Prop. Treas. Reg. § 1.959-10 Examples.

Par. 22. Sections 1.959-5 through 1.959-12 are added to read as follows:

(a) In general. This section provides examples that illustrate the application of §§ 1.959-1 through 1.959-9.

(b) Assumed facts. For purposes of the examples in this section, unless otherwise indicated, the following facts are assumed:

(1) US1 and US2 are unrelated domestic corporations that are covered shareholders, each of which uses the U.S. dollar as its functional currency and has a combined pool election in effect under § 1.959-2(c). Neither US1 nor US2 is a member of a consolidated group (as defined in § 1.1502-1(h)).

(2) F1 and F2 are foreign corporations, each of which is a controlled foreign corporation and uses the British pound (£) as its functional currency.

(3) PRS is a partnership.

(4) Each entity uses the calendar year as its taxable year, and no entity has a short taxable year.

(5) Tables depicting annual PTEP accounts, dollar basis pools, or PTEP tax pools do not depict accounts or PTEP groups with a balance of zero.

(c) Examples —(1) Example 1: Exclusion from gross income of previously taxed earnings and profits distributed in a covered distribution —(i) Facts. US1 directly owns all 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 US1, none of which is assigned to the taxable section 962 PTEP group. This example only analyzes the extent to which previously taxed earnings and profits are distributed and excluded from gross income under section 959. See paragraph (c)(2) of this section ( Example 2 ) for an illustration of composition, dollar basis, and associated foreign income taxes of distributed previously taxed earnings and profits, along with foreign currency gain or loss under section 986(c) and deemed paid taxes under section 960(b). See also § 1.961-4 (basis reductions and gain recognition for distributions of previously taxed earnings and profits).

(ii) Analysis. For purposes of analyzing the covered distribution, US1's share of the covered distribution is the entire £300x because that amount of the covered distribution is made to US1. See § 1.959-4(d)(1). Such share is allocated first to F1's previously taxed earnings and profits that are with respect to US1 immediately before the covered distribution (£180x) and then to F1's earnings and profits described in section 959(c)(3) and, therefore, is a distribution 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 stock of F1 on which US1's share of the covered distribution is made. See § 1.959-4(d)(4). Accordingly, £1.8x of previously taxed earnings and profits is treated as distributed with respect to each share of F1 stock, computed by multiplying the £180x distributed previously taxed earnings and profits by a fraction, the numerator of which is the portion of US1's share of the covered distribution that is made with respect to the share of F1 stock (£3x), and the denominator of which is the amount of US1's share of the covered distribution (£300x). See id. US1 excludes the £180x of previously taxed earnings and profits distributed to it from its gross income. See § 1.959-4(b)(1); see also § 1.312-8(c) (US1's receipt of previously taxed earnings and profits does not increase its earnings and profits).

(iii) Alternative facts: split-ownership—(A) Facts. The facts are the same as in paragraph (c)(1)(i) of this section ( Example 1 ), except as follows. US1 owns all the outstanding stock of F2, and US1 directly owns 80%, and F2 directly owns 20%, of the stock of F1. Thus, US1 receives a £240x portion, and F2 receives a £60x portion, of the £300x covered distribution made by F1. Under § 1.951-2, US1 is assigned the entirety of the £60x portion of the covered distribution received by F2.

(B) Analysis. For purposes of analyzing the covered distribution, US1's share of the covered distribution is the entire £300x, the sum of the portion of the covered distribution that is made to US1 (£240x) and the portion of the covered distribution that is made to F2 and assigned to US1 under § 1.951-2 (£60x). See § 1.959-4(d)(1). As is the case in paragraph (c)(1)(ii) of this section, such share is treated as a distribution of £1.8x of previously taxed earnings and profits with respect to each share of F1 stock (and F1's previously taxed earnings and profits with respect to US1 are reduced by the £180x of distributed previously taxed earnings and profits). Accordingly, US1 is treated as receiving £144x of previously taxed earnings and profits (£1.8x × 80 shares of F1 stock directly owned by US1) and F2 is treated as receiving £36x of previously taxed earnings and profits (£1.8x × 20 shares of F1 stock directly owned by F2). US1 excludes the £144x of previously taxed earnings and profits distributed to it from its gross income. See § 1.959-4(b)(1). F2 excludes the £36x of previously taxed earnings distributed to it from its gross income, solely for purposes of determining its subpart F income and tested income or tested loss. See § 1.959-4(b)(2)(i).

