# Prop. Treas. Reg. § 1.961-3: Basis increases for certain income inclusions. 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 provides the increases to basis under section 961 for inclusions under sections 951(a) and 951A(a) and § 1.961-11. Paragraph (b) of this section provides the general rule, pursuant to which, to reflect a covered shareholder's income inclusions for a controlled foreign corporation's taxable year, basis of certain property units (shares of stock of the controlled foreign corporation directly owned by the covered shareholder, property through which the covered shareholder owns (indirectly) stock of the controlled foreign corporation, and shares of stock of the controlled foreign corporation owned (indirectly) by the covered shareholder), is increased. Paragraph (c) of this section describes the specific rules for increasing basis pursuant to paragraph (b) of this section. Paragraph (d) of this section determines certain basis increases based on distributions of previously taxed earnings and profits by the controlled foreign corporation during the taxable year. Paragraph (e) of this section determines certain basis increases based on a hypothetical distribution, to the extent paragraph (d) of this section does not increase basis. Paragraph (f) of this section provides limitations on basis increases in certain cases. See § 1.961-12(c)(2) ( Example 2 ) for an example illustrating the application of this section. (b) In general. To reflect a covered shareholder's income inclusions for a taxable year of a controlled foreign corporation (such taxable year for which this section is being applied, the relevant taxable year ), basis of property units that are shares of stock of the controlled foreign corporation owned by the covered shareholder, and basis of any property units through which the covered shareholder owns stock of the controlled foreign corporation, is in each case increased in accordance with the rules described in paragraph (c) of this section. Generally, under those rules, basis increases begin at the level of stock of the controlled foreign corporation and then tier through property units through which the covered shareholder owns such stock, with at each level basis increases allocated among property units based on how previously taxed earnings and profits resulting from the income inclusions are, or likely will be, distributed on the property units (thus, the allocations may differ from the extent to which the income inclusions are attributable to the property units). Solely for purposes of this section, a reference to the basis of a property unit means adjusted basis in the case of a section 961(a) ownership unit, derived basis with respect to the covered shareholder in the case of a derivative ownership unit, or section 961(c) basis with respect to the covered shareholder in the case of a section 961(c) ownership unit. (c) Rules for increasing basis —(1) Determine amount of income inclusions giving rise to increases to basis —(i) In general. First, determine the amount of the covered shareholder's income inclusions with respect to the controlled foreign corporation for the relevant taxable year that give rise to increases to basis under section 961, computed as the sum of the section 951(a)(1)(A) inclusion amount and section 951(a)(1)(B) inclusion amount (defined in paragraphs (c)(1)(ii) and (iii) of this section). (ii) Section 951(a)(1)(A) inclusion amount. The section 951(a)(1)(A) inclusion amount is the sum of any amount (in U.S. dollars) that the covered shareholder includes in gross income with respect to the controlled foreign corporation for the relevant taxable year under section 951(a)(1)(A) or 951A(a) or § 1.961-11. (iii) Section 951(a)(1)(B) inclusion amount. The section 951(a)(1)(B) inclusion amount is the amount (in U.S. dollars) that the covered shareholder includes in gross income with respect to the controlled foreign corporation for the relevant taxable year under section 951(a)(1)(B). (2) Determine if any midyear transactions occur. Second, determine if any midyear transactions (which affect the timing of certain basis adjustments under paragraphs (d) and (e) of this section) occur within the relevant taxable year. A midyear transaction is any sale, exchange, or other disposition (including an issuance or redemption) occurring before the last relevant day of the relevant taxable year and involving one or more items of property that, immediately before or after the sale, exchange, or other disposition are stock of the controlled foreign corporation owned by the covered shareholder or property through which the covered shareholder owns stock of the controlled foreign corporation. (3) Apply actual distribution rule. Third, if, before the last relevant day of the relevant taxable year, the controlled foreign corporation distributes previously taxed earnings and profits with respect to the covered shareholder in a covered distribution (determined under § 1.959-4), then increase basis for a portion of the section 951(a)(1)(A) inclusion amount in accordance with paragraph (d) of this section. (4) Apply hypothetical distribution rule. Fourth, increase basis for any remaining portion of the section 951(a)(1)(A) inclusion amount and the section 951(a)(1)(B) inclusion amount in accordance with paragraph (e) of this section. (d) Actual distribution rule —(1) In general. For each distribution described in paragraph (c)(3) of this section (starting with the earliest distribution), increase basis of property units that are shares of stock of the controlled foreign corporation and, if applicable, property units through which the covered shareholder owns such shares, in accordance with paragraphs (d)(2) and (3) of this section. Treat each such increase to basis as made at the beginning of the first day of the relevant taxable year, unless the distribution is made after any midyear transactions, in which case treat each such increase as made immediately after the midyear transaction that most recently precedes the distribution. (2) Increases to basis of shares of stock of the controlled foreign corporation. Increase the basis of each property unit that is a share of stock of the controlled foreign corporation that the covered shareholder owns on the last relevant day of the relevant taxable year by the amount of the adjustment required under § 1.961-4 (basis reductions and gain recognition for