Par. 22. Sections 1.959-5 through 1.959-12 are added to read as follows:
(a) Scope. This section sets forth transition rules for the section 959 regulations. Paragraph (b) of this section addresses the establishment of annual PTEP accounts, dollar basis pools, and corporate PTEP accounts and provides for adjustments to reflect the transition tax under section 965. Paragraph (c) of this section addresses the establishment of PTEP tax pools, corporate PTEP tax pools, adjusted applicable percentages, and section 965(c) deduction percentages. Paragraph (d) of this section treats a domestic partnership (including an S corporation) as a covered shareholder for periods in which § 1.958-1(d)(1) does not apply. Paragraph (e) converts accounts of a domestic partnership (including an S corporation) to accounts of covered shareholders owning interests in the domestic partnership when both § 1.958-1(d)(1) and the section 959 regulations apply.
(b) Establishing annual PTEP accounts, dollar basis pools, and corporate PTEP accounts and adjustments for section 965 transition tax —(1) In general. When applying the 2019 notice provisions pursuant to § 1.959-12(c) (interim application of 2019 notice provisions), or the section 959 regulations (other than §§ 1.959-8 and 1.959-9) pursuant to § 1.959-12(d) (optional early application), to a taxable year of a foreign corporation, annual PTEP accounts, dollar basis pools, and corporate PTEP accounts are established and adjusted in accordance with the rules described in paragraphs (b)(2) and (3) of this section.
(2) Establishment of accounts —(i) In general. As of the beginning of the first taxable year of the foreign corporation to which the 2019 notice provisions apply, or, if earlier, the first taxable year of the foreign corporation to which the section 959 regulations (other than §§ 1.959-8 and 1.959-9) apply, a reasonable method (consistently applied) must be used to establish annual PTEP accounts, dollar basis pools, and corporate PTEP accounts reflecting the foreign corporation's previously taxed earnings and profits, including to reflect adjustments to previously taxed earnings and profits that would have been made if the principles of §§ 1.959-2 through 1.959-5 and 1.959-7 were to have previously applied. Establishing accounts in accordance with the preceding sentence includes conforming any of a covered shareholder's existing previously taxed earnings and profits accounts with respect to the foreign corporation, or dollar basis accounts with respect to the previously taxed earnings and profits, to the requirements of § 1.959-2. In addition, a covered shareholder is treated as consistently applying a reasonable method only if the covered shareholder and any covered shareholders with which the covered shareholder joins in filing a Federal income tax return apply that method with respect to all foreign corporations in which the covered shareholders own stock.
(ii) Multi-year accounts —(A) Previously taxed earnings and profits. To the extent a covered shareholder has an account reflecting previously taxed earnings and profits of the foreign corporation that relate to two or more taxable years and are described in the next sentence ( multi-year PTEP account ), a reasonable method to conforming the multi-year PTEP account to the requirements of § 1.959-2 includes treating such previously taxed earnings and profits as assigned to the general section 959(c)(1) PTEP group or the section 951(a)(1)(A) PTEP group (as applicable) within an annual PTEP account that relates to the last taxable year of the foreign corporation ending on or before December 31, 2017, and the section 904 category to which the multi-year PTEP account relates. Previously taxed earnings and profits are described in this sentence to the extent they are described in section 959(c)(1)(A) by reason of section 951(a)(1)(B) and not by reason of section 959(a)(2); described in section 959(c)(1)(B), including by reason of section 959(a)(3) (before its repeal); or described in section 959(c)(2) by reason of section 951(a)(1)(A) and without regard to section 965(a), 965(b)(4)(A), 951A(f)(2), 245A(e)(2), 959(e), or 964(e)(4).
(B) Dollar basis. To the extent a covered shareholder has an account reflecting the dollar basis of previously taxed earnings and profits of the foreign corporation that relate to two or more taxable years ( multi-year dollar basis account ), a reasonable method for conforming the multi-year dollar basis account to the requirements of § 1.959-2 includes treating previously taxed earnings and profits to which the multi-year dollar basis account relates as having a dollar basis equal to a pro rata portion of the multi-year dollar basis account, and placing that dollar basis into the related dollar basis pool. The pro rata portion is determined by multiplying the multi-year dollar basis account by a fraction, the numerator of which is previously taxed earnings and profits to which the multi-year dollar basis account relates, and the denominator of which is all previously taxed earnings and profits to which the multi-year dollar basis account relates.
