Par. 34. Section 1.986(a)-1 is amended by: 1. In paragraph (c), removing the language “PTEP group taxes (as defined in § 1.960-3(d)(1))” from the first sentence and adding the language “the corporate PTEP tax pool (as defined in § 1.959-1(b)) or any covered shareholder's PTEP tax pool (as defined in § 1.959-1(b))” in its place. 2. In paragraph (e)(1) removing the language “PTEP group taxes” and adding the language “a PTEP tax pool” in its place. 3. In paragraph (e)(2) removing the language “PTEP group taxes (as defined in § 1.960-3(d)(1))” in the first sentence and adding the language “the corporate PTEP tax pool (as defined in § 1.959-1(b)) or any covered shareholder's PTEP tax pool (as defined in § 1.959-1(b))” in its place, and removing the language “PTEP group taxes” in the second sentence and adding the language “a PTEP tax pool” in its place. 4. In paragraph (e)(3) removing the language “PTEP group taxes” in the last sentence and adding the language “a PTEP tax pool” in its place. Par. 35. Section 1.986(c)-1 is revised to read as follows:
(a) Scope. This section provides rules for the recognition of foreign currency gain or loss with respect to previously taxed earnings and profits (as described in section 959) under section 986(c). Paragraph (b) of this section provides rules for distributions of previously taxed earnings and profits to a covered shareholder and certain transactions that transfer or eliminate previously taxed earnings and profits. Paragraph (c) of this section provides a rule for distributions of previously taxed earnings and profits to a foreign corporation. Paragraph (d) of this section provides definitions. Paragraph (e) of this section provides the applicability date of this section. See § 1.961-5 for related basis adjustments in certain cases and § 1.959-10(c)(2) ( Example 2 ) for an example illustrating the application of this section. See also § 1.367(b)-2(j)(2) for the interaction of certain nonrecognition transactions and section 986(c).
(b) Recognition of foreign currency gain or loss —(1) In general. If, in any transaction, previously taxed earnings and profits with respect to a covered shareholder are distributed to the covered shareholder or cease to be with respect to the covered shareholder (for example, because the previously taxed earnings and profits transfer from the covered shareholder in a general successor transaction or are eliminated by reason of an election under section 338(g)), then the covered shareholder recognizes foreign currency gain or loss with respect to such previously taxed earnings and profits in accordance with the rules described in paragraphs (b)(2) through (4) of this section, subject to the exception in paragraph (b)(5) of this section for transfers of previously taxed earnings and profits other than in a general successor transaction.
(2) Determining foreign currency gain or loss. Foreign currency gain or loss is determined by comparing the U.S. dollar amount of the previously taxed earnings and profits described in paragraph (b)(1) of this section on the day on which the transaction occurs to the dollar basis of the previously taxed earnings and profits. If the U.S. dollar amount exceeds the dollar basis, the excess is foreign currency gain. If the dollar basis exceeds the U.S. dollar amount, the excess is foreign currency loss. If applicable, the U.S. dollar amount is determined by translating the previously taxed earnings and profits into U.S. dollars at the spot rate on the day on which the transaction occurs. See §§ 1.959-4 and 1.959-7 for determining dollar basis in distributions and general successor transactions, respectively.
(3) Limitations —(i) Section 965(a) previously taxed earnings and profits. In the case of previously taxed earnings and profits that are described in paragraph (b)(1) of this section and relate to the reclassified section 965(a) PTEP group or section 965(a) PTEP group, only a portion of foreign currency gain or loss with respect to the previously taxed earnings and profits is recognized, determined by multiplying the amount of the foreign currency gain or loss by the excess of 100 percent over the section 965(c) deduction percentage with respect to the previously taxed earnings and profits.
(ii) Section 965(b) previously taxed earnings and profits. No foreign currency gain or loss is recognized with respect to previously taxed earnings and profits that are described in paragraph (b)(1) of this section and relate to the reclassified section 965(b) PTEP group or section 965(b) PTEP group.
(iii) Taxable section 962 earnings and profits. No foreign currency gain or loss is recognized with respect to previously taxed earnings and profits that are described in paragraph (b)(1) of this section and relate to the taxable section 962 PTEP subgroup.
(4) Treatment of foreign currency gain or loss. Foreign currency gain or loss described in paragraph (b)(1) of this section is recognized concurrently with the transaction and is treated as ordinary income or loss from the same source, and relating to the same section 904 category, as the income inclusion to which the previously taxed earnings and profits are attributable.
(5) Exception for transfer of previously taxed earnings and profits other than in a general successor transaction. Except as provided in § 1.367(b)-2(j)(2)(i), no foreign currency gain or loss is recognized with respect to previously taxed earnings and profits when the previously taxed earnings and profits transfer to another covered shareholder in a transaction other than a general successor transaction.
(c) Distributions of previously taxed earnings and profits to a foreign corporation. No foreign currency gain or loss is recognized with respect to previously taxed earnings and profits when the previously taxed earnings and profits are distributed to a foreign corporation.
(d) Definitions. The definitions in § 1.959-1(b) apply for purposes of this section.
(e) Applicability date. This section applies to taxable years of foreign corporations that begin on or after [date of publication of final regulations in the Federal Register ] or are early application years (as described in § 1.959-12(d)) and to taxable years of persons for which such taxable years of those foreign corporations are relevant. See § 1.986(c)-1 as contained in 26 CFR part 1 revised as of April 1, 2024, for a version of this section applicable to prior taxable years.