SECTION 3. REGULATIONS — Internal Revenue Bulletin 2019-2

ISSUED ADDRESSING PREVIOUSLY TAXED EARNINGS AND PROFITS

.01 Annual Accounts and Groups of Previously Taxed Earnings and Profits

The Act created the need to account for new groups of PTEP because section 959(c)(2) PTEP may arise by reason of income inclusions under section 951(a)(1)(A), 245A(e)(2), 951A(f)(1), 959(e), 964(e)(4), or 965(a) or by reason of the application of section 965(b)(4)(A), and those different groups of PTEP may be subject to different rules under sections 960, 965(g), 245A(e)(3), and 986(c). Additionally, because section 959(c)(2) PTEP may be reclassified as section 959(c)(1) PTEP as a result of sections 956 and 959(a)(2), similar groups for section 959(c)(1) PTEP must be maintained in order to properly apply sections 960, 965(g), 245A(e)(3), and 986(c) when earnings are reclassified. Groups of section 959(c)(1) PTEP must also be maintained with respect to inclusions under section 951(a)(1)(B) and section 951(a)(1)(C) (before its repeal) (in such cases, not by reason of the application of section 959(a)(2) or section 959(a)(3) (before its repeal)).

The Treasury Department and the IRS expect that the forthcoming regulations will provide that an annual account (each an “annual PTEP account”) must be maintained and each annual PTEP account must be segregated into the 16 groups described below in each section 904 category (individually, a “PTEP group” and collectively, “PTEP groups”). For rules regarding the year and section 904 category to which an account corresponds, see proposed § 1.960–3(c)(1). These 16 groups include the ten groups identified in proposed § 1.960–3(c)(2), which is discussed in section 2 of this notice, and six additional groups.

E&P described in section 959(c)(1) (A) that were initially described in

section 959(c)(2) by reason of section 965(a) (“reclassified section 965(a) PTEP”); 2. E&P described in section 959(c)(1)(A) that were initially described in section 959(c)(2) by reason of section 965(b)(4)(A) (“reclassified section 965(b) PTEP”); 3. E&P described in section 959(c)(1) (A) by reason of section 951(a) (1)(B) and not by reason of section 959(a)(2) (“section 951(a)(1)(B) PTEP”); 4. E&P described in section 959(c)(1) (A) that were initially described in section 959(c)(2) by reason of section 951A(f)(2) (“reclassified section 951A PTEP”); 5. E&P described in section 959(c)(1) (A) that were initially described in section 959(c)(2) by reason of section 245A(e)(2) (“reclassified section 245A(e)(2) PTEP”); 6. E&P described in section 959(c)(1) (A) that were initially described in section 959(c)(2) by reason of section 959(e) (“reclassified section 959(e) PTEP”); 7. E&P described in section 959(c)(1) (A) that were initially described in section 959(c)(2) by reason of section 964(e)(4) (“reclassified section 964(e)(4) PTEP”); 8. E&P described in section 959(c)(1) (A) that were initially described in section 959(c)(2) by reason of section 951(a)(1)(A) (other than E&P that were initially described in (10) through (15) of this list) (“reclassified section 951(a)(1)(A) PTEP”); 9. E&P described in section 959(c)(1) (B), including by reason of section 959(a)(3) (before its repeal) (“section 956A PTEP”); 10. E&P described in section 959(c)(2) by reason of section 965(a) (“section 965(a) PTEP”); 11. E&P described in section 959(c)(2) by reason of section 965(b)(4)(A) (“section 965(b) PTEP”); 12. E&P described in section 959(c)(2) by reason of section 951A(f)(2) (“section 951A PTEP”); 13. E&P described in section 959(c)(2) by reason of section 245A(e)(2) (“section 245A(e)(2) PTEP”);

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E&P described in section 959(c)(2) by reason of section 959(e) (“section 959(e) PTEP”);
E&P described in section 959(c)(2) by reason of section 964(e)(4) (“section 964(e) PTEP”); and
E&P described in section 959(c)(2) by reason of section 951(a)(1)(A) not otherwise described in (10) through (15) of this list (“section 951(a)(1)(A) PTEP”). Accordingly, after the Act, section 959(c)(1) PTEP will be comprised of PTEP groups described in (1) through (9) of the preceding paragraph, and section 959(c)(2) PTEP will be comprised of PTEP groups described in (10) through (16) of the preceding paragraph. The forthcoming regulations will provide that once PTEP is assigned to a PTEP group within an annual PTEP account for the year of the income inclusion under section 951(a)(1) (including by reason of section 245A(e)(2), 951A(f)(1), 959(e), 964(e) (4), or 965(a)) or the year of application of section 965(b)(4)(A), the PTEP will be maintained in an annual PTEP account with a year that corresponds to the year of the account from which the PTEP originated if PTEP is distributed or reclassified in a subsequent taxable year. See also proposed §§ 1.960–3(c)(3) and 1.960– 3(c)(4) (providing similar rules for purposes of determining the amount of foreign income taxes deemed paid under section 960(b)).

