Announcement 2012-34 — Internal Revenue Bulletin 2025-5

334 (September 4, 2012). Thereafter, Rev. Proc. 2017-25, 2017-14 I.R.B. 1039 (April 3, 2017), formally established the SB/SE FTS program.

The PAM program allows a taxpayer and Appeals to resolve disputes through mediation while a taxpayer’s case is still under consideration by Appeals. Both the taxpayer and Appeals must agree to mediation, which is not binding. The PAM procedures are described in Rev. Proc. 201463, 2014-53 I.R.B. 1014 (December 29, 2014). See also section 7123(b)(1) of the Internal Revenue Code (Code). Both FTS and PAM operate in accordance with these authorities as well as applicable portions of the Internal Revenue Manual (IRM).

FTS AND PAM PILOT PROGRAM CHANGES

The changes being piloted under FTS and PAM incorporate and rely upon all existing FTS and PAM guidance except for that which is the subject of specific pilot revisions. All existing procedures for commencing and conducting FTS and PAM not specifically modified by this announcement remain in place and continue in operation.

Under the pilot program, FTS can be applied to one or more issues in a case. Previously, if a taxpayer had one issue that was ineligible for FTS, the entire case was ineligible. In addition, participation in FTS will not disqualify a taxpayer from PAM. Requests to participate in FTS and PAM will not be denied without the approval of a first-line executive. These first line executives include but are not limited to:

For Appeals: Director Examination Appeals, Director Collection Appeals, Director Specialized Examination Program & Referrals.
For LB&I: Director, Field Operations.
For SB/SE: Area Director, Field Examination; Director, Specialty Tax.
For TE/GE: Director Exempt Organizations (EO) Examinations; Director EO Rulings & Agreements; Director Government Entities; Director Employee Plans (EP) Examinations; Director EP Rulings & Agreements.

When requests for FTS or PAM are formally denied, taxpayers will receive an explanation for the denial. Finally, the pilot program removes the pre-FTS managerial conference requirements for SB/SE and TE/GE taxpayers. See IRM 8.26.2.5(1) (06-23-2017); IRM 8.26.7.2.1(1) (03-282014). These changes are intended to extend the provisions of the current FTS and PAM programs to a wider range of cases and to increase usage and oversight of ADR within the IRS. These piloted changes will be evaluated after a twoyear test period to determine the degree to which they should be discontinued, adjusted, or made permanent. Among other factors, this evaluation will be based on usage data, experiences of IRS personnel, and taxpayer satisfaction. The FTS pilot will be available to any taxpayer under the jurisdiction of Exam. The PAM pilot will likewise be available to taxpayers nationwide who have non-docketed cases before Appeals.

LAST CHANCE FTS PILOT PROGRAM

The IRS will also undertake a limited-scope Last Chance FTS pilot program. Under this program, when a taxpayer submits a protest in response to a 30-day or equivalent letter issued at the conclusion of an examination under SB/SE’s jurisdiction, the SB/SE Group Manager overseeing the case will ask Appeals to contact the taxpayer to inform the taxpayer of the FTS option. The designated Appeals point-of-contact will act as a neutral resource independent of the SB/SE examination staff proposing the adjustment or enforcement action and will provide the taxpayer with information regarding FTS. If the taxpayer requests FTS and the SB/ SE examination team consents to participate, the rules of traditional FTS, as modified by the FTS pilot described in this announcement, will apply. If the taxpayer chooses not to request FTS, the case will be transferred by SB/SE to Appeals using currently existing procedures.

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(202) 317-3576; concerning the portions of the proposed regulations relating to section 1502, Jeremy Aron-Dine at (202) 3176847; concerning the portions of the proposed regulations relating to partnerships, Jennifer N. Keeney at (202) 317-6850; and concerning submissions of comments and requests for a public hearing, contact the Publications and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by email at publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed additions and amendments to 26 CFR part 1 (proposed regulations) under sections 959 and 961 and certain other provisions of the Internal Revenue Code (Code) regarding previously taxed earnings and profits (PTEP). As discussed in the Explanation of Provisions, the primary provisions of the proposed regulations are issued pursuant to the express delegations of authority under sections 245A(g), 743(b), 904(d) (7), 951A(f)(1)(B), 960(f), 961(a) through (c), 965(o), 986(c)(2), 989(c), and 1502. The proposed regulations are also issued pursuant to the express delegation of authority under section 7805(a).

Background

I. Scope

The Background describes PTEP, including provisions giving rise to PTEP and provisions regarding the treatment of PTEP, and related guidance and issues under existing law. Any term used but not defined in this preamble has the meaning given to it in the proposed regulations.

