# Prop. Treas. Reg. § 1.961-9: Exclusion from gross income of previously taxed earnings and profits resulting from positive section 961(c) basis. 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 describes the consequences of positive section 961(c) basis. Paragraph (b) of this section excludes from gross income previously taxed earnings and profits resulting from the application of section 961(c) basis to covered gain. Paragraph (c) of this section defines covered gain. Paragraph (d) of this section describes rules for analyzing covered gain. Paragraph (e) of this section provides rules for applying positive section 961(c) basis to covered gain. Paragraph (f) of this section provides rules characterizing covered gain as previously taxed earnings and profits. Paragraph (g) of this section provides a dollar basis rule. Paragraph (h) of this section provides a rule allocating previously taxed earnings and profits to shares of stock. See § 1.961-12(c)(5) ( Example 5 ) for an example illustrating the application of this section. (b) Exclusion from gross income of previously taxed earnings and profits resulting from section 961(c) basis. Previously taxed earnings and profits that result from the application of a controlled foreign corporation's section 961(c) basis to covered gain are excluded from the controlled foreign corporation's gross income, solely for purposes of determining the controlled foreign corporation's subpart F income and tested income or tested loss, and provided that the covered shareholder to which the previously taxed earnings and profits relate is a United States shareholder in the controlled foreign corporation. (c) Covered gain —(1) In general. Covered gain is all gain recognized by a controlled foreign corporation on a sale, exchange, or other disposition of one or more section 961(c) ownership units that are shares of stock of a single corporation ( transferred units ), determined without regard to loss recognized on any transferred unit and without regard to section 961(c) basis. Covered gain includes amounts treated as gain from a sale, exchange, or other disposition (for example, under section 301(c)(3)), other than gain recognized pursuant to section 961(c) (for example, for distributions of previously taxed earnings and profits in excess of basis under § 1.961-4(d)). Section 961(c) basis is applied to covered gain, and previously taxed earnings and profits result from such application of section 961(c) basis, in accordance with the rules described in paragraph (d) of this section. (2) Coordination with dividend recharacterization provisions. Section 964(e)(1) (or any provision of the Code or regulations in this title that would treat covered gain as a dividend in whole or in part) does not apply to the portion of covered gain to which section 961(c) basis is applied and that, consequently, is previously taxed earnings and profits. (d) Rules for analyzing covered gain —(1) Determine each covered shareholder's share of the covered gain. First, determine each covered shareholder's share of the covered gain, computed as the portion of the covered gain that is assigned to the covered shareholder under § 1.951-2. (2) Apply section 961(c) basis. Second, apply the controlled foreign corporation's positive section 961(c) basis to each covered shareholder's share of the covered gain in accordance with paragraph (e) of this section. (3) Characterize covered gain as previously taxed earnings and profits. Third, characterize the portion of each covered shareholder's share of the covered gain to which section 961(c) basis is applied as previously taxed earnings and profits of the controlled foreign corporation in accordance with paragraph (f) of this section. Such characterization does not reduce previously taxed earnings and profits of the foreign corporation in which shares of stock are transferred units or any foreign corporation in which stock is owned through the transferred units. (4) Determine dollar basis. Fourth, determine the dollar basis of previously taxed earnings and profits resulting from section 961(c) basis in accordance with paragraph (g) of this section. (5) Treat resulting previously taxed earnings and profits as recognized with respect to particular transferred units. Fifth, treat previously taxed earnings and profits resulting from section 961(c) basis as recognized with respect to particular transferred units by allocating such previously taxed earnings and profits in accordance with paragraph (h) of this section. Such allocation is taken into account, for example, in applying section 964(e)(1) (taking into account paragraph (c)(2) of this section) to gain recognized with respect to a particular transferred unit. (6) Adjust previously taxed earnings and profits and make related account adjustments. Sixth, increase the controlled foreign corporation's previously taxed earnings and profits to reflect previously taxed earnings and profits resulting from section 961(c) basis and make the related adjustments described in § 1.959-3 to each covered shareholder's accounts. (e) Application of positive section 961(c) basis —(1) In general. In a sale, exchange, or other disposition in which a controlled foreign corporation recognizes covered gain, the controlled foreign corporation's positive section 961(c) basis with respect to a covered shareholder of the transferred units is applied to such covered shareholder's share of the covered gain (determined under paragraph (d)(1) of this section), to the extent thereof and subject to the limitation in paragraph (e)(2) of this section. (2) Limitation in nonrecognition transactions. In a nonrecognition transaction, the amount of positive section 961(c) basis that is taken into account in applying paragraph (e)(1) of this section with respect to the covered shareholder is limited to the excess of the amount of positive section 961(c) basis that would be taken into account by the covered shareholder but for this paragraph (e)(2) over the covered shareholder's share of the gain realized but not recognized by the controlled foreign corporation with respect to the transferred units. The covered shareholder's share of such realized-but-not-recognized gain is determined by multiplying the amount of that gain of the controlled foreign corporation by a fraction, the numerator of which is the covered shareholder's share of covered gain with respect to the transferred units (determined under paragraph (d)(1) of this section), and the denominator of which is the amount of covered gain with respect to the transferred units (determined under paragraph (c)(1) of this section). (3) Translation rule. If applicable, positive section 961(c) basis is translated into functional currency of the controlled foreign corporation at the spot rate on the day on which the sale, exchange, or other disposition occurs. (4) Unused positive section 961(c) basis. See § 1.961-11(c)(2) and (e) for rules applying positive section 961(c) basis in excess of covered gain to gain recognized pursuant to section 961(c). (f) Characterization of covered gain as previously taxed earnings and profits —(1) In general. The portion of a covered shareholder's share of covered gain to which section 961(c) basis is applied (determined under paragraph (d)(2) of this section) is characterized as previously taxed earnings and profits with respect to the covered shareholder ( section 961(c) PTEP ) in accordance with the rules described in paragraphs (f)(2) through (4) of this section. (2) Mirroring rule —(i) In general. The portion of section 961(c) PTEP that does not exceed the amount of mirrored PTEP (defined in paragraph (f)(2)(ii) of this section) has the same character as a pro rata portion of mirrored PTEP. The pro rata portion is determined by multiplying mirrored PTEP by a fraction, the numerator of which is the portion of section 961(c) PTEP described in the preceding sentence and the denominator of which is the amount of mirrored PTEP. (ii) Mirrored PTEP. For purposes of this paragraph (f)(2), mirrored PTEP is— (A) All previously taxed earnings and profits that transfer from the covered shareholder under § 1.959-7 in the sale, exchange, or other disposition in which the covered gain is recognized (or that would so transfer if the transferred units were sold in a general successor transaction); and (B) All previously taxed earnings and profits that would exist if foreign income taxes associated with previously taxed earnings and profits described in paragraph (f)(2)(ii)(A) of this section (determined under § 1.959-7 and, if applicable, translated into the functional currency of the foreign corporation to which the previously taxed earnings and profits would relate at the spot rate on the day on which the sale, exchange, or other disposition occurs) were treated as an additional amount of such previously taxed earnings and profits. (iii) Currency rule. For purposes of this paragraph (f)(2), if any previously taxed earnings and profits described in paragraph (f)(2)(ii) of this section are denominated in a currency other than the functional currency of the controlled foreign corporation recognizing the covered gain, then such previously taxed earnings and profits are translated into such controlled foreign corporation's functional currency at the spot rate on the day on which the covered gain is recognized. (3) Lookback rule —(i) In general. The portion of section 961(c) PTEP that is not characterized under paragraph (f)(2) of this section, if any, and that does not exceed the amount of lookback PTEP (defined in paragraph (f)(3)(ii) of this section) has the same character as a pro rata portion of lookback PTEP. The pro rata portion is determined by multiplying lookback PTEP by a fraction, the numerator of which is the portion of section 961(c) PTEP described in the preceding sentence and the denominator of which is the amount of lookback PTEP. (ii) Lookback PTEP. For purposes of this paragraph (f)(3), lookback PTEP is all previously taxed earnings and profits that both— (A) Resulted from an income inclusion under section 951(a) or 951A(a) of the covered shareholder attributable to the transferred units (including stock owned through the transferred units); and (B) Were related to a taxable year of a foreign corporation ending during the 36-month period that ends on the day on which the covered gain is recognized. (iii) Currency rule. For purposes of this paragraph (f)(3), if any previously taxed earnings and profits described in paragraph (f)(3)(ii) of this section are denominated in a currency other than the functional currency of the controlled foreign corporation recognizing the covered gain, then such previously taxed earnings and profits are translated into such controlled foreign corporation's functional currency by translating the U.S. dollar amount of the income inclusion giving rise to the previously taxed earnings and profits at the spot rate on the day on which the covered gain is recognized. (4) Section 245A(d) PTEP rule. The portion of section 961(c) PTEP that is not characterized under paragraphs (f)(2) and (3) of this section, if any, is characterized as relating to the section 245A(d) PTEP group, the taxable year of the controlled foreign corporation in which the covered gain is recognized, and the general category income under section 904(d)(1)(D). (g) Dollar basis rule. The dollar basis of previously taxed earnings and profits with respect to a covered shareholder that result from section 961(c) basis (determined under paragraph (d)(3) of this section) is equal to the U.S. dollar amount of the section 961(c) basis giving rise to such previously taxed earnings and profits. (h) Allocation of previously taxed earnings and profits —(1) In general. Previously taxed earnings and profits with respect to a covered shareholder that result from section 961(c) basis (determined under paragraph (d)(3) of this section) are allocated to transferred units in accordance with the rules of paragraph (h)(2) of this section. (2) Rules —(i) Stacking rule. First, allocate to each transferred unit an amount of previously taxed earnings and profits equal to the lesser of the amount of positive section 961(c) basis with respect to the covered shareholder of the transferred unit (to the extent taken into account in applying paragraph (e)(1) of this section) and the portion of the covered shareholder's share of the covered gain that is recognized with respect to the transferred unit. (ii) Pro rata rule. Second, allocate to each transferred unit a pro rata portion of any amount of previously taxed earnings and profits not allocated under paragraph (h)(2)(i) of this section, determined by multiplying such amount by a fraction. The numerator of the fraction is the portion of the covered shareholder's share of the covered gain that is recognized with respect to the transferred unit, less the amount of previously taxed earnings and profits allocated to the transferred unit under paragraph (h)(2)(i) of this section. The denominator of the fraction is the amount of previously taxed earnings and profits not allocated under paragraph (h)(2)(i) of this section.