Par. 37. Section 1.1502-59 is added to read as follows:
(a) Overview and scope. This section addresses the consequences to consolidated groups of previously taxed earnings and profits of foreign corporations, including under section 959 (regarding exclusions from gross income of distributions of previously taxed earnings and profits of foreign corporations) and section 961 (regarding basis adjustments to the stock of foreign corporations and other property). Paragraph (b) of this section provides definitions. Paragraph (c) of this section provides rules to treat a consolidated group as a single covered shareholder for purposes of the rules relating to previously taxed earnings and profits. Paragraph (d) of this section addresses the application of section 961 to consolidated groups. Paragraph (e) of this section addresses members that join or leave a consolidated group. Paragraph (f) of this section contains examples. Paragraph (g) of this section provides the applicability date of this section.
(b) Definitions. The definitions and rules of general applicability in §§ 1.959-1 and 1.961-1 apply for purposes of this section, with the following additions:
(1) Departing transaction. The term departing transaction has the meaning provided in paragraph (e)(3) of this section.
(2) Group derived basis. The term group derived basis has the meaning provided in paragraph (d)(2)(ii) of this section.
(3) Group section 961(c) basis. The term group section 961(c) basis has the meaning provided in paragraph (d)(2)(ii) of this section.
(4) Joining transaction. The term joining transaction has the meaning provided in paragraph (e)(2) of this section.
(5) Member shareholder. The term member shareholder means a member that owns stock of a foreign corporation.
(6) Section 959 rules. The term section 959 rules means section 959 and the section 959 regulations.
(7) Section 961 rules. The term section 961 rules means section 961 and the section 961 regulations.
(c) Single covered shareholder treatment under section 959 —(1) Overview. This paragraph (c) addresses the application of the section 959 rules to a consolidated group. Paragraph (c)(2) of this section provides the general rule that treats the group as a single covered shareholder. Paragraphs (c)(3) through (5) of this section describe the application of this general rule: paragraph (c)(3) of this section addresses the maintenance of group PTEP accounts; paragraph (c)(4) of this section provides for the allocation of PTEP among members; and paragraph (c)(5) of this section addresses intercompany transfers of foreign corporation stock. Where other provisions of the Code or regulations reference the section 959 rules (for example, sections 960(b) and 986(c)), the treatment described in this paragraph (c) applies for purposes of the application of those provisions.
(2) In general. For purposes of applying the section 959 rules, members of a consolidated group are treated as a single covered shareholder. However, each member computes and takes into account its own items with respect to the stock of foreign corporations (including items allocated by a partnership, or assigned from a controlled foreign corporation, to the member). For example, if a member receives a distribution from a foreign corporation, that member takes into account the tax consequences of the distribution.
(3) PTEP accounting. For purposes of applying §§ 1.959-2 (regarding accounting of previously taxed earnings and profits) and 1.959-3 (regarding adjustments to shareholder-level accounts relating to previously taxed earnings and profits)—
(i) A consolidated group establishes and maintains a single set of annual PTEP accounts, dollar basis pools, and PTEP tax pools with respect to a foreign corporation whose stock is owned by one or more members (for example, a consolidated group has a single combined pool election under § 1.959-2(c)); and
(ii) A foreign corporation establishes and maintains a single corporate PTEP account and corporate PTEP tax pool with respect to a consolidated group.
(4) Allocation of group accounts —(i) In general. When necessary (for example, to determine a member shareholder's section 956 amount or foreign currency gain or loss under section 986(c)), the relevant amount of the consolidated group's accounts described in paragraph (c)(3) of this section is allocated among the member shareholders. The relevant amount is the amount that the single covered shareholder would access if all members of a consolidated group were treated as a single covered shareholder. The allocation is made in proportion to each member shareholder's share of the item at issue relative to the total amount of the item for all member shareholders.
