SECTION 3. REGULATIONS TO BE

ISSUED ADDRESSING THE APPLICATION OF SECTION 965

.01 Application of Section 318(a)(3)(A) to Treat a Foreign Corporation as a Specified Foreign Corporation

As a result of the application of the constructive ownership rule in section 318(a)(3)(A) (providing for downward at

tribution of stock from a partner to a partnership), it may be difficult to determine if a foreign corporation is a specified foreign corporation under certain circumstances. Assume, for example, that a person, A, owns 100 percent of the stock of a domestic corporation, DC, and 1 percent of the interests in a partnership, PS. Assume further that a United States citizen, USI, owns 10 percent of the interests in PS and 10 percent by vote and value of the stock of a foreign corporation, FC. The remaining 90 percent by vote and value of the stock of FC is owned by non-U.S. persons that are unrelated to A, USI, DC, and PS. Absent the application of sections 958(b), 318(a)(3)(A), and 318(a)(3)(C), FC would not be a specified foreign corporation, because FC is not a CFC and there would be no domestic corporation that is a United States shareholder of FC.

Under sections 958(b) and 318(a) (3)(A), PS would be treated as owning 100 percent of the stock of DC and 10 percent of the stock of FC. As a result, under sections 958(b), 318(a)(5)(A), and 318(a)(3)(C), DC would be treated as owning the stock of FC treated as owned by PS, and thus DC would be a United States shareholder with respect to FC, causing FC to be a specified foreign corporation within the meaning of section 965(e)(1)(B). USI is a United States shareholder with respect to FC and thus, absent an exception, would be required to include amounts in gross income under section 951(a)(1) by reason of section 965 with respect to FC. The results are the same whether A or PS or both are domestic or foreign persons.

The Treasury Department and the IRS have determined that it would pose compliance difficulties for taxpayers and administrative difficulties for the IRS to require a United States person to determine whether a foreign corporation with respect to which it is a United States shareholder is a specified foreign corporation if such foreign corporation may be a specified foreign corporation solely by reason of downward attribution under section 318(a)(3)(A) of stock from a partner to a partnership when such partner has only a de minimis interest in such partnership. Accordingly, the Treasury Department and the IRS intend to issue regulations, pursuant to the grant of authority under section 965(o), providing

that, solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of section 965(e)(1)(B), stock owned, directly or indirectly, by or for a partner (tested partner) will not be considered as being owned by a partnership under sections 958(b) and 318(a)(3)(A) if such partner owns less than five percent of the interests in the partnership’s capital and profits. For purposes of the preceding sentence, an interest in the partnership owned by another partner will be considered as being owned by the tested partner under the principles of sections 958(b) and 318, as modified by this notice, as if the interest in the partnership were stock.

Thus, for example, assume the same facts as in the example above, except that A is a corporation wholly owned by B, and B directly owns 4 percent of the interests in PS. For purposes of the rule in this section 3.01, applying the principles of sections 958(b) and 318, as modified by this notice, as if the interest in PS were stock, A is treated as owning the interests in PS owned by B (in addition to the 1 percent interest in PS that A owns directly), and thus A is not treated as owning less than five percent of the interests in PS’s capital and profits. Accordingly, the rule in this section 3.01 does not apply, and PS is treated as owning A’s stock in DC for purposes of determining whether FC is a specified foreign corporation within the meaning of section 965(e)(1)(B).

.02 Determination of Cash Measurement Dates of a Specified Foreign Corporation with Respect to a United States Shareholder

In certain cases, a specified foreign corporation may not be owned by a particular United States shareholder on all of the cash measurement dates, whether because the specified foreign corporation goes out of existence before the final cash measurement date or because its stock is acquired or disposed of between cash measurement dates. The Treasury Department and the IRS understand that section 965(c)(3)(A)(i) could be interpreted to treat the close of the final taxable year of a specified foreign corporation that ceased to exist before November 2, 2017, as the final cash measurement date of such specified foreign corporation. Additionally, if

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a United States shareholder acquires or disposes of stock of a specified foreign corporation between cash measurement dates of the specified foreign corporation, questions have been raised as to whether the United States shareholder’s pro rata share of the cash position of such specified foreign corporation as of an earlier or subsequent cash measurement date should be taken into account for purposes of determining the United States shareholder’s aggregate foreign cash position.