(iv) Alternative facts: partnership-structure —(A) Facts. The facts are the same as in paragraph (c)(1)(i) of this section ( Example 1 ), except as follows. PRS directly owns all the stock of F1. US1 and US2, in the aggregate, directly own all the interests in PRS, and PRS's partnership agreement provides that US1 has a 60% share, and US2 has a 40% share, of any of PRS's items of income, gain, deduction, or loss. The covered distribution made by F1 is equal to £500x (£5x with respect to each share) and thus gives rise to £500x of dividend income to PRS, of which US1 has a £300x distributive share (£500x × 60%) and US2 has a £200x distributive share (£500x × 40%). Immediately before the covered distribution, F1 has no previously taxed earnings and profits with respect to US2.

(B) Analysis —( 1 ) US1's share of the covered distribution. US1 is treated as receiving £300x of the covered distribution, equal to its distributive share of the covered distribution. See § 1.959-4(c)(3). Therefore, for purposes of analyzing the covered distribution, US1's share of the covered distribution is £300x (the amount of the covered distribution treated as made to US1). See § 1.959-4(d)(1). For such share, the results are the same as in paragraph (c)(1)(ii) of this section.

( 2 ) US2's share of the covered distribution. US2 is treated as receiving £200x of the covered distribution, equal to its distributive share of the covered distribution. See § 1.959-4(c)(3). Therefore, for purposes of analyzing the covered distribution, US2's share of the covered distribution is £200x (the amount of the covered distribution treated as made to US2). See § 1.959-4(d)(1). The entirety of such share is a distribution of earnings and profits described in section 959(c)(3) because F1 has no previously taxed earnings and profits with respect to US2. See § 1.959-4(d)(2) and (e)(1). US2 excludes none of its £200x distributive share of the covered distribution from its gross income under section 959 because none of the covered distribution received by US2 is previously taxed earnings and profits.

(2) Example 2: Composition, dollar basis, and associated foreign income taxes of distributed previously taxed earnings and profits —(i) Facts. US1 directly owns all 100 shares of the single class of outstanding stock of F1. In year 8, F1 makes a £225x distribution of money with respect to its stock (£2.25x with respect to each share), and the entirety of this £225x is a covered distribution. On the day of the covered distribution, the spot rate is $1:£0.4. Tables 1 through 3 in this paragraph (c)(2)(i) provide F1's previously taxed earnings and profits with respect to US1, determined immediately before the covered distribution and thus reflecting adjustments pursuant to § 1.959-3 for US1's income inclusions under sections 951(a)(1)(A) and 951A (£80x and £70x, respectively) for F1's taxable year ending on December 31 of year 8. Some of the previously taxed earnings and profits are previously taxed earnings and profits that were distributed to F1 by other foreign corporations in earlier years. The adjusted applicable percentage with respect to previously taxed earnings and profits that resulted from section 965(a) or (b) and relate to the general category is 60%, and the section 965(c) deduction percentage with respect to previously taxed earnings and profits that resulted from 965(a) and relate to the general category is 60%.

