# Prop. Treas. Reg. § 1.959-5: Exclusion of a section 956 amount from gross income to the extent allocated to previously taxed earnings and profits. Proposed regulation, not in force. REG-105479-18, 89 FR 95362, published 2024-12-02 . Interprets 26 U.S.C. § 959. Par. 22. Sections 1.959-5 through 1.959-12 are added to read as follows: (a) Scope. This section provides rules for previously taxed earnings and profits to which a section 956 amount is allocated. Paragraph (b) of this section defines a section 956 amount. Paragraph (c) of this section describes rules for analyzing a section 956 amount, including rules for determining the extent to which a section 956 amount is excluded from gross income under section 959(a)(2). Paragraph (d) of this section provides rules for allocating a section 956 amount to previously taxed earnings and profits. Paragraph (e) of this section provides a dollar basis rule. Paragraph (f) of this section provides an associated foreign income taxes rule. See § 1.959-10(c)(4) ( Example 4 ) for an example illustrating the application of this section. (b) Section 956 amount. A section 956 amount is the amount determined under section 956 and § 1.956-1 with respect to a covered shareholder and a controlled foreign corporation. A section 956 amount is excluded from gross income in accordance with the rules described in paragraph (c) of this section. (c) Rules for analyzing a section 956 amount —(1) Determine the portion of the section 956 amount excluded from gross income under section 959(a)(2). First, the portion of the section 956 amount that it is allocated to section 959(c)(2) previously taxed earnings and profits, which is determined in accordance with paragraph (d) of this section, is excluded from the covered shareholder's gross income. (2) Determine dollar basis and associated foreign income taxes. Second, determine the dollar basis of, and foreign income taxes associated with, previously taxed earnings and profits to which the section 956 amount is allocated in accordance with paragraphs (e) and (f) of this section. (3) Adjust previously taxed earnings and profits and make related account adjustments. Third, reassign the controlled foreign corporation's previously taxed earnings and profits to which the section 956 amount is allocated from section 959(c)(2) PTEP groups to section 959(c)(1) PTEP groups, and if applicable increase the controlled foreign corporation's previously taxed earnings and profits assigned to the general section 959(c)(1) PTEP group by reason of section 951(a)(1)(B), to reflect the section 956 amount and make the related adjustments described in § 1.959-3. (d) Allocation of section 956 amounts —(1) In general. A covered shareholder's section 956 amount is first allocated to previously taxed earnings and profits of the controlled foreign corporation that are with respect to the covered shareholder and assigned to section 959(c)(2) PTEP groups (determined as described in paragraph (d)(2) of this section)), to the extent thereof and in accordance with the principles of § 1.959-4(e)(2)(iii) through (5). Any remaining portion of the section 956 amount is allocated to the controlled foreign corporation's earnings and profits described in section 959(c)(3). (2) Determination of previously taxed earnings and profits. In applying paragraph (d)(1) of this section, previously taxed earnings and profits are determined on the last relevant day of the controlled foreign corporation's taxable year to which the section 956 amount relates, but are reduced to the extent distributed during the taxable year, and are determined without regard to any transfer of previously taxed earnings and profits from the covered shareholder on (or after) the last relevant day of the taxable year. (e) Dollar basis rule. The dollar basis of previously taxed earnings and profits to which a covered shareholder's section 956 amount is allocated (determined under paragraph (d)(1) 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 determined in the same manner as previously taxed earnings and profits are determined in paragraph (d)(2) of this section. 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 to which the section 956 amount is allocated and relating to the dollar basis pool, and the denominator of the which is all previously taxed earnings and profits relating to the dollar basis pool. (f) Associated foreign income taxes rule. The foreign income taxes that are associated with previously taxed earnings and profits to which a covered shareholder's section 956 amount is allocated (determined under paragraph (d)(1) 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 determined in the same manner as previously taxed earnings and profits are determined in paragraph (d)(2) of this section. 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 to which the section 956 amount is allocated 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.