The Treasury Department and the IRS intend to issue regulations providing that (i) the final cash measurement date of a specified foreign corporation is the close of the last taxable year of the specified foreign corporation that begins before January 1, 2018, and ends on or after November 2, 2017, if any; (ii) the second cash measurement date of a specified foreign corporation is the close of the last taxable year of the specified foreign corporation that ends after November 1,

2016, and before November 2, 2017, if any; (iii) the first cash measurement date of a specified foreign corporation is the close of the last taxable year of the specified foreign corporation that ends after November 1, 2015, and before November 2, 2016, if any; and (iv) a United States shareholder takes into account its pro rata share of the cash position of a specified foreign corporation as of any cash measurement date of the specified foreign corporation on which such United States shareholder is a United States shareholder of such specified foreign corporation, regardless of whether such United States shareholder is a United States shareholder of such specified foreign corporation as of any other cash measurement date, including the final cash measurement date of such specified foreign corporation. For purposes of applying this paragraph, a 5253-week taxable year is deemed to begin on the first day of the calendar month nearest to the first day of the 52-53-week

taxable year, and is deemed to end or close on the last day of the calendar month nearest to the last day of the 52-53-week taxable year, as the case may be. See § 1.441–2(c).

Example . (i) Facts . Except as otherwise provided, for all relevant periods, USP, a domestic corporation, has owned directly at least 10 percent of the stock of CFC1, CFC2, CFC3, and CFC4, each a foreign corporation. CFC1 and CFC2 have calendar year U.S. taxable years. CFC3 and CFC4 have U.S. taxable years that end on November 30. No entity has a short taxable year, except as a result of the transactions described below.

(a) USP transferred all of its stock of CFC2 to an unrelated person on June 30, 2016, at which point USP ceased to be a United States shareholder with respect to CFC2.

(b) CFC4 dissolved on December 30, 2010, and, as a result, its final taxable year ended on December 30, 2010. (ii) Analysis . Each of CFC1, CFC2, CFC3, and CFC4 is a specified foreign corporation. Taking into account the regulations described in this section 3.02, the cash measurement dates of the specified foreign corporations to be taken into account by USP in determining its aggregate foreign cash position are summarized in the following table:

Cash Measurement Dates

Final Second First

CFC1 December 31, 2017 December 31, 2016 December 31, 2015

CFC2 N/A N/A December 31, 2015

CFC3 November 30, 2018 November 30, 2016 November 30, 2015

CFC4 N/A N/A N/A

accrue between measurement dates. Accordingly, the Treasury Department and the IRS intend to issue regulations providing that, for purposes of determining a specified foreign corporation’s post-1986 earnings and profits as of the measurement date on November 2, 2017, any foreign income tax (as defined in section 901(m)(5)) that accrues (i) within the specified foreign corporation’s U.S. taxable year that includes November 2, 2017, and (ii) after November 2, 2017, but on or before December 31, 2017, will be allocated between the respective portions of the foreign tax base on which the accrued foreign taxes are determined that are attributable to the part of the U.S. taxable year ending on November 2, 2017, and the part of the U.S. taxable year beginning after November 2, 2017.

The Treasury Department and the IRS have determined that it is appropriate to limit the scope of the regulations to for

.03 Treatment of Certain Accrued Foreign Income Taxes for Purposes of Determining Post-1986 Earnings and Profits

Post-1986 earnings and profits are defined, in relevant part, as the earnings and profits of a specified foreign corporation determined as of each of the two measurement dates described in section 965(a) and “computed in accordance with sections 964(a) and 986.” Section 965(d)(3). In general, section 964(a) provides that, under regulations prescribed by the Secretary, the earnings and profits of any foreign corporation, and the deficit in earnings and profits of any foreign corporation, for any taxable year shall be determined according to rules substantially similar to those applicable to domestic corporations. As described in section 3.02 of Notice 2018–13, for purposes of measuring the post-1986 earnings and profits of a specified foreign

corporation as of a measurement date, the extent to which an item of income, deduction, gain, or loss is taken into account as of such measurement date must be determined under principles generally applicable to the calculation of the earnings and profits of a domestic corporation. Section 3.02(a) of Notice 2018–13 provided a limited exception to this general rule in order to reduce taxpayer compliance burdens. Section 3.02(a) of Notice 2018–07 also announced the intention to issue regulations that may provide exceptions to this general rule in limited cases that are contemplated by section 965 or the legislative history to the Act, such as to address double counting or double noncounting.

