SECTION 6. EFFECTS OF CERTAIN

TRANSACTIONS ON BASE PERIOD INCLUSIONS AND MAXIMUM AMOUNT ELIGIBLE FOR SECTION 965(a) DRD

.01 Base Period Inclusions and APB 23 Limitation as U.S. Shareholder Attributes

(a) In general . For purposes of section 965, base period inclusions and APB 23 limitation are historical amounts that are treated as tax attributes particular to a U.S. shareholder as of the date these amounts are fixed under section 965(b)(1) and (2). See section 2.01 of this notice for the definition of the term “U.S. shareholder” for this purpose. Consequently, base period inclusions and APB 23 limitation remain with a particular U.S. shareholder (for example, when a U.S. shareholder ceases to be a member of a consolidated group). See Example 1 of section 6.01(d) of this notice. In addition, base period inclusions

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from its CFCs in any other election year may be taken into account in that year for purposes of section 965. See also section 5 of this notice for a discussion of taxable years to which section 965 applies.

This paragraph provides special rules to ensure that an acquiring consolidated group appropriately reflects an APB 23 limitation with respect to an acquired member when: (1) that member ceases to be a member of a selling consolidated group before the selling group’s APB 23 determination date; and/or (2) that member joins an acquiring group before the acquiring group’s APB 23 determination date. Specifically, if a U.S. shareholder joins a consolidated group before the acquiring group’s APB 23 determination date, there is no adjustment to the acquiring group’s APB 23 limitation because the U.S. shareholder’s membership in the new group (and such U.S. shareholder’s ownership of CFCs at the relevant time with permanently reinvested earnings) will be taken into account when determining the acquiring group’s APB 23 limitation. Under the preceding sentence, if the selling group’s APB 23 determination date has passed, the selling group reduces its APB 23 limitation to account for the departed U.S. shareholder. If a U.S. shareholder ceases to be a member of a consolidated group before the selling group’s APB 23 determination date, there is no downward adjustment to the selling group’s APB 23 limitation to reflect the departure because the selling group’s APB 23 limitation will reflect such disposition. However, if a U.S. shareholder ceases to be a member of a consolidated group before the selling group’s APB 23 determination date but after the acquiring group’s APB 23 determination date, the acquiring group’s APB 23 limitation is increased by the amount of the selling group’s APB 23 limitation that would be allocated to the acquired U.S. shareholder under section 4 of this notice if the selling group substituted “the date of the acquisition” for “June 30, 2003” in applying section 965(c)(1).

The rules of this paragraph that apply to dispositions or acquisitions of a member of a consolidated group also apply, as

and APB 23 limitation are treated in the same manner as items described in section 381(c). Therefore, if a corporation acquires the assets of a U.S. shareholder in a transaction described in section 381(a), the acquiring corporation succeeds to and takes into account the base period inclusions and APB 23 limitation of the transferor U.S. shareholder under the principles of section 381. See Example 5 of section 6.01(d) of this notice. For exceptions to these general rules, see section 6.01(b) and (c) of this notice.

Because these amounts are not treated as tax attributes particular to a CFC, they are unaffected by a disposition of a CFC. Thus, these rules apply even if the U.S. shareholder no longer owns the CFC that gave rise to the base period inclusions or APB 23 limitation. Similarly, because these amounts are tax attributes of the U.S. shareholder rather than the CFC, a domestic corporation that acquires the assets of a CFC in a transaction described in section 381(a) does not succeed to and take into account base period inclusions and APB 23 limitation attributable to the transferor CFC under the principles of section 381. See Example 1 of section 6.01(d) of this notice.

(b) Adjustments for acquisitions and dispositions of U.S. shareholders that are included in consolidated returns . (1) In general . Members of a consolidated group generally are treated as a single U.S. shareholder for the purpose of determining the group’s base period amount or APB 23 limitation. However, when a member exits or enters a U.S. consolidated group, adjustments are required to the selling ⁵ and/or acquiring group’s base period inclusions and APB 23 limitation to reflect that base period inclusions and APB 23 limitation generally remain with a particular U.S. shareholder (that is, with the specific member rather than with the group itself). The selling group reduces its base period inclusions and APB 23 limitation by the amounts that are attributable to a departed member, and the acquiring group correspondingly increases its base period inclusions and APB 23 limitation to account for the new member. For exceptions to these general rules, see paragraph

(2), below, and Examples 1, 4, 8 and 9 of section 6.01(d) of this notice. For specific rules addressing the determination of base period inclusions, see section 6.01(b)(3) of this notice.

