These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2025–5

January 27, 2025

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

Announcement 2025-6, page 526.

This is an Announcement that implements a pilot program

testing changes to Fast Track Settlement (FTS) programs

currently available to taxpayers under examination in the

Internal Revenue Service (IRS) Large Business and International (LB&I), Small Business/Self-Employed (SB/SE) and

Tax Exempt/Government Entities (TE/GE) Divisions. This

Announcement also describes pilot program changes to

Post Appeals Mediation (PAM) procedures and introduces a

“Last Chance FTS” pilot program for SB/SE taxpayers. In

this 2-year pilot, the primary changes to the current FTS programs include: (1) FTS may be used for a specific issue in a

case rather than requiring all issues in a case to be eligible

for FTS; and (2) PAM will be available for all taxpayers in the

FTS programs. In addition, the “Last Chance FTS” pilot program is intended to further publicize availability of FTS and

will initially be limited to select SB/SE cases.

REG-116610-20, page 638.

This document contains proposed amendments to the regulations governing practice before the IRS. These regulations propose to eliminate provisions related to registered

tax return preparers, classify the use of certain contingent

fee arrangements by practitioners as disreputable conduct,

establish new standards for appraisals and the disqualification of appraisers, and update certain provisions as appropriate.

T.D. 10017, page 517.

These final regulations provide three rules regarding the

timing of supervisory approval of penalties required under

Finding Lists begin on page ii.

section 6751(b). The appropriate rule depends on the procedures the IRS must follow before it may assess a penalty.

For penalties that are included in a pre-assessment notice

that provides the basis for Tax Court jurisdiction upon timely

petition, supervisory approval may be obtained at any time

before the notice is issued. For penalties raised in Tax Court

following a petition, supervisory approval may be obtained

at any time prior to the Commissioner requesting that the

court determine the penalty. For penalties that are not subject to pre-assessment review in Tax Court, supervisory

approval may be obtained at any time prior to assessment.

The regulations also include a list of penalties excepted from

the requirements of section 6751(b), and definitions of the

terms “immediate supervisor,” “designated higher level official,” “personally approved (in writing),” and “automatically

calculated through electronic means.”

INCOME TAX

Notice 2025-7, page 524.

This notice provides temporary relief allowing eligible taxpayers to rely on alternative methods for making an adequate

identification, within the meaning of § 1.1012-1(j)(3)(ii), with

respect to units of a digital asset held in the custody of a

broker.

REG-105479-18, page 527.

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.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 27, 2025 

Bulletin No. 2025–5

Part I

26 CFR 1.6751(b)-1

T.D. 10017

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 301

Rules for Supervisory

Approval of Penalties

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains

final regulations regarding supervisory

approval of certain penalties assessed by

the IRS. The final regulations are necessary to address uncertainty regarding

various aspects of supervisory approval

of penalties that have arisen due to recent

judicial decisions. The final regulations

affect the IRS and persons assessed certain

penalties by the IRS.

DATES: Effective Date: These regulations are effective December 23, 2024.

Applicability Date: For date of applicability, see §301.6751(b)-1(f).

FOR FURTHER INFORMATION

CONTACT: William Prater, (202) 3176845 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

This document amends the Regulations on Procedure and Administration (26

CFR part 301) by adding final regulations

under section 6751(b) of the Internal Revenue Code (Code) relating to supervisory

approval of certain penalties assessed by

the IRS. Section 6751(b)(1) expressly delegates to the Secretary of the Treasury or

her delegate the authority to designate, for

purposes of approving the initial determination of a penalty assessment under the

Bulletin No. 2025–5

Code, a higher level official other than

the immediate supervisor of the individual making that initial determination.

In addition, section 7805(a) of the Code

authorizes the Secretary to “prescribe

all needful rules and regulations for the

enforcement of [the Code], including all

rules and regulations as may be necessary

by reason of any alteration of law in relation to internal revenue.”

Background

On April 11, 2023, a notice of proposed

rulemaking (REG-121709-19) relating to

supervisory approval of certain penalties under section 6751(b) was published

in the Federal Register (88 FR 21564).

See the Background and the Explanation

of Provisions sections of the preamble to

REG-121709-19 for a discussion of the

proposed regulations, which are incorporated in this document to the extent not

inconsistent with the Summary of Comments and Explanation of Revisions section of this preamble.

Eight comments responding to the

notice of proposed rulemaking were

received and are available at https://www.

regulations.gov or upon request. A public hearing was held on September 11,

2023, and four speakers provided testimony. After careful consideration of all

of the written comments and testimony,

the proposed regulations are adopted by

this Treasury decision with minor modification. The public comments are summarized and discussed in the Summary of

Comments and Explanation of Revisions.

Summary of Comments and

Explanation of Revisions

Many of the comments addressed similar issues and expressed similar points

of view. The comments largely opposed

the proposed timing rules and many of

the proposed definitions. Comments

expressed concern that the proposed regulations would not implement what the

comments viewed as the purpose of section 6751(b). The Treasury Department

and the IRS disagree with these comments’ characterization of the text and

effect of the proposed regulations, as well

517

as their characterization of the statute’s

text and scope, its legislative history, and

the caselaw interpreting it.

As explained in the preamble to the

proposed regulations, the purpose of these

rules is to clarify application of section

6751(b) in a manner that is consistent

with the statutory text and that promotes

nationwide uniformity, administrability

for the IRS, and ease of understanding

by taxpayers. Several comments suggested alternative rules that would impose

extra-statutory formalities on IRS employees that would increase the probability of

appropriate penalties being avoided if IRS

employees do not satisfy those formalities. By contrast, the adopted rules faithfully interpret the statutory text, ensure

penalties are imposed where appropriate,

and guard against inappropriate use of

penalties.

1. Comments on Proposed Timing Rules

The proposed regulations included

three rules regarding the timing of supervisory approval of penalties under section

6751(b). Proposed §301.6751(b)-1(c) provided that, for penalties that are included

in a pre-assessment notice issued to a taxpayer that provides the basis for jurisdiction in the United States Tax Court (Tax

Court) upon timely petition, supervisory

approval must be obtained at any time

before the notice is mailed by the IRS.

Proposed §301.6751(b)-1(d) provided

that, for penalties raised in the Tax Court

after a petition, supervisory approval

may be obtained at any time prior to the

Commissioner requesting that the court

determine the penalty. Finally, proposed

§301.6751(b)-1(b) provided that supervisory approval for penalties that are not

subject to pre-assessment review in the

Tax Court may be obtained at any time

prior to assessment.

Comments argued that the proposed

timing rules should be rejected in favor of

earlier deadlines for supervisory approval

of penalties, which the comments asserted

would more effectively prevent bargaining by the IRS. The comments’ suggested

deadlines, however, lack any basis in the

statutory text, and are supported by reasoning that has been rejected by three

January 27, 2025

United States Circuit Courts of Appeals

(circuit courts). Moreover, the suggested

earlier deadlines would not do anything to

prevent bargaining, as the preamble to the

proposed regulations explained. Despite

the comments’ stated concerns about the

existence of bargaining, no comment

identified a specific example of bargaining, and no court has ever found that an

IRS employee attempted to use a penalty

as a bargaining chip.

Some comments suggested that the

timing rule should require supervisory

approval before issuance of a 30-day letter1 (or substantive equivalent). As support for this suggestion, one comment

stated that caselaw supported the assertion

that the statute is ambiguous regarding

when approval must occur. This comment

misinterprets the existing caselaw, which

has focused on an ambiguity as to what

the “initial determination” is that must be

approved, not on when the approval must

occur. On the question of when approval

must occur, the circuit courts that have

considered the issue have uniformly held

that a supervisor can approve a penalty

at any point before losing discretion over

whether to approve imposition of the

penalty. The comments advocating for

requiring approval before issuance of a

30-day letter (or substantive equivalent)

rest heavily on a misunderstanding of a

supervisor’s authority and on policy reasons that are not in fact served by the suggested deadline. The comments also fail

to address the circuit courts’ opinions that

are contrary to their recommendations on

this issue.

As multiple circuit courts have

explained, the statute lacks an “express

timing requirement,” and the Tax Court’s

“formal communication” rule has no basis

in the text of the statute. Kroner v. Commissioner, 48 F.4th 1272, 1276 (11th Cir.

2022); Laidlaw’s Harley Davidson Sales,

Inc. v. Commissioner, 29 F.4th 1066, 1072

(9th Cir. 2022), reh’g en banc denied, No.

20-73420 (9th Cir. July 14, 2022); Minemyer v. Commissioner, Nos. 21-9006 &

21-9007, 2023 WL 314832 (10th Cir. January 19, 2023). As explained in the preamble to the proposed regulations, the lack

of any deadline in the statute other than

1

assessment indicates that the provision did

not intend an earlier deadline.

Despite this, the Tax Court has continued

to apply its own precedent in cases appealable to circuits other than the Ninth, Tenth,

and Eleventh. See Aldridge v. Commissioner, T.C. Memo. 2024-24 (appealable to

the Eighth Circuit); Swift v. Commissioner,

T.C. Memo. 2024-13 (appealable to the

Fifth Circuit); Bachner v. Commissioner,

T.C. Memo. 2023-148; Robinson v. Commissioner, T.C. Memo. 2023-147 (appealable to the Fourth Circuit); Jadhav v. Commissioner, T.C. Memo. 2023-140; Conrad

v. Commissioner, T.C. Memo. 2023-100;

Braen v. Commissioner, T.C. Memo 202385 (appealable to the Third Circuit). For

cases appealable to the Ninth Circuit, the

Tax Court has held that it will follow the

timing rule of Laidlaw’s, which the Tax

Court interpreted to require a case-by-case

analysis of whether a particular supervisor

retained the discretion to approve penalties

when they did so. See Kraske v. Commissioner, 161 T.C. 104 (2023). In Kraske and

Pangelina v. Commissioner, T.C. Memo.

2024-5, the Tax Court suggested that an

IRS Examination Division (Exam) supervisor’s discretion may be lost when a case

is transferred to the Independent Office

of Appeals (Appeals), but this is factually

incorrect. As the Ninth Circuit recognized

in Laidlaw’s, it is only “once the notice is

sent” that “the Commissioner begins to

lose discretion over whether the penalty

is assessed.” Laidlaw’s, 29 F.4th at 1071

n.4. Even when a case is transferred from

Exam to Appeals, the Exam supervisor

still has discretion to provide the required

approval because the penalty is still before

the IRS as a whole. As the preamble to the

proposed regulations noted, a supervisor’s

discretion is lost only after the IRS issues a

pre-assessment notice subject to Tax Court

review to a taxpayer. Because a supervisor

retains discretion to approve a penalty until

that point, issuance of the pre-assessment

notice subject to Tax Court review remains

the appropriate deadline for obtaining

supervisory approval of penalties included

in such a notice.

The earlier deadlines that comments

recommended and that the Tax Court continues to impose do not serve the legis-

lative purpose that penalties be imposed

where appropriate. By contrast, the proposed timing rules serve the legislative

purpose of imposing penalties where

appropriate while ensuring the requirement for supervisory approval can prevent

bargaining. The proposed timing rules

are consistent with all of the circuit-level

authority interpreting the statute and provide a bright-line rule that is administrable

for the IRS and fair to taxpayers. Accordingly, this Treasury decision adopts the

proposed timing rules without modification.

2. Comments on Proposed Definitions

A. Individual who first proposed the

penalty

The proposed regulations provided that

the individual who first proposes a penalty

is the individual who section 6751(b)(1)

references as the individual making the

initial determination of a penalty assessment. A proposal can be made either to

a taxpayer (or the taxpayer’s representative) or to the individual’s supervisor or a

designated higher level official. One comment agreed with the proposed definition

of “individual who first proposed the penalty,” while two others disagreed.

The proposed regulations illustrated

the effect of this definition in an example in which a Revenue Agent proposes a

penalty to her immediate supervisor, but

the supervisor does not approve the penalty and it does not appear in the statutory

notice of deficiency; the penalty is then

raised by an IRS Office of Chief Counsel (Counsel) Attorney in a Tax Court

Answer and that attorney is considered

the “individual who first proposed the

penalty.” Those disagreeing with the proposed definition argued that, in that example, it was the Revenue Agent and not

the Counsel attorney that made the initial

determination of the penalty. Such a view

is at odds with the statutory text, which

references (with respect to the penalty)

the “initial determination of . . . assessment”, and caselaw. See North Donald

LA Property, LLC v. Commissioner, T.C.

Memo. 2023-50 (citing multiple cases

Typically a 30-day letter proposes penalties and gives the taxpayer an opportunity to request an administrative appeal.

January 27, 2025

518

Bulletin No. 2025–5

before concluding that “[w]e have never

held that the exam team’s decision not to

assert a penalty has any bearing on Chief

Counsel’s ability to assert that penalty

later”). As the preamble to the proposed

regulations explained, an initial determination that does not ultimately result in an

assessment of a penalty is not an “initial

determination of . . . assessment.” In addition, adopting the comments’ suggested

interpretation would render section 6214,

which allows Counsel to raise a penalty

in an answer, amended answer, or other

pleading, meaningless because it would

remove Counsel’s ability to make an independent evaluation of whether a penalty is

appropriate.

By contrast, the proposed definition

harmonizes the statutory scheme and

allows the IRS the flexibility to pursue

penalties when appropriate. The IRS

should not be prevented from asserting a

penalty solely because an individual IRS

employee involved earlier in the process

did not determine that the penalty was

appropriate at the time such employee

considered it, a result that would follow

from adopting the comments’ suggestions.

Instead, the IRS should be permitted to

assert penalties that both a Counsel attorney and the attorney’s supervisor believe

are warranted.

Comments’ concerns about the proposed definition of “individual who first

proposed the penalty” have led the Treasury Department and the IRS to conclude

that language is needed to clarify that, for

purposes of determining which individual

first proposed a penalty, the individual

must have proposed the penalty either to

a taxpayer (or the taxpayer’s representative) or to the individual’s supervisor

or designated higher level official. This

requirement is to preclude informal suggestions of coworkers or supervisors as

being treated as the initial determination

of a penalty assessment when those individuals had no official responsibility with

respect to a penalty determination or the

responsibility was a supervisory one. This

interpretation also allows supervisors to

do their job of reviewing and directing a

subordinate’s work, which may include

suggesting that their subordinates propose

a penalty. It also eliminates those who are

not assigned responsibility for making an

initial penalty determination from being

Bulletin No. 2025–5

treated as having done so by virtue of

having made an informal comment about

a penalty to a coworker. An example is

added to these final regulations to illustrate the effect of the definition. Specifically, the new example highlights that an

individual who did not make a proposal

to a taxpayer, supervisor, or designated

higher level official is not the individual

who made the initial determination of a

penalty assessment.