The Treasury Department and the IRS have determined that an additional limited exception to the general rule is appropriate for certain foreign income taxes that

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tice, a person is treated as related to a United States shareholder if (i) the person bears a relationship to the United States shareholder described in section 267(b) or section 707(b) and (ii) the relationship described in clause (i) of this sentence is satisfied either immediately before or immediately after the transaction. Furthermore, for purposes of the rules described in section 3.04(a)(ii) and (iv) of this notice, the term “transfer” includes any disposition, exchange, contribution, distribution, issuance, redemption, recapitalization, or loan, and includes an indirect transfer (for example, a transfer of an interest in a partnership is a transfer of the assets of such partnership).

No inference is intended as to the treatment, under general tax law, of transactions that occurred before the specified date. The IRS may, where appropriate, challenge such transactions under the Code, regulations, or judicial doctrines such as the step transaction doctrine or the economic substance doctrine.

(ii) Application of the Anti-Avoidance Rule to Cash Reduction Transactions

For purposes of applying the antiavoidance rule, a cash reduction transaction is presumed to be undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder. For this purpose, the term “cash reduction transaction” means (i) a transfer of cash, accounts receivable, or cash equivalent assets by a specified foreign corporation to a United States shareholder of such specified foreign corporation or a person related to a United States shareholder of such specified foreign corporation, or (ii) an assumption by a specified foreign corporation of an accounts payable of a United States shareholder of such specified foreign corporation or a person related to a United States shareholder of such specified foreign corporation, if such transfer or assumption would, without regard to the anti-avoidance rule, reduce the aggregate foreign cash position of such United States shareholder. The presumption described in this paragraph does not apply to a cash reduction transaction that occurs in the ordinary course of business.

Notwithstanding the presumption described in the preceding paragraph, except

eign income taxes that accrue on or before December 31, 2017, in order to allow for the section 965(a) earnings amounts of each specified foreign corporation to be determined as of the final measurement date, December 31, 2017.

The regulations announced in this section 3.03 are relevant solely for purposes of determining a specified foreign corporation’s post-1986 earnings and profits (including a deficit) within the meaning of section 965(d)(3). Therefore, the regulations to be issued will not affect, for example, the computation of credits for taxes deemed paid under sections 902 and 960.

.04 Prevention of the Reduction of the Section 965 Tax Liability of a United States Shareholder

(a) Anti-Avoidance Rule

(i) Transactions Undertaken with a Principal Purpose of Reducing Section 965 Tax Liability

The Treasury Department and the IRS intend to issue regulations under sections 965(c)(3)(F) and 965(o) providing that a transaction will be disregarded for purposes of determining a United States shareholder’s section 965 tax liability if each of the following conditions is satisfied: (i) such transaction occurs, in whole or in part, on or after November 2, 2017 (the “specified date”); (ii) such transaction is undertaken with a principal purpose of reducing the section 965 tax liability of such United States shareholder; and (iii) such transaction would, without regard to this sentence, reduce the section 965 tax liability of such United States shareholder (the “anti-avoidance rule”).

For purposes of this section 3.04(a) and section 3.04(b) of this notice, a transaction (or change in method of accounting or election described in section 3.04(b) of this notice) reduces the section 965 tax liability of a United States shareholder if such transaction (i) reduces a section 965(a) inclusion amount of such United States shareholder with respect to any specified foreign corporation, (ii) reduces the aggregate foreign cash position of such United States shareholder, or (iii) increases the amount of foreign income taxes of any specified foreign corporation

deemed paid by such United States shareholder under section 960 as a result of an inclusion under section 951(a) by reason of section 965. Also for purposes of this section 3.04(a) and section 3.04(b) of this notice, in the case of a United States shareholder that is a domestic passthrough entity, a domestic pass-through owner of such domestic pass-through entity is also treated as a United States shareholder. For the definition of domestic pass-through entity and domestic passthrough owner, see section 3.05(b) of this notice.