(ii) Analysis —(A) Distributed previously taxed earnings and profits. The entirety of US1's share of the covered distribution (£225x) is allocated to F1's previously taxed earnings and profits that are with respect to US1 immediately before the covered distribution because such previously taxed earnings and profits (£285x, computed as £150x + £75x + £60x, as set forth in table 1 in paragraph (c)(2)(i) of this section), are at least equal to such share. See § 1.959-4(d)(2) and (e)(1). Specifically, US1's share of the covered distribution is allocated first to the £65x of previously taxed earnings and profits assigned to the reclassified section 951A PTEP group, second to the £20x of previously taxed earnings and profits assigned to the section 965(a) PTEP group, and third to the £20x of previously taxed earnings and profits assigned to the section 965(b) PTEP group. See § 1.959-4(e)(2). The remaining portion of US1's share of the covered distribution (£120x, computed as £225x−£65x−£20x−£20x) is allocated pro rata to previously taxed earnings and profits that relate to year 8 and, therefore, is allocated to £40x of previously taxed earnings and profits assigned to the section 951(a)(1)(A) PTEP group and relating to year 8 and the general category (computed as £50x × £120x/£150x), £24x of previously taxed earnings and profits assigned to the section 951(a)(1)(A) PTEP group and relating to year 8 and the passive category (computed as £30x × £120x/£150x), and £56x of previously taxed earnings and profits assigned to the section 951A PTEP group and relating to year 8 and the section 951A category (computed as £70x × £120x/£150x). See § 1.959-4(e)(3) and (e)(5). US1 excludes the £225x of previously taxed earnings and profits distributed to it from its gross income. See § 1.959-4(b)(1); see also § 1.961-4 (basis reductions and gain recognition for distributions of previously taxed earnings and profits).

(B) Dollar basis and foreign currency gain or loss. The dollar basis of previously taxed earnings and profits distributed in US1's share of the covered distribution (described in paragraph (c)(2)(ii)(A) of this section) is computed separately with respect to previously taxed earnings and profits relating to a single dollar basis pool, and in each case is equal to a pro rata portion of the dollar basis pool immediately before the covered distribution (determined by multiplying all basis in the dollar basis pool by a fraction, the numerator of which is previously taxed earnings and profits distributed in the US1's share of the covered distribution and relating to the dollar basis pool, and the denominator of which is all previously taxed earnings and profits relating to the dollar basis pool). See § 1.959-4(f). Under § 1.986(c)-1, US1 recognizes foreign currency gain or loss with respect to previously taxed earnings and profits distributed to it, determined by translating the previously taxed earnings and profits into U.S. dollars using the spot rate on the day of the covered distribution and then subtracting from that U.S. dollar amount the dollar basis of the previously taxed earnings and profits. US1 does not recognize 60% (the section 965(c) deduction percentage) of the foreign currency gain or loss with respect to the previously taxed earnings and profits relating to the section 965(a) PTEP group. Table 1 in this paragraph (c)(2)(ii)(B) provides computations for dollar basis and foreign currency gain or loss with respect to each group of distributed previously taxed earnings and profits. Thus, US1 recognizes a total of $8.8x of foreign currency gain and $28.8x of foreign currency loss.

(C) Associated foreign income taxes. The foreign income taxes that are associated with previously taxed earnings and profits distributed in US1's share of the covered distribution (described in paragraph (c)(2)(ii)(A) of this section) are computed separately with respect to previously taxed earnings and profits relating to a single PTEP tax pool, and in each case are equal to a pro rata portion of the PTEP tax pool immediately before the covered distribution (determined by multiplying all foreign income taxes in the PTEP tax pool by a fraction, the numerator of which is previously taxed earnings and profits distributed in US1's share of the covered distribution and relating to the PTEP tax pool, and the denominator of which is all previously taxed earnings and profits relating to the PTEP tax pool). See § 1.959-4(g). Table 1 in this paragraph (c)(2)(ii)(C) provides these computations (and refers to associated foreign income taxes sourced from the creditable PTEP tax group as “creditable taxes” and associated foreign income taxes not sourced from the creditable PTEP tax group as “other taxes”).

(D) Deemed paid taxes. Under section 960(b), because F1 is a controlled foreign corporation in which US1 is a United States shareholder, US1 is deemed to pay the foreign income taxes properly attributable to previously taxed earnings and profits distributed to it, which are the foreign income taxes that are both associated with the previously taxed earnings and profits and sourced from the creditable PTEP tax group. See § 1.960-3(b). Thus, US1 is deemed to pay $51.7x of foreign income taxes ($2.9x + $2.8x + $26x + $10x + $10x). Under § 1.965-5(c), US1 is disallowed a credit for 60% (the adjusted applicable percentage) of the foreign income taxes deemed paid with respect to the previously taxed earnings and profits relating to the section 965(a) PTEP group or section 965(b) PTEP group, with the result that in each case US1 is disallowed a credit for $6x of the foreign income taxes deemed paid with respect to each of those groups of previously taxed earnings and profits ($10x × 60%).

