# Prop. Treas. Reg. § 1.959-4: Exclusion from gross income of previously taxed earnings and profits received in a distribution. Proposed regulation, not in force. REG-105479-18, 89 FR 95362, published 2024-12-02 . Interprets 26 U.S.C. § 959. Par. 21. Section 1.959-4 is revised to read as follows: (a) Scope. This section provides the rules for distributions of previously taxed earnings and profits under section 959. Paragraph (b) of this section excludes previously taxed earnings and profits received by a covered shareholder or controlled foreign corporation in a distribution from gross income. Paragraph (c) of this section defines a covered distribution. Paragraph (d) of this section describes rules for analyzing a covered distribution, including rules for determining the extent to which a covered distribution is a distribution of previously taxed earnings and profits. Paragraph (e) of this section provides rules for allocating covered distributions to earnings and profits. Paragraph (f) of this section provides a dollar basis rule. Paragraph (g) of this section provides an associated foreign income taxes rule. See § 1.959-10(c)(1) and (2) ( Examples 1 and 2 ) for examples illustrating the application of this section. See also §§ 1.367(b)-2(j)(2)(ii) and 1.367(b)-3(g)(1) for deemed distributions of previously taxed earnings and profits under other provisions of the Code. (b) Exclusion from gross income —(1) Distribution by a foreign corporation to a covered shareholder. Previously taxed earnings and profits that are distributed to a covered shareholder, other than previously taxed earnings and profits relating to the taxable section 962 PTEP subgroup, are excluded from the covered shareholder's gross income. (2) Distribution by a controlled foreign corporation to another controlled foreign corporation —(i) In general. Previously taxed earnings and profits that are distributed by a controlled foreign corporation to another controlled foreign corporation are excluded from the recipient controlled foreign corporation's gross income, solely for purposes of determining the recipient controlled foreign corporation's subpart F income and tested income or tested loss, and provided that the covered shareholder to which the previously taxed earnings and profits relate is a United States shareholder in both controlled foreign corporations. (ii) Treatment of a specified foreign corporation as a controlled foreign corporation. A specified foreign corporation (as defined in § 1.965-1(f)(45)(i)(B)) that is not otherwise a controlled foreign corporation is treated as a controlled foreign corporation for purposes of applying paragraph (b)(2)(i) of this section to previously taxed earnings and profits resulting from the application of section 965 that are distributed by the specified foreign corporation. (3) Additional consequences. Upon a distribution of previously taxed earnings and profits, see paragraph (d)(5) of this section for adjustments to previously taxed earnings and profits, § 1.961-4 for basis adjustments, § 1.986(c)-1 for recognition of foreign currency gain or loss if the distribution is to a covered shareholder, and § 1.960-3 for deemed paid foreign income taxes if the distribution is to a United States shareholder that is a corporation or to a controlled foreign corporation. See also section 962(d) (previously taxed earnings and profits distributed to a covered shareholder and relating to the taxable section 962 PTEP subgroup are included in gross income); § 1.1411-10(c)(1)(i)(A)( 1 ) (previously taxed earnings and profits distributed to a covered shareholder and relating to the taxable section 1411 subgroup are included in net investment income). (c) Covered distribution —(1) In general. A covered distribution is a distribution of property made by a foreign corporation to its shareholders with respect to its stock, to the extent that the distribution is a dividend (as defined in section 316), determined without regard to section 959(d), and not including an amount treated as a dividend by reason of section 78, 367(b), 964(e)(1), or 1248. In a covered distribution, previously taxed earnings and profits are distributed in accordance with the rules described in paragraph (d) of this section. (2) [Reserved] (3) Treatment of a partner's distributive share of a covered distribution. For purposes of the section 959 regulations, if a portion of a covered distribution is made or is treated as made under this paragraph (c)(3) to a partnership, a partner's distributive share of such portion is treated as a portion of the covered distribution made to the partner. (d) Rules for analyzing a covered distribution —(1) Determine each covered shareholder's share of the covered distribution. First, determine each covered shareholder's share of the covered distribution, computed as the sum of— (i) Any portion of the covered distribution that is made to the covered shareholder, and (ii) Any portions of the covered distribution that are made to upper-tier foreign corporations and assigned to the covered shareholder under § 1.951-2. (2) Determine distributed previously taxed earnings and profits. Second, determine the extent to which each covered shareholder's share of the covered distribution is a distribution of previously taxed earnings and profits in accordance with paragraph (e) of this section. (3) Determine dollar basis and associated foreign income taxes. Third, determine the dollar basis of, and foreign income taxes associated with, distributed previously taxed earnings and profits in accordance with paragraphs (f) and (g) of this section. (4) Treat distributed previously taxed earnings and profits as distributed pro rata with respect to shares of stock of the foreign corporation. Fourth, treat a pro rata portion of all previously