# Pro Rata Share of Subpart F Income, Tested Income, or Tested Loss

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2026-17365

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** August 26, 2026
- **Citation:** 91 FR 55037

## Text

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-115646-25]
RIN 1545-BR77
Pro Rata Share of Subpart F Income, Tested Income, or Tested Loss

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This document contains proposed regulations relating to the determination of a United States shareholder's pro rata share of subpart F income, tested income, or tested loss of a controlled foreign corporation. The proposed regulations would affect shareholders of foreign corporations, including United States shareholders of controlled foreign corporations.

DATES:

Written or electronic comments and requests for a public hearing must be received by October 26, 2026.

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-115646-25) 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 Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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 to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-115646-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations, Dylan J. Steiner at (202) 317-6934; 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 toll-free numbers).

SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed additions and amendments to 26 CFR part 1 (proposed regulations) under sections 951 and 951A and certain other provisions of the Internal Revenue Code (Code) relating to the determination of a United States shareholder's pro rata share of subpart F income, tested income, or tested loss of a controlled foreign corporation. The proposed regulations also include guidance regarding the transition rule (transition rule) in section 70354(c)(2) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA). The proposed regulations are issued pursuant to the express delegations of authority in section 951(a)(4) and section 70354(c)(2) of the OBBBA. The proposed regulations are also issued pursuant to the express delegation of authority in section 7805(a).

Background

I. Scope

This Background describes the rules for determining a United States shareholder's pro rata share of subpart F income, tested income, or tested loss, as relevant, as well as certain other related provisions. Any term used but not defined in this preamble has the meaning given to it in the proposed regulations.

II. Pro Rata Share Rules

A. Rules Before OBBBA

Former section 951(a)(1)(A), as in effect before amendments made by the OBBBA,
1

generally required a United States shareholder (U.S. shareholder) (as defined in section 951(b)) 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 if the corporation was a controlled foreign corporation (CFC) (as defined in section 957(a)) at any time during the taxable year and the shareholder owned stock of the corporation on the last day of the taxable year on which the corporation was a CFC (last relevant day). For this purpose, ownership of stock was determined under section 958(a) and thus included stock owned directly and stock owned indirectly through foreign corporations and other foreign entities (including certain domestic entities to the extent treated as foreign entities under § 1.958-1(d)(1)).
2

Under former section 951(a)(1)(B), a U.S. shareholder was generally also required to include in gross income its amount determined under section 956 for the taxable year of the foreign corporation.

1
All references to former provisions under section 951 or 951A in this preamble are to the versions of those provisions as in effect before the amendments made by the OBBBA.

2
For purposes of this preamble, a reference to stock ownership means stock owned within the meaning of section 958(a).

For purposes of former section 951(a)(1)(A), a U.S. shareholder's pro rata share of a CFC's subpart F income for a taxable year of the CFC was calculated by first determining the amount described in former section 951(a)(2)(A). This amount, which was determined based on the U.S. shareholder's proportionate share of a hypothetical distribution by the CFC, represented subpart F income (unreduced by distributions during the taxable year) allocable to stock of the CFC that the U.S. shareholder owned on the last relevant day.
See
§ 1.951-1(b) and (e). This amount was limited under former section 951(a)(2)(A) based on the portion of the taxable year during which the foreign corporation was a CFC. The amount determined under former section 951(a)(2)(A) was then reduced for certain distributions under former section 951(a)(2)(B) to arrive at the U.S. shareholder's pro rata share of the CFC's subpart F income. Former section 951(a)(2)(B) addressed cases in which stock of a CFC owned by a U.S. shareholder on the last relevant day was acquired by the U.S. shareholder during the CFC's taxable year by generally reducing the U.S. shareholder's pro rata share of the CFC's subpart F income by the amount of dividends received by any other person during the taxable year with respect to the acquired stock (but limited that reduction based on the portion of the CFC's taxable year during which the U.S. shareholder did not own the stock of the CFC).

Former section 951A(a) required a U.S. shareholder of a CFC to include in gross income its global intangible low-taxed income (GILTI inclusion amount).
See
§ 1.951A-1(b). A U.S. shareholder's GILTI inclusion amount was 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 owned stock, such as tested income, tested loss, and qualified business asset investment.
See
§ 1.951A-1(c). A U.S. shareholder's pro rata share of a CFC's tested items was determined in the same manner as a U.S. shareholder's pro rata share of a CFC's subpart F income under former section 951(a)(2), subject to certain modifications.
See
section 951A(e)(1) and § 1.951A-1(d).

B. OBBBA Revisions

1. Overview

The OBBBA amended sections 951(a) and 951A for taxable years of foreign corporations beginning after December 31, 2025. The OBBBA also provided the transition rule for certain taxable years before the amendments to sections 951(a) and 951A apply.

2. Revised Section 951(a)

As amended by the OBBBA, section 951(a)(1)(A) requires a U.S. shareholder of a foreign corporation to include in gross income the U.S. shareholder's pro rata share of the foreign corporation's subpart F income if the foreign corporation is a CFC at any time during the foreign corporation's taxable year (a CFC year) and the U.S. shareholder owns stock of the foreign corporation on any day during the CFC year. Thus, unlike pre-OBBBA law, a section 951(a)(1)(A) inclusion is not limited to U.S. shareholders that own stock in the CFC on the last relevant day. However, the OBBBA retains the last relevant day rule in section 951(a)(1)(B), under which a U.S. shareholder is generally required to include in gross income its amount determined under section 956.

For purposes of section 951(a)(1)(A), the OBBBA replaced the hypothetical distribution and reduction rules for determining a U.S. shareholder's pro rata share of subpart F income under former sections 951(a)(2)(A) and (B) with an approach that is instead based on the subpart F income attributable to the U.S. shareholder's ownership of stock of the foreign corporation during the CFC year. Specifically, section 951(a)(2) provides that a U.S. shareholder's pro rata share of a CFC's subpart F income is the portion of such income that is attributable to the stock of the foreign corporation owned by the shareholder and any period of the CFC year during which (i) the shareholder owned such stock, (ii) the shareholder was a U.S. shareholder of the corporation, and (iii) the corporation was a CFC.

The OBBBA also modified the time at which amounts determined under sections 951(a)(1)(A) and (B) are included in gross income by a U.S. shareholder. Under section 951(a)(3), any amount required to be included in gross income by a U.S. shareholder under section 951(a)(1)(A) or (B) with respect to a CFC year is included in gross income for the U.S. shareholder's taxable year that includes the last day on which the shareholder owns stock in the CFC during such CFC year.

Section 951(a)(4) provides that the Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of section 951(a), including regulations or other guidance allowing taxpayers to elect, or requiring taxpayers, to close the taxable year of a CFC upon a direct or indirect disposition of stock of the corporation.

3. Revised Section 951A

As amended by the OBBBA, section 951A(a) requires each person that is a U.S. shareholder of a CFC for any taxable year of the U.S. shareholder to include in gross income the U.S. shareholder's net CFC tested income for the taxable year. Section 951A(b)(1) provides that net CFC tested income means, with respect to any U.S. shareholder for any taxable year of the U.S. shareholder, the excess (if any) of (i) the aggregate of the U.S. shareholder's pro rata share of the tested income of each CFC with respect to which the shareholder is a U.S. shareholder for the taxable year of the U.S. shareholder, over (ii) the aggregate of the U.S. shareholder's pro rata share of the tested loss of each CFC with respect to which the shareholder is a U.S. shareholder for the taxable year of the U.S. shareholder.

Section 951A(c) provides that the pro rata shares of tested income and tested loss referred to in section 951A(b)(1) are determined under the rules of section 951(a)(2) in the same manner as section 951(a)(2) applies to subpart F income

and are taken into account in the taxable year of the U.S. shareholder determined under section 951(a)(3).

4. Transition Rule

For certain taxable years before the amendments to sections 951(a) and 951A made by the OBBBA apply, a U.S. shareholder determines its pro rata share of subpart F income and tested items under the transition rule. The transition rule provides that certain dividends are not treated as dividends for purposes of applying former section 951(a)(2)(B), except to the extent provided by the Secretary.

A dividend is subject to the transition rule if the dividend is (i) paid or deemed paid on or before June 28, 2025, and during the taxable year of a CFC that includes such date, provided the U.S. shareholder described in section 951(a) did not own (within the meaning of section 958(a)) the stock of the CFC during the portion of the taxable year on or before June 28, 2025, or (ii) paid or deemed paid after June 28, 2025, and before a foreign corporation's first taxable year beginning after December 31, 2025.
See
section 70354(c)(2)(A) of the OBBBA. Any dividend subject to the transition rule is not treated as a dividend for purposes of applying former section 951(a)(2)(B) if the dividend does not increase the taxable income of a United States person subject to Federal income tax for the taxable year (including by reason of a dividends received deduction, an exclusion from gross income, or an exclusion from subpart F income).
See
section 70354(c)(2)(B) of the OBBBA.

On December 4, 2025, the Treasury Department and the IRS released Notice 2025-75, 2025-52 I.R.B. 867 (transition rule notice), describing rules expected to be included in forthcoming proposed regulations regarding the application of the transition rule. The transition rule notice describes rules addressing the meaning of dividends paid or deemed paid by a CFC and the determination of whether a dividend does not increase the taxable income of a United States person subject to Federal income tax.

III. Other Provisions

A. Section 951B

The OBBBA added section 951B, which generally provides that sections 951 through 965 (other than sections 951A, 951(b), and 957) apply to any foreign controlled United States shareholder (FCUSS) of a foreign controlled foreign corporation (FCFC) by substituting “foreign controlled United States shareholder” for “United States shareholder” each place it appears and by substituting “foreign controlled foreign corporation” for “controlled foreign corporation” each place it appears.
See
section 951B(a)(1). Section 951A applies to an FCUSS by treating each reference to a “United States shareholder” in such section as including a reference to an FCUSS, and by treating each reference to a “controlled foreign corporation” in such section as including a reference to an FCFC.
See
section 951B(a)(2).

Section 951B(b) provides that an FCUSS is any United States person that would be a U.S. shareholder with respect to a foreign corporation if section 951(b) were applied by substituting “more than 50 percent” for “10 percent or more,” and section 958(b) were applied without regard to section 958(b)(4). Section 951B(c) provides that an FCFC is a foreign corporation, other than a CFC, which would be a CFC if section 957(a) were applied by substituting “foreign controlled United States shareholders” for “United States shareholders,” and section 958(b) were applied without regard to section 958(b)(4).

B. Section 960

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 corporation, the taxes deemed to have been paid by the corporation under section 960.

Section 960(a) provides that, if a domestic corporation that is a U.S. shareholder of a CFC includes any item of income under section 951(a)(1), the domestic corporation is deemed to have paid so much of the CFC's foreign income taxes as are properly attributable to such item of income. Section 960(d) generally provides that if any amount is includible in the gross income of a domestic corporation under section 951A, the domestic corporation is deemed to pay a percentage of the foreign income taxes paid or accrued by its CFCs with respect to their tested income.

C. Section 245A and § 1.245A-5(e) and (f)

Section 245A(a) allows a domestic corporation that is a U.S. shareholder a 100-percent deduction for the foreign-source portion of a dividend received from a specified 10-percent owned foreign corporation (section 245A deduction).
See also
sections 964(e)(4) and 1248(j) (generally permitting the section 245A deduction in connection with the sale or exchange of stock of a CFC). A specified 10-percent owned foreign corporation (SFC) is defined as any foreign corporation (other than a passive foreign investment company as defined in section 1297) with respect to which a domestic corporation is a U.S. shareholder.