When adjusting a consolidated group’s base period inclusions to reflect the entry or exit of a U.S. shareholder, the consolidated group makes the adjustment to the specific base period inclusions (as opposed to the base period amount) for the group to reflect the particular base period inclusions of the acquired or disposed of U.S. shareholder or its successor. In the same way, the consolidated group makes an adjustment to its APB 23 limitation to reflect the APB 23 limitation attributable to the acquired or disposed of U.S. shareholder or its successor.

The rules of this paragraph that apply to dispositions or acquisitions of a member of a consolidated group also apply, as relevant, in the context of the acquisition of an entire consolidated group.

(2) Special adjustment rules dependent upon timing of certain acquisitions or dispositions of U.S. shareholders . Certain adjustments to base period inclusions and/or APB 23 limitation provided under paragraph (b)(1) of this section are not made if certain transactions occur during the selling group’s election year, or certain transactions occur before or after a selling group’s or acquiring group’s ⁶ APB 23 determination date. In addition, special rules are provided in section 6.01(c) of this notice with respect to certain spin-off transactions.

Specifically, under this paragraph (b)(2), when a U.S. shareholder ceases to be a member of a selling group during the selling group’s election year, the selling group’s base period inclusions and APB 23 limitation are not reduced by amounts attributable to the departing U.S. shareholder. Nonetheless, the acquiring group still increases its base period inclusions and, subject to the special rules of this paragraph (b)(2), its APB 23 limitation attributable to the acquired U.S. shareholder under the general rules of paragraph (b)(1) of this section. See Example 1 of section 6.01(d) of this notice. In addition, dividends received by the U.S. shareholder

5 For purposes of this section 6, the term “selling group” also includes a group in which a U.S. shareholder ceases to be included as a member as a result of transactions other than sales (for example, through the distribution of the stock of the member).

6 For purposes of section 6, the term “acquiring group” includes a consolidated group that comes into existence after the acquisition of a corporation.

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values of the distributing group’s and the controlled group’s respective interests in each CFC owned by the distributing group and the controlled group immediately after the applicable base period spin-off. The base period inclusions allocated to the distributing group and the controlled group are further allocated amongst the members of such groups in proportion to the fair market value of such members’ respective interests in each CFC immediately after the applicable base period spin-off. See paragraph (c)(3) for the treatment of APB 23 limitations as a result of applicable base period spin-offs described in this paragraph (c)(2).

Section 965(c)(2)(C)(ii)(II) does not apply to any distribution that is not an applicable base period spin-off, such as a distribution that occurs after the base period; nor does it apply to allocate inclusions from CFCs with respect to which neither controlled nor distributing is a U.S. shareholder at the time of the spin-off. Instead, the rules of section 6.01(c)(1) of this notice apply to such distributions or inclusions.

(3) Spin-off of a U.S. shareholder that occurs during the base period - alloca- tion of APB 23 limitation . If an applicable base period spin-off (as defined in paragraph (c)(2) of this section) occurs with respect to a U.S. shareholder that is not a member of a consolidated group after the APB 23 determination date of either distributing or controlled, the APB 23 limitation of distributing or controlled is adjusted to the extent that distributing’s or controlled’s APB 23 limitation is attributable to the stock of a CFC that is transferred between distributing and controlled in connection with the spin-off. Consistent with the treatment of base period inclusions, such adjustment is made by allocating the portion of any APB 23 limitation attributable to distributing or controlled with respect to the earnings of a CFC that is transferred between distributing and controlled in proportion to the fair market values of such corporations’ respective interests as U.S. shareholders of such CFC immediately after the spin-off. If a spin-off occurs before the APB 23 determination dates of both distributing and controlled, the general rules of section 4 apply. See Example 3 of section 6.01(d) of this notice.

relevant, in the context of the acquisition of an entire consolidated group.

(3) Determining the base period inclu- sions to be inherited . When an acquiring group adjusts its base period inclusions to take into account an acquisition of a U.S. shareholder or consolidated group, the acquiring group takes into account five taxable years in the relevant base period for any acquired shareholder or group, assuming at least five taxable years are available. The inclusions are aggregated for taxable years one through five without regard to whether they are short or full taxable years on either side. An acquired U.S. shareholder or group cannot contribute more than five taxable years of inclusions to the base period history of the acquirer. The fifth taxable year in the acquiring group’s base period is the last potential taxable year in its base period.

If the acquired U.S. shareholder or group joins the acquiring group after the end of the acquiring group’s base period, the acquired U.S. shareholder’s or acquired group’s base period inclusions in its last five taxable years ending on or before June 30, 2003, are aggregated with the acquiring group’s base period inclusions in its five base period taxable years, on a year-by-year basis.