(ii) Application to covered distributions —(A) Overview. The allocation rule in paragraph (c)(4)(i) of this section applies if one or more member shareholders receive, or are assigned under § 1.951-2, a portion of a covered distribution (each, a member's portion ), then each member shareholder is allocated a portion of the group's accounts described in paragraph (c)(3) of this section to determine the extent to which the member's portion is previously taxed earnings and profits under § 1.959-4.
(B) The relevant amount of the covered distribution. For purposes of allocating the group accounts, the relevant amount is the amount of the total portion of the covered distribution received by or assigned to all member shareholders ( group's portion ) that would be previously taxed earnings and profits to a single covered shareholder. This amount is determined under § 1.959-4 based on the consolidated group's accounts described in paragraph (c)(3) of this section.
(C) Member shareholder's PTEP amount for covered distribution. The extent to which the member's portion is previously taxed earnings and profits under § 1.959-4 is determined by multiplying the amount determined under paragraph (c)(4)(ii)(B) of this section by a fraction. The numerator of the fraction is the member's portion, and the denominator is the group's portion.
(5) Intercompany transfers. Because a group maintains a single set of accounts under paragraph (c)(3) of this section (that is, member shareholders do not have their own accounts), an intercompany transfer (within the meaning of § 1.1502-13(b)(1)) of the stock of a foreign corporation is not a general successor transaction as defined in § 1.959-7(b).
(d) Basis under section 961 —(1) Overview. This paragraph (d) addresses the application of the section 961 rules to consolidated groups. Paragraph (d)(2) of this section contains the general rule providing for single- or separate-entity treatment of the group with respect to different types of property units. Paragraphs (d)(3) and (4) of this section, respectively, address basis increases and reductions under section 961. Paragraph (d)(5) of this section addresses the use of the group's basis to determine gain or loss on a property unit.
(2) Treatment of property units —(i) Section 961(a) ownership units. Because member shareholders directly own section 961(a) ownership units, adjustments to these ownership units under the section 961 rules are made separately to member shareholders' actual ownership interests.
(ii) Derivative ownership units and section 961(c) ownership units. Members of a consolidated group are treated as a single covered shareholder for purposes of accounting for the basis of derivative ownership units and section 961(c) ownership units. Therefore, a partnership has a single derived basis with respect to a consolidated group in a derivative ownership unit ( group derived basis ), and a controlled foreign corporation has a single section 961(c) basis with respect to a consolidated group in a section 961(c) ownership unit ( group section 961(c) basis ).
(3) Basis increases for income inclusions and gains —(i) In general. Adjustments under §§ 1.961-3 (for inclusions under sections 951(a), 951A(a), and 961) and 1.961-5(b) (relating to foreign currency gain) are determined based on each member shareholder's respective income inclusions under sections 951(a) and 951A(a), foreign currency gain under section 986(c), or income inclusions under § 1.961-11. To the extent the adjustment is to a section 961(a) ownership unit, the adjustments are made separately to each member shareholder's section 961(a) ownership unit. In contrast, to the extent the adjustment is to a derivative ownership unit or a section 961(c) ownership unit, the adjustment is made to the group derived basis or the group section 961(c) basis.
(ii) Example. A member (M1) directly owns all the stock of a foreign corporation (CFC1), which directly owns all the preferred stock in another foreign corporation (CFC3). Another member (M2) owns all the stock of a foreign corporation (CFC2), which owns all the common stock of CFC3. M1 and M2 have section 951(a) inclusions resulting from CFC3's subpart F income. M1's basis in its CFC1 stock, which is determined separately with respect to M1, and the group section 961(c) basis in CFC1's preferred stock in CFC3, are both adjusted based on M1's inclusion. Similarly, M2's basis in its CFC2 stock, which is determined separately with respect to M2, and the group section 961(c) basis in CFC2's common stock in CFC3, are both adjusted based on M2's inclusion.