(E) Account adjustments. To reflect the covered distribution, the distributed previously taxed earnings and profits, the dollar basis of the distributed previously taxed earnings and profits, and the foreign income taxes associated with the distributed previously taxed earnings and profits are removed from US1's annual PTEP accounts, dollar basis pools, and PTEP tax pools with respect to F1. See § 1.959-3(c)(1)(vi), (d)(1)(iv), and (e)(1)(iii). These adjustments are treated as made concurrently with the covered distribution. See § 1.959-3(f). In addition, the distributed previously taxed earnings and profits, and the foreign income taxes associated with distributed previously taxed earnings and profits, are removed from F1's corporate PTEP accounts and corporate PTEP tax pools for US1, and these adjustments are also treated as made concurrently with the covered distribution. See § 1.959-2(d).

(iii) Alternative facts: distribution of built-in loss property —(A) Facts. The facts are the same as in paragraph (c)(2)(i) of this section ( Example 2 ), except that, in the covered distribution (which continues to be £225x), F1 distributes property other than money. At the time of the covered distribution, the fair market value of the property is £225x and F1's adjusted basis of the property is £250x. Thus, the covered distribution decreases F1's earnings and profits by £250x. See sections 301(b)(1) and 312(a)(3).

(B) Analysis. The results are the same as in paragraph (c)(2)(ii) of this section and thus the covered distribution decreases F1's previously taxed earnings and profits by £225x. The remainder of the £250x decrease to F1's earnings and profits under section 312(a)(3) is accounted for by decreasing (including below zero, if applicable) F1's earnings and profits described in section 959(c)(3) by £25x.

(iv) Alternative facts: distribution to a foreign corporation —(A) Facts. The facts are the same as in paragraph (c)(2)(i) of this section ( Example 2 ), except as follows. US1 directly owns all the stock of F2, and F2 directly owns all 100 shares of the single class of stock of F1. Thus, F2 receives the entirety of the £225x covered distribution made by F1. Under § 1.951-2, US1 is assigned the entirety of the £225x covered distribution received by F2.

(B) Analysis. The results are the same as described in paragraph (c)(2)(ii) of this section, except that F2 excludes the £225x of distributed previously taxed earnings and profits from its gross income in accordance with § 1.959-4(b)(2), US1 does not recognize foreign currency gain or loss with respect to the distributed previously taxed earnings and profits in accordance with § 1.986(c)-1(c), and F2 is deemed to pay the $51.7x of foreign income taxes that are both associated with the distributed previously taxed earnings and profits and sourced from the creditable PTEP tax group in accordance with § 1.960-3(c). In addition, the distributed previously taxed earnings and profits (£225x), the dollar basis of the distributed previously taxed earnings and profits ($566.5x), and the foreign income taxes associated with the distributed previously taxed earnings and profits ($51.7x + $1.9x = $53.6x) are added to US1's annual PTEP accounts, dollar basis pools, and PTEP tax pools with respect to F2. See § 1.959-3(c)(1)(iii), (d)(1)(ii), and (e)(1)(i). Only the $51.7x portion of the associated foreign income taxes that F2 is deemed to pay are assigned to the creditable PTEP tax group within US1's PTEP tax pools with respect to F2. See § 1.959-3(e)(1)(i). These adjustments are treated as made at the beginning of F2's taxable year ending on December 31 of year 8. See § 1.959-3(f). In addition, the distributed previously taxed earnings and profits, and the foreign income taxes associated with the distributed previously taxed earnings and profits, are added to F2's corporate PTEP accounts and corporate PTEP tax pools for US1, and these adjustments are also treated as made at the beginning of F2's taxable year ending on December 31 of year 8. See § 1.959-2(d).