Similarly, if an acquired U.S. shareholder or group joins the acquiring group before the end of the acquiring group’s base period, the acquiring group inherits a base period inclusion history for the acquired U.S. shareholder or group for each of the taxable years in the acquiring group’s base period that end on or before the date of the acquisition. The acquired U.S. shareholder’s or acquired group’s taxable year ending on the date of the acquisition shall correspond to the taxable year in the acquiring group’s base period that ends on or before the date of the acquisition. The acquiring group then takes into account base period inclusions from the acquired U.S. shareholder’s or group’s taxable years prior to the taxable year ending with the date of the acquisition to the extent necessary to assemble a base period inclusion history for the inherited years. An acquired U.S. shareholder or acquired group may contribute five taxable years to the acquiring group’s history even if the acquiring group did not itself exist for its full five taxable year base period. For

illustrations of these rules, see Example 7 and Example 8 of section 6.01(d).

(c) Special rules for spin-offs . (1) In general . Except as provided in paragraphs (c)(2) and (3) of this section, a distribution to which section 355 (or so much of section 356 as relates to section 355) applies is treated in the same manner as a disposition of the stock of the controlled corporation (controlled) by the distributing corporation (distributing) for purposes of section 965 and this notice. See sections 5, 6.01(a) and (b) of this notice and Example 2 of section 6.01(d) of this notice. (2) Spin-off of a U.S. shareholder that occurs during the base period - allo- cation of base period inclusions . In the case of a spin-off of the stock of a U.S. shareholder to which section 355 (or so much of section 356 that relates to section 355) applies that occurs during the base period, and after which either distributing or controlled is a U.S. shareholder of a CFC (applicable base period spin-off), any base period inclusions received by either distributing or controlled from such CFC are allocated as provided in section 965(c)(2)(C)(ii). For purposes of determining distributing’s and controlled’s base period inclusions and base period amounts under section 965(c)(2)(C)(ii), section 965(c)(2)(C)(ii)(I) treats controlled as having been in existence for the same period that distributing has been in existence. Further, section 965(c)(2)(C)(ii)(II) allocates base period inclusions that are received or includible by distributing and controlled from a CFC prior to an applicable base period spin-off of controlled based on the fair market values of distributing’s and controlled’s interests in such CFC immediately after such spin-off.

However, if stock of a member of a consolidated group is distributed pursuant to an applicable base period spin-off and, as a result of such distribution a controlled corporation leaves the consolidated group, the base period inclusions of the consolidated group with respect to each of the group’s CFCs before the applicable base period spin-off are instead allocated between the members of the consolidated group that remain in the distributing corporation’s group (distributing group) and the members, if any, that leave the group and thereafter file a consolidated return with the controlled corporation (controlled group) in proportion to the fair market

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If the stock of a member of a consolidated group is distributed pursuant to an applicable base period spin-off and, as a result of such distribution a controlled corporation leaves the consolidated group and, the spin-off occurs after the APB 23 determination date of the consolidated group, the APB 23 limitation that is attributable to each CFC owned by the consolidated group before the applicable base period spin-off is, instead, allocated between the distributing group and the controlled group in proportion to the fair market values of the distributing group’s and the controlled group’s respective interests in each CFC owned by the distributing group and the controlled group immediately after the applicable base period spin-off. The APB 23 limitation allocated to the distributing group and the controlled group is further allocated between and among the members of such groups in proportion to the fair market values of such members’ respective interests in each CFC immediately after the applicable base period spin-off.

(d) Examples . The following examples illustrate the application of section 965(b)(1) and (2) and this section 6.01. Unless otherwise indicated, the following facts are assumed for purposes of these examples. All corporations and consolidated groups maintain calendar taxable years and were in existence prior to 1997. USP is a domestic corporation and the common parent of the USP consolidated group. USP wholly owns US1 and US2. US1 and US2 are U.S. shareholders and members of the USP consolidated group. US1 and US2 each wholly owns a foreign corporation, CFC1 and CFC2, respectively. USP elects to apply section 965 to its 2005 taxable year. USB is a domestic corporation and the common parent of the USB consolidated group, which is a consolidated group prior to any transactions described below. All domestic corporations acquired by the USB group that are eligible to do so elect to join in filling a consolidated return with the USB group. USB elects to apply section 965 for its 2005 taxable year. No elections are made under section 338 with respect to stock purchases.

Example 1 . Sale of U.S. shareholder by consoli- dated group . (i) Facts . On December 31, 2003, USP sells the stock of US1 to an unrelated foreign person, FP. US1 files a separate return for the taxable years following such sale. On October 25, 2004, US2 sells CFC2 to USB for cash.

