SECTION 5. REGULATIONS TO BE

ISSUED ADDRESSING ELECTIONS UNDER SECTION 962

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 domestic pass-through owner of such entity is subject to net income tax on its share of the section 965(a) inclusion amount. The Treasury Department and the IRS intend to issue regulations clarifying that a domestic pass-through owner who is an individual (including, as provided in § 1.962–2(a), a trust or estate) and a United States shareholder with respect to a DFIC may make an election under section 962 with respect to the individual’s share of the section 965(a) inclusion amount of a domestic passthrough entity with respect to such DFIC. However, an individual who is not a United States shareholder of a DFIC is not permitted to make an election under section 962 with respect to the individual’s share of a section 965(a) inclusion amount of a domestic pass-through entity with respect to such DFIC notwithstanding the rules in section 3.05(b) and (c) of this notice. See section 962(b). The regulations will clarify that the same principles apply to inclusions under section 951(a) other than by reason of section 965.

If an individual elects to have the provisions of section 962 apply for a taxable year, the tax imposed on amounts included in the individual’s gross income under section 951(a) (directly by reason of owning section 958(a) stock or indirectly by reason of being a domestic pass-through owner), including by reason of section 965, is an amount equal to the tax that would be imposed under section 11 if the amounts were received by a domestic corporation. In addition, § 1.962–1(b)(1)(i) provides that a deduction of a United States shareholder does not reduce the amount included in gross income under section 951(a) for purposes of computing the amount of tax that would be imposed under section 11.

The Treasury Department and the IRS have determined that in the case of a taxpayer making an election under section 962, Congress intended for the section 965(c) deduction (which is generally available to United States shareholders of

April 16, 2018 490 Bulletin No. 2018–16

DFICs, including individuals) to be allowed with respect to the tax imposed under section 11 rather than under section

1. See H.R. Rep. No. 115–466, at 620 (2017) (Conf. Rep.). Pursuant to the grant of authority under section 965(o), the Treasury Department and the IRS intend to modify § 1.962–1(b)(1)(i) to provide that, in computing the amount of tax due as a result of a section 962 election, the section 965(c) deduction may be taken into account. Specifically, the regulations will provide that “taxable income” as used in section 11 shall be reduced by the section 965(c) deduction. These regulations will not apply to any other deductions, and therefore existing § 1.962–1(b)(1)(i) will continue to provide that “taxable income” as used in section 11 shall not be reduced by any other deductions. Any section 965(c) deduction allowed in determining “taxable income” as used in section 11 for purposes of computing the tax due as a result of a section 962 election will not also be allowed for purposes of determining an individual’s actual taxable income.

Example . (i) Facts . USI, a United States citizen, owns 10% of the capital and profits of USPRS, a domestic partnership that has a calendar year taxable year, the remainder of which is owned by foreign persons unrelated to USI or USPRS. USPRS owns all of the stock of FS, a foreign corporation that is a CFC with a calendar year U.S. taxable year. USPRS has a section 965(a) inclusion amount with respect to FS of $1,000 and is allowed a section 965(c) deduction of $700. FS has no post-1986 foreign income taxes (as defined in section 902(c)(1) as in effect before the date of the enactment of the Act). USI makes a valid election under section 962 for 2017.

(ii) Analysis . USI’s “taxable income” described in § 1.962–1(b)(1)(i) equals $100 (USI’s distributive share of USPRS’s section 965(a) inclusion amount) minus $70 (USI’s distributive share of USPRS’s allowable section 965(c) deduction), or $30. No other deductions are allowed in determining this amount. USI’s tax on such amount will be equal to the tax imposed under section 11 as if $30 were received by a domestic corporation. USI cannot deduct $70 for purposes of determining USI’s taxable income that is subject to tax under section 1.