Treasury releases first set of long-awaited PTEP regulations

In brief

What happened?

Treasury and the IRS on November 29, 2024, released the first set of proposed regulations on the taxation of previously taxed earnings and profits (PTEP) and related basis adjustments. The proposed regulations under Section 959 (proposed Section 959 regulations) provide rules for PTEP accounting (both at the shareholder-level and foreign corporation-level), exclusions from gross income, and related determinations and adjustments. The proposed regulations under Section 961 (proposed Section 961 regulations) adjust the basis in shares of stock of a foreign corporation owned by a covered shareholder, and the basis in any items of property through which the covered shareholder owns stock of the foreign corporation, to reflect the foreign corporation’s PTEP with respect to the covered shareholder (for example, to reflect income inclusions giving rise to the PTEP or distributions of the PTEP). 

The proposed regulations under Section 951 provide two coordinated sets of rules regarding the assignment and allocation of covered items, which are gross income of a foreign corporation consisting of covered distributions or covered gains. The proposed regulations under Section 986(c) describe the circumstances in which a covered shareholder recognizes foreign currency gain or loss with respect to PTEP and provide rules for determining the amount of gain or loss that is recognized.  

The proposed regulations also provide guidance to replace current regulations under Section 960 that describe a controlled foreign corporation’s (CFC) PTEP and rules for purposes of applying Section 960(b), rules specific to members of a consolidated group, provisions on S corporations, Section 962 election by individuals to be subject to tax at corporate rates, currency translation rules, Section 985 functional currency, and anti-avoidance rules.  

Why is it relevant?

The proposed regulations provide long-awaited and important guidance on PTEP, which is earnings and profits (E&P) of a foreign corporation described in Section 959(c)(1) or (c)(2). Section 959 is intended to prevent double taxation by excluding PTEP from gross income of United States persons and CFCs.  

The proposed regulations implement Notice 88-71, which provided guidance regarding foreign currency gain or loss with respect to PTEP and announced an intent to issue regulations consistent with the guidance, and Notice 2019-01, which provided guidance and examples related to tracking PTEP and ordering PTEP distributions and indicated plans to issue regulations under Section 959 relating to PTEP. Treasury and the IRS provided ancillary guidance on PTEP as part of other guidance (e.g., interaction of PTEP distributions with foreign tax credits, proposed refinements to ensure consistent treatment of basis adjustments under Section 961 when PTEP distributions occur).  

The regulations generally are proposed to be effective for tax years of foreign corporations beginning on or after the date the proposed regulations are finalized and to tax years of persons for which such tax years of foreign corporations are relevant (general applicability date). Portions of the proposed Section 959 regulations relating to rules described in Notice 2019-01 would apply before the general applicability date to tax years of United States shareholders (and successors in interest) ending after December 14, 2018, and tax years of foreign corporations ending with or within those tax years, as described in Notice 2019-01 (2019 notice years).  

Taxpayers may choose to apply the proposed regulations (in their entirety) early to tax years of foreign corporations beginning before the general applicability date (the early application years) if certain conditions are met.  

The proposed regulations include transition rules under Section 959 for establishing and conforming accounts under Section 959, as well as rules under Section 961 for establishing derived basis and Section 961(c) basis. These rules also address particular transition issues relating to the treatment of domestic partnerships (including S corporations). 

Treasury and the IRS are expected to release future guidance to address certain issues not covered in the proposed regulations, including issues involving nonrecognition transactions, redemptions, transactions to which Section 964(e) applies, and structures where CFCs are partners (Notice 2024-16 announced intent to issue proposed regulations addressing basis treatment under Section 961(c) for transactions involving the acquisition of CFC stock by a domestic corporation in a Section 332 liquidation or Section 368(a)(1) asset reorganization). Treasury and the IRS intend to issue additional rules regarding the transfer of PTEP in acquisitions that are not general successor transactions. 

Action to consider

The proposed regulations are scheduled to be published in the Federal Register on December 2, 2024. Comments are due 90 days after the date of publication in the Federal Register. Treasury and the IRS have requested comments on much of the guidance included in the proposed regulations.  

Taxpayers should consider the applicability dates of the proposed regulations, including the option to early adopt the proposed regulations in their entirety, and the transition rules under Sections 959 and 961 and relating to the treatment of domestic partnerships (including S corporations.