(4) Basis reductions —(i) Reductions to basis of section 961(a) ownership units. Reductions to the basis of section 961(a) ownership units under §§ 1.961-4 (for distributions of previously taxed earnings and profits) and 1.961-5(b) (relating to foreign currency loss) are determined on a separate-entity basis. See paragraph (d)(2)(i) of this section.
(ii) Reductions to derived basis or section 961(c) basis. This paragraph (d)(4)(ii) coordinates the application of the section 961 rules to determine how to reduce group derived basis and group section 961(c) basis under §§ 1.961-4 and 1.961-5.
(A) Step 1: Proportionate allocation of derived basis and section 961(c) basis. When the section 961 rules apply to reduce derived basis or section 961(c) basis, the group derived basis and group section 961(c) basis is allocated to the member shareholders. The allocation is made in proportion to each member shareholder's share of the item at issue relative to the total for all member shareholders (for example, in proportion to a member shareholder's PTEP amount for a covered distribution, as described in paragraph (c)(4)(ii)(C) of this section).
(B) Step 2: Separate entity basis reduction. The member shareholders separately apply the section 961 rules to make the necessary basis reductions, taking into account the amount of group derived basis and group section 961(c) basis allocated to that member in paragraph (d)(4)(ii)(A) of this section (step 1) (for example, see § 1.961-4(d) for adjustments to section 961(c) ownership units for distributions of previously taxed earnings and profits to a controlled foreign corporation owned by member shareholders). To the extent the basis reduction exceeds the relevant basis in the ownership unit with respect to the member shareholder, the partnership or controlled foreign corporation recognizes gain (for example, see § 1.961-4(f)), which is allocated or assigned to the member shareholder.
(C) Step 3: Recombination of derived basis and section 961(c) basis. After applying the rules in paragraphs (d)(4)(ii)(A) and (B) of this section, to the extent there is any remaining positive derived basis or positive section 961(c) basis, or any resulting negative derived basis or negative section 961(c) basis, those bases are combined to produce the group derived basis or group section 961(c) basis for the relevant ownership unit.
(5) Use of group derived basis and group section 961(c) basis to determine gain or loss —(i) Section 1.961-8(b)(1) gain or loss. This paragraph (d)(5)(i) applies when a member shareholder is allocated a distributive share of gain or loss as described in § 1.961-8(b)(1). For purposes of applying positive derived basis under § 1.961-8(b)(2), the member shareholder is allocated a portion of the relevant group derived basis in proportion to the member shareholder's ownership interest in the foreign corporation described in § 1.961-8(b)(1) relative to the aggregate of all ownership interests in the foreign corporation of all member shareholders. The relevant group derived basis is the amount of derived basis the single covered shareholder would access if all members of the consolidated group were treated as a single covered shareholder.
(ii) Section 1.961-9(c) covered gain. This paragraph (d)(5)(ii) applies when a member shareholder is assigned a share of covered gain under § 1.951-2. For purposes of applying positive section 961(c) basis under § 1.961-9(e), the member shareholder is allocated a portion of the relevant group section 961(c) basis in proportion to the member shareholder's share of covered gain relative to the total for all member shareholders. The relevant group section 961(c) basis is the amount of section 961(c) basis the single covered shareholder would access if all members of a consolidated group were treated as a single covered shareholder.
(e) Consequences of joining or leaving a consolidated group —(1) In general. For purposes of applying the section 959 rules and the section 961 rules, a transaction in which a member shareholder joins or leaves a consolidated group is treated in the same manner as an acquisition or disposition of the stock of a foreign corporation owned by the member at the time the member joins or leaves the consolidated group, as applicable. Paragraphs (e)(2) and (3) of this section coordinate the application of §§ 1.959-7 (general successor transaction rules) and 1.961-5 (successor basis rules) to transactions in which a member shareholder joins or leaves a consolidated group, respectively. Paragraph (e)(4) of this section coordinates the application of section 986(c) to such transactions. The rules of this paragraph (e) apply only to transactions treated as acquisitions or dispositions of stock of the member shareholder (for example, if a member shareholder is sold to an unrelated party and an election under section 338(h)(10) is made, paragraph (e)(3) of this section does not apply).
