1's allocable share of USS1's applicable share of the USP Group's aggregate unused E&P deficit, and thus USS1's section inclusion amount with respect to CFC1 is reduced to $160x ($200x−$40x). Because USS2 is a section U.S. shareholder with respect to only one deferred foreign income corporation, the entire $60x of USS2's applicable share of the USP Group's aggregate unused E&P deficit is treated as CFC3's allocable share of USS2's applicable share of the USP Group's aggregate unused E&P deficit, and thus USS2's section inclusion amount with respect to CFC3 is reduced to $240x ($300x−$60x).
(C) Aggregate foreign cash position. Under section and , a section U.S. shareholder that includes a section inclusion amount in income is allowed a deduction equal to the section deduction amount. The section deduction amount is computed by taking into account the aggregate foreign cash position of the section U.S. shareholder. Under , the aggregate foreign cash position of USS1 is $100x, and the aggregate foreign cash position of USS2 is $50x.
(D) Section deduction amount. The section deduction amount of USS1 is $102x, which is equal to (i) USS1's 8 percent rate equivalent percentage (77.1428571%) of its 8 percent rate amount for USS1's 2017 year ($60x ($160x−$100x)), plus USS1's 15.5 percent rate equivalent percentage (55.7142857%) of its 15.5 percent rate amount for USS1's 2017 year ($100x). The section deduction amount of USS2 is $174.43x, which is equal to (i) USS2's 8 percent rate equivalent percentage (77.1428571%) of its 8 percent rate amount for USS2's 2017 year ($190x ($240x−$50x)), plus USS2's 15.5 percent rate equivalent percentage (55.7142857%) of its 15.5 percent rate amount for USS2's 2017 year ($50x). Because USS3 has no section inclusion amount, it has no section deduction amount and therefore is not allowed a section deduction.
Example 2
—(2) Application to members of a consolidated group—(i) Facts. The facts are the same as in of this section (the facts in Example 1), except that the USP Group has elected to file a consolidated return.
(ii) Analysis—(A) Section inclusion amount—(1) Single section U.S. shareholder treatment. Because each of USS1, USS2, and USS3 is a section U.S. shareholder of a specified foreign corporation and is a member of a consolidated group, of this section applies to treat USS1, USS2, and USS3 as a single section U.S. shareholder for purposes of section and .
(2) Determination of inclusion amount. The single section U.S. shareholder composed of USS1, USS2, and USS3 is a section U.S. shareholder with respect to CFC1, CFC2, CFC3, and CFC4. Under , in determining USS1's section inclusion amount, the single section U.S. shareholder decreases its pro rata share of the U.S. dollar amount of the section earnings amount of CFC1 by CFC1's allocable share of the aggregate foreign E&P deficit of the single section U.S. shareholder. CFC1's allocable share of the aggregate foreign E&P deficit is $333.33x, which is the product of the aggregate foreign E&P deficit of the single section U.S. shareholder ($500x ($400x + $100x)) and .67, which is the ratio determined by dividing its pro rata share of the section earnings amount of CFC1 ($600x) by the amount described in with respect to the single section U.S. shareholder ($900x ($600x + $300x)). Therefore, USS1's section inclusion amount with respect to CFC1 is $266.67 (its pro rata share of the section earnings amount of CFC1 ($600) less CFC1's allocable share of the aggregate foreign E&P deficit of the single section U.S. shareholder ($333.33x)). Similarly, under , in determining the section inclusion amount of USS2, the single section U.S. shareholder decreases its pro rata share of the U.S. dollar amount of the section earnings amount of CFC3 by CFC3's allocable share of the aggregate foreign E&P deficit of the single section U.S. shareholder. CFC3's allocable share of the aggregate foreign E&P deficit is $166.67x, which is the product of the aggregate foreign E&P deficit of the single section U.S. shareholder ($500x) and .33, which is the ratio determined by dividing its pro rata share of the section earnings amount of CFC3 ($300x) by the amount described in with respect to the single section U.S. shareholder ($900x ($600x + $300x)). Therefore, USS2's section inclusion amount with respect to CFC3 is $133.33x (its pro rata share of the section earnings amount of CFC3 ($300x) less CFC3's allocable share of the aggregate foreign E&P deficit of the single section U.S. shareholder ($166.67x)).
(B) Consolidated group aggregate foreign cash position. Because USS1 and USS2 are members of a consolidated group, the aggregate foreign cash position of each of USS1 and USS2 is determined under of this section. Under of this section, the aggregate foreign cash position of each of USS1 and USS2 is equal to the aggregate section inclusion amount of USS1 and USS2, respectively, multiplied by the group cash ratio of the USP Group, as determined pursuant to of this section. The group cash ratio of the USP Group is .50, which is the ratio of the USP Group's consolidated group aggregate foreign cash position ($200x ($50x + $100x + $50x)) and the sum of the aggregate section inclusion amounts of all members of the USP Group ($400x ($266.67x + $133.33x)). Therefore, under of this section, the aggregate foreign cash positions of USS1 and USS2 are, respectively, $133.34x ($266.67x × ($200x/$400x)) and $66.67 ($133.33x × ($200x/400x)).
(C) Section deduction amount. The section deduction amount of USS1 is $177.14x, which is equal to (i) USS1's 8 percent rate equivalent percentage (77.1428571%) of its 8 percent rate amount for USS1's 2017 year ($133.33x ($266.67x−$133.34x)), plus USS1's 15.5 percent rate equivalent percentage (55.7142857%) of its 15.5 percent rate amount for USS1's 2017 year ($133.34x). The section deduction amount of USS2 is $88.56x, which is equal to (i) USS2's 8 percent rate equivalent percentage (77.1428571%) of its 8 percent rate amount for USS2's 2017 year ($66.66x ($133.33x−$66.67x)), plus USS2's 15.5 percent rate equivalent percentage (55.7142857%) of its 15.5 percent rate amount for USS2's 2017 year ($66.67x). Because USS3 has no section inclusion amount, it has no section deduction amount and therefore is not allowed a section deduction.
[T.D. 9846, 84 FR 1875, Feb. 5, 2019, as amended by T.D. 9846, 84 FR 14261, Apr. 10, 2019]