B. Immediate supervisor and designated

higher level officials

The proposed regulations defined

the term “immediate supervisor” as any

individual with responsibility to review

another individual’s proposal of penalties

without the proposal being subject to an

intermediary’s approval.

Some comments argued that the proposed definition of “immediate supervisor” was too vague, and that it could allow

non-managerial, non-supervisory personnel to approve penalties. Some argued that

the definition should be revised to mean

any individual who “directly supervises

the substantive work” of an individual,

while others recommended that it be limited to a single individual that meets the

definition of a “supervisor” or “manager”

under other provisions of Federal law

related to labor and employment matters.

These alternative suggestions focus

on substantive work generally, rather

than penalty review specifically. Because

supervisory approval in this context relates

only to penalties, this broader focus is not

appropriate. By looking to an individual’s

assigned job duties rather than their title,

the proposed definition takes a functional

approach that is consistent with the statutory purpose of ensuring that a person

that is familiar with the penalty aspects

of a case be the one to give approval to

assert penalties. See Sand Inv. Co. v.

Commissioner, 157 T.C. 136, 142 (2021)

(holding that the legislative history supports the conclusion that the person with

the greatest familiarity with the facts and

legal issues presented by the case is the

“immediate supervisor” for purposes of

section 6751(b)). Moreover, unlike some

of the suggested alternatives, the proposed

definition recognizes that IRS employees

often have multiple supervisors with dif-

519

ferent roles for different parts of an examination.

After consideration of the comments,

the final regulations adopt the proposed

definition with one modification. Rather

than defining “immediate supervisor”

as “any individual with responsibility to

approve another individual’s proposal of

penalties,” the adopted definition defines

it as “any individual with responsibility

to review another individual’s proposal

of penalties.” This definition recognizes

that a person assigned to review a penalty

proposal has the responsibility to make a

judgment call about the appropriateness

of the penalty. Responsibility to review

another’s work is the hallmark of being a

supervisor. The definition adopted in the

final regulations takes a practical approach

that is consistent with the statute’s focus

on supervision of the penalty proposal.

Pursuant to the grant of authority in

section 6751(b)(1) to designate which

higher level officials may approve the initial determination, in addition to the general grant of authority in section 7805(a),

the proposed regulations defined a “higher

level official” as any person who has been

directed via the Internal Revenue Manual

or other assigned job duties to approve

another individual’s proposal of penalties

before they are included in a notice that

is a prerequisite to Tax Court jurisdiction,

an answer to a Tax Court petition, or are

assessed without the need for such inclusion.

Some comments disagreed with this

definition, arguing that it is too vague

and should be narrowed to only a small

group of upper-level management. But

these comments’ suggested alternatives

reject a functional approach in favor of

unnecessary formalities that could result

in appropriate penalties being eliminated.

They are also inconsistent with section

6751(b)’s provision of discretion to designate which higher level officials may

designate a penalty. Accordingly, the final

regulations adopt the proposed definition

without change.

C. Personally approved (in writing)

The proposed regulations define “personally approved (in writing)” to mean

any writing, including in electronic form,

that is made by the writer to signify the

January 27, 2025

writer’s assent and that reflects that it was

intended as approval.

Comments argued that the definition of

“personally approved (in writing)” should

be revised to require that the approval,

if made electronically, be made through

a digital signature that includes a software-generated timestamp indicating

when the document was signed and who

signed it. One comment also argued that,

alternatively, the IRS should require that

a statement of signing accompany the

request for a supervisor’s approval of a

penalty.

After consideration of the comments,

the proposed definition is adopted without

change. Adopting the comments’ suggestions would impose formalities that frustrate imposition of appropriate penalties.

The statute does not mandate the use of a

particular type of signature, only that the

approval be in writing. While it may be a

best practice to use digital signatures with

software-generated timestamps, mandating their use would go beyond the scope

of the statute and these regulations. Nor

does the statute require the immediate

supervisor to use any particular format

when approving the penalty, such as with

a statement of signing. The functional

approach adopted in these final regulations ensures that written approval, which

is all the statute requires, is obtained. See

PBBM-Rose Hill, Ltd. v. Commissioner,

900 F.3d 193, 213 (5th Cir. 2018) (rejecting an argument that section 6751(b)(1)

was not satisfied because the penalty was

not on the same page as the signature);

Deyo v. Commissioner, 296 F. App’x 157

(2d Cir. 2008) (rejecting an argument

that section 6751(b)(1) was not satisfied

because the approval was provided by a

stamp rather than a manual signature);

Thompson v. Commissioner, T.C. Memo.

2022-80 (rejecting the argument that

cross-examination of a revenue agent

and his supervisor was needed because it

“would be immaterial and wholly irrelevant” where there was written approval

in the record); Raifman v. Commissioner,

T.C. Memo. 2018-101 (same).

D. Automatically calculated through

electronic means

The proposed regulations provide that

a penalty is “automatically calculated

January 27, 2025

through electronic means” if it is proposed by an IRS computer program without human involvement. A penalty is no

longer considered “automatically calculated through electronic means” if a taxpayer responds to a computer-generated

notice proposing a penalty and challenges

the penalty or the amount of tax to which

the penalty is attributable, and an IRS

employee works the case.

Some comments argued that the proposed definition of “automatically calculated through electronic means” is too

broad and encompasses penalties that,

in the comments’ view, should never

be exempt from supervisory approval

for various reasons. As explained in the

preamble to the proposed regulations,

the scope of this definition is limited to

identifying when a penalty should be

considered exempt from the supervisory

approval requirements of section 6751(b)

(1) by operation of section 6751(b)(2)(B).

Comments sought to narrow the proposed

definition and impose additional requirements on the IRS that are divorced from

the statutory requirements. The comments

were directed to whether proposal and

assessment of certain penalties should

ever be automated, as opposed to whether

a specific penalty was in fact “automatically calculated through electronic means”

within the meaning of section 6751(b)(2)

(B). As such, the comments go beyond the

scope of the regulations.

One comment recommended that

the proposed definition be revised to

eliminate the requirement that an IRS

employee consider a taxpayer’s response

to an automatically-generated notice in

order to remove the penalty from the

automatically-calculated

exception.

In this comment’s view, this requirement could lead to situations where the

IRS ignores correspondence and asserts

penalties without proper consideration

of the taxpayer’s response to an automatically-generated penalty notice. The

Treasury Department and the IRS are

sensitive to the comment’s concerns but

consider this a matter outside of the scope

of these regulations. The stated concerns

are policy considerations about how

the IRS should handle correspondence.

They are not within the scope of these

regulations, which seek only to interpret

and define the statutory text of section

520

6751(b). As stated in the preamble to the

proposed regulations, it is the policy of

the IRS to give “full and fair consideration to evidence in favor of not imposing [a] penalty, even after the [IRS’]s

initial consideration supports imposition

of a penalty . . . .” This policy should

prohibit the type of conduct with which

the comment is concerned. Finally, even

if the IRS did fail to consider a taxpayer’s

response to an automatically-generated

penalty notice, there would be no bargaining nor would there be an individual

who made an initial determination with

respect to the penalty at issue. Accordingly, it would be impossible for the IRS

to obtain supervisory approval from the

(non-existent) individual’s supervisor. As

the preamble to the proposed regulations

explains, requiring supervisory approval

in that situation would disrupt the automated process and would not square with

the statutory text. For these reasons, the

proposed definition is adopted without

modification.

3. Other Comments

Comments made a number of other

recommendations that went beyond the

scope of the proposed regulations. These

recommendations related to the types of

forms the IRS should use in documenting supervisory approval and how those

forms should be provided to taxpayers,

the internal practices the IRS should follow to ensure compliance with section

6751(b) among its employees, and the

types of employees that should be permitted to approve certain penalties over

a certain dollar threshold. Other comments also criticized the existing penalty

approval process as ineffective and stated

that pending legislation would soon obviate the need for these regulations. Finally,

one comment was submitted that did not

relate to section 6751(b).

Aside from being outside of the scope

of these regulations, adopting these recommendations would impose laborious

formalities that are not required by section

6751(b) and that would give taxpayers and

their representatives more opportunities to

avoid the penalties that Congress intended

be asserted against them. The final regulations therefore do not adopt these recommendations.

Bulletin No. 2025–5

Special Analyses

IV. Executive Order 13132: Federalism

I. Regulatory Planning and Review

Executive Order 13132 (Federalism)

prohibits an agency from publishing any

rule that has federalism implications if

the rule either imposes substantial, direct

compliance costs on State and local governments, and is not required by statute,

or preempts State law, unless the agency

meets the consultation and funding

requirements of section 6 of the Executive

order. These final regulations do not have

federalism implications and do not impose

substantial direct compliance costs on

state and local governments or preempt

State law within the meaning of the Executive order.

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations

under Executive Order 12866 (June 9,

2023), tax regulatory actions issued by the

IRS are not subject to the requirements of

section 6(b) of Executive Order 12866, as

amended. Therefore, a regulatory impact

assessment is not required.

II. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby

certified that these regulations will not

have a significant economic impact on a

substantial number of small entities. This

certification is based on these regulations

imposing no obligations on small entities

and therefore no economic impact on

those entities. Because these regulations

ensure that only appropriate penalties

will apply by imposing requirements on

the IRS and do not otherwise bear on the

applicability of any penalty, the final regulations do not impose a significant economic impact on a substantial number of

small entities.

Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for the Office of

Advocacy of the Small Business Administration for comment on its impact on

small businesses, and no comments were

received.

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires

that agencies assess anticipated costs and

benefits and take certain other actions

before issuing a final rule that includes

any Federal mandate that may result in

expenditures in any one year by a State,

local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for

inflation. This rule does not include any

Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of

that threshold.

Bulletin No. 2025–5

V. Congressional Review Act

Pursuant to the Congressional Review

Act (5 U.S.C. 801 et seq.), the Office of

Information and Regulatory Affairs has

designated this rule as not a “major rule,”

as defined by 5 U.S.C. 804(2).

Drafting Information

The principal author of these regulations is William Prater of the Office of the

Associate Chief Counsel (Procedure and

Administration). However, other personnel from the Treasury Department and the

IRS participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 301 is

amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation

for part 301 is amended by adding an

entry for §301.6751(b)-1(a)(4) in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805

*****

521

Section 301.6751(b)-1(a)(4) also

issued under 26 U.S.C. 6751(b)(1).

*****

Par. 2. Section 301.6751(b)-1 is added

to read as follows:

§301.6751(b)-1 Supervisory and higher

level official approval for penalties.

(a) Approval requirement—(1) In general. Except as provided in paragraph (a)

(2) of this section, section 6751(b) of the

Internal Revenue Code (Code) generally

bars the assessment of a penalty unless

the initial determination of the assessment

of the penalty is personally approved (in

writing) by the immediate supervisor of

the individual making the initial determination or such higher level official as

the Secretary of the Treasury or her delegate may designate. Paragraph (a)(2) of

this section lists penalties not subject to

section 6751(b)(1) and this paragraph (a)

(1). Paragraph (a)(3) of this section provides definitions of terms used in section

6751(b) and this section. Paragraph (a)

(4) of this section designates the higher

level officials described in this paragraph

(a)(1). Paragraphs (b) through (d) of this

section apply section 6751(b)(1) and this

paragraph (a)(1) to penalties not subject

to pre-assessment review in the United

States Tax Court (Tax Court), penalties

that are subject to pre-assessment review

in the Tax Court, and penalties raised

in the Tax Court after a petition is filed,

respectively. Paragraph (e) of this section

provides examples illustrating the application of section 6751(b) and this section.

Paragraph (f) of this section provides

dates of applicability of this section.

(2) Exceptions. Under section 6751(b)

(2), section 6751(b)(1) and this section do

not apply to:

(i) Any penalty under section 6651,

6654, 6655, 6673, 6662(b)(9), or 6662(b)

(10) of the Code; or

(ii) Any other penalty automatically

calculated through electronic means.

(3) Definitions. For purposes of section

6751(b) and this section, the following

definitions apply—

(i) Penalty. The term penalty means

any penalty, addition to tax, or additional

amount under the Code.

(ii) Individual who first proposed the

penalty. Except as otherwise provided

January 27, 2025

in this paragraph (a)(3)(ii), the individual who first proposed the penalty is the

individual who section 6751(b)(1) and

paragraph (a)(1) of this section reference

as the individual making the initial determination of a penalty assessment. For

purposes of this section, a proposal of a

penalty can be made only to either a taxpayer (or the taxpayer’s representative)

or to the individual’s supervisor or designated higher level official. A proposal of

a penalty, as defined in paragraph (a)(3)

(i) of this section, to a taxpayer does not

include mere requests for information

relating to a possible penalty or inquiries

of whether a taxpayer wants to participate

in a general settlement initiative for which

the taxpayer may be eligible, but does

include offering the taxpayer an opportunity to agree to a particular penalty in

a particular amount other than a penalty

under a settlement initiative offered to a

class of taxpayers. An individual who first

proposed the penalty is not the individual

whom section 6751(b)(1) and paragraph

(a)(1) of this section reference as the individual making the initial determination of

a penalty assessment if the assessment of

the penalty is attributable to an independent proposal made by a different individual.

(iii) Immediate supervisor. The term

immediate supervisor means any individual with responsibility to review another

individual’s proposal of penalties, as

defined in paragraph (a)(3)(i) of this section, without the proposal being subject to

an intermediary’s approval.

(iv) Higher level official. The term

higher level official means any person

designated under paragraph (a)(4) of this

section as a higher level official authorized to approve a penalty for purposes of

section 6751(b)(1).

(v) Personally approved (in writing).

The term personally approved (in writing)

means any writing, including in electronic

form, made by the writer to signify the

writer’s assent. No signature or particular

words are required so long as the circumstances of the writing reflect that it was

intended as approval.