(ii) Result . On January 1, 2004, US1 is no longer a member of the USP consolidated group as a result of the sale of the US1 stock to FP. Accordingly, the USP group reduces its base period inclusions and APB 23 limitation attributable to US1. In addition, because US1 files a separate return after it ceases to be a member of the USP consolidated group, it takes into account its individual base period inclusions and APB 23 limitation. In contrast, US2’s sale of CFC2 does not affect US2’s base period inclusion history or APB 23 limitation, because base period inclusions and APB 23 limitation are not tax attributes of CFCs. Consequently, the USP group does not reduce its base period inclusions or APB 23 limitation as a result of the sale of CFC2. Similarly, USB does not make any adjustment to its base period inclusions or APB 23 limitation as a result of the acquisition of CFC2.

(iii) Alternative Facts . Assume the same facts as above, except that USP sells the stock of US1 to FP on February 15, 2005. On February 16, 2005, US1 is no longer a member of the USP consolidated group as a result of the sale of the US1 stock to FP. Because the transaction occurs within the USP election year, the USP group does not reduce its base period inclusions and APB 23 limitation attributable to US1. Further, US1 still takes into account its individual base period inclusions and APB 23 limitation should it make an election with respect to section 965(a) in its short taxable year following the acquisition (February 16, 2005 through December 31, 2005). The result with respect to USB is not changed under the alternative facts.

Example 2 . Spin-off of U.S. shareholder by con- solidated group . (i) Facts . The facts are the same as in Example 1, except that instead of USP selling the stock of US1, it distributes such stock in a distribution to which section 355 applies. US1 files a separate return for the taxable years following the distribution.

(ii) Result . The result is the same as that in Exam- ple 1 . The special rules under section 965(c)(2)(C)(ii) and section 6.01(c)(2) of this notice do not apply because the distribution did not occur during USP’s base period (which ended December 31, 2002).

Example 3 . Section 368(a)(1)(D) reorganiza- tion/section 355 distribution . (i) Facts . USP owns CFC3. USP has base period inclusions and APB 23 limitation attributable to CFC3. On December 31, 2002, USP transfers the stock of CFC3 to controlled, a newly formed domestic corporation wholly-owned by USP, in a transaction to which section 368(a)(1)(D) applies, and immediately thereafter distributes the stock of controlled in a distribution to which section 355 applies.

(ii) Result . The distribution occurs during the USP group’s base period and, therefore, the special rules under section 965(c)(2)(C)(ii) and section 6.01(c)(2) and (3) of this notice apply. As a result, USP’s base period inclusions and APB 23 limitation that are attributable to CFC3 are allocated as provided in section 965(c)(2)(C)(ii) and section 6.01(c)(2) and (3) of this notice. Therefore, all of the base period inclusions and APB 23 limitation of USP attributable to CFC3 are allocated to controlled because controlled owns all the CFC3 stock immediately after the section 355 distribution.

(iii) Alternative facts . The facts are the same as in Example 3, except that the transaction occurs on December 31, 2003. Because the distribution does not occur during USP’s base period, section

965(c)(2)(C)(ii) and section 6.01(c)(2) and (3) of this notice do not apply. Instead, the general rules of section 6.01(c)(1) of this notice apply. Therefore, none of the base period inclusions, and no portion of the APB 23 limitation, attributable to CFC3 are allocated to controlled; such amounts remain with USP.

Example 4 . Internal spin-off of CFC followed by applicable base period spin-off . (i) Facts . US1 has base period inclusions with respect to CFC1. On June 30, 2002, US1 distributes the stock of CFC1 to USP in a transaction to which section 355 applies (first spin-off). On December 31, 2002, USP transfers the stock of CFC1 to controlled, a newly formed domestic corporation wholly owned by USP, in a transaction to which section 368(a)(1)(D) applies, and immediately thereafter distributes the stock of controlled in a distribution to which section 355 applies (second spin-off).

(ii) Result . The first and second spin-offs occur during the USP group’s base period. Section 965(c)(2)(C)(ii)(II) does not apply to the first spin-off because CFC1 is not a United States shareholder. As a result US1’s base period inclusions attributable to CFC1 are not allocated between US1 and USP in accordance with US1’s and USP’s proportional ownership of CFC1 after the first spin-off. However, in the second spin-off controlled is distributed out of USP’s consolidated group. Accordingly, the USP group’s base period inclusions with respect to each of its CFCs before the spin-off of controlled are allocated between the USP group and controlled (or controlled’s group if controlled’s affiliated group files a consolidated return) in proportion to the USP group’s and controlled’s (or the controlled group’s) interests in each CFC owned by the USP group and controlled (or the controlled group) immediately after the second spin-off.