distributions) to such basis by reason of the distribution, subject to the following limitation. Do not increase the basis of the share by an amount greater than the product of the section 951(a)(1)(A) inclusion amount, reduced by all increases to basis under this paragraph (d)(2) by reason of earlier distributions, and a fraction, the numerator of which is the portion of the distribution that is made with respect to the share, and the denominator of which is the amount of the distribution. (3) Increases to basis of property units through which the covered shareholder owns stock of the controlled foreign corporation. If, when the distribution is made, the covered shareholder owns stock of the controlled foreign corporation through one or more property units, then increase the basis of each such property unit by the portion of the hypothetical distribution described in paragraph (e)(2) of this section (modified as described in the next sentence) that would be distributed with respect to the property unit in accordance with paragraph (e)(3) of this section, subject to the limitations in paragraph (f) of this section. For purposes of this paragraph (d)(3), the hypothetical distribution is treated as made when the distribution of previously taxed earnings and profits is made, the amount of the hypothetical distribution is equal to the increase to basis under paragraph (d)(2) of this section by reason of the distribution of previously taxed earnings and profits, and, at the level of the controlled foreign corporation, the hypothetical distribution is made in the same manner as the distribution of previously taxed earnings and profits. (e) Hypothetical distribution rule —(1) In general. Increase the basis of each property unit that the covered shareholder owns on the last relevant day of the relevant taxable year by the portion of the hypothetical distribution described in paragraph (e)(2) of this section that would be distributed with respect to the property unit in accordance with paragraph (e)(3) of this section, subject to the limitations in paragraph (f) of this section. Except as provided in paragraph (e)(4) of this section, treat a portion of each such increase to basis as made at the end of the last day of the relevant taxable year, determined by multiplying the amount of the increase to basis by a fraction, the numerator of which is the section 951(a)(1)(B) inclusion amount, and the denominator of which is the amount of the hypothetical distribution. Treat the remaining portion of each such increase to basis as made at the beginning of the first day of the relevant taxable year on which the covered shareholder owns the property unit, unless there are any midyear transactions, in which case treat each such remaining portion as made immediately after the last midyear transaction occurring during the relevant taxable year. (2) Hypothetical distribution. The hypothetical distribution described in this paragraph (e)(2) is a hypothetical distribution treated as made by the controlled foreign corporation, through all property (if any) through which the covered shareholder owns stock of the controlled foreign corporation, to the covered shareholder on the last relevant day of the relevant taxable year. The amount of the hypothetical distribution is equal to the section 951(a)(1)(A) inclusion amount, reduced by any increases to basis under paragraph (d)(2) of this section, plus the section 951(a)(1)(B) inclusion amount. In the hypothetical distribution, stock of the controlled foreign corporation and other property is taken into account only to the extent owned by the covered shareholder on the last relevant day, and the earnings and profits of the controlled foreign corporation and any foreign corporations through which the hypothetical distribution is treated as made are in each case treated as equal to the amount of the hypothetical distribution. (3) Distribution rights. The portion of the hypothetical distribution that would be distributed with respect to a property unit is determined under the principles of § 1.951-1(e)(2) through (6). However, an earlier distribution affects property units' distribution rights for purposes of the hypothetical distribution to the extent such earlier distribution results in the section 951(a)(1)(A) inclusion amount increasing basis under paragraph (d) of this section. (4) Certain increase to basis for section 951(a)(1)(B) inclusion amount. If basis of a property unit is increased pursuant to the second sentence of paragraph (e)(1) of this section, and at the end of the last day of the relevant taxable year the covered shareholder either does not own the property unit or owns the property unit in a manner different than how the covered shareholder owns the property unit at the time of the hypothetical distribution described in paragraph (e)(2) of this section, then treat such increase to basis as made immediately before the transaction in which the covered shareholder ceases to own the property unit in the same manner as it owns the property unit at the time of such hypothetical distribution. In addition, treat such increase to basis as made after the determination of any amount that must be included in gross income as a dividend (for example, under section 1248 or § 1.367(b)-4) as a result of such transaction. (f) Limitations —(1) Section 961(c) ownership units that are not stock of a controlled foreign corporation. Section 961(c) basis of a section 961(c) ownership unit is increased only if the section 961(c) ownership unit is a share of stock of a controlled foreign corporation. (2) Taxable section 962 previously taxed earnings and profits. The portion of an income inclusion that gives rise to previously taxed earnings and profits relating to the taxable section 962 PTEP subgroup does not increase adjusted basis of a section 961(a) ownership unit or derived basis of a derivative ownership unit. (3) Derivative ownership units that are partially owned by foreign corporations. If a derivative ownership unit is owned (indirectly) by one or more foreign corporations, then an increase to derived basis of the derivative ownership unit resulting from a hypothetical distribution described in paragraph (d)(3) or (e)(2) of this section cannot exceed the portion of the hypothetical distribution that would be distributed to the covered shareholder through only the derivative ownership unit and any interests in partnerships.