II. PTEP

A. Overview

Sections 959 and 961 are intended to operate in tandem to prevent double taxation of PTEP, which is earnings and profits (E&P) of a foreign corporation described in section 959(c)(1) or (c)(2). Section

The Last Chance FTS pilot program, which is intended to further publicize availability of FTS, will initially be limited to select cases under examination by SB/SE revenue agents and tax compliance officers. The Last Chance FTS pilot program will not impact a taxpayer’s eligibility for FTS. Instead, the IRS’s objective is to determine whether participation in FTS increases when taxpayers are reminded of their FTS options immediately prior to the case entering Appeals’ jurisdiction.

EFFECTIVE DATE AND EXPIRATION

The FTS and PAM pilot program changes described in this announcement are effective for all requests for FTS made on or after January 15, 2025 and expire on January 15, 2027. The Last Chance FTS pilot program is effective beginning on January 15, 2025 and expires on January 15, 2027.

COMMENTS

The IRS encourages taxpayers to submit written comments on the changes being piloted, including suggested improvements to make FTS and PAM more useful and effective. Comments may be submitted electronically via the Federal eRulemaking Portal at https://www. regulations.gov (type “IRS Announcement 2025-6” in the search field on the Regulations.gov home page to find this notice and submit comments). Alternatively, comments may be submitted by mail to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Announcement 2025-6), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may be submitted at any point during the pilot period.

DRAFTING INFORMATION

The principal author of this announcement is Robin Ferguson of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this announcement, contact Robin Ferguson at (202) 317-5217 (not a toll-free number).

Notice of Proposed Rulemaking

Previously Taxed Earnings and Profits and Related Basis Adjustments

REG-105479-18

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations regarding previously taxed earnings and profits of foreign corporations and related basis adjustments. The proposed regulations affect foreign corporations with previously taxed earnings and profits and their shareholders.

DATES: Written or electronic comments and requests for a public hearing must be received by March 3, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-105479-18) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “ Comments and Requests for a Public Hearing ” section.

Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket. Send paper submissions to: CC:PA:01:PR (REG-10547918), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations generally, Elena M. Madaj at

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959 designates amounts of E&P as PTEP based on amounts included, or treated as included, in gross income with respect to the foreign corporation under section 951(a). The remainder of this part II of the Background summarizes provisions giving rise to PTEP, provisions regarding the treatment of PTEP, and existing regulations under sections 959 and 961.

B. Provisions giving rise to PTEP

Section 951(a)

Section 951(a)(1)(A) requires a United States shareholder (as defined in section 951(b) or, if applicable, section 953(c)(1) (A)) of a foreign corporation to include in gross income its pro rata share of the corporation’s subpart F income (as defined in section 952) for a taxable year of the corporation (subpart F income inclusion), if the corporation is a controlled foreign corporation (CFC) (as defined in section 957(a) or, if applicable, section 957(b) or 953(c)(1)(B)) at any time during the taxable year and the shareholder owns (within the meaning of section 958(a)) stock of the corporation on the last day of the taxable year on which the corporation is a CFC (last relevant day). Pursuant to section 951(a)(1)(B), the United States shareholder is generally required to also include in gross income its amount determined under section 956 (section 956 amount) for the taxable year of the foreign corporation (section 956 inclusion). This amount represents an effective repatriation of E&P and is computed based on certain United States property held by the corporation. Ownership of stock within the meaning of section 958(a) means stock owned directly and stock owned indirectly through foreign entities, including domestic partnerships to the extent treated as foreign partnerships under §1.958-1(d) (1) (discussed in part III.B of the Background). For purposes of the remainder of this preamble, a reference to stock ownership means stock owned within the meaning of section 958(a).

Section 951(a)(2) determines a United States shareholder’s pro rata share of a foreign corporation’s subpart F income by first allocating a portion of such subpart F income to the United States share

holder, and then reducing such allocation in accordance with section 951(a)(2) (B) to take into account certain distributions where ownership of the stock of the foreign corporation is acquired by the United States shareholder during the corporation’s taxable year. See §1.951-1(b). Subpart F income allocated to a United States shareholder before the application of section 951(a)(2)(B) is computed by multiplying the subpart F income by a fraction, the numerator of which is the portion of the foreign corporation’s hypothetical distribution described in §1.951-1(e) that would be distributed with respect to the shareholder’s stock of the corporation, and the denominator of which is the amount of such hypothetical distribution. See §1.951-1(e). The amount of the hypothetical distribution is equal to the foreign corporation’s allocable E&P, which is generally the corporation’s E&P for the taxable year (not reduced by distributions during the year). See §1.951-1(e)(1)(ii).