Example 5 . Merger of a U.S. shareholder and other transactions . (i) Facts . On January 3, 2003, US1 sells its stock in CFC1 to USB for cash. On December 31, 2003, in an unrelated transaction US1 merges into US2. The merger of US1 into US2 is a reorganization under section 368(a)(1)(A). On December 31, 2004, in a transaction unrelated to the merger of US1 into US2, USP sells the shares of US2 to USB for cash. The APB 23 determination date for the USP and USB groups is December 31, 2002.

(ii) Result . The sale of CFC1 stock to USB has no effect on the USP group’s base period inclusions and APB 23 limitation. The merger of US1 into US2 on December 31, 2003, is a transaction described in section 381(a), and US2 therefore succeeds to and takes into account US1’s base period inclusions and APB 23 limitation.

Because US2 ceases to be a member of the USP consolidated group as a result of the sale of its stock to USB, the USP group reduces its base period inclusions and APB 23 limitation attributable to US2, including those amounts US2 succeeds to and takes into account as a result of the merger. Further, because US2 becomes a member of the USB consolidated group on January 1, 2005, USB’s base period inclusions and APB 23 limitation are increased by the same amounts by which USP’s base period inclusions and APB 23 limitation amount were decreased.

(iii) Alternative facts . The facts are the same as Example 5 (i), except that instead of USP selling the shares of US2 to USB, US2 sells its assets to USB in

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exchange for cash (and the assumption of any liabilities of US2) and distributes the cash proceeds to USP pursuant to a liquidation described in section 332.

Under the alternative facts, the result is the same as Example 5 (ii), except as follows. USP does not make any adjustments to its base period inclusions or APB 23 limitation as a result of the sale of US2’s assets to USB because the transaction with USB is not described in section 381(a) (this may not be the case, however, if the assets sold by US2 to USB include stock of a U.S. shareholder that is a member of the USP consolidated group). Further, USP continues to take into account the base period inclusions and APB 23 limitation attributable to US2 after the liquidation of US2 because the liquidation into USP is a transaction described in section 381(a). In addition, the USB consolidated group does not take into account the base period inclusions and APB 23 limitation attributable to US2, because US2 does not become a member of the USB consolidated group (nor does the USB consolidated group acquire the assets of US2 pursuant to a transaction described in section 381(a)). (iv) Alternative facts . The facts are the same as Example 5 (i), except that USP and USB make an election pursuant to section 338(h)(10) with respect to the sale of the stock of US2. The result under the alternative facts in this paragraph (iv) is the same as under the alternative facts of paragraph (iii) of this Example 5 . This is the case regardless of whether an election under section 338 is made with respect to the CFC2 stock owned by US2.

Example 6 . Acquisition of U.S. shareholder con- solidated group . (i) Facts . USB acquires all the stock of USP on January 3, 2003, a date subsequent to the APB 23 determination dates for both the USP and USB groups. As a result of the acquisition, the USP group terminates and all the members of the USP group become members of USB consolidated group.

(ii) Result . USB’s acquisition of all the stock of USP causes the USP consolidated group to cease to exist as of the end of January 3, 2003, a date after the end of the base periods of both the USP and USB groups. The USP group’s base period inclusions for

US1 base period

year-ends

USB group base period

year-ends

each of the five taxable years in its base period is added to the USB group’s base period inclusions for each corresponding taxable year in its base period to determine the USB group’s base period amount. In addition, because the acquisition occurs after the APB 23 determination dates of both the USB and USP groups, the USB group’s APB 23 limitation is increased by the USP group’s APB 23 limitation.

Example 7 . Taking into account base period in- clusions of acquired U.S. shareholder transferred af- ter the end of the acquirer’s base period . (i) Facts . The USB consolidated group uses a taxable year ending March 31. The USB group elects to apply section 965 to its taxable year that begins on April 1, 2005 and ends on March 31, 2006. On May 31, 2005, USB acquires from USP 100% of the stock of US1 for cash.

(ii) Result . The acquisition of US1 occurs during the section 965 election year of the USP group and the section 965 election year of the USB group. Therefore, the special rules set forth in section 6.01(b)(2) apply. Under those rules, the USB consolidated group takes into account the base period inclusions of US1 for purposes of determining its base period amount under section 965(b)(2). Because US1 ceases to be a member of the USP consolidated group during the election year of such group, the USP consolidated group will also take into account the base period inclusions of US1 for purposes of determining its base period amount under section 965(b)(2). Accordingly, there is no corresponding decrease by the selling group for the increase by the buying group of base period inclusions and APB 23 amounts as a result of the transaction.

