Par. 6. Section 1.951A-1 is amended by: 1. Revising paragraphs (a)(2) through (e); and 2. Removing paragraph (f). The revisions read as follows:
(a) * * *
(2) Scope. Paragraph (b) of this section provides the general rule requiring a United States shareholder to include in gross income its net CFC tested income for a U.S. shareholder inclusion year. Paragraph (c) of this section provides rules for determining the amount of a United States shareholder's net CFC tested income for the U.S. shareholder inclusion year, including a rule for the application of section 951A and the section 951A regulations to consolidated groups. Paragraph (d) of this section provides rules for determining a United States shareholder's pro rata share of tested income and tested loss for purposes of determining the United States shareholder's net CFC tested income. Paragraph (e) of this section provides additional definitions for purposes of this section and the section 951A regulations. For rules applying this section to foreign controlled United States shareholders and foreign controlled foreign corporations, see section 951B (generally treating references in this section to the term “United States shareholder” as including the term “foreign controlled United States shareholder” and the term “controlled foreign corporation” as including the term “foreign controlled foreign corporation”).
(b) Inclusion of net CFC tested income. Each person who is a United States shareholder of any controlled foreign corporation and owns stock of any such controlled foreign corporation includes in gross income in the U.S. shareholder inclusion year the shareholder's net CFC tested income inclusion amount, if any, for the U.S. shareholder inclusion year.
(c) Determination of net CFC tested income inclusion amount —(1) In general. Except as provided in paragraph (c)(2) of this section, the term net CFC tested income inclusion amount means, with respect to a United States shareholder and a U.S. shareholder inclusion year, the excess (if any) of—
(i) The aggregate of the shareholder's pro rata share of the tested income of each tested income CFC (as defined in § 1.951A-2(b)(1)) for a CFC inclusion year, over
(ii) The aggregate of the shareholder's pro rata share of the tested loss of each tested loss CFC (as defined in § 1.951A-2(b)(2)) for a CFC inclusion year.
(2) [Reserved]
(d) Determination of pro rata share— (1) In general. For purposes of paragraph (c)(1) of this section, each United States shareholder that owns stock of a controlled foreign corporation on any day during a CFC inclusion year determines its pro rata share (if any) of tested income or tested loss of the controlled foreign corporation for the U.S. shareholder inclusion year that includes the last day on which the United States shareholder owns stock in the controlled foreign corporation during the CFC inclusion year. In no case may the sum of the pro rata share of tested income or tested loss of a controlled foreign corporation for a CFC inclusion year allocated to stock under this paragraph (d) exceed the amount of the tested income or tested loss of the controlled foreign corporation for the CFC inclusion year. Except as modified in this paragraph (d), a United States shareholder's pro rata share of tested income or tested loss is determined under the rules of section 951(a)(2) and § 1.951-1(b) and (e) in the same manner as those provisions apply to subpart F income. See also § 1.951-1(d), which requires or permits the closing of the taxable year of a foreign corporation in specified circumstances. Under section 951(a)(2) and § 1.951-1(b) and (e), as modified by this paragraph (d), a United States shareholder's pro rata share of tested income or tested loss for a U.S. shareholder inclusion year is determined with respect to the stock of the controlled foreign corporation owned by the U.S. shareholder during a CFC inclusion year. A United States shareholder's pro rata share of tested income or tested loss is translated into United States dollars using the average exchange rate for the CFC inclusion year of the controlled foreign corporation. Paragraphs (d)(2) and (3) of this section provide rules for determining a United States shareholder's pro rata share of tested income or tested loss of a controlled foreign corporation.
(2) Tested income —(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, a United States shareholder's pro rata share of the tested income of each tested income CFC for a U.S. shareholder inclusion year is determined under section 951(a)(2) and § 1.951-1(b) and (e), substituting “tested income” for “subpart F income” each place it appears, other than in § 1.951-1(e)(2)(ii)(A).