(3) Adjustments for section 965 transition tax —(i) Increases for amounts included in gross income under section 951(a)(1)(A) by reason of section 965(a). When adding previously taxed earnings and profits to annual PTEP accounts to reflect an amount a covered shareholder includes in gross income under section 951(a)(1)(A) with respect to the foreign corporation by reason of section 965(a), assign such previously taxed earnings and profits to the section 965(a) PTEP group (rather than the section 951(a)(1)(A) PTEP group).
(ii) Increases for section 965(b) reductions. For purposes of adjusting annual PTEP accounts and dollar basis pools, treat an amount that a covered shareholder would have included in gross income under section 951(a)(1)(A) with respect to the foreign corporation but for section 965(b) and § 1.965-1(b)(2) or 1.965-8(b), as applicable, as included in the covered shareholder's gross income under section 951(a)(1)(A) with respect to the foreign corporation, and assign previously taxed earnings and profits resulting from such treatment to the section 965(b) PTEP group (rather than the section 951(a)(1)(A) PTEP group).
(c) Establishing PTEP tax pools, corporate PTEP tax pools, adjusted applicable percentages, and section 965(c) deduction percentages —(1) In general. As of the beginning of the first taxable year of a foreign corporation to which the section 959 regulations (other than §§ 1.959-8 and 1.959-9) apply pursuant to § 1.959-12(b) (general applicability date) or, if applicable, § 1.959-12(d) (optional early application), PTEP tax pools, corporate PTEP tax pools, adjusted applicable percentages, and section 965(c) deduction percentages reflecting the foreign corporation's previously taxed earnings and profits must be established in accordance with the rules described in paragraphs (c)(2) through (4) of this section.
(2) PTEP tax pools and corporate PTEP tax pools. PTEP tax pools and corporate PTEP tax pools are established by adding a pro rata portion of the foreign corporation's prior-law PTEP group taxes with respect to a prior-law PTEP group (defined in this paragraph (c)(2)) to each PTEP tax pool with respect to the foreign corporation, determined by multiplying such prior-law PTEP group taxes by a fraction. The numerator of the fraction is the balance of the prior-law PTEP group that is previously taxed earnings and profits relating to the PTEP tax pool, and the denominator of the fraction is the balance of the prior-law PTEP group. For purposes of this paragraph (c)(2), prior-law PTEP group taxes and prior-law PTEP groups mean PTEP group taxes and PTEP groups, respectively, as defined in § 1.960-3 as contained in 26 CFR part 1 revised as of April 1, 2024.
(3) Adjusted applicable percentage. An adjusted applicable percentage is established with respect to all of the foreign corporation's previously taxed earnings and profits assigned to the reclassified section 965(a) PTEP group, reclassified section 965(b) PTEP group, section 965(a) PTEP group, and section 965(b) PTEP group within a covered shareholder's annual PTEP accounts relating to the same section 904 category by calculating a weighted average of the applicable percentages (as defined in § 1.965-5(d)) with respect to the previously taxed earnings and profits. The weighted average is determined as the sum of the product of each such applicable percentage and the amount of previously taxed earnings and profits to which the applicable percentage relates, divided by the sum of the amount of previously taxed earnings and profits described in the preceding sentence. For purposes of this paragraph (c)(3), applicable percentages and previously taxed earnings and profits are determined as of the beginning of the taxable year.
(4) Section 965(c) deduction percentage. A section 965(c) deduction percentage is established with respect to all of the foreign corporation's previously taxed earnings and profits assigned to the reclassified section 965(a) PTEP group and section 965(a) PTEP group within a covered shareholder's annual PTEP accounts relating to the same section 904 category by calculating a weighted average of the percentages for which foreign currency gain or loss recognized under section 986(c) with respect to distributions of the previously taxed earnings and profits would be reduced under § 1.986(c)-1 as contained in 26 CFR part 1 revised as of April 1, 2024. The weighted average is determined as the sum of the product of each such percentage and the amount of previously taxed earnings and profits to which the percentage relates, divided by the sum of the amount of previously taxed earnings and profits described in the preceding sentence. For purposes of this paragraph (c)(4), percentages for which foreign currency gain or loss would be reduced under § 1.986(c)-1 and previously taxed earnings and profits are determined as of the beginning of the taxable year.