(vi) Automatically calculated through

electronic means. A penalty, as defined

in paragraph (a)(3)(i) of this section, is

automatically calculated through electronic means if an IRS computer program

January 27, 2025

automatically generates a notice to the

taxpayer that proposes the penalty. If a

taxpayer responds in writing or otherwise

to the automatically-generated notice and

challenges the proposed penalty, or the

amount of tax to which the proposed penalty is attributable, and an IRS employee

considers the response prior to assessment

(or the issuance of a notice of deficiency

that includes the penalty), then the penalty

is no longer considered “automatically

calculated through electronic means.”

(4) Higher level official. Any person

who has been directed by the Internal Revenue Manual or other assigned job duties

to approve another individual’s proposal

of penalties before they are included in a

pre-assessment notice prerequisite to Tax

Court jurisdiction, an answer, amended

answer, or amendment to the answer to a

Tax Court petition, or are assessed without need for such inclusion, is designated

as a higher level official authorized to

approve the penalty for purposes of section 6751(b)(1).

(b) Penalties not subject to pre-assessment review in the Tax Court. The

requirements of section 6751(b)(1) and

paragraph (a)(1) of this section are satisfied for a penalty that is not subject to

pre-assessment review in the Tax Court if

the immediate supervisor of the individual

who first proposed the penalty personally

approves the penalty in writing before the

penalty is assessed. Alternatively, a person designated as a higher level official as

described in paragraph (a)(4) of this section may provide the approval otherwise

required by the immediate supervisor.

(c) Penalties subject to pre-assessment

review in the Tax Court. The requirements

of section 6751(b)(1) and paragraph (a)(1)

of this section are satisfied for a penalty

that is included in a pre-assessment notice

that provides a basis for Tax Court jurisdiction upon timely petition if the immediate supervisor of the individual who first

proposed the penalty personally approves

the penalty in writing on or before the date

the notice is mailed. Alternatively, a person designated as a higher level official

as described in paragraph (a)(4) of this

section may provide the approval otherwise required by the immediate supervisor. Examples of a pre-assessment notice

described in this paragraph (c) include a

statutory notice of deficiency under sec-

522

tion 6212 of the Code, a notice of final

partnership administrative adjustment

under former section 6223 of the Code,

and a notice of final partnership adjustment under section 6231 of the Code.

(d) Penalties raised in the Tax Court

after a petition. The requirements of section 6751(b)(1) and paragraph (a)(1) of

this section are satisfied for a penalty that

the Commissioner raises in the Tax Court

after a petition (see section 6214(a) of the

Code) if the immediate supervisor of the

individual who first proposed the penalty

personally approves the penalty in writing

no later than the date on which the Commissioner requests that the court determine the penalty. Alternatively, a person

designated as a higher level official as

described in paragraph (a)(4) of this section may provide the approval otherwise

required by the immediate supervisor.

(e) Examples. The following examples

illustrate the rules of this section.

(1) Example 1. In the course of an audit regarding a penalty not subject to pre-assessment review

in the Tax Court, Revenue Agent A concludes that

Taxpayer T should be subject to the penalty under

section 6707A of the Code for failure to disclose a

reportable transaction. Revenue Agent A sends T

a letter giving T the option to agree to the penalty;

submit additional information to A about why the

penalty should not apply; or request within 30 days

that the matter be sent to the Independent Office

of Appeals (Appeals) for consideration. After T

requests that Appeals consider the case, A prepares

the file for transmission, and B (who is A’s immediate supervisor, as defined in paragraph (a)(3)(iii) of

this section) signs a cover memorandum informing

Appeals of the proposed penalty and asks Appeals

to consider it. The Appeals Officer upholds the penalty, and it is assessed. The requirements of section

6751(b)(1) are satisfied because B’s signature on the

cover memorandum is B’s personal written assent to

the penalty proposed by A and was given before the

penalty was assessed.

(2) Example 2. In the course of an audit, Revenue

Agent A concludes that Taxpayer T should be subject

to an accuracy-related penalty for substantial understatement of income tax under section 6662(b)(2).

Revenue Agent A sends T a Letter 915, Examination Report Transmittal, along with an examination

report that includes the penalty. The Letter 915 gives

T the option to agree to the examination report; provide additional information to be considered; discuss

the report with A or B (who is A’s immediate supervisor, as defined in paragraph (a)(3)(iii) of this section); or request a conference with an Appeals Officer. T agrees to assessment of the penalty and signs

the examination report to consent to the immediate

assessment and collection of the amounts shown on

the report. B provides written supervisory approval

of the penalty after T signs the examination report,

but before the penalty is assessed. Paragraph (b) of

this section applies because T’s agreement to assess-

Bulletin No. 2025–5

ment of the penalty excepts it from pre-assessment

review in the Tax Court. Because B provided written supervisory approval before assessment of the

penalty, the requirements of section 6751(b)(1) are

satisfied.

(3) Example 3. In the course of an audit of Taxpayer T by a team of revenue agents, Revenue Agent

A concludes that T should be subject to an accuracy-related penalty for negligence under section

6662(b)(1) and (c). Supervisor B is the issue manager and is assigned the duty to review the Notice

of Proposed Adjustment for any penalty A would

propose. Revenue Agent A reports to B, but B is not

responsible for the overall management of the audit

of T. C is the case manager of the team auditing T

and is responsible for the overall management of the

audit of T. C may assign tasks to A and other team

members, and has responsibility for approving any

examination report presented to T.

(i) Alternative Outcome 1: Only B approves

the penalty in writing before the mailing to T of a

notice of deficiency that includes the penalty. Under

paragraph (a)(3)(iii) of this section, B qualifies as

the immediate supervisor of A with respect to A’s

penalty proposal, and the requirements of section

6751(b)(1) are met.

(ii) Alternative Outcome 2: Only C approves the

penalty in writing before the mailing to T of a notice

of deficiency that includes the penalty. Because C

has responsibility to approve A’s proposal of the penalty as part of approving the examination report, C

qualifies as a higher level official designated under

paragraph (a)(4) of this section to approve the penalty proposed by A, and the requirements of section

6751(b)(1) are met.

(4) Example 4. In the course of an audit, Revenue Agent A concludes that Taxpayer T should be

subject to a penalty for negligence under section

6662(c). Revenue Agent A recommends the penalty

to her immediate supervisor B, who thinks more

factual development is needed to support the penalty but must close the audit immediately due to the

limitations period on assessment expiring soon. The

IRS issues a statutory notice of deficiency without

the penalty and T files a petition in the Tax Court.

In reviewing the case file and conducting discovery,

IRS Chief Counsel Attorney C concludes that the

Bulletin No. 2025–5

facts support imposing a negligence penalty under

section 6662(c). Attorney C proposes to her immediate supervisor, D, that the penalty should apply

and should be raised in an Answer pursuant to section 6214(a). D agrees and signs the Answer that

includes the penalty before it is filed. The section

6662(c) penalty at issue is subject to pre-assessment review in the Tax Court and was raised in the

Tax Court after a petition was filed under paragraph

(d) of this section. Therefore, written supervisory

approval under paragraph (d) of this section was

required prior to filing the written pleading that

includes the penalty. Attorney C is the individual

who first proposed the penalty for purposes of section 6751(b)(1) and paragraphs (d) and (a)(3)(ii) of

this section, and she secured timely written supervisory approval from D, the immediate supervisor,

as defined in paragraph (a)(3)(iii) of this section.

As a result, the requirements of section 6751(b)(1)

are met. Revenue Agent A did not make the initial

determination of the penalty assessment because

any assessment would not be attributable to A’s

proposal but would be based on the independent

proposal of Attorney C raised pursuant to section

6214(a).

(5) Example 5. In the course of an audit, Revenue Agent A concludes that Taxpayer T should be

subject to a penalty for negligence under section

6662(c). Revenue Agent A includes the penalty in a

draft report that she sends for review to her immediate supervisor B. B reviews A’s recommendation and notices that A did not consider whether a

penalty for a substantial understatement of income

tax under section 6662(d) should apply in the alternative. B sends an email to A telling her to “add a

section 6662(d) penalty if the math checks out.”

Revenue Agent A reviews the facts, determines that

the imposition of the section 6662(d) penalty is warranted, and adds the penalty to a report she issues

to the taxpayer. Revenue Agent A is the individual

who first proposed both of the penalties for purposes

of section 6751(b)(1) and paragraphs (d) and (a)(3)

(ii) of this section because she is the individual who

first proposed the penalty to the taxpayer. Supervisor

B did not make the initial determination of the section 6662(d) penalty because, even though she first

thought of and suggested it, she did not propose it to

523

the taxpayer or her supervisor (or designated higher

level official).

(6) Example 6. The IRS’s Automated Underreporter (AUR) computer program detects a discrepancy between the information received from a third

party and the information contained on Taxpayer

T’s return. AUR automatically generates a CP2000,

Notice of Underreported Income, that includes an

adjustment based on the unreported income and

a proposed penalty under section 6662(d) that is

mailed to T. The CP2000 gives T 30 days to respond

to contest the proposed adjustments and the penalty.

T submits a response to the CP2000, asking only for

more time to respond. More time is granted but no

further response is received from T, and a statutory

notice of deficiency that includes the adjustments

and the penalty is automatically generated and issued

to T. The section 6662(d) penalty at issue is automatically calculated through electronic means under

paragraphs (a)(2)(ii) and (a)(3)(vi) of this section.

The penalty was proposed by the AUR computer

program, which generated a notice to T that proposed

the penalty. Although T submitted a response to the

CP2000, the response did not challenge the proposed

penalty, or the amount of tax to which the proposed

penalty is attributable. Therefore, the penalty was

automatically calculated through electronic means

and written supervisory approval was not required.

(f) Applicability date. The rules of this

section apply to penalties assessed on or

after December 23, 2024.

Douglas W. O’Donnell,

Deputy Commissioner.

Approved: December 2, 2024.

Aviva R. Aron-Dine,

Deputy Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register December 20, 2024, 4:15 p.m., and published in the issue

of the Federal Register for December 23, 2024, 89

FR 104419)

January 27, 2025

Part III

TEMPORARY RELIEF

UNDER SECTION 1.10121(j)(3)(ii)

Notice 2025-7

SECTION 1. PURPOSE

This notice allows eligible taxpayers to use certain alternative methods for

making an adequate identification, within

the meaning of § 1.1012-1(j)(3)(ii),1 with

respect to units of a digital asset held in

the custody of a broker that are sold, disposed of, or transferred during the relief

period specified in this notice.

SECTION 2. BACKGROUND

Section 1012(c)(1) provides that in

the case of the sale, exchange, or other

disposition of a specified security on or

after the applicable date, the conventions

prescribed by regulations under that section must be applied on an account-byaccount basis. Section 1012(c)(3) provides that, for purposes of that section,

the terms “specified security” and “applicable date” have the meaning given those

terms in section 6045(g)(3). Section

80603 of the Infrastructure Investment

and Jobs Act, Pub. L. No. 117-58, 135

Stat. 429, 1339 (2021), expanded the

definition of a specified security in section 6045(g)(3) to include digital assets

with an applicable date of January 1,

2023. Section 6045(g)(3)(D) generally

defines a digital asset, for purposes of

information reporting by brokers, as any

digital representation of value which is

recorded on a cryptographically secured

distributed ledger or any similar technology as specified by the Secretary.

On August 29, 2023, the Department

of the Treasury (Treasury Department)

and the Internal Revenue Service (IRS)

published in the Federal Register (88 FR

59576) proposed regulations (2023 proposed regulations) under sections 6045,

1001, and 1012, and other sections of the

1

Code. The 2023 proposed regulations, in

part, would have clarified the statutory

requirements for determining and identifying the cost basis of digital assets. Consistent with section 1012(c), the proposed

regulations would have required basis

determination on an account-by-account

basis.

On July 9, 2024, the Treasury Department and the IRS published in the Federal

Register (89 FR 56480) T.D. 10000 (final

regulations). Section 1.1012-1(j) of the

final regulations provides ordering rules

for determining which units of the same

digital asset should be treated as sold, disposed of, or transferred when a taxpayer

holds multiple units of that same digital

asset within the same wallet that were

acquired on different dates or at different

prices. Paragraph (j) generally applies

separate rules depending on whether or

not the units are held by the taxpayer in

the custody of a broker.

For digital asset units held in the custody of a taxpayer’s broker, § 1.1012-1(j)

(3)(ii) generally permits a taxpayer to

make an adequate identification of the

units to be sold, disposed of, or transferred

by specifying to the custodial broker, no

later than the date and time of the sale, disposition, or transfer, the particular units of

the digital asset to be sold, disposed of, or

transferred by reference to any identifier

that the broker designates as sufficiently

specific to allow it to determine the basis

and holding period of those units. Section

1.1012-1(j)(3)(ii) also permits taxpayers to make an adequate identification of

such units by using a standing order or

instruction communicated to their custodial broker. Further, if the custodial broker

offers taxpayers only one method of making a specific identification, for example

by the earliest date on which units of the

same digital asset were acquired, the latest date on which units of the same digital

asset were acquired, or the highest basis, §

1.1012-1(j)(3)(ii) treats such method as a

standing order or instruction.

For units held in the custody of a broker

but for which the taxpayer does not make

an adequate identification of the units sold,

disposed of, or transferred in accordance

with § 1.1012-1(j)(3)(ii), § 1.1012-1(j)(3)

(i) treats such units as sold, disposed of,

or transferred in order of time from the

earliest date on which units of that same

digital asset held in the custody of the broker were acquired by the taxpayer (“FIFO

rule”). Regardless of whether the taxpayer

makes an adequate identification, in the

case of digital assets exchanged for different digital assets, § 1.1012-1(j)(3)(iii)

treats any units withheld for either the

broker’s backup withholding obligations

under section 3406, or for payment of

services described in § 1.1001-7(b)(1)(ii)

(digital asset transaction costs), as coming

from the units received in the exchange.

Separate ordering rules, found in §

1.1012-1(j)(1) and (2), prescribe how

units not held in the custody of a broker

are identified as the units sold, disposed

of, or transferred. The temporary relief

described in this notice does not apply to

digital asset units not held in the custody

of a broker.

Section 1.1012-1(j)(6) provides that §

1.1012-1(j) applies to all acquisitions and

dispositions of digital assets on or after

January 1, 2025.

