# Prop. Treas. Reg. § 1.961-13: Transition rules. Proposed regulation, not in force. REG-105479-18, 89 FR 95362, published 2024-12-02 . Interprets 26 U.S.C. § 961. Par. 28. Sections 1.961-3 through 1.961-14 are added to read as follows: (a) Scope. This section sets forth transition rules for the section 961 regulations. Paragraph (b) of this section addresses the establishment of derived basis of a partnership and section 961(c) basis of a controlled foreign corporation. Paragraph (c) 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 (d) of this section converts basis with respect to a domestic partnership (including an S corporation) to basis with respect to covered shareholders owning interests in the domestic partnership when both § 1.958-1(d)(1) and the section 961 regulations first apply. (b) Establishing derived basis of a partnership and section 961(c) basis of a controlled foreign corporation —(1) In general. As of the beginning of the first taxable year of a foreign corporation to which the section 961 regulations (other than §§ 1.961-6 and 1.961-7) apply pursuant to § 1.961-14(b), a partnership's derived basis of derivative ownership units, and a controlled foreign corporation's section 961(c) basis of section 961(c) ownership units, that are shares of stock of the foreign corporation or property through one or more covered shareholders own stock of the foreign corporation must be established in accordance with the rules described in paragraphs (b)(2) through (5) of this section. (2) Derived basis —(i) In general. The partnership's derived basis of each derivative ownership unit is established by increasing derived basis with respect to each covered shareholder by the U.S. dollar amount of derived basis with respect to the covered shareholder that would exist at the beginning of the taxable year (and therefore would not have been decreased in a distribution or general successor transaction, for example) if the principles of §§ 1.961-2 through 1.961-5, 1.961-8, and 1.961-10 were to have previously applied, determined using a reasonable method (consistently applied to each foreign corporation whose stock is owned by the partnership and with respect to each covered shareholder that owns an interest in the partnership). In the case of a domestic partnership, the increase described in the preceding sentence is determined without regard to an income inclusion of the domestic partnership or any lower-tier domestic partnership (for example, an income inclusion of the domestic partnership under section 951(a)(1)(A) that occurs in a period before § 1.958-1(d) applies to the domestic partnership). (3) Section 961(c) basis. The controlled foreign corporation's section 961(c) basis of each section 961(c) ownership unit is established by increasing section 961(c) basis with respect to each covered shareholder by the U.S. dollar amount of section 961(c) basis with respect to the covered shareholder that would exist at the beginning of the taxable year (and therefore would not have been decreased in a distribution or general successor transaction, for example) if the principles of §§ 1.961-2 through 1.961-5, 1.961-9, 1.961-10, and 1.961-11 were to have previously applied, determined using a reasonable method (consistently applied to each foreign corporation whose stock is owned by the controlled foreign corporation and with respect to each covered shareholder that owns stock in the controlled foreign corporation). (4) 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 the application of the principles of § 1.961-3 to an income inclusion under section 951(a)(1)(A) by reason of section 965(a). (5) Anti-duplication rule. Derived basis or section 961(c) basis is increased under this paragraph (b) to reflect an income inclusion under section 951(a)(1)(A) or 951A(a) only to the extent such an increase would not duplicate basis (including basis previously used) at the level of the partnership or the controlled foreign corporation, as applicable, to reflect the income inclusion (for example, in the case of a foreign partnership, basis previously provided under § 1.965-2(h)(5)(ii)). (c) Treatment of domestic partnerships (including S corporations) before application of § 1.958-1(d)(1). For purposes of the section 961 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 derived basis (of a partnership that is owned by the domestic partnership) or section 961(c) basis (of a controlled foreign corporation that is owned by the domestic partnership) apply to the domestic partnership in its capacity as a covered shareholder before those rules apply to a covered shareholder that owns interests in the domestic partnership. In such a case, for example, covered gain recognized by a controlled foreign corporation and assigned to the domestic partnership is first previously taxed earnings and profits by reason of the controlled foreign corporation's positive section 961(c) basis with respect to the domestic partnership and then, to the extent remaining, previously taxed earnings and profits by reason of positive section 961(c) basis with respect to covered shareholders owning interests in the domestic partnership. (d) Converting basis with respect to domestic partnerships (including S corporations) to basis with respect to partners (or shareholders) 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 961 regulations (other than §§ 1.961-6 and 1.961-7) apply (pursuant to § 1.961-14(b)), the rules described in paragraphs (d)(2) through (4) of this section apply to convert— (i) A lower-tier partnership's derived basis with respect to the domestic partnership of derivative ownership units (if such derived basis was earlier established pursuant to paragraphs (b)(2) and (c) of this section) to derived basis with respect to covered shareholders owning interests in the domestic partnership; and (ii) A controlled foreign corporation's section 961(c) basis with respect to the domestic partnership of section 961(c) ownership units (if such section 961(c) basis was earlier established pursuant to paragraphs (b)(3) and (c) of this section) to section 961(c) basis with respect to covered shareholders owning interests in the domestic partnership. (2) Rules for converting derived basis with respect to a domestic partnership —(i) Allocate derived basis to each covered shareholder. First, allocate a pro rata portion of the lower-tier partnership's derived basis with respect to the domestic partnership of each derivative ownership unit to each covered shareholder owning an interest in the domestic partnership at the beginning of the taxable year, determined by multiplying the derived basis with respect to the domestic partnership by the fraction described in § 1.959-11(e)(2)(i)(A) for the covered shareholder and the domestic partnership. (ii) Transfer derived basis. Second, transfer to each covered shareholder the portion of the lower-tier partnership's derived basis with respect to the domestic partnership of each derivative ownership unit that is allocated to the covered shareholder under paragraph (d)(2)(i) of this section. (3) Rules for converting section 961(c) basis with respect to a domestic partnership —(i) Allocate section 961(c) basis to each covered shareholder. First, allocate a pro rata portion of the controlled foreign corporation's section 961(c) basis with respect to the domestic partnership of each section 961(c) ownership unit to each covered shareholder owning an interest in the domestic partnership at the beginning of the taxable year, determined by multiplying the section 961(c) basis with respect to the domestic partnership by the fraction described in § 1.959-11(e)(2)(i)(A) for the covered shareholder and the domestic partnership. (ii) Transfer section 961(c) basis. Second, transfer to each covered shareholder the portion of the controlled foreign corporation's section 961(c) basis with respect to the domestic partnership of each section 961(c) ownership unit that is allocated to the covered shareholder under paragraph (d)(3)(i) of this section. (4) Coordination with deemed covered shareholder rules. The portion, if any, of the lower-tier partnership's derived basis with respect to the domestic partnership, or the controlled foreign corporation's section 961(c) basis with respect to the domestic partnership, that does not increase derived basis or section 961(c) basis with respect to a covered shareholder becomes with respect to the deemed covered shareholder for purposes of subsequently transferring the basis under § 1.961-5(c).