As discussed in section 2 of this notice, proposed § 1.960–3(c) provides that, for purposes of determining the amount of foreign income taxes deemed paid under section 960(b), with respect to a CFC, a separate annual PTEP account is maintained in each relevant section 904 category and the PTEP in each such account is assigned to one or more of the PTEP groups. However, the Treasury Department and the IRS recognize that for purposes of applying the ordering rules described in section 3.02 of this notice, it may be necessary to aggregate amounts across section 904 categories. The Treasury Department and the IRS expect that the forthcoming regulations will provide that, to the extent a CFC has E&P in a PTEP group that is in more than one section 904 category, any distribution out of that PTEP group is made pro rata out of

the earnings and profits in each section 904 category. Additionally, the rules in proposed §§ 1.960–1 and 1.960–3 addressing the types of PTEP groups and their treatment for purposes of applying section 960(b) will be coordinated, as appropriate, with the forthcoming regulations when finalized.

It is expected that forthcoming regulations will provide that dollar basis must be tracked for each annual PTEP account, and, to the extent provided in the forthcoming regulations, separately for each PTEP group within an annual account. The forthcoming regulations will confirm that distributions from any PTEP group reduce the shareholder’s stock basis under section 961(b)(1) without regard to how that basis was originally created, including if the basis was created under section 961(a) due to an inclusion unrelated to the PTEP group being distributed.

It is expected that the forthcoming regulations will provide transition rules for annual PTEP accounts maintained before the applicability date of the regulations. Annual PTEP accounts established for taxable years before the applicability date of the forthcoming regulations will only need to be segregated between the section 951(a)(1)(B) PTEP group, the section 956A PTEP group, and the section 951(a)(1)(A) PTEP group, except for the taxable year to which section 965 applies. For the taxable year to which section 965 applies, annual PTEP accounts must also be segregated between the reclassified section 965(a) PTEP group, the reclassified section 965(b) PTEP group, the section 965(a) PTEP group, and the section 965(b) PTEP group (the “section 965 PTEP groups”). A shareholder that has maintained a multi-year pool instead of annual PTEP accounts for its section 951(a)(1)(B) PTEP, section 956A PTEP, or its section 951(a)(1)(A) PTEP will be permitted to treat the respective pool as a PTEP group in a single annual PTEP account with an average dollar basis, and that annual PTEP account will be considered the annual PTEP account for the last taxable year ending before the applicability date of the proposed regulations. Additionally, a shareholder that has maintained aggregate dollar basis pools to reflect the dollar basis of its total section 959(c)(1) PTEP or its total section

959(c)(2) PTEP (or both) for taxable years before the applicability date of the regulations will be permitted to assign an average dollar basis to the PTEP in each annual account (other than the section 965 PTEP groups), if it maintained annual accounts for section 959(c)(1) PTEP and section 959(c)(2) PTEP.

The forthcoming regulations described herein are intended to allow for the most flexibility in applying the limitations on the creditability of certain foreign income taxes, and the rules under section 986(c) regarding the recognition of foreign currency gain or loss, to the different types of PTEP. Implementing all of the operative provisions relating to PTEP following the Act with complete precision requires maintaining PTEP in 16 PTEP groups across the section 904 categories in annual accounts. The Treasury Department and the IRS recognize the complexity and both the administrative and compliance challenges associated with maintaining such a large number of PTEP groups and are weighing those considerations against the need for precision in applying the related foreign tax credit and foreign currency rules. Some of the proposed PTEP groups, such as reclassified 245A(e) PTEP, reclassified section 959(e) PTEP, reclassified section 964(e)(4) PTEP, section 956A PTEP, section 245A(e) PTEP, section 959(e) PTEP, and section 964(e)(4) PTEP are unlikely to arise on a routine basis. Additionally, because of the one-time nature of section 965, once all of the PTEP in the section 965 PTEP groups are distributed, those groups will be completely eliminated. See section 3.02 of this notice. Furthermore, the Treasury Department and the IRS are considering ways to simplify the rules associated with PTEP by consolidating PTEP groups or grouping accounts into multi-year accounts, or by other methods, and request comments in this regard.