Under section 3.04(a)(ii) through (iv) of this notice, certain transactions are presumed to be undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder for purposes of the anti-avoidance rule. The presumption described in the preceding sentence may be rebutted only if facts and circumstances clearly establish that the transaction was not undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder. The regulations will provide that a taxpayer that takes the position that the presumption is rebutted must attach a statement to its income tax 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 section 3.04(a)(ii) and (iii), if the presumption does not apply because such transaction occurs in the ordinary course of business, whether such transaction was undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder must be determined under all the facts and circumstances. Under section 3.04(a)(ii) through (iv) of this notice, certain transactions are also treated per se as being undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder. Further, under section 3.04(a)(ii), certain distributions are treated per se as not being undertaken with a principal purpose of reducing the section 965 tax liability of such United States shareholder and therefore are not subject to the anti-avoidance rule.

For purposes of the rules described in section 3.04(a)(ii) through (iv) of this no

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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 such specified foreign corporation will be treated per se as not being undertaken with a principal purpose of reducing the section 965 tax liability of such United States shareholder for purposes of the anti-avoidance rule. A specified distribution will be treated per se as being undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder for purposes of the anti-avoidance rule. For purposes of this section 3.04(a)(ii), the term “specified distribution” means a cash reduction transaction that is a distribution by a specified foreign corporation of a United States shareholder if (i) at the time of the distribution, there was a plan or intention for the distributee to transfer, directly or indirectly, cash, accounts receivable, or cash equivalent assets to any specified foreign corporation of such United States shareholder, or (ii) the distribution is a non pro rata distribution to a foreign person that is related to such United States shareholder. For purpose of clause (i) of the preceding sentence, an indirect transfer includes, for example, a transfer of cash to a partnership if a specified foreign corporation of such United States shareholder is a partner.

(iii) Application of the Anti-Avoidance Rule to E&P Reduction Transactions

For purposes of applying the antiavoidance rule, an E&P reduction transaction is presumed to be undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder. For this purpose, the term “E&P reduction transaction” means a transaction between a specified foreign corporation and any of (i) a United States shareholder of such specified foreign corporation, (ii) another specified foreign corporation of a United States shareholder of such specified foreign corporation, or (iii) any person related to a United States shareholder of such specified foreign corporation, if such transaction would, without regard to the anti-avoidance rule, reduce the accumulated post-1986 deferred foreign income or the post-1986 undistributed earn

ings (as defined in section 902(c)(1) as in effect before the date of the enactment of the Act) of such specified foreign corporation or another specified foreign corporation of any United States shareholder of such specified foreign corporation. The presumption described in this paragraph does not apply to an E&P reduction transaction that occurs in the ordinary course of business.

Notwithstanding the presumption described in the preceding paragraph, a specified transaction will be treated per se as being undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder for purposes of the anti-avoidance rule. For purposes of the preceding sentence, the term “specified transaction” means an E&P reduction transaction that involves one or more of the following: (i) a complete liquidation of a specified foreign corporation to which section 331 applies; (ii) a sale or other disposition of stock by a specified foreign corporation, or (iii) a distribution by a specified foreign corporation that reduces the earnings and profits of such specified foreign corporation pursuant to section 312(a)(3).

(iv) Application of the Anti-Avoidance Rule to Pro Rata Share Transactions

For purposes of applying the antiavoidance rule, a pro rata share transaction is presumed to be undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder. For this purpose, the term “pro rata share transaction” means a transfer of the stock of a specified foreign corporation to a United States shareholder of the specified foreign corporation or a person related to a United States shareholder of such specified foreign corporation if such transfer would, without regard to the antiavoidance rule, (i) reduce such United States shareholder’s pro rata share of the section 965(a) earnings amount of such specified foreign corporation if it is a DFIC; (ii) increase such United States shareholder’s pro rata share of the specified E&P deficit of such specified foreign corporation if it is an E&P deficit foreign corporation; or (iii) reduce such United States shareholder’s pro rata share of the

cash position of such specified foreign corporation.

Notwithstanding the presumption described in the preceding paragraph, an internal group transaction will be treated per se as being undertaken with a principal purpose of reducing the section 965 tax liability of a United States shareholder for purposes of the anti-avoidance rule. 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 1504(a), determined without regard to paragraphs (1) through (8) of section 1504(b), 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, (i) each partner in a partnership, as determined without regard to clause (ii) of 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 701 through 777, and (ii) 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.