(2) Joining transactions —(i) In general. A transaction ( joining transaction ) in which a corporation ( joining member ) becomes a member of a consolidated group is treated in the same manner as a general successor transaction. In the joining transaction, the transferor covered shareholder is the joining member, the successor covered shareholder is the consolidated group, and the consolidated group is treated as acquiring ownership of all the stock of foreign corporations owned by the joining member. Thus, for example, any previously taxed earnings and profits in the joining member's annual PTEP accounts with respect to a foreign corporation are added to the consolidated group's annual PTEP accounts with respect to the foreign corporation. Similarly, a controlled foreign corporation's section 961(c) basis with respect to the joining member in a section 961(c) ownership unit is added to the controlled foreign corporation's section 961(c) basis with respect to the consolidated group in that unit, and a partnership's derived basis with respect to the joining member in a derivative ownership unit is added to the partnership's derived basis with respect to the consolidated group in that unit.
(ii) Combined pool election. The consolidated group's combined pool election status pursuant to § 1.959-2(c) controls after a joining transaction.
(3) Departing transactions —(i) In general. A transaction ( departing transaction ) in which a member shareholder ( departing member ) ceases to be a member of a consolidated group is treated in the same manner as a general successor transaction. In the departing transaction, the transferor covered shareholder is the consolidated group, the successor covered shareholder is the departing member, and the departing member is treated as acquiring ownership of all the stock of foreign corporations owned by the departing member at the time of the departing transaction. Thus, for example, any previously taxed earnings and profits in the consolidated group's annual PTEP accounts with respect to the foreign corporation are allocated between the consolidated group and the departing member shareholder. Similarly, a controlled foreign corporation's section 961(c) basis in a section 961(c) ownership unit with respect to the consolidated group is allocated between the consolidated group and the departing member, and a partnership's derived basis in a derivative ownership unit with respect to the consolidated group is allocated between the consolidated group and the departing member.
(ii) Combined pool election. The departing member retains the consolidated group's combined pool election status under § 1.959-2(c). However, if the departing member joins a new consolidated group, paragraph (e)(2)(ii) of this section applies to the new consolidated group.
(4) Coordination with section 986(c). Joining transactions and departing transactions do not result in recognition of foreign currency gain or loss under section 986(c) (notwithstanding § 1.986(c)-1). Thus, for example, the dollar basis of previously taxed earnings and profits in a joining member's annual PTEP accounts carries over when adding the previously taxed earnings and profits to the consolidated group's annual PTEP accounts pursuant to paragraph (e)(2)(i) of this section.
(f) Examples —(1) In general. This paragraph (f) provides examples illustrating the application of this section. These examples do not discuss every consequence of the transactions under related provisions of the Code and regulations.
(2) Assumed facts. For purposes of the examples in this paragraph (f), unless otherwise indicated, the following facts are assumed:
(i) USP, USS1, and USS2 are domestic corporations, each of which uses the U.S. dollar as its functional currency. USP is the common parent of the P consolidated group (P group), USS1 and USS2 are members of the P group, and all the stock of USS1 and USS2 is owned by USP.
(ii) F1 and F2 are controlled foreign corporations, each of which uses the British pound (£) as its functional currency.
(iii) PRS1 is a partnership.
(iv) Each entity uses the calendar year as its taxable year, and no entity has a short taxable year.
(v) There are no adjustments under section 743(b) to the basis of any partnership property.
(3) Example 1: Exclusion from gross income of distributed previously taxed earnings and profits —(i) Facts. Each of USS1 and USS2 directly owns 50 of the 100 shares of the single class of outstanding stock of F1. In year 3, F1 makes a £300x distribution of money with respect to its stock (£3x with respect to each share), and the entirety of this £300x is a covered distribution (a dividend as defined in section 316, determined without regard to section 959(d)). Immediately before the covered distribution, F1 has £180x of previously taxed earnings and profits with respect to the P group, none of which is assigned to the taxable section 962 PTEP group.