Section 954 generally provides that a dividend received by a CFC is included in the CFC's foreign personal holding company income (as defined in section 954(c)) and, thus, in the determination of the CFC's subpart F income. Under section 954(c)(6), however, a dividend received by a CFC from a related CFC is not included in the CFC's foreign personal holding company income if certain requirements are met (section 954(c)(6) exception).

Under § 1.245A-5(e), a section 245A shareholder (defined as a domestic corporation that is a U.S. shareholder with respect to an SFC and that owns directly or indirectly stock of the SFC) is not allowed a section 245A deduction for any dividend received from an SFC to the extent of the extraordinary reduction amount. Additionally, § 1.245A-5(f) provides that, if an upper-tier CFC receives a dividend from a lower-tier CFC in the same taxable year that an extraordinary reduction occurs with respect to the lower-tier CFC, then the section 954(c)(6) exception applies only to the extent the dividend exceeds the tiered extraordinary reduction amount.

In general, an extraordinary reduction amount is, with respect to a dividend received by a controlling section 245A shareholder (as defined in § 1.245A-5(i)(2)) from a CFC during a taxable year of the CFC in which an extraordinary reduction occurs with respect to the controlling section 245A shareholder's ownership of the CFC, the lesser of (i) the amount of the dividend, and (ii) the amount equal to the sum of the controlling section 245A shareholder's pre-reduction pro rata share of the CFC's subpart F income and tested income for the taxable year, reduced, but not below zero, by the prior extraordinary reduction amount. A pre-reduction pro rata share generally reflects the amount of subpart F income and tested income that the shareholder would have included in income, absent the extraordinary reduction. An extraordinary reduction generally occurs where a controlling section 245A shareholder transfers more than 10 percent of the CFC's stock during the CFC's taxable year or where the shareholder's ownership of the CFC otherwise decreases by more than 10 percent by the end of the taxable year.

An election may be made to close a CFC's taxable year if an extraordinary reduction occurs with respect to a

controlling section 245A shareholder and there would be an extraordinary reduction amount or tiered extraordinary reduction amount greater than zero. If the election is made, no amount is considered an extraordinary reduction amount or tiered extraordinary reduction amount with respect to the controlling section 245A shareholder. Instead, the CFC's taxable year closes for all purposes of the Code and for all shareholders of the CFC.

Explanation of Provisions

I. Scope

The proposed regulations would provide rules under sections 951 and 951A that determine a U.S. shareholder's pro rata share of a CFC's subpart F income, tested income, or tested loss. The proposed regulations would also modify information reporting regulations under section 6038 and the applicability date of certain regulations under sections 245A and 1502.

II. Section 951 Regulations

A. Overview

The proposed regulations under section 951 would provide rules to determine a U.S. shareholder's pro rata share of a CFC's subpart F income that reflect the changes to section 951(a) made by the OBBBA. The proposed regulations would also provide rules that require or permit the closing of a foreign corporation's taxable year in certain circumstances for all purposes of the Code.

B. Income Inclusion Rule

The proposed regulations would require each U.S. shareholder of a foreign corporation that owns stock in the foreign corporation at any time during a taxable year of the foreign corporation that is a CFC year to include in gross income the U.S. shareholder's pro rata share of the foreign corporation's subpart F income for the CFC year.
See
proposed § 1.951-1(b)(1). This amount is included in gross income in the U.S. shareholder's taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during the CFC year. The determination of the amount of a U.S. shareholder's pro rata share of subpart F income of a CFC for a CFC year is discussed in part II.E of this Explanation of Provisions.

The proposed regulations would also provide a rule for section 956 inclusions under section 951(a)(1)(B).
See
proposed § 1.951-1(b)(2). Because the amendments made by the OBBBA to section 951 generally retain the same approach to determining inclusions under section 951(a)(1)(B), this rule is consistent with the regulations under former section 951(a)(1)(B). However, as with inclusions of subpart F income under section 951(a)(1)(A), the proposed regulations would provide that amounts required to be included in gross income under section 951(a)(1)(B) are included in the U.S. shareholder's taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during the CFC year, which may accelerate the taxable year of the inclusion relative to former section 951(a)(1)(B). Further, as discussed in part II.D of this Explanation of Provisions, the closing of a foreign corporation's taxable year under the proposed regulations may affect the calculation of amounts under section 956 and a U.S. shareholder's inclusion under section 951(a)(1)(B).

C. Changes in Ownership of CFC Stock

As revised in the OBBBA, a U.S. shareholder's pro rata share of a CFC's subpart F income (as well as tested income or tested loss) is the amount attributable to the stock of the CFC owned by the U.S. shareholder and the periods of the CFC year during which the U.S. shareholder owned such stock while the foreign corporation was a CFC. The Treasury Department and the IRS considered various recommendations for implementing the OBBBA's revisions to the pro rata share rules. For example, the Treasury Department and the IRS considered a suggestion to address changes in ownership of stock of a CFC by permitting taxpayers to elect a per diem approach with exceptions for extraordinary items or an interim closing of the books approach, and to provide taxpayers an election to close the taxable year of CFCs in certain circumstances comparable to the election permitted under § 1.245A-5(e). The Treasury Department and the IRS also considered a suggestion to provide for both elective and mandatory closings with respect to the taxable year of a CFC, depending on the amount of ownership shift in a given transaction, and to otherwise address changes in ownership of stock of a CFC by implementing a ratable approach to determining a U.S. shareholder's pro rata share.

In general, in cases where there is no change in the ownership of stock of a CFC during its taxable year, a U.S. shareholder's pro rata share under the proposed regulations would be the same as determined under the existing rules in § 1.951-1(e) (
see
part II.E of this Explanation of Provisions). However, to address changes in ownership of stock of a CFC, and largely consistent with a recommendation received, the proposed regulations would generally apply a daily proration approach to allocating subpart F income, tested income, or tested loss to U.S. shareholders and, in certain cases, would require or permit a closing of the taxable year.

The Treasury Department and the IRS are of the view that other suggested approaches to address changes in ownership of stock of a CFC, such as an interim closing of the foreign corporation's books or a special allocation of extraordinary items, may, in certain cases, be complex, administratively burdensome, or lead to inappropriate results (for example, when the earnings and profits (E&P) limitation under section 952(c) applies). Rules in other contexts that adopt such approaches in allocating various items of income, gain, deduction, loss, and credit attributable to a taxpayer's ownership period differ from the pro rata share rules in that sections 951 and 951A require the allocation of subpart F income, tested income, or tested loss, each of which is a single, net amount determined at the foreign corporation level with respect to its taxable year.
Cf.
§ 1.706-4 (providing various rules, including a proration approach, interim closing method, and extraordinary item exception, where a partner's interest in a partnership varies during its taxable year) and § 1.1502-76(b) (permitting the ratable allocation of a year's items (other than extraordinary items) between the periods ending and beginning with a corporation becoming or ceasing to be a member of a consolidated group). The statutory language in section 951(a)(1)(A) requires this result by referring to the pro rata share of “the corporation's subpart F income for the CFC year,” which, in using the term defined in section 952, means the pro rata share of the sum of the amounts described in section 952(a) and not the pro rata share of specific items that comprise subpart F income.
See also
section 951A(c)(1) (providing that a U.S. shareholder's pro rata share of a CFC's tested income or tested loss, each defined in section 951A(b)(2) as a net amount for the CFC's taxable year, is determined under the rules of section 951(a)(2) in the same manner as such section applies to subpart F income).

The proposed regulations would require a closing of a foreign corporation's taxable year only in circumstances where the change in ownership of stock of a foreign corporation results in the foreign corporation becoming or ceasing to be a CFC (subject to certain modifications for

determining CFC status that generally are intended to prevent avoidance of the rule).
See
part II.D.2 of this Explanation of Provisions. In those cases, the provision's requirement to determine the subpart F income, tested income, or tested loss attributable to the ownership period of a U.S. shareholder is appropriately carried out by confining the analysis to the period in which the relevant earnings of the foreign corporation are subject to U.S. taxation under sections 951 through 965. The closing of the foreign corporation's taxable year in such cases prevents items of income, gain, deduction, or loss incurred while the foreign corporation's earnings are not subject to the subpart F provisions of the Code from affecting the determination of a U.S. shareholder's pro rata share under section 951 or 951A. Additionally, the required closing of the foreign corporation's taxable year may mitigate potential compliance burdens associated with obtaining information relating to the foreign corporation while it is owned and controlled by foreign persons.

In other cases involving changes in the ownership of stock of a foreign corporation during a CFC year, the proposed regulations would generally apply a daily proration approach.
See
part II.E of this Explanation of Provisions. The Treasury Department and the IRS are of the view that this approach, which allocates subpart F income (as well as tested income or tested loss) proportionately based on the number of days in the CFC year, is consistent with the statute's requirement to attribute an overall income amount to periods of ownership.
See also
§§ 1.1248-2 and 1.1248-3 (applying a similar daily proration approach for purposes of determining E&P attributable to foreign corporation stock owned by a United States person during certain periods). However, for certain changes in the ownership of stock of a CFC involving unrelated persons that generally result in shifts of ownership of more than 50 percentage points, the proposed regulations would provide an election to close the CFC's taxable year. This election permits taxpayers to achieve the accuracy, certainty, and reduced compliance burdens afforded by closing the taxable year in lieu of applying the daily proration approach to the entire taxable year.
See
part II.D.3 of this Explanation of Provisions. Contrary to certain recommendations that an elective closing be available upon less substantial transfers of ownership, the proposed regulations would limit elective closings to these circumstances, as a greater than 50 percentage point shift in ownership generally indicates that a seller or selling group has relinquished control of the CFC and therefore has a heightened interest in closing the CFC's taxable year so as to avoid the effect of the new controlling shareholder or shareholders' actions on the determination of their pro rata share. In these cases, the seller typically does not remain involved in the CFC's activities after relinquishing control, and an inability to close the taxable year could require the buyer and seller to coordinate in terms of tax compliance and controversy defense with respect to that year, potentially necessitating complex contractual provisions. Further, the potential benefit afforded by a closing of the CFC's taxable year in cases of less significant changes in ownership would likely be outweighed by the resulting compliance and administrative burden, and the additional flexibility to close the taxable year of a CFC could lead to improper manipulation or abuse if it was available for minor changes in ownership or transfers involving related persons.

D. Determination of CFC Year

1. In General

A U.S. shareholder's pro rata share of a foreign corporation's subpart F income is determined by reference to a CFC year of the foreign corporation. The determination of a CFC year of a foreign corporation is made after the application of rules in the proposed regulations that would require or permit the closing of the taxable year of a foreign corporation in certain cases where there is a change in the ownership of stock of the foreign corporation.

2. Mandatory Closing of Taxable Year of Foreign Corporation

The proposed regulations would provide that a foreign corporation closes its taxable year if there is a status change event, which occurs if a foreign corporation becomes or ceases to be a CFC.
See
proposed § 1.951-1(d)(1). If there is a status change event, the taxable year of the foreign corporation closes for all purposes of the Code and, thus, the closing applies to all shareholders of the foreign corporation regardless of whether a particular shareholder's ownership of stock in the foreign corporation changes.

The taxable year of the foreign corporation closes as of the end of the day on which the status change event occurs, which is the last day that the foreign corporation is or is not a CFC (unless the taxable year otherwise closes as of such date under another provision of the Code, for example, as a result of a section 338(g) election).
See
proposed § 1.951-1(d)(1)(ii). Thus, for example, if a domestic corporation owns all the stock of a foreign corporation (which uses a calendar taxable year) and sells all the stock of the foreign corporation to a nonresident alien individual on June 30, the status change event would occur on June 30, the date the foreign corporation ceases to be a CFC, and the taxable yefar of the foreign corporation would close as of the end of the day on June 30.
See also
proposed § 1.951-1(f) (regarding the ownership period of foreign corporation stock) discussed in part II.F of this Explanation of Provisions.