(ii) Special rule for prior allocation of tested loss. In any case in which tested loss has been allocated to any class of stock in a prior CFC inclusion year under paragraph (d)(3)(iii) of this section (or under § 1.951A-1(d)(4)(iii), as contained in 26 CFR part 1 edition revised as of April 1, 2026), tested income is first allocated to each such class of stock in the order of its liquidation priority to the extent of the excess (if any) of the sum of the tested loss allocated to each such class of stock for each prior CFC inclusion year under paragraph (d)(3)(iii) of this section (or under § 1.951A-1(d)(4)(iii), as contained in 26 CFR part 1 edition revised as of April 1, 2026), over the sum of the tested income allocated to each such class of stock for each prior CFC inclusion year under this paragraph (d)(2)(ii). Paragraph (d)(2)(i) of this section applies for purposes of determining a United States shareholder's pro rata share of the remainder of the tested income, except that, for purposes of the hypothetical distribution in § 1.951-1(e)(2)(ii), the amount of allocable earnings and profits of the tested income CFC is reduced by the amount of tested income allocated under the first sentence of this paragraph (d)(2)(ii). For an example of the application of this paragraph (d)(2), see paragraph (d)(3)(iv)(B) of this section ( Example 2 ).
(iii) Examples. The following examples illustrate the application of paragraph (d)(2) of this section. See also § 1.951-1(e)(4)(ix) ( Example 8 ) (illustrating a United States shareholder's pro rata share of tested income).
(A) Example 1— ( 1 ) Facts. FS, a controlled foreign corporation, has outstanding 70 shares of common stock and 30 shares of 4% nonparticipating, cumulative preferred stock with a par value of $10x per share. P Corp, a domestic corporation and a United States shareholder of FS, owns all of the common shares. Individual A, a United States citizen and a United States shareholder of FS, owns all of the preferred shares. Individual A, FS, and P Corp use the calendar year as their taxable year. Individual A and P Corp are shareholders of FS for all of Year 1. At the beginning of Year 1, FS had no dividend arrearages with respect to its preferred stock. For Year 1, FS has $100x of earnings and profits, $120x of tested income, and no subpart F income within the meaning of section 952.
( 2 ) Analysis — Determination of pro rata share of tested income. For purposes of determining P Corp's pro rata share of FS's tested income under this paragraph (d)(2) the amount of FS's allocable earnings and profits for purposes of the hypothetical distribution described in § 1.951-1(e)(2)(ii) is $120x, the greater of its earnings and profits as determined under section 964 ($100x) and the sum of its subpart F income and tested income ($0 + $120x). Under this paragraph (d)(2) and § 1.951-1(e)(2)(ii), the amount of FS's allocable earnings and profits distributed in the hypothetical distribution with respect to the preferred shares of FS is $12x (0.04 × $10x × 30) and the amount distributed with respect to the common shares of FS is $108x ($120x−$12x), which results in $12x of tested income being allocated to the preferred shares and $108x being allocated to the common shares. Accordingly, under this paragraph (d)(2) and § 1.951-1(e)(2), Individual A's pro rata share of FS's tested income is $12x, and P Corp's pro rata share of FS's tested income is $108x for Year 1.
(B) Example 2 —( 1 ) Facts. P Corp, a domestic corporation and a United States shareholder, owns all 100 shares of the only class of stock of FS, a controlled foreign corporation, from January 1 of Year 1, until May 26 of Year 1. On May 26 of Year 1, P Corp sells all its FS stock to R Corp, a domestic corporation that is not related to P Corp, and recognizes no gain or loss on the sale. P Corp does not make an election to close the taxable year of FS under § 1.951-1(d)(2). R Corp, a United States shareholder of FS, owns the stock of FS from May 27 through December 31 of Year 1. For Year 1, FS has $50x of earnings and profits, $50x of tested income, and no subpart F income within the meaning of section 952. P Corp, R Corp, and FS all use the calendar year as their taxable year, and Year 1 has 365 days.
( 2 ) Analysis — Determination of pro rata share of tested income. Under this paragraph (d)(2) and § 1.951-1(e)(2)(i), P Corp's pro rata share of the tested income of FS is $20x, which is equal to $50x of tested income multiplied by the product of two fractions. For the first fraction, the numerator is the number of shares P Corp owned (100) and the denominator is the number of shares of FS outstanding (100) (100 percent). For the second fraction, the numerator is the number of days in Year 1 that P Corp owned the shares while P Corp was a United States shareholder of FS and FS was a CFC (146) and the denominator is the number of days in the CFC inclusion year of FS (365) (40 percent). R Corp's pro rata share of the tested income of FS is $30x, which is equal to $50x of tested income multiplied by the product of two fractions. For the first fraction, the numerator is the number of shares R Corp owned (100) and the denominator is the number of shares of FS outstanding (100) (100 percent). For the second fraction, the numerator is the number of days in Year 1 that R Corp owned the shares while R Corp was a United States shareholder of FS and FS was a CFC (219) and the denominator is the number of days in the CFC inclusion year of FS (365) (60 percent).
