Par. 5. Section 1.958-1, as amended in a final rule published elsewhere in this issue of the Federal Register , effective January 25, 2022, is amended by: 1. Revising the first sentence of paragraph (d)(1); 2. Revising paragraph (d)(2)(v); 3. Adding a sentence to the end of paragraph (d)(4)(i); and 4. Adding paragraph (e). The revisions and addition read as follows:
* * * * *
(d) * * * (1) * * * Except as otherwise provided in paragraph (d)(2) of this section, for purposes of sections 951, 951A, 953(c), and 956(a) and § 1.964-1(c), and for purposes of any provision that specifically applies by reference to any of such sections or the regulations in this part under section 951, 951A, 953, or 956 (but only as the regulations in this part under section 953 or section 956 relate to section 953(c) or section 956(a), respectively), a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a). * * *
(2) * * *
(v) Applying section 953(c)(1)(A) for purposes of determining whether any foreign corporation is a controlled foreign corporation as defined in sections 953(c)(1)(B), 953(c)(3)(E), or 953(d)(1)(A).
* * * * *
(4) * * *
(i) * * * Notwithstanding the prior sentences, paragraph (d)(2)(v) of this section and the inclusion of the references to section 953(c) and § 1.964-1(c) in paragraph (d)(1) of this section apply to taxable years of foreign corporations beginning on or after [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register ], and to taxable years of United States persons in which or with which such taxable years of foreign corporations end.
* * * * *
(e) Elective entity treatment for certain S corporations —(1) In general. Except as otherwise provided in this paragraph (e), with respect to an S corporation (as defined in section 1361(a)(1)), paragraph (d)(1) of this section shall not apply, and such S corporation shall be treated as owning stock of a foreign corporation within the meaning of section 958(a), if—
(i) The S corporation and its shareholders (where applicable) make the election described in paragraph (e)(2) of this section;
(ii) The S corporation made its election under section 1362(a) before June 22, 2019;
(iii) The S corporation would have been treated as owning stock of a controlled foreign corporation within the meaning of section 958(a) on June 22, 2019, if § 1.951A-1(e) (as in effect and contained in 26 CFR part 1, as revised April 1, 2021) did not apply to it;
(iv) The S corporation had transition accumulated earnings and profits (as defined in paragraph (e)(3) of this section) on September 1, 2020, or on the first day of any subsequent taxable year; and
(v) The S corporation maintains sufficient records to support the determination of the transition accumulated earnings and profits amount.
(2) Election —(i) Time and manner of making election. With respect to the first taxable year ending on or after September 1, 2020, an S corporation may irrevocably elect to apply the provisions of paragraph (e)(1) of this section on a timely-filed (including extensions) original Form 1120-S, “U.S. Income Tax Return for an S Corporation,” by attaching a statement to such return including the contents of paragraph (e)(2)(ii) of this section. For taxable years of an S corporation ending before September 1, 2020, and after June 21, 2019, the S corporation and all of its shareholders may irrevocably elect to apply the provisions of paragraph (e)(1) of this section on timely-filed (including extensions) original returns or on amended returns filed by March 15, 2021, by attaching a statement including the contents of paragraph (e)(2)(ii) of this section thereto. An election described in Section 3.02 of Notice 2020-69, 2020-39 I.R.B. 604 that is filed (in the time and manner specified in Section 3.02 of Notice 2020-69) on or before [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register ] is deemed to satisfy the election requirement of this paragraph (e)(2).
(ii) Contents of election statement. The statement described in paragraph (e)(2)(i) of this section must:
(A) Identify that the S corporation and its shareholders (where applicable) are electing for the S corporation to be treated as owning stock of a foreign corporation within the meaning of section 958(a) under paragraph (e)(2) of this section;
(B) Include the amount of transition accumulated earnings and profits (as defined in paragraph (e)(3) of this section); and
(C) Where applicable, be signed by a person authorized to sign the S corporation's return that is required to be filed under section 6037.
(3) Transition accumulated earnings and profits —(i) In general. For purposes of this section, the term transition accumulated earnings and profits means, with respect to an S corporation and its shareholders, the amount of accumulated earnings and profits of the S corporation calculated as of September 1, 2020, reduced as described in paragraph (e)(3)(ii) of this section. Transition accumulated earnings and profits are not increased as a result of transactions occurring (or entity classification elections described in § 301.7701-3 of this chapter filed) after September 1, 2020. For purposes of this section, transition accumulated earnings and profits are not transferable to another person under any provision of the Code.
(ii) Reduction solely by distributions. An S corporation with transition accumulated earnings and profits is treated as having no transition accumulated earnings and profits if, beginning after September 1, 2020, the S corporation distributes in one or more distributions a cumulative amount of accumulated earnings and profits equal to or greater than the amount of the S corporation's transition accumulated earnings and profits as of September 1, 2020.
(4) Required aggregate treatment. In the case of an S corporation that has made an election under paragraph (e)(2) of this section and which satisfies the additional requirements of paragraph (e)(1) of this section, paragraph (d) of this section shall apply beginning with the S corporation's first taxable year for which the S corporation has no transition accumulated earnings and profits on the first day of that year, and to each subsequent taxable year of the S corporation.
(5) Examples. The following examples illustrate the application of paragraph (e).