The proposed regulations would provide additional rules for domestic partnerships (including certain S corporations treated as partnerships by operation of section 1373(a)) and options to acquire stock in determining whether there is a status change event that requires the closing of a foreign corporation's taxable year.
See
proposed § 1.951-1(d)(1)(iii). Specifically, solely for this purpose, in determining whether a foreign corporation is a CFC when stock of a foreign corporation is owned through a domestic partnership, the rule in § 1.958-1(d)(1) would apply without regard to the exceptions in § 1.958-1(d)(2)(i) and (ii) (and, thus, a domestic partnership would not be treated as owning stock of a foreign corporation within the meaning of section 958(a)). A similar rule would disregard the constructive ownership of stock of a foreign corporation by reason of an option to acquire such stock under section 318(a)(4) and § 1.958-2(e). These rules are generally intended to ensure that, while the requirement to close the taxable year of a foreign corporation is based on the CFC status of the foreign corporation, the CFC status of the foreign corporation for this purpose is determined by reference to the U.S. shareholders of the foreign corporation that are subject to income inclusions under sections 951 and 951A. Thus, for example, if a domestic corporation sells all the stock of a foreign corporation that is a CFC to a domestic partnership, and not more than 50 percent of the stock of the foreign corporation is owned after the sale, in the aggregate, by partners of the domestic partnership that are U.S. shareholders in the foreign corporation, the sale results in a status change event of the foreign corporation because, for this purpose, the foreign corporation ceases to be a CFC. Similarly, if a domestic partnership sells all the stock

of a foreign corporation to a domestic corporation, and not more than 50 percent of the stock of the foreign corporation was owned before the sale, in the aggregate, by partners of the domestic partnership that were U.S. shareholders in the foreign corporation, the sale also results in a status change event because, for this purpose, the foreign corporation
becomes
a CFC.

3. Election To Close Taxable Year of Foreign Corporation

Under the proposed regulations, the controlling section 958(a) U.S. shareholders of a CFC may elect to close the CFC's taxable year if a significant ownership variance occurs with respect to the CFC and the taxable year does not otherwise close on that date.
See
proposed § 1.951-1(d)(2). As with the mandatory closing of a foreign corporation's taxable year described in part II.D.2 of this Explanation of Provisions, if the election is made, the taxable year of the CFC closes for all shareholders of the foreign corporation and for all purposes of the Code as of the end of the day on which the significant ownership variance occurs.

The determination of whether there is a significant ownership variance is based on the total change in ownership of CFC stock by section 958(a) U.S. shareholders resulting from all specified transfers that occur pursuant to the same plan during what would be the taxable year of a CFC absent an elective closing (default taxable year). A significant ownership variance generally occurs if the specified transfers result in a decrease by more than 50 percentage points in section 958(a) shareholder ownership.
See
proposed § 1.951-1(d)(2)(ii)(A). For this purpose, a specified transfer generally includes a change in the ownership of the stock of a CFC resulting from a sale, exchange, or other disposition of stock of a foreign corporation or a partnership interest, as well as an issuance of stock or a partnership interest.

Because a significant ownership variance looks to all specified transfers that occur pursuant to the same plan during the same default taxable year of a CFC, the proposed regulations are intended to make the election available for transactions undertaken by multiple section 958(a) U.S. shareholders or that involve multiple specified transfers over the course of the CFC's default taxable year. For example, the proposed regulations would permit an elective closing of a CFC's taxable year if multiple section 958(a) U.S. shareholders that separately do not own more than 50 percent of the stock of a CFC together sell more than 50 percent of the stock of the CFC pursuant to the same plan on different days during the CFC's default taxable year.

If there are multiple specified transfers that occur pursuant to the same plan on different days in a default taxable year of a CFC, the significant ownership variance occurs on the day that the last such specified transfer occurs.
See
proposed § 1.951-1(d)(2)(ii)(A). This is the case regardless of the day on which there has been a more than 50-percent decrease in the ownership percentage of one or more section 958(a) U.S. shareholders of the CFC. For example, assume US1 and US2, both domestic corporations, own 60 percent and 40 percent of the stock of CFC, respectively. CFC uses a calendar taxable year. On June 30, US1 sells all its stock of CFC (60 percent) to US3, also a domestic corporation that is not related to US1 or US2, and pursuant to the same plan, US2 sells all its stock in CFC (40 percent) to US3 on September 1. In that case, the significant ownership variance occurs on September 1, the date of US2's sale, and, if an election is made, the taxable year of CFC closes on that date.

The Treasury Department and the IRS are of the view that the elective closing of the taxable year of a CFC should be restricted with respect to specified transfers among related parties because, in those cases, the change in economic ownership of CFC stock is less meaningful or possibly absent. Likewise, there is less reason, from an accuracy and burden-reduction standpoint, to provide an elective closing in the case of a transfer between related persons, and the availability of the election may lead to inappropriate manipulation (for example, transactions may be undertaken solely for purposes of closing a CFC's taxable year). Accordingly, the proposed regulations would generally provide that, in determining whether there is a significant ownership variance with respect to a CFC, the percentage of ownership of stock of the CFC owned by section 958(a) U.S. shareholders is not treated as decreasing to the extent there is an increase in the percentage of ownership of stock of the CFC by a related United States person.
See
proposed § 1.951-1(d)(2)(ii)(C)(
1
). For similar reasons, the proposed regulations would not take into account certain transfers in connection with reorganizations described in section 368(a)(1)(F) for this purpose.
See
proposed § 1.951-1(d)(2)(ii)(C)(
2
).

The section 958(a) U.S. shareholders of a CFC are the U.S. shareholders that own stock of the CFC. For purposes of making the election to close a CFC's taxable year, the controlling section 958(a) U.S. shareholders are all the section 958(a) U.S. shareholders of a CFC whose ownership of stock of the CFC decreases in a significant ownership variance. In certain cases, there may be only one controlling section 958(a) U.S. shareholder that makes the election (for example, if a U.S. shareholder owns all the stock of a CFC). A domestic partnership is not treated as owning stock of a CFC for this purpose and therefore cannot be a section 958(a) U.S. shareholder or a controlling section 958(a) U.S. shareholder.
See
§ 1.958-1(d).

To make the election, the controlling section 958(a) U.S. shareholders and each U.S. shareholder (if any) of the CFC that owns stock of the CFC on any date during the CFC's taxable year on or before the date of the significant ownership variance must enter into a written, binding agreement that all parties agree to the election. Each party to this binding agreement must be able to present the agreement to the IRS for inspection upon request. No binding agreement is required, however, if there is only one controlling section 958(a) U.S. shareholder and no other relevant U.S. shareholders of the CFC. Additionally, for this purpose, a U.S. shareholder that acquires stock of the CFC on the date of the significant ownership variance is not considered as owning that stock on that date and therefore is not required to enter the binding agreement unless the shareholder otherwise was a U.S. shareholder on or before that date.
See
proposed § 1.951-1(f). The proposed regulations would prescribe additional procedural requirements for making the election, including the requirement to provide certain information in a statement that must be submitted to the IRS.
See
proposed § 1.951-1(d)(2)(iv). The proposed regulations would also provide a consistency requirement, under which, if a significant ownership variance occurs with respect to multiple CFCs pursuant to a plan or series of related transactions, an election to close a CFC's taxable year may be made only if the election is made with respect to all the CFCs.
See
proposed § 1.951-1(d)(2)(vi).

4. Allocation of Foreign Income Taxes

The proposed regulations would provide a rule for allocating certain foreign income taxes that accrue during the period that would have been the foreign corporation's taxable year if not for the mandatory or elective closing. A mandatory or elective closing of a foreign corporation's taxable year can result in the foreign corporation's

foreign taxable year spanning multiple short U.S. taxable years. However, the foreign income tax with respect to that foreign taxable year would accrue only in the U.S. taxable year in which the foreign taxable year ends.
See
§ 1.905-1(d)(1)(i). The proposed regulations would address this issue by requiring an allocation of a portion of the foreign income tax that accrues in the CFC's U.S. taxable year following the closing date to the U.S. taxable year ending with the closing.
See
proposed § 1.951-1(d)(3)(i). The portion of the foreign income tax allocated to the U.S. taxable year ending with the closing is determined based on the portion of the foreign taxable income attributable to the period of the foreign taxable year ending with the closing using the closing of the books method described in § 1.1502-76(b). For example, if a foreign corporation that uses a calendar taxable year for both U.S. and foreign income tax purposes has its U.S. taxable year close on June 30 as a result of a mandatory or elective closing and the foreign corporation earned 50 percent of its foreign taxable income from January to June 30, 50 percent of the foreign income tax that accrues on December 31 (at the end of the foreign corporation's foreign taxable year and during its U.S. taxable year following the June 30 closing) would be allocated to its U.S. taxable year ending with the closing (January 1 to June 30).

5. Taxable Years of Partnerships Owned by Foreign Corporations

In the case of a foreign corporation that owns an interest in a partnership, generally, the partnership's taxable year would not close for any purpose of the Code solely as a result of the foreign corporation's taxable year closing. Therefore, if the partnership's taxable year begins before a status change event or significant ownership variance (for which an election is made) and ends after the early closing of the foreign corporation's taxable year, the foreign corporation would include its distributive share of the partnership's items arising in that partnership taxable year entirely in the foreign corporation's short taxable year following the status change event or significant ownership variance. By contrast, a concurrent closing of the partnership's taxable year would require the partnership's items to be allocated between the foreign corporation's short taxable year ending on the day of the status change event or significant ownership variance and the following short taxable year. Because this requirement to allocate partnership items between periods that are pre- and post-sale of stock of the foreign corporation would require a seller to obtain information from a buyer to determine the foreign corporation's distributive share of partnership items includible in the foreign corporation's first short taxable year, the proposed regulations would not provide for a closing of the partnership's taxable year with respect to the foreign corporation.

The Treasury Department and the IRS welcome comments as to whether a closing of a foreign corporation's taxable year as a result of a status change event or significant ownership variance should be treated as a deemed disposition of the foreign corporation's entire interest in a partnership for purposes of section 706, and therefore result in a closing of the partnership's taxable year with respect to the foreign corporation partner.
Cf.
§§ 1.706-1(c)(2)(i) and (iii), 1.1362-3(c)(1), 1.1377-1(b)(3)(iv), and 1.1502-76(b)(2)(vi) (in certain cases, treating an early closing of a corporate partner's taxable year as a deemed disposition of the partner's entire interest in the partnership and therefore resulting in treating the partnership taxable year as closing with respect to that partner).

E. Determination of Pro Rata Share of Subpart F Income

1. In General

The proposed regulations would provide rules for determining a U.S. shareholder's pro rata share of a CFC's subpart F income for a CFC year. This determination is made after the determination of the subpart F income of the CFC for the CFC year in accordance with section 952 and other applicable provisions, such as the E&P limitation, the chain deficit rules, and the recapture rules.

In general, the proposed regulations would apply a daily proration approach for purposes of determining the amount of a CFC's subpart F income that is attributed to the period during which a U.S. shareholder owns stock of a foreign corporation while it is a CFC during the CFC year.
See
part II.E.2 of this Explanation of Provisions. The proposed regulations would provide additional rules for applying this daily proration approach in circumstances involving multiple classes of stock of a foreign corporation and changes in the number of shares of outstanding stock of a foreign corporation during the CFC year.
See
parts II.E.3 and 4 of this Explanation of Provisions.

