Par. 27. Section 1.961-2 is revised to read as follows:
(a) Scope. This section describes the types of property units and types of basis for purposes of applying section 961. Paragraph (b) of this section defines a property unit and provides the general rule for basis of a property unit. Paragraphs (c) through (e) of this section provide definitions and rules for section 961(a) ownership units, derivative ownership units, and section 961(c) ownership units, respectively. See §§ 1.961-3 through 1.961-11 for basis adjustments and the effects of basis and § 1.961-12(c)(1) ( Example 1 ) for an example illustrating the application of this section.
(b) Property unit. A property unit is a section 961(a) ownership unit, derivative ownership unit, or section 961(c) ownership unit, as applicable (defined in paragraphs (c) through (e) of this section). Basis in a property unit must be established and maintained in U.S. dollars in accordance with this section and the adjustments prescribed in the section 961 regulations.
(c) Section 961(a) ownership unit. A section 961(a) ownership unit is a share of stock of a foreign corporation directly owned by a covered shareholder, or an interest in a partnership directly owned by a covered shareholder and through which the covered shareholder owns stock of a foreign corporation. A covered shareholder is provided adjusted basis in a section 961(a) ownership unit.
(d) Derivative ownership unit —(1) In general. A derivative ownership unit is a share of stock of a foreign corporation directly owned by a partnership and owned (indirectly) by one or more covered shareholders through only one or more partnerships, or an interest in a partnership directly owned by another partnership and through which one or more covered shareholders own stock of a foreign corporation through only partnerships. A partnership is provided derived basis in a derivative ownership unit in accordance with paragraph (d)(2) of this section.
(2) Derived basis. Derived basis is basis of a derivative ownership unit that must be established and maintained separately with respect to each covered shareholder that owns the derivative ownership unit through only one or more partnerships. Derived basis with respect to a covered shareholder may be a positive or negative amount and is treated as an attribute of the partnership that directly owns the derivative ownership unit.
(e) Section 961(c) ownership unit —(1) In general. A section 961(c) ownership unit is a share of stock of a foreign corporation directly owned by a controlled foreign corporation and owned (indirectly) by one or more covered shareholders. A controlled foreign corporation is provided section 961(c) basis in a section 961(c) ownership unit in accordance with paragraph (e)(2) of this section.
(2) Section 961(c) basis. Section 961(c) basis is basis of a section 961(c) ownership unit that must be established and maintained separately with respect to each covered shareholder that owns the section 961(c) ownership unit. Section 961(c) basis with respect to a covered shareholder may be a positive or negative amount and is treated as an attribute of the controlled foreign corporation that directly owns the section 961(c) ownership unit. Section 961(c) basis applies only for the purposes prescribed in the section 961 regulations and, therefore, for example does not affect the amount of the controlled foreign corporation's gross income or the amount of its earnings and profits.