SECTION 3. BASE PERIOD AMOUNT

• GENERAL PRINCIPLES

.01 Determination of Base Period Amount

(a) In general . A U.S. shareholder determines its base period inclusions and its

4 The terms “consolidated group,” “member,” “subsidiary,” and “separate return year” are defined in Treas. Reg. §1.1502–1. In addition, the term “member” also refers, when the context so requires, to a member of a section 52(a) group.

2005–22 I.R.B. 1102 May 31, 2005

Taxable year ending USP group base period inclusions

July 31, 1998 $250x July 31, 1999 $150x July 31, 2000 $200x July 31, 2001 $100x July 31, 2002 $50x

been subject to foreign tax of $10x. The applicable financial statement of the U.S. shareholder that wholly owns such CFC does not show a specific amount of earnings permanently reinvested outside the United States, but instead shows a $25x tax liability attributable to such earnings.

(ii) Result . Although the applicable financial statement of the U.S. shareholder does not show an amount of permanently reinvested earnings, it does show a tax liability of $25x attributable to earnings permanently reinvested. Thus, the amount described in section 965(b)(1)(C) is $71.4x ($25x/0.35). This amount may not be adjusted to take into account the foreign taxes imposed on such earnings.

.04 Allocation of APB 23 Limitation

As noted above, section 965(c)(5)(C) provides that if a financial statement is an applicable financial statement for more than one U.S. shareholder, APB 23 limitation is divided among such shareholders under regulations prescribed by the Secretary. In such a case, the portion of the APB 23 limitation allocated to the U.S. shareholder is the amount from the separate company financial statements (or supporting work papers) of such U.S. shareholder that were prepared in connection with determining the amount described in section 965(b)(1)(B) or (C) shown on the applicable financial statement that included such U.S. shareholder.

Section 965(c)(5)(C) contemplates not only the situation where the financial statement reflects the operations of affiliated corporations that are not consolidated for tax purposes (for example, a U.S. corporation and a domestic subsidiary thereof that elects to apply section 936), but also the situation where the financial statement reflects the operations of corporations that were formerly affiliated and/or consolidated but are not in such relationship during a section 965 election year. See section 6 of this notice for rules regarding the allocation of APB 23 limitation in such a case.

The following example illustrates the application of section 965(b)(1) and this section 4.04.

Example . (i) Facts . USP is a domestic corporation that files a consolidated return with its

To determine its base period years pursuant to section 965(c)(2), USP disregards the taxable years in its base period with the highest and lowest base period inclusions, which are 1998 ($250x) and 2002 ($50x). To determine its base period amount, USP then averages the base period inclusions for the remaining three taxable years (that is, the base period years). Therefore, USP’s base period amount is $150x (($150x + $200x + 100x)/3).

.02 Translation of Previously Taxed Income Distributed During the Base Period

For purposes of determining the dollar amount of base period inclusions attributable to distributions of PTI described in section 965(b)(2)(B)(iii), distributions of foreign currency are valued by multiplying the distributing CFC’s foreign currency amount of the PTI distribution by the spot rate (as defined in Treas. Reg. §1.988–1(d)(1)) on the date of distribution.