(3) Tested loss —(i) In general. A United States shareholder's pro rata share of the tested loss of each tested loss CFC for a U.S. shareholder inclusion year is determined under section 951(a)(2) and § 1.951-1(b) and (e) with the following modifications—
(A) “Tested loss” is substituted for “subpart F income” each place it appears;
(B) For purposes of the hypothetical distribution described in § 1.951-1(e)(2)(ii), the amount of allocable earnings and profits of a controlled foreign corporation for a CFC inclusion year is treated as being equal to the tested loss of the tested loss CFC for the CFC inclusion year; and
(C) Except as provided in paragraphs (d)(3)(ii) and (iii) of this section, the hypothetical distribution described in § 1.951-1(e)(2)(ii) is treated as made solely with respect to the common stock of the tested loss CFC.
(ii) Special rule in case of accrued but unpaid dividends. If a tested loss CFC's earnings and profits that have accumulated since the issuance of preferred shares are reduced below the amount necessary to satisfy any accrued but unpaid dividends with respect to such preferred shares, then the amount by which the tested loss reduces the earnings and profits below the amount necessary to satisfy the accrued but unpaid dividends is allocated in the hypothetical distribution described in § 1.951-1(e)(2)(ii) to the preferred stock of the tested loss CFC and the remainder of the tested loss is allocated in the hypothetical distribution to the common stock of the tested loss CFC.
(iii) Special rule for stock with no liquidation value. If a tested loss CFC's common stock has a liquidation value of zero and there is at least one other class of equity with a liquidation preference relative to the common stock, then the tested loss is allocated in the hypothetical distribution described in § 1.951-1(e)(2)(ii) to the most junior class of equity with a positive liquidation value to the extent of such liquidation value. Thereafter, tested loss is allocated to the next most junior class of equity to the extent of its liquidation value and so on. All determinations of liquidation value are to be made as of the beginning of the CFC inclusion year of the tested loss CFC.
(iv) Examples. The following examples illustrate the application of this paragraph (d)(3). See also § 1.951-1(e)(4)(x) ( Example 9 ) (illustrating a United States shareholder's pro rata share of subpart F income and tested loss).
(A) Example 1 —( 1 ) Facts. FS, a controlled foreign corporation, has outstanding 70 shares of common stock and 30 shares of 4% nonparticipating, cumulative preferred stock with a par value of $10x per share. P Corp, a domestic corporation and a United States shareholder of FS, owns all the common shares. Individual A, a United States citizen and a United States shareholder, owns all the preferred shares. FS, Individual A, and P Corp all use the calendar year as their taxable year. Individual A and P Corp are shareholders of FS for all of Year 5. At the beginning of Year 5, FS had earnings and profits of $120x, which accumulated after the issuance of the preferred stock. At the end of Year 5, the accrued but unpaid dividends with respect to the preferred stock are $36x. For Year 5, FS has a $100x tested loss, and no other items of income, gain, deduction or loss. At the end of Year 5, FS has earnings and profits of $20x.
( 2 ) Analysis. FS is a tested loss CFC for Year 5. Before taking into account the tested loss in Year 5, FS had sufficient earnings and profits to satisfy the accrued but unpaid dividends of $36x. The amount of the reduction in earnings below the amount necessary to satisfy the accrued but unpaid dividends attributable to the tested loss is $16x ($36x−($120x−$100x)). Accordingly, under paragraph (d)(3)(ii) of this section, $16x of the tested loss is allocated to the preferred stock of FS in the hypothetical distribution described in § 1.951-1(e)(2)(ii), and $84x ($100x−$16x) of the tested loss is allocated to the common shares of FS in the hypothetical distribution.