Contemporaneously with the issuance of § 1.1012-1(j), the IRS issued

Rev. Proc. 2024-28, 2024-31 I.R.B. 326

(July 29, 2024), which provides guidance

to taxpayers regarding how to transition

from a universal or multi-wallet basis

allocation methodology to a wallet by

wallet or account by account basis allocation methodology. Specifically, subject to certain requirements, Rev. Proc.

2024-28 provides a safe harbor on which

taxpayers may rely to allocate their units

of unattached basis to a digital asset

wallet or account that holds the same

number of remaining digital asset units

based on the taxpayer’s records of such

unattached basis and remaining units so

long as the allocation is reasonable. Rev.

Proc. 2024-28 permits taxpayers either

to make a specific unit allocation or to

make a global allocation in order to allocate units of unattached basis, subject to

various conditions.

Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code (Code) or the Income Tax Regulations (26 CFR part 1).

January 27, 2025

524

Bulletin No. 2025–5

The Treasury Department and the IRS

understand that some digital asset brokers

may not have in place, by January 1, 2025,

the technology needed to accept specific

instructions or standing orders communicated by taxpayers. These technology limitations may leave some taxpayers unable to

make adequate identifications in conformity

with § 1.1012-1(j)(3)(ii). Thus, by default,

any units in the custody of such brokers that

are sold, disposed of, or transferred would

be determined under the FIFO rule.

This notice provides temporary relief

allowing taxpayers to use additional methods for making an adequate identification

within the meaning of § 1.1012-1(j)(3)(ii)

during the relief period, as defined in section 3.03 of this notice. This notice does not

prohibit taxpayers from complying with §

1.1012-1(j)(3)(ii) as originally prescribed. In

addition, this notice does not affect how the

safe harbor described in Rev. Proc. 2024-28

applies. Taxpayers relying on the safe harbor described in Rev. Proc. 2024-28 may

also rely on the temporary relief described

in section 4.02 of this notice once the applicable requirements of Rev. Proc. 2024-28

have been satisfied, including, in the case

of taxpayers making a global allocation, the

completion of the global allocation.

A method of specifically identifying the

units of a digital asset sold, disposed of, or

transferred (for example, by the earliest

acquired, the latest acquired, or the highest basis) is not a method of accounting

to which section 446 or section 481 apply.

See § 1.1012-1(j)(4). Finally, the temporary relief described in this notice does not

apply for purposes of the § 1.6045-1 rules

for digital assets. See T.D. 10000.

SECTION 3. DEFINITIONS

Except as otherwise provided, the following definitions apply solely for purposes of this notice:

Bulletin No. 2025–5

.01 Digital Asset. The term “digital asset” has the meaning provided in §

1.1012-1(j).

.02 Broker. The term “broker” has the

meaning provided in § 1.1012-1(j).

.03 Relief Period. The term “relief

period” means the period beginning on

January 1, 2025, and ending on December

31, 2025.

SECTION 4. TEMPORARY RELIEF

.01 Scope. The temporary relief

described in section 4.02 of this notice

is available only with respect to units of

a digital asset held in the custody of a

broker that are sold, disposed of, or transferred during the relief period.

.02 Temporary Relief under § 1.10121(j)(3)(ii). A taxpayer may make an

adequate identification during the relief

period of a taxpayer’s units of a digital

asset to be sold, disposed of, or transferred

from the taxpayer’s units held in the custody of a broker by:

(1) Identifying, no later than the date

and time of the sale, disposition, or

transfer, on the taxpayer’s books

and records, the particular units to

be sold, disposed of, or transferred

by reference to any identifier, such

as purchase date and time or the purchase price for the unit, that is sufficient to identify the basis and holding

period of the units sold, disposed of,

or transferred; or

(2) Recording a standing order on the

taxpayer’s books and records, provided that the recorded standing

order includes sufficient information

to identify any digital asset units

sold, disposed of, or transferred and

is entered into the taxpayer’s books

and records before the units covered

by the order are sold, disposed of, or

transferred.

525

.03 Nonapplication of § 1.1012-1(j)

(3)(ii). If a taxpayer makes an adequate

identification under subsection 4.02 of

this notice, the rule in § 1.1012-1(j)(3)

(ii), which treats taxpayers whose broker offers only one method of making a

specific identification as having made

a standing order or instruction, does not

apply during the relief period.

.04 Safe harbor under Rev. Proc. 202428. Taxpayers relying on the safe harbor

under Rev. Proc. 2024-28 may rely on the

temporary relief described in section 4.02

of this notice only after the applicable

requirements of Rev. Proc. 2024-28 have

been satisfied.

SECTION 5. RELIANCE

Taxpayers may rely on the temporary

relief described in section 4.02 of this

notice only for the duration of the relief

period, as defined in section 3.03 of this

notice. Accordingly, taxpayers may not

rely on the temporary relief described in

section 4.02 of this notice to identify units

held in the custody of the broker as the

units sold, disposed of, or transferred in

the case of sales, dispositions and transfers made after the relief period ends.

SECTION 6. EFFECTIVE DATE

This notice is effective December 31,

2024.

SECTION 7. DRAFTING

INFORMATION

The principal authors of this notice

are Kyle Walker and Alexa T. Dubert of

the Office of Associate Chief Counsel

(Income Tax and Accounting). For further

information regarding this notice, contact

Kyle Walker or Alexa Dubert at (202)

317-4718 (not a toll-free number).

January 27, 2025

Part IV

Pilot Program Changes to

Fast Track Settlement

Announcement 2025-6

This announcement describes a pilot

program testing changes to Fast Track

Settlement (FTS) programs currently

available to taxpayers under examination

in the Large Business and International

(LB&I), Small Business/Self-Employed

(SB/SE), and Tax Exempt/Government

Entities (TE/GE) operating divisions (collectively, Exam).

FTS enables taxpayers that have

unagreed issues in at least one open taxable

year under examination to work together

with Exam and the IRS Independent Office

of Appeals (Appeals) to resolve outstanding

disputed factual and legal issues while the

case is still in Exam’s jurisdiction. LB&I,

SB/SE, and TE/GE each jointly administer FTS with Appeals. FTS is optional for

taxpayers and does not eliminate or replace

existing dispute resolution options, including taxpayers’ opportunities to request

Appeals consideration or a conference with

an Exam manager.

This announcement also describes pilot

program changes to Post Appeals Mediation (PAM) procedures and introduces a

“Last Chance FTS” pilot program for SB/

SE taxpayers.

BACKGROUND

FTS began as a pilot program in 2001

with the goal of successfully using dispute

resolution techniques to promote issue

resolution at earlier stages. See Notice

2001-67, 2001-2 C.B. 544 (December 3,

2001). In 2003, the IRS formally established FTS for taxpayers under the jurisdiction of the Large and Mid-Size Business division, a predecessor to LB&I.

The IRS also allowed the use of Appeals’

alternative dispute resolution (ADR) settlement authority in certain cases under

the jurisdiction of SB/SE. See Rev. Proc.

2003-40, 2003-25 I.R.B. 1044 (June 23,

2003). In 2012, the IRS permanently

established the FTS program for taxpayers under the jurisdiction of TE/GE. See

January 27, 2025

Announcement 2012-34, 2012-36 I.R.B.

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.

526

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.

Bulletin No. 2025–5

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).

Bulletin No. 2025–5

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

527

(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

January 27, 2025

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

1. 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-

January 27, 2025

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.

2. 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)

528

(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.

3. 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.

4. 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.

Bulletin No. 2025–5

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

1. 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

Bulletin No. 2025–5

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).

2. 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-

529

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).

January 27, 2025

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.

3. 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).

Notice 88-71, 1988-2 C.B. 374 (1988

notice), provides guidance regarding foreign currency gain or loss with

respect to PTEP and announced an intent

to issue regulations consistent with the

guidance. Under the 1988 notice, such

foreign currency gain or loss is determined with respect to each separate

category of income listed in section

904(d)(1) pursuant to a formula and is

recognized immediately before certain

sales or exchanges of stock of a foreign

corporation with respect to undistributed PTEP of the foreign corporation.

See also §1.985-5(e)(2) (requiring a

United States shareholder to recognize

foreign currency gain or loss when a

CFC changes its functional currency

to the U.S. dollar); §1.367(b)-2(j)(2)(i)

(application of section 986(c) to certain

nonrecognitions).

January 27, 2025

Section 1.986(c)-1 addresses foreign

currency gain or loss with respect to distributions of PTEP resulting from section

965. The rules provide that foreign currency gain or loss with respect to PTEP

resulting from section 965(a) is determined

based on movements in the exchange rate

between December 31, 2017, and the time

such PTEP is distributed, and that any such

gain or loss recognized is reduced in the

same proportion as the reduction by a section 965(c) deduction amount (as defined

in §1.965-1(f)(42)) of the section 965(a)

inclusion amount (as defined in §1.9651(f)(38)) that gave rise to the PTEP. The

rules also provide that section 986(c) does

not apply with respect to distributions of

PTEP resulting from section 965(b).

4. Foreign Income Taxes Under Sections

164(a), 901(a), and 960(b)

Section 164(a) generally provides that

a taxpayer is allowed a deduction for certain foreign income taxes paid or accrued

by the taxpayer.

Section 901(a) generally provides

that a taxpayer choosing to credit foreign

income taxes is allowed a credit for certain foreign income taxes paid or accrued

by the taxpayer plus, in the case of a

domestic corporation, the taxes deemed to

have been paid by the domestic corporation under section 960.

Section 960(b) applies for purposes

of sections 901 through 909 (relating to

the foreign tax credit). Section 960(b)(1)

provides that, if PTEP distributed by a

CFC to a corporate United States shareholder of the CFC is excluded from gross

income under section 959(a), the United

States shareholder is deemed to have paid

the foreign income taxes that are properly

attributable to the PTEP and that have not

already been deemed paid by a domestic corporation. Similarly, section 960(b)

(2) provides that, if PTEP distributed by

a CFC to another CFC is excluded from

gross income under section 959(b), the

recipient CFC is deemed to have paid the

foreign income taxes that are properly

attributable to the PTEP and that have not

already been deemed paid by a domestic

corporation. Section 960(f) provides that

the Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the pro-

530

visions of section 960. Section 904(d)(1)

provides that certain provisions including

section 960 apply separately with respect

to certain categories of income, and section 904(d)(7) provides that the Secretary

shall prescribe such regulations as may be

necessary or appropriate for the purposes

of section 904(d).

For purposes of determining the amount

of foreign income taxes deemed paid,

§1.960-3 requires the establishment and

maintenance of foreign corporation-level

accounts that track a foreign corporation’s

PTEP and foreign income taxes associated

with the PTEP. Those regulations adopt a

system of accounting for PTEP in annual

accounts for each separate section 904

category (as defined in §1.960-1(b)(23))

and further segregate each annual account

among ten PTEP groups.

Section 965(g) and §1.965-5 disallow

a percentage (referred to as the applicable

percentage, as defined in §1.965-5(d)) of

any credit or deduction for foreign income

taxes associated with PTEP resulting from

section 965(a) or (b). Section 245A(d) and

§1.245A(d)-1 disallow the entirety of any

credit or deduction for foreign income

taxes associated with PTEP resulting from

income inclusions by reason of section

245A(e)(2) (regarding hybrid dividends)

or certain income inclusions by reason of

section 964(e)(4) (regarding sales of stock

of a foreign corporation by a CFC). Sections 245A(g) and 965(o) provide that the

Secretary shall prescribe such regulations

or other guidance as may be necessary or

appropriate to carry out the provisions of

sections 245A and 965, respectively.

5. Election Under Section 962

Section 962(a) provides that, under

regulations prescribed by the Secretary, an

individual United States shareholder may

elect to be taxed at domestic corporate

rates on amounts included in the individual’s gross income under section 951(a)

and that those amounts are treated as taken

into account by a domestic corporation for

purposes of applying the relevant provisions of section 960. The election also

applies to amounts included in the individual’s gross income under section 951A(a)

because, for purposes of section 962, such

amounts are treated in the same manner as

a subpart F income inclusion. See section

Bulletin No. 2025–5

951A(f)(1). The purpose of section 962

generally is to equate an individual’s tax

burden with respect to certain earnings of

a CFC with the tax burden the individual

would have had if the individual were to

own the CFC through a domestic corporation. See S. Rep. No. 87-1881, at 92-93

(1962).

To carry out this purpose, section

962(d) generally subjects PTEP to an

additional level of taxation when distributed. It does so by, notwithstanding section 959(a)(1), requiring that the distributed PTEP be included in gross income

to the extent it exceeds the amount of tax

paid on the amounts to which the election

under section 962 applied.

Section 961(a) also carries out this purpose by, in the case of an election under

section 962, limiting a basis increase for

an income inclusion to which the election applied to the amount of tax paid by

the individual with respect to the income

inclusion. Additionally, in a distribution

of PTEP, section 961(b)(1) limits a basis

decrease to the amount that is excluded

from gross income under section 959(a)

after the application of section 962(d).

6. Section 1411

Section 1411 generally imposes a 3.8

percent tax on the net investment income

of certain individuals, trusts, and estates.

Under section 1411(c)(1) and §14114(a), net investment income includes

certain income from dividends and net

gain from the disposition of property.

Section 1.1411-10 provides, in relevant

part, rules regarding the application

of section 1411 to individuals, trusts,

and estates that own stock of a CFC,

and §1.1411-10(g) allows an election

with respect to a CFC to treat amounts

included in income under section 951(a)

with respect to the CFC as net investment

income for purposes of §1.1411-4(a)(1)

(i). See also §1.951A-5(b)(1) (treating a

GILTI inclusion in the same manner as a

subpart F income inclusion for purposes

of applying section 1411). If the election

provided under §1.1411-10(g) is made,

a distribution of E&P that is not treated

as a dividend pursuant to section 959(d)

is generally not treated as a dividend for

purposes of section 1411(c)(1)(A)(i) and

§1.1411-4(a)(1)(i). See §1.1411-10(c)

Bulletin No. 2025–5

(1)(i)(B). If the election provided under

§1.1411-10(g) is not made, however, net

investment income could reflect value

attributable to PTEP, either when the

PTEP is distributed or when a United

States shareholder directly or indirectly

disposes of stock of the CFC. Thus, if no

election is made, a distribution of E&P

that is not treated as a dividend pursuant

to section 959(d) is nevertheless a dividend for purposes of determining net

investment income under section 1411(c)

(1)(A)(i) and §1.1411-4(a)(1)(i), provided the distribution is attributable to

amounts that are or have been included

in gross income under section 951(a) in

a taxable year beginning after December 31, 2012. See §1.1411-10(c)(1)(i)(A)

(1). For purposes of calculating gain on

the disposition of stock of a CFC, basis

adjustments under section 961(a) and (b)

are similarly not taken into account for

section 1411 purposes in the absence of

the election. See §1.1411-10(d)(1).