.02 Ordering of Earnings and Profits upon Distribution and Reclassification

Section 959(c) provides that, for purposes of sections 959(a) and (b), section 316(a)(2) (relating to E&P of the taxable year) (“current E&P”) and then section 316(a)(1) (relating to E&P accumulated after February 28, 1913) (“accumulated E&P”) apply first to section 959(c)(1)

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PTEP, then to section 959(c)(2) PTEP, and finally to section 959(c)(3) E&P. The reference to section 316 in section 959 indicates that a distribution of PTEP is dependent upon the existence of E&P otherwise sufficient to support a dividend under section 316. The forthcoming regulations will clarify that a distribution will be a distribution of PTEP only to the extent it would have otherwise been a dividend under section 316. For example, if a foreign corporation has no current E&P or accumulated E&P at the end of a taxable year, a distribution from the corporation to a shareholder during the taxable year will be a return of basis or treated as gain from the sale or exchange of property under section 301(c)(2) or (3), respectively, regardless of whether the shareholder has one or more annual PTEP accounts with respect to its stock in the foreign corporation.

Under section 316, distributions are considered first as distributions from current E&P, to the extent thereof, and then as distributions from the most recently accumulated E&P, to the extent thereof. As noted above, PTEP will be maintained in annual PTEP accounts. To facilitate the rule in section 959(c), which incorporates the ordering rule of section 316, the forthcoming regulations will require a “last in, first out” approach to the sourcing of distributions from annual PTEP accounts, subject to the special priority rule for PTEP arising by reason of the application of section 965, as discussed in the following paragraph. Thus, in general, section 959(c)(1) PTEP in the most recent annual PTEP account will be distributed first (with an exception for section 965 PTEP), followed by the next most recent annual PTEP account, and so on, after which the same approach will apply to section 959(c)(2) PTEP. Within each annual PTEP account, the PTEP attributable to each group of PTEP earned in that year will be distributed in the order prescribed in the following paragraphs in this section 3.02. The forthcoming regulations will provide, under the grants of regulatory authority in sections 965(o) and 7805(a), that PTEP attributable to income inclusions under section 965(a) or by reason of section 965(b)(4)(A) receive priority when determining the group of PTEP from which a

distribution is made. This priority will be integrated into the general ordering rule of section 959(c) that sources PTEP first from section 959(c)(1) PTEP and then from section 959(c)(2) PTEP. Thus, starting with section 959(c)(1) PTEP, under the forthcoming regulations, as an exception to the last-in, first-out approach, distributions will be sourced first from the reclassified section 965(a) PTEP and then from the reclassified section 965(b) PTEP. Once those PTEP groups are exhausted, under the last-in, firstout approach, distributions will be sourced pro rata from the remaining section 959(c)(1) PTEP groups in each annual PTEP account, starting from the most recent annual account.

Once the PTEP groups relating to section 959(c)(1) PTEP are exhausted, distributions will be sourced from section 959(c)(2) PTEP. As described in the preceding paragraph, the forthcoming regulations will provide that, as an exception to the last-in, first-out approach, distributions will be sourced first from section 965(a) PTEP and then section 965(b) PTEP. Once those two PTEP groups are exhausted, under the last-in, first-out approach, distributions will be sourced pro rata from the remaining section 959(c)(2) PTEP groups in each annual PTEP account, starting from the most recent annual PTEP account. Finally, once all the PTEP groups have been exhausted, the remaining amount of any distributions will be sourced from section 959(c)(3) E&P, to the extent thereof.

The forthcoming regulations will also provide that reclassifications of PTEP pursuant to the application of section 959(a)(2) will be sourced first from section 965(a) PTEP, then section 965(b) PTEP, and then, under a last-in, first-out approach, pro rata from the remaining section 959(c)(2) PTEP groups in each annual PTEP account, starting from the most recent annual PTEP account.

These ordering rules are expected to simplify PTEP recordkeeping in the future because, once a foreign corporation distributes all of its section 965 PTEP, the foreign corporation and its U.S. shareholder(s) will have reduced the number of PTEP groups that need to be tracked. Absent the ordering rules described in the preceding paragraphs of this section 3.02, the last in, first out approach to PTEP

distributions would trap annual PTEP accounts with section 965 PTEP behind subsequent annual PTEP accounts, requiring the section 965 PTEP to be tracked indefinitely. The ordering rules to be provided in forthcoming regulations are illustrated by an example in section 3.04 of this notice.