Example . (i) 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 held the stock of FS for more than one year. 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 245A with respect to its deemed dividend under section 1248(j) as a result of the sale. FS has post-1986 earnings and profits as of December 31, 2017, and no previously taxed income or effectively connected income for any previous taxable year.

(ii) Analysis . The transfer of the stock of FS is a pro rata share transaction because such transfer is to a person related to USP, and the transfer would, without regard to the anti-avoidance rule, reduce USP’s pro rata share of FS’s section 965(a) earnings amount. Because USP and FP are also members of

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an affiliated group within the meaning of this section 3.04(a)(iv), 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 reducing the section 965 tax liability of USP. Accordingly, the transfer will be disregarded for purposes of determining USP’s section 965 tax liability with the result that, among other things, USP’s pro rata share of FS’s section 965(a) earnings amount is determined as if USP owned (within the meaning of section 958(a)) 100 percent 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 951(a)(2)(A) and (B).

(b) Disregard of Certain Changes in Method of Accounting and Entity Classification Elections

The Treasury Department and the IRS also intend to issue regulations, pursuant to the grant of authority under section 965(o), providing that any change in method of accounting made for a taxable year of a specified foreign corporation that ends in 2017 or 2018 will be disregarded for purposes of determining the section 965 tax liability of a United States shareholder if such change in method of accounting would otherwise reduce the section 965 tax liability of such United States shareholder. The rule described in this section 3.04(b) will apply whether or not such 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 whether or not such change in method of accounting was properly made. These regulations will 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, November 2, 2017.

The regulations will also provide that any entity classification election under § 301.7701–3 that is filed on or after the specified date will be disregarded for purposes of determining the section 965 tax liability of such United States shareholder if such entity classification election would otherwise reduce the section 965 tax liability of any United States shareholder. An entity classification election filed on or after the specified date will be subject to these regulations even if such entity classification election was effective on a date before the specified date.

The regulations described in this section 3.04(b) will apply regardless of whether such change in method of accounting or change of entity classification election is made with a principal purpose of reducing the section 965 tax liability of a United States shareholder.

.05 Rules Related to Elections, Reporting, and Payment

(a) Documentation of Cash Position

Section 965(c)(3)(D) provides that net accounts receivable, actively traded property, and short-term obligations shall not be taken into account by a United States shareholder in determining its aggregate foreign cash position to the extent that such United States shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into account by such United States shareholder with respect to another specified foreign corporation. The IRS intends to issue forms, publications, regulations, or other guidance that will specify the documentation that a United States shareholder must maintain or provide, and the time and manner for providing any such documentation, in order to make the required demonstration to the Secretary.

(b) United States Persons Eligible to Make Elections Under Section 965 in the Case of a United States Shareholder that is a Domestic Pass-Through Entity

Section 965 increases the amount included in the gross income of a United States shareholder under section 951(a)(1) only if such United States shareholder owns (within the meaning of section 958(a)) stock in one or more specified foreign corporations. See section 951(a)(2)(A). For purposes of this notice, the term “section 958(a) stock” means, with respect to a United States shareholder of a DFIC, the stock of the DFIC owned by the United States shareholder within the meaning of section 958(a).

The Treasury Department and IRS have determined that if a domestic passthrough entity is a United States shareholder of a DFIC and owns section 958(a) stock in such DFIC, the section 965(a) inclusion amount with respect to such section 958(a) stock and the section 965(c) deduction with respect to such amount

should be determined at the level of the domestic pass-through entity. However, the domestic pass-through owners of the domestic pass-through entity are subject to federal income tax on their share of the section 965(a) inclusion amount with respect to the section 958(a) stock of the domestic pass-through entity. Accordingly, in the case of a domestic passthrough entity that is a United States shareholder, the regulations will provide that each domestic pass-through owner takes into account its share of the section 965(a) inclusion amount with respect to section 958(a) stock of a DFIC of the domestic pass-through entity and the section 965(c) deduction with respect to such amount, regardless of whether such domestic pass-through owner is also a United States shareholder with respect to such DFIC. In this case, the section 965(a) inclusion amount and the related section 965(c) deduction must be allocated in the same proportion. For example, if a domestic pass-through owner is allocated 50 percent of the section 965(a) inclusion amount with respect to section 958(a) stock of a domestic pass-through entity, such domestic pass-through owner must be allocated 50 percent of the related section 965(c) deduction. If the domestic pass-through owner is also a United States shareholder with respect to such DFIC that owns section 958(a) stock of such DFIC, regulations will provide that the section 965(a) inclusion amount with respect to such section 958(a) stock of such domestic pass-through owner and the section 965(c) deduction with respect to such amount are determined separately from its share of the section 965(a) inclusion amount and section 965(c) deduction of the domestic pass-through entity.