D. Regulations under sections 959 and

961

The current regulations under sections

959 and 961 were issued in 1965 and have

not been updated to reflect certain statutory changes (for example, the enactment

of section 961(c)). The regulations also do

not address a number of issues relating to

the operation of sections 959 and 961.

In 2006, the Treasury Department

and the IRS issued a notice of proposed

rulemaking (71 FR 51155) (2006 proposed regulations) to provide more complete rules and address various open issues

under sections 959 and 961 and related

provisions.

In 2018, the Treasury Department and

the IRS issued Notice 2019-01, 2019-02

I.R.B. 275 (2019 notice), which announced

an intent to withdraw the 2006 proposed

regulations and issue a new notice of proposed rulemaking under sections 959 and

961 to address certain issues arising from

the Act. The 2019 notice described rules

for the maintenance of PTEP accounts and

other aspects relating to the operation of

section 959 and requested comments on

certain topics. The Treasury Department

and the IRS received several written comments in response to the 2019 notice. In

2022, the Treasury Department and the

531

IRS formally withdrew the 2006 proposed

regulations (87 FR 63981).

As indicated in the 2019 notice,

changes made by the Act had a significant impact on the role of PTEP and how

it functions within the U.S. tax system

and, in certain cases, exacerbated the need

to address longstanding issues. Thus, in

addition to the need for updated and more

complete rules as contemplated in the

2006 proposed regulations, the issuance

of new regulations requires consideration

of multiple issues raised by the Act. Certain significant considerations about the

role of PTEP in the current U.S. tax system are summarized below.

First, the Act significantly increased

the types of income that give rise to PTEP,

several of which involve specific rules

and limitations to determine foreign currency gain or loss and the availability of

foreign tax credits. Giving effect to the

various rules and limitations introduced

by the Act requires a detailed accounting

system to track PTEP in new groups, and

to ensure those rules and limitations are

appropriately applied by taxpayers and

can be administered by the IRS.

The Act also substantially increased

the amount of PTEP in the U.S. tax system. In many cases, a considerable portion

of a CFC’s income has been (or will be)

subject to tax under section 951(a)(1)(A)

or 951A(a), including by reason of the

transition tax imposed under section 965,

and thus only the residual amount of the

CFC’s income constitutes section 959(c)

(3) E&P.

At the same time, the Act introduced

section 245A, which in certain cases

allows a domestic corporation to claim a

dividends received deduction for section

959(c)(3) E&P. As a result, unlike before

the Act where section 959(c)(3) E&P

generally was subject to U.S. tax (with a

possible foreign tax credit in some cases)

when repatriated to the domestic corporation, such E&P may now generally be

repatriated without U.S. tax to a recipient domestic corporation. Nonetheless,

there are important distinctions between

section 959(c)(3) E&P and PTEP – in

particular, the section 245A deduction

generally allows E&P to be distributed

without a corresponding basis reduction (but see sections 961(d) and 1059),

whereas a distribution of PTEP reduces

January 27, 2025

basis (or gives rise to gain) in accordance with section 961(b). Therefore,

PTEP may not be preferable to section

959(c)(3) E&P and taxpayers might take

inappropriate positions to maximize the

existence of section 959(c)(3) E&P. For

example, a taxpayer may wish to claim a

section 961 basis increase for an amount

included in gross income but apply the

section 245A deduction on a distribution

of the corresponding E&P so that such

E&P is repatriated tax-free without any

basis reduction under section 961(b). To

prevent this type of planning, it is critical for the system to properly maintain

the PTEP character of that E&P so that

section 961(b) applies when the E&P is

distributed.

Existing rules governing PTEP also do

not adequately address structures where

a United States shareholder owns only a

portion of the stock in an upper-tier CFC

that owns stock in a lower-tier CFC. In

particular, there are no rules prescribing

the manner in which basis under section

961(c) functions in these non-wholly

owned structures. Further, after the enactment of section 951A in the Act, it is much

more likely for United States shareholders

to have disparate amounts of PTEP with

respect to the same CFC because a United

States shareholder’s GILTI inclusion is

determined based on items attributable to

all the stock of CFCs owned by the United

States shareholder, and this can raise

issues about how section 959(b) applies

in distributions of the PTEP (such as the

issues discussed in part II.D.1.ii of the

Explanation of Provisions). Thus, changes

in the Act have compounded already

existing complexities with respect to the

treatment of PTEP and basis in stock in

non-wholly owned structures.

Finally, existing rules do not sufficiently address the operation of the PTEP

provisions with respect to domestic partnerships (or certain S corporations) in light

of the enactment of section 951A and the

extension of aggregate treatment to such

entities in determining inclusions under

both sections 951(a) and 951A(a) (as discussed in part III.A of the Background).

Moreover, certain unresolved issues, such

as whether a partnership obtains basis

in stock of a CFC to account for PTEP,

which had previously been limited to foreign partnerships, now apply equally to

January 27, 2025

domestic partnerships (and certain S corporations).

III. Other Guidance and Issues

A. Regulations under section 958

Before the Act, domestic partnerships

(and S corporations by operation of section

1373(a)) were treated as owning stock of a

foreign corporation for purposes of determining inclusions in gross income under

section 951(a), and, thus, PTEP accounts

under section 959 were maintained, and

related basis adjustments under section

961 were made, at the partnership level.

Following the enactment of section

951A in the Act, in 2019 the Treasury

Department and the IRS published final

regulations treating a domestic partnership

(and certain S corporations) as an aggregate of its partners for purposes of applying section 951A and related provisions.

TD 9866, 84 FR 29288. That is, partners

do not take into account a distributive

share of a section 951A inclusion with

respect to the domestic partnership and its

CFCs, but instead are treated as proportionately owning the stock of those CFCs,

with the result that (as with foreign partnerships) income inclusions under section

951A are determined directly (and solely)

by partners that are United States shareholders with respect to a CFC. Subsequently, in 2022, the Treasury Department

and the IRS published §1.958-1(d) which,

consistent with the approach adopted

under section 951A, extends the aggregate

treatment of domestic partnerships to section 951. TD 9960, 87 FR 3648.

Under §1.958-1(d), for purposes of

sections 951, 951A, and 956(a), as well

as any provision that specifically applies

by reference to those sections (or regulations issued under those sections),

a domestic partnership is generally not

treated as owning stock of a foreign corporation under section 958(a), and stock

of a foreign corporation owned by the

domestic partnership is instead treated in

the same manner as stock of a foreign corporation owned by a foreign partnership

under section 958(a)(2) and §1.958-1(b).

Accordingly, because sections 959 and

961 specifically apply by reference to sections 951 and 951A (in the latter case, as

a result of section 951A(f)(1)(A)), aggre-

532

gate treatment of domestic partnerships

applies for purposes of sections 959 and

961 pursuant to §1.958-1(d). Regulations

do not, however, specifically address the

application of sections 959 and 961 with

respect to domestic partnerships or their

partners under §1.958-1(d).

B. Regulations under section 1502

Section 1502 authorizes the Secretary

to prescribe regulations for an affiliated

group of corporations that join in filing (or

that are required to join in filing) a consolidated return (consolidated group, as

defined in §1.1502-1(h)) to clearly reflect

the U.S. tax liability of the consolidated

group and to prevent avoidance of such

tax liability. For purposes of carrying out

those objectives, section 1502 also permits

the Secretary to prescribe rules that may

be different from the provisions of chapter 1 of subtitle A of the Code that would

apply if the corporations composing the

consolidated group filed separate returns.

Pursuant to these rules, members of a

consolidated group are treated as separate

entities for some purposes but as divisions

of a single corporation for other purposes.

See, for example, §1.1502-13(a)(2).

Regulations issued under section

1502 address the application of certain

provisions of subpart F in the context

of consolidated groups. See, for example, §1.1502-51 (application of section

951A to consolidated groups); §1.150280(j) (addressing determination of section 951(a)(2)(B) reduction for distributions under section 959(b) for purposes

of sections 951(a)(1)(A) and 951A(a)).

However, regulations do not address the

application of sections 959 and 961 with

respect to a consolidated group or its

members.

Explanation of Provisions

I. Scope

The proposed regulations provide rules

addressing core aspects of the PTEP system, including rules that address longstanding issues under sections 959 and

961, account for new provisions and

amendments under the Act, and implement the 1988 notice and 2019 notice.

Future guidance will address certain issues

Bulletin No. 2025–5

not addressed in the proposed regulations,

for example, issues involving nonrecognition transactions, redemptions, transactions to which section 964(e) applies,

and structures where CFCs are partners

in a partnership. See also Notice 2024-16,

2024-5 I.R.B. 622 (announcing intent to

issue proposed regulations addressing the

treatment of section 961(c) basis in certain

transactions in which a domestic corporation acquires stock of a CFC in a liquidation described in section 332 or an asset

reorganization described in section 368(a)

(1)). Future guidance may also address

any issues regarding the interaction of the

proposed regulations with existing rules

under other provisions.

II. Section 959 Regulations

A. Overview

The proposed regulations under section

959 provide rules for PTEP accounting

(both at the shareholder-level and foreign

corporation-level), exclusions from gross

income, and related determinations and

adjustments.

B. PTEP accounting (proposed §1.959-2)

1. Shareholder-Level Accounts

i. In general

Integral to the proposed regulations are

annual PTEP accounts, dollar basis pools,

and PTEP tax pools, which are established

and maintained by a covered shareholder

with respect to a foreign corporation in

which the shareholder owns stock. See

proposed §1.959-2(b)(1). These are integral aspects of the PTEP system because

they ensure proper tracking of amounts

described under provisions of the Code

such as sections 959(a), 986(c), and

960(b). These rules are issued pursuant

to the express delegations of authority

under sections 245A(g), 904(d)(7), 960(f),

965(o), and 989(c).

A covered shareholder means any

United States person, other than a domestic partnership. See proposed §1.959-1(b);

see also part VIII.A of the Explanation of

Provisions (providing that an S corporation is generally treated in the same manner as a domestic partnership). Domestic

Bulletin No. 2025–5

partnerships are excluded from this definition because they are treated as aggregates of their partners in determining

stock ownership for purposes of section

959 (discussed in part III.A of the Background). A covered shareholder is not limited to a United States shareholder because

the exclusion under section 959(a) is not

limited to United States shareholders. For

example, section 959(a) applies to any

United States person who acquires from

any person an interest in a foreign corporation with PTEP.

ii. Annual PTEP accounts

Annual PTEP accounts track a foreign

corporation’s PTEP with respect to a covered shareholder. See proposed §1.9592(b)(1). These accounts represent PTEP

distributable exclusively to the covered

shareholder (or a successor), directly or

indirectly through tiers, on any stock of

the foreign corporation.

Each annual PTEP account relates to a

single taxable year of the foreign corporation and a single section 904 category,

and PTEP within an annual PTEP account

is maintained in the foreign corporation’s

functional currency and assigned among

ten PTEP groups and two subgroups. See

proposed §1.959-2(b)(2). Tracking PTEP

on an annual basis is necessary to apply

the “last-in, first-out” rule for distributions

of PTEP in section 959(c), and PTEP is

maintained in the foreign corporation’s

functional currency pursuant to section

986(b). Tracking PTEP by section 904

category and by PTEP groups is necessary

to implement rules determining foreign

currency gain or loss and foreign tax credits with respect to PTEP.

The ten PTEP groups fall within two

categories – section 959(c)(2) PTEP

groups and section 959(c)(1) PTEP

groups. See proposed §1.959-2(b)(2)

(i). The section 959(c)(2) groups separately track PTEP resulting from subpart

F income inclusions, GILTI inclusions,

application of section 965(a) or 965(b),

or income inclusions to which section

245A(d) applies (PTEP resulting from

section 245A(e)(2) or certain PTEP resulting from section 959(e) (concerning section 1248) or section 964(e)(4) (concerning certain dispositions of foreign stock)).

The section 959(c)(1) PTEP groups cor-

533

respond to the section 959(c)(2) PTEP

groups and account for the reclassification

of PTEP pursuant to section 959(a)(2).

PTEP arising from section 956 inclusions

is combined with reclassified PTEP arising from subpart F income inclusions.

The two subgroups track PTEP arising

from income inclusions of certain covered shareholders. See proposed §1.9592(b)(2)(ii). One subgroup tracks PTEP

arising from an income inclusion of an

individual and includible in gross income

under section 962(d) when distributed

in a distribution to which section 959(a)

would otherwise apply (taxable section

962 PTEP). The second subgroup tracks

PTEP arising from an income inclusion

of an individual, estate, or trust that

would be includible in net investment

income under section 1411(c) when

distributed (that is, the election under

§1.1411-10(g) is not made and, thus, the

income inclusion giving rise to the PTEP

was not taken into account in determining net investment income).

Additionally, for PTEP resulting from

the application of section 965(a) or (b),

an adjusted applicable percentage must

be maintained, which tracks the percentage of a credit or deduction for foreign

income taxes associated with PTEP that

is disallowed under §1.965-5. See proposed §1.959-2(b)(2)(iii)(A). Similarly,

for PTEP resulting from the application of

section 965(a), a section 965(c) deduction

percentage must be maintained, which

tracks the percentage of foreign currency gain or loss with respect to PTEP

that is not recognized under §1.986(c)-1.

See proposed §1.959-2(b)(2)(iii)(B). The

adjusted applicable percentage and the

section 965(c) deduction percentage are

tracked by section 904 category. Each

is determined using a single weighted

average across that section 904 category,

which is intended to reduce the compliance burden and facilitate administrability

in cases in which the applicable percentage or section 965(c) deduction amount

differs with respect to PTEP in the section

904 category by not requiring the separate

tracking of those percentages or amounts.

See also part IX.B.3. of the Explanation of

Provisions (describing transition rules for

the initial determination of the adjusted

applicable percentage and section 965(c)

deduction percentage).

