SECTION 4. MODIFICATION TO

RULE DESCRIBED IN SECTION 3.03 OF NOTICE 2018–07 RELATING TO DISTRIBUTIONS OF PREVIOUSLY TAXED INCOME

Section 3.03 of Notice 2018–07 announced that the Treasury Department and the IRS intend to issue regulations providing that if a United States shareholder receives distributions from a DFIC during the inclusion year that are attributable to previously taxed income described in section 959(c)(2) by reason of section 965(a), the amount of gain recognized by the United States shareholder with respect to the stock of the DFIC under section 961(b)(2) will be reduced (but not below zero) by the section 965(a) inclusion amount (the “gain-reduction rule”). Notice 2018–07 does not expressly apply the gain-reduction rule to distributions to a United States shareholder from an entity (an “upper-tier entity”) that is not a DFIC (for instance, an E&P deficit foreign corporation) that has received distributions from a DFIC (a “lower-tier DFIC”) attributable to previously taxed income described in section 959(c)(2) by reason of section 965(a). Moreover, Notice 2018–07 could be interpreted to provide that even when the upper-tier entity is a DFIC, the amount of gain recognized by

the United States shareholder that is reduced by reason of the gain-reduction rule is limited solely to the section 965(a) inclusion amount of the United States shareholder with respect to the upper-tier entity, rather than also including the section 965(a) inclusion amount with respect to the lower-tier DFIC from which such upper-tier entity has received distributions attributable to previously taxed income described in section 959(c)(2) by reason of section 965(a). The Treasury Department and the IRS intend to issue regulations that provide that the gain-reduction rule also applies to distributions received from a DFIC through a chain of ownership described in section 958(a). Specifically, regulations will provide that if a United States shareholder receives distributions through a chain of ownership described under section 958(a) from a DFIC during the inclusion year that are attributable to previously taxed income described in section 959(c)(2) by reason of section 965(a), the amount of gain recognized under section 961(b)(2) by the United States shareholder with respect to the stock or property of any entity in the ownership chain described in section 958(a) through which the distribution is made will be reduced (but not below zero) by the section 965(a) inclusion amount of the United States shareholder with respect to such DFIC. The gain-reduction rule will apply similarly to reduce the amount of gain that would otherwise be recognized under section 961(c) by any controlled foreign corporation in the ownership chain described in section 958(a) through which the distribution is made to a United States shareholder for purposes of determining the amount included under section 951(a)(1) in the gross income of the United States shareholder.

Example . (i) Facts . USP, a domestic corporation, owns all of the stock of CFC1, a specified foreign corporation that has no post-1986 earnings and profits (or deficit), and CFC1 owns all the stock of CFC2, a DFIC. USP is a calendar year taxpayer. CFC1 and CFC2 have inclusion years that end on November 30, 2018. The functional currency of CFC1 and CFC2 is the U.S. dollar. USP’s adjusted basis in the stock of CFC1 is zero, and CFC1’s adjusted basis in the stock of CFC2 is zero. On January 1, 2018, CFC2 distributes $100 to CFC1, and CFC1 distributes $100 to USP. USP has a section 965(a) inclusion amount of $100 with respect to

CFC2. CFC2 has no other earnings and profits described in section 959(c)(1) or (2), other than earnings and profits described in section 959(c)(2) by reason of section 965(a).

(ii) Analysis . USP receives a distribution from CFC2, a lower-tier DFIC, through a chain of ownership described in section 958(a) during the inclusion year of CFC2 that is attributable to $100 of previously taxed income described in section 959(c)(2) by reason of section 965(a). The amount of gain that USP would otherwise recognize with respect to the stock of CFC1 under section 961(b)(2) and the amount of gain that CFC1 would otherwise recognize with respect to the stock of CFC2 under section 961(c) for purposes of determining CFC1’s subpart F income is reduced (but not below zero) in each case by $100, USP’s section 965(a) inclusion amount with respect to CFC2.