(d) Treatment of domestic partnerships (including S corporations) before application of § 1.958-1(d)(1). For purposes of the section 959 regulations, a domestic partnership (including an S corporation) is treated as a covered shareholder for any taxable year of the domestic partnership to which § 1.958-1(d)(1) does not apply. If a domestic partnership is treated as a covered shareholder, then rules regarding distributions of previously taxed earnings and profits apply to the domestic partnership in its capacity as a covered shareholder before those rules apply to covered shareholders that own interests in the domestic partnership. In such a case, for example, a covered distribution made to the domestic partnership is first a distribution of the distributing foreign corporation's previously taxed earnings and profits with respect to the partnership and then, to the extent remaining, a distribution of the distributing foreign corporation's previously taxed earnings and profits with respect to covered shareholders owning interests in the partnership.
(e) Converting domestic partnership-level (including S corporation-level) accounts to partner-level accounts after the application of § 1.958-1(d)(1) —(1) In general. As of the beginning of the first taxable year of a domestic partnership (including an S corporation) to which both § 1.958-1(d)(1) and the section 959 regulations (other than §§ 1.959-8 and 1.959-9) apply (pursuant to § 1.959-12(c) (general applicability date) or (d) (optional early application)), the domestic partnership's accounts described in § 1.959-2 with respect to a foreign corporation are converted to accounts of covered shareholders owning interests in the partnership in accordance with the rules described in paragraphs (e)(2) through (4) of this section.
(2) Rules for converting accounts —(i) Allocate previously taxed earnings and profits to each covered shareholder —(A) In general. First, allocate a pro rata portion of the foreign corporation's previously taxed earnings and profits with respect to the domestic partnership to each covered shareholder owning an interest in the partnership at the beginning of the taxable year, determined by multiplying all the foreign corporation's previously taxed earnings and profits with respect to the partnership by a fraction. The numerator of the fraction is the liquidation value of the covered shareholder's interest in the partnership, and the denominator of the fraction is the aggregate liquidation value of all partners' interests in the partnership (determined in each case under paragraph (e)(2)(i)(B) of this section).
(B) Liquidation value. For purposes of this paragraph (e)(2)(i), the liquidation value of a partner's interest in the partnership is the amount of cash the partner would receive with respect to the interest if, at the beginning of the taxable year, the partnership (and any partnership through which the partner indirectly owns an interest in the partnership) sold all of its property for an amount of cash equal to the fair market value of the property (taking into account section 7701(g)), satisfied all of its liabilities (other than those described in § 1.752-7), paid an unrelated third party to assume all of its § 1.752-7 liabilities in a fully taxable transaction, and then the partnership (and any partnership through which the partner indirectly owns an interest in the partnership) liquidated. Moreover, any change to a partnership agreement made with a principal purpose of altering the allocation of previously taxed earnings and profits under this paragraph (e)(2)(i) is disregarded.
(ii) Compute dollar basis and associated foreign income taxes. Second, treat the dollar basis of, or foreign income taxes associated with, previously taxed earnings and profits allocated to each covered shareholder as the same as what would be the dollar basis of, or foreign income taxes associated with, the previously taxed earnings and profits under § 1.959-4 if the previously taxed earnings and profits were distributed at the beginning of the taxable year.
(iii) Eliminate the domestic partnership's accounts and increase covered shareholders' accounts. Third, eliminate the domestic partnership's annual PTEP accounts, dollar basis pools, and PTEP tax pools with respect to the foreign corporation. Concurrently with such eliminations, increase each covered shareholder's annual PTEP accounts, dollar basis pools, and PTEP tax pools with respect to the foreign corporation to reflect the foreign corporation's previously taxed earnings and profits that are allocated to the covered shareholder or the dollar basis of, or foreign income taxes associated with, the previously taxed earnings and profits, as applicable.
(3) Coordination with section 986(c). No foreign currency gain or loss is recognized with respect to previously taxed earnings and profits under section 986(c) as a result of previously taxed earnings and profits ceasing to be with respect to the domestic partnership pursuant to this paragraph (e) (notwithstanding § 1.986(c)-1).
(4) Coordination with deemed covered shareholder rules. The portion, if any, of the foreign corporation's previously taxed earnings and profits with respect to the domestic partnership that does not give rise to an increase to a covered shareholder's annual PTEP accounts with respect to the foreign corporation under paragraph (e)(1) of this section becomes previously taxed earnings and profits of the foreign corporation with respect to the deemed covered shareholder for purposes of subsequently transferring the previously taxed earnings and profits under section 959. See § 1.959-7(g) for rules regarding the deemed covered shareholder.