January 27, 2025

iii. Dollar basis pools and PTEP tax pools

Dollar basis pools track the basis in U.S.

dollars of a foreign corporation’s PTEP

with respect to a covered shareholder,

and such dollar basis is used to determine foreign currency gain or loss under

section 986(c). See proposed §1.959-2(b)

(1). PTEP tax pools track the U.S. dollar

amount of foreign income taxes associated with a foreign corporation’s PTEP

with respect to a covered shareholder,

and such taxes are assigned to a creditable PTEP tax group to the extent eligible

to be deemed paid under section 960(b).

See proposed §1.959-2(b)(1) and (4)(ii).

The creditable PTEP tax group tracks foreign income taxes that are eligible to be

deemed paid under section 960(b).

Furthermore, together, dollar basis and

the U.S. dollar amount of associated foreign income taxes determine basis reductions under section 961 for distributions of

PTEP. See also part III.C.2 of the Explanation of Provisions.

Tracking foreign income taxes associated with PTEP in a shareholder-specific

manner (consistent with how PTEP is

tracked) differs from the approach under

existing §1.960-3 (and the 1988 notice),

which tracks such taxes only at the CFClevel (without regard to the shareholder

whose PTEP account was reduced by the

taxes). This new approach ensures that,

in structures involving multiple covered

shareholders, foreign income taxes are

associated with PTEP with respect to a

particular covered shareholder and do not

include foreign income taxes that were

imposed on PTEP with respect to another

covered shareholder. Thus, in a distribution of PTEP to a covered shareholder,

the covered shareholder’s basis is reduced

under section 961(b) by the foreign

income taxes that are (i) associated with

(and consequently reduced) PTEP with

respect to the covered shareholder, and (ii)

deemed paid by the covered shareholder.

This method is intended to prevent each

covered shareholder from incurring double taxation on a single item of income,

by ensuring that a covered shareholder

is able to take into account the foreign

income taxes associated with the PTEP

with respect to the covered shareholder.

Generally, dollar basis pools and PTEP

tax pools are maintained on a year-by-year

January 27, 2025

basis, with one pool for each PTEP group

within each annual PTEP account. See

proposed §1.959-2(b)(3) and (4). Maintenance of separate dollar basis pools for

each PTEP group prevents the commingling of dollar basis of PTEP that is subject to different rules with respect to the

recognition of foreign currency gain or

loss under section 986(c). Maintenance

of separate PTEP tax pools for each PTEP

group prevents the commingling of foreign income taxes for which the related

PTEP is subject to different rules regarding the applicability of section 960(b).

Under an exception intended to simplify PTEP accounting, a covered shareholder may elect to combine dollar basis

pools and PTEP tax pools across years.

See proposed §1.959-2(c). In such a case,

each dollar basis pool and PTEP tax pool

relates to PTEP assigned to a single PTEP

group and a single section 904 category

(without regard to the taxable years to

which the PTEP relates). See proposed

§1.959-2(b)(3) and (4). This election is

consistent with a comment in response to

the 2019 notice that recommended allowing taxpayers to pool dollar basis across

years within section 904 categories.

If a covered shareholder elects to combine dollar basis pools and PTEP tax pools

across years, the election applies to the

covered shareholder’s dollar basis pools

and PTEP tax pools with respect to each

foreign corporation in which the covered

shareholder owns stock. See proposed

§1.959-2(c)(1). This ensures consistent

treatment by not permitting a covered

shareholder to maintain combined pools

with respect to some foreign corporations

but not others. A combined pool election

may be revoked only with the consent of

the Commissioner. See proposed §1.9592(c)(2).

2. Foreign Corporation-Level Accounts

Foreign corporation-level accounts

track a foreign corporation’s PTEP and

associated foreign income taxes (corporate

PTEP accounts and corporate PTEP tax

pools, respectively). See proposed §1.9592(d)(1) and (d)(2). A corporate PTEP

account and corporate PTEP tax pool each

relate to a single covered shareholder,

and PTEP or foreign income taxes within

such an account are assigned to section

534

904 categories and PTEP groups (as is the

case in shareholder-level accounts). These

accounts reflect that PTEP and associated

foreign income taxes are foreign corporation-level attributes (which, as discussed

in part II.B.1 of the Explanation of Provisions, are tracked in a shareholder-specific

manner). These accounts also are necessary to allocate and apportion current

year taxes paid or accrued by a foreign

corporation among the relevant statutory

and residual groupings of the foreign corporation, as discussed in part II.F of the

Explanation of Provisions, as well as for

computations under section 956, which

take into account E&P described in section 959(c)(1). Finally, as with shareholder-level accounts, these rules are issued

pursuant to the express delegations of

authority under sections 245A(g), 904(d)

(7), 960(f), 965(o), and 989(c).

A corporate PTEP account relating to

a covered shareholder represents all PTEP

within the covered shareholder’s annual

PTEP accounts with respect to the foreign corporation (therefore, unlike shareholder-level accounts, a corporate PTEP

account does not relate to a single taxable

year of the foreign corporation). Similarly,

a corporate PTEP tax pool for a covered

shareholder represents all foreign income

taxes within the covered shareholder’s

PTEP tax pools with respect to the foreign

corporation. Thus, as a covered shareholder’s annual PTEP accounts and PTEP tax

pools with respect to a foreign corporation

are adjusted, the foreign corporation-level

accounts (including the PTEP groups

within the accounts) are also adjusted.

The proposed regulations do not provide rules for maintaining a foreign corporation-level account for section 959(c)

(3) E&P because the Treasury Department

and the IRS are studying whether such

E&P should be separately computed with

respect to each covered shareholder in

certain instances and related issues (for

example, coordination with section 1248).

For example, assume a case in which US1

and US2, each a covered shareholder, own

60% and 40%, respectively, of the stock

of CFC1, a foreign corporation. CFC1 has

$75x and $0 of PTEP with respect to US1

and US2, respectively, but only $50x of

total E&P as a result of incurring a deficit

in E&P after generating the PTEP. Under

a shareholder-specific approach to com-

Bulletin No. 2025–5

puting CFC1’s section 959(c)(3) E&P,

such E&P would be negative $45x with

respect to US1 ($50x × 60% − $75x) and

$20x with respect to US2 ($50x × 40%

− $0). Under a non-shareholder-specific

approach to computing section 959(c)

(3) E&P, CFC1’s section 959(c)(3) E&P

would be negative $25x ($50x − $75x).

The proposed regulations clarify that a

foreign corporation’s E&P is determined

independently of the foreign corporation’s

PTEP. See proposed §1.959-2(d)(3). For

example, in a distribution by a foreign

corporation with respect to its stock, section 316 determines the extent to which

the distribution is made out of the foreign corporation’s E&P, and section 959

determines the extent to which the portion

that is made out of E&P is a distribution

of PTEP. See also proposed §1.959-10(c)

(2)(iii) (Example 2, alternative facts,

regarding a distribution of built-in loss

property). Additionally, as in the example

in the preceding paragraph, the proposed

regulations clarify that a foreign corporation’s E&P may be less than the foreign

corporation’s PTEP because a loss does

not reduce PTEP.

C. Shareholder-level account adjustments

(proposed §1.959-3)

1. In General

The proposed regulations describe the

adjustments made to a covered shareholder’s annual PTEP accounts (including

PTEP groups within those accounts and,

if applicable, relevant percentages for

section 965 PTEP and PTEP subgroups),

dollar basis pools, and PTEP tax pools

with respect to a foreign corporation. See

proposed §1.959-3. The rules for making

these adjustments are issued pursuant to

the express delegations of authority under

sections 245A(g), 904(d)(7), 986(c)(2),

960(f), 965(o), and 989(c).

These adjustments reflect income inclusions and transactions related to a taxable

year of the foreign corporation, and the

adjustments preserve the character of the

foreign corporation’s PTEP with respect

to the covered shareholder (for example,

the taxable year, section 904 category,

and PTEP group to which PTEP relates).

In applying these rules to tiers of foreign

corporations, the adjustments are applied

Bulletin No. 2025–5

successively from the lowest-tier foreign

corporation to the highest-tier foreign corporation. See proposed §1.959-3(g).

An adjustment to annual PTEP

accounts is treated as made at one of three

points in time (each of which is discussed

below in this part II.C of the Explanation

of Provisions), which determines when

PTEP becomes (or ceases to be) available for distribution to the covered shareholder: (i) at the beginning of the first day

of the foreign corporation’s taxable year,

(ii) concurrently with the transaction giving rise to the adjustment, or (iii) at the

end of the last day of the foreign corporation’s taxable year. See proposed §1.9593(f). An adjustment to dollar basis pools

and PTEP tax pools is treated as made

concurrently with the related adjustment

to annual PTEP accounts.

2. Beginning of Year Adjustments

Three types of PTEP are added to

annual PTEP accounts at the beginning

of the foreign corporation’s taxable year

(even if, for example, the determination

of the amount giving rise to the PTEP

occurs at the end of such taxable year).

This timing ensures that PTEP generated

or received during the taxable year is

available for distribution as of the start of

the taxable year, consistent with sections

316(a)(2) and 959(c) (which determine

dividend treatment and the application of

section 959(a) or (b) based on E&P for the

taxable year).

The first type is PTEP arising from the

covered shareholder’s subpart F income

inclusion or GILTI inclusion with respect

to the foreign corporation for the taxable

year. See proposed §1.959-3(c)(1)(i) and

(ii). To reflect the addition of this PTEP,

basis equal to the U.S. dollar amount of the

income inclusion giving rise to the PTEP

is added to related dollar basis pools. See

proposed §1.959-3(d)(1)(i).

The second type is PTEP with respect

to the covered shareholder that is distributed to the foreign corporation during the

taxable year (discussed in part II.D of the

Explanation of Provisions). See proposed

§1.959-3(c)(1)(iii). To reflect the addition

of this PTEP, the dollar basis and associated foreign income taxes of the PTEP

are added to related dollar basis pools

and PTEP tax pools, and such taxes are

535

assigned to the creditable PTEP tax group

to the extent the foreign corporation is

deemed to pay the taxes under section

960(b)(2) and proposed §1.960-3(c). See

proposed §1.959-3(d)(1)(ii), (e)(1)(i).

Further, the PTEP is reduced by current

year taxes allocated and apportioned to

the PTEP (that is, by foreign income taxes

imposed on the PTEP and paid or accrued

by the foreign corporation in the taxable year, as distinguished from foreign

income taxes described in the preceding

sentence, which were paid or accrued

by another foreign corporation in a prior

distribution of the PTEP). See proposed

§1.959-3(c)(1)(v); see also part II.F of the

Explanation of Provisions (rules for allocating and apportioning current year taxes

to PTEP). Such current year taxes reduce

related dollar basis pools and are added to

related PTEP tax pools, where the taxes

are assigned to the creditable PTEP tax

group to the extent the foreign corporation

is a CFC and a credit for the taxes is not

disallowed or suspended at the level of the

CFC. See proposed §1.959-3(d)(1)(iii), (e)

(1)(ii).

The third type is PTEP with respect to

the covered shareholder that results from

the application of the foreign corporation’s section 961(c) basis to gain recognized by the foreign corporation during

the taxable year (discussed in part III.E

of the Explanation of Provisions). See

proposed §1.959-3(c)(1)(iv). To reflect

the addition of this PTEP, the dollar basis

of the PTEP is added to related dollar

basis pools. See proposed §1.959-3(d)(1)

(ii). Further, current year taxes allocated

and apportioned to the PTEP reduce the

PTEP, reduce related dollar basis pools,

and are added to related PTEP tax pools,

where (like in a distribution) the taxes are

assigned to the creditable PTEP tax group

to the extent the foreign corporation is a

CFC and a credit for the taxes is not disallowed or suspended at the level of the

CFC. See proposed §1.959-3(d)(1)(iii), (e)

(1)(ii).

3. Time of Transaction Adjustments

Three types of PTEP are added to, or

removed from, annual PTEP accounts

concurrently with the relevant transaction

occurring during the foreign corporation’s

taxable year.

January 27, 2025

The first type is PTEP distributed by

the foreign corporation during the taxable year. See proposed §1.959-3(c)(1)

(vi). To reflect the removal of this PTEP,

the dollar basis and associated foreign

income taxes of the PTEP are removed

from related dollar basis pools and PTEP

tax pools. See proposed §1.959-3(d)(1)

(iv), (e)(1)(iii).

The second type is PTEP arising from

gain recognized by the covered shareholder on the sale or exchange of stock

during the taxable year that is recharacterized and included in gross income as

a dividend under section 1248 by reason of E&P attributed to stock of the

foreign corporation under section 1248.

See proposed §1.959-3(c)(1)(vii); see

also section 959(e). This timing prevents

iterative computations that could result if

the PTEP were available for distribution

earlier in the taxable year. To reflect the

addition of this PTEP, basis equal to the

U.S. dollar amount of the income inclusion giving rise to the PTEP is added to

related dollar basis pools. See proposed

§1.959-3(d)(1)(i). The Treasury Department and the IRS are studying whether a

foreign corporation’s PTEP should similarly be increased to reflect gain treated

as a dividend under section 964(e)(1) by

reason of E&P of the foreign corporation,

which amount generally increases the

selling CFC’s PTEP, and welcome comments on whether increasing the foreign

corporation’s PTEP would be appropriate

notwithstanding the duplicative result

(that is, PTEP would be in the selling

CFC and the foreign corporation whose

E&P gave rise to the dividend).

The third type is PTEP that transfers

from (or to) the covered shareholder under

section 959’s successor rules (discussed

in part II.G of the Explanation of Provisions). See proposed §1.959-3(c)(1)(viii),

(ix). To reflect the removal (or addition)

of this PTEP, the dollar basis and associated foreign income taxes of the PTEP are

removed from (or added to) related dollar

basis pools and PTEP tax pools. See proposed §1.959-3(d)(1)(iv) and (v), (e)(1)

(iii) and (iv).

4. End of Year Adjustments

Two types of adjustments are made at

the end of the foreign corporation’s tax-

January 27, 2025

able year. These adjustments relate to the

covered shareholder’s section 956 amount

with respect to the foreign corporation for

the taxable year.