(ii) Analysis. For purposes of analyzing the covered distribution under § 1.959-4, the P group is treated as a single covered shareholder. See paragraph (c)(2) of this section. The P group's share of the covered distribution is the entire £300x because the entire covered distribution is made to members of the P group (£150x to USS1 plus £150x to USS2). See § 1.959-4(d)(1). The £300x are allocated first to F1's previously taxed earnings and profits that are with respect to the P group immediately before the covered distribution (£180x), and then to F1's earnings and profits described in section 959(c)(3). Therefore, the £300x consist of £180x of previously taxed earnings and profits and £120x of earnings and profits described in section 959(c)(3). See § 1.959-4(d)(2) and (e)(1). These previously taxed earnings and profits are treated as distributed pro rata with respect to the F1 stock on which the P group's share of the covered distribution is made. See § 1.959-4(d)(4) and paragraph (c)(4)(ii) of this section. Accordingly, £1.8x of previously taxed earnings and profits is treated as distributed with respect to each share of F1 stock. See id. USS1 and USS2 each excludes the £90x ((£150x ÷ £300x) × £180x) of previously taxed earnings and profits distributed to it from its gross income. See § 1.959-4(b)(1) and paragraph (c)(4)(ii) of this section. Moreover, the distributions of previously taxed earnings and profits to USS1 and USS2 do not result in any investment adjustments under § 1.1502-32 ( see § 1.1502-32(b)(5)(ii), Example 9 ) or adjustments to earnings and profits ( see §§ 1.312-8(c) and 1.1502-33). Because this analysis depends only on F1's PTEP with respect to the P group, these results do not depend on whether USS1 or USS2 owned F1 stock or had income inclusions with respect to F1 during the taxable years to which the distributed previously taxed earnings and profits relate.
(4) Example 2: Basis increases for income inclusions —(i) Facts. F1 has two classes of stock outstanding. USS1 directly owns all 100 shares of F1 common stock, and USS2 directly owns all 100 shares of F1 preferred stock. F1 directly owns all 50 shares of the single class of outstanding stock of F2. The shares of F1 stock directly owned by USS1 or USS2 are section 961(a) ownership units, and the shares of F2 stock directly owned by F1 are section 961(c) ownership units. For year 3, USS1 includes $60x and USS2 includes $40x in gross income under section 951(a)(1)(A) with respect to F2 (their pro rata shares of F2's subpart F income, translated into U.S. dollars in accordance with section 989(b)). F2 does not make any covered distributions, and therefore does not distribute any previously taxed earnings and profits, during the taxable year.
(ii) Analysis —(A) In general. To reflect USS1's and USS2's income inclusions for year 3, the basis of the F2 stock and F1 stock is increased in accordance with § 1.961-3. See § 1.961-3(b). F1's section 961(c) basis in the F2 stock with respect to the P group is increased based on the total inclusions of the P group, because members of a consolidated group are treated as a single covered shareholder for purposes of accounting for basis of section 961(c) ownership units, and because all of the P group's inclusions arise with respect to this F2 stock. See paragraphs (d)(2)(ii) and (d)(3)(i) of this section. USS1's adjusted basis in the F1 common stock and USS2's adjusted basis in the F1 preferred stock are increased based on each member's separate inclusion, because adjustments to section 961(a) ownership units are made separately to member shareholders' actual ownership interests. See paragraphs (d)(2)(i) and (d)(3)(i) of this section.