The USB consolidated group’s base period includes the five taxable years ending on or before June 30, 2003 (that is, taxable years ending March 31, 1999 through March 31, 2003). Similarly, the base period of US1 and USP includes the five taxable years ending on or before June 30, 2003 (that is, the taxable years ending December 31, 1998 through December 31, 2002). To determine the USB group’s base period amount, US1’s base period inclusions for each taxable year in its base period are added to the base

period inclusions for each corresponding taxable year in the USB group’s base period. Thus, US1’s base period inclusions for its taxable year ending December 31, 2002 are added to the base period inclusions for the USB group’s year ended March 31, 2003, and US1’s base period inclusions for the other four years in its base period are added to the USB group base period inclusions for the other four corresponding years in the USB group’s base period.

Because the acquisition of US1 occurs during the election years of both the USP group and the USB group, both groups will also take into account the APB 23 limitation attributable to US1.

Example 8 . Taking into account base period in- clusions of acquired U.S. shareholder transferred be- fore the end of the acquirer’s base period . (i) Facts . The facts are the same as Example 7, except as follows. USB acquired US1 on February 15, 2002, a date prior to the APB 23 determination dates of both USP and USB. The USB group’s base period includes the five taxable years ending March 31, 1999, through March 31, 2003. As a result of its acquisition, the base period of US1 includes its five taxable years that end on the following dates: February 15, 2002; December 31, 2001; December 31, 2000; December 31, 1999; and December 31, 1998. (ii) Result . To determine the USB group’s base period amount, US1’s base period inclusions for each taxable year in US1’s base period are added to the USB group’s base period inclusions for each corresponding taxable year in the USB group’s base period. US1’s short taxable year ending February 15, 2002, corresponds to the last taxable year in the acquirer’s base period that ends on or before the date of the acquisition (that is, the USB group’s taxable year that ends March 31, 2001). The USB group also succeeds to that portion of US1’s base period inclusion history for US1’s taxable years that precede the short taxable year ending on February 15, 2002, that correspond to the USB group taxable years in its base period.

The corresponding taxable years in the respective base periods may be illustrated as follows:

3/31/03 3/31/03 3/31/02 3/31/02 2/15/02 3/31/01 12/31/01 3/31/00 12/31/00 3/31/99 12/31/99 12/31/98

US1’s taxable years ending on December 31, 1999, and December 31, 1998, correspond to taxable years of the USB group that precede the USB group’s base period. Accordingly, the USB group does not take into account the base period inclusions of US1 in those years. Nevertheless, the USP group will reduce its base period inclusions attributable to US1 for these taxable years.

US1’s base period inclusions after February 15, 2002, are naturally taken into account by the USB group in determining its base period inclusions because such inclusions will occur during the time that

US1 is a part of the USB consolidated group. That is, US1 base period inclusions for its taxable year that ends March 31, 2002, and March 31, 2003, are taken into account in determining the USB group’s inclusions for such taxable years.

US1 ceased being a member of the USP consolidated group and joined the USB consolidated group before the APB 23 determination dates of both the USP and USB consolidated groups. As a result, no adjustment is made to the APB 23 amount of the USP or USB consolidated groups as a result of the sale of

US1 stock as provided in section 6.01(a)(2) of this notice.

(iii) Alternative facts . The facts are the same as in Example 8, except that the USB group’s first taxable year begins on April 1, 2000. The results are unchanged.

Example 9 . Acquisition of U.S. shareholder stock before Acquirer’s but after Seller’s APB 23 determi- nation date . (i) Facts . The USP group’s applicable financial statement provides for an APB 23 limitation of $700 million. The limitation is comprised of, as of the APB 23 determination date (December 31,

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not apply to US1’s second election year as a member of the USB group. The USB group has its own $500 million limitation, which is not adjusted upward as a result of the acquisition of US1.

Example 2 . Disposition of a member which does not join an unrelated consolidated group . (i) Facts . The facts are the same as in Example 1 except that the buyer of US1 is B, an individual unrelated to A. As in Example 1, US1 elects section 965 for its taxable year, which however ends on December 31, 2005. (ii) Result . On December 31, 2005, there is no section 52(a) group, and the election year of neither corporation ended before that date. Therefore, US1 and US2 each has its own $500 million limitation.

Example 3 . Merger into unrelated corpora- tion . (i) Facts . The facts are the same as in Example 1 except that instead of the stock of US1 being sold, US1 merges into USB in a reorganization described in section 368(a)(1)(A).

(ii) Result . The result is the same as in Example 1 . Example 4 . Merger into related corporation . (i) Facts . The facts are the same as in Example 3 except that US1 merges into US2 in a reorganization described in section 368(a)(1)(A).

(ii) Result . US2 is entitled to a full $500 million limitation for its election year ending December 31, 2005, because it is not a member of a section 52(a) group on December 31, 2005. US1 has a limitation of $0 for its election year ending September 30, 2005, because US1 and US2 would have been members of a section 52(a) group on their apportionment date, December 31, 2005, but for the merger of US1 which results in the end of US1’s election year before December 31, 2005.