(3) Example 3: Current year taxes imposed on a covered distribution —(i) Facts. US1 directly owns 60%, and US2 directly owns 40%, of the single class of outstanding stock of F2. F2 owns all the outstanding stock of F1. In year 3, F1 makes a £500x covered distribution to F2. Foreign withholding taxes of £75x (£500x × 15%) are paid on the covered distribution. F2 takes foreign income taxes into account when paid, the withholding taxes meet the definition of current year taxes for F2's taxable year ending on December 31 of year 3, and, other than pursuant to section 245A(d), no credits for taxes are disallowed or suspended at the level of F2. On the day of the covered distribution, the spot rate is $1:£0.5. Under § 1.959-4, the entirety of US1's £300x share of the covered distribution (£500x × 60%) is a distribution of F1's previously taxed earnings and profits with respect to US1, and none of US2's £200x share of the covered distribution (£500x × 40%) is a distribution of previously taxed earnings and profits. The distributed previously taxed earnings and profits consist of £120x of previously taxed earnings and profits assigned to the section 951(a)(1)(A) PTEP group and relating to year 2 and the passive category ( Character A PTEP ), £80x of previously taxed earnings and profits assigned to the section 245A(d) PTEP group and relating to year 2 and the passive category ( Character B PTEP ), £70x of previously taxed earnings and profits assigned to the section 951(a)(1)(A) PTEP group and relating to year 1 and the general category ( Character C PTEP ), and £30x of previously taxed earnings and profits assigned to the section 951(a)(1)(A) PTEP group and relating to year 1 and the passive category ( Character D PTEP ), as summarized in table 1 in this paragraph (c)(3)(i). This example only analyzes the allocation and apportionment of the current year taxes and related adjustments to previously taxed earnings and profits accounts. See also § 1.959-4 (exclusion from gross income of previously taxed earnings and profits received in a distribution); § 1.986(c)-1(c) (no foreign currency gain or loss recognized in distributions of previously taxed earnings and profits to a foreign corporation); § 1.961-4 (basis reductions and gain recognition for distributions of previously taxed earnings and profits).

(ii) Analysis —(A) In general. As a result of the covered distribution, which is a PTEP realization event, F2 has £300x of previously taxed earnings and profits with respect to US1 and £0 of previously taxed earnings and profits with respect to US2. The foreign gross income that F2 includes by reason of its receipt of the covered distribution is assigned to the statutory groupings, which are described in § 1.959-2(d)(1), and residual grouping by treating the previously taxed earnings and profits arising from such distribution as included in the U.S. dividend amount for purposes of § 1.861-20(d)(1). See § 1.959-6(c). The relevant statutory groupings are F2's corporate PTEP accounts that were increased by reason of its receipt of a covered distribution which was previously taxed earnings and profits with respect to US1 and the remaining portion of the covered distribution is assigned to the residual income grouping. See id. The £75x of current year taxes imposed on the covered distribution is allocated and apportioned to the previously taxed earnings and profits (US1's share of the covered distribution) and the residual income grouping (US2's share of the covered distribution) pro rata, with the result that £45x (£75x × £300x/£500x) is allocated and apportioned to previously taxed earnings and profits arising from the covered distribution and the remaining £30 (£75x × £200x/£500x) is assigned to the residual income grouping. See id.

(B) Allocation and apportionment of current year taxes among PTEP groups. The £45x of current year taxes allocated and apportioned to the previously taxed earnings and profits arising from the PTEP realization event with respect to US1 is further allocated and apportioned among the section 904 categories and PTEP groups within each corporate PTEP account that is increased by reason of F2's PTEP realization event. See § 1.959-6(b) and (c). Accordingly, £18x of current year taxes is allocated and apportioned to Character A PTEP (£45x × £120x/£300x), £12x of current year taxes is allocated and apportioned to Character B PTEP £45x × £80x/£300x), £10.5x of current year taxes is allocated and apportioned to Character C PTEP (£45x × £70x/£300x), and £4.5x of current year taxes is allocated and apportioned to Character D PTEP (£45x × £30x/£300x), each within F2's corporate PTEP account with respect to US1.