(B) Increases to basis of each property unit. The amount of the P group's income inclusions with respect to F2 that give rise to increases to basis under section 961 is $100x ($60x + $40x). See § 1.961-3(c)(1) and paragraph (d)(3) of this section. Under § 1.961-3(e), the section 961(c) basis with respect to the P group of each share of F2 stock is increased by $2x ($100x ÷ 50 shares). The basis of each share of F1 common stock owned by USS1 is increased by $0.60x ($60x ÷ 100 shares) and the basis of each share of F1 preferred stock owned by USS2 is increased by $0.40x ($40x ÷ 100 shares). These increases to basis are treated as made at the beginning of F2's taxable year. See § 1.961-3(c)(2) and (e)(1). These adjustments to the basis of the section 961(a) ownership units may be different from the adjustments that would be made under § 1.961-3(e) if they were all held by a single owner.
(C) Section 1502 basis and E&P adjustments. USP increases its basis in its USS1 stock by $60x and in its USS2 stock by $40x, reflecting each member's inclusion in income under section 951(a)(1)(A). See § 1.1502-32(b)(2)(i). Because the income inclusions increase USS1's and USS2's earnings and profits ( see § 1.312-6(f)), USP's earnings and profits are increased under § 1.1502-33(b)(1).
(5) Example 3: Basis reductions and gain recognition for distributions from upper-tier foreign corporation —(i) Facts. USS1 and USS2 directly own all the shares of the single class of outstanding stock of F1, with USS1 owning 60 shares and USS2 owning 40 shares. In year 3, F1 makes a pro rata covered distribution to USS1 and USS2. Under § 1.959-4, the entirety of the covered distribution is previously taxed earnings and profits with respect to the P group and excluded from the members' gross income. In addition, the sum of the dollar basis and associated foreign income taxes of the previously taxed earnings and profits that are distributed on each share of F1 stock is $6x. Immediately before the covered distribution, USS1's adjusted basis in each share of its F1 stock is $8x, and USS2's adjusted basis in each share of its F1 stock is $5x. Each of USS1 and USS2 is deemed to pay the entirety of the associated foreign income taxes of the previously taxed earnings and profits distributed to it under section 960(b) (because all such taxes are sourced from the creditable PTEP tax group and the member is a United States shareholder of F1) and is allowed a credit under section 901 for the entirety of such taxes.
(ii) Analysis. Under § 1.961-4(b), each of USS1 and USS2 separately reduces its adjusted basis in each share of F1 stock on which it receives previously taxed earnings and profits and, if applicable, recognizes gain with respect to those shares. See paragraph (d)(4)(i) of this section. The adjustment to each share of F1 stock is $6x, the sum of the dollar basis and associated foreign income taxes of the previously taxed earnings and profits received by the member on the share. See § 1.961-4(b)(2)(i). The basis of each of USS1's shares of F1 stock is reduced to $2x ($8x original basis − $6x adjustment). See § 1.961-4(b)(2)(ii). The basis of each of USS2's shares of F1 stock is reduced to $0x, and USS2 recognizes $1x of gain per share ($5x original basis − $6x adjustment). See § 1.961-4(b)(2)(ii) and (iii). These adjustments are treated as made concurrently with the covered distribution. See § 1.961-4(e)(1) and (f)(1).
(6) Example 4: Basis reductions and gain recognition for distributions from lower-tier foreign corporation —(i) Facts. USS1 and USS2 directly own all the shares of the single class of outstanding stock of F1, with USS1 owning 60 shares and USS2 owning 40 shares. F1 directly owns all the shares of the single class of outstanding stock of F2. In year 3, F2 makes a covered distribution to F1. Under § 1.959-4, the entirety of the covered distribution is previously taxed earnings and profits that are with respect to the P group and excluded from F1's gross income for purposes of determining its subpart F income and its tested income or tested loss. In addition, the sum of the dollar basis and associated foreign income taxes of the previously taxed earnings and profits that are distributed on each share of F2 stock is $6x. Immediately before the covered distribution, F1's adjusted basis in each share of F2 stock is £1.50x, and its section 961(c) basis with respect to the P group in each share is $5x. On the day of the covered distribution, the spot rate is $1:£0.5.