2. Single Class of Foreign Corporation Stock

Under the proposed regulations, if at all times during the CFC year the CFC has only a single class of stock outstanding and there is no change in the number of outstanding shares of stock of the CFC, a U.S. shareholder's pro rata share of subpart F income of a CFC would be determined based on the percentage of stock of the CFC the U.S. shareholder owned (that is, the number of shares the U.S. shareholder owned over the number of outstanding shares of the CFC) and the percentage of the CFC year during which the shareholder owned the stock of the foreign corporation while it was a U.S. shareholder and the foreign corporation was a CFC.
See
proposed § 1.951-1(e)(2)(i).

Thus, for example, if two U.S. shareholders (US1 and US2) each owned 50 percent of the single class of stock of a CFC for an entire CFC year, each of US1's and US2's pro rata shares of the CFC's subpart F income for the CFC year is equal to the proportionate amount of subpart F income attributable to the stock of the CFC the U.S. shareholder owned (that is, 50 percent of CFC's subpart F income). As an additional example, if US1 instead transfers all of its stock of a CFC to another U.S. shareholder (US3) during the CFC year, each of US1 and US3's pro rata share of the CFC's subpart F income for the CFC year is equal to the proportionate amount of subpart F income attributable to the stock multiplied by the percentage of days during the CFC year on which the U.S. shareholder owned the stock of the CFC.
See
proposed § 1.951-1(e)(4)(iii) (Example 2).

The computation prescribed in the proposed regulations is made separately with respect to CFC year blocks, which are those shares of a class of stock of the CFC that a U.S. shareholder owned for the same period within the CFC year (for example, if the U.S. shareholder acquired or disposed of a portion of its shares of the class of stock of the CFC during the CFC year).
See
proposed § 1.951-1(e)(2)(i)(B). A U.S. shareholder's pro rata share of subpart F income of the CFC for the CFC year is equal to the total of the amounts determined for each of its CFC year blocks.
See
proposed § 1.951-1(e)(4)(iii) (Example 2).

3. Multiple Classes of Foreign Corporation Stock

The proposed regulations would provide additional rules to address cases in which a foreign corporation has multiple classes of stock outstanding during a CFC year. In general, the proposed regulations would adopt the hypothetical distribution analysis under existing § 1.951-1(e) for purposes of

determining the subpart F income that is allocated among the classes of stock of a foreign corporation. Thus, to determine a U.S. shareholder's pro rata share of a CFC's subpart F income for a CFC year, the subpart F income is first allocated to the classes of stock of the CFC in the same proportion as the amount of allocable earnings and profits that would be distributed to each class of stock in a hypothetical distribution of the CFC's allocable earnings and profits on the last day of the CFC year (hypothetical distribution).
See
proposed § 1.951-1(e)(2)(ii). After the subpart F income is allocated to a class of stock, a U.S. shareholder determines its pro rata share of subpart F income with respect to each class of stock using the daily proration approach described in part II.E.2 of this Explanation of Provisions.
See
proposed § 1.951-1(e)(4)(iv) (Example 3).

For example, if, for the entirety of a CFC year, one U.S. shareholder (US1) owned all the common stock of a CFC and another U.S. shareholder (US2) owned all the preferred stock of the CFC, the hypothetical distribution applies to allocate the subpart F income of the CFC to the preferred and common stock. Each of US1 and US2's pro rata share of the CFC's subpart F income for the CFC year is then equal to the proportionate amount of subpart F income allocated to each class of stock of the foreign corporation that is attributable to the stock of the CFC the U.S. shareholder owned (thus, US1's pro rata share is equal to all of the subpart F income allocated to the common stock and US2's pro rata share is equal to all of the subpart F income allocated to the preferred stock). As an additional example, if US2 instead transfers all of its stock of the CFC (that is, the preferred stock) to another U.S. shareholder (US3) during the CFC year, each of US2 and US3's pro rata share of the CFC's subpart F income for the CFC year is equal to the subpart F income allocated to the preferred stock of the CFC as determined under the hypothetical distribution, multiplied by the percentage of days during the CFC year on which the U.S. shareholder owned the preferred stock of the CFC.
See
proposed § 1.951-1(e)(4)(iv) (Example 3).

4. Changes in Number of Outstanding Shares of Foreign Corporation

The proposed regulations would provide additional rules to address cases in which there are changes in the number of shares of stock of a foreign corporation outstanding during the year, for example, as a result of a redemption or issuance of stock of the foreign corporation during a CFC year. In general, the proposed regulations would adopt an approach based on the average number of shares outstanding of the foreign corporation during the CFC year.
See also
§ 1.1248-3(c)(2) (applying a similar share averaging approach for purposes of determining E&P attributable to stock of a foreign corporation).

If the number of shares outstanding within a class of stock of a CFC varies during the CFC year, the proposed regulations would provide that the daily proration approach described in part II.E.2 of this Explanation of Provisions is applied with respect to a class of stock by substituting a weighted average share count for the number of the CFC's shares outstanding during the CFC year when determining the U.S. shareholder's percentage of ownership of the stock of the foreign corporation.
See
proposed § 1.951-1(e)(2)(iii)(A). The weighted average share count is equal to the sum of the number of shares outstanding on each day of the CFC year divided by the number of days in the CFC year.
See
proposed § 1.951-1(e)(4)(v) (Example 4).

If there is more than one class of stock of a CFC outstanding during the CFC year and the number of shares within a class of stock varies during the CFC year, then the hypothetical distribution described in part II.E.3 of this Explanation of Provisions is based on the allocable earnings and profits that would be distributed to a class of shares if a weighted average share count was outstanding on the last day of the CFC year.
See
proposed § 1.951-1(e)(2)(iii)(B) and (4)(v) (Example 4).

F. Ownership Period of Foreign Corporation Stock

Section 1.951-1(f) provides that, for purposes of sections 951 through 964, the holding period of an asset (including stock of a CFC) is determined by excluding the day on which such asset is acquired and including the day on which such asset is disposed of. The proposed regulations would clarify that this rule applies in determining the period when stock of a foreign corporation is owned. Thus, for example, if a U.S. shareholder sells all the stock of a CFC to another U.S. shareholder, the selling U.S. shareholder is treated as owning the stock of the CFC through the end of the day of the sale, and the acquiring U.S. shareholder is treated as owning the stock of the CFC as of the beginning of the day immediately after the sale.

III. Section 951A Regulations

A. Pro Rata Share of Tested Income or Tested Loss

The proposed regulations would revise § 1.951A-1 to coordinate the determination of a U.S. shareholder's pro rata share of a CFC's tested income or tested loss with the rules provided in proposed § 1.951-1, including the determination of a foreign corporation's CFC year under the rules for mandatory and elective closings of a foreign corporation's taxable year.
See
proposed § 1.951A-1(d). The proposed regulations would generally retain the rules relating to the allocation of tested loss to preferred stock but modify those provisions to apply for purposes of the hypothetical distribution described in proposed § 1.951-1(e)(2)(ii).
See
proposed § 1.951A-1(d)(2)(ii) and (3). The examples under § 1.951A-1 would also be modified to illustrate the pro rata share rules in the proposed regulations.
See
proposed § 1.951A-1(d)(2)(iii) and (3)(iv).

B. Section 951A Inclusion Rules

The proposed regulations would revise § 1.951A-1 to incorporate other amendments to section 951A in the OBBBA. In particular, the proposed regulations would provide that, under section 951A as revised by the OBBBA, a U.S. shareholder is required to include in gross income its net CFC tested income inclusion amount, and the proposed regulations would prescribe the rule for determining this amount.
See
proposed § 1.951A-1(b) and (c). The proposed regulations would also remove the rules for determining a U.S. shareholder's pro rata share of qualified business asset investment, tested interest expense, and tested interest income. The Treasury Department and the IRS anticipate proposing additional changes to the regulations under section 951A to conform with the amendments made in the OBBBA in a separate guidance project.

IV. Information Reporting Under Section 1.6038-2

Section 6038(a)(1) provides that every United States person that controls (within the meaning of section 6038(e)(2)) any foreign business entity must furnish with respect to that entity such information as the Secretary may prescribe related to the items listed in section 6038(a)(1)(A) through (E) and any other information that is similar or related in nature to such listed information or which the Secretary determines to be appropriate to carry out the provisions of the Code. Section 1.6038-2(f) sets forth information that

may be required to be provided on Form 5471.

The proposed regulations would modify the information described in § 1.6038-2(f)(8) regarding the outstanding stock of a foreign corporation to reflect the amendments made by the OBBBA to sections 951 and 951A.
See
proposed § 1.6038-2(f)(8). Additionally, as revised, proposed § 1.6038-2(f) would provide that returns on Form 5471,
Information Return of U.S. Persons With Respect To Certain Foreign Corporations,
must contain information prescribed by Form 5471 (or successor form) and that such information may include, but is not limited to, the information set forth in § 1.6038-2(f). This revision clarifies that additional information may be required on Form 5471 that is not described by regulation, consistent with section 6038(a)(1).

V. Related Provisions

A. Section 951B

As described in part III.A of the Background, pursuant to section 951B(a)(1), section 951 applies to FCUSSs and FCFCs by replacing references to “United States shareholder” with “foreign controlled United States shareholder” and references to “controlled foreign corporation” with “foreign controlled foreign corporation.” Additionally, under section 951B(a)(2), section 951A applies to an FCUSS by treating references to a “United States shareholder” as including a reference to an FCUSS and by treating each reference to a “controlled foreign corporation” as including a reference to an FCFC.

Pursuant to the application of section 951B, the proposed regulations under sections 951 and 951A would apply to FCUSSs and FCFCs in the same manner. Thus, the proposed regulations under section 951 would apply by substituting references to “United States shareholder” for “foreign controlled United States shareholder” and references to “controlled foreign corporation” for “foreign controlled foreign corporation.” The proposed regulations under section 951A would apply by treating each reference to a “United States shareholder” as including a reference to an FCUSS and by treating each reference to a “controlled foreign corporation” as including a reference to an FCFC.

Because the proposed regulations would apply the same rules under sections 951 and 951A to FCUSSs and FCFCs pursuant to section 951B, the election to close the taxable year of a foreign corporation under proposed § 1.951-1(d)(2) would not be available to FCUSSs with respect to an FCFC because such shareholders cannot own the requisite percentage of stock of an FCFC (more than 50 percent of the vote or value) for a significant ownership variance to occur. The mandatory closing of a foreign corporation's taxable year under proposed § 1.951-1(d)(2), however, is required if a foreign corporation becomes or ceases to be an FCFC for the same reasons described in part II.C of this Explanation of Provisions. The mandatory closing of a foreign corporation's taxable year would include cases in which a CFC becomes an FCFC or an FCFC becomes a CFC to ensure the proper operation of section 951B.

B. Section 960

These proposed regulations would not make any changes to the regulations under section 960. While the determination of a corporate U.S. shareholder's pro rata share of a CFC's subpart F income, tested income, or tested loss has changed, the regulations under section 960 should continue to operate appropriately to determine the foreign income taxes deemed paid by a domestic corporation as a result of its inclusions under sections 951(a)(1) and 951A.

VI. Effect on Other Regulations

A. Section 1.1502-80(j)

Section 1.1502-80(j) provides that, in determining the amount described in former section 951(a)(2)(B) that is attributable to distributions of previously taxed earnings and profits to which section 959(b) applies, members of a consolidated group (as defined in § 1.1502-1(h)) are treated as a single U.S. shareholder for purposes of determining the part of the year during which such shareholder did not own the stock described in former section 951(a)(2)(A). Following the revisions to section 951 in the OBBBA, for taxable years of foreign corporations that begin after December 31, 2025, former section 951(a)(2)(B) does not apply in determining a U.S. shareholder's pro rata share of subpart F income or tested income. As a result, to the extent former section 951(a)(2)(B) is no longer relevant, § 1.1502-80(j) is no longer necessary to address the application of former section 951(a)(2)(B) within a consolidated group with respect to distributions to which section 959(b) applies. Accordingly, the proposed regulations would amend the applicability date in § 1.1502-80(j)(3) to clarify that § 1.1502-80(j) applies only to the extent former section 951(a)(2)(B) is applicable.