First, PTEP to which the section 956

amount is allocated (which, as discussed

in part II.E of the Explanation of Provisions, is excluded from the covered

shareholder’s gross income under section

959(a)(2)) is reassigned within annual

PTEP accounts from section 959(c)(2)

PTEP groups to section 959(c)(1) PTEP

groups. See proposed §1.959-3(c)(1)(x).

To reflect the reclassification, the dollar basis and associated foreign income

taxes of the PTEP are moved from dollar

basis pools and PTEP tax pools relating

to section 959(c)(2) PTEP groups to dollar basis pools and PTEP tax pools relating to section 959(c)(1) PTEP groups.

See proposed §1.959-3(d)(1)(vi), (e)(1)

(v).

Next, PTEP arising from the portion

of the section 956 amount included in

the covered shareholder’s gross income

under section 951(a)(1)(B) is added to

annual PTEP accounts. See proposed

§1.959-3(c)(1)(xi). In addition, an

amount of basis equal to the U.S. dollar

amount of the section 956 inclusion giving rise to the PTEP is added to related

dollar basis pools. See proposed §1.9593(d)(1)(i).

Further, additional rules address cases

where the covered shareholder acquires

ownership of stock of the foreign corporation on or after the last relevant

day of the foreign corporation’s taxable

year (that is, the last day of such taxable

year on which the foreign corporation is

a CFC) and a portion of a section 956

amount of a United States shareholder is

attributable to such stock. See proposed

§1.959-3(c)(4). Under these rules, PTEP

of the foreign corporation that has transferred to the covered shareholder but to

which such portion of the section 956

amount is ultimately allocated (discussed

in part II.E of the Explanation of Provisions) is reclassified from section 959(c)

(2) PTEP groups to section 959(c)(1)

PTEP groups. Moreover, the foreign corporation’s PTEP with respect to the covered shareholder is increased to reflect

the inclusion in income by the United

States shareholder of such portion of the

section 956 amount.

536

D. Distributions of PTEP (proposed

§1.959-4)

1. Application of Exclusions

i. In general

The proposed regulations provide

rules regarding the exclusions from

gross income under section 959(a)(1)

and (b) for PTEP that is distributed to a

covered shareholder or a CFC. See proposed §1.959-4; see also part II.D.2 of the

Explanation of Provisions (determining

distributed PTEP).

Under the section 959(a)(1) exclusion,

PTEP distributed to a covered shareholder,

other than taxable section 962 PTEP, is

excluded from the covered shareholder’s

gross income. See proposed §1.959-4(b)

(1); see also section 962(d) and proposed

§1.312-8(c) (domestic corporation’s

receipt of PTEP does not increase E&P,

discussed in part VIII.I of the Explanation

of Provisions).

Under the section 959(b) exclusion,

PTEP distributed by a CFC to another

CFC is excluded from the recipient CFC’s

gross income for purposes of determining the recipient CFC’s subpart F income

and tested income or tested loss, provided

that the PTEP relates to a covered shareholder that is a United States shareholder

in both CFCs. See proposed §1.959-4(b)

(2); see also §1.312-6(b) (the distribution

generally increases the recipient CFC’s

E&P) and proposed §1.952-1(c)(4) (the

distribution does not increase the recipient CFC’s current year E&P for purposes

of the limitation in section 952(c)(1)(A),

discussed in part VIII.I of the Explanation

of Provisions).

Applying the section 959(b) exclusion

for purposes of determining the recipient

CFC’s tested income or tested loss prevents double taxation (and thus is consistent with the policy of section 959)

in cases where the distribution is not a

related party dividend described in section 951A(c)(2)(A)(i)(IV) and therefore

could otherwise result in tested income.

The Treasury Department and the IRS

are of the view that this approach, which

is issued under the express delegation of

authority in section 951A(f)(1)(B), is consistent with section 951A(f)(1)(A) (treating an inclusion under section 951A(a)

Bulletin No. 2025–5

in the same manner as an inclusion under

section 951(a)(1)(A) for purposes of section 959), which should be interpreted as

allowing references to section 951(a) in

section 959 to be treated as including a

reference to section 951A(a).

Applying the section 959(b) exclusion

only to PTEP distributed by a CFC to

another CFC is consistent with the statute. However, under the express delegation of authority in section 965(o), the

proposed regulations provide a special

rule pursuant to which a specified foreign

corporation (as defined in §1.965-1(f)

(45)(i)(B)) that is not a CFC is treated

as a CFC for purposes of applying the

section 959(b) exclusion to section 965

PTEP distributed by the specified foreign corporation, which ensures that the

section 959(b) exclusion applies to such

PTEP when received by a CFC. See proposed §1.959-4(b)(2)(ii). The Treasury

Department and the IRS are studying

the application of section 959(b) to other

PTEP distributed by a foreign corporation that is not a CFC (for example, in a

case where the foreign corporation was

a CFC when the PTEP was generated

but is no longer a CFC when the PTEP

is distributed). Irrespective of whether

the section 959(b) exclusion applies to

PTEP distributed to a foreign corporation, the PTEP remains PTEP and, in a

subsequent distribution, may be excluded

from gross income under section 959(a)

(1) or (b). See proposed §§1.959-2 and

1.959-3 (describing shareholder-level

annual PTEP accounts and related adjustments with respect to a foreign corporation without regard to CFC status). This

treatment is required to give effect to

section 959(a), which does not depend on

the CFC status of any intermediary entities through which a covered shareholder

ultimately receives PTEP.

ii. Split-ownership structures

Under the proposed regulations, the

section 959(b) exclusion applies at the

CFC-level by excluding a distribution

of PTEP from the recipient CFC’s gross

income for certain purposes. In structures

where stock of a CFC is not all owned by

a single United States shareholder, the

application of the section 959(b) exclusion at the CFC-level could, absent spe-

Bulletin No. 2025–5

cial rules, result in all United States shareholders of the CFC sharing any benefits of

the exclusion (rather than just the United

States shareholder to which the excluded

PTEP relates) and partial double taxation

to the United States shareholder to which

the excluded PTEP relates (to the extent

the exclusion benefits other United States

shareholders).

Guidance issued before the Act

generally used a “gross-up” mechanism to address this issue. Rev. Rul.

82-16, 1982-1 C.B. 106, considered a

scenario where a United States shareholder owned 70% of the stock of an

upper-tier CFC, with the remaining

30% owned by non-United States shareholders, and the upper-tier CFC owned

all the stock of a lower-tier CFC. The

lower-tier CFC earned $100x of subpart

F income, which gave rise to a $70x

subpart F income inclusion and, thus,

$70x of PTEP with respect to the United

States shareholder. In a later year, the

lower-tier CFC distributed $200x to the

upper-tier CFC. The ruling concluded

that section 959(b) looks to the total

amount of E&P of the lower-tier CFC

that caused the United States shareholder’s subpart F income inclusion, with

the result that section 959(b) excluded

$100x (rather than $70x) from the

upper-tier CFC’s subpart F income in

applying section 951(a) to the United

States shareholder. Conversely, a $70x

exclusion under section 959(b) would

have caused the upper-tier CFC to have

an additional $30x of subpart F income

from the distribution, which would have

led to a $21x ($30x × 70%) subpart F

income inclusion for the United States

shareholder even though its share of the

distribution was all attributable to PTEP.

However, a gross-up mechanism raises

certain issues. For example, computing a

gross-up may be complex or burdensome

in light of the increased prevalence of

PTEP that is not pro rata with respect to

United States shareholders following the

Act (for instance, PTEP resulting from a

GILTI inclusion, which is not determined

solely by reference to a particular CFC).

Additionally, a gross-up mechanism could

result in the need for different determinations of a CFC’s subpart F income (and

tested income or tested loss) for different

United States shareholders of the CFC,

537

which is inconsistent with the way that

these types of income are treated under

existing regulations for other purposes of

the Code such as the expense allocation

rules or foreign tax credit rules.

Accordingly, instead of a gross-up

mechanism, the proposed regulations

coordinate the section 959(b) exclusion

with revisions to the pro rata share rules

of section 951(a) (discussed in part IV.C

of the Explanation of Provisions). Under

this approach, a CFC’s subpart F income

is determined with respect to all shareholders by excluding the same amount of

PTEP received by the CFC, and United

States shareholders’ pro rata shares of the

CFC’s subpart F income are computed in

a manner so that any benefits of the application of the section 959(b) exclusion

to PTEP with respect to a United States

shareholder generally inure only to that

United States shareholder. For instance, if

two United States shareholders own equal

interests in a CFC, and the CFC receives

a distribution half of which is PTEP with

respect to one United States shareholder

(because there is PTEP with respect to the

United States shareholder at least equal to

its share of distribution) and the other half

of which gives rise to subpart F income

(because there is no PTEP with respect to

the other United States shareholder and no

exception from subpart F income applies),

then only the United States shareholder

with respect to which there is no PTEP has

a pro rata share of the subpart F income

resulting from the distribution.

The Treasury Department and the IRS

are of the view that the approach in the

proposed regulations appropriately carries out the shareholder-specific nature of

section 959(b) (that is, excluding PTEP

with respect to a United States shareholder from a CFC’s gross income for

purposes of the application of section

951(a) to the CFC with respect to the

United States shareholder). Additionally,

this approach conforms with the approach

for applying section 961(c) which, under

the proposed regulations (as discussed

in part III.E of the Explanation of Provisions), also provides for a gross income

exclusion at the CFC-level that is coordinated with the section 951(a) pro rata

share rules to ensure its benefits generally inure only to the appropriate United

States shareholder.

January 27, 2025

iii. Issues involving allocation rules under

section 861

The approach in the proposed regulations discussed in part II.D.1.ii of the

Explanation of Provisions (applying the

section 959(b) exclusion, as well as section 961(c), at the CFC-level) can lead to

issues involving the rules of section 861

for allocating and apportioning deductions

because a CFC’s deductions that are not

current year taxes are not allocated and

apportioned under section 861 to PTEP.

See §1.960-1(c)(1)(ii) and proposed

§1.959-6(d)(1).

For example, in a case where some,

but not all, of a distribution received by

a CFC is PTEP, an amount of the CFC’s

deductible interest expense could reduce

the non-PTEP portion of the distribution.

See also proposed §1.951-1(h)(2)(ii)(C)

(Example 1, alternative facts). This may

result in a benefit if the non-PTEP portion would give rise to subpart F income

or tested income, but otherwise may not

be beneficial if the interest deductions

reduce section 959(c)(3) E&P and thus the

potential for a dividends received deduction under section 245A. Comments are

requested on how to appropriately allocate

and apportion deductions of a CFC when

some, but not all, of a distribution (or gain

recognized) is PTEP.

For example, comments are requested

on whether deductions that are not current year taxes, such as deductible interest

expense, should be allocated and apportioned to, and therefore reduce, the CFC’s

PTEP. Under this approach, to the extent

PTEP with respect to a United States

shareholder is reduced by deductions that

are not current year taxes, the shareholder

could be allowed to retain an equivalent

amount of adjusted basis in property

directly owned by the shareholder and on

which the remaining PTEP is ultimately

distributed, with the result that the shareholder would receive a benefit equivalent

to a deduction (similar to the result discussed in Part III.C.2.ii of the Explanation

of Provisions in the case of foreign income

taxes that are associated with PTEP but

not credited under section 901).

Comments are also requested on

whether, as an alternative to the approach

in the proposed regulations, sections

959(b) and 961(c) should apply at the

January 27, 2025

shareholder-level. Under this type of

approach, instead of section 959(b) preventing a distribution to a CFC from giving rise to subpart F income (as it has historically been interpreted, but with respect

to a particular shareholder), section 959(b)

would generally reduce a United States

shareholder’s pro rata share of the CFC’s

subpart F income, to the extent attributable to distributed PTEP. Furthermore,

section 961(c) would apply in a similar

manner in the case of a CFC’s gain from

a sale or other disposition of stock of a

foreign corporation. Comments should

address whether a CFC’s deductions that

are not current year taxes, such as deductible interest expense, should be allocated

and apportioned to gross income of the

CFC that does not give rise to an inclusion at the shareholder-level under section

959(b) or 961(c) or whether CFC-level

provisions (such as section 954(c)(3) or

(c)(6) or 964(e)(1)) apply to such income

and, if so applied, whether the E&P from

the income should be treated as section

959(c)(3) E&P or PTEP to ensure that the

CFC-level and shareholder-level provisions interact appropriately.

2. Determining Distributed PTEP

i. Covered distributions

For a distribution to be considered a

distribution of PTEP under section 959,

the proposed regulations first require that

the distribution be a covered distribution,

which is generally defined as any distribution made by a foreign corporation with

respect to its stock to the extent that the

distribution is a dividend (as defined in

section 316), determined without regard

to section 959(d). See proposed §1.9594(c)(1). While a covered distribution

may include deemed distributions treated

as dividends (for example, distributions

under section 304), a covered distribution

does not include an amount treated as a

dividend by reason of section 78, 367(b),

964(e)(1), or 1248. A deemed dividend

under section 78 is determined without

regard to E&P (and does not represent a

distribution of E&P to any shareholder),

and deemed dividends under the other

provisions, regardless of whether they

constitute deemed distributions of E&P,

are determined by excluding PTEP (apart

538

from §1.367(b)-2(j)(2)(ii), which separately provides for a deemed distribution

of PTEP in certain nonrecognition transactions, and §1.367(b)-3(g)(1), which

separately provides for a deemed distribution of E&P, including PTEP, in certain inbound nonrecognition transactions

described in §1.367(b)-3). The proposed

regulations do not address the treatment

of dividends arising under section 356(a)

(2) as covered distributions, which will

be addressed in future guidance regarding

reorganizations (although no inference is

intended as to the treatment of such dividends under current law). See proposed

§1.959-4(c)(2).