For purposes of this notice, the term “domestic pass-through entity” means a pass-through entity that is a United States person (as defined in section 7701(a)(30)). Also for purposes of this notice, a “passthrough entity” means a partnership, S corporation, or any other person to the extent that the income or deductions of such person are included in the income of one or more direct or indirect owners or beneficiaries of the person. Accordingly, if, for example, a domestic trust is subject to federal income tax on a portion of its section 965(a) inclusion amount and its

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domestic pass-through owners are subject to tax on the remaining portion, the domestic trust is treated as a domestic passthrough entity with respect to such remaining portion. Also for purposes of this notice, the term “domestic pass-through owner” means a United States person that is a partner, shareholder, beneficiary, grantor, or owner, as the case may be, in a domestic pass-through entity, except that, in the case of tiered pass-through entities, the term does not include a partner, shareholder, beneficiary, or owner that is itself a domestic pass-through entity. In the case of tiered pass-through entities, a reference in this notice to a domestic pass-through owner includes a United States person that is an indirect partner, shareholder, beneficiary, or owner through one or more other pass-through entities, and a reference to a domestic pass-through owner’s share of the section 965(a) inclusion amount and section 965(c) deduction of a domestic pass-through entity includes such domestic pass-through owner’s share of the section 965(a) inclusion amount and section 965(c) deduction of a domestic passthrough entity owned indirectly by such domestic pass-through owner through one or more other pass-through entities.

The elections under section 965(h), (m), and (n) (“specified elections”) are described in section 965 as available to a United States shareholder of a DFIC. However, because a domestic passthrough owner includes in income a share of the section 965(a) inclusion amount with respect to section 958(a) stock of a DFIC of a domestic passthrough entity, the Treasury Department and the IRS intend to issue regulations, pursuant to the grant of regulatory authority under section 965(o), allowing such domestic pass-through owner to make a specified election that applies to its share of the section 965(a) inclusion amount with respect to section 958(a) stock of a DFIC of the domestic passthrough entity. Such a domestic passthrough owner will be permitted to make a specified election regardless of whether the domestic pass-through owner is itself a United States shareholder of the DFIC. If a domestic passthrough owner makes a specified election for its taxable year, such election will be applicable to all section 965(a)

inclusion amounts included in the gross income of such domestic pass-through owner for such taxable year (other than amounts with respect to which elections under section 965(i) are effective), whether included directly by reason of owning section 958(a) stock in a DFIC or indirectly by reason of being a domestic pass-through owner.

If an S corporation is, directly or indirectly, a partner, beneficiary, or owner of a domestic pass-through entity and takes into account a share of the section 965(a) inclusion amount of a domestic passthrough entity with respect to a DFIC, and the S corporation is a United States shareholder of the DFIC, the regulations will provide that shareholders of the S corporation will be permitted to make an election under section 965(i) to defer the shareholder’s net tax liability under section 965 with respect to the S corporation. However, in such a case, if the S corporation is not itself a United States shareholder of a DFIC, the net tax liability under section 965 of a shareholder with respect to the S corporation for purposes of the election under section 965(i) will not include the shareholder’s share of the domestic pass-through entity’s section 965(a) inclusion amount with respect to the DFIC or section 965(c) deduction with respect to such amount.

(c) Determination of Amount of Net Tax Liability Under Section 965 for Purposes of Section 965(h)

As discussed in section 3.05(b) of this notice, if a domestic pass-through entity is a United States shareholder that has a section 965(a) inclusion amount with respect to section 958(a) stock in a DFIC, a United States person that is a domestic pass-through owner, directly or indirectly, in such domestic pass-through entity is subject to net income tax on its share of the section 965(a) inclusion amount. Accordingly, the Treasury Department and the IRS intend to issue regulations providing that for purposes of determining the net tax liability under section 965 of a domestic pass-through owner, the domestic pass-through owner will be treated as a United States shareholder. See, however, section 5 of this notice, which provides that a domestic pass-through owner that is

not itself a United States shareholder is not permitted to make an election under section 962.