(B) Example 2 —( 1 ) Facts. FS, a controlled foreign corporation, has outstanding 100 shares of common stock and 50 shares of 4% nonparticipating, cumulative preferred stock with a par value of $100x per share. P Corp, a domestic corporation and a United States shareholder of FS, owns all the common shares. Individual A, a United States citizen and a United States shareholder, owns all the preferred shares. FS, Individual A, and P Corp all use the calendar year as their taxable year. Individual A and P Corp are shareholders of FS for all of Year 1 and Year 2. At the beginning of Year 1, the common stock has no liquidation value and the preferred stock has a liquidation value of $5,000x and no accrued but unpaid dividends. In Year 1, FS has a tested loss of $1,000x and no other items of income, gain, deduction, or loss. In Year 2, FS has tested income of $3,000x and no other items of income, gain, deduction, or loss. FS has earnings and profits of $3,000x for Year 2. At the end of Year 2, FS has accrued but unpaid dividends of $400x with respect to the preferred stock, the sum of $200x for Year 1 (0.04 × $100x × 50) and $200x for Year 2 (0.04 × $100x × 50).
( 2 ) Analysis —( i ) Year 1. FS is a tested loss CFC in Year 1. The common stock of FS has a liquidation value of zero, and the preferred stock has a liquidation preference relative to the common stock. The tested loss ($1,000x) does not exceed the liquidation value of the preferred stock ($5,000x). Accordingly, under paragraph (d)(3)(iii) of this section, the tested loss is allocated to the preferred stock in the hypothetical distribution described in § 1.951-1(e)(2)(ii). Individual A's pro rata share of the tested loss is $1,000x, and P Corp's pro rata share of the tested loss is $0.
( ii ) Year 2. FS is a tested income CFC in Year 2. Because $1,000x of tested loss was allocated to the preferred stock in Year 1 under paragraph (d)(3)(iii) of this section, the first $1,000x of tested income in Year 2 is allocated to the preferred stock under paragraph (d)(2)(ii) of this section. P Corp's and Individual A's pro rata shares of the remaining $2,000x of tested income are determined under the general rule of paragraph (d)(2)(i) of this section, except that for purposes of the hypothetical distribution the amount of FS's allocable earnings and profits is reduced by the tested income allocated under paragraph (d)(2)(ii) of this section to $2,000x ($3,000x−$1,000x). Accordingly, under paragraph (d)(2)(i) of this section and § 1.951-1(e)(2)(ii), the amount of FS's allocable earnings and profits distributed in the hypothetical distribution with respect to the preferred stock of FS is $400x ($400x of accrued but unpaid dividends) and with respect to the common stock of FS is $1,600x ($2,000x−$400x), which results in $400x of tested income being allocated to the preferred stock and $1,600x of tested income being allocated to the common stock. Under paragraph (d)(2)(i) of this section and § 1.951-1(e)(2)(i), Individual A's pro rata share of the tested income is $1,400x ($1,000x + $400x), and P Corp's pro rata share of the tested income is $1,600x.
(e) Definitions. This paragraph (e) provides additional definitions that apply for purposes of this section and the section 951A regulations. Other definitions relevant to the section 951A regulations are included in §§ 1.951A-2 through 1.951A-4.
(1) CFC inclusion year. The term CFC inclusion year means a taxable year of a foreign corporation in which the foreign corporation is a controlled foreign corporation at any time during the taxable year.
(2) Controlled foreign corporation. The term controlled foreign corporation has the meaning provided in section 957(a).
(3) Own. The term own (or ownership or owned), when used with respect to stock of a foreign corporation, means to own the stock directly or indirectly within the meaning of section 958(a) and § 1.958-1(a). See also § 1.958-1(d) (except as provided in § 1.958-1(d)(2), a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a) for purposes of section 951A and for purposes of any provision that specifically applies by reference to section 951A or the section 951A regulations, and the domestic partnership is treated as a foreign partnership under section 958(a)(2) in determining the persons that own stock of the foreign corporation within the meaning of section 958(a)).
(4) United States shareholder. The term United States shareholder has the meaning set forth in section 951(b).
(5) U.S. shareholder inclusion year. The term U.S. shareholder inclusion year means a United States shareholder's taxable year that includes the last day on which the United States shareholder owns stock in a controlled foreign corporation during a CFC inclusion year of the controlled foreign corporation.