.03 Adjustments Due to an Income Inclusion in Excess of Current Earnings and Profits

A U.S. shareholder’s income inclusion under section 951A is not subject to a limitation based on the E&P of its CFCs for the taxable year. Consequently, in a year in which the portion of a U.S. shareholder’s GILTI inclusion amount allocated to a CFC under section 951A(f)(2) and proposed § 1.951A–6(b)(2) exceeds the CFC’s current E&P, the PTEP resulting by reason of section 951A(f)(1) and proposed § 1.951A–6(b)(1) will exceed the CFC’s current E&P and, in some cases, may exceed the CFC’s accumulated E&P as well. Similarly, an income inclusion under section 951(a)(1)(A) by reason of section 965 is not subject to an E&P limitation. Further, while an inclusion under section 951(a)(1)(A) (other than by reason of section 965) with respect to a CFC is generally subject to an E&P limitation under section 952(c)(1)(A), a U.S. shareholder’s inclusion under section 951(a)(1)(A) with respect to the CFC can exceed its E&P if such CFC has a tested loss. See section 951A(c)(2)(B)(ii) and proposed § 1.951A–6(d) (increasing a CFC’s E&P by the amount of a tested loss solely for purposes of applying the E&P limitation of section 952(c)(1)(A)).

As noted in section 3.02 of this notice, the aggregate of the amounts of section 959(c)(1) PTEP, section 959(c)(2) PTEP, and section 959(c)(3) E&P of a foreign corporation must equal the amount of E&P of the foreign corporation. The forthcoming regulations under section 959 will provide that current E&P are first classified as section 959(c)(3) E&P and then section 959(c)(3) E&P are reclassified as section 959(c)(1) PTEP or section 959(c)(2) PTEP, as appropriate, in full, which may have the effect of creating or increasing a deficit in section 959(c)(3) E&P. For example, in a case in which the portion of a U.S. shareholder’s GILTI in

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the U.S. dollar as its functional currency. Both USP and FC use the calendar year as their taxable year. Before 2018, the PTEP of FC was maintained in annual accounts. As of December 31, 2018, FC’s $300x of E&P (before taking into account distributions made or inclusions under section 951(a)(1)(B) in 2018) applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows:

clusion amount allocated to a CFC under section 951A(f)(2) and proposed § 1.951A– 6(b)(2) exceeds the current E&P of the CFC, section 959(c)(3) E&P will first be increased by the CFC’s current E&P and then decreased by the entire amount of the portion of the GILTI inclusion amount allocated to the CFC, possibly below zero, and section 959(c)(2) PTEP will be increased by the same amount. For a similar rule in the case in which a U.S. shareholder’s inclusion under section 951(a) by reason of section 965(a) exceeds E&P, see proposed § 1.965– 2(d)(1).

Finally, in a case where a foreign corporation has a current-year deficit in E&P, that deficit will solely reduce the foreign corporation’s section 959(c)(3) E&P without affecting the amount of its section 959(c)(1) PTEP or section 959(c)(2) PTEP.

.04 Examples

The rules described in sections 3.02 and 3.03 of this notice are illustrated in the following examples:

Example 1 –(i) Facts . USP, a domestic corporation, wholly owns FC, a foreign corporation that has

Section 959(c)(1) Section 959(c)(2) Section 959(c)(3)

Reclassified Reclassified Section Section Section Section Section Section 965(a) Section 965(b) 951(a)(1)(B) 965(a) 965(b) 951A 951(a)(1)(A)

Year PTEP PTEP PTEP PTEP PTEP PTEP PTEP

2018 50x 30x 20x

Reclassified Section 965(a)

Reclassified Section 965(b)

Section 951(a)(1)(B) PTEP

Section

965(a) PTEP

Section

965(b) PTEP

Section

951A PTEP

Year

PTEP

In 2018, FC has an amount described in section 956(a) (“section 956(a) amount”) of $125x, without considering the application of section 959(a)(2). In 2019, FC earns $25x of current E&P, and the amount of USP’s income inclusion under section 951A(a) that is allocated to FC under section 951A(f)(2) and proposed § 1.951A–6(b)(2) is $20x. FC also makes a distribution of $195x in 2019. In 2020, FC earns no current E&P, but FC makes a distribution of $60x. For all years, the PTEP of FC in each PTEP group is described in a single section 904 category, and all section 959(c)(3) E&P of FC are described in a single section 904 category.