(ii) Analysis. Under § 1.961-4(d), F1 reduces its section 961(c) basis in each share of F2 stock on which it receives previously taxed earnings and profits. If applicable, F1 recognizes gain with respect to those shares. These adjustments are made separately with respect to USS1 and USS2. See paragraph (d)(4)(ii) of this section. First, under paragraph (d)(4)(ii)(A) of this section, for each share of F2 stock, F1's section 961(c) basis with respect to the P group is allocated proportionately to USS1 ($3x, or 60%) and USS2 ($2x, or 40%). Next, under paragraph (d)(4)(ii)(B) of this section, the basis reductions are made separately for each of USS1 and USS2. For each share of F2 stock, USS1's portion of F1's section 961(c) basis ($3x) is reduced by USS1's share of the dollar basis and associated foreign income taxes ($3.60x = 60% × $6x). See § 1.961-4(d)(2). Because the reduction exceeds the positive section 961(c) basis, it must be tested against the limitation in § 1.961-4(d)(3). The amount of F1's adjusted basis in each share that is available with respect to USS1 is £0.90x (60% × £1.50x), which is equal to $1.80x. Because $1.80x is greater than $0.60x, USS1's portion of F1's section 961(c) basis is reduced to negative $0.60x ($3x − $3.60x), and no gain is recognized under § 1.961-4(d)(2)(iii). Similarly, USS2's share of F1's section 961(c) basis in each share of F2 stock ($2x) is reduced by its share of the dollar basis and associated foreign income taxes ($2.40x = 40% × $6x). The amount of F1's adjusted basis in each share that is available with respect to USS2 is £0.60x (40% × £1.50x), which is equal to $1.20x. Therefore, USS2's portion of F1's section 961(c) basis is reduced to negative $0.40x ($2x − $2.40x), and no gain is recognized under § 1.961-4(d)(2)(iii). Finally, under paragraph (d)(4)(ii)(C) of this section, the separately computed section 961(c) bases are recombined. As a result, F1's section 961(c) basis with respect to the P group in each share of F2 stock is negative $1x (negative $0.60x + negative $0.40x = negative $1x). The reductions to section 961(c) basis are treated as made concurrently with the covered distribution. See § 1.961-4(e)(1) and (f)(1).
(iii) Alternative facts: distribution in excess of basis. The facts are the same as in paragraph (f)(6)(i) of this section ( Example 4 ), except that the sum of the dollar basis and associated foreign income taxes per share of F2 stock is $9x instead of $6x. The application of paragraph (d)(4)(ii)(A) of this section is the same as in paragraph (f)(6)(ii) of this section. When applying paragraph (d)(4)(ii)(B) of this section, the basis reductions per share are $5.40x (60% × $9x) for USS1 and $3.60x (40% × $9x) for USS2. Because the reductions again exceed the positive section 961(c) basis, they must be tested against the limitation in § 1.961-4(d)(3). The amounts of F1's adjusted basis in each share that are available with respect to each member are the same as in paragraph (f)(6)(ii) of this section. For USS1, because the $1.80x limitation is less than $2.40x ($3x section 961(c) basis − $5.40x adjustment), USS1's portion of F1's section 961(c) basis per share is reduced to negative $1.80x, and $0.60x ($2.40x − $1.80x) of gain per share is recognized under § 1.961-4(d)(2)(iii), with this gain assigned solely to USS1. Similarly, for USS2, the $1.20x limitation is less than $1.60x ($2x section 961(c) basis − $3.60x adjustment). Therefore, USS2's portion of F1's section 961(c) basis per share is reduced to negative $1.20x, and $0.40x ($1.60x − $1.20x) of gain per share is recognized under § 1.961-4(d)(2)(iii), with this gain assigned solely to USS2. The basis of USS1 and USS2's F1 stock is increased under § 1.961-3 to reflect the gains recognized by F1 and included in the member's gross income pursuant to § 1.961-11. Finally, under paragraph (d)(4)(ii)(C) of this section, the separately computed section 961(c) bases are recombined. As a result, F1's section 961(c) basis with respect to the P group in each share of F2 stock is negative $3x (negative $1.80x + negative $1.20x = negative $3x).