Example 5 . Spin-off resulting in unrelated corporation . (i) Facts . USP is a publicly held corporation and the parent of a consolidated group. C and US1 are wholly owned domestic subsidiaries of USP. US1 cannot be included in the USP consolidated group by virtue of section 1504(a)(3) (relating to the five-year period required to elapse before reconsolidation). The USP group and US1 each maintain the calendar year as their taxable years and USP, C, and US1 are each U.S. shareholders of CFCs.

On September 30, 2005, USP distributes the stock of C to its shareholders. Thereafter, USP and C are not members of the same section 52(a) group.

The USP group and US1 each elect section 965 for their taxable years ending December 31, 2005. C also elects section 965 for its short taxable year starting on October 1, 2005, and ending on December 31, 2005. (ii) Result . December 31, 2005, is the apportionment date for the section 52(a) group that consists of the USP group and US1, and the $500 million limitation is allocated between the USP group and US1 on that date. None of the limitation is allocated to C separately for its short taxable year ending September 30, 2005 (its limitation is $0), but the apportionment does not apply to C’s second election year, the short taxable year ending December 31, 2005. C has its own $500 million limitation for that second election year.

Example 6 . Spin-off resulting in related corpora- tion . (i) Facts . The facts are the same as in Example 5 except that all the stock of USP is owned by A, an individual, and A acquires all the stock of C in the

2002), earnings permanently reinvested in CFC1 of $400 million and in CFC2 of $300 million. The $400 million of CFC1 earnings is attributable to US1, and the $300 million of CFC2 earnings is attributable to US2. USB maintains a taxable year ending January 31. On January 3, 2003, USP sells to USB 81% of US1’s outstanding stock and 60% of the outstanding stock of US2. The USB group’s APB determination date is January 31, 2003.

(ii) Result . By reason of the transactions, US1 and US2 cease to be members of the USP consolidated group on January 3, 2003, a date that is after the USP group’s APB 23 determination date. Therefore, the USP consolidated group reduces its APB 23 limitation by $700 million because US1 and US2 are no longer members of the USP consolidated group. Similarly, the USP group reduces its base period inclusions to the extent they are attributable to US1 and US2. Further, the acquisition of US1 and US2 occurred prior to USB’s APB 23 determination date. Therefore, the USB group does not increase its APB 23 limitation with respect to the transactions because the USB group will take into account permanently reinvested earnings of US1 and US2 for financial accounting purposes on its APB 23 determination date. Finally, USB inherits the relevant base period inclusion history of US1 because US1 joins the USB consolidated group. After the transaction, US2 is not a member of a consolidated group and therefore will file a separate return for subsequent taxable years. If US2 elects to apply section 965 in an eligible year, it will take into account its base period inclusion history and its APB 23 limitation.

(iii) Alternative facts . The facts are the same as in Example 9 (i), except that US1 and US2 are sold on February 1, 2003. The USB group’s reported APB 23 limitation is increased by $400 million as a result of USB’s purchase of 81% of the shares of US1 because US1 joins the USB consolidated group after the USB group’s APB 23 determination date; it is not increased by the $300 million attributable to US2 because US2 does not join the USB consolidated group. The base period inclusion results are unchanged.

.02 Allocated Portion of $500 Million Limitation

Pursuant to section 4.05 of this notice, the $500 million limitation described in section 965(b)(1)(A) is allocated among qualified members of a section 52(a) group on a single date, the apportionment date (as defined in section 4.05 of this notice), and only amongst the qualified members of the group on such date. A corporation or consolidated group is not allocated any of the $500 million limitation and it has a $0 limitation for an election year during which the corporation or consolidated group was a qualified member of a section 52(a) group if, on or after the end of its election year but before the section 52(a) group’s apportionment date (or, if none, the date that would have been the apportionment date had the transaction not occurred), the corporation

or consolidated group becomes unrelated to the other qualified members of the section 52(a) group or ceases to exist.

Once an allocation occurs on an apportionment date, the allocated limit applies to a corporation or consolidated group that is a qualified member of the section 52(a) group for its election years ending while it is a qualified member of such group, including those years that end before the apportionment date. However, if a corporation or consolidated group becomes unrelated to the other qualified members of a section 52(a) group before the end of an election year of such corporation or consolidated group, the corporation or group is entitled to its own $500 million limitation, unless it becomes part of a different section 52(a) group on or before that group’s apportionment date. If it becomes part of a different section 52(a) group on or before that group’s apportionment date, it may be allocated a portion of that section 52(a) group’s $500 million limitation. Accordingly, if a corporation or consolidated group is no longer a qualified member of a section 52(a) group, the former member does not retain any of the section 52(a) group’s $500 million limitation after it leaves such group.