(ii) Analysis -(A) 2018 . As of December 31, 2018, before considering FC’s section 956(a) amount, FC has total section 959(c)(2) PTEP of $255x. Under section 959(a)(2) and (f)(1), because FC’s section 959(c)(2) PTEP exceeds its section 956(a) amount, USP does not include any amount in income under section 951(a)(1)(B). However, under section 959(c)(1)(A), $125x of FC’s section 959(c)(2) PTEP must be reclassified as section 959(c)(1) PTEP. Under the rules described in section 3.02 of this notice, the reclassification is sourced first from section 965(a) PTEP and then from section 965(b) PTEP. Under the rules in

section 3.01 of this notice, the reclassified PTEP remains in the 2017 annual PTEP account. Thus, in FC’s 2017 annual PTEP account, FC’s reclassified section 965(a) PTEP is increased by $100x and its section 965(a) PTEP is decreased by $100x. Additionally, FC’s reclassified section 965(b) PTEP is increased by $25x and its section 965(b) PTEP is decreased by $25x. Accordingly, as of December 31, 2018, FC’s E&P applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows:

Section 959(c)(1) Section 959(c)(2) Section 959(c)(3)

Reclassified Reclassified Section Section Section Section Section Section 965(a) Section 965(b) 951(a)(1)(B) 965(a) 965(b) 951A 951(a)(1)(A)

Year PTEP PTEP PTEP PTEP PTEP PTEP PTEP

2018 50x 30x 20x

Reclassified Section 965(a)

Reclassified Section 965(b)

Section 951(a)(1)(B) PTEP

Section

965(a) PTEP

Section

965(b) PTEP

Section

951A PTEP

Year

PTEP

(B) 2019 –( 1 ) Current year adjustments . During 2019, FC earns $25x of current E&P, and the amount of USP’s income inclusion under section 951A(a) that is allocated to FC under section 951A(f)(2) and proposed § 1.951A–6(b)(2) is $20x. Thus, before taking into account USP’s income inclusions with

respect to FC and any distributions by FC, FC’s section 959(c)(3) E&P is initially increased by $25x. As a result of USP’s income inclusion under section 951A, FC’s section 951A PTEP increases by $20x and FC’s section 959(c)(3) E&P is decreased by $20x. Accordingly, as of December 31, 2019, FC’s

E&P (before taking into account distributions made in 2019) applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows:

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Section 959(c)(1) Section 959(c)(2) Section 959(c)(3)

Reclassified Reclassified Section Section Section Section Section 965(a) Section 965(b) 951(a)(1)(B) 965(a) 965(b) Section 951(a)(1)(A)

Year PTEP PTEP PTEP PTEP PTEP 951A PTEP PTEP

2019 20x 25x

2018 50x 30x

Reclassified Section 965(a)

Reclassified Section 965(b)

Section 951(a)(1)(B) PTEP

Section

965(a) PTEP

Section

965(b) PTEP

Section 951A PTEP

Year

PTEP

( 2 ) Distribution . FC’s distribution of $195x is from PTEP because the entire distribution would be a dividend under section 316(a) without regard to section 959 (that is, for purposes of section 316, at the end of 2019, FC has $325x of E&P (without regard to the distribution), $25x of which is current E&P). Under section 959(c), the distribution is first treated as attributable to section 959(c)(1) PTEP.

( i ) Section 959(c)(1) PTEP . Under the rules described in section 3.02 of this notice, the distribution is first sourced from reclassified section 965(a) PTEP and then from reclassified section 965(b) PTEP, and then pro rata from the remaining PTEP groups that contain section 959(c)(1) PTEP under a last-in, first

out (“LIFO”) approach. Thus, in FC’s 2017 annual PTEP account, FC’s reclassified section 965(a) PTEP is decreased by $100x and its reclassified section 965(b) PTEP is decreased by $25x. In FC’s 2016 annual PTEP account, FC’s section 951(a)(1)(B) PTEP is reduced by $25x. Thus, of the distribution of $195x, $150x is treated as attributable to section 959(c)(1) PTEP ($100x � $25x � $25x).