A special rule under section 245A(e) treats certain hybrid dividends received by a CFC as subpart F income of the receiving CFC for purposes of section 951(a) (1)(A). Similarly, section 964(e)(4) treats certain gain from a sale of stock of a foreign corporation by a CFC as subpart F income of the selling CFC for purposes of section 951(a)(1)(A). Consequently, a United States shareholder of such a receiving CFC or selling CFC includes in gross income under section 951(a)(1)(A) its pro rata share of such subpart F income.

Section 951A(a)

Pursuant to section 951A(a), a United States shareholder of a CFC is required to include in gross income its global intangible low-taxed income (GILTI inclusion). See §1.951A-1(b). A United States shareholder’s GILTI inclusion is determined by taking into account the shareholder’s pro rata share of tested items (as defined in §1.951A-1(f)(5)) of CFCs in which the shareholder owns stock, such as tested income, tested loss, and qualified business asset investment. See §1.951A-1(c). A United States shareholder’s pro rata share of a CFC’s tested items is determined in the same manner as a pro rata share of subpart F income under section 951(a)

(2), subject to certain modifications. See §1.951A-1(d).

Section 951A(f)(1)(A) provides that a GILTI inclusion is treated in the same manner as a subpart F income inclusion for purposes of applying certain provisions of the Code, including sections 959 and 961. Section 951A(f)(1)(B) grants the Secretary authority to provide rules for applying section 951A(f)(1)(A) to other provisions of the Code in any case in which the determination of subpart F income is required to be made at the level of the CFC.

Section 1248(a) or (f)

Section 1248(a) requires a United States person that satisfies certain ownership requirements with respect to stock in a foreign corporation to include gain recognized on a sale or exchange of stock in such foreign corporation in gross income as a dividend, to the extent of the E&P of the foreign corporation attributable to the stock (including E&P of certain lower-tier foreign corporations pursuant to section 1248(c)(2), but not including PTEP pursuant to section 1248(d)(1)). Section 1248(f) provides similar rules for certain distributions in nonrecognition transactions.

Section 959(e) treats an amount included in gross income of any person as a dividend under section 1248(a) or (f) as an amount included in gross income under section 951(a)(1)(A), for purposes of section 959.

Section 965

The transition tax imposed under section 965 as part of the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054 (2017) (the Act) increased the subpart F income of certain foreign corporations and treated such foreign corporations as CFCs for purposes of section 951 (if not already the case). Section 965(a) and (e). Consequently, a United States shareholder of such a foreign corporation generally included in gross income under section 951(a)(1)(A) its pro rata share of such additional subpart F income, subject to reduction under section 965(b) for certain E&P deficits attributable to stock of other foreign corporations owned by the shareholder.

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For purposes of section 959, the transition tax also treated the amount of a reduction to a United States shareholder’s inclusion with respect to a foreign corporation under section 965(b) as an amount included in the shareholder’s gross income with respect to the foreign corporation under section 951(a). Section 965(b)(4)(A).

C. Provisions regarding the treatment of PTEP

Gross Income Exclusions Under Section 959

Section 959 prevents double taxation by excluding PTEP from gross income of United States persons and CFCs. See H.R. Rep. No. 87-1447, at A101-102 (1962).

Section 959(a) provides that, when PTEP of a foreign corporation is distributed to, or would otherwise be included under section 951(a)(1)(B) in gross income of, a United States shareholder whose inclusion under section 951(a) gave rise to the PTEP, the PTEP is excluded from the United States shareholder’s gross income. Under successor rules within section 959(a), the exclusion extends to any other United States person who acquires from any person any portion of the United States shareholder’s interest in the foreign corporation (subject to any proof of identity rules that may be prescribed by the Secretary).

Section 959(b) applies for purposes of section 951(a) and provides that, when PTEP of a CFC is distributed through a chain of ownership described under section 958(a), the PTEP is excluded from the gross income of another CFC in the chain for purposes of applying section 951(a) to such CFC with respect to the United States shareholder whose inclusion under section 951(a) gave rise to the PTEP. Under successor rules within section 959(b), the exclusion extends to any CFC of any other United States shareholder who acquires from any person any portion of the United States shareholder’s interest in the CFC (subject to any proof of identity rules that may be prescribed by the Secretary).

Section 959(c) treats PTEP as distributed before E&P that is not PTEP. It does so by allocating distributions first to PTEP described in section 959(c)(1) (PTEP

resulting from a section 956 inclusion or PTEP that have been excluded under section 959(a)(2)), then to PTEP described in section 959(c)(2) (all other PTEP), and finally to non-PTEP (section 959(c)(3) E&P).