B. Section 1.245A-5(e) and (f)

The Treasury Department and the IRS are of the view that, because of the revisions to sections 951 and 951A in the OBBBA, the extraordinary reduction rules in § 1.245A-5(e) and (f) are no longer necessary. Accordingly, under the proposed regulations, the extraordinary reduction rules would not apply for taxable years of foreign corporations beginning after December 31, 2025.
See
proposed § 1.245A-5(k)(3). The proposed regulations would also modify § 1.245A-5(d) (limitation on the section 954(c)(6) exception with respect to extraordinary disposition accounts for lower-tier CFCs) to reflect the revisions to section 951 in the OBBBA.
See
proposed § 1.245A-5(d)(1)(ii).

C. Section 1248 Regulations

In general, under section 1248(a), if a United States person that satisfies certain ownership requirements recognizes gain on a sale or exchange of stock in a foreign corporation, then the gain is included in the gross income of such person as a dividend to the extent of the E&P of the foreign corporation attributable to the stock that accumulated while the United States person held the stock and the corporation was a CFC, taking into account E&P of certain lower-tier foreign corporations but excluding previously taxed earnings and profits. For this purpose, regulations under section 1248 provide rules for determining E&P attributable to stock in a foreign corporation in simple and complex cases.
See
§§ 1.1248-2 and 1.1248-3. The rules addressing complex cases incorporate the principles of § 1.951-1(e)(2) and (3) for purposes of allocating E&P to multiple classes of stock of a foreign corporation.
See
§ 1.1248-3(c)(4) and (d)(6).

The determination of a U.S. shareholder's pro rata share of a CFC's subpart F income, tested income, or tested loss under the proposed regulations is intended to be consistent with the manner in which E&P is attributed to stock of a foreign corporation under the rules prescribed in regulations under section 1248. The Treasury Department and the IRS, however, are studying the regulations under section 1248 and revisions to those regulations may be proposed in a separate guidance project. Comments are requested on the extent to which revisions to the regulations under section 1248 are necessary to coordinate

with the proposed regulations under sections 951 and 951A.

D. Proposed Regulations on Previously Taxed Earnings and Profits

On December 2, 2024, the Treasury Department and the IRS published proposed regulations under sections 959 and 961 and certain other provisions of the Code regarding previously taxed earnings and profits (89 FR 95362) (2024 proposed PTEP regulations). The 2024 proposed PTEP regulations contain certain rules premised on former section 951 and also proposed revisions to the regulations under section 951. The Treasury Department and the IRS intend to modify the 2024 proposed PTEP regulations to reflect the amendments to sections 951 and 951A in the OBBBA and the rules in these proposed regulations in a separate guidance project.

VII. Transition Rule

A. Application

The proposed regulations would provide rules for the application of the transition rule that are consistent with the rules described in the transition rule notice.
See
proposed § 1.951-4.

For example, the proposed regulations would provide as a general rule that certain dividends are not treated as dividends for purposes of applying former section 951(a)(2)(B) to the extent the dividend does not increase the taxable income of a United States person subject to Federal income tax.
See
proposed § 1.951-4(b). As described in section 3.04 of the transition rule notice, this general rule would apply by reference to the specific shares of stock of the CFC with respect to which a dividend was paid or deemed paid, and for which a U.S. shareholder would otherwise reduce its pro rata share under former section 951(a)(2)(B) absent the application of the transition rule. Accordingly, if a U.S. shareholder acquires shares of stock in a CFC after June 28, 2025, dividends paid with respect to those shares on or before June 28, 2025, and during the taxable year of the CFC that includes such date, are subject to the transition rule even if the U.S. shareholder owned other shares in the CFC on or before June 28, 2025.

The proposed regulations would also define dividends paid or deemed paid, United States person subject to Federal income tax, and taxable income for purposes of the transition rule.
See
proposed § 1.951-4(c) through (e).

In addition, the proposed regulations would provide rules for determining whether a dividend increases taxable income.
See
proposed § 1.951-4(f). The proposed regulations would provide that all applicable provisions of the Code, and the regulations thereunder, are applied before applying, and without regard to, the transition rule. Therefore, for example, to the extent a dividend paid to a controlling domestic shareholder before an extraordinary reduction would be ineligible for the dividends received deduction under section 245A(a) after applying section 245A and § 1.245A-5 without regard to the transition rule, the dividend would be treated as increasing the taxable income of a United States person subject to Federal income tax. The proposed regulations would provide an example demonstrating this result and the consequences that would follow under section 245A.

Finally, the proposed regulations would include the rules on partnerships and S corporations generally described in the transition rule notice, including a safe harbor in the context of certain publicly held partnerships.
See
proposed § 1.951-4(g).

B. Substantiation Requirement

Under section 3.03(4) of the transition rule notice, a U.S. shareholder that reduces its pro rata share of subpart F income or tested income under former section 951(a)(2)(B) as a result of a dividend subject to the transition rule must determine and document that the dividend increased the taxable income of a United States person subject to Federal income tax. The U.S. shareholder is required to provide a statement to the IRS that describes why the U.S. shareholder is entitled to treat such amount as a dividend for purposes of former section 951(a)(2)(B) and how the U.S. shareholder determined such amount increased the taxable income of a United States person subject to Federal income tax.

A commenter on the transition rule notice asserted that the requirement that a U.S. shareholder must determine and document that the dividend increased the taxable income of a United States person subject to Federal income tax is ambiguous and potentially onerous. The commenter noted that the transition rule notice does not explain what level of analysis, substantiation, or third-party information is required to demonstrate that a dividend resulted in an increase to taxable income and indicated that this information would be difficult to obtain for transactions that have already closed. The commenter recommended that the Treasury Department and the IRS eliminate or significantly pare back the requirement where the dividend is required by law to be included in the gross income of a United States person and where no exclusion or deduction could reasonably apply. Alternatively, the commenter suggested adopting a per se rule or safe harbor under which the requirement does not apply to dividends received by certain United States persons for whom inclusion in taxable income is mandatory under the Code and, for all other situations, provide that Federal income tax principles must be analyzed and indicate the type of documentation that is sufficient to demonstrate that the dividend increased taxable income.

The Treasury Department and the IRS are of the view that the substantiation requirement described in the transition rule notice properly requires taxpayers to establish that they are correctly calculating their pro rata share of subpart F income or tested income when applying the transition rule, while adequately prescribing the degree of detail taxpayers must provide. The Treasury Department and the IRS are also of the view that a per se rule or safe harbor rule is not appropriate. For example, in the case of a dividend paid or deemed paid to a United States person for whom inclusion in taxable income is mandatory under the Code (for example, an individual who is a United States citizen), information supporting the determination that the dividend recipient is such a person would satisfy the substantiation requirement. Additionally, a specific description of the types of documentation that taxpayers must provide for substantiation purposes would be overly restrictive. Accordingly, the proposed regulations do not adopt the commenter's recommendations and would include the substantiation requirement described in the transition rule notice.
See
proposed § 1.951-4(h).

VIII. Applicability Dates

The Treasury Department and the IRS expect to finalize the proposed regulations by January 4, 2027. Under section 7805(b)(2), the proposed regulations under sections 951, 951A, and 6038 are generally proposed to apply to taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of U.S. shareholders for which such taxable years of those foreign corporations are relevant.
See
proposed §§ 1.951-1(i)(1), 1.951A-7(a), and 1.6038-2(m).

Under section 70354(c) of the OBBBA, the amendments to the pro rata share rules of section 951(a) made by section 70354(a) of the OBBBA are made effective “for taxable years of foreign corporations beginning after December 31, 2025.” However, under section

70323(c) of the OBBBA, the amendments to section 951A made by section 70323(a) of the OBBBA, requiring a U.S. shareholder to include in gross income its net CFC tested income instead of its GILTI inclusion amount, are made effective “for taxable years beginning after December 31, 2025,” which the Treasury Department and the IRS believe is best interpreted as referring to the taxable years of a U.S. shareholder. Therefore, in the case of a foreign corporation whose taxable year begins after December 31, 2025, but ends with or within a taxable year of a U.S. shareholder that begins on or before December 31, 2025, former section 951A applies with respect to the U.S. shareholder, with the U.S. shareholder's pro rata shares of the CFC's tested items determined under section 951(a)(2) as amended by the OBBBA. Proposed § 1.951A-7(c) would therefore provide that, in this fact pattern, the U.S. shareholder applies the former version of § 1.951A-1 (which provides for the calculation and inclusion of the U.S. shareholder's GILTI inclusion amount rather than net CFC tested income) with respect to the CFC, but must take into account the amendments to section 951(a)(2) made by the OBBBA in determining the U.S. shareholder's pro rata share of any tested item.

As revised in the proposed regulations, §§ 1.245A-5(e) and (f) and 1.1502-80(j) would not apply with respect to taxable years of foreign corporations beginning after December 31, 2025.
See
proposed §§ 1.245A-5(k)(3) and 1.1502-80(j)(3).

Under section 7805(b)(2), the proposed regulations regarding the transition rule would apply to taxable years of a foreign corporation that either include June 28, 2025, or begin after June 28, 2025, but before the foreign corporation's first taxable year beginning after December 31, 2025.
See
proposed § 1.951-4(i).

Taxpayers may rely on all aspects of the proposed regulations before the date the proposed regulations are finalized, provided a taxpayer and its related parties (within the meaning of sections 267(b) and 707(b)(1)) follow the rules in their entirety and in a consistent manner.

Special Analyses

I. Regulatory Planning and Review—Economic Analysis

The Office of Management and Budget's (OMB) Office of Information and Regulatory Analysis has determined that this proposed regulation is not significant and is not subject to review under section 6(b) of Executive Order 12866. Therefore, a regulatory impact assessment is not required.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the OMB.

The collections of information in these proposed regulations contain reporting and recordkeeping requirements that enable the IRS to verify that a taxpayer is reporting the correct amount of taxable income. The collections of information will be used by the IRS for tax compliance purposes. The likely respondents are individuals, businesses, and other for-profit institutions.

The collections of information in the proposed regulations are in proposed §§ 1.951-1(d)(2)(i) and (iv), 1.951-4(h), and 1.6038-2(f)(8).

The collections of information in proposed § 1.951-1(d)(2)(i) and (iv) are elective for controlling section 958(a) U.S. shareholders electing to close a CFC's taxable year if a significant ownership variance occurs. The collection of information in proposed § 1.951-1(d)(2)(i) is satisfied by the controlling section 958(a) U.S. shareholders providing notice regarding the election to United States persons that own stock of a CFC during the taxable year that ends on the day on which the CFC's taxable year is treated as closing under proposed § 1.951-1(d)(2), other than those persons required to enter into the binding agreement. The collection of information in proposed § 1.951-1(d)(2)(iv) is satisfied by all controlling section 958(a) U.S. shareholders filing the “Elective Section 951 Year-Closing Statement” with a timely filed original Federal income tax return (including extensions) for the taxable year that includes the day the CFC's taxable year is treated as closing under proposed § 1.951-1(d)(2).

The collection of information in proposed § 1.951-4(h)(2) is mandatory for certain United States persons that are entitled to treat certain dividend amounts as a dividend for purposes of former section 951(a)(2)(B) as described in proposed § 1.951-4(h)(2). The collection of information is satisfied by a United States person attaching a statement to Form 5471 that describes how the United States person determined that the dividend increased the taxable income of a United States person that is subject to Federal income tax for the taxable year, applying the rules in proposed § 1.951-4.