(i) Example 1 —(A) Facts. Individual A and Individual B, each a United States citizen, respectively own 5% and 95% of the single class of stock of SCX, an S corporation. SCX's sole asset is 100% of the single class of stock of FC, a controlled foreign corporation, which SCX has held since June 1, 2019. None of SCX, Individual A, or Individual B own shares, directly or indirectly, in any other controlled foreign corporation. Individual A, Individual B, SCX, and FC all use the calendar year as their taxable year. On January 1, 2021, SCX has transition accumulated earnings and profits of $100x and AAA of $0. SCX elects to apply the transition rules under paragraph (e)(1) of this section. During the 2021 taxable year, FC has $200x of tested income (within the meaning of § 1.951A-2(b)(1)) and $0 of qualified business asset investment (QBAI) (within the meaning of § 1.951A-3(b)).
(B) Analysis —( 1 ) S corporation level. As an electing S corporation with transition accumulated earnings and profits on the first day of the taxable year (January 1, 2021), SCX is treated as owning (within the meaning of section 958(a)) all the stock of FC for purposes of applying sections 951 and 951A and any provision that applies specifically by reference thereto. Accordingly, SCX, a United States shareholder of FC, determines its GILTI inclusion amount under § 1.951A-1(c)(1) for its 2021 taxable year. SCX's pro rata share of FC's tested income is $200x, and its pro rata share of FC's QBAI is $0. SCX's net CFC tested income (within the meaning of § 1.951A-1(c)(2)) is $200x, and its net deemed tangible income return (within the meaning of § 1.951A-1(c)(3)) is $0. As a result, SCX's GILTI inclusion amount for 2021 is $200x. At the end of 2021, SCX increases its AAA by $200x to reflect the GILTI inclusion amount. Because SCX computes its income as an individual under section 1363(b), it cannot take a section 250 deduction for any GILTI inclusion amount. See § 1.250(a)-1(c)(1).
( 2 ) S corporation shareholder level. Neither Individual A nor Individual B is treated as owning the stock in FC within the meaning of section 958(a). Accordingly, Individual A and Individual B include in gross income their pro rata shares of SCX's GILTI inclusion amount as described in section 1366(a), which is $10x ($200x × 5%) for Individual A and $190x ($200x × 95%) for Individual B.
(ii) Example 2 —(A) Facts. The facts are the same as in paragraph (e)(5)(i) of this section, except that, on December 31, 2021, SCX distributes $300x to its shareholders. In addition, FC has an additional $200x of tested income (within the meaning of § 1.951A-2(b)(1)) and $0 of QBAI (within the meaning of § 1.951A-3(b)) during the 2022 taxable year.
(B) Analysis —( 1 ) Determination of transition accumulated earnings and profits. Before taking into account the distribution on December 31, 2021, the results for taxable year 2021 are the same as in paragraph (e)(5)(i)(B) of this section. For 2021, $200x, the portion of SCX's $300x distribution that does not exceed AAA, is subject to section 1368(c)(1). The remaining distribution of $100x is treated as a dividend under section 316 to the extent of SCX's accumulated earnings and profits. As of January 1, 2022, SCX has $0 of transition accumulated earnings and profits under paragraph (e)(3) of this section because the cumulative amount of SCX's distributions out of accumulated earnings and profits after September 1, 2020, equals or exceeds the amount of SCX's transition accumulated earnings and profits as of September 1, 2020.
( 2 ) S corporation level. Because SCX has no transition accumulated earnings and profits as of January 1, 2022, paragraph (d) of this section applies to SCX for its taxable year 2022 and for each subsequent taxable year. As a result, for purposes of determining a GILTI inclusion amount in its taxable year 2022, SCX is not treated as owning (within the meaning of section 958(a)) the FC stock; instead, SCX is treated in the same manner as a foreign partnership for purposes of determining the FC stock owned by Individual A and Individual B under section 958(a)(2). Accordingly, SCX does not have a GILTI inclusion amount for its 2022 taxable year (or for any subsequent taxable year) and therefore will not increase its AAA as a result of GILTI inclusion amounts attributable to FC stock for its taxable year 2022 (or for any subsequent taxable year).
( 3 ) S corporation shareholder level. With respect to Individual A, for purposes of determining the GILTI inclusion amount for taxable year 2022, Individual A is treated as owning 5% of the FC stock under section 958(a). Individual A is not a United States shareholder of FC because Individual A owns (within the meaning of section 958(a) and (b)) less than 10% of the FC stock. Accordingly, Individual A does not have a GILTI inclusion amount for taxable year 2022. With respect to Individual B, for purposes of determining the GILTI inclusion amount for taxable year 2022, Individual B is treated as owning 95% of the FC stock under section 958(a). In addition, Individual B is a United States shareholder of FC because Individual B owns (within the meaning of section 958(a) and (b)) at least 10% of the FC stock. Accordingly, Individual B's pro rata share of FC's tested income is $190x ($200x × 95%), and Individual B's pro rata share of FC's QBAI is $0. Individual B's net CFC tested income is $190x, and Individual B's net deemed tangible income return is $0. As a result, Individual B's GILTI inclusion amount for taxable year 2022 is $190x.
(6) Applicability date. This paragraph (e) applies to taxable years of S corporations ending on or after September 1, 2020. Taxpayers may choose to apply this paragraph (e) to taxable years of S corporations ending on or after June 22, 2019, provided that the S corporation and its shareholders that are United States shareholders consistently apply the rules set forth in this paragraph (e) with respect to all controlled foreign corporations whose stock the S corporation owns within the meaning of section 958(a).
* * * * *