Par. 28. Sections 1.961-3 through 1.961-14 are added to read as follows:
(a) Scope. This section sets forth rules regarding amounts that United States shareholders of a controlled foreign corporation must include in gross income under section 961(c) to account for gain recognized by the controlled foreign corporation pursuant to section 961(c) (for distributions of previously taxed earnings and profits in excess of basis under § 1.961-4(d), for foreign currency loss in excess of basis under § 1.961-5(b), or for negative section 961(c) basis under § 1.961-10(c)). Paragraph (b) of this section provides the general rule. Paragraph (c) of this section allocates gain recognized pursuant to section 961(c) to a United States shareholder. Paragraph (d) of this section adjusts allocations of gain to reflect transfers of stock of the controlled foreign corporation. Paragraph (e) of this section determines loss recognized under section 961(c) with respect to a United States shareholder. See § 1.961-12(c)(8) ( Example 8 ) for an example illustrating the application of this section. See also § 1.961-3, regarding basis increases for an inclusion under this section.
(b) In general. If a United States shareholder owns stock of a controlled foreign corporation on the last relevant day of a taxable year of the controlled foreign corporation, and the controlled foreign corporation recognizes gain pursuant to section 961(c) within that taxable year (all such gain, section 961(c) income ), then the United States shareholder includes in gross income the amount of section 961(c) income that is allocated to the United States shareholder (determined under paragraph (c) of this section). The inclusion is for the United States shareholder's taxable year in which or with which the controlled foreign corporation's taxable year ends and is treated in the same manner as an amount included in gross income under section 951(a)(1)(A) solely for purposes of increasing basis under § 1.961-3 and translation into U.S. dollars under 989(b).
(c) Allocation of section 961(c) income. For purposes of paragraph (b) of this section, the amount of the controlled foreign corporation's section 961(c) income that is allocated to a United States shareholder is the excess (if any) of—
(1) The sum of any portions of section 961(c) income that are assigned to the United States shareholder under § 1.961-4, 1.961-5, or 1.961-10, adjusted, if applicable, in accordance with paragraph (d) of this section as a result of transfers of stock of the controlled foreign corporation; over
(2) The amount of loss that the controlled foreign corporation is treated as recognizing under section 961(c) with respect to the United shareholder in accordance with paragraph (e) of this section.
(d) Rules for transfers of stock of the controlled foreign corporation —(1) General successor transactions —(i) General successor transaction occurring before the last relevant day. For purposes of paragraph (c)(1) of this section, if the controlled foreign corporation is an acquired foreign corporation in a general successor transaction that occurs before the last relevant day of the controlled foreign corporation's taxable year, then treat a pro rata portion of section 961(c) income that is both recognized before the general successor transaction and assigned to the transferor covered shareholder under § 1.961-4, 1.961-5, or 1.961-10 as instead assigned to the successor covered shareholder, determined by multiplying such section 961(c) income by the fraction described in § 1.961-5(c)(2)(i) for determining the controlled foreign corporation's section 961(c) basis that transfers in the general successor transaction.
(ii) General successor transaction occurring on or after the last relevant day. For purposes of paragraph (c)(1) of this section, if the controlled foreign corporation is an acquired foreign corporation in a general successor transaction that occurs on or after the last relevant day of the controlled foreign corporation's taxable year, then treat a pro rata portion of section 961(c) income that is both recognized after the general successor transaction and assigned to the successor covered shareholder under § 1.961-4, 1.961-5, or 1.961-10 as instead assigned to the transferor covered shareholder, determined by multiplying such section 961(c) income by the fraction described in § 1.961-5(c)(2)(i) for determining the controlled foreign corporation's section 961(c) basis that transfers in the general successor transaction.
(2) Other transfers. The principles of paragraph (d)(1) of this section apply to transactions, other than general successor transactions, in which the controlled foreign corporation's 961(c) basis transfers to another covered shareholder.
(e) Determining loss under section 961(c) —(1) In general. For purposes of paragraph (c)(2) of this section, the amount of loss that the controlled foreign corporation is treated as recognizing under section 961(c) with respect to the United States shareholder is, subject to the limitations in paragraph (e)(2) of this section, equal to the sum of the controlled foreign corporation's positive section 961(c) basis with respect to the United States shareholder of section 961(c) ownership units that are sold, exchanged, or otherwise disposed of by the controlled foreign corporation within the controlled foreign corporation's taxable year, reduced by the amount of such positive section 961(c) basis that is applied to covered gain under § 1.961-9.
(2) Limitations —(i) In general. Positive section 961(c) basis of section 961(c) ownership units increases the amount of loss that the controlled foreign corporation is treated as recognizing under section 961(c) only if loss is, or would be if there were a loss, recognized by the controlled foreign corporation on the sale, exchange, or other disposition of the section 961(c) ownership units and a current deduction in respect of the loss is, or would be, allowable.
(ii) Loss recognized only to the extent of certain gain. Positive section 961(c) basis of section 961(c) ownership units that are shares of stock of a single foreign corporation increases the amount of loss that the controlled foreign corporation is treated as recognizing under section 961(c) only to the extent of the portion of the amount described in paragraph (c)(1) of this section that is recognized with respect to stock of such foreign corporation.
(3) Translation rule. If applicable, positive section 961(c) basis of section 961(c) ownership units is translated into the controlled foreign corporation's functional currency at the spot rate on the day of the sale, exchange, or other disposition of the section 961(c) ownership units.