(7) Example 5: Use of positive derived basis —(i) Facts. USS1, USS2, and a nonresident alien individual, in the aggregate, directly own all the interests in PRS1, with USS1 and USS2 owning equal interests in PRS1. PRS1 directly owns all the shares of the single class of outstanding stock of F1 (derivative ownership units). In year 3, PRS1 sells all the F1 stock to an unrelated party for money. The distributive share of the gain recognized by PSI is $30x to each of USS1 and USS2, determined without regard to derived basis. Immediately before the sale (and taking into account any adjustments under § 1.961-5(b) resulting from the sale), PRS1's positive derived basis with respect to the P group in the F1 stock is $50x in total. In addition, PRS1 has no negative derived basis with respect to the P group in any of the shares.
(ii) Analysis. In applying PRS1's positive derived basis with respect to the P group in the F1 stock, a pro rata portion of such derived basis is taken into account with respect to each member. See paragraph (d)(5)(i) of this section. Thus, because USS1 and USS2 own equal interests in PRS1, $25x (or 50%) of the derived basis is taken into account with respect to each of USS1 and USS2. Accordingly, for each of USS1 and USS2, PRS1 is treated as applying $25x of derived basis to the member's $30x distributive share of gain on the sale. See § 1.961-8(b). As result, each member's distributive share of gain on the sale is adjusted by $25x, to a $5x distributive share of gain. See also § 1.961-8(c) (for purposes of adjusting each member's adjusted basis in its PRS1 interest under section 705, the member's distributive share of gain on the sale is $5x).
(8) Example 6: Use of positive section 961(c) basis —(i) Facts. USS1, USS2, and a nonresident alien individual, in the aggregate, directly own all the shares of the single class of outstanding stock of F1. USS1 and USS2 own an equal number of shares of F1. F1 directly owns all the shares of the single class of outstanding stock of F2 (section 961(c) ownership units). In year 3, F1 sells all the F2 stock to an unrelated party for money. F1 recognizes £100x of gain on the sale, determined without regard to loss recognized on any share and without regard to section 961(c) basis. This £100x is covered gain, and each of USS1 and USS2 is assigned a £30x portion of the covered gain under § 1.951-2. Immediately before the sale (and taking into account any adjustments under § 1.961-5(b) resulting from the sale), F1's positive section 961(c) basis in the F2 stock with respect to the P group is £50x (as translated from U.S. dollars into British pounds at the spot rate on the day of the sale). In addition, F1 has no negative section 961(c) basis with respect to the P group in any of the shares.
(ii) Analysis. In applying F1's positive section 961(c) basis with respect to the P group of the F2 stock, a pro rata portion of such section 961(c) basis is taken into account with respect to each member. See paragraph (d)(5)(ii) of this section. Thus, because USS1 and USS2 own equal interests in F1, £25x (£30x ÷ £60x, or 50%) of the section 961(c) basis is taken into account with respect to each of USS1 and USS2. All £25x of the section 961(c) basis taken into account with respect to each of USS1 and USS2 is applied to the member's £30x share of the covered gain. See § 1.961-9(d)(2) and (e)(1). As a result, a total of £50x of the covered gain is previously taxed earnings and profits of F1 with respect to the P group, characterized in accordance with § 1.961-9(f)(2) through (4). See § 1.961-9(d)(3), (f)(1) and paragraph (c)(1) of this section. F1 excludes the £50x of previously taxed earnings resulting from section 961(c) basis from its gross income, solely for purposes of determining its subpart F income and tested income or tested loss. See § 1.961-9(b).
(g) Applicability date. This section applies to a taxable year of a consolidated group for which a taxable year of a foreign corporation is relevant if such taxable year of the foreign corporation begins on or after [date of publication of final regulations in the Federal Register ] or is an early application year (as described in § 1.959-12(d)).