Comments on the 2019 notice asserted

that a distribution of PTEP should not

depend on the existence of E&P that

would result in a dividend under section

316, stating that section 959(c) requires

applying section 316 separately to sections 959(c)(1), (c)(2), and (c)(3) in determining whether there is sufficient E&P

under section 316 to support a distribution of E&P under that paragraph. Comments noted that the approach described

in the 2019 notice was contrary to section

959(a) and inconsistent with the policy of

section 959 to facilitate the repatriation of

PTEP. The Treasury Department and the

IRS remain of the view described in the

2019 notice under which the reference to

section 316(a) in section 959(c) indicates

that, under the statute, a distribution of

PTEP cannot occur unless there is sufficient current or accumulated E&P to support what would otherwise be a dividend

under section 316. This reading of the statute is consistent with the principle underlying section 959 that PTEP represents a

type of E&P. Thus, the proposed regulations do not adopt the comments.

ii. Analyzing covered distributions

The proposed regulations provide rules

for determining the extent to which PTEP

is distributed in a covered distribution. See

proposed §1.959-4(d). Under these rules,

each covered shareholder first determines

its share of the covered distribution, which

is the portion of the covered distribution

that is made to the covered shareholder

or any portion of the covered distribution that is made to an upper-tier foreign

corporation and assigned to the covered

Bulletin No. 2025–5

shareholder under proposed §1.951-2 (discussed in part IV.B of the Explanation of

Provisions). See proposed §1.959-4(d)(1).

For this purpose, the portion of a covered

distribution that is made to a partnership,

or that is treated as made to the partnership

in the case of tiered partnerships, is treated

as made to the partnership’s partners in

accordance with their respective distributive shares of such portion. See proposed

§1.959-4(c)(3). Thus, if a covered shareholder is a partner in an upper-tier partnership, the covered shareholder’s share

of a covered distribution would include a

portion of the covered distribution that is

made to a lower-tier partnership because

an amount of the covered distribution

made to the lower-tier partnership would

be treated as made to the upper-tier partnership by reason of the upper-tier partnership being a partner in the lower-tier

partnership and, in turn, an amount of the

covered distribution treated as made to the

upper-tier partnership would be treated as

made to the covered shareholder by reason

of the covered shareholder being a partner

in the upper-tier partnership.

Next, each covered shareholder allocates its share of the covered distribution to the distributing foreign corporation’s PTEP with respect to the covered

shareholder, to the extent thereof and in

accordance with the composition rules

described in part II.D.2.iii of the Explanation of Provisions, and then allocates

any remaining portion of such share to the

distributing foreign corporation’s section

959(c)(3) E&P. See proposed §1.959-4(d)

(2) and (e)(1). For this purpose, the distributing foreign corporation’s PTEP is

determined immediately before the covered distribution (and thus includes PTEP

resulting from a subpart F income inclusion or GILTI inclusion for the distributing foreign corporation’s taxable year in

which the covered distribution is made

because such PTEP is added to the covered shareholder’s annual PTEP accounts

at the beginning of the taxable year).

Further, because the amount of a covered shareholder’s share of a covered

distribution is determined on an aggregate basis rather than on a share-specific

basis, the proposed regulations treat a pro

rata portion of all PTEP distributed in

each covered shareholder’s share of the

covered distribution as distributed with

Bulletin No. 2025–5

respect to each share of stock of the distributing foreign corporation on which the

covered shareholder’s share of the covered distribution is made. See proposed

§1.959-4(d)(4); see also proposed §1.95910(c)(1) (Example 1). In this way, basis

adjustments resulting from distributed

PTEP can be made on each share of stock

of the foreign corporation in accordance

with section 961 and, if applicable, PTEP

of a recipient foreign corporation can be

increased.

iii. Composition rules

As discussed in part II.C of the Background, different types of PTEP can

have different tax effects, including with

respect to foreign currency gain or loss

under section 986(c) or deemed paid taxes

under section 960(b). Thus, once a covered shareholder has identified the portion

of its share of a covered distribution that is

allocated to PTEP, it is necessary to determine the specific PTEP that is distributed.

The proposed regulations include composition rules for this purpose. See proposed

§1.959-4(d)(3) and (e)(2) through (5); see

also proposed §1.959-10(c)(2) (Example

2).

Under these composition rules, PTEP

is sourced from section 959(c)(1) PTEP

groups before section 959(c)(2) PTEP

groups and then from each group within

the section 959(c)(1) PTEP groups or section 959(c)(2) PTEP groups, respectively,

on a “last-in, first-out” basis, subject to a

priority rule for PTEP resulting from section 965 (section 965 priority rule). See

proposed §1.959-4(e)(2), (3). Additionally, PTEP that otherwise has the same

priority is sourced first from PTEP that

is not taxable section 962 PTEP and then

from taxable section 962 PTEP, consistent

with the rules currently in §1.962-3. See

proposed §1.959-4(e)(4). Lastly, PTEP

that has the same priority is sourced on a

pro rata basis. See proposed §1.959-4(e)

(5).

The section 965 priority rule sources

PTEP in section 959(c)(1) PTEP groups

first from the reclassified section 965(a)

PTEP group, then from the reclassified

section 965(b) PTEP group, and finally

from the remaining section 959(c)(1)

PTEP groups. See proposed §1.959-4(e)

(2)(ii). Similarly, for PTEP in section

539

959(c)(2) PTEP groups, the section 965

priority rule sources such PTEP first

from the section 965(a) PTEP group, then

from the section 965(b) PTEP group, and

finally from the remaining section 959(c)

(2) PTEP groups. See proposed §1.9594(e)(2)(iii). The section 965 priority rule,

which is issued under the express delegation of authority in section 965(o),

is consistent with the 2019 notice and is

intended to simplify PTEP recordkeeping

and IRS administration.

Comments on the 2019 notice stated

that the section 965 priority rule (as

described in the notice) would be a departure from the last-in, first-out approach for

sourcing distributions from E&P, and also

argued that there is no suggestion in section 965 or its legislative history that such

a departure was intended or is necessary

or appropriate. Other comments asserted

that the policy for the section 965 priority

rule was unclear, stating that a pure last-in,

first-out approach does not impose additional burdens on taxpayers because once

a taxpayer has determined its section 965

PTEP the additional burden of maintaining that information is minimal. Further,

even if the section 965 priority rule simplifies PTEP recordkeeping, comments

noted that this may be outweighed by the

reduction in foreign tax credits under section 960(b) that accompanies distributions

of section 965 PTEP. Another comment

noted that the section 965 priority rule

would adversely affect certain individuals who made section 962 elections and

are economically compelled to distribute

their PTEP every year to pay taxes arising under section 951(a) because it would

accelerate the distribution of PTEP that

is not excluded from gross income under

section 962(d). Given these concerns,

and because the section 965 priority rule

departs from the longstanding approach in

existing §1.959-3(b), comments requested

that taxpayers be able to elect to apply a

last-in, first-out approach with no prioritization of section 965 PTEP.

The Treasury Department and the IRS

continue to be of the view that the section 965 priority rule will simplify PTEP

recordkeeping and IRS administration in

the future by eventually eliminating section 965 PTEP (which, as noted in part II.C

of the Background requires specific and

detailed rules to apply sections 960(b) and

January 27, 2025

986(c)) and reducing the overall number

of PTEP groups that need to be tracked.

The Treasury Department and the IRS are

of the view that, on balance, this benefit

outweighs the concerns raised in comments. Additionally, the section 965 priority rule is within the scope of the authority

delegated to the Treasury Department and

the IRS to administer section 965, including through sections 965(o) and 7805(a).

Further, the proposed regulations do not

adopt comments suggesting that taxpayers

be allowed to not apply the section 965

priority rule because this would undermine the simplification and burden reduction policy of the rule.

iv. Dollar basis and associated foreign

income taxes rules

The proposed regulations provide a pro

rata approach for determining the dollar

basis and associated foreign income taxes

of PTEP distributed in a covered shareholder’s share of a covered distribution.

See proposed §1.959-4(e)(3), (f) and (g).

Under this approach, the portion of a dollar

basis pool or PTEP tax pool, as applicable,

attributed to distributed PTEP is determined based on the percentage that such

PTEP represents of all PTEP relating to

the dollar basis pool or PTEP tax pool. As

discussed in part II.B.1.iii of the Explanation of Provisions, dollar basis pools and

PTEP tax pools are maintained separately

within each annual PTEP account for each

PTEP group unless a combined pool election is in effect, in which case each dollar basis pool and PTEP tax pool relates

to PTEP assigned to a single PTEP group

and a single section 904 category (without

regard to the taxable years to which the

PTEP relates).

E. PTEP to which a section 956 amount

is allocated (proposed §1.959-5)

The proposed regulations provide rules

regarding the exclusion from gross income

under section 959(a)(2) for PTEP that

would otherwise be included under section 951(a)(1)(B). See proposed §1.959-5;

see also proposed §1.959-10(c)(4) (Example 4). Under these rules, a covered shareholder allocates its section 956 amount

(that is, the amount determined under

section 956 and §1.956-1 with respect to

January 27, 2025

the covered shareholder and a CFC) first

to the CFC’s PTEP that is with respect

to the covered shareholder and assigned

to section 959(c)(2) PTEP groups, to the

extent thereof and in accordance with the

principles of the composition rules for

distributions of PTEP, and then allocates

any remaining portion of such section

956 amount to the CFC’s section 959(c)

(3) E&P. See proposed §1.959-5(c)(1) and

(d)(1).

For purposes of these rules, the CFC’s

PTEP is determined on the last relevant

day of the CFC’s taxable year to which the

section 956 amount relates (that is, the last

day of such taxable year on which the foreign corporation is a CFC). See proposed

§1.959-5(d)(2). However, the CFC’s PTEP

is reduced to the extent it is distributed on

or after the last relevant day to ensure that

the section 956 amount is allocated only to

section 959(c)(2) PTEP that remains after

accounting for all covered distributions

during the CFC’s taxable year, in accordance with section 959(f)(2). Moreover,

the PTEP is determined without regard

to any transfer of PTEP from the covered

shareholder to a successor covered shareholder on (or after) the last relevant day,

thereby ensuring that section 959(c)(2)

PTEP that exists with respect to the covered shareholder when the covered shareholder’s ownership of stock of the CFC

is determined for purposes of sections

951(a)(1)(B) and 956 may be taken into

account for purposes of section 959(a)(2).

As with distributions of PTEP, the proposed regulations use a pro rata approach

to determine the dollar basis and associated foreign income taxes of PTEP to

which a section 956 amount is allocated.

See proposed §1.959-5(e) and (f).

F. Allocating and apportioning current

year taxes to PTEP (proposed §1.959-6)

The proposed regulations provide

rules for the application of §1.861-20 to

allocate and apportion current year taxes

to the statutory groupings (as generally

described in §1.861-8(a)(4)) of PTEP of a

foreign corporation. See proposed §1.9596(b) (describing the statutory groupings

for purposes of proposed §1.959-6 as the

corporate PTEP accounts of the foreign

corporation described in proposed §1.9592(d)(1)). These rules are issued pursuant

540

to the express delegations of authority

under sections 245A(g), 904(d)(7), 960(f),

and 965(o).

Under the proposed regulations, current year taxes are generally associated

with PTEP to the extent the foreign corporation pays or accrues such taxes with

respect to PTEP arising by reason of a

PTEP realization event that occurs in the

same taxable year. See proposed §1.9596(b); see also proposed §1.959-10(c)(3)

(Example 3). A PTEP realization event

occurs if there is a distribution of PTEP

or gain recognized on a sale, exchange, or

other disposition of foreign stock that is

treated as PTEP as a result of the application of section 961(c) basis. Current year

taxes that are paid or accrued with respect

to a PTEP realization event that occurs in

a different taxable year may not be associated with PTEP of a foreign corporation

(consistent with the rule in current §1.9601(d)(3)(ii)(B)). See proposed §1.959-6(b)

and 1.960-1(d)(3)(ii)(B).

Proposed §1.959-6(c) provides rules

relating to the application of the allocation

and apportionment rules in §1.861-20.

Current year taxes (in the foreign corporation’s functional currency) are allocated

and apportioned to each corporate PTEP

account of the foreign corporation that

is increased during the taxable year as

the result of a PTEP realization event by

applying the rules in §1.861-20 and treating PTEP with respect to each covered

shareholder arising by reason of a PTEP

realization event as an amount of dividend

income (in the case of a distribution of

PTEP) or gain from the sale, exchange, or

other disposition of foreign stock (in the

case of PTEP resulting from the application of section 961(c) basis). See proposed

§1.959-6(c) for purposes of identifying the

corresponding U.S. item under §1.86120(b) through (c). While certain United

States shareholders (taking into account

the application of §1.958-1(d)) must take

into account a pro rata share of a CFC’s

subpart F income and tested income (or

loss), the CFC’s deductions are not divided

into pro rata shares allocable to particular

shareholders, and instead, must be allocated and apportioned to gross income of

the CFC before the determination of each

United States shareholder’s pro rata share

of subpart F income and tested income

(or loss). As a result, because deductions

Bulletin No. 2025–5

must be allocated and apportioned to a

CFC’s income (rather than being allocated

directly to United States shareholders), it

is necessary to allocate and apportion current year taxes with respect to the statutory groupings of PTEP of the foreign corporation, which the proposed regulations

provide are the corporate PTEP accounts

described in proposed §1.959-2(d)(1).

The proposed regulations also clarify

other aspects of allocations of deductions

involving PTEP. In particular, the proposed regulations provide that no deductions, other than current year taxes, may be

allocated and apportioned to the statutory

groupings of PTEP of a foreign corporation (consistent with the rule in current

§1.960-1(c)(1)(ii)). See proposed §1.9596(d)(1). See also the request for comments

in Part II.D.1.iii of the Explanation of

Provisions on an approach that would also

allocate and apportion deductions, other

than current year taxes, to PTEP.

Finally, the proposed regulations provide that current year taxes paid or accrued

by a foreign corporation that are denominated in a currency other than the functional currency of the foreign corporation

are translated into the functional currency

of the foreign corporation at the spot rate

on the day on which the current year taxes

are paid or accrued. See proposed §1.9596(d)(2). This currency translation rule

applies for purposes of (i) making certain

adjustments to accounts maintained under

section 959 and the proposed regulations

in the foreign corporation’s functional

currency and (ii) allocating and apportioning functional currency amounts at the

level of the foreign corporation.

G. General successor transactions

(proposed §1.959-7)

1. In General

If there is an acquisition of stock of a

foreign corporation that results in a change

of ownership of stock of the foreign corporation, successor rules in section 959

generally transfer the foreign corporation’s PTEP with respect to the covered

shareholder that relinquishes ownership

of stock of the foreign corporation to the

covered shareholder that acquires ownership of the stock. See section 959(a)

(applying the rules of section 959(a) to any

Bulletin No. 2025–5

other United States person who acquires

any portion of a United States shareholder’s interest in a

This text is long and has been trimmed here. Open the source document for the complete record.