The collection of information in proposed § 1.6038-2(f)(8) is mandatory for U.S. shareholders. The collection of information is satisfied by completing Schedules A and B relating to the outstanding stock of a CFC and changes in direct and indirect ownership of the CFC as described in or as prescribed by Form 5471 and its instructions.

These reporting requirements will be included within OMB Control Numbers 1545-0123 for business filers, 1545-0074 for individual filers, 1545-0092 for trust and estate filers and 1545-0047 for tax exempt filers in accordance with the PRA procedures under 5 CFR 1320.10.

The recordkeeping requirements include that taxpayers keep books of account and records that are adequate to permit verification that the reduction in the taxpayer's pro rata share under former section 951(a)(2)(B) was appropriate and that the taxpayer is reporting the correct amount of taxable income. The recordkeeping requirements also include that certain taxpayers enter into a binding agreement with other shareholders as described in part II.D.3 of the Explanation of Provisions.

All recordkeeping requirements will be included within OMB Control Numbers 1545-0123 for business filers, 1545-0074 for individual filers, 1545-0092 for trust and estate filers, and 1545-0047 for tax exempt filers in accordance with the PRA procedures under 5 CFR 1320.10.

III. Regulatory Flexibility Act

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency to prepare and make available for public comment an initial regulatory flexibility analysis that will describe the impact of the proposed rule on small entities.
See
5 U.S.C. 603(a). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a substantial economic impact on a substantial number of small entities. A small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction.
See
U.S.C. 601(3) through (6).

It is hereby certified that the proposed regulations will not have a significant economic impact on a substantial number of small entities. The Treasury

Department and the IRS have determined that the regulations may affect a substantial number of small entities but do not expect that the proposed regulations will have a significant economic impact on affected small entities within the meaning of sections 601(3) through (6) of the RFA. The proposed regulations provide guidance on issues regarding sections 951 and 951A and related provisions but do not change the economic impact of the existing regulations or impose any new costs on small entities. The proposed regulations would modify some existing reporting requirements as discussed in part II of this Special Analyses, but the modifications are not expected to impose significant costs on any entities. Notwithstanding this certification, the Treasury Department and the IRS welcome comments from the public about the impact of these regulations on small entities.

IV. Submission to the Small Business Administration

Pursuant to section 7805(f) of the Code, the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

V. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 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. In 2026, that threshold is approximately $214 million. The proposed regulations do 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.

VI. Executive Order 13132: Federalism

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. The proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order.

Comments and Requests for a Public Hearing

Consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES
section. In addition to the comments specifically requested in the Explanation of Provisions, the Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any comments submitted will be made available at
www.regulations.gov
or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits written comments. Requests for a public hearing are encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the
Federal Register
. Public hearings will be conducted in person with a telephonic option for individuals who wish to attend or testify at the hearing by telephone. Hearings will be made accessible to people with disabilities.

Statement of Availability of IRS Documents

Any IRS Revenue Procedures, Revenue Rulings, Notices, or other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at
www.irs.gov.

Drafting Information

The principal author of these regulations is James R. Kostura, Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

PART 1—INCOME TAXES

Paragraph 1.
The authority citation for part 1 is amended by revising the entry for § 1.951-1 and adding entries in numerical order for § 1.951-4 and § 1.951A-1 to read in part as follows:

Authority:

26 U.S.C. 7805 * * *

Section 1.951-1 also issued under 26 U.S.C. 951, 951(a)(4), and 7701(a).

Section 1.951-4 also issued under section 70354(c)(2), Pub. L. 119-21, 139 Stat. 72.

Section 1.951A-1 also issued under 26 U.S.C. 951(a)(4) and 951A.

Par. 2.
Section 1.245A-5 is amended by:

1. Revising the last sentence of paragraph (a);
2. Revising paragraph (d)(1)(ii);
3. Revising the second sentence of paragraph (j)(3)(ii)(D);
4. Revising paragraph (k)(1); and
5. Adding paragraphs (k)(3) and (4).
The revisions and additions read as follows:

§ 1.245A-5
Limitation of section 245A deduction and section 954(c)(6) exception.
(a) * * * Paragraph (k) of this section provides the applicability date of this section, including a rule that provides that the extraordinary reduction rules described in paragraphs (e) and (f) of this section do not apply to taxable periods of foreign corporations beginning after December 31, 2025.

(d) * * *

(1) * * *

(ii) The percentage of the upper-tier CFC's subpart F income that would be included in a United States shareholder's income under section 951(a) with respect to the upper-tier CFC's taxable year, determined without regard to the application of section 954(c)(6).

(j) * * *

(3) * * *

(ii) * * *

(D) * * * The percentage of CFC1's subpart F income for its taxable year that would be included in a United States shareholder's income is 100%. * * *

(k)
Applicability date
—(1)
In general.
Except as provided in paragraphs (k)(3) and (4) of this section, this section applies to taxable periods of a foreign corporation ending on or after June 14, 2019, and to taxable periods of section 245A shareholders in which or with which such taxable periods end.

(3)
Phaseout of extraordinary reduction rules.
Paragraphs (b)(2)(ii), (e), and (f) of this section do not apply to taxable periods of foreign corporations beginning after December 31, 2025.

(4)
Modification of extraordinary disposition rules.
Paragraphs (d)(1)(ii)

and (j)(3)(ii)(D) of this section apply to taxable periods of foreign corporations beginning after December 31, 2025, and to taxable periods of section 245A shareholders in which or with which such taxable periods end. For rules that apply to taxable periods of foreign corporations beginning on or before December 31, 2025, see § 1.245A-5 as contained in 26 CFR part 1 edition revised as of April 1, 2026.

Par. 3.
Section 1.901-2 is amended by revising paragraph (f)(6) to read as follows:

§ 1.901-2
Income, war profits, or excess profits tax paid or accrued.

(f) * * *

(6)
Allocation of foreign income taxes in connection with certain elections and status change events.
For rules relating to the allocation of foreign income taxes in connection with elections made pursuant to section 336(e),
see
§ 1.336-2(g)(3)(ii). For rules relating to the allocation of foreign income taxes in connection with elections made pursuant to section 338,
see
§ 1.338-9(d). For rules relating to the allocation of foreign income taxes in connection with elections made pursuant to § 1.245A-5(e)(3)(i),
see
§ 1.245A-5(e)(3)(i)(B) (applicable to taxable periods of foreign corporations beginning before December 31, 2025). For rules relating to the allocation of foreign income taxes in connection with an election pursuant to § 1.951-1(d)(2) or a status change event under § 1.951-1(d)(1),
see
§ 1.951-1(d)(3).

Par. 4.
Section 1.951-1 is amended by:

1. Revising paragraphs (a), (b), (d) through (f), and (h); and
2. Adding paragraph (i).
The revisions and addition read as follows:

§ 1.951-1
Amounts included in gross income of United States shareholders.

(a)
Scope.
This section sets forth the rules for determining amounts included in the gross income of a United States shareholder under section 951(a). Paragraph (b) of this section provides the general rule for amounts required to be included in gross income under section 951(a)(1)(A) and (B). Paragraph (c) of this section is reserved. Paragraph (d) of this section provides rules that require or permit the closing of the taxable year of a foreign corporation, which, if applicable, are necessary to determine the CFC year with respect to which a United States shareholder determines its pro rata share of subpart F income. Paragraph (e) of this section prescribes the rules for determining a United States shareholder's pro rata share of subpart F income for a CFC year. Paragraph (f) of this section provides a rule for determining the holding period of an asset (including stock of a controlled foreign corporation). Paragraph (g) of this section defines United States shareholder. Paragraph (h) of this section provides additional definitions. Paragraph (i) of this section provides applicability dates. For rules applying this section to foreign controlled United States shareholders and foreign controlled foreign corporations, see section 951B (generally replacing references in this section to the term “United States shareholder” with the term “foreign controlled United States shareholder” and the term “controlled foreign corporation” with the term “foreign controlled foreign corporation”).

(b)
In general
—(1)
Section 951(a)(1)(A) inclusions.
Each United States shareholder of a foreign corporation that owns stock in the foreign corporation on any day during a CFC year of the foreign corporation must, for the United States shareholder's taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during the CFC year, include in gross income the United States shareholder's pro rata share (determined under paragraph (e) of this section) of the foreign corporation's subpart F income for the CFC year.

(2)
Section 951(a)(1)(B) inclusions.
Each United States shareholder of a foreign corporation that owns stock in the foreign corporation on the last day of a CFC year on which the foreign corporation is a controlled foreign corporation must, for the United States shareholder's taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during the CFC year, include in gross income the amount determined under section 956 with respect to the United States shareholder for the CFC year, but only to the extent not excluded from gross income under section 959(a)(2).

(3)
Personal holding company determination.
For purposes of determining whether a United States shareholder that is a domestic corporation is a personal holding company under section 542 and § 1.542-1, the character of the amount includible in gross income of such domestic corporation under this paragraph (b) is determined as if such amount were realized directly by such domestic corporation from the source from which it is realized by the controlled foreign corporation.

(4)
Cross references. See
§ 1.957-2(a) for a special limitation on the amount of subpart F income in the case of a controlled foreign corporation described in section 957(b) (involving insurance income).
See
section 970(a) and § 1.970-1 for rules that reduce subpart F income of controlled foreign corporations that are export trade corporations.

(d)
Certain taxable year determinations
—(1)
Required closing of foreign corporation's taxable year
—(i)
In general.
If a status change event occurs with respect to a foreign corporation, the taxable year of the foreign corporation closes for all purposes of the Internal Revenue Code (and, therefore, as to all shareholders of the foreign corporation) under this paragraph (d)(1) as of the end of the day on which the status change event occurs, unless the taxable year otherwise closes as of such day under another provision of the Internal Revenue Code.

(ii)
Status change event.
A
status change event
occurs if a foreign corporation becomes or ceases to be a controlled foreign corporation. For purposes of paragraph (d)(1)(i) of this section, in the case of a foreign corporation becoming a controlled foreign corporation, the status change event occurs on the last day that the foreign corporation is not a controlled foreign corporation, and in the case of a foreign corporation ceasing to be a controlled foreign corporation, the status change event occurs on the last day that the foreign corporation is a controlled foreign corporation.

(iii)
Special rules for domestic partnerships and options.
Solely for purposes of determining whether a status change event occurs with respect to a foreign corporation—

(A) § 1.958-1(d)(1) is applied without regard to the exceptions in § 1.958-1(d)(2)(i) and (ii), and

(B) Section 318(a)(4) and § 1.958-2(e) do not apply.

(2)
Elective closing of controlled foreign corporation's taxable year
—(i)
In general.
If a significant ownership variance occurs with respect to a controlled foreign corporation, all the controlling section 958(a) U.S. shareholders of the controlled foreign corporation may elect to close the controlled foreign corporation's taxable year for all purposes of the Internal Revenue Code (and, therefore, as to all shareholders of the controlled foreign corporation) under this paragraph (d)(2) as of the end of the day on which the

significant ownership variance occurs, unless the taxable year otherwise closes as of such day under another provision of the Internal Revenue Code. If the election is made, all persons that own stock of the controlled foreign corporation (regardless of whether they are controlling section 958(a) U.S. shareholders) must file their respective Federal income tax returns and information returns consistently with the election. The closing of the controlled foreign corporation's taxable year is treated as a change in taxable year for purposes of the notice requirement in § 1.964-1(c)(3)(iii), treating the controlling section 958(a) U.S. shareholders as the controlling domestic shareholders of the foreign corporation for this purpose. The notice described in § 1.964-1(c)(3)(iii) must be provided to all United States persons that own stock of the controlled foreign corporation during the taxable year that ends on the day on which the controlled foreign corporation's taxable year closes under this paragraph (d)(2), other than those persons required to enter into the binding agreement described in paragraph (d)(2)(iv)(B) of this section.