(C) Account adjustments —( 1 ) Shareholder-level accounts. After the current year taxes are allocated and apportioned to the corporate PTEP accounts of F2 with respect to US1, the previously taxed earnings and profits in US1's PTEP groups within its annual PTEP accounts are reduced to reflect the current year taxes allocated and apportioned to the corresponding PTEP groups of F2. See § 1.959-3(c)(1)(v). These adjustments are treated as made at the beginning of F2's taxable year ending on December 31 of year 3. See § 1.959-3(f). Concurrently with this reduction, US1's dollar basis pools with respect to F2 are reduced by $90x, the U.S. dollar amount of the reduction that reflects the current year taxes allocated and apportioned to the distributed previously taxed earnings and profits (£45x × $1/£0.5), and $90x of current year taxes is added to US1's PTEP tax pools with respect to F2. See § 1.959-3(d)(1)(iii) and (d)(2), (e)(1)(ii) and (e)(2); see also section 986(a) and § 1.986(a)-1 (translation of foreign income taxes into U.S. dollars). Tables 1 through 3 in this paragraph (c)(3)(ii)(C) summarize the adjustments to US1's accounts to reflect the current year taxes.

( 2 ) Corporate-level accounts. Concurrently with the adjustments described in paragraph (c)(3)(ii)(C)( 1 ) of this section, the previously taxed earnings and profits in F2's corporate PTEP accounts for US1 are reduced by £45x and the foreign income taxes in F2's corporate PTEP tax pools for US1 are increased by $90x. See § 1.959-2(d).

(4) Example 4: Section 956 amount —(i) Facts. Individual A, a citizen of the United States, owns all the outstanding stock of F1 and does not make an election to apply the provisions of section 962 for any taxable year. For F1's taxable year ending on December 31 of year 3, the last relevant day is December 31 and Individual A's section 956 amount (amount determined under section 956 and § 1.956-1) is £200x. At the beginning of the last relevant day, F1 has £125x of previously taxed earnings and profits with respect to Individual A, all of which relate to F1's taxable year ending on December 31 of year 1 and are assigned to section 959(c)(2) PTEP groups. On the last relevant day, F1 makes a £75x covered distribution to Individual A, the entirety of which is allocated to (and thus is a distribution of) F1's previously taxed earnings and profits with respect to Individual A under § 1.959-4. This example only analyzes the extent to which the section 956 amount is allocated to previously taxed earnings and profits and excluded from gross income under section 959, along with related adjustments to annual PTEP accounts. See also § 1.959-3(d) and (e) (related adjustments to dollar basis pools and PTEP tax pools).

(ii) Analysis —(A) Allocation to previously taxed earnings and profits. Individual A's section 956 amount is first allocated to F1's previously taxed earnings and profits that are with respect to Individual A and assigned to section 959(c)(2) PTEP groups on the last relevant day, but reduced to reflect the covered distribution (£50x, computed as £125x − £75x). See § 1.959-5(c)(1) and (d). The £50x portion of the section 956 amount allocated to previously taxed earnings and profits is excluded from Individual A's gross income. See § 1.959-5(c)(1). Under section 951(a)(1)(B), Individual A includes the remaining £150x of the section 956 amount (translated into U.S. dollars in accordance with section 989(b)) in its gross income.

(B) Annual PTEP account adjustments. To reflect the section 956 amount, the £50x of previously taxed earnings and profits to which the section 956 amount is allocated are reassigned from section 959(c)(2) PTEP groups to section 959(c)(1) PTEP groups within Individual A's annual PTEP accounts relating to F1's taxable year ending on December 31 of year 1, and then £150x of previously taxed earnings and profits are added to Individual A's annual PTEP accounts relating to F1's taxable year ending on December 31 of year 3, where they are assigned to the general section 959(c)(1) PTEP group. See § 1.959-3(c)(1)(x) and (xi). These adjustments are treated as made at the end of the last day of F1's taxable year ending on December 31 of year 3. See § 1.959-3(f)(1).