taxed earnings and profits distributed in each covered shareholder's share of the covered distribution as distributed with respect to each share of stock of the foreign corporation owned by the covered shareholder, determined by multiplying all such previously taxed earnings and profits by a fraction. The numerator of the fraction is the sum of any portion of the covered distribution that is made with respect to the share of stock to the covered shareholder and any portions of the covered distribution that are made with respect to the share of stock to upper-tier foreign corporations and assigned to the covered shareholder under § 1.951-2. The denominator of the fraction is the amount of the covered shareholder's share of the covered distribution. (5) Adjust previously taxed earnings and profits and make related account adjustments. Fifth, decrease the distributing foreign corporation's previously taxed earnings and profits, and if applicable increase a recipient foreign corporation's previously taxed earnings and profits, to reflect the covered distribution and make the related adjustments described in § 1.959-3 to each covered shareholder's accounts. (e) Allocation of distributions —(1) In general. A covered shareholder's share of a covered distribution (determined under paragraph (d)(1) of this section) is first allocated to previously taxed earnings and profits of the foreign corporation that are with respect to the covered shareholder immediately before the covered distribution (as reflected in the covered shareholder's annual PTEP accounts with respect to the foreign corporation), to the extent thereof and in accordance with paragraphs (e)(2) through (5) of this section. Any remaining portion of such share is allocated to the foreign corporation's earnings and profits described in section 959(c)(3). (2) Priority rules —(i) Section 959(c)(1) rule. Allocate the covered shareholder's share of the covered distribution first to previously taxed earnings and profits assigned to a section 959(c)(1) PTEP group and then to previously taxed earnings and profits assigned to a section 959(c)(2) PTEP group. (ii) Rules within section 959(c)(1) PTEP groups. In allocating the covered shareholder's share of the covered distribution to previously taxed earnings and profits assigned to section 959(c)(1) PTEP groups, allocate first to previously taxed earnings and profits assigned to the reclassified section 965(a) PTEP group, then to previously taxed earnings and profits assigned to the reclassified section 965(b) PTEP group, and finally to previously taxed earnings and profits assigned to the remaining section 959(c)(1) PTEP groups. (iii) Rules within section 959(c)(2) PTEP groups. In allocating the covered shareholder's share of the covered distribution to previously taxed earnings and profits assigned to section 959(c)(2) PTEP groups, allocate first to previously taxed earnings and profits assigned to the section 965(a) PTEP group, then to previously taxed earnings and profits assigned to the section 965(b) PTEP group, and finally to previously taxed earnings and profits assigned to the remaining section 959(c)(2) PTEP groups. (3) Last-in, first-out rule. In allocating the covered shareholder's share of the covered distribution to previously taxed earnings and profits assigned to a single PTEP group or PTEP groups with the same priority (for example, the section 951(a)(1)(A) PTEP group, section 951A PTEP group, and section 245A(d) PTEP group), allocate first to previously taxed earnings and profits that relate to the most recent taxable year, then to previously taxed earnings and profits that relate to the next most recent taxable year, and so on. (4) Section 962 ordering rule. In allocating the covered shareholder's share of the covered distribution to previously taxed earnings and profits that are assigned to a single PTEP group or PTEP groups with the same priority and that relate to the same taxable year, allocate first to previously taxed earnings and profits that are not assigned to the taxable section 962 PTEP subgroup, and then to previously taxed earnings and profits that are assigned to such subgroup. (5) Pro rata rule. In allocating the covered shareholder's share of the covered distribution to previously taxed earnings and profits that are assigned to a single PTEP group or PTEP groups with the same priority and that relate to the same taxable year and have the same classification for section 962 purposes ( same priority PTEP ), allocate to a pro rata portion of same priority PTEP, determined by multiplying all same priority PTEP by a fraction, the numerator of which is the amount to be allocated to same priority PTEP, and the denominator of which is the amount of same priority PTEP. (f) Dollar basis rule. The dollar basis of previously taxed earnings and profits distributed in a covered shareholder's share of a covered distribution (determined under paragraph (d)(2) 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. The pro rata portion is 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 covered shareholder'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. (g) Associated foreign income taxes rule. The foreign income taxes that are associated with previously taxed earnings and profits distributed in a covered shareholder's share of a covered distribution (determined under paragraph (d)(2) 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. The pro rata portion is 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 the covered shareholder'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. Thus, associated foreign income taxes are sourced pro rata from foreign income taxes assigned to the creditable PTEP tax group in the PTEP tax pool and other foreign income taxes in the PTEP tax pool.