(ii)
Significant ownership variance
—(A)
In general.
A
significant ownership variance
occurs if, taking into account all specified transfers that occur pursuant to the same plan during the same taxable year of a controlled foreign corporation (such taxable year determined without regard to this paragraph (d)(2)), the percentage of the outstanding stock of the controlled foreign corporation owned by one or more section 958(a) U.S. shareholders of the controlled foreign corporation decreases, in the aggregate, by more than 50 percentage points (by vote or value), as compared to the percentage of stock of the controlled foreign corporation owned by those section 958(a) U.S. shareholders immediately before the first such specified transfer. For purposes of paragraph (d)(2)(i) of this section, the significant ownership variance occurs on the day that the last specified transfer taken into account in the significant ownership variance occurs.

(B)
Specified trans
fer. A
specified transfer
is—

(
1
) A sale, exchange, or any other disposition of one or more shares of stock of a foreign corporation or of a partnership interest by the same person on the same date, including a redemption of stock within the meaning of section 317(b) or a change in a partner's interest in a partnership as a result of a distribution or redemption, or

(
2
) An issuance of one or more shares of stock of a foreign corporation, an issuance of a partnership interest, or a change in a partner's interest in a partnership as a result of a contribution of property or services to the partnership, in each case occurring on the same date.

(C)
Special rules for related persons and certain reorganizations.
Solely for purposes of applying paragraph (d)(2)(ii)(A) of this section—

(
1
) The total percentage of the outstanding stock of the controlled foreign corporation owned by one or more section 958(a) U.S. shareholders is not treated as decreasing to the extent that, taking into account all the specified transfers referred to in paragraph (d)(2)(ii)(A) of this section, a United States person that is a related person, immediately following the last such specified transfer, with respect to any section 958(a) U.S. shareholder whose percentage of ownership of stock of the controlled foreign corporation decreased (determined without regard to this paragraph (d)(2)(ii)(C)(
1
)), has an increase in its percentage of ownership of stock of the controlled foreign corporation; and

(
2
) The transferor corporation and the resulting corporation (as defined in § 1.368-2(m)(1)) in a reorganization described under section 368(a)(1)(F) are treated as the same corporation.

(iii)
Certain United States shareholders
—(A)
Section 958(a) U.S. shareholders.
The
section 958(a) U.S. shareholders
of a controlled foreign corporation are the United States shareholders that own stock of the controlled foreign corporation.

(B)
Controlling section 958(a) U.S. shareholders.
The
controlling section 958(a) U.S. shareholders
of a controlled foreign corporation are the section 958(a) U.S. shareholders (or, if applicable, single section 958(a) U.S. shareholder) whose percentage of ownership of stock of the controlled foreign corporation decreases as part of a significant ownership variance.

(iv)
Time and manner of making election
—(A)
Election by controlling section 958(a) U.S. shareholders.
An election pursuant to this paragraph (d)(2) is made and effective if each controlling section 958(a) U.S. shareholder files the statement described in paragraph (d)(2)(v) of this section with its timely filed original Federal income tax return (including extensions) for the taxable year that includes the day the controlled foreign corporation's taxable year closes under this paragraph (d)(2). If a controlling section 958(a) U.S. shareholder is a member of a consolidated group (within the meaning of § 1.1502-1(h)), the agent for the group (within the meaning of § 1.1502-77(c)(1)) makes the election by filing the statement described in paragraph (d)(2)(v) of this section on behalf of such member.

(B)
Binding agreement.
Before the filing of the statement described in paragraph (d)(2)(v) of this section, all the controlling section 958(a) U.S. shareholders and all other section 958(a) U.S. shareholders of the controlled foreign corporation (if any) that own stock of the controlled foreign corporation on any day of the controlled foreign corporation's taxable year up to and including the day that the significant ownership variance occurs must enter into a written, binding agreement requiring the controlling section 958(a) U.S. shareholders to make the election described in this paragraph (d)(2). Each party to this binding agreement must be able to present the agreement to the Internal Revenue Service for inspection upon request. No binding agreement is required under this paragraph (d)(2)(iv)(B) if there is a single controlling section 958(a) U.S. shareholder and there is no other section 958(a) U.S. shareholder of the controlled foreign corporation that owns stock of the controlled foreign corporation on any day of the controlled foreign corporation's taxable year up to and including the day that the significant ownership variance occurs. In the case of a section 958(a) U.S. shareholder that owns stock of the controlled foreign corporation indirectly through one or more partnerships, the partnership that directly holds the stock of the controlled foreign corporation may enter into the binding agreement on behalf of the United States shareholder partner provided that, before the due date of the partner's original Federal income tax return, including extensions, the partner delegated the authority to the partnership to enter into the binding agreement pursuant to a written partnership agreement (within the meaning of § 1.704-1(b)(2)(ii)(
h
)).

(v)
Form and content of statement.
The statement required by paragraph (d)(2)(iv) of this section must be titled “Elective Section 951 Year-Closing Statement.” The statement must—

(A) Identify (by name and tax identification number, if any) the controlled foreign corporation, the controlling section 958(a) U.S. shareholders, and each other section 958(a) U.S. shareholder of the controlled foreign corporation that is party to the binding agreement referred to in paragraph (d)(2)(iv)(B) of this section;

(B) Describe the significant ownership variance to which the election applies and provide the date on which the

controlled foreign corporation's taxable year closes;

(C) State that each controlling section 958(a) U.S. shareholder and all other section 958(a) U.S. shareholders of the controlled foreign corporation described in paragraph (d)(2)(iv)(B) of this section have entered into a written, binding agreement to elect to close the controlled foreign corporation's taxable year in accordance with paragraph (d)(2)(iv)(B) of this section; and

(D) Be filed in the manner, if any, prescribed by forms, publications, or other guidance published in the Internal Revenue Bulletin.

(vi)
Consistency requirement.
If significant ownership variances occur with respect to multiple controlled foreign corporations pursuant to a plan or series of related transactions, the election described in this paragraph (d)(2) may be made only if it is made with respect to each of the controlled foreign corporations.

(3)
Foreign income taxes
—(i)
Allocation to taxable years.
If a foreign corporation's taxable year closes under paragraph (d)(1) or (d)(2) of this section and the foreign corporation's taxable year under foreign law does not close at the end of the date on which the foreign corporation's taxable year closes (the closing date), a portion of the foreign income tax with respect to such foreign taxable year that accrues in the taxable year following the closing date is allocated to the taxable year ending with the closing date. The allocation is made based on the portion of the taxable income of the foreign corporation (as determined under foreign law) for the foreign taxable year that is attributable under the principles of § 1.1502-76(b) (without regard to § 1.1502-76(b)(2)(ii)) to the period of the foreign taxable year ending with the closing date. This paragraph (d)(3) applies to all foreign income taxes for which the foreign corporation is the taxpayer under § 1.901-2(f) (other than withholding taxes as defined in section 901(k)(1)(B)). Foreign income taxes allocated to a taxable year under this paragraph (d)(3) are treated as accrued by the foreign corporation as of the close of that taxable year for all purposes of the Internal Revenue Code except for section 986(a).

(ii)
Allocation and apportionment to statutory and residual groupings.
The portion of the foreign income tax allocated under paragraph (d)(3)(i) of this section to the taxable year ending with the closing date is allocated and apportioned to statutory and residual groupings under § 1.861-20 by treating the foreign taxable income attributed under paragraph (d)(3)(i) of this section to the period of the foreign taxable year ending with the closing date as the foreign income included in the base on which the tax is imposed. The portion of the foreign income tax that remains in the taxable year following the closing date is allocated and apportioned to statutory and residual groupings under § 1.861-20 by treating the remaining foreign taxable income as the foreign income included in the base on which the tax is imposed.

(4)
Examples.
The following examples illustrate the application of this paragraph (d).

(i)
Example 1: Status change event
—(A)
Facts.
FC is a foreign corporation with a calendar taxable year. As of January 1 of Year 1, 100 percent of the stock of FC is owned by USP, a domestic corporation. On June 30 of Year 1, USP sells all its stock in FC to Individual A, a nonresident alien individual.

(B)
Analysis.
Under paragraph (f)(1) of this section, USP owns the stock of FC through June 30 of Year 1. Individual A owns the stock of FC on July 1 of Year 1. FC is therefore a controlled foreign corporation through June 30 of Year 1 and is not a controlled foreign corporation on July 1 of Year 1. Under paragraph (d)(1)(ii) of this section, a status change event occurs with respect to FC on June 30 of Year 1, which is the last day that FC is a controlled foreign corporation. Therefore, under paragraph (d)(1)(i) of this section, the taxable year of FC closes for all purposes of the Internal Revenue Code as of the end of the day on June 30 of Year 1.

(ii)
Example 2: Significant ownership variance
—(A)
Facts.
The facts are the same as in paragraph (d)(4)(i)(A) of this section (
Example 1
), except that Individual A is a United States citizen. USP and Individual A are not related persons.

(B)
Analysis.
Paragraph (d)(1) of this section does not apply to the sale of stock of FC by USP to Individual A because the sale does not result in FC ceasing to be a controlled foreign corporation. Under paragraph (d)(2)(ii)(B) of this section, the sale of stock of FC by USP to Individual A is a specified transfer. Under paragraph (d)(2)(ii)(B) of this section, USP is a section 958(a) U.S. shareholder of FC prior to the sale. Under paragraph (f)(1) of this section, USP owns the stock of FC through June 30 of Year 1, and Individual A owns the stock of FC on July 1 of Year 1. Under paragraph (d)(2)(ii)(A) of this section, USP's sale of all the stock of FC to Individual A results in a significant ownership variance that occurs on June 30 of Year 1. A significant ownership variance occurs because, taking into account the sale, the percentage of the outstanding stock of FC owned by USP decreases, in the aggregate, by more than 50 percentage points (by vote or value), as compared to the percentage of stock of FC owned by USP immediately before the sale (from 100 percent to 0 percent). Under paragraph (d)(2)(iii)(B) of this section, USP is the single controlling section 958(a) U.S. shareholder of FC. Therefore, pursuant to paragraph (d)(2)(i) of this section, USP may elect to close the taxable year of FC for all purposes of the Internal Revenue Code as of the end of the day on June 30 of Year 1.

(iii)
Example 3: Transfer between related persons
—(A)
Facts.
The facts are the same as in paragraph (d)(4)(ii)(A) of this section (
Example 2
), except that USP and Individual A are related persons.

(B)
Analysis.
Paragraph (d)(1) of this section does not apply to the sale of stock of FC by USP to Individual A because the sale does not result in FC ceasing to be a controlled foreign corporation. Under paragraph (d)(2)(ii)(B) of this section, the sale of stock of FC by USP to Individual A is a specified transfer. Under paragraph (d)(2)(iii)(A) of this section, USP is a section 958(a) U.S. shareholder of FC prior to the sale. Under paragraph (f)(1) of this section, USP owns the stock of FC through June 30 of Year 1, and Individual A owns the stock of FC on July 1 of Year 1. Under paragraph (d)(2)(ii)(C) of this section, solely for purposes of applying paragraph (d)(2)(ii)(A) of this section, the total percentage of the outstanding stock of FC owned by one or more section 958(a) U.S. shareholders is not treated as decreasing as a result of the sale because Individual A is a United States person that is a related person, immediately following the sale, with respect to USP, and the sale results in an increase in Individual A's percentage of ownership of stock of FC by 100 percent (entirely offsetting the 100 percent decrease in USP's percentage of ownership of stock of FC). Therefore, the sale does not give rise to a significant ownership variance and USP may not elect to close the taxable year of FC.