( ii ) Section 959(c)(2) PTEP . After the section 959(c)(1) PTEP is exhausted, the remaining portion of the distribution ($45x) is treated as attributable to section 959(c)(2) PTEP, to the extent thereof. Under the rules described in section 3.02 of this notice, distributions are first sourced from section 965(a)

PTEP and then from section 965(b) PTEP, and then pro rata from the remaining PTEP groups that contain section 959(c)(2) PTEP under a LIFO approach. Thus, in FC’s 2017 annual PTEP account, FC’s section 965(b) PTEP is decreased by $25x. In FC’s 2019 annual PTEP account, FC’s section 951A PTEP is decreased by $20x. Because the entire distribution has been accounted for, the remaining PTEP groups that contain section 959(c)(2) PTEP and FC’s section 959(c)(3) E&P are not affected. Accordingly, as of December 31, 2019, FC’s E&P applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows:

Reclassified

Section 959(c)(1) Section 959(c)(2) Section 959(c)(3)

Reclassified

Section Section Section Section Section Section

965(a) 965(b) 951(a)(1)(B) 965(a) 965(b) Section 951(a)(1)(A)

Year PTEP PTEP PTEP PTEP PTEP 951A PTEP PTEP

2019 25x

2018 50x 30x

2017

Total 105x 25x

Section

Section 951(a)(1)(B) PTEP

Section

965(a) PTEP

Section

965(b) PTEP

Section

965(b) PTEP

Section 951A PTEP

Year

965(a) PTEP

(C) 2020 . FC’s distribution of $60x is from PTEP because the entire distribution would be a dividend under section 316(a) without regard to section 959 (that is, for purposes of section 316, at the end of 2020, FC has $130x of E&P (without regard to the distribution), all which is accumulated E&P). Under section 959(c), the distribution is first treated as attributable to section 959(c)(1) PTEP; however,

FC has no section 959(c)(1) PTEP. Additionally, FC has no section 965(a) PTEP or section 965(b) PTEP. Under the rules described in section 3.02 of this notice, the distribution is sourced pro rata from the remaining PTEP groups that contain section 959(c)(2) PTEP under a LIFO approach. Thus, in FC’s 2018 annual PTEP account, FC’s section 951A PTEP is decreased by $37.5x ($60x x $50x/$80x)

and its section 951(a)(1)(A) PTEP is decreased by $22.5x ($60x x $30x/$80x). Because the entire distribution has been accounted for, the remaining PTEP groups that contain section 959(c)(2) PTEP and FC’s section 959(c)(3) E&P are not affected. Accordingly, as of December 31, 2020, FC’s E&P applicable to USP’s interest in FC are classified under section 3.01 of this notice as follows:

Section 959(c)(1) Section 959(c)(2) Section 959(c)(3)

Reclassified

Section Reclassified Section Section Section Section

965(a) Section 965(b) 951(a)(1)(B) 965(a) 965(b) Section 951(a)(1)(A)

Year PTEP PTEP PTEP PTEP PTEP 951A PTEP PTEP

2019 25x

2018 12.5x 7.5x

Section

Reclassified Section 965(b)

Section 951(a)(1)(B) PTEP

Section

965(a) PTEP

Section

965(b) PTEP

Section 951A PTEP

PTEP

Year

965(a) PTEP

Example 2 . (i) Facts . USP, a domestic corporation, wholly owns FC, a foreign corporation that has the U.S. dollar as its functional currency. Both USP

and FC use the calendar year as their taxable year. At the beginning of Year 1, FC has accumulated E&P of $50x, all of which is section 959(c)(3) E&P. In Year

1, FC has $25x of current E&P and FC makes no distributions. Furthermore, in Year 1, USP’s income inclusion under section 951A(a) that is allocated to

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FC under section 951A(f)(2) and proposed § 1.951A–6(b)(2) is $100x.

(ii) Analysis . Before taking into account USP’s income inclusions with respect to FC in Year 1, FC’s current E&P for Year 1 increase FC’s section 959(c)(3) E&P by $25x to $75x ($50x - $25x). The $100x of USP’s income inclusion under section 951A(a) allocated to FC results in an increase of $100x to FC’s section 951A PTEP (resulting in a balance of $100x) and a reduction of $100x to FC’s section 959(c)(3) E&P resulting in a deficit of $25x ($75x - $100x). The sum of the amounts of FC’s section 959(c)(1) PTEP ($0x), section 959(c)(2) PTEP ($100x), and section 959(c)(3) E&P (deficit of $25x) equals the amount of FC’s E&P ($75x).