For purposes of section 959, section 951A(f)(1) treats the portion of a United States shareholder’s GILTI inclusion that is allocated to a CFC in the same manner as a subpart F income inclusion.

Section 959(f) allocates a section 956 amount first to PTEP described in section 959(c)(2) and then to section 959(c) (3) E&P, taking into account distributions made by the foreign corporation. A section 956 amount is not allocated to PTEP described in section 959(c)(1) because, under section 956(a) and (b)(1), that PTEP is taken into account in determining the section 956 amount.

Thus, under section 959, a CFC’s E&P for a taxable year of the CFC is first classified as PTEP to reflect any subpart F income inclusions or GILTI inclusions with respect to the CFC. Next, any distributions made by the CFC during the taxable year are allocated to PTEP (and such PTEP is reduced). Then, any section 956 amount with respect to the CFC is determined for the taxable year, which is allocated to remaining section 959(c) (2) PTEP (and such PTEP is reclassified as section 959(c)(1) PTEP). Finally, the CFC’s E&P for the taxable year is classified as PTEP to reflect any inclusion under section 951(a)(1)(B).

Basis Adjustments Under Section 961

Section 961 describes rules that provide for basis increases to reflect amounts included in gross income under section 951(a) and basis reductions and gain recognition to reflect distributions of PTEP. Basis increases prevent undistributed PTEP of a foreign corporation from giving rise to gain or a subpart F income inclusion of a covered shareholder, and thus additional tax, in a sale or exchange of stock of the foreign corporation or property through which such stock is owned. See H.R. Rep. No. 87-1447, at A106 (1962); H.R. Rep. No. 105-148, at 529-30 (1997). Basis reductions and gain recognition prevent double benefits that would otherwise arise (for example, by ensuring a distri

bution of PTEP does not create a loss in the stock or other property on which the distribution is made because of basis provided under section 961 for the inclusion that gave rise to the PTEP).

Section 961(a) provides that, under regulations prescribed by the Secretary, a United States shareholder’s basis in its stock in a CFC, and basis in property through which it owns such stock, is increased by the amount included in the shareholder’s gross income under section 951(a) with respect to such stock or property.

Section 961(b)(1) provides that, under regulations prescribed by the Secretary, when a United States shareholder or a United States person receives an amount that is excluded from gross income under section 959(a), the basis of the stock or other property with respect to which the amount is received is reduced by the amount so excluded. To the extent that an amount excluded from gross income under section 959(a) exceeds the basis of the stock or other property with respect to which it is received, section 961(b)(2) treats the amount as gain from the sale or exchange of property.

Section 961(c) provides that, under regulations prescribed by the Secretary, if a United States shareholder owns stock in a CFC that is owned by another CFC, then adjustments similar to the adjustments provided by section 961(a) and (b) are made to the basis of such stock, and the basis of stock in any other CFC through which the United States shareholder owns the stock of the first mentioned CFC, but only for the purposes of determining the amount included under section 951 in the gross income of such United States shareholder. Under successor rules within section 961(c), basis adjustments carry over to any other United States shareholder who acquires from any person any portion of the interest of the United States shareholder by reason of which the shareholder was treated as owning the relevant CFC stock (subject to any proof of identity rules that may be prescribed by the Secretary). Section 961(c) further provides that the adjustments described in section 961(c) do not apply to any stock owned by the United States shareholder to which a basis adjustment applies under section 961(a) or (b).

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For purposes of section 961, section 951A(f)(1) treats the portion of a United States shareholder’s GILTI inclusion that is allocated to a CFC in the same manner as a subpart F income inclusion.

Section 1.965-2(f)(1) generally provides that basis is not increased under section 961 to reflect PTEP resulting from section 965(b), but §1.965-2(f)(2) permits taxpayers to elect to make certain basis adjustments.

Foreign Currency Gain or Loss Under Section 986(c)

Section 986(c)(1) requires the recognition of foreign currency gain or loss with respect to distributions of PTEP attributable to movements in exchange rates between the date of the income inclusion that gave rise to the PTEP and the distribution of the PTEP. Section 986(c)(1) further provides that such foreign currency gain or loss is treated as ordinary income or loss from the same source as the associated income inclusion. Section 986(c)(2) provides that the Secretary shall prescribe regulations with respect to distributions of PTEP through tiers of foreign corporations. Section 989(c) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the subpart that includes section 986 (subpart J of part III, subchapter N, chapter 1, subtitle A of the Code).