Furthermore, the regulations will provide that, in the case of a taxpayer that has made one or more elections under section 965(i) for a taxable year, the taxpayer’s net tax liability under section 965 for purposes of section 965(h) is the taxpayer’s net tax liability under section 965 as determined under section 965(h)(6) (taking into account the rules in this section 3.05(c)) reduced by the aggregate amount of the taxpayer’s net tax liabilities under section 965 as determined under section 965(i)(3) (taking into account the rule provided in section 3.05(b) of this notice) with respect to which elections under section 965(i) are effective.

(d) Application of Section 965(n) to Losses Arising in the Year in Which the Inclusion Year of a DFIC Ends

A United States shareholder of a DFIC may elect the application of section 965(n) for the taxable year of the United States shareholder in which, or with which, the inclusion year of the DFIC ends. If such an election is made, the United States shareholder does not take into account the amount described in section 965(n)(2) in determining the amount of the net operating loss deduction under section 172 of such shareholder for such taxable year or in determining the amount of taxable income for such taxable year which may be reduced by net operating loss carryovers or carrybacks to such taxable year under section 172.

Questions have arisen regarding the scope of the election under section 965(n) due to the use of the term “deduction” in section 965(n)(1)(A). A net operating loss “deduction” for a taxable year generally refers to the amount of a net operating loss carried to such taxable year from a prior or subsequent year rather than the net operating loss arising from such year. Compare section 172(a) and (c). However, interpreting “deduction” in section 965(n)(1)(A) to refer to carryovers or carrybacks (and not to the net operating loss for the taxable year) would cause that paragraph to be duplicative of section 965(n)(1)(B), which already provides that amounts described in section 965(n)(2) are disregarded for purposes of

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applying net operating loss carryovers or carrybacks to such taxable year under section 172. The Treasury Department and the IRS have determined that section 965(n)(1)(A) was intended to apply to a different set of losses than those to which section 965(n)(1)(B) applies. Therefore, the Treasury Department and the IRS intend to issue regulations providing that, if an election under section 965(n) is made with respect to a taxable year in which or with which the inclusion year of a DFIC ends, the amount of a net operating loss for such taxable year will be determined without taking into account as gross income the amount described in section 965(n)(2). The regulations will also clarify that an election made under section 965(n) will be treated as made with respect to both the amount of a net operating loss for such taxable year and the net operating loss carryovers or carrybacks for such taxable year.

(e) Filing and Payment Due Date for Specified Individuals

A specified individual (as defined in section 2.18 of this notice) who does not make the election under section 965(h)(1) or (i)(1) is considered to have timely filed such person’s return and paid the net tax liability under section 965 if the filing and payment are made on or before the fifteenth day of the sixth month following the close of the taxable year, and the specified individual attaches a statement to the return showing that the person for whom the return is made is a person described in § 1.6081–5(a). See § 1.6081–5(a)(5)–(6), and (b). For a specified individual who makes the election under section 965(h)(1), section 965(h)(2) provides that the installments must be paid on the due dates for the relevant returns (determined without regard to any extension of time for filing the return).

The question has arisen whether the disregarding of extensions of time to file in section 965(h)(2) applies to negate the extension of time to pay that is otherwise available under § 1.6081–5 for a specified individual that does not make the election under section 965(h)(1). The Treasury Department and the IRS intend to issue regulations providing that, if a specified individual receives an extension of time to file and pay under § 1.6081– 5(a)(5) or (6), then the individual’s due

date for an installment payment under section 965(h) is also the fifteenth day of the sixth month following the close of a taxable year.

.06 Treatment of Section 965(c) De- duction for Purposes of Sections 62(a) and 63(d)

Questions have arisen as to whether the section 965(c) deduction is a miscellaneous itemized deduction as defined in section 67(b). The Treasury Department and the IRS have determined that an individual’s section 965(c) deduction was not intended to be subject to the 2-percent floor under section 67 or the deduction disallowance under the AMT, or, in the case of a taxable year beginning after December 31, 2017, the deduction disallowance under section 67 as modified by the Act. Therefore, the Treasury Department and the IRS intend to issue regulations, pursuant to the grant of authority under section 965(o), providing that a section 965(c) deduction will not be treated as an itemized deduction, including for purposes of sections 56 and 67.