The following examples illustrate the application of section 965(b)(1) and this section 6.02. Unless otherwise indicated, it is assumed in each example that all U.S. shareholders have APB 23 limitations of zero.

Example 1 . Disposition of a member which joins an unrelated consolidated group . (i) Facts . A, an individual, wholly owns two domestic corporations, US1 and US2. US1 and US2 in turn each wholly own a foreign corporation, CFC1 and CFC2, respectively. US1 and US2 maintain the calendar year as their taxable year.

On September 30, 2005, A sells US1 to USB. USB is an unrelated domestic corporation and the common parent of a consolidated group that maintains a June 30 taxable year.

US1 elects section 965 for its taxable year ending September 30, 2005. US2 elects section 965 for its taxable year ending December 31, 2005. The USB group elects section 965 for its taxable year ending June 30, 2006.

(ii) Result . US2 is entitled to a full $500 million limitation for its election year ending December 31, 2005, because it is not a member of a section 52(a) group on December 31, 2005. US1 has a limitation of $0 for its election year ending September 30, 2005, because US1 and US2 would have been members of a section 52(a) group on an apportionment date, December 31, 2005, but for the disposition of US1 on or after the end of US1’s election year but before December 31, 2005. The apportioned limitation does

2005–22 I.R.B. 1110 May 31, 2005

For purposes of section 965(b)(3), indebtedness of a CFC to a foreign disregarded entity that is owned for Federal tax purposes by a related person is treated as related party indebtedness. Thus, for example, if on the initial measurement date there is $100x of indebtedness from a CFC to a foreign disregarded entity owned by a U.S. shareholder, which is a related person to the CFC, such amount is indebtedness described in section 965(b)(3)(B).

(b) Exception for Intercompany Trade Payables . For purposes of section 965(b)(3), the term “indebtedness” does not include indebtedness arising in the ordinary course of a business from sales, leases, or the rendition of services provided to or for a CFC by a related person, provided that such indebtedness is actually paid within 183 days.

.03 Determination of Related Party Indebtedness

A U.S. shareholder considers the indebtedness of its CFC to related persons only if the U.S. shareholder is a related person with respect to such CFC. For purposes of determining the related party indebtedness of a CFC pursuant to section 965(b)(3), the relationship between the CFC, its creditors, and any of its U.S. shareholders is determined independently on the initial measurement date and the last measurement date, respectively. For example, if on such date the creditor of the CFC is a related person and a U.S. shareholder is a related person with respect to such CFC, the U.S. shareholder has an amount of indebtedness that is considered under section 965(b)(3) and the rules of this section.

.04 Amount of Reduction under Section 965(b)(3)

(a) In General . Pursuant to section 965(b)(3) and the rules of this section, a U.S. shareholder reduces the amount of cash dividends that would otherwise be taken into account under section 965(a) by the excess (if any) of its last measurement date RPI (as determined under section 7.05(b)) over its initial measurement date RPI (as determined under sections 7.05(a) and 7.05(c)). If two or more U.S. shareholders may otherwise be considered to have an amount that is considered under

distribution. As a result, USP and C remain members of a single section 52(a) group after the distribution.

(ii) Result . December 31, 2005, is the apportionment date for the section 52(a) group that consists of the USP group, US1, and C, and the $500 million limitation is allocated between the USP group, US1, and C on that date. C’s allocation applies to its second election year, the short taxable year ending December 31, 2005. During the time that C is a member of the USP group, it is not separately allocated any of the $500 million limitation of the section 52(a) group.

Example 7 . Interaction of APB 23 limitation and $500 million limitation . (i) Facts . The facts are the same as in Example 1, except that US1 has an APB 23 limitation of $300 million, and USB has an APB 23 limitation of $400 million. (ii) Result . The result is the same as in Example 1 with respect to the $500 million limitation. The maximum repatriations allowed under section 965 for US1 in its election year ending September 30, 2005, is the greater of its allocated portion of the $500 million limitation or its APB 23 limitation. US1’s APB 23 limitation of $300 million exceeds its portion of the $500 million, which is $0. Thus, US1’s maximum amount under section 965(b)(1) is $300 million. As in Example 1, the USB group’s $500 million limitation is not adjusted as a result of USB’s acquisition of US1. However, the USB group’s APB 23 limitation is adjusted upward to reflect the $300 million APB 23 limitation attributable to US1. Because the maximum repatriations allowed under section 965 for the USB group is the greater of $500 million or APB 23 limitation, the USB group’s APB 23 limitation exceeds $500 million as a result of the acquisition. Thus, USB’s maximum amount under section 965(b)(1) is $700 million ($400 million + $300 million).