(e)
Pro rata share of subpart F income defined—
(1)
Overview.
This paragraph (e) determines a United States shareholder's pro rata share of a controlled foreign corporation's subpart F income for a CFC year. Paragraph (e)(2) of this section contains the rules for determining a United States shareholder's pro rata share of subpart F income. Paragraph (e)(3) of this section sets forth an anti-abuse rule, and

paragraph (e)(4) of this section contains examples.

(2)
In general.
A United States shareholder's pro rata share of a controlled foreign corporation's subpart F income for a CFC year is the portion of the subpart F income attributable to the stock of the foreign corporation that the United States shareholder owns during the period of the CFC year in which the United States shareholder owns the stock, the shareholder is a United States shareholder of the foreign corporation, and the foreign corporation is a controlled foreign corporation, as determined under the rules of this paragraph (e)(2).

(i)
One class of stock with constant number of shares outstanding
—(A)
Daily proration.
Subject to paragraph (e)(2)(i)(B) of this section, if the controlled foreign corporation has only one class of stock outstanding at all times during the CFC year and there is no change in the number of outstanding shares of the controlled foreign corporation during the CFC year, a United States shareholder's pro rata share of the controlled foreign corporation's subpart F income is equal to the subpart F income of the controlled foreign corporation for the CFC year multiplied by the product of—

(
1
) A fraction, the numerator of which is the number of shares of the controlled foreign corporation the United States shareholder owned during the CFC year, and the denominator of which is the number of shares of the controlled foreign corporation outstanding for the CFC year, and

(
2
) A fraction, the numerator of which is the number of days the United States shareholder owned the shares of the controlled foreign corporation while a United States shareholder of the foreign corporation and while the foreign corporation was a controlled foreign corporation during the CFC year, and the denominator of which is the number of days in the CFC year.

(B)
Stock with different ownership periods during CFC year
—(
1
) In general. If a United States shareholder owns shares in more than one CFC year block during a CFC year (for example, because the United States shareholder acquires or disposes of a portion of its shares during the CFC year), paragraph (e)(2)(i)(A) of this section is applied separately to each CFC year block, and the United States shareholder's pro rata share of the controlled foreign corporation's subpart F income for the CFC year is equal to the total amount determined with respect to all of its CFC year blocks.
See
paragraph (e)(4)(iii) of this section (
Example 2
).

(
2
)
Definition of CFC year block.
The term CFC year block means a group of shares within a class of stock of a controlled foreign corporation that a United States shareholder owns for the same period during a CFC year.

(ii)
More than one class of stock with constant number of shares outstanding in each class.
If a controlled foreign corporation has more than one class of stock outstanding during a CFC year and there is no change in the number of outstanding shares in any class of the controlled foreign corporation's stock during the CFC year, paragraph (e)(2)(i) of this section is applied separately to each class of stock after first allocating the controlled foreign corporation's subpart F income for the CFC year among the classes of stock. For this purpose, the amount of subpart F income for the CFC year allocated to a class of stock of a controlled foreign corporation is the amount that bears the same ratio to the corporation's subpart F income for the CFC year as the amount of the corporation's allocable earnings and profits that would be distributed with respect to the class of stock bears to the total amount of the corporation's allocable earnings and profits that would be distributed with respect to all the stock of the corporation if all the allocable earnings and profits of the corporation for the CFC year (not reduced by actual distributions during the year) were distributed (hypothetical distribution) on the last day of the CFC year.

(A)
Definition of allocable earnings and profits.
The term allocable earnings and profits means, with respect to a controlled foreign corporation for a CFC year, the amount that is the greater of—

(
1
) The earnings and profits of the corporation for the CFC year determined under section 964, and

(
2
) The sum of the subpart F income (as determined under section 952 after the application of section 951A(b)(2)(B)(ii) and § 1.951A-6(b)) of the corporation for the CFC year and the tested income of the corporation for the CFC year.

(B)
Hypothetical distribution analysis.
The amount of the controlled foreign corporation's allocable earnings and profits distributed in the hypothetical distribution with respect to each class of stock is determined based on the distribution rights of the stock during the CFC year. Subject to paragraphs (e)(2)(ii)(C) and (D), and (e)(3), of this section, the distribution rights of a class of stock are determined taking into account all facts and circumstances related to the economic rights and interest in the allocable earnings and profits of the corporation of each class, including the terms of the class of stock, any agreement among the shareholders and, if and to the extent appropriate, the relative fair market value of shares of stock. For purposes of this paragraph (e)(2)(ii)(B), facts and circumstances do not include actual distributions (including distributions by redemption) or any amount treated as a dividend under any other provision of subtitle A of the Internal Revenue Code (for example, under section 78, 356(a)(2), 367(b), or 1248) made during the CFC year.

(C)
Special rules
—(
1
)
Redemptions, liquidations, and returns of capital.
No amount of allocable earnings and profits is distributed in the hypothetical distribution with respect to a particular class of stock based on the terms of the class of stock of the controlled foreign corporation or any agreement or arrangement with respect thereto that would result in a redemption (even if such redemption would be treated as a distribution of property to which section 301 applies pursuant to section 302(d)), a distribution in liquidation, or a return of capital.

(
2
)
Certain cumulative preferred stock.
If a controlled foreign corporation has outstanding a class of redeemable preferred stock with cumulative dividend rights and dividend arrearages on such stock do not compound at least annually at a rate that equals or exceeds the applicable Federal rate (as defined in section 1274(d)(1)) that applies on the date the stock is issued for the term from such issue date to the mandatory redemption date based on a comparable compounding assumption (the relevant AFR), the amount of the corporation's allocable earnings and profits distributed in the hypothetical distribution with respect to the class of stock may not exceed the amount of dividends actually paid during the CFC year with respect to the class of stock plus the present value at the end of the CFC year of the unpaid current dividends with respect to the class determined using the relevant AFR and assuming the dividends will be paid at the mandatory redemption date. For purposes of this paragraph (e)(2)(ii)(C)(
2
), if the class of preferred stock does not have a mandatory redemption date, the mandatory redemption date is the date that the class of preferred stock is expected to be redeemed based on all facts and circumstances.

(
3
)
Dividend arrearages.
If there is an arrearage in dividends for prior taxable years with respect to a class of preferred stock of a controlled foreign corporation, an amount of the corporation's allocable earnings and

profits is distributed in the hypothetical distribution to the class of preferred stock by reason of the arrearage only to the extent the arrearage exceeds the accumulated earnings and profits of the controlled foreign corporation remaining from prior CFC years beginning after December 31, 1962, as of the beginning of the CFC year, or the date on which such stock was issued, whichever is later (the applicable date). If there is an arrearage in dividends for prior CFC years with respect to more than one class of preferred stock, the previous sentence is applied to each class in order of priority, except that the accumulated earnings and profits remaining after the applicable date are reduced by the allocable earnings and profits necessary to satisfy arrearages with respect to classes of stock with a higher priority. For purposes of this paragraph (e)(2)(ii)(C)(
3
), the amount of any arrearage with respect to stock described in this paragraph (e)(2)(ii)(C)(
3
) is determined in the same manner as the present value of unpaid current dividends on such stock under paragraph (e)(2)(ii)(C)(
2
) of this section.

(D)
Restrictions or other limitations on distributions
—(
1
)
In general.
A restriction or other limitation on distributions of an amount of earnings and profits by a controlled foreign corporation is not taken into account in determining the amount of the corporation's allocable earnings and profits distributed in the hypothetical distribution to a class of stock of the controlled foreign corporation.

(
2
)
Definition of restriction or other limitation.
For purposes of paragraph (e)(2)(ii)(D)(
1
) of this section, a restriction or other limitation on distributions includes any limitation that has the effect of limiting the distribution of an amount of earnings and profits by a controlled foreign corporation with respect to a class of stock of the corporation, other than currency or other restrictions or limitations imposed under the laws of any foreign country as provided in section 964(b).

(
3
)
Exception for certain preferred distributions.
For purposes of paragraph (e)(2)(ii)(D)(
1
) of this section, the right to receive periodically a fixed amount (whether determined by a percentage of par value, a reference to a floating coupon rate, a stated return expressed in terms of a certain amount of U.S. dollars or foreign currency, or otherwise) with respect to a class of stock the distribution of which is a condition precedent to a further distribution of earnings and profits that year with respect to any class of stock (not including a distribution in partial or complete liquidation) is not a restriction or other limitation on the distribution of earnings and profits by a controlled foreign corporation.

(
4
)
Illustrative list of restrictions and limitations.
Except as provided in paragraph (e)(2)(ii)(D)(
3
) of this section, restrictions or other limitations on distributions include, but are not limited to—

(
i
) An arrangement that restricts the ability of a controlled foreign corporation to pay dividends on a class of stock of the corporation until a condition or conditions are satisfied (for example, until another class of stock is redeemed);

(
ii
) A loan agreement entered into by a controlled foreign corporation that restricts or otherwise affects the ability to make distributions on its stock until certain requirements are satisfied; or

(
iii
) An arrangement that conditions the ability of a controlled foreign corporation to pay dividends to its shareholders on the financial condition of the corporation.

(iii)
Changes in number of shares outstanding.
If the number of shares within any class of stock of a controlled foreign corporation outstanding on each day of a CFC year changes (for example, because of an issuance of new shares or a redemption of outstanding shares), a United States shareholder's pro rata share of subpart F income is determined under the rules provided in paragraphs (e)(2)(i) and (ii) of this section as modified by this paragraph (e)(2)(iii).

(A)
Weighted average share count.
For purposes of applying paragraph (e)(2)(i) of this section, a United States shareholder's pro rata share of subpart F income is determined by substituting a weighted average share count for the number of the controlled foreign corporation's shares outstanding during the CFC year, which is equal to the sum of the number of shares outstanding on each day of the CFC year divided by the number of days in the CFC year.

(B)
Multiple classes of stock.
For purposes of applying paragraph (e)(2)(ii) of this section, a controlled foreign corporation's subpart F income for the CFC year is allocated among classes of stock based on the allocable earnings and profits that would be distributed to a class of stock in the hypothetical distribution if a weighted average share count of the class was outstanding on each day of the CFC year and, thus, on the last day of the CFC year when the hypothetical distribution occurs.

(3)
Transactions and arrangements with a principal purpose of changing pro rata shares.
Appropriate adjustments must be made to the allocation of allocable earnings and profits that would be distributed (without regard to this paragraph (e)(3)) in a hypothetical distribution with respect to any share of stock to disregard the effect on the hypothetical distribution of any transaction or arrangement that is undertaken as part of a plan a principal purpose of which is the avoidance of Federal income taxation by changing the amount of allocable earnings and profits that would be distributed in any hypothetical distribution with respect to such share. This paragraph (e)(3) also applies for purposes of the pro rata share rules described in § 1.951A-1(d) that reference this paragraph (e).

(4)
Examples.
The following examples illustrate the application of this paragraph (e).

(i)
Facts.
Except as otherwise stated, the following facts are assumed for purposes of the examples:

(A) FC1 is a controlled foreign corporation.

(B) USP1 and USP2 are domestic corporations that are United States shareholders of FC1.

(C) Individual A is a nonresident alien individual, and FC2 is a foreign corporation that is not a controlled foreign corporation.

(D) All persons use the calendar year as their taxable year.

(E) Year 1 has 365 days.

(F) Any ownership of stock of FC1 by any shareholder is for all of Year 1.

(G) The common shareholders of FC1 are entitled to dividends when declared by FC1's board of directors.

(H) There are no accrued but unpaid dividends with respect to preferred shares, the preferred stock is not described in paragraph (e)(2)(ii)(C)(
2
) of this section, and common sha

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2026-17365. Public record. Not legal advice.