(5) Example 5: General successor transaction —(i) Facts. US1 directly owns all 100 shares of the single class of outstanding stock of F1. On June 30 of year 3, US1 sells 40 shares of stock of F1 to US2 for money equal to the fair market value of the shares. Section 304 does not apply to the sale. Immediately before the sale, F1 has £180x of previously taxed earnings and profits with respect to US1, none of which resulted from an income inclusion of US1 for F1's taxable year ending on December 31 of year 3 under section 951(a)(1)(A) or 951A(a) because F1 has no subpart F income or tested income for such taxable year. As a result of gain that US1 recognizes on the sale and includes in gross income as a dividend under section 1248(a) by reason of F1's earnings and profits described in section 959(c)(3), F1's previously taxed earnings and profits with respect to US1 are increased by £20x under section 959(e) and § 1.959-3(c)(1)(vii), concurrently with the sale. This example only discusses the extent to which previously taxed earnings and profits transfer under section 959. See also § 1.959-3 (related adjustments to annual PTEP accounts, dollar basis pools, and PTEP tax pools); § 1.986(c)-1 (recognition of foreign currency gain or loss with respect to transferred previously taxed earnings and profits).

(ii) Analysis —(A) In general. The sale is a general successor transaction in which F1 is an acquired foreign corporation, US1 is the transferor covered shareholder, and US2 is the successor covered shareholder. See § 1.959-7(b)(1). As described in paragraphs (c)(5)(ii)(B) and (C) of this section, there is £72x of general successor PTEP and £20x of section 959(e) successor PTEP. Such previously taxed earnings and profits transfer from US1 to US2, concurrently with the general successor transaction. See § 1.959-3(f)(1).

(B) General successor PTEP. General successor PTEP is a pro rata portion of F1's previously taxed earnings and profits that are with respect to US1 immediately before the general successor transaction (£180x), determined by multiplying all such previously taxed earnings and profits by 40%, which is the percentage of a £180x hypothetical distribution treated as made by F1 immediately before the general successor transaction that would be distributed with respect to stock of F1 that US2 acquires in the general successor transaction. See § 1.959-7(c)(1)(i) and (d). Thus, there is £72x of general successor PTEP, sourced pro rata from each PTEP group within each of US1's annual PTEP accounts with respect to F1. See also § 1.959-7(e)(1) and (f)(1) (rules for determining the dollar basis and associated foreign income taxes of general successor PTEP).

(C) Section 959(e) successor PTEP. Section 959(e) successor PTEP is all £20x of F1's previously taxed earnings and profits with respect to US1 that, under section 959(e), result from the application of section 1248 to gain recognized by US1 in the general successor transaction. See § 1.959-7(c)(2); see also § 1.959-7(e)(2) and (f)(2) (providing the dollar basis of section 959(e) successor PTEP, and providing that the foreign income taxes associated with section 959(e) successor PTEP is zero).

(iii) Alternative facts: previously taxed earnings and profits not eligible to transfer—(A) Facts. The facts are the same as in paragraph (c)(5)(i) of this section ( Example 5 ), except as follows. F1 has £10x of subpart F income for its taxable year ending on December 31 of year 3 and thus US1 includes £6x (£10x × 60% of stock of F1 retained by US1) in its gross income for such taxable year under section 951(a)(1)(A). Consequently, F1 has an additional £6x of previously taxed earnings and profits with respect to US1 immediately before the sale.

(B) Analysis. The results are the same as described in paragraph (c)(5)(ii) of this section. None of the additional £6x of previously taxed earnings and profits transfer to US2 because the general successor transaction is before December 31 of year 3, the last relevant day of F1's taxable year that includes the general successor transaction. See § 1.959-7(c)(1)(ii).

(iv) Alternative facts: deemed covered shareholder —(A) Facts. The facts are the same as in paragraph (c)(5)(i) of this section ( Example 5 ), except that the purchaser of the shares of stock of F1 is a nonresident alien individual (Individual B).

(B) Analysis. The results are the same as described in paragraph (c)(5)(ii) of this section, applied by substituting the deemed covered shareholder (who is a hypothetical person treated as owning all the stock of F1 owned by Individual B) for US2. See § 1.959-7(g). Thus, if a covered shareholder subsequently acquires a portion of Individual B's stock of F1, then a portion of F1's previously taxed earnings and profits with respect to the deemed covered shareholder (adjusted consistent with § 1.959-3, including to reflect any distributions from F1 to Individual B) transfer from the deemed covered shareholder to the acquiror covered shareholder.